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Trump’s strong performance pushes the market up even further

Trump’s strong performance pushes the market up even further

Last night President Trump addressed a joint session of Congress, and while it sounded somewhat like a campaign speech, the overall tone was far tamer and optimistic than we saw on the campaign trail and lacked his signature attacks. Even though there were no major policy shifts and as we expected few details, Trump called for both political parties to work together to get the country back on track after the last 8 years. That call for unity was far from surprising, given that in order to move tax reform ahead and replace the Affordable Care Act, Trumps needs a united GOP and support from at least some Senate Democrats. Given the quick exit of Democrats following Trump’s concluding remarks, odds are the President will have much work to do to get his agenda flowing.

There were a few surprises last night, including Trump’s softening stance on immigration as well as his calling on Congress to pass legislation to pave the way for a $1 trillion public-private infrastructure project. Trump has been rather vocal about the need to fix the country’s aging highways and byways, so the call itself isn’t surprising even though the price tag is larger than many expected. Again, the devil will be in the details for this public-private proposal given concerns for increasing the national debt even further than it has over the last several years.

All in all, it was a good speech and one that in our view signals a more presidential Trump, but for those looking for harder details there was little to be had and it looks like the policy timetable has probably been extended. While the stock market is gapping higher yet again today, it looks to us like it’s increasingly further out along its skis.

 

Recapping the Week’s Economic Data Thus Far

 

 

This morning we received the January reading on Personal Income & Spending, which showed income ticking up modestly month over month to 0.4 percent, but spending in January tumbled vs. that in December. Yes, there tends to be a seasonal dip following the holiday filled December, but even so, the January spending figure of 0.2 percent came in below the expected 0.3 percent reading. After dipping to 5.4 percent in December, the Personal Saving rate inched higher in January to 5.5 percent.

Now, that is a modest miss on the personal spending side of the equation, but when we pair it with January’s weaker than expected core capital goods orders and shipments, it’s another sign the domestic economy as a whole likely remains stuck in low gear this quarter. We talked about this earlier this week, as well as the current mismatch between GDP forecasts for the first half of 2017. Later this morning, we’ll get both the ISM Manufacturing Index and Markit Economics Final February Manufacturing PMI reports and we’ll be going over them to see what’s what when it comes to the current quarter’s GDP.

This morning also brought the final February Manufacturing PMI figures for the Japan and the Eurozone as well as the first viewing of the same for China. The final data for both the Eurozone and Japan are very much in line with the Flash reports we received last week, pointing toward a firming global economy from a  production and order perspective. The data also showed that their weaker currencies relative to the dollar is generating stronger export business; in the Eurozone, February saw the fastest growth of new export business in almost six years. While the February Manufacturing PMI figures of 53.3 and 51.7 in Japan and China clocked in lower than the 55.4 recorded for the Eurozone, the underlying economies continued to improved compared to several months ago. One of the key signs that we watch as an indicator of future business, orders, trended higher leading to the first expansion in work backlog levels in Japan since the end of 2015.

One other key element from these Final PMI reports was the pick-up in input costs due primarily to higher commodity and raw material costs. We’ll look for confirmation in both the Final Manufacturing PMI for the US as well as ISM’s February Manufacturing Index. Per data published by ISM, over the last few months prices have been expanding at a stronger pace and if this continues, we expect Federal Reserve representatives to talk more about inflationary prospects ahead of the March Federal Open Market Committee meeting.

On the back of President Trump sharing a $1 trillion infrastructure spending plan last night, should the February ISM and Markit data show continued manufacturing strength, we are likely to see share prices for companies like US Concrete (USCR), Ingersoll-Rand (IR), Home Depot (HD), and Granite Construction (GVA) that fit our Economic Acceleration/Deceleration investment theme benefit. The same can likely be said for shares of The Industrial Select Sector SPDR Fund (XLI) as well as Financial Select Sector SPDR Fund (XLF) should the market mentality shift to one that thinks a March rate hike for the Fed looks increasingly likely. Given the run several of these have had, we’re taking a hard look at what entry points offer subscribers a favorable risk vs. reward profile.

 

Dycom Trounces Expectations and Lifts Its Outlook

Early this morning Connected Society holding Dycom Industries (DY) a specialty contractor that serves the wireless and wireline industries, reported stronger than expected quarterly revenue and guided the current quarter ahead of expectations. For the January quarter, Dycom delivered EPS of $0.82, well ahead of the expected $0.69 and $0.54 in the year-ago quarter, on revenue that rose 25 percent year over year to $701.1 million, also well ahead of the $659.4 million that was expected.

