Markets traded lower on the week as investors continue to worry over the impacts slowing global growth. Internationally, we saw China reduce its target GDP growth rate from 6.5% to between 6% and 6.5%. Additionally, China reported abysmal trade data with the countries trade balance coming in at $4.12 billion versus expectations of $26.38 billion. Elsewhere, the European Central Bank (ECB), maintained 0% interest rates, while slashing 2019 GDP estimates from 1.7% to 1.1% and announcing a new stimulus package. Clearly the international picture is not a good one. That said, with the exception of a very poor nonfarm payroll report on Friday, that we believe was impacted by weather conditions, the U.S. economy continues to show signs of growth. However, despite the rosy domestic picture, there are some cracks (housing, autos, potentially in the job market should we not see an upward revision to February on the next release) and we have therefore sought to raise cash in anticipation of any pullbacks.
Additionally, on the U.S./China trade front, one factor to keep in mind is that given the awful data out of China and decent data out of the U.S., we would not be surprised to see President Trump ramp up the tough talk on China as the data is highly in favor of the U.S. The president, who has pointed to a deal on the horizon, may use this as a chance to "go for the jugular" so to speak as we may not see a better setup than the one we have right now to address key issues such as forced IP transfers and government policies designed to undercut U.S. industries.
Lastly, Zev Fima had the chance this week to sit with TheStreet's Tech Stocks Editor Nelson Wang for Technically Speaking segment to discuss Facebook's shift toward private messaging and TheStreet's London correspondent Martin Baccardax to discuss some of the factors driving the market both abroad and here in the US: Technically Speaking:
What's driving the market:
Treasury yields were pushed lower, to around 2.62% following weak macro data abroad and a poor nonfarm payroll report domestically. In line with the treasury move, gold prices pulled back a bit, however, moving below $1,300 per ounce, though rebounded off the lows of the week following the nonfarm report. The dollar strengthened versus the euro following a downward revision in European growth guidance by the ECB while oil ended the week lower, though it continues to hover in the mid-$50s per barrel.
We're in the final stretch of fourth-quarter earnings season. Within the portfolio we heard from Salesforce and Kohl's.
Salesforce
After the closing bell on Monday, Salesforce.com reported a top and bottom-line beat with its fiscal fourth-quarter 2019 result. Non-GAAP revenue of $3.64 billion (up 27% year over year on a constant currency, or cc, basis) edged the consensus of $3.56 billion, and adjusted earnings per share of $0.70 (up 49% year over year) exceeded the consensus by $0.15.
Taking a look at guidance, management expects full-year fiscal 2020 revenue to be in the range of $15.95 billion to $16.05 billion (consensus $15.97 billion). On the bottom line, adjusted earnings per share are expected to be in the range of $2.74 to $2.76, which is in line with the $2.75 consensus. However, investors took issue with what management guided for in the first quarter because it was light of expectations. Revenue is expected to be $3.67 billion to $3.68 billion (consensus $3.691 billion) and adjusted earnings per share is expected to be $0.60 to $0.61, which is below the $0.63 consensus figure. Nevertheless, we think this was just management being conservative (Q1 is typically the lowest quarter in terms of sales and earnings for the year), and we expect the secular trend of digital transformations will help management achieve its target of $26 to $28 billion in revenue by FY2023, a result that means sales will organically double in the next four years.
Kohl's
On Tuesday before the opening bell, Kohl's reported a top and bottom line beat with its fourth quarter earnings result. Revenue of $6.82 billion (down 3.3% year over year) topped consensus of $6.58 billion, and earnings per share of $2.24 (up 20% year over year) exceeded consensus of $2.18. Taking a look at same-store sales, or "comps", Kohl's delivered +1% on a shifted basis and -1% on a fiscal basis, with the latter result being in-line with the -1% consensus view.
Looking at guidance, management expects earnings per share in the range of $5.80 to $6.15, a strong result against a $5.75 consensus view. Meanwhile, the comparable sales change of 0% to +2% was in-line with the 0.9% consensus expectation. Although first-quarter comps are expected to be on the lighter side due to February's poor weather, investors looked past this after management announced the exciting expansion to its partnership with Amazon. Instead of operating as a "store within" concept, Kohl's will act more as a wholesale retailer for the e-commerce giant, doubling the number of stores it sells Amazon-based products in.
Economy
On Tuesday, shortly after the opening bell, the Institute of Supply Management (ISM) reported that the non-manufacturing index (NMI), which tracks the service sector of the economy, jumped 3 percentage points in February to 59.7%, surpassing expectations of 57.2%, following January's 56.7% reading. The better-than-expected results come after last week's PMI report, which missed expectations, coming in at 54.2% vs. consensus of 55.8%. For perspective, over the past 12 months, the NMI has averaged 58.7% with a high of 60.8% and a low of 56.7%. See here for our full analysis.
Also on Tuesday, the U.S. Census Bureau reported that new home sales in December increased 3.7% month over month to a seasonally adjusted annual rate of 621,000. The reading topped expectations of 600,000, however, serving to more than offset the beat, November's reading was revised down to a rate of 599,000 (from 657,000, previously reported). With the December's reading, on a year-over-year basis, sales are down 2.4% from December 2017's estimated rate of 636,000. As for costs, the average selling price in December pushed to $377,000 (from $357,600 in November). The median sales price also increased, swelling to $318,600 (from $303,500 in November). See here for our full analysis.
On Wednesday, the ADP National Employment Report was released, indicating a 183,000 private sector seasonally adjusted payroll increase for the month of February, missing expectations for 190,000 added jobs. However, partially offsetting the weak results, January's reading was revised up to +300,000, from +213,000 previously reported, and lowered December's reading to +263,000 from +271,000. The headline reading can be further broken down into a "goods-producing" sector and a "service-providing" sector. The goods-producing sector accounted for 44,000 jobs, while the service-providing sector accounted for 139,000. See here for our full analysis.
On Thursday, the Department of Labor reported that initial jobless claims for the week ending March 2 were 223,000, a decrease of 3,000 from the previous week's revised level of 226,000 (revised up from 225,000) and 2,000 claims below expectations of 225,000. Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 226,250, a decrease of 3,000 from the previous week's revised average of 229,250 (revised up from 229,000). The low rate of layoffs reflects a strengthening labor market as claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market - for an incredible 209 consecutive weeks, the longest streak for weekly records dating back to 1967. The previous longest stretch ended in April 1970 and lasted for 161 weeks. For the official weekly release, please see here.
On Friday, the U.S. Labor Department reported that the economy added 20,000 jobs during the month of February, well below expectations for a 180,000 gain. This big miss was partially offset by revisions to the December and January readings, which were revised up to +227,000 from +222,000 and to +311,000 from +304,000, respectively. With these revisions, job gains have now averaged 186,000 over the last three months. Even though the jobs number came in well below expectations, the unemployment rate declined 0.2 percentage points to 3.8% in February. Meanwhile, the labor force participation rate held steady at 63.2%. In February, average hourly earnings for all employees on nonfarm payrolls increased by $0.11 to $27.66, following a $0.02 gain in January. Over the year, average hourly earnings (i.e., wage inflation) have increased $0.91, or 3.4%, a tick up from the 3.2% annual rate of advance seen in January. See here for our full analysis.
Lastly on Friday, the U.S. Census Bureau reported that housing starts surged 18.6% month over month in January to a seasonally adjusted annual rate of 1.230 million, up from December's revised rate of 1.037 million, and outpacing expectations of a 10.86% monthly increase. With January's reading, housing starts were down 7.8% from January 2018. As for building permits, units authorized in January increased 1.4% month over month to a seasonally adjusted annual rate of 1.345 million, exceeding expectations of a 2.94% monthly decline. This follows a revised December reading of 1.326 million. With January's monthly advance, permits are down 1.5% from the same time last year. See here for our full analysis.
(Note: T is the most recent period, T-1 is the prior period's reading and T-2 is two periods back, the intent being to illustrate any trends)
Oil
On the commodity front, prices remain rangebound in the $50s as investors weigh the potential for a US/China trade deal to reignite global growth against a global economic environment in which China and Europe are guiding for slower growth than previously expected. Also helping to support prices are the OPEC+ production cuts, with Russia stating their intention this week, to accelerate the rate of production cuts and sources out of OPEC calling out the possibility for an extension of the current production cut plan that is currently planned to run through the end of the first half of the year.
