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Saying adios to Farmland Partners as its dividend gets slashed

Saying adios to Farmland Partners as its dividend gets slashed

 

Key point inside this Alert:

  • We are issuing a Sell on shares of Farmland Partners (FPI) and removing them from the Tematica Investing Select List.

 

While I realize the selling out of Farmland Partners may come as a bit of a surprise to subscribers, I was shocked last night by the dramatic cut to the company’s quarterly dividend that was announced as a part of its disappointing June quarter results. Candidly, given the impact of trade and tariffs, I was inclined to give the June quarter a pass, but when a company slashes its dividend by 75% to $0.05 per share for 3Q 3018 from the expected $0.20 per share per quarter it’s a signal that something is likely amiss.

The fact that the Board “will evaluate the dividend in subsequent quarters” offers little solace, especially given the cut to its outlook. Farmland now expects its 2018 AFFO/share guidance to a range of $0.30-$0.34 from the prior range of $0.40-0.44.

Granted Farmland management tried to explain the dividend cut as a part of the decision by the Board to boost its buyback activity given what it sees as a very undervalued stock.

But… and it’s a big but… one has to wonder why the company opted to cut the 3Q 2018 dividend payment by $5.6 million ($0.15 per share times the 37.5 million shares of common stock outstanding on a fully diluted basis) when it exited the June quarter with $26.4 million in cash on the balance sheet. The math suggests that we’re not likely to see a pronounced rebound in the dividend especially since the company’s revised guidance is heavily weighted to the December quarter.

Am I frustrated?

You bet, but as I have learned over the years it’s far better to stick to the facts and data and to exit the position lest we become emotional and hope it sorts itself out at some point. In other words, remain cold-blooded. I also expect the shorts that have been circling the shares will use the dividend cut to reaffirm their argument, which means FPI shares are likely in for a tough time in the coming months especially with a very different dividend yield to be had compared to when we first acquired them.

Yes, it will be a painful exit given the position will likely be down some 30% from where we added them, but despite the pain, the goal here is to stem the loss of capital (worst case) and avoid a dead money stock (best case).  I suspect we will be better off to let this one go vs. the alternative to be had.

 

 

Weekly Issue: Trade Meetings and Earnings Reshape Market Outlook

Weekly Issue: Trade Meetings and Earnings Reshape Market Outlook

Key points from this issue:

  • Earnings from Boeing (BA) and General Motors (GM) signal markets will trade day-to-day as trade meetings and earnings season heat up.
  • Our price target on Dycom Industries (DY) shares remains $125
  • Our AXTI price target remains $11.
  • Our price target on Nokia (NOK) shares remains $8.50
  • Our long-term price target for Farmland Partners (FPI) shares remains $12.
  • As we head into the seasonally strong second half of the year for United Parcel Service (UPS), our price target on the shares remains $130.

 

This week we’ve moved into the meaty part of 2Q 2018 earnings season, and so far, we’ve seen a number of companies beat top and bottom line expectations. Some market observers will point out that some 20%-25% of the S&P 500 group of companies are in that boat, and are declaring “victory” for the market. With today’s earnings from Boeing (BA) that and General Motors (GM), the market is trending lower as Boeing’s outlook falls short of Wall Street expectations while GM cut its outlook due to higher commodity prices. As you probably guessed, one of the culprits for GM is higher aluminum and steel prices.

My take on that is with 75%-80% of the S&P 500 yet to report, that claim while it could prove to right, it also could be a bit premature. As I shared with Oliver Renick, host at the TD Ameritrade Network a few days ago, we’ve only started to see the impact of initial trade tariffs and if the international dance continues we could see far more tariff jawboning put into action.

Consider a tweet from President Trump this morning that suggests a tariff follow through is possible.

 

 

But last night Trump tweeted a path forward to eliminating tariffs and other trade barriers between the Eurozone and the US ahead of his meeting today with the European Commission President Jean-Claude Juncker today to discuss trade, including tariffs on autos.

It would appear Trump is attempting to keep his negotiating opponents off balance in the hopes of improving trade relations from a US perspective. But it also seems that others have read Trump’s Art of the Deal by now as according to EU trade commissioner Cecilia Malmstrom, the Commission is also preparing to introduce tariffs on $20 billion of U.S. goods if Washington imposes trade levies on imported cars.

