Month: October 2022

Commonwealth Bank of Australia (ASX: CBA) shares are in the green again today, after finishing in positive territory every trading day last week.

CBA shares closed on Friday trading for $103.22 a share and in Monday morning trade, are swapping hands for $104.805 apiece, up 1.54%.

That’s today’s price action for you.

Now, here’s why CommBank is looking to shake up the board over at the Reserve Bank of Australia (RBA).

Why CommBank wants to see some changes with the RBA board

We don’t have to tell you that inflation in Australia is running hot.

Whether you’re filling up your car, buying groceries, or planning a holiday, you’ll have noticed the bigger hit to your pocketbook.

The latest official figures put inflation in Australia at a blistering 7.3%. And that number is expected to edge into the 8% range before beginning to pull back in 2023.

In a bid to tame inflation, the RBA has been steadily hiking interest rates, from the historic low of 0.10% back in May to today’s 2.60%. And the central bank is widely expected to raise rates by another 0.25% or even a full 0.50% when the board meets tomorrow.

That’s a far cry from what RBA governor Philip Lowe was telling the public last year. At the time, he offered reassurances that rates would remain at rock bottom levels into 2024.

And that, amongst other grievances, doesn’t sit well with CBA chief economist Stephen Halmarick, who said those types of forecasts should not be made again.

“Forward guidance should only be based on a set of pre-conditions related to meeting the inflation objective and never calendar based, either implicitly or explicitly,” he said (as quoted by The Australian Financial Review).

In a submission to an independent review of the RBA’s board, CBA said it wanted to see a major shakeup of the board when it comes to making monthly interest rates decisions, with a greater presence of monetary policy experts joining public servants and business leaders.

“The current structure of the RBA board is not compatible with generally accepted best practice for boards in Australia,” Halmarick said. “A widely accepted structure for an effective board is for the board to have nine members in a 3-3-3 model.”

And the RBA board should open the door to senior executives from outside the organisation.

“There is a need to facilitate the two-way flow of people into and out of the RBA and the private sector. This could be done at multiple levels across the RBA,” Halmarick added.

How have CBA shares been tracking?

CBA shares are up 3.58% year to date, a solid result when compared to the 9.6% loss posted by the S&P/ASX 200 Index (ASX: XJO) so far in 2022.

The post Own CBA shares? Here’s why the bank wants to shake up the RBA board appeared first on The Motley Fool Australia.

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More reading

• Is this ASX 200 share really offering a dividend yield above 30%?
• Lake Resources share price climbs on quarterly operations progress
• The BHP share price went backwards in October. Time to pounce?
• Why is the Core Lithium share price outperforming today?
• The ANZ share price has had a strong run, rising 10% in October

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Lake Resources N.L. (ASX: LKE) share price is firing up today after the company released its quarterly report for the period ending 30 September.

Shares in the ASX lithium explorer are currently trading 3.55% higher at $1.02 apiece at the time of writing.

Let’s look at the company’s highlights for the quarter.

What did Lake Resources report?

• Net cash flow used in operating activities: $9 million
• Net cash flow used in investing activities: $17.34 million
• Cash and cash equivalents at end of the period: $158.87 million
• Estimated quarters of funding available: 14.27

Lake Resources provided an overview of its operations in the report.

The company advised its Kachi demonstration plant installation in Argentina was complete. Commissioning to test the plant was conducted during the quarter. The plant was tested in California, and the test was reportedly successful.

Meanwhile, drilling at Kachi continues. The company is conducting two different types of drilling to both improve its estimates on how many resources are available and to find more resources.

At Lake Resources’ Cauchari, Olaroz, and Paso lithium brine projects, also in Argentina, the company is continuing its lithium exploration via a drilling program.

What else happened?

Lake Resources made two key leadership changes in the quarter. David Dickson was appointed CEO and managing director, with a mandate to “lead the company’s transition from exploration focus to
development, construction and toward production”.

