Good 2nd quarter earnings amidst a complicated environment


Fund Commentary
19 Sep 2016


In August a lot of attention was geared towards the slow global growth outlook, the Bank of England, the Federal Reserve, and the ongoing 2nd quarter earnings releases. The month kicked off with enduring concerns over a soft global economy that continued to pressure commodity prices and weighed against U.S. stock market sentiment as China’s economic transformation, and the awaited effects of Brexit, dulled outlooks.

On 4th August, right after the BOE’s monetary policy committee cut the bank rate by 25 basis points and decided to increase asset purchases; the governor Mr. Carney held a somewhat reassuring press conference where he reiterated his stance on the need for continued supportive action. Following these events, the pound fell and bond yields declined.

For the U.S., economic data releases were mixed but still supported a scenario of moderate expansion despite the continued slowdown in productivity growth. Additionally, Fed Chair Janet Yellen and other officials suggested that the Federal Reserve is significantly closer to a rate hike than the market was pricing in. However, the mixed data, especially on a month-to-month basis, alongside the ongoing slowdown in productivity growth coupled with the Fed having possibly cried “wolf” too many times left financial markets skeptical on the probability of a September move – as indicated by the federal funds futures contracts suggesting less than a 40% probability.

As reduced earnings forecasts set the stage for most companies in the S&P500 to beat estimates, they did. The Information Technology sector came out first with 95+% of companies surprising on the upside followed by Healthcare (90+ %) and Consumer Staples (80+ %). Nonetheless, top line figures were not as flamboyant with only 50+% of companies beating consensus forecasts. For the Fund, 11 companies reported their 2nd quarter earnings with only one disappointing the Investment Adviser’s expectations. Amerco, the holding company for U-haul international, Amerco Real Estate, Republic Western Insurance Company, and Oxford Life Insurance reported a drop in profitability for the quarter on a year-over-year basis. The main reasons identified were (1) the cost increase put through on rental trucks by Ford and General Motors, (2) a mismatch between the equipment offered and what customers wanted as the high demand for medium-size one-way trucks couldn’t be supplied, and (3) a rise in their property taxes. Nonetheless, the Investment Adviser remains confident in this company’s medium-tolong- term story and believes that the share price correction is not justified given the underlying business and its growth opportunities. Additionally, Amerco’s self-storage segment remained strong and management clearly stated that their equipment mix is being adjusted to better fit customer demands. As a result, the price correction was seen as an opportunity to increase the position’s weighting. On the other hand, ePlus which provides IT hardware, software, and services surpassed the highest of expectations for the quarter and delivered an +18.6% surprise on its bottom line and a solid +1% on its top line. The company continues to outperform in a market that is facing headwinds in both storage and enterprise. ePlus’s exposure mix, which leans more toward high growth segments and non-discretionary spending such as security and emerging technologies, seems to be a big driver behind its outperformance relative to the overall IT market.

All in all, the Investment Adviser is pleased with the 2nd quarter earnings results as the companies held by the Fund continued to confirm their strong and above-market underlying growth trajectory and remains confident that the Fund is in a good position to deliver value to its shareholders over time.


The views and statements contained herein are those of the Eric Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 14/09/16 and are based on internal research and modelling.