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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.
Yet again, boosting our price target on Universal Display

Yet again, boosting our price target on Universal Display

KEY POINTS FROM THIS POST:

  • We are boosting our price target on Universal Display (OLED) shares to $175 from $135 given the increasingly apparent shortage in organic light emitting diode displays.

  • Maintaining our price target of $55 on Applied Materials (AMAT).

Over the last week following the introduction of the organic light emitting diode display (OLEDs) contained in Apple’s (AAPL) new iPhone X, Universal Display (OLED) shares on the Tematica Investing Select List have come into focus.

How into focus?

Even USA Today ran an article on the iPhone X that cited the current OLEDs shortage as the reason behind the later than expected shipping date for that new flagship Apple (AAPL) smartphone:

“OLED manufacturers can’t build the screens fast enough as they increasingly pop up on smartphones, high-definition TVs, watches, virtual reality headsets and other gizmos. It’s an issue that not only is dogging Apple, costing it billions of dollars in short-term sales, but has tripped up Samsung, HTC and Google, too.”

The article goes on to discuss OLED display dynamics, as well as the demand for the technology from larger format TVs and prospects for other applications. On the heels of that article, we are hearing chatter among traders that Wall Street firms are turning increasingly bullish on Universal Display shares, hence the “pop” in the share price over the last few days — opening above $140 at the bell this morning.

From our perspective, this is not necessarily new information and we’ve suspected that as the Apple event came and went, the herd would recognize Universal Display’s position in the OLED display industry. As the herd once again catches up to us, we’re going to leap ahead of them yet again by boosting our price target on Universal Display shares to $175 from $135. This new price target, which equates to 1.0x on a price to earnings growth basis when applied to consensus 2018 EPS expectations of $2.85 up from $1.10 in 2016, offers just over 20% upside from current levels.

  • We are boosting our price target on Universal Display (OLED) shares to $175 from $135.

 

As we boost this price target, we should also keep in mind the current organic light emitting diode capacity crunch bodes well for display equipment demand at Applied Materials (AMAT). As a reminder, Applied Materials is holding its 2017 Analyst Day on September 27th, and we expect a bullish update on both its display business as well as its semiconductor capital equipment one.

  • Our price target on Applied Materials (AMAT) shares remains $55

 

 

WEEKLY ISSUE: Thematic Tailwinds Blow Strong, Even as Market Fundamentals Bring Concern

WEEKLY ISSUE: Thematic Tailwinds Blow Strong, Even as Market Fundamentals Bring Concern

Even though our concerns over the underlying fundamentals of the market remain — especially amidst this most recent rebound — thematic tailwinds continue to propel several of our positions on the Tematica Select List, particularly those tailwinds for the Cash-Strapped Consumer and Connected Society investment themes.

 

The week started off in rebound mode for the stock market. The damage from Hurricane Irma, while severe with several million people still without power, was far less than the devastation many forecaster models had been predicting. That sigh of relief sent stocks climbing on Monday and put the major market indices back to new record highs. While many likely cheered that rebound — especially those investors that have only recently returned to the market — several underlying dynamics remain, which could make for potential trouble in the coming weeks.

Those concerns are the same items we recapped earlier this week as part of our thought process behind Goldman Sachs (GS) CEO Lloyd Blankfein sharing the current market environment has him “unnerved”. Unfortunately, these items did not fade with the passing of Irma, nor are they likely to and in the case of market’s stretched valuation, the rebound is only exacerbating things further. Furthermore, we have yet to see any markedly downward revisions into GDP forecasts for the current quarter, despite the tens of billions in hurricane damages and business interruptions. Hardly surprising, given the regional Federal Reserve banks adjust their forecasts to published economic data and the impact of the two storms has yet to turn up in the data. But it will in the coming weeks, just the way it did in the August auto & truck data, and will in the August Retail Sales data out later this week.

