Does Katzenberg’s Quibi and its $100M in ad sales signal a streaming bubble?

Does Katzenberg’s Quibi and its $100M in ad sales signal a streaming bubble?

As we get ready to enter the second half of 2019, we will see several streaming video services launching, including the high profile ones from Disney and Apple, with more to follow in the coming quarters. No surprise as consumers flock to that aspect of our Digital Lifestyle investing theme, preferring to watch what they want, when they want on the device they want.

The question we are thinking through is how long until we see the once quality content filled streaming services become the new cable – filled with subpar programming and in some cases ads?

It seems every week there is a new streaming video service with recent ones including the ability to watch Broadway shows and short-form programming. An example of the latter is Quibi by Jeffrey Katzenberg, one of the former Disney Hollywood wonders, and in a world of other streaming services as well as short-form videos from Snap, Twitter, Facebook and Instagram, the Tematica jury is out on its success.

What’s interesting in the price point at $7.99 for an ad-free subscription, which is less than the $6.99 starting price for Disney+. That same $6.99 starting price was one of the factors that led Comcast to rethink its own streaming service in favor of selling its stake in Hulu to Disney.

The bottom line is we’ve seen these rushes in the past, and invariably there is a shakeout that will washout a number of entrants looking to capitalize on the trend.

Quibi, the short-form video platform founded by Jeffrey Katzenberg, hasn’t even launched, but has already booked $100 million in advertising sales, according to a report from The WSJ this morning. The company, which aims to cater to younger viewers with premium content chopped up into “quick bites,” says it has already booked advertisers, including Protector & Gamble, Pepsi Co., Anheuser-Busch InBev, Walmart, Progressive and Google.

It still has around $50 million in unsold ad inventory ahead of launch.

It’s hard to imagine how a service like Quibi will compete in a market dominated by paid streamers like Netflix and free services like YouTube — both preferred by a younger demographic. But Quibi has been raising massive amounts of money to take them on. In May, it was reported that Quibi was going after another billion in funding, on top of the billion it had already raised.

Beyond the industry’s big bet on Katzenberg himself, Quibi has booked big-name talent, including Steven Spielberg and Guillermo del Toro, and is filming a show about Snapchat’s founding, which may draw in millennial viewers.

But it sounds like Quibi may also be relying on gimmicks — like Spielberg’s horror series that you can only watch at night (when it’s dark outside). Not to mention the very idea that Quibi thinks it’s invented a new kind of media that falls between today’s short-form and traditional TV-length or movie-length content found elsewhere.

On Quibi, shows are meant to be watched on the go, through segments that are around 7 to 10 minutes long. Some of the content will be bigger, more premium productions, while others will be more akin to what you’d find on cable TV or lower-cost daily news programming.

The service will launch April 6, 2020 with two tiers. A $4.99 per month plan includes a pre-roll ad before each video segment. The ad is 10 seconds if the video is less than 5 minutes, and it’s 15 seconds for any videos between 5 and 10 minutes. Some ads themselves will tell “brand stories” throughout the program breaks.

A $7.99 per month tier offers an ad-free experience.

Source: Jeffrey Katzenberg’s streaming service Quibi books $100M in ad sales ahead of launch | TechCrunch

Kraft Heinz agrees to buy paleo company Primal Kitchen

Kraft Heinz agrees to buy paleo company Primal Kitchen

We have seen a growing number of food and beverage companies acquiring businesses to help reposition their offering to include healthy, natural and good for you food. Kraft Heinz is joining a group that includes Hershey, Kellogg, PepsiCo, and Coca-Cola among others as they look to rise the tailwinds associated with our Clean Living investing theme.

With the Kraft Heinz purchase of Primal Kitchen, we’d note the valuation of 4x sales, which helps explain why Kraft Heinz is also launching a venture arm, Springboard, that will work with food start-ups that we suspect will also be in tune with our Clean Living investing theme.

Kraft Heinz said Thursday it plans to buy paleo condiment and dressing company Primal Kitchen for about $200 million, as the ketchup maker looks for a platform to help compete against upstart brands.

Primal Kitchen is expected to generate about $50 million in revenue this year, Kraft Heinz said. The deal is expected to be completed in early 2019.

