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Adding more Del Frisco’s to our plate following several bullish data points

Adding more Del Frisco’s to our plate following several bullish data points

Key points inside this issue

  • We are scaling into shares of Del Frisco’s Restaurant Group (DFRG) following several bullish data points from last week. Our price target for DFRG shares remains $14.
  • Our price target on Amazon (AMZN) remains $2,250
  • Our price target on United Parcel Service (UPS) shares remains $130
  • Our price target on Chipotle Mexican Grill (CMG) shares remains $550
  • Our price target on Costco Wholesale (COST) remains $250
  • I am reviewing our current price target of $130 for shares of McCormick & Co.
  • Last week’s podcast – Lithium Ion Batteries: The Enabler of the Digital Lifestyle
  • Last week’s Thematic Signals

Last Friday we received a number of positive data points for restaurant spending, which coupled with the latest US Department of Agriculture report on falling beef prices has me using the recent weakness in our Del Frisco’s Restaurant Group (DFRG) shares to improve our cost basis. Since adding DFRG shares to the portfolio, they’ve fallen nearly 10% since the end of August and just over 3% since we added them to our holdings despite favorable economic and industry reports. Part of that downward pressure came from Stephens throwing in the towel on its bullish stance on the shares last Wednesday. It would appear that Stephens jumped the gun given the favorable data that emerged later in the week.

Let’s review all of those data points…

 

August Retail Sales

The August Retail Sales report saw its headline figure come in at +0.1% month over month missing expectations of +0.4% and marked the slowest gain since February suggesting persistently high gas prices could be taking a bite out of consumer spending. With prospects for higher gas prices ahead following last week’s greater than expected crude inventory drawdown reported by the Department of Energy and the greater than expected jump in Total Consumer Credit for January, it would appear that Middle-Class Squeeze consumers slowed their spending in August vs. July. Hat tip to Tematica’s Chief Macro Strategist, Lenore Hawkins, and her coverage of those data points in last Friday’s Weekly Wrap. If I’m reading it, so should you.

Turning to the year over year view, August retail sales rose 6.2%, led by a more than 20% increase in gas station sales due to the aforementioned gas prices, and continued gains in Nonstore retailers (+10.4%) and food services & drinking places (+10.1%). Over the last three months, these last two categories are up 9.9% and 9.5% year over year, even as gas station sales are up nearly 21% by comparison. Those figures bode extremely well for our Digital Lifestyle positions in Amazon (AMZN) and United Parcel Service (UPS), our Clean Living holding that is Chipotle Mexican Grill (CMG) and Del Frisco’s Restaurant Group, a Living the Life company.

The report also offered confirming context for our shares in Costco Wholesale (COST) as its August same-store sales handily beat those contained in the August Retail Sales report. Also inside this latest missive from the U.S. Department of Commerce, grocery store sales rose 4.3% year over year in August, which keeps me bullish on our shares of McCormick & Co. (MKC) even as they hover over our current $130 price target.

In terms of areas reporting declines in August Retail Sales Report, we continue to see pressure at Sporting goods, hobby, musical instrument, & bookstores (-3.9%) and Department Stores (-0.7%), continuing the trend of the last few months. With Amazon continuing to flex its business model as well as its own line of private label products, including fashion, sportswear, and apparel, as well as continued digital commerce gains at Walmart (WMT) and its Bonobos brand, we see these retail categories remaining challenged in the coming months.

 

August restaurant data from TDN2K

On Friday we also received figures from TDn2K’s Black Box Intelligence that showed August same-store restaurant sales rose +1.8%, the best highest since 2015. TDn2K’s data is based on weekly sales from over 30,000 locations representing more than 170 brands and nearly $70 billion in annual sales. More positives for our positions in Chipotle and Del Frisco’s. I’ll tuck this data point away as well as the July and eventual September one to compare them against same-store sales quarterly results for out two restaurant holdings.

 

US Department of Agriculture

The most recent data published on Friday by the US Department of Agriculture showed cow prices were down 13.6% year over year in July, continuing the trend of double-digit year over year declines that began this past May. I see this as confirmation of deflationary beef prices that bode well for both margins and EPS gains at both Del Frisco’s and to a lesser extent Chipotle.

Later this week, I’ll look for further confirmation of beef deflation leverage when Darden Restaurants (DRI), the parent of Capitol Grill reports its quarterly earnings.

 

Scaling into Del Frisco’s shares

The net result of these three Friday data points has me adding to our Del Frisco’s Restaurant Group shares at current levels. If our Chipotle shares were lower than our entry point, I’d be doing the same, but they aren’t – if they do fall below the $473 layer, all things being equal I’d look to repeat today’s actions but with CMG shares.

  • We are scaling into shares of Del Frisco’s Restaurant Group (DFRG) following several bullish data points from last week. Our price target for DFRG shares remains $14.
Adding Clean Living Play Chipotle Mexican Grill to the Select List

Adding Clean Living Play Chipotle Mexican Grill to the Select List

 

I’ve been keeping a close watch on the shares of Chipotle Mexican Grill (CMG) since we removed them from the Tematica Investing Select List in mid-2016. The company was previously part of what we now refer to as our Clean Living investment theme given its use of fresh, high-quality raw ingredients including meats that are raised without the use of non-therapeutic antibiotics or added hormones and none of the ingredients in the food (excluding beverages) in U.S. restaurants contain genetically modified organisms (GMOs).

The company was removed from the Tematica Select List back in 2016 when the share price dropped below our $390 stop-loss at the time.  Over the last 26 months, CMG shares fell to a low of $263 in November 2017 then rallied back to a recent high of just under $531. To refresh memories, Chipotle was once a darling of Wall Street as consumers flocked to eat its fast-casual Mexican fair that emphasized “food with integrity,” but its shares and management came under pressure following several outbreaks of foodborne illness that left diners ill and sent traffic, sales and shares plummeting in 2017. It appeared a recovery was underway until another outbreak occurred in mid-2017, once again hitting sales and the shares. This continued flow of bad headlines and whipsawing in the share price has kept us on the sidelines.

Management announced it would step down in November 2017 and in March 2018 Brian Niccol, the then CEO of Taco Bell, took over the Chipotle reigns. While Taco Bell may not be the poster child for refined cuisine, under Niccol’s watch Taco Bell same-store sales had grown an average of 4% a year at a time when the restaurant industry was experiencing a challenging environment as consumer preferences shifted toward healthier foods, snacks and beverages.

Investors loved the idea as the news of Niccol’s appointment started CMG shares on their current rebound. Niccol and his team quickly went to work on basic blocking and tackling, which led to declining guest complaints and improving guest satisfaction scores as shared on the June 2018 quarterly earnings call. Also on that call, following his first full quarter at the helm, Niccol shared his strategic plan for the company. It centered on four key areas: menu innovation, updated marketing, the introduction of a loyalty program, and a greater emphasis on digital sales.

That plan is already being put into action with the testing of several potential new menu items at its test kitchen in New York, including quesadillas, nachos, chocolate milkshakes (which personally perked up my ears), avocado tostadas, and a new salad. Once the company has confirmed these and other new test products meet consumer taste preferences and operational hurdles they will go national, a process that could take 18 to 36 months. Niccol also talked about overhauling the company’s marketing strategy, including more on TV spots and an overall campaign that is more  “engaging and lighthearted.” We’ll wait and see what this looks like before commenting, but historically Chipotle has shunned advertising and while this could weigh on margins in the coming quarters, it could help reinvigorate the company’s brand. Again, more on that in the coming months.

Coming later this year, Chipotle will test its loyalty program with the expectation of rolling it out in full force during 2019. We’ve seen the success of other loyalty programs, most notably at Starbucks (SBUX), and I am cautiously optimistic. As it is looking to improve its digital sales, the company has made some changes to its mobile app and recently added delivery at 1,800 of its locations via DoorDash through its app and website. By the end of 2019, customers “will be able to order delivery from within the Chipotle app in most locations.” We’ve seen the success of delivery at former Select List holding Habit Restaurant (HABT), and recognize it tends to come with premium pricing – a positive for Chipotle.

Rather than drink the new CEO’s Kool-Aid, let’s remember there is more work to be done with management’s “Big Fix” initiative, but as we have seen before, as the turnaround momentum begins to build, the benefits begin to kick in. As traffic rebounds, the company should see volume benefits paired with prior pricing actions improve the bottom line. Given the nature of its business, I will keep watch on trends in beef, pork and chicken, as well as other key ingredients such as avocados, and the potential benefit or hindrance to margins and EPS.

When examining CMG shares, I can see upside to at least $550, which equates to 45x expected earnings near $12 in 2019, up significantly from $6.60 in 2017. While that P/E figure is rich, it has the shares trading at a PEG ratio of roughly 1x. The 2019 EPS figure bakes in continued benefits from the company’s “Big Fix” turnaround and assumes management is able to squeeze meaningful margin leverage as it returns the company back to growth. While we will be patient we will also be tracking the company’s “Big Fix” progress.

So why now?

Simple, a recent downgrade from investment firm Wedbush hit Chipotle shares and led them to fall just over 9% during the last several trading days from $523 to the current $475. For some perspective, that followed a recent upgrade by Morgan Stanley to an Overweight rating and the reiteration of an Overweight rating by Piper Jaffray. I see Wedbush’s comment as very rear-view mirror relative to the company’s progress in turning the business around, a key point of our investment thesis. That 9% drop in the share price means we now have nearly 16% upside to that “at least” $550 price target. Yes, Niccol and the company have much further to go, and from time to time there will be missteps and setbacks along the way, but as the saying goes, our eye is on the long-term prize with Chipotle.

