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MGM Update: August Macau gaming revenue shrugs off Typhoon Hato

MGM Update: August Macau gaming revenue shrugs off Typhoon Hato

Early this morning the Macau Gaming Inspection and Coordination Bureau reported August gross gaming revenue rose 20.4% year over year, with a month over month dip of just over 1%. While this sequential dip may catch some off guard and could rattle the shares of gaming and resort companies operating in the Chinese city somewhat, as we head into the holiday weekend, let’s remember that as of late Houston was not the only city hit by a natural disaster. Earlier this month, Macau was hammered by the severe Typhoon Hato, which shuttered casinos and resorts for several days.

Adjusting our view for that, the year over year growth in Macau gaming revenue remained impressive in August as the city continues to woo tourists and gamblers, particular VIP gamblers. This was one of the key aspects for the addition of MGM Resorts (MGM) in June to the Tematica Select List as part of our Guilty Pleasure investment theme. With MGM slated to open another Macau based resort in 2018 — the MGM Cotai that will include a spa, theatre, and 1,500 hotel rooms — the company continues to expand its presence in this market. As a reminder, Macau is the only part of China where casino gambling is legal, and odds are China’s rising middle class (a key part of our Rise & Fall of the Middle Class investing theme) is embracing our Guilty Pleasure theme as are tourists to the region.

Being the data junkies we are here at Tematica, we’ll look to the next report on Macau gross gaming revenue due in early October to see how quickly the city shrugs off the effects of Hato. Before then, we’ll get the August Nevada Gaming Revenue Report and that should shed some details on the recent Mayweather-McGregor fight had on Las Vegas, even though it wasn’t a sold out event.

Finally, one quick reminder, on September 8 MGM shares go ex-dividend to reflect the next $0.11 per share dividend, which will be paid on September 15. While the current annualized dividend yield of 1.3% is not the largest, we see the recent decision to pay a quarterly dividend as more indicative of the company’s multi-year strategy.

  • For now, our price target on MGM Resorts (MGM) shares remains $37.
WEEKLY ISSUE: Shedding Dycom Shares, Remaining Bullish on UPS and Facebook

WEEKLY ISSUE: Shedding Dycom Shares, Remaining Bullish on UPS and Facebook

Throwing in the Cards on Dycom (DY)

Before we get things started this week, early this morning Connected Society company Dycom (DY) reported an EPS beat for the quarter but issued a weaker than expected outlook for the current quarter. Of late, we’ve noticed stock price fatigue when a company beats expectations and raises its outlook, and that likely means Dycom’s report will be met with investors shedding the shares. In recent years, we’ve seen similar reports from companies met with sharp moves lower, and given the current environment, we see the odds of that happening with DY shares rather likely.

We expect the management team to discuss the rationale and drivers behind its recast guidance on the earnings call this morning. As investors, we’ll want to cap the potential pullback in the shares on the Tematica Select List and that has us exiting the position. As Wall Street analysts parse the data and lower their EPS expectations we see target price cuts being set lower as well.

  • We are issuing a Sell rating on Dycom (DY) shares.
  • As we do this, we will shift DY shares to the Tematica Contender List because it will only be a matter of time before mobile operators pony up to expand existing network capacity and build out their 5G as well as gigabit fiber networks.

 

No Shortage of Confirming Thematic Data Points this Week

While last week ended on a high note with all the major stock indices finished higher, this week we’ve seen a return of volatility to the market thanks to North Korea at the same time Texas grapples with one of the worst hurricanes in recent memory. The people of Houston are certainly in our thoughts this week and in the coming ones as we assess the impact to be had on the both the Texas economy and that of the overall country.

Exacerbating the markets move has been the usual seasonally low trading volume we tend to find at the tail end of the summer. As we called out in this week’s Monday Morning Kickoff, there are a number of reasons to think September, which is usually one of the most volatile months for stocks, is likely to be so once again.

As we prepare that amid the usual end of the month, start of the new month data flow, we’ll continue to take our cues and investment moves from our thematic lens. Even amidst the political tension of the last few weeks, once again there has been no shortage of confirming data points for our 17 investment themes. Earlier this week we shared comments our initial findings on the Amazon (AMZN)-Whole Foods Market (WMF) tie up, but also what the Mayweather vs. McGregor bout meant for Las Vegas and our MGM Resort (MGM) shares as well as how we found positive confirmation for our Applied Materials (AMAT) shares in a filing made by Samsung.

We also shared out take on a recent upgrade to Starbucks (SBUX) shares made by Wedbush following prospects for stronger than expected U.S. same-store-sales. As temperatures start to cool, and holiday shopping season thoughts begin to form we recognize that Starbucks will once again have its semi-addictive seasonal beverage — the Pumpkin Spice Latte — and when matched with its expanded food offering we see the recent trend of better than expected same-store sales continuing.