Sean Miller also joined as the corporate development officer “to accelerate activity across Lake’s 100% owned exploration projects Cauchari, Olaroz, and Paso”.

In other developments, Lake Resources signed an offtake agreement with WMC Energy and SK for up to 50,000 tonnes per annum of lithium carbonate.

The company also advised Definitive Feasibility Studies (DFS) and Environmental Social Impact Assessment (ESIA) studies were continuing. The demonstration plant validation is required before the DFS can be completed.

Lake Resources share price snapshot

The Lake Resources share price has slipped into the green year-to-date, up 0.99%, and is trading 8.51% higher over the past 12 months. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) is down 7.94% and 6.42% over the respective periods.

The company’s market capitalisation is around $1.42 billion.

The post Lake Resources share price climbs on quarterly operations progress appeared first on The Motley Fool Australia.

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More reading

• Is this ASX 200 share really offering a dividend yield above 30%?
• Own CBA shares? Here’s why the bank wants to shake up the RBA board
• The BHP share price went backwards in October. Time to pounce?
• Why is the Core Lithium share price outperforming today?
• The ANZ share price has had a strong run, rising 10% in October

Motley Fool contributor Matthew Farley has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Woolworths Group Ltd (ASX: WOW) share price has descended slightly lower during the month of October.

Woolworths shares have shed 2.51% since market close on 30 September and are currently trading at $33.095 on the last day of October. At the time of writing, Woolworths shares are up around 1%.

Let’s take a look at how October played out for the Woolworths share price

How did the month play out?

Woolworths’ major competitor on the ASX has had a relatively flat month. Coles Group Ltd (ASX: COL) shares have fallen 0.3% since market close on 30 September. The S&P/ASX 200 Consumer Staples Index (ASX: XSJ) has also dropped 0.09% over the same time frame.

Woolworths shares dropped 3.15% on October 26. On this day, Woolworths highlighted challenges that may lay ahead for the company. Woolworths CEO Brad Banducci said:

As we move further into F23, we expect the operating environment to remain challenging but we are extremely focused on returning to consistently good customer and team experiences.

We are very conscious of the challenges of inflation and cost-of-living pressures for our customers.

Another notable event in October was news of a data breach impacting online retailer MyDeal. Woolworths acquired MyDeal in September. Data including names, email addresses, phone numbers, and dates of birth of around 2.2 million customers were impacted.

However, no payment data, driver licence details, or passport numbers were affected. MyDeal also has a completely separate platform to other businesses within Woolworths.

Inflation worries and interest rate rises have also weighed on investors’ minds during October.

Looking ahead, analysts at Wilsons have recently named Woolworths as one the 22 high-yield dividend shares it recommends.

Goldman Sachs analysts also placed a buy rating on the Woolworths share price in October with a $42.70 price target. Goldman is predicting Woolworths to pay fully franked dividends of $1.07 per share in FY 2023 and $1.16 in FY 2024.

Share price snapshot

The Woolworths share price has descended 13% in the past 12 months, losing that amount during the year to date.

For perspective, the S&P/ASX 200 (ASX: XJO) has lost about 9% in the past year.

Woolworths has a market capitalisation of more than $40 billion based on the current share price.

The post How has the Woolworths share price fared in October? appeared first on The Motley Fool Australia.

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More reading

• Amazon stock just tanked. Could this be a canary in the coal mine for ASX 200 retail shares?
• Woolworths share price dumps 3% as forecasts ‘remain challenging’
• 22 high-yield ASX dividend shares Wilsons is targeting
• 5 things to watch on the ASX 200 on Wednesday
• Brokers name 2 ASX 200 shares to buy for a retirement portfolio

Motley Fool contributor Monica O’Shea has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Pushpay Holdings Ltd (ASX: PPH) share price has returned from its trading halt with a bang.

In morning trade, the donation technology company’s shares are up 9% to $1.15.

Why is the Pushpay share price storming higher?

