GRU’s Grand Day Out and MGM’s Bad Privacy Luck

GRU’s Grand Day Out and MGM’s Bad Privacy Luck

In the last twenty-four hours, we’ve had two powerful reminders of the growing need for cybersecurity and digital privacy solutions. The first was the announcement from gaming and hospitality giant MGM Resorts International (MGM) that it had been the victim of a data breach in 2019. The second was a statement from the US State Department blaming the Russian military intelligence agency known as the GRU for the cyberattacks that hit Georgia last October and disrupted “several thousand Georgian government and privately-run websites and interrupted the broadcast of at least two major television stations.” 

As the digital world becomes increasingly pervasive so too does the need for cybersecurity and data protection solutions. The passage of General Data Protection Regulation (GDPR) in the European Union and the California Consumer Privacy Act are both driving spending on security measures as companies race towards compliance with these new personal data privacy regulations.

In the case of the MGM breach, the personal details of more than 10.6 million guests of the resort chain were published on a hacking forum, including information from driver’s licenses, passports, and military ID cards. While the company doesn’t have any current operations in California, it does have operations in Maryland, Massachusetts and New York. All three of those states introduced new privacy laws in 2019, which are pending in Maryland and Massachusetts but active in New York as of January 2020. 

Those new laws and a growing number of similar legislative acts emerging in other states are intended to increase the cost to companies of data breaches compared. As we noted in “A Whitepaper on Cybersecurity and Privacy”, fines associated with privacy law violations can be $100-$750 per user, which could be financially devastating. If a company doing business in California experienced an attack similar in size and scope to MGM’s, it would be staring down a potential fine between $1-$8 billion. For some perspective, the MGM breach paled in comparison to the 2018 breach at Marriot International (MAR) that exposed data of up to 500 million guests. 

Luckily for MGM, this data breach occurred in 2019 before new privacy laws were enacted this year. Even so, in response to the attack, MGM retained two cybersecurity forensics firms to conduct an internal investigation into the server exposure and has “strengthened and enhanced the security of our network to prevent this from happening again.”[1] That means spending on cybersecurity and data privacy solutions. Given the evolving nature of attacks, this will not be a one-time investment. MGM, and all companies facing such risks, will need to be perpetually vigilant in safeguarding their networks especially customer data. 

Threat intelligence firm KELA identified the culprit behind the MGM attack as a member of the GnosticPlayers[2], a hacking group responsible for the hacks of more than 45 companies and the leaking of over one billion user records throughout 2019. The new privacy laws in the US and the European Union expand the potential damage such hacking groups can inflict on companies, increasing the need for cyber protection lest they leave themselves vulnerable to attacks and privacy-related fines. The new privacy regulations increase the potential financial harm to a company from hacking, creating yet another powerful incentive for preventative security spending. 

While the attack on MGM was a clear example of the need for better corporate cybersecurity and data privacy, the cyberattack on Georgia, is one of cyber warfare. The Georgia attack knocked out thousands of government, private sector, and media websites, and interrupted broadcasts of at least two major television stations.

The UK’s National Cyber Security Centre (NCSC), concluded, “with the highest level of probability, “the attacks, aimed at web-hosting providers, were carried out by the GRU (a Russian military spy agency) in a bid to destabilize the country. The GRU is also believed to be behind NotPetya, a June 2017 cyberattack that invaded global corporate networks crashing many systems worldwide, disrupting business for companies including “Maersk, pharmaceutical giant Merck, FedEx’s European subsidiary TNT Express, French construction company Saint-Gobain, Mondelez, and Reckitt Benckiser. “[3]

In terms of the size of the NotPetya attack, “According to confirmation received by WIRED from former Homeland Security adviser Tom Bossert, the result of this attack was more than $10 billion total loss in damages.”[4] That compares to losses of $4-$8 billion associated with the WannaCry virus in May 2017.

While the attack on Georgia is gaining renewed exposure, the reality is it is just the latest in a growing number of cyber warfare attacks; a list of such attacks is being compiled by the Center for Strategic & International Studies. 

The bottom line is in a world of increasing connectivity that brings ever greater accessibility, companies, governments, and institutions are facing a cyber arms race that will generate continual and growing demand for evolving cyber defense solutions. If a company opts not to secure itself, it risks devastating fines. We suspect the more prudent companies will instead engage with cybersecurity and data privacy companies that comprise the Foxberry Tematica Research Cybersecurity & Data Privacy Index.


[1] ZDNet, “Exclusive: Details of 10.6 million MGM hotel guests posted on a hacking forum”, 2020. Available at https://www.zdnet.com/article/exclusive-details-of-10-6-million-of-mgm-hotel-guests-posted-on-a-hacking-forum/

[2] ZDNet, “Exclusive: Details of 10.6 million MGM hotel guests posted on a hacking forum”, 2020. Available at https://www.zdnet.com/article/exclusive-details-of-10-6-million-of-mgm-hotel-guests-posted-on-a-hacking-forum/

[3] NS Tech, “Russia’s GRU launched cyberattacks aimed at destabilising Georgia, says NCSC”, 2020. Available at https://tech.newstatesman.com/security/russia-gru-cyber-attacks-georgia-ncsc

[4] Business Standard, “NotPetya: How a Russian malware created the world’s worst cyberattack ever”, 2018. Available at https://www.business-standard.com/article/technology/notpetya-how-a-russian-malware-created-the-world-s-worst-cyberattack-ever-118082700261_1.html

All Eyes On The September Jobs Report

All Eyes On The September Jobs Report

Today’s Big Picture

US market futures point to a modestly lower open Friday morning. After the disappointing manufacturing and services data this week, all eyes will be on today’s Nonfarm Payrolls report, which is expected to see 145,000 jobs added in September, up from 130,000 in August with the unemployment rate holding at 3.7% and wages gaining +0.2%. Keep in mind that the General Motors (GM) strike will add some confusion to the data as striking workers aren’t counted in payrolls.

We’ll also be looking for any updates on the previous downward revisions to payrolls. In August the BLS cut job gain estimates for 2018 and early 2019 by about 500,000, the largest such downward revision in the past decade. Overall we’ve seen downward revisions for around 17 months – a sure sign that labor market dynamics ...

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WEEKLY ISSUE: Investment themes changing the diamond industry, Apple’s WWDC 2018 and more

WEEKLY ISSUE: Investment themes changing the diamond industry, Apple’s WWDC 2018 and more

  • Following Apple’s WWDC 2018 keynote presentation, we are boosting or price target on Apple (AAPL) shares to $210 from $200.
  • As MGM Resorts (MGM) avoids Las Vegas strike disruptions, our price target remains $39
  • Paccar (PCAR) shares catch an upgrade; our price target remains $85
  • We are adding shares of Charles & Covard (CTHR) to the Tematica Investing Contender List as part of our Affordable Luxury investing theme.

