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With 2017 Poised to be the Year of Ransomware, More Cyber Spending is on the Way

With 2017 Poised to be the Year of Ransomware, More Cyber Spending is on the Way

With headlines swirling following the WannaCry attack that hit more than 230,000 computers across more than 150 countries in just 48 hours, on this episode of Cocktail investing we spoke with Yong-Gon Chon, CEO of cyber security company Focal Point to get his insights on that attack, and why ransomware will be the cyber threat in 2017. Before we get into that Safety & Security conversation, Tematica’s investing mixologists, Chris Versace and Lenore Hawkins broke down last week’s economic and market data as well as the latest relevant political events. With all the controversy in D.C., there was a lot to discuss concerning the likelihood that the Trump Bump, which was based on assumptions around tax reform, regulatory roll-back, and infrastructure spending is evolving into the Trump Slump as investors realize the anticipated timeline for such was decidedly too aggressive. With mid-term elections looming, we expect the Trump opposition will be emboldened by the controversy surrounding the administration and will put in best efforts to appeal to their constituents. For the market, it’s another reason to see the Trump agenda likely slipping into late 2017-early 2018, and that realization is likely to weigh on robust GDP and earnings expectations for the balance of 2017.

The markets on May 17th suffered their biggest losses in 2017, with the Nasdaq taking the biggest one-day hit since Brexit, as the turmoil in Washington dampens investors’ appetite for risk while raising questions over GDP and earnings growth. While some Fed banks are calling for 2Q 2017 GDP as high as 4.1 percent (quite a jump from 1Q 2017’s 0.7 percent!), the data we’re seeing suggests something far slower. We continue to think there is more downside risk to be had in GDP expectations for the balance of 2017, and the latest Trump snafu is only likely to push out team Trump’s reforms and other stimulative efforts into 2018. If 2Q growth is driven in large part by inventory build, which is what the data is telling us, expect the second half to be significantly weaker than the mainstream financial media would lead you to believe.

While the global financial impact of the WannaCry ransomware attack may have been lower than some other high profile attacks such as ILOVEYOU and MyDoom, the speed at which it moved was profound. We spoke with Yong-Gon Chon, CEO of Focal Point Data Risk about the incident to get some of the perspective and insight the company shares with its c-suite and Board level customers. While many are focusing on WannaCry, Yong-Gon shares that as evidenced by recent content hijackings of Disney (DIS) and Netflix (NFLX), ransomware is poised to be the cyber threat of 2017. Those most likely to be targeted are those organizations that prioritize uptime and whose businesses tend to operate around the clock, making backups and software updates extremely challenging.

While in the past IP addresses may have been scanned once every four to five hours, in today’s increasingly Connected Society, IP addresses are scanned one to ten times every second. As consumers and businesses in the developed and emerging economies increasingly adopt the cloud and other aspects of Connected Society investing theme, we are seeing an explosion in the amount of data as more and more of our lives are evolving into data-generating activities. From wearables to appliances to autos, our homes, offices, clothing and accessories are becoming sources of data that goes into the cloud. With the Rise of the New Middle Class in emerging markets, we are seeing the number of households participating in this datafication grow dramatically, exposing new vulnerabilities along the way. That increasingly global pain point is fodder particularly for cyber security companies, such as Fortinet (FTNT), Splunk (SPLK) and Cisco Systems (CSCO) that are a part of our Safety & Security investing theme.

During our conversation with Yong Gon we learned that companies need to understand that breaches must be viewed as inevitable in today’s Connected Society, network boundaries are essentially a thing of the past. Security can no longer about preventing nefarious actors from gaining entrance, but rather is now about managing what happens once a company’s network has been invaded. From a sector perspective, with all the regulation and reporting requirements in financial services, many of these firms are leading the way in how to best deal with such breached.Uber

For investors who want to understand the potential impact of cybercrime, Yong-Gon Chon suggests looking at how much data a company is generating and how the company is managing the growth of that data, with companies such as Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL) and Uber examples of heavy generators. Investors need to look at a company’s cyber risk as a function of the magnitude of its data generation and the company’s level of maturity in addressing that risk. By comparison, companies not affected by attacks such as WannaCry need to be asking themselves why didn’t they get hit? Was it luck or did we do something right? If so, what did we do right and what is the scope of protection we have given what we’ve learned about the latest attack strategies?

We also learned about the new efforts underway globally to develop attribution of cyber threats so as to differentiate between those threats from professional cyber criminals versus the capricious tech savant engaging in ill-advised boundary exploration. Along with this shift is also a change in the boardroom, where cybersecurity is viewed in the context of its potential impact on the business, rather than as a function of a company’s IT department.

One thing we can be assured of is that hackers are watching each other and the good ones are learning what makes attacks fail and where organizations are weakest. As the Connected Society permeates more and more of our lives, these risks become more pernicious and their prevention more relevant to our everyday lives. The bottom line is we are likely to see greater cyber security spending in preventative measures as well cyber consulting as those responsibilities become a growing focus of both the c-suite and board room.

Companies mentioned on the Podcast

  • Amazon.com (AMZN)
  • Apple (AAPL)
  • CVS Health (CVS)
  • Disney (DIS)
  • Facebook (FB)
  • Focal Point
  • JC Penny Co (JCP)
  • Kohl’s (KSS)
  • Macy’s (M)
  • Microsoft (MSFT)
  • Netflix (NFLX)
  • Nordstrom (JWN)
  • TJX Companies (TJX)
  • Twitter (TWTR)
  • Uber
  • United Parcel Service (UPS)
  • Walgreens Boots Alliance (WBA)

Resources for this podcast:

Walmart and Amazon Clash on Free Shipping, But Only One Has Multiple Thematic Tailwinds

Walmart and Amazon Clash on Free Shipping, But Only One Has Multiple Thematic Tailwinds

 

 

The battle for the digital consumer is on with Amazon responding to Walmart’s attempts to grow its online and mobile business. Back in February, Amazon cut its free shipping price from $49 to $35 and this week is slashed that down to $25, which compares to Walmart’s current $35 minimum for free shippping. We can understand using this tactic to entice non-Prime customers, but in our view a few orders gets you to Prime and that’s before you consider all the services Prime members get like streaming audio, video, storage and  others.

While Walmart is looking to compete with Amazon when it comes ot the Connected Society, Amazon’s Content is King, Cashless Consumption and Disruptive Technology tailwinds more than make up the difference.

Amazon.com Inc (AMZN) said on Tuesday it cut the threshold for free shipping to $25 from $35, upping the ante against Wal-Mart Stores Inc (WMT) in a hotly contested battle for ecommerce supremacy.

The world’s biggest retailer, Wal-Mart, has been building up its ecommerce business through acquisitions such as Jet.com, as it looks to narrow the massive gap with Amazon.

Wal-Mart started its own membership program called ShippingPass last year, which offered free two-day shipping for $49 a year. However, the company ended the program in January, replacing it with free two-day shipping on orders of $35 or more.

