COCKTAIL INVESTING: Panera Challenges McD’s, Apple Watch flubs, and the SEC gets hacked

COCKTAIL INVESTING: Panera Challenges McD’s, Apple Watch flubs, and the SEC gets hacked

[podcast src=”https://html5-player.libsyn.com/embed/episode/id/5766036/height/90/width/470/theme/custom/autonext/no/thumbnail/yes/autoplay/no/preload/no/no_addthis/no/direction/forward/render-playlist/no/custom-color/88AA3C/” height=”90″ width=”470″]

Download Episode

This week, Tematica’s investing mixologists Chris Versace and Lenore Hawkins face-palmed after learning the Securities Exchange Commission (SEC) has been compromised in a cyber-attack. This ironic breach mere days after Equifax broke the news on its breach… as we discuss, this increasing pain point that spills out of our Connected Society investing theme is fodder for our Safety & Security one.  As our portfolio mixologists touch on that, they dish on the Fed’s latest missive coming out of its September monetary policy meeting and on a variety of data points for our Connected Society, Food with Integrity and Fattening of the Population investing themes. Chris and Lenore also mix in the latest economic data, and share why S&P 500 Global Ratings’ first rating cut to China’s sovereign credit rating in nearly two decades is important for investors.

  • After last week’s not-too-special event, we share our view on why it’s so disappointing there are connectivity issues with the new Apple Watch model even before it begins to ship.
  • As Apple tries to get itself back on track, Google is scooping up the team at smartphone company HTC that helped Google develop its Pixel phone. We share why Google is making this move and it’s got something to do with its core search business. Here’s a hint – it isn’t good news.
  • Why is Post Holdings pivoting its business with the purchase of the packaged foods business at Bob Evans? Believe it or not, it’s all about the sausage!
  • What do drones in Greece and being a neighbor of comedian Kathy Griffin have in common? The answer ties into one of our investing themes.
  • Who’s hiring and who’s not hiring for the year-end holiday shopping season? Part of the answer ties to where people are shopping for toys that is part of our Connected Society theme.
  • What’s the story behind Panera Bread CEO Ron Shaich challenging McDonald’s, Wendy’s and other fast food companies? The answer ties into our Food with Integrity investing theme and if you’ve seen the documentary Super Size Me you can guess where this is going. You can practically see Lenore roll her eyes at the response from McDonald’s.
  • The Fed expects to hike interest four times before the end of 2018 as it embarks on selling securities on its QE bloated balance sheet, but its economic forecast calls for year over year declines in 2018 and 2019. As Chris and Lenore face-palm, they put some much-needed perspective on this, and explain the real reasons for the Fed’s actions.
  • Over the coming week, we’ll be eyeing several key economic reports, including the Flash U.S. September PMI report, the August reports for Durable Orders and Personal Income & Spending. We’ll also be watching Hurricane Maria as we look to get a final tally on hurricane-related damage and what it means to 3Q 2017 GDP.

Companies mentioned on this podcast

  • Alphabet (GOOGL)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Bob Evans (BOBE)
  • Burger King (QSR)
  • Equifax (EFX)
  • HTC
  • KB Home (KBH)
  • Kohl’s (KSS)
  • Panera Bread (PNRA)
  • Post Holdings (POST)
  • Macy’s (M)
  • McDonald’s (MCD)
  • Nest
  • Nordstrom (JWN)
  • Target (TGT)
  • Toys R Us
  • United Natural Foods (UNFI)
  • Wal-Mart (WMT)
  • Wendy’s (WEN)

Resources for this podcast:

Program’s we’re currently streaming:

Markets Reach New Highs, But Why?

Markets Reach New Highs, But Why?

At Tematica, we separate our politics from our analysis to be able to provide objective assessments, which means that we need to call out an error we see in the prevailing narrative. Thursday the Dow hit its 7th straight record close, despite the news that Special Counsel Mueller has impaneled a grand jury in the Russia election tampering probe. While many are attributing the market’s gains to president Trump’s administration, this divergence calls that into question. As does the reality that President Trump’s approval rating has hit new lows with disapproval ratings reaching new highs while the market has continued to rise.

Apple (AAPL) and Boeing (BA) collectively have been responsible for 70 percent of the Dow’s gains the past 6 weeks while the FAANG stocks – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL) – which account for just 11 percent of the S&P 500 market capitalization have generated 26 percent of year-to-date return. Juicing up those returns has been leverage, with margin debt up 20 percent on a year-over-year basis in each of the past 5 months and is today over 60 percent HIGHER than at the 2007 peak.

The reality is that in the past 6 weeks, the median stock price and median sector price haven’t actually moved. What has happened has been a falling U.S. dollar, which is on track for the weakest annual performance in 14 years. That’s really something in light of the prevailing narrative that assures us the U.S. economy is going like gangbusters. Ignore that recent ISM report which saw Services experience the biggest drop since November 2008 – same goes for the Composite Index. Amazing to have a falling dollar and the U.S. Treasury 10-year yield right around where it was during the depth of the Great Recession while the Fed is tightening and yet we are to believe the economy is firing away, hmmm.

The top three stocks in the Dow for foreign revenue, Apple (APPL), Boeing (BA) and McDonalds (MCD) account for 50 percent of the Dow’s year-to-date gains, hmmmm.

So what’s going on here?

Euro to US Dollar Exchange Rate Chart

Euro to US Dollar Exchange Rate data by YCharts

In euro terms, the S&P 500 is actually down 1.9 percent year-to-date. In Mexican peso terms it is down around 4 percent and even in the polish zloty it is down roughly 5 percent.