We’ve also uncovered more signs that brick & mortar retail remains in a worrisome place. First, Simon Property Group (SPG), the nation’s largest mall operator, is asking an Indiana court to issue an injunction to put the brakes on Starbucks phasing out of its 379 Teavana locations over the coming twelve months. No doubt Simon Property Group is feeling the headwind associated with the shift toward digital commerce in a big way, but we have to say this move reeks of desperation. We certainly understand the difficult position Simon Property Group is with its business at risk as more retailers embrace digital commerce solutions on their own or pair with Amazon to leverage its logistics capabilities.

The thing is, while Simon Property Group may try to fight one set of retail closures, in reality, it is a game of “whack-a-mole” as others are popping up to take their place. Over the weekend Affordable Luxury candidate Perfumania Holdings (PERF), which sells discounted perfumes from high-end brands, such as Dolce & Gabana and Burberry, filed for Chapter 11 bankruptcy and intends to close 64 of its 226 stores. We blame the adoption of our digital commerce aspect of our Connected Society theme not only at Amazon, but also Ulta Beauty (ULTA) and Sephora. Sephora, in particular, has focused on digital commerce and has embraced augmented reality, a component of our Disruptive Technology theme, to improve the customer experience.

Sephora is not alone in making cosmetics shopping even easier. Shopping platform FaceCake has partnered with brands like NARS Cosmetics to let online shoppers try on everything from makeup to handbags. Another example is IKEA as its new Catalog App uses augmented reality to allow customers to virtually place and view 200 different IKEA products in their homes. All you need is a smartphone (unfortunately, no Swedish meatballs are included in the online app). As more retailers embrace augmented reality in their apps, we question the need for consumers to visit physical store locations.

Connecting the dots, however, we find the growing usage of augmented reality will speed the shift toward digital commerce, and that bodes very well for our shares of United Parcel Service (UPS) as we head into the seasonally strongest time of the year for the company.

  • Our price target on United Parcel Service (UPS) shares remains $122; given the 10% move in the position, subscribers should continue to hold the share.
  • Those that missed our initial recommendation should look to revisit the shares closer to $105.

 

 

Restaurants Too Are Feeling the “Retail-Mageddon” Pinch

On a related note to the pains retailers are feeling we covered earlier, the restaurant industry is suffering from many of the same woes afflicting retailers – plain and simple, there are too many physical locations, and customers increasingly prefer to have everything delivered to their door.

That’s why pizza chains, especially Domino’s (DPZ) and Papa John’s (PAPA) have been able to gain an edge. Roughly 60% of Papa John’s orders are digital from not only its own app, but also via Facebook (FB)’s name product as well as its Messenger product. As the restaurant industry looks for solutions by leveraging our Connected Society, Disruptive Technology, and Cashless Consumption themes, we see Facebook (FB) and its multi-tiered platform offering benefitting. This along with its move into original content that bodes well for additional advertising, as well as its overall monetization efforts across those platforms keeps us bullish on Facebook shares.

  • Our price target on Facebook (FB) shares remains $200

 

Looking Ahead to the Coming Weeks

As we put the summer behind us in the coming days and absorb the litany of economic data to be had, our intention is to use whatever market volatility emerges to our advantage. This means revisiting recent additions to the Tematica Contender List like Nokia (NOK) and Innovative Solutions (ISSC), but also examining new potential positions for the select list as well.

 

Best Buy makes progress on digital commerce, but more needed

Best Buy makes progress on digital commerce, but more needed

Earlier today, Best Buy (BBY) delivered better than expected quarterly results, which reflect our increasingly Connected Society. As Best Buy Chairman and CEO Hubert Joly put it, “higher-than-expected growth was driven by stronger consumer demand with technology products” as well as share gains due to competitor closures and bankruptcies. Areas of strength included computing, wearables, smart home, and mobile phones all of which mesh with our Connected Society investing theme.

What really caught our attention was the continued growth in the company’s online business as its quarterly domestic online comparables rose more than 30% year over year, bringing online sales to just over 13% of revenue. In many respects, Best Buy has much more to go, but the management team recognizes this shifting competitive landscape associated with this theme in part because “So much of the customer experience has been starting online.” Acknowledging that, Best Buy conceded that it has “some key categories that are pre-underpenetrated online.”

We’ll continue to monitor Best Buy’s progress in accessing the Connected Society tailwind, but for now, with less than 20% of its revenue derived from digital commerce, we continue to prefer the Tematica Select List position in Amazon (AMZN).

  • We continue to have a Buy on Amazon (AMZN) shares with a $1,150 price target.

In support of maximizing the multichannel retail business, we continue to drive digital innovation to improve the customer experience. In the second quarter our domestic online comparable sales grew 31%. Online sales were more than $1 billion for the second consecutive time in a non-holiday quarter and were 13.2% of domestic revenue, up from 10.6% last year. We are on pace to generate well over $5 billion in domestic online sales this fiscal year.