Source: Amazon cuts free shipping minimum to $25 | Reuters

WEEKLY ISSUE: Several stocks capitalizing on strong thematic tailwinds

WEEKLY ISSUE: Several stocks capitalizing on strong thematic tailwinds

In this Week’s Issue:

  • Disney Delivers an EPS Beat, But Reaffirms 2017 is a “Transitional” Year
  • Amplify Snacks Serves Up a Healthy Quarter
  • USA Technologies: Riding the Cashless Consumption Wave
  • March JOLTS Report Confirms Our Stance on AMN Healthcare (AMN) Shares

 

As we noted in the Monday Morning Kickoff a few days ago, this week was going to be yet another barn burner in terms of activity, with yet another 1,000 companies reporting earnings. We’ve gotten some incremental economic data points, but the main ones for the week – the April reports for PPI, CPI and Retail Sales – all come later in the week.

As we sifted through hundreds of earnings reports over the last two days, we also saw further downward revisions by both the Atlanta Fed and the New York Fed for their respective 2Q 2017 GDP forecasts. Hardly surprising, given the readings from ISM and Markit Economics as well as the April data supplied by regional Fed banks, but once again here we are. What made headlines yesterday was the comments from Commerce Secretary Wilbur Ross that the US economy “won’t achieve the Trump administration’s 3 percent growth goal this year and not until all of its tax, regulatory, trade and energy policies are fully in place.”

Given Ross’s comments that the growth target “ultimately could be achieved in the year after all of President Donald Trump’s business-friendly policies are implemented” but that “delays were possible if the push for tax cuts was slowed down in Congress,” odds are there is some DC-style politicking going on. Even so, the reality is without a jolt to the system odds are the US economy will remain in low gear.

As we’ve shared previously, the economy is facing several headwinds associated with our Aging of the Population and Cash-strapped Consumer investing themes that are likely to keep it’s growth range bound. As such, we continue to see current GDP expectations as somewhat aggressive for the coming quarters, and the same holds true for S&P 500 earnings expectations. That said, we are not buyers of the stock market, but rather those companies that are well suited to capitalize on the tailwinds associated with our investing themes. You’ll see confirmation of that in our comments below on Disney (DIS), Amplify Snacks (BETR), USA Technologies (USAT) and AMN Healthcare (AMN), as well as Amazon (AMZN) and Alphabet (GOOGL) in the next paragraph.

As a quick reminder, later this week we’ll get the April Retail Sales Report, which could see favorable comparisons year over year given the late Easter holiday. As usual, we’ll be digging in below the headlines to get a better sense of consumer spending for not only what they are buying, but where. We once again suspect the report will confirm the accelerating shift toward digital commerce that is power our Amazon (AMZN) and Alphabet (GOOGL) shares. We continue to rate both Buy with $1,100 and $1,050 price targets, respectively.

Now let’s dig into the earnings reports for several positions on the Tematica Select List…

 

 

 

Disney delivers an EPS beat, but reaffirms 2017 is a “transitional” year.

Last night Disney (DIS) reported March 2017 results, which included better than expected EPS, revenue that came in a tad shy of expectations and sober forward guidance, which reminded investors that 2017 is a transitional year for the company as it targets better growth in 2018. EPS for the quarter came in at $1.50, $0.09 ahead of consensus expectations as revenue rose 2.8 percent compared to the year-ago quarter hitting $13.34 billion, shy of the $13.44 billion that was expected.

Heading into 2017, we noted the first half of the year would likely be a more subdued one and so far that is proving to be exactly the case. As we enter the company’s fiscal second half of 2017, Disney has a far stronger movie lineup, which should continue into 2018 and beyond. Higher costs at ESPN and investments in new park attractions, however, are likely to be gating factors over the next few quarters. We see Disney as investing today to leverage its vast array of characters and tentpole films that will drive incremental business at its parks, for its merchandise and other businesses in the coming quarters.

Our price target remains $125, but we’ll continue to revisit that target based on box office strength in the coming months. Odds are the quarter’s results will take some of the wind out of Disney’s sails, but with the company set to continue to leverage its Content is King strategies, we’re inclined to be patient.

Breaking down the company’s segment results from the March quarter we find:

  • Cable Networks revenues for the quarter increased 3 percent to $4.1 billion and operating income decreased 3 percent to $1.8 billion. The decrease in operating income was due to a decrease at ESPN due to higher programming costs because of the timing between College Football Playoff (CFP) bowl games and NBA programming, which was partially offset by increases at the Disney Channels and Freeform. Programming costs are expected to be 8 percent higher this year due in part to the new NBA contract.
  • On a positive note, Disney continues to make progress in transitioning ESPN by expanding its reach into streaming services like those from Sling TV, Sony’s (SNE) PlayStation Vue, YouTube TV (GOOGL), Hulu and DirecTV Now from AT&T (T). While Disney is seeing favorable momentum, it’s still not enough to totally offset the slide it is seeing in cable subscriptions. As we discussed recent, Disney is focusing on live mobile content, which should help drive incremental viewing compared to the 23 million unique users who collectively spent 5.2 billion minutes engaging with ESPN on its mobile platforms in the March quarter.
  • Parks and Resorts revenues for the quarter increased 9 percent to $4.3 billion and segment operating income increased 20 percent to $750 million. We’d note that segment benefited from price increases taken in prior months, but this was offset by the later than usual Easter holiday this year.
  • As expected construction is underway on Star Wars attractions at both Disney World and Disney Land, a great example of how the company’s film content will drive park attendance and merchandise sales. Management commented that in a few days the 10 millionth guest will pass through Shanghai Disney and the park is tracking to break even this year as Disney downshifts investing in the park compared to year-ago levels.
  • Studio Entertainment revenues for the quarter decreased 1 percent to $2.0 billion and segment operating income increased 21 percent to $656 million. Despite having two films that grossed more than $1 billion each during the quarter – Rouge One from the Star Wars franchise and remake of Beauty and the Beast – the quarter faced stiff year over year comparisons given the success of last year’s Star Wars: The Force Awakens and Zootopia and in essence making them a victim of their own success. On the earnings call, as expected management talked up Friday’s Guardians of the Galaxy 2 release, which took the top spot at the box office and raked in more than two times the first installment of the Guardians franchise. Disney reminded investors it has four Marvel films coming over the next 14 months, as well as the next installment of the Pirates of the Caribbean franchise and Cars 2 dropping in the next few months before The Last Jedi lands in December. Longer-term, there will be more Marvel, Pixar and Lucasfilm tentpole properties, but on the call Disney shared that Frozen 2 will be released in 2019.
  • Broadcasting revenues for the quarter increased 3 percent to $1.9 billion and operating income increased 14% to $344 million led by greater sales of Marvel TV programming content to Netflix (NFLX) and others.
  • Consumer Products & Interactive Media revenues for the quarter decreased 11% to $1.1 billion and segment operating income increased 3 percent to $367 million.

