Morning Note: Market news and updates from Intuit and Medtronic.
Market News
Gold has dropped to around $2,330 per ounce, nearing two-week lows, and set for its first weekly drop in three, as investors reduced expectations of Fed rate cuts following the recent US economic release. Yesterday, S&P Global’s May flash readings of the manufacturing, services, and composite PMIs show US business activity is accelerating. At the same time, the number of Americans filing for unemployment claims were less than expected, indicating strength in the labour market. This followed the Fed’s May meeting minutes released earlier in the week, which revealed ongoing concerns about sticky inflation, with several officials indicating an inclination to raise interest rates should price growth persist.
US equity markets drifted off late in the session – S&P 500 (-0.8%), Nasdaq (-0.4%) – with Asian indices following suit this morning in Asia: Nikkei 225 (-1.2%); Hang Seng (-1.4%); Shanghai Composite (-0.3%). Japan’s CPI ex-fresh food slowed to 2.2% in April. The data is unlikely to deter the Bank of Japan, which is seen raising rates in July and October, according to Bloomberg Economics.
The FTSE 100 is currently trading 0.8% lower at 8,271. Traders ruled out an intertest rate reduction from the Bank of England next month and now see a one-in-three chance for one in August. This follows a continued recovery in consumer confidence – GfK‘s key sentiment tracker climbed two points in May to -17. This contrasted with the retail sales data for April, which slipped 2.3%, far more than the 0.5% drop predicted. Sterling trades at $1.2690 and €1.1735.
Nvidia cut the price of its H20 chip in China due to competition from Huawei, Reuters reported. Meanwhile, Alphabet and Meta held talks with major Hollywood studios about licensing content for use in AI video generation software.
Source: Bloomberg
Company News
Last night, Intuit released results for the three months to 30 April, the third quarter of its financial year to July 2024. The group highlighted another strong quarter, with earnings coming ahead of market expectations. Although the full-year guidance was raised, the size of the upgrade came as a slight disappointment to the market. In response, the shares were marked down 6% in after-hours trading.
Intuit supplies finance software to individuals, small companies, and accountants. With its strong brands (Quickbooks and TurboTax), the company is the de facto standard for consumer tax preparation software and small business financial management software in the US, and increasingly overseas. The company is focused on expanding its share in DIY, transforming the assisted tax preparation category, and expanding beyond tax with a consumer platform. Growth prospects remain attractive, with large cross-selling opportunities in the US as the group migrates its customer base to the cloud, while underpenetrated international markets provide a growth opportunity. The group also owns Credit Karma (consumer credit) and Mailchimp (marketing automation platform) taking it deeper into personal finance and small business marketing services. With data and AI core to its strategy, the group is accelerating innovation across its global financial technology platform to power the prosperity of consumers and small businesses.
In the near term, there is some risk of customer churn if business failures pick up and from increased bad debts from working capital loans made by the company. However, over the medium term, with its suite of online products, Intuit believes it has an addressable market of $300bn+ driven by the shift to virtual solutions, the acceleration to online and omnichannel capabilities, digital money offerings, and the need to help consumers improve their financial health. The group is aiming to grow its revenue by double-digits in organic terms and expand its operating margin. Despite an uncertain macro environment, in the latest quarter, total revenue grew by 12% to $6.7bn, in line with the consensus forecast.
In the Small Business & Self-Employed division, revenue grew 18% to $2.4bn, split between Online Ecosystem (+19% to $1.8bn) and Desktop Ecosystem (+14% to $633m). Within the Online Ecosystem, QuickBooks Online Accounting grew 19%, driven primarily by customer growth, mix-shift, and higher effective prices. Online Services grew 20%, driven by growth in payroll, Mailchimp, and payments. Total international online revenue grew by 12% on a constant currency basis.
In the Consumer division, revenue rose by 9% to $3.7bn, while ProTax grew by 3% to $254m. Credit Karma, the consumer credit business, is treated as a separate division. During the quarter, the unit generated revenue of $443m, up 8%, primarily reflecting growth in Credit Karma Money, credit cards, personal loans, and auto insurance.
Group operating income grew by 11% to $3.7bn, while adjusted EPS rose 11% to $9.88, topping the $9.37 consensus forecast.