Breaking down the quarterly revenues, organic contract revenue rose just under 23 percent and acquired businesses during the year added another $13.4 million. Year over year, adjusted EBITDA rose more than 29%, which in our view reflects solid cost control at its installations and projects, but we also recognize the 4 percent decline in the share count helped improve year over year EPS comparisons. Even so, it was a solid beat all the way around.

Details tend to be scant in the earnings press release, but the company does provide some additional details ahead of the earnings call. Peering over that material, we saw that Dycom’s customer composition that has had AT&T (T), Comcast (CMCSA), CenturyLink (CTL) and Verizon (VZ) among its top customers remained largely unchanged during the quarter. On a combined basis those four companies accounted for just over 70 percent of Dycom’s revenue in the quarter vs. just over 69 percent in the prior quarter and just under 63 percent in the year-ago quarter. We attribute that improvement to Dycom’s position with the wireless and wireline players that are building out network capacity and prepping to bring next generation networks to market in order to deploy more advanced service offerings.

We’ve noted previously the combined 2017 capital spending plans for AT&T, Verizon, CenturyLink and Comcast for broadband and wireless will be up modestly year over year with a greater portion of spending on network capacity and new technologies (5G, Gigabit fiber). We continue to see Dycom as a prime beneficiary of that wireless and wireline capital spending. In the earning press release, Dycom guided revenue for the current quarter, which is benefitting from mild winter temperatures, in the range of $715-$745 million vs. the consensus of $715.75 million with EPS in the range of $1.11-$1.24 compared to the consensus of $1.13. We expect far more details to emerge on the company’s earnings call that will be held this morning at 9 AM ET.

On the housekeeping front, this morning Dycom’s Board authorized an additional $75 million share repurchase.

  • Ahead of the earnings call this morning, we continue to rate Dycom Industries (DY) a Buy with a $110 price target.

 

Not just cost-cutting driving the cord-cutting revolution

Not just cost-cutting driving the cord-cutting revolution

Google’s YouTube on Tuesday unveiled a web-TV service that will offer a package of over 40 broadcast and cable channels for $35 a month, making the tech giant the latest entrant in a race to win over millions of consumers who are shifting away from traditional TV.The new service, dubbed YouTube TV, is set to launch in the next few months. It will have all the major broadcasters, including ABC, CBS, NBC and Fox, as well as several dozen well-known cable channels, such as ESPN, FX, USA, MSNBC and Fox News.

Source: Google’s YouTube to Launch $35-a-Month Web-TV Service – WSJ

 

The launch of YouTube TV is about as obvious as when Starbucks launched coffee ice cream.  People loved Starbucks. They love ice cream. Coffee drinkers like coffee ice cream. Boom, Starbucks Mocha Java Chip ice cream was born and America’s waistline continued to expand just like the coffee.

YouTube’ dominance of the online video world is unmatched, and so cutting the deals with the networks to launch live YouTube TV makes sense. What jumped out to us, however, was this one line:

There’s no question millennials love great TV content,” said YouTube Chief Executive Susan Wojcicki. “But what we’ve seen is they don’t want to watch it in the traditional setting.”

It reflects the realities of today’s Connected Society in that the ability to always access the web from anywhere, anytime has led to place-shifting of traditional content consumption. “Thursday Must See TV” is long gone, as is the family gathering around the TV to all watch a big game. Sure there are services that have been around that let you access your cable content from anywhere, but that means double payment to both the service provider and the cable company.

Of course, the biggest question is if Alphabet can cut this deal, what’s Apple’s problem been for so many years?

Reasons To Be Cautious Ahead of Trump’s Feb. 28 Speech?

Reasons To Be Cautious Ahead of Trump’s Feb. 28 Speech?

Subscribers to Tematica Investing received this commentary on Monday, Feb. 27 with specific instructions pertaining the Tematica Select List.

