Weekly Issue: Talking Thematics, Boeing and Retail Sales
Key points inside this issue
- We are issuing a Buy on and adding shares of Energous Corp. (WATT) to the Select List as part of our Disruptive Innovators investing theme with an $11 price target.
- We will continue to patiently hold Thematic Leader Del Frisco’s Restaurant Group (DFRG) shares as the Board continues to review potential strategic alternatives.
I’m just back from some meeting in New York, and it was a busy trip that included visits with Yahoo Finance and Cheddar to discuss the January retail sales report and the gyrations in the Dow Jones Industrial Average given the issues and concerns that have erupted with Boeing (BA) following another 737 MAX aircraft crash over the weekend. You can watch my appearance on Yahoo Finance here and the one with Cheddar here, but quickly on those two items, while the January retail sales report was better than expected, the headline figure for December was revised lower from the first negative print we received.
Also, we’ve started to get February same-store comp sales and from a growing number of retailers, those figures have been negative. And you’ve probably noticed that we are once again seeing a sea of store closures being announced by retailers. If you haven’t, I walked through some of these on last week’s Cocktail Investing podcast, which you can listen to here. As I pointed out on my appearances on Yahoo Finance and Cheddar, we are seeing a bifurcation in the retail land. Those that are riding the tailwinds associated with our Living the Life and Middle-Class Squeeze investing themes are thriving, while those caught in between – Macy’s (M), Gap (GPS), L Brands (LB) and others – are struggling once again. We here at Tematica have talked about rising consumer debt and delinquency levels, and I continue to see those increasingly cash-strapped consumers turning to off-price retailers and warehouse clubs, like Middle-Class Squeeze leader Costco Wholesale (COST) in the coming months.
With regard to Boeing, while it isn’t a Thematic Leader or on the Select List, the demand for its aircraft is being powered by international air travel, particularly out of Asia, which fits very well with our New Global Middle-Class investing theme. The issue plaguing the company and its shares is two 737 MAX planes have crashed in a relatively short time, and this has led several countries to ground those planes as issues behind the most recent crash are sought. This has raised several questions for Boeing as the 737 family is an important one, accounting for 80% of its aircraft backlog entering 2019 and 58% of its January order book. How long will those planes be grounded? What does it mean for future 737 family orders and production levels that drive revenue, profits, and earnings?
In the past Boeing has quickly dealt with situations such as these, and it has already announced an extensive change to the flight-control system in the 737 MAX aircraft. I’ll continue to watch these developments and gauge the impact to be had on2019 expectations. Odds are they will be coming in from where they were just a few weeks ago. In the past, these situations, while dreadful, have offered a favorable entry point to BA shares provided the timing is right. Right now, it seems to be a tad too early, but with upside to $450, it’s one to watch closely.
On a side note, the Boeing issue highlights a key difference in how the major market indices are constructed. BA shares account for just under 10% of Dow Jones Industrial Average, which means the recent stock pressure has weighed on that index heavily. This explains the wide difference this week between how the Dow has performed vs. the S&P 500, which only has 0.9% exposure to Boeing shares. That’s a huge difference, and it points to understanding the ins and outs of the indices for not only the market but for any passive ETFs that one may own. In the case of Boeing, there are a number of ETFs that hold the shares, but one of the ones with sizable exposure is the ETFMG Drone Economy Strategy ETF (IFLY). That ETF, which looks to invest in drones, holds 4.96% of its assets in BA shares, even though its revenues from drones and other autonomous systems are so small they aren’t even broken out by the company in SEC filings.
Tematica Investing
Powering up the Select List with WATT shares
In our increasingly connected society, two of the big annoyances we must deal with are keeping our devices charged and all the cords we need to charge them. When I upgraded my iPhone to one of the newer models, I was pleasantly surprised by the ease of charging it wirelessly by laying it on a charging disc. Pretty easy.
I’m hardly alone in appreciating this convenience, and we’ve heard that companies ranging from Tesla Inc. (TSLA) to Apple Inc. (AAPL) are looking to bring charging pads to market. That means a potential sea change in how we charge our devices is in the offing, which means a potential growth market for a company that has the necessary chipsets to power one or more of those pads. In other words, if there were no such chipsets, we would not be able to charge wirelessly.
Off to digging, I went to see if there is a pure-play company that fits this Disruptive Innovator investment theme charge (and yes, that was a very poor pun on my part.) What I turned up was Energous Corp. (WATT) and its WattUp solution. WattUp consists of proprietary semiconductor chipsets, software and antennas that enable radio frequency (RF)-based, wire-free charging of electronic devices. Like the charging disc I have, and the ones depicted by Apple, WattUp is both a contact-based charging and at-a-distance charging solution, which means all we need do is lay our wireless devices down be it on a disc, pad or other contraption to charge them. In November 2016, Energous entered into a Strategic Alliance Agreement with Dialog Semiconductor (DLGNF), under which Dialog manufactures and distributes IC products incorporating its wire-free charging technology.
