Menu
Weekly Issue: Trade Meetings and Earnings Reshape Market Outlook

Weekly Issue: Trade Meetings and Earnings Reshape Market Outlook

Key points from this issue:

  • Earnings from Boeing (BA) and General Motors (GM) signal markets will trade day-to-day as trade meetings and earnings season heat up.
  • Our price target on Dycom Industries (DY) shares remains $125
  • Our AXTI price target remains $11.
  • Our price target on Nokia (NOK) shares remains $8.50
  • Our long-term price target for Farmland Partners (FPI) shares remains $12.
  • As we head into the seasonally strong second half of the year for United Parcel Service (UPS), our price target on the shares remains $130.

 

This week we’ve moved into the meaty part of 2Q 2018 earnings season, and so far, we’ve seen a number of companies beat top and bottom line expectations. Some market observers will point out that some 20%-25% of the S&P 500 group of companies are in that boat, and are declaring “victory” for the market. With today’s earnings from Boeing (BA) that and General Motors (GM), the market is trending lower as Boeing’s outlook falls short of Wall Street expectations while GM cut its outlook due to higher commodity prices. As you probably guessed, one of the culprits for GM is higher aluminum and steel prices.

My take on that is with 75%-80% of the S&P 500 yet to report, that claim while it could prove to right, it also could be a bit premature. As I shared with Oliver Renick, host at the TD Ameritrade Network a few days ago, we’ve only started to see the impact of initial trade tariffs and if the international dance continues we could see far more tariff jawboning put into action.

Consider a tweet from President Trump this morning that suggests a tariff follow through is possible.

 

 

But last night Trump tweeted a path forward to eliminating tariffs and other trade barriers between the Eurozone and the US ahead of his meeting today with the European Commission President Jean-Claude Juncker today to discuss trade, including tariffs on autos.

It would appear Trump is attempting to keep his negotiating opponents off balance in the hopes of improving trade relations from a US perspective. But it also seems that others have read Trump’s Art of the Deal by now as according to EU trade commissioner Cecilia Malmstrom, the Commission is also preparing to introduce tariffs on $20 billion of U.S. goods if Washington imposes trade levies on imported cars.

While I would love to see some forward progress coming out of these talks, but just like with China the probability is rather low in my opinion. Much like with the China trade talks, things have escalated so that both sides will be looking to claim some victory to report back to their countrymen and women.  This likely means that as we migrate over the next few weeks of earnings, we will have to continue to watch trade developments, especially if more recent and wider spread tariffs wind up being enacted.

With more on the earnings and trade to be had in the coming days, we should be ready for day-to-day moves in the market, which will make it challenging for traders and options players. As they struggle, we’ll continue to take a longer-term focus, heeding the signals to be had with our thematic investing lens. Now, let’s get to some updates and other items…

 

Checking in on 5G spending from Verizon and AT&T

With both Verizon Communications (VZ) and AT&T (T) reporting June quarter results yesterday, I sifted through their comments on several fronts but especially on 5G given our positions in mobile infrastructure and licensing company Nokia (NOK), specialty contractor Dycom (DY) as well as compound semiconductor company AXT Inc. (AXTI). The nutshell take is things remain on track as both carriers look to launch commercial 5G networks in the coming quarters.

Verizon delivered solid quarterly results, buoyed by its core wireless business that added 531,000 net retail postpaid subscribers, which included 398,000 postpaid smartphone net adds. We’ve talked about how sticky mobile service is with consumers as smartphones are increasingly a life link for their connected lives so it comes as little surprise that Verizon’s customer loyalty remains strong with the quarter marking the fifth consecutive period of retail postpaid phone churn at 0.80 percent or better.

In terms of capital spending, a figure we want to watch as Verizon gets ready to launch its commercial 5G network, the company shared its 2018 spend will be at the lower end of its previously guided range of $17.0-$17.8 billion. Now here’s the thing, the mix of spending will favor 5G, which confirms the bullish comment and tone we shared last week from Ericsson (ERIC) on the North American 5G market.

With AT&T, its net capital spending in the June quarter slipped to $5.1 million, down from roughly $6 million in the March quarter but the company shared it will spend roughly $25 billion in all of 2018. Doing some quick math, we find this spending is weighted to the back half of 2018, which likely reflects investments in its 5G network as well as the new first responder network, FirstNet, it is building. During the earnings call, management shared the company now has 5G Evolution in more than 140 markets, covering nearly 100 million people with a theoretical peak speed of at least 400 megabits per second with plans to cover 400 plus markets by the end of this year. In terms of true 5G, trials are progressing and AT&T is tracking to launch service in parts of 12 markets by the end of this year.

That network spend and 5G buildout bodes well for both our Dycom shares.

  • Our price target on Dycom Industries (DY) shares remains $125

 

In addition, a few days ago mobile chip company Qualcomm (QCOM) shared that its 5G antennas are ready from prime time. More specifically, Qualcomm is shipping 5G antennas to its device partners that include Samsung, LG, Sony (SNE), HTC and Xiaomi among others for testing. Moreover, Qualcomm said it stands ready for “large-scale commercialization” which likely means 5G devices are just quarters away instead of years away.

We’d note those device partners of Qualcomm’s mentioned above have all announced plans to bring initial 5G powered phones to market during the first half of 2019. That means the supply chain will be readying power amplifiers and switches that will enable these devices to communicate with the 5G networks, which bodes well for incremental compound semiconductor substrate demand at AXT. Because 5G is being viewed as an “access technology” that will move mobile broadband past smartphones and similar devices, I continue to see this as a positive for the higher margin licensing business at Nokia as well.

As a reminder, AXT will report its quarterly results after tonight’s market close, and expectations for its June quarter are clocking in at $0.08 per in earnings on $26.1 million in revenue, up 60% and roughly 11% year over year.

