Watch the ripples not the event

Image: Vilnis Husko

It’s easy to see what’s happening in retail financial markets today.

Yields are rising in bond markets and we have almost every central bank governor (other than for BoJ’s Governor Haruhiko Kuroda) warning that there will be more rate hikes. Plus, Fed Chair Jerome Powell seems to have his elbow jammed on the 0.50% hike button, and one eye on the 0.75%+ button.

This has caused the share prices of most of the world’s well known consumer companies to fall dramatically and you can easily check your yahoo or robin hood for the latest 20% to 25% hit.

But what about B2B companies? These are companies engaged in selling solutions to other businesses, not direct to consumers, and are often ignored by or unknown to retail investors.

In particular, there is a wide range of ‘pick and shovel’ companies that sell to intermediate manufacturers and consumer-facing companies which operate in sectors that will most likely bleed sales during a recession - so shouldn’t we be paying attention to these companies now?

Yesterday, I noted on Twitter that lithography equipment and chip solution giant ASML Holdings had made it to number one on Bridgewater’s short list.

Bridgewater is betting against this company as well as 21 others, and they’re all part of the Euro Stoxx 50 index. Yup, there’s a definite short Europe theme going on there.

ASML is a US$190 billion company - but 9 months ago it was a $340 billion company. It’s lost $150 billion in equity value from its all-time high. Ouch.

Sure, it’s based in Europe where the economy is being egregiously scarred from Russian hostilities, but that’s not the only reason it would be on the short list.

If you’re not in the industry, you’ve probably never heard of it. so, here’s something from page 16 of ASML’s annual report from last year, that tells the story.

In essence, ASML is a rather large pick & shovel company for semi/chip vendors like Taiwan Semi, Micron, Samsung and the rest of the industry.

They and their peer group are great companies with many displaying dominance in their respective sectors.

But for the moment they remain in the wrong market at the wrong time and are all down 25% to 30% from their highs.

Taiwan Semi is also in the geo-political crosshairs, given its location and China’s aspirations for Taiwan.

Producing equipment for Micron, for example, to make memory chips in difficult geographical environments (i.e., U.S fab shop is still to be built) to put into devices which will be sold into recessionary sentiment represents just one of the revenue headwinds that ASML is facing by virtue of its customers.

So, if you’re having a look at a B2B company, put aside the headline numbers and ignore the spin and why’s it’s just about to come roaring back, if you can.

Instead, focus on the customer/supplier and try to get a fix on how the current macro and geo-political environment will ripple through those players over the next six months to a year.

That should provide you with a better read on potential sales, costs and earnings performance.

Mike

Next Level Corporate Advisory is a leading M&A and capital markets advisor with a 20 year track record of delivering the highest quality of independent financial advice as well as strategic transactions to help companies of all sizes level-up, in and out of Australia.

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