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WEEKLY ISSUE: Is Inflation Rearing Its Ugly Head or Not?

WEEKLY ISSUE: Is Inflation Rearing Its Ugly Head or Not?

Today is the day that we here at Tematica, and other investors as well, have been waiting for to make some semblance of the recent stock market volatility. Earlier this morning we received the January Consumer Price Index (CPI), one of the closely watched measures of that now dirty word – inflation. As a quick reminder, the market swings over the last two weeks were ignited by the headline wage data in the January Employment Report, as well as other signs, such as rising freight costs that led us to add shares of Paccar (PCAR) to the Tematica Investing Select List earlier this week. This topic of resetting inflation expectations and what it may mean for the Fed and interest rates has been a topic of conversation on recent Cocktail Investing Podcast between Tematica’s Chief Macro Strategist Lenore Hawkins and myself.

 

What the January CPI Report Showed and Its Impact on AMZN, COST and UPS

The headline figures from the January CPI report showed the CPI rose 0.5% month over month in January, which equates to a 2.1% increase year over year. Keeping in sync with the headline figure, which includes all categories, the consensus expectation was for a 0.3% month over month increase. The driver of the hotter than expected headline print was the energy index rose, which climbed 3.0% in January, and we’ve witnessed this first hand in the gasoline price jump of late. Excluding the volatile food and energy components, the “core” CPI index was up 0.3% month over month in January, coming in a bit ahead of the expected 0.2% increase. On a year over year basis, that core figure rose 1.8%, which is in keeping with the 1.7%-1.8% over the last eight months. Month over month gas and fuel prices were up 5.7% and 9.5%, respectively.

Late yesterday, the American Petroleum Institute released data showing a 3.9 million barrel increase in crude stockpiles for the week ended Feb. 9, along with a 4.6 million barrel rise in gasoline stocks and a 1.1 million barrel build in distillates. With crude inventories once again on the rise as US oil production has risen in response to the recent surge in oil prices from September to late January, we’ve seen oil prices retreat to December levels and odds there is more relief to come.

As we wait for others, who if you’ve seen the whipsaw in stock market futures today are simply reacting to the January headline CPI figure, to get some clearer heads about themselves and digest the internals of the report, I’ll share our thoughts on the January Retail Sales report that was also published this morning.

Staring with the headline figure, January Retail Sales came in at -0.3% month over month, falling short of the 0.2% consensus forecast. Excluding auto and food, January core retail sales fell 0.3% month over month; on a year over year basis, retail sales rose 3.9% with nonstore sales leading the way (up 10.2%) followed by gas stations sales (up 9.0% year over year), which is of little surprise given our January CPI conversation above. We do see that nonstore figure as further confirmation for not only our Amazon (AMZN) and United Parcel Service (UPS) shares, but also our Costco Wholesale (COST) ones as it continues to embrace our Connected Society theme.

  • Our price target on Amazon (AMZN) shares remains $1,750
  • Our price target on Costco Wholesale (COST) shares remains $200
  • See my comments below for my latest thoughts on UPS shares

 

Market’s Knee-Jerk Reaction to January Retail Sales Offered Opportunity in PCAR, Not BGFV

Despite the 3.9% year over year January Retail Sales print, the market is focusing on the month over month drop, which was one of the weakest prints in some time. Here’s the thing, we here at Tematica have been talking about the escalating level of debt that consumers have been taking on as a headwind to consumer spending and despite the post-holiday sales, consumers tend to ramp spending down after the holidays. Odds are these two factors led to that month over month decline, but even so up 3.9% year over year is good EXCEPT for the fact that gas station sales are bound to fall as gas prices decline.

If we look at these two reports, my take on it is a skittish stock market is once again knee-jerk reacting to the headline figures rather than understanding what is really going on. The initial reaction saw Dow stock market futures fall from +150 to -225 or so before rebounding to -125. As data digestion occurs, odds are concerns stoked by the initial reactions will fade as well

With market anxiety still running higher compared to this time last year or even just six months ago, I expect the market to cue off the major economic data points to be had in the coming weeks building to the Fed’s next FOMC meeting on March 20-21. As I pointed out on this week’s podcast, at that meeting we’ll get the Fed’s updated economic forecast and I expect that will have chins wagging over the prospects of three or four rate hikes to be had in 2018.

In the meantime, I’ll continue to look for opportunities like I saw with Paccar (PCAR) shares on Monday, and avoid pitfalls like the one I mentioned yesterday with Big Five Sporting Goods (BGFV). And for those wondering, per the January Retail Sales Report, sporting goods sales 7.1% in January. Ouch! And yes, I always love it when the data confirms my thesis.

  • Our price target on Paccar (PCAR) shares remains $85

 

Waiting on Applied Materials Earnings Announcement

After today’s market close, Applied Materials (AMAT) will share its latest quarterly results, and update its outlook. As crucial as those figures are, in recent weeks we’ve heard positive things from semi-cap competitors, which strongly suggests Applied should deliver yet another good quarter and a solid outlook. Buried inside those comments, we’ll get a better sense as to the vector and velocity for its products, both for chips as well as display equipment.

Those comments on the display business will also serve as an update for the currently capacity constrained organic light emitting diode market, one that we watch closely given the position in Universal Display (OLED) shares on the Tematica Investing Select List. I see this morning’s announcement by Universal that it successfully extended its agreement with Samsung though year-end 2022 with an optional 2-year extension as reminding investors of Universal’s position in the rapidly growing technology. With adoption poised to expand dramatically in 2018, 2019 and 2020, I continue to see OLED shares as a core Disruptive Technologies investment theme holding.

  • Our price target on Applied Materials (AMAT) shares remains $70
  • Our price target on Universal Display (OLED) shares remains $225

 

 

Should We Be Concerned About UPS Amid Amazon Announcement?

Several paragraphs above I mentioned United Parcel Service (UPS) shares, and as one might expect the headline reception to the January Retail Sales Report has them coming under further pressure this morning. That adds to the recent news that our own Amazon (AMZN) would be stepping up its business to business logistics offering and competing with both UPS and FedEx (FDX). Of course, this will take time to unfold, but these days the market shoots first and asks questions later. At the same time, we are entering into a seasonally slower time of year for UPS, and while yes consumers will continue to shift toward digital shopping as we saw in today’s retail sales report, the seasonal leverage to be had from the year-end holidays is now over.

 

 

While it may sound like we are getting ready to give UPS shares the ol’ heave ho’, along with the February market gyrations, it’s been a quick ride to the $106 level from $130 for UPS shares, and this has placed them into the oversold category. From a share price perspective, the shares are back to levels last seen BEFORE both the 2017 Back to School and year-end holiday shopping seasons. With prospects for digital shopping to account for an even greater portion of consumer wallets in 2018 and 2019 vs. 2017, we’re going to be patient with UPS shares in the coming months as we wait for the next seasonal shopping surge to hit.

  • Our long-term price target on UPS shares remains $130.

 

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

 

 

It’s Wednesday, February 7, and the stock market is coming off one of its wild rides it has seen in the last few days. I shared my thoughts on the what’s and why’s behind that yesterday with subscribers as well as with Charles Payne, the host of Making Money with Charles Payne on Fox Business – if you missed that, you can watch it here.