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week. We’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes. We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List,

As Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting what’s called a “skinny budget” today, (which we view as the “opening bid budget”) tomorrow night, President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform – “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on which to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition.  Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been the improving, but not stellar economic data and the hope that President Trump’s policies will jumpstart the economy. We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

Again, our thought is better to be safe than sorry given where the market currently sits. Some investors may want to utilize stop losses across positions like Universal Display (OLED), CSX Corp. (CSX), Skyworks Solutions (SWKS), Activision Blizzard (ATVI) and others that have been robust performers thus far in 2017 in order to preserve gains should the stock market get its post-Trump speech jiggy on. More aggressive investors may wish to utilize inverse ETFs, such as ProShares Short S&P500 ETF (SH), ProShares Short Dow30 ETF (DOG), or ProShares Short QQQ (PSQ), while traders implement call options on those inverse ETFs or employ the use of select puts.

 

 

Prepping for Dycom’s Earnings This Week

Prepping for Dycom’s Earnings This Week

While we are finally starting to see the pace of corporate earnings reports subside, there are still a number of stragglers on the Tematica Select List. One of those is Dycom Industries (DY), which will report its quarterly results on Wednesday (Mar. 1) before the market open. Consensus expectations call for this communications heavy specialty contractor and Connected Society company to deliver EPS of $0.69 on revenue of $661.8 million and guide the current quarter to EPS of $1.09-$1.18 on revenue of $708-$725 million.

We’ve noted that as Dycom customers have been reporting and sharing their 2017 capital spending plans over the last few weeks, the combined 2017 capital spending plans for Dycom’s core customers — AT&T (T), Verizon (VZ), CenturyLink (CTL) and Comcast (CMCSA) — for broadband and wireless will be up modestly year over year with a greater portion of spending on network capacity and new technologies (5G, Gigabit fiber). We continue to see Dycom as a prime beneficiary of that wireless and wireline capital spending.

As we noted earlier today, this week the 2017 iteration of Mobile World Congress is being held and its one of the major wireless trade shows of the year. We expect a number of announcements to be had, some of which should shed light on expected 5G deployments. We see those items as filling in between the lines for Dycom’s core customers, many of which continue to build out existing 4G LTE networks as they begin to test their 5G offerings.

As we get ready for Dycom’s earnings and follow on management comments during the follow-up conference call, we are inclined to sit tight and be patient with the position given our view that, worst case, it’s only a matter of time for next-generation network technologies to be deployed. Keep in mind, in order for them to be deployed, they first have to be constructed.

  • We continue to rate DY shares a Buy with a $110 price target.
Cocktail Investing Ep 5: M&A activity among Consumer Staples, fast food thematic signals, Fed-Speak, and what exactly is the Border Adjustment Tax (BAT)?

Cocktail Investing Ep 5: M&A activity among Consumer Staples, fast food thematic signals, Fed-Speak, and what exactly is the Border Adjustment Tax (BAT)?

In this week’s program, Tematica’s cocktail mixologists, Chris Versace and Lenore Hawkins sit down to discuss some of the week’s economic data, relevant political events and share where they have spotted a few of the latest Thematic Signals, such as:

  • What McDonald’s (MCD) soft drink promotional price cuts mean to our Cash Strapped Consumer
  • How the Connected Society is pushing UPS to up its game as online shoppers increasingly expect two-day shipping.
  • Major League Baseball looks to remain relevant in our Content is King world by potentially partnering with Facebook (FB), which in turn is placing its app on Apple TV (AAPL), as the way we consume content and connect with each other continues to evolve.

This week saw some telling moves in the M&A arena with Kraft (KHC) calling off its prematurely disclosed bid for Unilever (UL) as consumer staples companies such as JM Smucker (SJM) and General Mills (GIS) struggle — not exactly a robust sign for the economy despite what we see in the headlines. Others like Restaurant Brands (QSR) that are looking to buy growth get an agreement done with Popeye’s Louisiana Kitchen (PLKI), and we talk about the whys behind that strategic rationale.

Of course, this week we received the clear-as-mud minutes from the latest Federal Reserve’s Open Market Committee meeting, which we dig into as well as dish out the 411 on what this Border Adjustment Tax is all about and how it could affect you and the companies in which you invest.

The teflon market continues to push up as valuations get further into the stratosphere and forward EPS estimates get revised downward. We’ve now gone an unprecedented 8 years without a 20 percent correction and the VIX 65-day moving average has dropped down into territory that normally precedes a pullback. While we are optimistic when it comes to the economy, we have to acknowledge our Aging of the Population theme means the first baby boomers are turning 70 this year with 1.5 million doing so each year over the next 15 years, which will have a dramatic impact on spending as well as health care costs. That’s especially the case when only 50% of them have saved enough for retirement.