From the perspective of the Tematica Select List, we continue to see the August Retail Sales report putting some much-needed perspective around Costco Wholesale (COST) shares given the simply stellar monthly comparable sales figures the company has been delivering.

  • We continue to rate Costco Wholesale (COST) shares a Buy with a $190 price target.

 

When Market Concerns Arise, Relying on a Thematic Approach is Even More Crucial

Amid the noise in that retail sales data, we suspect our Connected Society theme and our Amazon (AMZN) shares will be share gainers from the recent Back to School shopping season. That’s also a positive for the position in United Parcel Service (UPS) that is on the Tematica Select List, and we see those shares being strong performers once again in the upcoming holiday shopping season that increasingly includes Halloween.

As crazy as it may seem, in 2016 American spent roughly $8.4 billion on Halloween. We’re already seeing rows and rows of Halloween candy line our grocery stores, even though soda manufacturers like Coca-Cola (KO) and PepsiCo (PEP), and now sports drinks companies, are looking to reduce sugar content in their offerings. We see the unsweetening of the beverage category continuing to benefit our position in International Flavors & Fragrances (IFF) as manufacturers look to replace that oh so yummy sugar taste with other appealing, yet healthier, solutions. Should the move to limit sugar spill over into candy and other confections, it would be another shot in the arm for IFF shares and potentially McCormick & Co. (MKC) as well. We’ll be talking more on this during this week’s Cocktail Investing Podcast.

 

  • We continue to rate shares of Amazon (AMZN) a Buy at current levels, and our price target remains $1,150.
  • United Parcel Service (UPS) shares, up more than 14% since being added to the Tematica Select List, are now less than a handful of dollars away from our $122 price target. As such, we rate UPS shares a Hold at current levels. As a reminder, that’s a true Hold, not Wall Street speak to exit the shares.
  • The same can be said with International Flavors & Fragrances (IFF) shares, which are up nearly 17% on a blended basis. Our price target on IFF shares remains $145, however, we are revisiting this target with an upward bias.
  • Our price target on McCormick & Co. (MKC) shares remains $110.

 

 

Looking Ahead to the End of the 3rd Quarter

When we exit this week, we will have two weeks left, not only in September, but in 3Q 2017 as well. It means in roughly a month’s time, we will once again be back in the quarterly earnings deluge. Given what I discussed above, I’ll be watching and listening as companies issue business updates over the next few weeks due in part to Harvey and Irma, and putting it into perspective for Tematica Select List positions. While the debt ceiling conversation has been kicked down the road until December, next week’s Federal Reserve monetary policy meeting, which is likely to leave interest rates unchanged, should clue us a bit more into the Fed’s balance sheet unwinding timetable.

Finally, while you start preparing your holiday shopping lists, I expect the political battles in Washington will once again flare up as the 2017 election season kicks into gear, just as Team Trump looks to make its case, hopefully with some concrete details, for tax reform. Giving a shot in the arm to potential political uncertainty, this morning North Korea showed trademark defiance over new U.N. sanctions imposed after its sixth and largest nuclear test.

The bottom line is we’ve seen volatility return to the market in September, and there are reasons to think we will see more of it before we enter 4Q 2017 in just a few weeks. While we continue to turn over new candidates for the Tematica Select List, we’ll continue to be patient until those potential positions have the right mix between potential upside vs. downside. Like always, our thematic lens will continue to be our North Star.

 

 

The Silver Lining in Apple’s Otherwise Lame Special Event

Some quick words on Apple’s (AAPL) special event yesterday – it was lame!

As we feared, not only did the company’s latest products show off iterative at best features, the presentation was less than enthusiastic, as was the reception by attendees at the new Steve Jobs Theater. Candidly when Apple began talking about its new retail footprint and then started the iPhone conversation with new colors, we had a feeling it was all about to go downhill. And we were right. What ensued was a noticeable groan be it for the lack of compelling new features or the fact that Apple’s “one more thing” – the iPhone X – and its $1,000 price point won’t begin shipping until early November, far later than anyone had expected.

