By: James Cooke, Kathy Davey, Magdel Neale, Dylan Griffiths.
Microsoft (MSFT US)
Microsoft, founded in 1975, is one of the world's leading technology companies with products that include the Windows operating system, Office, and Azure cloud services. The company offers licensing and support for its wide portfolio of software products, designing, selling, and delivering devices and online advertising to a global audience. It also owns LinkedIn and recently bolstered its gaming business by combining Xbox with Activision Blizzard.
For the fiscal first quarter to the end of September 2023, the company released another set of strong results that exceeded market expectations. The Cloud business (Azure) delivered another impressive performance as demand, particularly from commercial customers, remained strong. Productivity and Business Processes also saw an improvement, however, growth in the More Personal Computing segment remained soft, with the tough macroeconomic environment still having a negative impact on demand for personal computers and Xbox gaming consoles. Profitability across the board was strong, with operating expenses being well- controlled (R&D, marketing, and labour costs were all flat y/y). This led to further expansion in the margin. The outlook for 2Q24 and beyond was positive.
Microsoft is trading on a forward PE of 31.0 times, this represents a 31% premium to its peers against an average of 16% over the last five years. This is balanced against growth that is expected to be steadier than and well above that of the broader sector in the medium term. Relative to its own history, the stock is still trading within fair value range, despite a recent sharp appreciation in the share price.
Nvidia (NVDA US)
Nvidia was founded in 1993 by current CEO, Jensen Huang, and operates as a fabless chipmaker that outsources production to third party foundries such as Taiwan Semiconductor Manufacturing Company Limited (TSMC) and Samsung. The company created the Graphics Processing Unit (GPU) in 1999, which was originally used to render graphics in PC gaming but now has multiple applications including in Artificial Intelligence (AI). The GPU can render images faster because of its parallel processing capability, which allows the processor to perform multiple calculations at the same time. Along with GPUs and Central Processing Units (CPUs), Nvidia also develops Data Processing Units (DPUs), which are specialists in moving data around in data centres. The DPU is the third member of the data-centric accelerated computing model.
Nvidia reports across five divisions (Data Centre, Gaming, Professional Visualisation, Automotive, and OEM and Other) with Data Centre being the largest contributor to revenue.
For the third quarter ended October 2023, Nvidia reported a strong beat on consensus across several key metrics as the company continued to record double- and triple-digit growth numbers across most of its big businesses. Data Centre remained front and centre, as global demand continued to soar. The recovery in the Gaming segment was healthy. Management's outlook for the fourth quarter was also positive.
The stock is trading on a forward PE of 24.3 times, in-line with its peers, and below its own average rating over time. This is against current expected earnings growth of ~268% for FY24 and ~66% for FY25.
Siemens (SIE GR)
Siemens is a leading global industrial conglomerate based in Germany operating in the subsectors of Automation, Infrastructure, Transport and Healthcare. The company has a strong focus on technology, offering both hardware and software solutions to its clients. Siemens core divisions are 'Digital Industries' which focuses on automation, and 'Smart Infrastructure' which focuses on electrification, building management systems and electrical products. The company also runs a 'Mobility' division which is focused on trains, railway signalling and communications products, and has a 75% share in 'Siemens Healthineers'.
For the full year ended September 2023, the company delivered a decent set of results. The top- and bottom-line metrics topped management guidance for the financial year. The group highlighted large contract wins and contract renewals as the driving force behind a strong order book, and ultimately sales growth. Strong free cashflow generation across all industrial businesses was also a notable positive. The increased dividend was well received.
Management's growth outlook for FY24 is conservative due to continued destocking of inventories by customers and distributors, particularly in China. This is expected to normalise in 2H24 and management still anticipates “high value” growth for the financial year despite a muted macroeconomic backdrop.
Siemens trades just above its five-year average price to earnings at 15.1 times and just below its five-year average EV/EBITDA at 10.7 times. The company trades at a discount to its peers and we believe this gap can close as the company takes advantage of opportunities to simplify the structure further.
NXP (NXPI US)
NXP is a global semiconductor company that is based in Europe and listed on the Nasdaq. The company provides secure connectivity solutions for embedded applications in the automotive, industrial, internet of things (IoT), mobile, and communication infrastructure markets.
For the third quarter to 1 October 2023, the bottom-line came in at the upper end of previous guidance, while the top-line was in line with guidance. Revenue was flat compared to the previous year but grew slightly sequentially as the company benefitted from recovery in demand for Mobile (Virtualised Secure Transactions & Access), and Industrial & IoT (Edge Processing, Connectivity & Security) businesses, as well as resilience in automotive solutions (~55% of revenue), against an underperformance by core- industrial and communications infrastructure & other (~17% of revenue). While the automotive sector itself is cyclical, the average content from NXP per vehicle is increasing dramatically. Unlike some peers, the company did not price gouge during the post- pandemic shortage of semiconductors and instead reaffirmed long-term collaborations with major automobile manufacturers. Profitability and cash flow generation improved sequentially, but still lagged the previous year's performance. Similar to peers, this result supported optimism by industry players that the semiconductor industry had turned the corner and is starting to recover, as evidenced by the group's robust sequential growth (q/q) in key metrics. The semiconductor sector has been operating in a tough environment, underpinned by weak consumer demand for electronics, inventory build-ups due to slow destocking cycles, and high inflation.
NXP is trading on a forward PE of 10.9 times, below its long-term average.
Eaton (ETN US)
NEaton is a power management company manufacturing electrical products for residential, commercial, and industrial construction, utilities, vehicles, and aerospace. The company helps customers manage power with efficiency and safety. Eaton is diversified across its product range and regionally, selling products to customers in over 175 countries. The company is among the top four large global players worldwide in the low-medium voltage electrical industry with the strongest distribution network in the US.
For the third quarter to the end of September 2023, Eaton delivered yet another quarter of record numbers. Earnings came in ahead of both management's previous guidance and consensus expectations, with revenue in line with forecasts. Sustained growth was seen across all segments, bolstered by another solid operating performance, supported by further cost controls, which led to strong margin expansions. Robust demand across markets propelled backlogs. The group continued to be highly cash generative, with double-digit increases in both operating cashflow and free cashflow.
The outlook was also encouraging - with upward revisions in adjusted EPS, organic sales growth and operating cashflow forecasts.
Eaton is trading on a forward PE of 22.8 times, which looks full compared to both its long-term average and peers. However, consensus has been slow to adjust earnings expectations higher and we believe this rating will come down once new earnings estimates are factored in. The company's electrical backlog is three times its historical size (this is high margin business) and order growth in Aerospace is persisting.
