WEEKLY ISSUE: Uncertainty is back, but we’re thematically prepared

WEEKLY ISSUE: Uncertainty is back, but we’re thematically prepared

Key points inside this issue:

  • The Fed, Trump, tariffs and the data bring uncertainty back to the market
  • What it means for investors
  • We will continue to hold Disney (DIS), Apple (AAPL), Amazon (AMZN) and AT&T (T) shares.
  • What to watch this week

The Fed, Trump, tariffs and the data bring uncertainty back to the market

Between the number of S&P 500 companies reporting last week to the Fed’s FOMC meeting and the pieces of economic data coming at us, we knew it was going to be a busy and potentially volatile week. What few saw coming was the attempt by Fed Chairman Powell to give the market the 25 basis point rate cut it was expecting and regain the position of the market not knowing exactly what the Fed’s next move might be. But then we received the July ISM Manufacturing Index and the July IHS PMI data for the four global economic horsemen (China, Japan, the eurozone and the US). In aggregate those data points signaled the continued slowdown in the global manufacturing economy.  

Granted, the sequential pick up in the July ADP Employment Report fostered the view the domestic economy hasn’t frozen over just yet, but Friday’s July Employment Report reveled slower job creation month over month. 

Normally, economic data like we’ve received in the back half of last week would be enough to ignite the market doves and stoke the view that another rate cut by the Fed was more likely before we exit 2019. And it was that view that led the major market indices higher on Thursday, that was until President Trump did something that arguably next to no one saw coming – announced another layer of tariffs on China that would go into effect on September 1. The implications of that move, which would likely lead to yet another trimming of forecasts for both the economy and earnings, pulled the market lower on Thursday afternoon. 

And on Friday morning, China responded by saying while it does not want a trade war, its not afraid to fight one. Soon thereafter, President Trump is “open to delaying or halting the 10% tariff on September 1” if China were to take action between now and then. Remember, we shared our concern that trade talks could devolve into playground taunting and fighting. Well, we are there and sticking with the analogy, it’s likely going to keep the stock market on the uncertainty teeter totter for the next few weeks. 

If some were hoping for a more normal August for stocks following this week’s Fed meeting, we’re sorry to say that’s not likely to happen. In the past we’ve shared several analogies about investing – it’s not crock pot cooking, you can’t fix it and forget it or investing is not a like a photo, i.e. snapshot in time, but much like a good film it’s an evolving story. As this latest chapter begins to unfold, it will be mean assessing and re-assessing expectations as new developments are had and their ripple effects determined.

What it means for investors

Odds are this will uncertainty will result in the usual back and forth for the market in the coming weeks, which will also see the usual end of summer low trading volumes. While a good chunk of Wall Street is at the beach, I’ll remain vigilant and continue to leverage our thematic lens.

More than likely, we will see the herd once again focus on domestically focused as well as inelastic business models as it looks for ports of safety. We’ve have a number of these among the Thematic Leaders and the Tematica Select ListChipotle Mexican Grill (CMG), Dycom Industries (DY), Costco Wholesale (COST), Axon Enterprises (AAXN), AT&T (T), and USA Technologies (USAT). Unlike the shoot from the hip go to choice of the herd that tends to zero in on electric utilities that group of six have the added benefit of thematic tailwinds propelling their respective businesses.

As August drips by, I’ll continue to look for thematically well positioned companies that offer favorable risk to reward tradeoffs in terms of share prices as I look to position us for what lies ahead. In the meantime, I would recommend subscribers catch the August 5, 2019 issue of Bloomberg Businessweek as the cover story focuses the coming streaming video war that I’ve talked about both here and on the Thematic Signals podcast. The author likens it to “The Hunger Games”, and in many respects I can see why that is a good comparison.

While we were recently stopped out of Netflix (NFLX), I’ll remind you that among the Thematic Leaders and Tematica Select List we have several companies — Disney (DIS), Apple (AAPL), Amazon (AMZN), and AT&T in particular – that are focusing on this market. Each brings their own particular set of strengths ranging from content to addressable customer base, but all three have other businesses besides streaming video to drive profits and cash flow that can fund their respective streaming businesses.

  • We will continue to hold Disney (DIS), Apple (AAPL), Amazon (AMZN) and AT&T (T) shares.

What to watch this week

After all the happenings for last week that I described above, this week looks to be yet another frenetic one for corporate earnings with more than 1,100 reports to be had, but the pace of June quarter earnings begins to slow and we face a lighter economic data schedule as well. And to be clear, even though we will face a plethora of June quarter reports, let’s remember that exiting this week roughly 78% of the S&P 500 has reported and next week another 13% of that group will be doing so. What this means is the vast majority of reports next will have far less of an impact on the market. This doesn’t diminish them from an ownership of data and information perspective, but rather a smaller impact is likely on earnings revisions and trading ranges. 

Corporate earnings to watch

In terms of which reports I’ll be focusing on this week, it should come as little surprise that they are the ones touching our various investment themes. Here’s my short list:

  • Monday, August 5: Tyson Foods (TSN), International Flavors & Fragrances (IFF), Insulet (PODD) and ShakeShak (SHAK). 
  • Tuesday, August 6: Tenneco (TEN), ADT (ADT), AMN Healthcare (AMN), Comscore (SCOR), LendingClub (LC), Disney (DIS), 
  • Wednesday, August 7: CVS Health (CVS:NYSE), CyberArk (CYBR), Physicians Realty Trust (DOC), Darling Ingredients (DAR), Skyworks (SWKS), Tivity Health (TVTY), 
  • Thursday, August 8: Activision-Blizzard (ATVI:), Alarm.com (ARLM), Dropbox (DBX), Synaptics (SYNA:Nasdaq), Uber (UBER) 
  • Friday, August 9: US Concrete (USCR)

Economic data to watch

Before we tackle the coming week’s economic data, I’ll mention GDP expectations from the Atlanta Fed and New York Fed started last week off between 2.0%-2.2% and as we exited the week those expectations sat at 1.6%-1.9%. As I touched on above, the employment data we received last week pointed to a still growing economy but the take on the manufacturing economy per the July ISM Manufacturing Index and the July US IHS Markit PMI data pointed to a slowing domestic manufacturing one. 

We have only a handful of meaningful economic data coming at us this week in the form of the July inflation reports and ISM’s July reading on the US service economy. Given our pension for looking at other data set in addition to the formal economic data, we here at Tematica will be on the lookout for the last Cass Freight Index and other truck tonnage figures as well as the weekly railcar loading data. Those have been signaling the slowdown we’ve seen in the government produced economic data, and as such we’ll keep a close watch on them in order to stay one step ahead of the herd. 

Should the coming economic data be continue to disappoint relative to expectations and signal the vector and velocity of the domestic economy is down and even slower than recent revisions suggest, odds are the market will increasingly expect another Fed rate cut sooner than later. Our concern, however, is the intended effect of this week’s rate cut and another one should it come to pass on business investment could be muted by the continued trade uncertainty and weakening global economy. As we’ve seen with falling mortgage rates that didn’t stimulate demand earlier this year, in the near-term businesses may stay on the sidelines given the trade and economic uncertainties despite more favorable interest rates.


WEEKLY WRAP: Don’t Let the Debt Ceiling Deal Fool You

WEEKLY WRAP: Don’t Let the Debt Ceiling Deal Fool You

This week our Safety and Security investing theme, unfortunately, reigned supreme. Just days after the worst storm in modern U.S. history took nearly one quarter of U.S. refining capacity offline and dropped a biblical amount of rain on Texas, here comes Hurricane Irma, the most powerful Atlantic Ocean hurricane in recorded history after having done major damage in the Caribbean. Right behind her is Hurricane Jose, currently a Category 3.

Apparently not to be outdone, Mexico was struck by its strongest earthquake in a century, measuring 8.2 magnitude, just before midnight on Thursday local time, which resulted in a Pacific tsunami warning issued immediately after. Then there is Hurricane Katia, which could hit the eastern coast of Mexico in a few days.

Whoever has been ticking off mother nature, please knock it off. Of course, all kidding aside, our hearts and prayers go out to all those affected.

There is something distinctly unnerving seeing equity markets relatively calm when mother nature is tossing a whopping 4 apocalyptic-like disasters our way. But then if the South Korean Kospi doesn’t care about North Korea rattling its nuclear sword, then we suppose the S&P 500 might not be terribly fussed about nature tossing a little Armageddon our way.

These horrific natural disasters are also reflected in our Scarce Resources investing theme as the price of frozen concentrated orange juice, lumber, Brent crude, heating oil, nickel and aluminum rise. We’ve also seen shares of Home Depot (HD) and Lowe’s (LOW) both gain over 5% since the start of the month. Given the magnitude of these storms and subsequent destruction, we expect the fallout to dominate headlines over the coming days. We also recognize companies ranging from Disney (DIS) to Kroger (KR) will see disruptions that will weigh on expectations for the current quarter as well as the speed of the economy.

As investors, however, we continue to see signs of a stock market that is poised for greater volatility than we’ve seen over the last few months. Yes, we recognize that September tends to be that way, but it’s looking like this September will be more volatile than some. We say this given:

  • Federal Reserve Vice Chair Stanley Fischer announced he was stepping down for “personal reasons.” His term was to end June 2018. Between his departure and likely end of Fed Chair Yellen’s term, Trump needs to fill six out of seven positions, which just adds more uncertainty into monetary policy. Keep in mind that it will be a major challenge to find anyone that will be both dovish and pro-deregulation. We’ve heard that after his comments regarding Trump’s handling of Charlottesville, Gary Cohn is no longer being considered for Fed Chair when Yellen’s term ends in early 2018.
  • Treasury Secretary Mnuchin warned that the U.S. could seek to sanction any country trading with North Korea in an effort to put the kybosh on this missile and nuclear testing insanity. China and Russia quickly signaled their opposition, reducing the chances that this area of geopolitical uncertainty will be resolved diplomatically in the near-term.
  • Back in D.C., within hours of Paul Ryan announcing that the Democrats’ proposal on the debt-ceiling was “ridiculous and unworkable,” Trump overruled both his Treasury Secretary and GOP leadership by siding with the Dems over the three-month debt ceiling extension, which has some GOP conservatives already labeling it the “Pelosi-Schumer-Trump Deal.” So that relationship is going well.

Meanwhile, the U.S. economy continues to show signs of being long in the tooth, as even the Bureau of Labor Statistics has acknowledged that employment growth has been slowing.

The Fed’s Beige Book revealed that “contacts in many Districts expressed concerns about a prolonged slowdown in the auto industry,” and “low inventories of homes for sale continued to weigh on residential real estate activity across the country.” These are typical late stage indicators with slowing employment growth and peaking home and auto, (although the damage from the recent storms is likely to help with some of that excess auto inventory as folks will need to replace their submarined vehicles.)

While the ISM non-manufacturing business activity index did improve to 57.5 in August, up from 55.9 in July, this is the second weakest reading over the past twelve months and still well below the 60+ levels we saw at the beginning of the year. As for future growth prospects, the share of businesses expanding dropped to the lowest level of the year at 67% from 78% in June and July.

