Category Archives: Tooling & Retooling America

Robots Could Kill a Bright Spot in the U.S Employment Picture

Robots Could Kill a Bright Spot in the U.S Employment Picture

 

Developers are close to creating robots that can move products off shelves and into boxes, a breakthrough that would revolutionize one of the most labor-intensive aspects of e-commerce.

Read Full Story: Next Leap for Robots: Picking Out and Boxing Your Online Order – WSJ

 

One of things keeping the Unemployment Rate low has been the explosion in demand for workers in the many fulfillment and distribution centers across the country — after all, someone has to grab all the orders from the shelves and put them in the box to ship to you.  Or do they?

The evolution in robotic technology could kill those jobs too, as this story from the Wall Street Journal depicts. It’s why our Tooling & Retooling investment theme has been rising in prominence lately.  The theme sits in the cross hairs of high under-employment and hiring managers that can’t find qualified workers and an educational system that is stagnating at a time when federal, state and local budgets are being cut.

What this report solidifies is that the future of what could be considered low-skill work isn’t bright. This includes not just fulfillment centers, but also the recent report of a fully automated McDonald’s puts the future of working in fast-food restaurants in doubt for the future. On the other hand, being able to design, build, install and repair all of these automated systems and robots, that’s a skill that will be in top demand, as well as the cyber-security skills to prevent intruders from hacking into the system.

WEEKLY ISSUE: A new contender for our Tooling & ReTooling Investment theme

WEEKLY ISSUE: A new contender for our Tooling & ReTooling Investment theme

In this Week’s Issue:

  • A Quick Economic Recap
  • Data on Tap for the Week Ahead
  • A New Contender for Tooling & Retooling Thanks to Aerospace Mandates!
  • Amazon (AMZN) and Alphabet (GOOGL) both flirt with the $1,000 price line
  • Dycom (DY) shares hit hard, but thematic tailwinds are still strong

 

We here at Tematica hope you had an enjoyable and relaxing holiday weekend that also served as a reminder for all those who fought so we can enjoy the freedoms we have. Three-day weekends serve to help recharge one’s batteries and we’ll need it this week. We have a plethora of economic data coming at us, which will set the stage for the European Central Bank’s next meeting (June 8) as well as the next Federal Open Market Committee meeting (June 13-14). With the Fed’s most recent FOMC minutes indicating the group is looking to determine if the recent economic slump was indeed transitory, we expect there will be much focus on this week’s data.

Odds are that will be a hot topic of this week’s Cocktail Investing Podcast, and if you missed last week’s episode then you missed out on our restaurant pain conversation. Of course, if you head over to TematicaResearch.com you can find that episode there, or you can simply subscribe to the podcast on iTunes – you can guess which one I’d recommend, so you don’t miss out.


 

A Quick Economic Recap

Because there was no Monday Morning Kickoff published this week, let’s recap last week and what it meant for the Tematica Select List. As the market ground higher last week — setting new records for both the S&P 500 and the Nasdaq Composite Index — there were added signs that even though the domestic economy is faring better now than in the first quarter, it’s still not setting the world on fire.

We saw evidence of a struggling economy in Friday’s April core durable goods order data and in disappointing April new home sales earlier last week. While this morning’s April Personal Income & Spending were in-line with expectations, we have to remember April spending benefitted from the late Easter holiday. Digging into the report, the biggest spending increase was for durable goods, while spending on services fell month over month. The personal savings rate remained flat at 5.3 percent for the third consecutive month. Unsurprisingly, the latest Case-Schiller 20-city index, which seeks to measures the value of residential real estate in 20 major U.S. metropolitan areas, rose once again in March reflecting the continued shortage of available homes for sale that is benefitting sellers and helping drive prices higher.

Even the latest Fed minutes that came out last week showed some debate as to the nature of the recent economic slowdown. Then on Friday, St. Louis Fed President James Bullard shared his view that the path of inflation in the U.S., which has started to roll over according to the latest data, is “worrisome.” Bullard, who is not a voting member of the Federal Open Market Committee (FOMC), went on to reiterate his dovish view that the central bank is seeking to hike rates too quickly and by too much. As we have said before, the Fed has historically done a great job of hiking rates right into a recession… hopefully, Fed Chairwoman Janet Yellen realizes this.

