Drew Angerer/Getty
Markets ended the holiday-shortened week relatively flat as first-quarter earnings season ramped up. While the results have been mixed, the takeaway thus far is that while the economy is showing signs of a slowdown, growth remains, and the macroeconomic backdrop continues to support both consumer and business demand. Additionally, there are signs that the global environment is improving, with China reporting that 1Q19 GDP grew at a rate of 6.4% and that exports, industrial production and retail sales in March were higher than expected. That said, while the domestic and global economic backdrops remain encouraging and supportive of more room to the upside for equities, we continue to believe that the real catalyst will be a meaningful and enforceable trade deal being reached between the U.S. and China.
Treasury yields ticked up to ~2.56% while gold prices fell to the ~$1,274 per ounce level. The dollar index held at around the 97 level while WTI oil prices pushed to nearly $64 per barrel.
First-quarter earnings season has officially begun. Within the portfolio, we heard from Citigroup (C) , Goldman Sachs (GS) , UnitedHealth Group (UNH) , Johnson & Johnson (JNJ) , Abbott Laboratories (ABT) , Honeywell (HON) and Schlumberger (SLB) .
Citigroup
On Monday, Citigroup reported mixed headline results with its first quarter 2019 earnings. Revenue of $18.576 billion (down 2% year over year) was in-line with the $18.599 billion consensus, however, earnings per share of $1.87 (up 11% year over year) topped the consensus of $1.80.
Looking to several key bank-wide metrics, Citi's net interest revenue as a percent of average interest-earning assets (net interest margin or "NIM") was in-line at 2.72%, the efficiency ratio improved to 57%, return on tangible common equity was 11.9%, and tangible book value per share increased to $65.55.
By segment, Global Consumer Banking (GCB) revenue was $8.45 billion (+2% YoY, +4% ex-Hilton portfolio sale) and in-line with the $8.48 billion consensus. Institutional Clients Group (ICG) revenue was $9.694 billion (-2% YoY) compared to the $9.54 billion consensus, with notable outperformance from Investment Banking and Fixed Income Markets. Lastly, Corporate/Other revenue was $431 million (-27% YoY), shy of the $515 million consensus. See here for our full analysis.
Goldman Sachs
On Monday, before the opening bell, Goldman Sachs reported mixed results with its fiscal first quarter earnings release. On the top line, sales of $8.81 billion (-13% YoY) just missed consensus of $8.9 billion. However, on the bottom line, earnings per share of $5.71 (-18% YoY), breezed past expectations of $4.89 per share.
In addition to the solid heading readings, the bank's annualized return on average common shareholders' equity (ROE) was 11.1% in the first quarter, while annualized return on tangible equity (ROTE) in the quarter was 11.7%. Furthermore, book value per share (BVPS) came in at $209.07 (+12% YoY), while tangible book value per share (TBVPS) grew to $198.25 (+12% YoY). Additionally, speaking to the bank's financial standing, the firm's common equity tier 1 (CET1) ratio, which compares core equity capital to total risk-weighted assets and is a measure of financial strength, came in at 13.7% (+40 bps YoY). See here for our full analysis.
UnitedHealth Group
UnitedHealth Group reported earnings on Tuesday and delivered a top and bottom-line beat with its first quarter 2019 result. Revenues of $60.3 billion (up 9% year over year) topped the consensus of $59.71 billion, and adjusted earnings per share of $3.73 (up 23% year over year) exceeded the consensus of $3.59.
As for some key metrics, the company's medical care ratio (often referred to as the MLR) came in at 82%, beating expectations of 82.2% (lower is better). Meanwhile, cash flows from operations were $3.2 billion, representing 0.9x net income. By division, UnitedHealthcare revenues were $48.9 billion (consensus $48.6 billion) for an increase of 8% year over year, and operating margins expanded 70 basis points to 6%. At Optum, revenues increased about 12% year over year to $26.4 billion (consensus $26.21 billion), with operating margin expansion of 10 basis points to 7.1% (in-line). On guidance, management raised its full year adjusted earnings per share outlook, increasing the range of $14.50 to $14.75 from $14.40 to $14.70. Despite the clean results and strong fundamentals, shares fell victim to comments about the "Medicare for All" proposal, overshadowing what was a good print otherwise. See here for our full analysis.