Primal Kitchen was founded by food blogger Mark Sisson, who started “Mark’s Daily Apple” in 2006 and has written a number of diet and exercise books. The company makes paleo-friendly products including mayo, avocado oil and dressings. It says its products are without processed or artificial ingredients, added sugars, soybean or canola oils.

Paleo diets focus on foods that were available in the Paleolithic era, like nuts, seeds, lean meats and vegetables. The idea, which has gained a strong following in recent years, is that the human body is best suited to eat the foods that early humans ate rather than the modern diet, which includes processed foods.

Kraft Heinz has begun to follow the playbook written by many of its peers seeking growth as eating habits change. For most Big Food companies, it is hard to duplicate the innovation and culture necessary to create the same success seen by younger brands like Kind Bar.

As such, Kraft Heinz joined other Big Food brands this year in launching a venture arm, Springboard, to partner with food start-ups.

Using Primal Kitchen as a platform would also echo a strategy that others have employed, to varying degrees of success. Kellogg has said it wants to use its $600 million acquisition of RXBar as a platform and Hershey is looking at its acquisition of Amplify Brands as a platform for its growing suite of snack brands.

Source: Kraft Heinz agrees to buy paleo mayo and dressing company Primal Kitchen

Weekly Issue: We aren’t out of the woods just yet

Weekly Issue: We aren’t out of the woods just yet

Key Points from this Issue:

  • We are downgrading Universal Display (OLED) shares from the Thematic Leaders to the Select List and cutting our price target to $125 from $150. In the coming days, we will name a new Thematic Leader for our Disruptive Innovators investing theme.
  • Given the widespread pain the market endured in October, Thematic Leaders Chipotle Mexican Grill (CMG), Del Frisco’s (DFRG), Axon Enterprises (AXXN), Alibaba (BABA) and Netflix (NFLX) were hit hard; however, the hardest hit was Amazon (AMZN).

 

This week we closed the books on the month of October, and what a month it was for the stock market. In today’s short-term focused society, some will focus on the rebound over the last few days in the major domestic stock market indices, but even those cannot hide the fact that October was one of the most challenging months for stocks in recent memory. In short, the month of October wiped out most the market’s year to date gains as investors digested both September quarter earnings and updated guidance that spurred a re-think in top and bottom line expectations.

All told, the Dow Jones Industrial Average fell 5.1% for the month, making it the best performer of the major market indices. By comparison, the S&P 500 fell 6.9% in October led by declines in eight of its ten subgroups. The technology-heavy Nasdaq Composite Index dropped 9.2% and the small-cap focused Russell 2000 plummeted 10.9%. That marked the Nasdaq’s steepest monthly drop since it posted a 10.8% fall in November 2008. The month’s move pulled the Russell 2000 into negative territory year to date while for the same time period both the Dow and S&P 500 closed last night up around 1.5%.

We are just over halfway through the September quarter earnings season, which means there are ample companies left to report and issue updated guidance. Candidly, those reports could push or pull the market either higher or continue the October pain. There are still ample risks in the market to be had as the current earnings season winds down. These include the mid-term elections; Italy’s next round of budget talks with Brussels; upcoming Trump-China trade talks, which have led to another round of tariff preparations; and Fed rate hikes vs. the slowing speed of the global economy.

Despite the very recent rebound in the stock market, CNN’s Fear & Greed Index remains at Extreme Fear (7) as I write this – little changed from last week. What this likely means is we are seeing a nervous rebound in the market, and it will likely some positive reinforcement to make the late October rebound stick. As we navigate that pathway to the end of the year, we will also be entering the 2018 holiday shopping season, which per the National Retail Federation’s annual consumer spending survey should rise more than 4% year over year.

This combination of upcoming events and sentiment likely means we aren’t out of the woods just yet even though we are seeing a reprieve from the majority of October. As is shared below, next week has even more companies reporting than this week as well as the midterm elections. The strategy of sitting on the sidelines until the calmer waters emerge as stock prices come to us is what we’ll be doing. At the right time, we’ll be adding to existing positions on the Thematic Leaders and Thematic Select List as well as introducing new ones.