From our perspective, we continue to see the prospects for growth challenged by rising debt levels, little to no wage growth and the headwind of an aging population that, over time, will sap the available workforce pool. Per Economics 101, it’s pretty hard to grow an economy if there aren’t people there to work or as another put it this morning, “the reality of an economy slowed by an aging population and a lack of worker productivity growth.”

Despite some early wins on President Trump’s overseas tour, his approval rating remains below 40 percent, according to the latest from Gallup. As if this wasn’t enough, the Congressional Budget Office reported the GOP Health Plan would result in 23 million fewer Americans with health insurance — fodder for the 2017 election season and likely to help embolden Democrats to resist working with the president to instill reforms until at least mid- November. What’s more, it should weigh on GDP and earnings expectations in the back half of 2017.

As we enter the 2017 campaign season, we’ll continue to read the tea leaves in Washington to assess the potential timing of Trump’s policy moves (late 2017-early 2018?) as well as the potential impact on the markets.


 Data on Tap for the Week Ahead

Turning back to the week ahead, as we mentioned above it’s a rather intense one of the economic front, and with the Fed’s comments, it likely means the data will be in focus even more than usual. Luckily, we have no portfolio companies reporting earnings, which will allow us to zero in on the data, and possibly put some more of our cash to work

On deck over the next few days, we have May ISM Manufacturing & Services, the ADP and the Bureau of Labor Statistics May Employment reports, as well as the official PMI data for May from Markit Economics all, arrive over the next few days. Also, don’t forget May auto sales, April construction spending and the Fed’s latest Beige Book. Be sure to check back later in the week at TematicaInvesting.com for our take on the data.

Yep, it’s going to be a humdinger of a week for economic numbers, and making it even more interesting, a few Fed speakers are on tap. As we contend with the what’s ahead, we’ll continue to look for well-positioned companies that shine through our thematic investment perspective and offer a favorable net risk to reward trade-off. In the meantime, should we uncover some well-positioned companies that have some potential, but we need to see the fundamentals firm or the share price come in a bit, we’ll put them on the Contenders List. Speaking of which . . .


 A New Contender for Tooling & Retooling Thanks to Aerospace Mandates!

There are several strategies investors use to uncover companies that are poised to be on the receiving end of improving demand. We can track industry data looking for a rebound or acceleration that point to rising demand, like many do with companies like CSX (CSX) and Norfolk Southern (NSC) for example.

We can look for new and disruptive technologies that are changing the playing field within an industry, and one such example is our Universal Display (OLED), which as subscribers know is poised to benefit from the shift in smartphones, TVs and wearables to organic light emitting diode (OLED) displays from light emitting diode (LED) backed liquid crystal displays (LCDs). Another strategy is to look for pain points and identify those that can solve the chokehold.

There are others of course, including technical tools, but we can also look to regulatory mandates to help uncover potential pain points and the companies that could benefit. While there tends to be some back and forth in DC over regulatory mandates, once they are agreed upon and the timeline is set, we have a line in the sand that results in companies complying or potentially being fined. That line in the sand tends to result in a pull-forward in demand and historically speaking a falloff in demand once the timeline has been achieved.

We’ve seen this demand pull-forward in the trucking industry with new engine emission mandates and in the rail industry with braking technology mandates. We’re in the process of seeing this with another mandate in the trucking industry as fleet operators have until December 2017 to meet the electronic logging device (ELD) mandate to track hours of service. Compliance with this mandate is one factor leading to rising demand for our CalAmp (CAMP)shares, which have climbed more than 29 percent year to date.

Another industry that has its fair share of staged regulatory mandates is aviation. We’ve seen several mandates over the last decade plus, including one to compress the distance between flying aircraft. This was better known as Reduced Vertical Separation Minimum or RVSM for short. Much like mandates for trucks, railcars and others, the addressable market included both new aircraft as well as the existing fleet, which works very well for those companies that serve the after-market. With recent and even newer technologies, we are seeing another round of global mandates that phase in this year, but there is a larger looming mandate for air traffic management in both the US and Europe called Automatic Dependent Surveillance-Broadcast (ADS-B).

