Earnings season roundup – the key takeaways for investors

As another earnings season comes to a close, our share research team look at what stood out for them.

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Consumer spending – wallets remain open, for now.

Matt Britzman, Equity Analyst

Given a backdrop of low consumer confidence and soaring living costs, you’d be forgiven for assuming consumers would be tightening purse strings. My takeaway from the recent inflow of corporate earnings is that, in some sectors at least, wallets are still open.

Global brewers Heineken and AB InBev sang from the same hymn sheet in recent results. Both businesses called out robust beer volumes and a consumer who continues to favour more premium brands. The latter point is especially beneficial. Premium brands attract higher margins which helps in an environment where operating costs are rising.

Taylor Wimpey provided some insight into the health of the UK housing market. Demand continued to outstrip supply and relatively low interest rates, coupled with good mortgage availability, remained too tempting for some buyers to resist. There’s also positive data on forward orders, cancelations and buyer sentiment that suggests rising living costs are having little effect on buying decisions.

It’s not all rosy for builders though. Build costs are trending 9-10% higher and delays in getting planning permission through the system are immediate challenges.

Brand power looks to be as important as ever. Giants like Unilever and Reckitt Benckiser, that bring us the likes of Magnum and Dettol respectively, posted a strong set of results. Higher prices were the key driver and that’s where the brand power comes into its own. The allure of a great name can help squeeze more out of buyers even when times are tough.

Unilever did see some weakness creep into volumes, which could be a sign of things to come. Reckitt had no such issues though, neither did fellow giant Nestlé, with both able to squeeze out higher volumes despite price hikes.

The important thing to remember about company earnings is that, in the main, they’re lagging indicators. They tell us what’s happened, more than what’s going to happen. So, while spending might have been resilient over the past few months, investors should stay mindful of the mounting pressures on consumer finances.

Apple – suggests quality companies are in a better position than thought

Sophie Lund-Yates, Lead Equity Analyst

There were concerns heading into Apple’s results. Around 100 of the tech giant’s top suppliers are in China, where renewed lockdowns and pared back manufacturing activity has run rampant in recent months. Despite this, Apple’s revenue increased 1.9%, to $83bn in the third quarter.

However, within that, overall product sales dipped, with only iPhone sales increasing. This is potentially problematic as Apple relies on its physical product sales to build scale in its more profitable services division (things like the App Store and Apple Music). This division hasn’t built up enough scale yet for it to take the heat out of the need for growing hardware sales.

The big question now is how well the new iPhone’s received later this year. Apple has one of the most powerful brands on the planet which means the normal inflationary spending rules don’t apply. That said, it might still be a tall order to convince people to part with $1,000 for a new phone while household budgets are under such strain.

However, for all the challenges, the market’s reaction to the results was much better than feared. Given the recent tech sell-off, it was likely Apple was going to have to shoot the lights out in order to avoid negative sentiment. But the group’s valuation grew on the day.

Why does this matter?

It highlighted that the market has a lot more faith in strong branding and Apple’s potential pricing power, despite current conditions, than originally thought. That has a positive read-across for other quality consumer companies and is something to monitor. As ever though, remember nothing is guaranteed.

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NatWest – high-street lender benefits from a rising interest rate

Sophie Lund-Yates, Lead Equity Analyst

Traditional high-street lenders were upended by the pandemic as lockdowns and historic low interest rates put them between a rock and a hard place. NatWest felt this pain as they posted a full year operating loss of £351m in 2020. However, times are changing.

A spate of interest rate rises, coupled with growth in mortgage lending, has bolstered NatWest’s underlying operating profits to £2.7bn in the first half of 2022.

Banks benefit from a rising interest rate as the interest they charge on loans is higher than what they pay on deposits, known as net interest margin.

NatWest is a big beneficiary of this as most of its business revolves around traditional lending, unlike some other banks who make the majority of their income from trading and commission fees. Since the start of the year, the bank’s net interest margin has risen from 2.39% to 2.72%, making business as usual more profitable.

People are also starting to realise interest rates will likely rise again in the future, ushering them to follow through with purchasing big-ticket items before it’s too late. NatWest certainly captured this movement as mortgage lending grew £6.3bn to £20.6bn for the first half of the year, a trend felt across the industry.

It’s fair to say investors were impressed after the announcement. Not least with its mortgage growth, but also the amount of money set aside for bad loans, known as loan provisions. After beating analyst predictions on this front, CEO Alison Rose was quick to point out there has been no “sign of distress or default” from customers yet – a surprising comment given the current environment.

The uncertainty still looms, however. The question remains on whether NatWest can sustain this growth as inflation remains rampant and consumer confidence falls to all-time lows. Still, markets felt upbeat about these results as they offered a glimmer of hope in a backdrop of uncertainty.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

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