Markets ground higher this week, aided by a Friday rally on the back of bank earnings that served to increase investor optimism as the results pointed to a U.S. economy that remains resilient with little evidence of a recession anytime soon. That said, while the U.S. economy remains robust, the global economy continues to be under pressure, with the International Monetary Fund, this week, lowering its projections for global growth in 2019 and 2020 to 3.5% and 3.6%, respectively -- representing a downward revision of 0.2 and 0.1 percentage points in 2019 and 2020, respectively. Also, this week, we hosted our monthly Members Only call, which can be reviewed here.
Looking ahead, it's time to buckle up because... earnings are here (in our Jon Snow voice from Game of Thrones!)
Treasury yields edged up to ~2.55% while gold prices dipped to about $1,295 per ounce level. The dollar index held around the 90 level while WTI oil prices pushed to roughly the $64 level.
First-quarter earnings season has officially begun. Within the portfolio, we heard from JP Morgan (JPM) .
JP Morgan
Friday morning, before the opening bell, JPMorgan Chase reported a top and bottom-line beat with its first-quarter 2019 results. On the top line, managed revenues of $29.85 billion (+4.6% YoY), beat expectations of $28.44 billion and on the bottom line, diluted earnings per share of $2.65 (+11.8% YoY), exceeded estimates of $2.35 per share.
Importantly, the net yield on interest-earnings assets (net interest margin or "NIM") was in-line to slightly better than expectations at 2.56% with strong total net interest income and return on tangible common equity (ROTCE) bounced back to 19%. Meanwhile, tangible book value per share (TBVPS) increased to $57.62 and the efficiency ratio was 55%. Full results can be found here.
Economy
On Monday, the Commerce Department reported that new orders for manufactured goods (durable and nondurable) in February ticked down 0.5% (or $2.6 billion), to $497.5 billion, in line with expectations following a flat January reading. Shipments of manufactured durable goods increased 0.2% to $258.5 billion, following a 0.5% decline in January. Unfilled orders for durable goods fell 0.3% to $1,177.6 billion following a 0.1% increase in January. Lastly, inventories of manufactured durable goods rose 0.3% to $418.9 billion following a 0.5% increase in January. Importantly, new orders of non-defense capital goods excluding aircraft (i.e., core capital goods) ticked down 0.1% in February, following a 0.9% advance in January and a 0.8% decline in December. Shipments for core capital goods also decreased 0.1% in February, following a 1.0% increase in January and a 0.1% increase in December. See here for our full analysis.
On Wednesday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) increased 0.4% in March on a seasonally adjusted basis, outpacing expectations for a 0.3% monthly increase. This follows a 0.2% advance in February, which itself came on the heels of three months of unchanged readings (November through January). Over the last 12 months, the CPI has increased 1.9% before seasonal adjustment, also exceeding expectations for a 1.8% increase and represents an acceleration from February's 1.5% annual pace of advance. The so-called "core" CPI, which excludes food and energy costs due to their volatility, rose 0.1% in March, short of expectations for a 0.2% increase and coming on the heels of 0.1% advance in February. Over the past 12 months, core CPI has risen 2.0%, also a miss versus expectations of a 2.1% annual increase, however, above February's 2.1% annual rate of advance. See here for our full analysis.
The U.S. Bureau of Labor Statistics (BLS) reported on Thursday that the Producer Price Index for final demand jumped up 0.6% (seasonally adjusted) in March, doubling expectations for a 0.3% monthly increase. This follows a 0.1% increase in February and a 0.1% decrease in January. On an annual basis (unadjusted), the PPI increased 2.2%, exceeding expectations for a 1.9% annual increase, following a 1.9% annual rate of advance in February. Core PPI was unchanged in March following a 0.1% uptick in February and 0.2% advance in January. Additionally, the core index advanced 2.0% from the same time last year. See here for our full analysis.
Also, on Thursday, the Department of Labor reported that initial jobless claims for the week ending April 6 were 196,000, a decrease of 8,000 from the previous week's revised level of 204,000 (revised up from 202,000), 15,000 claims below expectations of 211,000 and the lowest level since October 4, 1969 when it was 193,000. Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 207,000, a decrease of 7,000 from the previous week's revised average of 214,000 (revised up from 213,500). 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 214 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.
