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Author Archives: Chris Versace, Chief Investment Officer

About Chris Versace, Chief Investment Officer

I'm the Chief Investment Officer of Tematica Research and editor of Tematica Investing newsletter. All of that capitalizes on my near 20 years in the investment industry, nearly all of it breaking down industries and recommending stocks. In that time, I've been ranked an All Star Analyst by Zacks Investment Research and my efforts in analyzing industries, companies and equities have been recognized by both Institutional Investor and Thomson Reuters’ StarMine Monitor. In my travels, I've covered cyclicals, tech and more, which gives me a different vantage point, one that uses not only an ecosystem or food chain perspective, but one that also examines demographics, economics, psychographics and more when formulating my investment views. The question I most often get is "Are you related to…."
Atari Banks Its Gaming Content On a  Television Future

Atari Banks Its Gaming Content On a  Television Future

While today’s teens and Millennials have enjoyed rich graphics and plotlines in their gaming experience, those of us that grew up with Missile Command, Asteroids, Centipede, Defender and many other classics fondly recall our Atari gaming system. Was it simple by today’s standards, absolutely, but we still spent hours saving the world or defending the galaxy. Now Hasbro, which acquired Atari in 1998, recognizes that Content is King, and is aiming to bring its gaming content to TV as well as the box office.

 

Atari has announced plans for a multi-pronged television strategy, reports Variety. The gaming company, which is best known for its late 1970s and early 1980s games and consoles, has several new television series in development, including a game show.Game On is an unscripted reality-style game show Atari in which contestants navigate through life-sized sets based on games from Atari’s library. Atari has also partnered with Discover on a TV series based on its 1978 game Codebreaker.

Source: Atari Aims For Television Future

Look out DirecTV Now, here comes Hulu’s live TV streaming service complete with ESPN

Look out DirecTV Now, here comes Hulu’s live TV streaming service complete with ESPN

The race to replace broadcast TV with streaming services has become even more competitive with Hulu tossing it’s hat in the ring alongside the soon to be launched DirecTV Now from AT&T that is likely to benefit from the announced Time Warner acquisition. To drive viewers, it’s all about the content and increasingly proprietary content like we’re increasingly finding at Netflix and Amazon. While the Disney relationship brings ESPN into its fold, it sounds to us like Hulu needs to get that balance sheet going.

Hulu said today it has partnered with Disney and 21st Century Fox for its upcoming live TV streaming service, launching next year. The deals involve Fox’s news, entertainment, sports, and other properties, along with Disney’s portfolio of networks from is ABC Television Group and ESPN, among other things. In total, the two agreements will bring more than 35 TV networks to Hulu’s live TV service.What this means for consumers who are considering cutting the cord with pay TV is that they’ll gain access to two of the top broadcast networks, Fox and ABC, on Hulu’s new streaming platform.In terms of sports, the two deals will include Fox Sports networks (Fox Sports 1 and 2), BTN, ESPN networks, including ESPN1, ESPN2, ESPN3, ESPNU, ESPN-SEC, and Fox’s regional sports networks in dozens of markets. Meanwhile, other popular cable TV channels will also be included, like Disney Channel, Disney XD, Disney Junior, Fox News, Fox Business, Freeform, FX, FXX, FXM, National Geographic and Nat Geo Wild.

Source: Hulu’s live TV streaming service will have channels from Fox & Disney, including ABC, ESPN & more | TechCrunch

As gaming’s influence grow’s, Facebook’s Gameroom was a matter of time

As gaming’s influence grow’s, Facebook’s Gameroom was a matter of time

We’ve continued to watch gaming become a growing force in our Content is King theme as it has spawned movies like Assasin’s Creed as well as live events that attract viewers worldwide. It was only a matter of time until Facebook focused on gaming, now we want to see how it brings its growing emphasis of monetization to Gameroom.

After losing mobile gaming to iOS and Android, Facebook is making a big push into playing on PC with today’s developer launch of its Gameroom Windows desktop gaming platform. After months of name changes, beta tests and dev solicitation, Facebook opened up the beta build for all developers and officially named it Gameroom.

The app is openly available for users to download on Windows 7 and up.Gameroom let users play web, ported mobile and native Gameroom games in a dedicated PC app free from the distractions of the News Feed.

