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WEEKLY ISSUE: A Guilty Pleasure or a Habit? In this case it’s the same

WEEKLY ISSUE: A Guilty Pleasure or a Habit? In this case it’s the same

 

KEY POINTS FROM THIS ALERT:

  • We are adding shares of Habit Restaurant (HABT) to the Tematica Investing Select List as part of our Guilty Pleasure investing theme with an $11.50 price target.
  • We are boosting our price target on USA Technologies (USAT) shares to $12 from $11 following robust margin performance in the March quarter and strong prospects for more realized synergies with its Cantaloupe acquisition and new Ingenico relationship.
  • After reporting March quarter earnings that saw its net asset value per share continue to climb, we continue to rate GSV Capital (GSVC) shares a Buy with an $11 price target.

 

After formally adding shares of Disruptive Technology company AXT Inc. (AXTI) back to the Tematica Investing fold earlier this week, we’ve got a jam-packed issue this week that includes a new recommendation that brings an active position in our Guilty Pleasure investing theme onto the Tematica Investing Select List. Let’s get to it…

Adding Habit Restaurant shares to the Tematica Investing Select List

People need to eat. That’s a pretty recognizable fact. Some may eat more than others, some may eat less; some may eat meat, others may not. But at the end of the day, we need food.

As investors, we recognize this and that means considering where and what consumers eat, and also identifying companies that are poised to benefit from other opportunities. One such opportunity is geographic expansion, and with restaurants it often means expanding across the United States.

Typically, expansion is driven by new store openings, which in turn drive sales. Tracing back its expansion over the last several years, Chipotle Mexican Grill (CMG) had to build up to 2,363 locations. Even with that number of locations, per Chipotle’s recently filed 10-K, the company still expects to “open between 130 and 150 new restaurants in 2018.” At that pace, it would take quite a while before Chipotle has as many locations as McDonald’s (MCD) (more than 14,000) or Starbucks (SBUX) (just under 14,000) in the U.S. exiting last year.

A little over a year ago, Restaurant Brands (QSR), the company behind Tim Hortons and Burger King, acquired Popeye’s in part for food-related synergies but also the opportunity to grow Popeye’s through geographic expansion. In 2016, Popeye’s had some 2,600 locations compared to more than 7,500 Burger Kings in the U.S. For those wondering, that’s greater than the 2,251 locations Jack in the Box (JACK) had in 2017.

And that brings us to a quick service with a California char-grill twist restaurant that is Habit Restaurant (HABT). With just 209 Habit Burger Grill fast casual locations in 11 states spread between the two coasts, Habit has ample room to expand its concept serving flame char-grilled burgers and sandwiches, fries, salads and shakes. And if you’re wondering how good Habit is, I took the liberty of trying its products and sampling its friendly service at one of the few East coast locations — it’s work, someone had to do it. I can certainly understand why this Guilty Pleasure company was named “best tasting burger in America” in July 2014.

In 2017, the company recorded revenue of $331.7 million from which it generated EPS of $0.16. For this year, consensus expectations have it serving up revenue near $393 million, up around 18% year over year, but EPS of $0.05 — a sharp drop from 2017.

What we’re seeing is Habit hitting an inflection point as it engages a national advertising agency, opens 30 new locations this year and contends with higher wage costs (up 6%-7% vs. 2017), as well as test markets breakfast. Inflection point stocks can be tricky largely because even as things go right there can be mishaps along the way. With the company expected to open the greatest number of new locations during the March quarter, I put the shares on the back burner in early March when they were near $10 with a note to follow up after the company reported the March quarter.

Last week, Habit issued its quarterly results with year over year revenue growth near 17%, but still out of reach compared to consensus expectations, and it also missed on the bottom line. Following that report, HABT shares fell x%, bottoming our near $8.20 before settling at $8.60.

What led to the shortfall?

During the March quarter, Habit opened 11 new company-owned locations – more than the expected 7-10 for the quarter — more than one-third of its targeted new openings for 2018. Another factor was rising costs in the form of inputs (beef and chicken in the protein complex and French fries) as well as higher labor costs, particularly in California, during its peak promotional activity.