While I would love to see some forward progress coming out of these talks, but just like with China the probability is rather low in my opinion. Much like with the China trade talks, things have escalated so that both sides will be looking to claim some victory to report back to their countrymen and women.  This likely means that as we migrate over the next few weeks of earnings, we will have to continue to watch trade developments, especially if more recent and wider spread tariffs wind up being enacted.

With more on the earnings and trade to be had in the coming days, we should be ready for day-to-day moves in the market, which will make it challenging for traders and options players. As they struggle, we’ll continue to take a longer-term focus, heeding the signals to be had with our thematic investing lens. Now, let’s get to some updates and other items…

 

Checking in on 5G spending from Verizon and AT&T

With both Verizon Communications (VZ) and AT&T (T) reporting June quarter results yesterday, I sifted through their comments on several fronts but especially on 5G given our positions in mobile infrastructure and licensing company Nokia (NOK), specialty contractor Dycom (DY) as well as compound semiconductor company AXT Inc. (AXTI). The nutshell take is things remain on track as both carriers look to launch commercial 5G networks in the coming quarters.

Verizon delivered solid quarterly results, buoyed by its core wireless business that added 531,000 net retail postpaid subscribers, which included 398,000 postpaid smartphone net adds. We’ve talked about how sticky mobile service is with consumers as smartphones are increasingly a life link for their connected lives so it comes as little surprise that Verizon’s customer loyalty remains strong with the quarter marking the fifth consecutive period of retail postpaid phone churn at 0.80 percent or better.

In terms of capital spending, a figure we want to watch as Verizon gets ready to launch its commercial 5G network, the company shared its 2018 spend will be at the lower end of its previously guided range of $17.0-$17.8 billion. Now here’s the thing, the mix of spending will favor 5G, which confirms the bullish comment and tone we shared last week from Ericsson (ERIC) on the North American 5G market.

With AT&T, its net capital spending in the June quarter slipped to $5.1 million, down from roughly $6 million in the March quarter but the company shared it will spend roughly $25 billion in all of 2018. Doing some quick math, we find this spending is weighted to the back half of 2018, which likely reflects investments in its 5G network as well as the new first responder network, FirstNet, it is building. During the earnings call, management shared the company now has 5G Evolution in more than 140 markets, covering nearly 100 million people with a theoretical peak speed of at least 400 megabits per second with plans to cover 400 plus markets by the end of this year. In terms of true 5G, trials are progressing and AT&T is tracking to launch service in parts of 12 markets by the end of this year.

That network spend and 5G buildout bodes well for both our Dycom shares.

  • Our price target on Dycom Industries (DY) shares remains $125

 

In addition, a few days ago mobile chip company Qualcomm (QCOM) shared that its 5G antennas are ready from prime time. More specifically, Qualcomm is shipping 5G antennas to its device partners that include Samsung, LG, Sony (SNE), HTC and Xiaomi among others for testing. Moreover, Qualcomm said it stands ready for “large-scale commercialization” which likely means 5G devices are just quarters away instead of years away.

We’d note those device partners of Qualcomm’s mentioned above have all announced plans to bring initial 5G powered phones to market during the first half of 2019. That means the supply chain will be readying power amplifiers and switches that will enable these devices to communicate with the 5G networks, which bodes well for incremental compound semiconductor substrate demand at AXT. Because 5G is being viewed as an “access technology” that will move mobile broadband past smartphones and similar devices, I continue to see this as a positive for the higher margin licensing business at Nokia as well.

As a reminder, AXT will report its quarterly results after tonight’s market close, and expectations for its June quarter are clocking in at $0.08 per in earnings on $26.1 million in revenue, up 60% and roughly 11% year over year.

  • Our AXTI price target remains $11.
  • Our price target on Nokia (NOK) shares remains $8.50

 

Farmland Partners fights back

A few weeks ago, we shared not only our long-term conviction for Farmland Partners (FPI) shares but also prospects for continued drama in the coming months. Well, let’s say we’re not disappointed as this morning the company filed a lawsuit in District Court, Denver County, Colorado against “Rota Fortunae” (a pseudonym) and other entities who worked with or for Rota Fortunae in conducting a “short and distort” scheme to profit from the sharp decline in Farmland’s stock price resulting from false and misleading posting on Seeking Alpha. Farmland is seeking damages and injunctive relief for defamation, defamation by libel per se, disparagement, intentional interference with prospective business relations, unjust enrichment, deceptive trade practices, and civil conspiracy.

