Overseas Market Report – Stocks Rally to End Higher; Jobs Report Eyed
Stocks pared early losses and rallied to end higher on Friday as investors weighed the impact of a disappointing jobs report. The swing from losses to gains in the S&P 500 and Dow was the largest in four years.
The U.S. economy added only 142,000 jobs in September, well off the 200,000 jobs expected by economists. July and August's reports were revised down by a combined 59,000 jobs. The unemployment rate was steady at 5.1%, but the participation rate fell in the month. Hourly wages and hours worked slipped slightly. Wages are now up 2.2% year-over-year.
Treasury bond rallied on the jobs report, sending yields lower. The yield on the 10-year Treasury bond fell below 2% for the first time since April.
Factory orders dropped by 1.7% in August versus the forecasted decline of 1.3%. Durable goods were down 2.3% while nondurable goods were off a more modest 1.1%.
At market close the Dow, S&P 500, and NASDAQ were up 1.2%, 1.4% and 1.7%
For Australian ADRs listed on the NYSE, BHP Billiton added 97 cents (3.02%) to $33.06, ResMed gained 42 cents (0.82%) to $51.67, Telstra Corporation lifted 3 cents (0.15%) to $19.91, Spark New Zealand rose 25 cents (2.64%) to $9.71 and Westpac increased 26 cents (1.23%) to $21.40.
At 7:45 AM (AEST), the 10-year Treasury note yield was 1.99% and the 5-year yield was 1.30%.
There was limited corporate news on Friday.
European markets turned higher after dipping immediately after the release of the U.S. jobs report.
The FTSE 100, Paris CAC and Germany's DAX were up 1.0%, 0.7% and 0.5% respectively.
Asian shares were generally higher.
The Hang Seng rose 3.2% while the Nikkei 225 was flat. India's Sensex was up 0.3%.
Australian Market Report – Argonaut Thought for the Day
Tox Free Solutions (TOX) | Waste happens
Earlier this year the large French waste management Company, Suez Environment, told the AFR that it had €600-700m financial capacity to acquire assets and that Australia was on the radar. Late last month, it followed through on these comments, announcing the A$485m acquisition (subject to FIRB approval) of the 40% minority stake in Sembsita Pacific that it did not already own. In our view the deal highlights the waste management consolidation opportunities in Australia.
With M&A activity on the cards, a glance through relative valuations is worthwhile. Based on Bloomberg data for a selection of waste management businesses around the world, we would argue that TOX looks relatively cheap. We acknowledge it is significantly smaller than the peers listed on the table below, but also note that its growth potential is greater (the Company has a solid EPS CAGR of >10% ’s over the last 6 years).
Figure 1: Trading metrics of selected waste management companies (Source: Bloomberg)
The share price has declined from >$3.00 in the middle of the year to $2.58 at present, no doubt influenced by the Company’s exposure to regional resource hubs. Headlines, particularly in the iron ore and LNG space, have not made for attractive reading in recent months, and companies with any exposure to these sectors have shared the pain.
It does create some earnings uncertainty in the near term, particularly where there is exposure to exploration and construction activity. However, it’s worth making a couple of points:
• We estimate around two thirds of revenue is generated outside of the resources (both mining and oil & gas) sector – in infrastructure, commercial, government and manufacturing sectors
• Of the resources exposure, we expect that at least half of the revenue is contracted and generated from producing assets
• TOX has opportunities to generate longer term earnings streams as projects under construction shift to production (the contract for operational waste management across all Chevron’s assets is a valid example)
• Consensus earnings growth forecasts for TOX are muted (i.e. relatively low forecast multiples are not due to overly ambitious earnings forecasts)
We stated in our research note post the FY15 results (Well positioned after strong cash inflows, 21 August 2015) that despite a degree of near-term earnings variability and uncertainty, in our view TOX is one of the better WA-based industrial businesses. The leadership team has managed organic and acquisitive growth well, and we believe there are opportunities for TOX to increase market share in the large, growing and defensive waste market. After good cash flows in the last half, we also noted that the current strength of the balance sheet should help the Company deliver organic and potentially acquisitive growth.
When releasing this report we upgraded to a buy recommendation after a period of share price weakness. The recent corporate activity in the sector and current peer trading metrics simply reinforce this view.
Recent Contacts & Presentations
Orbital (OEC), Intueri Education (IQE), OBJ Limited (OBJ), TFS Corporation (TFC), HRL Holdings (HRL), Tox Free Solutions (TOX), Sino Gas & Energy (SEH), Dacian (DCN), Carnarvon Petroleum (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), FAR Limited (FAR), Central Petroleum (CTP)