Weekly Issue: Exiting One Positioning and Sharpening Our Pencils on Several More
KEY POINTS FROM THIS POST:
- As Amplify falls out of the slipstream of our Food with Integrity investing tailwind, we are issuing a Sell rating on BETR shares and removing them from the Tematica Research Select List.
- Our price target on Apple (AAPL) shares remains $200, but as we move through the next several weeks, we will assess iPhone demand data for potential upside.
- Our price target for Costco Wholesale (COST) shares is $185, which is in line with recent peak price-to-earnings (P/E) and dividend yield multiples over the last few years when applied to expected 2017 earnings prospects.
- Our $150 price target for International Flavors & Fragrances (IFF) is under review with an upward bias.
- We are increasing our price target on Universal Display (OLED) to $200 from $175, which keeps our Buy rating intact.
Over the last several trading days, we’ve had a number of companies on the Tematica Select List report their quarterly earnings. This has us focusing today’s issue on recapping what was said, and sharing our views as well as making any price target adjustments.
Earlier this week, we added a new position to the Select List – Trade Desk (TTD), which we see as riding both our Connected Society and Content is King investing themes. If you missed the special alert, you can find it here. Our price target is $80, and we expect to have more on this following the company’s earnings report this Thursday (Nov. 9th). As we shared in the alert adding TTD shares, while we don’t expect any post-earnings weakness, our strategy will be to use any such development to improve our cost basis as advertising increasingly accelerates toward digital platforms.
You’ll notice that over the last few weeks, we’ve added both Apple and now Trade Desk to the Select List. In the next few weeks, we’ll be looking to position the list for 2018, and that likely means we will do some proactive pruning, shedding those companies that have underperformed significantly or whose tailwinds aren’t blowing as hard. As we do this, we’ll also look to reshape our Contender List as well.
Now, let’s break down those earnings reports and other key items from the last few days…
Exiting Amplify Snacks
Following the second quarter in a row of lackluster quarterly results last night — results that included missing expectations as well as guiding the coming quarters below expectations — we are removing Amplify Snacks (BETR) shares from the Select List and exiting the position. While revenue for the September quarter rose roughly 40% year over year, it didn’t cross the bar that was consensus expectations. Weighing on the company’s performance, however, was the tumble in margins, which reflected the launch of newer snack products as well as increased promotional activity.
Aside from the company’s performance, we are also seeing what looks to be a far more competitive snacking landscape. At the recent 2017 National Association of Convenience Stores Show in Chicago, protein was the snacking buzz word. New products from ConAgra (NYSE) include a Slim Jim Premium line, while Kraft Heinz (NASDAQ) had protein focus with Oscar Mayer meat trays, Philadelphia Bagel & Cream Cheese Dips, Planters NUT-rition mixes and coated Crunchers Nuts. Kellogg (K) highlighted Special K trail mixes and Protein/Nourish Bites. We see these companies and others looking to tap into the paleo and keto snacking wave, and in our view, this helps explain the kicked up use of incentives by Amplify.
- As Amplify falls out of the slipstream of our Food with Integrity investing tailwind, we are issuing a Sell rating on BETR shares and removing them from the Tematica Research Select List.
Apple — Beats Expectations
Last week Connected Society investment theme company Apple (AAPL) delivered better-than-expected earnings and revenue for the third quarter. Management also guided the current quarter in line with expectations, which drove the shares higher. On the earnings call, CEO Tim Cook said the production ramp for iPhone X is going well, but noted that Apple can’t predict a supply/demand balance timeframe at this point.
We see that as Apple being Apple — purposely vague. Even so, the key is that despite reports of tepid iPhone 8 demand, Apple did not disappoint with its guidance for the current quarter, which contains mass production of the higher-average- selling-priced iPhone X as well as the arrival of the holiday selling season. Third- party surveys suggest that smartphones will be in high demand this holiday season.
- Our price target on AAPL shares remains $200, but as we move through the next several weeks, we will assess iPhone demand data for potential upside.
Costco Wholesale — Withstanding Amazon
Last week, Costco Wholesale (COST) reported its October sales, which rose 10% year over year with total company same-store sales up 7.5% (5.6% excluding gas and foreign currency) and e-commerce sales up 31% year over year.
In our view, these results confirm Costco’s ability to withstand the “Amazon effect.” We see Cash-strapped Consumers embracing Costco to stretch their disposable dollars while it opens 25 new warehouses in the coming year following the 26 it unveiled over the last 12 months. As a reminder, the company’s high-margin membership fee is a key driver of its bottom line. We also like that Costco management is stepping up its game to counter grocery moves by Amazon (AMZN) and others by partnering with Instacart.
- Our price target for Costco Wholesale (COST) shares is $185, which is in line with recent peak price-to-earnings (P/E) and dividend yield multiples over the last few years when applied to expected 2017 earnings prospects.
International Flavors & Fragrances — Bested the Top and Bottom Line
Earlier this week the Rise & Fall of the Middle Class and Food with Integrity company that is International Flavors & Fragrances (IFF) reported third-quarter 2017 results that bested both top- and bottom-line expectations. The combination of better-than-expected operating performance during the quarter with continued share count shrinkage led IFF to deliver earnings of $1.42 per share vs. the expected $1.37. With the shares bumping up against our $150 price target, we are parsing the company’s outlook and earnings call comments to revisit potential upside to be had in the shares from current levels.
Breaking down the quarter’s revenue, the higher-margin Flavor’s business accounted for 47% of the quarter’s sales and posted 12% sales growth year over year with organic growth benefiting from across the board growth in its products, especially Sweet. We see that as a confirming sign of the shift toward “better for you food” as food and beverage companies look for sugar alternatives. Sales at the Fragrance business (53% of sales, 51% of operating profit) rose 13% year over year (12% on a currency neutral basis). Of note, the segment’s Fine Fragrance business advanced 20% year over year, which included a helping hand from the acquired Fragrance Resources business.
- Our $150 price target for International Flavors & Fragrances (IFF) is under review with an upward bias.
Universal Display — Continues to Pop
Last week, Universal Display smashed third-quarter top- and bottom-line expectation and guided the current quarter ahead of consensus expectations. That beat and raise popped the shares over the last several days. As we only half-joked about over the summer, we are once again boosting our price target to $200 from $175 as we continue to see further upside in the shares as industry capacity ramps for organic light-emitting diode displays. These continued capacity additions should improve display pricing, making it more cost competitive and foster adoption for new applications, such as automotive lighting and eventually general lighting, beyond smartphones and TVs in the coming quarters.
Next week’s earnings report from Applied Materials (AMAT) should offer even further bullish commentary on the organic light emitting diode market.
- We are increasing our price target on Universal Display (OLED) to $200 from $175, which keeps our Buy rating intact.
More earnings on deck this week
This week we’ll get results from several more Select List holdings, including MGM Resorts (MGM), USA Technologies (USAT), Disney (DIS) and newly added Trade Desk (TTD). All of this means, that yes it will once again be another busy week for us here at Tematica. Next week, we have earnings from Applied Materials (AMAT) coming at us, but all in all, it should be a much calmer week… of course, that may depend on what happens with tax reform.
