KMI provided a surprise disclosure with 2018-20 dividend guidance of $0.80, $1.00, and $1.25. While this was actually below 2019-20 consensus of $1.21 and $1.58, we think the certainty is more important, the 6.4% yield in 2020 is close enough to peers, and the buyback explains the below consensus numbers. This ends the multi-year dance around when KMI will raise the dividend and by how much – removing one of the two pillars of uncertainty for the stock (the other is ongoing with TMX). The $2B buyback (5% of mkt cap) planned for 2018-20 surprised us despite recent market discussions. We’re not big fans. We get the flexibility it provides to defend the stock, but we think investors prefer more yield – reallocating the $2B to dividends would add 1.5%/yr to a still low yield. There’s also something unsettling about 5x levered companies buying back stock, though perhaps our long history covering the more volatile power sector shapes that view.
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We initiated on 25 Diversified Industrial stocks across the Capital Goods, Construction & Building Systems, and Flow Control Sectors. Investors were not myopic around a particular space, although value and energy investors focused on Flow Control as a way to represent oil derivative views. On the Capital Goods side, investors generally agreed that while we see a lot of positive data points, most have been priced in, and that sound capital allocation, such as PH’s CLARCOR acquisition, will be what drives multiple expansion. In the Construction space, our conversations revolved around IoT as a meaningful differentiator going forward (specifically for AYI, which is already a beneficiary), the distributors that are not impacted by AMZN (such as WCC and AXE) and our top pick, SWK, again for sound capital allocation, with its purchase of the Craftsman brand.
MCOs have significantly outperformed the S&P 500 both over the past 12 months (36% vs. 14%) and since the election (36% vs. 16%). This outperformance has pushed the stocks above historical valuations across the board and naturally engendered questions around whether the group is still an attractive investment over the near to intermediate term. We believe recent outperformance has been driven by three key factors: (1) strong fundamental performance (EPS growth CAGR of 12% over last 3 years), (2) company specific optionality being priced in such as HUM M&A potential and (3) industry optionality such as potential benefit from lower tax rates, HIF repeal/delay and higher interest rates.
CP reported adjusted 2Q EPS of C$2.77, modestly above Cons. of $2.71 and in line with our estimate. Against easy comps, total revenue, EBIT and EPS increased 13%, 23% and 35% y/y. CP’s OR improved 330bp y/y and was 20bp better than our model. CP also reiterated its guidance of high-single digit EPS growth, but we think guidance is now overly conservative.
CHRW reported 2Q EPS of $0.78 vs. Cons. of $0.90 and our estimate of $0.87. Total net revenue, EBIT and EPS declined -3%, -22% and -21% y/y, each much worse than last qtr. Net operating margins declined 770bp y/y and missed our model by 270bp due to higher SG&A including claims and bad debt expense. Gross rev. also missed our model due to lower trucking vols, and gross yields only slightly missed our model by 20bp.
Investors are showing more caution on utilities today (7/19/17) with 26% expecting outperformance and 45% underperformance to year end. This flipped from our last poll in April which was 45% outperform and 36% underperform (this was when the Trump trades were unraveling). We think the utility caution reflects a more bullish market view and that the sector has held up relatively well. Within utilities, there has been a notable shift in the regulated vs power mix which had been overwhelmingly weighted to regulateds and now is more balanced. In Power, 38% are overweight in our poll vs only 5% back in April. Regulateds are down to 47% overweight from 76% in April.
This morning (7/19/17) AGR reported Q2 adjusted EPS of $0.46 that beat our above-consensus estimate of $0.42, while reaffirming 2017 guidance at $2.10-2.35. Q2 EPS increased vs. $0.38 last year and was primarily driven by Networks’ new rate plans in NY/CT and higher renewables capacity. Importantly, the company essentially reiterated all of its long-term targets at each business line and continues to strive for 8-10% EPS growth through 2020. Stability and consistency are key to establishing further investor conviction in what is a robust growth plan. Today’s release was another step in the right direction.
This week's consensus storage estimate is a +35Bcf injection, compared to a +38Bcf injection in 2016 and versus the 5-year average of a +57Bcf injection. At the consensus estimate, this week’s storage would be ~148Bcf above the 5-year average, and given the low/high range of injections for the next three weeks (based on 10-year average injections), total storage should stand between ~76Bcf and ~322Bcf above the 5-year avg. by late July.
UAL’s earnings call today (7/19/17) after reporting earnings last night didn’t alter our investment thesis. We are keeping all our PRASM estimates unchanged and we feel incrementally better about the multi-year CASM ex-fuel story, which offsets slightly higher fuel costs. We remain well above consensus for 2018.
This month, we highlight a paper studying how credit card payment data can be used in stock selection (see Agarwal, et al [2017). Furthermore, (see Rohal, et al ), Chew, et al  provides a relatively complete framework for textual analysis. Both credit card payment and NLP are active areas of research that we are currently pursuing. However, the relatively short history of data coverage for most alternative data sources pose a serious challenge for statistical analysis. Ledoit, et al  introduce the DCC-NL covariance matrix estimator and show how it can be used in cross-sectional market anomaly detection, especially limited data history.
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