Are we surprised? No, especially since the Farmland management team signaled it would be moving down this path. While this will likely result in some incremental noise, we’ll continue to focus on the business and the long-term drivers of the agricultural commodities that drive it.

  • Our long-term price target for Farmland Partners (FPI) shares remains $12.

 

Paccar delivers on the earnings front, boosts its dividend

Tuesday morning, heavy and medium duty truck company Paccar (PCAR) delivered strong June quarter results, beating on both the top and bottom line. For the quarter, Paccar reported earnings of $1.59 per share, $0.16 better than the $1.43 consensus on revenues that rose more than 24% year over to year to $5.47 billion, edging out the $5.39 billion that was expected. The strength in the quarter reflects not only rising production and delivery levels that reflect the pick up in truck orders over the last 6-9 months, but also the ripple effect had on the company’s high margin financing business. Also too, as truck up time increases as does the number of Paccar trucks in service, we’ve seen a nice pick up in the company’s Parts business that carries premium margins relative to the new truck one.

During the quarter, Paccar repurchased 1.21 million of its common shares for $77.2 million, completing its previously authorized $300 million share repurchase program. The Board of Directors approved an additional $300 million repurchase of outstanding common stock earlier this month and given the current share price that is below that average repurchase price we suspect this new program will be put to use quickly. Also during the quarter, Paccar boosted its quarterly dividend to $0.28 per share from $0.25, and management reminded investors of the company’s track record of delivering quarterly and special dividends in the range of 45-55% of net income.

Given 111% year over year growth in the new heavy truck orders throughout the U.S. and Canada during the first half of 2018, we continue to be bullish on PCAR shares as we head into the second half of 2018. Even so, we’ll continue to analyze the monthly truck order data as well as freight indicators and other barometers of domestic economic activity to assess the continued strength in new truck demand. In the coming months, we expect long-time followers of Paccar will begin to focus on the potential year-end special dividend the company has issued more often than not.

  • Our price target on Paccar (PCAR) shares remains $80.

 

A quick note on United Parcel Service earnings

Early this morning, United Parcel Service (UPS) beat estimates by a penny a share, with an adjusted quarterly profit of $1.94 per share. Revenue beat forecasts, as well, boosted by strong growth in online shopping – no surprise to us given our Digital Lifestyle investing theme. UPS will host a conference call this morning during which it will update its outlook for the back half of the year, and that should help quantify the year over year growth in Amazon’s (AMZN) Prime Day 2018 ahead of its earnings report later this week.

  • As we head into the seasonally strong second half of the year for United Parcel Service (UPS), our price target on the shares remains $130.

 

 

Weekly Issue: Amazon Prime Day, Netflix Earnings, Controversy at Farmland Partners and June Retail Sales

Weekly Issue: Amazon Prime Day, Netflix Earnings, Controversy at Farmland Partners and June Retail Sales

Key points from this week’s issue:

  • Amazon (AMZN): What to watch as Amazon Prime Day 2018 comes and goes; Following the strong run in Amazon (AMZN) shares over the last several weeks, our $1,900 price target is under review.
  • Habit Restaurants (HABT): Our price target on Habit shares remains $11.50
  • Costco (COST): We are once again boosting our price target on Costco Wholesale (COST) shares to $230 from $220.
  • Netflix (NFLX): Despite 2Q 2018 earnings results, I continue to see Netflix shares rising further in the coming quarters as investors become increasingly comfortable with the company’s ability to deliver compelling content that will attract net new users, driving cash flow and bottom line profits. Our NFLX price target remains $525.
  • Farmland Partners (FPI): While credibility questions will keep Farmland in the penalty box in the short term, we continue to favor the longer-term business fundamentals. Our price target on FPI shares remains $12.

 

 

Catching up with the stock market

Last week we saw a change in the domestic stock market. After being led by the technology-heavy Nasdaq Composite Index and the small-cap-laden Russell 2000 during much of 2Q 2018, last week we saw the Dow Jones Industrial Average take the pole position, handily beating the other three major market indices. As all investors know, individual stocks, as well as the overall market, fluctuate week to week, but with just over two weeks under our belt in the current quarter, all four major market indices have moved higher, shrugging off trade concerns at least for now.