In fact, when President Trump was elected, the U.S. stock market capitalization represented 36 percent of total global market capitalization. That ratio rose to nearly 38.5 percent but has since fallen to 35 percent where it was all the way back in June 2015. On a relative basis, the U.S. stock market has significantly outperformed. What we are seeing here is more a function of a falling currency that a rising stock market reflecting a robust economy.

What could go wrong? The Intercontinental Exchange now has a net short position for the U.S. dollar for the first time since May 2014 and after that time the greenback gained 5 percent within 3 months. If the market has been rising on a falling dollar….

Then there is that debt ceiling debate that, when taking into account recent dynamics in D.C. between various members of Congress and the White House, could make Game of Thrones appear rather tame. This coming at a time when the tax reform debate is set to kick off. Oh and there are those November elections to really bring out the softer side of politics. With the Chargers no longer playing in San Diego this Fall, (What the hell?) I think I’ll have more than enough games to watch coming out of Washington.

Cocktail Investing Ep. 7  – Crude Tumbles, Jobs, Inflation and the Fed as More People Stop Fighting Obesity? Say What?

Cocktail Investing Ep. 7  – Crude Tumbles, Jobs, Inflation and the Fed as More People Stop Fighting Obesity? Say What?

In this episode of Cocktail Investing, Tematica Research’s resident mixologists Chris Versace and Lenore Hawkins not only recap, but also scrutinize the rash of conflicting economic data that has put a pause in the stock market’s move higher. Some data points to an improving economy, while others have led the Atlanta Fed to dramatically cut its GDP forecast for the current quarter.

Chris and Lenore tackle the factors behind that as well as other impediments that are likely to keep the US economy rangebound over the coming quarters. They also share their views on the upcoming economic data points the Fed is likely to focus on as it decides if it should boost interest rates this month.

 

Some Thematic Signals You Might Wish to Forget

As we like to say here at Tematica, one needs to dig below the headline to see what is really going on. As one does that, context and perspective are key to put the data puzzle pieces together in a cohesive manner to get a clear signal lest one be even more confused by all the noise. In our view, there is no better way to do that than with our thematic perspective, which means we are not following the herd and using the same tired sector based approach. You’ll hear some examples when Chris and Lenore share some thematic signals for Tematica’s Fattening of the Consumer, Rise & Fall of the Middle Class and Disruptive Technologies investing themes. After you’re done, you may think twice about meatless protein and perhaps you’ll sign up for a virtual reality lesson on how to re-tile your shower.

 

Companies mentioned on the Podcast
  • ADP (ADP)
  • Amazon (AMZN)
  • Chevron  (CVX)
  • Energy Select Sector SPDR ETF (XLE)
  • Exxon Mobil (XOM)
  • Express Inc. (EXPR)
  • JC Penney (JCP)
  • J. Jill Group (JILL)
  • Lowe’s Companies (LOW)
  • Kohl’s (KSS)
  • Macy’s (M)
  • RadioShack Corp. (RSH)
  • Royal Dutch Shell (RDS.A)
  • Snap Inc. (SNAP)
  • Swift Transportation (SWFT)
  • Tyson Foods (TSN)
  • Weight Watchers (WTW)

 

 

Chris Versace Tematica Research Founder and Chief Investment Officer
Lenore Hawkins Tematica Research Chief Macro Strategist
Cocktail Investing Ep 6: The growing divide between the hard & the soft economic reports, boxed.com CEO Chieh Huang

Cocktail Investing Ep 6: The growing divide between the hard & the soft economic reports, boxed.com CEO Chieh Huang

In this week’s program, Tematica’s cocktail mixologists, Chris Versace and Lenore Hawkins talk about everything from the market’s reaction to Trump’s speech before Congress to the widening divide between the real hard economic data reports coming in, (spoiler alert – not so hot) and the softer sentiment reports which are on fire, as well as the latest Thematic Signals. From mobile carriers moving more and more into content in our Connected Society in which Content is King to McDonald’s experimenting with different delivery models for our Cash Strapped Consumer who is eschewing quick service restaurants, preferring Foods with Integrity.

This week we saw the wind down to the December quarter earnings season, Trump’s first speech before Congress and Amazon Web Services wreaked havoc on businesses far and wide when it went down. Snap, the parent company of Snapchat, traded publicly for the first time and despite iffy fundamentals, the share price jumped up dramatically.

January’s real personal income growth weakened materially while real spending growth was the weakest since 2009 – not exactly consistent with the jubilant headlines. It also raises questions for our consumer spending led economy. With signs of inflation picking up both in and outside the US per February data from Markit Economics and ISM, the Fed is looking more like it will hike in March, despite their recent Beige book being full of terms like “modest”, “moderate”, “mixed” and subdued” – go figure.

McDonald’s is looking to offer mobile ordering alongside curbside pickup as it experiences declining foot traffic and same store sales. As we share on the podcast, we think embracing technology is not going to get at the heart of McDonald’s problems.

Mobile carriers are finding more and more they need to feed their networks with content as more than 80 percent of 18 to 34-year-olds in the U.S. use mobile platforms to consume content, spending more than two hours on average every day viewing videos or using apps. We think this is bound to result in a boom for the eye-glass and contact lens industry in a few years time – we’re only half kidding.

If that all wasn’t enough, we had the great pleasure of speaking with Chieh Huang, CEO of our latest online shopping obsession, Boxed.com. In just four years Chieh and his team have grown the business from operating out of Chieh’s garage to now generating over $100 million in revenue while getting their products to 96 percent of their customers in just two days or less. We spoke with him about just how his team has generated such stellar growth and his insights into the incredible level of pain we see in the retail sector. We couldn’t have enjoyed ourselves more talking with a guy who is deep in the thick of a Disruptive Technology with a compelling offering for the Cash Strapped Consumer in our Connected Society.