  • Our AXTI price target remains $11.
  • Our price target on Nokia (NOK) shares remains $8.50

 

Farmland Partners fights back

A few weeks ago, we shared not only our long-term conviction for Farmland Partners (FPI) shares but also prospects for continued drama in the coming months. Well, let’s say we’re not disappointed as this morning the company filed a lawsuit in District Court, Denver County, Colorado against “Rota Fortunae” (a pseudonym) and other entities who worked with or for Rota Fortunae in conducting a “short and distort” scheme to profit from the sharp decline in Farmland’s stock price resulting from false and misleading posting on Seeking Alpha. Farmland is seeking damages and injunctive relief for defamation, defamation by libel per se, disparagement, intentional interference with prospective business relations, unjust enrichment, deceptive trade practices, and civil conspiracy.

Are we surprised? No, especially since the Farmland management team signaled it would be moving down this path. While this will likely result in some incremental noise, we’ll continue to focus on the business and the long-term drivers of the agricultural commodities that drive it.

  • Our long-term price target for Farmland Partners (FPI) shares remains $12.

 

Paccar delivers on the earnings front, boosts its dividend

Tuesday morning, heavy and medium duty truck company Paccar (PCAR) delivered strong June quarter results, beating on both the top and bottom line. For the quarter, Paccar reported earnings of $1.59 per share, $0.16 better than the $1.43 consensus on revenues that rose more than 24% year over to year to $5.47 billion, edging out the $5.39 billion that was expected. The strength in the quarter reflects not only rising production and delivery levels that reflect the pick up in truck orders over the last 6-9 months, but also the ripple effect had on the company’s high margin financing business. Also too, as truck up time increases as does the number of Paccar trucks in service, we’ve seen a nice pick up in the company’s Parts business that carries premium margins relative to the new truck one.

During the quarter, Paccar repurchased 1.21 million of its common shares for $77.2 million, completing its previously authorized $300 million share repurchase program. The Board of Directors approved an additional $300 million repurchase of outstanding common stock earlier this month and given the current share price that is below that average repurchase price we suspect this new program will be put to use quickly. Also during the quarter, Paccar boosted its quarterly dividend to $0.28 per share from $0.25, and management reminded investors of the company’s track record of delivering quarterly and special dividends in the range of 45-55% of net income.

Given 111% year over year growth in the new heavy truck orders throughout the U.S. and Canada during the first half of 2018, we continue to be bullish on PCAR shares as we head into the second half of 2018. Even so, we’ll continue to analyze the monthly truck order data as well as freight indicators and other barometers of domestic economic activity to assess the continued strength in new truck demand. In the coming months, we expect long-time followers of Paccar will begin to focus on the potential year-end special dividend the company has issued more often than not.

  • Our price target on Paccar (PCAR) shares remains $80.

 

A quick note on United Parcel Service earnings

Early this morning, United Parcel Service (UPS) beat estimates by a penny a share, with an adjusted quarterly profit of $1.94 per share. Revenue beat forecasts, as well, boosted by strong growth in online shopping – no surprise to us given our Digital Lifestyle investing theme. UPS will host a conference call this morning during which it will update its outlook for the back half of the year, and that should help quantify the year over year growth in Amazon’s (AMZN) Prime Day 2018 ahead of its earnings report later this week.

  • As we head into the seasonally strong second half of the year for United Parcel Service (UPS), our price target on the shares remains $130.

 

 

Amazon shares some Prime Day results, Bullish 5G comments from Ericsson

Amazon shares some Prime Day results, Bullish 5G comments from Ericsson

Key points in this issue:

  • Our $1,900 price target for Amazon (AMZN) shares is under review with an upward bias.
  • Our price target on United Parcel Service (UPS) remains $130.
  • Our price target on Dycom (DY) shares remains $125.
  • Our price target on AXT Inc. (AXTI) shares is $11.
  • Our price target on Nokia (NOK) shares is $8.50.

 

Follow up on Prime Day 2018

As the dust settles on Amazon’s (AMZN) 2018 Prime Day, the company shared that not only did Prime members purchase more than 100 million products during the 36-hour event, but that it was also the “biggest in history.” While details were limited, this commentary like means the 2018 event handily eclipsed last year’s. Adding credence to that was the noted addition of Prime Day in Australia, Singapore, the Netherlands, and Luxembourg, which brought the total event country count to 17. It was also reported that Prime Day Sales on Amazon’s third-party marketplace were up some 90% during the first 12 hours of Prime Day this year.

All very positive, but still no clarity on the overall magnitude of the event relative to forecasts calling for it to deliver $3.4-3.6 billion in revenue. There was also no mention about the number of new Prime members that joined the Amazon flock, but historically Prime Day has led to a smattering of conversions and with it occurring in 17 countries this year, including four new ones, odds are Amazon continued to draw in new Prime users.

As we mentioned yesterday, our $1,900 price target for Amazon shares is under review with an upward bias. In looking at Prime Day from a food chain or ecosystem perspective, we see it benefitting the package volume for Tematica Investing Select List resident United Parcel Service (UPS). I’ll be looking for confirming data in comments from United Parcel Service when it reports its 2Q 2018 quarterly results on July 25 as well as any insight it offers on Back to School shopping and the soon to be upon us year-end holiday shopping season. Let’s also keep in mind that UPS will share those comments one day before Amazon reports its quarterly results on July 26.

  • Our $1,900 price target for Amazon (AMZN) shares is under review with an upward bias.
  • Our price target on United Parcel Service (UPS) remains $130.

 

Ericson’s 5G comments are positive for Dycom, AXT and Nokia shares

Also yesterday, leading mobile infrastructure company Ericsson (ERIC) reported its 2Q 2018 results, and while we are not involved in the shares, its comments on the 5G market bode very well for our the shares of specialty contractor Dycom Industries (DY) and compound substrate company AXT Inc. (AXTI) as well as mobile infrastructure and wireless technology licensing company Nokia (NOK).

More specifically, Ericsson called out that its sales in North America for the quarter increased year over year due to “5G readiness” investments across all of its major customers. This confirms the commentary of the last few weeks as AT&T (T) and Verizon (VZ) – both of which are core Dycom customers – move toward commercial 5G deployments in the coming quarters.