On the domestic front, on Wednesday, the U.S. Energy Information Agency (EIA), reported that in the week ending March 1, U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) increased by 7.1 million barrels to 452.9 million barrels, a bearish reading versus analyst expectations for 1.2-million-barrel increase. Additionally, U.S. production held at a weekly high of 12.1 million bpd. Lastly, net imports increased by 1.647 million bpd as imports increased by 1.084 million bpd, while exports declined by 556,000 bpd. See here for the full report.
Lastly, we note that the spread between WTI and Brent sits at roughly $9 per barrel. Recall, this is a key metric as the wider the spread, the more attractive U.S. based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.
Stocks
In the portfolio this week, we initiated a position in Home Depot (here) and subsequently bulked up on that position (here) as we believe weather issues that plagued the fourth quarter to be temporary, we expect the housing market to stabilize and believe the risk/reward profile to be favorable thanks to strong dollar headwinds abating as we move through the year and see support resulting from an increased dividend and robust $15 billion share repurchase program.
Additionally, we used weakness to bulk up on several positions including, CVS (here), which we continue to view as being vastly oversold; Lam Research (here, here and here ); and UnitedHealth Group (here).
Regarding CVS, we reiterate that you have to buy weakness and exercise wide scales when there is an incessant amount of selling on the same news or no real news, no matter how painful it may be in the short-term. We continue to believe that the pressure will be short-term because the company's only main issues rest with its headwinds related to the Long-Term Care business and industry-related pressures, which are expected to abate as we move through this transition year and into a return to growth in 2020.
As for Lam Research, quarterly earnings are expected to decline on a sequential basis over the first few quarters of calendar year 2019, however that's not the dynamic investors should be focused on. Instead, it is all about industry conditions and how growth trends in DRAM/NAND supply will be below demand growth in the back half of the year, forcing the memory market to tighten and an inflection in both prices and chip maker spending. Very positive for Lam Research, who is a market share gainer in the industry.
On the UnitedHealth Group front, Investors have been fretting what the recently introduced "Medicare for All" bill will mean for the future health insurance companies, ignoring the facts of how the bill does not have enough support on both party lines and its funding costs will likely be too exorbitant. We acknowledge that this headline risk may linger in the short-term, however, this is classic shoot first, ask questions later type behavior that creates opportunity.
On the other hand, we raised cash by trimming shares of Danaher (here and here). As noted in our alert, following the GE BioPharma deal announcement, which is a transformative one that doubles down on the high-margin, strong growing Life Sciences industry and should lead to further gains down the road, the M&A catalyst is now off the table due to the size of the deal and we cannot let ourselves get greedy here.
Additionally, we closed out our position in PayPal (here). We are still fans of the digital payment space and how PayPal is monetizing both its namesake platform and Venmo, however, we think the company's valuation has gotten full and we lack catalysts at the moment.
Moving on to the broader market, with fourth-quarter earnings season winding down, results thus far have been relatively positive versus expectations with 67.5% of companies reporting a positive EPS surprise. For the fourth-quarter, earnings growth has increased roughly 14.7% year over year vs. expectations for an overall 14.45% increase throughout the season; of the 426 non-financials that reported, earnings growth is up 15.5%. Revenues are up 6.0% vs. expectations throughout the season for an 6.08% increase; 67.5% of companies beat EPS expectations, 23.1% missed the mark and 9.3% were in line with consensus. On a year-over-year comparison basis, 74.4% beat the prior year's EPS results, 23.94% came up short and 1.42% were virtually in line. The best performing sectors so far have been Information Tech, Industrials and Healthcare, while the worst performing have been the Real Estate, Utilities and Energy.
Next week, 23 companies in the S&P 500 will report earnings. No portfolio companies will be reporting.
Other key earnings reports for the market include: ADT (ADT), Kronos Worldwide (KRO), Stitch Fix (SFIX), PetIQ (PETQ), Dick's Sporting Goods (DKS), Momo (MOMO), KEYW Holding (KEYW), ZTO Express (ZTO), Quorum (QHC), Cohu (COHU), ZAGG (ZAGG), Everi (EVRI), Express (EXPR), Surgery Partners (SRGY), Vera Bradley (VRA), Daqo New Energy (DQ), Smart & Final Stores (SFS), Tailored Brands (TLRD), Cloudera (CLDR), Domo (DOMO), Embraer SA (ERJ), Genesco (GCO), Hudson (HUD), Cannae Holdings (CNNE), Broadcom (AVGO), Huazhu Group (HTHT), Adobe Systems (ADBE), Ulta Beauty (ULTA), Turquiose Hill Resources (TRQ), Zumiez (ZUMZ), DocuSign (DOCU) and Citi Trends (CTRN)
Economic Data (*all times ET)
U.S.
Monday (3/11)
Retail Sales Ex Auto MoM (8:30): 0.50% expected
Retail Sales Ex Auto and Gas (8:30): 0.60% expected
Retail Sales Advance MoM (8:30): 0.10% expected
Tuesday (3/12)
NFIB Small Business Optimism (6:00)
CPI MoM (8:30): 0.20% expected
CPI Ex Food and Energy MoM (8:30): 0.20% expected
CPI YoY (8:30): 1.60% expected
Wednesday (3/13)
MBA Mortgage Applications (7:00)
PPI Final Demand MoM (8:30): 0.20% expected
PPI Ex Food and Energy MoM (8:30): 0.20% expected
PPI Final Demand YoY (8:30): 1.90% expected
PPI Ex Food and Energy YoY (8:30): 2.60% expected
Durable Goods Orders (8:30): -0.70% expected
Durables Ex Transportation (8:30): 0.20% expected
Cap Goods Orders Nondef Ex Air (8:30)
Construction Spending MoM (10:00)
Thursday (3/14)
Import Price Index MoM (8:30): 0.30% expected
Initial Jobless Claims (8:30)
Continuing Claims (8:30)
Bloomberg Consumer Comfort (9:45)
New Home Sales (10:00): 628k expected
Friday (3/15)
Empire Manufacturing (8:30): 10 expected
Industrial Production MoM (9:15): 0.60% expected
Capacity Utilization (9:15): 78.80% expected
- of Mich. Sentiment (10:00): 95.4 expected
Net Long-term TIC Flows (16:00)
Total Net TIC Flows (16:00)
International
Monday (3/11)
Japan Machine Tool Orders YoY (2:00)
Germany Industrial Production SA MoM (3:00): 0.40% expected
Germany Industrial Production WDA YoY (3:00): -3.10% expected
Tuesday (3/12)
UK Visible Trade Balance GBP/Mn (5:30): -£12010m expected
UK Trade Balance Non EU GBP/Mn (5:30): -£3700m expected
UK Trade Balance (5:30): -£3300m expected
UK Industrial Production MoM (5:30): -0.10% expected
UK Industrial Production YoY (5:30): -1.60% expected
UK Manufacturing Production MoM (5:30): -0.10% expected
UK Manufacturing Production YoY (5:30): -2.10% expected
Japan PPI YoY (19:50): 0.80% expected
Japan Core Machine Orders MoM (19:50): -1.90% expected
Japan Core Machine Orders YoY (19:50): -2.50% expected
Wednesday (3/13)
Japan Tertiary Industry Index MoM (00:30): -0.40% expected
EU Agg Industrial Production SA MoM (6:00): 0.50% expected
Thursday (3/14)
Germany CPI MoM (3:00): 0.50% expected
Germany CPI YoY (3:00): 1.60% expected
Germany CPI EU Harmonized MoM (3:00): 0.50% expected
Germany CPI EU Harmonized YoY (3:00): 1.70% expected
Friday (3/15)
EU Agg CPI Core YoY (6:00): 1.00% expected
EU Agg CPI MoM (6:00): 0.30% expected
EU Agg CPI YoY (6:00): 1.50% expected
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Tickers: ABT AMZN AMGN AAPL APC BP CRM CMCSA CSCO CVS DIS DHR FB FIVE GOOGL GS HD HON JPM JNJ KSS LRCX MSFT C DWDP SLB UNH PANW VIAB
ONES
Amazon (AMZN) ; $1620.80; 90 shares; 5.58%; Sector: Information Technology
WEEKLY UPDATE: This week, along with JP Morgan and Berkshire Hathaway, Amazon launched the website for the three companies' healthcare venture, Haven which will be headed by CEO Atul Gawande. On the website, "Haven was established by Amazon, Berkshire Hathaway, and JPMorgan Chase to bring together the resources and capabilities of the three companies to create better outcomes, greater satisfaction, and lower costs for their U.S. employees and families." Additionally, the companies stated mission "transform health care to create better outcomes and overall experience, as well as lower costs for you and your family." We do not expect this to provide a material financial impact to any of the three companies in the near-term, as the early days will be limited regarding reach and availability to the general public. However, longer-term we are very interested to see what the team comes up with as the rising costs of medical care have been a key issue for Americans and anything that helps bring these costs down are not only a positive for those suffering from health issues but for the economy overall as lower medical costs can result increased levels of discretionary income and therefore more consumption, a key driver of U.S. GDP. 1-Wk. Price Change: -3.05%; Yield: 0.00%
INVESTMENT THESIS: We believe upside will result from Amazon's continued Commerce dominance, AWS' continued leadership in the public cloud space, and ongoing growth of the company's advertising revenue stream, which feeds off Amazon's eCommerce business. Additionally, we believe profitability will continue to improve as AWS and advertising account for a larger portion of total sales as both these segments sport higher margins than the eCommerce operation. And while we believe the increasing share of revenue from these higher margin businesses will be key to driving profitability longer-term, we believe margins on ecommerce stand to improve as the company's infrastructure is further built out and economies of scale further kick in. The embedded call option is that management is always looking to enter a new space and generate new revenue streams. Target Price: Reiterate $2,050; Rating: One
RISKS: High valuation exposes the stock to volatile swings, eCommerce has exposure to slower consumer spending, competition, management is not afraid to invest heavily. The outcome of the Pentagon's $10 billion JEDI contract is also something to watch as Amazon is largely considered to be the front runner, Potential headwinds resulting from new eCommerce regulation in India, management is not scared to invest aggressively for growth, which can at times cause volatile reactions as near-term concerns arise relating to the impact on margins.