But with CEO’s of major U.S. manufacturers making the headlines that Trump is the most pro-business president since the founding fathers, stocks are holding up just fine… for now. More on that on the podcast. Listen now.

Companies mentioned on the Podcast

  • Amazon.com (AMZN)
  • Apple (APPL)
  • Campbell Soup (CPB)
  • Facebook (FB)
  • General Mills (GIS)
  • Houlihan Lokey (HLI)
  • JM Smucker (SJM)
  • Kraft Heinz (KHC)
  • Macy’s (M)
  • Major League Baseball
  • McDonald’s (MCD)
  • Nordstrom (JWN)
  • Popeyes Louisiana Kitchen (PLKI)
  • Restaurant Brands Intl (QSR)
  • Twitter (TWTR)
  • Unilever (UL)
  • United Parcel Service (UPS)
  • Whole Foods Market (WFM)

 

Lenore Hawkins Tematica Research Chief Macro Strategist
Chris Versace Tematica Research Founder and Chief Investment Officer
If Social Media Giant Inks a Deal with MLB It Could be More Than a Connected Society Play

If Social Media Giant Inks a Deal with MLB It Could be More Than a Connected Society Play

Earlier today, Reuters is reporting that Connected Society company Facebook (FB) is in talks with Major League Baseball (MLB) to live stream at least one game per week during the upcoming season. We’ve seen Facebook live stream other sporting events, like basketball and soccer, but should the company ink a deal with MLB it would mean a steady stream of games over the season.

Given the nature of live sporting events, as well as the strong fan following, we see Facebook’s angle in offering this kind of program as threefold — looking to attract incremental users, drive additional minutes of use, and deliver more advertising to its user base, which should improve its monetization efforts. All three of those are very much in tune with Facebook’s existing revenue strategy and meshes rather well with its growing interest in attacking the TV advertising market.

From a high level such a deal pushing Facebook not only deeper into the increasingly Connected Society, but pulling it into our Content is King investing theme as well. Sporting events are one of the last holdouts in the move to streaming services, and its loyal fan base is likely to shift to video consumption alternatives that allow them to get events where they want, when they want and on the device they have at the time be it TV, smartphone, computer or tablet. With the recent deployment of its app for Apple’s (AAPL) Apple TV and others soon to follow, Facebook has all of these modalities covered.

To date, Netflix (NFLX) has shied away from streaming such events, and while there have been rumblings about Amazon (AMZN) entering the fray with its Prime video platform, Twitter (TWTR) has been one of the few to venture into this area live streaming Thursday night NFL games last season. Between Facebook and Twitter, we see MLB and others opting for Facebook given its larger and more global reach as well as far greater success at monetizing its user base.

Should a deal with MLB come through, we would see this not only as a positive development but one that likely paves the way for more streaming video content on Facebook’s platforms — sports or otherwise. As avid consumers of streaming content, we would welcome this with open arms; as investors, depending on the scope of such a rollout there could be upside to our $155 price target for the Facebook stock.

 

On the Major League Baseball / ESPN side of the Equation

Today’s news report about this potential Facebook / MLB deal doesn’t mention Major League Baseball’s other media and streaming activities, particularly ESPN.  This spring will make the beginning of the fifth year of a $5.6 billion agreement between MLB and ESPN that keeps the national pastime on that network through 2021. Of course, the struggles of Disney-owned ESPN have been well-documented recently as its cable subscriber numbers continue to decline as chord-cutting activity increases, as well as seeing consumers trade down to smaller cable packages that omit ESPN.

Major League Baseball, on the other hand, has been at the forefront of the streaming of its games and app-driven content through BAMTech, the digital media company spun off by Major League Baseball’s MLB Advanced Media. Just last year, The Walt Disney Co (DIS) stepped up to make a $1 billion investment in BAMTech, joining MLB and the National Hockey League as co-owners.

So while this Facebook/MLB story makes no mention of Disney and ESPN, it’s pretty clear from the tangled web of BAMTech ownership, that ESPN will either be somehow involved in the streaming of these live events on Facebook (possibly producing the broadcast and using ESPN announcers) or in the very least Disney will financially benefit from the deal given its ownership in BAMTech.