Key Global Economic Readings
(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, while the status quo remains largely unchanged with sanctions on Iran and Venezuela being compounded by the ongoing production cut from OPEC+, the big news this week was that OPEC's output dropped 534,000 barrels per day in March to 30.02 million, putting the monthly output figure from OPEC at the lowest level since February 2015 (when it was 29.97 million bpd). Aiding the decline was a 324,000-bpd reduction out of Saudi Arabia to just under 9.8 million bpd, bringing total cuts from the oil producing nation to roughly 1.3 million bpd since peaking at 11.1 million bpd November 2018. As for Venezuela, production plunged by 289,000 bpd in March as U.S. sanctions have compounded by oil industry power outages and economic turmoil.
Further aiding OPEC's output decline, production in Iraq, OPEC's second largest producer, was cut down by 126,000 bpd. However, the declines were partially offset by a 196,000 bpd increase in production out of Libya, a nation where production is highly volatile due to political unrest.
On the domestic front, on Wednesday, the U.S. Energy Information Agency (EIA), reported that in the week ending April 5, U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) increased by 7.0 million barrels to 456.6 million barrels, a bearish reading versus expectations for 2.0-million-barrel increase. Additionally, U.S. production held at a record high of 12.2 million bpd. Lastly, net imports increased by 210,000 bpd as imports fell by 164,000 bpd, while exports decreased by 374,000 bpd. See here for the full report.
Lastly, we note that the spread between WTI and Brent sits at roughly $7 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, with the market continuing to grind higher, we used the opportunity to book some profits, trimming a portion of our position in Five Below Inc FIVE (here) and Amgen AMGN (here).
Moving on to the broader market, with first-quarter earnings season kicking off this week, data is limited and we are therefore refraining from reporting on results versus expectations for until more companies release results. As a reminder, results in the fourth quarter of 2018 were relatively positive versus expectations with 67.5% of companies reporting a positive EPS surprise. For the fourth-quarter, earnings growth increased roughly 14.7% year over year vs. expectations for an overall 14.49% increase throughout the season; of the 426 non-financials that reported, earnings growth was up 15.5%. Revenues were 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, 55 companies in the S&P 500 will report earnings. Within the portfolio, we will hear from Citigroup C and Goldman Sachs GS on Monday before the opening bell, UnitedHealth Group UNH and Johnson and Johnson JNJ on Tuesday before the opening bell, Abbott Laboratories ABT on Wednesday before the opening bell, and Honeywell HON, Schlumberger SLB and Danaher DHR on Thursday before the opening bell.
Other key earnings reports for the market include: M&T BANK MTB, Aphria APHA, Wintrust Fin WTFC, Pinnacle Finl PNFP, Bank of America BAC, Wipro WIT, Progressive PGR, BlackRock BLK, Comerica CMA, First Horizon FHN, IBM IBM, United Continental UAL, Netflix NFLX, CSX CSX, Mellanox Tech MLNX, Hancock Whitney HWC, Fulton Fincl FULT, Marten Transport MRTN, Ericsson ERIC, PepsiCo PEP, Morgan Stanley MS, U.S. Bancorp USB, BNY Mellon BK, Textron TXT, ASML ASML, PolyOne POL, Las Vegas Sands LVS, Alcoa AA, Crown CCK, United Rentals URI, Crown Castle CCI, Plexus PLXS, E*TRADE ETFC, Sleep Number SNBR, Pier 1 Imports PIR, Sallie Mae SLM, Taiwan Semi TSM, American Express AXP, Travelers TRV, Union Pacific UNP, PPG Industries PPG, BB&T Corp BBT, SunTrust STI, KeyCorp KEY, Citizens Financial Group CFG, Intuitive Surgical ISRG, People's United Financial PBCT and Exponent EXPO.
Economic Data (*all times ET)
U.S.