As such, we’re using the recent drop in the shares relative to the $550 price target to add CMG shares back to the Select List as part of our Clean Living investing theme. The strategy with this position will be to add to the shares on weakness provided the company continues to make progress on the new management team’s four-pronged initiative AND drives favorable traffic and sales metrics.

  • We are issuing a Buy on the shares of Chipotle Mexican Grill (CMG) and adding them to the Tematica Investing Select List with a $550 price target. 

 

Clean Living: Healthier food, healthier people, healthier homes, offices and a healthier planet

Clean Living: Healthier food, healthier people, healthier homes, offices and a healthier planet

 

They say too much information is a dangerous thing, but in the case of consumers, access to information is helping reshape how they are living their lives:

  • According to a recent survey from Label Insight, 39% of U.S. consumers say they would switch from the brands they currently buy to others that provide clearer, more accurate product information.
  • Per Nielsen, 73% of consumers surveyed said they feel positive about brands that share the “why behind the buy” information about their products.
  • 68% say they’re willing to pay more for foods and beverages that don’t contain ingredients that they perceive to be
  • In some cases, consumers are more interested in knowing what’s not included than what is included in the products they buy. 53% percent of consumers surveyed said the exclusion of undesirable ingredients is more important than the inclusion of beneficial ingredients. These include high fructose corn syrup, artificial sweeteners and colorings, sugar, sulfites, genetically modified organisms (GMOs), refined grains and carbohydrates, and dozens of other ingredients.

 

This shift in preference for healthy, natural products and the eschewing of artificial chemicals, sweeteners, sugar and other synthetics is one of the basic building blocks for TematicaResearch’s Clean Living investing theme. In 2017, the US organic food market was roughly $44 billion and is expected to reach $70.4 billion by 2025 according to Hexa Research.  The trend towards more natural, “good for you” foods and other products isn’t just focused on organics, however:

  • According to a 2016 Neilsen survey, 50% of people surveyed in North America reported they try to avoid foods with GMOs.
  • In another study, this time by Consumer Reports in 2014, 72% of participants responded that when shopping it is important to avoid GMOs and 40% look for non-GMO labels and claims on packaging.
  • On the gluten free front Statista reports that by 2020, the market is projected to be valued at 7.59 billion U.S. dollars.

 

We see this movement towards natural, organic, non-GMO and even gluten-free foods reflected in commentary from grocery chain Kroger that natural foods continue to generate strong double-digit growth compared to overall same-store sales growth in the low single-digits. This shift in consumer preferences is already having an impact on companies, with some responding to the tailwind, such as

  • Amazon (AMZN) buying Whole Foods Market
  • The Hershey Company (HSY) first acquiring Krave, a maker of jerky products, and then Amplify Snacks, the provider of Skinny Pop popcorn products and Oatmega grass fed whey protein bars and cookies;
  • Annie’s Homegrown, the Berkeley, California-based maker of “natural” and organic pastas, meals and snacks was snatched up by General Mills (GIS) in 2014, one of several natural acquisitions by the food giant that includes Immaculate Baking, Cascadian Farms, and Muir Glen.
  • Baked fruit and vegetable snack-maker Bare Foods Co. was scooped up by PepsiCo (PEP), which has also introduced organic and healthier versions of some of its biggest snack brands. PepsiCo has also introduced Bubly, a sparkling water brand.
  • In 2016 Coca-Cola (KO) announced it had more than 200 reformulation initiatives underway to reduce added sugar across its carbonated soft drink portfolio.
  • French dairy giant Danone has agreed to acquire plant-based dairy alternatives company WhiteWave Foods Co.
  • International Flavors and Fragrances (IFF) acquired Israeli flavors and natural ingredients firm Frutarom for $7.1 billion to become the second largest supplier in the global natural flavors market.
  • Cott Corp. (COT) sold its traditional beverage manufacturing business for $1.25 billion to Refresco Group NV and retained its water, coffee, tea and filtration service business — categories aligned with health and wellness trends.

 

 

Dining Out Trends Towards Clean as Well

While softening in recent years, in the United States we eat a good portion of our meals away from home — as much as 50% according to some reports. Of course, we all like to indulge ourselves when we go out for a night on the town, however, the Clean Living movement has also become pervasive across restaurant menus and chains in recent years. According to the Natural Restaurant Association, restaurant operators are taking notice, and in 2016 it was reported that more than eight in 10 of their guests paid more attention to the nutrition content of food when compared to two years prior. Given the growing pervasiveness of clean living and transparency, we suspect that percentage has likely inched higher since them

Just a couple of years ago, Chipotle (CMG), before its rash of health and food safety issues, was held out as the poster child for Clean Living restaurants. With its “Food with Integrity” program that began in earnest in 2015 with its ban on GMO’s across its entire menu, the burrito chain also focused on locally grown vegetables, free-range pork and chicken and antibiotic-free meats among other things. Panera Bread Co. (PNRA) announced in 2014 its plan to remove preservatives, sweeteners, flavors and colors from artificial sources from its entire menu, a process that took nearly 3 years to complete.

Zoe’s Kitchen (ZOES) — the fast-casual chain of Mediterranean-inspired comfort food with made-from-scratch recipes using fresh ingredients — made the leap from private to public in 2014 and now boasts over 200 locations across 17 states. There is a rash of food chains that are currently privately-held that are also riding this trend which includes the probably the most widely known, Cava Grill. Others include True Food Kitchen, Sweetgreen, Freshii, and Chopt.

 

 

Clean Living Isn’t Just What We Put In Our Bodies

In addition to clean eating, another aspect of this theme includes natural skincare & make-up, and non-toxic baby products. According to a market study by Grand View Research, the global market for natural and organic personal care products is projected to grow to $25.1 billion by 2025, expanding at a CAGR of 9.5% over the 2017-2025 period. In recent years there has been a long list of acquisitions in this  natural category:

  • Tom’s of Maine, known for its natural toothpastes, mouthwashes and deodorants was scooped up by Colgate-Palmolive (CL) in 2006 for $100 million.
  • Organic balms and butters brand Burt’s Bees was acquired by Clorox (CLX) for $925 million in 2017.
  • After building Bare Escentuals — producer of mineral and powder based makeup line bareMinerals — from the ground up, CEO Leslie Blodgett accepted a buyout in 2010 from Tokyo-based cosmetics company Shieseido for a reported $1.7 billion
  • Similarly, Johnson & Johnson (JNJ) counts in its stable of brands Aveeno, L’Oreal owns The Body Shop, and Estee Lauder (EL) owns both Aveda and Origins, among other brands.

As with clean eating, where the movement went from fringe brands being acquired by large consumer packaged goods brands to those companies actually reformulating their mainstay brands to be more natural, organic and chemical-free, we’ve seen personal care brands respond to this movement as well:

  • Companies such as Procter & Gamble (PG) and Estée Lauder have acquired or invested in clean brands, knowing their giant manufacturing processes can’t just take out a few parabens and call ita day. Other companies, such as Unilever (UL), have started completely from scratch, creating their own new skin-care and hair-care lines.
  • Johnson & Johnson has announced it will disclose all ingredients in its baby care products, including fragrance ingredients, down to 0.01% of content.
  • In 2017, L’Oréal Paris-owned Garnier introduced Skin Actives Naturals, a line of 96% (at least) naturally derived products, they also began listing ingredient sources on their labels, while cutting parabens, silicones, dyes, and sulfates.
  • Unilever announced that it would be scooping up natural deodorant brand Schmidt’s. That closely followed the acquisition of cult-fave natural deodorant brand Native by Proctor & Gamble in late November.

In keeping with our Rise of the Middle Class investing theme, we are also seeing a growing number of health-conscious consumers in the emerging markets as well.

According to a report from RedSeer the current organic skin care market in India is pegged at $125 million, growing at 25% year-over-year to reach $315 million by 2022.

 

Clean Living Means a Clean Planet

The market for natural and organic cleaning supplies has been a niche market at best for many decades — when it came to cleaning, consumers felt a chemical onslaught was best. But in recent years, as health concerns began to arise with the chemicals in these products as part of an overall adoption of a healthier lifestyle, such products have moved into the mainstream and according to ReportLinker, the U.S specialty household cleaners market is expected to reach $7.96 billion by 2024.

When asked by Nielsen to pick the attributes they seek when purchasing all-purpose cleaners, 40% around the world say they want environmentally friendly benefits and nearly as many (36%) say they don’t want harsh chemicals. Seventh Generation Inc, based in Burlington, VT is probably one of the most well-known brands in the space, selling cleaning, paper and personal care products with a focus on sustainability and the conservation of natural resources. Starting as a mail-order only company in 1988, the company was acquired by Unilever in 2016 for $700 million – notice a trend here yet?

Other companies are also offering products for the home that have high recycling content and environmentally friendly processes, such as Trex Companies and its decking products. The average 500-square foot composite Trex deck contains 140,000 recycled plastic bags, which makes it one of the largest plastic bag recyclers in the U.S. as it saves 400 million pounds of plastic film and wood from landfills each year. As one might suspect Trex is not the only company capitalizing on recycling and clean. Other areas in which we are seeing these unfold include low chemical furniture, mattresses, paint, flooring and even footwear made entirely from post-consumer water bottles by Rothy’s.

Another aspect of this theme is clean technologies, which include products and technologies designed to be economically competitive by using less material and energy to reduce their environmental impact compared with incumbent technologies. Example of clean technologies include biofuels, wind and solar power, electric vehicles, solid-state lighting and other renewables that are replacing coal, petroleum and other fossil fuel based solutions. According to the International Agency, by 2030 there will be 125 million electric vehicles across the globe compared to the 3.1 million found in 2017. With these and other forms of clean energy, we’ll be careful to watch the political landscape as well as new technological developments associated with our Disruptive Innovators investing theme that could alter the playing field on cost, efficiency or both.