As the market gets ready for the upcoming trade summit, we are seeing trade tensions heat up ahead of that date. We’ve also got a new government in Italy, and while the recent economic data has been positive, I’m seeing increasing signs of inflation in the system. To me, that looks likely to lead the Fed to the increasingly expected four interest rate hikes this year.

I suspect all of the issues discussed above — trade, interest rates and other geopolitical tensions — will be recurring ones that will likely lead to an ebb and flow of uncertainty in the market, ultimately keeping it rangebound in the near-term. In that type of environment, I’ll continue to look for new opportunities utilizing our thematic approach to investing. As compelling situations are uncovered, we’ll look to be opportunistic.

With a number of things to get to, including how the diamond industry is beginning to pivot in response to some of our thematic tailwinds, I’ll cut it there for this week…

 

Apple’s WWDC 2018 was far from boring

Earlier this week, following Apple’s (AAPL) World Wide Developer Conference (WWDC) 2018 that focused on the company’s various software platforms the shares hit a multi-year high at $193.42 before settling modestly lower. I’ve been waiting in the wings to bump our price target on this Connected Society company higher and following this week’s keynote that introduced the software updates that consumers will have access to later this year, I am boosting that target to $210 from $200.

The expectation coming into the event was Apple would focus on software refinements and performance. While that was the case, there were a number of new features that in our view did more than that.

Now let’s discuss some of the announcements…

Apple got to it early on with iOS, taking the wraps of iOS 12 that will power both past and present iPhone and iPad models. While the initial conversation was on performance improvements, Apple soon ticked off a number of features including more robust Augment Reality capabilities, including multiplayer gaming; deeper integration of its digital assistant Siri in the OS and with third party apps; overhauled News, Stocks, Voice Memo and iBooks apps; new features for iMessage, including Memoji; and at long last group Facetime. There was some thought Apple would also introduce more robust controls to limit usage, and it does so with updates to its Do Not Disturb and Notifications capabilities, but also introduced Screen Time that should help people as well as parents restrict usage time on iOS devices.

Next up was watchOS, which continued its focus on connectivity and activity as it debuted Walkie Talkie mode that allows people to quickly communicate with each other. The iOS improvements with Siri are also finding their way to Apple Watch as is a new Podcast app. Apple also shared later this year it will debut Student ID support with both iOS and watchOS. Student ID will allow students to gain access from dorms and dining halls to gyms and libraries, along with campus events or attending class, making purchases from campus retail shops and bookstores, and paying for laundry and items from vending machines. Apple expects to roll this out with a handful of universities and expand it over time.

Turning to the OS that powers Apple TV, better known as tvOS, it gains support for Dolby Atmos surround sound, as well as a streamlined sign-in protocol for cable providers.

As for macOS, the upcoming version dubbed Mojave, will have  all new features like a dedicated Dark Mode, an all-new App Store, tweaks to the desktop, and the migration of several iOS apps. That migration for News, Stocks, Voice Memo and Home is part of a longer-term initiative to port iOS apps to mac OS, and Apple expects developers will be able to transition their apps to Mac sometime in 2019. Finally, in the wake of the Cambridge Analytica data scandal, Apple emphasized privacy, with a new Safari feature that preemptively blocks tracking sites like Facebook’s Like and Comment feature and asks you to allow it to appear when you’re browsing a website.

While developers will have access to these new OS iterations shortly, consumers will not until sometime this Fall. Historically, Apple has formally released these platforms shortly after it debuts its new hardware.

Are these updates ho-hum?

Not at all in my opinion. While they could be seen a quieter updates, they bring features and functionality that will spur usage as Apple once again does what it has done in years past – used its software and design expertise to remove friction for consumers. Odds are these features will help spur users of older Apple devices to upgrade later this year, but I continue to see a far larger iPhone upgrade cycle coming once 5G networks go mainstream.

Factor in Apple’s dividend and share repurchase plans, and what some may call boring still looks pretty exciting to me.

  • Following Apple’s WWDC 2018 keynote presentation, we are boosting or price target on Apple (AAPL) shares to $210 from $200.

 

MGM avoids the Las Vegas strike

Last week, I discussed the pending union strike for casino hotel workers on the Las Vegas Strip and how we would be assessing its potential impact for MGM Resorts (MGM). Over the weekend, the company has reportedly reached a new tentative 5-year contract that covers approximately 24,000 workers at 10 casino resorts on the Las Vegas Strip. We’ll continue to monitor the situation and assess any potential impact but, in my view, this tentative agreement is a step in the right direction and could lead to a modest boost to MGM’s properties as its competitors contend with the strike.

  • Our price target on MGM Resorts (MGM) shares remains $39

 

Paccar shares catch an upgrade

Yesterday shares of heavy-duty and medium duty truck company Paccar (PCAR) caught an upgrade to an Outperform rating from Neutral at investment firm Macquarie complete with a $75 target. That upgrade came on the news that May preliminary net orders of heavy trucks (Class 8) in North America were 35,600 units, up 110% year-on-year and up 2.5% vs April.

Despite the swelling order book for heavy and medium duty trucks that reflects the current shortage that is driving freight costs higher, Macquarie is one of the few to turn bullish on Paccar shares. Candidly, given the year over year strength in new truck orders we’re surprised that more haven’t turned positive on the shares.

I’ll look for further confirmation in the soon to be published May Cass Freight Index data. That data for April showed a 10% year over year increase in freight shipments, which in our view served to signal the domestic economy was firming. As more data is had that points to the improving outlook for new truck demand, I expect others will jump on board, boosting their ratings and price targets along the way.

You know what they say when it comes to situations like this – better to be early than late.

  • Our price target on Paccar (PCAR) shares remains $85;

 

Examining a lab grown diamond company as De Beers adjusts its business model

Last week I posted a Thematic Signal that discussed legendary diamond firm De Beers having to pivot its business as it contends with the reality that is our Cash-strapped Consumer investing theme. As I’ve said for some time, these thematic tailwinds and headwinds lead to a change in behavior at consumers and businesses that companies must respond to it they want to survive and thrive. If not, they run the risk of being dead on the vine. If consumers aren’t buying diamonds because they can’t afford them, then the exiting business model at De Beers has to change. Simple. As. That.

In this case De Beers has launched a new line of synthetic diamonds that are a fraction of the price for natural diamonds. Prices for the synthetic diamonds will start at $200 for a quarter carat and increase to $800 for a full carat stone. The company’s natural stones start at roughly 10 times that amount, depending on their clarity and other attributes. We see this move at this price point as part of De Beers’ attempt to capture incremental business associated with our Affordable Luxury investing theme.

With De Beers embracing synthetic diamonds, odds are the flood gates will soon open up with others doing the same. To me, this sounds like a new market opportunity for Charles & Covard (CTHR), the original creator and leading source of Forever One™, Forever Brilliant® and Forever Classic™ moissanite gemstones for fine jewelry. Charles & Covard’s gemstones are based on a patented a thermal growing process for creating pure silicon carbide (SiC) crystals in a controlled laboratory environment that enables lab created grown moissanite gemstones. As the company has positioned its wears, they are free from environmental and ethical issues, and capable of disrupting traditional definitions of fine jewelry.