Source: Facebook officially announces Gameroom, its PC Steam competitor | TechCrunch

Thematic Tailwinds and Headwinds Battling it Out this Week

Thematic Tailwinds and Headwinds Battling it Out this Week

With less than a week to go until the conclusion of the 2016 presidential contest, and having closed the books on an October that saw the S&P 500 fall just over 1.9 percent — marking its third consecutive monthly decline — the stock market is likely to tread water as the brouhaha that is the latest Clinton email scandal plays out. With just days to go, what was looking like a sure Clinton win that would result in a “more of the same” and at least a somewhat predictable environment is now all being called into question once again.We know the stock market, like most individuals, is not a fan of uncertainty. Best case, the market moves sideways until all is resolved one way or another; worst case it trades lower should the uncertainty build further ahead of next Tuesday. Potentially adding fuel to that uncertainty fire, we still have several hundred companies issuing quarterly reports this week, the outcome of the Fed’s November FOMC meeting this afternoon and the October Employment Report hitting the wires on Friday.Put it all together and it’s a recipe that calls for staying on the sidelines for the time being.While we continue to see thematic tailwinds blowing, these market headwinds are likely to restrain much of any progress in the coming days. We’ll continue to keep our “insurance” position — the ProShares Short S&P 500 ETF (SH) — on the Tematica Investing Select List until the stock market is in calmer waters.

As crazy as it may seem, we have just nine weeks until 2017. We know… so hard to believe, but as we have all learned there is no stopping the clock — if there was, where would our Fountain of Youth investing theme be? No doubt once the election has come and gone, it will be the usual sprint to the holidays and the end of 2016. If it’s like years past, it will be a blur.

With that in mind, we are going to do a little house cleaning today to make some room for newer positions in the coming weeks that will better position us for 2017. As we do this, we’re also going to trade out of our Nike (NKE) shares for a greater position in Under Armour (UA).

Here we go…

We’re trying something new this week.

After receiving much feedback, we’re including the full text of this week’s newsletter directly in this email (Just keep scrolling to view it all)

We avoided doing this in the past due to the length of the content in each issue and what we thought would be a poor experience for you, the reader to have to scroll through so much content.

But we’re always up for trying something new, so we gave it a shot this week!

The full newsletter in PDF form can be downloaded by clicking the button below just like it has always been since we launched this new format back in March.

Or, you can just keep scrolling and read it all here in the newsletter.

Be sure to let us know what you think of this new approach — whether you love it or hate it! — by dropping us an email to CustomerService@tematicaresearch.com .

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Chris Versace
Chief Investment Officer
Tematica Research, LLC

 

Closing out PetMed Express (PETS) and
Regal Entertainment Group (RGC

We’ve loved having PetMed Express (PETS) and Regal Entertainment Group (RGC) on the Tematica Select List as they’ve benefitted from their respective thematic tailwinds, but also because of their enviable dividend yields. Not to mention how we feel like we’re helping out own cause each time we hit the local Regal Theatres to catch the latest flick — complete with the large bucket of popcorn!

Alas, the time has come to move on from these dividend dynamos. With the latest economic data that is the Flash October Manufacturing PMI from Markit Economics showing a pronounced pickup in China and in the US, the odds of the Fed hiking interest rates continues to shift more to the “will do” camp for the December FOMC meeting. As this likelihood increases, so too will the headwinds for these two higher dividend yielding stocks, which means we’re inclined to pull the rip cord sooner than later.

Therefore, after you receive this email, having both delivered double-digit returns for the Tematica Select List, we will:

  • Close out our Connected Society thematic position in PetMed Express (PETS).
  • Close our our position in Content is King thematic company Regal Entertainment Group (RGC).

For those wondering, we will continue to hold shares of Physicians Realty Trust (DOC), an Aging of the Population thematic position that is also a higher dividend yielding stock given the pronounced demographic tailwind at the back of the company’s business model.

 

 

Exiting Nike (NKE) and Doubling Down on Under Armour (UA)

In addition to shedding out positions in RGC and DOC, the tea leaves are showing its time to move on from our position in Nike (NKE), which with last night’s market close was down 11 percent from when we added it this past May.

We continue to see the Rising Middle Class — the upside of our Rise & Fall of the Middle Class investing thematic — snapping up branded athletic wear and apparel; however we find Under Armour (UA) has far more room for share gains than Nike as it attacks the International, women’s, footwear and sportswear markets. As we noted last week, UA is stepping up its game to hit its $7.5 billion revenue target by 2018, and odds are high those added marketing efforts that impacted UA’s margin outlook will also hit Nike’s business and its shares. We expect Under Armour to be in the penalty box with investors, a position that takes time for a company to work itself out of. The silver lining is that while its growth rate has been reset, Under Armour is still poised to continue to grow revenue and operating income in the coming quarters as its initiatives take hold.