On the housekeeping front, during the March quarter, Disney repurchased about 18.6 million shares for about $2 billion. Over the last two quarters (better known as the company’s fiscal year-to-date), its repurchased 41.5 million shares for approximately $4.4 billion. Citing lower than expected capital spending needs and improved operating cash flow, Disney once again increased its share repurchase target by $2 billion to $9 billion to $10 billion for the year. As the company chews through this program, it should help improve year over year EPS comparisons, but we’ll still be monitoring both operating profit as well as net income growth when contemplating how to best value the shares.

The bottom line on DIS shares:

  • Given the appreciation in the shares price over the last five months, we would not add to positions in the Walt Disney Co (DIS) at current levels and thus are changing our rating to a Hold at this point in time.
  • Rather, we would look to commit fresh capital to DIS shares between $100-$105 if the shares pull back in the coming days, while over the longer term we still maintain a price target of $125 for the shares.

 

 

Amplify Snacks Serves Up a Healthy Quarter

After last night’s market close, Foods with Integrity theme company Amplify Snacks (BETR) reported 1Q 2017 results that included EPS of $0.06 vs. the expected $0.06 on revenue of $87.2 million vs. the consensus expectation of $87.6 million and up more than 60% compared to $54.3 million in the year-ago quarter. The one wrinkle in the quarter was the company’s gross margin line that contracted year over year, which we attribute to short-term initiatives to grow the company’s business further. For example, during the quarter the company launched its SkinnyPop Ready-to-Eat popcorn in the U.K., carried a full quarter of both the Oatmega and Tyreell acquisitions, and introduced new SkinnyPop product extensions (popcorn cakes, popcorn mini-cakes and microwave popcorn).

As these initiatives bear fruit over the coming months and longer term as Amplify brings Tyrrell chip products to the US in the back half of 2017 and 2018, the good news is the company continues to expand its distribution. Exiting the quarter, its ACV (a widely recognized distribution measure) hit 81 points up from 73 in the same period last year. The year over year improvement reflects new distribution across grocery, mass and convenience channels as those companies embrace our Foods with Integrity investing theme and expand their healthy snacking alternatives.

Given stronger prospects for the domestic business, Amplify amended its tax guidance which has led to a modestly higher tax rate than previously expected. This, in turn, has led the company to ever so so slightly trim its 2017 EPS outlook to $0.42-0.50 versus our prior expectation of $0.43-0.51., which in our view is a very minor change relative to the growth prospects to be had over the coming quarters.

  • Exiting the company’s quarterly earnings report, we continue to rate BETR shares a Buy with a $10.50 price target.

 

  

USA Technologies: Riding the Cashless Consumption Wave

Yesterday, USA Technologies (USAT) reported inline EPS expectations for the March quarter on better than expected revenue. USA Technologies 1Q 2017 revenue rose 30 percent year over year as the company continued to grow the number of connected to its ePort services, up 26 percent to 504,000 connections. As the adoption of mobile payments continues to spread, USA expanded its customer base by another 500 to reach 12,400 exiting the quarter, a 15 percent increase year over year. The company also issued a more upbeat outlook calling for 2017 revenue of $95-$100 million, a tad higher than the $95-$97 consensus expectation derived from the three Wall Street analysts following the shares.

On the earnings call, the company shared a number of confirming data points for investment thesis on USAT shares including:

  • USAT is working with Ingenico to provide customers with more hardware options and where Ingenico will be able to leverage USA’s quick connect service as well as ePort Connect platform for use with its NFC/contactless unattended payment solutions. As way of background, Ingenico was the first international multi-billion-dollar mainstream payments hardware company that have entered the unattended retail market.
  • During the quarter, USA also launched an alliance with vending company Gimme Vending as also announced a stand-alone loyalty program that integrates with Apple’s (AAPL) Apple Pay.
  • Digging into 1Q 2017 revenue, the company had 105 million total transactions representing 203 million in transaction volume increases of 28% and 34% respectively from last year.
  • License and transaction fees rose 19% year over year to $17.5 million compared to $14.7 million last year. We call this out because the segment includes recurring monthly service as well as transaction processing fees, which offer good visibility and predictability. As the percentage revenue derived from license and transaction continues to climb from 66% of total revenue in 1Q 2017, the company’s visibility should similarly improve.

With the continued migration toward a cashless society, we continue to rate USAT shares a Buy with a $6.00 price target.

 

 

March JOLTS Report Confirms Our Stance on AMN Healthcare (AMN) Shares

Yesterday we received the March Job Openings and Labor Turnover Survey and once again it showed not only a strong year over year increase in healthcare job openings, but also the number of open healthcare jobs significantly outweighs the number of positions filled. Granted the data lags by a month, but given the April jobs data, we rather doubt there has been any meaningful change in the metrics over the last month. We continue to see the far greater number of healthcare job openings compared to the available talent pool as driving demand for AMN Healthcare’s (AMN) healthcare workforce solutions.

  • With more than 20% upside to our $47 price target, we continue to rate AMN shares a Buy.

 

 

 

 

 

 

 

 

 

Amazon pushing even further into our Content is King investment theme

Amazon pushing even further into our Content is King investment theme

It literally feels like every day Amazon is rolling out something new — whether it’s auto parts store, a video version of its Echo Device or a new Amazon exclusive piece of content, which we have today.

It’s no secret that Amazon Prime is the Trojan Horse of everything Amazon goes these days — getting a credit card on a file and making purchasing one-click away. Doesn’t hurt that Amazon Prime also brings in $99 per year and the company now has nearly as many members as CostCo. So in layering on the benefits of joining Prime, Amazon just announced the addition of Amazon Tickets and member-exclusive events. Are people going to join Amazon Prime to get tickets to see Blondie?  Probably not, but it’s a glimpse into what might be to come . . .

Amazon is expanding its perks for Prime subscribers, with the launch of its own concert series called Prime Live Events. The debut shows will take place in London in May through July, starting with Blondie later his month. Alison Moyet, Texas, and Katie Melua will also each have their own shows this summer. If you can’t make it to London or afford the tickets, you’ll be able to stream the concerts through Amazon Prime Video after they wrap.The tickets are sold through Amazon, which is handling the events and their promotion.Tickets for Blondie start at £150 (roughly $194 USD) for a concert that will be held at London’s Round Chapel. However, the other events are a bit less expensive with prices that start at either £75 or £95. (See below).Amazon had previously tested the concept of hosting its own concerts with John Legend and Robbie Williams at smaller venues.The concerts are being promoted as intimate events at iconic venues – giving concert goers a unique experience they couldn’t get elsewhere. The idea is that by offering access to these exclusive shows only to Prime members, consumers will purchase Amazon’s annual subscription just for the chance to buy the tickets.While Amazon hasn’t yet announced any shows outside the U.K., Recode had reported back in November the company was planning an international expansion of its Amazon Tickets business. The company had also last year sold tickets to U.K. customers for events like an Elton John concert and theater performances like “Wicked” and “Book of Mormon.”