 

 

Companies Sustaining the Clean Living Focus

As its name suggests, the Tematica Research Clean Living investing theme focuses on companies that provide products, ingredients and other solutions and services that are in keeping with the clean lifestyle. This theme could be summed up succinctly with “Healthier food, healthier people, healthier homes, offices and a healthier planet.”

Examples of publicly traded companies riding the Clean Living investment theme tailwinds:

  • Amazon (AMZN)
  • Chipotle (CMG)
  • Cott Corp. (COT)
  • First Solar (FSLR)
  • Freshpet (FRPT)
  • Gaia (GAIA)
  • Hain Celestial (HAIN)
  • International Flavors (IFF)
  • National Beverage Corp. (FIZZ)
  • Natural Grocers (NGVC)
  • Nautilus (NLS)
  • Primo Water (PRMW)
  • The Simply Good Foods Co. (SMPL)
  • SodaStream International (SODA)
  • Sprouts Farmers Market (SFM)
  • Tesla (TSLA)
  • Town Sports International Holdings (CLUB)
  • Trex Company (TREX)
  • United Natural Foods (UNFI)
  • Zoes’ Kitchen (ZOES)

 

 

No need to be tempted by Blue Apron’s falling stock price

No need to be tempted by Blue Apron’s falling stock price

Recently we shared with Tematica Research Members our perspective on shares of Blue Apron (APRN). In a nutshell, our message was “stay away” from this company as it faced several headwinds. In the last few weeks, APRN shares hit $5.50, well off their initial public offering price of $10, but the shares have since cratered another 13%. For an aggressive trader, that would have been a nice short trade as the S&P 500 rose roughly 0.5% over the same time frame. Candidly, APRN shares were considered as a short trade for our Tematica Options+ service; however shorting stocks in the single digits is fraught with all sorts of issues no matter how tempting it may be.

Tomorrow, November 2, 2017, Blue Apron will report its 3Q 2017 quarterly results before the market open. Given the additional drop in the shares, odds are investors will yet again be contemplating what to do — get involved, leave it alone or perhaps getting even more aggressive to the downside — those are the choices we face.

Before we come to a quick conclusion, let’s remember Blue Apron management just initiated a round of layoffs – not good for a company that has recently become public! The drop in headcount equates to a 6% reduction and comes on the heels of a botched first quarter as a public company. As we learned in that earnings report, not only did Blue Apron deliver a wide miss to the downside vs. expected earnings, but the company also slashed its marketing spend to $30.4 million from $60.6 million in the prior quarter to conserve cash. Because of the June quarter loss per share of $31.6 million or -$0.47 per share, Blue Apron finished the June quarter with $61.6 million in cash down from $81.4 million at the end of 2016. As we pointed out previously, if the company were to simply hit existing EPS expectations for the back half of 2017 it means a most likely painful secondary offering or private investment in a public entity (PIPE) transaction will be needed.

The move to cut marketing spend and conserve cash led to declines in orders per customer and average orders per customer year over year, despite the improved customer count year over year. Now, this is where context and perspective come in handy – yes, Blue Apron’s customer count rose year over year in the June quarter, but it tumbled 9% compared to the March quarter. Ouch!

What this tells us is that Blue Apron is in a difficult situation – it has to carefully manage cash, but for a company that is reliant on marketing to grow its customer base, it means potentially sacrificing growth. And that’s before we consider the threat of Amazon (AMZN), which through Amazon Fresh has partnered with eMeals to take on Blue Apron and others like it. While this is a fairly new initiative, via eMeals Amazon offers gluten-free, paleo, Mediterranean, and other select lifestyle choices. We suspect there will be another salvo fired at Blue Apron as Amazon fully integrates Whole Foods in the coming months.

Even before we tackle September quarter expectations, it’s not looking good for Blue Apron, and what we’ve outlined above explains not only the rise in short interest but also the decline in institutional ownership as the share price collapsed. Generally speaking, the vast majority of institutional investors will not flirt with companies near a $5 stock price.

In terms of what’s expected when it comes to Blue Apron’s 3Q 2017 earnings, the consensus view calls for EPS of -$0.42 on revenue that is forecasted to drop 20% sequentially to $191.47 million. That bottom line loss means the company will burn through even more cash during the quarter. Think of it this way – if the management team was confident in its second half prospects, then why roll heads and introduce a “company-wide realignment”?

What if Blue Apron’s loss for the quarter is less than expected?

While that could pop the stock in the short-term, odds are the company will still be facing stiff competitive headwinds and be in a cash-constrained position. The only real question is will its cost containment efforts buy it another quarter until it hits the cash wall? Any investor will see the blood in the water and factor that into their thinking when it comes time to price the eventual offering the company will need to survive.

Aside from the quarter’s financial metrics, key items to watch inside the quarter’s earnings report will be the sequential trend in orders, customer count, orders per customer and average revenue per customer. Those will set the tone for the company’s updated outlook that if recent history holds will be shared on the 3Q 2017 earnings conference call. For those still intrigued, be sure to see how that outlook meshes with the current consensus view for the December quarter that clocks in at EPS of -$0.22 on revenue of roughly $200 million. The real upside surprise would be if the company moves up expectations for it to be break-even on the bottom line, but given recent headcount cuts and restructuring the odds are very low we will hear such talk.

Stepping back and reviewing the above, we are not expecting the company to throw a life preserver to its stock price. It is possible that 3Q 2017 metrics surprise on the upside, and this could pop the stock, but it doesn’t remove the business environment and cash need challenges Blue Apron’s business will still face. We will be looking at the upcoming pricing of meal kit competitor Hello Fresh’s initial public offering, and with its CEO’s stated goal to “become the clear No. 1 player on the U.S. market in 2018” this likely means, even more, pricing and margin pressure ahead for Blue Apron.

Bottomline, our perspective is this, if Blue Apron’s earnings report is better than expected don’t take the bait. We’ll continue to look for and invest in companies that are well positioned to ride the thematic tailwinds associated with our 17 investment themes and are well capitalized. Investors who have been around the block the time or two have seen situations like this one with Blue Apron before and it rarely ends well.

As Warren Buffett said, “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” We could not agree more.

Initial observations of the Amazon-Whole Foods marraige

Initial observations of the Amazon-Whole Foods marraige

With the official closing of the Amazon (AMZN) acquisition of Whole Foods Market (WFM) yesterday, I made a point of visiting two locations near me outside of Washington, D.C. The traffic in the store was greater than usual for a Monday, as were the length of the lines at the checkout counters. There were a number of prices that were better as has been reported, and there was a pop-up stand for Amazon Echo devices.

What was missing, however, were the appropriate Amazon’s private label brands that are slated to hit shelves at Whole Foods locations, as well as the lockers that will allow for both delivery of items as well as returns.

I say appropriate items because Amazon has quietly expanded the scope of its private label products from food (Happy Belly, Mama Bear and Wickedly Prime) and supplements (Amazon Elements) to fashion, electronics, household items, cosmetics, lingerie, and furniture to name a several. Conversations with the store managers confirmed Amazon private label products will be turning over in the store “over time” where appropriate. That hasn’t slowed Amazon from including Whole Foods’ private label brand, 365 Everyday Value, on its website although based on some basic searching 365 Everyday Value has yet to be offered under Amazon Fresh.

Like many large acquisitions, integration and the targeted synergies come over time, and I are still in the very early days of these two companies being under one roof. I expect the rollout of Amazon private label products to be had at the 470 Whole Foods locations in the U.S. and the U.K. over the coming quarters with added benefits coming (Amazon Fresh, Amazon meal kits and the instillation of Amazon Prime as the new membership rewards program).

As the combined entity flexes its product and logistical offering, I suspect before too long the conversation will shift from “death of the mall” to “death of the grocery store.” One of the “secret weapons” that Amazon has over its grocery and other competitors that range from Kroger (KR) to Wal-Mart (WMT) is the high margin Amazon Web Services, which continues to be embraced by corporate America as it increasingly migrates to the cloud.

One thing I am pondering is based on the number of Whole Foods locations, will Amazon look to make other grocery acquisitions in a bid to reach key markets that have a high concentration of Amazon Prime customers? If so, this could quickly turn the conversation from “the death of the mall” to the “death of the grocery store.”

 

  • We continue to rate Amazon (AMZN) shares a Buy with a $1,150 price target.

Source: Whole Foods prices cheaper with Amazon – Business Insider

Amazon Continues to Grab More and More Consumer Wallet Share

Amazon Continues to Grab More and More Consumer Wallet Share

Last week we received the disappointing June Retail Sales report, which pointed to another step down in GDP expectations for the second quarter as well as the ongoing pain for brick & mortar retailers, especially department stores like Macy’s (M), JC Penney (JCP) and the like.

Digging into the June retail sales report, we noticed month-over-month declines almost across the board, but one of the larger declines was in… you guessed it.. department stores, which fell 3.9 percent year over year. By comparison, Nonstore retailers (code for e-tailers), like Amazon (AMZN), rose 9.7 percent year over year.

We’d also note the June retail sales report caps the second-quarter data and, in tallying the three months, nonstore retailer sales rose more than 10 percent year over year. On the other hand department stores fell more than 3 percent, while the sporting goods, hobby, book and music store category dropped nearly 6 percent year over year. Keep in mind that Nike (NKE) only recently partnered with Amazon to leverage its second to none logistics as Nike looks to reduce its reliance on third party retailers such as Foot Locker (FL) and grow its higher margin Direct to Consumer business. Yet another reason to expect declining mall traffic in the coming months especially if more branded apparel companies look to partner with Amazon… and yes, we expect that to happen.