The catalyst for the rise in the Pushpay share price on Monday has been news that the company has accepted a takeover offer from the Sixth Street and BGH Capital Consortium.

Sixth Street is a global investment firm and BGH Capital is an Australia and New Zealand-focused private equity firm. Together, the two parties currently hold, in aggregate, 20.34% of the shares in Pushpay.

According to the release, Pushpay has entered into a scheme implementation agreement under which the consortium will acquire all of Pushpay’s shares at a price of NZ$1.34 (A$1.21) per share in cash via a scheme of arrangement. This represents a 14.7% premium to the Pushpay share price prior to its trading halt.

Why did Pushpay accept this offer?

The release notes that following a comprehensive process and a thorough consideration of strategic options, the Pushpay board believes the offer provides “compelling value for shareholders.”

It highlights that while it is only a 14.7% premium to the last close price, it is a 30.1% premium to undisturbed share price on 22 April before takeover offers were first received. In addition, since then, the ASX All Technology index has declined 12.1%.

It implies an equity value of US$898 million and an acquisition multiple of 16x the midpoint of its revised EBITDAF guidance of US$56 million for FY 2023.

Pushpay’s Chair, Graham Shaw, commented:

In considering the options, including the possibility of continuing to implement the Company’s growth strategy as a publicly listed company, the Board adopted a long-term view of the risks and rewards of various alternatives.

After a thorough assessment, the Board believes that the Sixth Street / BGH Consortium Scheme proposal currently represents the most compelling value for shareholders. Although the Board remains confident in the future of Pushpay, the transaction will accelerate a capital return to shareholders and mitigates the risks that would otherwise be involved in delivering the opportunities from executing Pushpay’s strategic plan over time. Accordingly, the Board is pleased to unanimously recommend the transaction to shareholders.

The post Pushpay share price rips 9% ahead on takeover agreement appeared first on The Motley Fool Australia.

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More reading

• Share market sell-off: 3 top ASX shares to buy now

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended PUSHPAY FPO NZX. The Motley Fool Australia has positions in and has recommended PUSHPAY FPO NZX. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Whitehaven Coal Ltd (ASX: WHC) share price has been on fire this year.

Despite losing more than 10% last week, the S&P/ASX 200 Index (ASX: XJO) coal stock is up an astounding 241% in 2022 on the back of soaring coal prices.

This year has also seen Whitehaven resume its dividend payments for the first time in two years. At the current share price, Whitehaven Coal trades on a trailing dividend yield of 5.1%.

But both the share price and its future dividend payouts could come under pressure if coal prices fall as low and as rapidly as was laid out in the federal budget estimates last week.

Why did coal prices rocket this year?

Energy prices were already trending higher heading into 2022 as the world reopened from the lengthy pandemic shutdowns.

Then Russia’s invasion of Ukraine sent energy prices soaring as the West moved to ban Russian oil, gas and coal exports, among other sanctions.

Thermal coal (primarily used to generate electricity) saw prices rocket even faster than metallurgical coal (primarily used for steel making).

Whitehaven mines both varieties, earning more than half its revenue from thermal coal.

In early March, Newcastle coal (thermal) was trading for US$440 per tonne, a record high. At the time, the Whitehaven Coal share price was ‘only’ up 50% for the calendar year.

As of Friday’s close, thermal coal was trading for US$385 per tonne.

But if last week’s federal budget forecast is correct, coal prices are likely to head in the other direction heading into 2023.

Why the Whitehaven Coal share price could outperform forecast

The federal budget forecasts that coking coal prices will slide to $US130 per tonne (Free on Board (FOB) Australia) by Q1 2023. Meanwhile, thermal coal prices are forecast to fall to $US60 per tonne (FOB Australia) by the end of Q1 2023.

That kind of retrace would clearly throw up some headwinds for the Whitehaven Coal share price.

But the coal mining giant might perform far better than the budget’s coal price forecasts suggest.