Monday (4/15)
Empire Manufacturing (8:30): 8 expected
Net Long-term TIC Flows (16:00)
Total Net TIC Flows (16:00)
Tuesday (4/16)
Industrial Production MoM (9:15): 0.30% expected
Capacity Utilization (9:15): 79.20% expected
Wednesday (4/17)
MBA Mortgage Applications (7:00)
Trade Balance (8:30): -53.5b expected
Wholesale Inventories MoM (10:00): 0.40% expected
Thursday (4/18)
Retail Sales Advance MoM (8:30): 0.80% expected
Retail Sales Ex Auto MoM (8:30): 0.70% expected
Retail Sales Ex Auto and Gas (8:30): 0.50% expected
Philadelphia Fed Business Outlook (8:30): 11 expected
Initial Jobless Claims (8:30)
Continuing Claims (8:30)
Bloomberg Consumer Comfort (9:45)
Markit US Manufacturing PMI (9:45): 53 expected
Markit US Services PMI (9:45): 55 expected
Markit US Composite PMI (9:45)
Leading Index (10:00): 0.40% expected
Friday (4/19)
Housing Starts (8:30): 1230k expected
Building Permits (8:30): 1300k expected
International
Monday (4/15)
Tuesday (4/16)
Japan Tertiary Industry Index MoM (00:30): -0.20% expected
UK Claimant Count Rate (4:30)
UK Jobless Claims Change (4:30)
UK ILO Unemployment Rate 3Mths (4:30): 4.00% expected
Germany ZEW Survey Current Situation (5:00): 8.5 expected
Germany ZEW Survey Expectations (5:00): 0.5 expected
EU Agg ZEW Survey Expectations (5:00)
Japan Trade Balance (19:50): ¥296.9b expected
China Industrial Production YoY (22:00): 6.00% expected
China Industrial Production YTD YoY (22:00): 5.60% expected
China Retail Sales YoY (22:00): 8.40% expected
China GDP YoY (22:00): 6.30% expected
Wednesday (4/17)
Japan Industrial Production MoM (00:30)
Japan Industrial Production YoY (00:30)
Japan Capacity Utilization MoM (00:30)
UK CPI MoM (4:30): 0.20% expected
UK CPI YoY (4:30): 2.00% expected
UK CPI Core YoY (4:30): 1.90% expected
UK Retail Price Index (4:30): 285.7 expected
UK RPI MoM (4:30): 0.20% expected
UK RPI YoY (4:30): 2.60 % expected
UK PPI Output NSA MoM (4:30): 0.30% expected
UK PPI Output NSA YoY (4:30): 2.20% expected
EU Agg CPI Core YoY (5:00): 0.80% expected
EU Agg CPI MoM (5:00)
EU Agg CPI YoY (5:00): 1.40% expected
Thursday (4/18)
Germany Markit/BME Germany Manufacturing PMI (3:30)
Germany Markit Germany Services PMI (3:30)
Germany Markit/BME Germany Composite PMI (3:30)
EU Agg Markit Eurozone Manufacturing PMI (4:00)
EU Agg Markit Eurozone Services PMI (4:00)
EU Agg Markit Eurozone Composite PMI (4:00)
UK Retail Sales Ex Auto Fuel MoM (4:30): -0.30% expected
UK Retail Sales Ex Auto Fuel YoY (4:30): 4.00% expected
UK Retail Sales Inc Auto Fuel MoM (4:30) -0.40% expected
UK Retail Sales Inc Auto Fuel YoY (4:30): 4.60% expected
Japan Natl CPI YoY (19:30): 0.50% expected
Japan Natl CPI Ex Fresh Food YoY (19:30): 0.70% expected
Friday (4/19)
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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 DOW SLB UNH PANW VIAB NVDA
ONES
Amazon (AMZN) $1,843.06; 90 shares; 6.1%; Sector: Info. Tech.