While we missed the move in Apple shares in recent months, we see yesterday’s underwhelming event serving as a reminder that at least for now, Apple’s business remains reliant on the slower growing smartphone market. Odds are Apple will continue to gain incremental share and generate significant cash, but the opportunity for real growth from here hinges on either a new business category or a new must-have product from an existing one. As we shared earlier this week, neither of those appears to be on the near-term horizon. Given several thematic tailwinds that power its various businesses, we’ll continue to look for an opportune entry point, but for now, it looks like the shares will fall victim to “buy the rumor, sell the news.”

 

Now for the better news…

Just because growth is lacking at Apple, there were several announcements yesterday that bode rather well when it comes to growth for Universal Display (OLED) and AXT Inc. (AXTI). Regarding Universal Display, Apple did announce it is adopting organic light emitting diode displays in the iPhone X with its Super Retina Display, however, again, that product is not set to ship until early November. This likely means a modest push out in expectations. We see that, however, as a modest bump in the road for the capacity constrained organic light emitting diode industry that is hog tied due to demand from not only Apple but other smartphone vendors as well as other applications (TVs, wearables, interior automotive lighting). If Apple follows its historical pattern, and we think it will, we expect the Super Retina Display to make its way down the lineup into other iPhone models as well as those for iPads as supply eases and newer iterations are introduced.

While Apple’s didn’t specifically point to a display capacity shortage as the culprit behind the later than expected ship time for the iPhone X, its timetable when paired with recent comments from Applied Materials (AMAT) certainly suggest the industry remains constrained relative to demand. Moreover, with applications such as TVs calling for larger display sizes vs. those for smartphones and wearables, the industry is likely to be constrained for some time, especially as more TV vendors look to bring more models featuring that technology to market over the coming quarters. We see that as a good problem for Applied Materials and its display equipment business. The next update from Applied will be at its 2017 Analyst Day on September 27, and we expect an upbeat tone not only for its display business but from its semiconductor capital equipment one as well.

  • Currently, Universal Display (OLED) shares are up a whopping 149% since we initiated the position in October, and in many respects, the outlook continues to brighten.
  • As we move into 4Q 2017 and with increasing clarity on the growing number of applications we will be revisiting our $135 price target, odds are with an upward bias.
  • We continue to be bullish on Applied Materials (AMAT) shares and our price target remains  $55.

 

Turning to AXT Inc (AXTI), Apple did announce it was bringing standalone wireless connectivity to its latest Apple Watch. In order for that to happen, Apple has to pack the device with cellular technology, which means RF semiconductors that are based on AXT’s compound substrates. This is one more step in the expanding array of connected devices under the Internet of Things umbrella. From our perspective, the untethering of Apple Watch from the iPhone makes this newest model the one consumers are most likely to desire. While it’s still not enough to move the needle for Apple, it does move it for AXT.

  • We will use this incremental demand to bump our price target on AXT (AXTI) shares to $11 from $10.50. The added upside keeps our Buy rating on the shares in place.

 

On a disappointing note . . .

There was no update on Apple Pay in yesterday’s event, other than how with its new iPhone X it is utilizing its new Face ID technology as part of the payment process with Apple Pay. We were hoping for a more meaningful update given our position in USA Technologies (USAT), but we’ll happily settle for the news coming out of CVS Health (CVS) that it is utilizing new vending machines at “select landmark locations to outside of its store footprint. These machines will be stocked with things like over-the-counter medications, beauty and personal care products, eye care and oral health care products, first aid items, batteries, phone chargers, earbuds, and healthy snacks and beverages. We see this as yet another expansion in the unattended retail market that hinges on cashless consumption that is enabled by USA’s products and services.

  • Our price target on shares of USA Technologies (USAT) remains $6.