We’ve also heard similar comments from T-Mobile USA (TMUS) as well. But let’s remember that 5G is not a US-only mobile technology, and we are seeing similar signs of readiness and adoption for its deployment in other countries. For example, the top three mobile operators in South Korea are working to launch the technology in March 2019. Mobile operators in Spain are bidding on 5G spectrum, France has established a roadmap for its 5G efforts and recently the first end to end 5G call was made in Australia.

While the US will likely be the first market to commercially deploy 5G service, it won’t be the only one. This means similar to what we have seen with past mobile technology deployments such as 3G and 4G LTE, this global rollout will span several years. While Ericsson’s North American comments bode well for our DY shares, these other confirmation points keep us bullish on our shares of AXT and NOK as well.

  • Our price target on Dycom (DY) shares remains $125.
  • Our price target on AXT Inc. (AXTI) shares is $11.
  • Our price target on Nokia (NOK) shares is $8.50.

 

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

WEEKLY ISSUE: The Shakeout from Market Volatility on the Select List

 

 

It’s Wednesday, February 7, and the stock market is coming off one of its wild rides it has seen in the last few days. I shared my thoughts on the what’s and why’s behind that yesterday with subscribers as well as with Charles Payne, the host of Making Money with Charles Payne on Fox Business – if you missed that, you can watch it here.

As investors digest the realization the Fed could boost interest rates more than it has telegraphed – something very different than we’ve experienced in the last several years – the domestic stock market appears to be finding its footing as gains over the last few days are being recouped. Lending a helping hand is the corporate bond market, which, in contrast to the turbulent moves of late in the domestic stock market, signals that credit investors remain comfortable with corporate credit fundamentals, the outlook for earnings and the ability for companies to absorb higher interest rates.

My perspective is this expectation reset for domestic stocks follows a rapid ascent over the last few months, and it’s removed some of the froth from the market as valuations levels have drifted back to earth from the rare air they recently inhabited.

 

Among Opportunity This New Market Dynamic Brings, There Have Been Casualties

While this offers some new opportunities for both new positions on the Tematica Investing Select List as well as the opportunity to scale into some positions at better prices once the sharp swings in stocks have abated some, it also means there have been some casualties.

We were stopped out of our shares in Cashless Consumption investment theme company, USA Technologies (USAT) when our $7.50 stop loss was triggered yesterday. While the shares snapped back along with the market rally yesterday, we were none the less stopped out, with the overall position returning more than 65% since we added them to the Select List last April. For those keeping track, that compares to the 15.3% return in the S&P 500 at the same time so, yeah, we’re not exactly broken up over things. We will put USAT shares on the Tematica Contender List and look to revisit them after the company reports earnings tomorrow (Thursday, Feb. 8).

That’s the second Select List position to have been stopped out in the last several days. The other was AXT Inc. (AXTI) last week, and as a reminder that position returned almost 27% vs. a 15% move in the S&P 500. Again, not too shabby!

The last week has brought a meaningful dip in shares of Costco Wholesale (COST). On recent episodes of our Cocktail Investing Podcast, Tematica Chief Macro Strategist Lenore Hawkins and I have discussed the lack of pronounced wage gains for nonsupervisory workers (82% of the US workforce) paired with rising credit card and other debt. That combination likely means we haven’t seen the last of the Cash-Strapped Consumer investment theme — of the key thematic tailwinds we see behind Costco’s business. While COST shares are still up more than 15% since being added to the Select List, we see the recent 5% drop in the shares as an opportunity for those who remained on the sidelines before the company reports its quarterly earnings in early March.

  • Our price target on Costco Wholesale (COST) shares remains $200.

 

 

Remaining Patient on AMAT, OLED and AAPL

Two other names on the Tematica Investing Select List have fallen hard of late, in part due to the market’s gyrations, but also over lingering Apple (AAPL) and other smartphone-related concerns. We are referring to Disruptive Technologies investment theme companies Applied Materials (AMAT) and Universal Display (OLED). As we shared last week, it increasingly looks that Apple’s smartphone volumes, especially for the higher priced, higher margin iPhone X won’t be cut as hard as had been rumored. Moreover, current chatter suggests Apple will once again introduce three new iPhone models this year, two of which are slated to utilize organic light emitting diode displays.

Odds are iPhone projections will take time to move from chatter to belief to fact. In the meantime, we are seeing other smartphone vendors adopt organic light emitting diode displays, and as we saw at CES 201 TV adoption is going into full swing this year. That ramping demand also bodes for Applied Materials (AMAT), which is also benefitting from capital spending plans in China and elsewhere as chip manufacturers contend with rising demand across a growing array of connected devices and data centers.

  • Our price target on Apple (AAPL) remains $200
  • Our price target on Universal Display (OLED) remains $225
  • Our price target on Applied Materials (AMAT) remains $70

 

The 5G Network Buildout is Gaining Momentum – Good News for NOK and DY

This past week beleaguered mobile carrier, Sprint (S), threw its hat into the 5G network ring announcing that it will join AT&T (T), Verizon (VZ), and T-Mobile USA (TMUS) in launching a commercial 5G network in 2019. That was news was a solid boost to our Nokia (NOK) shares, which rose 15% last week. The company remains poised to see a pick-up in infrastructure demand as well as IP licensing for 5G technology, and I’ll continue to watch network launch details as well as commentary from Contender List resident Dycom Industries (DY), whose business focuses on the actual construction of such networks.

Several months ago, I shared that we tend to see a pack mentality with the mobile carriers and new technologies – once one makes a move, the others tend to follow rather than risk a customer base that thinks they are behind the curve. In today’s increasingly Connected Society that chews increasingly on data and streaming services, that thought can be a deathblow to a company’s customer count.

  • Our price target on Nokia (NOK) shares remains $8.50
  • I continue to evaluate upgrading Dycom (DY) shares to the Select List, but I am inclined to wait until we pass the winter season given the impact of weather on the company’s construction business.