ACTIONS, ANALYSIS & MORE: Mad Money Interview with Amazon Web Services CEO Andy Jassey (2/28/19), One More Reason to Invest in Amazon (3/1/19), Daily Rundown (2/15/219) Amazon Remains One of the Best Stories in Technology (2/11/19), Daily Rundown (2/1/19), Fourth-Quarter Earnings Analysis (1/31/19), A Check on the Market, Tech and Media (1/28/19), Keep These Themes In Mind (1/10/19), Initiation (2/2/18), Investor Relations
Amgen (AMGN) ; $180.87; 500 shares; 3.46%; Sector: Healthcare
WEEKLY UPDATE: None 1-Wk. Price Change: -5.38%; Yield: 3.21%
INVESTMENT THESIS: We see upside resulting from better-than-expected Aimovig uptake and wider adoption of Repatha resulting from the company's 60% price cut, which will serve to increase volume and offset the lower priced. We also believe the price cut to be a smart move that is being viewed favorably in light of the calls for lower drug prices. As we've noted previously, the decision to cut prices has made it so that ~80% of current Medicare patients can afford the life-saving cholesterol drug. Target Price: Reiterate $220; Rating: One
RISKS: Drug pricing, pipeline issues, loss of exclusivity on key drugs, competition
ACTIONS, ANALYSIS & MORE: Buying Back Shares (2/4/19), Fourth-Quarter Earnings Analysis (1/29/19), Daily Rundown (1/30/19), Jim Cramer's Mad Money interview with CEO Bob Bradway (1/7/19), Updates From The JPMorgan Healthcare Conference (1/9/19), Initiation (8/1/18), Investor Relations
BP (BP) ; $42.25; 2600 shares; 4.20%; Sector: Energy
WEEKLY UPDATE: No company specific news. Shares lower due to volatility in energy prices. 1-Wk. Price Change: -0.78%; Yield: 5.82%
INVESTMENT THESIS: In addition to higher oil prices aiding the sector, we believe BP shares will see further upside thanks to management's visible trajectory toward a stated 900,000-barrel-per-day production target by 2021, a target reiterated during the companies fourth-quarter earnings conference call, and an improving cash flow profile as Macondo related payments (expected to be ~$2 billion in 2019 and ~$1 billion in 2020) wind down and the company works to reduce breakeven prices for organic free cash flow from $50 per barrel currently toward the $35 to $40 range by 2021. The cash flow dynamic also gives us increased confidence in BPs ability to maintain its dividend payout, a key factor supporting shares against any downturns in commodity prices and a crucial consideration for our income-oriented members. Target Price: Reiterate $54; Rating: One
RISKS: Commodity price pressure, Macondo liability coming in above expectations
ACTIONS, ANALYSIS & MORE: Oil Rises Despite Down Day in the Market, Daily Rundown (2/5/19), Fourth-Quarter Earnings Analysis, A brief look at BP following "Top Pick" reiteration at RBC (12/10/18), Initiation (7/10/18), Investor Relations
Citigroup (C) ; $62.06; 1550 shares; 3.68%; Sector: Financials
WEEKLY UPDATE: None 1-Wk. Price Change: -3.74%; Yield: 2.90%
INVESTMENT THESIS: We see upside resulting from an expanded price-to-tangible book valuation as management executes on its turnaround initiative and believe improving return on tangible common equity performance will ultimately lead to a higher book price and multiple expansion. Furthermore, the bank's over-capitalized balance sheet provides significant room for capital return to shareholders, providing a level of support and making for an attractive risk/reward profile. Target Price: $80; Rating: One
RISKS: The economic cycle, Financial System Regulation, interest rates, emerging markets, credit quality
ACTIONS, ANALYSIS & MORE: Fourth-Quarter Earnings Analysis (1/14/19), Initiation (4/29/16), Investor Relations
Comcast (CMCSA) ; $38.19; 1500 shares; 2.93%; Sector: Communication Services
WEEKLY UPDATE: None 1-Wk. Price Change: -2.33%;Yield: 2.20%
INVESTMENT THESIS: We see further upside resulting from progress on the integration of Sky plc, which will serve to increase the company's international presence while nearly doubling its customer base. Additionally, the acquisition provides Comcast access to Sky's "Q Box," which said to be even better than the X1 and provides a buffer should cord cutting accelerate in Europe. Recall, domestically, the X1 has been shown to be more resilient to the trend than competing platforms. Regarding the debt load on the balance sheet resulting from the acquisition, we reaffirm that management has an excellent M&A track record and believe strong cash flow generation will provide the means to successfully de-leverage overtime, allowing shares to re-rate higher over time. Lastly, regarding the U.S. business, we believe management's decision to focus operations around broadband is continuing to be rewarded with higher margins and providing a greater ability to bundle cheaper, less in demand services such as video. Target Price: Reiterate $45; Rating: One
RISKS: An acceleration of cord cutting, failure to realize targeted Sky integration synergies, 5G impacting broadband business, competition
ACTIONS, ANALYSIS & MORE: Assessing Weakness Related to AT&T's Quarter (1/31/19), Fourth-Quarter Earnings Analysis (1/23/19), Daily Rundown (1/23/19), Initiation (6/27/16), Investor Relations
CVS (CVS) ; $52.93; 2075 shares; 4.20%; Sector: Healthcare
WEEKLY UPDATE: This week, we took another look at this troubled position and while we acknowledge that it has not been easy to own, we continue to believe that patience will be rewarded and view the move following earnings to be overblown as investors focus more on the near-term with little credit being given to the multi-year transformation taking place. We spoke more to this opportunity in our Alert here. 1-Wk. Price Change: -8.95%; Yield: 3.78%
INVESTMENT THESIS: We see upside resulting from Aetna integration progress, which we believe will allow shares to re-rate higher as the price-to-earnings valuation closes the gap with peers, and a deleveraging of the balance sheet, which has been another concern for investors. We believe the new CVS Health will transform into a diversified pharmacy/healthcare retailer that is integrated with a managed care operation, creating a more personalized and analytic-based experience that all patients will want. Additionally, we value shares because CVS is an all-domestic company (providing insulation from trade-related headwinds) in the healthcare field (defensive) without a lot of cyclicality, making it even more attractive as we are faced with a barrage of headlines about slower global economic growth. Target Price: Reiterate $84; Rating: One
RISKS: Failure to execute on Aetna integration, greater than expected rebate guarantee headwinds on PBM business, regulatory headwinds
ACTIONS, ANALYSIS & MORE: Adding More CVS Health Shares (3/5/19), Adding to CVS Health Assessing the Weakness in the Health Insurance Group (3/4/19), "Medicare for All" bill pressures shares (2/27/19), Fourth-Quarter Earnings Analysis (2/20/19), January 2019 Members Call w/ Transcript, A Checkup on CVS, Initiation (11/13/18), Investor Relations
Salesforce (CRM) ; $155.06; 2400 shares; 3.50%; Sector: Information Technology
WEEKLY UPDATE: As is so often the case, shares came under pressure into the company's fourth quarter earnings release on Monday, after the close. And while shares were unable to rally, in part due to poor first-quarter guidance, we believe the sellers to be near-sighted as management has a tendency to guide conservatively to start out a new fiscal year, full year guidance was in line with expectations and perhaps most importantly, the company guided that they are targeting $26 to $28 billion in revenue by FY23, which if achieved would represent an organic doubling of revenue over the next four years. 1-Wk. Price Change: -5.76%; Yield: 0.00%