As background, the global jewelry market is estimated by McKinsey & Company to be $257 billion in size. Like many other industries the move to digital sales is also resulting in a shift in where consumers are buying jewelry. Per McKinsey, by 2020 the global online fashion jewelry market is expected to drive $45 billion in sales, roughly 15% of the global jewelry market, with the global online fine jewelry hitting $30 billion of the global jewelry market. By comparison, estimates put the lab-created gemstone market near $8 billion by 2020 with the largest geographic market being Asia-Pacific followed by North America.

Charles & Covard, which derives more than 90% of its revenue from the domestic market, sells loose moissanite jewels and finished jewelry through two operating segments:

  • Online Channels (38% of sales) which is comprised of the company’s charlesandcolvard.com website, e-commerce outlets, including marketplaces such as Amazon (AMZN) and eBay (EBAY), and drop-ship customers, such as Overstock.com (OSTK), and other pure-play, exclusively e-commerce customers, such as Gemvara;
  • Traditional segment (62% of revenue), which consists of wholesale, retail, and television customers such as Helzberg Diamonds, Rio Grande, Stuller, and Boscov’s.

Only one analyst formally covers CTHR shares with a $2.50 price target, but there are no consensus expectations for EPS let alone revenue. Revenue for Charles & Covard has remained in the $25-$29 million bandwith over the last five years, and annualizing the company’s March quarter results suggests revenue near $27 million this year with EPS of roughly -$0.12.

There is some issue with that, which centers on the inherent seasonality within the company’s business that reflects the year-end holidays and gift giving. Odds are that means the company’s top and bottom line could be ahead of those figures.

Now here is where it gets a little cloudy. While forecasts suggest there are robust growth prospects ahead for laboratory created diamonds and other jewels, which could equate to a significant tipping point for Charles & Covard should reality match those forecasts, the company is facing a potential supplier issue.

Its sole supplier of SiC crystals is Cree (CREE) and Charles & Covard has a certain exclusive supply rights for SiC crystals to be used for gemstone applications. In December 2014, Charles & Covard entered into a new exclusive supply agreement with Cree that will expire on June 24, 2018, unless extended by the parties for an additional two-year period.

While the two companies boast being on good terms, the reality is Cree is a captive supplier that Charles & Covard rely on to for their products. This means watching the next few weeks for the deal terms for either a new supply agreement or ones attached to the extension as they could alter profitability expectations. Other complications include the company’s microcap status and its average daily trading volume of just 70,750 shares.

For those reasons, even though the lab grown diamond market looks to have favorable growth prospects, we’re going to keep an eye on Charles & Covard shares by putting them on the Tematica Investing Contender List.

  • We are adding shares of Charles & Covard (CTHR) to the Tematica Investing Contender List as part of our Affordable Luxury investing theme.
WEEKLY ISSUE: Taking a Last Sip from Our Venti Latte as We Head into the Summer

WEEKLY ISSUE: Taking a Last Sip from Our Venti Latte as We Head into the Summer

KEY POINTS FROM THIS ALERT:

  • We are issuing a Sell on Starbucks (SBUX) shares and removing them from the Tematica Investing Select List.
  • We are trimming our position in USA Technologies (USAT) shares, selling half the position on the Tematica Investing Select List and keeping the other half in play to capture any potential additional upside.
  • Heading into this week’s Costco (COST) earnings call, our price target is $210.
  • Heading into Apples 2018 WWDC event next week, our price target on Apple (AAPL) shares remains $200.
  • While we watch for a potential Las Vegas strike, our longer-term price target for MGM remains $39.
  • We continue to have a Buy rating and an $85 target for Paccar (PCAR) shares
  • With data points confirming a pick-up in business investment, we continue to have a Buy rating and a $235 price target for Rockwell Collins (ROK) shares.

 

Coming into this shortened week for the stock market following the Memorial Day holiday, we’ve seemingly traded one concern for another. I’m talking about the shift in investor focus that has moved from the pending June 12 meeting between the US and North Korea to renewed concerns over Italy and what it could mean for the eurozone and the euro as well as the overall stock market and the dollar. In last week’s Weekly Wrap, I thought Tematica’s Chief Macro Strategist, Lenore Hawkins, did a bang-up job summing up the situation but as we entered this week it pivoted once again, pointing to the likelihood of new elections that could pave the way for anti-euro forces.

This fresh round of uncertainty led the market lower this week, pulling the CNN Money Fear & Greed Index back into Fear territory from Neutral last week. Not surprising, but as investors assess the situation odds are US stocks, as well as the dollar and US Treasuries, will be viewed as ports of safety. That realization likely means the short-term turbulence will give way to higher stock prices, especially for US focused ones. Multinational ones will likely see a renewed currency headwind given the rebound in the dollar as well as the new fall in the euro.

I’ll continue to keep close tabs on these developments and what they mean for not only our thematic lens, but also for the Tematica Investing Select List. Expect to hear more about this on our Cocktail Investing podcast as well.

 

Cutting Starbucks shares from the Tematica Investing Select List

Given our thematic bent, we tend to be investors with a long-term view and that means it takes quite a bit for me to remove a company from the Tematica Investing Select List. Today, we are doing that with Starbucks (SBUX) and for several reasons. As I just mentioned above, this multinational company will likely see currency headwinds return that will weigh on its income statement.

At the same time, the company has been underperforming of late in same-store sales comparisons, which have slipped to the low single digits from mid-single digits in 2013-2016. The decline has occurred as Starbucks has reaped the benefits of its improved food offering over the last several quarters, and its new beverage offerings of late have underwhelmed. In the March quarter, if it weren’t for price increases, its same-store sales would have been negative.

While I still go to Starbucks as does the rest of team Tematica, the reality is that we are not spending incremental dollars compared to last year outside of a price increase for our latte or cappuccino. Said a different way, Starbucks needs to reinvigorate its product line up to win incremental consumer wallet share. In the past, the company had new beverages and then the addition of an expanded food and snack offering to deliver favorable same-store comparisons. Now with a full array of beverages, food and snacks, the question facing Starbucks is what’s next?

It’s this question as well as the simple fact that the closure of its stores yesterday to deliver racial tolerance training to its employees will weigh not only on same-store sales comps for the current quarter but hit profits as well. Keep in mind too that we are heading into the seasonally slower part of the year for the company.

Taking stock of Starbucks stock, my view is let’s take the modest profit and dividends we’ve collected over the last 24 months and move on.

  • We are issuing a Sell on Starbucks (SBUX) shares and removing them from the Tematica Investing Select List.

 

Trimming back our position in USA Technologies

Since adding shares of USA Technologies (USAT) back to the Tematica Investing Select List in early April, they have risen more than 50%, making them one of the best performers thus far in 2018. While the prospects for mobile payments remains vibrant and we are starting to see some consolidation in the space, I’m reminded of the old Wall Street adage – bulls make money, bears make money and pigs get slaughtered.

