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Weekly Issue: Looking for Trump-Proof Companies

Weekly Issue: Looking for Trump-Proof Companies

We exited last week with the market realizing there was more bark than bite associated with President Trump’s steel and aluminum tariffs. That period of relative calm, however, was short-lived as the uncertainty resumed in Washington yesterday in the form of changeups in the administration with Trump letting go Secretary of State Rex Tillerson just after agreeing to talks with North Korea, and more saber rattling with trade actions against China for technology, apparel, and other imports. This also follows Trump’s intervention in the proposed takeover of Qualcomm (QCOM) by competitor Broadcom (BRCM).

While many an investor will focus on the “new” volatility in the market, I’ll continue to use our thematic lens to look for companies that are “Trump-Proof” in the short-term. That’s not a political statement, but rather a reflection of the reality that the modus operandi of President Trump and his Twitter habit often cause significant swings in the market as the media attempts to digest and interpret his comments.

How will we find these so-called Trump-proof companies? By continuing to use our thematic lens to uncover well-positioned companies that are benefitting from thematic tailwinds that alter the existing playing field, regardless of the latest noise from Washington politicians.

At least for now, volatility is back in vogue and that is bound to drive headlines and other noise. I’ll continue to focus on the data, and if you read this week’s Monday Morning Kickoff you know we are in the midst of a whopper of a data week. While the Consumer Price Index (CPI) for February was in line with expectations, and on a year over year basis core rose 1.8% — the same as in January — which should take some wind out of the inflation mongers. This morning we have the February Retail Sales report, which in my view should once again serve up confirming data for our positions in Amazon (AMZN) and Costco Wholesale (COST), which continue to benefit from our Connected Society and Cash-strapped Consumer investing themes.  Later in the week, the February reading on Industrial Production should confirm the demands that are exacerbating the current heavy truck shortage here in the U.S. – good news for the Paccar (PCAR)shares on the Tematica Investing Select List.

 

 

An Update on Our Once Star Performer, Universal Display (OLED)

A few weeks ago, I shared an update on Universal Display (OLED) shares, which have been essentially treading water following the company’s December quarter results. Later today, the management team will be presenting at the Susquehanna’s Seventh Annual Semi, Storage & Tech Conference. Odds are the management team will reiterate its view on market digesting the organic light emitting diode capacity additions made over the last several quarters, but I expect they will also describe the growing number of applications that will come on stream in the next 3-6 quarters.  As of late February, Susquehanna had a positive rating on OLED shares with a price target of $200 and I suspect they will have some bullish comments following today’s presentation.

 

Considering the ripples to be had with the latest Connected Society victim, Toys R Us

Over the weekend we were reminded of the situation facing many brick & mortar retailers that are failing to adapt their business to ride our Connected Society investing theme. I’m referring to toy and game retailer Toys R Us, the one-time Dick’s Sporting Goods (DKS) or Home Depot (HD) of its industry. Like several sporting goods retailers and electronic & appliance retailers such as Sports Authority, Sports Chalet, and HH Gregg that have gone belly up, if Toys R Us doesn’t get a last-minute lifeline or find a buyer it will likely file Chapter 7.

It’s been a rocky road for the one-time toy supermarket company as it entered bankruptcy in September, aiming to emerge with a leaner business model and more manageable debt. The company obtained a new $3.1 billion loan to keep the stores open during the turnaround effort, but results worsened more than expected during the holidays, casting doubt on the chain’s viability. The company entered this year with more than 800 stores in the U.S. — under both the Toys “R” Us and Babies “R” Us brands, but by January, it announced the shuttering of 180 locations.

The pending bankruptcy to be had at Toys R Us is but the latest in the retail industry, but it’s not likely to be the last. Claire’s Stores Inc., the fashion accessories chain with a debt load of $2 billion, is also preparing to file for bankruptcy in the coming weeks as is Walking Co. Holdings Inc.

What these all have in common is the increasing shift by consumers to digital commerce and the growing reliance on retailers for what is termed the direct to consumer (D2C) business model. Certain branded apparel, footwear, and other consumer product companies, like Nike (NKE) have embraced Amazon’s formidable logistics capabilities and this has benefitted our United Parcel Service (UPS) shares. As we have said before, and we recognize it sounds rather simplistic, when you order products online they have to get to where they are being sent. Hello UPS!