Last week Commonwealth Bank of Australia (ASX: CBA) published its Economic Insights report, scrutinising the budget forecasts.

When it came to the outlook for coal prices, CBA’s analysts were far more bullish.

On metallurgical, or coking coal, the bank said:

The Budget’s coking coal price view is markedly lower than our view from 2022/23 to 2025/26… We think the disruption to Russian coking coal exports (~10% of the seaborne market) will take years to replace fully, helping keep a premium entrenched in coking coal prices over the Budget’s outlook period.

CBA also believes thermal coal prices will hold up better and longer than the budget has estimated. According to the report:

Like coking coal, we see the disruption to Russian thermal coal exports (~15% of the seaborne market) to be more long-lasting than the Budget over the outlook period. Replacing Russian thermal coal exports in the seaborne market will be challenging given the underinvestment in the sector over the last few years.

If CBA’s analysts have got this right, the Whitehaven Coal share price should fare considerably better than under the budget’s outlook.

The post Why the Whitehaven Coal share price could outperform this government forecast appeared first on The Motley Fool Australia.

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More reading

• 5 ASX shares that have crushed the market this year
• If CBA is right, ASX 200 coal shares should keep the good times rolling
• Why is the Whitehaven Coal share price rebounding strongly today?
• How to find wealth compounders inside the ASX 200 right now
• Why is the Whitehaven share price getting beaten up today?

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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On Friday, the S&P/ASX 200 Index (ASX: XJO) finished the week deep in the red. The benchmark index fell 0.9% to 6,785.7 points.

Will the market be able to bounce back from this on Monday? Here are five things to watch:

ASX 200 expected to jump

It may be Halloween, but there’s nothing scary about the Australian share market’s expected performance today. The benchmark index looks set to start the week very strongly after a great session on Wall Street on Friday night. According to the latest SPI futures, the ASX 200 is poised to open the day 92 points or 1.35% higher this morning. On Wall Street, the Dow Jones was up 2.6%, the S&P 500 rose 2.45%, and the NASDAQ stormed 2.9% higher. This was driven by a softer inflation reading in the US.

Oil prices fall

Energy shares such as Santos Ltd (ASX: STO) and Woodside Energy Group Ltd (ASX: WDS) could have a subdued start to the week after oil dropped on Friday night. According to Bloomberg, the WTI crude oil price was down 1.3% to US$87.90 a barrel and the Brent crude oil price fell 1.2% to US$95.77 a barrel. Concerns over COVID restrictions in Chinese were to blame for this decline.

IGO update

The IGO Ltd (ASX: IGO) share price will be one to watch on Monday when the battery materials miner releases its quarterly update. Investors will no doubt be keen to see how the company’s lithium operations are faring. In addition, the market will be looking to see if IGO is on track to achieve its production and cost guidance for FY 2023. Management is aiming for full year Greenbushes lithium production of 1,350kt-1,450kt with costs of A$225 to A$275 a tonne.

Macquarie rated as a buy

The Macquarie Group Ltd (ASX: MQG) share price is good value according to analysts at Morgans. This morning the broker retained its add rating with a slightly trimmed price target of $214.30. The broker commented: “MQG is a quality franchise, well exposed to structural growth areas, and the company is managing a more difficult FY23 environment well.”

Gold price falls

Gold miners including Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) could have a poor start to the week after the gold price fell on Friday. According to CNBC, the spot gold price was down 1.2% to US$1,644.8 an ounce during the session. Rising treasury yields weighed on the precious metal.

The post 5 things to watch on the ASX 200 on Monday appeared first on The Motley Fool Australia.

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More reading

• Is the Macquarie share price in the buy zone? Here’s what Goldman Sachs thinks
• Why did the AGL share price outperform the ASX 200 on Friday?
• Here were the 3 most heavily traded ASX 200 shares on Friday
• Here are the top 10 ASX 200 shares today
• ‘Some market trends are now entrenched’: Why this expert tips greatness for Santos shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Bear markets can often feel like doomsday events for investors, but there’s good that comes out of these healthy downturns. Bear markets separate the wheat from the chaff.