Speaking of the Thematic Leaders and the Select List, as the mood shifts from Halloween to the year-end shopping season,  we have several companies including Amazon (AMZN), United Parcel Service (UPS), Costco Wholesale (COST), Del Frisco’s Restaurant Group (DFRG), McCormick & Co. (MKC) and Apple (AAPL) among others that should benefit from that uptick in holiday spending as well as our Digital Lifestyle, Living the Life and Middle-class Squeeze investing themes in the next few months.

 

UPDATES TO The Thematic Leaders and Select List

Given the widespread pain the market endured in October, we were not immune to it with the Thematic Leaders or companies on the Tematica Select List. Given the volatility, investor’s nerves it was a time of shoot first, ask questions later with the market – as expected – trading day to day based on the most recent news. I expect this to continue at least for the next few weeks.

The hardest hit was Amazon, which despite simply destroying September quarter expectations served up what can only be called a conservative forecast for the current quarter. For those that didn’t tune in to the company’s related earnings conference call, Amazon management flat out admitted that it was being conservative because it is too hard to call the second half of the quarter, which is when it does the bulk of its business during the frenetic holiday shopping season. I have long said that Amazon shares are one to hold not trade, and with the move to expand its private label product, move into the online pharmacy space as well as continued growth at Amazon Web Services, we will do just that. That conservative guidance also hit United Parcel Service (UPS) shares, but we see that as a rising tide this holiday season as digital shopping continues to take consumer wallet share this holiday shopping season.

Both Chipotle Mexican Grill (CMG), Del Frisco’s (DFRG), Axon Enterprises (AXXN), Alibaba (BABA) and Netflix (NFLX) have also been hit hard, and I’m waiting for the market to stabilize before scaling into these Thematic Leader positions. As we’ve moved through the current earnings season, comments from Bloomin’ Brands (BLMN), Del Taco (TACO), Wingstop (WING), Habit Restaurant (HABT) and others, including Chipotle, have all pointed to the benefit of food deflation. Chipotle’s Big Fix continues with progress had in the September quarter and more to be had in the coming ones. Del Frisco’s will soon report its quarterly results and it too should benefit from a consumer with high sentiment and lower food costs.

With Axon, the shares remain trapped in the legal volley with Digital Ally (DGLY), but as I pointed out when we added it to the Leaders, Axon continues to expand its safety business with law enforcement and at some point, I suspect it will simply acquire Digital Ally given its $30 million market cap. Turning to Alibaba (BABA) and Netflix (NFLX), both have been hit hard by the downdraft in technology stocks, with Alibaba also serving as a proxy for the current US-China trade war. In my opinion, there is no slowing down the shift to digital streaming that is driving Netflix’s business and its proprietary content strategy is paying off, especially outside the US where it is garnering subscriber growth at price points that are above last year’s levels. This is one we will add to as things settle down.

The same is true with Alibaba – there is no slowing down the shift to the Digital Lifestyle inside of China, and as Alibaba’s other business turn from operating losses to operating profits, I expect a repeat of what we saw with Amazon shares. For now, however, the shares are likely to trade sideways until we see signs of positive developments on trade talks. Again, let’s hang tight and make our move when the time is right.

 

Downgrading Universal Display shares to the Select List

Last night Thematic Leader Universal Display (OLED) reported rather disappointing September quarter results that fell well short of expectations and guided the current quarter below expectations given that the expected rebound in organic light emitting diode materials sales wasn’t ramping as expected despite a number of new smartphones using organic light emitting diode displays. On the earnings call, the company pointed out the strides being had with the technology in other markets, such as TV and automotive that we’ve been discussing these last few months but at least for the near-term the volume application has been smartphones. In short, with that ramp failing to live up to expectations for the seasonally strongest part of the year for smartphones, it speaks volumes about what is in store for OLED shares.

By the numbers, Universal now expected 2018 revenue in the range of $240-$250, which implies $63-$73 million for the December quarter vs. $77.5 million for the September quarter and $88.3 million in the year-ago one. To frame it another way, that new revenue forecast of $240-$250 million compares to the company’s prior one of $315- $325 million and translates into a meaningful fall off vs. 2017 revenues of $335.6 million. A clear sign that the expected upkeep is not happening as fast as was expected by the Universal management team. Also, too, the first half of the calendar year tends to be a quiet one for new smartphone models hitting shelves. And yes, there will be tech and consumer product industry events like CES, CEBIT, and others in 2019 that will showcase new smartphone models, but candidly we see these new models with organic light emitting diode displays as becoming a show-me story given their premium price points. Even with Apple (AAPL) and its September quarter earnings last night, its iPhone volumes were flat year over year at 46.9 million units falling short of the 48.0 million consensus forecast.