Now let’s consider the ripple effect of the pending Toys R Us bankruptcy.

When events such as this occur, there is a liquidation effect and a subsequent void. As we saw when Sports Authority went bankrupt, the businesses at Nike and Under Armour (UAA) were impacted by liquidation sales in the short term. At the same time, both lost the recurring sales associated with Sports Authority. Odds are we will see the same happen with Toys R Us with companies like Mattel (MAT) and Hasbro (HAS) taking it on the chin. In my view these companies are already struggling as teens, tweens and kids of all ages shift to digital games, apps and e-gaming, which are aspects of our Connected Society and Content

In my view these companies are already struggling as teens, tweens and kids of all ages shift to digital games, apps and e-gaming, which are aspects of our Connected Society and Content is King themes. When was the last time you saw an elementary schooler play with Ken or Barbie? More likely they are on an iPad or Microsoft (MSFT) Xbox while their older siblings are playing the new craze sweeping the nation – Fortnite. And yes, that it appears the rumors are true and Fornite will soon be available across Apple’s iDevices.

Looking at the financial performance of Mattel, not even the all mighty Star Wars franchise could save them from delivering declining revenue and earnings this past holiday shopping season. On the liquidation front, we are likely to see the toys businesses at Target (TGT) as well as Walmart (WMT) take the brunt of the blow. But here too this is likely just another hit as these two retailers have already been dealing with falling revenue at Mattel and Hasbro. Walmart is the largest customer for Mattel and Hasbro, accounting for about 20% of total sales for each toy maker. Both toy companies get nearly 10% of their revenue from Target too.

One of the investing strategies that I employ with the Select List is “buy the bullets, not the guns” which refers to buying well-positioned suppliers that serve a variety of customers. In situations like what we are seeing in the brick & mortar retail sector, we can turn that strategy upside down and uncover those companies, like Mattel and Hasbro, that we as investors should avoid given the multiple direct and indirect headwinds they are currently facing or about to.

 

Blue Apron and GNC, two examples of the struggle to fight against thematic headwinds

Blue Apron and GNC, two examples of the struggle to fight against thematic headwinds

 

In Tematica Investing, we focus on companies that are benefitting from tailwinds associated with our investment themes. As a good institutional portfolio manager knows, avoiding problematic investments is critical as they can sabotage returns to be had from well-positioned ones. In our Tematica lingo, that means avoiding companies that have thematic headwinds bearing down on their businesses and buying companies that are rising the tailwinds.

 

No need to revisit Blue Apron shares

We’ve been bearish on shares of Blue Apron (APRN) and we’ll try not to pat ourselves too hard on the back as we take a victory lap on that call.

As we saw yesterday, there is a good reason to remain that way as Walmart (WMT) is formally getting into the meal kitting business. While many were expecting Amazon (AMZN) to leverage its Whole Foods Market business with its own meal kitting offering (we still are), Walmart is leveraging its position as the largest grocer to enter the fray. The goal for the brick & mortar retail giant is to help build its digital footprint as well as take share from the restaurant industry, which has been pressured by weak traffic and average ticket pressure. Odds are Walmart is also looking to ride the consumer shift toward healthier eating and snacking that is part of our Food with Integrity theme along with a hefty dose of our Connected Society one.

All in all, this looks like a good extension for Walmart and one that is poised to make an already challenging environment even more so for Blue Apron.

 

 

Struggling GNC Holdings looks East

Another company that has been running into a significant thematic headwind is GNC Holdings (GNC). Once a dominant player in the sports performance and nutrition space (otherwise known as body-building), the supplement retailer has been attempting to reposition itself to a wider audience as a seller of “health, wellness and performance products.” As the performance market has moved online and to other sources, GNC has been attempting to capture more women and appeal to the Boomers and their set of nutritional needs, which are far different than the iron clangers in the free weight section of the gym.

To say this stock price chart looks like a one-way roller coaster that only goes down would be an understatement. A better comparison would be an alpine slide that starts extremely high up a mountain, has several twists and turns, but only goes in one direction – down. Since peaking in late 2013 near $60, that’s exactly what we’ve seen with GNC shares as its profits turned to losses despite a comparatively modest dip in revenue over the last few years.