Of course, those mini market rallies occurred in the calm period before the 2Q 2018 earnings storm, which kicks off in earnest tomorrow when more than 84 companies will issue their report card for the quarter. Last week’s initial earnings reports for 2Q 2018 were positive for the market as was the latest Small Business Optimism Index reported by the NFIB. Despite those positive NFIB findings, which marked the sixth highest reading in the survey’s 45-year history, business owners continue to have challenges finding qualified workers. The challenge to fill open positions is not only a headwind for growth, but also increases the prospects for wage inflation.

For context, that NFIB survey reading matched the record high set in November 2000, which helps explain the survey’s findings for more companies planning to increase compensation. That adds to the findings from the June PPI report that showed headline inflation rising to 3.4% year over year and the 2.9% year-over-year increase in the June CPI report, all of which gives the Fed ample room to continue increasing interest rates in the coming months. Granted, a portion of that inflation is due to the impact of higher oil prices, but also higher metal and other commodity costs in anticipation of tariffs being installed are contributing. Again, these data points give the Fed the cover fire it will need when it comes to raising interest rates, which at the margin means borrowing costs will inch their way higher. Here’s the thing — all of that data reflects the time-period before the tariffs.

The focus over the next few weeks will be on corporate earnings, particularly how they stack up against expectations calling for more than 20% year-over-year EPS growth for the S&P 500 companies in the back half of 2018. So far, in aggregate, the reports we’ve received give little reason to worry, but to be fair we’ve only had a few dozen in recent weeks, with several hundred to be had. But… ah you knew there was a but coming… with companies like truck freight company JB Hunt blowing the doors off expectations but keeping its full-year 2018 guidance intact… a flag is raised. Another flag raised in the earnings results thus far was the consecutive slowdown in loan growth seen at JPMorgan Chase (JPM), Citigroup (C), PNC (PMC) and Wells Fargo (WFC), which came down to 2.1% year-over-year on an aggregate basis from 3% in the March quarter.

If earnings expectations come up short, we will likely see the market trade-off. How much depends on the discrepancy between reality and projections. Also, keep in mind, the current market multiple is ahead of the market’s historical average, and a resetting of EPS expectations could trigger something similar in the market multiple. What this means is at least as we go through the next few weeks there is a greater risk to be had in the market. As we move into the back half of the September quarter, if Trump can show some progress on the trade front we could have a market rally toward the end of the year. Needless to say, I’ll continue to keep one eye on all of this while the other ferrets out signals for our thematic investing lens.

 

It’s that Prime Day time of year

As I write this, we have passed the 24-hour mark in what is one of if not the largest self-created holidays. Better known as Amazon (AMZN) Prime Day, this made-up holiday strategically falls during one of the seasonally slowest times of the year for retailers. For those uninitiated with the day, or those who have not seen the litany of websites touting the evolving number of deals and retail steals being served up by Amazon throughout the day, Prime Day is roughly a day and a half push by Amazon to goose it sales by serving up compelling offerings and enticing non-Prime members to become ones. To put some context around it, Coresight Research forecasts Prime Day 2018 will generate $3.4 billion in sales in 36 hours — roughly 6% of the $58.06 billion Amazon is expected to report in revenue for the entire September quarter.

What separates this year’s Prime Day from prior ones isn’t the prospect for record-breaking sales, but rather the increased arsenal of private label products had by Amazon. Over the last few quarters, Amazon has expanded its reach into private label apparel and athletic wear as well as others like shoes and jewelry. All told, Amazon now sells more than 70 of its own brands, which it can price aggressively on Prime Day helping it win incremental consumer wallet share. Prime Day is also a deal bonanza for Amazon’s own line of electronic devices, ranging from FireTV products to Kindle e-readers and Echo powered digital assistants. The thing with each of those devices is they help remove friction to other Amazon products, such as its streaming TV and music services, Audible and of course its digital book service.

Unlike last year, this year’s Prime Day started off with a hitch in that soon after it began shoppers were met with the company’s standard error page because it was overwhelmed with deal seekers. Not a bad problem and certainly a great marketing story, but it raises the question as to whether Amazon will hit that $3.4 billion figure.

To me, the allure of Prime Day is the inherent stickiness it brings to Amazon as the best deals are offered only to Prime members, which historically has made converts of the previously unsubscribed. Those new additions pay their annual fee and that drives cash flow during a seasonally slow time of year for the company, while also expanding the base of users as we head into the year-end holiday shopping season before too long. Very smart, Amazon. But then again, I have long said Amazon is a company that knows how to reduce if not remove transaction friction. Two-day free Prime delivery, Amazon Alexa and Echo devices, Kindle digital downloads, and Amazon Pay are just some of the examples to be had.