Full Article: Amazon debuts its own concert series in the UK as a perk for Prime members | TechCrunch

Even amid cautious outlook we are boosting target price for Facebook

Even amid cautious outlook we are boosting target price for Facebook

In this Alert:

  • We are boosting our price target on Connected Society company Facebook (FB) to $160 from $150.
  • Even so, we are now rating the shares a Hold, and would only commit new capital if the shares move closer to $145 or below.

We are boosting our price target on Connected Society company Facebook (FB) to $160 from $150 following this week’s better than expected 1Q 2017 quarterly results and arguably cautious outlook. That boost to our price target, paired with the share’s retreat since hitting a new 52-week high on Tuesday, offers upside of roughly 6.5 percent, and as such we are changing our rating on the shares from a Buy to a Hold.

We’ve had a remarkable run in the FB shares, climbing more than 24 percent, even after the week’s lift since we added them to the Tematica Select List back in late November. For subscribers that missed our recommendation, we’d suggest nibbling closer to $145 or below or on signs the telegraphed advertising slowdown fails to emerge.

As we started to say above, earlier this week Facebook reported March quarter revenue and EPS that handily beat expectations with EPS coming at $1.04, $0.18 ahead of expectations. Revenue for the quarter rose just over 49 percent year over year, reaching slightly better than $8 billion with advertising comprising 98 percent of total quarterly revenue. Compared to year ago levels, revenue growth was had in all four geographic regions led by Rest of World up 66 percent and Asia-Pacific up 60 percent. Slower growth was had in the US & Canada, which represented 49.4 percent of quarterly revenue vs. 51 percent in the year ago quarter. The continued shift to mobile by consumers in the US and faster growth in Rest of World and Asia-Pacific, which tends to be more mobile first, led mobile advertising to reach 85 percent of Facebook’s total advertising revenue for the quarter, up from 82 percent in the year ago quarter. To us, data like this cements Facebook’s position in our Connected Society investing theme.

After reporting robust results and beating Wall Street expectations, Facebook threw some cold water on things when it shares it view calling for a meaningful slowdown in ad growth revenue, due in part to desktop ad blockers, and expense to rise 40 percent -50 percent year over year. In looking for some perspective on Facebook’s slowing ad growth claim, we scoured for some perspective and found that eMarketer sees digital advertising hitting $83 billion in the US this year (up more than 15 percent year over year) of which $58.4 billion will be derived from mobile advertising (up 25 percent year over year). This suggests to us at least that Facebook’s claim for slowing ad revenue growth is likely to be conservative, but in the here and now, Wall Street is reacting to management’s outlook.

Over time, we’ll be checking the data and if eMarketers forecast looks to ring true we’ll plan on revisiting our Facebook price target and rating. Even as we remove our Buy rating, we would argue that jus like Amazon (AMZN) and Alphabet (GOOGL), Facebook with its various digital properties that are embracing monetization strategies are shares to own, not to trade as consumers, businesses and other entities migrate deeper into our increasingly Connected Society.

 

Prior to earnings reports next week we take a look at DIS and IFF shares

Prior to earnings reports next week we take a look at DIS and IFF shares

In this Alert:

  • We’ll continue to look for factors that could drive upside to our $145 price target for International Flavors & Fragrances (IFF), but for now, we would not commit fresh capital at current levels and are changing our rating to a Hold.
  • Amid a robust line-up of movies coming over the coming month for the Walt Disney Co. (DIS) and the right-sizing of ESPN, our price target on DIS shares remains $125.

 

We’ve shared a number of thoughts today following quarterly results from Facebook (FB), AMN Healthcare (AMN) and the explosive results from Universal Display (OLED). Before our next regular scheduled issue of Tematica Investing this coming Wednesday, we’ll get earnings from both International Flavors & Fragrances (IFF) as well as Disney (DIS). Below we share the consensus expectations for both as well as our thoughts heading into those two reports.

 

International Flavors & Fragrances (IFF) Rise & Fall of the Middle Class

IFF shares continued to inch higher this week, bringing the year to date return to just over 17 percent and well ahead of the S&P 500. IFF will report its 1Q 2017 earnings this coming Tuesday (May 9) before the market open. Consensus expectations sit at EPS of $1.51 on revenue of $831.8 million. We’ve seen a number of confirming signs for the firm’s flavorings business over the last few months as food and beverage companies ranging from Pepsico (PEP) to Coca-Cola and others look to preserve taste while cutting back on sugar and other unhealthy ingredients. We see the pain of those food and beverage companies grappling with the shifting consumer preference that is in sync with our Foods with Integrity investing theme being a positive for IFF.

Longer term, the outlook remains bright for this market as the Freedonia Group’s forecast calls for global demand for flavors and fragrances to reach $26.3 billion by 2020, which would be a 21% increase from $21.7 billion in 2015.

  • As we digest IFF’s earnings and outlook, we’ll continue to look for factors that could drive upside to our $145 price target, but for now, we would not commit fresh capital at current levels and are changing our rating to a Hold.

 

Disney Content is King

Disney shares have been strong performer thus far in 2017, but the shares fell more than 3 percent this past week, which we attribute to investors taking profits in an increasingly nervous market. Next Tuesday, Disney will report its 1Q 2017 earnings and ahead of that, consensus expectations are clocking in at EPS of $1.41 on revenue of $13.45 billion for the quarter.

We expect an upbeat report with the company focusing on its robust line-up of movies over the coming months that kicks off with today’s theatrical release of Guardians of the Galaxy 2.  That will soon be follow up by Pirates of the Caribbean: Dead Men Tell No Tales on May 26, Cars 3 on June 16 and Spider-Man: Homecoming on July 7. Those rapid-fire releases likely bode well for this Content is King company across several of its businesses in the second half of 2017. We also expect management to discuss its right sizing efforts for ESPN as it re-positions that business toward streaming and other digital content.

  • Our price target on DIS shares remains $125.

 

 

 

HOLDINGS UPDATE: Raising target price on this Disruptive Technology company as it knocked it’s earnings report out of the park

HOLDINGS UPDATE: Raising target price on this Disruptive Technology company as it knocked it’s earnings report out of the park

In this Alert:

  • Universal Display (OLED) smashed consensus expectations for 1Q 2017 on both the top and bottom line, delivering EPS of $0.22 per share, well ahead of expectations calling for a break even quarter.
  • As such, we are raising our price target on OLED from $100 up to $125 as we are just now beginning to see the expected ramp up in capacity for the company’s organic light emitting diode displays.