In my view, all of this means the best case scenario in the near-term is OLED shares will be dead money. Odds are once Wall Street computes the new revenue numbers and margin impact, EPS numbers for the next few quarters will be taken down and will hang on the shares like an anchor. Given our cost basis in the shares near $101, and where the shares are likely to open up tomorrow – after market trading indicates $95-$100, down from last night’s closing price of $129.65 – we have modest downside ahead. Not bad, but again, near-term the shares are likely range bound.

Given our long-term investing style and the prospects in markets outside of the smartphone, we’re inclined to remain long-term investors. That said, given the near-term headwinds, we are demoting Universal Display shares from the Thematic Leaders to the Select List. Based on revised expectations, we are cutting our price target from $150 to $125, fully recognizing the shares are likely to rangebound for the next 1-2 quarters.

  • We are downgrading Universal Display (OLED) shares from the Thematic Leaders to the Select List and cutting our price target to $125 from $150. In the coming days, we will name a new Thematic Leader for our Disruptive Innovators investing theme.

 

Clean Living signals abound

As we hang tight, I will continue to pour through the latest thematic signals that we see day in, day out throughout the year, but I’ll also be collecting ones from the sea of earnings reports around us.

If I had just read that it would prompt me to wonder what some of the recent signals have been. As you know we post them on the Tematica Research website but during the earnings season, they can get a tad overwhelming, which is why on this week’s Cocktail Investing podcast, Lenore Hawkins (Tematica’s Chief Macro Strategist) and I ran through a number of them. I encourage you to give it a listen.

Some of the signals that stood out of late center on our Clean Living investing theme. Not only did Coca-Cola (KO) chalk up its September quarter performance to its water and non-sugary beverage businesses, but this week PepsiCo (PEP) acquired plant-based nutrition bar maker Health Warrior as it continues to move into good for you products. Mondelez International (MDLZ), the company behind my personal fav Oreos as well as other cookies and snacks is launching SnackFutures, a forward-thinking innovation hub that will focus on well-being snacks and ingredients. Yep, it too is embracing our Clean Living investing theme.

Stepping outside of the food aspect of Clean Living, there has been much talk in recent months about the banning of plastic straws. Now MasterCard (MA) is looking to go one further with as it looks to develop an alternative for those plastic debit and credit cards. Some 6 billion are pushed into consumer’s hands each year. The issue is that thin, durable card is also packed with a fair amount of technology that enables transactions to occur and do so securely. A looming intersection of our Clean Living, Digital Infrastructure and Safety & Security themes to watch.

 

Turning to next week

During the week, the Atlanta Fed published its initial GDP forecast of 2.6% for the current quarter, which is essentially in line with the same forecast provided by the NY Fed’s Nowcast, and a sharp step down from the initial GDP print of 3.5% for the September quarter. Following the October Employment Report due later this week, where wage growth is likely to be more on investor minds that job gains as they contemplate the velocity of the Fed’s interest rate hikes, next week brings several additional pieces of October data. These include the October ISM Services reading and the October PPI figure. Inside the former, we’ll be assessing jobs data as well as pricing data, comparing it vs. the prior months for hints pointing to a pickup in inflation. That will set the stage for the October PPI and given the growing number of companies that have announced price increases odds are we will some hotter pricing data and that could refocus the investor spotlight back on the Fed.

Next week also brings the September JOLTS report as well as the September Consumer Credit report. Inside those data points, we expect more data on the continued mismatch between employer needs and available worker skills that is expected to spur more competitive wages.  As we examine the latest credit data, we will keep in mind that smaller banks reporting higher credit card delinquency rates while Discover Financial (DFS) and Capital One (COF) have shared they have started dialing back credit spending limits. That could put an extra layer of hurt on Middle-class Squeeze consumers this holiday season.