Now for the positive developments. First, to offset those higher costs the company is implementing a 3.9% menu price hike at the end of May. Second, its expansion plans – with another 20 or so company restaurants this year and 6-8 franchised locations  —remain on track with but at a slower open rate compared to the March quarter.

This expansion should help improve the company’s geographic footprint further as it follows the three new east coast locations openings (Maryland, New Jersey) opened during the March quarter. During the earnings call, the company shared that roughly 20% of its company-operated growth will be on the east coast and about 50% will be drive through locations. On another note, the company is testing a breakfast menu, which in our view is a long-term positive given that per NPD Group findings, breakfast is the fastest growing meal with 80% of that growing being had a quick service restaurants.

Now here’s the thing – no matter what metric you look at for the shares OTHER than P/E they are cheap.  The shares are currently trading at 8.0x on an enterprise value to 2018 earnings before interest, taxes, depreciation and amortization (EBITDA) basis, which is more than 40% discount to the peer group that includes Jack in the Box (JACK), Wendy’s (WEN) and other quick-service restaurants. Some of that discount is warranted as Habit has to wind its way through some likely growing pains, but as I shared above the longer-term driver of the company’s success will be geographic expansion. It bears repeating — we’ve seen this time and time again with restaurant companies ranging from Dunkin’ Donuts to Starbucks (SBUX), Chipotle (CMG) back in the day and Del Taco (TACO) more recently. There is also the chance that another quick service chain will pull a Restaurant Brands-Popeye’s move to jumpstart its own growth metrics.

With more than 25% upside to our $11.50 price target, which is still a discount to the quick service peer group, and modest downside following the news of the March quarter, the risk to reward profile in HABT shares is rather tasty. As the company continues to expand its footprint East, I’ll continue to review the impact on the business – good and bad — as well as the bottom line and what it means for our price target.

  • We are adding shares of Habit Restaurant (HABT) to the Tematica Investing Select List as part of our Guilty Pleasure investing theme with an $11.50 price target.

 

Robust margins lead us to boost our price target for USAT shares

Yesterday morning USA Technologies (USAT) reported March quarter results that pushed the shares higher in morning trading, and has us nudging our price target to $12 from $11 in response. For the quarter, USA achieved EPS of $0.04, beating the consensus by $0.03, despite missing revenue expectations for the period by just over 6%, as the company’s gross margin rose to more than 33% vs. 25.0% in the year-ago quarter.

That jump in profitability reflects continued growth in USA’s total mobile payment connection base as well as sustained growth in the dollar transaction volume carried over those connections. Exiting the quarter, USA’s total connection base stood at 969,000 across 15,600 customers (up from 504,000 and 12,400, respectively exiting March 2017), with transaction volume climbing to $318 million, up 57% higher year over year.  USA’s margins also benefitted from realized synergies from its November 2017 acquisition of Cantaloupe Systems. As a reminder, Cantaloupe utilizes cloud-based, mobile technologies to offer an integrated end-to-end vending and payment solution for cashless vending, dynamic route scheduling, automated pre-kitting and merchandising and inventory management.

We continue to see that as extremely synergistic with USA’s mobile payment platform for vending and other unattended retail applications, with more incremental revenue and profit synergies to be had in the coming quarters. Central among those synergies is new customer engagements, which should drive additional mobile payment connections and customer growth. Also adding to that is the recently inked multi-year with payment processing firm Ingenico that pairs Ingenico’s hardware, software, security and services products with USA’s mobile payment services platform. As the company’s results and guidance, including the margin commentary, are digested, we expect 2018 EPS to move higher from the pre-earnings report consensus of $0.06 for this year and $0.13 next year.

Do we continue to think that USAT will emerge as a potential takeout candidate as the mobile payment industry continues to grow and mature? Yes, but that does not factor into our new price target of $12.

  • We are boosting our price target on USA Technologies (USAT) shares to $12 from $11 following robust margin performance in the March quarter and strong prospects for more realized synergies with its Cantaloupe acquisition and new Ingenico relationship.

 

Net asset value per share continues to climb at GSV Capital

Last night shares of Asset-lite company GSV Capital (GSVC) reported mixed March quarter results with a beat on the bottom line and a miss on the top line. As I’ve shared before, the real driver of GSV’s shares price is not revenue or earnings, but the trajectory of its investment portfolio, which we measure through its net asset value per share. Exiting the March quarter, that portfolio’s net assets across 29 positions totaled approximately $210.5 million, or $9.99 per share up from to $9.64 per share at the end of 2017, and $8.83 per share exiting the March 2017 quarter.