 

After last night’s market close, Disruptive Technology company Universal Display (OLED) smashed consensus expectations for 1Q 2017 on both the top and bottom line. For the quarter, Universal Display delivered EPS of $0.22 per share, well ahead of expectations calling for a break even quarter, and compares to $0.04 in the year-ago quarter. The company’s 1Q 2017 revenue rose 87 percent year over year to $55.6 million vs. the $33.5 million consensus and $29.7 million in the year-ago quarter. Management also upsized their outlook for 2017 calling for revenue of at least $260-$280 million, which is not only well ahead of the $247 million consensus view for 2017, it puts Universal’s revenue on a path to growth 30-40 percent this year. We chalk this better than expected outlook to the growing pipeline of organic light emitting diode industry capacity expansion that is being led by new product launches that are adopting organic light emitting diode displays.

Given the company’s revised guidance and recent propulsive to deliver better than expected results given a number of favorable demand factors for organic light emitting diode displays, we expect earnings expectations to be reset higher this morning, most likely somewhat near EPS of $1.70 on revenue of $270 million for this year vs. the consensus of $1.43 on revenue of $243 million ahead of last night’s earnings. Odds are those Wall Street analysts that were below the consensus for 2018 (EPS of $2.25 on revenue of $325 million) will also bump those forecasts higher. It also most likely means price targets on OLED shares will move higher, lifting the current consensus above the $95 level.

 

In our view this prompts two logical questions — what are we doing with our price target and our rating on OLED shares?

First, there is no doubt OLED shares have been a strong, strong performer this year as they are up more than 95 percent since the start of 2017 compared to 12.7 percent for the Nasdaq Composite Index. With ramping capacity over the coming year, we certainly see rising demand for the company’s chemicals and an expanding market for its intellectual property and licensing business, which means expanding revenue and earnings over the coming quarters. The company’s upward revision to its 2017 expectations gives us greater confidence in that, and we suspect more data that points to expanding industry capacity and more applications adoption OLED display will only do more of the same in the coming months.

The challenge in assessing exactly how fast Universal’s earnings will grow in 2018 and 2019 is due in gauging commercial revenue for the company’s chemicals, which are tied to industry capacity not just coming online but moving from startup to commercial volumes. That said, as Apple (AAPL) and others adopt organic light emitting diode displays and replace existing display technologies across smartphones, TVs, wearables and other applications, we strongly suspect continued revenue and earnings growth to be had at Universal Display.

  • We estimate the company will grow its bottom line at a compound annual growth rate of 35 to 45 percent between 2016-2018/2019, which equates to a PEG ratio of 1.1-1.3 using 2018 consensus expectations of $2.25 per share in earnings.
  • Applying a PEG ratio of 1.5 to 2018 expectations derives a new price target of $125, which even after today’s move higher offers sufficient upside to keep our Buy rating on OLED shares.
  • Should Universal Display continue its meet or beat track record when its comes to quarterly results, we could see even further upside to that new price target.

 

On the housekeeping front, Universal Display closed the March quarter with $340 million of cash, short term and long term investments for approximately $7.20 of cash per share. The company also announced the Board of Directors approved a cash dividend of $0.03 per share on the company’s common stock, payable on June 30th to all shareholders of record as of June 15.

 

WEEKLY ISSUE: While earnings so far have been mixed bag, it’s been mostly good news for the Tematica Select List

WEEKLY ISSUE: While earnings so far have been mixed bag, it’s been mostly good news for the Tematica Select List

In this Week’s Issue:

  • Boosting Amazon and Alphabet Price Targets on Blockbuster Earnings
  • Intel’s Capital Spending Bodes Well For Applied Materials
  • Facebook Earnings Due After Today’s Market Close
  • Universal Display and AMN Healthcare Earnings On Tap for Thursday

 

As we noted in our Monday Morning Kickoff out just a few days ago, this week is by far one of the busiest with more than 1,000 companies reporting, a slew of economic data and the Fed’s latest FOMC meeting. The Fed meeting culminates today at 2 PM ET, and soon thereafter we’ll learn if the Fed has once again boosted interest rates. As we have been pointing out here at Tematica in an almost broken drum-like fashion, the domestic economy cooled rather dramatically during 1Q 2017, with GDP clocking in around 0.7 percent vs. 2.1 percent in 4Q 2016.

While that is in the rear view mirror, the initial data for 2Q 2017 found in the April data from ISM Manufacturing, Markit Economics and several regional Fed indices all point to a continuation of that slow speed. That compares to the current consensus expectation that has GDP clocking in at 2.8 percent according to The Wall Street Journal’s Economic Forecasting Survey. At least, for now, that view looks rather aggressive and with inflation data rolling over as year over year comparisons ease, it looks to us like the Fed is likely to stand pat on interest rates later today. Of course, there will be the usual slicing and dicing of the Fed policy statement to get a better sense if the Fed will look to boost rates at its next meeting in June or in the back half of this year. As a reminder, coming into 2017 the Fed shared that it was looking to boost rates three times. Following one hike already earlier this year, the growing question could very well be will they get around to all three?

Turning to the Tematica Select List, we’ve seen a number of strong moves over the last week as we’ve journeyed through 1Q 2017 earnings season. Examples include our Amazon (AMZN), Alphabet (GOOGL) and PowerShares Exchange-Traded Fund Trust (PNQI) shares, but we’ve still yet to hear from a number of Select List companies. Luckily (yes that was sarcasm), we’ve got several reporting later this week, including Facebook (FB) after today’s close, followed by Universal Display (OLED) and AMN Healthcare (AMN) tomorrow night. In the coming paragraphs, we’ve set the table for what is expected from these companies and we also share our price target updates for Amazon and Alphabet, which even after their respective moves over the last week still keeps the shares in the Buy zone.

In case you were afraid the earnings fun would be over soon, that’s certainly not the case as we have several others Select List companies, including The Walt Disney Co. (DIS) and International Flavors & Fragrances (IFF) reporting next week. Don’t worry, we’ll be here to guide you through it, using our thematic lens to lead the way.

 

Boosting Amazon and Alphabet Price Targets on Blockbuster Earnings

Last week, Amazon reported blowout earnings of $1.48 per share for the first quarter, well ahead of the $1.10 consensus expectation for the quarter. Revenue for the quarter rose 23 percent, year over year, to $35.71 billion, ahead of the $35.31 billion consensus number with double-digit improvement across all three businesses — North America, 23.5%; International, 15.6%; and Amazon Web Services (AWS), 42.7%. The revenue beat, alongside better-than-expected operating income of $1 billion vs. the $900 million consensus and Amazon’s own guidance for the quarter of $250 million-$900 million, led to the positive earnings surprise.

Sifting through the segment results, AWS continues to be the key profit generator for the company as it delivered the vast majority of the company’s overall operating profit, with operating losses at International offsetting profits in North America. As impressive as that was, we’d note that despite the segment’s revenue growth, its operating margin only improved to 24.3 percent in 1Q 2017 vs. 23.5 percent in the year-ago quarter. Once again Amazon offered forward guidance that one could drive a truck through, but even though it was not specifically shared, we find there is a growing comfort following the quarter that Amazon can deliver profits even as it continues to expand its footprint.