 

Disney Offers Some Hope for Its ESPN Unit

Last night Disney (DIS) announced its December quarter results while the overall tone was positive, the stand out item to me was the announcement of the new ESPN streaming service being introduced in the next few months that has a price tag of $4.99 a month. For that, ESPN+ customers will get “thousands” of live events, including pro baseball, hockey and soccer, as well as tennis, boxing, golf and college sports not available on ESPN’s traditional TV networks. Alongside the service, Disney will unveil a new, streamlined version of the ESPN app, which is slated to include greater levels of customization.

In my view, all of this lays the groundwork for Disney’s eventual launch of its own Disney streaming content service in 2019, but it also looks to change the conversation around ESPN proper, a business that continues to lose subscribers. Not surprising, given that Comcast (CMCA) continues to report cable TV subscriber defections. One of the key components to watch will be the shake-out of the rights to stream live games from the major professional leagues — the NFL, Major League Baseball, the NBA. Currently, ESPN is on the hook for about $4 billion a year in rights fees to those three leagues alone — not to mention the rights fees committed to college athletics. Those deals, however, include only the rights to broadcast those games on cable networks or on the ESPN app to customers that can prove they have a cable subscription, not cord-cutters. So the question will be how quick will customers jump on board to pay $5 a month for lower-level games, or will they be able to cut deals with the major professional sports leagues to include some of their games as well.

Nevertheless, I continue to see all of these developments as Disney moving its content business in step with our Connected Society investing theme, which should be an additive element to the Content is King investment theme tailwind Disney continues to ride. With that in mind, we are seeing rave reviews for the next Marvel movie – The Black Panther – that will be released on Feb. 16. The company’s more robust 2018 movie slate kicks off in earnest a few months later.

  • We will continue to be patient investors with Disney, and our price target on the shares remains $125

 

 

 

Nokia: 5G paves the way for higher earnings

Nokia: 5G paves the way for higher earnings

 

Shares of Disruptive Technology company Nokia (NOK) are gapping up nicely this Thursday afternoon, following better than expected December quarter results, and favorable long-term guidance that reflects the pending ramp in 5G mobile technology. For the December quarter Nokia delivered EPS of $0.13 vs. the expected $0.11 and $0.12 in the year ago quarter. Despite a modest dip in revenue for the quarter, Nokia’s revenue for the final three months of the year came in ahead of expectations.

Breaking down the results across the Nokia’s two core businesses – Networks and Nokia Technologies – our core investment thesis on the shares that hinges on the IP licensing business was confirmed as both revenue and profits at Nokia Technologies soared during the quarter. Year over year Nokia Technologies revenue rose 79% year over year and profits rose 145% due primarily to new licensing agreements as well as catch up payments from licensees. With a gross margin of more than 90%, incremental wins like those had during the quarter tend to flow through to the company’s bottom line. During the fourth quarter 2017, Nokia Technologies entered into a multi-year patent licensing agreement with Huawei and received an arbitration ruling related to a contract dispute with BlackBerry.

With approximately 20,000 patent families, we see Nokia Technologies being well positioned to expand its licensing customer base as 5G networks move mobile connectivity beyond today’s smartphone-centric market into the connected home, connected car, wearables, and the industrial internet – in other words, the Internet of Things. We see this high margin business delivering meaningful EPS expansion in the coming quarters as 5G deployments gain momentum similar to past 3G and 4G rollouts.

One of the leading indicators that we’ll be watching for that expansion will be Nokia’s own networks business as well as that of others. We’ll also be listening to comments from AT&T (T), Verizon (VZ) and T-Mobile USA (TMUS), all of which are expected to begin 5G deployments later this year.

Sticking with Nokia’s Networks business, for the December quarter, currency moved against it, leading revenue to fall 4%; however, on a constant currency basis, revenue was up 2% year over year. For the coming year, Nokia sees the transition to 5G network deployments from 4G/LTE ones weighing on margins in 2018, but as those deployments scale and mature the company sees a more favorable financial impact in 2019 and 2020. We see the above comments about AT&T, Verizon and T-Mobile USA as confirming Nokia’s expectations.

This expected uptick in 5G is reflected in Nokia issuing longer-term guidance and the boosting of its divided points to the confidence in the pending upturn related to 5G. For 2018, Nokia is forecasting EPS of €0.23-€0.27 vs. €0.33 in 2017 rising to markedly to €0.37-€0.42 in 2020. In terms of its dividend, the company has proposed dividend of €0.19 per share for 2017, which is up considerably from the $0.02 per share paid for 2016. In terms of 2018 and beyond, management continues to target a dividend payout of between 40%-70% of EPS. What this likely means is as the Networks business turns up as 5G ramps and Nokia Technologies expands its reach, we are apt to see further increases in the company’s annual dividend.

While this position has been frustrating, the key with any business tied to cyclical spending is to catch the shares as the winds of spending are poised to blow harder driving revenue and earnings higher in the process. That’s what we see in the coming quarters for 5G, and that means being a patient investor with NOK shares.

  • Our long-term price target on Nokia (NOK) shares remains $8.50
Ahead of CES 2018, AT&T targets 5G in 2018. Another positive for NOK and AXTI shares

Ahead of CES 2018, AT&T targets 5G in 2018. Another positive for NOK and AXTI shares

Early this morning it was announced that AT&T (T) “will be providing 5G services in around 12 markets by late 2018” and “plans to add 3 million more locations to the AT&T Fiber network, for a total of 12.5 million locations across 82 metro areas by mid-2019.” This follows comments several weeks ago by T-Mobile USA’s (TMUS) CTO Neville Ray that it would look to deploy its own 5G network across the entire nation by 2020. At the time of the T-Mobile news, we shared the likelihood that AT&T and Verizon (VZ) would soon be putting their own 5G stakes in the ground, and that is what we are seeing today. Given the impact of 5G networks on our Disruptive Technologies and Connected Society investing themes, we are following these developments rather closely.

Whenever I heard of this big spending plans on networks, facilities or other forms of capital spending, my mind switches into detective mode and the first question tends to be: Who benefits?

In this case, it’s who benefits as AT&T opens the purse strings and spends on the network and as its competitors follow suit?

