(BFM Bourse) – The results season is currently in full swing with many groups delivering their first quarter performances at the same time. Several recent examples show that the market sometimes needs several sessions or even several weeks to capture all the interest in a publication.
It’s always a very hectic time for the markets: earnings season. Due to legal obligations and recommendations from the Financial Markets Authority (for example, companies only have three months to publish a half-yearly financial report after the closing of the accounts, and this in the middle of summer) the schedule may turn out to be very busy.
This week more than 20 CAC 40 groups revealed results or revenues for the first quarter. It’s even worse for the half-year results. Last year, around thirty CAC 40 companies and (approximately) 90 members of the SBF 120 published their accounts for the first half of the year in the last week of July.
It is therefore not easy for investors to follow all company announcements. Especially since several examples show that a publication from a listed company is sometimes appreciated not over one session but over several days or even weeks.
This is due to the fact that analysts, when publishing a publication, often write a “first take”, that is to say a first draft, sometimes summary, to dissect these results. It may then take them several days to reevaluate their model, their projections and possibly change their opinion of the company.
A two-step rise for the number one chocolate maker
Let us cite the recent example of Barry Callebaut, the Swiss world number one in cocoa and chocolate. This company does not sell products directly to consumers, but supplies cocoa and chocolates to large agri-food groups, pastry chefs, restaurateurs, caterers and even chocolate drink manufacturers.
The recent surge in cocoa prices (they have tripled since the start of the year) automatically translates into an increase in the company’s revenues since it must pass on the inflation of the raw material. But this surge is far from constituting a panacea for Barry Callebaut, because it creates pressure both on volumes and on the need for working capital (i.e. to extremely simplify the cash necessary to run the activity).
But on April 10, the group managed to publish an increase in its volumes in the first half (+0.7%) and especially in the second quarter (+1%). The stock soared 11% on the Zurich Stock Exchange.
A few days later, on April 16, the stock gained 6.7%. In the meantime, analysts have further digested the chocolate maker’s announcements. And revised their opinion. UBS abandoned its “sell” advice and moved to “neutral”, judging that the worst was over in terms of cash absorption due to the surge in cocoa bean prices. Stifel decided, the same day, to raise its advice to “buy” from “hold”, the bank saying it was surprised by the company’s increasing volumes. Which helped him to be more positive about the medium-term outlook.
Renault results that convince over time
Sometimes it takes more time. Renault shares had progressed well following the publication of its results (+6.5%) marked by significantly stronger cash generation than expected. But the stock then gave back a large part of its gains the following session (-4.7%). Except that Renault subsequently experienced a very pronounced stock market rally, with an increase of more than 40% since mid-February.
Many research firms have, in the meantime, raised their targets for action, or even their recommendations. This is the case of Barclays, at the beginning of April, which moved to “overweight”. Among the reasons given to justify its renewed optimism, the British establishment cited the generation of cash, as published by the group during its annual results, which allayed its fears about Renault’s financial balance sheet.
Morgan Stanley, for its part, raised its price target to 59 euros (compared to a stock currently around 47 euros) on April 10, citing (among other things) the company’s cash flow return and robust execution. of the company, as it demonstrated during the annual results. “The fruits of this execution are becoming more visible today with the acceleration of cash returns, the improvement in the health of the balance sheet and the increase in the group’s margins to historic levels,” she underlined.
The particular case of Forvia
Sometimes the market even has difficulty dissecting a publication and violent reactions can occur. The case of Forvia, an automobile equipment manufacturer born from the takeover of the German Hella by the French Faurecia, illustrates this well.
In February, the group published results that exceeded expectations. After an initial clearly positive reaction, the stock turned around during the session and then dropped almost 20% over two sessions.
As Deutsche Bank noted, the market questioned the quality of the improvement in working capital requirements, fearing that this variation hides a wolf. Even though nothing indicated this as it was. Management had to hold a conference with analysts two days later to clarify several points. In particular the fact that reverse factoring, a mechanism allowing its suppliers to immediately receive payment of an invoice via a third party (the “factor” who later collects the money), was well recorded in its balance sheet and did not constituted only 10% of its supplier debt.
The clarification provided by management then helped to partially alleviate these fears, with the stock gaining 9%. Stifel praised the intervention as “welcome”. “Forvia management has corrected all the erroneous interpretations and inaccuracies that circulated” two days earlier, the design office appreciated. UBS then switched to buying the stock, pointing to unjustified fears about Forvia’s deleveraging.
A sign that concerns may have been exaggerated after the publication of annual results, Forvia shares jumped nearly 8% on April 18, after encouraging activity in the first quarter, but not significantly above expectations.
Market reaction over one day, an imperfect thermometer
More broadly, as we regularly explain in our articles devoted to the groups that are most successful during the results seasons, the market reaction in the single session following a publication constitutes an interesting but sometimes fragmentary and incomplete thermometer.
Particularly because market conditions on day “d” can inflate or, on the contrary, greatly reduce the merit of this stock market reaction. In 2023, Dassault Systèmes jumped 12% following the publication of its 2022 annual results. But this jump was part of a session where technology stocks were very well oriented, notably due to expectations of higher rates. weak US Federal Reserve.
Conversely, during the results for the first half of 2023, Stellantis had gained “only” 2.7%, an increase which could have been much stronger if the market as a whole had not corrected (the CAC 40 had lost 1.35%) on the same day. Moreover, the action will gain 5.3% the next day thanks to positive comments from analysts and another 2.4% the following session, showing that the title still had something under the hood.
It also happens that the market reaction is distorted by external factors. A year ago, Renault (once again) published satisfactory activity for the first quarter. But the stock fell immediately, not because of the publication, but because of Tesla’s announcement in the night of price cuts which had raised fears about the group’s vulnerability to price cuts from the Californian manufacturer.
Finally, let us note that the difficulties of understanding for analysts and strategists are not limited to the stock markets. For weeks now, the various banks (Goldman Sachs, UBS) have been thinking about potential explanations for the jump in the price of gold, which undermines the traditional economic fundamentals supposed to influence the price of the precious metal.
Julien Marion – ©2024 BFM Bourse