Thus far in 2018, Amazon shares are up more than 58%, making them one of the best performers on the Tematica Investing Select List – hardly surprising given the number of thematic tailwinds pushing on its businesses. Even before we got to Prime Day, we’ve seen Amazon expanding its reach on a geographic and product basis, winning new business for its Amazon Web Services unit along the way. More recently, Amazon is angling to disrupt the pharmacy business with its acquisition of online pharmacy PillPack, a move that has already taken a bite out of CVS Health (CVS) and Walgreen Boots Alliance (WAB) shares. Odds are there will be more to come from Amazon on the healthcare front, and it has the potential to add to its business in a meaningful way as it once again looks to reduce transaction friction.So, what am I looking for from Amazon coming out of Prime Day 2018? Aside from maybe a few of mine own purchases, like a new Echo Spot for my desk, on the company data front, I am going to be looking for the reported number of new Prime subscribers Amazon adds to the fold. Sticking with that, I’m even more interested in the number of non-US Prime subscribers it adds, given the efforts by Amazon of late to bring 2-day Prime delivery to parts of Europe. As we here in the US have learned, once you have Prime, there is no going back.

  • Following the strong run in Amazon (AMZN) shares over the last several weeks, our $1,900 price target is under review.

 

June Retail Sales Report is good for Habit Restaurant and Costco shares

Inside this week’s June Retail Sales Report there were several reasons for investors to take a bullish stance on consumer spending in light of the headline increase of 0.5% month-over-month. On a year-over-year basis, the June figure was an impressive 6.6%, but to get to the heart of it we need to exclude several line items that include “motor vehicles & parts” and “gas stations.” In doing so, we find June retail sales rose 6.4% year-over-year, which continues the acceleration that began in May. The strong retail sales numbers likely means upward revisions to second-quarter GDP expectations by the Atlanta Fed and N.Y. Fed. Despite the positive impact had on 2Q 2018 GDP, odds are this spending has only added to consumer debt levels which means more pressure on disposable income in the coming months as the Fed ticks interest rates higher.

Now let’s examine the meat of the June retail report and determine what it means for the Tematica Select List, in particular, our positions in Habit Restaurants Inc. (HABT) and Costco Wholesale (COST).

Digging into the report, we find retail sales at food services and drinking places rose 8.0% year-over-year in June — clearly the strongest increase over the last three months. How strong? Strong enough that it brought the quarter’s year-over-year increase to 6.1% for the category, more than double the year-over-year increase registered in the March quarter.

People clearly are back eating out and this was confirmed by the June findings from TDn2K’s Black Box Intelligence. Those findings showed that while overall restaurant sales rose 1.1% year over year in June, one of the stronger categories was the fast casual category, which benefitted from robust to-go sales. That restaurant category is the one in which Habit Restaurant competes, and the combination of these two June data points along with new store openings and higher prices increases our confidence in Habit’s second-quarter consensus revenue expectations.

  • Our price target on Habit Restaurants (HABT) remains $11.50

Now let’s turn to Costco – earlier this month the warehouse retailer reported net sales of $13.55 billion for the retail month of June an increase of 11.7% from $12.13 billion last year. Compared to the June Retail Sales Report, we can easily say Costco continues to take consumer wallet share. Even after removing the influences of gas sales and foreign currency, Costco’s June sales in the US rose 7.7% year over year and not to be left out its e-commerce sales jumped nearly 28% year over year as well. Those are great metrics, but exiting June, Costco has 752 warehouse locations opened with plans to further expand its footprint in the coming months. New warehouses means new members, which should continue to drive the very profitable membership fee income in the coming months, a key driver of EPS for the company.

Over the last few weeks, COST shares have been a strong performer. After several months in which it has clearly taken consumer wallet share and continued to expand its physical locations, I’m boosting our price target on COST shares to $230 from $220, which offers roughly 7% upside from current levels before factoring in the dividend. Subscribers should not commit fresh capital at current levels but should continue to enjoy the additional melt up to be had in the shares.

  • We are once again boosting our price target on Costco Wholesale (COST) shares to $230 from $220.

 

What to make of earnings from Netflix

Last week we added shares of Netflix (NFLX) to the Tematica Investing Select List given its leading position in streaming as well as original content, which makes it a natural for our newly recasted Digital Lifestyle investing theme, and robust upside in the share price even after climbing nearly 100% so far in 2018. As a reminder, our price target for NFLX is $525.