Johnson & Johnson
On Tuesday, before the opening bell, Johnson & Johnson reported a top and bottom line beat with is fiscal first quarter 2019 earnings release. On the top line, sales of $20.02 billion (+5.5% YoY) outpaced expectations of $19.61 billion. On the bottom line, earnings per share of $2.10 (+1.9%) exceeded consensus of $2.04 per share.
Additionally, on an organic basis (which adjusts for currency, acquisitions and divestitures), management now expects full year 2019 sales to increase 2.5% - 3.5%, up from prior guidance for a 2.0% - 3.0% increase. With this, management expected operational sales (adjusted only for the impact of currency) to come in at $82 - $82.8 billion, up from $81.6 - $82.4 billion previously. Additionally, on the bottom line, management upped its adjusted operational earnings guidance from $8.65 - $8.80 previously, to $8.73 - $8.83 per share. This compares to consensus coming into the release of $81.05 billion on the top line and earnings per share of $8.58 on the bottom. See here for our full analysis.
Abbott Laboratories
On Wednesday Abbott Laboratories reported a top and bottom-line beat with its first-quarter 2019 results. Revenues of $7.535 billion (up 2% year over year on a reported basis) beat the $7.476 billion consensus, and adjusted earnings per share of $0.63 (up 6.7% year over year) beat the consensus by two pennies. Organic sales growth came in at +7.1%, topping management's guidance of a little less than +7% that stood against a tough year-over-year comp.
By segment, the results were generally positive: with Nutrition notching its eight consecutive quarter of improved growth with +6.7% organic sales; FreeStyle Libre driving Medical Devices to +9.5% organic sales; Established Pharmaceuticals remaining active with 5.4% organic sales; however, Diagnostics taking a step back but still delivering +4.4% organic sales. On guidance, even though management simply backed its full year earnings per share range of $3.15 to $3.25 when others wanted a raise, we believe this was just conservatism as CEO Miles White does not like to raise numbers this early in the year. See here for our full analysis.
Honeywell
On Thursday Honeywell reported a top and bottom-line beat with its first quarter result. Revenues of $8.88 billion (up 7% year over year ex spins) topped the consensus of $8.64 billion, and adjusted earnings per share of $1.93 (up 13% year over year ex spins) exceeded the consensus of $1.83.
The company achieved an impressive 8% increase in organic sales growth, representing an acceleration from the fourth quarter 2018's +6% tally. Growth came from every segment, with Aerospace and Safety & Productivity Solutions each delivering organic sales growth of 10%. Meanwhile, Home Building Technologies accelerated from the prior quarter, increasing organic sales by 9%. Rounding out the list is Performance Materials and Technologies, which was no slouch with a 5% increase in organic sales. On guidance, management raised its 2019 forecast on several key fronts. Revenue is now expected to be in the range of $36.5 billion to $37.2 billion with organic sales in the range of +3% to +6% (up from +2% to +5%). On the bottom line, management expects earnings per share to be in the range of $7.90 to $8.15, up from pervious guidance for $7.80 to $8.10. See here for our full analysis.
Schlumberger
Thursday morning, before the opening bell, Schlumberger reported in line to better-than-expected results with its first quarter 2019 earnings release. On the top line, sales of $7.879 billion (+1% YoY) outpaced expectations of $7.81 billion, while earnings of $0.30 per share (-21% YoY) were in line with expectations.