Companies mentioned on the Podcast

  • ALDI
  • Amazon.com (AMZN)
  • Apple (APPL)
  • AT&T (T)
  • Boeing (BA)
  • Comcast (CMCSA)
  • Costco (COST)
  • Dycom (DY)
  • Goldman Sachs (GS)
  • Facebook (FB)
  • Lidl
  • McDonald’s (MCD)
  • Snap (SNAP)
  • United Parcel Service (UPS)
  • Verizon (VZ)
  • Walmart (WMT)
  • Wegmans Food Markets

 

Chris Versace Tematica Research Founder and Chief Investment Officer
Lenore Hawkins Tematica Research Chief Macro Strategist
Cocktail Investing Ep 5: M&A activity among Consumer Staples, fast food thematic signals, Fed-Speak, and what exactly is the Border Adjustment Tax (BAT)?

Cocktail Investing Ep 5: M&A activity among Consumer Staples, fast food thematic signals, Fed-Speak, and what exactly is the Border Adjustment Tax (BAT)?

In this week’s program, Tematica’s cocktail mixologists, Chris Versace and Lenore Hawkins sit down to discuss some of the week’s economic data, relevant political events and share where they have spotted a few of the latest Thematic Signals, such as:

  • What McDonald’s (MCD) soft drink promotional price cuts mean to our Cash Strapped Consumer
  • How the Connected Society is pushing UPS to up its game as online shoppers increasingly expect two-day shipping.
  • Major League Baseball looks to remain relevant in our Content is King world by potentially partnering with Facebook (FB), which in turn is placing its app on Apple TV (AAPL), as the way we consume content and connect with each other continues to evolve.

This week saw some telling moves in the M&A arena with Kraft (KHC) calling off its prematurely disclosed bid for Unilever (UL) as consumer staples companies such as JM Smucker (SJM) and General Mills (GIS) struggle — not exactly a robust sign for the economy despite what we see in the headlines. Others like Restaurant Brands (QSR) that are looking to buy growth get an agreement done with Popeye’s Louisiana Kitchen (PLKI), and we talk about the whys behind that strategic rationale.

Of course, this week we received the clear-as-mud minutes from the latest Federal Reserve’s Open Market Committee meeting, which we dig into as well as dish out the 411 on what this Border Adjustment Tax is all about and how it could affect you and the companies in which you invest.

The teflon market continues to push up as valuations get further into the stratosphere and forward EPS estimates get revised downward. We’ve now gone an unprecedented 8 years without a 20 percent correction and the VIX 65-day moving average has dropped down into territory that normally precedes a pullback. While we are optimistic when it comes to the economy, we have to acknowledge our Aging of the Population theme means the first baby boomers are turning 70 this year with 1.5 million doing so each year over the next 15 years, which will have a dramatic impact on spending as well as health care costs. That’s especially the case when only 50% of them have saved enough for retirement.

But with CEO’s of major U.S. manufacturers making the headlines that Trump is the most pro-business president since the founding fathers, stocks are holding up just fine… for now. More on that on the podcast. Listen now.

Companies mentioned on the Podcast

  • Amazon.com (AMZN)
  • Apple (APPL)
  • Campbell Soup (CPB)
  • Facebook (FB)
  • General Mills (GIS)
  • Houlihan Lokey (HLI)
  • JM Smucker (SJM)
  • Kraft Heinz (KHC)
  • Macy’s (M)
  • Major League Baseball
  • McDonald’s (MCD)
  • Nordstrom (JWN)
  • Popeyes Louisiana Kitchen (PLKI)
  • Restaurant Brands Intl (QSR)
  • Twitter (TWTR)
  • Unilever (UL)
  • United Parcel Service (UPS)
  • Whole Foods Market (WFM)

 

Lenore Hawkins Tematica Research Chief Macro Strategist
Chris Versace Tematica Research Founder and Chief Investment Officer
And the Hacking Continues!

And the Hacking Continues!

DOWNLOAD THIS WEEK’S ISSUE
The full content of Tematica Investing is below; however downloading the full issue provides detailed performance tables and charts.Click here to download.

After Gapping Up Following Friday’s January Employment Report, The Market Is Trading Sideways Again This Week

Over the last week, the S&P 500 rose 0.6 percent, with the bulk of that move coming on the heels of the January Employment Report. As we pointed out in this week’s Monday Morning Kickoff, the face of that report was mostly positive, and when paired with other January manufacturing reports out last week, it likely paves the way for the Fed heads to start jawboning about a potential rate hike at the March FOMC meeting.

Well, we heard just that when Philadelphia Federal Reserve Bank President Patrick Harker on Monday said an interest-rate hike should be on the table at the U.S. central bank’s next meeting, in March. Should other domestic economic data, like the aforementioned January manufacturing data, continue to improve month over month, we expect the herd view to skew toward a March rate hike.

Looking across the Atlantic, however, as expected we are indeed hearing more about Grexit and Frexit this week. Odds are, we have not heard the last of those rumblings as we head into the 7th inning with 4Q 2016 earnings reports. Given where we are in the current earnings season, we have several updates to share on the Amazon (AMZN), CalAmp Corp. (CAMP), Dycom Industries (DY), Facebook (FB), and International Flavors & Fragrances (IFF) positions on the Tematica Select List.

At the same time, we see not only cyber attacks once again taking over the headlines — or at least what non-President Trump headlines there are — but we see impressive order and booking metrics as cyber security companies report their quarterly results.

This sets us up with a new position for the Tematica Select List so without further ado…

And the Hacking Continues!