Therefore, we will do the prudent thing given the sharp rise in our USAT shares in roughly a handful of weeks – we will trim the position back, selling half the position on the Tematica Investing Select List and keep the other half in play to capture the additional upside. As we do this, we are placing our $12 price target under review with an upward bias. That said, we would need to see upside near $16 to warrant placing fresh capital into the shares.

  • We are trimming our position in USA Technologies (USAT) shares, selling half the position on the Tematica Investing Select List and keeping the other half in play to capture the additional upside.

 

Prepping for Costco earnings later this week

After the market close on Thursday (May 31), Costco Wholesale (COST) will report its latest quarterly earnings. Consensus Wall Street expectations are for EPS of $1.68 on revenue of $31.59 billion.

Over the last several months, the company’s same-store sales show it gaining consumer wallet share as it continued to open additional warehouse locations, which sets the stage for favorable membership fee income comparisons year over year. Exiting April, Costco operated 749 warehouse locations around the globe, the bulk of which are in the U.S. and that compares to 729 warehouses exiting April 2017. The number of Costco locations should climb by another 17 by the end of August and paves the way for continued EPS growth in the coming quarters.

  • Heading into this week’s earnings call, our price target is $210 for Costco (COST) shares

 

Updates, updates, updates, updates

Apple (AAPL)                                                                       
Connected Society

Next Monday Apple will hold its 2018 World-Wide Developer Conference (WWDC), which historically has been a showcase for the company’s various software platforms. This year it’s expected to feature iOS 12, the next evolution in its smartphone and tablet software. Recently it was hinted that Apple will unleash the full power of Near Field Communication capabilities found in those chipsets, which have been inside the iPhone since the iPhone 6 model.

In my view, this is likely to be but one of the improvements shared at the event. Those hoping for a hardware announcement are likely to be disappointed, but we never know if we’ll get “one more thing.”

  • Heading into next week’s 2018 WWDC event, our price target on Apple (AAPL) shares remains $200.

 

MGM Resorts International (MGM)
Guilty Pleasure

Quarter to date, shares of gaming-and-resort company MGM have come under pressure but our position in them is down only modestly. I’m putting MGM shares on watch this week following a vote by Las Vegas casino workers to strike when their contract expires at the end of May. I see that vote as a negotiating tactic with dozens of casino and resort operators, akin to what we’ve been seeing emanating from Washington these last few months.

I’ll continue to watch for a potential resolution and what it could mean for margins and EPS expectations. We’ve been patient with MGM shares, but if a strike ensues I’m apt to exit the position and fish in more fruitful waters for this investment theme of ours.

  • While we watch for a potential Las Vegas strike, our longer-term price target remains $39.

 

Paccar (PCAR)
Economic Acceleration/Deceleration

Over the last month, shares of this heavy-duty and medium-duty truck manufacturer have traded sideways. According to the most recent data point from the Cass Freight Index, shipment rose just over 10% year over year in April. That sets the stage for a favorable April reading for the American Trucking Associations’s For-Hire Truck Tonnage Index that rose 6.3% year over year after increasing 7.7% in February on the same basis.

At the same time, we continue to hear from a growing array of companies that they are facing rising costs due in part to surging trucking rates. Coca-Cola (KO) recently reported a 20% year-over-year increase in freight expense. Procter & Gamble (PG), Hasbro, Inc. (HAS), Danone SA, and Nestle SA also reported higher transportation costs and Unilever (UL) expects high-single-digit to high-teens increases in U.S. freight costs in the coming quarters. All of this confirms the current truck shortage that is fueling robust year-over-year growth in new orders for medium and heavy-duty trucks. Next week, we should get the May data and I expect the favorable year over year comparisons to continue.

As production rises to meet demand, we see a positive impact on Paccar’s business on both the top and bottom lines. Our $85 price target equates to just under 15x current estimated 2018 EPS, which has crept up by a few pennies over the last several weeks to $5.69 per share vs. $4.26 in 2017.

  • We continue to have a Buy rating and an $85 target for Paccar (PCAR) shares

 

Rockwell Automation (ROK)
Tooling & Re-Tooling

Our thesis on Rockwell Automation has focused on the expected pick-up in business investment and capital spending following tax reform last year. As the March quarter earnings season winds down, data collected by Credit Suisse reveals spending on factories, equipment and other capital goods by companies in the S&P 500 is expected to have risen to $166 billion during the quarter, up 24% year over year. That’s the fastest pick-up in capital spending since 2011 and marks a March-quarter record since Credit Suisse started collecting the data in 1995.

That year over year increase is roughly in line with the year over year increase in March 2018 U.S. manufacturing technology orders according to data published in the U.S. Manufacturing Technology Orders report from The Association For Manufacturing Technology (AMT). For March quarter in full, AMT’s data points to a 25% year over year improvement, which is in line with Credit Suisse’s capital spending assessment.

Based on these prospects, as well as statistics for the average age of private fixed assets that reveal the average age of U.S. factory stock is near 60 years old, it appears AMT’s 2018 forecast that calls for a 12% increase in US orders of manufacturing equipment compared to 2017 is looking somewhat conservative.

I’ve also noticed that over the last several weeks 2018 EPS expectations for Rockwell have inched up to $7.87 per share from $7.79, while 2019 expectations have moved higher to $8.81 per share from $8.73. I see those upward movements as increasing our confidence in our $235 price target for ROK shares.

  • With data points confirming a pick-up in business investment, we continue to have a Buy rating and a $235 price target for Rockwell Collins (ROK) shares.

 

With more earnings on the way, getting ready for a shortened week for stocks

With more earnings on the way, getting ready for a shortened week for stocks

Today is all quiet when it comes to the domestic stock market as they are closed in observance of President’s Day. While never one to dismiss a long weekend, it does mean having a shorter trading week ahead of us. From time to time, that can mean a frenetic pace depending of the mixture and velocity of data to be had. This week, there are less than a handful of key economic indicators coming at us including the January Existing Home Sales report and one for Leading Indicators.

Midweek, we’ll get the report that I suspect will be the focus for most investors this week – the monthly Flash PMI reports for China, Europe and the U.S. from Markit Economics. These will not only provide details to gauge the velocity of the economy in February, but also offer the latest view on input prices and inflation. Given the inflation focus that was had between the January Employment Report and the January CPI report, this new data will likely be a  keen focus for inflation hawks and other investors. I expect we here at Tematica will have some observations and musings to share as we digest those Flash PMI reports.

On the earnings front, if you were hoping for a change of pace after the last two weeks, we’re sorry to break the news that more than 550 companies will be reporting next week. As one might expect there will be a number of key reports from the likes of Home Depot (HD) and Walmart (WMT).  For the Tematica Investing Select List, we’ll get results from four holdings:

 

MGM Resorts (MGM) on Tuesday (Feb. 20)

When this gaming and hospitality company reports its quarterly results, let’s remember the Las Vegas shooting that had a negative impact on overall industry Las Vegas gaming activity early in the December quarter. In amassing the monthly industry gaming data, while gaming revenue rebounded as the seasonally slow quarter progressed, for the three months in full it fell 5% year over year. Offsetting that, overall industry gaming revenue for the December quarter rose 20% year over year in Macau.

