Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The battle of Nikola has started; earnings to watch next week
Peter Garnry
Chief Investment Strategist
Summary: Nikola shares plunged 11% yesterday on fraud and deception allegations by a short seller. With no immediate defense by the company the shares were taking in the dark. However, the CEO and co-founder Trevor Milton has said he will make a rebuttal before the US market opens. We also take a look at next week's earnings focusing on Adobe that has all the characteristics of a great company.
Nikola shares tumbled 11% yesterday on a short seller report from Hindenburg Research claiming fraud and deception on an unprecedented scale. The bulls fought bravely in the first hour but as the Nasdaq 100 lost momentum during the session the selling pressure became too much for Nikola. The CEO and co-founder Trevor Milton was quick to respond on Twitter, but this tweet has since been removed and instead replaced with a new tweet indicating that he has been working all night on rebuttal which will be out before market opens. Milton’s comments and Bosch’s statement that they feel misquoted in the report seem to have lifted sentiment somewhat with the stock currently up 2% in pre-mkt. Bosch is an early investor and key business partner on the component side for Nikola. Earlier this week GM announced a $2bn equity stake (11% of the share capital) in Nikola and one would think that one of the largest carmakers in the world has done its due diligence. Today’s session is crucial for sentiment in Nikola as any weak defense by Milton will add to the pressure.
Aside from the short seller report and whether it is correct or not, Nikola has caught attention of its lofty promises to manufacture the world’s best electric truck. The facts are still that the company is valued at $14.2bn with analysts covering the company not expecting more than $283mn in revenue by FY2022. Even in today’s frothy equity market this is an aggressive valuation based on a strong vision and little execution so far.
Adobe is next week’s most interesting earnings release
Earnings releases are running low outside the normal quarterly calendar and only companies not following the regular calendar quarters are reporting. Next week there are four earnings releases worth watching with Adobe being the most interesting.
Adobe reports FY20 Q3 (ending 31 August) on Tuesday after the US market close. Analysts expect revenue of $3.16bn up 11% y/y and EPS of $2.41 up 50% y/y as the business continues to scale with little need for higher fixed operating costs and capex. We have recently talked about the three key indicators of a great company: 1) high ROIC-WACC spread (the return on capital minus cost of capital), 2) earnings predictability (measure of the business’ robustness), and 3) growth in invested capital and revenue. Adobe is a company that scores high on all three indicators. ROIC to WACC ratio is 3.4x with a ROIC of 26% and an earnings predictability of 98% meaning that the company offers few surprises thanks to its new subscription-based business model introduced six years ago. The total invested capital has grown by 9.5% annualized the past 10 years indicating a huge opportunity set for Adobe.
Three other interesting earnings releases besides Adobe are those from Lennar (Monday), FedEx (Tuesday) and Inditex (Wednesday). Lennar is a US homebuilder and will provide a glimpse and outlook for the US housing market. Lower mortgage rates and the gradual rebound in economic activity has pushed US housing starts almost back to where they were before the US lockdown. FedEx being one of the world’s largest logistics companies is worth watching for clues on global trade and how the economic rebound is progressing. Inditex with its main brand Zara has also been weak on e-commerce and integrating it well into its physical stores. This weakness has been put to full display during the COVID-19 lockdowns and the company is one the worst hit European retailers within fashion.
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