We are seeing some improvement in productivity, with nonfarm productivity rising 1.5% on an annualized basis in Q2 versus expectations for 1.3% after having growth of a mere 0.1% in the first quarter. Obviously, we like to see productivity improving, but the longer-term trend is still nothing to get excited about. Remember that the potential growth of an economy is a function of just two things: improvements in productivity and growth in the labor pool. The civilian labor has been growing at less than 1% for much of the time since the post-financial crisis.

 

 

In other cheery news, the U.S. Dollar is on course for its biggest weekly slide in almost fourth months, dropping to its lowest level in 33 months. Mario Draghi’s recent comment that the European Central Bank could start QE tapering as early as October pushed the euro up over $1.20 and further weakened the dollar. Weakness has also been driven by the decreasing likelihood of further rate hikes in 2017, made more unlikely by the ongoing natural disasters coupled with the North Korea-related tensions. The dollar has declined for six consecutive months, the longest slide in 14 years, and is down over 12% from post-election highs. The Amex Dollar Index (DXY) has broken down through major support levels and sits at levels last seen at the start of 2015.

The Treasury market is also reflecting the less-rosy outlook with the 10-year Treasury yield hitting its lowest level since the election, on its way towards 2%. While the major U.S. indices are mostly unchanged since the start of the month, the SPDR Gold Shares ETF (GLD) has gained over 3% and the iShares Silver Trust ETF (SLV) is up nearly 4% and the long-dated iShares 20+ Year Treasury Bond ETF (TLT) has gained over 1.3%. Risk-off is the new black so far in September.

The bond market is also indicating we are in the later stages of this business cycle with the rather pronounced decline in yields. The pullbacks we’ve seen in shares of the more cyclical segments of the stock market also indicate that the coming months are more likely to see further slowing in the economy.

The current bull market is the second longest since WWII, outpaced only by the one ending in March 2000. That one also saw record high valuations and much talk of “this time it’s different.”

 

 

Stepping back, we have valuations that remain heady, with the decidedly meh reactions to earnings and revenue beats, (most shares actually fell on reaction day) in the last reporting round reflecting the priced-to-perfection. We have an economy and a bull market that are both long in the tooth heading into what is typically the most volatile time of the year on top of unusually high domestic and geopolitical tensions.

The U.S. economy is no longer the “cleanest shirt” in the laundry in terms of economic growth as Europe and emerging markets look increasingly more robust and have more attractive valuations. Don’t forget that going back to even before 1900, the U.S. has experienced a recession within 12-months of the end of every two-term presidency. We have experienced the second longest run in history of trading days without a 5% or more pullback in the S&P 500. Reversion to the mean demands that prolonged periods of hyper-low volatility must result in heightened volatility.

While we may see some market relief as the debt-ceiling battle has been pushed back 3-months — removing the possibility of a technical default in October — the upside potential from here, versus the downside risk, indicate caution. Investors would be wise to put on some protection and have a plan for getting out if things get wiggly. Yes, that is one of the technical terms we use here at Tematica.

 

 

WEEKLY ISSUE: Deploying Several Defensive Measures to Protect Gains

WEEKLY ISSUE: Deploying Several Defensive Measures to Protect Gains

In this Week’s Issue:

  • Deploying Several Defensive Measures to Protect Our Gains
  • Alphabet (GOOGL), Asset-lite Business Models
  • Applied Materials (AMAT), Disruptive Technology
  • Universal Display (OLED), Disruptive Technology
  • Dycom Corp. (DY), Connected Society
  • Facebook (FB), Connected Society
  • USA Technologies (USAT), Cashless Consumption

 

Amid the market’s choppy behavior over the last week, the reality is it was little changed as measured by the performance of the S&P 500. In recent days, the market’s focus has once again turned to Washington, first with Treasury Secretary Steve Mnuchin testifying to the Senate Banking, Housing, and Urban Affairs Committee in which he reiterated that the Trump administration’s goal of 3 percent or better GDP is achievable provided “we make historic reforms to both taxes and regulation.” That was followed up this week with the release of President Trump’s 2018 budget, titled A New Foundation for American Greatness, which includes $639 billion slated for military spending that would allow the Pentagon to bolster its ranks by more than 56,000 troops, buy more helicopters and trucks for the Army, boost the Navy’s fleet and pay for more stealth warplanes for the Air Force.

From a thematic perspective that is shot in the arm for another aspect of our Safety & Security investing theme following last week’s high profile WannaCry ransomware attack. While we have PureFunds ISE Cyber Security ETF (HACK) on the Tematica Select List, we’ll look to uncover well-positioned “bullets” for the Select List in the coming days to round out our exposure to this spending tailwind.

Speaking of our Safety & Security investing theme, if you missed last week’s Cocktail Investing Podcast in which Tematica’s Chief Macro Strategist, Lenore Hawkins and I discussed the WannaCry attack, ransomware and cyber spending with Yong-Gon Chon, CEO of cyber security company Focal Point, click here to download it on iTunes. My advice would be to subscribe on iTunes so you get every podcast each and every week, and remember they are absolutely free.


Deploying Several Defensive Measures to Protect Our Gains

As the stock market has moved higher and higher, it’s not lost on us that a number of holdings on the Tematica Select List have been inching up week after week, closing the gap on our respective price targets — that’s a nice problem to have, isn’t it?

Obviously, we’re not really going to complain about positions like Dycom (DY)or Universal Display (OLED) outperforming the market so far in 2017, but we will look at remaining upside to our price targets with an eye to protect subscribers from piling in at levels that don’t afford sufficient upside to warrant taking on potential risk. Yes, it’s the RISK and REWARD that we look at when assessing whether a position makes the cut onto the Select List.

With less than 10 percent upside to respective price targets, we are downgrading several stocks to “Hold” from “Buy.” Unlike Wall Street traders, our Hold rating is just that – maintain the position to capture additional upside, not “Hold means Sell.” For example, even though there is just 8 percent upside to our Alphabet (GOOGL) price target, there are enough tailwinds blowing that could lead to us to revise our price target upward over the coming months. With that mind, we are now rating shares of Alphabet, CalAmp (CAMP), International Flavors & Fragrances (IFF), and Facebook (FB) as Holds. As we do this, we’ll be mindful of pullbacks in the market that offer buying opportunities as well as potential upside to existing price targets.

We’re also making some prudent changes with regard to stop losses, and with that in mind we will make the following adjustments:

  • Boost our stop loss on IFF shares to $125 from $115, which will lock in a nice profit given our $120ish entry price.
  • Raise the stop loss on our PowerShares Exchange-Traded Fund Trust (PNQI) shares to $98 from $90, which cements at least a 17 percent return in the shares.
  • Increase our stop loss on Universal Display (OLED) shares to $85 from $70, which will ensure a minimum return of 60 percent given our $53 entry point.
  • Finally, with our GOOGL shares, we’re stepping the stop loss up to $900 from $800, which will give us a minimum return of just over 22 percent in the shares.

One last item of note, during the past week our position in AMN Healthcare (AMN) was stopped out when the shares crossed below our $37 stop loss level leaving us with a modest profit. Despite that happening, the drivers that led us to initially add the shares to the Tematica Select List – the intersection of the current nursing shortage and the demand for healthcare workers that is a part of our Aging of the Population investing theme – remain intact. As such, we’ll add AMN shares to the Tematica Contender List while we look for a favorable re-entry price.


 Updates Updates Updates

Below are some happenings for those companies on the Tematica Select List that we found noteworthy over the last week. As 1Q 2017 earnings season finally begins to die down, we expect to resume our quest to find new positions for the Select List or at least the thematic bullpen that we affection call the Tematica Contenders List. Two companies that I’m starting to roll my sleeves up on include MGM Resorts International (MGM) as part of our Guilty Pleasure investing theme and CSX (CSX), which falls under our Economic Acceleration/ Deceleration investing theme.


Alphabet (GOOGL), Asset-lite Business Models

GOOGL shares were largely unchanged this past week on the heels of its annual Google I/O event. There were several notable announcements there, including new hardware and augmented reality (AR) developments, as well as the news that Google Home will be available in more countries outside the U.S. over the coming months.

Earlier in the week Alphabet announced its Waymo division would team up with Lyft to commercialize its driverless technology, which increases the potential for Waymo to go from investment mode to perhaps revenue generating over the next several quarters. Should that happen, Alphabet could either redeploy those investments to other projects and if not we could see a reason to contemplate upside to EPS in 2019-2020.

Getting back to the here and now or at least the nearer term, we continue to see Alphabet as extremely well positioned for the continued acceleration in our increasingly connected society toward digital search (desktop and mobile), advertising dollars shifting to digital platforms (Google, YouTube) and consumer appetite for streaming content. At the same time, the company continues to exhibit a more focused view on delivering profits, something we appreciate as shareholders.

  • Our price target is $1,050, which offers roughly 8% upside from current levels.
  • Even as GOOGL shares approach our target, much like we say with Amazon (AMZN) shares, GOOGL shares are ones to own, not trade.

 


 

Applied Materials (AMAT), Disruptive Technology

Last week Applied Materials (AMAT) reported better-than- expected earnings on in-line revenue due primarily to robust margin expansion versus year-ago levels. Furthermore, given prospects for continued margin improvement and underlying order strength, the company guided the current quarter above consensus expectations. Per the quarterly report, Semiconductor Systems sales rose more than 50 percent year over year, benefiting from the ongoing digitization that has chips becoming the new “fabric” of lives — Connected Car, Connected Home, the Internet of Things (IoT) and wearables. Applied is also benefiting from rising semiconductor capacity in China as well as strong demand for organic light emitting diode displays that led its display equipment sales to spike more than 100 percent in the quarter.

  • On the underlying strength in the current demand up-cycle and prospects for further margin improvement, we are boosting our price target to $55 from $47, which offers upside of 22 percent from current levels.
  • We continue to rate AMAT shares a Buy

 


 

Universal Display (OLED), Disruptive Technology

You probably noticed in our Applied Materials comments earlier that one of the drivers to its strong quarter was robust demand from the currently capacity constrained organic light emitting diode market, or OLED’s for short and not to be confused with Universal Display’s ticker symbol, which is also OLED. If you didn’t feel free to scroll back up and re-read them.

During AMAT’s earnings conference call, the management team gave a rather bullish endorsement for our position in OLED shares when it said, “we see investment in mobile OLED getting stronger as confidence in the adoption rates of OLED technology increases. Recent forecasts indicate that two-thirds of new smartphones could have OLED displays by 2021 and screen manufacturers are accelerating their investment plans accordingly.”

With more applications — ranging from smartphones to TVs and wearables — embracing OLEDs in the coming quarters and ramping industry capacity to meet that demand, the outlook for Universal’s chemicals and licensing business looks very bright.

  • We are reassessing our current $125 price target with an upward bias.

 


 

Dycom Corp. (DY), Connected Society

This morning, our shares of Dycom Corp. (DY) are getting hard hit following the company’s mixed quarterly earnings report. The good news is for the April quarter, Dycom crushed expectations with $1.30 per share in earnings on revenue of $786.3 million compared to consensus expectations of $1.19 and $736.2 million, respectively. Organic revenue nearly 15 percent year on year, while business acquired in the last year contributed $23 million. While details in the pre-earnings conference call press release were scant, we see the year over year growth speaking to the continued build out of next generation networks at core customers like Verizon (VZ), Comcast (CMCSA) and our own AT&T (T).