As investors digest the realization the Fed could boost interest rates more than it has telegraphed – something very different than we’ve experienced in the last several years – the domestic stock market appears to be finding its footing as gains over the last few days are being recouped. Lending a helping hand is the corporate bond market, which, in contrast to the turbulent moves of late in the domestic stock market, signals that credit investors remain comfortable with corporate credit fundamentals, the outlook for earnings and the ability for companies to absorb higher interest rates.

My perspective is this expectation reset for domestic stocks follows a rapid ascent over the last few months, and it’s removed some of the froth from the market as valuations levels have drifted back to earth from the rare air they recently inhabited.

 

Among Opportunity This New Market Dynamic Brings, There Have Been Casualties

While this offers some new opportunities for both new positions on the Tematica Investing Select List as well as the opportunity to scale into some positions at better prices once the sharp swings in stocks have abated some, it also means there have been some casualties.

We were stopped out of our shares in Cashless Consumption investment theme company, USA Technologies (USAT) when our $7.50 stop loss was triggered yesterday. While the shares snapped back along with the market rally yesterday, we were none the less stopped out, with the overall position returning more than 65% since we added them to the Select List last April. For those keeping track, that compares to the 15.3% return in the S&P 500 at the same time so, yeah, we’re not exactly broken up over things. We will put USAT shares on the Tematica Contender List and look to revisit them after the company reports earnings tomorrow (Thursday, Feb. 8).

That’s the second Select List position to have been stopped out in the last several days. The other was AXT Inc. (AXTI) last week, and as a reminder that position returned almost 27% vs. a 15% move in the S&P 500. Again, not too shabby!

The last week has brought a meaningful dip in shares of Costco Wholesale (COST). On recent episodes of our Cocktail Investing Podcast, Tematica Chief Macro Strategist Lenore Hawkins and I have discussed the lack of pronounced wage gains for nonsupervisory workers (82% of the US workforce) paired with rising credit card and other debt. That combination likely means we haven’t seen the last of the Cash-Strapped Consumer investment theme — of the key thematic tailwinds we see behind Costco’s business. While COST shares are still up more than 15% since being added to the Select List, we see the recent 5% drop in the shares as an opportunity for those who remained on the sidelines before the company reports its quarterly earnings in early March.

  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Remaining Patient on AMAT, OLED and AAPL

Two other names on the Tematica Investing Select List have fallen hard of late, in part due to the market’s gyrations, but also over lingering Apple (AAPL) and other smartphone-related concerns. We are referring to Disruptive Technologies investment theme companies Applied Materials (AMAT) and Universal Display (OLED). As we shared last week, it increasingly looks that Apple’s smartphone volumes, especially for the higher priced, higher margin iPhone X won’t be cut as hard as had been rumored. Moreover, current chatter suggests Apple will once again introduce three new iPhone models this year, two of which are slated to utilize organic light emitting diode displays.

Odds are iPhone projections will take time to move from chatter to belief to fact. In the meantime, we are seeing other smartphone vendors adopt organic light emitting diode displays, and as we saw at CES 201 TV adoption is going into full swing this year. That ramping demand also bodes for Applied Materials (AMAT), which is also benefitting from capital spending plans in China and elsewhere as chip manufacturers contend with rising demand across a growing array of connected devices and data centers.

  • Our price target on Apple (AAPL) remains $200
  • Our price target on Universal Display (OLED) remains $225
  • Our price target on Applied Materials (AMAT) remains $70

 

The 5G Network Buildout is Gaining Momentum – Good News for NOK and DY

This past week beleaguered mobile carrier, Sprint (S), threw its hat into the 5G network ring announcing that it will join AT&T (T), Verizon (VZ), and T-Mobile USA (TMUS) in launching a commercial 5G network in 2019. That was news was a solid boost to our Nokia (NOK) shares, which rose 15% last week. The company remains poised to see a pick-up in infrastructure demand as well as IP licensing for 5G technology, and I’ll continue to watch network launch details as well as commentary from Contender List resident Dycom Industries (DY), whose business focuses on the actual construction of such networks.

Several months ago, I shared that we tend to see a pack mentality with the mobile carriers and new technologies – once one makes a move, the others tend to follow rather than risk a customer base that thinks they are behind the curve. In today’s increasingly Connected Society that chews increasingly on data and streaming services, that thought can be a deathblow to a company’s customer count.

  • Our price target on Nokia (NOK) shares remains $8.50
  • I continue to evaluate upgrading Dycom (DY) shares to the Select List, but I am inclined to wait until we pass the winter season given the impact of weather on the company’s construction business.

 

Disney Offers Some Hope for Its ESPN Unit

Last night Disney (DIS) announced its December quarter results while the overall tone was positive, the stand out item to me was the announcement of the new ESPN streaming service being introduced in the next few months that has a price tag of $4.99 a month. For that, ESPN+ customers will get “thousands” of live events, including pro baseball, hockey and soccer, as well as tennis, boxing, golf and college sports not available on ESPN’s traditional TV networks. Alongside the service, Disney will unveil a new, streamlined version of the ESPN app, which is slated to include greater levels of customization.

In my view, all of this lays the groundwork for Disney’s eventual launch of its own Disney streaming content service in 2019, but it also looks to change the conversation around ESPN proper, a business that continues to lose subscribers. Not surprising, given that Comcast (CMCA) continues to report cable TV subscriber defections. One of the key components to watch will be the shake-out of the rights to stream live games from the major professional leagues — the NFL, Major League Baseball, the NBA. Currently, ESPN is on the hook for about $4 billion a year in rights fees to those three leagues alone — not to mention the rights fees committed to college athletics. Those deals, however, include only the rights to broadcast those games on cable networks or on the ESPN app to customers that can prove they have a cable subscription, not cord-cutters. So the question will be how quick will customers jump on board to pay $5 a month for lower-level games, or will they be able to cut deals with the major professional sports leagues to include some of their games as well.

Nevertheless, I continue to see all of these developments as Disney moving its content business in step with our Connected Society investing theme, which should be an additive element to the Content is King investment theme tailwind Disney continues to ride. With that in mind, we are seeing rave reviews for the next Marvel movie – The Black Panther – that will be released on Feb. 16. The company’s more robust 2018 movie slate kicks off in earnest a few months later.

  • We will continue to be patient investors with Disney, and our price target on the shares remains $125

 

 

 

WEEKLY ISSUE: CES 2018 Delivers for the Tematica Investing Select List

WEEKLY ISSUE: CES 2018 Delivers for the Tematica Investing Select List

Welcome to this week’s issue of Tematica Investing, where we leverage our proprietary thematic lens to invest in well-positioned companies when it comes to our investment themes.

Over the last week, we’ve seen one of the best starts to a new trading year in some time, and the Tematica Investing Select List has been benefitted from not only that start but news being made at the currently occurring annual technology tradeshow better known as CES 2018. I’ll recap some of the meaningful announcements below in a minute, but the impact of those results have moved our positions in Universal Display (OLED), Applied Materials (AMAT), Nokia (NOK) and AXT Inc. (AXTI) higher over the last week.

These moves and the causes behind them have me once again revisiting my price targets on OLED and AMAT shares to the upside. Confirming data will likely be had in the coming days as 4Q 2017 earnings begin in earnest next Tuesday. As I discussed in this week’s Monday Morning Kickoff, the likely scenario is we see U.S. listed companies offer an upbeat outlook and use the benefit to be had from tax reform to boost 2018 EPS expectations. On an annual basis, those tax reform related benefits should more than outweigh the cold snap weather and winter storm Grayson disruptions that we have likely encountered with restaurant, retail and construction companies. This means that at least in the near-term investors will need to be choosey, hwoever, the net effect should see the stock market melt higher, especially if more Wall Street strategists boost their price targets for the S&P 500, the proxy for the overall U.S. stock market. I expect this to be the likely scenario.