INVESTMENT THESIS: We are bullish on shares of CRM as we view Salesforce as a key player in the "digital revolution" and invaluable to those companies looking to build out their digital strategy and better understand their customer base. Furthermore, we believe the acquisition of MuleSoft effectively expanded the company's total addressable market by unlocking data previously trapped on legacy systems, to be used on the Salesforce platform. These factors compounded by a strong management team keep us confident that the company remains on track to reach its FY2022 target of $21 billion to $23 billion in revenue. Target Price: Reiterate $170; Rating: One
RISKS: Slowdown in IT spending, competition
ACTIONS, ANALYSIS & MORE: Daily Rundown (3/5/19), Fourth Quarter earnings Analysis (3/4/19), January 2019 Members Call w/ Transcript, Pivotal upgrades to Buy, Wedbush adds to "Best Ideas List" (1/7/19), Initiation (6/5/18), Investor Relations
Cisco (CSCO) ; $51.07; 775 shares; 4.59%; Sector: Information Technology
WEEKLY UPDATE: None 1-Wk. Price Change: -0.66%; Yield: 2.74%
INVESTMENT THESIS: We see upside resulting from an improved earnings profile as the company transitions from lumpier hardware sales, toward a recurring software and security revenue stream. We also believe the reduction in DRAM prices, a major input cost for the company, is proving to be a near- to- mid-term tailwind. Lastly, we believe the transformation along with corporate initiatives to adopt the cloud will keep earnings resilient in the face of any broader macroeconomic slowdown. Target Price: Reiterate $56; Rating: One
RISKS: A rebound in DRAM prices placing pressure on margins, a decline in corporate IT spending, competition, execution risk related to the shift toward software and security
ACTIONS, ANALYSIS & MORE: Daily Rundown (3/1/2019) Second-Quarter Earnings Analysis (2/13/19),Daily Rundown (2/14/19) Initiation (11/1/18), Investor Relations
Disney (DHR) ; $113.81; 600 shares; 2.87%; Sector: Media
WEEKLY UPDATE: This week, analysts at JPMorgan published a note stating, "We maintain a favorable view on the potential success of Disney+," adding, "our confidence in the resilient success of Disney+ comes from the company's unmatched brand recognition, extensive premium content, and unparalleled ecosystem to market the service." As for the potential viewer adoption, the analysts stated their belief that the platform "can ultimately reach ~45m domestic and ~115m international subscribers for a total of ~160m worldwide," a level that if achieved would put the platform on par with the likes of Netflix. While we acknowledge that such a feat would take time, we agree that the company's IP portfolio and brand recognition, along with its ability to potentially bundle the service with ESPN+ and Hulu (something the analysts speculated to as something that could be in the cards), make Disney one of, if not the best suited company to take on Netflix, the clear leader in the streaming place. Additionally, speaking at the company's shareholder meeting, CEO Bob Iger stated, regarding the content that will ultimately be available on the Disney+ platform, "at some point, fairly soon, after launch, it will house the entire Disney motion picture library." The main takeaway being that the days of the "Disney Vault" are coming to an end. Additionally, Iger reiterated, "all of the films that we're releasing, starting this year's slate with Captain Marvel, will also be on the service." The only films that will likely not be on the service to start are those still unavailable due to licensing agreements, however, those too will in time arrive on the platform. Additionally, while there was little in terms of material updates, Iger noted that we're "in the final stages" of the 21st Century Fox acquisition and that we should see final regulatory approval "soon". 1-Wk. Price Change: -0.18%; Yield: 1.55%
INVESTMENT THESIS: We see upside resulting from Disney's direct to consumer efforts via ESPN+ and Disney+ and are happy to ride out the associated investment cycle. Additionally, we view the integration of Fox assets as another catalyst as progress is made given the acquisition brings with it programming across six continents, reaching over 1.8 billion consumers that speak roughly 50 different languages, as well as the rights to Start India, India being one of the fastest growing countries in the world and all of the domestic content, plus an additional 30% ownership of Hulu, bringing their total Hulu ownership to 60%.Furthermore, we are bullish on the Studio Entertainment division's 2019 movie lineup, which features a new Avengers, Toy Story 4, and live-action reboots of The Lion King and Aladdin, amongst other titles. Lastly, we believe a strong consumer should continue to support attendance and spending at Parks and Resorts. Target Price: Reiterate $135; Rating: One
RISKS: Fox integration risk, competition, macroeconomic slowdown impacting the consumer
ACTIONS, ANALYSIS & MORE:Daily Rundown (2/7/19), The Many Positives at Disney (2/6/19), First-Quarter Earnings Analysis, Assessing Weakness Related to AT&T's Quarter (1/31/19), A Check on the Market, Tech and Media (1/28/19), Daily Rundown (1/24/19), Initiation (8/21/18), Investor Relations
Facebook (FB) ; $169.60; 425 shares; 2.75%; Sector: Communication Services
WEEKLY UPDATE: On Wednesday, CEO Mark Zuckerberg published a note entitled "A Privacy-Focused Vision for Social Networking" in which he outlined the company's "vision and principles around building a privacy-focused messaging and social networking platform." Perhaps, most importantly, Zuckerberg acknowledged the company's data privacy issues stating, "frankly we don't currently have a strong reputation for building privacy protective services," and outlined several ways in which the company plans to address them going forward. While shares are still well off their all-time high, we believe the commitment to, and actions taken to achieve this goal of a more private and secure online platform will be the key factor allowing the company to move past the slew of negative headlines that plagued it in 2018. To achieve this, Zuckerberg outlined several principles (which members can delve deeper into via the link above) that the company will rely on to achieve its goals including: an emphasis on private interactions, encryption, reducing permanence, safety, interoperability, and the need for secure data storage. Bottom line, while there is plenty of work yet to be done, we believe that management has finally gotten the message that if they ever want to the company to return to its former glory, they must start to think about privacy first. The message has been received, the plan is in place, the goal has been made clear and we look forward to seeing management execute and in the process, regain the public's trust. 1-Wk. Price Change: 4.51%; Yield: 0.00%
INVESTMENT THESIS: Facebook is the leading social media company. It monetizes its platforms and delivers targeted advertisements across all major demographics at a high ROI. Although revenue is expected to decelerate as the company transitions its monetization emphasis to Instagram Stories from Facebook's NewsFeed, and there are additional risks to margins related to increased OpEx spending, we believe both processes have become well understood by investors at this point. Plus, we think future growth opportunities exist through increased monetization of the WhatsApp and Messenger verticals. While critics claim the member base has become disengaged, Facebook's third quarter results showed trends have held with daily active users (DAUs) of 1.49 billion (+9% YoY) and monthly active users (MAUs) of 2.27 billion (+10% YoY). Lastly, we believe the stock's current price to earnings multiple is cheap relative to the company's growth and competitive moat. Target Price: Reiterate $200; Rating: One