In other words, they make apparent the companies that are worthy of investor dollars, as well as those that probably should have never gone public in the first place.

There’s one very distinguishable trait that nearly all bear market winners have in common: Healthy cash levels on their balance sheets.

Having a lot of cash allows strong companies to take advantage of cheap valuations in the form of acquisitions.

While cash-poor companies struggle to keep their boats afloat, those with strong balance sheets can bolster their businesses by buying out their competitors or acquiring entire new product lines.

How to identify a cash-rich balance sheet

If diving deep into financial statements isn’t your thing, then you’re in luck, because identifying a strong cash position is very easy.

Simply add the cash and cash equivalents and short-term investments/securities lines on the balance sheet, and you’ll arrive at the company’s total cash.

Comparing this number to the current liabilities (expenses the company will pay in the next 12 months) gives you a good idea of how cash-rich the business is.

Take Shopify (NYSE: SHOP), for example. The company has nearly $7 billion in cash and only $700 million in current liabilities. Not only does that tell us the company is more than capable of self-funding its operations, it also has plenty of cash to deploy in this bear market.

Winners from past bear markets

Some of the most prolific and profitable companies today were built on tremendous acquisitions made when the market was selling off.

Had these companies not had adequate cash reserves during these periods, they would likely not be nearly as prominent as they are today.

Let’s take a look at some examples:

Company	Acquisition	Year	Price paid	Current annual revenue from acquisition
Disney (NYSE: DIS)	Marvel	2009	$4 billion	~ $2.8 billion*
Alphabet (NASDAQ: GOOG)	YouTube	2006	$1.65 billion	$28 billion
Meta (NASDAQ: META)	Instagram	2012	$1 billion	$47 billion

Data source: Public company filings and box office data. Table by author. * Does not account for revenue from Disney Plus subscribers.

In the wake of the Great Financial Crisis, Disney made one of the most important acquisitions in film history, buying up a relatively obscure comic book company called Marvel. As we all know now, the Marvel Cinematic Universe is one of the world’s most successful franchises, bringing in a whopping $2.8 billion in annual revenue for Disney.

That number is pretty astounding, considering the company only paid $4 billion to acquire Marvel. And the real annual revenue is likely much higher, since it’s difficult to estimate how much of Disney’s streaming revenue is due to its Marvel titles.

If the Marvel acquisition looks impressive, then the YouTube and Instagram buyouts are downright silly. Alphabet paid just $1.65 billion for YouTube in the years following the dot-com bubble, and today it accounts for $28 billion in revenue for the Google parent company.

Meta (at the time Facebook) might have made the greatest acquisition of all time when it bought Instagram for a ridiculously cheap price of $1 billion in 2012. Today, Instagram accounts for roughly 44% of Meta’s total revenue. To call this acquisition a home run would be the understatement of the century.

All three companies owe a meaningful amount of their success to the high-quality acquisitions made in past down markets.

Cash-rich companies are uniquely positioned to prosper in recoveries

The examples above highlight just how important it is to have cash in bear markets. An abundance of capital not only protects the business from bankruptcy, it gives the company the ability to buy up cheap assets to strengthen its competitive advantages.

Very few acquisitions will be as dramatically important as the examples above, but the discounts created by bear markets can turn average buyouts into meaningful sources of revenue and income in the future.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Look for stocks with this balance sheet trait to outperform in the coming recovery appeared first on The Motley Fool Australia.

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More reading

• Meta Is betting billions that AI will fix its advertising business
• Better buy: Disney vs. Netflix stock
• Alphabet’s ad business slows to a trickle. Time to sell?
• Meta just dropped a metaverse bomb on investors. Here’s what you need to know
• Why Meta Platforms stock was down more than 20% today

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Mark Blank has positions in Shopify and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., Shopify, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $1,140 calls on Shopify, long January 2024 $145 calls on Walt Disney, short January 2023 $1,160 calls on Shopify, and short January 2024 $155 calls on Walt Disney. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Searching for big dividend yields? If you are, then read on because listed below are two ASX dividend shares that offer investors very generous yields.