WEEKLY UPDATE: This week, Amazon announced that it has expanded the ability for customers to make purchases from Whole Foods Market via Prime Now to Asheville, Charlottesville, Columbia, Lexington, Little Rock, Manchester, Mobile, Naples and Savannah. With this the service, which delivers food to customer homes in as little as an hour, is now available in 75 U.S. metros, with plans for further expansion throughout 2019. Additionally, the company announced "three new renewable energy projects as part of its long-term goal to power all Amazon Web Services (AWS) global infrastructure with renewable energy." Regarding brick-and-mortar efforts, The Verge reported that Amazon Go stores (locations featuring automated checkout) would begin accepting cash so as not to discriminate against those without an Amazon account or the means to utilize the automated system. Lastly, regarding the highly coveted $10 billion Pentagon "Joint Enterprise Defense Infrastructure" (aka JEDI) cloud contract, Business Insider reported this week that Oracle and IBM are out and that Microsoft and Amazon will be moving forward, with the ultimate winner expected to be announced by mid-July. 1-Wk. Price Change: 0.31%; 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), Amazon Remains One of the Best Stories in Technology (2/11/19), 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
BP PLC (BP) ; $44.67; 2,600 shares; 4.27%; Sector: Energy
WEEKLY UPDATE: Shares continue to climb on the sustained move high in commodity prices, which this week benefited from news that OPEC's output plunged to a four-year low in March on the back of a 324,000-bpd decline in Saudi Arabian output. 1-Wk. Price Change: 0.31%; Yield: 5.51%
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) ; $67.42; 1,550 shares; 3.84%; Sector: Financials
WEEKLY UPDATE: We provide our earnings preview in our Alert here. The company will report earnings next Monday, before the opening bell. As for the stock, shares traded higher in reaction to the positive print from JPMorgan, however, we cautioned club members during our Friday conference call that Citigroup is not as good as JPM, and we have considered downgrading our rating to a TWO. 1-Wk. Price Change: 2.85%; Yield: 2.67%
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: What You Need to Know when the Banks Report (4/12/2019) Fourth-Quarter Earnings Analysis (1/14/19), Initiation (4/29/16), Investor Relations
CVS Health (CVS) ; $52.81; 2,075 shares; 4.03%; Sector: Healthcare
WEEKLY UPDATE: Following a largely uneventful Senate hearing regarding the pharmacy benefits management (PBM) business, in which representatives from CVS, UNH and others, spoke before the Senate Finance Committee, analysts at Cantor Fitzgerald released a note in which they described the day as a net positive for PBMs "as the group was able to counter the negative sentiment with constructive responses, recognizing this story is far from over." The largely immaterial "net benefit" view appeared to also be echoed by analysts at JP Morgan, who wrote in their own note that "in our view, there was nothing materially incremental or surprising that came out of the hearing, and we believe the participants did well responding to the questions that were posed to them. That said, we believe ongoing uncertainty around the regulatory environment will continue to remain an overhang to sentiment." We agree that while the hearing went as well as we could have hoped, regulation in the space will continue to weigh on shares until there is more clarity on the future of the PBM model. 1-Wk. Price Change-2.31%; Yield:3.79%
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: Updating CVS Health (4/8/2019), Our Case for CVS Health Over Walgreens (4/3/2019), Stocks We Are Looking at During Friday's Selloff (3/22/2019), A Check on CVS Health After Last Night's Interview (3/22/19), 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) ; $160.71; 775 shares; 4.58%; Sector: Info. Tech.
WEEKLY UPDATE: None 1-Wk. Price Change: 1.37%; 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 Systems (CSCO) ; $56.29; 1500 shares; 3.1%; Sector: Info. Tech.
WEEKLY UPDATE: None 1-Wk. Price Change: 1.96%; Yield:2.49%
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 (4/3/2019), Daily Rundown (3/1/2019) Second-Quarter Earnings Analysis (2/13/19),Daily Rundown (2/14/19) Initiation (11/1/18), Investor Relations
Disney (DIS) ; $130.06; 975 shares; 4.66%; Sector: Communication Services
WEEKLY UPDATE: This week, Disney hosted its Investor Day, featuring the unveil of the highly anticipated Disney+ streaming platform. Also, this week, the company released the first trailers for the live action The Lion King and Star Wars: The Rise of Skywalker. 1-Wk. Price Change: 13.08%; Yield: 1.35%
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 (3/28/2019), Adding to Disney (3/25/2019), Stocks We Are Looking at During Friday's Selloff (3/22/2019), The Disney-Fox Deal Is Set to Complete (3/19/2019) Daily Rundown (2/7/19), The Many Positives at Disney (2/6/19), First-Quarter Earnings Analysis, A Check on the Market, Tech and Media (1/28/19), Daily Rundown (1/24/19), Initiation (8/21/18), Investor Relations
Dow Inc. (DOW) ; $58.30; 458 shares; 0.98%; Sector: Chemicals
WEEKLY UPDATE: The company officially announced on Thursday that its first quarterly dividend payment will be $0.70/share. This was in line with what we expected in our deep-dive analysis. 1-Wk. Price Change: 1.85%; Yield: 4.80%