Now for the less than good news that is pressuring the DY shares  – the company’s outlook for the current quarter. Dycom is forecasting contract revenue to be in the range of $780-$810 with EPS between $1.35-$1.50, which falls short of consensus expectations that were looking for revenue $845-$850 million with EPS in the range of $1.76-$1.79. As we suspected, the culprit given the nature of the company’s business is the timing of projects, and in this case, the mild winter led to some pull forward, hence the part of the better than expected April quarter revenue. The other driver for the April quarter revenue beat was one industry participant has begun to invest in the wireline infrastructure required to enable fully converged wireless-wireline networks. As we’ve seen before, this tends to result in copy-cat spending by competitors, which in our view bodes well for Dycom in the coming quarters.

Stepping back, we see both cable and mobile operators expanding existing network capacity and launching new, next-generation networks to meet need the near unquenchable demand for data. On this morning’s earnings call, Dycom shared that it is seeing a broadening set of customer opportunities that are in the initial stages of planning, engineering and design and deployment. While this has helped temper near-term spending expectations, the company is continuing to win contracts as customers continue to improve their network capabilities and performance. This brings us back to timing, and that means keeps tabs on Dycom’s customer base and respective network capacity additions and new technology deployments, such as fiber to the home and business as well as 5G backhaul. We expect the Wall Street community will trim back near-term revenue expectations, but given the 18 percent drop in DY shares this morning, we would argue those cuts are largely factored into the stock price.

Keeping one eye on the medium to longer-term view as these networks get built out over the next few years (not quarters), we’re inclined to use the pullback in the shares to round out the portfolio’s position size as the shares settle down provided our suspicion over the guidance miss is on point.

  • Given the initial purchase prices on the Tematica Select List at $72.89 and $80.47, we’re going to be patient with this position.
  • For those subscribers that missed the initial run in DY shares, we see this as an excellent jumping on point.

 


 

Facebook (FB), Connected Society

In the last few days, Facebook (FB) was fined by the European Commission just over $100 million on its acquisition of WhatsApp. That’s nothing to sneeze at, but there was far bigger news concerning the social media giant this week.

First, Facebook is expanding its video offering, inking a deal to broadcast a live Major League Baseball game each Friday for the rest of the season. All in all, that’s a 20-game package that begins tonight.

Second, Facebook’s “Order Food” option on both the web and mobile is now in beta testing. This initiative is an expansion of a deal from late last year with Delivery.com and Slice in which users could place orders with supported restaurants from their own Facebook pages. In our view, this speaks to the monetization across Facebook’s multi-platform offering that is benefiting from ongoing feature upgrades.

In the coming months, we’ll look to see if the slowdown in digital advertising, cited on Facebook’s earnings call, is occurring or if the shift to mobile advertising continues to be robust.

  • Our price target remains $160.
  • For now, we would suggest subscribers look to add to FB positions below $145.

 


 

USA Technologies (USAT), Cashless Consumption

Last week, USAT shares rose more than 2 percent during a quiet news week for the company. Despite the relative silence, comments from Alphabet (GOOGL) at its annual I/O developer conference revealed Android Pay was expanding into new markets: Brazil, Canada, Russia, Spain, and Taiwan. As mobile payments expand across the globe, much the way credit and debit cards have, we see an expanding target market for USA’s payment solutions.

  • We intend to be patient investors and hold USAT shares as mobile-payment adoption grows.
  • Our price target remains $6 and the shares are a Buy at current levels.

 

 

 

 

 

With 2017 Poised to be the Year of Ransomware, More Cyber Spending is on the Way

With 2017 Poised to be the Year of Ransomware, More Cyber Spending is on the Way

With headlines swirling following the WannaCry attack that hit more than 230,000 computers across more than 150 countries in just 48 hours, on this episode of Cocktail investing we spoke with Yong-Gon Chon, CEO of cyber security company Focal Point to get his insights on that attack, and why ransomware will be the cyber threat in 2017. Before we get into that Safety & Security conversation, Tematica’s investing mixologists, Chris Versace and Lenore Hawkins broke down last week’s economic and market data as well as the latest relevant political events. With all the controversy in D.C., there was a lot to discuss concerning the likelihood that the Trump Bump, which was based on assumptions around tax reform, regulatory roll-back, and infrastructure spending is evolving into the Trump Slump as investors realize the anticipated timeline for such was decidedly too aggressive. With mid-term elections looming, we expect the Trump opposition will be emboldened by the controversy surrounding the administration and will put in best efforts to appeal to their constituents. For the market, it’s another reason to see the Trump agenda likely slipping into late 2017-early 2018, and that realization is likely to weigh on robust GDP and earnings expectations for the balance of 2017.

The markets on May 17th suffered their biggest losses in 2017, with the Nasdaq taking the biggest one-day hit since Brexit, as the turmoil in Washington dampens investors’ appetite for risk while raising questions over GDP and earnings growth. While some Fed banks are calling for 2Q 2017 GDP as high as 4.1 percent (quite a jump from 1Q 2017’s 0.7 percent!), the data we’re seeing suggests something far slower. We continue to think there is more downside risk to be had in GDP expectations for the balance of 2017, and the latest Trump snafu is only likely to push out team Trump’s reforms and other stimulative efforts into 2018. If 2Q growth is driven in large part by inventory build, which is what the data is telling us, expect the second half to be significantly weaker than the mainstream financial media would lead you to believe.

While the global financial impact of the WannaCry ransomware attack may have been lower than some other high profile attacks such as ILOVEYOU and MyDoom, the speed at which it moved was profound. We spoke with Yong-Gon Chon, CEO of Focal Point Data Risk about the incident to get some of the perspective and insight the company shares with its c-suite and Board level customers. While many are focusing on WannaCry, Yong-Gon shares that as evidenced by recent content hijackings of Disney (DIS) and Netflix (NFLX), ransomware is poised to be the cyber threat of 2017. Those most likely to be targeted are those organizations that prioritize uptime and whose businesses tend to operate around the clock, making backups and software updates extremely challenging.

While in the past IP addresses may have been scanned once every four to five hours, in today’s increasingly Connected Society, IP addresses are scanned one to ten times every second. As consumers and businesses in the developed and emerging economies increasingly adopt the cloud and other aspects of Connected Society investing theme, we are seeing an explosion in the amount of data as more and more of our lives are evolving into data-generating activities. From wearables to appliances to autos, our homes, offices, clothing and accessories are becoming sources of data that goes into the cloud. With the Rise of the New Middle Class in emerging markets, we are seeing the number of households participating in this datafication grow dramatically, exposing new vulnerabilities along the way. That increasingly global pain point is fodder particularly for cyber security companies, such as Fortinet (FTNT), Splunk (SPLK) and Cisco Systems (CSCO) that are a part of our Safety & Security investing theme.

During our conversation with Yong Gon we learned that companies need to understand that breaches must be viewed as inevitable in today’s Connected Society, network boundaries are essentially a thing of the past. Security can no longer about preventing nefarious actors from gaining entrance, but rather is now about managing what happens once a company’s network has been invaded. From a sector perspective, with all the regulation and reporting requirements in financial services, many of these firms are leading the way in how to best deal with such breached.Uber

For investors who want to understand the potential impact of cybercrime, Yong-Gon Chon suggests looking at how much data a company is generating and how the company is managing the growth of that data, with companies such as Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL) and Uber examples of heavy generators. Investors need to look at a company’s cyber risk as a function of the magnitude of its data generation and the company’s level of maturity in addressing that risk. By comparison, companies not affected by attacks such as WannaCry need to be asking themselves why didn’t they get hit? Was it luck or did we do something right? If so, what did we do right and what is the scope of protection we have given what we’ve learned about the latest attack strategies?

We also learned about the new efforts underway globally to develop attribution of cyber threats so as to differentiate between those threats from professional cyber criminals versus the capricious tech savant engaging in ill-advised boundary exploration. Along with this shift is also a change in the boardroom, where cybersecurity is viewed in the context of its potential impact on the business, rather than as a function of a company’s IT department.

One thing we can be assured of is that hackers are watching each other and the good ones are learning what makes attacks fail and where organizations are weakest. As the Connected Society permeates more and more of our lives, these risks become more pernicious and their prevention more relevant to our everyday lives. The bottom line is we are likely to see greater cyber security spending in preventative measures as well cyber consulting as those responsibilities become a growing focus of both the c-suite and board room.

Companies mentioned on the Podcast

  • Amazon.com (AMZN)
  • Apple (AAPL)
  • CVS Health (CVS)
  • Disney (DIS)
  • Facebook (FB)
  • Focal Point
  • JC Penny Co (JCP)
  • Kohl’s (KSS)
  • Macy’s (M)
  • Microsoft (MSFT)
  • Netflix (NFLX)
  • Nordstrom (JWN)
  • TJX Companies (TJX)
  • Twitter (TWTR)
  • Uber
  • United Parcel Service (UPS)
  • Walgreens Boots Alliance (WBA)

Resources for this podcast:

WEEKLY ISSUE: “WannaCry” cyber attack impact on our Safety & Security investment theme

WEEKLY ISSUE: “WannaCry” cyber attack impact on our Safety & Security investment theme

In this Week’s Issue:

  • Checking the data, the economic data that is
  • WannaCry makes HACK shares jump for joy
  • Disney (DIS) held movie hostage?
  • Alphabet (GOOGL) and Lyft team to commercialize self-driving cars
  • Amazon’s (AMZN) at it again, this time with furniture
  • Getting ready for earnings from Applied Materials (AMAT) and what it means for Universal Display (OLED)

 

It’s been a much welcomed slower week of economic data and corporate earnings, but Mother Nature sensing we might like the lull after the last few weeks, many across the globe had to contend with the WannaCry ransom ware cyber attack – more on that below and what it means for our Safety & Securityinvestment theme position in PureFunds ISE Cyber Security ETF (HACK) shares. We’ve also got a number of updates to share, so away we go…

 

Checking the data, the economic data that is

Before we dish on WannaCry, let’s recap the economic data received this week, which included the May reading on manufacturing under the purview of the NY Fed, as well as April data for Housing Starts and Industrial Production. Let’s start with the good news, which was manufacturing activity per the April Industrial Production report ticked higher month over month, but even though this took a bite out of excess manufacturing capacity, manufacturing capacity remains underutilized. Moving over the April Housing Starts, single-family homes were flat month over month, while multifamily units fell more than 9 percent compared to March.

 

On the back of that data, the Atlanta Fed boosted its 2Q 2017 GDP reading to 4.1 percent from the prior 3.6 percent reading. Then we received the Empire Manufacturing Index for May, which clocked in at -1.0, well below the expected 7.5 reading and down compared to April’s 5.2 showing. Not exactly supportive of the Atlanta Fed’s revised forecast, and candidly more in line with the slowing evidenced in the majority of the economic data.