Another exciting opportunity to maximize the multichannel retail business is our In-Home Advisor program. Our in-home advisors are professional sales consultants with broad product knowledge. They provide free consultations and serve as a single point of contact covering all technology needs across all vendors. In other words, they can help you design including place a great entertainment system, help you pick out your appliance for a kitchen model or help you steam music and content across your home without annoying buffering issues.

After testing the program in several cities, over the last year and a half, we’re currently rolling it out nationally. By the end of September, we will be offering these free in-home consultations across all major U.S. cities nationwide.

We’re very focused on the smart home as a key part of our Best Buy 2020 strategy, and we will continue to enhance this category across our stores and website this year. For example, to demonstrate we’re responsible with voice technology, we’re bringing new Alexa and Google Assistant experiences to 700 stores nationwide in collaboration with Amazon and Google. These enhanced experiences are unique to Best Buy and show how you can completely use voice technology. Especially trained Blue Shirts are on hand to provide advice and of course our Geek Squad agents can help install, set up and support the products.

The new species began arriving to stores in July and the rollout will be complete by the end of the third quarter. Of course, we’re continuing to work on a number of other initiatives around tech support, smart home, mobile and appliances, and we will provide update during our investor day next month.

Source: Best Buy’s (BBY) CEO Hubert Joly on Q2 2018 Results – Earnings Call Transcript 

Initial observations of the Amazon-Whole Foods marraige

Initial observations of the Amazon-Whole Foods marraige

With the official closing of the Amazon (AMZN) acquisition of Whole Foods Market (WFM) yesterday, I made a point of visiting two locations near me outside of Washington, D.C. The traffic in the store was greater than usual for a Monday, as were the length of the lines at the checkout counters. There were a number of prices that were better as has been reported, and there was a pop-up stand for Amazon Echo devices.

What was missing, however, were the appropriate Amazon’s private label brands that are slated to hit shelves at Whole Foods locations, as well as the lockers that will allow for both delivery of items as well as returns.

I say appropriate items because Amazon has quietly expanded the scope of its private label products from food (Happy Belly, Mama Bear and Wickedly Prime) and supplements (Amazon Elements) to fashion, electronics, household items, cosmetics, lingerie, and furniture to name a several. Conversations with the store managers confirmed Amazon private label products will be turning over in the store “over time” where appropriate. That hasn’t slowed Amazon from including Whole Foods’ private label brand, 365 Everyday Value, on its website although based on some basic searching 365 Everyday Value has yet to be offered under Amazon Fresh.

Like many large acquisitions, integration and the targeted synergies come over time, and I are still in the very early days of these two companies being under one roof. I expect the rollout of Amazon private label products to be had at the 470 Whole Foods locations in the U.S. and the U.K. over the coming quarters with added benefits coming (Amazon Fresh, Amazon meal kits and the instillation of Amazon Prime as the new membership rewards program).

As the combined entity flexes its product and logistical offering, I suspect before too long the conversation will shift from “death of the mall” to “death of the grocery store.” One of the “secret weapons” that Amazon has over its grocery and other competitors that range from Kroger (KR) to Wal-Mart (WMT) is the high margin Amazon Web Services, which continues to be embraced by corporate America as it increasingly migrates to the cloud.

One thing I am pondering is based on the number of Whole Foods locations, will Amazon look to make other grocery acquisitions in a bid to reach key markets that have a high concentration of Amazon Prime customers? If so, this could quickly turn the conversation from “the death of the mall” to the “death of the grocery store.”

 

  • We continue to rate Amazon (AMZN) shares a Buy with a $1,150 price target.

Source: Whole Foods prices cheaper with Amazon – Business Insider

Mayweather vs McGregor not a sellout, but it’s the coming data that matters for MGM shares

Mayweather vs McGregor not a sellout, but it’s the coming data that matters for MGM shares

According to TV By The Numbers, roughly 3.2 million people tuned in to watch the Floyd Mayweather Jr. vs. Conor McGregor over the weekend. Those figures are preliminary in nature and are subject to change, but what’s not going to change is the simple fact that T-Mobile Arena in Las Vegas that housed the fight did not sell out. According to the official tally, 14,623 were in attendance vs. the 20,000-seat capacity according to ESPN’s Arash Markazi, making it a far cry from a sellout despite all the hubbub and hype.

While we look for final figures from the weekend’s fight and what it means for our MGM Resorts (MGM) shares, we’re also assessing the potential fallout from Typhoon Hato on the company’s Macau operations. Given the severity of Hatto (it triggered Hong Kong’s most severe typhoon 10 warning for only the third time in the past 20 years), we strongly suspect to see some aberrations in the August data when it is published. Ahead of those next Macau figures will be the July gaming revenue data for Las Vegas, which has been robust vs. a year ago, but is starting to bump up against stronger year over year comparison.