Putting these factors together and balancing them for MGM’s revenue mix, we’ve seen EPS and revenue expectations move to the now current $0.08 and $2.5 billion vs. $0.11 and $2.46 billion in the year ago quarter. On MGM’s earnings call, we’ll be looking to see if corporate spending is ramping down as had been predicted as well as what the early data has to say about the new Macau casino. We’ll also get insight on the potential direct and indirect benefits of tax reform for MGM’s bottom line.

  • Heading into that report our price target for MGM shares remains $37.

 

Universal Display (OLED) on Thursday (Feb. 22).

After several painful weeks, shares of Universal Display rebounded meaningfully last week following the news it re-signed Samsung to a multi-year licensing deal and an upbeat outlook from Applied Materials (AMAT)for the organic light-emitting display market. For subscribers who have been on the sidelines for this position, with the Apple (AAPL) iPhone X production news now baked in the cake we see this as the time to get into the shares. We expect an upbeat earnings report to be had relative to the December quarter consensus forecast for EPS of $0.85 on revenue of $100 million, up 55% and 34%, respectively, year over year.

Based on what we’ve heard from Applied as well as developments over organic light emitting diode TVs and other devices at CES 2018, we also expect Universal will offer a positive outlook for the current as well as coming quarters.

  • Our price target on OLED shares remains $225.

 

 

Weekly Issue: Black Friday, Tax Reform and Boosted Dividends in Time for the Holidays

Weekly Issue: Black Friday, Tax Reform and Boosted Dividends in Time for the Holidays

Black Friday Through Cyber Monday Provide Confirming Data Points for Amazon (AMZN) and UPS Positions

Earlier this week, we not only issued our Tematica Investing thoughts on the holiday shopping weekend, which was very confirming for our Connected Society investment theme thesis on both Amazon (AMZN) and United Parcel Service (UPS), it was also the topic of conversation between Tematica’ Chief Macro Strategist Lenore Hawkins and myself on this week’s earlier than usual Cocktail Investing Podcast. As a reminder, we see United Parcel Service as the sleeper second derivative play on the shift to digital shopping this holiday season and beyond.

Per data published by GBH Insights, on Black Friday alone, Amazon garnered close to half of all online sales, which set new record levels on Thanksgiving as well as Black Friday and Cyber Monday. As we learned yesterday, this year’s Cyber Monday was the biggest sales day for online and mobile ever in the US as online sales hit $6.59 billion, up 16.8% year over year. As Lenore and I discussed on the podcast, spending on mobile devices continued to take share from desktop and in-store spending during Thanksgiving and Black Friday, and that also happened on Cyber Monday as mobile sales broke a new record by reaching $2 billion.

Yesterday, Amazon issued a press release sharing it was the “’best-ever’ holiday shopping weekend for devices sold between Thanksgiving and Cyber Monday. After reviewing the data and prospects for Amazon’s business this holiday season as it benefits in part from its expanding private label brand business as well as the even greater than expected shift to digital commerce this holiday shopping season, we are boosting our price target on AMZN shares to $1,400 from $1,250. While some may focus on the implied P/E of 175x expected 2018 EPS of $7.98 for our new price target, it equates to a price to earnings growth (PEG) rate of roughly 1.0% as Amazon is set to grow its EPS by a compound annual growth rate of just over 184% over the 2015-2018 period. Even if 2018 expectations are a tad aggressive, after taking a more conservative 2018 view our new $1,400 price target equates to a PEG ratio between 1.1-1.3x, which we find more than acceptable from a risk to reward perspective.

  • We are boosting our price target on Amazon (AMZN) shares to $1,400 from $1,250.
  • Our price target on United Parcel Service (UPS) remains $130.

 

Market Moves Higher Ahead of Senate Vote on Tax Reform

The major market indices continued to move higher as the Senate Budget Committee approved the Senate’s tax plan yesterday, which brings it to an expected floor vote tomorrow. This inches the prospects for potential tax reform happening by the end of 2017 a bit higher, although while we remain optimistic we here at Tematica continue to see far greater odds of tax reform happening in 2018 as the House and Senate bills close their respective gap. While both bills cut taxes on businesses and individuals, they differ in the scope and timing of those cuts.

As enthusiasm has gained for tax reform, smaller cap stocks have rallied, as small-caps tend to have greater U.S. exposure in revenue and profit mix compared to bigger, multi-national stocks. The small-cap laden Russel 2000 is up more than 1% this week alone and has risen roughly 2.8% over the last month beating out the Dow Jones Industrial Average, the S&P 500 and even the Nasdaq Composite Index. That small-cap climb, combined with the influence of our thematic tailwinds led the USA Technologies (USAT), AXT Inc. (AXTI) and LSI Industries (LYTS) to rise even faster than the Russell. Over the last month, they’ve risen more than 30%, 18%, and 5% respectively and over the last few weeks, we’ve trimmed back USAT and AXTI shares, booking meaningful wins, while offsetting those gains by closing out positions that have been lagging.

As tax reform lumbers forward, we’ll continue to monitor developments and what they mean for both the market and the Tematica Investing Select List.

 

 

Dividend Dynamo Company McCormick Does it Again

Call me old-fashioned, but I love dividends and I love companies that have the ability to raise their dividends even more. When a company boosts its dividend, it tends to result in a step function move higher in its stock price. If it’s a serial dividend raiser, or as I like to call them a dividend dynamo company, we tend to get a hefty 1-2 combination punch of a step higher in the stock price as well as higher dividend payments. Boom!

We’ve got several such companies on the Tematica Investing Select List, and this week McCormick & Co. (MKC) once again boosted its quarterly dividend. This new 10% increase to $0.52 per share marks the 32nd consecutive year that McCormick has increased its quarterly dividend and offers us even greater comfort with our $110 price target. With regard to this new dividend, it is payable on January 16 to shareholders of record on December 29 – mark your calendars!

  • Our price target on McCormick & Co. (MKC) shares remains $110

 

What We’re Watching For Over the Coming Days

During the next several days, as we exit November a number of economic data points will start to roll in, as well as other key data points such as retailer monthly same-store sales figures. Amid the number of economic reports to be had, we’ll be parsing the October construction spending report and what it means for both non-residential construction activity and shares of LSI Industries (LYTS). The shares have been an “under the radar” mover on a week to week basis, but since adding the position to the Tematica Investing Select List in mid-September are up more than 5%. As August-September hurricane-related construction rebounds, we continue to see further upside ahead for LYTS shares.

  • Our price target on LSI Industries (LYTS) remains $10.

