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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
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

Adding this Missing Link Connected Society Stock to the Tematica Select List

Adding this Missing Link Connected Society Stock to the Tematica Select List

This morning we are adding shares of delivery and logistics company United Parcel Service (UPS) to the Tematica Select List with a price target of $122. We’ve often referenced UPS and its business as the missing link in the digital shopping aspect of our Connected Society investing theme. Year to date, UPS shares have fallen 6 percent, which we attribute in part to the seasonal slowdown in consumer spending. As we pointed out in our analysis of the January Retail Sales report last week, the shift toward digital commerce continues to accelerate and we see that a positive tailwind for UPS’s business and comments from UPS’s annual investor day held yesterday confirm our view.

As of last night’s market close UPS shares stood near $108, which when compared to our $122 price target offers 14 percent upside before we factor in the 3.1 percent dividend yield. Including the quarterly dividend of $0.83 per share into our thinking, we see 17 percent upside from current levels to our price target. As such we are adding UPS shares to the Tematica Select List with a Buy rating. Should the shares drift toward the $100 level, we are inclined to get more bullish on the shares given the business fundamentals as historical dividend yield valuation metrics.

 

A Look Ahead to 2018-19 for UPS

Yesterday, at its annual investor day United Parcel Service shared its 2018-2019 financial targets, expanded delivery and pick-up schedule, and continued buybacks. In reviewing those details, we continue to see the accelerating shift toward digital commerce at the expense of brick & mortar retail powering the company’s business. While most tend to focus on Amazon (AMZN) when we think of digital shopping, the reality is we see a far more widespread push toward it from the likes of Wal-Mart (WMT) as well as traditional retailers and consumer product companies. Wal-Mart, in particular, is shared on its earnings call yesterday that it would expand its online efforts to include grocery and called out both mobile and online as part of is efforts to “provide customers with a better offer.”

What all of this tells us is we have reached the tipping point for digital commerce, and like a tanker that is turning, once it hits the tipping point it tends to pick up speed. We see that in the coming quarters as retailers that lagged behind are now forced to invest to stay relevant with consumers.

In response to that accelerating shift, UPS is planning to expand its delivery and pickup schedule to six days for ground shipments, including Saturdays. In tandem, UPS will continue to invest in its logistics network, which signals it is preparing for the continued transformation in how consumers shop. That transformation is leading UPS to forecast revenue growth in the range of 4-6 percent over the 2018-2019 period, which means no slowdown in revenue growth from 2017 is expected. UPS also shared it intends to repurchase between $1-$1.8 billion in share repurchase during 2018-2019, which should allow it o grow EPS faster than revenue. UPS expects EPS during 2018-2019 to grow 5-10 percent, which is at the upper end of current expectations. As such, we expect to see Wall Street boosting price targets today and tomorrow up from the current consensus of $115 to something more inline with our $122 price target.

 

Embracing Technology of the Future

 

A drone demonstrates delivery capabilities from the top of a UPS truck during testing in Lithia, Florida, U.S. February 20, 2017. REUTERS/Scott Audette

UPS also shared it continues to test drone deliveries, including launching the drone from the top of a UPS van that is outfitted with a recharging station for the battery-powered drone. Granted this in testing, but in our view, the hub and spoke method of deploying drones from UPS trucks makes sense given that drones, especially those carrying packages, are like to operate for limited time frames due in part to battery power demands. In UPS’s tests, the battery-powered drone recharges while it’s docked. It has a 30-minute flight time and can carry a package weighing up to 10 pounds.

Again, we find this interesting, but odds are we will not see any pronounced impact on UPS’s delivery business for at least several quarters. Longer-term, initiatives such as these could spur further productivity and margin improvements.

 

The Bottomline on United Parcel Service (UPS)
  • We are adding shares of United Parcel Service (UPS) to the Tematica Select List with a price target of $122.
  • Should the shares drift toward the $100 level, we are inclined to get more bullish on the shares given the business fundamentals as historical dividend yield valuation metrics.

 

What We’re Watching This Week

What We’re Watching This Week

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As you probably know, this week is a shortened one following the 3-day holiday that was President’s Day. We still have a number of companies reporting their quarterly earnings this week, and that includes the Tematica Select List’s own Universal Display (OLED). The shares have had a strong run, up just over 28 percent year to date, and that likely has them priced near if not at perfection. Last week, Applied Materials (AMAT) gave a very bullish view when it comes to the ramping organic light emitting diode manufacturing capacity, as the industry prepares for Apple (AAPL) and others switching to this display technology. Consensus expectations for Universal’s December quarter results are EPS of $0.42 on $68.6 million in revenue. We expect a bullish outlook to be had when Universal reports its results this Thursday.

Alongside Universal Display, there will be a few hundred other companies reporting. Among those, we’ll be tuning into reports from Wal-Mart (WMT), Macy’s (M), JC Penney (JCP) and TJX (TJC) for confirming data on our Amazon (AMZN) thesis. Similarly, we’ll be looking at Cheesecake Factory’s (CAKE) for confirmation in the restaurant pain that is benefitting our McCormick & Co. (MKC) and United Natural (UNFI) shares.

On the economic data front, the calendar is a tad light, with the highlight likely to be the next iteration of the Fed’s FOMC minutes. Given Fed Chairwoman Janet Yellen’s two-day testimony on Capitol Hill that we touched on above, we’re not expecting any major surprises in those minutes. Even so, we’ll be pouring over them just the same.

This morning we received the February Flash Manufacturing PMI metrics from Markit Economics and not only did Europe crush expectations hitting a six-year high in February. Across the board, from business activity to backlogs of work and business confidence, the metrics rose month over month. One item that jumped out to us was the increase in supplier delivery times, which tends to be a harbinger of inflation — something to watch in average selling price data over the next few months. Turning to Japan, the Markit flash manufacturing PMI rose to 53.5 in February, its highest level since March 2014, with sequential strength in all key categories — output, exports, employment and new orders. but Japan hit it’s highest level since March 2014.

 


Here at home, the Flash U.S. Composite Output Index hit 54.3 in February, a downtick from 55.8 in January, but still well above the 50 line that denotes a growing economy. The month over month slip was seen in manufacturing as well as the service sector. Despite that slip, new manufacturing order growth remained faster than at any other time since March 2015 and called out greater demand from energy sector clients. No surprise, given the rising domestic rig count we keep reading about each week.

Manufacturers also called out that input cost inflation was at its highest level since September 2014 and we think this is something that will have the Fed’s ears burning.

 


Currently, our view is the next likely rate hike by the Fed will be had at the May meeting, which offers plenty of time to assess pending economic stimulus, immigration and tax cut plans from President Trump. Again, we’ll be watching the data to determine to see if that timing gets pulled forward.

Stay tuned for more this week.

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