 

 

Tomorrow (Thursday), we’ll get the Philly Fed Index and we’ll be matching the May figure against 22.0 in April and consensus forecast of 18.5 for May. As we digest that data point, we’ll be looking for the next 2Q 2017 GDP update from the NY Fed and its Nowcasting model. As a reminder the most recent Nowcasting reading pegged 2Q 2017 GDP at 1.9 percent, down from 2.9 percent at the end of March.
 

WannaCry makes HACK shares jump for joy

Over the last five days, shares of the PureFunds ISE Cyber Security ETF (HACK)rose more than 2 percent bringing the position return to more than 6 percent since being added to the Tematica Select List in early February. As we saw over the last few days, we are seeing a pronounced pick-up in cyber attacks, which include WannaCry and the more than 300,000 computers across over 150 countries that it violated as well as other attacks on hospitals and even clothing retailer Brooks Brothers.

From time to time, we tend to settle in following a headline-worthy cyber attack and complacency returns. We’ve seen this several times, and it tends to result in a demand spike for cyber security stocks, only to see them level off over the coming months. By comparison, we continue to see a growing frequency of cyber attacks both large, medium and small, which is fueling demand and driving revenue for cyber security companies. If one were to postulate, this demand is one downside to our Connected Society investing theme. We would agree, as one company’s tailwind can be another’s headwind, and that pain point can create an opportunity for others. Pretty much what we see here, and it keeps us bullish on HACK shares given our $35 price target.

We’ll be doing a deeper dive on this week’s Cocktail Investing Podcast when Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talk with Yong-Gon (“Young Gun”) Chon, the CEO of Focal Point Data — consulting firm that advises CEOs and Boards on cyber risk.  Be sure the check the website for when the podcast is posted, or subscribe on iTunes to automatically receive each and every episode. While the Cocktail Investing podcast is free – it is, unfortunately, a “BYOB” event.

 

 

Disney (DIS) held movie hostage?

During a town hall meeting with employees, Bob Iger CEO of The Walt Disney Co (DIS) shared “hackers have claimed to have stolen a movie and are threatening to release it in segments until their demands, which include a pirate-like ransom paid with Bitcoin, are met.” While Iger did not identify the would-be stolen film, chatter suggests it to be the new “Pirates of the Caribbean” sequel, which is set to open on May 26. This is the latest film in a franchise that has grossed grossing nearly $3.73 billion worldwide. Disney is currently working with federal authorities to investigate the attack, and we’ll continue to monitor developments and what they may means for the company’s film business in the near-term.

  • The recent post-earnings pullback offers 16 percent upside to our $125 price target at current levels.
  • With a robust movie slate, declining capital spending and a super-sized $10 billion buyback program, we continue to favor the House of Mouse.

 

 

Alphabet (GOOGL) and Lyft team to commercialize self-driving cars

Amid its skirmish with Uber over self-driving technology that it is developing at Waymo, this week Alphabet’s (GOOGL) partnership with ride-hailing startup Lyft took a new turn as they agreed to work together to develop products and technology for autonomous autos. While terms and other details of the arrangement were not disclosed, there are several thoughts on what this could mean for Alphabet’s Waymo. The most obvious of which is a path to commercialization. Even Warren Buffett commented on the threat that driverless cars and trucks pose to several of Berkshire Hathaway’s businesses at the annual shareholder meeting this year, couching his remarks with “at some point.”

As we see it, the arrangement with Lyft has the potential to bring Waymo’s driverless technology to commercialization as it leverages Lyft’s network of taxis operating in more than 300 cities across the United States. What’s Lyft’s motivation in this? Reducing its largest cost, which are the drivers that get as much as 80 percent of fares, not to mention cash subsidies to retain those drivers. With other companies ranging from Apple (AAPL) to Mobileye (MBLY)vying for a slot in the driverless car market, we’ll continue to watch developments.

  • Our price target on GOOGL shares remains $1,050, which offers just under 10 percent upside from current levels.
  • With the market trading at stretched valuations, we would hold off adding to GOOGL positions at current levels.
  • That said, GOOGL shares are ones to own as we move deeper into the Connected Society.

 

 

Amazon’s (AMZN) at it again, this time with furniture

Turning to Amazon, there were two announcements that caught our eye – the first deals with Amazon’s expanding into furniture, while the other is the dismal brick & mortar retail landscapes. We commented on the later in last week’s Roundup, but we’re seeing reminders of retail-megaddon this week in TJX Companies (TJX) dismal earnings report. Our view remains Amazon is net share gainer as it expands its product and geographic footprint. That brings us back to our first point, the expansion of its furniture offering. While Amazon has sold furniture online for years, much like apparel, it is it stepping up its game as it offers a wider variety of selection — Ashley Furniture sofas and chairs and Jonathan Adler home decor. What Amazon is looking to do is tap into the growth prospects for online furniture sales, which eMarketer sees growing to more than $55 billion by 2020, up from $36 billion this year.

  • Our AMZN price target remains $1,100, which offers just under 14 percent upside from current levels. As with GOOGL shares.
  • AMZN shares are one to buy and hold, and that’s exactly what we aim to do.

 

 

Getting ready for earnings from Applied Materials (AMAT) and what it means for Universal Display (OLED)

Applied Materials (AMAT) will report its quarterly earnings after Thursday’s (May 18) market close. Heading into the weekend consensus expectations call for the company to deliver EPS of $0.76 on revenue of $3.54 billion. As we digest the company’s earnings, we’ll be focusing on bookings and backlog with an eye for potential upside to our price target. With that report, we’ll get another take on ramping OLED industry demand. All signs point to rising capacity, and we’ll be listening to Applied’s comments not only for incremental capacity additions but the timing for those new facilities going from beta to commercial production. With more applications ranging from smartphones to TVs and wearables embracing OLEDs in the coming quarters and ramping industry capacity to meet that demand, the outlook for Universal Display’s (OLED)chemicals and licensing business looks very bright.

We’d note the price moves in these two shares have been strong, and both have continued to encroach on our respective price targets. While we anticipate an upbeat quarter and outlook from Applied, we also think expectations are running high into the earnings report. In our view, to justify the Buy ratings on both stocks, we would need to see upside to $52 for AMAT shares and near $135 for OLED shares, respectively, from current levels. We’ll dial into AMAT’s quarterly report and make our next move based on those findings. With OLED shares, we suspect we’re likely to see a series of rising price targets over the coming months as we wait for the initial sales data on Apple’s next iPhone. Odds are Apple will once again under-produce relative to demand, resulting in the headlines touting yet again another new iPhone selling out. Up over 120 percent as of last evening’s close, we will continue to hang onto our OLED shares for the ride that is to come.

 

 

 

 

 

WEEKLY ISSUE: Several stocks capitalizing on strong thematic tailwinds

WEEKLY ISSUE: Several stocks capitalizing on strong thematic tailwinds

In this Week’s Issue:

  • Disney Delivers an EPS Beat, But Reaffirms 2017 is a “Transitional” Year
  • Amplify Snacks Serves Up a Healthy Quarter
  • USA Technologies: Riding the Cashless Consumption Wave
  • March JOLTS Report Confirms Our Stance on AMN Healthcare (AMN) Shares

 

As we noted in the Monday Morning Kickoff a few days ago, this week was going to be yet another barn burner in terms of activity, with yet another 1,000 companies reporting earnings. We’ve gotten some incremental economic data points, but the main ones for the week – the April reports for PPI, CPI and Retail Sales – all come later in the week.

As we sifted through hundreds of earnings reports over the last two days, we also saw further downward revisions by both the Atlanta Fed and the New York Fed for their respective 2Q 2017 GDP forecasts. Hardly surprising, given the readings from ISM and Markit Economics as well as the April data supplied by regional Fed banks, but once again here we are. What made headlines yesterday was the comments from Commerce Secretary Wilbur Ross that the US economy “won’t achieve the Trump administration’s 3 percent growth goal this year and not until all of its tax, regulatory, trade and energy policies are fully in place.”

Given Ross’s comments that the growth target “ultimately could be achieved in the year after all of President Donald Trump’s business-friendly policies are implemented” but that “delays were possible if the push for tax cuts was slowed down in Congress,” odds are there is some DC-style politicking going on. Even so, the reality is without a jolt to the system odds are the US economy will remain in low gear.

As we’ve shared previously, the economy is facing several headwinds associated with our Aging of the Population and Cash-strapped Consumer investing themes that are likely to keep it’s growth range bound. As such, we continue to see current GDP expectations as somewhat aggressive for the coming quarters, and the same holds true for S&P 500 earnings expectations. That said, we are not buyers of the stock market, but rather those companies that are well suited to capitalize on the tailwinds associated with our investing themes. You’ll see confirmation of that in our comments below on Disney (DIS), Amplify Snacks (BETR), USA Technologies (USAT) and AMN Healthcare (AMN), as well as Amazon (AMZN) and Alphabet (GOOGL) in the next paragraph.

As a quick reminder, later this week we’ll get the April Retail Sales Report, which could see favorable comparisons year over year given the late Easter holiday. As usual, we’ll be digging in below the headlines to get a better sense of consumer spending for not only what they are buying, but where. We once again suspect the report will confirm the accelerating shift toward digital commerce that is power our Amazon (AMZN) and Alphabet (GOOGL) shares. We continue to rate both Buy with $1,100 and $1,050 price targets, respectively.

Now let’s dig into the earnings reports for several positions on the Tematica Select List…

 

 

 

Disney delivers an EPS beat, but reaffirms 2017 is a “transitional” year.

Last night Disney (DIS) reported March 2017 results, which included better than expected EPS, revenue that came in a tad shy of expectations and sober forward guidance, which reminded investors that 2017 is a transitional year for the company as it targets better growth in 2018. EPS for the quarter came in at $1.50, $0.09 ahead of consensus expectations as revenue rose 2.8 percent compared to the year-ago quarter hitting $13.34 billion, shy of the $13.44 billion that was expected.

Heading into 2017, we noted the first half of the year would likely be a more subdued one and so far that is proving to be exactly the case. As we enter the company’s fiscal second half of 2017, Disney has a far stronger movie lineup, which should continue into 2018 and beyond. Higher costs at ESPN and investments in new park attractions, however, are likely to be gating factors over the next few quarters. We see Disney as investing today to leverage its vast array of characters and tentpole films that will drive incremental business at its parks, for its merchandise and other businesses in the coming quarters.

Our price target remains $125, but we’ll continue to revisit that target based on box office strength in the coming months. Odds are the quarter’s results will take some of the wind out of Disney’s sails, but with the company set to continue to leverage its Content is King strategies, we’re inclined to be patient.

