Morning Note: Market news and updates from Adobe and Bunzl.

Market News

The 10-year Treasury yield fell back below 4% for the first time since August after the Federal Reserve signalled a shift to rate cuts next year. The Fed kept interest rates steady for a third time as expected, but the Summary of Economic Projections showed that average expectations from FOMC members point to a funds rate of 4.6% by the end of next year, well below previous projections of 5.1%. Markets are now assigning a nearly 73% chance the first decrease in borrowing costs will happen as soon as March. The dollar fell, while gold has rallied by 3% to $2,036 an ounce. The oil price also rose to $75.40 a barrel.

US equity markets also rallied last night – S&P 500 (+1.4%); Nasdaq (+1.4%) – and are expected to rise by another 0.5% at the open this afternoon. The FTSE 100 is currently trading 2.2% higher at 7,711. Stocks trading ex-dividend today include AB Foods (1.88%), Burberry (1.23%), and DS Smith (2.04%).

UK interest rates are expected to remain unchanged when the Bank of England meets today. UK surveyors are the most optimistic they’ve been on future house sales in almost two years, after the recent cooling in mortgage rates. The RICS gauge improved to minus 43 in November from minus 61 the previous month, suggesting a more moderate decline in valuations. Sterling trades at $1.2626 and €1.1588.

Source: Bloomberg

Company News

Last night, Adobe released results for the financial year to 1 December 2023. The figures exceeded market expectations, but the guidance issued for FY2024 was more muted than expected. In response, the shares fell by 5% in after-hours trade.

Adobe is a global software company best known for the Acrobat product, considered the gold standard for creating, editing, scanning, signing, and sharing digital documents. The company generates annual revenue of more than $19bn through a recurring revenue model with real-time visibility – subscriptions account for more than 90% of the total. As a result, the business tends to be fairly resilient during economic downturns.

The group believes every disruptive technology has presented opportunities for Adobe to innovate and increase its addressable market opportunity. This has been true for cloud computing, mobile, as well as AI. The company estimates it has an addressable market of more than $200bn, leaving it well positioned for significant growth in the years ahead with its industry-leading products and platforms. In the field of AI, earlier in the year Google announced Adobe Firefly will be a premier generative AI partner for Bard, powering text-to-image capabilities. After an unprecedented beta trial that saw over 2bn images generated, Adobe Firefly models and the Firefly web application are now commercially available. In addition, NVIDIA and Adobe are collaborating on Generative AI optimisations across hardware and software. As a result, the group is seeing a new era of AI-enhanced creativity with innovations across its product portfolio.

During the latest financial year, revenue grew by 13% in constant currency to a record $19.4bn. Growth was driven by strong demand across Creative Cloud, Document Cloud, and Experience Cloud. In the final quarter, revenue was up 13% to $5.05bn, a touch better than the market forecast.

Digital Media is the group’s largest division, accounting for 73% of revenue. During the year, revenue grew by 14% to $14.22bn, with Creative and Document Cloud were up 14% and 15%, respectively. Digital Media Annualised Recurring Revenue (ARR) grew by $1.9bn to $15.3bn. Digital Experience grew by 12% to $4.89bn, while the smallest division, Publishing & Advertising, fell 12% to $300m.

The company earns very high operating margins, in the mid-40s. In the latest financial year, the margin rose from 45.1% to 45.9%. EPS grew by 17% to $16.07 and by 19% to $4.27 in the final quarter, better than the $4.14 expected by the market.

The business is very cash generative, with $7.3bn generated in the year, and the group ended the period with cash and short-term investments of $7.8bn. This was despite making significant investments in its technology platforms. The group repurchased $4.63bn of its shares during the final quarter, leaving $2.15bn remaining on the current $15bn programme to be completed by FY2024.

Adobe provided guidance new guidance for FY2024 which factors in current expectations for the macroeconomic environment. Revenue is expected to grow by around 10% to $21.3bn-$21.5bn, slightly below the current consensus forecast of $21.7bn. EPS is expected to growth by 11% to $17.6-$18.0.

Source: Bloomberg

Bunzl has this morning released a brief trading update which highlights that its profit for the full year will be slightly ahead of prior guidance. In response, the shares have been marked up 3% against a strong overall market backdrop.

Bunzl is a specialist international distribution and services group. The company provides an efficient and cost effective one-stop-shop solution to enable its customers to reduce or eliminate the ‘hidden’ costs of sourcing and distributing a broad range of goods that are essential to the successful operation of their businesses but which they do not themselves resell – think disposable tableware, rubber gloves, and plastic trays. The strategy is to expand the business through organic growth, consolidating markets through focused acquisitions, and continuously improving operating efficiency. The group is also supporting customers looking to transition towards packaging better suited to the circular economy, with around half of Bunzl’s packaging sales made from alternative materials.

Revenue in 2023 is expected to be broadly in line with 2022, at constant exchange rates and excluding the impact of the disposal of the group’s UK healthcare business. Within this, revenue growth from acquisitions is expected to be offset by the expected underlying revenue decline, reflective of lower Covid-19 related sales, reducing inflation benefit and wider post-pandemic related normalisation trends, particularly in North America.

Adjusted operating profit is expected to grow ‘moderately’, with the operating margin expected to be slightly ahead of the previous record level.  

As expected, the group has not provided an update on its financial position with this statement – as a reminder, at the half-year stage, gearing was 1.1x net debt to EBITDA. This provides the flexibility to make acquisitions, with 17 deals agreed in the year to date, including three announced today. As highlighted above, the group also optimised its portfolio through the disposal of its UK healthcare business. Bunzl also has a strong track record of generating shareholder returns, with more than 30 consecutive years of dividend growth.

Looking forward, despite uncertainties relating to the wider economic and geopolitical landscape, the group expects some revenue growth in 2024, at constant exchange rates, driven by announced acquisitions and slightly positive organic growth. Group operating margin is expected to be broadly in-line with 2023, and to remain substantially higher compared to pre-pandemic levels, driven by the higher margin acquisitions acquired since then, as well as an underlying margin increase.

Overall, we believe Bunzl is well placed because of its predominant focus on high volume/low value consumable products and the ability for the business to adapt quickly to changing demands and challenges, including disrupted supply chains. Its business proposition is highly valuable to its customers, allowing them to focus on their core business and run their operations more cost-effectively by achieving purchasing efficiencies and savings, while at the same time freeing up working capital, improving their distribution capabilities.

Source: Bloomberg