From our perspective, Amazon is riding the pole position of not only our Connected Society investing theme, but increasingly our Content is King, Cashless Consumption, and Asset-Lite Business Model as well. Talk about the power of four thematic tailwinds… as we have said before, Amazon is a stock to own and we see no signs of that changing anytime soon.

Also last week, Asset-Lite Business Model company  Alphabet (GOOGL) delivered knockout earnings and revenue despite concerns for advertising weakness at YouTube. For the March quarter, Alphabet delivered an impressive EPS of $7.73, $0.35 ahead of consensus expectations as revenue for the quarter rose more than 22 percent year over year to 424.75 billion. Without question Alphabet’s business – Search, Advertising and YouTube — are all benefitting by the shift to mobile from the desktop; launches thus far of the company’s TV streaming service, YouTube TV have been favorable and demand for its cloud business, much like that at Amazon, remains strong.

As we have shared for some time, we see no abatement in the tailwinds that are driving the two business, which includes the migration to online shopping, cloud adoption, streaming content and migration of advertising dollars to digital platforms. If anything, we continue to see prospects for those winds to blow even harder as the two companies continue to position themselves better than well for our increasingly connected society.

Those winds, along with solid execution and a focus on profits at both companies, are behind our revised price targets for both companies:

  • Our new price target on Amazon (AMZN) shares is $1,100, up from the prior $975, which offers just over 17 percent upside and keeps our Buy rating intact.
  • Our new price target for Alphabet (GOOGL) shares is $1,050, up from $975, and that equates to roughly 12 percent upside, which also keeps our Buy rating intact.

 

Intel’s Capital Spending Bodes Well For Applied Materials

Also last week, Intel (INTC) reported its quarterly earnings and reiterated its outlook for capital spending of $12 billion this year, which would be up from $9.6 billion in 2016. While not new information, the confirmation serves as a reminder of the tailwind driving the business at Applied Materials (AMAT). We expect similar data points as earnings season progresses in light of demands not only for memory and other chips but also organic light-emitting diode capacity. with regard to the latter, we’ll look for similar comments on OLED industry display capacity constraints and expansion when Universal Display (OLED) reports earnings after tomorrow’s market close (more on that below).

  • Our price target on AMAT shares remains $47.

 

Facebook Earnings Due After Today’s Market Close

On the heels of Alphabet’s stronger- than-expected quarterly results, expectations are running for Facebook (FB), a Connected Society company that like Alphabet is benefitting from the accelerating shift to digital advertising across its various properties. Even though Facebook has a track record of beating Wall Street expectations when it reports its quarterly results, from time to time whisper expectations that are above published forecasts can get the better of a company. Given the strong quarterly results coming out of Alphabet, odds are Wall Street is expecting Facebook to deliver at least several pennies better than the consensus forecast for 1Q 2017 that calls for EPS of $1.12 on revenue of $7.83 billion. We acknowledge the strong price move year to date as well as Alphabet’s quarterly results likely mean anything other than a blowout earnings report is likely to result in the shares pulling back.

  • In our view, any post-earnings pullback is a likely opportunity for those who have missed out previously.
  • We’ve been reviewing our $150 price target, which is modestly below the $161 consensus target on the shares, and expect to update it following Facebook’s earnings report out after today’s market close. 

 

Universal Display and AMN Healthcare Earnings On Tap for Thursday

The earnings fun continues tomorrow when we have both Universal Display (OLED) and AMN Healthcare (AMN) reporting results after the market close. First, with AMN, expectations are far the healthcare workforce solutions company to deliver EPS of $0.60 on revenue of $493 million. Recent JOLTs reports have confirmed the discrepancy between healthcare workers job openings and the viable candidate pool, which bode rather well for AMN’s workforce placement business. Longer-term, the Aging of the Population and capacity constrained nursing schools are a powerful combination that provides a longer-term tailwind for AMN’s business.

  • Our price target on AMN heading into the earnings report remains $47.

Turning to Universal Display, this Disruptive Technology investment theme company is expected to deliver EPS between -$0.05 per share and $0.02 on revenue between $31.8-$36 million, vs. $29.7 million achieved in the year-ago quarter. We’d remind subscribers the key to the Universal Display’s investment narrative is the expanding number of applications for organic light emitting diode displays, including prospects for Apple’s (AAP) next iteration of the iPhone.

On last night’s earnings call for Apple, the company’s iPhone volumes missed expectations and even CEO Tim Cook called out the culprit — “rumors around future products” — that is likely pushing out the current upgrade cycle. In our view, what’s bad for Apple today is very good news for Universal Display.

On the Universal Display earnings call, we expect to get an update on industry capacity expansion plans that bode well for our Applied Materials shares, as well as one for recent expansions being switched on. Without question, there will be much chatter over new applications, the next iPhone, and rising manufacturing levels, all of which points to rising demand for Universal’s chemicals and IP licensing business.

  • We continue to rate OLED shares a Buy and heading into the earnings call our price target remains $100.

 

WEEKLY ISSUE: Earnings and Washington Drama Take Center Stage

WEEKLY ISSUE: Earnings and Washington Drama Take Center Stage

In this Week’s Issue:

  • No Real Shock in AT&T’s (T) Earnings, However, Some of the Details Have Us Downgrading Dycom (DY) from a “Buy” to a “Hold”
  • What We’re Expecting Later This Week in Earnings Reports from Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX)
  • Developments in Our Positions in DIS, HACK, IFF, BETR

 

With the pace of corporate earnings picking up this week, we have a lot to cover so we’ll keep our opening comments rather brief.

You’ve likely noticed the strong rise to the market this week, following the initial round of French elections. That euphoria, however, could be short-lived as the market’s focus returns to earnings and the unfolding drama in Washington. While the earnings reports we’ve received thus far have been encouraging, in sifting between the headlines there are some reasons to be concerned and as we get the bulk of this week’s reports today and tomorrow, we suspect more concerns will bubble to the top.

On the political front, there is the risk of a federal government shutdown (low probability in our opinion), the renewed GOP effort on healthcare reform and now  Trump’s tax proposal. To us, the combination of earnings and Washington happenings are likely to cause some renewed uncertainty in the market, which could lead to some giveback in its recent gains. Yes, we know new records were set in the Dow Jones Industrial Average and the Nasdaq Composite Index, but in our view that only means stretched market valuation are even more so. Given the findings of the Bank of American Merrill Lynch institutional money manager survey we shared in this week’s Monday Morning Kickoff that 83 percent find the stock market over-valued, we suspect that level has only ticked higher in the last few days.

We will continue to be prudent with the Tematica Select List and follow the latest thematic data points. Be sure to tune into the latest episode of the Cocktail Investing Podcast later this week, when we share a number of those data points.

Now let’s get to it…

 

No Real Shock in AT&T’s (T) Earnings, However, Some of the Details Have Us Downgrading Dycom (DY) from a “Buy” to a “Hold”

 

Last night Connected Society investment theme company AT&T (T) reported 1Q 2017 results that met bottom line expectations but missed on revenue for the quarter. With our underlying investment thesis intact — the transformation of the company into a mobile content player from simply a wireless services player — despite the wireless led revenue shortfall in the quarter, we will continue to watch AT&T shares with the intention of using weakness below $40 to round out our position size as the shares settle out from last night’s earnings report.