Between the two companies, the upside is not only far greater at Under Armour, but the odds are far better “the bad news” has been priced into UA shares over the last week vs. what could be a continued slow leak in Nike shares over the coming quarters as UA and Adidas step up their game. All of this has us:

  • Exiting the Tematica Investing Select List position in Nike (NKE) and . . . 
  • Using the proceeds from that trade as well as the ones from RGC and PETS to scale further into the Under Armour (UA) position on the Select List. 
  • We will set a protective stop loss  in all of our UA shares at $25, but we would look to scale further into the shares below $27.

Update Update Updates

 

Alphabet (GOOGL)    Connected Society

Last week, Alphabet reported better-than-expected September-quarter with shares up roughly 2 percent for the month of October. We attribute the upside in its report to the tailwinds propelling its business — specifically, the increasing shift toward a digital lifestyle that is driving incremental advertising dollars to online and mobile; streaming video consumption; and online shopping.

The core Google Site business delivered a 25 percent revenue increase, excluding the impact of foreign currency, due to continued strength in mobile search and YouTube. The Cloud business continues to gain share on overall Cloud adoption, which offers longer-term growth prospects as do newer hardware initiatives (Pixel, Google Home). We see Alphabet continuing to invest in these newer businesses in the coming quarters, which is likely to limit margin expansion. Even so, the company continues to grow more than 20 percent and the shares are trading at 19.8x consensus 2017 EPS expectations of $40.56.

We’d also note the board of directors authorized a new $7 billion share repurchase program following completion of the prior program. We suspect investors will welcome that news as it has the potential to shrink the share count by up to 8.5 million shares at the current share price.

  • Our price target on GOOGL shares remains $975.

 

Amazon.com (AMZN)    Connected Society

Last week we used the drop in Amazon’s share price post-earnings to increase our position in AMZN shares on the Tematica Investing Select List. The decline was brought on by the largely unexpected pick-up in capital-investment spending during the company’s September quarter (bleeding into October), which resulted in lower-than-expected earnings.

As we discussed, Amazon’s stepped-up investment in distribution centers shows the company is strategically adding capacity ahead of this year’s holiday season, which per Deloitte, is expected to see digital shopping rival bricks-and-mortar shopping. These new distribution centers will also benefit the company as it continues to expand offerings (Prime, Prime Now, Prime Fresh, and fashion to name a few) both in the U.S. and abroad, which should lead to improved utilization and subsequently better retail margins over the coming quarters.

Over the weekend, Amazon announced it has entered China with its Amazon Prime service, and we see this as a further step in the company expanding its global footprint, as well as one of the reasons behind Amazon’s wide guidance range that rattled investors last week — you remember, somewhere between “$0 and $1.25 billion!”

The bottom line is that from time to time, market indigestion offers a favorable entry point into a company’s shares, especially if the long-term drivers and tailwinds remain intact. We’ve seen this several times with Amazon, and believe last week’s decline was the latest example. We see no slowdown in the shift to digital commerce, streaming video consumption, and other drivers behind Amazon’s business.

  • With upside of more than 20 percent to our recently revised $975 price target, we continue to rate Amazon shares, which closed last night at $785.14, as a Buy.

 

 

AMN Healthcare Services (AMN)    Aging of the Population

Last week, the company changed its ticker symbol for the shares to “AMN” from “AHS”.  Let’s just say it was a less-than-smooth transition, considering that several stock quote sites did not register the change, but showed AHS shares as no longer trading.

Fantastic! (yes, that would be more than a bit of sarcasm there!)

Amid the confusion, the stock fell just under 4 percent last week and has continued to trend lower this week. The company will report its September-quarter results this Thursday (Nov. 3) after the market close — let’s hope at that point all of these so-called investing websites have caught up — as all Consensus expectations call for AMN to deliver EPS of $0.54 on revenue of $468.6 million for the quarter.

A recent report from the New York-based Paraprofessional Healthcare Institute showed that by 2020 the U.S. will require 1.6 million more direct-care workers than in 2010, which equates to a 48 percent increase for nursing, home-health and personal-care aides over the decade. And this shortage is expected to get worse near term, as the 78 million aging baby boomers (roughly 24 percent of the domestic population) will require increasingly more health-care services.