RISKS: Regulation, weak engagement on core platform, capital spending, margin pressure, monetization strategy of WhatsApp and Messenger
ACTIONS, ANALYSIS & MORE: Fourth-Quarter Earnings Analysis (1/30/19), Daily Rundown (1/25/19), Daily Rundown (1/24/19), Palo Alto Networks, Facebook Get Positive Nods from Analysts Alert (1/22/19), Facebook Rises on Analyst Call (1/8/19), Initiation (1/8/2013), Investor Relations
Alphabet (GOOGL) ; $1149.97; 70 shares; 3.08%; Sector: Communication Services
WEEKLY UPDATE: This week, the Wall Street Journal reported that "The French government on Wednesday introduced a new levy aimed at big tech businesses, adding to more than a dozen similar measures globally that collectively could cost Silicon Valley companies billions of dollars." Per the report, "The latest measure, likely the first in a wave of proposed digital-services taxes to take effect in Europe, will apply a 3% tax on revenue that companies like Alphabet Inc.'s Google or Amazon.com Inc. reap in France from such activities as undertaking targeted advertising or running a digital marketplace." 1-Wk. Price Change: 0.13%; Yield: 0.00%;
INVESTMENT THESIS: We believe that while Search and digital ad dominance is what will carry shares in the near- to- midterm, longer-term it is the company's artificial intelligence (AI) "moat" that will provide for new avenues of growth. AI is what has made the company's Search, Video (YouTube) and targeted ad capabilities best-in-class and is the driving force behind the company's success in voice (Google Home) and autonomous driving (Waymo). Furthermore, we believe it is this AI expertise that will also make the company more prevalent in other industries, including healthcare via subsidiary Verily, as AI and machine learning continue to disrupt operations across industries. We believe Alphabet's willingness to invest in new areas, knowing most will fail, is a recipe for long-term success as while most "Moonshot Factory" projects may fail, every once in a while, you end up with a Waymo, perhaps the division's, most successful graduate to date. Lastly, compounding out positive view of the company's future opportunities, we believe that Alphabet's free cash flow generation and solid balance sheet set it apart and are what will allow the company to continue taking chances on far-out ground-breaking and potentially world changing projects. Target Price: Reiterate $1,400; Rating: One
RISKS: Regulatory risk (data privacy), competition, macroeconomic slowdown impacting consumers and therefore ad buyer activity
ACTIONS, ANALYSIS & MORE: Fourth-Quarter Earnings Analysis, Daily Rundown (2/5/19), A Check on the Market, Tech and Media (1/28/19), Initiation (11/27/13), Investor Relations
Goldman Sachs (GS) ; $195.24; 550 shares; 4.10%; Sector: Financials
WEEKLY UPDATE: None 1-Wk. Price Change: -1.49%; Yield: 1.64%
INVESTMENT THESIS: Goldman Sachs is a strong performing investment bank, and the firm is currently ahead of its goal to generate an additional $5 billion in annual revenue by 2020. Meanwhile, the firm has delivered consistent improvements to its return on equity and return on tangible common equity metrics-which are drivers of a premium over book price-while tangible book value has continued to grow. Another reason why we think the share price deserves a greater premium is because of management's emphasis on fee-based, or more recurring, revenue streams. At the end of 2018, 61% of Goldman's revenues were fee-based, up from 48% in 2013. Target Price: Reiterate $270; Rating: One
RISKS: The economic cycle, Financial System regulation, 1MDB litigation, interest rates, financial market activity
ACTIONS, ANALYSIS & MORE: Trade Alert (2/11/19), Daily Rundown (2/7/19),Daily Rundown (1/16/2019), Fourth-Quarter Earnings Analysis (1/16/19), Initiation (2/14/2018), Investor Relations
Home Depot (HD) ; $181.23; 200 shares; 1.39%; Sector: Retail
WEEKLY UPDATE: While there were no specific updates this week, we note that housing data in recent weeks has been positive, a factor we spoke to in more detail in our New Home Starts alerts from this week. 1-Wk. Price Change: -2.13%; Yield: 3.00%
INVESTMENT THESIS: The unquestioned leader in home improvement supplies, we like Home Depot for its consistent same-store sales performance, ability to gain market share and improve margins, and its business model that is relatively immune from Amazon-like pressures. We initiated our position shortly before the Spring--Home Depot's "Holiday season" --expecting the company to outperform expectations. Longer term, management's 2020 financial targets include sales to increase to the range of $115 billion to $120 billion, with operating margins in a range of 14.4% to 15% and return on invested capital of more than 40%. Lastly, Home Depot is a cash-generating machine. Making good use of its cash flows, the company recently authorized a 32% increase to its quarterly dividend (which puts the yield ~3.0%) as well as announced a $15 billion share repurchase program. Target Price: Reiterate $210; Rating: One
RISKS: Consumer Spending habits; Housing market downturn; inclement weather
ACTIONS, ANALYSIS & MORE: Initiation (3/4/19), Daily Rundown (3/4/19), Fourth Quarter Earnings Release (2/26/19) Investor Relations
Honeywell (HON) ; $151.59; 850 shares; 4.92%; Sector: Industrials
WEEKLY UPDATE: Honeywell management presented at the J.P. Morgan Aviation, Transportation and Industrial conference on Thursday. When asked about the global macro-economic environment, CFO Greg Lewis said: "Look, we're 2 months in. And we talked about a 3% to 5% organic growth guidance when we came out in early February; and as we highlighted, that we felt like in the early part of the year, we were trending towards the high end of that. And we are. So February quarter-to-date has been pretty strong. We still have a long way to go." That's a very encouraging news to hear during a week when concerns of global growth seeped into the broader markets. By business type, JPMorgan analyst Stephen Tusa wrote: "Long-cycle businesses (~40% of portfolio post-spins) continue strong with Intelligrated and Aerospace in particular, while short-cycle businesses (~60%) are also seeing some growth." Recall that when management issued guidance with its last release, short-cycle uncertainty was where much of this year's unpredictably rest. We are only two-months into the year, but it sounds like Honeywell is off to a good start. 1-Wk. Price Change: -2.65%; Yield: 2.16%
INVESTMENT THESIS: Following a 2018 year when the company spun off two businesses, we believe the new Honeywell is worthy of a premium to its peer group as it has become less cyclical and more focused with stronger organic sales growth trends. The two segments we remain most positive on for their long-term growth profiles are Aerospace and Safety and Productivity Solution, as both stand to benefit from strong secular trends. Additionally, we appreciate management's ability to drive operational improvements in areas such as margin and free cash flow. Lastly, the balance sheet is clean has plenty of optionality, keeping the door open for accretive M&A and/or share buybacks. Target Price: Reiterate $175; Rating: One
RISKS: A slowdown in the aerospace market, a deterioration in commodity prices that affect businesses within PMT segment, trade war/tariffs exposure.
