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Monthly Archives: October 2016

Special Alert: Jumping on Amazon AMZN opportunity offered by 3Q 2016 earnings report

Special Alert: Jumping on Amazon AMZN opportunity offered by 3Q 2016 earnings report

 Jumping on Amazon AMZN opportunity offered by 3Q 2016 earnings report

  • We are using the weakness in Amazon’s (AMZN) shares resulting from disappointing earnings in the short-term to build our position for the long-term. 
  • We see no slowdown in the drivers and thematic tailwinds powering Amazon’s business and see its stronger than anticipated capital spending in the September quarter as Amazon preparing itself for future growth.
  • Our price target remains $975 for AMZN shares. 

When I made the decision earlier this year to take over the publishing of my newsletter, one of the reasons was my desire to be able to deliver to my readers the information when and how they need it — not based on a pre-set publishing calendar or an artificial 8-page content limit, but on how the market is reacting to news and developments and the details required in order for investors like you to have the information they need to make investment decisions.

Well, this week, and the unfolding events that have occurred, demonstrate exactly what I was thinking.

First, on Tuesday, we sent out the alert regarding our exiting of our Sherwin Williams (SHW) and Whirlpool Corp. (WHR) positions, as well as adjusting our target price on Under Armour (UA).  Then on Wednesday, we published our weekly  issue of Tematica Investing, but quickly followed that up on Thursday with an alert on Dycom Industries (DY) and an opportunity to scale into that position as the market was over-reacting to news about Google exiting the Fiber business.
Well, we’re now back again today with a similar scenario, this time surrounding Amazon’s (AMZN) earnings report and the market’s reaction to that . . .
Last night Amazon reported September quarter earnings of $0.52 per share that fell well short of the $0.78 per share consensus expectation for the quarter and the $0.17 per share achieved in the year-ago quarter. September quarter revenues rose 29% year over year to $32.71 billion, which was modestly ahead of the expected $32.65 billion. Also weighing on the shares was the company’s guidance for the current quarter that called for revenue to be in the range of $42-$45.5 billion, up 17 to 27 percent year over year, with operating income between $0-$1.25 billion vs. consensus expectations of $44.65 billion in revenue.

No, that’s not a typo on the operating profit guidance; once again Amazon has given such wide guidance — anywhere from $0 up to $1.25 billion — we could steer an aircraft carrier through it.

That combination led to AMZN shares falling to the $745 level before recovering to $772, down just over 5.5 percent in after-market trading, following the company’s earnings call.

As we have said previously when it comes to Amazon and quarterly earnings, the wildcard to watch out for is management’s often cryptic outlook and investment spending relative to expectations. This was exactly the case as investment spending at both the North American and International Retail businesses weighed on operating margins, leading them to fall to 1.8 percent in the 3Q 2016 quarter from 4.2 percent in 2Q 2016.

Stronger than expected spending during the September quarter, included initiatives to ramp up for what is expected to be a barn-burner of consumer spending on digital commerce this holiday shopping season. We’ve talked about this accelerating shift over the last several months, and consulting firm Deloitte sees digital holiday shopping rivaling brick & mortar retail spending for the first time in 2016. Against that expectation, Amazon added 18 fulfillment centers during 3Q 2016 and another five in first few weeks of October. While these will help position Amazon well for the expected spending surge over the coming months, near-term, those new centers will weigh on margins, hence the lighter than expected operating performance in the current quarter. As these newer centers mature over the coming quarters, their margins should improve, especially as the incremental capacity they bring is absorbed by Fulfilled By Amazon (FBA) and other aspects of Amazon’s fulfillment network.

While the current market environment, which is very much in a “Shoot first, ask questions later” mood, is hitting Amazon shares, in the short-term, if we step back, Amazon continues to play the long game as it expands the scope and scale of its Prime umbrella.