Next week, we’ll get the September JOLTS report, which like those in prior months, is likely to show a continuing gap between demand for health-care workers and supply.

  • We will watch this post earnings later this week as we continue to rate the shares a Buy with a $47 price target.

 

CalAmp (CAMP)    Connected Society

Last week CAMP shares fell 4 percent without anything on the news front. Rather, we took comments from United Parcel Service (UPS), which is moving to phase 2 in deploying its telematics-based ORION safety and routing solution as a positive data point for CAMP. The same is true for the increase in technology spending by ServiceMaster Global (SERV) as part of its ServSmart initiative and the rollout of enhanced route management and scheduling tools at Rollins (ROL). These examples and others point to fleet management companies embracing telematics and other technology to drive productivity, which confirms our thesis on the shares. On Nov. 7, CAMP management will hold a webcast to discuss its LoJack-branded LotSmart and SureDrive applications.

  • Ahead of that event, we continue to rate CAMP a Buy with a $20 price target.

 

Dycom Industries (DY)    Connected Society

Last week, Alphabet (GOOGL) officially said it was hitting the pause button on Google Fiber in terms of entering new markets as it revisits its technology of choice from fiber to high-speed wireless. Even though this had been talked about as far back as August, the news, shared via a blogpost on Google, led to a sharp fall in DY to near $72.50 from just shy of $85.

In our special alert last Thursday, we noted customer analysis showed Google Fiber has been a modest customer, which, in our view, meant the price drop from last week was overdone. As such, we scaled into DY shares, after which the shares moved over the last few days to close last night at $76.88 — a 5.5 percent gain from last week’s scale in price.

While capital spending and related deployments can be lumpy, we see the ongoing shift toward the digital lifestyle straining network capacity, forcing incremental spending on existing networks and the deployment of newer, higher speed ones.

  • We continue to rate DY a Buy with a $115 price target.

 

United Natural Foods (UNFI)          Foods with Integrity

Recent data points to the continued weakening of restaurant traffic as consumers take advantage of food price deflation to return to grocery stores and eat in rather than out. This bodes well for United Natural’s expanding footprint as consumers continue to shift toward natural, organic and similar products.

We’ll look for confirming data on grocery traffic and volume as well as shifting consumer preferences when Kellogg (K) and key UNFI customer Whole Foods Market (WFM) report their earnings this week. Our thesis on UNFI shares has been that the winding down of the overly competitive grocery-store pricing environment, paired with internal cost-reduction efforts, should drive margin expansion in the coming quarters, particularly net margins. As such, we will be patient with UNFI shares as the company regains investor confidence after stubbing its toe during 2015. We are not forecasting any additional acquisitions even though the company has been an active acquirer.

  • Our price target on UNFI remains $65.

 

Universal Display (OLED)    Disruptive Technology

While Apple’s (AAPL) Toolbar feature on its revamped MacBook Pro models features retina display technology, over the weekend Japan’s Nikkei ran a report citing the CEO of Foxconn/Sharp, one of Apple’s key suppliers, that Apple will be “switching from LTPS (low-temperature poly-silicon) to organic light emitting diode panels” with the iPhone 8.

As we have said, any move by Apple to utilize that display technology would be a positive for its overall adoption. Other signposts we’ll be watching include OLED equipment order activity at Applied Materials (AMAT), Aixtron (AIXG) and Veeco Instruments (VECO) as well as new product announcements and OLED applications from consumer electronics companies ahead of the holiday shopping season and after at events such as CES 2017.

These and other data points should help track the expected growth in the OLED market, which is expected to grow at a 16 percent compound annual rate over the 2014-20 period to roughly $44 billion. Our price target on OLED shares is $68, which offers potential upside of more than 30 percent. Given the volatile nature of the stock, we have dipped our toe in the water with OLED shares and our strategy will be to add to the position on dips so as to improve our cost basis. As such, we are rating OLED a Buy

Later this week Universal Display will issue its September-quarter guidance and updated outlook, which we expect to be affected by Samsung’s Galaxy Note 7 issues. This has already been at least partially baked into expectations, though, with consensus EPS forecasts for 2016 falling to $0.87 from $1.08 over the last several weeks and 2017 expectations drifting lower to $1.34 from $1.53.

Our price target on OLED shares remains $68.

