Market news, results from J&J, and potential hotel sector consolidation.

Market News

Equity markets are fairly steady despite an escalation of tension in the Middle East. Meanwhile, China’s GDP beat in the third quarter, increasing 4.9% from a year prior. Industrial production and retail sales also grew more than expected in September, while fixed-asset and property investments fell short.

US equities were little changed last night – S&P 500 (flat); Nasdaq (-0.3%) – while this morning in Asia, markets were mixed: Nikkei 225 (flat); Hang Seng (-0.1%); Shanghai Composite (-0.7%). The FTSE 100 is currently down 0.3% at 7,652.

Treasuries steadied – the 10-year currently yields 4.85% – and the yen eked small gains after the BOJ’s surprise bond operation, holding near the key 150 level. The unscheduled bond-purchase came after benchmark yields touched a fresh decade high. While the move had no immediate impact on JGBs, Japan’s sovereign debt is under renewed pressure as traders test the BOJ’s tolerance in the lead up to its 30-31 October policy meeting. Gold continued to benefit from its safe haven status and moved up to $1,936 an ounce.

The ECB’s Yannis Stournaras said the Middle East turmoil shifted the balance against any further tightening, the FT reported. “We are in the dark — it is better to keep all of our options open,” he said.

UK inflation failed to slow as forecast in September, leaving open the possibility of a further Bank of England rate hike. CPI rose 6.7% from a year earlier, the same pace as the previous month, as rising oil prices offset downward pressures from food costs. Sterling strengthened to $1.2188 and €1.1523.

Brent Crude traded higher and currently trades at $90.50 a barrel.

Source: Bloomberg

Company News

Yesterday lunchtime, Johnson & Johnson released Q3 results that were better than expected and, once again, raised its guidance for the full year. However, in response, the shares were marked down by 1% in US trading hours.

J&J is a global healthcare company with leading positions pharmaceuticals and medical devices. The group has more than 20 products/platforms each with sales of more than $1bn. The group’s strategy is to grow sales faster than the market, and to grow earnings faster than sales. Given its broad spread of businesses, J&J is considered the bellwether of healthcare companies, providing a good read-across for a range of other stocks.

The company’s former Consumer Health unit has been spun off and now trades as a separate listed company (Kenvue). J&J still owns around 9% of the stock, a stake currently worth around $3.5bn.

In the three months to 30 September, reported sales grew by 6.8% to $21.4bn, slightly above the market forecast of $21.0bn. On an adjusted operational basis, which excludes the impact of acquisitions and disposals, sales grew by 4.9%, with US domestic sales (+8.9%) outpacing international sales (+0.3%). Operational growth excluding the impact of revenue from Covid-19 vaccine was 9.0%.

The group’s performance demonstrates continued strength and resilience across both of its businesses. Innovative Medicine (i.e., Pharmaceuticals, 65% of sales) grew by 4.4%, or 8.2% excluding Covid-19 vaccine. Growth was driven by a broad range of products. MedTech (i.e., medical devices, 35% of sales) increased by 6.0%, driven primarily by electrophysiology products in Interventional Solutions, wound closure products in General Surgery, and contact lenses in Vision.

The gross margin remained very high at 69.1%, while adjusted EPS grew 19.3% to $2.66, above the consensus forecast of $2.52.

J&J has a very strong balance sheet and ended the quarter with net debt of $6bn on the back of free cash flow generation of c. $12bn. The group has consistently invested in organic growth – R&D spend was $3.4bn in the quarter – and, as a result, around 25% of sales come from products launched in the last five years. J&J has completed its $5bn programme and declared a 5.3% increase in its quarterly dividend to $1.19. At the new rate, the indicated dividend on an annual basis is $4.76 per share, or a 3% yield.

The group has once again nudged up its guidance for 2023: adjusted operational sales growth of 7.2%-7.7% (vs. 6.2%-7.2% previously) and adjusted operational EPS growth of 12.2%-12.8% to $10.02-$10.08 (vs 11%-12% to $9.90-$10.00 previously). In the Innovative Medicine division, the group is confident in its ability to deliver growth from key brands and continued progress from recently launched products. In MedTech, the group expects to generate competitive growth fueled newly launched products. In 2024, the group expects procedure volumes to remain consistent with 2023 levels.

Source: Bloomberg

Yesterday afternoon, Choice Hotels International announced a proposal to acquire Wyndham Hotels & Resorts in a cash and stock transaction valued at $7.8bn. In response, Wyndham rejected the offer. If a deal were to go ahead it would be a further step in the consolidation of the global lodging industry. The move provides a positive read-across for our investment in UK-listed IHG, which was up 3% following the announcement.

Choice Hotels is one of the leading lodging franchisors in the world, with nearly 7,500 hotels, representing almost 630,000 rooms, in 46 countries and territories. The company owns a diverse portfolio of 22 brands that range from full-service upper upscale properties to midscale, extended stay, and economy: Comfort Inn, Cambria Hotels, Country Inn, and Park Plaza. The company operates an asset-light franchising business model generates predictable free cash flow and strong returns on investment throughout economic cycles.

Choice Hotels has announced a proposal to acquire Wyndham Hotels & Resorts in a cash-and-stock transaction valued at $7.8bn (or $9.8bn including debt). The offer of $49.50 in cash and 0.324 shares represents a 26% premium to Wyndham’s 30-day volume-weighted average closing price ending on 16 October and a 30% premium to Wyndham’s latest closing price. Choice is expected to fund the cash portion of the purchase with a combination cash on hand and the issue of new debt securities.

Choice is making its latest proposal public following Wyndham’s decision to disengage from further discussions with Choice, following nearly six months of dialogue. The statement highlights that only a few weeks ago, Choice and Wyndham were in a negotiable range on price and consideration. It did not come as a surprise, therefore, that later in the day Wyndham rejected the offer, calling it “underwhelming” and citing regulatory risks around a possible combination.

For franchisees, a transaction would bring Choice’s proven franchisee success system to a broader set of owners, enabling them to benefit from Choice’s world-class reservation platform and proprietary technology to drive cost savings and greater investment returns. A deal is expected to generate annual run-rate synergies of c.$150m through the rationalisation of operational redundancies, duplicate public company costs, and top-line growth potential.

Choice’s recent acquisition of Radisson Hotel Group Americas provides a good precedent of what can be achieved. During the integration of the nearly 600 Radisson hotels into the Choice platform, Radisson’s franchisees have already meaningfully benefited from increased guest traffic to direct and digital channels, improvement in conversion rates, and access to more corporate accounts, among other benefits.

Source: Bloomberg