Issuing a Buy on PureFunds ISE Cyber Security ETF (HACK) shares
as part of our Safety & Security investing theme

Once again cyber hacking is back in the news on several fronts:

  • The hospitality giant InterContinental Hotels Group (IHG) has confirmed that payment systems of 12 US hotels were victims of a massive data breach between August and December 2016.
  • An anonymous attack took down web-hosting company Freedom Hosting II, which hosts dark websites — sites that require software to access. All told, thousands of dark websites were taken offline in the process.
  • Taiwan is investigating an unprecedented case of threats made to five brokerages by an alleged cyber-group seeking payment to avert an attack that could crash their websites.
  • Norway’s foreign ministry, army, and other institutions have been targeted in a cyber-attack by a group suspected of having links to Russian authorities, according to Norwegian intelligence.

And that’s just a sampling of the cyber attack related headlines over the last few days. When we add in the growing number of corporate cyber attacks as well as those against government institutions (remember those from last November?), we are reminded that a few years ago former Defense Secretary Leon E. Panetta warned that the United States was facing the possibility of a “cyber-Pearl Harbor” and was increasingly vulnerable to foreign computer hackers who could dismantle the nation’s power grid, transportation system, financial networks, and government.

This earnings season we’ve seen a pickup in orders at a number of cybersecurity companies ranging from Fortinet (FTNT) and Checkpoint Systems (CKP) to Proofpoint (PFPT). Sifting through those reports, we find several common items bubbling to the surface:

There is the secular trend in cybersecurity that includes not only adoption of cyber security solutions for Internet of Things and Cloud, but also customers migrating to integrated solutions over single-point ones.

That migration is driving vendor consolidation, which with hindsight explains some of the extended sales cycles we heard about in the back half of 2016.

One positive is companies like Fortinet are seeing a pronounced pick-up in larger deal size, even as they add more customers. With Fortinet, it added 10,000 customers during 4Q 2016, which left it total customer base to more than 300,000. Meanwhile, Fortinet experienced significant growth in its larger deal sizes, up 31-39 percent for deal sizes above $500,000 and $1 million respectively.

This tells us that corporations and other institutions are stepping up their game for this dark side of our Connected Society investing theme. That bodes very well for cybersecurity stocks, which represent a key aspect of our Safety & Security investing theme.

The issue is deciding which one to place our hard-earned capital in… in our view, the near constant one-upmanship between hacker & attackers and cyber security firms looks an awful lot like the gaming console “wars” from a few years ago. Every time there was a hot new game, gamers would flock to the new platform. As cyber attackers become more creative, we suspect we are likely to see some cyber security firms respond more quickly than others, leading to market share shifts and better revenue and profit growth.

 

While this may sound like a complex problem, the solution could not be simpler.

Rather than focus on any one or two cyber security companies, instead we’ll place a basket of them onto the Tematica Select List. That basket is PureFunds ISE Cyber Security ETF (HACK), which counts Fortinet, Checkpoint Software, Palo Alto Networks (PAWN), Proofpoint, Symantec (SYMC), Qualys (QLYS), CyberArk Software (CYB) and Imperva (IMPV) among its top holdings. In sum, those eight positions account for just under 41 percent of the ETF’s assets.

Over the last several months HACK shares have been on a tear, but as our Connected Society theme continues to expand to include more devices (the Connected Car, Connected Home, the Internet of Things) across more of the globe (see Facebook’s 4Q 2016 earnings results below for an example of this), odds are the demand for cyber security solutions will remain robust. Just take a look at how often people in restaurants and elsewhere are checking their smartphones — the Connected Society toothpaste is not going to go back into its tube.

  • As such, we see long legs ahead for the cybersecurity aspect of our Safety & Security investing theme, which to us makes HACK a core, long-term holding.
  • In keeping with that, we are issuing a Buy on PureFunds ISE Cyber Security ETF (HACK), with a long-term price target is $35.
  • We’re inclined to use pullbacks below $25 to improve our cost basis. 

We would point out that cyber security is one aspect of our Safety & Security investing theme, which also includes personal, homeland and corporate security. President Trump continues to speak about rebuilding the US military, which should spur demand for a variety of defense companies. As more clarity comes to these proposed plans, we’ll look to include the proper exposure should valuations offer a compelling entry point. Stay tuned.

 

 

Amazon (AMZN) Connected Society 

Since the calendar turned to 2017, Amazon shares have been on a nice trajectory. Following December-quarter results, however, which included weaker-than-expected guidance for the current quarter, largely due to foreign currency issues, Amazon shares slipped just over 3 percent this past week. Given the comments we’ve heard across the earnings spectrum this reporting season about foreign currency, Amazon was bound to disappoint. Excluding the $558 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 24 percent compared with fourth quarter 2015 versus the reported 22 percent increase for the quarter.

We also continue to see the company investing for the long term as it builds out its streaming content, expands its Fulfilled By Amazon and other initiatives such as Alexa, its voice digital assistant. Even so, margin expansion at both the North American business, as well as Amazon Web Services, enabled Amazon to handily beat consensus EPS expectations of $1.42 with reported earnings of $1.54 for 4Q 2016. Year over year, EPS improved more than 50 percent despite the stepped-up level of investments in the second half of 2016 and revenue shortfall of nearly $1 billion in the December quarter. To us, this means those who have questioned Amazon’s ability to deliver profitable growth while continuing to invest are likely to rethink their position . . . or they should be.