 

 

This week, Amazon sent more than a flare across the bow of newly public meal kit company Blue Apron (APRN) and took one step deeper into expanding its food focused efforts. As they’ve become public, recent trademark filings reveal Amazon is looking to attack the growing meal kit business and has trademarked “We do the prep. You be the chef,” “We prep. You cook” and “No-line meal kits.”

Looking into the filings, the described service offering tied to these trademarks is “Prepared food kits composed of meat, poultry, fish, seafood, fruit and/or and vegetables and also including sauces or seasonings, ready for cooking and assembly as a meal; Frozen, prepared, and packaged meals consisting of meat, poultry, fish, seafood, fruit and/or vegetables; fruit salads and vegetable salads; soups and preparations for making soups.”

As we said above, it sure looks like Amazon is looking to leverage its growing presence in food, and our Food with Integrity investing theme, to capitalize on the growing meal kit business that led Blue Apron to go public. Looking back over the last few years, we see this as a natural extension of its food efforts that began in 2013 with the launch of Amazon Fresh for groceries followed by Amazon Restaurants for restaurant delivery in 2014. Of course, the pending acquisition of Whole Foods (WFM) is the key ingredient (see what we did there) to rounding out its position in the meal kit business and tap the $800 billion grocery opportunity.

This announcement, paired with others that include Amazon’s move into the apparel industry, bolsters its already strong position for the quarters to come. Now for a word of caution – of late it seems that Amazon can do no wrong and in our view, this sets up pretty high expectations for the company’s 2Q 2017 earnings and the outlook for the second half of 2017, which includes Back to School, and holiday shopping.

One of the few places the herd gets tripped up with Amazon is on the cost side of the equation, particularly when it comes to investing for future growth. Given the number of initiatives Amazon has in place, we think there is a meaningful probability that Amazon boosts its investment spending near-term for these newer initiatives as it has done in the past when it reports its quarterly results on July 27. If we’re right, it could lead to a pullback in the shares especially since Amazon tends to be rather tight lipped when it comes to details on its earnings conference calls. We would look to scale into AMZN shares between $820-$870, roughly a 15-20 percent drop from current levels, which tends to be the range that high profile stocks like Amazon get hit if they come up short on earnings or guidance.

  • We continue to see Amazon as a long-term wallet share gainer as it continues to expand its umbrella of service offerings and geographic footprint, while benefitting from the adoption of its high margin cloud business.
  • Our price target remains $1,150.

 

 

WEEKLY ISSUE: Adding a New Scarce Resources Play to the Tematica Select List

WEEKLY ISSUE: Adding a New Scarce Resources Play to the Tematica Select List

In this Week’s Issue:

  • Adding Some CORN to the Select List
  • Amazon – More Than Prime Day this Week
  • What PepsiCo Says About Our Foods With Integrity Investing Theme
  • The Wall Street Journal Serves up a Bullish Case for our AMAT Shares
  • USA Technologies: Arming Itself for the Growing Cashless Consumption Opportunity

 

We’re several days into 3Q2017 and while we’re waiting for 2Q 2017 earnings to kick into gear, we’re once again seeing Washington and all Trump-related shenanigans dominate the headlines. Amid the bluster of renewed chatter among Trump-related ties to Russia, we found more interesting a comment from Treasury Secretary Steve Mnuchin. Mnuchin stated, “the Trump administration hopes to roll out its “full-blown” tax reform plan in early September and sign it into law by the end of the year.” While we are all for tax reform, the issue is the timetable as this, too, has now slipped past the original August deadline.

Yesterday, Senate Majority Leader Mitch McConnell has delayed the start of the August Senate recess until the third week in August in order to allow more time for “work on health care reform” among other tasks. Put together, it continues to look like we should see a reset in GDP expectations as well as earnings expectations for the back half of the year.

This week there are just a handful of S&P 500 companies reporting, and as we discussed in this week’s Monday Morning Kickoff, that will change beginning next week with the up-tempo velocity lasting through August 4. We’re sharpening our pencils and getting ready for the onslaught. Before then, we’re adding a new Scarce Resource play onto the Tematica Select List this week as well as sharing our take on this week’s news for Amazon (AMZN), McCormick & Co. (MKC), International Flavors & Fragrances (IFF), Amplify Snacks (BETR), Applied Materials (AMAT) and Universal Display (OLED).

 

Adding Some CORN to the Select List

Several weeks back, we spoke with Sal Gilbertie, President, Chief Investment Office and co-founder of Teucrium Trading about his commodity-based ETFs, which include the:

  • Teucrium Corn Fund (CORN)
  • Teucrium Wheat Fund (WEAT)
  • Teucrium Soybean Fund (SOYB)
  • Teucrium Sugar Fund (CANE)

Given our past lives that looked at agricultural equipment companies, we were more than familiar with the supply-demand dynamics of commodities before we spoke with Sal. Sometimes it’s either the supply side or demand side of the equation in the driver seat, but from time to time both levers are being pulled, much like we are seeing with oil these days where there is both rising supply and weakening demand. The windup is oil prices have been under pressure and we continue to expect oil earnings to be reset given that price falloff.

 

We’re seeing something very different when it comes to the agricultural commodities, especially corn and wheat as prices for both have been climbing of late. What’s at work here is steadily rising demand associated in part with the “rise” aspect of our Rise & Fall of the Middle-Class that is spurring demand for the protein complex and other food stuffs. There is also the influence of our investing theme given that the world’s population continues to grow and now exceeds 7.4 billion people. Roughly every three months, there are around 20 million more people on our planet, which means that since 2013 there are around 320 million more mouths to feed. We’d also point out that these agriculture commodities are consumables, meaning that once they are eaten they are gone and need to be purchased again. That is especially true with corn given the plethora of uses that span a multitude of food and industrial products including starch, sweeteners, corn oil, beverage and industrial alcohol, and fuel ethanol.

 

 

What explains the rise in corn and wheat prices, however, is the supply side. Over the past four years from 2013-2016, crop yields in the U.S. were at record levels, and inventories rose and that led US farmers to plant fewer acres this year. In turn, at the start of 2017, the U.S. Department of Agriculture projected that the 2017 crop would be more than a billion bushels smaller than the 2016 crop.

Flash forward to the last week of June and we are witnessing a developing drought across North Dakota, South Dakota and Montana, which is boosting grain prices. That drought has led to deteriorating corn crop conditions year over year with 65 percent of the U.S. corn crop being rated good/excellent vs. 68 percent a year ago at this time. While the overall drought situation in the US is far better than this time a year ago per data furnished by the US Drought Monitor, drought conditions have been on the rise, particularly in key corn regions that are North Dakota, Iowa and the Northern Plains.

 

At the same time, we are hearing reports of horrific weather in China that is driving down forecasts for its corn crop. Why do we mention China? Per data tabulated by WorldAtlas, China is the second largest producer of corn behind the US with Brazil a very distant third. Here’s the thing, China recently slashed its 2017/18 corn output forecast to the lowest level in four years after drought and hail hit plantings. Following those events, Chinese Agricultural Supply and Demand Estimates (CASDE) shared that farmers in parts of China’s northeast corn belt regions switched to soybeans and substitute grains after drought made it hard to plant corn, leading to a drop in corn acreage.

Putting it all together, we are seeing a supply-demand imbalance shaping up for corn and that makes it a viable prospect for our Scarce Resources investing theme. While there are a number of indirect beneficiaries to rising corn prices, as well as number that will feel the pinch of rising input costs, the Teucrium Corn Fund (CORN), which reflects corn futures contracts, is the purest play on rising corn prices. We’ll continue to monitor US drought conditions but with The Weather Network forecasting “normal or warmer than normal temperatures during the summer” odds are we could see more supply constraints ahead and that would bode well for CORN shares. We’d note the last time there was a significant drought in the US was 2012, when corn reached a high of $8.4375 per bushel in August 2012 up from roughly $3.30-$3.40 in May 2010. Currently, the spot price for corn price is hovering near $3.85 per bushel.

The Bottomline on CORN:

  • We are adding Teucrium Corn Fund (CORN) shares to the Tematica Select List with a $25 price target.
  • This is a new Scarce Resources position, and we are holding off with a stop-loss at this time as our strategy would be to opportunistically increase the Select Lists exposure while improving the overall cost basis.

 

 Amazon – More Than Prime Day this Week

We are in the afterglow of Amazon’s (AMZN) Prime Day 2017, which concluded early this morning. The company trotted out all sorts of deals, especially on its own products and services, and while we’re still shifting through the day-after data that Amazon management is putting out, by all accounts this year’s event blew the last two years out of the water with the company claiming it took in 6,000 Amazon Prime orders per minute and over $1 billion in sales from this newly created “holiday” event.

Behind the noise of Prime Day, Amazon once again quietly expanded its footprint. The two latest announcements include talk of it is forming its own Geek Squad like offering — a service it is currently testing in several cities out west. That news sent Best Buy (BBY) shares tumbling on Monday, taking nearly $1 billion off the company’s market cap in a single day. And yes, the irony of Amazon raking in the same amount of sales on Tuesday that Best Buy lost in market cap on Monday isn’t lost on us — it’s one of the clearest depictions of how thematic tailwinds for one company become headwinds for another.

 

The second announcement comes in the form of Amazon partnering with King Vintners, a subsidiary of Oregon’s King Estate Winery, for its NEXT private label wine offering. This move continues Amazon’s move into private label products, which tend to carry better margins. As a reminder, Amazon is also expanding its private label business in the food and apparel categories as well. We see Amazon clearly positioning itself to capture greater consumer wallet share as we head into the back half of the shopping year.