 

 

In perusing the company’s latest 10K filing, the company offers up an explanation of sorts: “Prior to 2017, we had been experiencing declining traffic trends leading to decreasing same-store sales in our retail stores. After extensive consumer research and market analysis, we determined that our business model needed to be reimagined.”

Not exactly what a shareholder, existing or prospective one, wants to hear, but at least we can credit the management for not acting like an ostrich with their head in the ground as Amazon rolled into space as did others. The combination of having to “reimagine” its business model as well as fend of competitors led annual Selling, General & Administrative expenses to rise over 2015-2017 as revenue shrank, pushing GNC to deliver bottom-line losses.

Digging into the financials, the company experienced negative same-store sales in every quarter during 2016 and the first two of 2017. Making matters worse, average transaction amount was in negative territory over the last five quarters, and sales at GNC.com sales were falling as well. December 2017 quarterly sales were up 0.2% in company-owned stores vs. down 1.2% in the September 2017 quarter.

Not exactly a recipe for success, but clear signs the company could be in turnaround mode. What makes this potential turnaround interesting is the new partnership with CITIC Capital and Harbin Pharmaceutical Group. As a way of background, CITIC Capital is a global investment firm with a strong position in China and the Harbin Pharmaceutical Group is a joint venture of several China-based pharmaceutical companies. CITIC will invest $300 million in the form of a newly issued convertible perpetual preferred security with a 6.5% coupon payable in cash or in kind and a $5.35 conversion price. GNC will use the funds to repay existing debt and for other general corporate purposes, and on an as-converted basis, CITIC will hold roughly 40% of GNC’s outstanding equity. That’s a significant shareholder and one that will also appoint a total of five members to GNC’s newly expanded 11 member board.

The company expects the transaction to close in the second half of 2018, but it will require regulatory approval in both the U.S. and China. Given the current geopolitical tensions we are reading about almost daily, there could be some speed bumps associated with these approvals. Also too, GNC is ramping marketing associated with its recently launched pricing strategy and loyalty program, One New GNC strategy in the current quarter. This likely means margin pressure is poised to continue.

The bottom line is even though GNC is facing steep competitive domestic pressures, it’s new relationships could pivot its business but there are several hurdles to be overcome. Keyword being “could.” The risk related question I find myself asking is “Yes, I understand what the management team is saying, but what if the pivot or turnaround doesn’t happen as expected?”

We’ve seen many a company that in the face of thematic headwinds and mounting competitive pressures have attempted to reposition their businesses. Few have succeeded. My gut tells me that GNC, much like Blue Apron, Blackberry (BBRY), Angie’s List, GoPro (GPRO), Fitbit (FIT) and others, is on the road to nowhere for investors. But that’s my gut, which means reminding myself to keep an open mind and watch the data as it becomes available.

 

 

 

With more earnings on the way, getting ready for a shortened week for stocks

With more earnings on the way, getting ready for a shortened week for stocks

Today is all quiet when it comes to the domestic stock market as they are closed in observance of President’s Day. While never one to dismiss a long weekend, it does mean having a shorter trading week ahead of us. From time to time, that can mean a frenetic pace depending of the mixture and velocity of data to be had. This week, there are less than a handful of key economic indicators coming at us including the January Existing Home Sales report and one for Leading Indicators.

Midweek, we’ll get the report that I suspect will be the focus for most investors this week – the monthly Flash PMI reports for China, Europe and the U.S. from Markit Economics. These will not only provide details to gauge the velocity of the economy in February, but also offer the latest view on input prices and inflation. Given the inflation focus that was had between the January Employment Report and the January CPI report, this new data will likely be a  keen focus for inflation hawks and other investors. I expect we here at Tematica will have some observations and musings to share as we digest those Flash PMI reports.