Automatic Dependent Surveillance–Broadcast (ADS-B) helps pilots and air traffic controllers create a safer, more efficient National Airspace System (NAS) relies on aircraft avionics, a constellation of GPS satellites, and a network of ground stations across the country to transmit an aircraft’s position, ground speed, and other data to air traffic controllers. Compared to existing radar, the coverage area and accuracy is greater and it can be used in areas where radar coverage is not possible, such as over the Gulf of Mexico. ADS-B also transmits surveillance information about an aircraft in flight or while on the ground. In the US, the Federal Aviation Administration has mandated that aircraft operating in most controlled U.S. airspace be equipped for ADS-B Out by January 1, 2020 and in Europe retrofit compliance is set for June 8, 2020.

Per data from Boeing there were 22,520 jet airplanes in service during 2015, and the over the next 20 years that figure is slated to rise to more than 45,000. This bodes well for those companies like Honeywell (HON) and Rockwell Collins (COL) that serve the OEM aircraft market, but those more than 22,000 planes offer a meaningful retrofit opportunity.

One of the companies that benefitted from the RVSM mandate several years ago was Innovative Solutions & Support (ISSC), which saw its shares climb to more than $24 in 2005 during the height of RVSM compliance. In a nutshell, the company is an avionics company that saw its revenue swell to more than $63 million in 2005, up from just over$28 million in 2003 before rolling over to roughly $18 million in 2007. Over the years, the company continued to innovate with new avionics products, including flat panel displays, and despite the revenue fall off from the RVSM heydays, the company has continued to generate respectable gross margins while still funding new product development.

Currently, there is one lone analyst covering the stock and no published earnings estimates, which can make valuing the shares a little challenging. It can also mean the shares are a potential diamond in the rough.

  • As we look to get a better understanding of the ADS-B and other pending aerospace/avionics mandates, we’re adding Innovative Solutions & Support (ISSC) shares on the Tematica Contender’s List, which is where we list companies that we’re doing more work on and in some cases we’re waiting for the risk to reward trade-off to reach a more appetizing level.
  • We’ll keep you posted on our analysis as we zero in on our valuation of ISSC shares and decide when to move them from a contender to a player.

 


 Amazon (AMZN) and Alphabet (GOOGL) both flirt with the $1,000 price line

From our perspective, we see Amazon crossing that mark on a sustained basis first as it continues to expand its purview on both a service/product offering and a geographic one. Make no mistake, we see Alphabet shares crossing that line too, it’s just likely to take a bit longer as it contends with growing competition in the digital advertising space from the likes of Facebook (FB) and now Amazon (AMZN). That said, as we see advertisers continue to embrace our Connected Society investing theme it means more ad dollars flowing to streaming and digital platforms, which bodes well all three of these companies.

  • Our price target on AMZN shares remains $1,100, which offers just 10 percent upside and this has us reviewing both our price target and potentially our Buy rating on the shares.
  • Following the strong share price runs for both GOOGL and FB, we continue to rate both Hold. Please note, that is not code for Sell, but rather a true Hold as all three of these are stocks to own, not trade.

 


 Dycom (DY) shares hit hard, but thematic tailwinds are still strong

Last week, following the company’s quarterly earnings report that offered a softer than expected near-term outlook, Connected Society player Dycom Corp (DY) shares came under significant pressure, dropping over 25 percent. Of course, we’re still up slightly from when we initiated our positions back in September and October of last year, all of which spells opportunity.

The issue with DY shares essentially boils down to a combination of timing and investor expectations. During the quarter, the mild winter weather allowed Dycom to pull forward projects from the current quarter, and odds are investor enthusiasm for 5G deployments has gotten a tad ahead of itself helping DY’s share price soar to a 52-week high of $110 this month from the low $80s in January.

DY shares are now back at early January levels, but from a fundamental perspective, we continue to see both cable and mobile operators expanding existing network capacity and launching new, next-generation networks to meet the nearly unquenchable demand for data. The silver lining in all of this is Dycom is seeing a broadening set of customer opportunities that are in the initial stages of planning, engineering and design and deployment. Also noted on the company’s earnings call, the company is continuing to win contracts, as customers work to improve their network capabilities and performance.

This brings us back to timing, and that means keeping tabs on Dycom’s customer base and respective network-capacity additions and new technology deployments, such as fiber to the home and business as well as 5G backhaul. We’ve seen timing bumps like this in the past with Dycom and other companies like it, and these pullbacks tend to present a buying opportunity — provided the fundamentals remain intact. Based on what we are hearing and seeing from the consumers and Dycom’s customers, we believe that to be the case.