The company’s top five holdings, which included privately held Palantir Technologies, Spotify (SPOT), Dropbox (DBX), private company Coursera and NESTGVS, accounted for 58% of GSV’s investment portfolio exiting March vs. 39% in the year ago quarter. With consensus price targets of $157 and $33 for Spotify and Dropbox shares, respectively, we continue to see added lift in the company’s net asset value per share. Should the company’s largest holding in Palantir Technologies go public as is widely postulated or be acquired, we would have a third leg to the stool driving GSV’s net asset value growth higher.

Helping the net asset value per share comparisons, GSV repurchased 1.1 million shares during the quarter for $6.2 million, which reduced the shares outstanding by 5% year over year. Following the upsizing of the company’s share repurchase program by an additional $5 million, GSV has roughly $8.8 million remaining. At current levels, the company could repurchase another 1.25 million shares, shrinking its outstanding share count by 6%.

  • After reporting March quarter earnings that saw its net asset value per share continue to climb, we continue to rate GSV Capital (GSVC) shares a Buy with an $11 price target.

 

Boosting our AMZN price target as Amazon crushes expectations

Boosting our AMZN price target as Amazon crushes expectations

KEY POINTS FROM THIS UPDATE ON AMAZON (AMZN):

  • We are boosting our price target on Amazon (AMZN) shares to $1,250 from $1,150, which keeps our Buy rating intact.
  • Last night Amazon crushed 3Q 2017 expectations and offered an upbeat take on the current quarter.
  • Culling through the quarterly results, Amazon’s key differentiator – Amazon Web Services – continues to ride the cloud adoption wave and fund its expanding services and geographic footprint.
  • 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.

 

Last night thematic investing poster child Amazon (AMZN) reported 3Q 2017 results that easily topped expectations and sent the shares soaring in after-market trading. Quickly reviewing the results, which have already been amply covered by the financial media but bear repeating as they set the tone for our conversation – Amazon delivered EPS of $0.52 vs. the consensus expectation of -$0.01 with revenue for the quarter coming in at $43.74 billion topping the expected $42.14 billion. Even backing out the $1.3 billion in revenue derived from Whole Foods, Amazon’s digital retail and Amazon Web Services (AWS) outpaced expectations. The clear driver of the upside was AWS as well as the 59% increase in its subscription services business that includes digital music, digital video, audiobooks, e-books.

As investors know, context and perspective are key and in this case, Amazon’s 3Q 2017 revenue tied its 4Q 2016 revenue, which included the 2016 holiday shopping season. Once again, the bulk of the company’s operating earnings were furnished by AWS, which we continue to see as the company’s key differentiator compared to other retailers and one of its platforms alongside its digital voice assistant Alexa that is helping it weave itself even deeper into consumer’s lives.

In Amazon tradition, the company issued rather wide guidance with revenue for the current quarter between $56-$60.5 billion, which is in line with consensus expectations and equates to a year over year increase of 28%-38%. In terms of operating income for the current quarter, Amazon shared its current view that is should fall in the range of $300 million to $1.65 billion and that compares to the $1.64 billion Wall Street was expecting and $1.3 billion earned in the year-ago quarter. Given the litany of 2017 holiday shopping forecasts that call for an acceleration in digital shopping growth rates, it’s rather likely that Amazon’s top line guidance will prove conservative… yet again.

 

Boosting our AMZN price target to $1,250

Heading into last night’s earnings report, our price target for AMZN shares was $1,150. Today, given several factors, including the accelerating pace of digital commerce, continued revenue growth and margin expansion at AWS and the burgeoning subscription revenue business, we are boosting our price target to $1,250. As we do this we are seeing other investment banks up their price targets and some that have been less enthusiastic on AMZN shares finally come around and upgrade the rating to a Buy or some equivalent. 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.

