HASAN TEVFIK, Senior Research Analyst, MST Marquee comments on the Federal Reserve meeting:
The FOMC meeting resulted in no change in policy but markets seemed to be disappointed by the Feds unwillingness to guide to further easing. In the press conference, Chair Powell inadvertently provided the pathway to the next asset price bubble. Here are the three most important things to come out of the meeting.
- The Fed believes the current weakness in inflation is transitory. Powell highlight a number of areas that have suffered weak inflation in the short-term that are expected to experience a recovery. They included funds management (huh? Not sure if Vanguard thinks the weakness here is temporary), apparel (ditto…Asian manufacturer) and airfares.
- MST forecast no move in policy. Our US Economists, Julia Coronado and Laura Rosner, are forecasting no change in the policy rate in their forecast horizon. However, they do note that the risks to the next move are tilted towards a cut, particularly if the data slows more than expected and/or there is an unexpected tightening in financial conditions (the equity market takes another sharp dive and credit spreads to widen considerably).
- Time to change the inflation mandate (?). It is clear central banks control inflation less than they think (or thought). The accommodative policy has not led to rising inflation. But as central banks continue to target consumer prices, as they pursue the mandate, they could fuel the next asset price bubble and encourage further misallocation of capital. The equity markets in the US or Australia do not need a rate cut. However, if policy is eased further we should expect even higher valuations...which could prove to be transitory!
Australian Banks - CS downgrades ANZ Banking Group
(ANZ $27.95, +14% YTD) - Bracing for near-term headwinds
- ANZ - Reported cash earnings (ex-divestments) of A$3,363m vs CS A$3,471m. The key driver of the 3% miss was lower revenue, driven by a NIM of 180bps vs our forecast of 187bps. Highlights included a strong institutional banking performance (+32% vs pcp), albeit assisted by write-backs and good expense control. However, more than offset by a falling contribution from the Australian division, an unlikely near-term turnaround in asset growth and group NIM decline of 13bps vs pcp, with an outlook for continued pressure. Near-term, ANZ faces outsized headwinds from anaemic asset growth, margin decline, a non-linear cost trajectory and capital/regulation. Earnings reduced by 7%. Target price $26.55 (prev $28.00). Downgrade to Underperform. ANZ currently trades on 10.5x forward earnings (9% discount to the major bank peer group vs a 7% four-year average discount) and a corresponding book multiple of 1.3x.
Amazon (AMZN $1950, +29% YTD) - Turning the Shipping Screw on the Competition, We Like the Aggression
- AMZN reported 1Q19 results with revenue of $59.7b, +19% FX-neutral growth versus our estimate of $59.1b, CSOI at $5.7b versus our $4.3b. Our FY19 adj. EPS increases to $41.14 vs. $40.88 prior.
- Investment Case: In our (CS) view the most important takeaway was the Prime free shipping terms pushing down to 1 day delivery from the current 2 days starting in April. Amazon has been consistently pushing the boundaries on its shipping offering to the consumer, as competing merely on price is an unsustainable strategy, whereas the ability to improve delivery terms takes time. While the US will be the first to see the faster delivery service, International territories should be not too far behind. Incremental outbound shipping costs (to be recognized in Cost of Sales) will be around ~$800mm. We like this aggressive move to press its logistic footprint advantage as this places Amazon on the path to return more sharply to the growth side of the growth versus profitability balance. In other words, investors will get their old Amazon back. While our near-term profit estimates decrease, this augurs faster GMV growth for 2020 and beyond, and our target price increases to $2200 versus $2100 prior. Our investment thesis remains 1) continued e-commerce segment operating margin expansion as Amazon grows into its larger infrastructure, 2) optionality for faster-than-expected FCF growth via its advertising segment, and 3) upward bias to AWS revenue forecasts and likely more moderate deceleration path as suggested by the ongoing capital intensity in the business.
- Valuation: Our DCF-based PT which is based on a 10.5% WACC and 3% terminal growth increases to $2200. Higher-than-expected capital intensity for the e-commerce segment or AWS is a risk to our price target and estimates.