Here’s what you need to know about these ASX dividends shares:

Vanguard Australian Shares High Yield ETF (ASX: VHY)

The first option for income investors to consider is actually an ETF.

The Vanguard Australian Shares High Yield ETF provides investors with exposure to ASX-listed shares that have higher than average forecast dividends.

But it does this with diversification in mind. Rather than just loading up on banks and miners, the ETF restricts the proportion invested in any one industry to 40% and 10% for any one company.

Among the ASX dividend shares that you’ll be owning a slice of with this ETF are mining behemoth BHP Group Ltd (ASX: BHP), Australia’s largest bank Commonwealth Bank of Australia (ASX: CBA), and telco giant Telstra Corporation Ltd (ASX: TLS).

At present, the Vanguard Australian Shares High Yield ETF trades with an estimated forward dividend yield of 6.3%.

Westpac Banking Corp (ASX: WBC)

A second option for income investors to consider is banking giant Westpac.

Goldman Sachs is very positive on Westpac due to its “strong leverage to rising rates” and “cost management initiatives.”

In fact, Westpac is the broker’s number one pick in the sector and has its coveted conviction buy rating on its shares with a $27.07 price target. This implies potential upside of 13% for investors.

The broker is also expecting some big dividends in the coming years, sweetening the deal further. Goldman has pencilled in fully franked dividends of 123 cents per share in FY 2022 and 139 cents per share in FY 2023. Based on the current Westpac share price of $23.99, this will mean yields of 5.1% and 5.8%, respectively.

The post These ASX dividend shares have big yields appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Corporation Limited. The Motley Fool Australia has recommended Vanguard Australian Shares High Yield Etf and Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Reserve Bank of Australia (RBA) will be gathering again next week to decide on the cash rate.

At the last meeting, the central bank surprised the market with a smaller than expected rate hike.

The market was forecasting a 0.5% increase, but the RBA lifted rates by 0.25% to 2.60%.

How big will the RBA’s rate hike be in November?

According to the latest cash rate futures, the market is sitting on the fence with this meeting, pricing in only a 51% probability of a 0.5% increase to 3.10%. It appears to believe a smaller 0.25% increase to 2.85% is the more likely route that the central bank will take.

However, the economics team at banking giant Westpac Banking Corp (ASX: WBC) don’t agree with this view and are predicting a 0.5% increase.

According to its latest weekly economic report, Westpac’s chief economist, Bill Evans, believes that the latest quarterly inflation reading was a major surprise and will force the RBA to act. He said:

The September quarter inflation report has come as such a major surprise that we think the Reserve Bank Board will decide to raise the cash rate by 50bps at the next Board meeting on November 1.

The quarterly CPI print was an increase of 1.8% for the trimmed mean (the accepted measure for underlying inflation) well above market expectations of 1.5%. Annual trimmed mean inflation lifted to 6.1%yr. This is the highest quarterly and annual increase in underlying inflation since the ABS began producing estimates in 2002. Historical estimates compiled by the RBA show the quarterly rise is the biggest since 1988.

But why raise rates?

Evans believes the RBA needs to take strong action now before things get out of control. He explained:

During this period of rising inflation we have been most concerned about a strong inflationary psychology becoming entrenched in the Australian psyche. As this develops, businesses become more confident that they can raise their prices; consumers become more accepting of such action and see significant wage increases, in the context of tight labour markets, as necessary to compensate, sustaining the whole inflation process.

Evidence from the survey that pricing power is becoming widespread across expenditure items should be of considerable concern to an inflation–targeting central bank. The Budget papers have raised the prospect of a 50%+ increase in electricity prices over 2022 and 2023. This means inflation overall will remain more elevated and poses further pressures on inflation psychology. The best way for the central bank to break this nexus is to adopt strong rhetoric and strong action.