 

Here’s what we’ll be watching for at today’s Apple special event

Here’s what we’ll be watching for at today’s Apple special event

Several of the Disruptive Technologies investment theme companies currently on the Tematica Select List will play a key role in the Apple Special Event scheduled for Tuesday, September 12th. In all likelihood the companies themselves will never be mentioned during the event, but with expectations once again running high ahead the next generation iPhone, here’s what we’ll be watching for as it pertains to the Tematica Select List.

 

Early this afternoon, Connected Society and smartphone reliant Apple (AAPL) will hold its next special event that is widely expected to unveil a bevy of new products, including its latest iPhone models. Much has been made over the last few days of “leaked information” over these new models as well as new iterations for Apple TV and Apple Watch, but as exciting as those other new products may be because the iPhone is the majority of Apple’s revenue and profits odds are investors will focus their attention on those new models.

While we don’t own Apple shares, and we touched on at least one of those reasons yesterday, there are several companies on the Tematica Select List that will be affected by today’s special event – Universal Display (OLED), Applied Materials (AMAT), and AXT Inc. (AXTI) as well as USA Technologies (USAT) and Nuance Communications (NUAN).

 

Universal Display (OLED) 

As subscribers should be aware, Universal Display is a Disruptive Technology investment theme company that supplies needed chemicals and intellectual property utilized in the manufacturing of organic liquid crystal displays (OLEDs). Over the last few months, there has been much talk of ramping demand in an industry that is capacity constrained as Apple begins to adopt the technology in the iPhone while other applications (other smartphone vendors, TVs, wearables and automotive interior lighting) continue to replace existing lighting and displays with OLEDs. There are now indications that Apple is likely to introduce OLEDs in its new premium iPhone, purportedly the iPhone X.

The issue, however, is that it is being reported that the manufacturing of iPhone X device is currently capped at around 10,000 units per day and may not begin shipping until next month. This could be due OLEDs supply constraints, but if this speculation over the iPhone X turns out to be true, we could see a pullback in our OLED shares, especially following the more than 18% move in the last month alone that has the shares bumping up against our $135 price target. We continue to think that as the adoption of OLEDs continues to ramp up, we will see a step-function higher in our price target for Universal Display shares, but in the near-term, our concern is that rapid climb in the share price could hit a “buy the rumor, sell the news” wall following Apple’s event. If such an outcome occurs, our view is subscribers should continue to hold OLED shares for the long-term. If the shares retreated to the $110-$115 level, which would be a sharp pullback, we would view that as another bite at the apple for subscribers that have so far held off buying OLED shares.

  • Our price target on Universal Display (OLED) shares remains $135
  • For now, subscribers that have missed out on OLED shares should look to scoop them up between $110-$115.

 

Applied Materials (OLED) 

If the supposition that Apple’s iPhone X production is capped because of capacity constraints for OLEDs, we see that being a resounding positive for shares of Disruptive Technology company Applied Materials (AMAT). As a reminder, Applied not only manufactures semiconductor capital equipment (the machines that make chips) it does the same for displays, including OLEDs. Applied has been rather frank about the robust demand for OLEDs, and it remains one of the reasons we are bullish on AMAT shares. Others include rising memory demand as well as ramping in-country semiconductor capacity in China.

  • Our price target on Applied Materials (AMAT) shares remains $55.

 

AXT Inc. (AXTI)

We would be surprised to hear Apple talk about 5G wireless technology, which would require several additional layers of RF semiconductors, largely because most wireless carriers like AT&T (T), Verizon (VZ) and T-Mobile USA (TMUS) are still testing the technology. If, however, the Apple Watch is updated to include LTE wireless technology, that would be a source of new demand for RF semiconductors, like those from Skyworks Solutions (SWKS) and Qorvo (QRVO). In turn, that means those companies, as well as other RF semiconductor suppliers of Apple’s, would require additional compound semiconductor substrates from AXT Inc. (AXTI). While we still see the eventual deployment of 5G networks that will drive incremental RF semiconductor demand as the key driver longer-term for AXT’s business, incremental demand from devices like Apple Watch is certainly welcome.