Getting back to Prime Day, it’s actually more like 30 hours, which we suspect Amazon is doing to expand its reach across the globe. We also suspect one of the key strategies behind Prime Day is to hook shoppers with either Prime services or entice them with unbundled and discounted Amazon services in order to upsell them to Prime later on. Of course, there is the goosing of its digital sales as well. Early reports from Amazon state that the best-selling Prime Day item thus far is the Amazon Echo smart speaker – talk about a potential Trojan horse to other Amazon offerings. We’ll be watching over the day as more Prime Day data pours out and we try to assess the contribution from outside the US, which in our view offers ample growth opportunities for Amazon.  We’d do so over a glass of Amazon’s NEXT wine, but they, unfortunately, don’t ship to Virginia yet — our loss.

  • As a reminder, we currently rate Amazon shares as a Hold — they are shares to own, not trade.
  • Our price target remains $1,100.

 

 

What PepsiCo Says About Our Foods With Integrity Investing Theme

Shifting gears, yesterday morning PepsiCo (PEP) reported its 2Q 2017 earnings this morning with organic revenue growth clocking in just over 3 percent. At first blush, we would note this is a positive for our McCormick & Co. (MKC) shares given that PepsiCo is McCormick’s largest Industrial Segment customer. The same can be said for Tematica Select List company International Flavors & Fragrances (IFF), as PepsiCo is one of its larger customers as well.  So you can see why were so keen to see what Pepsi had to say about its second quarter performance.

Digging below headlines and listening in on the PepsiCo’s 2Q 2017 earnings call we find even more confirming reasons to be bullish on these two Select List holdings:

“…we continue to transform our beverage portfolio to offer more non-carbonated options and reducing sugar levels across the portfolio.”

“We have reduced added sugars, saturated fat and sodium in many of our products, while continuing to expand our lineup of nutritious foods and beverages to meet growing consumer demand.”

“Lipton tea, over the years we have not only added more variety but we have strengthened the brand by introducing increasingly premium offerings, first with Pure Leaf and more recently with the Tea House Collection, resulting in the leading share position we enjoy today. Or Mountain Dew, where over time we have expanded the trademark from traditional green-bottle Dew and Diet Dew to exciting line extensions like Code Red, White Out and Voltage, and our very successful Kickstart lineup. Or Doritos, where our loyal consumers have embraced flavor extensions to the core product and innovations we have taken to foodservice and quick serve restaurants. Or Quaker, where we have provided increasing portability and convenience to a hearty, healthy breakfast through the introduction of Breakfast Squares and Breakfast Flats.”

“Our product transformation efforts to date have resulted in a portfolio where we now derive approximately 45 percent of our net revenue from products that we refer to as guilt-free. These products include diet and other beverages that contain 70 calories or less from added sugar per 12-ounce serving and snacks with low levels of sodium and saturated fat…”

In sum, PepsiCo’s comments confirm the shift toward healthier, “food that is good for you” products and beverages, which is a key aspect of our Foods with Integrity investing theme. Those same comments also confirm the shift away from unhealthy ingredients that is spurring demand for flavoring solutions at both McCormick & Co. as well as International Flavors & Fragrances — because, after all, once you remove all the sugar and artificial flavors, it still needs to taste good in order to sell. As this tailwind continues to blow, another beneficiary to be had is Amplify Snacks (BETR).

The bottom line as we see it with all this Foods with Integrity news:

  • Our price target on McCormick & Co. (MKC), International Flavors & Fragrances (IFF) and Amplify Snacks (BETR) shares remain $110, $145 and $11, respectively.
  • To date, ETF holdings in each of these three stocks is insufficient, but we will continue to revisit potential ETFs that mesh with our Foods with Integrity investing theme.

 

 

The Wall Street Journal Serves up a Bullish Case for our AMAT Shares

Yesterday, we had positive confirmation on one of the several aspects of our investment thesis in Applied Materials (AMAT) from an article in the Wall Street Journal. The article reminds us of the ramping semiconductor market in China and how that is fueling demand for semiconductor capital equipment at Applied and others.

Per data from Gartner, currently China consumes half the world’s chips, but only produces less than 10 percent of those chips – and this is something China is looking to change as it spends up to $108 billion over the next 10 yeas on its own chip-making industry. According to industry group SEMI, at least 20 fabs are currently under construction in China.

That clearly makes the “China factor” one to watch, but there is also rising demand for memory and other chips as we move deeper into our increasingly Connected Society with the Connected Car, Connected Home, wearable and other connected devices as well as the more industrial focused Internet of Things. The next catalyst to watch will be earnings from Taiwan Semiconductor (TSM), one of largest semiconductor manufacturers, that will be reported tomorrow. Inside those results, we’ll be scrutinizing TMS’s capital spending plans for the coming quarters and what it means for semiconductor capital equipment orders.

Let’s remember too, Applied Materials has other tailwinds on its business, including ramping demand for the capacity constrained organic light emitting diode display industry that is also propelling demand at Universal Display (OLED) as well as demand. While Apple (AAPL) has yet to say a word about its next iPhone model, a growing number of reports project that Apple will have more than half of its iPhones using organic light emitting diode displays by 2020. That action will spur adoption among other smartphone vendors, including lower cost Chinese vendors. In short, we continue to see a strong ramp in demand subsequently capacity for organic light emitting diode displays.

  • Our price target on Applied Materials (AMAT) shares remains $55.
  • In reviewing potential ETF plays that hold AMAT shares, the one with the largest exposure to AMAT shares is First Trust Nasdaq Semiconductor ETF (FTXL), which has more than 8 percent of its assets in Applied Materials. As enticing as that sounds, FTXL’s market cap is just over $20 million and average daily trading volume is thin as a pancake at just under 6,000 shares per day. An option with far greater liquidity would be the VanEck Vectors Semiconductor ETF (SMH), which holds just under 5 percent of its assets in AMAT shares.
  • With the recent slip lower, based on yesterday’s market close we see just over 14 percent upside to our $125 price target for Universal Display (OLED) shares.

 

 

USA Technologies:
Arming Itself for the Growing Cashless Consumption Opportunity

Cashless Consumption company USA Technologies (USAT) saw its shares come under some pressure earlier this week when it filed an S-1 registration statement to offer $34.5 million in common stock with an overallotment option of up to another $5.2 million. If the full amount were sold, another 8 million or so USAT shares could potentially enter the market and there likely would be some EPS dilution, that’s the reason USAT shares moved 10 percent lower over the last week. From a business perspective little has changed in the course of a week, in fact, the outlook for our Cashless Consumption theme in many respects has never looked better.

Google (GOOGL) is preparing to enter the mobile payment space in India, and the latest figures show the Chinese spent $5.5 trillion through mobile payment platforms last year. After launching in Singapore, Australia and Mexico last year, Citibank MasterCard (MA) customers in the US can now begin using Citi Pay, the mobile tap-and-pay service, here in the U.S. More specific to USA Technologies, it recently expanded its merchant services relationship with JPMorgan Chase (JPM).

As shareholders, we may not love the move by USAT and its new stock offering, but it will provide the company with additional firepower in this quickly expanding market. Fundamentally speaking, we continue to like the company’s position as mobile payments grow across the globe. We are also seeing M&A chatter around the Cashless Consumption theme, with some suggesting that PayPal (PYPL) should acquire Square (SQ). With an arguably fragmented playing field that spans software, hardware, services and geographic opportunities there is little question in our minds that we will see consolidation activity in the coming quarters. We continue to see USA Technologies as a prime target.

  • We will continue to monitor USAT shares closely, with an eye to expand our position size closer to $4.50 or below given our initial buy-in price of $4.50.
  • Subscribers looking for an ETF play on our Cashless Consumptioninvesting theme should examine the PureFunds ISE Mobile Payments ETF (IPAY). While it catches our Cashless Consumptioninvesting theme, in our view, the average daily volume is too low to make it a viable recommendation at this time, but we’ll keep it on our radar for when average trading volume hits over 100,000 shares per day. 
QUARTER WRAP-UP: Look Back Before Moving Ahead

QUARTER WRAP-UP: Look Back Before Moving Ahead

In this Week’s Issue:

  • A Recap of Our Moves Over the Second Quarter
  • Ahead of 2Q 2017 Earnings Season We’re Adjusting Several Stop Losses
  • What We’ll Be Watching Near-term for the Back Half of the Year

 

This week, rather than a weekly check-in, we’re going to spend our time wrapping up the quarter that was and all its happenings, as well as offer a look ahead to the back half of the year. Along the way, we’re also using this time to tighten up a few of our protective stop-loss levels. Whether you’re reading this on the beach, or in your lonely office while everyone else is on vacation this week, we’ve got a lot to cover, so let’s get to it . . .

 

A Recap of Our Moves Over the Second Quarter

With last Friday’s market close, we shut the books on not only the month of June, but the second quarter of 2017 and the first half of the year. During the last 90 days, we’ve seen several things unfold as the stock market powered higher despite the Fed boosting interest rates, the Trump Bump become the Trump Slump, and an increasing amount of data pointing to a slowing domestic economy. All told the domestic market indices rose between 2.6 to 4.0 percent during the second quarter. The Nasdaq, which came in at the upper end of that range, pared its gains back over the last few weeks as those items we discussed above have bubbled up in investor minds. Over the last quarter, the Russell 2000, a barometer of small-cap stocks returned 2.2 percent, bringing its year to date return to just over 4 percent.