Given our $37 price target on MGM shares, which is a hair below the consensus price target of $37.50, we continue to evaluate scaling into the shares. Given the volatile market of late, we are also keeping close tabs on the shares from a technical perspective – should the shares cross the $29.50 level we’re inclined to cut losses and jettison the shares.

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

Source: Mayweather vs McGregor didn’t sell out T-Mobile Arena | SI.com

Wedbush upgrade confirms our stance on Starbucks

Wedbush upgrade confirms our stance on Starbucks

Over the weekend, Barron’s published an excerpt from Wedbush’s price target hike and upgrade on Starbuck (SBUX) shares last week. We’ve been patient with the shares during the summer given it’s a seasonally weaker time frame for the company. As the summer comes to an end, we are encouraged by Wedbush’s findings that Starbucks same-store sales are trending better than expected. We attribute this in part to the company’s revamping and expanding its food menu, which is likely driven higher consumer tickets.

As we head into the cooler months, we suspect the demand for hot beverages and food will lead to further sequential improvements in domestic same-store sales. We also see the company’s global same-store sales benefitting from the recent decision to buy the remaining 50% share of its East China business from long-term joint venture partners Uni-President Enterprises and President Chain Store for approximately $1.3 billion in cash. With the agreement, Starbucks will assume 100% ownership of approximately 1,300 Starbucks stores in Shanghai and Jiangsu and Zhejiang Provinces. As part of that announcement, Starbuck reiterated plans to have a total of 5,000 stores in mainland China, the company’s fastest-growing market outside of the U.S.,  by 2021. In our view, this roll-out keeps Starbucks within our Rise & Fall of the Middle Class and Affordable Luxury tailwinds.

  • Our price target on Starbucks (SBUX) shares remains $74.

We are upgrading Starbucks (ticker: SBUX) to Outperform from Neutral. We are increasing the price target to $60 from $57.

Checks indicate U.S. comps tracking in line with expectations. Our recent checks of 5% of U.S. co-owned locations point to same-store-sales (SSS) growth in line with fiscal-fourth-quarter consensus of 3.5%. Mobile order and pay continues to be cited as a meaningful driver with increased frequency. We continue to model 3% for the fiscal fourth quarter, but based on our checks we view a rounded-up 4% U.S. comp as realistic should this trend continue through September.

Source: Starbucks to See Boost From China Acquisition – Barron’s

Samsung Electronics confirms our thesis on Applied Materials

Samsung Electronics confirms our thesis on Applied Materials

 

Given all the attention that organic light emitting diode displays are getting ahead of Apple’s (AAPL) pending launch of its next iPhone, it’s understandable that Applied Material’s (AMAT) display business would be the center of attention. Early this morning, however, Samsung Electronics confirmed the other key drivers behind our bullish stance on AMAT shares – ramping semiconductor capital spending to not only meet growing global demand for chips but also China’s intent to become a key manufacturing hub for chips.

With Samsung accounting for 12%-18% of Applied revenue stream over the last three years, we see Applied as very well positioned to capture capital spending dollars at Samsung for capacity in China as well as around the globe in the current and coming quarters.

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

SEOUL (Reuters) – Samsung Electronics Co Ltd expects to invest $7 billion over the next three years to expand its NAND memory chip production in China’s northwestern city of Xi’an, the South Korean tech giant said on Monday. In a regulatory filing Samsung said it approved $2.3 billion of the expected investment of $7 billion on Monday.

The firm accounted for 38.3 percent of global NAND flash memory chip revenue in April-June, the latest data from researcher IHS showed.

China is trying to develop its own memory chip producers but it is likely to be several years before they can compete with existing makers, analysts said. Samsung Electronics said a memory chip boom that propelled it to record profit in the second quarter was likely to continue in the July-to-September quarter.

Source: Samsung Electronics to invest $7 billion to boost China NAND chip output

No Sleepy End of  Summer in Sight

No Sleepy End of  Summer in Sight

 

We’ve survived the eclipse, and while the display was a bit underwhelming outside of the Beltway, we hope you enjoyed this rare experience that pulled 10 percent of US viewers away from Netflix while it was happening. Rest assured the consumers of streaming content that help power our Connected Society investing theme were back on board soon thereafter propelling Marvel’s The Defenders to a binge viewing pop after dropping last Friday. From time to time we may see speed bumps for our Connected Society investing theme, but much like trying to put toothpaste back into the tube, we don’t see a reversal in this tailwind or any other of those associated with our investing themes anytime soon.

If anything, as we break down the monthly retail sales data, examine data points such as the box office take and maneuverings by companies like Target (TGT) and Wal-Mart (WMT), we see that Connected Society tailwind blowing even harder as we head into the 2017 holiday shopping season. This morning it was shared that Wal-Mart is teaming with Alphabet (GOOGL) to bring Wal-Mart products to people who shop on Google Express, Google’s online shopping mall. What’s significant about this news is that it marks the first time Wal-Mart has made its products available in the U.S. on a website other than its own. Also, too, Wal-Mart is embracing aspects of our Disruptive Technology theme as it makes it products available to customers via Google Home (Google’s answer to Amazon’s Echo) as well as Google Assistant, its artificial intelligence software assistant found in smartphones powered by Google’s Android software.

