Our in-depth note today (11/17/2017) includes 1) the evolution of electric vehicles, 2) a cost-benefit analysis of electric vs. diesel trucks, 3) our expectation for very low adoption rates by over-the-road truckers, and 4) longer-term implications for truckers, rails, and truck OEMs.
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We spoke with a small, private TL carrier and truck broker about recent TL pricing and capacity trends. On the brokerage side, our contact saw TL acceptance rates fall to the low 70s right after the hurricanes. Since then, the market has loosened up somewhat but is still very tight due to peak season, Thanksgiving produce inventory stocking, and the iPhone launch. Given tighter capacity, our contact is seeing a material acceleration in brokerage volumes, with volumes up 5%-7% in September, up 9% in October and up 10% so far in November. On the rate side, this shipper is currently seeing spot rates at a 20% premium to contractual rates, down from the 100-200% premiums right after the hurricanes. He is expecting TL rates to increase 10% y/y in C18, up from his prior expectation of low- to mid-single digit increases prior to the hurricanes.
Today (11/17/2017), CBS Corporation (CBS) will spin off CBS radio and merge it with Entercom Communications (ETM). The combined company named Entercom (ETM) will have annual revenue of about $1.7 bn. An investor presentation can be found here.
Yesterday (11/17/2017) CMS released a regulation covering proposed policy and technical changes to Medicare, primarily related to Medicare Advantage and Part D. The proposed regulation is separate from the normal rate update process (proposal in February, final rule in April) and comes in response to the request for information (RFI) that CMS released earlier this year during the 2018 rate update process. Beyond technical changes to facilitate the implementation of the Comprehensive Addiction and Recovery Act (CARA) and the 21st Century Cures Act, the proposed regulation seeks to encourage innovative plan/benefit design and while somewhat uncertain would also appear to eliminate the Star Ratings benefit from contract consolidation in Med Adv. If finalized, these changes would become effective for the 2019 plan year.
Three weeks ago, we introduced our PRASM headwind predictor, which is an interactive tool that factors in three variables that we find often contribute to meaningful impacts to airline PRASM growth rates. Those three factors are: (1) competitive capacity trends, (2) the mix of new markets, and (3) an airline’s own capacity growth. The idea was to show investors how those three factors combine to impact an airline’s future RASM guide and/or to give investors a sense if an existing guide is conservative or optimistic. We planned on rolling this out in multiple versions to build functionality so as not to overwhelm you guys with a complicated initial version. And we want to incorporate user feedback. So please don’t be shy if you think there’s something missing.
Wolfe Research’s QES team held its inaugural global quantitative and macro investing conference on November 14th and 15th in New York City. Nearly 500 buy-side investment professionals, academics, investment researchers, traditional as well as alternative data vendors, data scientist, and technologists attended the event.
We like both in part because of the asset-light unit growth that will allow them to grow market share over the longer-term. In the near-term they benefit from corporate tax reform, improving forward lodging data, a better relative position with more international exposure, and a continued rotation trade from poor performing consumer sectors, in our view. The stocks might seem expensive, but MAR’s current P/E premium to the market is in line with its 20+ year average. Assuming tax reform happens MAR would be trading in line with its own 10-year historical average and at a discount to its 20+ year average. Historical comparisons for HLT are irrelevant because of the change in the business model following the spinoffs that occurred in January.
3Q17 EPS beat with $0.58 vs. Cons of $0.54. The beat came from higher sales with comps of +3% (Cons. of 1.3%). The company notes that foreign currency fluctuations negatively impacted EPS by ~$0.02. GM missed Consensus by 10 bps. The company noted that merchandise margin was approximately flat to LY (we note the inclusion of an insurance recovery payout of ~$0.03, which offset lost productivity from damage to the Fishkill distribution center) and rent & occupancy leveraged 60 bps. SG&A was 29.9% vs. Cons. of 30.2%. The company repurchased 3.8 million shares for about $100 million and ended the third quarter of fiscal year 2017 with 389 million shares outstanding. This quarter continues the YTD momentum, with Gap brand now comping positive, which we expect to continue into the holiday season. Management increased FY17 EPS guidance from $2.02 to $2.10 to $2.18 to $2.22 (Street at $2.06).
AMC on 11/16/17, ROST posted a beat to both top-and- bottom line, reporting 3Q17 EPS of $0.72 vs. Cons. at $0.67 on a +4.0% comp (vs. Cons of +1.8%). This is the second consecutive REQ score of 10 out of 10. ROST continues to prove the resilience of the off-price model, as well as the ability to drive sales with in-season chase to drive upside. On the 3Q17 EPS beat, management raised FY17 EPS guidance to be $3.24 to $3.28 (up from $3.16 to $3.23) vs. Consensus of $3.23. In reaction, shares were up ~8% in the after-market trading session.
We remain on the sidelines as we have seen consumer demand volatility from quarter-to-quarter. Price competition in the sector remains. Additionally, the negative sales-to-inventory spread (although due to in-transit and investments to drive West Elm and Rejuvenation) keeps us cautious. We appreciate management’s execution and operational focus during a tough retail backdrop, especially offsetting the investment in shipping through ongoing supply chain-driven cost reduction. However, in the longer-term, we believe Wayfair’s (W - OP) focus on aggressive top-line growth could pose a threat to WSM’s strong customer base over time. WSM reported in-line 3Q17 EPS of $0.84. The company’s 3Q17 comp beat was on +3.3% compared to Cons. comp expectations of +3.0%. WSM guided 4Q17 EPS to a range of $1.49 to $1.64 vs Cons. of $1.65 on comp growth of +2% to +6%.
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