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UK government ramps cybersecurity spending with a shift to deterrence 

UK government ramps cybersecurity spending with a shift to deterrence 

The UK’s sharp increase in cyber security spending serves as a reminder that such security is a global problem and requires near- constant updating as the “bad guys” mount newer and different attacks. The key call is the increasing importance of deterrence, which speaks to proactive vs. reactive security.

 

The U.K. government will spend £1.9 billion (US $2.3 billion) over the next five years to pump up its cybersecurity defenses and pay for new research, Chancellor of the Exchequer Philip Hammond said.

The goal of the spending, part of a new national cybersecurity strategy, is to make the U.K. one of the “safest places in the world to do business,” with a world-class cybersecurity industry and workforce, Hammond said Tuesday.

This is no longer just an issue for the IT department but for the whole workforce. Cyber skills need to reach into every profession.”

Source: UK government to spend $2.3 billion to bolster cybersecurity | PCWorld

Special Alert: Jumping on Amazon AMZN opportunity offered by 3Q 2016 earnings report

Special Alert: Jumping on Amazon AMZN opportunity offered by 3Q 2016 earnings report

 Jumping on Amazon AMZN opportunity offered by 3Q 2016 earnings report

  • We are using the weakness in Amazon’s (AMZN) shares resulting from disappointing earnings in the short-term to build our position for the long-term. 
  • We see no slowdown in the drivers and thematic tailwinds powering Amazon’s business and see its stronger than anticipated capital spending in the September quarter as Amazon preparing itself for future growth.
  • Our price target remains $975 for AMZN shares. 

When I made the decision earlier this year to take over the publishing of my newsletter, one of the reasons was my desire to be able to deliver to my readers the information when and how they need it — not based on a pre-set publishing calendar or an artificial 8-page content limit, but on how the market is reacting to news and developments and the details required in order for investors like you to have the information they need to make investment decisions.

Well, this week, and the unfolding events that have occurred, demonstrate exactly what I was thinking.

First, on Tuesday, we sent out the alert regarding our exiting of our Sherwin Williams (SHW) and Whirlpool Corp. (WHR) positions, as well as adjusting our target price on Under Armour (UA).  Then on Wednesday, we published our weekly  issue of Tematica Investing, but quickly followed that up on Thursday with an alert on Dycom Industries (DY) and an opportunity to scale into that position as the market was over-reacting to news about Google exiting the Fiber business.
Well, we’re now back again today with a similar scenario, this time surrounding Amazon’s (AMZN) earnings report and the market’s reaction to that . . .
Last night Amazon reported September quarter earnings of $0.52 per share that fell well short of the $0.78 per share consensus expectation for the quarter and the $0.17 per share achieved in the year-ago quarter. September quarter revenues rose 29% year over year to $32.71 billion, which was modestly ahead of the expected $32.65 billion. Also weighing on the shares was the company’s guidance for the current quarter that called for revenue to be in the range of $42-$45.5 billion, up 17 to 27 percent year over year, with operating income between $0-$1.25 billion vs. consensus expectations of $44.65 billion in revenue.

No, that’s not a typo on the operating profit guidance; once again Amazon has given such wide guidance — anywhere from $0 up to $1.25 billion — we could steer an aircraft carrier through it.

That combination led to AMZN shares falling to the $745 level before recovering to $772, down just over 5.5 percent in after-market trading, following the company’s earnings call.

As we have said previously when it comes to Amazon and quarterly earnings, the wildcard to watch out for is management’s often cryptic outlook and investment spending relative to expectations. This was exactly the case as investment spending at both the North American and International Retail businesses weighed on operating margins, leading them to fall to 1.8 percent in the 3Q 2016 quarter from 4.2 percent in 2Q 2016.

Stronger than expected spending during the September quarter, included initiatives to ramp up for what is expected to be a barn-burner of consumer spending on digital commerce this holiday shopping season. We’ve talked about this accelerating shift over the last several months, and consulting firm Deloitte sees digital holiday shopping rivaling brick & mortar retail spending for the first time in 2016. Against that expectation, Amazon added 18 fulfillment centers during 3Q 2016 and another five in first few weeks of October. While these will help position Amazon well for the expected spending surge over the coming months, near-term, those new centers will weigh on margins, hence the lighter than expected operating performance in the current quarter. As these newer centers mature over the coming quarters, their margins should improve, especially as the incremental capacity they bring is absorbed by Fulfilled By Amazon (FBA) and other aspects of Amazon’s fulfillment network.

While the current market environment, which is very much in a “Shoot first, ask questions later” mood, is hitting Amazon shares, in the short-term, if we step back, Amazon continues to play the long game as it expands the scope and scale of its Prime umbrella.