My perspective that I laid our in this week’s Monday Morning Kickoff remains – I continue to suspect expectations could be getting ahead of themselves given the recent climb in consumer debt levels and continued growth in the lack of qualified workers that could hamstring business investment in the coming months despite lower taxes. The strategy that we’ll follow near term is to listen to the data and look for opportunities – companies at prices that offer a skewed risk-to-reward proposition that is in our favor. It has been that discipline married with Tematica’s thematic lens that has steered us clear of such 2017 disasters as GoPro (GPRO) and Blue Apron (APRN).

 

Watching the Fed minutes this afternoon

Later today, we will receive the next iteration of the Fed’s FOMC meeting minutes. While we know the policy impact from the December meeting, I’ll be interested in seeing more on to what degree the Fed factored in tax reform into its GDP forecasts, and what it sees as some of the swing factors to watch.

 

A first pass from CES 2018

While CES 2018, the annual technology trade show held in Las Vegas that features more than 4,000 exhibitors, officially got underway yesterday, we’ve received a number of announcements in the last few days that have sent tech shares in general, and several of our holdings, higher.

Starting with TVs, which are one of the more high-profile items to kick off the annual gathering, we are starting to see artificial intelligence (AI) embedded into these devices. For example, is adding both Alphabet’s (GOOGL) Google Assistant and Amazon’s (AMZN) Alexa to its latest 4K OLED and Super UHD LCD TV lineup. But TVs aren’t the only things that will embed AI in the coming year – yesterday it was announced by Moen that its cloud-based, Wi-Fi enabled shower system “U by Moen” will add support for Apple’s Siri and Amazon’s Alexa AI assistants in the first half of 2018.

Outside of Moen, both Kohler and Whirlpool (WHR) are also bringing voice activation capabilities to their smart kitchen, bath and appliance products. No stranger to voice assistants in its products, Whirlpool is going one step further as the appliances it is debuting at CES this year can be controlled using Alexa or Google Assistant. Per Whirlpool, its offering includes “dishwashers that can be set and started remotely by voice, refrigerators that homeowners can change temperature settings on using a voice assistant, and washing machines that let the user check with Alexa to see how much time is left on a cycle.”

We’re also seeing connectivity make its way into toothbrushes courtesy of Colgate’s (CL) Smart Electronic Toothbrush uses Apple ResearchKit with the user’s permission to crowdsource toothbrushing data so the company can “anticipate the future of oral care.”

This is a first pass at the CES news flow and I’ll have more over the coming days, so be sure to check back at TematicaInvesting.com for those thoughts.

Stepping back we find the rising number of connected devices – be they through voice assistants, smartphones or other – driving incremental demand for RF semiconductors. This, in turn, bodes very well for incremental substrate demand for AXT’s (AXTI), the basic building block for RF semiconductors from the likes of Skyworks Solutions (SWKS), Qorvo (QRVO) and others.

That is poised to drive semiconductor manufacturing utilization rates higher and bodes well for incremental orders at semi-cap company Applied Materials (AMAT), which is also benefitting from the ramp in organic light emitting diode display demand I noted above. With AMAT shares trading at just 13.5x on expected 2018 earnings, I’m once again reviewing my $65 price target with an upward bias.

I also see Amazon making a significant “land grab” with its Alexa voice assistant, which, in our view, bodes very well for continued growth in Amazon’s Prime membership and the company capturing consumer wallet share.

  • We continue to rate AXT Inc. (AXTI) shares a Buy at current levels and our price target remains $11.
  • We continue to rate Applied Materials (AMAT) shares a Buy at current levels and our price target remains $65.
  • We continue to have a Buy on Amazon (AMZN) shares, and our price target remains $1,400.

 

 

Weekly Issue: More trimming and more gains, this time with AXTI shares

Weekly Issue: More trimming and more gains, this time with AXTI shares

KEY POINTS WITH THIS ALERT

  • We are trimming back our position in AXT Inc. (AXTI), which closed last night more than 60% above our mid-June entry point. we are selling one-third of the position, which lets us book some fantastic gains, but also leaves ample exposure on the Tematica Investing Select List. As we make this trade we’re also adding a stop loss at on AXTI at $8.25, which ensures a minimum return near 27% on the remaining shares.
  • Prepping for the official start of the 2017 holiday shopping season
  • Waiting on Tax reform and what it may mean for small-cap cap stocks
  • Applied Materials (AMAT) offers bullish outlook on Mad Money

Note: We’re bringing the weekly Tematica Investing issue to you a day earlier than usual given the likelihood that a significant number of subscribers will, like many, many other folks, be traveling tomorrow ahead of the Thanksgiving holiday. Usually, the day before and after Thanksgiving see lower than usual trading volumes as investors and traders look to turn the holiday into an unofficial four day weekend. As we digest our turkey, trimmings and that extra piece of pie, Team Tematica will be analyzing the Black Friday data, reporting our findings on Monday.  

From all of us here at Team Tematica, we wish you and yours a very Happy Thanksgiving! And if you see Tematica’s Chief Macro Strategist Lenore Hawkins on Fox Business this Friday remember that pickles and pecan pie do not mix well together on Thanksgiving.

 

More trimming and more gains, this time with AXTI shares

Over the last week, we’ve done some trimming and pruning to the Tematica Investing Select List, shedding shares in USA Technologies (USAT) and Universal Display (OLED), while offsetting those gains by exiting Nuance Communications (NUAN), Teucrium Corn Fund (CORN) and ProShares Short S&P 500 ETF (SH) shares. You can see the details here  in case you missed it.

Today we are back at the trimming again, but this time with Disruptive Technologies company AXT Inc. (AXTI) following yesterday’s 12% gain in the shares, which closed just 5% below our $11 price target. That rapid move brought the positon’s return to more than 60% as of last night’s close since we added the shares to the portfolio in mid-June.

Do we see additional upside in the shares as 5G mobile networks are deployed and high-speed broadband deployments in data centers, wireless backhaul, and other applications grow in the coming quarters? We sure do, but we also are prudent investors. As such, we are trimming the AXTI position back, which returns a hefty slug of the capital deployed from when we originally added the shares, while keeping ample exposure to capture additional upside in the coming quarters.

In short, while we are making a prudent move today, we’re going to let this winner run given the favorable fundamentals, and over the coming days, we’ll look to crunch the numbers to determine additional upside to be had from current levels.

  • We are trimming back our position in AXT Inc. (AXTI), which closed last night more than 60% above our mid-June entry point.
  • We are selling one-third of the position, which lets us book some fantastic gains, but also leaves ample exposure on the Tematica Investing Select List.
  • Our $11 price target is under review.
  • As we make this trade we’re also adding a stop loss at on AXTI at $8.25, which ensures a minimum return near 27% on the remaining shares.

 

Prepping for the official start of the 2017 holiday shopping season

As I noted above, later this week as Thanksgiving 2017 fades we’ll see the 2017 holiday shopping season heat up. Several weeks ago, I shared several forecasts all of which call for 2017 holiday shopping to rise 3.5% to 4.5%, with digital commerce sales poised to grow multiples faster, leading companies such as Amazon (AMZN) and United Parcel Service (UPS) to win consumer wallet share.

