Morning Note: Market news and updates from Adidas and Johnson & Johnson.

Market News

US equities moved lower last night – S&P 500 (-0.8%); Nasdaq (-1.0%) – as investors weighed if the artificial intelligence rally still has room to run after a tepid outlook from key equipment supplier ASML, which fell 15%. Nvidia fell 5%. Small Cap stocks outperformed Big Tech by the most since July. Shares in European luxury names are trading lower after LVMH reported weaker than expected Q3 sales.

Stagflation odds have jumped following latest NY Fed Survey, with 3-year inflation expectations increasing to 2.7% from 2.5% and debt delinquency perceptions rising to the highest level since April 2020. The Fed’s Raphael Bostic expects US growth to slow in 2024 but remain robust and sees the benchmark rate dropping to about 3% to 3.5% in the long run. The 10-year Treasury yield slipped to 4.02%, while the dollar rose and gold moved up to $2,675 an ounce, approaching an all-time high.

In Asia this morning, Chinese stocks fluctuated ahead of a press briefing on Thursday: Hang Seng (+0.3%); Shanghai Composite (+0.1%). The yen briefly climbed after a Bank of Japan board member said conditions warrant gradual policy normalisation. The Nikkei 225 fell by 1.8%.

The FTSE 100 is currently trading 0.7% higher at 8,310. UK inflation fell by more than expected in September – CPI came in at 1.7%, versus 1.9% expected, and 2.2% in the previous month. This leaves scope for further interest rate cuts from the Bank of England. Sterling slipped back to $1.30.

Israel carried out strikes in Beirut’s southern suburbs for the first time in days, state-run National News Agency reported. Brent Crude rallied from its recent low and trades at $74.25 a barrel. According to the International Energy Agency (IEA), the world is set for cheaper energy in the second half of the decade.

Source: Bloomberg

Company News

This morning, Adidas released a brief trading update for the third quarter of 2023 which was better than expected and increased its guidance for the full year. However, the shares have been marked down by 4%, dragged lower by weakness across the European luxury and consumer goods sector.

Adidas is a multi-brand sporting goods company. Its products have traditionally had a broad appeal from serious athletes, casual athletes to sports fashion, and from mid-price to high-price points. As a result, the group should be well placed to benefit from the continued focus on health and fitness, the rising middle class in emerging markets, and fashion trends in sportswear. The group’s results are still being impacted by the initiatives to reduce inventory levels following the termination of the adidas Yeezy partnership with rapper and fashion designer Kanye West.

In the three months to 30 September, revenue was up 10% in currency-neutral terms at €6.4bn, driven by the popularity of the group’s three-striped Samba and Gazelle shoes. Excluding the impact of the Yeezy revenue, growth was 14%. Further details on trading by region, sales channel, and category will be disclosed at the time of the results on 29 October.

The company’s gross margin grew by two percentage points to 51.3%. Operating profit rose by 46% to €598m, including a contribution of around €50m from the sale of parts of the remaining Yeezy inventory.

The group increased its full-year guidance for the third time this year to reflect the better-than-expected performance during the quarter and the current brand momentum. Currency-neutral revenue is now expected to grow by around 10%, versus previous guidance for high single-digit growth. The company’s operating profit is now expected to reach a level of around €1.2bn, up from the previous guidance of around €1.0bn. Within its guidance, the company assumes the sale of the remaining Yeezy inventory during the remainder of the year to occur on average at cost. This would result in additional sales of around €50m and no further profit contribution in the fourth quarter.

Source: Bloomberg

Yesterday lunchtime, Johnson & Johnson released Q3 results ahead of market expectations and upgraded its full-year revenue guidance. In response, the shares were marked up 1% in US trading hours.

J&J is a global healthcare company with leading positions in 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 $3.7bn.

In the latest quarter, reported sales grew by 5.2% to $22.47bn, a touch above the market forecast of $22.16. On an adjusted operational basis, which excludes the impact of acquisitions and disposals, growth was 5.4%, with US domestic sales (+6.5%) outpacing international sales (+4.0%).

The group’s performance demonstrates continued strength and resilience across both of its businesses. Innovative Medicine (i.e., Pharmaceuticals, 65% of sales) grew by 6.4% during the quarter, driven by a broad range of products, particularly in oncology.

MedTech (i.e., medical devices, 35% of sales) increased by 3.7%, with net acquisitions and divestitures positively impacting growth by 2.7%. Otherwise, growth was driven primarily by electrophysiology products and Abiomed in Cardiovascular. The company warned China remains competitive and could be a short-term headwind.

The group made significant pipeline progress including approvals of Tremfya in ulcerative colitis, Rybrevant in non-small cell lung cancer, and submission of an investigational device exemption for the group’s general surgery robotic system, Ottava.

The gross margin remained very high at 69.0%, in line with the 69.1% generated last year. Adjusted EPS fell by 9% to $2.42 but was better than the consensus forecast of $2.21.

J&J has a very strong balance sheet and ended the quarter with net debt of $16bn on the back of free cash flow generation of $14bn. The group has consistently invested in organic growth – R&D spend was $5.0bn in Q3 – and, as a result, around 25% of sales come from products launched in the last five years. J&J increased its dividend by 4.2% to $1.24 per share – a similar rise for the full year would equate to a yield of 3%

The group updated its full-year guidance to reflect improved operational performance and the impact of recent acquisitions. Adjusted operational sales are expected to grow by 6.0% to $89.6bn (vs. $89.4bn previously). Guidance for adjusted operational EPS has been trimmed from $10.05 to $9.91 to reflect improved performance (-10c) offset by the acquisition of V-Wave (-24c).

Source: Bloomberg