Friday, August 14, 2020

Did Investors Make a Good Call on Deutsche Telekom?

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What’s happening: Shares of Deutsche Telekom AG gained on Thursday despite the German telecommunications company reporting a decline in net profits for the second quarter.

What happened: The coronavirus pandemic had a limited impact on the company’s business during the second quarter, as people depended more on their phones amid shelter-in-place orders.

Despite this, Deutsche Telekom’s bottom line was hit in the quarter. Revenues grew on the back of the merger between T-Mobile and Sprint, enabling management to raise projections.

How were the results: Deutsche Telekom reported a decline in net profits for the second quarter, although core earnings improved.

  • Group revenues climbed a whopping 37.5% to €27 billion, exceeding market estimates.
  • Net profits contracted to €754 million, from €944 million in the same quarter last year.
  • Core profits, or adjusted EBITDA AL (earnings before interest, taxation, depreciation and amortization after leases), rose to €9.83 billion, from €6.28 billion in the year-ago quarter, and coming in higher than the consensus view of €8.92 billion.

Why it matters: Deutsche Telekom’s US business, T-Mobile, closed its $23 billion takeover of Sprint on April 1, which boosted revenues in the second quarter. Excluding the impact of the merger and exchange rates, the German company’s revenues slipped by 0.6% in the second quarter. Revenues from mobile roaming were affected the most due to travel restrictions by various countries.

CEO Timotheus Höttges said that Deutsche Telekom now intends to focus on Europe, following a surge in its market capitalization to €72 billion, which puts the company ahead of rivals Vodafone, Orange, and Telefonica.

The telecommunications giant raised its projection for adjusted EBITDA after leases for the year to around €34 billion, from its earlier forecast of €25.5 billion. However, considering integration costs associated with the Sprint takeover, the group lowered its guidance for free cash flows after leases to €5.5 billion, from its earlier forecast of €8 billion, missing analyst expectations.

How shares responded: Shares of Deutsche Telekom gained 1.3% to close at €15.31 on Thursday, following the release of quarterly results. The stock has gained only around 6% year to date, versus the 47% surge in T-Mobile’s share price.

What to watch: With the completion of its merger deal in the US and the company now looking to focus in Europe, investors expect the company’s business to grow at a rapid pace in the near term. The easing of travel restrictions by some countries is also expected to benefit the company’s roaming revenues.

The Markets Today

     

European stocks will be in focus today, ahead of a basket of economic reports due to be released later in the day.

Context: Stocks in Europe closed lower on Thursday, as investors focused on the lack of progress in talks around the coronavirus relief package in the US.

Details: Market sentiment remained subdued yesterday, as US House Speaker Nancy Pelosi saying that no progress had been made by Washington in deciding the new covid-19 aid package.

Meanwhile, the US Labor Department reported better-than-expected jobless claims data for the latest week. People filing for claims declined to 963,000 in the week ending August 7 and came in lower than the consensus estimate of 1.1 million.

The Europe Stoxx 600 index closed lower by 0.6% on Thursday, with bank stocks leading the decline. Retail shares bucked the overall trend, adding 0.2% in the previous session.

Shares of Thyssenkrupp tumbled more than 16% on Thursday after the German steel company recorded a quarterly loss of €679 million. Aegon’s stock tumbled more than 15% after the insurer posted a 67% decline in profits for the first half of the year. Shares of Carlsberg fell by around 6% after the brewer projected a decline in its profits this year by 10% to 15%.

What to watch: Markets await data on GDP, balance of trade and employment change from the Eurozone. The Eurozone economy is expected to contract by a record 15.0% in the second quarter. Analysts expect the region’s trade surplus to widen to €12.6 billion in June, from €9.4 billion in the previous month. The number of employed persons, which dropped by 0.2% to 160.4 million during the first quarter, is expected to drop by 1.7% in the second quarter.

Investors will continue to monitor the covid-19 numbers, with total cases exceeding 20.7 million globally.

Other Markets: US indices trading closed mixed on Thursday, with the Dow Jones index and S&P 500 down by 0.29% and 0.20%, respectively, and the Nasdaq 100 gaining 0.27%.

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What else to watch today

     

France’s inflation rate, Turkey's industrial production, current account and retail trade, Brazil’s IBC-Br economic activity index, Canada’s new motor vehicle sales and manufacturing sales as well as the US retail sales, unit labor costs, labor productivity, industrial production, University of Michigan's consumer sentiment index, business inventories and Baker Hughes crude oil rigs.