On the earnings front, if you were hoping for a change of pace after the last two weeks, we’re sorry to break the news that more than 550 companies will be reporting next week. As one might expect there will be a number of key reports from the likes of Home Depot (HD) and Walmart (WMT).  For the Tematica Investing Select List, we’ll get results from four holdings:

 

MGM Resorts (MGM) on Tuesday (Feb. 20)

When this gaming and hospitality company reports its quarterly results, let’s remember the Las Vegas shooting that had a negative impact on overall industry Las Vegas gaming activity early in the December quarter. In amassing the monthly industry gaming data, while gaming revenue rebounded as the seasonally slow quarter progressed, for the three months in full it fell 5% year over year. Offsetting that, overall industry gaming revenue for the December quarter rose 20% year over year in Macau.

Putting these factors together and balancing them for MGM’s revenue mix, we’ve seen EPS and revenue expectations move to the now current $0.08 and $2.5 billion vs. $0.11 and $2.46 billion in the year ago quarter. On MGM’s earnings call, we’ll be looking to see if corporate spending is ramping down as had been predicted as well as what the early data has to say about the new Macau casino. We’ll also get insight on the potential direct and indirect benefits of tax reform for MGM’s bottom line.

  • Heading into that report our price target for MGM shares remains $37.

 

Universal Display (OLED) on Thursday (Feb. 22).

After several painful weeks, shares of Universal Display rebounded meaningfully last week following the news it re-signed Samsung to a multi-year licensing deal and an upbeat outlook from Applied Materials (AMAT)for the organic light-emitting display market. For subscribers who have been on the sidelines for this position, with the Apple (AAPL) iPhone X production news now baked in the cake we see this as the time to get into the shares. We expect an upbeat earnings report to be had relative to the December quarter consensus forecast for EPS of $0.85 on revenue of $100 million, up 55% and 34%, respectively, year over year.

Based on what we’ve heard from Applied as well as developments over organic light emitting diode TVs and other devices at CES 2018, we also expect Universal will offer a positive outlook for the current as well as coming quarters.

  • Our price target on OLED shares remains $225.

 

 

Kicking the tires on Rite Aid shares

Kicking the tires on Rite Aid shares

There are several facets to our Aging of the Population investment theme, ranging from the obvious — assisted living, pharmaceuticals, financial services and vitamins and supplements — to the not so obvious such as online shopping, disruptive technology and artificial intelligence which can help maintain independence as the physical realities of an aging body take hold.

We as a people are also living longer, and statistics tabulated by Milliman show an encouraging pattern of increased life expectancy which will trigger increased consumption patterns in the population for medical services and pharmaceuticals. This should be a positive tailwind to pharmacy companies, such as CVS Health (CVS), Walgreen Boots (WBA) and Rite Aid (RAD) that are also pivoting their businesses toward health and wellness offerings. This tailwind also bodes well for the pharmacy businesses at Tematica Select List holding Costco Wholesale (COST) and other companies, like Kroger (KR) and other grocery chains, that have pharmacies.

Looking back over 2017, it was a painful year for Rite Aid, as its shares fell around 75%. Part of that reflects regulators blocking the acquisition of Rite Aid by Walgreens Boots Alliance for some $9.4 billion. After attempts to structure a deal that would placate regulators, this past September the two companies announced that Rite Aid would instead sell off more than 1,900 stores and three distribution centers to Walgreens for $4.375 billion in cash. Rite Aid is in the process of transferring those stores and facilities over to Walgreens, a process that’s expected to span through most of 2018. In exchange, Rite Aid will be receiving an influx of cash, which it has earmarked to primarily reduce the outstanding debt on its balance sheet. That debt reduction should drive a favorable decline in interest expense, enabling the company to drop more to its bottom line in the coming quarters.

Current Wall Street expectations call for Rite Aid to post losses of $0.06 per share in 2018 and $0.03 per share in 2019. Those consensus figures are tallied from six active analysts following Rite Aid and their consensus price target is $2.07, with a consensus view of “Hold.”

As I mentioned above, we here at Tematica see the aging of the U.S. population unfolding as more baby boomers pass 70 years of age, making it a multi-year tailwind to the pharmacy business, particularly as people are living longer. That’s not to say it will be easy peasy for Rite Aid considering the pharmacy businesses at CVS Health, Walgreens, Walmart (WMT), Kroger (KR), Costco Wholesale and others. Note, we haven’t even mentioned the rumblings of bricks and mortar crusher Amazon’s (AMZN) potential entry into the category.