 

While we are understandably bearish on the vast majority of brick & mortar retailers, we remain upbeat with Costco Wholesale (COST) given its higher-margin membership fee income stream. Over the last several months, Costco’s monthly same-store sales reports have shown it is not suffering at the hands of Amazon at all, but rather in keeping with our Cash-Strapped Consumer investing theme, it continues to take consumer wallet share. As Costco shares it November data, we’ll be sure to break it down and assess what it means for our $190 price target.

  • Our price target on Costco Wholesale (COST) remains $190.

 

With Guilty Pleasure MGM Resorts (MGM) shares on the Select List, we’ll also be on the lookout for November gaming data pertaining to Nevada as well as Macau. As we mentioned recently, we are heading into one of the slower seasons for the Las Vegas strip and MGM continues to renovate several choice properties with expectations of reopening them in 1Q 2018. We’ll continue to be patient, and if the opportunity presents itself opportunistic as well given our $37 price target. On the housekeeping font, MGM’s next quarterly dividend of $0.11 per share should arrive in mid-December.

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

 

 

SPECIAL ALERT: Some House Cleaning of the Tematica Select List

SPECIAL ALERT: Some House Cleaning of the Tematica Select List

 

KEY POINTS FROM THIS POST:

  • Adding to the Trade Desk (TTD) position and improving the cost basis along the way
  • Funding the TTD move by exiting Teucrium Corn Fund (CORN) shares
  • Boosting our International Flavors & Fragrances (IFF) price target
  • Upping our USA Technologies price (USAT) target as well
  • MGM Resorts (MGM) enters a seasonally slow period
  • What’s expected from Applied Materials (AMAT) on Thursday?

 

As we shared in today’s Monday Morning Kickoff, this week will see a downtick in the pace of corporate earnings. There are, however, still companies worth listening to beyond Applied Materials (AMAT) — the only Tematica Investing Select List company reporting this week. In addition to sharing what’s expected from Applied later this week, today we’re boosting our price targets on International Flavors & Fragrances (IFF) and USA Technologies (USAT) as well as scaling into recently added Trade Desk (TTD) shares, using the proceeds from closing out the position in Teucrium Corn Fund (CORN) shares. We’ve also got an update of MGM Resorts (MGM) following its quarterly earnings report last week.

 

Adding to the Trade Desk position and improving the cost basis along the way

As we shared on Friday, we are using the sharp pullback in Trade Desk (TTD) shares to add to our position on the Tematica Investing Select List, while improving our cost basis from just under $65. Our view is the 21% move lower in TTD shares last week was an extreme overreaction given the company’s current quarter guidance was less than 1% below consensus expectations. At the same time, we only see the shift to digital advertising accelerating as consumers flock to digital platforms from podcasts, like our own Cocktail Investing podcast to various social media and streaming platforms.

  • Adding to the Trade Desk (TTD) position
  • Our price target on Trade Desk (TTD) shares remains $80

 

Funding the TTD move by exiting Teucrium Corn Fund (CORN) shares

To help fund this doubling down in Trade Desk shares — and continuing the process of house cleaning as we prepare to exit 2017 — we are issuing a Sell on Scarce Resource play Teucrium Corn Fund (CORN) shares. Here’s why: last week in its November Crop Production and Supply/Demand Report, the US Department of Agriculture (USDA) shared U.S. corn production reached “175.4 bushels per acre vs. the trade’s expectations of 172.4 bushels per acre and the USDA’s October estimate of 171.8.”

This means despite rising international demand for corn, the ending stocks are much greater than expected a month ago, let alone several months ago, and that has this consumable resource being far less scarce than expected when we added the CORN shares to the Select List. We’ll move the shares down to the Contender List, but it won’t be until the spring 2018 planting season that we look to revisit CORN shares and even then, it will depend on the geopolitical environment for agriculture exports and demand.

While never an enjoyable moment to close a position, we see this as the right move at the right time as the 13% loss endured will offset short-term taxable gains booked earlier in the year when we closed positions in PowerShares NASDAQ Internet Portfolio ETF (PNQI), Costco Wholesale (COST), and more recently CalAmp Corp. (CAMP).

  • We are issuing a Sell on Teucrium Corn Fund (CORN) shares and placing them on the Tematica Investing Contender List.

 

Boosting our International Flavors & Fragrances price target

In last Wednesday’s Weekly Tematica Investing issue, as part of our review of International Flavor & Fragrances (IFF) September quarter earnings that handily beat expectations, I shared that my $150 price target was under review. I can now share that my new price target on the shares is $160, which is in line with the shares average dividend yield of 1.7% over the 2005-2016 period when applied to the current $0.69 quarterly dividend. On a price to earnings basis, my new price target is a modest premium to the 10-year average, but we see as warranted given the rising demand for organic flavoring solutions as well as the shifting preference for non-sugar flavoring that is forcing beverage companies, like PepsiCo (PEP) and Coca-Cola (KO) to reformulate their beverages.

  • Our new price target on International Flavors & Fragrances (IFF) shares is $160, which keeps our Hold rating intact.

 

Upping our USA Technologies price target as well

Last week USA Technologies (USAT) reported mixed September-quarter results, with earnings per share that beat expectations while revenue fell modestly short of Wall Street consensus. Also last week, USA shared it would acquire Cantaloupe Systems, a provider of cloud and mobile solutions for vending and office coffee services. At the same time, the company boosted its 2018 outlook. Factoring in Cantaloupe, USA now sees its 2018 revenue falling in the range of $127 million to $142 million, compared to the pre-earnings consensus of $123.8 million.

Given the lift in revenue, as well as favorable margins associated with Cantaloupe, we’re boosting our price target to $8.00 from $6.50, which offers around 13% potential upside from current levels. This keeps our Hold rating on USAT shares intact.

Getting back to the USA’s results, revenue rose 19%, year to year, to $25.6 million, marking its 32nd consecutive quarter of year-over-year revenue growth. We’d note that even before including Cantaloupe in the outlook for the coming quarters, USA’s base 2018 guidance means the company would have had to grow its revenue another 21% even after we annualized September-quarter revenue.

So, what gives us the confidence the company can continue to deliver on those growth metrics with its core business? Let’s look at some operating metrics from the September quarter:

  • Net new connections rose 37%, year over year, to 26,000, bringing total connection count to 594,000, of which approximately 500,000, or 84%, are a near-field communication (NFC) enabled.
  • USA’s customer base rose by 550 new customers in the quarter and was the highest new customer count it has achieved in two years, bringing the total number of customers on the ePort Connect service to 13,250. While it may be simple or obvious, the more customers on ePort Connect, the more potential transactions there are in vending and unattended retail.

On the earnings call, USA management shared several new developments that bode very well for continued ePort Connect growth in the coming quarters:

  • As part of its partnership with Canteen, the largest automated merchandising company in the United States, offering vending, micro-market, office coffee and dining services to a large network of corporate-owned and franchise locations, two Canteen franchisees will transition their business to 100% connectivity for cashless payments.
  • Premier Food Service, a leading food service provider in Kansas, will upgrade more than 1,400 locations to USA’s ePort Connect service and over 300 kiosks to its consumer engagement and loyalty program.
  • Berkshire Foods, a leading vending and food service company in Connecticut and New York, is widening its footprint with the addition of 1,000 new ePort Interactive and ePort G10-S units to its existing network of approximately 1,500 locations that use USA’s services.