On the Tematica Investing Select List, we have existing positions in mobile infrastructure company Nokia (NOK), as well as AXT (AXTI) whose substrates are the core building block for wireless and fiber optic related semiconductors. Both stocks are trading up modestly today, but I’d note that given the winter storm that is pounding the Northeast today (believe me I know on this as I am huddled in a hotel room about 30 miles outside of Manhattan right now) trading volumes are rather lite.

As I shared in yesterday’s Tematica Investing, I expect to hear much more about 5G next week when CES 2018 is held. Heading into next week, I remain bullish on both Nokia and AXT shares, which have respective price targets of $11 and $8.50.

On the back of the AT&T news, we are eyeing bringing specialty contractor Dycom (DY) back into the Tematica Investing Select List fold. I say eyeing because as much as a positive as the 5G race will be for the company, the record low temperatures across the country and winter storm Grayson are likely to lead to some disruptions in the current quarter for Dycom and could thus push revenue from the first quarter into the second quarter. Once these probable disruptions are priced into DY shares, I’ll look to revisit them as well as other chip companies that are poised to benefit from incremental 5G demand, but must first contend with the seasonal slowdown in smartphone demand.

 

 

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

A few days ago in the Monday Morning Kickoff, I cautioned that over the coming days we would see a profound increase in data in the form of economic data and earnings. We are seeing just that as we head into the eye of the earnings storm today and tomorrow. For the Tematica Investing Select List that means results will be had from Connected Society company Facebook after today’s market close, followed tomorrow by Disruptive Technologies company Universal Display (OLED) and the latest addition – Apple (AAPL). Yes, after patiently keeping our eyes on Apple for some time, we finally added the shares back to the Select List given what we see as a robust 2018 for the company. If you missed our deep thoughts on that addition you can find it here, and below we’ve previewed what’s expected from these three companies.

We all know there are a number of factors that influence the market, and two of them – the Fed and prospects for tax reform – will be in full coverage today and tomorrow. This afternoon the Fed will break from its November FOMC policy meeting, and while next to no one expects the Fed to boost interest rates coming out of it, the focus will be the language used in the post-meeting statement. Last week’s stronger than expected 3Q 2017 GDP print of 3.0% — you can read Tematica’s take on that here – and Fed Chairwoman Janet Yellen’s likely status as a lame duck keep the prospects of a rate hike in December fairly high in our view.

Tomorrow, the highly anticipated tax reform bill is slated to be revealed, a day later than expected “because of continued negotiations over key provisions in the bill.” It’s being reported that issues still being negotiated include retirement savings and the state and local tax deduction — two key provisions that involve raising revenue to pay for the plan. As the bill’s details are released, we suspect many will be interested in proposed tax bracket changes and the potential economic impact to be had as well as near-term implications for the national debt. We will have more comments and thoughts on the proposed bill later this week as it, along with the tone of earnings to come, will influence the market’s move in the coming days.

 

A quick reminder on Amazon and Nokia plus boosting our Alphabet price target

Before we preview what’s to come later today and tomorrow, I wanted to remind you that last week, on the heels of Amazon destroying 3Q 2107 expectations, we boosted our price target for AMZN shares to $1,250 from $1,150, keeping our Buy rating intact. As expected, other investment banks and analysts did indeed up their rating and price targets as we move deeper into what is poised to be one of the busiest quarters in Amazon’s history. The wide consensus is that once again digital shopping will take consumer wallet share this holiday season. As Amazon benefits from that e-commerce tailwind following robust Prime membership growth in 3Q 2017, the company is also poised to see its high margin Amazon Web Services business continue to benefit from ongoing cloud adoption. In our view, this combination makes Amazon a force to be reckoned with this holiday season, especially since it remains the online price leader according to a new report from Profitero.

  • As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.
  • Our price target on Amazon is $1,250.

 

We also used the sharp sell-off in Nokia (NOK) shares to scale into that position as its high margin licensing business continues to perform as its addressable device market continues to expand. That addition helped improve our NOK cost basis considerably as we patiently wait for the commercial deployment of 5G networks that should goose its network infrastructure business. Hand in hand with those deployments, we should see even further expansion of Nokia’s licensing market expand as the connected car, connected home and Internet of Things markets take hold.

  • We continue to rate Nokia (NOK) shares Buy with an $8.50 price target.

 

Also last week, Alphabet (GOOGL) soared following the company’s 3Q 2017 results that crushed expectations and confirmed the company’s position in mobile. More specifically, the company delivered EPS of $9.57, $1.17 per share better than expected, as revenue climbed nearly 24%, year over year, to $27.77 billion, edging out the expected $27.17 billion.

Across the board, the company’s metrics for the quarter delivered positive year-over-year comparisons and in response, we are upping our price target to $1,150 from $1,050. Given its positions in search, both desktop and mobile, the accelerating shift in advertising dollars to digital platforms, and YouTube’s move into both streaming TV and proprietary programming, we continue to rate GOOGL shares a Buy.

  • We are upping our price target on Alphabet (GOOGL) shares to $1,150 from $1,050.

 

After today’s market close, Facebook will report its 3Q 2017 results

Following positive reports from Amazon, Alphabet and even Twitter (TWTR) that confirmed the accelerating shift to digital platforms for advertising and consumer spending, Facebook shares rallied in tandem over the last few days. This brings the year-to-date rise in the shares to more than 55% fueled in part by several investment banks upping their price targets and ratings for the shares. For now, our price target on FB shares remains $200.

Despite the better-than-expected results from those companies mentioned above, we have not seen any upward move in consensus expectations for Facebook’s 3Q 2017 results that will be reported after today’s market close. As I share this with you, those expectations for 3Q 2017 sit at EPS of $1.28 on revenue of $9.84 billion while those for the current quarter are $1.70 in earnings and $12 billion in revenue. On the earnings call, we’ll be looking not only for updated quarterly metrics but also updates on its monetization efforts and how its video streaming offering, Watch, is developing. We see Watch as a salvo against TV advertising given its 2 billion-and-growing user footprint across the globe. We also hope to hear more about Facebook’s virtual reality initiatives and its plan to expand the recently launched online food-ordering capability.