As for the specific results by region, on a sequential basis, revenues declined 3% in North America to $2.738 billion, were up 1% in Latin America at $992 million, fell 7% in Europe/CIS/Africa to $1.707 billion, and declined 5% in Middle East & Asia to $2.338 billion. When we look at the full scope of Schlumberger's International business, revenue in the quarter fell 5%. On an annual basis, North American revenues were also down 3%, however, international revenues were up 3% from the same time last year. See here for our full analysis.
Economy
On Tuesday, the Federal Reserve announced that industrial production ticked down 0.1% in March, missing expectations for a 0.2% monthly advance. However, working to partially offset the miss, February's reading was revised up to indicate a 0.1% increase (revised up from a flat reading previously reported). Meanwhile, capacity utilization came in at 78.8%, also below expectations of 79.15%. Total industrial production is up 2.8% from the same time last year, while total capacity utilization increased 2.0% annually. See here for our full analysis.
On Thursday, the U.S. Commerce Department reported that retail and food-services sales advanced 1.6% in March to $514.1 billion, exceeding expectations for a 1.0% monthly advance. With the March advance, retail and food services sales are up 3.6% from the same time last year. On a monthly basis, excluding auto sales (which because of their high-ticket price can result in volatile monthly readings), retail sales increased 1.2%, also outpacing expectations for a 0.7% increase. Excluding autos and gas, sales were up 0.9%, again beating expectations for a 0.4% increase. Core retail sales advanced 1.0% beating the 0.4% estimate. See here for our full analysis.
Also, on Thursday, the Department of Labor reported that initial jobless claims for the week ending April 13 were 192,000, a decrease of 5,000 from the previous week's revised level of 197,000 (revised up from 196,000), 13,000 claims below expectations of 205,000 and the lowest level since September 6, 1969 when it was 182,000. Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 201,250, a decrease of 6,000 from the previous week's revised average of 207,250 (revised up from 207,500) and the lowest level for the average since November 1, 1969 when it was 200,500. 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 215 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.
Lastly, while the market will be closed Friday, we are expecting to receive New Home Starts data.
(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 supply side dynamics remain largely unchanged, with OPEC+ production cuts, combined with U.S. sanctions on Venezuela and Iran continuing to support prices as supply gets sucked out of the market, signs of a rebound in global growth (recall, China's 1Q19 GDP reading came in better than expected) are also aiding the move higher as investors speculate that future demand expectations may be on the conservative side. Remember, the global economy runs on oil as, despite efforts to increase the use of alternative sources, oil remains the key source of energy. As a result, speculation that global growth may be better than previously expected, naturally leads to speculation that demand will increase more than expected.
That said, one potential headwind for the market is the June OPEC meeting. While it was previously expected that the production cuts would be extended, reports are coming in that OPEC+ may actually look to boost production in order to compete with the U.S. for market share as the U.S. continues to pump at near record levels, soaking up any demand OPEC+ may be leaving on the table as a result of the cuts.
On the domestic front, on Wednesday, the U.S. Energy Information Agency (EIA), reported that in the week ending April 12, U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) fell by 1.4 million barrels to 455.2 million barrels, a bullish reading versus expectations for 1.2-million-barrel decrease. Additionally, U.S. production came in a bit, falling to 12.1 million bpd. Lastly, net imports decreased by 659,000 bpd as imports fell by 607,000 bpd, while exports increased by 52,000 bpd. See here for the full report.
Lastly, we note that the spread between WTI and Brent sits at roughly $8 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 bulked up our stake in Viacom VIAB while closing out our position Danaher DHR. We exited Danaher ahead of the quarterly release, we provided some thoughts for members on the quarter, here.
Moving on to the broader market, with first-quarter earnings season still in the early innings, data is limited and we are therefore refraining from reporting on results versus expectations 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, 188 companies in the S&P 500 will report earnings. Within the portfolio, we will hear from Microsoft, Facebook and Lam Research on Wednesday, after the opening bell; Comcast on Thursday, before the opening bell; and Amazon on Thursday, after the closing bell.