ACTIONS, ANALYSIS & MORE: Daily Rundown (2/7/19), Daily Rundown (2/1/19), Fourth-Quarter Earnings Analysis (2/1/19), Daily Rundown (1/25/2019), Daily Rundown (1/24/2019), Initiation (12/18/2017), Investor Relations
Johnson & Johnson (JNJ) ; $138.06; 675 shares; 3.56%; Sector: Healthcare
WEEKLY UPDATE: The biggest update this week was that the U.S. Food and Drug Administration approved Johnson & Johnson's Spravato (esketamine) for the treatment of treatment-resistant depression. As we noted in our alert, while we do not believe sales to be material this year, but expect Spravato to act as an additional driver to the company's already above-market growing pharmaceutical franchise. In terms of out year financials, we also remind members that Barclays forecasts sales upward of $700 million in 2023. And while, that does imply a solid trajectory, we think it understates Spravato's potential -- it should be bigger on an accelerated timeline because of its life-saving possibilities. In support of this view, we refer back to a previous Morgan Stanley note from mid-February that expected this product to be $1 billion by 2022. 1-Wk. Price Change: -0.21%; Yield: 2.61%
INVESTMENT THESIS: We view Johnson and Johnson as a consistent performer with durable franchises across the consumer and healthcare industry. Importantly, we expect the company's Pharmaceutical and Consumer business to grow above their respective industry growth rates, and even though Medical Devices has lagged, we have seen encouraging signs of improvements. Lastly, the company has one of the best balance sheets in the market, providing management with plenty of optionality for strategic M&A and/or buybacks. Target Price: Reiterate $155; Rating: One
RISKS: Talc Litigation, Biosimilar and generic pressure, pipeline execution.
ACTIONS, ANALYSIS & MORE: Johnson & Johnson's Spravato Approval by the FDA Is a Big Win Updates (2/13/19), Thoughts on Esketamine (2/8/19), Fourth-Quarter Earnings Analysis (1/22/19), Initiation (9/17/18), Investor Relations
JPMorgan Chase (JPM) ; $103.01; 950 shares; 3.74%; Sector: Financials
WEEKLY UPDATE: The two main updates this week were that the website for the company's healthcare venture with Amazon and Berkshire Hathaway, called Haven, went live and that according to a report from Reuters, the bank will no longer provide services to the private prison industry including names like CoreCivic Inc and GEO Group Inc. Per the report, "The decision is a result of the bank's ongoing evaluations of the costs and benefits of serving different industries." All in, we do not view either update as material to the company's financials. 1-Wk. Price Change: -1.36% ; Yield: 3.11%
INVESTMENT THESIS: We view JPMorgan as the best of breed large cap financial. The firm consistently delivers the best return on equity/tangible common equity performance in the industry, making the stock well deserving of a premium to its growing tangible book value. Not only that, but the Fortress balance sheet provides a degree of insulation to the risks associated with an economic shock. Lastly, we believe the valuation is very reasonable, especially considering the roughly 3% dividend yield and big buyback. Target Price: Reiterate $130; Rating: One
RISKS: The economic cycle, Financial System regulation, interest rates, credit quality.
ACTIONS, ANALYSIS & MORE: Daily Rundown (1/16/2019), Fourth-Quarter Earnings Analysis (1/15/19), Initiation (12/27/2017), Investor Relations
Lam Research (LRCX) ; $168.83; 375 shares; 2.42%; Sector: Technology
WEEKLY UPDATE: While there was little news on the stock this week, we took advantage of some weakness to bolster our position. While we continue to expect the inflection in memory prices to take some time, we maintain that the declines in memory pricing will lead to cutbacks in capex and wafer fab equipment, a factor that will in turn cause growth trends in DRAM/NAND supply to be below demand growth trends and ultimately result in a return of cap-ex spending and a return to Lam Research's earnings power. The reason we have elected to move on shares now is because perfect timing is nearly impossible, and we believe that current levels provide and attractive valuation with plenty of room for upside and healthy yield that will reward us in the meantime. 1-Wk. Price Change: -4.48%; Yield: 2.61%
INVESTMENT THESIS: We see upside resulting from ongoing industry dynamics that we believe will result in a coming inflection point for profitability as we enter the back half of the year. We believe that memory (DRAM & NAND) companies, which are customers of Lam Research, are currently holding back on capital expenditures in an effort to boost near-term profits and preserve cash flows, a dynamic that will ultimately result in supply growth lagging demand growth. Moreover, we believe that thanks to the digital revolution and rapidly growing internet of things space, we believe the demand for memory is becoming less cyclical in nature and as a result, we believe that should our thesis prove correct and we do see a supply shortage in the back half of 2019, then memory prices should begin to rebound and lead to increased CapEx/investments in capital equipment (what Lam sells) in the future. As we noted in out initiation, the current dynamic resembles the first half of 2016, a period that immediately preceded an inflection in prices, which lead to a sharp increase in Lam's earnings. Regarding management signaling, we also believe an inflection is coming due to the timing of management's recently announced $5 billion share repurchase program, which we view as a "call" that the industry dynamic is about to turn, and the stock has bottomed because the earnings decline is about to end. Target Price: Reiterate $210; Rating: One
RISKS: A delay in semiconductor companies increasing capital expenditures, a macroeconomic slowdown that hampers demand for memory chips.
ACTIONS, ANALYSIS & MORE: Adding to Our Lam Research Position (3/7/19), Daily Rundown (2/28/2019), Updates on a Few Tech Names Trade (2/21/19), Daily Rundown (2/14/19), Initiation (2/13/2019), Investor Relations
Schlumberger (SLB) ; $41.29; 1950 shares; 3.08%; Sector: Energy
WEEKLY UPDATE: No company specific news. Shares lower due to volatility in energy prices. 1-Wk. Price Change: -8.63%; Yield: 4.84%
INVESTMENT THESIS: We believe Schlumberger is the best of breed name in the oil services industry. Although the company's earnings power is dependent on the timing of the upstream investment cycle, management has a strong reputation in execution as well as a good handle in understanding the supply/demand dynamic of the industry. The company's premier technology gives it an advantage over peers and allows for market share gains. Furthermore, we value the company's international presence as it means a lessened exposure to North America, where new drilling activity remains limited. As compensation for our patience in the investment cycle's recovery, shares offer an attractive dividend that was confirmed to be backed by cash flow on the company's most recent earnings call. Target Price: Reiterate $65; Rating: One
RISKS: Commodity price pressure, weak capital spending of upstream oil and gas operators.
ACTIONS, ANALYSIS & MORE: Markets Surge Higher, Oil Prices Climb (2/12/18), Oil Rises Despite Down Day in the Market, Rating Upgrade and Trade Alert (1/22/19), Daily Rundown (1/22/19), Fourth-Quarter Earnings Analysis (1/18/19), Initiation (3/26/2015), Investor Relations
UnitedHealth Group (UNH) ; $237.29; 300 shares; 2.72%; Sector: Healthcare
United Healthcare Group UNH; $221.08; 225 shares; 1.65%; Sector: Health
WEEKLY UPDATE: This week, we took another look at UNH as shares remain under pressure while investors await updates on the "Medicare For All" bill. Our ultimate take away was that while we continue to expect near-term headline risk to pressure this stock, the business fundamentals remain strong and that should be the ultimate driver of the direction in price. 1-Wk. Price Change: -3.60%; Yield: 1.52%
INVESTMENT THESIS: We view UnitedHealthcare Group as a high performing health insurance company. Its business is divided into two subsidiaries: UnitedHealthcare, which represents the insurance side of the company, and Optum, a fast-growing, margin expanding, and technology/data leveraging division with exposure to PBM, healthcare consulting, and specialized health and wellness services. We value the company's consistent, economic-cycle resilient performance, supported by management's long-term expectation of 13% to 15% growth. Lastly, the company generates a significant amount of operating cash flow, which supports the large share repurchase program that is currently in place. Target Price: Reiterate $305; Rating: One
RISKS: Higher than expected medical costs, changes to healthcare policy, slower growth at Optum
ACTIONS, ANALYSIS & MORE: Adding to UnitedHealth Group (3/7/19) Taking Another Look at the Managed Care Stocks (3/4/19), Assessing the Weakness in the Health Insurance Group, "Medicare for All" bill pressures shares (2/27/19), Fourth-Quarter Earnings Analysis (1/15/19), Daily Rundown (1/15/2019), Initiation (4/2/2018), Investor Relations
Viacom (VIAB) ; $28.86; 1800 shares; 1.99%; Sector: Communication Services
WEEKLY UPDATE: On Monday, Viacom completed its acquisition of Pluto TV. Our previous thoughts on the transaction can be found here. Management's six key points to its Pluto TV strategy can be found here. 1-Wk. Price Change: -2.00%; Yield: 2.77%
INVESTMENT THESIS: In addition to the potential for Viacom to merge with CBS, a combination expected to be beneficial for shareholders of both companies, we believe shares too cheap relative to its effective turnaround strategy as profitability has steadily improved since Bob Bakish became CEO in 2016. To this point, we believe Paramount operations, which has undergone a transition from consistent underperformance to now multiple consecutive quarters of improved adjusted operating income with the last three being profitable, will continue to improve and demand more attention as momentum continues and management progresses in further monetizing intellectual property. Lastly, we believe the Pluto acquisition will increase management's ability to sell ads and offset the pressure on TV ads that has resulted from cord cutting. Target Price: Reiterate $40; Rating: One
RISKS: Competition, Pluto TV integration fails to meet expectations,
ACTIONS, ANALYSIS & MORE: Daily Rundown (3/8/19), Fourth-Quarter Earnings Analysis, Daily Rundown (2/6/19), Daily Rundown (2/5/19), Assessing Weakness Related to AT&T's Quarter (1/31/19), A Check on the Market, Tech and Media (1/28/19), Initiation (10/18/18), Investor Relations
TWOS
Anadarko Petroleum (APC) ; $42.07; 1250 shares; 2.01%; Sector: Energy
WEEKLY UPDATE: No company specific news. Shares lower due to volatility in energy prices. 1-Wk. Price Change: -5.25%; Yield: 2.85%;
INVESTMENT THESIS: Led by a management team that has shown a commitment to finding ways to unlock value and increase shareholders returns, we view the "oily" Anadarko Petroleum Corp as a high-quality U.S. exploration and production company. The company generates a significant amount of cash flow off its diversified asset base. In 2019, management's capital plan is based on a $50 oil and $3 natural gas environment. Lastly, as mentioned, shareholder returns are always in focus, and last November management announced a $1 billion addition to its existing share-repurchase program, a 20% increase to the quarterly dividend, and a $500 million increase to its debt-reduction program. Target Price: Reiterate $65; Rating: Two
RISKS: Commodity price pressure, regulatory risk in Colorado, pipeline constraints in the Permian Basin.