  • As Facebook continues to garner advertising dollars and flexes its platforms to gather more revenue and profit dollars, we are once again assessing potential upside to our $200 price target for this Connected Society company

 

Thursday brings Apple and Universal Display earnings

After tomorrow’s market close we receive earning from Disruptive Technology company Universal Display (OLED) and Connected Society company Apple (AAPL). There have been a number of positive data points to be had for our Universal Display shares over the last several weeks and they have propelled the shares higher by 13% over the last month. That latest move has brought the return on the OLED position that we have had on the Tematica Investing Select List since October 2016 to more than 175%. Patience, it seems, does pay off as does collecting and assessing our thematic signals.

In terms of 3Q 2017, consensus expectations call for the company to deliver EPS of $0.12 on revenue of $47.1 million. We’d remind subscribers the company has a track record of beating expectations and a favorable report this week from LG Display points to that as once again being likely tomorrow.

As noted by LG Display, “Shipments of big OLED TV panels have increased, as 13 manufacturers adopted our products…We plan to focus on investing in OLED products as part of our long-term preparation for the future” away from LCD displays. LG Display also shared it is planning to spend 20 trillion won to expand OLED production through 2020.

We see this rising capacity as bullish for our Universal shares as well as our Applied Materials (AMAT) shares given its display equipment business, but also as a signal that OLED display demand is poised to expand into other markets, including automotive.

  • Our price target on Universal Display shares remains $175.
  • Our price target on shares of Applied Materials (AMAT) remains $65.

 

With regard to Apple’s 3Q 2017 earnings, expectations have this Connected Society company reporting EPS of $1.87 on revenue of $50.8 billion. As we mentioned when we added the position, given the timing of both new iPhone model launches we are likely to see 3Q 2017 results get a pass as investors focus on the outlook for the current quarter. As I shared on Monday, our strategy will be to use any pullback in AAPL shares near the $140-$145 level to improve our cost basis for what looks to be a favorable iPhone cycle in 2018.

  • Our price target on Apple (AAPL) remains $200.
Using the drop in Nokia stock price to scale into shares

Using the drop in Nokia stock price to scale into shares

 

KEY POINTS FROM THIS ALERT:

  • We are using yesterday’s post-earnings fall in Nokia (NOK) shares to scale into the position and dramatically improve our cost basis for our original NOK position we added on September 18, 2017.
  • We continue to rate the shares a Buy and our long-term price target remains $8.50.

Following yesterday’s sharp drop in the shares of Disruptive Technology investment theme company, Nokia that occurred despite the thesis confirming earnings report, we are scaling into NOK shares this morning to improve our cost basis. We see strong medium to longer-term opportunities associated with 5G deployments and expanding base for Nokia intellectual property business beyond smartphones. We previously shared we would look to scale into the shares below $5.50 and we are doing just that today as the shares opened at $4.99 per share

We will continue to be opportunistic in building out the Tematica Select List’s exposure to Nokia in the coming weeks, provided we are able to improve our average cost basis for the shares amid confirming data points for its respective businesses.

  • We are issuing a second buy signal on Nokia (NOK) shares, which opened this morning at $4.99 per share.
  • Our price target on Nokia (NOK) shares remains $8.50 and our rating a Buy.

 

 

Breaking down earnings from AXT, Nokia and UPS, plus thoughts on Amplify Snacks

Breaking down earnings from AXT, Nokia and UPS, plus thoughts on Amplify Snacks

We are officially in the thick of earnings season with reports from AXT Inc. (AXTI) last night, and both Nokia (NOK) as well as United Parcel Service (UPS) this morning. Below we have comments on the better than expected results from AXT, share why we are going to be patient with Nokia shares for the long-term and how United Parcel Service confirms out thesis on the shares. We also have some thoughts on the recent share price pressure in Amplify Snacks (BETR), and explain why Amazon’s (AMZN) comments and outlook on its Whole Foods business are what we’ll be watching next for this position.

 

Many positives in AXT’s 3Q 2017 earnings report and outlook

Last night compound semiconductor substrate and Disruptive Technology company AXT (AXTI) reported 3Q 2017 top and bottom line results that handily beat consensus expectations and delivered an in-line view on the current quarter. This popped the shares some 7% in aftermarket trading last night and sees the shares trading up nicely today.

More specifically, AXT delivered EPS of $0.11, $0.02 better than the consensus and up dramatically from $0.07 in the year-ago quarter on revenue that rose 29% compared to 3Q 2017. Higher substrate volumes revealed the operating leverage in the company’s business model and led gross margins to soar to 39.5% in the quarter, up from 30.8% in the prior quarter. Other factors aiding the margin comparisons included raw material prices and vendor consolidation as well as product mix, both of which help margins in the coming quarters.

In terms of its outlook for the current quarter, AXT guided revenue and EPS in the ranges of $26-$27 million and $0.07-$0.09, respectively, which compares with the consensus forecast of $26.6 million in revenue with EPS of $0.08. What’s not obvious in those ranges is expected growth at the midpoint of 22% and 47%, respectively. The current quarter, as well as the next one, tend to reflect the seasonal downtick compared to the third quarter 3Q 2017, which tends to house the RF semiconductor ramp for year-end smartphone sales. Given new smartphone models, continued growth in data traffic that is leading further data center investment, and new solar panel applications the outlook for continued year over year growth at AXT remains more than favorable.

For example, Audi and BMW are using solar panels on certain new models to provide power to the vehicle’s climate control system fan without ruining the battery, even when the vehicle is turned off. In addition, Audi and Alta Devices recently announced their partnership to integrate solar cells into panoramic glass roofs of Audi models to generate solar energy that increases the range of Audi electric vehicles. The first of these car prototypes are expected to by the end of this year, and the solar cells utilize compound semiconductor technology that is built on AXT’s substrates.

In the data center arena, companies such as Microsoft (MSFT), Intel (INTC), Cisco (CSCO), Broadcom (AVGO) and a number of others are driving the adoption of silicon photonics to drive data rates of 100 gigabits per second or better. This adoption bodes well for AXT’s higher margin indium phosphide substrates.