I’m not going to sugar coat it, folks. What all of this tells me is Rite Aid is a turnaround story, and expectations are low, which also makes it a “show-me story.”

The hope/opportunity is that the Rite Aid management team is able to transform the company quicker than expected by leveraging the 20.7 million customers in its loyalty program, improving its offerings and shrinking its operating costs as it looks to offset reimbursement pressure. Management has already identified some $96 million in administrative cost savings, and I suspect there could be more savings to be had in the coming quarters as Rite Aid continues to right size itself.

I also see the company’s predominantly domestic footprint making it a solid beneficiary in terms of tax reform. As I shared in yesterday’s weekly issue of Tematica Investing, tax reform related EPS benefits are arguably all over the map, but Rite Aid should see some lift to its 2018 EPS forecast – the question is how much? More than likely this combination will lead to better-than-expected EPS performance over the coming quarters, and with the current low expectations that would likely move RAD shares, especially if its analyst following became either more bullish or less bearish on the company.

The question is one of magnitude in terms of tax reform benefits vs. expectations, and for that reason, I’m inclined to hold off on adding RAD shares to the Select List until we have some clarity on this key issue, especially since Rite Aid has been received income tax benefits in recent quarters. With the company’s next earnings report likely to occur in early April, we can look at results from CVS Health and Walgreens to get a handle on the potential tax reform impact to be had at Rite Aid. CVS shared that as a result of tax reform it sees its effective tax rate to run near 27% this year, which should increase its cash flow by roughly $1.2 billion, but Walgreen’s recent guidance did not factor in any impact from tax legislation.

Not very helpful, and rather than jump the gun on this, I’ll continue to assess the potential benefit on Rite Aid’s business and what it could mean for its shares. Until that clarity arrives, I’m adding Rite Aid shares to the Tematica Contender List as part of our Aging of the Population investment theme.

Barnes & Noble: Certain stocks  are cheap for a reason

Barnes & Noble: Certain stocks  are cheap for a reason

Over the last few weeks, we’ve been kicking the tires on several new positions for the Tematica Research Select List and recently added both United Rental (URI) and Vulcan Materials (VMC) to the Contender List. While it’s always exciting to add new positions, we have to remember that even with a stock market that is melting up like the one we are currently seeing, we still need to understand the business dynamics at play for the company behind the shares. Are we seeing thematic tailwinds or headwinds, and are there any catalysts to be had that will alter the winds that are blowing or intensify the force of those winds?

A great example can be found in book and gift retailer Barnes & Noble (BKS), which is attempting to pivot its business model headwind with a new line of stores that have an expanded café as it faces the realities of today’s online world, what we call our Connected Society investment theme. The gist of these new stores is the café will draw people in, but the crux of the issue is will it get people to shop for something more than a cup of coffee or a convenient snack?

Whenever possible, I find a boots on the ground approach, roll up your sleeves and check it out approach is called for. And that’s exactly what I did.

The new Barnes & Noble stores are an interesting concept and I’ve visited one of the few locations that is open in the Washington, DC metro area. It’s a wide-open space, the food is good and the menu includes a variety of soft and adult beverages. For mobile workers looking for a place to hole up, this will give Starbucks (SBUX), Panera Bread (PNRA) and others like them a run for their money.

Back to the question from above —  is sitting in the café likely to alter the changing behavior that is buying books and other things online?

I can say that I, and a score of others, were showrooming the newer books and truth be told I even hunted around for a few copies of the book I co-wrote with Tematica’s Chief Macro Strategist Lenore Hawkins – Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals. For those looking for a copy, I’d recommend buying it online as you’ll get a far better price. No surprise, as that is one of the reasons consumers are flocking to digital commerce — the ability to easily price compare and stretch those disposable spending dollars.

Back to my Barnes & Noble visit . . . did the vast majority of people buy books, that is plunk down cash, card or even smartphone and buy a book or two, a calendar, or some other gift idea?

During the several times I have been there, both during the 2017 holiday shopping season and after, the overwhelming answer was “no.”

And then there was the other shoe to drop.