ACTIONS, ANALYSIS & MORE Oil Rises Despite Down Day in the Market, Fourth-Quarter Earnings Analysis, Initiation Alert (5/9/2018), Investor Relations
Apple (AAPL) ; $172.91; 450 shares; 2.97%; Sector: Technology
WEEKLY UPDATE: This week, Fortune reported that Apple acquired the patent portfolio of defunct home security company Lighthouse AI. While details are limited, we would speculate that the move could have been done in anticipation of a home security offering to compete with Alphabet's Nest platform or Amazon's Ring system. Also, this week, 9to5mac reported that Apple's long-awaited augmented reality product is expected to go into mass production as soon as the fourth quarter of this year and no later than the second quarter of 2020. While details are limited (this is Apple after all) the report indicated that the first iteration of the new device will likely be highly dependent on the iPhone for much of the computing needs. We view the news as important for two reasons. First, if true, it could serve to silence the bear calls claiming that the company lacks innovation. Second, if the new device truly does rely on the iPhone for processing power, it may be the catalyst the company needs to motivate consumers to upgrade from older devices, addressing the concerns of a mature smartphone market with elongated upgrade cycles. As cited in the article, the timeline matches the one previously reported by Bloomberg back in 2017. 1-Wk. Price Change: -1.18%; Yield: 1.69%
INVESTMENT THESIS: While we acknowledge that near- to- midterm performance remains heavily influenced by iPhone sales, we believe longer-term upside will come as Services revenue grows its share of overall sales. Services provide for a recurring revenue stream at higher margins, a factor that serves to reduce earnings volatility while allowing for a higher percentage of sales to fall to the bottom line, as a result, we believe that Services growth and the installed base, are much more important than how many devices the company can sell in a given 90-day period. In addition to improved profitability we also believe the transparent nature of this revenue stream will demand an expanded price-to-earnings multiple as segment sales grow. Furthermore, we believe that Apple's desire to push deeper into the healthcare arena will help make its devices invaluable as more life-changing features are added and the company works to democratize health records. Lastly, also see upside resulting from increased adoption of wearables (think the Apple Watch) and potential new product announcements such as an AR/VR headset or an update on project Titan, the company's secretive autonomous driving program. Target Price: Reiterate $180; Rating: Two
RISKS: Slowdown in consumer spending, competition, lack of new product innovation, elongated replacement cycles, failure to execute on Services growth initiative
ACTIONS, ANALYSIS & MORE: Fiscal Year First-Quarter Earnings Analysis (1/29/19), JPMorgan speculates on takeover targets, Daily Rundown (1/30/19), The Healthcare Ecosystem (1/9/19), Apple should acquire health record company Epic, CEO Tim Cook Interview (1/15/19), Initiation (1/4/10), Investor Relations
Abbott Laboratories (ABT) ; $76.63; 925 shares; 2.71%; Sector: Healthcare
WEEKLY UPDATE: This week, we received an update on Alinity when the company announced that "Regional Medical Laboratory, Inc. (RML) will use the company's most advanced technology, Alinity ci-series, to conduct diagnostic testing for millions of patients. RML, part of the Ascension network, which is the largest non-profit health system in the U.S., performs diagnostics testing for more than 2.4 million patients through hospital systems in Texas, Wisconsin, Oklahoma, Kansas and Tennessee." We are pleased with the news as the U.S. launch of Alinity has been a key pillar of our investment thesis and a primary factor we believed would allow shares to advance in 2019 and build on the strong performance seen in 2018. Also this week, Abbott announced that "Key medical devices across Abbott's cardiovascular portfolio will be highlighted in five late-breaking clinical trials at the American College of Cardiology's 68th Annual Scientific Session (ACC 2019) from March 16 - 18 in New Orleans." We look forward to learning more at that time and will of course update members as the updates flow in. 1-Wk. Price Change: -2.49%; Yield: 1.67%
INVESTMENT THESIS: Strong underlying performance with an achievable (and beatable) 2019 organic sales growth expectation in the 6.5% to 7.5% range. The company boasts high performing franchises in Medical Devices (with strong growth in Diabetes Care) and Diagnostics (with strong gains in Core Laboratory), while Nutrition and Established Pharmaceutical remain strategic parts of its total portfolio. We believe the company's opportunities for upside rest with additional Libre uptake, the Alinity U.S. launch, and an expanded indication of the Mitraclip. We believe in CEO Miles White and the Abbott management team, who has a strong track record of integrating acquisitions and delivering double-digit earnings per share growth. Lastly, Abbott has plenty of financial flexibility to pursue mergers/acquisitions and other strategic actions. Target Price: Reiterate $80; Rating: Two
RISKS: Emerging market exposure, Product disruptions.