During the quarter, we added a number of new positions to the Tematica Select List, including Cashless Consumption company USA Technologies (USAT), Food with Integrity play Amplify Snack Brands (BETR) and MGM Resorts (MGM), a Guilty Pleasure company if there ever was one. We also added RF semiconductor substrate company AXT (AXTI), as a food chain play on not only Apple’s (AAPL) upcoming iPhone, but also one for the upcoming 5G rollout by the likes of our own AT&T (T) as well as Verizon Communications (VZ) and other mobile carriers. That same 5G rollout, as well as continued 4G LTE and fiber buildouts, are also powering Dycom (DY) shares. Toward the very end of the quarter, we took advantage of the mismatch between the Cash-Strapped Consumer opportunity with Costco Wholesale (COST) when the herd dragged the share price down thinking it is a casualty of the Amazon (AMZN) – Whole Foods (WFM) tie up. Make no mistake, we see casualties spinning out of Amazon’s acquisition, but as we said previously, those look more like Kroger (KR) and Sprouts Farmers Market (SFM).

In addition to these newcomers, the Select List benefitted from strong moves in several Connected Society positions during the quarter, including Amazon (AMZN), Alphabet (GOOGL) and Facebook (FB) as well as the sleeper move in CalAmp (CAMP) shares that climbed more than 23 percent over the three-month period. As impressive as that was, the real champ on the Tematica Select List was Universal Display (OLED), which soared more than 30 percent during 2Q 2017, bringing our total gain to over 100 percent since we added the shares to the Select List in October of last year.

With all of these positions, we continue to see further gains ahead. While the upside in Amazon, Alphabet and Facebook are much talked about, we’d remind you about the Electronic Logging Device mandate that goes into effect late this year and will be a strong catalyst for CalAmp shares. The industry capacity constraint for organic light emitting diodes is bumping up demand from not only Apple, but other applications. That capacity constraint status will span several quarters as it is likely Apple will only have half of its iPhone production using organic light emitting diode displays by 2020 according to a new report from Trendforce. That’s both good for Universal Display (OLED) shares as well as Applied Materials (AMAT).

Those strong results offset weaker showings at Guilty Pleasure company Starbucks (SBUX), Connected Society play AT&T (T) and Content is Kingstalwart Disney (DIS). From time to time, we need to be patient with a position as we wait for the herd to catch up to the thematic tailwinds we’re seeing. That was the case with Universal Display (OLED) as well as Dycom Industries (DY), and we are seeing that with both Starbucks and AT&T. The key to Starbucks is its international expansion, particularly in China where it will benefit from the Rising Middle Class. While we are seeing deflation hit mobile carriers, the AT&T-Time Warner (TWX) combination should transform AT&T’s business from data driven to one that is a better blend of data, advertising and content. We’ve seen the content moat strategy pay off before at Disney (DIS)and Comcast (CMCSA), and we’ll be patient with AT&T shares given the deal doesn’t close until later this year. As far as Disney goes, it was evident earlier this year that 2017 was going to be a transition year for the company. We saw that in its box office line-up, which was one of the lightest in several years. That means we’re in a holding pattern with Disney until October when it begins to release the next iterations from Marvel, Disney Animation and Lucasfilm.

Toward the end of the second quarter, we saw some declines at Rise & Fall of the Middle-Class company McCormick & Co. (MKC), a dividend dynamo company if there ever was one, and Alphabet (GOOGL) shares following the $2.71 billion (€2.4 billion) fine from EU antitrust regulators and their view that Alphabet must “apply the same methods to rivals as its own when displaying their services.” As a reminder, Alphabet’s Google business has 90 days to end the conduct and explain how it will implement the decision, or face additional penalties of up to 5 percent of average daily global revenue. With more than $92.5 billion in cash, Alphabet has ample funds to swallow the fine, however, the implication of the decision could reshape how Google presents search results in Europe — if not eventually elsewhere. As such, we expect the company will review the decision and consider an appeal. Getting back to McCormick, the shares traded off recently, which has them once again back in the Buy zone given the upside to our $110 price target and current dividend yield.

Also during the quarter, we saw a few strong reminders in the form of the WannaCry and Petya ransomware attacks, both of which impacted our Safety & Security investing theme and why PureFunds ISE Cyber Security ETF (HACK) shares are on the Select List. With North Korea launching yet another missile, and the opening of defense deals under the Trump administration, we’re looking at several other aspects of that theme.

When we added Nuance Communications (NUAN) to fold in January, one of the reasons why was that voice, rather than touch, was the emerging interface for devices. During 2Q 2017 we saw that notion go from emerging to center state. Even today, Samsung is talking about launching a connected speaker as it once again follows in Apple’s footsteps, but this time it is way behind not only Apple, but also Amazon and Alphabet. With voice technology spreading to autos and appliances, we remain in the early innings with NUAN shares.

Finally, during 2Q 2107 we shed three positions:

  • We were stopped out of Aging of the Population play AMN Healthcare (AMN) when the shares crossed $37, which led us with a modest gain.
  • The same occurred with United Natural Foods (UNFI), a Foods with Integrity selection, but the positioned booked a loss near 9.5 percent over the last 9 months.
  • Offsetting those results, given some concerns about the Nasdaq giving back its gains (something that has played out as we expected), we exited PowerShares NASDAQ Internet Portfolio ETF (PNQI) shares last week with a return of more than 23.5 percent.

 

Ahead of 2Q 2017 Earnings Season We’re Adjusting Several Stop Losses

We’ll talk more about what we expect for 2Q 2017 earnings season and the back half of the year in a few paragraphs, but before that event kicks off in earnest by this time next week, we are setting or revising a number of protective stop losses. To head a question off, we are not setting ones for Amazon, Facebook, Alphabet and some others that are core positions for the longer-term. Nor are we setting ones for more recently added positions such as COST, AXTI, MGM, and BETR shares as we’re inclined to use weakness to improve the respective cost basis like we recently did with COST shares.

Okay, here we go:

  • Setting a protective stop loss on Starbucks at $50.00
  • USA Technologies (USAT) at $4.50, which worst case means a break-even position for this Cashless Consumption company;
  • United Parcel Service at $100.00, which locks in a modest gain;
  • McCormick & Co. at $90;
  • Applied Materials at $35;
  • CalAmp at $18, which will lock in a profit of more than 30 percent;
  • We will keep our stop loss for International Flavors & Fragrances (IFF) and AT&T (T) at $125 and $36, respectively, as well as Disney and Universal Display both at $100.

 

What We’ll Be Watching Near-term for the Back Half of the Year

With the Fourth of July holiday now past, odds are this will be a somewhat slow and sleepy week as many have opted to utilize the holiday and how it fell on the calendar to turn a few days into a summer vacation. Who can blame them?

While they are getting some rest and relaxation in, and hopefully enjoy several of our investing themes along the way including Foods with Integrity, Guilty Pleasures, and Fattening of the Population (those last two with some degree of moderation of course), those of us manning the desks will have a compressed week with no shortage of data to look at. This includes the latest FOMC minutes being issued later today, followed by the June ADP Employment Report and ISM Service report on Thursday, and Friday’s June Employment Report. All of that comes after disappointing June auto and trucks sales, but General Motor’s (GM) recent cut to its 2017 auto forecast by several hundred thousand units, was there any real surprise to the June data? We think not and odds are it means another leg down for the speed of the economy.

We get this data every month, so why is it extra important this time around?

It’s the beginning of the last data set for 2Q 2017. As all of this data is digested, we expect to see some movement in 2Q 2017 GDP forecasts. Currently, the consensus tabulated by The Wall Street Journal calls for 3.0 percent GDP in 2Q 2017, with 2.5 percent in the second half of the year. On Friday, the Atlanta Fed trimmed its 2Q 2017 GDPNow forecast to 2.7 percent — down from its 4.0 percent on May 1st. On the other hand, the New York Fed’s NowCast sits at 1.9 percent for 2Q 2017 and 1.6 percent for 3Q 2017. These next data pieces will help us complete the puzzle to see if the economy is more in tune with the Atlanta Fed or the New York Fed, and as we’ve discussed over the last several weeks, that will have implications for what is said in the upcoming 2Q 2017 earnings season.

While many will be watching 2Q 2017 results over the coming weeks, we will also be assessing the potential adjustments to 3Q 2017 and 4Q 2017 earnings prospects. Currently, the “herd” is calling for the S&P 500’s EPS to grow more than 11 percent in the second half of 2017 compared to the first half. Keep in mind, the average growth in second half earnings for the S&P 500 compared to the first half over the 2010-2016 period was 5.6 percent. Not to be repetitive, but rather summative, given the speed of the economy, the Trump Slump, oil earnings revisions and ripple effect of GM’s comments among other things, odds are that 11 percent forecast will be coming down.

What this means is there is a far greater probability of volatility returning to the market as these revisions are had. If we’re right and EPS expectations for the S&P 500 get trimmed back, we’ll be faced with one of two things:

  • Either the market becomes that much more expensive than the 17.9x multiple on expected (but still yet to be revised lower) 2017 EPS it closed at on Friday.
  • Or investors will re-asses the market multiple, likely pushing it lower, as those EPS cuts are made.

What this means is we’ll be watching the data over the coming days as well as the ensuing earnings reports, and adjusting the Select List as necessary. This could mean scaling into existing positions or add new ones at better prices. Either way, we’ll be watching and at the ready.