Earlier this week, Netflix reported its June quarter results and I had the pleasure of appearing on Cheddar to discuss the results as they hit the tape. What we learned was even though the company delivered better than expected EPS for the quarter, it missed on two key fronts for the quarter – revenue and subscriber growth. The company also lowered the bar on September quarter expectations. While NFLX shares plunged in

While NFLX shares plunged in after-market trading immediately after its earnings were announced on Monday, sliding down some 14%, yesterday the shares rallied back some to closed down a little more than 5% at the end of Tuesday’s trading session. Trading volume in NFLX shares was nearly 6x its normal levels, as the shares received several rating upgrades as well as a few downgrades and a few price target changes.

Here’s the thing, even though the company fell short of new subscriber targets for the quarter, it still grew its membership by more than 5 million in the quarter to hit 130 million memberships, an increase of 26% year over year. Combined with a 14% increase in average sales price, revenue in the quarter grew 43% year over year. Tight expense control led to the company’s operating margin to reach 11.8% in 2Q 2018, up from 4.6% in the year-ago quarter.

In recent quarters, the number of Netflix’s international subscribers outgrew the number of domestic ones, and that has a two-fold impact on the business. First, the company’s exposure to non-US currencies has grown to just over half of its streaming revenue and the strengthening dollar during 2Q 2018 weighed on the company’s international results. With its content production in 80 countries and expanding, Netflix will move more of its operating costs to non-US dollar currencies to put a more natural hedging strategy in place. Second, continued growth in its international markets means continuing to develop and acquire programming for those markets, which was confirmed by the company’s comments that its content cash spending will be weighted to the second half of this year.

From my perspective, the Netflix story is very much intact and the drivers we outlined have not changed in a week’s time. I continue to see Netflix shares rising further in the coming quarters as investors become increasingly comfortable with the company’s ability to deliver compelling content that will attract net new users, driving cash flow and bottom line profits.

  • Despite Netflix’s (NFLX) 2Q 2018 earnings results, I continue to see Netflix shares rising further in the coming quarters as investors become increasingly comfortable with the company’s ability to deliver compelling content that will attract net new users, driving cash flow and bottom line profits. Our NFLX price target remains $525.

 

 

Checking in on Farmland Partners

Last week we saw some wide swings in shares of Farmland Partners (FPI), and given its lack of analyst coverage I wanted to tackle this head-on. Before we get underway, let’s remember that Farmland Partners is a REIT that invests in farmland and looks to increase rents over time, which means paying close attention to farmer income and trends in certain agricultural prices such as corn, wheat and soybeans.

So what happened?

Two things really. First, a bearish opinion piece on FPI shares ran on Seeking Alpha last week, which accused FPI of “artificially increasing revenues by making loans to related-party tenants who round-trip the cash back to FPI as rent; 310% of 2017 earnings could be made-up.” Also according to the article FPI “has not disclosed that most of its loans have been made to two members of the management team” and it has “significantly overpaid for properties.”

As one might suspect, that article hit FPI shares hard to the gut, dropping them some 38%. Odds are that article caught ample attention, something it was designed to do. Soon thereafter, Farmland Partners responded with the following data:

  • The total notes and interest receivable under the Company’s loan program was $11.6 million, or 1.0% of the Company’s total assets, as of March 31, 2018.
  • The program generated $0.5 million in net revenues, or 1.1% of total revenue, in the year ended December 31, 2017.
  • The program is directed at farmers, including, as previously disclosed, tenants. It was publicly announced in August 2015, and included in the Company’s public disclosures since then. None of the borrowers under the program as of March 31, 2018 were related parties, or have other business relationships with the Company, other than as borrowers and, in some cases, tenants.

Those clarifications helped prop FPI shares up, but odds are it will take more work on the part of Farmland’s management team to fully reverse the drop in the shares.

In over two decades of investing, I’ve seen my fair share of bears extrapolate from a few, or less than few, data points to make a sweeping case against a company. When that happens, it tends to be short-lived with the effect fleeting as the company delivers in the ensuing quarters. Given the long-term prospects we discussed when we added FPI shares to the Select List, I’m rather confident over the long-term. In the short-term, the real issue we have to contend with is falling commodity prices and that brings us to our second topic of conversation.

