Indeed, a media speculated Target / Kroger merger makes enormous sense, in our opinion. Both Target and Kroger have deficiencies that make operating in this new omni-channel world even harder. Target needs a credible food offering to drive more frequent visits to the stores and distribution / execution expertise in consumables. Kroger, on the other hand, has an omni-channel problem, and is far behind Amazon, Walmart, and Target. By combining both companies, Target would gain more credibility in food, purchasing scale, and execution expertise in consumable goods. Kroger would gain access to a stronger omni-channel offering and well-liked brand in Target, particularly in apparel and general merchandise. Under our analysis, we estimate a $32/share offer price for Kroger, which would represent an approximate 33% premium to Kroger’s current price. This would suggest a total transaction value (including the assumption of Kroger net debt, pro forma to reflect a portion of c-store proceeds to reduce debt) of roughly $40 billion.
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Yesterday AM (4/20/2018), GPC reported Q1 2018 earnings. Total revenue growth of +17.4% was 300bps above Consensus. Adj. EPS of $1.27 missed both Consensus of $1.32 and our $1.29. Full-year 2018 guidance remained unchanged despite the miss, potentially partially offset by a now lower tax rate guide of 26% (vs. 26-27% previously). GPC shares were down -3.5% versus the S&P 500 of -0.6%.
We spoke with a large consumer products shipper about current TL pricing and capacity trends. Our contact’s tender acceptance rates have improved to 86%-87%, up from a low point of 76%-77% in 4Q:17. The shipper’s decision to expand his approved carrier list in C18 has helped drive this improvement as tender acceptance rates on single-sourced lanes were particularly bad at the end of 2017. Spot pricing remains extremely elevated but improved tender acceptance has helped our contact reduce exposure to the spot market which is helping his transportation budget. This shipper recently completed his annual TL bid and his contractual rates will increase 6%-8% later this year. As a result, our contact plans to expand his use of intermodal and dedicated. Our contact expects his intermodal rates to increase around 10% this year, and he’s shifting more business to JBHT and HUBG and away from IMCs that don’t control their own boxes. This shipper has seen an improvement in rail service following significant weather difficulties in 1Q, but he’s a little concerned about NSC’s decision to close a couple intermodal lanes which he uses. As a result, our contact may shift a little business to CSX where service has clearly improved.
Linn Energy announced that the company will separate into two public entities named Riviera Resources (RVRA) and Roan Resources (Roan). Riviera Resources will contain the assets of Blue Mountain Midstream, an expanding midstream business centered in the core of the Merge. Following the spin, David Rottino, who has been CFO of Linn since 2015, will serve as President and CEO of Riviera.
SLB reported a clean 1Q18 EPS of $0.38, beating both Consensus and WR estimates of $0.37 and $0.36. EBITDA of $1,623mm was slightly below Consensus and WR of $1,676mm and $1,631mm. EBIT of $749mm matched Consensus of $750mm but better than our $725mm estimate. Revenue of $7,829mm (Consensus and WR of $7,814mm and $7,756mm) was down 4% q/q led by 7% seq decrease in Cameron topline. Consolidated EBIT margins of 9.6% was in-line with Consensus but a tad better than WR of 9.4% driven by stronger-than-expected margins in Reservoir Characterization, which offset the margin miss in Production. See variance below.
Excluding $269mm of pre-tax adjustments, BHGE reported an Adj. EBITDA of $617mm (Cons/WR = $615mm/$625mm) and Adj. EPS of $0.09, slightly above Cons and WR = $0.06. Total revs of $5,400mm (-7% q/q) were in line with Cons/WR. In OFS, NAM/Int’l revs were -6%/flat q/q compared to SLB -7%/+1% that also reported this morning. Consolidated EBIT margins of 4.2% were also in line with Cons/WR of 3.9%/4.1%, Digital Solutions and OFS demonstrated best margin performance relative to Consensus. Orders of $5,238mm (0.97x B/B) were -8% q/q and about 5% below our estimate. 1Q share buybacks were $500mm, as expected from disclosures in Form 4 filings at the end of March. BHGE has now completed roughly $1bn out of its $3bn share buyback program. Excluding $108mm of disposal of assets, FCF was a $117mm vs our estimate of $104mm. Everything pretty much as expected. See variance details.
Following Tuesday’s (4/17/2018) earnings report and conference call, we are revising our 2018 estimates upwards to reflect the Q1 beat and increased 2018 guidance. For 2018, UNH increased EPS guidance to $12.40-$12.65 from $12.30-$12.60. See our previously published call takeaways for read-thrus on the sector and our earnings summary highlights.
Investment summary. We updated our Hardlines pricing survey from October, which was highlighted in our note Lowe’s May Have a Building Price Problem. In our latest survey of home improvement goods (including appliances) HD had the lowest prices, with LOW and AMZN priced at premiums of 2% and 4%, respectively. When excluding appliances, Amazon actually leads the group in pricing, with HD and LOW priced at premiums of 1% and 3%, respectively. It appears that Lowe’s has made some progress in shrinking its price gap, but it looks like the company still has more to go, as LOW had the highest priced items approx. 37% of the time and was the lowest price option only 9% of the time. Importantly, HD seems to have narrowed the pricing differential in the appliance category relative to LOW where our last survey suggested the advantage was to LOW.
On Monday (4/16/2018), the Minnesota PUC ALJ will issue a recommendation on Line 3 Replacement, a key project in ENB’s growth backlog important for meeting long term DCF and deleveraging goals. We think a recommendation for L3R is more likely, though we expect the ALJ will include conditions. Key will be what the conditions are and what impacts they may have on the costs or economics of the project. We believe investor expectations assume L3R moves ahead so there could be downside risk in the event of a recommendation against the project. Regulators will rule in the summer.
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