Other key earnings reports for the market include: Haliburton HAL, Kimberly-Clark KMB, Grainger GWW, Steel Dynamics STLD, NVR NVR, Lincoln Electric LECO, Lennox Int'l LII, HNI HNI, AVX Corp AVX, Whirlpool WHR, Celanese CE, Range Resources RRC, Zions Bancorp ZION, Brown & Brown BRO, Cadence Design CDNS, Bright Scholar Design BEDU, Verizon VZ, United Tech UTX, Centene CNC, Proctor & Gamble PG, Lockhead Martin LMT, Coca-Cola KO, Nucor NUE, Sherwin-Williams SHW, Harley Davidson HOG, Stryker SYK, Texas Instruments TXN, eBay EBAY, Canadian Pacific CP, W.R. Berkley WRB, TD Ameritrade AMTD, Carlisle Cos CSL, Total System TSS, Snap SNAP, AT&T T, United Micro UMC, Anthem ANTM, Boeing BA, Caterpillar CAT, Novartis AG NVS, General Dynamics GD, Northrup Grumman NOC, Thermo Fisher TMO, SAP SE SAP, Cenovus Energy CVE, DTE Energy DTE, Biogen BIIB Stanley Black & Decker SWK, Norfolk Southern NSC, Domino's Pizza DPZ, Visa V, PayPal PYPL, Tesla TSLA, Ameriprise Financial AMP, O'Reilly Auto ORLY, Raymond James RJF, Packaging Corp PKG, Chipotle Mexican Grill CMG, Xilinx XLNX, ServiceNow NOW, AU Optronics AUO, Yandex N.V. YNDX, Valero Energy VLO, UPS UPS, 3M MMM, AbbVie ABBV, Raytheon RTN, Penske Auto PAG, Int'l Paper IP, Bristol-Myers BMY, Nokia NOK, Southwest Air LUV, Altria MO, American Electric ARP, Waste Mgmt WM, Illinois Tool ITW, Ford Motor F, Intel INTC, World Fuel Services INT, Capital One COF, Volaris Aviation VLRS, Starbucks SBUX, Aflac AFL Avnet AVT, Principal Fincl PFG, Discover Financial Services DFS, Alaska Air ALK, Cerner CERN, Mattel MAT, Sony SNE, Exxon Mobil XOM, Chevron CVX, Archer-Daniels ADM, LyondellBasell LYB, Sanofi SNY, Imperial Oil IMO, AstrraZeneca AZN, Lear LEA and Colgate-Palmolive CL.
Economic Data (*all times ET)
U.S.
Monday (4/22)
Chicago Fed Nat Activity Index (8:30)
Existing Home Sales (10:00): 5.28m expected
Tuesday (4/23)
FHFA House Price Index MoM (9:00)
Richmond Fed Manufact. Index (10:00): 10 expected
New Home Sales (10:00): 650k expected
Wednesday (4/24)
MBA Mortgage Applications (7:00)
Thursday (4/25)
Durable Goods Orders (8:30): 0.50% expected
Initial Jobless Claims (8:30)
Durables Ex Transportation (8:30): 0.40% expected
Continuing Claims (8:30)
Bloomberg Consumer Comfort (9:45)
Friday (4/26)
GDP Annualized QoQ (8:30): 1.80% expected
Personal Consumption (8:30)
GDP Price Index (8:30): 1.20% expected
Core PCE QoQ (8:30)
- of Mich. Sentiment (10:00)
International
Monday (4/22)
Tuesday (4/23)
Japan Machine Tool Orders YoY (2:00)
EU Agg Consumer Confidence (10:00): -6.9 expected
Wednesday (4/24)
Japan All Industry Activity Index MoM (00:30)
Germany IFO Business Climate (4:00): 99.9 expected
Germany IFO Expectations (4:00): 96.2 expected
Germany IFO Current Assessment (4:00): 104.2 expected
UK PSNB ex Banking Groups (4:30): 0.5b expected
Thursday (4/25)
Japan Jobless Rate (19:30)
Japan Job-To-Applicant Ratio (19:30)
Japan Tokyo CPI YoY (19:30)
Japan Tokyo CPI Ex-Fresh Food YoY (19:30)
Japan Industrial Production MoM (19:50)
Japan Industrial Production YoY (19:50)
Japan Retail Trade YoY (19:50)
Japan Retail Sales MoM (19:50)
Friday (4/26)
Japan Housing Starts YoY (1:00)
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Tickers: ABT AMZN AMGN AAPL APC BP CRM CMCSA CSCO CVS DIS FB FIVE GOOGL GS HD HON JPM JNJ KSS LRCX MSFT C DWDP DOW SLB UNH PANW VIAB NVDA
ONES
Amazon (AMZN) $1,861.69; 90 shares; 6.15%; Sector: Info. Tech.