Breaking down the company’s segment results from the March quarter we find:

  • Cable Networks revenues for the quarter increased 3 percent to $4.1 billion and operating income decreased 3 percent to $1.8 billion. The decrease in operating income was due to a decrease at ESPN due to higher programming costs because of the timing between College Football Playoff (CFP) bowl games and NBA programming, which was partially offset by increases at the Disney Channels and Freeform. Programming costs are expected to be 8 percent higher this year due in part to the new NBA contract.
  • On a positive note, Disney continues to make progress in transitioning ESPN by expanding its reach into streaming services like those from Sling TV, Sony’s (SNE) PlayStation Vue, YouTube TV (GOOGL), Hulu and DirecTV Now from AT&T (T). While Disney is seeing favorable momentum, it’s still not enough to totally offset the slide it is seeing in cable subscriptions. As we discussed recent, Disney is focusing on live mobile content, which should help drive incremental viewing compared to the 23 million unique users who collectively spent 5.2 billion minutes engaging with ESPN on its mobile platforms in the March quarter.
  • Parks and Resorts revenues for the quarter increased 9 percent to $4.3 billion and segment operating income increased 20 percent to $750 million. We’d note that segment benefited from price increases taken in prior months, but this was offset by the later than usual Easter holiday this year.
  • As expected construction is underway on Star Wars attractions at both Disney World and Disney Land, a great example of how the company’s film content will drive park attendance and merchandise sales. Management commented that in a few days the 10 millionth guest will pass through Shanghai Disney and the park is tracking to break even this year as Disney downshifts investing in the park compared to year-ago levels.
  • Studio Entertainment revenues for the quarter decreased 1 percent to $2.0 billion and segment operating income increased 21 percent to $656 million. Despite having two films that grossed more than $1 billion each during the quarter – Rouge One from the Star Wars franchise and remake of Beauty and the Beast – the quarter faced stiff year over year comparisons given the success of last year’s Star Wars: The Force Awakens and Zootopia and in essence making them a victim of their own success. On the earnings call, as expected management talked up Friday’s Guardians of the Galaxy 2 release, which took the top spot at the box office and raked in more than two times the first installment of the Guardians franchise. Disney reminded investors it has four Marvel films coming over the next 14 months, as well as the next installment of the Pirates of the Caribbean franchise and Cars 2 dropping in the next few months before The Last Jedi lands in December. Longer-term, there will be more Marvel, Pixar and Lucasfilm tentpole properties, but on the call Disney shared that Frozen 2 will be released in 2019.
  • Broadcasting revenues for the quarter increased 3 percent to $1.9 billion and operating income increased 14% to $344 million led by greater sales of Marvel TV programming content to Netflix (NFLX) and others.
  • Consumer Products & Interactive Media revenues for the quarter decreased 11% to $1.1 billion and segment operating income increased 3 percent to $367 million.

On the housekeeping front, during the March quarter, Disney repurchased about 18.6 million shares for about $2 billion. Over the last two quarters (better known as the company’s fiscal year-to-date), its repurchased 41.5 million shares for approximately $4.4 billion. Citing lower than expected capital spending needs and improved operating cash flow, Disney once again increased its share repurchase target by $2 billion to $9 billion to $10 billion for the year. As the company chews through this program, it should help improve year over year EPS comparisons, but we’ll still be monitoring both operating profit as well as net income growth when contemplating how to best value the shares.

The bottom line on DIS shares:

  • Given the appreciation in the shares price over the last five months, we would not add to positions in the Walt Disney Co (DIS) at current levels and thus are changing our rating to a Hold at this point in time.
  • Rather, we would look to commit fresh capital to DIS shares between $100-$105 if the shares pull back in the coming days, while over the longer term we still maintain a price target of $125 for the shares.

 

 

Amplify Snacks Serves Up a Healthy Quarter

After last night’s market close, Foods with Integrity theme company Amplify Snacks (BETR) reported 1Q 2017 results that included EPS of $0.06 vs. the expected $0.06 on revenue of $87.2 million vs. the consensus expectation of $87.6 million and up more than 60% compared to $54.3 million in the year-ago quarter. The one wrinkle in the quarter was the company’s gross margin line that contracted year over year, which we attribute to short-term initiatives to grow the company’s business further. For example, during the quarter the company launched its SkinnyPop Ready-to-Eat popcorn in the U.K., carried a full quarter of both the Oatmega and Tyreell acquisitions, and introduced new SkinnyPop product extensions (popcorn cakes, popcorn mini-cakes and microwave popcorn).

As these initiatives bear fruit over the coming months and longer term as Amplify brings Tyrrell chip products to the US in the back half of 2017 and 2018, the good news is the company continues to expand its distribution. Exiting the quarter, its ACV (a widely recognized distribution measure) hit 81 points up from 73 in the same period last year. The year over year improvement reflects new distribution across grocery, mass and convenience channels as those companies embrace our Foods with Integrity investing theme and expand their healthy snacking alternatives.

Given stronger prospects for the domestic business, Amplify amended its tax guidance which has led to a modestly higher tax rate than previously expected. This, in turn, has led the company to ever so so slightly trim its 2017 EPS outlook to $0.42-0.50 versus our prior expectation of $0.43-0.51., which in our view is a very minor change relative to the growth prospects to be had over the coming quarters.

  • Exiting the company’s quarterly earnings report, we continue to rate BETR shares a Buy with a $10.50 price target.

 

  

USA Technologies: Riding the Cashless Consumption Wave

Yesterday, USA Technologies (USAT) reported inline EPS expectations for the March quarter on better than expected revenue. USA Technologies 1Q 2017 revenue rose 30 percent year over year as the company continued to grow the number of connected to its ePort services, up 26 percent to 504,000 connections. As the adoption of mobile payments continues to spread, USA expanded its customer base by another 500 to reach 12,400 exiting the quarter, a 15 percent increase year over year. The company also issued a more upbeat outlook calling for 2017 revenue of $95-$100 million, a tad higher than the $95-$97 consensus expectation derived from the three Wall Street analysts following the shares.

On the earnings call, the company shared a number of confirming data points for investment thesis on USAT shares including:

  • USAT is working with Ingenico to provide customers with more hardware options and where Ingenico will be able to leverage USA’s quick connect service as well as ePort Connect platform for use with its NFC/contactless unattended payment solutions. As way of background, Ingenico was the first international multi-billion-dollar mainstream payments hardware company that have entered the unattended retail market.
  • During the quarter, USA also launched an alliance with vending company Gimme Vending as also announced a stand-alone loyalty program that integrates with Apple’s (AAPL) Apple Pay.
  • Digging into 1Q 2017 revenue, the company had 105 million total transactions representing 203 million in transaction volume increases of 28% and 34% respectively from last year.
  • License and transaction fees rose 19% year over year to $17.5 million compared to $14.7 million last year. We call this out because the segment includes recurring monthly service as well as transaction processing fees, which offer good visibility and predictability. As the percentage revenue derived from license and transaction continues to climb from 66% of total revenue in 1Q 2017, the company’s visibility should similarly improve.

With the continued migration toward a cashless society, we continue to rate USAT shares a Buy with a $6.00 price target.

 

 

March JOLTS Report Confirms Our Stance on AMN Healthcare (AMN) Shares

Yesterday we received the March Job Openings and Labor Turnover Survey and once again it showed not only a strong year over year increase in healthcare job openings, but also the number of open healthcare jobs significantly outweighs the number of positions filled. Granted the data lags by a month, but given the April jobs data, we rather doubt there has been any meaningful change in the metrics over the last month. We continue to see the far greater number of healthcare job openings compared to the available talent pool as driving demand for AMN Healthcare’s (AMN) healthcare workforce solutions.

  • With more than 20% upside to our $47 price target, we continue to rate AMN shares a Buy.

 

 

 

 

 

 

 

 

 

WEEKLY ISSUE: While earnings so far have been mixed bag, it’s been mostly good news for the Tematica Select List

WEEKLY ISSUE: While earnings so far have been mixed bag, it’s been mostly good news for the Tematica Select List

In this Week’s Issue:

  • Boosting Amazon and Alphabet Price Targets on Blockbuster Earnings
  • Intel’s Capital Spending Bodes Well For Applied Materials
  • Facebook Earnings Due After Today’s Market Close
  • Universal Display and AMN Healthcare Earnings On Tap for Thursday

 

As we noted in our Monday Morning Kickoff out just a few days ago, this week is by far one of the busiest with more than 1,000 companies reporting, a slew of economic data and the Fed’s latest FOMC meeting. The Fed meeting culminates today at 2 PM ET, and soon thereafter we’ll learn if the Fed has once again boosted interest rates. As we have been pointing out here at Tematica in an almost broken drum-like fashion, the domestic economy cooled rather dramatically during 1Q 2017, with GDP clocking in around 0.7 percent vs. 2.1 percent in 4Q 2016.

While that is in the rear view mirror, the initial data for 2Q 2017 found in the April data from ISM Manufacturing, Markit Economics and several regional Fed indices all point to a continuation of that slow speed. That compares to the current consensus expectation that has GDP clocking in at 2.8 percent according to The Wall Street Journal’s Economic Forecasting Survey. At least, for now, that view looks rather aggressive and with inflation data rolling over as year over year comparisons ease, it looks to us like the Fed is likely to stand pat on interest rates later today. Of course, there will be the usual slicing and dicing of the Fed policy statement to get a better sense if the Fed will look to boost rates at its next meeting in June or in the back half of this year. As a reminder, coming into 2017 the Fed shared that it was looking to boost rates three times. Following one hike already earlier this year, the growing question could very well be will they get around to all three?

Turning to the Tematica Select List, we’ve seen a number of strong moves over the last week as we’ve journeyed through 1Q 2017 earnings season. Examples include our Amazon (AMZN), Alphabet (GOOGL) and PowerShares Exchange-Traded Fund Trust (PNQI) shares, but we’ve still yet to hear from a number of Select List companies. Luckily (yes that was sarcasm), we’ve got several reporting later this week, including Facebook (FB) after today’s close, followed by Universal Display (OLED) and AMN Healthcare (AMN) tomorrow night. In the coming paragraphs, we’ve set the table for what is expected from these companies and we also share our price target updates for Amazon and Alphabet, which even after their respective moves over the last week still keeps the shares in the Buy zone.

In case you were afraid the earnings fun would be over soon, that’s certainly not the case as we have several others Select List companies, including The Walt Disney Co. (DIS) and International Flavors & Fragrances (IFF) reporting next week. Don’t worry, we’ll be here to guide you through it, using our thematic lens to lead the way.

 

Boosting Amazon and Alphabet Price Targets on Blockbuster Earnings

Last week, Amazon reported blowout earnings of $1.48 per share for the first quarter, well ahead of the $1.10 consensus expectation for the quarter. Revenue for the quarter rose 23 percent, year over year, to $35.71 billion, ahead of the $35.31 billion consensus number with double-digit improvement across all three businesses — North America, 23.5%; International, 15.6%; and Amazon Web Services (AWS), 42.7%. The revenue beat, alongside better-than-expected operating income of $1 billion vs. the $900 million consensus and Amazon’s own guidance for the quarter of $250 million-$900 million, led to the positive earnings surprise.

Sifting through the segment results, AWS continues to be the key profit generator for the company as it delivered the vast majority of the company’s overall operating profit, with operating losses at International offsetting profits in North America. As impressive as that was, we’d note that despite the segment’s revenue growth, its operating margin only improved to 24.3 percent in 1Q 2017 vs. 23.5 percent in the year-ago quarter. Once again Amazon offered forward guidance that one could drive a truck through, but even though it was not specifically shared, we find there is a growing comfort following the quarter that Amazon can deliver profits even as it continues to expand its footprint.