With regard to Cantaloupe, we like the acquisition as it builds on the company’s service offering as well as helps expand its footprint even further. Cantaloupe is headquartered in San Francisco and has approximately 300,000 machines on its service with more than 1,300 operator customers in the U.S., Canada, Australia and South America. The acquisition is expected to close in short order, and as such, we expect more associated synergies to come to light in the coming weeks and months.

  • We are boosting our price target on USA Technologies (USAT) shares to $8.00 from $6.50.

 

MGM Resorts (MGM) enters a seasonally slow period

Last Wednesday, MGM Resorts (MGM) reported its September quarter results, which beat on revenue but missed by $0.02 per share on EPS. Despite that mixed result, due in part to the August typhoon in Macau, the management team echoed comments from Las Vegas Sands (LVS) that it is seeing Las Vegas return to normalized activity levels as the impact of the Oct. 1 shooting fades.

This prompted MGM to issue current quarter guidance for its Las Vegas business that is down low to mid-single digits, far better than many had feared, given the events early in the quarter and led our shares to climb more than 5% on Wednesday. With regard to Macau, activity in Asia’s tourist and leisure capital has also bounced back and MGM confirmed its second property in the region will open late this coming January.

Stepping back, the company shared more on how it responded to the October shooting explaining that, along with other casino operators, it shut down all marketing channels, bringing them back online on Oct. 10. Since then, the company has seen the historical patterns of October — typically the strongest month in the quarter and one of the stronger ones during the year — take hold.

As we move past this relief rally and digest the current guidance, the company’s prospects in the short term will be facing continued spending to revamp several of its properties, as well as open its next Macau property in January. This opening will keep the recent stream of new or updated properties flowing following the acquisition of the Borgata Hotel Casino and Spa in August 2016 and the MGM National Harbor opening in December 2016; we expect it to continue as MGM re-opens its Monte Carlo property as the Park MGM.

There will also be some impact of time shifts, with the Las Vegas convention season in the first quarter of 2018. The company has already booked 80% of its convention room nights for 2018, which is great given that roughly 60% of its business is corporate in nature. It has a robust entertainment calendar at all of its arenas (Mandalay Event Center, MGM Grand Garden or T-Mobile Park Theatre) that should bode well for its hotel, restaurant, and gaming operations.

What this means, at least over the next few months, is that we will have to be patient with MGM shares as spending is curtailed, allowing the company’s operating strategy to flow through to the bottom line. Helping soften the would-be blow, earlier this week the company’s board approved the next quarterly dividend of $0.11 per share that will be paid on Dec. 15. On the earnings call, management reiterated that they remain committed not only to the current dividend but to increase it over time.

Here’s what we’re going to do with MGM shares… Following last week’s 5% move higher in MGM shares, we have roughly 13% upside to our $37 price target, but as discussed above, we see some short-term headwinds that will likely keep the shares range bound. As we move into 2018, we’ll look to revisit our $37 price target provided the company’s investments in new and existing properties wanes, which should enhance the company’s earnings and cash generation.

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

 

What’s expected from Applied Materials on Thursday?

On Thursday, after the market close, Applied Materials (AMAT) will be reporting its quarterly results. The results come on the heels comments made earlier in the current earnings season regarding growing chip demand due to the expanding roster of connected devices, artificial intelligence, gaming, data center expansion and China’s goal of building its own semiconductor capacity. We’ve also heard bullish display commentary from not only our own Universal Display (OLED), but also LG Display and Samsung as they increasingly focus on organic light-emitting diodes for smartphones, TVs and eventually other applications like automotive and general lighting.

Consensus expectations have Applied Materials achieving EPS of $0.91 on revenue of $3.94 billion for the quarter. We’ll also be reviewing the company’s backlog and book to bill metric for the quarter as we reassess our current $65 price target.

  • Heading into Applied Material’s (AMAT) earnings call on Thursday, our price target on the shares is $65.
  • Our price target on Universal Display (OLED) shares remains $200.

 

WEEKLY ISSUE: Some Underperformers Set to Come out from the Shadows

WEEKLY ISSUE: Some Underperformers Set to Come out from the Shadows

Monday was one of those sort-of holidays that saw banks, the post office and schools closed, but domestic stock markets and a number of other businesses open. The result was once again a more subdued start to the week that leads into what is poised to be a focal point for the stock market as 3Q 2017 earnings kickoff. Over the last several days, we saw through earnings from restaurant company Darden (DRI) and Cal-Maine Foods (CALM) and this week the negative 2017 reset from coatings company Axalta Coating Systems (AXTA). This tells me that not only has Wall Street underestimated the impact of September’s hurricane trifecta — a fact we saw in last Friday’s September Employment Report — but it has likely overestimated the current speed of the economy as well.

The next few days will give way to several economic reports that will more fully shine a light on the true speed of the economy, and they will help set the table for what is to come over the next few weeks as literally thousands of companies report. As subscribers, you know through our weekly Thematic Signals and our Cocktail Investing Podcast that I co-host with our Chief Macro Strategist Lenore Hawkins, we are constantly scrutinizing data points with our thematic lens and assessing the market.

Now let’s take a look at our overall market view, which is one of the key backdrops when it comes to investing – thematic or otherwise. As we shared on last week’s podcast, the domestic stock market continues to grind its way higher ahead of 3Q 2017 earnings. This march higher is being fueled in part by the return of investor greed as measured by CNNMoney’s Fear & Greed Index. The question we are increasingly pondering is what are those late to the party seeing that allows them to get comfortable with enough upside to now jump into a market that is trading at more than 19x expected 2017 earnings?

With the market priced to perfection and expectations running high, odds are we are bound to see some disappointment. The fact that margin debt is running at record levels is not lost on us here at Tematica, and it has the potential to exacerbate any near-term bump or pullback in the market.

This has us holding steady with the Tematica Select List, but it doesn’t mean we are being idle. Rather, we are scrutinizing contenders and revisiting price points at which we would scale into existing positions. Not quite our 2017 holiday shopping list, but one that as we approach Halloween could be ripe for harvesting.

 

 

Checking in on some of our outperformers

We’ve benefitted from this push higher as the Select List’s positions in LSI Industries (LYTS), Amplify Snacks (BETR), USA Technologies (USAT), Amazon (AMZN), Alphabet (GOOGL) and International Flavors & Fragrances (IFF) have outperformed the month to date move in the S&P 500. With USAT shares, this has them closing in on our $6.50 price target, while the others have ample upside to our respective price targets.