Clearly, Wal-Mart is shoring up its position and investing for where retail continues to head — a path that is increasingly chartered by the Connected Society. To us, this development, along with Nike’s (NKE) recent teaming with Amazon (AMZN), is a clear signal of what’s happening in retail. It also says that lines are being drawn between those partnered with Amazon and those that aren’t. We suspect many will see this as evidence of the “retail-megeddon” that is upending the retail industry. Here at Tematica, however, our view is Amazon and Wal-Mart are in the thematic sweet spot and are positioned to become the Coke and Pepsi of retail.

We also continue to see Costco Wholesale (COST) emerging as the bronze medal winner in retail. The company’s July retail sales metrics certainly showed it is gaining consumer wallet share as it rides our Cash-Strapped Consumerand Rise & Fall of the Middle-Class tailwinds. Plus, Costco’s business model is also based on collecting membership fees, which continue to grow, and thus insulates it somewhat from the struggles of brick & mortar retail. In our view, if Costco were to acquire Boxed.com, that transaction would be a game changer for Costco’s digital shopping business.

  • We continue to have Buy ratings on Amazon (AMZN), Alphabet (GOOGL), Costco Wholesale (COST) shares with price targets of $1,150,  $1,050 and $190, respectively. 

 

 

The No Man’s Land that is the last two weeks of August. 

As we shared in this week’s Monday Morning Kickoff, trading volumes are likely to be lower these next 10 days ahead of the Labor Day weekend.  Of course, while many try to get their last bit of R&R in at a nearby beach or lake, Washington is once again taking center stage. As you have probably guessed that means some back and forth political maneuvering will push the market around over the coming weeks as renewed hopes of U.S. tax reform contend with President Trump threatening a government shutdown if Congress didn’t present him with a spending bill for the next fiscal year that included funding for a border wall. Not exactly the tone we’d like to hear ahead of the debt ceiling negotiations.

While we ultimately think the debt ceiling will be raised, we’re not looking forward to the “deadline is approaching” drama that will likely unfold. Giving us some reassurance, during a public event on Monday in Kentucky with Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell said there was “zero chance — no chance” that Congress would fail to raise the debt ceiling. Of course, that doesn’t mean it’s going to be a walk in the park getting there.

As we watch those developments, we’ve started to get some hints as to what tax reform might look like. Early indications suggest capping the mortgage interest deduction for homeowners, scrapping people’s ability to deduct state and local taxes, eliminating businesses’ ability to deduct interest and allowing for the “repatriation” of corporate profits from overseas. As we’ve seen with the efforts to repeal and replace Obamacare, the devil will be in the details, and more solid ones should emerge in the coming weeks.

Finally, less than a week into NAFTA renegotiations, President Trump has cast doubt on the future of the trade agreement saying, “I think we’ll end up probably terminating NAFTA at some point.” Again, the devil will be in the details, and until those emerge we’re likely to see corporate American hem and haw as it faces several new obstacles that are fanning the flames of uncertainty.

In our view, this is points to a potentially tumultuous next few weeks, low volume end of August followed by September, historically one of the worst months for the stock market. From a Tematica Select List perspective, we’ve seen the recent volatility ding some of the positions, but we remain comfortable given the confirming data points that we are seeing.

For example, during his address Monday night, President Trump announced a new strategy that calls for sending more troops to Afghanistan. Trump provided few specifics about his policy and how much the U.S. military commitment in the region would increase as a result. The decision, however, to further commit rather than withdraw equates to a tailwind for defense spending that is a part of our Safety & Security investing theme. Also, this week, security researchers have discovered several apps on the Google Play store harboring malware, another reminder of the downside to our increasingly Connected Society that provides lift for the cyber security aspect of our Safety & Security investing theme. As we look for details on incremental defense spending, we’ll continue to recommend subscribers add PureFunds ISE Cyber Security ETF (HACK) shares to their holdings if they haven’t already done so.

  • We continue to have a buy on PureFunds ISE Cyber Security ETF (HACK) shares with a long-term price target of $35.

 

 

More Tailwinds for OLEDs

Last week, as it reported a solid earnings beat and raised its outlook for the balance of the year, Applied Materials (AMAT) had several bullish things to say on organic light-emitting diode display demand:

“Display is growing even faster than wafer fab equipment as customers make multi-year investments to address large inflections in both TV and mobile. In TV, a major push to new Gen 10.5 substrates is under way. These huge, 10- square-meters substrates are ideally suited for manufacturing larger-format screens, 60 inches and bigger. We now expect 30 new Gen 10.5 factories to be built over the next several years. At the same time, mobile organic light-emitting diode (OLED) display investment is getting stronger as customers prepare for broad adoption of OLED in smartphones. OLED enables new form factors that result in a larger display area for smartphone, further expanding the overall market.”