  • We continue to rate DY shares a Buy with a $115 price target.
  • Subscribers that missed DY shares earlier this year should use the recent drop to either add to or begin a position in DY shares.

 

 

Tematica’s Take on Mnuchin’s Reforms and Growth Prospects

Tematica’s Take on Mnuchin’s Reforms and Growth Prospects


There are several drivers of a company’s business as well as the price of its shares, assuming it is publicly traded. We described many of these in Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns, but a short list includes new technology, regulatory mandates, the overall speed of the global economy and new policies flowing out of Washington. From a business perspective, more regulations and taxes tend to drive costs higher, leaving companies with smaller profits to spread across developing new products and services, implementing new technologies and creating more jobs – in other words investing for the company’s future.

 

We’re seeing this today in the restaurant industry, which is struggling with the impact of higher minimum wages as companies like McDonald’s (MCD) and others look to bring mobile ordering, as well as in-store kiosks like those found at Panera Bread (PNRA), to market. There has been much made about the low to no growth in the US economy over the last several years, but headwinds, like our aging population that has people shifting from spenders to savers and rising consumer debt levels that weigh on disposable income levels and consumer spending, make prospect for growth challenging.

 

Last week Treasury Secretary Steve Mnuchin reiterated in his testimony in front of the Senate Banking, Housing, and Urban Affairs Committee that the Trump administration’s goal of 3 percent or better GDP is achievable provided, “we make historic reforms to both taxes and regulation.” Mnuchin went on to say, “he’s got 100 bodies working on tax system reform and that they’re working on far more than just undoing the Dodd-Frank Act” including overhauling housing finance reform.

 

Over the weekend in a radio interview, Mnuchin noted, “The good news is that [the administration and Congress] all agree on the fundamental principles: simplifying personal taxes, creating a middle-income tax cut and making our business taxes more competitive.” Mnuchin went on to acknowledge that over the past eight years, the US economy has had very low growth, but “tax and regulatory changes and better trade deals” can unleash more historically typically growth rates in this country,” with “sustainable levels of 3 percent growth.”

 

The key word employed by Mnuchin is “reform,” and no matter which definition of the word offered by Merriam Webster – “to amend or improve by change of form or removal of faults or abuses” or “to put an end to (an evil) by enforcing or introducing a better method or course of action” – it’s rather clear Mnuchin’s language suggests something far more historic than a temporary tax cut or other one-time band aids like we’ve seen in recent years. That resetting should help reduce regulatory and litigation costs, but also a lower corporate tax rate, which would benefit predominantly US based companies like Verizon Communications (VZ), CVS Health (CVS), Walt Disney (DIS), Norfolk Southern (NSC) and others as well as their shareholders.

 

With true regulatory and tax reform, there would be the added benefit of certainty or at least greater certainty that would allow for longer-term corporate planning. It’s rather well understood the stock market abhors uncertainty, but uncertainty in the form of short-term tax cuts and ones that are about to expire as well as a shifting regulatory environment wreak havoc on corporate planning and subsequently spending. One example is Research & Experimentation Tax Credit (better known as R&D Tax Credit) was originally introduced in the Economic Recovery Tax Act of 1981 with an original expiration date of December 31, 1985.

 

Flash forward a few years, and the credit has expired eight times and has been extended fifteen times with the last extension expired on December 31, 2014. Not exactly a boon to corporate planning, but in 2015, Congress made permanent the research and development tax credit, which now allows more consistent planning and product development at companies ranging from Apple (AAPL) and Facebook (FB) to II-VI (IIVI) and Oracle (ORCL), not to mention food and beverage companies like Coca-Cola (KO) and PepsiCo (PEP). Douglas L. Peterson, President and Chief Executive Officer of S&P Global Inc. summed it up well when he said, “If we knew where the cost was going…and we’re able to predict it over the long run, we could have a completely different planning cycle and invest in the long run.”

 

While these reforms are likely to help reignite growth in the US economy, the stark reality is between increased spending to rebuild US infrastructure as well as the US military and ensuring entitlement programs are in place for our aging population, there is a deficit funding gap at least in the short to medium term that will need to be addressed. While there are several mechanisms being bandied about, a recurring one is the Border Adjustment Tax. There are those that oppose it, particularly retailers that source heavily from outside the US, but the argument for the Border Adjustment Tax is that it would help level the playing field between imported goods and those crafted within the US as well as encourage companies to source within the US, thereby developing industries and creating jobs.

