• That’s Now How It Works
    Posted by on July 31st, 2018 at 10:37 am

    In this morning’s Wall Street Journal, Kevin Kingsbury makes the case that Apple could already have a market value of $1 trillion, if not for dividends and share buybacks.

    The article begins:

    All else being equal, every dollar a company spends on shareholder dividends or stock buybacks cuts a firm’s market cap by a buck.

    That’s incorrect. A dividend payment would reduce the market value of a firm. It’s effectively spinning off some of its bank account. But a share buyback should make no difference in a firm’s market value.

    Think of it this way. What would happen if you were to undo the share buyback? The firm would just sell shares on the open market for cash. The nature of the firm’s assets change, but the value doesn’t change.

  • Morning News: July 31, 2018
    Posted by on July 31st, 2018 at 7:30 am

    How Companies Are Making Customers Pay for Trump’s Trade War

    How to Gauge the Fed’s Reaction to Trump’s Tweet

    Correction Worse Than February Is Looming, Morgan Stanley Says

    FAANG Funk

    Smartphone Slowdown Hits Profits at Samsung Electronics

    Sony’s Profit Soars on PlayStation Strength

    BP Earnings Boosted by Higher Oil Prices

    Nokia, T-Mobile US Agree $3.5 Billion Deal, World’s First Big 5G Award

    Credit Suisse Returns on Horizon as Thiam Overhaul Nears End

    Harley-Davidson Beats the Street But Is Still Losing in the Marketplace

    Uber Shuts Down Its Self-Driving Truck Unit

    Vivendi to Explore Selling Up to 50% of Universal Music Group

    Michael Batnick: Contrarian Indicators

    Ben Carlson: Mean Reversion & The Placebo Effect

    Roger Nusbaum: Less Forgiving Backdrop For Individual Stocks

    Be sure to follow me on Twitter.

  • CNN: “Why Amazon Can’t Touch Ross and TJMaxx”
    Posted by on July 30th, 2018 at 10:20 pm

    CNN echoes a point we’ve made a few times before. Ross is not being sunk by Amazon:

    Ross (ROST), a clothing and home decor chain, recently opened 30 stores and plans to add 70 more this year. It’s aiming for 2,500 stores eventually, up from about 1,500 today.

    (…)

    Ross, which doesn’t have a digital shop, relies on a flexible purchasing strategy to offer top brands at bargain prices, enticing shoppers to head to stores to find clothes they can’t buy online.

    The average item is only $10, and 98% of the stuff in its store is under $30.

    “The place that Ross and TJX occupy is a place that’s tough to do online,” said Simeon Siegel, a retail analyst at Nomura Group. “I believe Ross is winning because it doesn’t have e-commerce, not in spite of it.”

    Capitalizing on brand miscues

    Ross racked up more than $14 billion in sales last year, second only to TJX in its category. It has recorded 13 consecutive years of growth at stores open at least a year, outpacing Macy’s (M), JCPenney (JCP), and Nordstrom (JWN).

    Ross stores offer a mix of name-brand and designer apparel and home fashion for 20% to 60% less than department and specialty stores.

    When brands produce too many clothes or department stores cancel orders, Ross and other discounters step in and buy the leftover inventory.

    Ross calls them “opportunistic purchases.” It can either quickly ship the product to shelves to meet in-season looks or pack the products away in warehouses to sell later. Both methods help the company constantly rotate through a wide assortment of styles and fashions.

    (…)

    Discounters like Ross have much shorter lead times — often late in the season when fashion trends have already been well established.

    “They can be more nimble reacting to what customers want,” said Moody’s senior retail analyst Christina Boni. The business model “reduces fashion and markdown risks that other apparel retailers face.”

    ‘Treasure hunt’

    Brands and retail stores are expanding online and focusing on improving in-store amenities. By contrast, Ross offers a “treasure-hunt shopping experience that cannot be replicated online,” said Betty Chen, Ross’ director of investor and media relations.

    Stores are a single floor, laid out neatly and predictably, to make it easy for shoppers to identify sections and find their sizes.

    (…)

    The average household income for Ross customers is $63,000 a year, according to an off-price sector report set to be released by retail think tank Coresight Research in early August. Amazon shoppers’ average household income is $85,000.

    The off-price sector has shown strength during recessions, when consumers look to trade down for purchases, and also during growth periods.