We’ll be watching to see if any such move develops.

  • We continue to rate FB shares a Buy with $155 price target.
  • We continue to rate AMZN shares a Buy and our price target remains $975
  • We continue to rate DIS shares a Buy with a $125 price target.

 

 

Adding this Missing Link Connected Society Stock to the Tematica Select List

Adding this Missing Link Connected Society Stock to the Tematica Select List

This morning we are adding shares of delivery and logistics company United Parcel Service (UPS) to the Tematica Select List with a price target of $122. We’ve often referenced UPS and its business as the missing link in the digital shopping aspect of our Connected Society investing theme. Year to date, UPS shares have fallen 6 percent, which we attribute in part to the seasonal slowdown in consumer spending. As we pointed out in our analysis of the January Retail Sales report last week, the shift toward digital commerce continues to accelerate and we see that a positive tailwind for UPS’s business and comments from UPS’s annual investor day held yesterday confirm our view.

As of last night’s market close UPS shares stood near $108, which when compared to our $122 price target offers 14 percent upside before we factor in the 3.1 percent dividend yield. Including the quarterly dividend of $0.83 per share into our thinking, we see 17 percent upside from current levels to our price target. As such we are adding UPS shares to the Tematica Select List with a Buy rating. Should the shares drift toward the $100 level, we are inclined to get more bullish on the shares given the business fundamentals as historical dividend yield valuation metrics.

 

A Look Ahead to 2018-19 for UPS

Yesterday, at its annual investor day United Parcel Service shared its 2018-2019 financial targets, expanded delivery and pick-up schedule, and continued buybacks. In reviewing those details, we continue to see the accelerating shift toward digital commerce at the expense of brick & mortar retail powering the company’s business. While most tend to focus on Amazon (AMZN) when we think of digital shopping, the reality is we see a far more widespread push toward it from the likes of Wal-Mart (WMT) as well as traditional retailers and consumer product companies. Wal-Mart, in particular, is shared on its earnings call yesterday that it would expand its online efforts to include grocery and called out both mobile and online as part of is efforts to “provide customers with a better offer.”

What all of this tells us is we have reached the tipping point for digital commerce, and like a tanker that is turning, once it hits the tipping point it tends to pick up speed. We see that in the coming quarters as retailers that lagged behind are now forced to invest to stay relevant with consumers.

In response to that accelerating shift, UPS is planning to expand its delivery and pickup schedule to six days for ground shipments, including Saturdays. In tandem, UPS will continue to invest in its logistics network, which signals it is preparing for the continued transformation in how consumers shop. That transformation is leading UPS to forecast revenue growth in the range of 4-6 percent over the 2018-2019 period, which means no slowdown in revenue growth from 2017 is expected. UPS also shared it intends to repurchase between $1-$1.8 billion in share repurchase during 2018-2019, which should allow it o grow EPS faster than revenue. UPS expects EPS during 2018-2019 to grow 5-10 percent, which is at the upper end of current expectations. As such, we expect to see Wall Street boosting price targets today and tomorrow up from the current consensus of $115 to something more inline with our $122 price target.

 

Embracing Technology of the Future

 

A drone demonstrates delivery capabilities from the top of a UPS truck during testing in Lithia, Florida, U.S. February 20, 2017. REUTERS/Scott Audette

UPS also shared it continues to test drone deliveries, including launching the drone from the top of a UPS van that is outfitted with a recharging station for the battery-powered drone. Granted this in testing, but in our view, the hub and spoke method of deploying drones from UPS trucks makes sense given that drones, especially those carrying packages, are like to operate for limited time frames due in part to battery power demands. In UPS’s tests, the battery-powered drone recharges while it’s docked. It has a 30-minute flight time and can carry a package weighing up to 10 pounds.

Again, we find this interesting, but odds are we will not see any pronounced impact on UPS’s delivery business for at least several quarters. Longer-term, initiatives such as these could spur further productivity and margin improvements.

 

The Bottomline on United Parcel Service (UPS)
  • We are adding shares of United Parcel Service (UPS) to the Tematica Select List with a price target of $122.
  • Should the shares drift toward the $100 level, we are inclined to get more bullish on the shares given the business fundamentals as historical dividend yield valuation metrics.