On the earnings call last night, Amazon mentioned the importance of grocery and consumables. We expect to see a continued emphasis in these areas going forward as consumers, especially Millennials, continue to shift their shopping habits. Exiting the September quarter, Prime Fresh was in 40 cities across seven countries, compared to 17 a year ago. Amazon Restaurant Delivery (a part of the Prime Now offering) is in 19 metropolitan cities in the US, up from two last year. Amazon looks to further expand  its fashion and apparel offering  by courting additional brands and manufacturers. Another area of investment continues to be its International expansion, especially in India. Given the favorable demographics in that market — age, internet usage, rising disposable income — we see that opportunity helping drive long-term growth for Amazon’s International efforts. The same is true with its Prime Instant Video business, for which Amazon nearly doubled its investment spending in the second half of the year as it pursues worldwide rights for programming rather than doing so country by country.

To be clear, while such capital investments can put a sour taste in our mouths in the short run and are likely to reignite long-term profitability questions, we see the 3Q 2016 investment as a temporary spike ahead of the 2016 holiday season and lays the groundwork for future revenue gains.

Could the company have telegraphed its plans better?

Probably, but Amazon has always been tight-lipped about its plans, which we chalk up to the increasingly competitive nature of the industry; transparency with investors also means revealing the strategy to competitors.

In deciphering management’s commentary on the earnings conference call last night, we recognize the company will continue to invest for the long-term, but management has clearly signaled that spending will be lumpy. Reading between the lines, spending in the September quarter was one of those larger lumps. As the investment spending returns to roughly more normal levels and as the higher margin Amazon Web Services continues to account for a greater piece of the overall business mix, we see margins rebounding from 1.8 percent in the September quarter. Revenue from its Cloud business rose 55 percent year over year and nearly doubled its operating profits to $1.0 billion, which equates to an operating margin of 31.6 percent compared to normalized operating margins in the low-to-mid single digits for the retail facing business.

We are likely to see 2016 EPS estimates get trimmed back, not only for the 3Q 2016 miss, but also to reflect the five additional fulfillment centers that were added in early October. Even so, there is a high probability that Amazons’ overall operating profit dollars will move up from the $575 million achieved in the September quarter as the overall pace of investment returns to more normalized levels in the current quarter. With regard to 2017 EPS estimates, we are likely to see those get trimmed back from the $11 per share range to roughly $10 per share or so as Wall Street factors in incremental expectations for investment India, Video and Alexa/Echo. The good news for us is our $975 price target was well below many of the other recently hiked price target that were above $1,000. Even after pairing back 2017 expectations, our price target remains intact.

The bottom line is from time to time, market indigestion offers a favorable entry point into a company’s shares, especially if the long-term drivers and tailwinds remain intact. We‘ve seen that several times over the years with Amazon shares, and we see it once again today. We see no slowdown in the shift to digital commerce, streaming video consumption, and others drivers behind Amazon’s business. 

With that in mind, we suspect many on Wall Street will give Amazon a pass on the September quarter as it remains the best-positioned company to capitalize on those tailwinds and drivers. 

  • We continue to rate AMZN share a Buy and are using this morning’s weakness as the long-term opportunity it is to scale into AMZN shares.
  • Our price target for the shares remains $975.


Chris Versace
Chief Investment Officer
Tematica Research, LLC

Special Alert: Using overreaction to Fiber to scale our DY position

Special Alert: Using overreaction to Fiber to scale our DY position

Using the Overreaction to Google Fiber to Scale our Dycom (DY) Position

Yesterday our shares of Dycom fell more than 14% following a blog post by that it would pause the expansion of its Google Fiber offering to potential fiber cities as it “refines its approach.” Alphabet (GOOGL)

We’d note this “news” from Alphabet is not exactly new information, as 2 months ago Alphabet announced it was scaling back Google Fiber with planned headcount reductions. It was also noted at the time that Google Fiber would change its name to Access and likely convert to wireless technology.

We see last night’s blog post by Alphabet as the formal announcement. This pause which pushes out any deployment in 10 potential cities does not impact planned Fiber deployments in Huntsville, Alabama; Irvine, California; San Antonio, Texas; and Louisville, Kentucky.