INVESTMENT THESIS: We appreciate the transformation that has occurred at Dow Inc following its merger and separation. Dow Inc has streamlined its operations and now sells into six different businesses in three market verticals: Performance Materials and Coating; Industrial Intermediates and Infrastructure; and Packaging and Specialty Products. Capital discipline is of greater importance at the company, with management favoring brownfield projects over greenfield and focusing on incremental, high-return on invested capital projects. This strategy allows management to offer a significant capital return policy and target a peer leading dividend payout ratio of approximately 45% across the cycle. From its first day post-separation, Dow Inc was the high yielding stock in the Dow Jones Industrial Average, and management has a program in place to repurchase $3 billion worth of stock. Target Price: Reiterate $62; Rating: One
RISKS: Macroeconomic slowdown, margin compression due to commodity prices, competition
ACTIONS, ANALYSIS & MORE: Daily Rundown 4/2/2019), How the DowDuPont Spinoff Impacts Shareholders (4/2/19), Initiation (4/1/19), Investor Relations
Facebook (FB) ; $179.10; 425 shares; 2.80%; Sector: Communication Services
WEEKLY UPDATE: On Sunday, the Wall Street Journal reported that Facebook "is in talks to develop an underwater data cable that would encircle the [African] continent." The project, code named "Simba" is being considered in an effort to drive down bandwidth costs and make offerings more accessible to the region. Per the report, "Industry executives say the proposed Simba system is uniquely ambitious. The project would give Facebook's European and Asian data centers a dedicated and reliable link to growing African markets where its apps like WhatsApp are already popular." While we view the project as ambitious and certainly a longer-term positive if it can aid in increasing user adoption, we do not believe it material in the near-term. On Tuesday, analysts at Morgan Stanley bumped up their price target from $190 to $195 stating "We see the ~$4bn+ opportunity but believe a stronger payments offering is key to capitalize, which takes time. Monetizing Stories took time too; good news is we believe Stories are monetizing now." This follows last week's note from analysts at Deutsche Bank, in which they also called out the social media company's opportunity to build out a significant revenue stream via e-commerce operations on Instagram. 1-Wk. Price Change: 1.92%; 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: Facebook Instagram Update (4/3/2019), 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) ; $1,222.73; 70 shares; 3.15%; Sector: Communication Services
WEEKLY UPDATE: On Monday, via a post on Medium, we learned that Project Wing, the company's drone delivery program (and recent Moonshot graduate) was granted approval by the Civil Aviation Safety Authority (CASA) to begin formal business operations. While too small to move the needle for a company the size of Alphabet, we view the news as indicative of the ways Alphabet is looking to revolutionize various industries outside of technology (in this case, the delivery industry). Also, this week, the company hosted the "Google Cloud Next" conference, which TheStreet.com's Eric Jhonsa reported on here. In addition to the coverage provided by Jhonsa, we would also flag this report by GeekWire, in which a new cloud offer deigned for retailers is discussed. We view this as a strong move on the part of Alphabet as it looks compete with AWS by offering retailers cloud services in a way that does not fund their biggest threat, Amazon. 1-Wk. Price Change: 0.93%; 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: Alphabet Announces Stadia (3/19/19), 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) ; $207.84; 550 shares; 4.2%; Sector: Financials
WEEKLY UPDATE: No company-specific updates this week, however, we did provide a preview of next week's earnings release, here. 1-Wk. Price Change: 2.72%; Yield: 1.54%
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: The Apple Card: A Huge, Underappreciated Opportunity (4/4/19), Stocks We Are Looking at During Friday's Selloff (3/22/2019), 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) ; $203.85; 300 shares; 2.25%; Sector: Consumer Discretionary
WEEKLY UPDATE: JPMorgan noted this week their belief that "the first week of April is off to an improved start, all things considered." That's key because we are entering the Spring selling season, which to a retailer like Home Depot, is comparable to the winter holiday shopping season. 1-Wk. Price Change: 0.89%; Yield: 2.67%
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: Stocks We Are Looking at During Friday's Selloff (3/22/2019), Initiation (3/4/19), Daily Rundown (3/4/19), Fourth Quarter Earnings Release (2/26/19) Investor Relations
JPMorgan Chase & Co. (JPM) ; $111.21; 950 shares; 3.88%; Sector: Financial
WEEKLY UPDATE: The company reported a top and bottom line beat with its first quarter 2019 results which we wrote about in our Alert here. 1-Wk. Price Change: 5.60%; Yield: 2.88%
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: JPMorgan 1st Quarter Earnings (4/12/2019), Daily Rundown (1/16/2019), Fourth-Quarter Earnings Analysis (1/15/19), Initiation (12/27/2017), Investor Relations
Nvidia (NVDA) ; $190.01; 200 shares; 1.4%; Sector: Info. Tech.