In looking into the details of what AT&T reported, we find that for the March quarter AT&T delivered earnings $0.74 per share on revenue of $39.4 billion vs. the expected $40.5 billion. The culprit in the revenue miss was a combination of lower new equipment sales (roughly 1 million fewer units vs. a year ago), a more challenging pricing environment and a loss of 191,000 postpaid subscribers — pretty much the same issues that plagued Verizon’s (VZ) Verizon Wireless business in the March quarter. The subscriber winner appears to have been T-Mobile USA (TMUS), but we offer our view that being a winner in an increasingly commoditized and price sensitive business is not really winning long-term.

In a somewhat surprising move, AT&T has decided it will no longer give full-year revenue guidance due to the unpredictability of the mobile handset market. Given the combination of the move to no longer subsidizing mobile phone purchases and a domestic wireless market that is more tied to the phone upgrade cycle than new subscriber growth, we are not shocked that forecasting wireless handset revenue has become increasingly difficult. Offsetting the 2.8 percent drop in AT&T’s revenue year over year, the company improved its consolidated margins by 80 basis points vs. year ago levels due to automation, digitization, and network virtualization. The company targets having 55 percent of its network functions virtualized by the end of 2017, which should offer incremental margin improvement opportunities over the coming quarters.

Our thesis on the T shares has centered on the pending transformation that will occur in the business model following the merger with Time Warner (TWX), which will shift the emphasis away from the increasingly commoditized mobile service business. Even ahead of the closing of that transaction, AT&T has taken steps to position itself within the content arena with the acquisition of DirectTV and the subsequent launch of DirecTV Now. On the earnings call, these were areas of focus with AT&T commenting that it continues to expect approval for Time Warner transaction and we’ve shared the environment toward it in Washington has warmed considerably since the 2016 presidential election. We continue to expect more details in terms of guidance and synergies to be had once the transaction closes late this year.

After what some would say was a slow start, DirecTV Now — the company’s s over-the-top service that offers a wide selection of live television, premium programming and On Demand content — continued to add customers in the quarter. AT&T is looking to get a little more aggressive in the second half of 2017 with DirectTV Now, particularly with wireless bundling and we’ve already started to see new TV ads with Mark Wahlberg touting the offering. With just five months under the belt, we expect AT&T to be patient with this business, especially since it is likely to be a direct beneficiary of the Time Warner’s content library in 2018.

The bottom line is while the revenue miss for the quarter was a disappointment, following Verizon’s results it was hardly a shock to the system. The revenue miss at both companies highlights the reasons for our owning the shares very much remain intact. As we said several months ago, with AT&T’s business poised to transform over the coming quarters, its shares are likely to be rangebound until we have some clarity and understanding on the synergies to be had. That same transformation means that investors are likely to look past near-term ups and downs in the wireless business. In our view, in hindsight, AT&T’s move to snare Time Warner shows the management team is rather forward-thinking and the same can be said for its leading wireless spectrum business as it looks to bring select 5G services to market in 2018.

AT&T’s focus on bringing 5G services to market are, of course, rather positive for our Dycom (DY) shares. During 1Q 2017, AT&T spent $6 billion on capital spending and reiterated its plans to invest $22 billion in full for 2017. With that expected spending level at Dycom’s largest customer unchanged to the upside, and following the additional 5 percent move in DY shares over the last few days, we now have just 6 percent upside to our $115 price target for Dycom.

To keep our Buy rating intact on DY shares from current levels, we’d need to see upside in the shares to more than $125; at the same time we recognize that given the 33 percent move in DY shares over the last three months, they could come under pressure should the market get a little rocky this earnings season. For those reasons, we’re downgrading DY shares to a Hold. We’ll continue to evaluate our price target as we other key customers update their 2017 capital spending plans and should we get wind of an accelerating 5G deployment timetable.

  • Our price target on AT&T shares remains $45, and we intend to use near-term post-earnings weakness to add to this long-term holding.
  • Our price target on Dycom (DY) shares remains $115 for now and given just percent upside to that target we are downgrading DY shares to a Hold from Buy. 

 

What We’re Expecting Later This Week in Earnings Reports from Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX)

AT&T’s earnings report was just the start of what is to be a frenzied two weeks, as more than 2,000 companies report quarterly results and offer their latest outlook on what’s to come near-term. This week alone we have 40 percent of the S&P 500 reporting, and among that sea of results, we have three more Tematica Select List companies doing the same — Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX) — all after the market close tomorrow (Thursday, April 27).

Here’s what the market’s expecting and our pre-results commentary:

 

AMAZON (AMZN): Amazon shares have been a strong performer amid the escalating brick & mortar retail death spiral, climbing more than 20 percent thus far in 2017. That sharp move higher compared to just 6.7 percent for the S&P 500 likely means expectations are once again running high for Amazon even though consensus expectations call for EPS of $1.13 on revenue of $35.3 billion. We’ve seen this several times over the years and at times Amazon surprises Wall Street with its investment plans that tend to weigh on its outlook. As we saw last September, that mismatch tends to weigh on Amazon shares, offering a solid buying opportunity for long-term investors.

Amazon is a stock to own for the long-term given several powerful tailwinds that power its various businesses. While the right investment strategy is to use weakness to build one’s position, for subscribers who are underweight Amazon, we would suggest holding off right now from adding more shares until after the company reports.

  • For now, our price target on AMZN remains $975.

 

Alphabet (GOOGL): Over the last week, Alphabet (GOOGL) shares have climbed more than 4 percent, bringing the year to date return to more than 12 percent. As we get ready for the company’s 1Q 2017 earnings report tomorrow, let’s remember the YouTube advertising snafu it had during the quarter, which could weigh on overall results. We would advise subscribers underweight GOOGL shares to be patient as we could see better prices late this week or early next. Longer-term, with the continued move in the Connected Society investment theme that bodes well for the core Search business as well as its own shopping portal efforts plus the launching streaming TV service, dubbed YouTube TV, the company still has several multi-year tailwinds behind it. On Alphabet’s earnings call, we’ll be listening for comments on returning capital to shareholders as well as signs the new regime remains focused on margins.

  • Our price target on GOOGL shares remains $975, which offers 10 percent upside from current levels. 

 

STARBUCKS (SBUX): Over the last week or so, Starbucks (SBUX) shares have broken out of the $54-$58 trading range they have been in over the last four months. Part of that move was due to an upgrade by the research arm of Stifel, which now sees upside to $67 for SBUX shares, which compares to our long-term price target of $74. Expectations call for Starbucks to deliver EPS of $0.45 on revenue of 45.41 billion for the March quarter and for the team to guide the current quarter to EPS between $0.52-$0.59 on revenue between $5.6-$6 billion.