We could not have summed it up better ourselves, and that report keeps us bullish on both AMAT and Universal Display (OLED) shares despite the recent pullback both have experienced.

  • We continue to have Buy ratings on both Applied Materials (AMAT) and Universal Display (OLED) shares with prices targets of $55 and $135, respectively

 

USAT Beats Expectations and Offers Bullish Outlook

Yesterday, shares of Cashless Consumption company USA Technologies (USAT) popped in early trading following an earnings and revenue beat for the June quarter. More specifically, the company beat bottom line expectations by $0.01 per share and topped revenues with $34.3 million, $3.2 million ahead of consensus forecasts, and up more than 55% year over year. Ticking through the press release there were a number of positive connection and customer metrics shared by the company and as expected the company offering a bullish outlook for the coming quarters.

That’s the good news.

The less good news is the company fell short when it came to discussing the impact of its recent stock offering that was completed in late July. Yes, during the current quarter, and we find that somewhat disappointing. The company did say, however, that it plans to “to take advantage of opportunities both organic and inorganic that may present themselves in this rapidly evolving landscape” and that means an acquisition or more. When peppered on the earnings conference call, USAT shared that it would seek acquisitions to “enhancing our offering with additional value-added services or allowing us to expand into additional verticals or geographies to drive further growth.”

Not a bad development by any stretch, but it is one that raises some unknowns, particularly for a small company. As we’ve heard many a banker say, the headaches associated with small acquisitions are the same ones with big ones, the only difference is the size of the fee. Given the size of the business as well as the team, the question is will USAT undertake nip and tuck acquisitions that add to its capabilities and expand its footprint or would it look to make a bolder move, potentially swallowing a larger player? We’re fans of the former, while the latter tends to result in some of those headaches such as product, facility, technology and spending integration and rationalization, as well as layoffs.

Given the global proliferation of mobile payments and the first-hand experience I had in Singapore, we’re going to stick with USAT shares for the time being. Based on any potential acquisition, we’ll look to digest the implications and what it may mean for holding the shares.

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

 

 

Disruptive Voice Technology Continues to Take Hold

Last night we shared the news that Barclays (BRC) has enabled voice payments to be made using Apple’s (AAPL) Siri functionality. This is another step forward in the disruptive use of voice technology as an interface across smartphones, intelligent speakers and soon other applications. As more and more applications come to market, we continue to be bullish on shares of Nuance Communications (NUAN) despite the slow tumble they’ve experienced over the last several weeks. As a reminder, the company has inked technology deals with Apple as well as Facebook (FB) to power their respective messaging chat bots even as the use of voice technology proliferates.

  • We remain bullish on Nuance (NUAN) shares, and our price target stands at $21.

 

 

Even Though DY Remains in Radio-Silence, We Continue to Be Patient

Next week Dycom Industries (DY) will report its quarterly results on Wednesday morning (August 30). Despite the ever-increasing need to add incremental wireless capacity and build out next generation wireline networks, in part for wireless data backhaul, to keep up with data demand, DY shares have sunk some 28% over the last three months. This equates to a round trip in the position from a high of just over $110 back to our blended cost basis of $76.68 on the Tematica Select List.

Frustrating to say the least. That frustration is compounded by the lack of news to be had from the company. Its last communique was at the Stifel Industrials Conference back in June. We know network spending at its key customers — AT&T (T), Verizon (VZ) and Comcast (CMCSA) — remains on track as they look to bring incremental 4G and gigabit internet capacity on stream, while beta-ing 5G capacity. Comcast’s recent launch of Xfinity Wireless also likely means additional wireless capital spending will be had in the coming quarters.

  • We’ll continue to be patient with Dycom Industries (DY), which is hovering in oversold territory.
  • Should the shares retreat further into the mid-$60s, we’re inclined to once again scale into the position, improving our cost basis along the way. 

 

 

Remaining Opportunistic as the Market Gets Cautious

Remaining Opportunistic as the Market Gets Cautious

After taking the prior week off on my sojourn to Singapore to present at INVESTFair 2017, I’m back. Take it from me, not only was the food fantastic as I put on several extra pounds, but Singapore is far ahead of us when it comes to our Cashless Consumption investing theme. Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talked about this on our Cocktail Investing podcast recently, but that level of activity keeps us bullish on USA Technology (USAT) shares on the Tematica Select List.

Earlier this week, we posted comments on Content is King player Disney (DIS)’s recent announcement it will look to shun Netflix (NFLX) and enter the streaming content market gun, rather than remaining a content bullet, and scaled further into shares of Food with Integrity company Amplify Snacks (BETR). We also sent over out latest high-level thoughts on the market in this week’s Monday Morning Kickoff – if you missed it, you can read it here.