Barnes & Noble recently shared its holiday sales for the nine-week holiday period ending December 30, 2017, and it was not good. Not good at all. In fact, it was just painful and rather revealing. Year over year for the period, total sales were $953 million, declining 6.4%, and comparable store sales also declined 6.4% for the holiday period. Now, this next piece of data is particularly revealing – during the holiday period, Barnes & Noble’s online sales declined 4.5% year over year.

We all know that brick & mortar retail is having a challenging time as it squares off against Select List holding Amazon (AMZN) ups the ante, and Walmart (WMT) is pulling out the stops – acquisitions, repositioning Sam’s Clubs into distribution centers, and new digital offerings – to compete. But Barnes & Noble is seeing its online business contract at a time when consumers are increasingly shifting their buying preference to this modality. We saw this in spades this holiday shopping season and in the December Retail Sales report released on Friday that showed Non-store retail sales rose 12.7% year over year and 11.0% for the last three months of the year vs. the same period in 2016. For context during those two periods, retail sales rose 5.6% and 5.9% year over year, respectively.

From my eyes, it sure seems Barnes & Noble is fighting the same headwinds it has been over the last few years, and at least thus far, it’s strategies to right itself have not been paying off.

Now let’s add some perspective, for the company’s last three quarters it generated bottom line losses and for what should be its seasonally strongest quarter it’s business contracted, both in-store and online. Making matters even worse, the last two reported quarters missed expectations by a decent margin. Put it all together, and it says the company’s business continues to, put it politely, be challenged and there is not a lot of confidence to be had right now in the management team.

This is a reason to pass on BKS shares. Plain and simple. No matter how tempting they might look.

Some investors may be tempted by the current dividend yield that clocks in at more than 11%. That’s a heady dividend yield and one that is bound to catch eyes, but again let’s remember that recent string of bottom line losses and the fact the company’s current quarterly dividend runs just shy of $11 million per quarter vs. the $11.3 million in cash it had on its books exiting October. The issue may not be with the current dividend, but if the headwinds plaguing the company continue, odds are people will begin to question the company’s ability to maintain the current quarterly dividend of $0.15 per share without dipping into other borrowings on its balance sheet.

I’d rather stick with our Amazon shares and the Costco Wholesale (COST) shares on the Select List, especially as Costco continues to deliver robust same-store sales growth figures each month.

  • Our price target on Amazon (AMZN) shares remains $1,400
  • Our price target on Costco Wholesale (COST) shares remains $200
SPECIAL ALERT: Some House Cleaning of the Tematica Select List

SPECIAL ALERT: Some House Cleaning of the Tematica Select List

 

KEY POINTS FROM THIS POST:

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

 

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

 

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

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

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

 

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

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

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

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

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

 

Boosting our International Flavors & Fragrances price target

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

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

 

Upping our USA Technologies price target as well

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

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

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

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

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

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

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

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

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

 

MGM Resorts (MGM) enters a seasonally slow period

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

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

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

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

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

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

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

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

 

What’s expected from Applied Materials on Thursday?

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

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

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

 

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

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

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

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

 

 

Taking a Higher View of the Market

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

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

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

 

 

Solid earnings from Corning, keeps our Buy rating intact

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

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

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

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

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

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

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

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

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

 

 

 

 

 

No need to catch the falling knife that is Blue Apron, we have Amazon

No need to catch the falling knife that is Blue Apron, we have Amazon

This year we’ve seen several busted initial public offerings, and one of them is Blue Apron (APRN), which came public at near $10 and been essentially cut in half over the last four months. As was joked in the business pages, that is “less than the price of one of its meals.”

Such a sharp drop raises the question, “Could the fall in the stock be overdone?”

That’s a fair question as one of the tools in the investing kit is picking off undervalued stocks. The keyword that makes all of the difference is “undervalued” as it relies on the notion that at a certain point, other investors and the market will recognize the potential value to be had in the underlying business.

Let’s remember the impetus that led to Blue Apron landing on the busted IPO list: Amazon’s (AMZN) intent to acquire Whole Foods and trademarking its own meal kit offering. This made Blue Apron, along with Kroger (KR) and other grocery stores, the latest company to be upended by Amazon. Last week we saw Amazon add eMeals to AmazonFresh. Through the program, eMeals subscribers can now send their shopping list, which is automatically generated for all meals selected each week, to AmazonFresh as well as Walmart (WMT) Grocery and Kroger ClickList. Another thorn in the side of Blue Apron.