Also, next week, the Fed has its next FOMC meeting, and while it’s not expected to boost rates at that meeting, we can expect much investor attention to be focused on subsequent Fed head comments as well as the eventual publication of the meeting’s minutes in the coming weeks ahead of the December meeting.

On the earnings front, following this week’s more than 1,000 earnings reports next week bring another 1,100 plus reports. What this means is more than half of the S&P 500 group of companies will have issued September quarter results and shared their revised guidance. As these reports are had, we can expect consensus expectations for those companies to be refined for the balance of the year. Thus far, roughly 63% of the companies that have issued EPS guidance for the current quarter have issued negative guidance, but we have yet to see any meaningful negative revisions overall EPS expectations for the S&P 500.

Outside the economic data and corporate earnings flow next week, we also have US midterm elections. While we wait for the outcome, we would note if the Republicans maintain control of the House and Senate, it likely means a path of less resistance for President Trump’s agenda for the coming two years. Should the Democrats gain ground, which has historically been the case following a Republican presidential win, it could very well mean an even more contentious 24 months are to be had in Washington with more gridlock than not. Should that be the case, expectations for much of anything getting done in Washington in the medium-term are likely to fall.

Yes, next week will be another busy one that could challenge the recent market rebound. We’ll continue to ferret out signals for our thematic lens as we remain investors focused on the long-term opportunities to be had with thematic investing.

 

 

 

 

Introducing The Thematic Leaders

Introducing The Thematic Leaders

 

Several weeks ago began the arduous task of recasting our investment themes, shrinking them down to 10 from the prior 17 in the process. This has resulted in a more streamlined and cohesive investment mosaic. As part of that recasting, we’ve also established a full complement of thematic positions, adding ones, such as Chipotle Mexican Grill (CMG) and Altria (MO) in themes that have been underrepresented on the Select List. The result is a stronghold of thematic positions with each crystalizing and embodying their respective thematic tailwinds.

This culmination of these efforts is leading us to christen those 10 new Buy or rechristened Buy positions as what are calling The Thematic Leaders:

  1. Aging of the Population – AMN Healthcare (AMN)
  2. Clean Living – Chipotle Mexican Grill (CMG)
  3. Digital Lifestyle – Netflix (NFLX)
  4. Digital Infrastructure –  Dycom Industries (DY)
  5. Disruptive Innovators – Universal Display (OLED)
  6. Guilty Pleasure – Altria (MO)
  7. Living the Life – Del Frisco’s Restaurant Group (DFRG)
  8. Middle-Class Squeeze – Costco Wholesale (COST)
  9. Rise of the New Middle-Class – Alibaba (BABA)
  10. Safety & Security – Axon Enterprises (AAXN)

 

By now you’ve probably heard me or Tematica’s Chief Macro Strategist Lenore Hawkins mention how Amazon (AMZN) is the poster child of thematic investing given that it touches on nearly all of the 10 investing themes. That’s true, and that is why we are adding Amazon to the Thematic Leaders in the 11th slot. Not quite a baker’s dozen, but 11 strong thematic positions.

One question that you’ll likely have, and it’s a logical and fare one, is what does this mean for the Select List?

We wouldn’t give up on companies like Apple (AAPL), Alphabet (GOOGL), Disney (DIS), McCormick & Co. (MKC) and several other well-positioned thematic businesses that are on the Select List. So, we are keeping both with the Thematic Leaders as the ones that offer the most compelling risk-to-reward tradeoff and the greater benefit from the thematic tailwinds. When we have to make an adjustment to the list of Thematic Leaders, a company may be moved to the Select List in a move that resembles a move to a Hold from a Buy as it is replaced with a company that offers better thematic prospects and share price appreciation. Unlike Wall Street research, however, our Hold means keeping the position in intact to capture any and all additional upside.

Another way to look at it, is if asked today, which are the best thematically positioned stocks to buy today, we’d point to the Thematic Leaders list, while the Select List includes those companies that still have strong tailwinds behind their business model but for one reason or another might not be where we’d deploy additional capital. A great example is Netflix vs. Apple, both are riding the Digital Lifestyle tailwind, but at the current share price, Netflix offers far greater upside than Apple shares, which are hovering near our $225 price target.