WEEKLY ISSUE: Doubling down on COST as yet another cyber attack provides support for our HACK position

WEEKLY ISSUE: Doubling down on COST as yet another cyber attack provides support for our HACK position

 

In this Week’s Issue:

  • Doubling Down on Costco Shares
  • More Cyber Attacks, Mean It’s a Good Time to Own HACK Shares
  • Alphabet Gets Wrapped on the Knuckles

 

We’re moving deeper into summer with more schools across the country finishing out the academic year. Most would expect that would mean a slower go of things, but that’s hardly been the case. True, the only economic data point to be had this week was the May Durable Orders report, which simply isn’t going to speed up anyone’s 2Q 2017 GDP forecast. Nondefense capital goods orders excluding aircraft — a proxy for business spending — declined 0.2 percent, while shipments of these same goods, which factor into the GDP computation, also declined 0.2 percent. We continue to think businesses are sitting on the sidelines as the Trump Slump is likely to continue through the summer months and into the fall.

At the same time, we’ve also had commentary from some of the Fed heads about the stock market including this from yesterday from San Francisco Federal Reserve Bank President John Williams:

 “The stock market seems to be running pretty much on fumes.”

He’s not alone in thinking the market is overvalued. A record 44 percent of fund managers polled in a monthly survey from Bank of America Merrill Lynch saw equities as overvalued this month, up from 37 percent last month. The surveyed body included 200 panelists with a combined $596 billion under management participated in the survey.

With the S&P 500 trading at roughly 18x 2017 expectations that have more downside risk than upside surprise potential as we discussed in this week’s Monday Morning Kickoff, we suspect we are likely to see more announcements like the one yesterday from General Motors (GM). If you missed it, GM now expects U.S. new vehicle sales in 2017 will be in the “low 17 million” unit range, versus last year’s record of 17.55 million units. Keep in mind, GM has been hard hit lately and seen its US inventory creep up to 110 days of supply in June, up from 100 in May. As GM said, “the market is definitely slowing” and that means we’re going to see more widespread pressure on the likes of Ford Motor Company (F), Honda Motor Company (HMC) and other auto manufactures. Lower production volume also means reduced demand at key suppliers like Federal Mogul (FDML), Dana Corp. (DAN), Delphi Automotive (DLPH) and similar companies. Pair this with the May Durable Orders report, and it’s another reason to see a step down in GDP for the back half of the year.

At the same time, yesterday also brought the news of the Petya ransomware, which in our view not only serves to reinforce our Safety & Security investing theme as well as our position in PureFunds ISE Cyber Security ETF (HACK)shares (more on that below), but also reminds us of the tailwinds powering all of our investing themes here at Tematica. We don’t look to own sectors, but rather companies that are benefitting from multi-year thematic tailwinds – that has been and will continue to be our guiding light, and if we have the opportunity to improve our cost basis in the coming weeks we’ll aim to take it.

In fact, we’re doing that today with shares of Costco Wholesale (COST) right now…

 

Doubling Down on Costco Shares

Last week we added back shares of Costco Wholesale (COST) to the Tematica Select List given what we saw (and continue to see) as an overreaction to the Amazon (AMZN)–Whole Foods (WFM) tie up. Not only hasn’t the transaction closed yet, and it won’t for several months until that occurs. It will be deep into 2018 before any Whole Foods integration is even close to being done. This tells us the market is shooting first and asking questions later… potentially much later.

With COST shares falling another 2 percent over the last week, bringing the two-week drop to more than 11 percent, we’ll use the current share price to improve the position’s cost basis and grow the respective position size to the overall Select List. As we’ve shared before, the real key to Costco’s profits and EPS is its membership fee income, and with more locations set to open in the coming quarters plus a recent membership price hike, we remain bullish on COST shares.

  • With COST shares closing last night at $159.26, we’re going to use the continued drop in share price to lower our cost basis by adding a second position in the shares as of this morning.
  • Our price target on Costco Wholesale (COST) shares remains $190
  • As we scale into the position today, we are setting a stop loss at $135, but we’ll look to move that higher as COST shares rebound.

 

 

 

More Cyber Attacks, Mean It’s a Good Time to Own HACK Shares

When we added PureFunds ISE Cyber Security ETF (HACK) shares back in February this year to the Select List as part of our Safety & Security investing theme, we acknowledge the frequency of cyber attacks would be a likely catalyst for the shares. Simply put, a higher frequency of attacks would not only spur cybersecurity spending, but odds are it would also act as a rising tide as media attention shifts to these attacks lifting all cyber security boats including our HACK shares.

We recently witnessed the WannaCry ransomware attacks, and as we learned during our Cocktail Investing Podcast conversation with Yong-Gon Chon, CEO of cyber security company Focal Point, following attacks were going to get bigger and bolder. That’s exactly what we saw yesterday with “Petya” ransomware that hit firms both large and small with ransomware in Europe and now the US. The attack was first reported in Ukraine, where the government, banks, state power utility and Kiev’s airport and metro system were all affected. It soon spread to including the advertising giant WPP, French construction materials company Saint-Gobain and Russian steel and oil firms Evraz and Rosneft. The new malware uses an exploit called EternalBlue to spread by taking advantage of vulnerabilities in Microsoft Corp.’s Windows operating system, similar to WannaCry and the infected computers display a message demanding a Bitcoin ransom worth $300. Those who pay are asked to send confirmation of payment to an email address.

According to a study by IBM (IBM), the amount of spam containing ransomware surged to 40 percent by the end of 2016 from just 0.6 percent in 2015. While many ransomware attacks are blocked by security software, the number of infections getting through is growing. Symantec (SYMC) said it detected 463,000 ransomware infections in 2016, 36 percent higher than the year before. Odds are that figure is only to go higher in 2017 and 2018.

  • We continue to have a Buy on PureFunds ISE Cyber Security ETF (HACK) with a price target of $35.

 

 

 

Alphabet Gets Wrapped on the Knuckles

Alphabet (GOOGL) is one of the building blocks of our Connected Societyinvesting theme due primarily, but not entirely to the company’s market share leading position in digital search. We define digital search much the way we do digital commerce – it comprises both desktop and mobile activity. Alphabet is also home to some of the most widely used apps across the various smartphone operating systems including YouTube (#2), Google Search (#4), Google Maps (#5), Google Play (#6), Gmail (#8) and Google Calendar (#11).

Google’s YouTube is expanding not only into original content with YouTube Red, but recently copped to targeting TV advertising dollars as well as eventually creating video content with “big name stars.” Alphabet is also bringing a YouTube TV service to market that will stream broadcast TV much the way AT&T’s (T) DirectTV Now and Hulu do. Let’s not forget Google Wallet or Android Wallet.

Putting it all together, Alphabet has several thematic tailwinds pushing its respective businesses as well as burgeoning ones like its Waymo self-driving car initiative that recently partnered with Avis Budget Group (CAR).

One of the items we’ve been watching and waiting for with Alphabet (GOOGL)has been the pending fine from EU antitrust regulators following the ruling that Alphabet had abused its “search engine” power and promoted its own shopping service in search results. Following several years of investigation, yesterday that EU body hit Alphabet with a decision that included a record $2.71 billion (€2.4 billion) fine and “ordered the search giant to apply the same methods to rivals as its own when displaying their services.” Google has 90 days to end the conduct and explain how it will implement the decision, or face additional penalties of up to 5 percent of average daily global revenue.

On its face, the $2.7 billion is a drop in the cash bucket for Alphabet, which ended the March quarter with $92.5 billion in cash. Alphabet could simply swallow the fine, but the implication of the decision could reshape how Google presents search results in Europe if not eventually elsewhere. As such, we expect the company will review the decision and consider an appeal, thereby dragging this out for another few months.

In the short-term the fine is a bump in the road for Alphabet, but we’ll continue to see how this situation develops further and what its implications are for not only Google, but other dominant technology firms such as Amazon (AMZN)that also rely on displayed search results, but also offer their own proprietary products. As we monitor these and other developments, we continue to Alphabet shares as ones to own not trade as we continue to migrate deeper into an increasingly connected society. The same goes for Amazon shares.

  • Our price targets on AMZN and GOOGL shares remain $1,150 and $1,050, respectively.

 

Costco vs Amazon? We see opportunity for both

Costco vs Amazon? We see opportunity for both

 

In this Week’s Issue:

  • Amazon (AMZN) to Buy Whole Foods (WFM) and We Add Costco Wholesale (COST) Shares Back to the Tematica Select List
  • Investor Short-Sightedness Triggers United Natural Foods (UNFI) Stop-Loss
  • Checking in on Dycom (DY) Shares
  • While Disney’s (DIS) Summer Movie Slate Hasn’t Lived Up to Expectations, We Still See Some Bright Spots

 

 

We’ve given each other some hard lessons lately, but we ain’t learnin’

The quote above is a lyric by Bruce Springsteen, and it came to mind as we look at this week’s market.  So far, we took one step up on Monday, and then one step back on Tuesday, essentially wiping out any gains. Let’s hope we don’t end up following Springsteen’s full lyrics and taking “one step up and two steps back” as the rest of the week plays out.

The biggest hit so far this week was had in the energy “sector” as oil prices continued their move down, officially moving into bearish territory. Crude’s slide is due not only to growing supply, but also weak demand. Not to sound like a know it all, but supply-demand dynamics are pretty much economics 101, and when we see ramping US supply alongside a slowing domestic economy, it hasn’t been hard to guess where the price of oil is headed.

The proverbial second shoe to watch is earnings. We mention this because according to FactSet the energy sector is expected to be the biggest contributor to EPS growth for the S&P 500 in the current quarter. Oil, however, closed last night at $43.34, well below the $51 level it averaged in 1Q 2017 and the $52 mean estimate for the average price of oil for Q2 2017.