  • Our price target on AXT Inc. (AXTI) shares remains $10.50

 

USA Technologies (USAT) & Nuance Comm. (NUAN)

Finally, during today’s presentations, we’ll also be watching and listening for incremental news on USA Technologies (USAT), an Apple Pay partner, as well as Nuance Communications (NUAN). In iOS 11, Apple will continue to expand the services offered through Apple Pay, and we expect to hear at least some usage statistics from Apple CEO Tim Cook today. With Nuance, voice continues to become the new interface of choice across new applications from smart speakers to chat-bots, like those being rolled out by Google (GOOGL), Facebook (FB) and yes, Apple, and that keeps us bullish on NUAN shares.

  • Our price target on USA Technologies (USAT) shares remains $6
  • Our price target on Nuance Communications (NUAN) remains $21.

 

 

 

WEEKLY ISSUE: What September May Bring

WEEKLY ISSUE: What September May Bring

Alright, alright, alright! Welcome back from the last bit of summer vacation, and it’s back to business for companies and stocks. We’ve moved from sleepy August to September, historically one of the most volatile months for stocks. Over the last few weeks, we’ve chin-wagged quite a bit over the items that could disrupt the market, but as happens from time to time, something appears out of thin air that is an unexpected disruptor. Last week that was the damage done by Hurricane Harvey, and now we have not just one but potentially two more hurricanes to contend with – Irma and Jose. Also adding to the news mix was the return of North Korea, following its nuclear test over the holiday weekend.

 

WE KNOW ONE THING SEPTEMBER WILL BRING . . . DRAMA

Normally after the Labor Day weekend, we see trading volume return to normal and the “B-team” that was covering trading desks replaced by the A-team. As they return, those players pore over data and happenings over the last few weeks that they’ve been away. This helps explain why September tends to be one of the more volatile months for stocks.

Another reason for the September volatility spikes is that in the coming days we’re going to see a return of investor conferences, and companies presenting at these events will give their first update since reporting 2Q 2017 earnings back in July. These updates will shape the tone of the second half of the year, and as we’ve shared previously, expectations call for meaningful EPS growth compared to the first half. In the coming days, we’ll start to see if those forecasts are as aggressive as we think they are given the speed of the economy.

We already know that Harvey and Irma will be and near-term economic shock to the system, likely resulting in a meaningful hit to GDP in the current quarter. In the coming days and weeks, we expect to hear retailers, restaurants, insurers, and others that have been impacted by Harvey reset expectations, and that is likely to weigh on the market near-term.  Eventually, we’ll see a snap back as rebuilding occurs in the coming months, but that will benefit a different set of companies than those affected. With that in mind, yesterday, we posted our thoughts on what the fallout could mean from the Harvey-Irma combination and shared a who’s who of stocks that are likely beneficiaries. With Jose being added to the mix, things could be even brighter for that list of companies we’re scoping out.

Cocktail Investing: Hurricane Harvey and its Impact on the Markets and EconomyAs we wait to see the incremental impact to be had from both Irma and Jose, let’s remember something we called out on last week’s Harvey focused podcast – the rebuilding effort, including federal relief, could trigger a sooner than expected debt ceiling coverage. Now we’re getting wind that the Republican Freedom Caucus is opposed to attaching a funding request for Hurricane Harvey aid to a debt limit increase and on the news that President Trump ended the Deferred Action for Childhood Arrivals (DACA) program. There has been no shortage of DC drama these last several weeks, and as we noted a few weeks ago, and with the debt ceiling discussion and tax reform taking center stage that DC drama is likely to extend its current run in the center ring.

We see this a one drama replacing another, with the one replaced being the Fed’s expected September balance sheet unwinding. In our view, following the near-term economic impact by Harvey and potentially the other hurricanes odds are the Fed will hold off with its balance sheet unwinding for a few more months. Even Federal Reserve Governor Lael Brainard argued this week the economic effects of Hurricane Harvey “raise uncertainties about the economic outlook for the remainder of the year” and argued for “a wait-and-see approach” before raising rates again. We’ve already seen another push out in rate hike expectations, and as balance sheet unwinding slips closer to the end of the year we’ll likely see yet another push out for the next Fed rate hike as well.

