Top US stocks to watch: Banks, Apple and eBay

Bank of America, Wells Fargo and Citigroup all beat expectations, Apple rumoured to be disrupting the buy now pay later industry, eBay sells down its stake in Adevinta, things are looking up for Delta and American Airlines, and Nike fails to block a probe into its tax affairs.

USA (1)

Bank of America

Bank of America reported better-than-expected earnings in the second quarter after releasing reserves that had been set aside for bad loans, and said it expects to return more cash to shareholders going forward.

Bank of America reported net income of $9.2 billion in the three months to the end of June, a significant jump from the $3.5 billion booked the year before. Diluted EPS rose to $1.03 from just $0.37 and came in well ahead of the $0.77 expected by analysts. Earnings were boosted by the $2.2 billion of reserves released, although this was lower than the $2.7 billion released in the previous quarter. Bank of America said it returned $6 billion in dividends and buybacks during the quarter and that it expects to ‘return a higher amount in the coming quarters’.

‘Despite the continued challenge of low interest rates, the diversity and leadership positions of our eight lines of business enabled us to benefit from a faster economic recovery this quarter. We believe our continued focus on client selection and responsible growth has positioned us well. Total loan balances grew for the first time since the first quarter of 2020 even as we recorded the lowest credit loss rates in 25 years,’ said chief financial officer Paul Donofrio.

Wells Fargo

Wells Fargo also beat expectations in the second quarter as it returned to profit.

Wells Fargo reported a profit of $6.04 billion in the three months to the end of June, or $1.38 per share. That swung from the $3.84 billion, or $1.01 per share loss booked the year before. Profits were boosted by $1.6 billion of reserves for bad loans being released. The profit was better than the $0.95 expected by analysts. Total revenue was up 11% to $20.27 billion in the quarter.

‘In the beginning of the year we discussed a path to improving our returns. If you look at our results and exclude the significant reserve release and outsized venture capital gains, we believe we are doing what’s necessary to improve the underlying earnings power of the company and with the ability to return significant excess capital beginning in the third quarter are on a clear path to achieve double-digit ROTCE, which is the first step to achieving returns in the mid-teens,’ said chief executive Charlie Scharf.

Citigroup

Citigroup also beat expectations in the second quarter and said the economic recovery is taking hold faster-than-expected.

Net income of $6.2 billion was much-improved from the $1.05 billion reported the year before. EPS jumped to $2.85 from $0.38 and came in well ahead of the $1.96 forecast by analysts. Profits were boosted by $2.4 billion of reserves released that had been set aside for bad loans.

‘The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising. We saw this across our businesses, as reflected in our performance in Investment Banking and Equities as well as markedly increased spending on our credit cards. While we have to be mindful of the unevenness in the recovery globally, we are optimistic about the momentum ahead,’ said chief executive Jane Fraser, who took over at the helm earlier this year.

Apple and Goldman Sachs

Apple and Goldman Sachs are reported to be preparing to launch a new buy now, pay later service that could disrupt the industry, according to Bloomberg.

The service will allow customers purchasing anything using Apple Pay in instalments and rival similar offerings from the likes of Affirm and PayPal. Goldman Sachs is the natural partner considering it already provides support for Apple’s credit card.

Buy now, pay later has boomed since the start of the pandemic and analysts believe Apple’s entry could be more disruptive than anything banks or credit companies could launch due to its reach, with billions of people hooked into the Apple ecosystem of products.

eBay

EBay has agreed to sell a chunk of its stake in Adevinta to Permira after agreeing to reduce its holding in the company with Austrian regulators.

Permira is buying 125 million shares in Adevinta, a leader in online classifieds around the world, for $2.25 billion. That is at a 5% discount to the volume-weighted average price over the last 30 days and will reduce eBay’s stake in the business to 34% from 44%. Notably, Permira has a 30-day option to buy an additional 10 million shares for another $180 million, which, if exercised, would cut eBay’s stake further to 33%.