On the earnings call last night, Amazon mentioned the importance of grocery and consumables. We expect to see a continued emphasis in these areas going forward as consumers, especially Millennials, continue to shift their shopping habits. Exiting the September quarter, Prime Fresh was in 40 cities across seven countries, compared to 17 a year ago. Amazon Restaurant Delivery (a part of the Prime Now offering) is in 19 metropolitan cities in the US, up from two last year. Amazon looks to further expand  its fashion and apparel offering  by courting additional brands and manufacturers. Another area of investment continues to be its International expansion, especially in India. Given the favorable demographics in that market — age, internet usage, rising disposable income — we see that opportunity helping drive long-term growth for Amazon’s International efforts. The same is true with its Prime Instant Video business, for which Amazon nearly doubled its investment spending in the second half of the year as it pursues worldwide rights for programming rather than doing so country by country.

To be clear, while such capital investments can put a sour taste in our mouths in the short run and are likely to reignite long-term profitability questions, we see the 3Q 2016 investment as a temporary spike ahead of the 2016 holiday season and lays the groundwork for future revenue gains.

Could the company have telegraphed its plans better?

Probably, but Amazon has always been tight-lipped about its plans, which we chalk up to the increasingly competitive nature of the industry; transparency with investors also means revealing the strategy to competitors.

In deciphering management’s commentary on the earnings conference call last night, we recognize the company will continue to invest for the long-term, but management has clearly signaled that spending will be lumpy. Reading between the lines, spending in the September quarter was one of those larger lumps. As the investment spending returns to roughly more normal levels and as the higher margin Amazon Web Services continues to account for a greater piece of the overall business mix, we see margins rebounding from 1.8 percent in the September quarter. Revenue from its Cloud business rose 55 percent year over year and nearly doubled its operating profits to $1.0 billion, which equates to an operating margin of 31.6 percent compared to normalized operating margins in the low-to-mid single digits for the retail facing business.

We are likely to see 2016 EPS estimates get trimmed back, not only for the 3Q 2016 miss, but also to reflect the five additional fulfillment centers that were added in early October. Even so, there is a high probability that Amazons’ overall operating profit dollars will move up from the $575 million achieved in the September quarter as the overall pace of investment returns to more normalized levels in the current quarter. With regard to 2017 EPS estimates, we are likely to see those get trimmed back from the $11 per share range to roughly $10 per share or so as Wall Street factors in incremental expectations for investment India, Video and Alexa/Echo. The good news for us is our $975 price target was well below many of the other recently hiked price target that were above $1,000. Even after pairing back 2017 expectations, our price target remains intact.

The bottom line is from time to time, market indigestion offers a favorable entry point into a company’s shares, especially if the long-term drivers and tailwinds remain intact. We‘ve seen that several times over the years with Amazon shares, and we see it once again today. We see no slowdown in the shift to digital commerce, streaming video consumption, and others drivers behind Amazon’s business. 

With that in mind, we suspect many on Wall Street will give Amazon a pass on the September quarter as it remains the best-positioned company to capitalize on those tailwinds and drivers. 

  • We continue to rate AMZN share a Buy and are using this morning’s weakness as the long-term opportunity it is to scale into AMZN shares.
  • Our price target for the shares remains $975.


Chris Versace
Chief Investment Officer
Tematica Research, LLC

Special Alert: Using overreaction to Fiber to scale our DY position

Special Alert: Using overreaction to Fiber to scale our DY position

Using the Overreaction to Google Fiber to Scale our Dycom (DY) Position

Yesterday our shares of Dycom fell more than 14% following a blog post by that it would pause the expansion of its Google Fiber offering to potential fiber cities as it “refines its approach.” Alphabet (GOOGL)

We’d note this “news” from Alphabet is not exactly new information, as 2 months ago Alphabet announced it was scaling back Google Fiber with planned headcount reductions. It was also noted at the time that Google Fiber would change its name to Access and likely convert to wireless technology.

We see last night’s blog post by Alphabet as the formal announcement. This pause which pushes out any deployment in 10 potential cities does not impact planned Fiber deployments in Huntsville, Alabama; Irvine, California; San Antonio, Texas; and Louisville, Kentucky.

While this is likely to be a bump in the road for Google Fiber’s — now Access — spending on expanding existing network capacity, as well as preparation for next generation network technologies continues at Dycom’s core customers AT&T (T), Verizon (VZ), and Comcast (CMCSA). In particular, both Comcast and AT&T increased their capital spending in the low double-digits range on a year over year basis in the September quarter. In total, those three customers accounted for 54% of Dycom’s June quarter revenue and Dycom’s #3 customer, CenturyLink (CTL), is set to report its quarterly results on next week (Nov. 2nd), and we expect its spending to be up year over year as well.