WEEKLY UPDATE: The stock was detailed in our April members-only conference call. 1-Wk. Price Change: -0.49%; Yield: 0.34%
INVESTMENT THESIS: We believe upside will result from Nvidia's GPU dominance, the moat created by its CUDA, the company's parallel computing platform and significant growth in all of the company's end markets including, the cloud, gaming, autonomous vehicles and pro visualization. Furthermore, we believe the cloud (i.e. data center) growth will be even more of a factor in upside following the acquisition of Mellanox, which thanks to its low latency "InfiniBand" technology, provides Nvidia the ability be a more integral player in the buildout of data centers by working to both accelerate server subsystems via GPU-acceleration and accelerate the data center overall by "tying together" the multiple subsystems and allowing them to operate as a single cohesive unit. Target Price: Reiterate $205; Rating: One
RISKS: slow uptake of ray-tracing chips which will depend on gaming publishers' implementation of the new technology in software releases, a slowdown in the IT/data center spending, competition, slower than expected inventory channel normalization.
ACTIONS, ANALYSIS & MORE: Updates on Nvidia (3/26/2019) Adding to Nvidia (3/25/2019) Stocks We Are Looking at During Friday's Selloff (3/22/2019), A look at Gaming/eSports (3/21/2019), Nvidia Investor Day Takeaways (3/20/19), Nvidia Is Far From Our Only Gaming Position (3/19/19), Initiation (3/18/19), Investor Relations
Schlumberger (SLB) ; $45.65; 1,950 shares; 3.27%; Sector: Energy
WEEKLY UPDATE: None 1-Wk. Price Change: 1.47%; Yield: 4.38%
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
United Healthcare Group (UNH) ; $223.22; 300 shares; 2.46%; Sector: Health
WEEKLY UPDATE: Shares were a major disappointment this week as investors fled the MCOs in indiscriminate fashion in what looks like to be a panic trade based on regulator/political headlines. Fortunately, UnitedHealth Group has the opportunity to calm the nerves of investors and improve sentiment when they report earnings next Tuesday before the opening bell. We do not think the recent steep decline is justified because the company's fundamentals largely have not changed, but we still need to see solid earnings and cost control. 1-Wk. Price Change: -10.27%; Yield: 1.61%
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) ; $30.29; 2100 shares; 2.34%; Sector: Communications Services
WEEKLY UPDATE: A caller on Monday's "Mad Money" asked Jim about his thoughts on Viacom. Jim agreed with the caller's assessment on VIAB, sharing the view that it is cheap, the company has great content, and a merger with CBS Corp is likely based on a huge amount of cost synergies that could be realized (last week RBC Capital Markets estimated in their VIAB upgrade note that merger synergies could be ~$1 billion by CY20). Jim added later that he believes Viacom is the cheaper of the two because he thinks they are having good quarter. This consideration matters because we never give countenance to an investment solely on a takeover basis. In a more industry view, we believe the reaction to Disney's Investor Day underscored the importance content-creators and production studios have in the evolving media industry. We continue to believe VIAB is too inexpensive and shares should be bought. 1-Wk. Price Change:1.71%; Yield:2.64%
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, contract renewals, cord cutting.