After Apple’s Apple Watch and iPhone event last week, which in several respects underwhelmed relative to expectations despite setting up an iPhone portfolio at various price points, odds are the iPhone upgrade cycle won’t accelerate until the one for 5G. The question is will that be in 2019 or 2020? Given that 5G networks will begin next year, odds are we only see modest 5G smartphone volumes industry-wide in 2019 with accelerating volumes in 2020. Given Apple’s history, it likely means we should expect a 5G iPhone in 2020. Between now and then there are several looming positives, including its growing Services business and the much discussed but yet to be formally announced streaming video business. I continue to suspect the latter will be subscription based.  That timing fits with our long-term investing style, and as I’ve said before, we’re patient investors so I see no need to jettison AAPL shares at this time.

The bottom line is given the upside to be had, Netflix shares are on the Thematic Leaders list, while Apple shares remain on the Select List. The incremental adoption by Apple of the organic light emitting diode display technology in two of its three new iPhone models bodes rather well for shares of Universal Display (OLED), which have a $150 price target.

Other questions…

Will we revisit companies on the Select List? Absolutely. As we are seeing with Apple’s Services business as well as moves by companies like PepsiCo (PEP) and Coca-Cola (KO) that are tapping acquisitions to ride our Clean Living investing tailwind, businesses can morph over time. In some cases, it means the addition of a thematic tailwind or two can jumpstart a company’s business, while in other cases, like with Disney’s pending launch of its own streaming service, it can lead to a makeover in how investors should value its business(es).

Will companies fall off the Select List?

Sadly, yes, it will happen from time to time. When that does happen it will be due to changes in the company’s business such that its no longer riding a thematic tailwind or other circumstances emerge that make the risk to reward tradeoff untenable. One such example was had when we removed shares of Digital Infrastructure company USA Technologies (USAT) from the Select List to the uncertainties that could arise from a Board investigation into the company’s accounting practices and missed 10-K filing date.

For the full list of both the Thematic Leaders and the Select List, click here

To recap, I see this as an evolution of what we’ve been doing that more fully reflects the power of all of our investing themes. In many ways, we’re just getting started and this is the next step…. Hang on, I think you’ll love the ride as team Tematica and I continue to bring insight through our Thematic Signals, our Cocktail Investing podcast and Lenore’s Weekly Wrap.

 

 

Soft and hard seltzers gaining share and quenching consumer thirst

Soft and hard seltzers gaining share and quenching consumer thirst

When companies ranging from PepsiCo and Coca-Cola add aggressively to their product portfolio it likely means we are at or near an inflection point in terms of consumer preference. That is what we are seeing with flavored seltzers given PepsiCo’s 2018 introduction of its bubly Sparkling Water, its more recent acquisition of SodaStream and Coca-Cola testing its Dasani PureFill machine. Those perusing the shopping aisles may have noticed the influx of seltzer flavors but the observant shopper probably noticed the growing number of hard seltzers being offers from Spiked Seltzer, Nauti, and others. One has to wonder how long it will be until these Guilty Pleasures catch the eye of companies like Molson Coors and Constellation Brands.

 

While sparkling water on the whole has seen impressive growth, canned sparkling water in particular has emerged as a huge contributor to category performance. Nielsen reference data by package type shows that while bottled sparkling water commands the majority of dollar sales (64% of all sparkling water sales were from bottled varieties), canned sparkling water has performed exceptionally well this year, up 43% from last year to reach sales of over $803 million. And the week ended Aug. 18, 2018, saw sales of over $21 million for canned sparkling water, up 39% compared to the same week last year, whereas bottled sparkling water is up 11% during the same period. Above and beyond the effects of rising aluminum prices, growth in canned sparkling water is driving the category’s profits.

Stretching across the store, hard seltzers is a category on the rise in the alcohol market. Within the last 12 months ended July 14, 2018, sales of hard seltzers are up 177%. In fact, hard seltzers now represent about 10% of all flavored malt beverage (FMB) sales.