Recognizing the seasonal downturn we will face in the coming months, we will continue to be patient with AXTI shares.

  • Our price target on AXT (AXTI) shares remains $11, which for now keeps the shares a Buy at current levels.
  • With regard to that rating, we’ll be watching the $9.90 level, which offers roughly 10% upside to our price target.

 

Nokia: The market focuses on network infrastructure, but it’s the licensing business that matters.

Early this morning Nokia (NOK) reported 3Q 2017 results of €0.09 per share in earnings, €0.03 ahead of expectations even though overall revenue fell 7% year over year to €5.54 billion, a hair shy of the €5.64 billion consensus forecast. In trading today, Nokia shares are getting hit hard given the guidance that calls for continued declines in its Networks Business. We are not surprised by this guidance as we continue to wait for deployments of 5G technology in 2018-2020. Despite that shortfall, continued focus on cost in the Networks Business, as well as ongoing customer wins bode well for the business as the 5G ramp begins.

What we found as rather confirming was the continued growth in its high margin Nokia Technologies business, which rose to 9% of 3Q 2107 sales and 22% of 3Q 2018 gross profits up from 6% and 15%, respectively, in the year-ago quarter. Despite the overall revenue shortfall for Nokia in 3Q 2017, Nokia Technologies led the company’s consolidated margins higher and drove the EPS upside in the quarter. In other words, our thesis behind owning NOK shares was confirmed in this morning’s earnings report. As 5G and other technologies contained in the company’s intellectual property arsenal matriculate in the coming quarters, we see continued improvement ahead for this business and that bodes well for the company’s overall margin and EPS generation.

One of our key strategies has been to use share price weakness to scale into a position on the Tematica Select List provided the underlying investment thesis remains intact. As we saw in Nokia’s 3Q 2017 earnings report, that is the case. As we look for that opportunity, we’d note that Nokia’s Board of Directors plans to propose a dividend of EUR 0.19 per share for 2017, which if history holds will be paid in the first part of 2018. Given the current share price, that is a hefty dividend yield to be had and adds both a layer of support to the shares and adds to the total return to be had.

  • Our price target on Nokia (NOK) shares remains $8.50

 

Quick thoughts on UPS’s 3Q 2107 results

With United Parcel Service (UPS), the results and outlook were in line what we expected and simply put the company’s outlook simply reinforces our shift to digital commerce predicated thesis on the shares. Case in point, UPS sees:

  • Record holiday delivery of about 750 million packages,
  • Deliveries between Black Friday and New Year’s Eve forecasted to increase 5% from 2016
  • 17 of 21 holiday delivery days before Christmas to exceed 30 million packages each.

This latest forecast echoes what we’ve already heard about this holiday shopping season from the National Retail Federation, E-Marketer, and others.

We’ll dig through the UPS’s earnings call in greater detail, but what we’ve heard thus far along with a price increase slated for December 24th keeps our Buy rating and $130 price target intact. As we do that, we’ll also be looking at Amazon’s forecast for the current quarter and its comments on the holiday shopping season.

  • Our price target on United Parcel Service (UPS) share remains $130.

 

Shares of Amplify Snacks under pressure, but Amazon/Whole Foods will be the guide

Finally, our Amplify Snacks (BETR) shares have been under pressure this past week. On the news front, things have been rather quiet and the shares could be coming under pressure as institutional investors being their tax loss selling. We’ll look for confirmation on our thesis – consumers shifting toward food and snacks that are “healthy for you” in quarterly results out tonight from Amazon (AMZN) as it discusses recent performance and its outlook for recently acquired Whole Foods. As we do this, we’ll also be revisiting the dollar’s recent run-up and what it could mean for Amplify given its growing exposure to markets outside of the U.S.

With the shares approaching oversold levels, we are keeping a close eye on the shares. As we mentioned above with Nokia, we certainly like to improve our cost basis provided our investment thesis remains intact.

Investing herd continues to catch up to us

Investing herd continues to catch up to us

Over the weekend I was doing my usual reading and noticed our positions in both Costco Wholesale (COST) and Applied Materials (AMAT) received favorable mentions in Barron’s. I always say it’s nice to see the herd catching up to what we’ve been seeing and saying, and these two articles are just the latest. As we shared in this week’s Monday Morning Kickoff, we are heading hip deep into 3Q 2017 earnings season. Thus far, we have been observers, but that will change this week when a number of companies on the Tematica Investing Select List report their quarterly results and update their outlook for the current quarter.

 

Costco Wholesale – Oppenheimer misses the real EPS generator

In Costco: 5 Reasons to Load Up digs into Oppenheimer’s Buy rating on COST shares and its $185 price target, which is in line with our price target. Candidly, while we agree with several of the presented points, we find it somewhat confounding that Costco’s continued footprint expansion, a key driver of very profitable membership fee income was not mentioned. While we could chalk it up to not really understanding how the company derives its overall profits and EPS, we’ll take the high road and say they did focus on reasons why the recent pullback in COST shares due to the perception of e-commerce threats is overblown.

 

 

Applied Materials – Semi-cap is strong, but let’s not forget about Display

Turning to Applied Materials, it was included in 4 Cheap Stock Picks for the Impatient article even though AMAT shares have been on a tear throughout 2017. The article rightly discussed one of the key drivers of rising semiconductor capital equipment demand:

It bodes well that China is rapidly building a chip industry, and must stock its factories with new machines, while new applications, including artificial intelligence and machine learning, are expanding the world-wide market for chips.

But, the article failed to mention the growing demand for Applied’s Display Business that is benefitting from the ramp in organic light emitting diode displays, which is also benefitting our Universal Display (OLED) shares. With both businesses firing, and following an upbeat outlook from semi-cap competitor Lam Research (LRCX), we remain bullish on AMAT shares. Our price target now stands at $65, but we suspect that as demand for its products continues to climb in 2018 there is likely another price increase to be had in the coming months.

  • Our price target on Applied Materials (AMAT) shares is $65.
  • Our price target on Universal Display (OLED) shares is $175.