ACTIONS, ANALYSIS & MORE: Fourth-Quarter Earnings Alert (1/23/19), Daily Rundown (1/23/2019), Initiation (6/5/2017), Investor Relations
Danaher (DHR) ; $125.04; 925 shares; 4.02%; Sector: Healthcare
WEEKLY UPDATE: Though we remain bullish on shares following the news that the company would be acquiring General Electric's life sciences business, we elected to trim shares this week to lock in an impressive gain of about 53% on our earliest remaining lots. As we noted in our alert, while the acquisition is a transformative deal that doubles down on the high-margin, strong growing Life Sciences industry and it should lead to further gains down the road, the M&A catalyst is now off the table due to the size of the deal and we cannot let ourselves get greedy. Lastly, on Friday, after the closing bell, the company announced a $0.01 increase to their divided to $0.17 per share, payable on April 26, 2019 to shareholders of record on March 29, 2019. 1-Wk. Price Change: -2.14%; Yield: 0.51%
INVESTMENT THESIS: With exposure to several strong performing end markets in the Life Science industry, and the constant application of the Danaher Business System (DBS) which facilitates operational improvements, we view Danaher as a high-quality diversified conglomerate. Its largest contributors to organic sales growth come from its Life Science, Diagnostics, and Environment & Applied Solutions divisions. Although its Dental segment continues to lag due to a challenged industry environment, management has strategically planned for a spinoff of this business in the second half of 2019. We believe this action will improve the consistency of the company's overall core sales growth trends, making the stock more deserving of a premium to peers. Target Price: Raised to $130 Rating: Two
RISKS: Exposure to China tariffs, execution and timing risk of Dental spinoff
ACTIONS, ANALYSIS & MORE: Danaher to acquire GE Life Sciences (2/25/19), Daily Rundown (2/25/2019) Fourth-Quarter Earnings Analysis (1/29/19), Initiation (1/12/2017), Investor Relations
DowDuPont (DWDP) ; $54.68; 1375 shares; 2.87%; Sector: Chemicals
WEEKLY UPDATE: None 1-Wk. Price Change: 2.51%; Yield: 2.78%
INVESTMENT THESIS: We are bullish on shares of DWDP as we approach the coming breakup into three separate companies and believe this is the main catalyst to watch in 2019. The Materials division will spin off by April 1, 2019 with the remainder expected to be broken up by June 1, 2019. Until then, we believe trade progress can be a meaningful driver for shares to grind higher as China has previously agreed to buy more agriculture goods from the U.S. (think soy beans, etc...) and work down the trade deficit over time. Additionally, we believe additional support will come from the company's $3 billion share repurchase program, which we remind members is expected to be completed before the Materials division spinoff and is another factor supporting out positive view of the current risk/reward profile. Target Price: Reiterate $70; Rating: Two
RISKS: Execution risk relating to the breakup, slowing global growth, trade war intensification, oil prices, natural gas prices
ACTIONS, ANALYSIS & MORE: Fourth-Quarter Earnings Analysis (1/31/19), Initiation (6/6/14), Investor Relations
Five Below (FIVE) ; $114.89; 250 shares; 1.10%; Sector: Consumer Discretionary
WEEKLY UPDATE: Late on Wednesday, coverage on Five Below was initiated with an Outperform rating and $140 price target at Oppenheimer. They wrote that Five, "operates a unique and defensible small-store format and enjoys significant opportunity for further, outsized unit expansion, for the foreseeable future." Similar to what we have previously said about how the market will view FIVE, the analysts wrote, "investors are apt to continue to pay up for industry-leading sales and EPS growth prospects." Additionally, Oppenheimer sees Five's new store rollout is still in its "early innings", and they believe FIVE can capture share off the failures of other retailers (like Toys 'R' US). 1 Wk. Price Change: -3.58%; Yield: 0.00%
INVESTMENT THESIS: This is a regional to national story that we believe will sustain momentum as organic growth, thanks to management's ability to recoup its initial investment in new stores in 8 months on average, is largely based on new store openings, something fully in management's control. Additionally, we value Five Below for its entirely domestic revenue stream, which insulates it from global trade dynamics and any slowing of global growth. And while tariffs may pressure the supply chain, should they increase, we believe management is already taking steps to mitigate any potential margin pressure. Lastly, while an economic slowdown could impact all retailers, we believe that Five Below's focus on less expensive products will allow it to be resilient as shoppers will naturally look for discounts when funds run low, making Five Below stores all the more attractive in such an environment. Target Price: Reiterate $125; Rating: Two
RISKS: Economic slowdown leading to less consumer spending, competition, lack of innovative product mix
ACTIONS, ANALYSIS & MORE: Sell Alert (1/23/19), Initiation (12/14/18), Investor Relations
Kohl's (KSS) ; $67.77; 900 shares; 2.33%; Sector: Consumer Discretionary
WEEKLY UPDATE: This week, Kohl's released a very solid fourth-quarter earnings report that was compounded by a strong FY2019 EPS forecast that topped consensus, at the low end! However, as strong as the results and outlook were, we were even happier to hear that the company's Amazon partnership is about to kick into high gear with management set to transition the program from the current "store within a store" concept "to a more robust wholesale relationship with Amazon." As a result, Kohl's plans to double its efforts and expand the store count to over 200, up from current 100 rate. Even further, Kohl's plans to dedicate space in over 200 stores to Amazon devices - basically an Amazon store within a store. 1-Wk. Price Change: -0.48%; Yield: 3.87%
INVESTMENT THESIS: We like Kohl's position in the department store industry. Its brands are tailored to middle-income buyers who shop for value, or good deals, while their store locations remain away from the mall which has been subject to decline in foot traffic. The company is run by a strategic management team who has several strong initiatives in place (standard-to-small initiatives, Amazon partnership, etc.) that drive traffic and improve inventory management. Lastly, we expect Kohl's to be a large beneficiary of peer closings (like Bon-Ton), resulting in increased market share. Target Price: Reiterate $90; Rating: Two
RISKS: A decline in consumer spending, shifts in consumer fashion preferences, margin pressure related to increased competition,
ACTIONS, ANALYSIS & MORE: Fourth Quarter Earnings Analysis (3/5/19), Holiday Sales Update (1/10/19), Holiday Season Retail Roundup (1/18/19), Initiation Alert (4/4/2018), Investor Relations
Microsoft (MSFT) ; $110.51; 600 shares; 2.53%; Sector: Information Technology
WEEKLY UPDATE: None 1-Wk. Price Change: -1.80%; Yield: 1.67%
INVESTMENT THESIS: We believe the cloud to be a secular growth trend and that upside to shares will result from Microsoft's hybrid cloud leadership as the company grab's market in this expanding industry. While companies may look to build out multi-cloud environments, Microsoft's Azure offering will be a prime choice thanks to the company's decision to provide the same "stack" used in the public cloud, to companies for their on-premise data centers. Additionally, we would note that hybrid environments are currently the preference for most companies because it allows them to maintain critical data in house while taking advantage of the agility and scalability provided by public clouds. Outside of the cloud opportunity, we maintain a positive view on the company's growing gaming business, which we believe is becoming an increasingly prominent factor in the Microsoft growth story as gaming becomes more mainstream, management works to convert its gaming revenue from one-time license purchase to a recurring subscription model and as technologies like augmented/virtual reality evolve. Finally, as it relates to LinkedIn and other subscription-based services such as O365 and various Dynamics products, we continue to value them highly for their recurring revenue streams, which we remind members, provides for greater transparency of future earnings. Target Price: Reiterate $118; Rating: Two
RISKS: Slowdown in IT spending, competition, cannibalization of on premises business by the cloud
ACTIONS, ANALYSIS & MORE: Updates on a Few Tech Names Microsoft Rises on Bullish Analyst Call (2/21/19), Fiscal Year Second-Quarter Earnings Analysis (1/30/19), Keep These Themes In Mind (1/10/19), Initiation (11/27/17), Investor Relations
Palo Alto Networks (PANW) ; $234.63; 275 shares; 2.47%; Sector: Technology
WEEKLY UPDATE: This week, analysts at Barclays published a note following their meeting with CFO Kathy Bonanno and CMO Rene Bonvanie that we discussed in more detail here. Additionally, as called out in our alert, The Wall Street Journal reported that there have been more than 200 cyberattacks linked to Iranian hackers in the past two years, serving to bolster our conviction that Palo Alto plays in a space that is in secular bull market mode as the need for cybersecurity has never been greater. 1-Wk. Price Change: -4.42%; Yield: 0.00%
INVESTMENT THESIS: We believe cyber security to be a secular growth trend that will continue to be a priority for cooperate investments globally in coming years. We value Palo Alto above others because, while firewall spend will continue to be a key factor supporting sales and earnings in the near- to- mid-term, we believe CEO Nikesh Arora's intense focus on cloud security will provide for longer relevance and industry dominance. Target Price: Reiterate $285; Rating: Two
RISKS: Slowing global growth - particularly in the US, where PANW does the bulk of its business - leading to less than expected corporate cyber security investments, competition, cloud providers moving into the cloud security space
ACTIONS, ANALYSIS & MORE: What's Going On With Shares of Palo Alto Networks? (3/7/19), Fiscal Year Second-Quarter Earnings Analysis (2/26/19), Daily Rundown (2/14/19) Daily Rundown (2/7/19) Trimming for a Gain (2/7/19), Palo Alto Networks, Facebook Get Positive Nods From Analysts (1/22/19), Initiation (10/9/18), Investor Relations