 

Culling through AMZN’s 3Q 2017 results

Digging into 3Q 2017 earnings report, Amazon rattled off more than 30 highlights which in sum point to its expanding footprint and effectively recapped a number of product and service announcements during the quarter. The real meat came in culling through the company’s income and business segment information for the quarter. In that, we see the real power behind AWS as it supplied nearly all of the company’s operating income in the quarter and just 10.5% of the quarter’s revenue. Again, we see this as the key differentiator that allows Amazon to fund its retail expansion efforts and better yet the business is on an $18 billion run rate exiting 3Q 2017, up from $13 billion coming out of 3Q 2016 and $16 billion for 2Q 2017. What this tells us is AWS continues to win share as more companies embrace the cloud, and as that occurs AWS’s margins continue to scale higher enabling Amazon to expand its geographic and service footprint.

To be fair, the North American retail business rose 35% year over year fueled in part by the ongoing shift to digital commerce that we increasingly talk about as Amazon’s service offering expands (more on that shortly) and a successful Prime Day 2017. This kept the North American business as the company’s largest, but these ongoing investments in warehouses, new services, and video content once again weighted on segment profits. Contrary to expectations, the North American segment was profitable during the quarter, but its operating margin did slip to 0.4% in 3Q 2017 vs. from roughly 1.4% in the year-ago quarter. Again, not unexpected given the number of investments Amazon continues to make so it can continue to expand its product and service offering, catering to customer wants, but better than expected. In the current stock market environment that is meaningful.

Turning to the International retail facing business, revenue rose 29% year over year to $13.7 billion, a hair shy of the $14 billion achieved in 4Q 2016 as it too benefitted from Prime Day 2017 as well as the debut of Prime in India last year. During the earnings call Amazon shared that in India, it had more Prime members join in India than in any other country in the first 12 months. Despite the amazing growth in the International business, there is no other way to say it other than this segment continues to be a drag on Amazon’s overall profit picture as its operating loss widened both sequentially and year over year. It’s being fueled by the same expansion efforts as Amazon looks to solidify its footprint outside the US by replicating the growing number of Prime services it has in the U.S. We see this as Amazon doing what it does – playing the long game, and while we will be patient with this business we will be sure to monitor its ongoing progress.

 

Amazon to unleash even more creative destruction

Above it was mentioned that Amazon continues to expand its footprint and in addition to its in sum stellar 3Q 2017 results, it was reported that Amazon is positioning to unleash its creative destruction forces on the pharmaceutical industry. Yesterday, the St. Louis Post-Dispatch reported: “Amazon has become a licensed pharmaceutical wholesaler in 12 states, with a pending application in a thirteenth.” Because , Amazon would also need to be licensed as a pharmacy in each state to which it shipped drugs we see this as signs that Amazon is making a move, with the next question being will it build its own capabilities or will it look to acquire a building block company like it did with Whole Foods and grocery? We’ll continue to watch this for what it means not only for Amazon’s balance sheet but more importantly its revenue and profit stream.

It was also quietly announced this week that “Amazon will soon allow customers in some areas to place orders for takeout food with local restaurants from inside the Amazon app.”

 

Once again, the herd catches up on Universal Display (OLED) shares

Once again, the herd catches up on Universal Display (OLED) shares

After languishing for several weeks, shares of Disruptive Technology company Universal Display (OLED) shares over the last two days popped $16, or more than 14%, to finish close last night at $127.10. The catalyst for the move was Deutsche Bank initiated coverage on the company with a Buy rating and a price target of $135, in line with our own.

While we like the herd catching up to our way of thinking, the surge in the shares comes with less than two weeks until Apple’s (AAPL) next iPhone event on September 12. We suspect over the next two weeks the iPhone rumor mill will be once again cranking up, with much chin wagging over the number of models, form factors and how many models will be employing an organic light emitting diode display. This likely means that at least in the short term, OLED shares are likely to melt higher, but as we’ve seen many, many times the devil is in the details when it comes to Apple’s new products. That means expectations in the near-term could get ahead of themselves, and we note this with 6% upside to our $135 target.


Make no mistake, we continue to see a bright future ahead for Universal Display and its organic light emitting diode chemicals and IP business over the coming quarters as the number of applications climbs alongside increasing screen sizes for smartphones and TVs. This has us long-term bullish on the shares, and while it’s likely that we might have to raise our price target on OLED shares again before the end of 2017, the risk we run in the very short-term is the shares are ahead of themselves at least temporarily.