They key for us will be the continued expansion overseas as well as an upgrade in the company’s food efforts, which to us are likely to be key areas of focus on the earnings call following the poor reception of its Unicorn Frappuccino. Coffee prices have abated over the last several months, which could help Starbucks project some additional margin lift in the coming quarters.

  • We continue to rate SBUX shares a Buy at current levels. 

 

Developments in Our Positions in DIS, HACK, IFF, BETR

 

The Walt Disney Co (DIS): This morning we’re hearing that Disney’s ESPN network could start issuing pink slips at its flagship cable sports channel today. Several reports suggest the layoffs may be more numerous than the expected, with some 70 employees ranging from anchors, reporters, analysts and online writers losing their jobs in coming weeks. We see this as the latest move by Disney to right the cost structure in a business that is finding its way among chord-cutters and Cash-Strapped Consumers seeking more cost friendly streaming services. Disney continues to explore such options, and we suspect more developments to be had on this in the coming quarters.

With the move in Disney shares in recent weeks, our positions are up 14 percent, with another 9 percent to go to our $125 price target. With a robust movie slate over the coming months that includes Guardians of the Galaxy 2 (May 5), Pirates of the Caribbean: Dead Men Tell No Tales (May 26), Cars 3 (June 16) and Spider-Man: Homecoming (July 7), we’re reviewing potential upside to our $125 price target for DIS. 

 

PureFunds ISE Cyber Security ETF (HACK): This week we  received two quick reminders over the downside to our increasingly Connected Society that fuels ourSafety & Security investing theme and bodes well for the PureFunds ISE Cyber Security ETF (HACK) shares on the Tematica Select List. First, last night at the very end of its earnings conference call Chipotle Mexican Grill (CMG) slipped in that it had detected “unauthorized activity” on a network that supports payment processing at its restaurants. Then this morning, French presidential candidate Emmmanuel Macron’s campaign team confirmed it had been the target of at least five advanced cyberattack operations since January.

  • We continue to favor the HACK ETF as a diversified play on the ever-growing need for cyber security, which is just one aspect of our Safety & Security investing theme. 

 

International Flavors & Fragrances (IFF): During PepsiCo’s (PEP) earnings call last night the company reported higher-than-expected quarterly revenue and profit as it benefits from demand for its healthier drinks and snacks and kept a tight leash on costs. The company has said it now gets about 45 percent of its net revenue from “guilt-free” products — beverages that have fewer than 70 calories per 12 ounces and snacks that have lower amounts of salt and saturated fat.

We see that as a very favorable sign for our International Flavors & Fragrances (IFF) shares, which are up more than 8 percent since we added them, which leaves some 4 percent to our $145 price target.

  • Given the accelerating move by PepsiCo and others into health snacks and drinks, we are reviewing that $145 price target for IFF.

 

Amplify Snack Brands (BETR): As you are probably thinking, PepsiCo’s results mentioned earlier are very much in tune with our Food with Integrity investing theme as well as our decision to add Amplify Snack Brands (BETR) to the Tematica Select List last week. Over the last week, BETR shares slipped some 2 percent, but we’d remind subscribers that stocks under $10 can be volatile week to week. We continue to like Amplify’s expanding offering and footprint, and when the company reports its results we expect to hear more on those efforts.

  • We continue to rate BETR shares a Buy with an $11 price target. 
Previewing AT&T (T) Earnings and Watching Capital Spending Levels for Dycom (DY)

Previewing AT&T (T) Earnings and Watching Capital Spending Levels for Dycom (DY)

After today’s market close when Connected Society company AT&T (T) reports its 1Q 2017 results we will get the first of our Tematica Select List earnings for this week. This Thursday we’ll get quarterly results from both Amazon (AMZN) and Alphabet (GOOGL) with several more to follow next week.

Getting back to AT&T, consensus expectations call for the company to deliver EPS of $0.74 on revenue of $40.57 billion for the March quarter. As we have come to appreciate, these days forward guidance is as important as the rear view mirror look at the recently completed quarter; missing either can pressure shares, and mission both only magnifies that pressure. For the current (June 2017) quarter, consensus expectations are looking for AT&T to earn between $0.72—$0.79 on revenue of $40.2-$41.3 billion.

Setting the state for AT&T’s results, last week Verizon (VZ) issued its March quarter results that saw both its revenue and earnings miss expectations. Buried in the results, we found decreased overage revenue, lower postpaid customers and continued promotional activity led to a year on year revenue delicate for Verizon Wireless. The culprits were the shift to unlimited plans and growing emphasis on price plans that likely led to customer switching during the quarter.

If AT&T were still a mobile-centric company, we’d be inclined to re-think our investment in the shares, but it’s not. Rather, as we’ve discussed over the last several months, given the pending merger with Time Warner (TWX), AT&T is a company in transition from being a mobile carrier to a content-led, mobile delivery company. As we’ve seen in the past, consumers will go where the content is (aka Content is King investment theme), and that means AT&T’s content portfolio provides a competitive moat around its mobile business. In many ways, this is what Comcast (CMCSA) established in buying NBC Universal — a content moat around its broadband business… the difference is tied to the rise of smartphones, tablets and other mobile content consumption devices that have consumers chewing content anywhere and everywhere, and not wanting to be tied down to do so.

For that reason, we are not surprised by Comcast launching Xfinity Mobile, nor were we shocked to hear Verizon is “open” to M&A talks with Comcast, Disney (DIS) and CBS (CBS) per CEO Lowell McAdam. In our view, Verizon runs the risk of becoming a delivery pipe only company, and while some may point to the acquisitions of AOL and Yahoo, we’d respond by saying that both companies were in troubled waters and hardly must-have properties.

With AT&T’s earnings, should we see some weakness on the mobile side of the business we’re inclined to let the stock settle and round out the position size as we wait for what is an increasingly likely merger with Time Warner.

 

We’re Also on the Look Out for Datapoints Confirming Our Position in Dycom (DY)

As we listen to the call and dig through the results, we’ll also keep an eye on AT&T’s capital spending plans for 2017 and outer years, given it is Dycom’s (DY) largest customers (another position in our Tematica Select List). As we digest that forecast and layer it on top of Verizon’s expected total capital spending plan of $16.8-$17.5 billion this year, we’ll look to either boost our price target on Dycom or revise our rating given we now have just over 8 percent upside to our $115 price target.

 

Tematica Select List Bottomline on AT&T (T) and Dycom (DY)
  • Our price target on AT&T (T) shares remains $45; should the shares remain under $40 following tonight’s earnings, we’ll look to scale into the position and improve our cost basis.
  • Heading into AT&T’s earnings call, our price target on Dycom (DY) shares remains $115, which offers less than 10 percent upside. This earnings season, we’ll review customer capital spending plans to determine addition upside to that target, but for now given the pronounced move in DY shares, up more than 18 percent in the last month, we’d hold off committing fresh capital at current levels.