Dialog happens to be the exclusive supplier of these Energous products for the general market and Dialog is also a well-known power management supplier to Apple across several products, including the iPhone. Indeed, last week Dialog bucked the headline trend of late and shared that it isn’t seeing a demand hit from Apple after fellow suppliers Lumentum Holdings Inc. (LITE) and Qorvo Inc. (QRCO) cut guidance earlier this week.
On its September quarter earnings call, Dialog shared it was awarded a broad range of new contracts, including charging across multiple next-generation products assets, with revenue expected to be realized starting in 2019 and accelerating into 2020. I already can feel several mental carts getting ahead of the horse as some think, “Ah, Energous might be the technology that will power Apple’s wireless charging solution!”
Adding fuel to that fire, on its September quarter earnings conference call Energous shared that “given the most recent advances in our core technology” its relationship with its key strategic partner – Dialog – “has now progressed beyond development, exploration and testing to actual product engineering.”
Since then, there have been several additional developments:
- In late December, Energous announced its first commercial product to receive FCC approval, the WattUp-enabled personal sound amplification products (PSAPs) from Delight. Energous’ WattUp wireless technology allows the Delight PSAP to charge on a charging pad. The products are now certified to be marketed and sold in the United States.
- At CES in January, Energous launched Wireless Charging 2.0 and demonstrated with Deutsche Telekom (DTEGY) a transmitter design that can charge multiple electronic devices at a distance.
- We are hearing renewed chatter that Apple’s (AAPL) delayed wireless charging solution, known as the Airpower charging mat, is likely to hit shelves in the coming months. As I pointed out, Apple has long used Dialog Semiconductor (DLGNF) for its power solutions and Dialog is the exclusive supplier for Energous products. In early January, Apple supplier Luxshare Precision initiated AirPower production and that would seem to confirm rumored timetables that AirPower would begin shipping during the first half of 2019.
- In the company’s December quarter earnings release, Energous shared that on the back of a favorable showing at the CES 2019 and Mobile World Congress 2019, “no less than 10 companies currently tracking for product launches to the consumer in 2019 with chip sales starting in the first half of the year and ramping in the second half.”
Taken together these recent developments point to robust revenue growth for Energous (WATT) compared to the $1.1 million-$1.4 million range between what was reported in 2017 and what’s expected for 2018. Current consensus estimates have the company delivering revenue of $94 million in 2020, which reflects a full year of shipping product. Two points of caution on that forecast: First, it comes from a combination of two Wall Street analysts, which is not a wide enough number that inspires 100% confidence; Second, Energous is on the cusp of going from essentially a start-up company to a real one, and odds are there will be fits and starts, delays and pushouts along the way. This will require us to be patient with the shares, but it also means continuously evaluating the competitive landscape.
As that revenue ramp and bottom-line improvement come to fruition, valuation metrics are likely to move higher for WATT shares. There is also potential upside following the eventual teardown analysis of Apple’s Airpower charging mat, which could very well bring the Apple halo to WATT.
So why now with WATT shares?
Alongside the company’s December quarter earnings report, it also completed a $25 million common stock offering of 3.3 million shares priced “in the hole” at $7.70. I say “in the hole” because prior to that offering the shares were trading well above $9. For some, that was clearly a disappointment, especially given the $20.1 million the company had in cash on its balance sheet exiting 2018. Odds are the company entered into this transaction in order to have sufficient capital as it heads into the oncoming production ramp to meet demand from these “no less than 10 customers.” Not a great transaction, but also not a horrible thing given that it likely heads off an even more painful one later on. For us, it’s given us the opportunity to get into WATT shares at a far better price point.
Our 12-18-month price target on WATT shares is $11, which equates to an enterprise value to 2020 revenue multiple of 4.0x vs. the current 2.4x multiple. If you’re thinking the combination of revenue growth and that valuation framework could make Energous a takeout candidate, I would have to agree.
- We are issuing a Buy on and adding shares of Energous Corp. (WATT) to the Select List as part of our Disruptive Innovators investing theme with an $11 price target.
Del Frisco’s delivers, but no word on the strategic alternatives
Yesterday, Living the Life Thematic Leader Del Frisco’s (DFRG) reported its December quarter results, which were modestly ahead of expectations. On the company’s earnings call it reviewed the usual metrics and shared a long-term favorable outlook, which candidly was expected. What the company did not say, however, was anything about the strategic initiatives it is reviewing. Recall that several months ago, the company added a new Board member with investment banking experience to spearhead this activity. Given the level of steak house M&A that has happened in recent years, due in part to the more defensive nature of higher-end dining vs. casual restaurants, they’ve been a sought-after asset.
With Just One More Restaurant, the company that licenses the Palm Steakhouse name, filing for Chapter 11 late last week due to fiduciary misconduct, there is one less prospect to be had. Much like a game of musical chairs, as the number of seats or in this case steak house businesses drop, they become more valuable. We will continue to patiently hold DFRG shares as the Board continues to review the alternatives. Should a transaction fail to emerge, I am inclined to revisit the company’s position on the Thematic Leader board.
- For now, we will continue to patiently hold Thematic Leader Del Frisco’s Restaurant Group (DFRG) shares as the Board continues to review potential strategic alternatives.