Putting these pieces together – hurricanes and the GDP impact, ongoing DC drama, and companies poised to reset guidance – it’s no surprise we’ve seen the Volatility Index perk up yesterday. Again, as the A-team on Wall Street has returned to their saddles. Most likely this means a thorough going over with an extra eye on risk management, as the herd looks to lock in profits.

We’ll be doing the same – revisiting thematic data points that reside in our own Thematic Signals and elsewhere – to do a review of positions on the Tematica Select List. As you saw with our recent exit of Dycom (DY) shares, we’re not ones to fall in love with the positions, but as you saw yesterday when we added to Costco (COST) shares when we see a mismatch between fundamentals and stock price performance, we’ll take action.

 

Thematic Data points this week — Apple & Universal Display

We have no companies reporting earnings this week, but we will be looking at thematic data points found in results from Safety & Security company American Outdoor Brands (AOBC), Cashless Consumption contender VeriFone (PAY) and Affordable Luxury company Restoration Hardware (RH). Next Tuesday, September 12th, Apple (AAPL) is set to take the wraps off its next iPhone iteration and this means we’ll finally get the official word on Apple’s use of organic light emitting diode displays. As we recently cautioned, there tends to be much build up ahead of these Apple events, and there is a history in the post-Steve Jobs era of them underwhelming. If that happens, we could see shares of Disruptive Technology position Universal Display (OLED) come under some pressure. Given the accelerating adoption of the technology across a variety of applications beyond smartphones, we would view any pullback as an opportunity.

  • 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.

 

Be sure to check the website as well as your email for updates and other alerts as we share more thematic insights and actions during the week.

 

 

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.
Bearish Thoughts on General Motors Shares

Bearish Thoughts on General Motors Shares

While higher interest rates might be a positive for financials, at the margin, however, it comes at a time when credit card debt levels are approaching 2007 levels according to a recent study from NerdWallet. The bump higher in interest rates also means adjustable rate mortgage costs are likely to tick higher as are auto loan costs, especially for subprime auto loans. Even before the rate increase, data published by S&P Global Ratings shows US subprime auto lenders are losing money on car loans at the highest rate since the aftermath of the 2008 financial crisis as more borrowers fall behind on payments. If you’re thinking this means more problems for the Cash-strapped Consumer (one of our key investment themes), you are reading our minds.

In 4Q 2016, the rate of car loan delinquencies rose to its highest level since 4Q 2009, according to credit analysis firm TransUnion (TRU). The auto delinquency rate — or the rate of car buyers who were unable make loan payments on time — rose 13.4 percent year over year to 1.44 percent in 4Q 2016 per TransUnion’s latest Industry Insights Report. That compares to 1.59 percent during the last three months of 2009 when the domestic economy was still feeling the hurt from the recession and financial crisis. And then in January, we saw auto sales from General Motors (GM), Ford (F) and Fiat Chrysler (FCAU) fall despite leaning substantially on incentives.

Over the last six months, shares of General Motors, Ford, and Fiat Chrysler are up 8 percent, -2.4 percent, and more than 70 percent, respectively. A rebound in European car sales, as well as share gains, help explain the strong rise in FCAU shares, but the latest data shows European auto sales growth cooled in February. In the U.S., according to data from motorintelligence.com, while General Motor sales are up 0.3 percent for the first two months of 2017 versus 2016, Ford sales are down 2.5 percent, Chrysler sales are down 10.7 percent and Fiat sales are down 14.3 percent.

In fact, despite reduced pricing and increasingly generous incentives, car sales overall are down in the first two months of 2017 compared to the same time in 2016.