WEEKLY UPDATE: On Thursday, Amazon and Alphabet announced that in the coming months, the YouTube app will be made available for Amazon Fire TV devices and Fire TV smart TVs, as well as to Prime Members streaming to Chromecast and Chromecast built-in deices. This new working relationship between the two tech giants is a positive for future collaborations. 1-Wk. Price Change: 1.01%; 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) ; $44.39; 2,600 shares; 4.23%; Sector: Energy
WEEKLY UPDATE: None 1-Wk. Price Change: -0.63% Yield: 5.54%
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) ; $69.67; 1,550 shares; 3.96%; Sector: Financials
WEEKLY UPDATE: Reported first-quarter 2019 earnings on Monday, before the opening bell. 1-Wk. Price Change: 3.34%; Yield: 2.58%
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: First-Quarter Earnings Analysis (4/15/19), What You Need to Know when the Banks Report (4/12/2019), Initiation (4/29/16), Investor Relations
CVS Health (CVS) ; $52.63; 2,075 shares; 4.01%; Sector: Healthcare
WEEKLY UPDATE: Shares were downgraded to Perform from Outperform at Oppenheimer on Monday, shares were initiated with a Buy rating at Guggenheim on Wednesday. 1-Wk. Price Change -0.34%; Yield: 3.80%
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 HealthAssessing 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) ; $155.99; 775 shares; 4.43%; Sector: Info. Tech.
WEEKLY UPDATE: The company announced on Monday it will integrate Salesforce.org into Salesforce. 1-Wk. Price Change: -2.94%; 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
Dow Inc. (DOW) ; $57.77; 458 shares; 0.97%; Sector: Chemicals
WEEKLY UPDATE: On Thursday, the company provided an update regarding first-quarter 2019 performance that you can read about here. Management expects Materials Science to be in line with previous guidance with net sales of $10.8 billion and Operating EBITDA of $1.9 billion. 1-Wk. Price Change: -0.91%; Yield: 4.85%
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
FacebookFB ; $178.28; 425 shares; 2.78%; Sector: Communication Services
WEEKLY UPDATE: On Wednesday, Business Insider reported that Facebook "unintentionally uploaded" email contact information of 1.5 million new Facebook users since May 2016. Additionally, the company said on Thursday in an updated blog post that millions of Instagram user passwords had been exposed to employees. Nevertheless, the stock showed a degree of resilience against this backdrop of negative press. 1-Wk. Price Change: -0.46%; 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
AlphabetGOOGL ; $1,241.47; 70 shares; 3.19%; Sector: Communication Services
WEEKLY UPDATE: On Thursday, Amazon and Alphabet announced that in the coming months, YouTube app will be made available for Amazon Fire TV devices and Fire TV smart TVs, as well as Prime Members streaming to Chromecast and Chromecast built-in deices. This new working relationship between the two tech giants is a positive for future collaborations. 1-Wk. Price Change: 1.53%; 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) ; $205.91; 550 shares; 4.15%; Sector: Financials
WEEKLY UPDATE: Reported first-quarter 2019 earnings on Monday, before the opening bell. 1-Wk. Price Change: -0.93%; Yield: 1.65%
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: First-Quarter Earnings Analysis (4/15/19), The Apple Card: A Huge, Underappreciated Opportunity (4/4/19), Stocks We Are Looking at During Friday's Selloff (3/22/19), Trade Alert (2/11/19), Daily Rundown (2/7/19),Daily Rundown (1/16/2019), Initiation (2/14/18), Investor Relations
JPMorgan Chase & Co. (JPM) ; $113.46; 950 shares; 3.95%; Sector: Financial
WEEKLY UPDATE: None 1-Wk. Price Change: 2.02%; Yield: 2.82%
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) ; $186.30; 200 shares; 1.37%; Sector: Info. Tech.