ACTIONS, ANALYSIS & MORE: Viacom and T-Mobile Announce New Content Deal (4/3/2019), Adding to a Media Stock Shortly After the Bell (4/1/2019) Updates on Viacom (3/29/2019), Updates on Viacom (3/26/19), Contract Renewal With AT&T (3/25/19), 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
Amgen (AMGN) ; $191.42; 250 shares; 1.76%; Sector: Healthcare
WEEKLY UPDATE: On Tuesday, Amgen said the FDA approved Evenity "for the treatment of osteoporosis in postmenopausal women at high risk for fracture." However, with the approval expected to be marginal in terms of its impact on the company's bottom line, we opted to trim shares on the resulting strength. 1-Wk. Price Change-2.04% Yield 3.03%
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: Two
RISKS: Drug pricing, pipeline issues, loss of exclusivity on key drugs, competition
ACTIONS, ANALYSIS & MORE: Amgen Update (4/8/2019), Raising Cash This Morning Through Two Trims (3/27/2019), Trimming Amgen This Morning (3/18/2019), 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
Anadarko Petroleum (APC) ; $61.78; 1,050 shares; 2.39%; Sector: Energy
WEEKLY UPDATE: Friday morning, Chevron announced that it will acquire all of Anadarko Petroleum Corp's shares outstanding for $65, valuing all of the outstanding shares at roughly $33 billion. This value represented a premium of about 39% over its prior day price. This transaction will be a combination of cash and stock, with APC shareholders receiving 0.3869 shares of Chevron and $16.25 per share. We are still evaluating our options of if we want to take the money and run or become Chevron shareholders.
1-Wk. Price Change: 31.65%; Yield: 1.94%;
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, Chevron Stock Price
ACTIONS, ANALYSIS & MORE APC catches a bid (4/12/2019), Oil Rises Despite Down Day in the Market, Fourth-Quarter Earnings Analysis, Initiation Alert (5/9/2018), Investor Relations
Apple (AAPL) ; $198.87; 450 shares; 3.29%; Sector: Technology
WEEKLY UPDATE: On Monday, analysts at PiperJaffray published the results of their 37th semi-annual "Taking Stock With Teens" indicating that of ~8,000 respondents (average age of 16.3 years with 46% female, 54% male), 83% had an iPhone -- "the highest percentage we have seen in our survey" -- with 86% planning for their next phone to be an iPhone. Additionally, the analysts called out that the Apple Watch was the most popular smart watch among teens, at 20% share, followed by the Samsung Gear at only 2% market share. As the analysts put it, "we view the survey data as a sign that Apple's place as the dominant device brand among teens remains well intact." Also, this week, analysts at Morgan Stanley published a note on the company's healthcare initiative titled, "Don't Underestimate Apple's Move into Healthcare," in which they state, "We think Apple is building a healthcare ecosystem and is poised to emerge as a leader in consumer-centric healthcare." As members know, we believe healthcare to be the next major step for Apple as the company advances offerings such as the Apple Watch to further resemble medical devices, we are pleased to see the analyst community starting to come around to our thinking. 1-Wk. Price Change: 0.95% Yield: 1.47%
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: Raised to $220; 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: The Apple Card: A Huge, Underappreciated Opportunity (4/4/19), Apple Services Event (3/26/19), Fiscal Year First-Quarter Earnings Analysis (1/29/19), 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) ; $78.01; 825 shares; 2.37%; Sector: Healthcare
WEEKLY UPDATE: None 1-Wk. Price Change: -1.25% Yield: 1.64%
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
Comcast (CMCSA) ; $41.30; 2,200 shares; 3.34%; Sector: Communication Services
WEEKLY UPDATE: Comcast touched a new 52-week high this week on the heels of an upgrade to Outperform by analysts at Macquarie. 1-Wk. Price Change: 2.18%; Yield: 2.03%
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: Two
RISKS: An acceleration of cord cutting, failure to realize targeted Sky integration synergies, 5G impacting broadband business, competition
ACTIONS, ANALYSIS & MORE: Upgrade to Outperform (4/9/19), Daily Rundown (3/27/2019) Raising Cash Through 2 Small Trades (3/20/2019), 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
Danaher (DHR) ; $131.63; 550 shares; 2.66%; Sector: Life Sciences
WEEKLY UPDATE: None 1-Wk. Price Change: 0.03% Yield: 0.52%
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: $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) ; $39.47; 1,375 shares; 2%; Sector: Chemicals
WEEKLY UPDATE: None 1-Wk. Price Change: 4.17%; Yield: 3.85%