 

So what’s an investor in these auto shares to do, especially if you added GM or FCAU shares in early 2016? The prudent thing would be to take some profits and use the proceeds to invest in companies that are benefitting from multi-year thematic tailwinds such as Applied Materials (AMAT), Universal Display (OLED) and Dycom Industries (DY) that are a part of our Disruptive Technology and Connected Society investing themes.

Currently, GM shares are trading at 5.8x 2017 earnings, which are forecasted to fall to $6.02 per share from $6.12 per share in 2016. Here’s the thing, the shares peaked at 6.2x 2016 earnings and bottomed out at 4.6x 2016 earnings last year, which tells us there is likely more risk than reward to be had at current levels given the economic and consumer backdrop.  Despite soft economic data that shows enthusiasm and optimism for the economy, the harder data, such as rising consumer debt levels paired with a lack of growth in real average weekly hourly earnings in February amid a slowing economy, suggests we are more likely to see GM’s earnings expectations deteriorate further. And yes, winter storm Stella likely did a number of auto sales in March.

Subscribers to Tematica Pro received a short call on GM shares on March 16, 2017

 

 

Barron’s Gets Behind our OLED, AMAT and DIS Positions

Barron’s Gets Behind our OLED, AMAT and DIS Positions

Over the weekend, among its many articles Barron’s published two pertaining to several positions on the Tematica Select List — Disruptive Technology plays Universal Display (OLED), Applied Materials (AMAT) and Content is King company Disney (DIS). In our view, each of these articles is bullish for the corresponding shares, but even so let’s review:

In “Corning, Samsung: China’s OLED Spend May Be Big Trouble in 2018, Says Bernstein”  following conversation with 23 companies and industry experts, investment firm Bernstein share their view that, “China is a big force in a rise in spending for display technologies, particularly, OLED, which is taking over from LCD, and also for spending on semiconductors, with the move to so-called 3-D NAND chips.”  The authors of the report go on to say:

“OLED capacity ramp-ups from the Chinese players are even more aggressive than we thought, and hence equipment and material players are benefiting from this ‘OLED capex cycle’. On the semiconductor equipment side, we are seeing a similar story – rising capex for 3D NAND coming from China will translate into good demand for semi equipment makers. Finally, for memory, DRAM supply is tight for now, so read-through is positive for DRAM pricing through 2017.”

We certainly see this rather positive and confirming for our investment thesis on Universal Display and Applied Materials. While many have and will likely continue to focus on Apple (AAPL) and its next iPhone iteration, we see a larger shift going on, much like the one we saw more than a decade ago when light emitting diode (LED) technology exploded. As LED applications expanded from mobile phones and backlighting for LCD TVs to automotive lighting, Cree (CREE) shares took off, which was very positive for our readers at the time since we had a Buy rating on the shares at the time. This time around, we see the same happening for Universal Display shares, especially since we see Universal’s business benefitting from its intellectual property licensing business. In our view that makes the company more like Qualcomm (QCOM) than Cree.

Turning to the second article, “Disney’s Iger On Movies, Parks, ESPN” the author hits a number of points that power our investment thesis — an improving movie slate and recent park price increases that should drive revenue higher this year. The article also bangs a familiar drum that is ESPN, which continues to hemorrhage customers as more and more cut the cord, but it also mentions that Disney is expected to launch its own over the top ESPN service later this year as well as ESPN landing on other over the top services like our own AT&T’s (T) DirectTV NOW. As we recently shared, Disney is also focusing on cost control inside ESPN, including laying off TV, radio, and online personalities as part of a plan to “trim $100 million from the 2016 budget and $250 million in 2017.”

Getting back to Disney’s film business, its latest release, live-action “Beauty and the Beast” delivered a record-setting weekend box office opening with $170 million. Not only was this a record-setting March opening weekend, but the seventh largest domestic opening of all-time. Internationally, “Beauty and the Beast” delivered an estimated $180 million in ticket sales from 44 material markets for an estimated $350 million global opening, making it the #14 on the all-time best list. We can already see the Disney merchandise flying off the shelves now and later this year when the DVD and video on demand releases hit just in time for year-end holiday shopping. Much the way Disney is adding Frozen and Star Wars franchise attractions to its park, we would not be surprised to see a Beauty and the Beast addition as well.