From our perspective, Amazon is riding the pole position of not only our Connected Society investing theme, but increasingly our Content is King, Cashless Consumption, and Asset-Lite Business Model as well. Talk about the power of four thematic tailwinds… as we have said before, Amazon is a stock to own and we see no signs of that changing anytime soon.

Also last week, Asset-Lite Business Model company  Alphabet (GOOGL) delivered knockout earnings and revenue despite concerns for advertising weakness at YouTube. For the March quarter, Alphabet delivered an impressive EPS of $7.73, $0.35 ahead of consensus expectations as revenue for the quarter rose more than 22 percent year over year to 424.75 billion. Without question Alphabet’s business – Search, Advertising and YouTube — are all benefitting by the shift to mobile from the desktop; launches thus far of the company’s TV streaming service, YouTube TV have been favorable and demand for its cloud business, much like that at Amazon, remains strong.

As we have shared for some time, we see no abatement in the tailwinds that are driving the two business, which includes the migration to online shopping, cloud adoption, streaming content and migration of advertising dollars to digital platforms. If anything, we continue to see prospects for those winds to blow even harder as the two companies continue to position themselves better than well for our increasingly connected society.

Those winds, along with solid execution and a focus on profits at both companies, are behind our revised price targets for both companies:

  • Our new price target on Amazon (AMZN) shares is $1,100, up from the prior $975, which offers just over 17 percent upside and keeps our Buy rating intact.
  • Our new price target for Alphabet (GOOGL) shares is $1,050, up from $975, and that equates to roughly 12 percent upside, which also keeps our Buy rating intact.

 

Intel’s Capital Spending Bodes Well For Applied Materials

Also last week, Intel (INTC) reported its quarterly earnings and reiterated its outlook for capital spending of $12 billion this year, which would be up from $9.6 billion in 2016. While not new information, the confirmation serves as a reminder of the tailwind driving the business at Applied Materials (AMAT). We expect similar data points as earnings season progresses in light of demands not only for memory and other chips but also organic light-emitting diode capacity. with regard to the latter, we’ll look for similar comments on OLED industry display capacity constraints and expansion when Universal Display (OLED) reports earnings after tomorrow’s market close (more on that below).

  • Our price target on AMAT shares remains $47.

 

Facebook Earnings Due After Today’s Market Close

On the heels of Alphabet’s stronger- than-expected quarterly results, expectations are running for Facebook (FB), a Connected Society company that like Alphabet is benefitting from the accelerating shift to digital advertising across its various properties. Even though Facebook has a track record of beating Wall Street expectations when it reports its quarterly results, from time to time whisper expectations that are above published forecasts can get the better of a company. Given the strong quarterly results coming out of Alphabet, odds are Wall Street is expecting Facebook to deliver at least several pennies better than the consensus forecast for 1Q 2017 that calls for EPS of $1.12 on revenue of $7.83 billion. We acknowledge the strong price move year to date as well as Alphabet’s quarterly results likely mean anything other than a blowout earnings report is likely to result in the shares pulling back.

  • In our view, any post-earnings pullback is a likely opportunity for those who have missed out previously.
  • We’ve been reviewing our $150 price target, which is modestly below the $161 consensus target on the shares, and expect to update it following Facebook’s earnings report out after today’s market close. 

 

Universal Display and AMN Healthcare Earnings On Tap for Thursday

The earnings fun continues tomorrow when we have both Universal Display (OLED) and AMN Healthcare (AMN) reporting results after the market close. First, with AMN, expectations are far the healthcare workforce solutions company to deliver EPS of $0.60 on revenue of $493 million. Recent JOLTs reports have confirmed the discrepancy between healthcare workers job openings and the viable candidate pool, which bode rather well for AMN’s workforce placement business. Longer-term, the Aging of the Population and capacity constrained nursing schools are a powerful combination that provides a longer-term tailwind for AMN’s business.

  • Our price target on AMN heading into the earnings report remains $47.

Turning to Universal Display, this Disruptive Technology investment theme company is expected to deliver EPS between -$0.05 per share and $0.02 on revenue between $31.8-$36 million, vs. $29.7 million achieved in the year-ago quarter. We’d remind subscribers the key to the Universal Display’s investment narrative is the expanding number of applications for organic light emitting diode displays, including prospects for Apple’s (AAP) next iteration of the iPhone.

On last night’s earnings call for Apple, the company’s iPhone volumes missed expectations and even CEO Tim Cook called out the culprit — “rumors around future products” — that is likely pushing out the current upgrade cycle. In our view, what’s bad for Apple today is very good news for Universal Display.

On the Universal Display earnings call, we expect to get an update on industry capacity expansion plans that bode well for our Applied Materials shares, as well as one for recent expansions being switched on. Without question, there will be much chatter over new applications, the next iPhone, and rising manufacturing levels, all of which points to rising demand for Universal’s chemicals and IP licensing business.

  • We continue to rate OLED shares a Buy and heading into the earnings call our price target remains $100.

 

WEEKLY ISSUE: Earnings and Washington Drama Take Center Stage

WEEKLY ISSUE: Earnings and Washington Drama Take Center Stage

In this Week’s Issue:

  • No Real Shock in AT&T’s (T) Earnings, However, Some of the Details Have Us Downgrading Dycom (DY) from a “Buy” to a “Hold”
  • What We’re Expecting Later This Week in Earnings Reports from Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX)
  • Developments in Our Positions in DIS, HACK, IFF, BETR

 

With the pace of corporate earnings picking up this week, we have a lot to cover so we’ll keep our opening comments rather brief.

You’ve likely noticed the strong rise to the market this week, following the initial round of French elections. That euphoria, however, could be short-lived as the market’s focus returns to earnings and the unfolding drama in Washington. While the earnings reports we’ve received thus far have been encouraging, in sifting between the headlines there are some reasons to be concerned and as we get the bulk of this week’s reports today and tomorrow, we suspect more concerns will bubble to the top.

On the political front, there is the risk of a federal government shutdown (low probability in our opinion), the renewed GOP effort on healthcare reform and now  Trump’s tax proposal. To us, the combination of earnings and Washington happenings are likely to cause some renewed uncertainty in the market, which could lead to some giveback in its recent gains. Yes, we know new records were set in the Dow Jones Industrial Average and the Nasdaq Composite Index, but in our view that only means stretched market valuation are even more so. Given the findings of the Bank of American Merrill Lynch institutional money manager survey we shared in this week’s Monday Morning Kickoff that 83 percent find the stock market over-valued, we suspect that level has only ticked higher in the last few days.

We will continue to be prudent with the Tematica Select List and follow the latest thematic data points. Be sure to tune into the latest episode of the Cocktail Investing Podcast later this week, when we share a number of those data points.

Now let’s get to it…

 


No Real Shock in AT&T’s (T) Earnings, However, Some of the Details Have Us Downgrading Dycom (DY) from a “Buy” to a “Hold”

 

Last night Connected Society investment theme company AT&T (T) reported 1Q 2017 results that met bottom line expectations but missed on revenue for the quarter. With our underlying investment thesis intact — the transformation of the company into a mobile content player from simply a wireless services player — despite the wireless led revenue shortfall in the quarter, we will continue to watch AT&T shares with the intention of using weakness below $40 to round out our position size as the shares settle out from last night’s earnings report.

In looking into the details of what AT&T reported, we find that for the March quarter AT&T delivered earnings $0.74 per share on revenue of $39.4 billion vs. the expected $40.5 billion. The culprit in the revenue miss was a combination of lower new equipment sales (roughly 1 million fewer units vs. a year ago), a more challenging pricing environment and a loss of 191,000 postpaid subscribers — pretty much the same issues that plagued Verizon’s (VZ) Verizon Wireless business in the March quarter. The subscriber winner appears to have been T-Mobile USA (TMUS), but we offer our view that being a winner in an increasingly commoditized and price sensitive business is not really winning long-term.

In a somewhat surprising move, AT&T has decided it will no longer give full-year revenue guidance due to the unpredictability of the mobile handset market. Given the combination of the move to no longer subsidizing mobile phone purchases and a domestic wireless market that is more tied to the phone upgrade cycle than new subscriber growth, we are not shocked that forecasting wireless handset revenue has become increasingly difficult. Offsetting the 2.8 percent drop in AT&T’s revenue year over year, the company improved its consolidated margins by 80 basis points vs. year ago levels due to automation, digitization, and network virtualization. The company targets having 55 percent of its network functions virtualized by the end of 2017, which should offer incremental margin improvement opportunities over the coming quarters.

Our thesis on the T shares has centered on the pending transformation that will occur in the business model following the merger with Time Warner (TWX), which will shift the emphasis away from the increasingly commoditized mobile service business. Even ahead of the closing of that transaction, AT&T has taken steps to position itself within the content arena with the acquisition of DirectTV and the subsequent launch of DirecTV Now. On the earnings call, these were areas of focus with AT&T commenting that it continues to expect approval for Time Warner transaction and we’ve shared the environment toward it in Washington has warmed considerably since the 2016 presidential election. We continue to expect more details in terms of guidance and synergies to be had once the transaction closes late this year.

After what some would say was a slow start, DirecTV Now — the company’s s over-the-top service that offers a wide selection of live television, premium programming and On Demand content — continued to add customers in the quarter. AT&T is looking to get a little more aggressive in the second half of 2017 with DirectTV Now, particularly with wireless bundling and we’ve already started to see new TV ads with Mark Wahlberg touting the offering. With just five months under the belt, we expect AT&T to be patient with this business, especially since it is likely to be a direct beneficiary of the Time Warner’s content library in 2018.

The bottom line is while the revenue miss for the quarter was a disappointment, following Verizon’s results it was hardly a shock to the system. The revenue miss at both companies highlights the reasons for our owning the shares very much remain intact. As we said several months ago, with AT&T’s business poised to transform over the coming quarters, its shares are likely to be rangebound until we have some clarity and understanding on the synergies to be had. That same transformation means that investors are likely to look past near-term ups and downs in the wireless business. In our view, in hindsight, AT&T’s move to snare Time Warner shows the management team is rather forward-thinking and the same can be said for its leading wireless spectrum business as it looks to bring select 5G services to market in 2018.

AT&T’s focus on bringing 5G services to market are, of course, rather positive for our Dycom (DY) shares. During 1Q 2017, AT&T spent $6 billion on capital spending and reiterated its plans to invest $22 billion in full for 2017. With that expected spending level at Dycom’s largest customer unchanged to the upside, and following the additional 5 percent move in DY shares over the last few days, we now have just 6 percent upside to our $115 price target for Dycom.

To keep our Buy rating intact on DY shares from current levels, we’d need to see upside in the shares to more than $125; at the same time we recognize that given the 33 percent move in DY shares over the last three months, they could come under pressure should the market get a little rocky this earnings season. For those reasons, we’re downgrading DY shares to a Hold. We’ll continue to evaluate our price target as we other key customers update their 2017 capital spending plans and should we get wind of an accelerating 5G deployment timetable.

  • Our price target on AT&T shares remains $45, and we intend to use near-term post-earnings weakness to add to this long-term holding.
  • Our price target on Dycom (DY) shares remains $115 for now and given just percent upside to that target we are downgrading DY shares to a Hold from Buy. 