As trade and tariffs have continued to escalate, we’ve seen corn, wheat and soybean prices come under pressure. Because these are key drivers of farmer income, we can understand FPI shares coming under some pressure. However, here’s the thing –  on the podcast, Lenore and I recently spoke with Sal Gilbertie of commodity trading firm Teucrium Trading, and he pointed out that not only are these commodity prices below production costs, something that historically is short-lived, but the demographic and production dynamics make the recent moves unsustainable. In short, China’s share of the global population is multiples ahead of its portion of the world’s arable land, which means that China will be forced to import corn, wheat and soybeans to not only feed its people but to feed its livestock as well. While China may be able to import from others, given the US is among the top exporters for those commodities, that can only last for a period of time.

Longer-term, the rising new middle class in China, India and other parts of greater Asia will continue to drive incremental demand for these commodities, which in the long-term view bodes well for FPI shares.

What I found rather interesting in Farmland’s press release was the following –  “We are evaluating what avenues are available to the Company and its stockholders to remedy the damage inflicted.” Looks like there could be some continued drama to be had.

  • While credibility questions will keep Farmland Partners (FPI) in the penalty box in the short term, we continue to favor the longer-term business fundamentals. Our price target on FPI shares remains $12.

 

WEEKLY ISSUE: Farming for a New Thematic Selection

WEEKLY ISSUE: Farming for a New Thematic Selection

 

KEY POINTS FROM THIS ALERT:

  • We are adding Farmland Partners (FPI) to the Tematica Investing Select List with a $12 price target.
  • On the heels of a smart equity investment in PTC Inc. (PTC), we reiterate our $235 price target for shares of Rockwell Automation (ROK).

 

Stocks appear to have shrugged off the lack of developments spinning out of the international trade and talks that were had over the last several days.  Perhaps this reflects the meh attitude had by investors that understand it will take time to turn these conversations into solutions. As the focus on those events fades, we have the Fed’s next FOMC meeting on deck that will come into the spotlight even though it is widely expected to boost interest rates exiting this meeting.

This begs the question as to why this meeting will be so closely watched and the answer lies in that it is one of the handful of meetings at which the Fed will hold a post-meeting press conference as well as issues its updated economic forecast. My strong suspicion is the Fed will respond to the widening number of inflationary data points that we’ve been seeing in both hard economic data and other signals in its comments and forecast. More than likely this means the Fed will signal a fourth rate hike this year, again something that has been gaining in thought. Inside the Fed’s forecast, I’ll be looking to see if it telegraphs a change in the number of rate hikes for 2019 as well.

The reason I’ll be focusing on the overall number of rate hikes over the next several quarters is what it means for interest cost on an incremental basis as well as the impact to be had on consumer spending and the economy.

As we wait for that event and its implications to unfold later this afternoon, I’m adding a new company, Farmland Partners (FPI) to the Tematica Investing Select List. Up front, I will tell you Farmland is far from a household name, but it is a Real Estate Investment Trust (REIT) that as its name suggests invests in US farmland. As I explain below, there are several thematic factors coming together across our Rise of the New Middle Class and Scarce Resources investing themes with Farmland. Now with no further adieu…

 

Adding Farmland Partners to the Select List

As I just mentioned, we are adding shares of Farmland Partners to the Tematica Investing Select List to gain not only high dividend yielding exposure to the real-estate industry, but also benefit from the increasing scarcity that is arable farmland that is becoming more valuable as the middle class outside the US continues to expand. In thematic speak, we see the company as a direct beneficiary of our Scare Resource investing theme and an indirect one for our Rise of the Middle Class one.

My price target for FPI shares is $12, which equates to a price to book value of roughly 1.1x its current book value of $10.85 exiting the March quarter.

Who is Farmland Partners?

FPI is the largest U.S.-listed farmland REIT. Its portfolio spans some 166,000 acres across 17 states, with rental income driving roughly 90% of the company’s revenue stream. Farmers use about 70% of FPI’s land for primary crops like corn, with the remaining 30% committed to specialty crops such as almonds or citrus. In addition, Farmland “double dips” to some extent by producing solar and wind power on 11 of its farms.

If you’re thinking this is a very different REIT and a very different kind of company, I’d agree — but investors can often find meaningful opportunities in such overlooked companies. And FPI is definitely overlooked, with just two analysts covering the stock vs. the more than 18 who follow REITs like Public Storage (PSA) and HCP (HCP).