As investors, our view tends to be skewed to the medium to longer term. It’s that view that recognizes Amazon continues to invest for future growth as it benefits from the accelerating shift to digital shopping and Cloud adoption that led Amazon Web Services (AWS) to grow 47 percent year over year in the December quarter. For 2016 in full, AWS revenue rose 55 percent to more than $12 billion, with margins rising to 30 percent from 23.6 percent in 2015. To put this into context, AWS accounted for just 9 percent of overall Amazon revenue in 2016 but was responsible for just over half of the company’s 2016 operating income.

Turning to Amazon’s North American business, revenues climbed 22 percent in the December quarter, but operating margins in that business rose to 4.7 percent. Doing some quick math, we’d note the incremental margin for the North American business clocked in at 6.8 percent, which tells us the company is indeed realizing volume benefits and other synergies in this business.

Amazon’s international business continues to be a drag on overall profits as it posted operating losses both for the December quarter and for 2016 in full. As we have seen in recent quarters, Amazon will continue to invest for future growth, but it has developed a more disciplined approach, and we suspect that approach will be utilized in the International business as well.

This brings us to the company’s guidance for the current quarter, which fell short of consensus expectations due in part to foreign exchange rates. As Apple (AAPL) CEO Tim Cook noted on that company’s earnings call, foreign exchange will be a “major negative” as the company moves from the December to the March quarter.

The same holds true for Amazon, which shared that it expects foreign currency to impact current quarter revenue by $730 million. Factoring that into the consensus view that expected revenue for the current quarter will land near $36 billion, Amazon’s guidance of $33.25 billion to $35.75 billion, up 14 percent-23 percent year over year, is far more understandable. Stepping back, that year-over-year guidance is in a very challenging retail environment and in our view implies continued share gains at both the North American and AWS businesses. On the operating income guidance, Amazon again offers a range that is wide enough to fly a 747 through.

Stepping back and looking at the company’s competitive positions poised to benefit from their respective Connected Society tailwinds — the shift to digital consumption (shopping, content streaming, grocery) and Cloud adoption — we continue to see favorable revenue and profit growth for AMZN over the long term.

  • We’ll continue to monitor retail sales data and Cloud adoption as well as other relevant data points, but for now, are keeping our $975 price target for Amazon shares as well as our Buy rating. 
  • To be blunt, Amazon is a stock to own, not trade. We’d suggest subscribers who are underweight in the shares use the recent pullback to their long-term advantage.

 

The Walt Disney Company (DIS) Content is King

Last night Content is King company Walt Disney reported December quarter earning of $1.55 per share, $0.06 per share better than consensus expectations. Offsetting that upside surprise, which was partly fueled by the company’s share buyback efforts given the near 4% drop in the share count year over year, revenue for the December quarter came in lighter than expected at $14.78 billion vs. the consensus that was looking for $15.29 billion.

In our view, even though revenue and earnings fell compared to the December 2015 quarter we have to remember the year-ago quarter was one for the record books due in part to the impact of Star Wars: the Force Awakens on several Disney businesses.

  • Given the tone of the underlying business, which should improve throughout the year, and prospects for Disney to further shrink its share count in the coming quarters thereby enhancing EPS metric in the process, we are keeping our $125 price target intact even as several Wall Street firms are boosting their price targets to levels higher or inline with ours.
  • We continue to rate the shares a Buy, but would advise subscribers that are underweight the shares to be more aggressive at price below $105 should they arise in the coming weeks. 

 

Let’s Dig into the Details of Disney’s Latest Quarter

For a year at the company that had been described as one starting off slow and building throughout the year, the December quarter was, in our view, a solid one, especially after factoring in the results from the latest installment of the Star Ware franchise, The Force Awakens.

Without question, the standout-out performance was had at the company’s Parks and Resorts business which delivered a 13% increase in operating income on “just” a 6% revenue increase year over year. That business continues to benefit from tight cost controls as well as price hikes taken during calendar 2016. As we get ready for spring break travel season, we’ll be watching for potential 2017 price hikes at the domestic parks. In late May, Pandora: The World of Avatar will open at Disney’s Animal Kingdom in Orlando, Florida. This follows the roll out of Frozen across several parks, and longer-term yet-to-be-named Star Wars-themed lands at Walt Disney World and Disneyland in 2019.

Near-term, the Parks business will benefit from an extra week in the current quarter, but with the Easter holiday falling later than usual this year and landing in the June quarter that timing issue is expected to weigh on current quarter prospects. Timing will also impact the Studio business, which has just one major release in the current quarter — Beauty & the Beast — which looks to be a strong performer, but will be forced into comparisons to The Force Awakens and Zootopia in the year ago quarter.

Moving past the current quarter, the Studio business has a number of Marvel, Pixar and Star Wars films in the pipeline that include a new Spider-Man movie, a sequel to the Cars film, Guardians of the Galaxy 2 and the next Star Wars installment, all of which makes for a very strong second half of the year.

That brings us to the company’s Media Networks business, which is composed of Cable Networks and Broadcasting. This segment has been one investors have been watching closely given the performance of ESPN over the last several quarters and questions about the broadcasting business as streaming alternative become more robust. Case in point, our own AT&T’s DirecTV Now and a similar service soon to be launched by Hulu. During the yesterday’s earnings conference call, Bob Iger reminded participants of initiatives to bring ESPN content to various streaming platforms (Sling TV, PlayStation Vue, DirecTV Now, and Hulu). After the call, The Wall Street Journal reported a new unannounced but signed deal with YouTube. Combined with its BAMTech acquisition, Disney continues to move in the right direction to reposition the Media Networks business to deliver content to consumers when and where they want it. We’ll be looking for additional color on the YouTube relationship, including advertising revenue potential.