Renewed interest in sparkling waters is yet another reflection of consumers’ ongoing shift toward opting to make healthier choices. The sparkling water category across traditional beverage and alcohol beverage categories taps into several health and wellness trends popular with Americans today, such as the appeal of a low carbohydrate and low calorie option would could potentially be seen as a low guilt beverage and an offering that is gluten free. Beyond the potential health benefits consumers see, these drinks can be refreshing, provide interesting flavors and, within the beverage alcohol market, its versatility could appeal thanks to its ability to be part of a cocktail mix.

 

Source: No Signs of Fizzing Out: America’s Love of Sparkling Water Remains Strong Through August

SodaStream to help Pepsico ride the Clean Living slipstream

SodaStream to help Pepsico ride the Clean Living slipstream

From reducing salt and fats from its snack business to the introduction of Bulby, its own line of flavored seltzer waters, PepsiCo continues to transform its business in line with shifting consumer preferences that are reflected in our Clean Living investing theme. With the acquisition of SodaStream, Pepsico takes several steps forward as it not only gains entrance into the home market but with a solution that is plastic bottle free and further shifts it away from sugary products and introduced healthier alternatives.

This move follows the recent introduction of healthier beverages at Starbucks and Coca-Cola testing vending machines offering clean, water-based drink alternatives.  While we may not be in the wee-early innings of this Clean Living transformation, we are still quite far from anywhere near the 7th inning stretch. We expect more M&A activity of publicly traded clean(ish) companies, as well as private ones in the coming quarters as entrenched food and beverage companies, look to ride the Clean Living tailwind.

 

Beverage and snack giant PepsiCo announced plans Monday to acquire at-home carbonated drink maker SodaStream for $3.2 billion.

Purchase, New York-based PepsiCo agreed to pay $144 per share in cash for SodaStream’s outstanding stock, a 32 percent premium to its 30-day volume weighted average price.The deal gives PepsiCo a new line through which it can reach customers in their homes rather than through stores.

It comes as U.S. grocers are in a state of transformation, with 70 percent of shoppers expected to buy groceries online by 2025, according to Food Marketing Institute and Nielsen. Meantime, retailers are squeezing brands on price and giving increasing shelf-space to upstart and private label brands.

“We get to play in a business — home beverages — where we don’t play,” PepsiCo CFO Hugh Johnston told CNBC.With this move, PepsiCo is doubling down on its drinks business, which has struggled in North America as consumers move away from sugary, carbonated beverages. It also seemingly addresses the challenge that buying new drink brands risks cannibalizing its legacy beverages.

Tel Aviv-based SodaStream makes a machine and refillable cylinders through which users can make their own soda or carbonated water drinks.

PepsiCo has made its own efforts at sparkling water, launching Bubly earlier this year to help fight against LaCroix.

Source: PepsiCo to buy SodaStream for $3.2 billion

Starbucks taps kombucha to pivot from sugary drinks and recapture consumers

Starbucks taps kombucha to pivot from sugary drinks and recapture consumers

First Cold Brew and now kombucha is being added to the beverage fold at Starbucks as it, much like Coca-Cola and PepsiCo, are contending with the increasing consumer preference for healthier beverages, snacks, and food. In other words, less sugar as evidenced by the consumer wane for high calorie, high margin Frappucinos, and sugar soda as well as diet soda. While kombucha is a growing market, it’s not quite as mainstream as the Frappuccino was, which likely means it is part of larger salvo to be had by Starbucks as it looks to reposition its beverage portfolio to meet consumer tastes. Never an easy feat, and one that probably means trial and error.

 

Starbucks is brewing up some kombucha.The coffee chain announced it’s going to sell its own line of the trendy fermented tea. Starbucks (SBUX) is offering six flavors of kombucha under its Evolution juice brand and said the drinks have started shipping to stores in select cities.

Why kombucha? The cold-pressed drink is hot right now because of its probiotic punch and zingy flavor. Sales of the fermented tea totaled $1.2 billion last year, skyrocketing nearly 40%. Starbucks says “consumer interest” also spiked the same amount in 2017.

Tapping into the booming drink could help Starbucks reverse its fortunes. Recently installed CEO Kevin Johnson said customers have soured on sugary drinks, like the Frappucino, and he wants the brand to sell more healthy drinks. Evolution’s kombucha is low in calories and has 3 to 7 grams of sugar depending on the flavor.