 


What We’re Expecting Later This Week in Earnings Reports from Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX)

AT&T’s earnings report was just the start of what is to be a frenzied two weeks, as more than 2,000 companies report quarterly results and offer their latest outlook on what’s to come near-term. This week alone we have 40 percent of the S&P 500 reporting, and among that sea of results, we have three more Tematica Select List companies doing the same — Amazon (AMZN), Alphabet (GOOGL) and Starbucks (SBUX) — all after the market close tomorrow (Thursday, April 27).

Here’s what the market’s expecting and our pre-results commentary:

 

AMAZON (AMZN): Amazon shares have been a strong performer amid the escalating brick & mortar retail death spiral, climbing more than 20 percent thus far in 2017. That sharp move higher compared to just 6.7 percent for the S&P 500 likely means expectations are once again running high for Amazon even though consensus expectations call for EPS of $1.13 on revenue of $35.3 billion. We’ve seen this several times over the years and at times Amazon surprises Wall Street with its investment plans that tend to weigh on its outlook. As we saw last September, that mismatch tends to weigh on Amazon shares, offering a solid buying opportunity for long-term investors.

Amazon is a stock to own for the long-term given several powerful tailwinds that power its various businesses. While the right investment strategy is to use weakness to build one’s position, for subscribers who are underweight Amazon, we would suggest holding off right now from adding more shares until after the company reports.

  • For now, our price target on AMZN remains $975.

 

Alphabet (GOOGL): Over the last week, Alphabet (GOOGL) shares have climbed more than 4 percent, bringing the year to date return to more than 12 percent. As we get ready for the company’s 1Q 2017 earnings report tomorrow, let’s remember the YouTube advertising snafu it had during the quarter, which could weigh on overall results. We would advise subscribers underweight GOOGL shares to be patient as we could see better prices late this week or early next. Longer-term, with the continued move in the Connected Society investment theme that bodes well for the core Search business as well as its own shopping portal efforts plus the launching streaming TV service, dubbed YouTube TV, the company still has several multi-year tailwinds behind it. On Alphabet’s earnings call, we’ll be listening for comments on returning capital to shareholders as well as signs the new regime remains focused on margins.

  • Our price target on GOOGL shares remains $975, which offers 10 percent upside from current levels. 

 

STARBUCKS (SBUX): Over the last week or so, Starbucks (SBUX) shares have broken out of the $54-$58 trading range they have been in over the last four months. Part of that move was due to an upgrade by the research arm of Stifel, which now sees upside to $67 for SBUX shares, which compares to our long-term price target of $74. Expectations call for Starbucks to deliver EPS of $0.45 on revenue of 45.41 billion for the March quarter and for the team to guide the current quarter to EPS between $0.52-$0.59 on revenue between $5.6-$6 billion.

They key for us will be the continued expansion overseas as well as an upgrade in the company’s food efforts, which to us are likely to be key areas of focus on the earnings call following the poor reception of its Unicorn Frappuccino. Coffee prices have abated over the last several months, which could help Starbucks project some additional margin lift in the coming quarters.

  • We continue to rate SBUX shares a Buy at current levels. 

 


Developments in Our Positions in DIS, HACK, IFF, BETR

 

The Walt Disney Co (DIS): This morning we’re hearing that Disney’s ESPN network could start issuing pink slips at its flagship cable sports channel today. Several reports suggest the layoffs may be more numerous than the expected, with some 70 employees ranging from anchors, reporters, analysts and online writers losing their jobs in coming weeks. We see this as the latest move by Disney to right the cost structure in a business that is finding its way among chord-cutters and Cash-Strapped Consumers seeking more cost friendly streaming services. Disney continues to explore such options, and we suspect more developments to be had on this in the coming quarters.

With the move in Disney shares in recent weeks, our positions are up 14 percent, with another 9 percent to go to our $125 price target. With a robust movie slate over the coming months that includes Guardians of the Galaxy 2 (May 5), Pirates of the Caribbean: Dead Men Tell No Tales (May 26), Cars 3 (June 16) and Spider-Man: Homecoming (July 7), we’re reviewing potential upside to our $125 price target for DIS. 

 

PureFunds ISE Cyber Security ETF (HACK): This week we  received two quick reminders over the downside to our increasingly Connected Society that fuels ourSafety & Security investing theme and bodes well for the PureFunds ISE Cyber Security ETF (HACK) shares on the Tematica Select List. First, last night at the very end of its earnings conference call Chipotle Mexican Grill (CMG) slipped in that it had detected “unauthorized activity” on a network that supports payment processing at its restaurants. Then this morning, French presidential candidate Emmmanuel Macron’s campaign team confirmed it had been the target of at least five advanced cyberattack operations since January.

  • We continue to favor the HACK ETF as a diversified play on the ever-growing need for cyber security, which is just one aspect of our Safety & Security investing theme. 

 

International Flavors & Fragrances (IFF): During PepsiCo’s (PEP) earnings call last night the company reported higher-than-expected quarterly revenue and profit as it benefits from demand for its healthier drinks and snacks and kept a tight leash on costs. The company has said it now gets about 45 percent of its net revenue from “guilt-free” products — beverages that have fewer than 70 calories per 12 ounces and snacks that have lower amounts of salt and saturated fat.

We see that as a very favorable sign for our International Flavors & Fragrances (IFF) shares, which are up more than 8 percent since we added them, which leaves some 4 percent to our $145 price target.

  • Given the accelerating move by PepsiCo and others into health snacks and drinks, we are reviewing that $145 price target for IFF.

 

Amplify Snack Brands (BETR): As you are probably thinking, PepsiCo’s results mentioned earlier are very much in tune with our Food with Integrity investing theme as well as our decision to add Amplify Snack Brands (BETR) to the Tematica Select List last week. Over the last week, BETR shares slipped some 2 percent, but we’d remind subscribers that stocks under $10 can be volatile week to week. We continue to like Amplify’s expanding offering and footprint, and when the company reports its results we expect to hear more on those efforts.

  • We continue to rate BETR shares a Buy with an $11 price target. 
WEEKLY ISSUE: Adding 2 new positions as part of our Cashless Consumption and Food with Integrity themes

WEEKLY ISSUE: Adding 2 new positions as part of our Cashless Consumption and Food with Integrity themes

Welcome back and we hope you enjoyed any and all of the various holidays over the last ten days and didn’t gorge on chocolate and jelly beans.

Since our last issue of Tematica Investing, we’ve seen a shift in market sentiment toward the disconnect between the speed of the economy and earnings expectations, something we’ve been discussing for what seems like more than several weeks. We’ll chalk it up to the forward-looking nature of thematic investing. In our view, it’s always best to be ahead of the market and well positioned than be late and caught with your pants down.

During our downtime last week, we’ve rolled up our thematic sleeves on several companies, and today we are adding two to the Tematica Select List as part of our Cashless Consumption and Food with Integrity investing themes (details further down). As we do this, we’re mindful that 1Q 2017 earnings season is only now gearing up with more than 300 companies reporting this week, more than 975 next week and another 1,250 during the first week of May. Previously we’ve said and we continue to suspect these reports will lead to a reset in earnings expectations for the 2Q-3Q 2017 as economists reduce GDP forecasts and Trump initiatives get pushed into the back half of 2017 at best, with any likely impact not being seen until early 2018.

While that may seem like “Debbie Downer” outlook, we’re hopeful any market pullback will provide the potential to either scale into existing Tematica Select List positions at better prices or begin new ones in well-positioned companies at better prices that we’ve seen in January and February.

Finally, we’d also remind you to head to the Tematica website, Apple’s iTunes, Google Play or other podcast outlet to listen to our Cocktail Investing podcast. Recent episodes have included conversations with The Hartford Funds on its new bond ETFs, and Teucrium Trading on its commodity ETFs as well as the weekly dialog between Chris Versace, Tematica’s Chief Investment Officer, and Lenore Hawkins, Tematica’s Chief Macro Strategist. We’ll have another new episode out this week so be sure to tune in — you don’t want to miss it.

 

Brief Comments on Our Existing Positions

With two new positions on the Tematica Select List to dive into, we’ll keep our larger portfolio comments to the vast majority of positions are little changed over the last two weeks. Of course, there are some exceptions like Dycom (DY) shares, which have climbed more than 8 percent over the last week. We’re also keeping our eyes on AT&T (T) shares, which are hovering just over $40 and look rather tasty given the 4.9 percent dividend yield at current levels. We suspect that yield is bound to attract investors should market volatility ramp over the next three earnings filled weeks.

Oh wait, we’d said we wanted to get to those two new positions… be sure to check back to the Tematica website for additional comments on Facebook (FB), Applied Materials (AMAT), Dycom (DY) and CalAmp (CAMP) and other existing positions later this week.

 

 

Adding Cashless Consumption Company USA Technologies (USAT)

Over the last few days, we’ve been digesting one of Facebook’s (FB) new moves, which is bringing digital payments to its WhatsApp app in India. From a fundamental basis, we see the shift toward digital payments expanding for a number of reasons both here at home as well as in the emerging markets. In the U.S., the proliferation of the smartphone and apps like Apple Pay (AAPL), Square (SQ) and PayPal (PYPL) as well as initiatives from American Express (AXP), Visa (V), MasterCard (MA) and Verifone (PAY), is fostering mobile payment adoption. Recently Chris Versace used Apple Pay to pay for gas at an Exxon Mobil (XOM) station.

We see this as a sign that more applications for mobile payments are coming beyond paying at the grocery store, like we’ve seen people do more frequently. One of the markets that is being tapped, no pun intended, is vending machines, which have already migrated from bills and coins to credit cards. One of the companies behind that shift is USA Technologies (USAT) and it is using its ePort acceptance technology to vending machines as well as kiosks, laundry, arcades and other self- serve and unattended retail applications.

All told, USA Technologies has 11,900 customers and over 500,000 point-of-sale cashless payment connections on the ePort Connect platform. In terms of its revenue stream, recurring monthly service plus transaction processing accounted for approximately 77 percent of fourth-quarter 2016 revenue. We like recurring revenue as it offers predictability as well as cash flow, which in turn tends to offer better valuation metrics. Recently, six Pepsi-licensed bottlers have agreed to bring USA’s payment solutions to 2,000 machines, enabling the firms to track the acceptance of cash, credit/debit cards and contactless payments, including mobile wallet payments such as Apple, Android and Samsung Pay. The rollout includes 1,750 of USA’s touch-screen-enabled ePort Interactive payment devices as well as 370 of its NFC-enabled G9 ePorts, for a total of 2,120 units.

What also caught our eye was that USAT’s cloud-based interactive media and content delivery management system will serve up targeted advertising to consumers visiting these vending operators, including multimedia marketing campaigns, delivery of nutritional information and sampling. This media-content business could drive incremental revenue, with potentially far higher margins compared to USAT’s reported gross margin of 29 percent.