As a quick recap since our last Tematica Investing, we’ve seen a far more cautious attitude enter the market following the back and forth with the U.S. and North Korea. At the same time, we’re also seeing some fatigue as even solid earnings beats like the one yesterday from Home Depot (HD) are not having the usual or expected stock price reaction. While we could toss it up to the fact that we’re entering the back half of August — one of the traditionally slower times of the year as people sneak it that last round of summer vacation — there could be something else going on.

Our view here at Tematica is investors are taking stock of not only the vector and velocity of the domestic economy, but also the growing political unease and are looking ahead to what’s coming down the barrel in September: the unveiling of President Trump’s tax reform, Congress dealing with the debt ceiling and potentially the start of the Fed’s balance sheet unwinding. All that during what has historically been one of the worst months for the domestic stock market. We’d add in that September is full of investor conferences, and after the usual August quiet, we suspect investors will be listening closely to these upcoming company presentations to fine tune back-half of the year expectations.

So, while we’ve seen a bit of a rebound in the market so far this week following last week’s sell off, we’re inclined to see the near-term waters remaining a tad choppy. Let’s remember, trading volumes tend to be a tad light this time of year and that can exacerbate the swings in stock prices. The net result is that we will tread carefully in the coming weeks, but we will still be opportunistic like we were with the buying of additional Amplify Snacks (BETR) shares yesterday, a move that reduced the overall cost basis on the Tematica Select List.

 

Checking in on July Retail Sales – Looks Great for Amazon, Alphabet, UPS and Costco

As mentioned in this week’s Monday Morning Kickoff, there is a modest amount of economic data to be had this week, including yesterday’s July Retail Sales Report. Overall it was a positive report with core retail sales, which exclude auto, gasoline station, building materials, and food services and drinking places sales, up 0.5 percent. Moreover, the June decline of 0.1 percent was revised to an uptick of 0.1 percent. Digging into the July report, we found a pick-up in digital commerce, which likely reflects the Back to School shopping season as well as ongoing efforts by Amazon (AMZN) and others to grab consumer wallet share. Let’s remember that Amazon’s own would-be shopping holiday – Prime Day – fell in early July and likely was partly responsible for the strong rebound in digital shopping during the month.

Year over year, Nonstore retailers (Commerce Dept. speak for digital commerce sales) rose 11.5 percent in July, once again making the category the strongest performer. We see this as boding well for not only our Amazon shares but also for United Parcel Service (UPS) — those packages have to get to your front door somehow — as well as Alphabet (GOOGL) given its Google Shopping service as well as the company’s Search business.

Getting back to the July Retail Sales Report, most other categories were positive for the month, save for Sporting Goods, Electronics & Appliances and Department Stores. The month’s data helps put some understanding around Dick’s Sporting Goods (DKS) slashing its 2017 outlook, but we also think that company is poised to hit the headwind aspect of our Connected Society investing theme following Nike’s (NKE) recent linkage with Amazon. Said another way, we continue to see a bleak outlook for traditional brick & mortar retailers as consumer products and apparel companies, especially branded ones, embrace Amazon and other digital logistic businesses.

Finally, the July Retail Sales Report put some much-needed context around Costco Wholesale’s (COST) July sales report. As a reminder, Costco reported its July sales increased 6.0 percent in the US, and 6.2 percent across the entire geographic footprint. That compares to just a 2 percent increase for General Merchandise stores as well as Grocery vs. July 2016. Additionally, Costco continued to open up new warehouse locations during the month, reaching 736 locations compared to 729 at the end of April. Paired with the recent membership fee increase, this expanding footprint should be a positive impact for the all-important and high margin member fee revenue stream.

• Our price target on Amazon (AMZN) shares remains $1,150.
• Our price target on Alphabet (GOOGL) shares remains $1,050.
• Our price target on United Parcel Service (UPS) shares remains $122.
• Our price target on Costco Wholesale (COST) remains $190.

 

On Deck – Earnings from Applied Materials

Even though we are in the dog days of summer, we still have a few companies left to report their quarterly results. One of them is Applied Materials (AMAT), and that event happens later this week. Following a bullish report from competitor Lam Research (LRCX), we expect solid results to be had. Despite the move lower over the last several weeks, the outlook for semiconductor capital equipment remains bright given the expanding reach of chips into a variety of end markets as well as demand for next-generation memory and display solutions.

This includes the same currently capacity-constrained organic light emitting diode display market, which is seeing rising demand dynamics from the smartphone, TV, wearables and automotive industries. And yes, this same demand function that is benefitting the shares of Universal Display (OLED) on the Tematica Select List. On Applied’s earnings call we’ll be listening for equipment order as well as overall demand tone for this disruptive display technology to determine as best we can how many quarters

One final demand driver that should result in a positive quarter for AMAT — ramping capacity in China. The potential wrinkle with this is we’ll need to be mindful of exchange rates and the impact on the company’s business, but all in all, we suspect the company will deliver a solid quarter with an upbeat outlook.

