Article / 26 February 2016 at 13:21 GMT

Earnings Watch: Troubled Volkswagen must come clean on pollution

Head of Equity Strategy / Saxo Bank
Denmark
  • Volkswagen, Glencore and Barclays all report next week
  • VW must provide clear answers about NOx scandal
  • Glencore is under huge pressure amid commodity rout
  • Barclays market cap depressed by weak investment banking arm

fumes
 VW really needs to clean up its image. Photo: iStock

By Peter Garnry

The earnings season is in its final stage but 61 companies in the S&P 1200 Global will still report earnings next week. Below we will go through the most interesting earnings releases.

Volkswagen: do you have some good answers?

The diesel scandal has been brutal for Volkswagen's shareholders with the share price down more than 50% in less than a year. Uncertainty remains around both the short-term and long-term impact with the former related to a clear solution to the NOx pollution issues in North America and Europe. Longer term the brand has suffered also and this is reflected in a drop in its European market share over the past five months.

The stock is priced at a fair level given the uncertainty and likely very low top line growth including unknown future litigation costs related to the diesel scandal. Volkswagen reports Q4 figures on Monday with analysts expecting EPS €0.51 down 89% y/y.

Volkswagen's weekly share price since 2011
Volkswagen share price

Source: Saxo Bank. Create your own charts with SaxoTrader click here to learn more


Glencore: cut costs and sell assets

The world's largest commodity trader has found itself in the midst of the most violent broad-based commodity decline since 1991 cutting deep the company's operating profits as the former trading business could not turn the market volatility into an advantage. The physical business is under great pressure from lower copper prices due to weaker China growth. 

The stock is priced for high probability of some credit event. As a result, management has announced an aggressive cost cutting programme, full stop on capex and promised to divest certain mining assets to shore up the balance sheet to maintain its investment-grade credit rating which is important for the company's viability. Glencore's cash flow generation has improved over the years and we expect that trend to continue. If the commodity trader can avoid a fire sale of mining assets and brings down its net debt level then the stock is trading at attractive levels. 

Glencore reports FY15 H2 earnings on Tuesday at 0700 GMT with analysts expecting EPS 0.02 down 89% y/y and revenue down 32% y/y.

Glencore weekly share price since IPO in 2011
Glencore share price
Source: Saxo Bank 

Barclays: IB clouds the underlying value

Investment banking (capital markets) has been tough on Barclays since the financial crisis in 2008 with downward pressure on revenue on top of high costs from regulations and overly expensive bankers. The issues in its IB have pushed down Barclay's valuation to be among the cheapest within European banks only surpassed by Deutsche Bank when you adjust for their own debt. The issue for Barclays is that their IB business cannot produce ROE above 6% and thus is destroying shareholder value.

In our view the value of Barclay's Card and Commercial Banking is close to the current market value. If Barclays can scale down the IB business and reinvest the capital into its more profitable business units then the CET1 ratio will improve while leaving room for higher dividends benefiting shareholders. We are very bullish on Barclays at these levels if management can show a trustworthy plan to reduce its operating capital in the IB business. Barclays reports Q4 figures on Tueday at 07:00 GMT with analysts expecting EPS £0.02 down 77% y/y and net revenue down 4% y/y.

Barclays weekly share price since 2011
Barclays share price
Source: Saxo Bank 

HP Enterprise: turnaround to unlock value

FY15 was tough for HP Enterprise, the recent spin-off from the old Hewlett-Packard, due to macro headwinds but also weakness in Enterprise Services. We have had a long position in HP Enterprise since November 11 as we view the valuation as very compelling as we believe a well executed turnaround will unlock a lot of shareholder value and push the valuation closer to peers. FY15 Q4 showed some healthy signs despite the weaker EPS. Enterprise Services decline moderated and Storage was a big positive surprise. HP Enterprise will report FY16 Q1 earnings on Thursday after the market close. Analysts are expecting EPS $0.40

HP Enterprise daily chart since spin-off in November 2015
HP Enterprise chart
Source: Saxo Bank 

– Edited by Clare MacCarthy

 

Peter Garnry is head of equity strategy at Saxo Bank

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Earnings Watch - 2016-02-29

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