While this is likely to be a bump in the road for Google Fiber’s — now Access — spending on expanding existing network capacity, as well as preparation for next generation network technologies continues at Dycom’s core customers AT&T (T), Verizon (VZ), and Comcast (CMCSA). In particular, both Comcast and AT&T increased their capital spending in the low double-digits range on a year over year basis in the September quarter. In total, those three customers accounted for 54% of Dycom’s June quarter revenue and Dycom’s #3 customer, CenturyLink (CTL), is set to report its quarterly results on next week (Nov. 2nd), and we expect its spending to be up year over year as well.

Rounding out Dycom’s top six customers are Windstream Communications and Charter Communications, which when combined with the prior four customers account for roughly 79% of Dycom’s June quarter revenue. The next largest individual customer is “Unnamed Customer”, but is likely Alphabet at just 3.6 percent of June quarter revenue. We’d note this Unnamed Customer accounted for just over 6 percent of revenue over the prior 12 months.

The bottom line is that Alphabet is likely to be a relatively small customer for Dycom, and we see the drop in the share price over the last 24 hours, not to mention the larger 20 percent drop in the shares since the news of Google Fiber’s issues were first reported two months ago, to be an overreaction to what is likely to be at worst a modest reduction to Dycom’s outlook over the coming year. We attribute this overreaction in part to the current market mood this earnings season that is looking more and more like a shoot first and ask questions later one.

Given the continuing shift toward the digital lifestyle and mobile data consumption that is pressuring network capacity and resulting in next generation deployments, we continue to see a bright outlook for Dycom. Moreover, given its experience in mobile network infrastructure, we suspect that when Alphabet Access deploys its wireless solutions the odds are high Dycom will be the contractor of choice.

The Bottomline on Dycom Industries (DY)

  • We are scaling into the Dycom (DY) position, which closed at $72.50 per share yesterday, on the Tematica Select List at current levels. 
  • The move will add to the initial DY position we took on September 14, 2016 and significantly reduces our cost basis.
  • As we do so, we will also put a $65 stop loss in place. 
  • Our price target remains $115.


Chris Versace
Chief Investment Officer
Tematica Research, LLC

As earnings shape-up as expected, we reshape the Tematica Select List

As earnings shape-up as expected, we reshape the Tematica Select List

 

We all know that on its own earnings season is as busy a time as it gets. This time around, however, things have been complicated by a wave of merger and acquisition announcements, one of which involved our position in Connected Societycompany AT&T (T). We’ll speak to why we like the transaction and see it as very positive for our AT&T shares below. Outside those merger headlines and commentary, you’ve likely read or seen that as we get further and further into the current earnings season, we are seeing a growing number of disappointments. We’d like to say we’re surprised, but as we’ve shared with you over the last several weeks we’ve been expecting something like this.

We’ve caught some cover fire ourselves, which led to our Special Alert yesterday in which we shed Sherwin Williams (SHW) and Whirlpool Corp. (WHR) — more on that move on page 5. We’ll continue to look for thematic opportunities at better prices in the days and weeks ahead. Now let’s tackle all of what’s already transpired this week…
This week’s issue of Tematica Investing includes:

  • Earnings season for the September quarter is heating up, and it’s as we expected with more than a few disappointments.
  • Over the weekend, Connected Society AT&T (T) announced it would acquire Content is King contender Time Warner (TWX). Despite what appears to be headline resistance to the deal, we like the strategic positioning and rationale that is bringing these two companies together.
  • Following disappointing results for the September quarter with more of the same signaled for the current quarter, we’ve cut both Sherwin Williams (SHW) and Whirlpool Corp. (WHR) from the Tematica Investing Select List.
  • With operating profit expectations reset at Under Armour (UA), we’ve reduced our price target on the shares to $40 from $55. After the sharp drop in the shares due to that expectation reset, our revised target offers 22 percent upside, which has us keeping it on the Tematica Investing Select List with a Buy rating.

You can click below to download the full report.
downalod-pdf

Chris Versace
Chief Investment Officer
Tematica Research, LLC

AT&T CEO puts DirecTV Now at $35/month, but…

AT&T CEO puts DirecTV Now at $35/month, but…

AT&T has been all over the news the last several days, and the news flow continues today when fresh from yesterday’s conference call to discuss the merger with Time Warner,  CEO Randall Stephenson shared its soon to launch DirecTV Now video streaming service will cost $35 per month. Details were rather sparse and we expect more when the official launch happens “next month.”

We expect many comparisons to offerings from Sling as well as pricing relative to Netflix and Hulu, but we suspect it will be far cheaper than the video services offered by Verizon’s FiOS, Comcast and others. As potential chord-cutters, we are anxious for the details!