Outside of the company’s performance and business outlook, the biggest news that likely has investor tongues wagging this morning is the news that CEO Bob Iger is open to staying after his contract expires in 2018. We see that helping to calm the transition concerns and reassures investors that Iger is likely to remain on board to groom his successor.

On the housekeeping front, Disney repurchased about 15 million shares for about $1.5 billion during the December quarter. Including the current quarter, Disney has bought back some 22 million shares for approximately $2.2 billion leaving $5-$6 billion to go on its announced plan to spend $7-$8 billion on buying back shares this year.

 

CalAmp (CAMP) Connected Society

CAMP shares rose modestly last week, bringing the year-to-date return to 5.0 percent, which is well ahead of the major market indices on the same basis. As we’ve shared, one of the key near-term catalysts for CAMP shares is the electronic logging device (ELD) mandate, which requires trucking companies to move from paper logbooks to electronic logs to record drivers’ hours of service by Dec. 18, 2017.

Last week, freight transportation companies Landstar (LSTR) and Hub Group (HUBG) reported quarterly earnings and inside those conference calls was some bullish commentary for CalAmp. Landstar shared that it has programs to migrate the non-complaint portion of its truck fleet to ELDs before year-end and it’s “beginning those conversations now in order to make that occur.” While Hub Group did not call out ELD spending specifically, it acknowledged that its capital spending would trend higher year over year in 2017 due in part to technology-related investments. Given the ELD mandate, we suspect there at least a portion of that spending will be to ensure its vehicles comply by the current deadline.

Industry estimates suggest more than one million ELDs will be deployed in the U.S. this year to comply with that mandate. This bodes very well for CalAmp’s core telematics systems business (57 percent of revenue) in the coming quarters. Longer term, we continue to see the company’s business model benefiting from the connected vehicle market, which includes autos, trucks and other equipment like that from customer Caterpillar (CAT).

  • We continue to rate CAMP shares a Buy with a $20 price target.

 

Dycom Industries (DY) Connected Society

As we noted in last week’s Tematica Investing, several of Dycom’s key customers recently reported quarterly earnings and the combined capital spending plans of those customers — AT&T, Verizon, and Comcast — look to be flat to up year over year, with a greater portion of spending on network capacity and new technologies (5G, Gigabit fiber). This week we’ll get quarterly results from CenturyLink (CTL) and given the prevailing trends we expect it, too, will offer a favorable capital spending outlook for 2017 and beyond. Having said that, we will listen for any positive or negative impact in CenturyLink’s $34 billion plan to buy Level 3 Communications (LVLT).

We continue to see Dycom as a prime beneficiary of that wireless and wireline capital spending required to keep feeding our data-hungry Connected Society investment theme. In our view, the current share price offers subscribers who are underweight in Dycom an excellent opportunity to pick up the shares at better prices than we’ve seen recently.

  • We continue to rate Dycom shares a Buy with a $110 price target.

 

Facebook (FB) Connected Society

Despite delivering better-than-expected December-quarter earnings with strong user metrics and average revenue per user (ARPU), FB traded modestly lower following those quarterly results. To us, the one statistic that jumped out at us was the company’s ability to get nearly 30 percent more revenue per user during the quarter.

  • With advertising dollars continuing to shift to digital platforms, we continue to see Facebook’s efforts paying off in the coming quarters. 
  • As such, we continue to rate shares a Buy. As we do this, we’re boosting our price target to $155 from $150.

 

Now onto the quarter results . . . 

Facebook reported December quarter EPS of $1.41, well ahead of the $1.31 per share consensus forecast. Revenue for the quarter climbed more than 50 percent, year over year, to $8.63 billion, besting revenue expectations of $8.49 billion. Sifting through the various metrics from daily active users to mobile daily active users, all the metrics were trending in the right direction with both up 17  to 18 percent year over year.

We continue to see the growing influence of mobile on Facebook’s business with 1.74 billion mobile monthly active users, roughly 93 percent of the company’s monthly active user base. As we mentioned above, we continue to see Facebook capturing advertising share, and it did just that in the December quarter as mobile advertising accounted for roughly 84 percent of its advertising revenue in the quarter. We chalk this up to Facebook monetizing more of its platforms (Facebook, Instagram and now Messenger) as well as the greater use of video. As the company continues to improve its ad targeting across users, we would expect some lift in pricing, which should benefit margins.

Part of our initial investment thesis for Facebook was not only the social network company’s ability to not only expand its reach across the globe, but also improve average revenue per user (ARPU) metrics as it does this. During the quarter, the company’s ARPU climbed more than 30 percent, year over year, on a global basis. As one might expect, ARPU remains skewed heavily to the U.S. and Canada, which clocked in at $80, up some 47 percent year over year. As a result, U.S. and Canada accounted for just over 50 percent of revenue followed by Europe (23 percent), Asia-Pac (15 percent) and Rest of World (10 percent). Even so, all geographies were up double-digits, year over year, from a low of 17 percent (Asia-Pac) to a high of 28.7 percent (Europe).

The bottom line is our thesis on the shares remains intact, and we continue to see the tailwinds blowing hard as advertisers continue to focus on digital advertising. We liken this to the shift to digital shopping by consumers that is benefiting our Amazon (AMZN), $839.40, 5.54 percent) shares. Much like that shift, we do not see the one behind Facebook slowing in the near-term.

 

International Flavors & Fragrances (IFF) 

Rise & Fall of the Middle Class

In a quiet week of trading, with no company-specific news, IFF shares were down 1.6 percent, keeping them in the same range they’ve been in over the last several weeks. We continue to see ample upside to our $145 price target over the coming quarters fueled by rising disposable income, particularly in the emerging markets, but also from the shift in consumer preferences to natural and organic flavors. We saw confirmation in this from competitor Givaudan, which as part of its December-quarter earnings report last week shared that, “Natural flavors have been going at an average of 8 percent over the last two years… and represent more than 40 percent of our flavor sales.”

