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Remaining patient in the face of more near-term pain for Disney shares

Remaining patient in the face of more near-term pain for Disney shares

In recent weeks, shares of Content is King company Walt Disney (DIS) have drifted lower as the company shared it is pulling its content from Netflix (NFLX) and embarking on its own streaming services for Disney, Marvel and Star Wars content as well as ESPN. This move brings more than a few questions at a time when candidly there is no clear cut catalyst for the shares. Investors don’t like uncertainty and hence the slow drift lower in the shares to the recent $101-$102 level, that is in line with our entry points in the shares, from $110-$111 just over a month ago.

Given new developments that include CEO Bob Iger sharing that Disney’s 2017 EPS would be flat year over year, vs. consensus expectations that were looking for year on year growth near 2.5%, and the impact of Hurricane Irma on its Florida operations, we expect DIS shares could come under additional pressure in the near-term. One strategy would be to exit the shares, another is to recognize that in the next few months Disney will once again be back at the box office as well as opening new attractions at is very profitable parks business. As a reminder, the company recently opened Frozen land and is slated to open Toy Story land in 2018 followed by Star Wars Land in 2019. These new and branded attractions are likely to entice former park visitors as well as attract new ones.

As the water and impact of Irma subside, we will look to use any incremental near-term pain in DIS shares to improve our cost basis, remembering the company had a whopper of a share buyback program in place exiting the June quarter. On that corresponding earnings conference call, Disney signaled it would repurchase between $2.2-$3.2 billion of stock in the current quarter. Odds are that effort will help backstop the shares in the coming days. Our bias is to use any pullback that brings the shares closer to the $90 level to improve the positions cost basis. Recognizing the potential impact of Irma, and remaining questions on its proprietary streaming business, however, we are reducing our price target to $120 from $125.

  • While we expect further near-term disruptions at Disney (DIS) owing to Hurricane Irma, we will remain patient with the shares.
  • We are trimming our price target to $120 from $125.
Musings on Apple’s “Record” December Quarter

Musings on Apple’s “Record” December Quarter

Last night Tematica Research Chief Investment Officer Chris Versace appeared on CGTN America’s Global Business program to talk about Apple’s (AAPL) December quarter earnings and several other topics. As CEO Tim Cook put it, “We sold more iPhones than ever before and set all-time revenue records for iPhone, Services, Mac and Apple Watch…” which enabled the company to deliver better than expected revenue and earnings per share relative to Wall Street consensus expectations.

While Cook boasted of strong Apple Watch growth, iPhone shipments were up 5 percent year over year, hardly the robust growth levels we’ve seen in the past. Meanwhile, the Mac business — the next largest one next to the iPhone at just over 9 percent of total revenue — saw volumes rise 1 percent year over year, while iPad units fell 19 percent compared to the year-ago quarter. One bright spot in the company’s December quarter was Apple’s Services business, which rose 18 percent year over year and boasts more than 150 million paid customer subscriptions.

Circling back to that better than expected December quarter EPS, we’d be remiss if we didn’t point out Apple’s net income actually shrank year over year. If it weren’t for the company flexing its cash-rich balance sheet, which clocked in at $246.1 billion, to shrink the share count during 2017 Apple’s reported EPS would have been flat to down year over year instead of being reported up just under 10 percent. Coming into 2017, Apple has nearly $50 billion remaining on its current capital return program, which means more share repurchase activity is possible in the coming quarters.

One other sour point in the earnings report was Apple’s guidance for the current quarter, which fell shy of expectations. One particular call out was the impact of foreign currency, which is expected to be a ‘major negative’ as the company moves from the December to the March quarter.

The long and short of it is that while Apple CEO Tim Cook called it a record quarter, the reality is Apple’s financial performance remains closely linked to the iPhone, which still accounts for 70 percent of Apple’s overall business. To us here at Tematica this means until Apple can bring to market an exciting new product, or reenergize an existing one that can jumpstart growth, the company will be tied to the iPhone upgrade cycle. Expectations for the next iteration, the presumed iPhone 8, call for a new body, new display — hence  Disruptive Technology company Universal Display (OLED) being on the Tematica Select List — and a greater use of capacitive touch that should eliminate the current home button and bezel. But we’ll have to see if this new model on the 10th anniversary of the transformative device’s launch will capture the hearts of customers, as the last couple of models have only had a meh response.

Despite its current reliance on the iPhone, there are hopeful signs at Apple, such as the new AirPods that echo past design glory, an Apple TV business that has 150 million active subscriptions and a growing Services business. The issue is even if Apple doubled its service business in the coming year, it would still account for 15-20 percent of Apple’s overall revenue. Moreover, if that happened in the coming year it would likely mean the next iteration of the iPhone underwhelmed, something Apple is not likely to shoot for on the devices 10-year anniversary. Near-term, Apple is likely to remain a victim of its own success in creating one of the most loved and most used devices on the plant.

We’ll continue to keep tabs on this poster child company for our Connected Society investment theme company, but with no evident catalyst over the coming months, we’re inclined to be patient and pick off the AAPL shares at better prices.

 

Additional Thematic Data Points from Apple’s Earnings Announcement

While we are not quite buyers of Apple shares just yet, there was a number of confirming thematic data points shared during the company’s earnings conference call last night:

  • Rise & Fall of the Middle Class — “The middle class is growing in places like China, India, Brazil, but certainly, the strong dollar doesn’t help us.”
  • Cashless Consumption — “Transaction volume was up over 500% year over year as we expanded to four new countries, including Japan, Russia, New Zealand, and Spain, bringing us into a total of 13 markets. Apple Pay on the Web is delivering our partners great results. Nearly 2 million small businesses are accepting invoice payments with Apply Pay through Intuit QuickBooks Online, FreshBooks, and other billing partners. And beginning this quarter, Comcast customers can pay their monthly bill in a single touch with Apple Pay.”
  • Content is King — “In terms of original content, we have put our toe in the water with doing some original content for Apple Music, and that will be rolling out through the year. We are learning from that, and we’ll go from there. The way that we participate in the changes that are going on in the media industry that I fully expect to accelerate from the cable bundle beginning to break down is, one, we started the new Apple TV a year ago, and we’re pleased with how that platform has come along. We have more things planned for it but it’s come a long way in a year, and it gives us a clear platform to build off of… with our toe in the water, we’re learning a lot about the original content business and thinking about ways that we could play at that.”
  • Connected Society — “every major automaker is committed to supporting CarPlay with over 200 different models announced, including five of the top 10 selling models in the United States.

We’ll continue to look analyze management commentary for more thematic data points as more companies report their December-quarter earnings over the next few weeks.