As this shopping shift is occurring, we are also seeing Amazon build its own private- label offerings across a growing number of categories, including sportswear, electronics, and accessories to kitchenware. This is placing additional pressure on bricks-and-mortar names such as J.C. Penney (JCP) and Sears (SHLD) — the shares in those two companies are down 55%-60% year to date. There, of course, is more than enough reason to think there will be even more pain on the way as traditional retail businesses are pumping up the use of discounts to win business, which should further pressure margins.

In a survey conducted by the Berkley Research Group of more than 100 high-level retail executives in October, 64% of the respondents said they expected promotions to play a more significant role in overall sales during the 2017 holidays. What this tells me is there is more trouble ahead for retail as these companies sacrifice profits to win revenue — not exactly a sustainable business model and one that tends to lead to declining earnings per share.

I’ll be back early next week to share my observations on the weekend holiday shopping activity as well as Cyber Monday, and what it all means for positions on the Tematica Investing Select List.

  • Our price target on Amazon (AMZN) shares remains $1,250
  • Our price target on United Parcel Service (UPS) is $130.

 

Waiting on Tax reform and what it may mean for small-cap stocks

Last Friday, Treasury Secretary Steven Mnuchin told CNBC that he expects a GOP tax cut bill to be sent to President Donald Trump to sign by Christmas. As I shared last week, there are several differences between the tax bill passed by the House late last week and the proposed one by the Senate. With both the House and Senate not in session this week, I don’t expect much movement on tax reform, but that means there are four weeks for the House and Senate to put forth a bill together to reach the president’s desk in time for Christmas. While I’m hopeful, the reality is the next few weeks will tell us how probable this is.

As we’ve seen over the last few weeks, small-cap stocks are likely to ebb and flow over the next few weeks based on the meat of tax reform and whether it will be passed for 2018 or not until 2019. On the Tematica Investing Select List we primarily have large-cap stocks, which are defined as companies with a market capitalization value of more than $10 billion, and two mid-cap stocks in the form of Universal Display (OLED) and Trade Desk (TTD) shares. We do, however, have three small-cap stocks – USA Technologies (USAT), AXT Inc. (AXTI) and LSI Industries (LSI), which means Team Tematica will be on the case as it pertains to tax reform over the next few weeks.

 

Applied Materials (AMAT) offers bullish outlook on Mad Money

Last Friday, Applied Materials (AMAT) President and CEO Gary Dickerson appeared on CNBC’s Mad Money and discussed several aspects of our Connected Society and Disruptive Technologies investing themes and how they are powering the company’s semiconductor capital equipment business. Dickerson also role in artificial intelligence and big data.

https://www.cnbc.com/video/2017/11/17/amat-ceo-the-future-of-competition-changing-fueling-our-business.html?play=1

I see Dickerson’s comments echoing our multi-faceted and multi-year thesis on Applied shares. The next proof point to watch for ramping organic light emitting diode display demand will be the next iteration the global consumer electronics and consumer technology tradeshow that is CES 2018, which runs from January 8-12, 2018. In the coming weeks, we’ll begin to hear more about the various consumer electronic items that will be previewed and debuted at the show, and we expect a smattering of organic light emitting diode display TVs. Already we’re hearing LG will launch a full line up of OLED TVs in 2018, and that OLED TVs are expected to see a meaningful price reduction, which could foster greater consumer adoption. I see both as positives for not only AMAT shares but also Universal Display (OLED) shares.

  • Our price target on Applied Materials (AMAT) shares is $70
  • Our price target on Universal Display (OLED) shares is $225

 

Last week’s Cocktail Investing podcast –
The Rise in our Rise & Fall of the Middle Class investing theme

If you missed last week’s podcast — and shame on you if you did — Lenore Hawkins and I did a deep dive on what’s driving the Rise in our Rise & Fall of the Middle Class investing theme. From sharing why this is happening to what the implications are, we tackle it all. In an upcoming podcast, we’ll be giving the same treatment to the Falling Middle Class in this investing theme, but my advice is listening to last week’s will offer not only some great context, but you’ll also learn why to this day Lenore shuns pecan pie. Download it now for some great entertainment during your holiday travels.

Boosting OLED and AMAT price targets after AMAT’s latest beat and raise quarter

Boosting OLED and AMAT price targets after AMAT’s latest beat and raise quarter

 

KEY POINTS FROM THIS ALERT:

  • Last night Applied Materials (AMAT) delivered another beat and raised its quarterly outlook due to strength across the board in its semi-cap and display equipment businesses.
  • Based on the strength of Applied’s chips and display business, we are once again boosting our price target on AMAT shares, this time to $70 from $65. We continue to rate AMAT shares a Buy at current levels.
  • We are also boosting our Universal Display (OLED) price target to $225 from $200, which keeps our Buy rating intact.

 

After the market close, Applied Materials (AMAT) reported stronger than expected October quarter EPS and raised its outlook for the current quarter relative to consensus expectations. Powering that boosted outlook is the company’s backlog, which now spans $6.03 billion, up 32% year over year, with increases in semiconductor systems, display, and other businesses. Reviewing the company’s results and its drivers — which include the rising demand for chips as our Connected Society and Disruptive Technologies investing themes continue to expand as well as robust demand for organic light emitting diodes displays — we are boosting our price target on AMAT shares to $70 from $65.

In my view, Applied’s CEO summed up what is driving its business rather well on the earnings conference call last night:

“In the annual war for leadership in the smartphone market, handset manufacturers are adding more and more functionality to their devices. IoT applications are expanding rapidly and data generation is exploding. Major inflections are taking place in the data center, and there’s an emerging battle for leadership in high-performance computing and artificial intelligence. And there is huge demand for new display technology, while at the same time, average screen sizes for both TVs and mobile devices are growing considerably.”

  • Based on the strength of Applied’s chips and Display business, we are once again boosting our price target, this time to $70 from $65.
  • We continue to rate AMAT shares a Buy at current levels.

 

 

The October Quarter and AMAT’s Outlook

For the October quarter, Applied delivered EPS of $0.93 excluding non-recurring items on revenue of $3.97 billion, up 41% and 20% year over year, respectively. Sales improvements were had at all three of the company’s business units – Semiconductor Systems (up 14% year over year), Display (up 50% year over year), and Applied Global Services (up 20% year over year). Profit margins rose nicely at the Semiconductor Systems business, but it was the jump in margins at the Display business to 31.8% from 22.8% in the year-ago quarter that led the company’s overall margins to move higher.

On the housekeeping front, during the quarter Applied spent $385 million to repurchase 8 million shares of common stock at an average price of $48.65. Given the health of its business units, Applied should continue to generate ample cash following the $3.6 billion it generated over the last 12 months (roughly 25% of revenue), the company continues to look at returning capital to shareholders. Applied has a track record of boosting its dividend, but on the earnings call, last night shared that as we get clarity on tax policy it will revisit its mix of share repurchases vs. dividend increases. I see that as a rather prudent move, but either way, it means more capital being returned to shareholders, which is not a bad thing at all in my view.

Based on the strength of its markets and its backlog, Applied’s view is it will earn EPS of $0.94-$1.02 on revenue between $4.0-$4.2 billion in the current quarter. That makes the October quarter another “beat and raise” one for the company given current quarter expectations for EPS of $0.91 on $3.97 billion in revenue. I expect AMAT shares will trade up on this news, and with the underlying drivers pointing to a continued upcycle for chips and display, I expect a number of price target hikes to be had in the coming days. Team Tematica will continue to monitor the demand drivers for Applied’s business to determine if the company’s beat and raise track record is likely to continue in 2018. Based on what we’ve seen so far, we are inclined to think that is more likely than not.

