Following the passage of the Senate tax bill earlier this month it’s looking increasingly likely that some form of tax reform will happen. In this note we try to examine the potential impact for each company we cover. We use the current Senate bill in our analysis, but this is obviously a very fluid situation and any final version signed by the President will likely be different. A lot of estimates are also still required (i.e. determining P&L vs. cash EBIT).
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While the impact of tax reform on EPS will be uneven across industrials with a mix of high and low taxpayers, we believe the next level is most important. Tax reform lowers the marginal cost of automation and increases the cost of labor. The mix of gross margins also implies some of the tax savings will be competed away. The earnings revisions are fairly straightforward, but we believe a composite of pricing power and exposure to the right side of change will drive this group beyond the year-end machinations and headline tax savings. The focus has been myopic on high/low tax payers, rightfully so, but with some of the stock performance appearing off-sides, investors are missing some points.
We hosted CEO Pedro Pizzarro for a Fireside Chat (replay) and local investor meetings this week. We appreciated management commitment to these long scheduled meetings despite the very recent fires. Pedro’s message was that the core EIX story has not changed – above average earnings and dividend growth driven by ratebase investments needed to meet CA’s clean energy targets. This is supported by a strong balance sheet (overequitized right now) with no need for equity. Pedro recognizes the uncertainty of the fire exposure and inverse condemnation but believes these will be worked out over time. He remains a believer that the CA regulatory model gets to constructive outcomes albeit noisy along the way.
There is not much time left to year end and we are still waiting for any news on NRG’s asset sale program including NYLD/renewables and conventional generation. We are becoming more concerned on potential delays and/or risk on values to get the sales done quick. Given the exceptional performance this year and wide ownership of the stock, the stock may weaken if NRG is not able to get asset sales announced by year end.
Our research indicates that the tax bill winding its way through Congress, if passed, should accelerate growth which would be most beneficial to our Hardline companies such as Home Depot. The basic mechanisms that cause higher growth include a reduction in income taxes that should drive near-term consumption and encourage individuals to work more, and a large cut in the corporate tax rate which economists almost universally agree should spur investments in capital and, to a lesser degree, labor, driving productivity improvements. As consumption and investments ramp-up, near-term growth should accelerate. Over time, economic growth potential is governed by the accumulation of capital, additional labor and, most importantly, improving productivity. This legislation checks all the boxes suggesting a higher level of growth is probable.
Wolfe Research's Healthcare Services Analyst, Justin Lake, hosted a webcast with Accounting & Tax Policy Analyst Chris Senyek to explore the potential effects of tax reform on MCOs and providers in the new year.
This week's consensus storage estimate is a -56Bcf withdrawal, compared to a -132Bcf withdrawal in 2016 and the 5-year average of a -78Bcf withdrawal. At the consensus estimate, this week’s storage would be ~14Bcf 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 (~384)Bcf below and ~214Bcf above the 5-year avg. by the end of December.
Initiating coverage of TechnipFMC with an Outperform rating and $32 price target (9.0x WR ’19 EBITDA), now our favorite offshore stock. FTI is executing a winning transformational offshore strategy that could ultimately make offshore more competitive when compared to shorter-cycle, lower breakeven barrels like US unconventionals. Therefore, similar to our diversified service companies, we see FTI as a structural winner during The Age of Optimization.
AMZN announced expanded shipping options through December 24th to more than 8,000 cities (from 5,000 on Cyber Monday in November), including free same-day/one-day shipping for Prime members, and free two-hour delivery for Prime Now. The free two-hour delivery for Prime Now is available in more than 30 cities in the U.S. on purchases over $35 and one-hour delivery is available for a fee. The company also is offering free 30-day trials of Amazon Prime. Following AMZN’s press release this morning, TGT announced its $550mm cash acquisition of Shipt in order to bring same-day delivery to its stores by the 2018 holiday season.
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