Morning Note: Trade war escalates, Uber IPO caution, IAG profits sag

Forex
Indices
Morning Note

Tariffs on $200bn worth of Chinese exports were raised to 25% last night. Trump was true to his word, and there is no can kicking. This marks a sharp escalation in the trade spat, but it’s not gone nuclear yet.

Talks between the Chinese and the Americans are continuing today, although we don’t hold out much hope of anything meaningful being achieved this week.  

It all tends to suggest Mr Trump is playing one of his aces in order to force the Chinese into concessions. His bet is that the US economy can weather any hit from tariffs better than China. He is probably right but this will not help ease uncertainty about the global economy. Beijing is weighing whether to retaliate. 

Yesterday the S&P 500 bounced off its lows, closing down just 0.3% at 2870.72, having plumbed lows around 2835. The Dow was offside by 139 points on the close, but was over 400 points lower at one point. Algos seemed to bidding it up after the ‘beautiful letter’ nonsense.

Oil has rallied, indicating markets have had enough of the selloff. Brent was last pushing up at 70.75, above the key 70.60 resistance point. The flag pattern does look like it could be a bullish continuation pattern that is just about complete – watch for a leg higher. But failure to cement the tentative gains we see this morning would be bearish – look for the area around 69.50 for support.

Asian stocks bounced overnight and European futures point higher today. Chinese stocks were last about 3% higher – just remember how much these stocks had sold off earlier in the week.  There is still hope that a deal will be done.

Uber prices at low end 

Uber priced at the bottom end of the range at $45. It’s a rough time to be coming to the market after the selloff this week but this IPO exists to a degree in its own bubble. Are you betting on the long payoff? If not, you may well be disappointed – profits are not coming any time soon.  

But shares could yet pop higher today, partly because of this conservative approach that Uber clearly learned from Lyft’s bumpy ride post-IPO. I said yesterday (Uber set for big pop despite Lyft worries, 09/05/19) that I would not be surprised if the people selling Lyft stock are simply doing so in preparation for the Uber listing, so be careful reading too much into the Lyft troubles. FOMO is a strong emotion. 

Nevertheless, my main concern is the slowing revenue growth. Whatever the cash burn, you’d want to see accelerating top line growth in a disruptor coming to market.  

IAG profits sag

Profits at IAG were hit by rising fuel costs and a big FX headwind, whilst we see a broader thread across airlines with margins being competed away. Excess capacity remains a problem, as we heard from Lufthansa. In fact, we can pretty much regurgitate what we noted about Lufthansa – lots of competition means no one has the pricing power, whilst labour costs are a factor, but the biggest headwind right now is fuel costs, which were up 15.8%. Non-fuel costs were 0.8% higher. 

Although passenger revenue growth was at a healthy clip, up in excess of 5%, first quarter operating profit slumped to €135 million before exceptional items, which was down 60% from a year before on pro forma basis. Profits after exceptional items – which were zero in Q1 – were down 86%. FX headwinds knocked €61m from the bottom line. 2019 operating profit is seen in line with 2018 – which means no growth in the year ahead. 

Uber set for big pop despite Lyft worries

IPO

Uber will price its IPO today with shares set to be set somewhere between $44 and $50, with the stock to start trading on Friday.

There is certainly a more cautious tone to this one than when its big rival, Lyft, listed. Shares in the latter have fallen over 30% since IPO day. Fears that this is just the froth at the top of a tech bubble are surfacing. However with the pricing range there is a big chance of a significant pop on the day, even if one remains of a conservative disposition and wonders about the fundamentals and whether Uber can ever be profitable. FOMO will win the battle on the day, but maybe not the war.

Uber will be valued at between $80.5bn and $91.5bn, well below the $100 bandied about for some time but still well ahead of the last funding round in August, when the company was valued at around $76bn.

The FT reports that Uber will price at or below the midpoint of that range. I would anticipate a big pop on the day if that were the case, as this is already a fairly conservative range.

Uncertain earnings

The latest financial figures raise as many questions as they answer. In Q1 2019, Uber made a net loss of $1bn, on revenues of $3bn. That represented growth of 18-20 per cent, solid enough, but well down from the 70 per cent growth a year ago.

Last year’s numbers also present investors with problems. 2018 revenues rose 43% last year to $11.3bn from $7.9bn in 2017 – good but slower than that of the prior year when we saw revenues double. The company burned $2.1bn in cash in 2018, albeit down from $4.5bn just a couple of years before. Meanwhile, revenues from the core ride-hailing division have flatlined over the last two quarters. Uber’s revenue for the fourth quarter came in at $3 billion, up 25 percent from the same quarter last year, but this was lower than the 38 percent in Q3.

Lyft’s spectre

Lyft casts something of a shadow over the Uber IPO. Having been aggressively priced ahead of going public shares in Lyft are now down over 30 per cent from where they were on IPO day. Lyft is a spectre in another sense – gaining market share from Uber. Indeed, it’s not just Lyft – Uber is losing market share to many other local rivals in a number of geographies. In the US and Canada it’s barely recovered from its 2017 annus horribilis.

Lyft’s Q1 earnings have been said to cast a pall over the Uber IPO. I would be less certain about that – it was a huge loss for sure, but below last year. Uber has said that 2019 will be when losses peak. I wouldn’t be surprised if the people selling Lyft stock are simply doing so in preparation for the Uber listing.

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