But what’s perhaps most interesting is that FPI’s share price is essentially unchanged so far in 2018 despite the upward moves in prices for corn, wheat and soybeans that these charts show:

 

 

 

We can attribute some of these crop-price hikes to potential tariffs that would limit global supply, but the increases also have to do with rising global demand. The U.S. Department of Agriculture recently boosted its 2018 projection for overall American grain and feed exports to $31.2 billion — $1.5 billion higher than the agency’s February projection. That’s also up from the $30.35 billion of grain and feed that American producers shipped overseas in 2017.

And with rising global demand for proteins due in part to emerging markets’ rising middle classes, we’re likely to see price increases continue for these commodities over the longer term. In fact, America recorded it third-best year for agricultural exports in 2017, shipping $140.5 billion of goods. That’s up $10.9 billion year over year. By comparison, China only exported $22 billion of such crops, followed by Canada at $20.4 billion and Europe at $11.6 billion.

The higher U.S. exports have come even though America’s arable land fell by nearly 15% between 1997 and 2015 vs. a slight gain in worldwide arable land. Add in rising demand from emerging Asian economies for food imports and U.S. farmland seems poised to become more valuable over time.

We’re already seeing this in the USDA’s annual Land Values report. The latest edition valued U.S. farmland at $3,080 per acre on average in 2017, up from just $1,483 per acre in 2000. While there can be some ups and downs year to year, U.S. farmland prices have generally been growing at just under a 4.7% compound annual growth rate.

In short, I see arable land as a scarce resource, with Farmland Partners poised to benefit over the longer term as land prices creep higher. Income investors should also remember that as Farmland’s business grows, it must pay out at least 90% of its income to keep its REIT status. That bodes well for future dividend increases.

In the meantime, Farmland will pay its next quarterly dividend of $0.1275 per common share on July 16 to shareholders of record as of July 2. On an annualized basis, that equates to a dividend yield of 5.7%, well above the 1.8% yield to be had with the S&P 500.

Getting to the $12 price target

As for the stock’s price, FPI is trading at just $8.70 as I write this — about a 20% discount from the $10.85-per-share book value that the company had as of March 31. For those unfamiliar with book value, it’s a proxy for the total value of a company’s assets that shareholders would theoretically receive if the business had to liquidate.

FPI’s discount to book value strongly suggests that its shares are undervalued, likely due to recent trade-war and interest-rate fears. While this might restrain FPI shares in the near term, I instead choose to focus on the stock’s long-term favorable fundamentals discussed above. That said, FPI shares have had a favorable move higher since early May and that has the shares approaching over bought status. Given the upside to be had, we’re adding the shares to the Select List, but we would look to scale deeper into the position below $8, which would also serve to improve our cost basis.

Like most REITs, odds are Farmland will use its balance sheet to grow its operating business by acquiring additional farmland. If and when such transactions occur, we’ll assess the impact to the share’s book value and our price target. For now, my $12 price target equates to roughly 1.0x the company’s most recent book value of $10.85 per share, which is in line with its price to book value average over the last three years.

 

Rockwell Automation makes a strategic move and bumps up its buyback program

Yesterday, Rockwell Automation (ROK), a company that is riding our Tooling & Re-Tooling investment theme, made two announcements. The first one surrounds its upsizing its stock buyback program by $300 million to $1.5 billion. I see this as a positive in terms of supporting the share price, but it will be something to watch in terms of profit growth when Rockwell reports its quarterly earnings over the coming quarters.

The second announcement to me is far more interesting because it focused on the evolution of Rockwell’s business model. Specifically, Rockwell shared it will spend $1 billion to acquire 10.58 million shares of PTC Inc. (PTC), a company that software company focused on internet of things (IoT), augmented reality and industrial automation communications, and the Rockwell CEO, Blake Moret will join PTC’s board of directors. That bite at PTC shares will equate to an 8.4% ownership stake by Rockwell in PTC. While details were in short supply, I see the partnership bringing PTC’s offerings, which are in-line with several aspects of our Disruptive Technologies investing theme, to Rockwell’s factory automation solutions. A smart move as 5G and IoT looms ahead.

The focus on ROK shares will continue to be business investment spending as companies look to take advantage of tax reform and new depreciation schedules to update and overhaul their plants and other facilities. Our price target on ROK shares remains $235.

  • On the heels of a smart equity investment in PTC Inc. (PTC), we reiterate our $235 price target for shares of Rockwell Automation (ROK).