WEEKLY UPDATE: While company specific news was limited, on Thursday, Reuters reported that "China's Tencent has won a key approval to start selling the Nintendo Switch in the country, paving the way for the console to enter the world's largest video games market two years after it was first released worldwide." The reason we mention this is because, Switch consoles are powered by Nvidia gaming chip and as noted in the report, until now, "The need to navigate complex regulations and the search for a local partner have hampered Japanese gaming company Nintendo's efforts to bring its hybrid home-portable Switch console to China, holding back the development of console gaming there." As a result, we will watch closely for unit sales guidance revisions from Nintendo and management as a readthrough to potential additional chip sales for Nvidia. 1-Wk. Price Change: -1.95%; 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) ; $45.56; 1,950 shares; 3.26%; Sector: Energy
WEEKLY UPDATE: Reported first-quarter 2019 earnings on Thursday, before the opening bell. 1-Wk. Price Change: -0.20%; Yield: 4.39%
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: First-Quarter Earnings Analysis (4/18/19), 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), Initiation (3/26/2015), Investor Relations
United Healthcare Group (UNH) ; $221.75; 300 shares; 2.44%; Sector: Health
WEEKLY UPDATE: Reported first-quarter 2019 earnings on Tuesday, before the opening bell. We also provided some more thoughts on the impact and potential of "Medicare for All"1-Wk. Price Change: -0.66%; Yield: 1.62%
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: Thoughts on UNH and "Medicare for All" (4/17/19), First-Quarter Earnings Analysis (4/16/19), 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), Daily Rundown (1/15/2019), Initiation (4/2/2018), Investor Relations
Viacom (VIAB) ; $30.18; 2300 shares; 2.55%; Sector: Communications Services
WEEKLY UPDATE: None 1-Wk. Price Change: -0.36%; Yield: 2.65%
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: Buy Alert (4/16/2019), 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, Investor Relations
TWOS
Amgen (AMGN) ; $177.47; 250 shares; 1.63%; Sector: Healthcare
WEEKLY UPDATE: The company announced that the recently approved Evenity is now available for shipment in the U.S. at a list price of $1,825 per dose. Later in the week, analysts at Piper Jaffray referenced a survey which indicated that Teva's Ajovy had gained ground on Aimovig. 1-Wk. Price Change: -7.29%; Yield: 3.27%
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
Apple (AAPL) ; $203.86; 450 shares; 3.36%; Sector: Technology
WEEKLY UPDATE: On Tuesday, the news broke that Apple and Qualcomm had reached a settlement, agreeing to dismiss all litigation relating to a multi-year royalty dispute. Additionally, the two companies entered into a six-year licensing agreement and multi-year chip supply agreement. While the news was clearly a much larger positive for Qualcomm than Apple (with money flowing from Apple to Qualcomm), we view it as a positive for Apple as it removes a key overhang and brings the company that much closer to developing a 5G capable iPhone, with some expecting an initial release as early as 2020. Following the news, analysts at Morgan Stanley stated, "While today's agreement with Qualcomm will result in Apple paying an unspecified one-time settlement to Qualcomm, we view the conclusion of AAPL and QCOM's legal dispute as a net positive for the stock, as it removes a long-standing overhang that has been in place since early 2017. Big picture, today's settlement and multi-year chipset supply agreement means that Apple is better positioned for the upcoming push to 5G," adding that according to reports from the Nikkei, "Apple and some of its suppliers have already begun testing Qualcomm's 5G modem chips, and Apple is likely to purchase them for use in their September 2020 iPhone launch, implying a 5G capable iPhone in 2020 is now a real possibility." 1-Wk. Price Change: 2.51%; Yield: 1.43%
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) ; $73.92; 825 shares; 2.24%; Sector: Healthcare
WEEKLY UPDATE: Reported first-quarter 2019 earnings on Wednesday, before the opening bell. 1-Wk. Price Change: -5.24%; Yield: 1.73%
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: Raised to $82; Rating: Two
RISKS: Emerging market exposure, Product disruptions.
