We believe the bull case is that the series of margin headwinds from warranty, inflation, and mix subside as Industrial Tools growth remains solid and Energy bounces cyclically. Industrial looks quite strong and investments seem promising, but Energy appears underexposed to improving areas of the US market. On the discrete cost headwinds, guidance appears to contemplate fairly dramatic improvement in F2H18 as it is. With valuation still at a premium to peers, bulls need to assume that ATU is materially under-earning, early in its cyclical recovery, or primed for meaningful beats and raises. We don’t see this and reiterate our Underperform rating and $21 PT.
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Home Depot and Pinterest have partnered to expand Pinterest’s visual discovery feature, Shop the Look, with over 100,000 home décor products. This is a further expansion of the two companies’ previous partnership “Built In Pins”, which is a video campaign that illustrates the steps of a home improvement project through images (pins).
Chris Senyek had his latest “Earnings Quality” report out yesterday (3/21/2018) (see links to note and video tutorial below), so I thought it would be helpful to highlight a few of the names where the technicals lineup with his fundamental concerns. As we all know, regardless of earnings quality, fighting strong price trends and momentum can be a frustrating and money losing proposition. It’s when trends begin to crack and momentum wanes, that I get particularly interested on the short side. Of the stocks discussed in yesterday’s report, Tesla, BioMarin Pharmaceutical, Albemarle, B&G Foods, Kratos Defense & Security Solutions, U.S. Silica and Chesapeake Energy possess these attributes, with each exhibiting longer-term absolute and relative distribution. Trade accordingly.
Right before the market opened (3/22/2018) CCL reported F1Q EPS ex-items of $0.52, vs. consensus of $0.43, our $0.45 estimate, and its prior revised guide of $0.39-$0.43. CCL beat constant currency net yield guidance by 190bp, which was slightly higher than the last five quarter average beat of ~180bp, and some costs shifted out of 1Q to future periods. It was a fantastic quarter, again, but guidance and forward booking commentary could have been better. The fact that the stock opened up 2% right now in a weak market is interesting, because it plays into our thesis that these stocks can still work in a decelerating booking/yield growth environment, especially if it just driven by tougher y/y comparisons.
This week's consensus storage estimate is a -88Bcf withdrawal, compared to a -137Bcf withdrawal in 2017 and the 5-year average of a -53Bcf withdrawal. At the consensus estimate, this week’s storage would be 331Bcf below the 5-year avg, and given the low/high range of withdrawals for the next three weeks (based on 10-year avg withdrawal), total storage should stand between (~498)Bcf below and (~66)Bcf below the 5-year avg. by the end of March
We increasingly believe corporate-level M&A is the spark needed for E&Ps to outperform the market with the Permian at the top of the list for consolidation. Amongst the group, we think JAG fits the trait of a good take-out candidate given the quality acreage position and top-tier margins while trading at a ~2x discount to the Permian peer group. Add to that the recent stock underperformance, unexpected management resignations, high insider ownership, and board composition, we see an increasing probability that JAG could be the next target.
LUV filed an investor update today (03/21/18) and cut 1Q18 RASM guidance from the prior range of +1-2% y/y to ~flat while also improving 1Q18 CASMx guidance by 50bp and guiding to the low end of fuel ($2.10/gal). We didn’t expect LUV to raise 1Q18 RASM, but we didn’t expect them to cut, either. The pricing spat in California remains an issue. In fact, ALK just trimmed some 2Q California capacity over the weekend. Guidance bumps by others seem more about international strength for network airlines, and JBLU merely raised the low end of an already huge range. LUV cited weaker than expected spring break travel and off-peak weakness. Perhaps the new PSS overshot with ticket inventory as it builds history. Our guess: LUV just mis-forecast the holiday travel period, for one thing. These things happen. Shaving 5-6% out of the name on this update feels harsh and implies 2018 EPS estimates will decline ~$0.25/share, holding valuation constant. That seems like too much. For what it’s worth LUV provided positive commentary on 2Q RASM and affirmed its guide of >0% RASM growth for 2018. Demand still feels good, and we expect a snap back in RASM as LUV’s RM systems “learn” and spool throughout the year.
This morning (03/21/18) a registration statement was filed noting Steve Wynn’s intention to sell all or a portion of his shares. Steve is limited to selling a maximum of 1/3 of his stock per quarter without the company’s approval. Yesterday afternoon an amended 13D was filed for Elaine Wynn with updates following the prior settlement, and it was disclosed in the 13D that “Ms. Wynn may engage in discussions with the company’s shareholders, management and board of directors regarding a variety of matters…” Recall Steve owns 12% and Elaine owns 9%.
Excluding $1.35 of one-time tax benefits that FDX kept in its adjusted EPS, FDX would have reported F3Q EPS of $2.37, well below Cons. of $3.11 and our estimate of $3.18. Express EBIT missed our model by 31% and LTL missed by 15%, while Ground beat us by 6%. Even if we add back $170M of y/y headwinds at Express (mostly incentive comp), Express EBIT still would have missed our model by 8% in F3Q. We believe FDX is now accruing around a 100% bonus payout this year, so we don’t expect much of an incremental incentive comp headwind next year.
Our quarterly earnings quality (EQ) score is an objective way to identify potential accounting related short ideas and as a risk tool to avoid potential blow-ups in the portfolio. We strongly believe that the balance sheet and cash flow statement are forward indicators of potential income statement problems and that management teams may mask deteriorating business fundamentals through various accounting maneuvers (e.g., cookie jar reserves, cost capitalization, aggressively recognizing revenue, changing depreciation policies, etc.). Click here for a video on the EQ methodology and tutorial on how to use the spreadsheet
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