Tiger Key Market Highlights – Starbucks, Johnson & Johnson
US rebounded marginally from a sequential fall in producer prices, post a sharp sell-off from major US indices on Tuesday, after key inflation data were above estimates with the CPI showing 8.3%, even as energy prices cooled.
Core CPI which excludes food and energy components also came in at 6.3% versus prior month of 5.9%, which shows stickiness in key prices such as rent and electricity.
While it has already been widely expected that a 75bps rate hike was possible in the upcoming week, the market raised the probability of potentially an even tighter monetary condition. US short term 2-year yields surged to over 3.8%.
The ECB also decided on a jumbo rate hike of 75bps from zero last week, after the 50bps hikes in July. Europe is in a catch-22 situation given that inflation in August is expected to hit 9.1% and may continue to creep higher in the months into winter as energy prices continue to remain high, given the restricting of gas from Russia. Moreover, we expect crude oil prices to stay firm, sanctions on Russian oil are expected to start in December.
China continues to ramp up stimulus to boost the housing market demand, including having local governments relax the home purchase restrictions. Amid the string of disruption to the economy due to the tight “zero-COVID” policy, it is a surprise that top officials have started resuming overseas travel, potentially signifying their inflection in view of the pandemic situation.
$Starbucks(SBUX)$ raised its 3-year outlook on an expected recovery from its China operation, seeing 15%-20% rise in earnings per share over the next 3 years backed by solid same store growth as well as implied margin improvements, which is above the comparable restaurant sector’s average.
Despite the COVID situation in China, the company is looking to grow its store count to 9,000 by 2025 from 5,700. Global network of stores is expected to reach 45,000 by 2025 from 35,000. Starbucks is also resuming its share buybacks with $20b to be returned to shareholders through 2025. SBUX trades 17x/15x FY23/24 enterprise value to EBITDA multiple.
$Johnson & Johnson(JNJ)$ reaffirms guidance with operational sales growth of 6.5%-7.5% for 2022 and authorized a $5 billion share repurchase given its strong balance sheet. Its stronghold in the pharmaceuticals continues to be a key driver of top line with its oncology and auto-immune diseases drugs.
J&J is also seeing tailwinds from its medical devices segment as patient volume recovers towards pre-covid levels. J&J previously announced it will be splitting its pharmaceutical and medical devices sector from the consumer health segment which is expected to create more shareholder value as two separate entities. JNJ trades at 16.3x/15.5x FY22/23 price to earnings multiple.
JNJ has outperformed the market with a decline by 3.75% YTD given its more defensive qualities as a leader in the health care sector.
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