EBay agreed to cut its stake in Adevinta to 33% with Austrian regulators in order to secure approval for its plans to create a new leader in online classifieds by selling eBay’s Classifieds Group to Adevinta in return for $2.5 billion in cash and 540 million shares.

Nike

Nike has lost its battle to prevent a probe into its tax affairs in Europe after the bloc’s second-highest court, the General Court of the European Union, supported an investigation that was launched two years ago.

The investigation is focused on how Nike may have paid less tax by using royalty payments between its Dutch subsidiaries and other Nike companies. Regulators claim Nike has an advantage by paying more royalties and therefore reducing the amount of tax payable in the Netherlands.

Delta Air Lines

Delta Air Lines beat expectations in the second-quarter of its financial year and said domestic leisure travel has now fully recovered to pre-pandemic levels while also signalling that the days of burning through cash are behind it.  

The airline said adjusted operating revenue was down 49% in the second-quarter to $6.35 billion, although this was slightly better than the $6.22 billion expected. Meanwhile, net income plunged 55% to $652 million from $1.44 billion.

Delta Air Lines said it expects revenue to be down 30% to 35% in the third quarter compared to two years ago, before the pandemic hit. That would compare to the 60% fall reported in the first quarter.

American Airlines

Meanwhile, peer American Airlines released second-quarter results yesterday that revealed it is expecting to return to positive cashflow for the first time since the start of the pandemic.

The company said quarterly revenue was down around 37.5% year-on-year, slightly better than the 40% decline forecast. It said earnings at the bottom-line will be anywhere between a $35 million loss and a $25 million profit.

More importantly, American Airlines said its cash pile grew by around $1 million per day in the quarter, bringing an end to the days of extreme cash burn. This meant American Airlines ended the period with $21.3 billion in liquidity, which also benefited from an improvement in forward bookings.

Philip Morris International

Tobacco giant Philip Morris International’s proposed $1.45 billion takeover of British drugmaker Vectura looks set to come under the spotlight after reports that the UK’s minister for business, Kwasi Kwarteng, is trying to gain more information on the rationale behind the deal.

The Times reported that there are concerns that a tobacco company is looking to buy a business that develops treatments against the conditions caused by smoking. Philip Morris has said the deal will give Vectura access to its inhalation technology that has been developed during its creation of next-gen products.

‘The acquisition will provide our people with the opportunity to form the backbone of an autonomous inhaled therapeutic business unit of PMI, helping develop products to improve patients’ lives and address unmet medical needs,’ said Vectura chairman Bruno Angelica.

Alexion Pharmaceuticals

AstraZeneca will formally complete its $39 billion merger with Alexion Pharmaceuticals next week after being given the green light by the UK’s Competition & Markets Authority.

The pair agreed to merge late last year in a deal that will see AstraZeneca pay $60 in cash and issue 2.1243 American Depositary Shares for each Alexion share. This will see Alexion shareholders own around 15% of the combined group. With the UK regulator being the last to approve the deal, it should now be completed next week on Wednesday July 21.

The merger is set to combine Alexion’s strong position in immunology with AstraZeneca’s strengths in oncology, cardiovascular, renal and metabolism, and respiratory diseases. It will also see AstraZeneca push Alexion’s portfolio in new countries and territories. The pair are also launching a new rare disease unit called Alexion AstraZeneca Rare Disease, which will be based in Boston in the US. The combined group is expecting to deliver double-digit revenue growth through to 2025 and the deal should enhance earnings in the first year.

Tencent and Alibaba

Reports suggest that Chinese giants Tencent and Alibaba are considering gradually opening up their services to one another, according to the Wall Street Journal.

The report states the pair are considering the likes of adding Tencent’s WeChat Pay to Alibaba’s ecommerce platforms, Taobao and Tmall, as a starting point. Currently, both have restrictions in place that prevent customers from using Tencent services on Alibaba platforms, and vice-versa.

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