What this likely means is we are going to see negative revisions for energy earnings if not for the current quarter then for the back half of 2017. As those revisions happen, the ripple effect will bring down expected earnings growth for the S&P 500 as well. And that’s before we share the New York Fed’s Nowcast for 2Q 2017 GDP hit 1.9 percent this week with 3Q 2017 falling to 1.5 percent.

Then there is the upcoming health care battle in the Senate and the rest of the Trump agenda (repatriation, tax reform, infrastructure), which as we’ve been saying is far more likely to begin anew after the 2017 elections.

The bottom line is, it looks like the market is bound to have a bout of indigestion come 2Q 2017 earnings season that kicks off soon after the July 4th holiday. Of course, here at Tematica, we don’t “buy the market,” but rather capitalize on our multi-year thematic tailwinds. With that in mind, in this week’s issue of Tematica Investing we’re bringing an old favorite back into the fold – Cash-Strapped Consumer play Costco Wholesale (COST). We also share our thoughts on Amazon (AMZN) buying Whole Foods Market (WFM), and check in on both Dycom (DY) and Disney (DIS).

 

 

Amazon (AMZN) to Buy Whole Foods (WFM) and We Add Costco Wholesale (COST) Shares Back to the Tematica Select List

If you were pulling an abbreviated Rip Van Winkle over the last few days and missed the headlines, Amazon (AMZN) is back in the news as it once again looks to implement what we can only be viewed as an amping up of its creative destruction on the grocery industry. Friday morning the company announced it has a definitive agreement to acquire Whole Foods Market (WFM) for $42 per share in all cash transaction valued at $13.7 billion. With $21.5 billion in cash and just $7.7 billion in total debt on a balance sheet with $21.7 billion in equity, we see little if any financing challenges for Amazon.

Per usual, Amazon was scant on details, but we see this acquisition catapulting its position in grocery, particularly organic and natural that continues to be one of the fastest growing grocery categories. Amazon should also be able to utilize Whole Foods warehouse and stores to expand the reach of its Amazon Fresh business at a time when more consumers are embracing online grocery delivery. With companies like Panera Bread (PNRA) sharing that 26% of its weekly orders are now generated digitally, we suspect we are at or near the tipping point for digital grocery. For those unfamiliar with Whole Foods’s existing online delivery offering, it currently offers delivery in under 1 hour from a growing number of locations, which strategically fits with Amazon’s Prime Now offering.

According to the “The Digitally Engaged Food Shopper” report from Nielsen (NLSN), currently a quarter of American households buy some groceries online, up from 19% in 2014. The report goes on to forecast that more than 70 percent will engage with online food shopping within 10 years resulting in online grocery capturing 20 percent share up from 4.3 percent in 2016. When dealing with percentages, we prefer to consider the actual dollar amounts and in this case, it means online grocery jumping to more than $100 billion by 2025, up from $20.5 billion in 2016.

Now, a quick word on this decade forecasts. We tend to ignore the actual numbers, preferring instead to note the vector, which in this case is solidly higher and fits with our increasingly connected society. That said, we know Amazon tends to play the long game, and we see them once again doing this by entering into this transaction with Whole Foods, a deal that offers a solid base from which to flex its logistical muscles. We find this move far more appealing than if Amazon opted to build it from scratch, given the existing infrastructure as well as the simple fact that for the duration Whole Foods management team will continue to run the chain after the deal closes and stores will continue to operate under the Whole Foods brand.

In a nutshell, we see this as a win-win for Amazon as it looks to battle Kroger (KR), Sprouts Farmer (SFM), Wal-Mart (WMT) and others that have ventured into the grocery space like Target (TGT) for consumer wallet share.

We would point out that we are not as negative as some over the potential impact on Costco Wholesale (COST), which derives a significant percentage of its operating profit from membership fees. Costco continues to expand its warehouse footprint, which bodes well for growing its all-important membership fee income.

Following the Amazon-Whole Foods news, Costco shares are off roughly 9 percent and we see this as more than just an overreaction. Rather we see this as an opportunity to get back into COST shares, as the company continues to both expand its footprint as well as continue to help the Cash-Strapped Consumer stretch their disposable income. For those subscribers that have been with us a while, you’ll remember Costco was added to the Tematica Select List last September and we ended up selling half the shares and were stopped out of the second half on a dip of the shares. All told, our positions generated a 14.6 percent return and given the recent dip in the shares, we’re ready to add another batch of shares to our cart:

  • We are adding back shares of Costco Wholesale (COST) back to the Tematica Select List with a price target of $190.
  • As we will look to opportunistically improve the cost basis of this position, there is no recommended stop loss at this time.

Getting back to Amazon, there has been no shortage of headlines speculating what may or may not happen in the grocery sector with the move. Our position is we see Amazon using Whole Foods as a platform that not only expands its Amazon Fresh footprint, it also improves Amazon’s position within our Food with Integrity investing theme. That brings the number of thematic tailwinds pushing on Amazon to 6 – Connected Society, Cash-Strapped Consumer, Content is King, Cashless Consumption, Rise & Fall of the Middle Class and now Food with Integrity. As we share this we once again we find ourselves once again thinking Amazon is business and a stock to own, not trade as it continues to be a disruptor to be reckoned with.

  • We are boosting our price targets on Amazon (AMZN) shares to $1,150 from $1,100 to factor in the existing Whole Foods business.
  • We continue to rate AMZN shares a Buy.

 

 

Investor Short-Sightedness Triggers UNFI Stop-Loss

From time to time, we say our goodbyes to a position on the Tematica Select List. The reasons can be a position has reached its price target, original thematic tailwinds may give way to headwinds or the stop-loss gets triggered.

This last one is what happened with United Natural Foods (UNFI) when the shares crossed below the $38.50 stop loss that was set last week. Interestingly enough, they passed through that stop loss level on the news of Amazon (AMZN) acquiring Whole Foods Market (WFM), which would likely do more good for UNFI’s business than harm. This isn’t the first nor is it likely to be the last of the herd shooting first and asking questions later.

  • We’ll place UFNI shares on the Thematic Contender’s list, and look for a compelling re-entry point should one emerge like it did with Costco shares.

 

 

Checking in on Dycom Shares

We remained patient with shares of Dycom (DY) after the company offered weaker than expected guidance inside its March quarter earnings. Over the last few weeks, we have been rewarded for that patience as DY shares have rebounded 15 percent to current levels. Granted, we’re still a ways off the $105-$100 level high we saw prior to the dip, but flipping that around, it is still an opportunity for subscribers that missed out on Dycom’s sharp move higher from late March through most of April to add to their position. We say this because, over the last few weeks, Dycom and other specialty contractors have been making the conference rounds sharing upbeat comments regarding the accelerating deployment of 5G wireless technologies and gigabit Ethernet over the coming years.

From a thematic perspective, we see the increasing amount of screen time we are all accumulating across our desktops, tablets and smartphones, as well as other burgeoning connected applications (car, home, Internet of Things) choking network capacity. Part of the solution is to roll out these next generation solutions, but also for the carriers to expand existing network capacity – all of which bodes well for Dycom, given its customer base that includes AT&T (T), Comcast (CMCSA), Verizon (VZ) and CenturyLink (CTL).

Hindsight being 20/20, DY shares were more than likely overextended, and odds are no matter what the management had provided as an outlook for the current quarter, it would have fallen short of expectations. That’s the downside of a quick rocket ride higher like the one we’ve enjoyed in Dycom shares, but we recognized this when we opted to keep the position on the Tematica Select List and now we’re reaping the rewards of that decision.

  • Our price target on DY remains $115, which offers more than 25% upside from current levels.

 

 

While Disney’s Summer Movie Slate Hasn’t Lived Up to Expectations, We Still See Some Bright Spots

Since peaking in late April, shares of Walt Disney (DIS) have fallen 10 percent as some of the company’s movies fell short of expectations, especially the new installment of the Pirates of the Caribbean franchise. Granted, Guardians 2 still took the box office, and we’re still determining how successful the latest Pixar film, Cars 3, will be, but it is probably safe to say that Disney’s not hitting it out of the park like it has in recent years. That reflects the thin by comparison movie slate the company has this year and with no new films until Thor: Ragnarok (Oct. 21), Coco (Nov. 22) and Star Wars: The Last Jedi (Dec. 22) it means a relatively quiet summer for Disney’s film business.

The next major event to watch is the Disney-run D23 Expo from July 14-16 at the Anaheim Convention Center in California, which should provide a number of updates on the company’s various businesses. Historically, it’s been a showcase for Disney’s films, including clips of those soon to be released. This year, we expect more details on its extended Marvel and Star Wars franchise plans as well as likely timing for Frozen 2 and The Incredibles 2 from Pixar. After D23 Expo, however, as we mentioned above, it’s likely to be a relatively quiet summer for Disney. With a $10 billion buyback in place and declining capital spending, we see support for the stock near current levels, with upside likely nearing the last few months of the year as Disney returns to the box office.

As we remain patient with this Content is King company, we’ll continue to monitor ongoing at ESPN as well as the parks business. The Parks & Resorts segments is one of Disney’s most profitable business segments and while the business tends to benefit from price increases, there is another reason we see better margins ahead. The factor behind this is Disney’s Shanghai theme park, after 11 million visitors, is close to breaking even after its first full year of operations. Based on performance at other non-US parks, this is far faster than anyone expected and also serves to confirm the power of Disney’s content. As that drag on profitability continues to fade, we see it becoming a positive contributor to Disney’s bottom line and increases confidence in current consensus expectations for the company to deliver EPS of $5.94 this year and $6.75 next year.

  • Our price target on Walt Disney (DIS) share remains $125, which at current levels keeps the shares a Buy.
  • We would be buyers of DIS shares up to $108, which leaves 15 percent upside to our price target.