: 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
Cisco Systems (CSCO) ; $56.40; 1500 shares; 3.10%; Sector: Info. Tech.
WEEKLY UPDATE: The stock was downgraded to Buy from "Conviction Buy" at Goldman Sachs on Tuesday. The analysts also raised their price target to $62 from $58. 1-Wk. Price Change: 0.20%; Yield: 2.48%
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: Downgrade to Two
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
Comcast (CMCSA) ; $42.43; 2,200 shares; 3.42%; Sector: Communication Services
WEEKLY UPDATE: None 1-Wk. Price Change: 2.74%; Yield: 1.98%
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
Disney (DIS) ; $132.45; 975 shares; 4.74%; Sector: Communication Services
WEEKLY UPDATE: We downgraded shares to a Two due to the strong post-investor day run. While we would be inclined to view weakness as a buying opportunity (thus our Two rating), we believe the easy money to have been made and profits can be taken at scale. 1-Wk. Price Change: 1.84%; Yield: 1.33%
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: Two
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
DowDuPont (DWDP) ; $39; 1,375 shares; 1.97%; Sector: Chemicals
WEEKLY UPDATE: On Thursday, the company provided an update regarding first quarter 2019 performance that you can read about here. Although management reduced first-half 2019 expectations for Agriculture (Corteva), reconfirming full-year guidance means that a portion of sales will simply shift over to the back half of the year. Meanwhile, management indicated that Specialty Products net sales and operating EBITDA will be down 3% and flat in the upcoming quarter, respectively. Some viewed this as an improvement to previous guidance of both net sales and operating EBITDA down low-single digits percent. 1-Wk. Price Change: -1.19%; Yield: 3.90%
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) ; $141.65; 200 shares; 1.04 %; Sector: Consumer Discretionary
WEEKLY UPDATE: Jim will interview CEO Joel Anderson on Thursday's Mad Money. We will follow up with our view the interview next week. Meanwhile, the stock was initiated with a Buy rating and $150 price target by Bank of America on Monday. 1-Wk. Price Change: 4.95%; Yield: %
WEEKLY UPDATE: The stock was downgraded to Buy from "Conviction Buy" at Goldman Sachs on Tuesday. The analysts also raised their price target to $62 from $58. 1-Wk. Price Change: %; 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: Follow Up on Retail (4/15/19),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
Home Depot (HD) ; $205.66; 300 shares; 2.26%; Sector: Consumer Discretionary
WEEKLY UPDATE: On Wednesday, analysts at Morgan Stanley reiterated their Overweight rating in a note titled, "All Seems Good in HD's Hood." Per the note, following meetings with management, the analysts came away with increased confidence that same-store sales are tracking on par with expectations, with demand picking up in March and April following a slow, weather-impacted February, and the belief that "guidance for ~30 bps gross margin decline could prove conservative, barring any unforeseen cost headwinds between now and the end of the year." Given the bottoming and potential rebound we are seeing in the housing market, we continue to like shares of HD despite the recent run and believe the note to support our view that as the weather improves, Home Depot will benefit, and shares will grind higher. 1-Wk. Price Change: 0.89%; Yield: 2.65%
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: Downgrade to Two