Could this result in a “buy the rumor, sell the news” set up given Apple’s upcoming event? It’s possible, but given the medium- to longer-term growth prospects, we would see that as an opportunity for those that have missed out on scooping the shares thus far. As we’ve shared in the last few weeks, the $110-$115 share price band makes for a compelling proposition on risk-to-reward trade-off for patient investors. As new data becomes available, we’ll incorporate it into our thinking, including our price target.

  • At current levels, subscribers should “Hold” Universal Display (OLED) shares rather than commit fresh capital.
  • Our price target remains $135, but given expanding market applications for its products and licensing business, we’re inclined to be owners of the shares for the medium to longer term.
Yet again, we’re boosting the Price Target for this Disruptive Technology company

Yet again, we’re boosting the Price Target for this Disruptive Technology company

Our shares of Universal Display (OLED) continued on a tear yesterday as they climbed more than 7 percent, bringing the year to date return to a staggering 55 percent. Last week the company reported robust quarterly revenue and earnings, which as we commented had a bullish outlook. In recent weeks, we’ve seen a positive piling on with regard to the shares and the robust outlook for organic light emitting diode displays, which includes adoption in Apple’s (AAPL) next iPhone iteration, but a number of other applications as well. We’ve used the last few days to revisit our 12-24 month price target on the shares, and we are boosting that one again to $100 from $85. At the current share price that new price target offers roughly 18 percent upside.

Given the sharp rise over the last few days, we aren’t surprised by the shares giving back some of the gains today. As we commented yesterday, President Trump’s speech to Congress tonight could present a bump in the road for the stock market, which has been on a steady move higher over the previous 12 days. We interpret that march higher as the market expecting some degree of details from Trump in his speech tonight. If the speech does underwhelm with scant details, we could see the market interpret that as a push out in the timing for Trump’s fiscal stimulus agenda and tax overhaul. Again, as we shared this morning, our view has been that we are not likely to see any impact from Trump’s initiatives until late in the second half of 2017 and the stock market needs to recognize that.

That’s a long way of saying we could see OLED shares pullback further tomorrow should the market get a case of digestion mixed with expectation resetting. Subscribers that are underweight OLED shares should view that as an opportunity given the ramping demand and industry capacity for organic light emitting diode displays.

  • Our new price target on OLED shares is $100, which has us keeping our Buy rating intact.
  • We continue to have a protective stop loss at $70 for the shares.
Applied Material’s Outlook for OLEDs Boosts Our Universal Display Price Target

Applied Material’s Outlook for OLEDs Boosts Our Universal Display Price Target

This morning our shares of Disruptive Technology play Universal Display (OLED) are once again climbing higher. We attribute this to the bullish comments that compound semiconductor capital equipment company Applied Materials (AMAT) shared on the organic light emitting diode market on its earnings call last night. Given the current industry shortage for organic light emitting diode displays, AMAT has been a company to watch for potential capacity increases, and AMAT signaled that in a big way last night when it said,

  • “…In the past few months, our view of display spending has strengthened further. We now see customers increasing their investments by around $3 billion in 2017, $1 billion more than we thought in November. Our early view of 2018 is also positive.”
  • “50% of our demand going forward for this year is new customers for the mobile OLED” with orders improving across all of its mobile OLED customer base.

Taken together, these comments confirm the growing adoption of organic light emitting diode displays in the mobile market, principally in smartphones. Reading between the lines, we suspect part of the large increase from “new customers for the mobile OLED” is a thinly veiled reference to Apple (AAPL) and its 2017 iPhone refresh. Looking past mobile, we continue to see growing demand for this disruptive display technology from TV and wearable applications as well as those in Internet of Things applications.

On the back of this news, we are boosting our price target on OLED shares to $80 from $68, which offers upside of just over 10 percent from current levels. Our next catalyst for the shares will be when Universal Display reports its quarterly earnings on Feb. 23. Given the industry developments, we expect the company to offer a bullish outlook for 2017 and beyond. Even so, we’d need to see either upside in the shares in the range of $85-$90 or a pullback below $65 to warrant a Buy rating on OLED shares.

  • We are maintaining our Hold rating on OLED shares even as we bump up our price target to $80 from $68.