Source: Starbucks’ new menu item: Kombucha

 Our Clean Living theme hitting Frappuccino sales at Starbucks

 Our Clean Living theme hitting Frappuccino sales at Starbucks

The war on sugar has hit companies like Hershey Foods (HSY), forcing it to pivot its snacking M&A strategy to better meet shifting consumer preferences for healthy, natural and organic snacks.

We’ve seen a prononced shift for waters and seltzers that is driving companies like National Beverage Corp. (FIZZ), home of LaCroix, and Cott Corp. (COT), a now pure play company on water, coffee, tea and filtration, as consumers increasingly reach less frequently for sugary sodas or ones that have artificial sweeteners.

In other words, Hershey, Coca-Cola (KO), PepsiCo (PEP) are contending with the headwind associated with our Clean Living investing theme, while National Beverage and Cott are rising the tailwind.

Now we are seeing consumers balk at the sugar laden Frappuccino that has become a staple at Starbucks (SBUX) complete with seasonal specialites. While this is the latest thorn in the side of Starbucks, it has the potential to not only hit it on the profit line but also force an accelerated re-think on its beverage and even its food offerings.

 

Frappuccino sales are struggling, and concerns about how much sugar the slushy drinks contain may be among the reasons.Starbucks says sales from the drinks that mix coffee, ice, syrup and milk are down 3 percent from a year ago, and is blaming the “health and wellness” trend for the dip.”These are oftentimes more indulgent beverages — higher in sugar, higher in calories,” Starbucks CEO Kevin Johnson said during a presentation to investors Tuesday.

A 16-ounce Cupcake Creme Frappuccino has 400 calories and 63 grams of sugar. A Triple Mocha Frappuccino has 390 calories and 51 grams of sugar. That’s with 2 percent milk and whipped cream.

Peter Saleh, restaurant analyst for BTIG, notes that interest in healthy eating isn’t new: “It’s not something that popped up out of nowhere.”

Another problem may simply be “people not wanting to consume full-price Frappuccinos…” A medium Frappuccino costs between $4 and $5. Exactly how many calories the drinks deliver varies.

Source: Starbucks claims Frappuccino sales down due to ‘health and wellness’ trend | Fox News

With soda getting left in the cold, PepsiCo trots out Bubly sparkling water

With soda getting left in the cold, PepsiCo trots out Bubly sparkling water

 

Over the last decade, sugary soft drink volumes have been under pressure, but until recently soda companies have seen their case volumes bolstered by diet beverage that incorporate alternative sweeteners to deliver zero calories. With consumers becoming more health conscious as well as preferring healthier and good for you ingredients as part of our Food with Integrity investing theme, diet soda case volumes have also come under pressure and this is pushing companies like Coca-Cola, Dr. Pepper Snapple, Cott Corp., and PepsiCo to deliver new formulations and offer healthier alternatives. One of the biggest pushes is in flavored sparkling water, and now PepsiCo is joining the fray with Bubly, going head to head with not only La Croix, but also Coke’s line of flavored sparkling water under its Dasani brand.

 

PepsiCo is introducing Bubly, a new brand of sparkling water that comes in eight flavors, including apple, strawberry and mango, in brightly colored cans with lowercase lettering and greetings on the pull tabs. (“Hey u!” “yo!”)Bubly marks the most direct attack yet on LaCroix, a brand of flavored sparkling waters that has, in recent years, seen sales soar as it developed a near cultlike devotion among millennials.For PepsiCo, Bubly is a big bet. The beverage and snacks giant will put its formidable marketing and distribution machine behind the rollout. Bubly will land on shelves this month, and two ads will appear during the Oscars broadcast on March 4.PepsiCo executives say Bubly, with no artificial flavors, sweeteners or calories, fits into its broader corporate initiative to offer consumers healthier snack and beverage products.Continue reading the main storyRELATED COVERAGELETTER OF RECOMMENDATIONLetter of Recommendation: LaCroix Sparkling Water MARCH 3, 2015‘Lady Doritos’? Pepsi Wants a Do-Over FEB. 6, 2018But it is also an acknowledgment that sales of carbonated soda are falling as consumers increasingly shun sugary drinks in favor of healthier options, including water.

Source: PepsiCo Dips Its Toes Into the Sparkling Water Market – The New York Times

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.