 

Boosting our Universal Display Price Target

On the earnings call last night Applied Materials also shared that it now sees demand for its Display business even stronger than it last forecast, which called for 30% growth year over year. What I found more compelling, however, was that based on the investments being made in the display industry today Applied sees roughly half — 50% — of all smartphone screens being organic light emitting diode displays by 2020. That is far stronger than the IHS forecast that called for organic light emitting diode displays to account for 40% of all smartphone screens by 2022.

With the outlook for this display technology expanding more rapidly than expected in smartphones, plus ramping in the use of OLEDs in other markets (TVs, automotive lighting, general illumination), the outlook for Universal’s chemicals and high margin licensing business looks even brighter. This, in turn, has us once again boosting our Universal Display price target to $225 from $200.

  • We are boosting our Universal Display (OLED) price target to $225 from $200, which keeps our Buy rating intact.
SPECIAL ALERT: Some House Cleaning of the Tematica Select List

SPECIAL ALERT: Some House Cleaning of the Tematica Select List

 

KEY POINTS FROM THIS POST:

  • Adding to the Trade Desk (TTD) position and improving the cost basis along the way
  • Funding the TTD move by exiting Teucrium Corn Fund (CORN) shares
  • Boosting our International Flavors & Fragrances (IFF) price target
  • Upping our USA Technologies price (USAT) target as well
  • MGM Resorts (MGM) enters a seasonally slow period
  • What’s expected from Applied Materials (AMAT) on Thursday?

 

As we shared in today’s Monday Morning Kickoff, this week will see a downtick in the pace of corporate earnings. There are, however, still companies worth listening to beyond Applied Materials (AMAT) — the only Tematica Investing Select List company reporting this week. In addition to sharing what’s expected from Applied later this week, today we’re boosting our price targets on International Flavors & Fragrances (IFF) and USA Technologies (USAT) as well as scaling into recently added Trade Desk (TTD) shares, using the proceeds from closing out the position in Teucrium Corn Fund (CORN) shares. We’ve also got an update of MGM Resorts (MGM) following its quarterly earnings report last week.

 

Adding to the Trade Desk position and improving the cost basis along the way

As we shared on Friday, we are using the sharp pullback in Trade Desk (TTD) shares to add to our position on the Tematica Investing Select List, while improving our cost basis from just under $65. Our view is the 21% move lower in TTD shares last week was an extreme overreaction given the company’s current quarter guidance was less than 1% below consensus expectations. At the same time, we only see the shift to digital advertising accelerating as consumers flock to digital platforms from podcasts, like our own Cocktail Investing podcast to various social media and streaming platforms.

  • Adding to the Trade Desk (TTD) position
  • Our price target on Trade Desk (TTD) shares remains $80

 

Funding the TTD move by exiting Teucrium Corn Fund (CORN) shares

To help fund this doubling down in Trade Desk shares — and continuing the process of house cleaning as we prepare to exit 2017 — we are issuing a Sell on Scarce Resource play Teucrium Corn Fund (CORN) shares. Here’s why: last week in its November Crop Production and Supply/Demand Report, the US Department of Agriculture (USDA) shared U.S. corn production reached “175.4 bushels per acre vs. the trade’s expectations of 172.4 bushels per acre and the USDA’s October estimate of 171.8.”

This means despite rising international demand for corn, the ending stocks are much greater than expected a month ago, let alone several months ago, and that has this consumable resource being far less scarce than expected when we added the CORN shares to the Select List. We’ll move the shares down to the Contender List, but it won’t be until the spring 2018 planting season that we look to revisit CORN shares and even then, it will depend on the geopolitical environment for agriculture exports and demand.

While never an enjoyable moment to close a position, we see this as the right move at the right time as the 13% loss endured will offset short-term taxable gains booked earlier in the year when we closed positions in PowerShares NASDAQ Internet Portfolio ETF (PNQI), Costco Wholesale (COST), and more recently CalAmp Corp. (CAMP).

  • We are issuing a Sell on Teucrium Corn Fund (CORN) shares and placing them on the Tematica Investing Contender List.

 

Boosting our International Flavors & Fragrances price target

In last Wednesday’s Weekly Tematica Investing issue, as part of our review of International Flavor & Fragrances (IFF) September quarter earnings that handily beat expectations, I shared that my $150 price target was under review. I can now share that my new price target on the shares is $160, which is in line with the shares average dividend yield of 1.7% over the 2005-2016 period when applied to the current $0.69 quarterly dividend. On a price to earnings basis, my new price target is a modest premium to the 10-year average, but we see as warranted given the rising demand for organic flavoring solutions as well as the shifting preference for non-sugar flavoring that is forcing beverage companies, like PepsiCo (PEP) and Coca-Cola (KO) to reformulate their beverages.

  • Our new price target on International Flavors & Fragrances (IFF) shares is $160, which keeps our Hold rating intact.

 

Upping our USA Technologies price target as well

Last week USA Technologies (USAT) reported mixed September-quarter results, with earnings per share that beat expectations while revenue fell modestly short of Wall Street consensus. Also last week, USA shared it would acquire Cantaloupe Systems, a provider of cloud and mobile solutions for vending and office coffee services. At the same time, the company boosted its 2018 outlook. Factoring in Cantaloupe, USA now sees its 2018 revenue falling in the range of $127 million to $142 million, compared to the pre-earnings consensus of $123.8 million.

Given the lift in revenue, as well as favorable margins associated with Cantaloupe, we’re boosting our price target to $8.00 from $6.50, which offers around 13% potential upside from current levels. This keeps our Hold rating on USAT shares intact.

Getting back to the USA’s results, revenue rose 19%, year to year, to $25.6 million, marking its 32nd consecutive quarter of year-over-year revenue growth. We’d note that even before including Cantaloupe in the outlook for the coming quarters, USA’s base 2018 guidance means the company would have had to grow its revenue another 21% even after we annualized September-quarter revenue.

So, what gives us the confidence the company can continue to deliver on those growth metrics with its core business? Let’s look at some operating metrics from the September quarter:

  • Net new connections rose 37%, year over year, to 26,000, bringing total connection count to 594,000, of which approximately 500,000, or 84%, are a near-field communication (NFC) enabled.
  • USA’s customer base rose by 550 new customers in the quarter and was the highest new customer count it has achieved in two years, bringing the total number of customers on the ePort Connect service to 13,250. While it may be simple or obvious, the more customers on ePort Connect, the more potential transactions there are in vending and unattended retail.

On the earnings call, USA management shared several new developments that bode very well for continued ePort Connect growth in the coming quarters:

  • As part of its partnership with Canteen, the largest automated merchandising company in the United States, offering vending, micro-market, office coffee and dining services to a large network of corporate-owned and franchise locations, two Canteen franchisees will transition their business to 100% connectivity for cashless payments.
  • Premier Food Service, a leading food service provider in Kansas, will upgrade more than 1,400 locations to USA’s ePort Connect service and over 300 kiosks to its consumer engagement and loyalty program.
  • Berkshire Foods, a leading vending and food service company in Connecticut and New York, is widening its footprint with the addition of 1,000 new ePort Interactive and ePort G10-S units to its existing network of approximately 1,500 locations that use USA’s services.