  • We continue to rate Universal Display (OLED) shares a Buy with a $100 price target.
  • Our rating on Applied Materials (AMAT) remains a Buy with a $47 price target. 
  • We continue to rate Disney (DIS) shares a Buy with a $125 price target.
Walking a Tight Rope as the Fed Faces a Stagflating Economy

Walking a Tight Rope as the Fed Faces a Stagflating Economy

The big question that’s been overhanging the market this week was cleared up yesterday when the Fed announced the next upward move in interest rates, something the stock market has been increasingly expecting over the last several weeks. In looking at the Fed’s new forecasts compared to those issued three months ago, there were no material changes in the outlook for GDP, the Unemployment Rate, on expected inflation.

We find the Fed’s action yesterday rather interesting against that backdrop, especially given its somewhat lousy track record when it comes to timing its rate increases —  more often than not, the Fed tends to raise interest rates at the wrong time. This time around, however, it seems the Fed is somewhat hellbent on getting interest rates back to normalized levels from the artificially low levels they’ve been at for nearly a decade. Even the language with which they announced the rate hike — “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent” — makes one wonder exactly what data set they are using to base the decision.

The thing is, recent economic data hasn’t been all that robust. Yesterday morning, the Fed’s own Atlanta Fed once again slashed its GDPNow forecast for 1Q 2016 yesterday to 0.9 percent from 1.2 percent last week and more than 3.0 percent in January. That’s a big downtick from 1.9 percent GDP in 4Q 2016! Given the impact of winter storm Stella, particularly in the Northeast corridor, odds are GDP expectations will once again tick lower as consumer spending and brick & mortar retail sales were both disrupted. As Tematica’s Chief Macro Strategist Lenore Hawkins pointed out yesterday, real average hourly earnings decreased 0.3 percent, seasonally adjusted, year over year in February.

Despite that lack of wage growth, we have seen inflation pick up over the last several months inside the Purchasing Managers’ Indices published by Markit Economics and ISM for both the manufacturing and services economies as well as the Producer Price Index. Year over year in February, the Producer Price Index hit 2.2 percent, marking the largest 12-month increase since March 2012. Turning to the Consumer Price Index, the headline figure rose 2.7 percent this past February compared to a year ago, making it the 15th consecutive month the 12-month change for core CPI was between 2.1 percent and 2.3 percent. We’ve all witnessed the rise in gas prices, up some 18 percent compared to this time last year, and while there are adjustments to strip out food and energy from these inflation metrics, our view at Tematica is food and energy are costs that both businesses and individuals must bear. Rises prices for those items impact one’s ability to spend, especially if wages are not growing in tandem.

It would seem the Fed is caught once again between a rock and a hard place — the economy is slowing and inflation appears to be on the move. The economic term for such an environment is stagflation. In looking to get a handle on stagflation the Fed is walking a thin line between trying to get a handle on inflation while not throwing cold water on the economy as it continues to target two more rate hikes this year.

Once again, we find ourselves rather relieved that we don’t have Fed Chairwoman Janet Yellen’s job. We’re far more content to look at the intersecting and shifting landscapes around us to look for companies positioned to prosper from multi-year thematic tailwinds like those found on the Tematica Select List. Great examples include Buy rated Applied Materials (AMAT), Dycom Industries and Universal Display (OLED) among others. As we do this, we recognize the stock market is out over its ski tips and yet to fully bake in the current and likely near-term economic reality into its thinking especially as the likely timing on potential Trump economic policies look further out than previously thought. This is likely to offer the opportunity to find such thematic beneficiaries at better prices in the coming weeks compared to today.

While we may be a tad ahead of the herd on this, we’ll continue to be prudent investors and let the data, the hard data, talk to us as we navigate our next moves with the Tematica Select List.

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.