 

This week’s earnings calendar

As I mentioned above, we are no longer passive observers this earning season as we have 6 companies on the Tematica Select List reporting this week. Here’s a quick rundown of when those companies will report and current consensus expectations. As you might expect, we’ll have color commentary on these reports, especially those that require us to take any action.

Tuesday, October 24

Corning (GLW; Disruptive Technology) – Consensus expectations call for this glass company that serves display and fiber markets to deliver EPS of $0.41 on revenue of $2.6 billion. Our price target is $37.

 

Wednesday, October 25

AXT Inc. (AXTI; Disruptive Technologies): Consensus expectations call for the RF semiconductor and fiber building block company to deliver EPS of $0.09 on $27 million in revenue. Our price target is $11

 

Thursday, October 26

Alphabet (GOOGL; Asset-Lite) – Consensus expectations have this internet search and digital advertising company earnings EPS of $8.33 on revenue of $27.2 billion for the quarter. Our price target is $1,050.

Amazon (AMZN; Connected Society) – Consensus expectations for the company we consider the poster child for thematic investing to deliver EPS of $0.03 on revenue of $42 billion, up almost 29% year over year. Our price target is $1,150.

Nokia Corp. (NOK: Asset-Lite – Consensus expectations have this wireless infrastructure, connected device and intellectual property company earnings EPS of $0.06 on revenue of $6.35 billion for 3Q 2017. Our price target stands at $8.50.

United Parcel Service (UPS; Connected Society) – This e-commerce delivery solutions company is slated to deliver EPS of $1.45 on revenue of $15.6 billion. Our price target on UPS shares remains $130.

 

 

BlackBerry’s accelerating transition lands it on the Tematica Contender List

BlackBerry’s accelerating transition lands it on the Tematica Contender List

We’re adding a new name to the Tematica Investing Contender List today, and it’a one that you may have heard something about before – BlackBerry (BBRY).

As you read that sentence there is a distinct probability that you said “huh?” or something similar to yourself or the person next to you.

Yes, we said BlackBerry, as in the company that was once the dominant smartphone manufacturer until it was outflanked by Apple (AAPL) with the iPhone, which as we all know revolutionized the smartphone industry. Back in the day, we had BlackBerry’s named device and while it was ahead of the competitors when it came to email, the reality was  the device had a horrible internet browser, a click wheel that made maneuvering around the screen challenging to say the least and its phone capabilities paled in comparison to other mobile phones at the time. In short, it was ripe for disruption and Apple did just that.

All of this helps explain the “huh?” reaction you likely had.

Here’s the thing, one of the traps that investors fall into is thinking things remain the same at companies. Sometimes that is true, and we’re seeing as part of the reason activist investor Nelson Peltz was gunning for a seat on the board of Proctor & Gamble (PG) – more on this is another post. In the case of BlackBerry, it has been a turnaround in the making that has spanned several years with revenue falling from $6.8 billion in 2014 to $1.05 billion for the 12 months ending this past August.

Now, this is where things start to get interesting because during that time period the company managed to not only shrink its bottom line losses from $1.99 per share in 2014, over the last 12 months it delivered EPS of $0.13. Current consensus expectations sit at $0.06 per share for the current year, rising to $0.08 next year even as revenue is forecasted to decline further. From a stock perspective, this means the shares are still uber expensive even if we back out the roughly $3.00 per share the company has in net cash. That’s one reason why the shares are only making it onto the Contender List, and I’ll share a few more before too long.

The nagging question is what is driving the bottom line improvement even as revenue is expected to fall further over the coming quarters?

It’s the transition in the business model from hardware to software services, which carry richer gross margins, and focuses on security. This transition brought BlackBerry back onto our radar screens as part of our Safety & Security investment theme. As we all know in reading the headlines, there isn’t likely to be any slowdown in the speed of cyber-attacks, and this is helping fuel BlackBerry’s transition. In the recently reported August quarter, its software services business accounted for just under 80% of overall revenue vs. 44% in the year-ago quarter. To show the power of that transition, gross margins in the recently completed August quarter rose to nearly 74% vs. 29% in the year-ago quarter. Lending a helping hand, the comparatively lower margin device business fell to just $16 million in revenue vs. $105 million in the August 2016 quarter. This accelerating transition helps explain why BBRY shares have climbed 15% over the last three months vs. 6.6% for the Nasdaq Composite Index and 5.3% for the S&P 500.

As this transformation continues, another item to watch at BlackBerry is its embedded software business, a key part of our Asset-Lite investment theme.  The initial licensing focus for BlackBerry has been in the automotive industry with regard to autonomous cars. Recently Delphi Automotive (DLPH) announced that it chose BlackBerry QNX for its Centralized Sensing Localization and Planning platform, which is a fully integrated autonomous driving solution. Given our recent Cocktail Investing Podcast with Audi on prospects for autonomous cars, we know this is a development that still has several years to go until it is ready for prime time. That said, the win for BlackBerry at Delphi is certainly encouraging.

Finally, BlackBerry has had some success leveraging its licensing business, which includes software licensing, intellectual property licensing, and technology licensing. As we know given the position in Nokia (NOK) on the Tematica Investing Select List, licensing businesses tend to carry very favorable margins, but it’s also one that moves in fits and starts not a smooth, continuous line. We also know that it’s a business that takes time to convert prospects and opportunities into revenue and profits, and in the case of BlackBerry, there are others such as Qualcomm (QCOM), InterDigital (IDCC) and Nokia that have competing licensing businesses. This means we’re not apt to see leaps and bounds of improvement with this Blackberry business in a short period of time, but more likely periodic wins.

The bottom line is that BlackBerry’s transition to a Safety & Security and Asset Lite Business Model is accelerating, it has yet to really reap the rewards on its bottom line. With the shares currently trading at 142x expected 2018 earnings and well into overbought territory, we are going to place BBRY shares on the Contender List and watch for either a pullback in the shares to $8 to $9 at which they have support or signs its EPS generation is poised to accelerate in a meaningful manner over the coming quarters.