    Despite a healthy economy and a recovery in many Americans’ discretionary income since the 2008 recession, widening inequality has created a base of Ross’ low and middle-income core shoppers, said John Mercer, a senior analyst at Coresight.

    (…)

    Siegel argued Ross is also protected against Amazon because two-thirds of the business is handled with cash or debit.

    Ross has argued that the high costs of online shipping and frequent return rates mean it doesn’t make sense for Amazon to attack heavy-discount apparel sellers.

    “The economics just don’t work,” Ross’ president and chief operating officer, Michael O’Sullivan, told Goldman Sachs analysts last year. “If I was Amazon, I don’t think I’d be looking at the off-price space as my big opportunity.”

    Amazon may have reached a similar conclusion. Analysts see the company operating in clothing as more of a traditional department store rather than an off-pricer.

    “Amazon looks to be shifting its focus away from cut-price, third-party-branded offerings with the launch of many more private labels and stronger relationships with brands,” Coresight’s Mercer said.

  • The Tech Crack-Up
    Posted by on July 30th, 2018 at 2:57 pm

    The tech sector has been getting hit hard over the last few days. Here’s a look at the intra-day chart of Facebook (black), Netflix (gold) and Twitter (blue):

    Bloomberg says that the tech correction is close to $300 billion.

    What’s interesting is that Facebook is the biggest loser today in the S&P 100. At least it was the last time I looked. After that come some semi-related stocks: MasterCard, Amex, Visa, PayPal, Priceline and Amazon.

  • Clarifying the Record
    Posted by on July 30th, 2018 at 2:25 pm

    I will never understand what makes a tweet go viral. Last night, I tweeted:

    Currently, it’s been liked over 18,000 times. I had no idea it would take off like this. To set the record straight, I got the joke from Reddit. I cleaned up the original and corrected some of the grammar. I found versions of this joke going back even further.

  • New High for AFLAC
    Posted by on July 30th, 2018 at 11:36 am

    Shares of AFLAC (AFL) had a rough June, but the recent strong earnings report combined with higher guidance has pushed the duck stock to a new all-time high.

  • Alliance Data Announces $500 million Buyback
    Posted by on July 30th, 2018 at 10:03 am

    This morning, Alliance Data Systems (ADS) announced a new $500 million share buyback program.

    Alliance Data Systems Corporation (NYSE: ADS), a leading global provider of data-driven marketing and loyalty solutions, today announced that its board of directors has approved a new $500 million share repurchase program beginning August 1, 2018 to replace the current program that expires July 31, 2018.

    Repurchases will be financed primarily through free cash flow. The Company expects to maintain moderate levels of debt over the course of the repurchase program, providing flexibility to pursue tuck-in acquisitions or portfolio purchases.

    “This repurchase agreement demonstrates the Board’s confidence in our business model, our financial performance, and our commitment to delivering value to our stakeholders,” said Charles Horn, chief financial officer of Alliance Data. “We will opportunistically repurchase our stock, while maintaining ample liquidity to have the flexibility to support our growth, as well as the continuation of a quarterly dividend.”

  • Morning News: July 30, 2018
    Posted by on July 30th, 2018 at 6:53 am

    Mark Carney Is Preparing for Brexit and the Next Crisis

    Oil Rises After Fourth Weekly Decline as Supply Risks Persist

    Debt Is the Easy Way for Aramco

    The U.S. Is Still The Global Natural Gas King

    Powell to Duck Trump Jabs and Let Economy Justify Fed Rate Pause

    BMW is Hiking the Prices of American-Made SUVs in China

    Coca-Cola Raises Prices On Trump’s Favorite Drink Over Tariffs

    The FAANG-Nary In The Coal Mine

    Have a Cryptocurrency Company? Bermuda, Malta or Gibraltar Wants You

    The Big Mac at 50: McDonald’s CEO on ‘MacCoin,’ the Big Mac Index, and Why There Will Probably Never Be a Veggie Big Mac

    SoftBank-Owned ARM Is Said to Agree to Buy Treasure Data

    3 Reasons a $1 Million Nest Egg Won’t Cut It in Retirement

    Cullen Roche: Three Things I Think I Think – GDP, Housing and Bad Narratives & The Best Investment Writing – Volume 2

    Michael Batnick: These Are the Goods

    Howard Lindzon: Keep An Eye On Homebuilders and Some Good Reads

    Be sure to follow me on Twitter.