There was more news for Blue Apron last week as the company announced a “company-wide realignment” to “focus the company on future growth and achieving profitability…” As part of that realignment, Blue Apron said it would be cutting 6% of its workforce. Let’s remember that this comes less than a handful of months after the company went public!

But it gets worse.

Current consensus expectations have Blue Apron losing $1.56 per share this year, with bottom-line losses narrowing to -$0.73 per share in 2018. Keep in mind the company botched its first quarter as a public company when it posted a second-quarter loss of $0.47 per share vs. the expected $0.30 per share loss. That’s a huge miss out of the gate as a newly public company.

Put that out of the box earnings miss together with its headcount reductions and we have a pretty clear credibility problem with the management team, which is likely to be outclassed and out-muscled by Amazon and other grocery chains. And that raises the question as to what is Blue Apron’s competitive advantage? Recipes? Ingredients? Those can both be replicated by Amazon, especially with Whole Foods, and others as they scale up their natural and organic offerings to ride our Food with Integrity investment theme tailwind.

As we ponder that, let’s not forget that Blue Apron closed its June 2017 quarter with $63.3 million in cash on its balance sheet. That compares to the net loss of $83.8 million during the first half of 2017 and the expected net loss of that is expected to grow in the second half of the year. Simple math tells us, the company is poised to face a cash crunch or do a painful secondary offering to bring in additional cash. We’ve seen this movie before and it never has a happy ending.

The bottom line is APRN shares are cheap, and they are cheap for a reason – they are running headlong into the headwind of our Connected Society and Food with Integrity investment themes. My advice is to move along and not be tempted by the falling knife that is APRN. Better to focus on a well-positioned company that has an enviable or defendable competitive advantage. To us here at Tematica, that is Amazon (AMZN) in spades.

  • Our price target on Amazon (AMZN) shares is $1,150.
Walmart and Amazon Clash on Free Shipping, But Only One Has Multiple Thematic Tailwinds

Walmart and Amazon Clash on Free Shipping, But Only One Has Multiple Thematic Tailwinds

 

 

The battle for the digital consumer is on with Amazon responding to Walmart’s attempts to grow its online and mobile business. Back in February, Amazon cut its free shipping price from $49 to $35 and this week is slashed that down to $25, which compares to Walmart’s current $35 minimum for free shippping. We can understand using this tactic to entice non-Prime customers, but in our view a few orders gets you to Prime and that’s before you consider all the services Prime members get like streaming audio, video, storage and  others.

While Walmart is looking to compete with Amazon when it comes ot the Connected Society, Amazon’s Content is King, Cashless Consumption and Disruptive Technology tailwinds more than make up the difference.

Amazon.com Inc (AMZN) said on Tuesday it cut the threshold for free shipping to $25 from $35, upping the ante against Wal-Mart Stores Inc (WMT) in a hotly contested battle for ecommerce supremacy.

The world’s biggest retailer, Wal-Mart, has been building up its ecommerce business through acquisitions such as Jet.com, as it looks to narrow the massive gap with Amazon.

Wal-Mart started its own membership program called ShippingPass last year, which offered free two-day shipping for $49 a year. However, the company ended the program in January, replacing it with free two-day shipping on orders of $35 or more.

Source: Amazon cuts free shipping minimum to $25 | Reuters

Food Network teaming with Instacart shows increasing reach of e-commerce 

Food Network teaming with Instacart shows increasing reach of e-commerce 

Following Amazon’s Prime Fresh and Walmart’s teaming with Uber and Lyft for grocery delivery, the intersection of Content is King and the Connected Society is driving a shift in where and how people buy groceries and ingredients. Much like other industry shaking events associated with the Connected Society, this will have a profound impact on both a direct and indirect basis.

xpansion of online fulfillment availability is giving retailers new avenues for selling goods via the Internet.Food Network is teaming up with Instacart to integrate the online grocery delivery service with the Recipe Box and Grocery List features available on FoodNetwork.com and Food.com. The offerings allow consumers to search for online recipes and then create and share shopping lists of the necessary ingredients.

Source: Commentary: Food Network offering shows increasing reach of e-commerce | Chain Store Age