For its fragrance business, Givaudan achieved double-digit growth in North America and a solid performance in Latin America and the Middle East. We see these results as a positive for IFF when it reports its quarterly results on Feb. 15, but we will remind subscribers that given IFF’s international exposure, currency is likely to weigh on its results as well as its near-term outlook. But as we have said before, we see that largely reflect in the share price. We continue to focus on the growing shift to organic flavors and fragrances, the former of which has soda companies such as Coca-Cola (KO) and PepsiCo (PEP) looking to reformulate their products to exclude sugar.

Longer term, the outlook remains bright for this market as the Freedonia Group’s forecast calls for global demand for flavors and fragrances to reach $26.3 billion by 2020, which would be a 21 percent increase from $21.7 billion in 2015.

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

DOWNLOAD THIS WEEK’S ISSUE
The full content of Tematica Investing is above; however downloading the full issue provides detailed performance tables and charts. Click here to download.

Adding defensive measures as earnings season brings back volatility

Adding defensive measures as earnings season brings back volatility

DOWNLOAD THIS WEEK’S ISSUE
The full content of Tematica Investing is below; however downloading the full issue provides detailed performance tables and charts.Click here to download.

Our Thoughts on Connected Society Company
Apple’s “Record” Earnings

We wish we could say it’s been a quiet week since our last issue of Tematica Investing, a smooth sailing one in fact, but thanks to the growing political drama coming out of the new White House and a pick up in the velocity of earnings reports this week, the only word we can use to describe it is “frenetic.”

Last night I was a guest on CGTN America to discuss Apple’s (AAPL) quarterly results. The long and short of it is that while Apple CEO Tim Cook called it a record quarter, the reality is the iPhone still accounts for 70 percent of Apple’s overall business. While Cook boasted of strong Apple Watch growth, iPhone shipments were up 5 percent year over year, hardly the robust growth levels we’ve seen in the past.

Meanwhile, the Mac business — the next largest business line next to the iPhone — saw volumes rise 1 percent year over year, while iPad units fell 19 percent compared to the year-ago quarter. If Apple didn’t flex its cash position, which now sits at $246 billion, to buy back stock during the quarter, reported earnings would have been flat year over year.

To us here at Tematica this means until Apple can bring to market a new product, or reenergize an existing one that can jumpstart growth, the company will be tied to the iPhone upgrade cycle. Expectations for the next iteration, the presumed iPhone 8, call for a new body, new display — hence our position in Disruptive Technology company Universal Display (OLED) — and a greater use of capacitive touch that should eliminate the current home button. But we’ll have to see if this new model on the 10thanniversary of the transformative device’s launch will capture the hearts of customers, as the last couple of models have only had a meh response.

Despite Apple’s current reliance on the iPhone, there are hopeful signs in other areas, such as the new AirPods that echo past design glory, an Apple TV business that has 150 million active subscriptions and a growing services business. We’ll continue to keep tabs on this poster child company for our Connected Society company, but with no evident catalyst over the coming months, we’re inclined to sit patiently on the sidelines and pick off the AAPL shares at better prices.

In the meantime, our position in Universal Display (OLED), up 24 percent since initiating the position in October, gives us exposure to any Apple upside as the rumors persist it will integrate the OLED technology into the iPhone 8. As we often like to say — even though it’s somewhat politically incorrect in today’s hyper-sensitive world — “it’s better to buy the bullets, not the gun.”

  • Until there is more confirmation of the integation of OLED’s into the next iPhone, or another thematic tailwind reveals itself, we are maintaining a Hold rating on Universal Display (OLED) as the current price of $66 per share is close to our $68 per share target. 

 

Confirming Thematic Data Points From Earnings Reports and Other Sources

While we are not buyers of Apple shares just quite yet, there was a number of confirming thematic data points shared during the company’s earnings conference call last night:

  • Rise & Fall of the Middle Class — “The middle class is growing in places like China, India, Brazil, but certainly, the strong dollar doesn’t help us.”
  • Cashless Consumption — “Transaction volume was up over 500% year over year as we expanded to four new countries, including Japan, Russia, New Zealand, and Spain, bringing us into a total of 13 markets. Apple Pay on the Web is delivering our partners great results. Nearly 2 million small businesses are accepting invoice payments with Apply Pay through Intuit QuickBooks Online, FreshBooks, and other billing partners. And beginning this quarter, Comcast customers can pay their monthly bill in a single touch with Apple Pay.”
  • Content is King — “In terms of original content, we have put our toe in the water with doing some original content for Apple Music, and that will be rolling out through the year. We are learning from that, and we’ll go from there. The way that we participate in the changes that are going on in the media industry that I fully expect to accelerate from the cable bundle beginning to break down is, one, we started the new Apple TV a year ago, and we’re pleased with how that platform has come along. We have more things planned for it but it’s come a long way in a year, and it gives us a clear platform to build off of… with our toe in the water, we’re learning a lot about the original content business and thinking about ways that we could play at that.”
  • Connected Society — “every major automaker is committed to supporting CarPlay with over 200 different models announced, including five of the top 10 selling models in the United States. “

Aside from Apple, there has been no shortage of thematic data points buried in earnings reports over the last few days. Even though we cut Under Armour (UAA) from the Tematica Select List yesterday, we’d note its Direct to Consumer business, which reflects its online and mobile shopping efforts, rose 26 percent year over year in the December quarter. H&M Stores has announced it will slow its physical store openings and instead focus more of its efforts online.  Both confirming data points for our Connected Society investment theme.