  • Q2 GDP = 4.1%
    Posted by on July 27th, 2018 at 12:50 pm

    The second-quarter GDP is out. The U.S. economy grew by 4.1% during the second three months of the year.

    The U.S. economy grew at the strongest pace in nearly four years during the second quarter, powered by a rebound in consumer spending, strong exports and firm business investment.

    Gross domestic product—the value of all goods and services produced across the economy—rose at a seasonally and inflation-adjusted annual rate of 4.1% from April through June, the Commerce Department said Friday. That was a pickup from the first quarter’s revised growth rate of 2.2%.

    The bounce back in consumer spending “was more powerful than anticipated and speaks to the impact of an increasingly tight labor market and strong job growth on consumer income and households’ confidence,” Brian Coulton, chief economist at Fitch Ratings, said in a note to clients, adding the “numbers really bring the possibility of 3% growth for 2018 as a whole into the frame.” Compared with the second quarter a year ago, output grew 2.8%.

    President Donald Trump said Friday that the U.S. economy is growing at a “very sustainable” pace and predicted that it will expand at least 3% for the year.

    The president touted his own track record since taking office, saying that the economy is growing at a pace 10 times faster than during the presidencies of George W. Bush or Barack Obama.

    While last quarter was good, let’s remember that the U.S. economy grew at a faster rate during the entire time from 1950 through 1978 than it did last quarter.

    Here’s a look at recent quarterly growth rates:

    Here’s year-over-year change in nominal GDP growth:

  • Moody’s Earned $2.04 per Share
    Posted by on July 27th, 2018 at 9:27 am

    This morning, Moody’s (MCO) reported Q2 earnings of $2.04 per share. Wall Street had been looking for $1.89 per share. Here are some details:

    2Q18 revenue of $1.2 billion up 17% from 2Q17
    2Q18 operating income up 16% from 2Q17; adjusted operating income up 17%1
    2Q18 diluted EPS of $1.94 up 20% from 2Q17; adjusted diluted EPS of $2.04, up 32%
    Reaffirming FY 2018 diluted EPS and adjusted diluted EPS guidance ranges of $7.20 to $7.40 and $7.65 to $7.85, respectively

    “Moody’s second quarter revenue increased 17%, reflecting strong performance at Moody’s Analytics, driven by contribution from Bureau van Dijk, as well as record revenue for Moody’s Investors Service, primarily due to robust bank loan and collateralized loan obligation market activity,” said Raymond McDaniel, President and Chief Executive Officer of Moody’s. “Additionally, we are reaffirming our full year 2018 guidance of $7.20 to $7.40 for diluted EPS and $7.65 to $7.85 for adjusted diluted EPS.”

    SECOND QUARTER HIGHLIGHTS

    Moody’s Corporation reported record revenue of $1.2 billion for the three months ended June 30, 2018, up 17% from the second quarter of 2017, including eight percentage points of growth attributable to Bureau van Dijk.

    Operating expenses totaled $641.1 million, up 19% from the prior-year period, including 11 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets, as well as non-recurring acquisition and integration expenses associated with the Bureau van Dijk acquisition (“Acquisition-Related Expenses”).

    Operating income was $534.0 million, up 16% from the second quarter of 2017. Adjusted operating income, which excludes depreciation and amortization, as well as Acquisition-Related Expenses, was $584.4 million, up 17% from the prior-year period. Operating margin for the second quarter was 45.4% and the adjusted operating margin was 49.7%.

    Diluted EPS of $1.94 was up 20% from the second quarter of 2017. Adjusted diluted EPS of $2.04 was up 32%. Second quarter 2018 adjusted diluted EPS excludes $0.10 per share related to amortization of acquired intangible assets and Acquisition-Related Expenses. Second quarter 2017 adjusted diluted EPS primarily excludes a $0.13 foreign currency hedge gain. Both second quarter 2018 diluted EPS and adjusted diluted EPS include a $0.02 per share tax benefit related to the adoption of accounting standard update ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” compared to a $0.05 per share tax benefit in the second quarter of 2017.

    Despite the earnings beat, shares of MCO lost 4.9% on Friday.