The post Will the RBA raise rates again next week? Here’s what Westpac expects appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Coming into Alphabet Inc‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) third-quarter earnings report on Tuesday night, there were already signs that growth would be sluggish.

Fellow digital advertising stock Snap Inc said revenue growth slowed to just 6% in its third quarter, and Alphabet management had already warned about macroeconomic uncertainty in its second-quarter earnings report.

Those fears were validated when the Google parent posted third-quarter results that were even worse than expected.  

Revenue increased just 6%, or 11% in constant currency, to $69.1 billion and ultimately missed estimates at $70.6 billion. On the bottom line, operating income fell 19% to $17.1 billion, and earnings per share shrank from $1.40 in the quarter a year ago to $1.06 (below the analyst consensus of $1.25). The stock fell 6.6% in the after-hours session on Tuesday night. 

Advertising screeches to a halt

While Google Cloud and the projects in the “other bets” segment, like the autonomous driving service Waymo, get some attention from investors, Alphabet is fundamentally an advertising business, and advertising makes up essentially all of its profits, as Google Cloud and other bets lose billions of dollars each year.

Google Search still drives a majority of the company’s revenue and profits, making it the biggest determinant of the company’s success.

In the third quarter, revenue from the search segment increased just 4.3% to $39.5 billion, while YouTube’s top line fell for the first time since the company broke out its results, declining 2% to just over $7 billion. Revenue at Google Network, which is made up of Google ads on non-Google properties, also fell 1.6% to $7.9 billion.

Management noted that the stronger dollar was partly responsible for the weak growth and said that lapping rapid growth in the quarter a year ago when overall revenue jumped 41% was the main reason for the underwhelming performance.

However, Alphabet’s overall revenue also declined sequentially, and advertising revenue slipped 3.2% from Q2 to $54.5 billion, a clearer sign that macroeconomic headwinds are weighing on the business.

On the earnings call, the company said it saw a pullback in verticals, including financial services like insurance, loans, and crypto, and that negative trends in ad demand strengthened from the second quarter to the third quarter.

Is this a red flag?

Advertising is a cyclical business, and in uncertain economic environments like the current one, it’s often one of the first expenses that businesses cut back on, which makes sense. Companies anticipating a decline in consumer spending are likely to cut back on marketing, and digital advertising in particular can be easily ramped up or down according to demand. Cutting ad budgets also doesn’t come with the baggage that laying off employees or slashing capital expenditures does.

Alphabet management seems to expect the headwinds to get worse before they get better. The company doesn’t give guidance, but it said it expects stronger currency headwinds in the fourth quarter and plans to slow spending growth in the fourth quarter and in 2023, which should help shore up the profit decline.

After headcount jumped 25% to 187,000 year over year in the third quarter, CEO Sundar Pichai promised that employee additions would be significantly slower in the fourth quarter and in 2023. In Q4, the company plans to add less than half the new employees it did in Q3.

As a public company, Alphabet has been through two advertising cycles before. Both times, in the financial crisis and the coronavirus pandemic, advertising growth fell sharply but quickly rebounded as the economic climate improved, and that should be the case again. 

Google’s advertising products are essential tools for a wide range of businesses, and it has a near monopoly on search, with around 90% in market share in the countries where it operates. Despite the decelerating growth, this is not a broken business by any means. 

Investors should expect slow growth over the next few quarters, as ad demand is likely to be weak, but Alphabet’s strengths are still intact. Furthermore, the stock is reasonably priced at a price-to-earnings ratio of roughly 20 based on this year’s estimates.

If the bear market persists, the stock could decline further, but for a dominant business and a profit machine, this isn’t a bad entry point at all.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Alphabet’s ad business slows to a trickle. Time to sell? appeared first on The Motley Fool Australia.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Snap Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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