INVESTMENT THESIS: We are bullish on shares of DWDP as we approach the coming breakup into now two separate companies and believe this is the main catalyst to watch in 2019. The company successfully completed the Dow Inc separation April 2, 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. Target Price: Reiterate $45; Rating: Two
RISKS: Execution risk relating to the breakup, slowing global growth, trade war intensification, farming conditions
ACTIONS, ANALYSIS & MORE: Daily Rundown (3/29/209), Updates on DowDuPont (3/29/2019), Fourth-Quarter Earnings Analysis (1/31/19), Initiation (6/6/14), Investor Relations
Five Below Inc (FIVE) ; $134.97; 200 shares; 0.99%; Sector: Consumer Discretionary
WEEKLY UPDATE: Five Below caught an upgrade to Overweight from Matthew Boss at JPMorgan on Thursday. Remember, he is our favorite retail analyst but was the one that downgraded it in February. Now he wants investors to come back in because he thinks the comp drivers at the company are still in their early innings thanks to branding, marketing, and remodeling efforts. Furthermore, management is saying 2019 will be the best year since 2013 for licensing because of the notable movie releases (Frozen 2, Aladdin, toy story -- all Disney). 1-Wk. Price Change: 7.62%; 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: Raised to $135; Rating: Two
RISKS: Economic slowdown leading to less consumer spending, competition, lack of innovative product mix
ACTIONS, ANALYSIS & MORE: Daily Rundown (3/28/2019), Bumping Up Our Price Target on Five Below (3/28/2019), Fourth-Quarter Earnings Analysis (3/27/19), Sell Alert (1/23/19), Initiation (12/14/18), Investor Relations
Honeywell (HON) ; $162.47; 700 shares; 4.18%; Sector: Industrials
WEEKLY UPDATE: None 1-Wk. Price Change: 0.49%; Yield: 2.02%
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: Two
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: Trimming Honeywell (3/14/2019), 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) ; $135.98; 600 shares; 3%; Sector: Healthcare
WEEKLY UPDATE: None 1-Wk. Price Change: -0.15%; Yield: 2.65%
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: Two
RISKS: Talc Litigation, Biosimilar and generic pressure, pipeline execution.
ACTIONS, ANALYSIS & MORE: Trimmed Shares (3/27/2019), 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
Kohl's (KSS) ; $69.73; 800 shares; 2.05%; Sector: Consumer Discretionary
WEEKLY UPDATE: Jim had a fantastic interview with CEO Michelle Gass on Thursday's episode of "Mad Money." This interview increased our conviction in management's ability to drive sales through the numerous store initiatives. We plan to upgrade on a pullback towards a 4.0% yield (approximately $67). 1-Wk. Price Change: -3.19%; 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: Trimmed shares (3/27/2019) 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
Lam Research (LRCX) ; $194.08; 400 shares; 2.85%; Sector: Info. Tech.
WEEKLY UPDATE: None 1-Wk. Price Change: -0.55%; Yield: 2.27%
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: Stocks We Are Looking at During Friday's Selloff (3/22/2019), 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
Microsoft Corp (MSFT) ; $120.95; 600 shares; 2.67%; Sector: Technology
WEEKLY UPDATE: As we called out in our Amazon update above, Business Insider reported this week that Oracle and IBM are out of the race for the highly coveted $10 billion Pentagon "Joint Enterprise Defense Infrastructure" (aka JEDI) cloud contract, and that Microsoft and Amazon will be moving forward, with the ultimate winner expected to be announced by mid-July. Per the report, "Microsoft and Amazon are able to move forward because they fulfilled the minimum requirements needed for the project." 1-Wk. Price Change: 0.88%; Yield: 1.52%
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) ; $244.66; 225 shares; 2.02%; Sector: Info. Tech.
WEEKLY UPDATE: This week, we were once again reminded of the importance of cyber security and bolstered in our view that the need for security services such as those provided by Palo Alto represents a secular growth trend as the heads of all major banks testified in front of the House Financial Services Committee and voiced their opinion that the number one risk to our financial system is cyber-attacks. As a reminder, this is the same view voiced by Fed chair Jerome Powell when he spoke on 60 Minutes (here) stating "we spend a great deal of resources and time on cyber resilience. And so do our banks," while going on to later note that "at the Fed we have a particular role in making sure that our banking institution is resilient to cyber risks. We take this very seriously. I'd say in a sense it is our top priority." 1-Wk. Price Change: 2.42%; 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, Positive Nods From Analysts (1/22/19), Initiation (10/9/18), Investor Relations