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Best of Lex: meta Facebook, better Twilio, debtor Sunak

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Dear readers,

Facebook is renaming itself Meta Platforms, highlighting a shift to a platform focused on virtual reality. Chief executive Mark Zuckerberg says the next frontier is the metaverse. This is a seamless online world of media, leisure and services that does not exist yet.

The US tech group must also hope the new name distances it from the controversies embroiling the Facebook social network. These are focused on an alleged preference for profit over restrictions on harmful content. The change may be effective PR. But it will be less potent in helping Facebook move away from growing signs of difficulty in its core business.

Daily active user growth slowed in the third quarter. Advertising revenue fell quarter over quarter. The Reality Labs unit, which builds its augmented reality, virtual reality and metaverse products, will cost $10bn in forgone operating profit next year. The money machine keeps on cranking but it is losing momentum.

We took the measure of metaverse hiring at Facebook last week, and decided that this too was a smokescreen.

Lex is more bullish on another US tech group. Twilio is a leader in the fast-growing but jargon-beset sector. This is the so-called communications platform as a service business. The industry provides tools to connect companies with customers, their own employees and other businesses.

As more companies interact with people remotely, the more useful Twilio’s services become. Lex thinks the 13 per cent sell-off in the shares following a slight dip in revenue growth from existing customers is overdone.

Here is something else that might be overblown: fears over the Chinese ownership of Volvo Cars. Geely will modify Volvo’s share structure and lower the valuation to $18bn, pricing the business at about nine times forward earnings. Lex, writing on Tuesday, reckoned the cold reception to Volvo’s initial public offering should soon thaw. On Friday, the Volvo listing was substantially oversubscribed ahead of its trading debut in Stockholm.

In the UK, chancellor Rishi Sunak delivered a “tax, spend and save” Budget on Wednesday that, in reality, will do little to whittle down huge pandemic debts. Commercial banks, those agents of central banks, will benefit from a cut to the bank surcharge, which will fall from 8 to 3 per cent in 2023 even as corporation tax paid by all larger businesses rises to 25 per cent. They will still be significantly worse off.

HSBC’s pre-tax profit rose 74 per cent to $5.4bn in the third quarter, a big beat on expectations, as fee income grew by a tenth. Its wealth business and personal banking helped, with reported balances up a tenth. Lex believes HSBC’s biggest political risks are priced into its shares.

Europe’s biggest wealth manager UBS has also benefited from rich people sticking with their private bankers. Quarterly results beat expectations and the Swiss banking group’s capital position has grown stronger, with common equity tier one at 14.9 per cent. Shareholders who stay put should get a bumper bonus.

Deutsche Bank has taken a different strategy. It has shifted away from equities sales and trading and split off part of its asset management arm. Private banking revenues, which include wealth management, have not moved. Market reaction hinted at disappointment even as pre-tax profits beat expectations. Shares trade under half their tangible book value, one of the cheapest in Deutsche’s universe. But investors should be pleased with the way management decisions have steadied the bank.

For non-financial companies, supply chains hold the key to earnings. Lex sees companies that are “nearshoring” — moving production closer to home — to be better bets for investors. US shoemaker Steve Madden has shifted about half of its production from Asia to Mexico and Brazil. Clogs maker Crocs plans to move some production from Vietnam to China and Indonesia.

Delivering those goods after production is another problem. The volume of containers heading from Asia to the US hit a record in September. Container shipping rates are up about 80 per cent in the past six months.

Ocean Network Express, Japan’s main international container shipping company, has benefited. But its owners, which are listed shipping lines, still have disappointing operating margins. Shares of the smallest, Kawasaki Kisen, are up more than 300 per cent in the past year. Investors should consider taking profits.

A few businesses are proving they are above common cares, including higher freight costs. Hershey, the US maker of Reese’s Peanut Butter Cups, continued its strong run. Earnings topped expectations in the third quarter and raised forecasts thanks to pent-up demand ahead of Halloween. Lex thinks the stock is undervalued. It trades at just 26 times forward earnings, a steep discount to Swiss chocolate maker Lindt and British chocolatier Hotel Chocolat. The latest results underscore the ability of some companies to raise prices to offset higher costs.

Enjoy your weekend,

June Yoon
Lex writer

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