The business is highly cash generative and ended the quarter with net debt of $1.3bn. Intuit takes a disciplined approach to capital management, investing cash in opportunities that yield an expected return on investment greater than 15%. The group repurchased $584m of shares during the quarter and has $2.1bn remaining of a new authorisation. A quarterly dividend of 90c has been declared, 15% higher than last year.
The company has nudged up its guidance for the financial year to July 2024. Revenue is now expected to grow by 13% (vs. 11%-12% previously) to $16.18bn, while adjusted EPS is now expected to grow by 17% (vs. 12%-14% previously) to $16.79-$16.84. For the current quarter, the group is targeting revenue growth of 13% to 14% and EPS of $1.80-$1.85.
Yesterday afternoon, Medtronic released results for its financial year to 26 April 2024 which were pretty much in line with market expectations. However, the group’s forward-looking guidance was somewhat of a disappointment. In response, the stock was marked down 5%.
Medtronic is one the largest medical device companies in the world, with products to treat 70 health conditions, including cardiac devices, cranial and spine robotics, insulin pumps, surgical tools, and patient monitoring systems.
During the year, revenue increased by 5.2% on an organic basis to $32.4bn. In the final quarter, the business accelerated slightly, with revenue up 5.4% in organic terms to $8.6bn. Growth was a touch ahead of expectation ($8.4bn) and broad-based, with mid-single digit or higher organic revenue growth in all four segments.
By region, in the full year, US revenue rose by 3.2% in organic terms to $16.6bn, non-US developed market revenue was up 6.0% to $10.0bn, and emerging markets revenue grew 10.1% to $5.8bn.
The business is split into four ‘portfolios’: Cardiovascular (37% of revenue); Neuroscience (29%); Medical Surgical (26%); and Diabetes (8%). During the year:
Cardiovascular revenue grew by 5.0% in organic terms, with a high-single digit increase in Structural Heart & Aortic, mid-single digit increase in Coronary & Peripheral Vascular, and low-single digit increase Cardiac Rhythm & Heart Failure, and low-single digit.
Neuroscience grew by 5.2% in organic terms, with a high-single digit increase in Cranial & Spinal Technologies, mid-single digit increase in Specialty Therapies, and a low-single digit increase in Neuromodulation.
Medical Surgical rose by 4.7%, with a mid-single digit increase in Surgical & Endoscopy and low-single digit increase in Acute Care & Monitoring.
Diabetes revenue grew by 8.6% in organic terms.
Medtronic continues to take actions to improve the overall performance of the company, including streamlining its organisational structure and strengthening its supply chain. During the year, the group completed the divestiture of its Renal Care Solutions business.
The company is seeing early benefits of COGS efficiency efforts, with the gross margin only down 40 basis points to 66.1%. The operating margin fell by 100 basis points to 25.6%. Full-year EPS was down by 2% to $5.20 at constant exchange rates. In the final quarter, EPS fell by 7% to $1.46, in line with the market forecast of $1.45.
Annual free cash flow rose by 14% to $5.2bn, driven by improvements in working capital, with conversion of 75%. The group ended the year with net debt of $17.0bn.
The group is undertaking the largest planned R&D increase in its history (+10%) to accelerate long-term growth and capitalise on a long list of opportunities. There have been around 130 new product approvals in the last 12 months, with several just starting, or yet to contribute, to growth. The group’s strategic collaboration with NVIDIA to accelerate AI innovation for healthcare is ongoing with six AI products already FDA approved.
The company remains committed to returning a minimum of 50% of free cash flow to shareholders, primarily through dividends and share repurchases. The company is a constituent of the S&P 500 Dividend Aristocrats Index, having increased its payout for 47 consecutive years. The latest annual payment is expected to be $2.80 per share, up 1.4%, and equating to a yield of 3.5%. During the final quarter, the company also bought back $1.5bn of its shares.
Guidance for the financial year to end-April 2025 has been provided, driven by the beginning of new product cycles in some of MedTech’s most attractive markets, which is further enhanced as the company applies AI across its portfolio. Organic revenue is expected to grow by 4%-5%, while adjusted EPS is expected to be $5.40-$5.50, up 4%-6%. For the current quarter the target of $1.19-$1.21 is behind the consensus forecast of $1.25.