On a side note, odds are Applied will discuss factors that are driving chip demand and therefore incremental demand for its semiconductor capital equipment. Likely subjects include data centers, the Internet of Things, the Connected Car and other markets. The one we’ll be listening to given the Tematica Select List position in AXT Inc. (AXTI) and Dycom (DY) will be the smartphone market — which is entering its seasonally strong part of the year — and any commentary on 5G network deployments. Other 5G commentary points to a pick-up in testing by Verizon Communications (VZ) and AT&T (T) as well as Apple being granted a license to test 5G wireless services. Both of these developments reinforce our bullish view on both AXT and DY shares on the Tematica Select List.

• Our price target on Applied Materials (AMAT) remains $55.
• Our price target on AXT Inc. (AMAT) remains $11.
• Our price target on Dycom Industries (DY) remains $115.

 

Housekeeping Items

There are no housekeeping items this week, other than to remind you to check TematicaResearch.com as we post more thematic and macro commentary in the coming days. And while the Cocktail Investing podcast is on hiatus until the last week of August, feel free to revisit some of the past episodes here.

 

 

 

The Tematica Take on Disney’s Pending New Streaming Service

The Tematica Take on Disney’s Pending New Streaming Service

We expect Disney shares are likely to trade sideways over the next several weeks as the market continues to digest the recently announced moves by the House of Mouse. We, on the other hand, continue to see our Content is King investment theme providing significant tailwinds to the business, and as such we’re suspending our stop-loss and will instead look to use further share weakness to improve our cost position.

 

Our Content is King investment theme has been getting plenty of attention over the last week. It started with Disney (DIS) announcing it would look to sever its relationship with Netflix (NFLX) as it plans to launch its own streaming services for ESPN and Disney content in 2018 and 2019, respectively. During the company’s 2Q 2017 earnings call, in which it discussed its better than expected quarterly results, it also offered some insight into its plans around this planned streaming service:

  • The new Disney content service will become the exclusive home in the U.S. for subscription video-on-demand viewing of the newest live action and animated movies from Disney and Pixar, beginning with the 2019 slate, which includes Toy Story 4, the sequel to Frozen, and The Lion King from Disney live-action, along with other highly-anticipated movies.
  • Disney will be making a substantial investment in original movies, original television series, and short form content for this platform, produced by our studio, Disney Interactive, and Disney Channel teams.
  • Subscribers will also have access to a vast collection of films and television content from our library.

As part of this move, Disney increased its ownership position in BAMTech, but came up short when it came to specifics about the launch of the planned service. You’ll notice what was not discussed, which was Disney’s Marvel and Lucasfilm properties, both of which are staples at Netflix, including several Marvel TV properties like Daredevil, Jessica Jones, and others. We chalk this up to Disney still figuring it out as it goes, but we expect more details to emerge in the coming months.

We understand Disney’s move for greater control over the distribution of its content as consumers increasingly shun cable and satellite bundles in favor of embracing the cutting the cord aspect of our Connected Society investing theme to watch what they want, where they want and when they want. Obviously, this move by Disney adds a layer of investment and uncertainty into the mix as it raises many questions at a time when the company is shy on details. That said, we know Disney is extremely careful in making its moves and usually has a well thought out, cohesive plan that leverages without sacrificing its content.

As we and others digest this initiative, with no major catalyst pending until the company resumes its run at the box office later this year, we expect Disney shares are likely to trade sideways over the next several weeks. We do suspect Disney will opportunistically use its share buyback program to its advantage in the coming weeks, which should help support the shares in the coming weeks. On the June quarter earnings call, Disney shared it had repurchased 22.3 million shares for $2.4 billion during the April-June 2017 period. Over the last nine months (let’s remember Disney is one of those “funny fiscals” that ends its business year in September), the company has repurchased 64.3 million shares for approximately $6.8 billion and shared it intends to end the current fiscal year repurchasing $9-$10 billion. Some quick sandbox math tells us that means Disney could buy back $2.2 to $3.2 billion worth of stock in the current quarter. Given the fall off in the shares of late, we’re inclined to think such activity will skew toward the higher end of the range.

In keeping with our Content is King theme, we recognize the vast library of characters and content under the Disney hood. As the company returns to a more normalized presence at the box office beginning in the December quarter and continuing through 2018, we’ll be patient with the shares.

We’ll be pulling the lens back on several Content is King announcements, including Netflix buying comic-book company MillarWorld as well as inking an exclusive deal with the creator Disney/ABC’s Scandal Shonda Rhimes, and Facebook (FB) angling to attack both the TV advertising spending stream and Alphabet’s (GOOGL) YouTube at the same time. We’ll have our thematic thoughts on what these moves and others mean for our Content is King theme on TematicaResearch.com shortly.

  • Our price target on DIS shares remains $125.
  • We will suspend our $100 stop loss at this time, as we’re inclined to use any incremental weakness to improve our cost basis in the position.