Shifting gears somewhat, a new study from the Food Marketing Institute and Nielsen projects online grocery sales in the U.S. could grow tremendously in the next decade. By 2025, the report suggests that American consumers could be spending upwards of $100 billion on online grocery purchases, comprising some 20 percent of the total market share. Currently, 23% of US consumers purchase groceries through digital channels.

Confirming the accelerating shift toward digital shopping that is a hallmark of our Connected Society investing theme, during the December quarter United Parcel Service (UPS) saw its domestic average daily volumes rose 5% year over year with International domestic growth up more than 20% in Asia and 10% across the Eurozone. Noting the strong growth in Asia, we’d say it likely reflects the Rise aspects of our Rise & Fall of the Middle-Class thematic.

We expect to hear much more on the accelerating shift toward digital shopping when Amazon (AMZN) reports its quarterly earnings tomorrow (Feb. 2).

Getting back to Cashless Consumption, Juniper Research now expects $1.35 trillion to be spent worldwide through mobile wallets by the end of 2017. The nearly 30 percent increase over 2016 spending will be due to users in the Far East and China through Alipay and WeChat while Westerners continue to embrace mobile wallets from Apple Pay, MasterCard (MA) and PayPal.
Turning to our Fattening of the Population theme: 

  • McDonald’s (MCD) is deploying Big Mac vending machines… yes, we know what you’re thinking and there is no way we could make something like that up.
  • Civil servants in the UK have been warned that bringing cake into work for birthdays and celebrations could be a “public health hazard”. The Faculty of Dental Surgery at the Royal College of Surgeons (RCS) warned that in large offices, sweets and cakes have become a daily occurrence and the growing trend is contributing to poor oral health and the obesity epidemic. (There is a “bad teeth” joke somewhere in there, but for once we’ll take a pass on that one) On a serious note, sadly it seems that yes, despite what we may like to think, too much a good thing may not be good for us.

 

 
Hey Alexa, Order My Starbucks

Our most recent addition to the Tematica Select List was Disruptive Technologycompany Nuance Communications (NUAN) given the explosive growth that is expected in voice digital assistants over the coming years. We know that Starbucks (SBUX) has been an early adopter of technology that allows customers to pay and order ahead online with the Starbucks app. Starbucks Mobile Order & Pay currently accounts for more than 7 percent of transactions in US company-operated stores. Building on that, Starbucks has launched My Starbucks Barista, a voice-activated “barista” baked into the company’s existing iOS mobile app that uses artificial intelligence. Currently in beta testing, My Starbucks Barista will be available to 1,000 select US customers initially, with a planned rollout through summer 2017 and an Android version to follow.

As we pointed out when we added NUAN shares to the Tematica Select List, Amazon’s Echo technology is leading the way, and the same holds with Starbucks. Select customers can now use Amazon’s Alexa to order “on command”  and the ability to recall and repeat past favorite drinks is also included. Customers simply need to say “Alexa, order my Starbucks” from wherever they have an Alexa device.

As with My Starbucks Barista, we expect Starbucks will deploy this across more Echo devices in the coming months. What it means is more people adopting the use of voice technology, and we find that very bullish for our NUAN shares.

  • We continue to rate NUAN shares a Buy with a $21 price target, as well as Guilty Pleasure company Starbucks (SBUX) with a price target of $74.

 

 

Beholden to the All-Mighty Buck

Finally, one recurring standout this earnings season is the impact of currency given the dollar’s strength during 4Q 2016. We’ve heard it from Buy-rated McCormick & Co. (MKC), United Parcel Service (UPS) and others, but it was Apple that really hammered the point home. In the earnings call last night, Apple said, “we expect foreign exchange to be a major negative as we move from the December to the March quarter.” Not exactly a surprise, given that 60 percent of its revenue is from outside the US.

 

 

Housekeeping at the House of Mouse

While The Walt Disney Company (DIS) will not report its December quarter results until February 7, we’re boosting our protective stop loss on the shares to $101.50 from $87. Currently, we’re up 10 percent% on a blended basis with the shares and while we are enjoying that nice return, after languishing in the red for a while on the positions we are aware of how volatile earnings season can be. This move in the stop loss should prevent any losses in the Disney position on the Tematica Select List.

Why $101.50? Because our blended buy-in price is $101.50.

Even as we reset this stop loss level, we remain bullish on Disney shares given the slate of Marvel, Pixar and Star Wars films that will hit theaters in coming quarters. We are also encouraged by Disney’s other moves to spread the content wealth across its licensing and parks businesses as well as its exploration of streaming alternatives for ESPN.

  • As we boost our protective stop-loss on DIS to $101.50, our price target for the shares remains $125

 

 

Setting a Stop Loss on Facebook (FB) Shares

We’ve come to appreciate the volatile nature of corporate earnings season and we’re starting to see that once again these last few days. While we continue to see Facebook (FB) benefitting from its monetization efforts across its various social media platforms as advertisers embrace digital over radio, print and broadcast, we’ve noticed a something that could be a near-term issue. Over the last several weeks, we’ve noticed a shift toward people curbing their Facebook usage due to a growing sense of political outrage complete with over the top comments. This has prompted some to start referring to Facebook as “Hatebook”.

Our concern is all of this could lead to a softer short-term outlook than most might be expecting for the current quarter.

  • As such, we’re going to install a protective stop loss at $112 for our FB shares. Better to be prudent ahead of time, than sorry later is our thinking. 

DOWNLOAD THIS WEEK’S ISSUE
The full content of Tematica Investing is above; however downloading the full issue provides detailed performance tables and charts. Click here to download.