 

The challenge here is that with the gap between Job Openings and Hirings already well above historical norms as companies struggle to find the right talent for open positions as we sit at what has been the lower range of the unemployment rate over the past fifty years, who is going to take these jobs? Regular Tematica readers will quickly recognize how this pertains to our Tooling and Re-tooling investment theme.

 

 

We frequently discuss here at Tematica Research how economic growth requires that either the labor pool grows and/or productivity must rise. If companies are able to keep more of their income thanks to tax cuts, they can invest back into their own operations so that the productivity of their workforce improves. That being said, cutting corporate tax rates doesn’t guarantee that companies will do such reinvestment as they could also look to return the additional funds to investors through dividends, fund buyback programs or hold onto it if there is concern that times could get tough in the near to medium-term future. Investors need to assess the overall economic conditions and business drivers as well as other incentives facing companies when it comes to decided just what to do with those tax savings.

 

As Team Trump and his allies, including Mnuchin, look to reset the administration’s timetable for meaningful reform, investors should begin doing their homework on which companies stand to benefit. If we see lower corporate tax rates like those being discussed, we could see greater earnings falling to corporate bottom lines, which could spur shares in those companies higher, outside of any decision on just what to do with those newly saved funds. If we see infrastructure spending beginning, it offers another shot in the arm for companies like US Concrete (USCR), Granite Construction (GVA) and aggregates companies like Martin Marietta (MLM). Any boost in defense spending would likely bode well for companies such as General Dynamics (GD), Raytheon (RTN) and Northrop Grumman (NOC).

 

The key is for investors to develop their wish list today and be ready to strike once we know the particulars on the actual reforms. While that is likely a sound strategy, we would suggest investors go one step further and utilize our thematic perspective to identify those companies already benefiting from pronounced multi-year tailwinds that could also benefit from tax and regulatory reform, rather than being dependent solely on these reforms making it through the D.C. sausage factory.

August Jolts Report and NFIB Data Confirms the Tooling and Retooling Thematic.

August Jolts Report and NFIB Data Confirms the Tooling and Retooling Thematic.

As you digest all of the economic data we dumped on your today, you’re likely getting the correct view that we tend to look at things from several different angles, with the Employment Report being one such item.

Seasonally adjusted, in thousands

Seasonally adjusted, in thousands

In addition to all of the third party metrics and the below the headline data we look at, another insightful report is the Job Openings and Labor Turnover (JOLTs) Report. The August JOLTs report, published by the Bureau of Labor Statistics showed the number of job openings in July rose to 5.8 million (versus expectations for 5.3 million), a record high since the data started to be collected in December 2000. By comparison, data from the National Federation of Independent Business showed that job creation remained flat at small businesses in July.

What we found more interesting inside the NFIB report was 56 percent reported hiring or trying to hire, but 48 percent (or 86 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. In case you were wondering, much like the 5.8 million job openings, that 48 percent figure was also a record high.

Screen Shot 2015-09-10 at 4.37.34 PM

Combined what these two reports tell us is that we have plenty of companies with jobs they need to fill, but cannot find qualified applicants.  At the same time, we have a historically high percent of the population having given up looking for work.  This strikes at the heart of the need for workers to “re-tool” as part of our Tooling & Re-tooling investing thematic.

Over the long run this is good news for companies like ITT Educational Service ([stock_quote symbol=”ESI”]) and Capella Education ([stock_quote symbol=”CPLA”]), as well as Strayer Education (STRA), which have been hit hard in recent years by the lack of wage returns on higher education and scrutiny from federal regulators.  A recovering economy coupled with awareness of more and more job openings could push prospective students into taking the plunge.

One player that we’ll be watching on the horizon is McGraw-Hill Education, which has recently filed an S-1 form with the Securities and Exchange Commission for its initial public offering. The company has transformed from publishing “just” textbooks and instructional materials into producing digital learnings content and outcome-focused learning solutions, such as McGraw-Hill Connect, which Tematica Chief Investment Officer Christopher Versace uses as part of his graduate teaching.