We continue to rate these stocks as follows:

  • Our price target on LSI Industries (LYTS) remains $10.00
  • Our price target on Amplify Snacks (BETR) remains $10.50
  • Our price target on Amazon (AMZN) remains $1,150
  • Our price target on Alphabet (GOOGL) remains $1,050

With USA Technologies (USAT) shares, we will continue to keep them on the Select List and as we reassess our Thematic Signals and other data points for additional upside to be had relative to our $6.50 price target.

The same is true with International Flavors & Fragrances (IFF), given the accelerating shift away from sugar toward food that is good for you vs. the modest upside to our current $150 price target.

 

It’s not all bad news for the underperformers however

While we like to focus on the outperformers, we tend to spend as much, if not more time, on the ones that are underperforming. Currently, that means shares of Costco Wholesale (COST), Nokia (NOK), MGM Resorts (MGM) and recently added United Parcel Service (UPS).

In reverse order, shares of Connected Society derivative company UPS shares came under pressure following comments that Amazon is once again flirting with expanding its own logistics business. While this may happen, it will take years to replicate the hub and spoke to home delivery service currently offered by UPS that is poised to benefit from the accelerating shift to digital commerce this holiday shopping season. We remain bullish on this position and expect the shares to rebound as we move into the 2017 holiday shopping season. We will look to scale into UPS shares closer to $110 should such a pullback in the shares emerges this earnings season.

Shares of Guilty Pleasure company MGM Resorts continue to languish following the recent Las Vegas shooting. In our view, it will take some time for the perception of the business to recover. As that time elapses, we’ll look to improve our cost basis following the better than expected August Nevada gaming data. Below $30 is where we are inclined to make our move, and our price target stands at $37.

We continue to see favorable data on 5G testing and deployments that bode very well for Nokia’s intellectual property business as well as its communications infrastructure business. Much like MGM shares we will be patient and look to opportunistically improve the cost basis on this Disruptive Technologies Select List position.

We have a more detailed look at Cash-Strapped Consumer company Costco down below, but as you’ll soon read we continue to favor the shares despite some concerning developments.

 

So, what’s up with Costco Wholesale?

As we mentioned above Costco is one of the recent underperformers and it comes following last week’s better than expected quarterly earnings results. The issue is that its the earnings call Costco shared that it is seeing a slowdown in membership rates, which Wall Street took to mean “Here comes Amazon!” While we agree that Amazon is set to continue disrupting traditional retail as it leverages Whole Foods into grocery and meal kits, and continues to focus on apparel, Costco’s issue is it opened 16 new warehouses during the first 9 months of its recently completed fiscal year, so odds are it would see some slowing in membership growth.

For those not convinced that Costco’s business is thriving we would point out the following:

  • September 2017: Net sales up 12%
  • August 2017: Net sales up 10.0% year over year with comparable stores sales up 7.3% (up 5.9% excluding gasoline prices and foreign exchange)
  • July 2017: Net sales up 8.8 percent year over year with comparable store sales up 6.2% (up 5.3% excluding gasoline prices and foreign exchange)
  • June 2017: Net sales up 7.0% year over year with comparable store sales up 6.0% (up 6.5% excluding gasoline prices and foreign exchange)

Looking at that data, we see Costco not only as a company that has continued to improve net sales month over month, but one that is hardly suffering the same fate as traditional brick & mortar retailers. Moreover, we would point out the company had 741 warehouses in operation during the August 2017 quarter, up from 715 a year ago. This led to a 13% increase in its high margin Membership Fee revenue, which accounted for nearly all of its net income during the quarter.

As we have said before, the power in Costco’s business model is the warehouses and membership fee income, and we see this continuing to be the case. As part of our Connected Society theme, we will continue to monitor consumer acceptance of delivered grocery. This includes Costco’s new two-day delivery services for both dry groceries and fresh foods that will be free for online orders exceeding $75 from 376 U.S. Costco stores. Unlike many brick & mortar retailers, Costco is not standing around and watching its competitors outflank it, rather it is responding. To us, this suggests the recent pullback is overdone.

  • We continue to have a Buy on Costco Wholesale (COST) shares, and our price target remains $190.

 

 

 

 

Amid a Las Vegas tragedy, remaining patient with MGM shares

Amid a Las Vegas tragedy, remaining patient with MGM shares

This morning shares of Guilty Pleasure company MGM Resorts (MGM) are under some pressure following the Las Vegas shooting that saw a gunman fire on a crowd of people at an outdoor country music festival. Reports are still being filed, but as of now, the current assessment is that at least 50 people were killed. Again, a tragic event outside of the Mandalay Bay Hotel, which is owned by MGM Resorts, but one that is likely not to be repeated.

As we’ve seen in the past these disruptions, while horrific, tend to only have a short-term impact on the stock, as things settling down to “normal” before too long. We see Las Vegas casinos likely amping up their already considerable security procedures in response, and tourist traffic returning to normal before too long.

Including today’s events, the MGM shares on the Tematica Investing Select List are down just under 2% since we added them in early June. We will remain patient with the position as we wait for the next round fundamental data – monthly gaming figures from Macau and Nevada.

  • Our price target on shares of Guilty Pleasure company MGM Resorts (MGM) remains $37
A little bit of financial engineering underway at MGM Resorts

A little bit of financial engineering underway at MGM Resorts

While many eyes have been focused the build up to today’s Apple (AAPL) event, Guilty Pleasure company MGM Resorts (MGM) has made some interesting moves. Recently the company adopted a $1 billion stock repurchase plan and announced it will sell the real estate of its National Harbor property to MGM Growth Properties (MGP), a real estate investment trust (REIT) that focuses on destination entertainment and leisure resorts. That property sale is estimated at $1.19 billion and should provide ample firepower for the new stock buyback plan at MGM Resorts.

Two quick observations – first, we see this piece of financial engineering as bringing added flexibility to MGM Resorts, while also adding some extra capital to the balance sheet. Second, generally speaking, we like stock buyback programs as they tend to increase our comfort level with a company hitting EPS expectations provided the company actually executes its stock repurchase plan. This morning MGM Resorts flexed its new buyback program by sharing it plans to buy 10 million shares from Tracinda, private investment corporation owned by the late Kirk Kerkorian and a significant owner of MGM shares. The transaction, which is expected to close later this week will shrink the outstanding share count by roughly 2%. Following the transaction, Tracinda’s position will be reduced to 8.3% of MGM’s outstanding shares and MGM will have roughly $627 million in buyback power remaining under this new authorization.

We see this as a solid start on executing this new buyback program. Should the company eventually complete this program at or near the current share price, it would shrink the outstanding share count by another 19 million shares or just over 3%.

We’d note this engineering falls below the company’s operating line, and as beneficial as they may be to the bottom line, as investors we still have to focus on the fundamentals. Our next set of monthly gaming revenue updates from Nevada as well as Macau will tell us how both the Mayweather vs. McGregor bout and Typhoon Hato helped or hindered things in August.

 

  • Ahead of those next updates, our price target on MGM Resorts remains $37, which offers just under 14% upside from current levels factoring in the current dividend yield of 1.3%.