 

Many Reasons to be Bullish on This Semi-Cap Company

Many Reasons to be Bullish on This Semi-Cap Company

We are adding shares of Applied Materials (AMAT) to the Tematica Select List as the company’s business is poised to benefit from our Disruptive Technology investing theme over the coming 12-24 months. Applied Materials is a leading nano- manufacturing equipment, service, and software provider to the semiconductor, flat panel display (FPD), and solar industries. In short, it builds the capital equipment that is used to manufacture chips, display and solar panel components. Our price target of $47 offers upside of roughly 30 percent and equates to just over 17x expected 2018 earnings in the range of $2.75 per share. By comparison, consensus expectations call for AMAT to deliver EPS of $2.55-$2.60 this year, up from $1.75 in 2016. Our rating is a Buy up to $41-$42.

Why We’re Adding AMAT Shares to the Tematica Select List

It’s been a while since we’ve seen the TV ad touting cotton as the fabric of our lives. Over the last few years, as we’ve been migrating more and more into the digital society, we’ve thought the new fabric of our lives is chips. As we know from our devices, be it a laptop, smartphone, tablet, we are facing the need for more computing power, greater connectivity speeds and more connections into more things (cars, homes, and that Internet of Things thing).

There are also newer and in some cases disruptive technologies — like emissive display technology organic light emitting diodes (OLEDs), a technology that is catching fire in the smartphone market, TVs and wearables. In short, there is a pronounced increase in the for chips, which is also spurring a pickup in new semiconductor capital equipment. We know this given our existing position in Universal Display (OLED) shares.

Exiting December, North America-based manufacturers of semiconductor equipment posted $1.99 billion in orders worldwide and a book-to-bill ratio of 1.06, according to the December Equipment Market Data Subscription (EMDS) Book-to-Bill Report published by SEMI. December bookings rose more than 28 percent compared to November 2016 and were up nearly 48% on a year over year basis.

In the recently reported January quarter, Applied’s order book rose more than 85 percent year over year, as orders for its silicon and display businesses rose more than 85 percent and 200 percent, respectively. The silicon business is benefitting from strong 3D NAND demand, given significant power and performance advantages over other memory solutions, as well as silicon to power applications, 4K video, as well as compute-intensive applications like artificial intelligence and smart vehicles.

 

As part of the Internet of Things, we’re seeing sensors and communications being added to a variety of commercial and consumer products as well. These and other applications are, on a combined basis, driving robust demand for additional semiconductor capacity and that is fuel for Applied’s semiconductor business. We see this reflected in capital spending budgets at companies like Intel (INTC), which is boosting its 2017 budget by $2.5 billion year over year to $12 billion. Taiwan Semiconductor (TSM)‘s 2016 capital spending came in at $10.2 billion, ahead of the expected $9.5 billion, and the company is slated to spend another $10 billion in 2017.

The accelerating ramp in OLED display demand was the primary driver of that robust Display order activity, and Applied noted the demand has only strengthened over the last several months. “In the past few months, our view of display spending has strengthened further. We now see customers increasing their investments by around $3 billion in 2017, $1 billion more than we thought in November. Our early view of 2018 is also positive.” It added: “50% of our demand going forward for this year is new customers for the mobile OLED”, with orders improving across all of its mobile OLED customer base. We strongly suspect a significant factor in this ramping Display demand is Apple (AAPL) adopting OLED displays in its next iPhone iteration. Odds are that shift will push other smartphone vendors to adopt OLED display.

One overarching driver over the long term is ramping capacity for semiconductor capital equipment and display technologies in China as it consumes a growing number of devices. In total, wafer fabrication equipment (WFE) sales in China are expected to reach $7 billion in 2017, compared to $6.7 billion in 2016 and $3.4 billion in 2013, according to SEMI, with more significant spending likely in 2018. With easier export controls in China compared to several years ago, companies like Applied can now ship more advanced tools into the country.

Against such a rosy outlook, we’d note semiconductor capital equipment demand tends to be dependent on the health of the economically sensitive semiconductor and consumer electronics industries. This means that we will continue to keep our eyes tuned not only to chip demand and fabrication utilization levels, but also the underlying economic tone of the global economy.

Valuation and Price Target

Our $47 price target equates to 17-18x expected 2017-2018 EPS, which we’d note is a discount to 52-week high price multiples in the range of 21-22x earnings that were accorded to AMAT shares during 2015 and 2016. On the downside, AMAT shares have bottomed out at roughly an average P/E multiple of 12x over the last few years. Applying that multiple to slated 2017-2018 earnings points to downside near $30-$32, and those are levels near which we’d look to scale into our position on share price weakness, as along as the current outlook remains intact.