Rounding out Dycom’s top six customers are Windstream Communications and Charter Communications, which when combined with the prior four customers account for roughly 79% of Dycom’s June quarter revenue. The next largest individual customer is “Unnamed Customer”, but is likely Alphabet at just 3.6 percent of June quarter revenue. We’d note this Unnamed Customer accounted for just over 6 percent of revenue over the prior 12 months.

The bottom line is that Alphabet is likely to be a relatively small customer for Dycom, and we see the drop in the share price over the last 24 hours, not to mention the larger 20 percent drop in the shares since the news of Google Fiber’s issues were first reported two months ago, to be an overreaction to what is likely to be at worst a modest reduction to Dycom’s outlook over the coming year. We attribute this overreaction in part to the current market mood this earnings season that is looking more and more like a shoot first and ask questions later one.

Given the continuing shift toward the digital lifestyle and mobile data consumption that is pressuring network capacity and resulting in next generation deployments, we continue to see a bright outlook for Dycom. Moreover, given its experience in mobile network infrastructure, we suspect that when Alphabet Access deploys its wireless solutions the odds are high Dycom will be the contractor of choice.

The Bottomline on Dycom Industries (DY)

  • We are scaling into the Dycom (DY) position, which closed at $72.50 per share yesterday, on the Tematica Select List at current levels. 
  • The move will add to the initial DY position we took on September 14, 2016 and significantly reduces our cost basis.
  • As we do so, we will also put a $65 stop loss in place. 
  • Our price target remains $115.


Chris Versace
Chief Investment Officer
Tematica Research, LLC

As earnings shape-up as expected, we reshape the Tematica Select List

As earnings shape-up as expected, we reshape the Tematica Select List

 

We all know that on its own earnings season is as busy a time as it gets. This time around, however, things have been complicated by a wave of merger and acquisition announcements, one of which involved our position in Connected Societycompany AT&T (T). We’ll speak to why we like the transaction and see it as very positive for our AT&T shares below. Outside those merger headlines and commentary, you’ve likely read or seen that as we get further and further into the current earnings season, we are seeing a growing number of disappointments. We’d like to say we’re surprised, but as we’ve shared with you over the last several weeks we’ve been expecting something like this.

We’ve caught some cover fire ourselves, which led to our Special Alert yesterday in which we shed Sherwin Williams (SHW) and Whirlpool Corp. (WHR) — more on that move on page 5. We’ll continue to look for thematic opportunities at better prices in the days and weeks ahead. Now let’s tackle all of what’s already transpired this week…
This week’s issue of Tematica Investing includes:

  • Earnings season for the September quarter is heating up, and it’s as we expected with more than a few disappointments.
  • Over the weekend, Connected Society AT&T (T) announced it would acquire Content is King contender Time Warner (TWX). Despite what appears to be headline resistance to the deal, we like the strategic positioning and rationale that is bringing these two companies together.
  • Following disappointing results for the September quarter with more of the same signaled for the current quarter, we’ve cut both Sherwin Williams (SHW) and Whirlpool Corp. (WHR) from the Tematica Investing Select List.
  • With operating profit expectations reset at Under Armour (UA), we’ve reduced our price target on the shares to $40 from $55. After the sharp drop in the shares due to that expectation reset, our revised target offers 22 percent upside, which has us keeping it on the Tematica Investing Select List with a Buy rating.

You can click below to download the full report.
downalod-pdf

Chris Versace
Chief Investment Officer
Tematica Research, LLC

AT&T CEO puts DirecTV Now at $35/month, but…

AT&T CEO puts DirecTV Now at $35/month, but…

AT&T has been all over the news the last several days, and the news flow continues today when fresh from yesterday’s conference call to discuss the merger with Time Warner,  CEO Randall Stephenson shared its soon to launch DirecTV Now video streaming service will cost $35 per month. Details were rather sparse and we expect more when the official launch happens “next month.”