Speaking at a Wall Street Journal conference today, AT&T CEO Randall Stephenson reportedly told attendees that DirecTV Now will launch in November at a price of $35/month. That puts the service $15/month above the starting point for the competing Sling TV live-TV streaming offering, and about the same price point for the barest-bones versions of Sony’s PlayStation Vue service.Where DirecTV Now appears to be trying to compete is on content. According to reports — again, this has not been officially announced or confirmed — Stephenson says that DirecTV Now will offer 100 channels.

Source: AT&T CEO: DirecTV Now Streaming Service Will Cost $35/Month, Launch Next Month – Consumerist

Special Alert: Removing SHW, WHR shares and adjusting UA target price

Special Alert: Removing SHW, WHR shares and adjusting UA target price

This morning was one of our less fun ones given earnings reports from Sherwin Williams (SHW), Whirlpool Corp. (WHR) and Under Armour (UA). Given those results and impact on the respective share prices, we are issuing this special alert rather than waiting until tomorrow for the next regular issue of Tematica Investing.

Quickly, here is the actions we are making, with our explanation further down:

  • After you get this alert we will close out the shares of both Sherwin Williams (SHW) and Whirlpool Corp. (WHR), removing them from the Tematica Investing Select List.
  • We are cutting our price target on UA shares to $40 from $55, but we are still keeping our Buy rating on the shares. 

 

So what did we learn this morning that is driving this action?

 

We are removing both Sherwin Williams and Whirlpool shares from the Tematica Investing Select List given the combination of weaker than expected September quarter results and downside guidance for the balance of 2016. Included in the reset outlook are weaker than expected revenue growth that will translate into reduced EPS expectations near-term. The share reaction in the shares — SHW down more than 9 percent and WHR down over 10 percent — mean the shares are likely to remain range bound if not fall further as Wall Street recasts its earnings expectations for the coming quarters.

While we could be patient with the shares, we suspect there will be other better-positioned opportunities to come rather than endure a potentially slow craw to our breakeven points with these two positions.

Turning to Under Armour, this morning Under Armour reported better than expected September quarter results and re-affirmed its 2016 revenue forecast. For the quarter UA delivered EPS of $0.29 per share on revenue of $1.47 billion vs. expectations of $0.25 per share in earnings on revenue of $1.45 billion. Ticking through the company’s earnings report reveals double-digit growth across all revenue categories (wholesale, direct to consumer, North America, International, apparel, footwear and accessories), with total revenue up 22.5% on a year-over-year basis.

So why are UA shares down? 

On the earnings conference call, UA management shared it will step up the level of investment to drive growth and it will weigh on margins and bottom line performance over the coming several quarters. Even though UA reiterated its 2018 revenue target of $7.5 billion, this increased level of investment in most aspects of the company’s business to achieve its revenue targets means resetting margin and EPS expectations.

As such, UA backed away from its 2018 operating income target of $800 million, and while it did not offer a specific revision, it painted the picture of mid-teens operating income growth over the next two years, which suggests operating income more like $580-600 million by 2018 compared to $440-$445 million this year. Compounding these investments is the likely prospect that gross margins improvement will be the continued expansion of the company’s footwear margins, which are in the low-to-mid 30% range today.

Ahead of the company’s earnings call, UA shares were up 2% on the better than expected September quarter results. During the call, however, as we and other investors digested the updated guidance the shares dropped more than 14% pre-market. What we are seeing is a major reset in expectations for both the company’s financial performance and the corresponding valuation for its shares. That reset, which paints 2018 earnings more like $0.75-$0.80 than the current $1.00 per share consensus, has us cutting our price target on UA shares to $40 from $55.

After adjusting for the sharp falloff in UA shares this morning, which is likely to be overdone in the short-term as Wall Street revises its earnings and price target expectations as we have done, our revised price target offers 23% upside. As such we will continue to keep a Buy rating on UA shares.

We expect UA will be in the penalty box with investors, a position that takes a company time to work its way out of. The silver lining is that while its growth rate has been reset, UA is still poised to continue to grow its revenue and operating income in the coming quarters as its initiatives take hold. As the shares settle out in the coming days and cool off from today’s news, and we would look to be opportunistic.

We’ll have more for you tomorrow in your regularly scheduled Tematica Investing!

Chris Versace
Chief Investment Officer
Tematica Research, LLC