 

The Bottom Line on Applied Materials (AMAT)
  • We are adding shares of Applied Materials (AMAT) to the Tematica Select List.
  • Our price target of $47 offers upside of roughly 30 percent.
  • Our rating is a Buy up to $41-$42.

 

January Retail Sales – Department Store Pain vs. E-tailing Gains

January Retail Sales – Department Store Pain vs. E-tailing Gains

Earlier today the Census Bureau published its report on January Retail Sales, which topped expectations with a print of +0.4 percent vs. the expected 0.1 percent. Stripping out January Auto sales and food services, Retail sales +0.2 percent month over month. To us, the more telling figure was the 5.1 percent year over year increase in Retail only sales that was fueled by the 14.5 percent increase in Nonstore retailers, the +13.9 percent increase in gasoline station sales as well as strong showings from the Health & Personal Care stores categories and Building Material & Garden stores. Lackluster categories remained General Merchandise and Department Stores as well as Furniture and Electronics & Appliance stores.

 

Donning our thematic hats and looking at the January report, we find continued support for the accelerating shift toward digital commerce that sits at the core of our Connected Society investing theme and benefits companies like Amazon (AMZN) and Alphabet (GOOGL), both of which are on the Tematica Select List, and eBay as well as delivery companies such as United Parcel Service (UPS). To us there is no more telling statistic for that than the year over year comparison between Nov. 2015 – Jan. 2016 and Nov. 2016 – Jan. 2017. when Nonstore retail sales rose 12.7 percent vs. 4.6 percent for overall retail sales. Talk about a share gain!

We see the strong showing by Health & Personal Care stores as rather confirming for our Aging of the Population investment theme, while the continued pain felt at department stores comes as little surprise given the post-holiday shopping comments we’ve heard from Macy’s (M), Kohl’s (KSS), JC Penney (JCP) and others, which includes a number of location closures. That loss of anchor tenants alongside announced store closings ranging from The Limited to Wet Seal and others only supports our Death of the Mall view that poses a significant headwind to mall real-estate investor trust companies like Simon Property Group (SPG), Westfield Corp. (WFGPY) and Taubman Centers (TCO).

  • We continue to rate AMZN shares a Buy with a price target of $975
  • We continue to rate GOOGL shares a Buy with a $900 price target
January Retail Sales – Department Store Pain vs. E-tailing Gains

January Retail Sales – Department Store Pain vs. E-tailing Gains

Earlier today the Census Bureau published its report on January Retail Sales, which topped expectations with a print of +0.4 percent vs. the expected 0.1 percent. Stripping out January Auto sales and food services, Retail sales +0.2 percent month over month. To us, the more telling figure was the 5.1 percent year over year increase in Retail only sales that was fueled by the 14.5 percent increase in Nonstore retailers, the +13.9 percent increase in gasoline station sales as well as strong showings from the Health & Personal Care stores categories and Building Material & Garden stores. Lackluster categories remained General Merchandise and Department Stores as well as Furniture and Electronics & Appliance stores.

Donning our thematic hats and looking at the January report, we find continued support for the accelerating shift toward digital commerce that sits at the core of our Connected Society investing theme and benefits companies like Amazon (AMZN), a Tematica Select List holding, and eBay as well as delivery companies such as United Parcel Service (UPS). To us there is no more telling statistic for that than the year over year comparison between Nov. 2015 – Jan. 2016 and Nov. 2016 – Jan. 2017. when Nonstore retail sales rose 12.7 percent vs. 4.6 percent for overall retail sales. Talk about a share gain!

We see the strong showing by Health & Personal Care stores as rather confirming for our Aging of the Population investment theme, while the continued pain felt at department stores comes as little surprise given the post-holiday shopping comments we’ve heard from Macy’s (M), Kohl’s (KSS), JC Penney (JCP) and others, which includes a number of location closures. That loss of anchor tenants alongside announced store closings ranging from The Limited to Wet Seal and others only supports our Death of the Mall view that poses a significant headwind to mall real-estate investor trust companies like Simon Property Group (SPG), Westfield Corp. (WFGPY) and Taubman Centers (TCO).