With regard to Cantaloupe, we like the acquisition as it builds on the company’s service offering as well as helps expand its footprint even further. Cantaloupe is headquartered in San Francisco and has approximately 300,000 machines on its service with more than 1,300 operator customers in the U.S., Canada, Australia and South America. The acquisition is expected to close in short order, and as such, we expect more associated synergies to come to light in the coming weeks and months.

  • We are boosting our price target on USA Technologies (USAT) shares to $8.00 from $6.50.

 

MGM Resorts (MGM) enters a seasonally slow period

Last Wednesday, MGM Resorts (MGM) reported its September quarter results, which beat on revenue but missed by $0.02 per share on EPS. Despite that mixed result, due in part to the August typhoon in Macau, the management team echoed comments from Las Vegas Sands (LVS) that it is seeing Las Vegas return to normalized activity levels as the impact of the Oct. 1 shooting fades.

This prompted MGM to issue current quarter guidance for its Las Vegas business that is down low to mid-single digits, far better than many had feared, given the events early in the quarter and led our shares to climb more than 5% on Wednesday. With regard to Macau, activity in Asia’s tourist and leisure capital has also bounced back and MGM confirmed its second property in the region will open late this coming January.

Stepping back, the company shared more on how it responded to the October shooting explaining that, along with other casino operators, it shut down all marketing channels, bringing them back online on Oct. 10. Since then, the company has seen the historical patterns of October — typically the strongest month in the quarter and one of the stronger ones during the year — take hold.

As we move past this relief rally and digest the current guidance, the company’s prospects in the short term will be facing continued spending to revamp several of its properties, as well as open its next Macau property in January. This opening will keep the recent stream of new or updated properties flowing following the acquisition of the Borgata Hotel Casino and Spa in August 2016 and the MGM National Harbor opening in December 2016; we expect it to continue as MGM re-opens its Monte Carlo property as the Park MGM.

There will also be some impact of time shifts, with the Las Vegas convention season in the first quarter of 2018. The company has already booked 80% of its convention room nights for 2018, which is great given that roughly 60% of its business is corporate in nature. It has a robust entertainment calendar at all of its arenas (Mandalay Event Center, MGM Grand Garden or T-Mobile Park Theatre) that should bode well for its hotel, restaurant, and gaming operations.

What this means, at least over the next few months, is that we will have to be patient with MGM shares as spending is curtailed, allowing the company’s operating strategy to flow through to the bottom line. Helping soften the would-be blow, earlier this week the company’s board approved the next quarterly dividend of $0.11 per share that will be paid on Dec. 15. On the earnings call, management reiterated that they remain committed not only to the current dividend but to increase it over time.

Here’s what we’re going to do with MGM shares… Following last week’s 5% move higher in MGM shares, we have roughly 13% upside to our $37 price target, but as discussed above, we see some short-term headwinds that will likely keep the shares range bound. As we move into 2018, we’ll look to revisit our $37 price target provided the company’s investments in new and existing properties wanes, which should enhance the company’s earnings and cash generation.

  • Our price target on MGM Resorts (MGM) shares remains $37.

 

What’s expected from Applied Materials on Thursday?

On Thursday, after the market close, Applied Materials (AMAT) will be reporting its quarterly results. The results come on the heels comments made earlier in the current earnings season regarding growing chip demand due to the expanding roster of connected devices, artificial intelligence, gaming, data center expansion and China’s goal of building its own semiconductor capacity. We’ve also heard bullish display commentary from not only our own Universal Display (OLED), but also LG Display and Samsung as they increasingly focus on organic light-emitting diodes for smartphones, TVs and eventually other applications like automotive and general lighting.

Consensus expectations have Applied Materials achieving EPS of $0.91 on revenue of $3.94 billion for the quarter. We’ll also be reviewing the company’s backlog and book to bill metric for the quarter as we reassess our current $65 price target.

  • Heading into Applied Material’s (AMAT) earnings call on Thursday, our price target on the shares is $65.
  • Our price target on Universal Display (OLED) shares remains $200.

 

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

A few days ago in the Monday Morning Kickoff, I cautioned that over the coming days we would see a profound increase in data in the form of economic data and earnings. We are seeing just that as we head into the eye of the earnings storm today and tomorrow. For the Tematica Investing Select List that means results will be had from Connected Society company Facebook after today’s market close, followed tomorrow by Disruptive Technologies company Universal Display (OLED) and the latest addition – Apple (AAPL). Yes, after patiently keeping our eyes on Apple for some time, we finally added the shares back to the Select List given what we see as a robust 2018 for the company. If you missed our deep thoughts on that addition you can find it here, and below we’ve previewed what’s expected from these three companies.

We all know there are a number of factors that influence the market, and two of them – the Fed and prospects for tax reform – will be in full coverage today and tomorrow. This afternoon the Fed will break from its November FOMC policy meeting, and while next to no one expects the Fed to boost interest rates coming out of it, the focus will be the language used in the post-meeting statement. Last week’s stronger than expected 3Q 2017 GDP print of 3.0% — you can read Tematica’s take on that here – and Fed Chairwoman Janet Yellen’s likely status as a lame duck keep the prospects of a rate hike in December fairly high in our view.

Tomorrow, the highly anticipated tax reform bill is slated to be revealed, a day later than expected “because of continued negotiations over key provisions in the bill.” It’s being reported that issues still being negotiated include retirement savings and the state and local tax deduction — two key provisions that involve raising revenue to pay for the plan. As the bill’s details are released, we suspect many will be interested in proposed tax bracket changes and the potential economic impact to be had as well as near-term implications for the national debt. We will have more comments and thoughts on the proposed bill later this week as it, along with the tone of earnings to come, will influence the market’s move in the coming days.

 

A quick reminder on Amazon and Nokia plus boosting our Alphabet price target

Before we preview what’s to come later today and tomorrow, I wanted to remind you that last week, on the heels of Amazon destroying 3Q 2107 expectations, we boosted our price target for AMZN shares to $1,250 from $1,150, keeping our Buy rating intact. As expected, other investment banks and analysts did indeed up their rating and price targets as we move deeper into what is poised to be one of the busiest quarters in Amazon’s history. The wide consensus is that once again digital shopping will take consumer wallet share this holiday season. As Amazon benefits from that e-commerce tailwind following robust Prime membership growth in 3Q 2017, the company is also poised to see its high margin Amazon Web Services business continue to benefit from ongoing cloud adoption. In our view, this combination makes Amazon a force to be reckoned with this holiday season, especially since it remains the online price leader according to a new report from Profitero.

  • As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.
  • Our price target on Amazon is $1,250.

 

We also used the sharp sell-off in Nokia (NOK) shares to scale into that position as its high margin licensing business continues to perform as its addressable device market continues to expand. That addition helped improve our NOK cost basis considerably as we patiently wait for the commercial deployment of 5G networks that should goose its network infrastructure business. Hand in hand with those deployments, we should see even further expansion of Nokia’s licensing market expand as the connected car, connected home and Internet of Things markets take hold.

  • We continue to rate Nokia (NOK) shares Buy with an $8.50 price target.

 

Also last week, Alphabet (GOOGL) soared following the company’s 3Q 2017 results that crushed expectations and confirmed the company’s position in mobile. More specifically, the company delivered EPS of $9.57, $1.17 per share better than expected, as revenue climbed nearly 24%, year over year, to $27.77 billion, edging out the expected $27.17 billion.