We expect many comparisons to offerings from Sling as well as pricing relative to Netflix and Hulu, but we suspect it will be far cheaper than the video services offered by Verizon’s FiOS, Comcast and others. As potential chord-cutters, we are anxious for the details!

Speaking at a Wall Street Journal conference today, AT&T CEO Randall Stephenson reportedly told attendees that DirecTV Now will launch in November at a price of $35/month. That puts the service $15/month above the starting point for the competing Sling TV live-TV streaming offering, and about the same price point for the barest-bones versions of Sony’s PlayStation Vue service.Where DirecTV Now appears to be trying to compete is on content. According to reports — again, this has not been officially announced or confirmed — Stephenson says that DirecTV Now will offer 100 channels.

Source: AT&T CEO: DirecTV Now Streaming Service Will Cost $35/Month, Launch Next Month – Consumerist

Special Alert: Removing SHW, WHR shares and adjusting UA target price

Special Alert: Removing SHW, WHR shares and adjusting UA target price

This morning was one of our less fun ones given earnings reports from Sherwin Williams (SHW), Whirlpool Corp. (WHR) and Under Armour (UA). Given those results and impact on the respective share prices, we are issuing this special alert rather than waiting until tomorrow for the next regular issue of Tematica Investing.

Quickly, here is the actions we are making, with our explanation further down:

  • After you get this alert we will close out the shares of both Sherwin Williams (SHW) and Whirlpool Corp. (WHR), removing them from the Tematica Investing Select List.
  • We are cutting our price target on UA shares to $40 from $55, but we are still keeping our Buy rating on the shares. 

 

So what did we learn this morning that is driving this action?

 

We are removing both Sherwin Williams and Whirlpool shares from the Tematica Investing Select List given the combination of weaker than expected September quarter results and downside guidance for the balance of 2016. Included in the reset outlook are weaker than expected revenue growth that will translate into reduced EPS expectations near-term. The share reaction in the shares — SHW down more than 9 percent and WHR down over 10 percent — mean the shares are likely to remain range bound if not fall further as Wall Street recasts its earnings expectations for the coming quarters.

While we could be patient with the shares, we suspect there will be other better-positioned opportunities to come rather than endure a potentially slow craw to our breakeven points with these two positions.

Turning to Under Armour, this morning Under Armour reported better than expected September quarter results and re-affirmed its 2016 revenue forecast. For the quarter UA delivered EPS of $0.29 per share on revenue of $1.47 billion vs. expectations of $0.25 per share in earnings on revenue of $1.45 billion. Ticking through the company’s earnings report reveals double-digit growth across all revenue categories (wholesale, direct to consumer, North America, International, apparel, footwear and accessories), with total revenue up 22.5% on a year-over-year basis.

So why are UA shares down? 

On the earnings conference call, UA management shared it will step up the level of investment to drive growth and it will weigh on margins and bottom line performance over the coming several quarters. Even though UA reiterated its 2018 revenue target of $7.5 billion, this increased level of investment in most aspects of the company’s business to achieve its revenue targets means resetting margin and EPS expectations.

As such, UA backed away from its 2018 operating income target of $800 million, and while it did not offer a specific revision, it painted the picture of mid-teens operating income growth over the next two years, which suggests operating income more like $580-600 million by 2018 compared to $440-$445 million this year. Compounding these investments is the likely prospect that gross margins improvement will be the continued expansion of the company’s footwear margins, which are in the low-to-mid 30% range today.

Ahead of the company’s earnings call, UA shares were up 2% on the better than expected September quarter results. During the call, however, as we and other investors digested the updated guidance the shares dropped more than 14% pre-market. What we are seeing is a major reset in expectations for both the company’s financial performance and the corresponding valuation for its shares. That reset, which paints 2018 earnings more like $0.75-$0.80 than the current $1.00 per share consensus, has us cutting our price target on UA shares to $40 from $55.

After adjusting for the sharp falloff in UA shares this morning, which is likely to be overdone in the short-term as Wall Street revises its earnings and price target expectations as we have done, our revised price target offers 23% upside. As such we will continue to keep a Buy rating on UA shares.