With just four analysts covering the shares and institutional ownership near 45 percent, we suspect USAT shares remain largely undiscovered. Looking at the expectations of those four analysts, the consensus view is for revenue to grow almost 24 percent this year to $96 million before climbing to nearly $115 million in 2018. With Apple launching more banks and credit unions on Apple Pay both in and outside the U.S., as well as Alphabet (GOOGL) doing the same, odds are there is upside to be had with that 2018 revenue forecast, especially as more applications by Verifone and others are deployed. We’d note USA Technologies recently appointed a new chief financial officer, and when this happens there tends to be clearing of the decks, or as some call it, “throwing out everything and the kitchen sink,” when it comes to guidance. In our view, should this come to pass it could allow us to scale into the position at better prices.

 

 

USAT shares are trading at between 1.3x and 1.5x enterprise value to consensus 2017-18 revenue, and the balance sheet is rather clean with net cash of more than $16 million. Year to date, the shares are up modestly and well off the 52-week high of $5.81, which in our view offers an opportunity to begin building a position for the long term. We see upside to $6 over the coming quarters as more mobile payment applications are deployed and acceptance rises. Given USA’s position in self- serve retail and mobile payments, we would not be surprised if it was scooped up one day by Verifone, Par Technology (PAR) or another entity in the space.

 

The Bottomline on USAT Shares:

  • We are adding USAT shares to the Tematica Select List with a Buy rating and $6 price target.
  • Our intention is to build the position out on weakness, scaling into the shares between $3.50 and $3.85, or on signs mobile payment adoption is accelerating faster than expected.
  • We intend to be patient investors and hold the shares as mobile payment adoption grows.

 


 

BETR Shares are a Foods with Integrity Play

If you’ve wandered the aisles of your local grocery chain, odds are you’ve noticed more shelf space and end-caps increasingly giving way to natural, organic and “better for you” foods. Recent comments from Chipotle Mexican Grill (CMG) that it will shed all artificial additives and Darden Restaurants’ (DRI) Olive Garden focusing on healthier recipes echo similar moves by Panera Bread (PNRA) to offer “cleaner” food to customers.

Beverage companies ranging from Coca-Cola (KO) to PepsiCo (PEP) and Dr. Pepper Snapple (DPS) are exploring ways to reduce sugar in their carbonated beverages, and the same is happening at candy companies. We see these moves as confirming signs for our Foods with Integrity investing theme that is also powering the Tematica Select List position in United Natural Foods (UNFI).

Industry forecasts call for the global organic food and beverage market to grow to $238.4 billion by 2022, up from $89.8 billion in 2015. There are a variety of factors fueling this growth, but the two major ones are growing consumer awareness and increasing interest of large retailers. Over the last several quarters, we’ve seen Costco Wholesale (COST) and Kroger (KR), among others, increase their natural, organic and fresh food offerings. Over the last few quarters, confirming comments from Kroger included “Natural, organic and health and wellness continued to be a food megatrend,” “we continue to focus on the areas of highest growth like natural and organic products,” and“ Our natural and organic sales continue to outpace total sales growth.“

This brings us to Amplify Snacks (BETR), a company whose primary product line is SkinnyPop, a market-leading better for you (BFY) ready-to-eat popcorn brand that uses simple, allergen-free and non-GMO ingredients. Other products include Crisps Topco, Paqui, Oatmega protein snack bars and Perfect cookie products. With the Crisps Topco acquisition that closed in the third quarter of 2016, Amplify acquired a foothold into the international better-for-you snack market, while the Oatmega purchase brings the company into the $6-billion bar category in the U.S.

In terms of customers, Amplify serves the natural, grocery, mass and food service markets across the U.S., with Costco Wholesale and Wal-Mart’s (WMT) Sam’s Club accounting for 22 percent and 12 percent of sales in 2016, respectively. We’d note those percentages have fallen over the last few years from 33 percent and 22 percent as Amplify has continued to grow its revenue from $55 million in 2013 to just under $271 million in 2016.

Current consensus forecast call for Amplify to deliver revenue of $405 million this year before climbing to just under $460 million in 2018. Continued consumer adoption of better-for-you foods, growing distribution both in and outside the U.S. and new product offerings are driving revenue expectations. In 2016, Amplify’s sales in North America accounted for 85 percent of overall revenue, which reflected one quarter of Crisps Topco. Management targets launching SkinnyPop in international markets in the first half of 2017 and Crisps Topco products in the U.S. in early 2018.

 

 

Our price target for BETR shares is set at $11, which offers roughly 23 percent from current levels. The shares recently bottomed out at $7.86, 12 percent below current levels, following a modest earnings miss in the fourth quarter. Our strategy for this Foods with Integrity stock will be to use either market weakness or signs that its products are gaining acceptance and incremental distribution faster than the market expects. Should shares fall below $8.50, we’d be inclined to scale into the position given the favorable risk-to-reward dynamics.

While we don’t invest in companies simply on potential takeout speculation, given the trend of larger companies looking to tap into the growing organic/natural food market there is the possibility that Amplify is showing up on acquisition radar screens. Over the last several quarters we’ve seen

  • Hershey (HSY) acquire Krave to tap into the paleo and protein snack market,
  • Campbell Soup (CPB) bought Garden Fresh Gourmet,
  • Mondelez International (MDLZ) scooped up Enjoy Life Foods,
  • Danone (DANOY) acquired WhiteWave,
  • General Mills bought Annie’s, and
  • PepsiCo attempted to acquire Chobani Yogurt.

As Amplify continues to expand its footprint and deliver continued revenue growth, odds are it will pop up on competitor radar screens that include PepsiCo, Kellogg, General Mills, Snyder’s-Lance and other larger snack and food companies. Again, we are adding BETR shares to the portfolio given the fundamental drivers behind the business, but as investors, we certainly would not fight a premium takeout offer on the shares.

During the coming earnings season, we’ll be listening to comments on the organic, natural and better-for-you food adoption from Wal-Mart, Sprouts Farmer Markets (SFM) and Costco as well as product mix data from PepsiCo, Kellogg (K), ConAgra (CAG), General Mills (GIS) and Snyder’s-Lance (LNCE).

 

The Bottomline on Amplify (BETR) Shares:

  • We are adding BETR shares to the Tematica Select List with a Buy rating and a $11 price target.
  • We would look to scale into the position below $8.50

 

 

WEEKLY ISSUE: As April starts off more like March than January and February, we tighten up several price targets

WEEKLY ISSUE: As April starts off more like March than January and February, we tighten up several price targets

We have entered 2Q 2017 and with all of two days under our belt, it looks like April is at least starting off more like March than January or February. As we discussed in this week’s Monday Morning Kickoff, we are in what we call No Man’s Land — that time period after the quarter close and before companies start reporting their earnings. It tends to be a time of reduced trading volume, something we’ve seen at both NYSE and Nasdaq listed stocks, as investors wait for tell-tale signs of what’s to come. Another way to phrase it is to say they are waiting for the first signs of what is likely to come.

 

Retailer Woes Means Even Stronger Tailwinds for Amazon

In the last few weeks of March, we had less than stellar results from LuluLemon (LULU), Nike  (NKE), FedEx (FDX) and several other companies. While Urban Outfitters (URBN) won’t report its quarterly results for a while, on Monday night it shared that thus far during the quarter, its comparable retail segment net sales are “mid-single digit negative” vs. up 1 percent in the year ago quarter. Last night, Saks owner Hudson Bay (TSE) shared that overall consolidated sales fell more than 1 percent year over year. More signs that traditional retail remains a challenging environment due in part to Connected Society investing theme company Amazon (AMZN).

Amazon shares, have been on a tear over the last three months, climbing more than 19.8 percent vs. 3.9 percent for the S&P 500. Along the way, the shares have set several new highs, including a fresh intraday high yesterday at $908.54 before closing at $906.83 and firmly in overbought territory. As we head into earnings season, we remember that despite the continued tailwinds that are pushing Amazon’s businesses — the shift to digital consumption and the cloud — Amazon continues to invest heavily in its business. The risk is that from time to time the company’s investment plans tend to be larger than those expected by Wall Street, and when confronted with that realization investors shed shares.

We’ve seen that several times in recent years, and given our view that first-quarter earnings season is likely to bring a return of volatility to the market, we’re going to get a little more cautious on AMZN shares.

  • With an additional 7.5 percent to our $975 price target, we are reducing our rating on AMNZ shares to a Hold from Buy. 
  • We would look to revisit our rating below $850 or on signs that potential upside to our price target is closer to $1,050. 

 

AT&T Gets the FirstNet Nod and That’s Also Good for Dycom

As expected, it was announced AT&T won a lucrative contract to build and manage a nationwide public safety network for America’s police, firefighters, and emergency medical services. Dubbed FirstNet, it will cover all 50 states, five U.S. territories, and the District of Columbia, including coverage for rural and tribal lands. Besides basic voice and Internet service, AT&T expects the network to be used for applications “providing near real- time information on traffic conditions to determine the fastest route to an emergency.”

This win also bodes well for specialty contractor Dycom (DY) that counts AT&T as its largest customer. As Dycom’s other key customers that include Verizon (VZ) and Comcast (CMCSA), deploy both next-generation solutions as well as add incremental capacity to existing networks, we continue to see blue skies ahead for DY shares on the Tematica Select List.

Circling back to the key item of 2017 for AT&T shares — the pending merger with Time Warner (TWX) — chatter in and around DC seems to suggest that President Trump has softened his opposition to the combination of the two companies. We’d note this follows the recent approval of the pending acquisition by the European Commission.

  • As more clarity on the merger between AT&T and Time Warner develops, we are likely to revisit our $44 price target. All things being equal, we are likely to add to our position below $40
  • Our price target on DY shares remains $115.

 

Easter and Spring Break Bode Well For Disney

As we enter peak Spring Break travel season, which bodes well for Disney’s (DIS) parks business, particularly Disney World and its other Florida attractions, we remind subscribers that the company recently announced it was boosting ticket prices, which we may cringe at as consumers, but love as shareholders. Combined with leveraging its Frozen and Star Wars content at the parks over the coming years, we see Disney providing new reasons to revisit these destinations.

Looking beyond the April travel season and continued performance of Beauty and the Beast at the box office, the next catalyst we see for the shares will be several box-office films being released by Disney — Guardians of the Galaxy 2 (May 5), Pirates of the Caribbean: Dead Men Tell No Tales (May 26), Cars 3 (June 16) and Spider-Man: Homecoming (July 7).

  • We have just over 10 percent to our $125 price target for DIS shares.

 

Housekeeping Items

First, if you missed our comments on either Alphabet (GOOGL) or McCormick & Co. (MKC) shares that we posted yesterday, you can find them here and here, respectively.

Second, later this week on TematicaResearch.com we’ll share our thoughts on the purported acquisition of Panera Bread (PNRA) by Guilty Pleasure investment theme company Starbucks (SBUX) as well as our take on the rash of economic data to come later this week.

Third, be sure to the website later in the week for the latest edition of the Cocktail Investing Podcast as well as archived episodes.

Finally, in observance of the upcoming Easter holiday, US stock markets will be closed on Friday, April 14. With the aforementioned spring break in full swing next week, we too here at Tematica will be taking a respite as we get ready to gear into 1Q 2017 earnings the following week.

Odds are we won’t be able to keep ourselves from posting some commentary throughout the week on TematicaResearch.com, but your next regularly scheduled Tematica Investing issue will be on Wednesday, April 19.