Across the board, the company’s metrics for the quarter delivered positive year-over-year comparisons and in response, we are upping our price target to $1,150 from $1,050. Given its positions in search, both desktop and mobile, the accelerating shift in advertising dollars to digital platforms, and YouTube’s move into both streaming TV and proprietary programming, we continue to rate GOOGL shares a Buy.

  • We are upping our price target on Alphabet (GOOGL) shares to $1,150 from $1,050.

 

After today’s market close, Facebook will report its 3Q 2017 results

Following positive reports from Amazon, Alphabet and even Twitter (TWTR) that confirmed the accelerating shift to digital platforms for advertising and consumer spending, Facebook shares rallied in tandem over the last few days. This brings the year-to-date rise in the shares to more than 55% fueled in part by several investment banks upping their price targets and ratings for the shares. For now, our price target on FB shares remains $200.

Despite the better-than-expected results from those companies mentioned above, we have not seen any upward move in consensus expectations for Facebook’s 3Q 2017 results that will be reported after today’s market close. As I share this with you, those expectations for 3Q 2017 sit at EPS of $1.28 on revenue of $9.84 billion while those for the current quarter are $1.70 in earnings and $12 billion in revenue. On the earnings call, we’ll be looking not only for updated quarterly metrics but also updates on its monetization efforts and how its video streaming offering, Watch, is developing. We see Watch as a salvo against TV advertising given its 2 billion-and-growing user footprint across the globe. We also hope to hear more about Facebook’s virtual reality initiatives and its plan to expand the recently launched online food-ordering capability.

  • As Facebook continues to garner advertising dollars and flexes its platforms to gather more revenue and profit dollars, we are once again assessing potential upside to our $200 price target for this Connected Society company

 

Thursday brings Apple and Universal Display earnings

After tomorrow’s market close we receive earning from Disruptive Technology company Universal Display (OLED) and Connected Society company Apple (AAPL). There have been a number of positive data points to be had for our Universal Display shares over the last several weeks and they have propelled the shares higher by 13% over the last month. That latest move has brought the return on the OLED position that we have had on the Tematica Investing Select List since October 2016 to more than 175%. Patience, it seems, does pay off as does collecting and assessing our thematic signals.

In terms of 3Q 2017, consensus expectations call for the company to deliver EPS of $0.12 on revenue of $47.1 million. We’d remind subscribers the company has a track record of beating expectations and a favorable report this week from LG Display points to that as once again being likely tomorrow.

As noted by LG Display, “Shipments of big OLED TV panels have increased, as 13 manufacturers adopted our products…We plan to focus on investing in OLED products as part of our long-term preparation for the future” away from LCD displays. LG Display also shared it is planning to spend 20 trillion won to expand OLED production through 2020.

We see this rising capacity as bullish for our Universal shares as well as our Applied Materials (AMAT) shares given its display equipment business, but also as a signal that OLED display demand is poised to expand into other markets, including automotive.

  • Our price target on Universal Display shares remains $175.
  • Our price target on shares of Applied Materials (AMAT) remains $65.

 

With regard to Apple’s 3Q 2017 earnings, expectations have this Connected Society company reporting EPS of $1.87 on revenue of $50.8 billion. As we mentioned when we added the position, given the timing of both new iPhone model launches we are likely to see 3Q 2017 results get a pass as investors focus on the outlook for the current quarter. As I shared on Monday, our strategy will be to use any pullback in AAPL shares near the $140-$145 level to improve our cost basis for what looks to be a favorable iPhone cycle in 2018.

  • Our price target on Apple (AAPL) remains $200.
Weekly Issue: Keeping our eye on the ball as the market gyrates on earnings of the day

Weekly Issue: Keeping our eye on the ball as the market gyrates on earnings of the day

As we mentioned in this week’s Monday Morning Kickoff, we are indeed heading deeper into 3Q 2017 earnings season and that means the pace of reports is going to pick up with each passing day. On Monday, I shared which companies on the Tematica Investing Select List will be reporting earnings this week as well as how the Wall Street herd is catching up to our bullish thoughts on Cash-Strapped Consumer investment theme company Costco Wholesale (COST) and Disruptive Technology investment theme company Applied Materials (AMAT).

Yesterday I shared my thoughts on why subscribers should NOT catch the falling knife that is Blue Apron (APRN) shares – in a nutshell,  Blue Apron is facing too many thematic headwinds and other issues after recently going public. My analysis also suggests a painful secondary offering is in the cards for this company, and my thought is we should sidestep this ongoing disaster and fish in more fruitful waters. Also yesterday, Disruptive Technology investment theme company Corning (GLW) issued solid results and an upbeat outlook that moved the shares higher – more thoughts on that below.

 

 

Taking a Higher View of the Market

What we are currently seeing is a day to day fluctuation in the stock market based on the earnings reports of the day. Last Friday, General Electric (GE), Proctor & Gamble (PG) and Honeywell (HON) weighed on the market. That same downward pressure continued on Monday following results from Whirlpool (WHR). Yesterday, positive quarterly results from Caterpillar (CAT) and 3M (MMM) had the major market indices retracing their way higher. As these market moves occurred, I’d note U.S. Treasury yields hit their highest since March, but at the same time, CNNMoney’s Fear & Greed Index has continued to climb higher into Extreme Greed.

What this tells us is the market is likely to be somewhat schizophrenic based on what it hears. As the frequency of reports spikes later this week and next week, we are bound to see some wobbles in the market. Keep in mind that tomorrow (Thursday, October 26th), we will see more than 340 companies report, including Amazon (AMZN) and Alphabet (GOOGL), and those will set the tone for how the markets finish out the week.

As the litany of reports is had over the next 13 trading days, we’ll continue to use our thematic lens to ferret out confirming data points and examine new positions for the Tematica Select List. As we do this, we’ll look for opportunities to improve our cost basis in existing Select List positions, and, if need be, jettison any that are seeing their thematic tailwinds become headwinds.

 

 

Solid earnings from Corning, keeps our Buy rating intact

Yesterday, Disruptive Technology investment theme company Corning (GLW) reported 3Q 2017 results that were ahead of expectations and the company offered an upbeat outlook for what’s ahead in the coming quarter but fell shy of issuing formal guidance. For the quarter, the company reported EPS of $0.43 vs. the expected $0.41 on revenue that was modestly better than expected — $2.61 billion vs. the consensus expectation of $2.59 billion.

Parsing through the report, nearly every Corning business segment reported sequential revenue and earnings improvement with one exception. That exception would be the company’s core Display business, which while second from a revenue percentage basis behind Optical Communications, is the clear profit breadwinner for the Corning. As a reminder, these two businesses — Display and Optical Communications — account for the bulk of Corning’s sales and earnings, roughly 67% of sales and 74% of operating profits. As such, these are the two key drivers of the company’s performance and the ones we will continue to focus on.

If there was one wrinkle in the report, it was that recent wins in the Display business unit led to Corning’s operating profit to slip year over year. The sequential ramp in operating expenses for the Display business is tied to the launch of its Gorilla Glass. This new product is not only a key stable of smartphones like Apple’s (AAPL) iPhone, but Corning is launching it into new markets and applications such as gasoline particulate filters, pharmaceutical glass packaging, and other automotive applications, including replacing the conventional auto glass. Walmart (WMT) recently introduced a new line of screen protectors under the name Blackweb, which uses Corning glass. And the company continues to garner wins at smartphone OEMs in emerging regions including new devices at Positivo in Brazil, LAVA in India and Polytron in Indonesia.