We expect UA will be in the penalty box with investors, a position that takes a company time to work its way out of. The silver lining is that while its growth rate has been reset, UA is still poised to continue to grow its revenue and operating income in the coming quarters as its initiatives take hold. As the shares settle out in the coming days and cool off from today’s news, and we would look to be opportunistic.

We’ll have more for you tomorrow in your regularly scheduled Tematica Investing!

Chris Versace
Chief Investment Officer
Tematica Research, LLC

Anyone else smell something?

Anyone else smell something?

The smell we’re talking about is not the market — although frankly, we are finally seeing suspicions over the state of the global economy are finally catching up with revenue and earnings expectations.

No, the smell we’re talking about comes in the form of International Flavors & Fragrances (IFF), which we are adding to the Tematica Select Investment List today. We like the company’s flavors and fragrances business, which touches so many facets of daily life in both developed economies and, increasingly, in emerging markets. We also like management’s rising dividend policy, with an annualized $2.24 per share this year, up from $1.00 per share in 2010.
This week’s issue of Tematica Investing includes:

  • We are heading into the thick of earnings season this week and as expected it’s looking rather spotty with some upside surprises and a growing number of disappointments. We’ll continue to be cautious, looking for opportunities to either scale into existing positions or add new ones.
  • We are promoting shares of International Flavors & Fragrances (IFF) to the Tematica Investing Select List with a $145 price target. We will hold off setting a protective stop loss as we move deeper into September quarter earnings, preferring to improve our cost basis should the opportunity present itself.
  • To make room for IFF shares, we are closing out our position in the Consumer Discretionary SPDR ETF (XLY).
  • Updates – We’ve got a ton of them this week, including Amazon (AMZN), Costco Wholesale (COST), Under Armour (UA), Universal Display (OLED) and several others.

You can click below to download the full report.
downalod-pdf

 

Will eSports not only overhaul professional “real sports”, but the gaming industry as a whole?

Will eSports not only overhaul professional “real sports”, but the gaming industry as a whole?

While a current Presidential candidate might take a disparaging tone when she refers to these “basement dwellers” the world of esports (professional gamers” is starting to rack up some series dollars these days —  $250 million in esports venture investments in August alone.

At Tematica, we’re of course intrigued by the eSports phenomenon when viewed through our he Content is King thematic lens, which looks at the companies providing the entertainment and information that consumers are engaging with these days — whether it’s in the form of broadcast, print, digital, etc. Video games are content and are taking up more and more of hours of media consumption.

But there’s also another interesting component to this and that’s Connected Society, which is our thematic that looks at the interactivity between people through devices, apps and other forms of digital communication. eSports clearly falls into that category given the need to have users connected to one another and competing in real time.

The piece of information in this report from REDEF that really caught our attention was the suggestion that game manufacturers could move away from a per-game fee to a subscription-based fee. So instead of purchasing Madden 17 NFL Football, you’ll just own a subscription to Madden Football and receive continuous updates. Sustainable, repetitive and predictive revenue — we like it! It’s what Tim Cook is trying to do at Apple. Will be interesting to see if it pans out in the gaming world.

 

 

One way to acquire and maintain a large active player base is to shift from the business model of making a new game every year to operating these virtual sports as perpetually-updating subscription services. Compared to most games and genres, this model is particularly well suited to virtual sports as the game mechanics of these games tend not to vary tremendously from year-to-year. In general, players are mostly paying for slight graphic updates and new rosters.

Still, serious challenges exist:

These billion-dollar franchises are cash cows for game publishers. Globally, FIFA is the world’s leading virtual sports game and FIFA 16 accounted for 16% of EA’s net revenue ($703 million) in fiscal year 2016. Until necessary, no one at EA wants to shake the treeNo console-focused series has transitioned to digital-first distribution, which would be necessary for the modelThe shift would create a number of complications. What’s the new price? Does the price vary over time? What’s the cost (and blowback) of losing physical retailer support? And s

Source: REDEF ORIGINAL: Why Virtual Sports Games Will Drive the Next Wave of Growth for Esports

With Earnings Cracks Appearing in Market, We’ll Stay on the Sidelines

With Earnings Cracks Appearing in Market, We’ll Stay on the Sidelines

UPDATE: 11:00am Wednesday October 12, 2016

Earlier today, we sent out our weekly issue of Tematica Investing. (The original post is below).