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
Honeywell (HON) ; $169.06; 700 shares; 4.34%; Sector: Industrials
WEEKLY UPDATE: Reported first-quarter 2019 earnings on Thursday, before the opening bell. 1-Wk. Price Change: 4.06%; Yield: 1.94%
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: First-Quarter Earnings Analysis (4/18/19), Trimming Honeywell (3/14/2019), Daily Rundown (2/7/19), Daily Rundown (2/1/19), Daily Rundown (1/25/2019), Daily Rundown (1/24/2019), Initiation (12/18/2017), Investor Relations
Johnson & Johnson (JNJ) ; $137.52; 600 shares; 3.03%; Sector: Healthcare
WEEKLY UPDATE: Reported first-quarter 2019 earnings on Tuesday, before the opening bell. 1-Wk. Price Change: 1.13%; Yield: 2.62%
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: First-Quarter Earnings Analysis (4/16/19), Trimmed Shares (3/27/2019), Johnson & Johnson's Spravato Approval by the FDA Is a Big WinUpdates (2/13/19), Thoughts on Esketamine (2/8/19), Initiation (9/17/18), Investor Relations
Kohl's KSS; $70.37; 800 shares; 2.06%; Sector: Consumer Discretionary
WEEKLY UPDATE: None 1-Wk. Price Change: 0.92%; 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: Follow Up on Retail (4/18/19), 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) ; $194.77; 400 shares; 2.86%; Sector: Info. Tech.
WEEKLY UPDATE: None 1-Wk. Price Change: 0.36%; Yield: 2.26%
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: Two
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 NamesTrade (2/21/19), Daily Rundown (2/14/19), Initiation (2/13/2019), Investor Relations
Microsoft Corp (MSFT) ; $123.37; 600 shares; 2.72%; Sector: Technology
WEEKLY UPDATE: On Thursday, we learned that Microsoft acquired Express Logic, "a leader in real time operating systems (RTOS) for IoT and edge devices powered by microcontroller units (MCUs)." Per the release, this acquisition will allow Microsoft to "unlock access to billions of new connected endpoints, grow the number of devices that can seamlessly connect to Azure and enable new intelligent capabilities." We view this as a positive move that will allow Microsoft to further enhance Azure growth, the core pillar of our investment thesis. 1-Wk. Price Change: 2.0%; Yield: 1.49%
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 NamesMicrosoft 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) ; $235.46; 225 shares; 1.94%; Sector: Info. Tech.
WEEKLY UPDATE: None 1-Wk. Price Change: -3.76%; 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
Three
Anadarko Petroleum (APC) ; $64.18; 1,050 shares; 2.47%; Sector: Energy
WEEKLY UPDATE: This week, we followed up on the Chevron takeover news, here and downgraded the name to a Three (designated for stocks we would sell on strength), noting that while Chevron is one of our favorite names amongst the oil majors, we have not been too bullish on the energy sector as a whole. Selling our position fits our desire to be less exposed to the commodity, and we can use this good APC-cash to eventually buy new name from our bullpen 1-Wk. Price Change: 3.88%; Yield: 1.87%
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: Three
RISKS: Commodity price pressure, regulatory risk in Colorado, pipeline constraints in the Permian Basin, Chevron Stock Price
ACTIONS, ANALYSIS & MOREAPC 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
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long ABT, AMZN, AMGN, AAPL, APC, BP, CRM, CMCSA, CSCO, CVS, DIS, FB, FIVE, GOOGL, GS, HD, HON, JPM, JNJ, KSS, LRCX, MSFT, C, DWDP, DOW, SLB, UNH, PANW, VIAB and NVDA.