All of these new wins led to a sequential dip in margins for the Display business unit. We expect, however, for margins to rebound as start-up expenses associated with these recent wins fade in the coming quarters. That fade was offset by profit improvements in the company’s other businesses, especially Specialty Materials, that led to the sequential profit improvement reported by Corning.

Now, you’re probably thinking – how did the company deliver an EPS beat when its operating profit fell?

The answer is in its active buyback program, which shrank the outstanding shares by more than 8% year over year. Since announcing its plan to return more than $12.5 billion plan to shareholders in the form of stock repurchases and dividends, Corning has already returned $8.5 billion by shrinking its outstanding shares by nearly 30%, increased its dividends twice in as many years and intends to increase the dividend by at least 10% annually in 2018 and again in 2019.

When we added GLW shares to the fold exactly a month ago, we noted the company had a robust plan to return capital to shareholders. Today’s report shows the company is on track with that plan, and we suspect the management will highlight this progress on the earnings call.

All in all, we would sum the report up as being solid and expected, something investors like. We continue to see larger format displays sizes for TVs and smartphones as well as the adoption of newer connected devices in cars, homes and on people spurring demand for the company’s Display business. We also see a similar pick up in demand for the company’s Optical Fiber business as 5G wireless networks transition from beta to commercial deployments.

  • We continue to rate Corning (GLW) shares a Buy with a $37 price target.

 

 

 

 

 

Investing herd continues to catch up to us

Investing herd continues to catch up to us

Over the weekend I was doing my usual reading and noticed our positions in both Costco Wholesale (COST) and Applied Materials (AMAT) received favorable mentions in Barron’s. I always say it’s nice to see the herd catching up to what we’ve been seeing and saying, and these two articles are just the latest. As we shared in this week’s Monday Morning Kickoff, we are heading hip deep into 3Q 2017 earnings season. Thus far, we have been observers, but that will change this week when a number of companies on the Tematica Investing Select List report their quarterly results and update their outlook for the current quarter.

 

Costco Wholesale – Oppenheimer misses the real EPS generator

In Costco: 5 Reasons to Load Up digs into Oppenheimer’s Buy rating on COST shares and its $185 price target, which is in line with our price target. Candidly, while we agree with several of the presented points, we find it somewhat confounding that Costco’s continued footprint expansion, a key driver of very profitable membership fee income was not mentioned. While we could chalk it up to not really understanding how the company derives its overall profits and EPS, we’ll take the high road and say they did focus on reasons why the recent pullback in COST shares due to the perception of e-commerce threats is overblown.

 

 

Applied Materials – Semi-cap is strong, but let’s not forget about Display

Turning to Applied Materials, it was included in 4 Cheap Stock Picks for the Impatient article even though AMAT shares have been on a tear throughout 2017. The article rightly discussed one of the key drivers of rising semiconductor capital equipment demand:

It bodes well that China is rapidly building a chip industry, and must stock its factories with new machines, while new applications, including artificial intelligence and machine learning, are expanding the world-wide market for chips.

But, the article failed to mention the growing demand for Applied’s Display Business that is benefitting from the ramp in organic light emitting diode displays, which is also benefitting our Universal Display (OLED) shares. With both businesses firing, and following an upbeat outlook from semi-cap competitor Lam Research (LRCX), we remain bullish on AMAT shares. Our price target now stands at $65, but we suspect that as demand for its products continues to climb in 2018 there is likely another price increase to be had in the coming months.

  • Our price target on Applied Materials (AMAT) shares is $65.
  • Our price target on Universal Display (OLED) shares is $175.

 

This week’s earnings calendar

As I mentioned above, we are no longer passive observers this earning season as we have 6 companies on the Tematica Select List reporting this week. Here’s a quick rundown of when those companies will report and current consensus expectations. As you might expect, we’ll have color commentary on these reports, especially those that require us to take any action.

Tuesday, October 24

Corning (GLW; Disruptive Technology) – Consensus expectations call for this glass company that serves display and fiber markets to deliver EPS of $0.41 on revenue of $2.6 billion. Our price target is $37.

 

Wednesday, October 25

AXT Inc. (AXTI; Disruptive Technologies): Consensus expectations call for the RF semiconductor and fiber building block company to deliver EPS of $0.09 on $27 million in revenue. Our price target is $11

 

Thursday, October 26

Alphabet (GOOGL; Asset-Lite) – Consensus expectations have this internet search and digital advertising company earnings EPS of $8.33 on revenue of $27.2 billion for the quarter. Our price target is $1,050.

Amazon (AMZN; Connected Society) – Consensus expectations for the company we consider the poster child for thematic investing to deliver EPS of $0.03 on revenue of $42 billion, up almost 29% year over year. Our price target is $1,150.

Nokia Corp. (NOK: Asset-Lite – Consensus expectations have this wireless infrastructure, connected device and intellectual property company earnings EPS of $0.06 on revenue of $6.35 billion for 3Q 2017. Our price target stands at $8.50.

United Parcel Service (UPS; Connected Society) – This e-commerce delivery solutions company is slated to deliver EPS of $1.45 on revenue of $15.6 billion. Our price target on UPS shares remains $130.

 

 

Applied Materials serves up a better than expected 2017 Analyst Day

Applied Materials serves up a better than expected 2017 Analyst Day

Yesterday was a big day, and while you may be thinking about the headlines surrounding the revealed GOP tax plan I’m talking about the very upbeat 2017 Analyst Day held by Disruptive Technology company Applied Materials (AMAT). I expected the company to deliver a bullish take on the health of its end markets, but candidly it was even stronger than expected as the company offered not one, not two, but three-year guidance. That’s right it offered its take on 2020 with earnings of $5.08 per share and announced a new $3 billion share repurchase program.

As we are fond of saying here at Tematica, context is key and that 2020 EPS of $5.08 compares to consensus EPS of $3.20 this year and $3.60 next year. Continuing the context, adding the new $3 billion buyback program to the mix brings the total outstanding buyback to roughly $4 billion. At current share price levels, ls the company could buy up to 81.6 million shares, roughly 7.5% of the total outstanding share count. As one might suspect, the underlying strength of this outlook lies in robust chip demand not only due to smartphones but also ramping Internet of Things applications, big data and artificial intelligence (A.I.) that are part of our Connected Society and Disruptive Technology investing themes.

Inside its multi-year forecast, Applied is calling for a compound annual growth rate of 23% for its Display business. In our view confirms the growing adoption of organic light emitting diode displays (OLEDs) and reinforces our bullish stance on Universal Display (OLED) shares. When we first introduced Universal Display shares, we compared it to the transition to light emitting diodes that took several years and also started in mobile phones but expanded into other applications as industry manufacturing capacity rose and prices declined. We continue to see the same evolution happening with OLEDs, and that should drive demand for Universal’s chemicals as well as expand its high-margin intellectual property business.

In sum, what was expected to be a positive development for both Applied Materials and Universal Display was even stronger than expected. On the back of this more than favorable outlook, we are boosting our price target on AMAT shares to $60 from $55. For now, our price target on OLED shares remains $175.

  • On the back of this more than favorable outlook, we are boosting our price target on Applied Materials (AMAT) shares to $60 from $55.
  • Our price target on Universal Display (OLED) shares was recently raised to $175 from $135, and we remain quite comfortable with that revision.