We always love hearing from our subscribers when they tell us how much they enjoy Tematica Investing not only for its insightful investing thoughts and recommendations but because we try to keep it fun as well.

Believe it or not, we also like it when a subscriber drops us a line to point out something we missed — sometimes it’s a more than useful data point and sometimes it’s pointing out that a position was stopped out.

The latter happened today thanks to one of our loyal subscribers reminded us that AT&T (T) shares crossed through our $39 stop loss on Monday, which closed out the position with an 18 percent return. 

The bittersweet issue, however, is we were stopped out on the very day when owning the shares at the end of the day qualified us for the next $0.48 per share dividend payment on November 1.

If you didn’t set the price limit — well, then I guess it’s one of those cases like back in elementary school when you didn’t do your homework, but end up having a substitute teacher anyway. You live to see another day.

Here’s the thing…

Over the last several weeks, AT&T shares have drifted lower falling more than 10 percent in the process. We continue to like the company’s sticky and inelastic mobile business as well as its enviable dividend yield that currently sits just under 5 percent as it continues to invest in its soon to be released DirectTV Now video streaming service. In our view, that service puts AT&T in a much firmer competitive stance to battle Comcast (CMCSA) and Verizon (VZ).

Moreover, on the back of several negative earnings pre-announcements from Honeywell (HON), Dover Corp. (DOV), Illumina (ILMN) and Fortinet (FTNT) and Alcoa’s (AA) revenue shortfall and revised lower outlook, we are using the current weakness in AT&T shares to scale back into what we see as safer harbor as earnings season kicks into gear.

Our price target on the shares remains $44. We are holding off issuing a protective stop loss as we will use market volatility this earnings season to improve our cost basis should the opportunity arise.

I apologize for the confusion on this, and more importantly for the implications on returns.  But my stance is, and will always be, that we own up to our mistakes and set the record straight.

Thank you for your business, and let us know if you have any questions.

Chris Versace
Chief Investment Officer
Tematica Research, LLC

ORIGINAL POST: 10:00am Wednesday October 12, 2016

Well, how many more ways can we talk about the disparity between market valuations and earnings reality?

As is so often the case, a picture is worth 1,000 words (In our case, probably 25,000 words) and today the following image floated across our Twitter feed, which pretty much summed it all up:

beergoggles

Thanks to Danielle DiMartino Booth (@DiMartinoBooth ) for sharing it, and you can read more in her post on LinkedIn by clicking here.

 

This week’s issue of Tematica Investing includes:

  • A tough week of negative earnings pre-announcements for the stock market so far, we dig into which companies are finally coming to grips with reality and what it means for our investment themes and holdings.  Read More >>
  • With September quarter earnings just getting started, we are inclined to keep our inverse ETF positions intact to hedge against what we see as a volatile market ahead. Read More >>
  • To get ready for the earnings onslaught, we’re publishing the earnings calendar over the next few weeks for the Tematica Investing Select List to give you a heads-up as to which firms are announcing when. See Calendar >> 
  • Updates, Updates, Updates — AT&T (T), Costco Wholesale (COST), Sherwin Williams (SHW) and Universal Display (OLED)

 

You can click below to download the full report.
downalod-pdf

 

When the market presents opportunity, we take it

When the market presents opportunity, we take it

To be successful in the markets, you often have to maintain the perspective that NFL commentators and analysts talk about on Sunday afternoons:  “take what the defense is giving you.”As we’ve turned the page from September and the third quarter of the year, there are certainly ample obstacles ahead: the presidential election, OPEC production, any potential move on Fed rates, aggressive earnings expectations — just to name a few.
It means we will continue to be prudent with the Tematica Investing Select List as we see to maximize returns ahead while minimizing risk. And if there was an underlying theme to this week’s issue — not an investing theme, but a theme in its truest sense — it would be “opportunity”.  Opportunity to shore up a few things ahead of the third quarter earnings storm that comes at us in full gale next week, and opportunity to make a key addition.

This week’s issue of Tematica Investing includes: