Company & Sector Research
General
Viasat (VSAT US) + Inmarsat: One-Off or Catalyst for Consolidation?
Multiple satellite operators to be affected by the $7.3bn blockbuster deal - including Eutelsat, EchoStar, Intelsat, Iridium, Telesat, and SES. Quilty Analytics expects the merger to be transformative for Viasat, and one that will rekindle industry interest in satellite operator consolidation. However, complicated network integration, heavy regulatory scrutiny, and potential dissonance between corporate cultures will make for a lengthy subsumption of Inmarsat.
Europe
Hedgeye
If public markets don’t realise the value here, DUFN will be acquired by someone like Kering or LVMH - Brian McGough describes the “three stages to getting paid” on this dominant travel retail luxury consolidator. He argues that analysts are asleep on modelling top line recovery to 2025 where Brian is forecasting EPS of CHF 13.37 (over double consensus). With the company hitting new highs in growth, margins and ROIC, it should be hitting new peak multiples of 20-25x earnings. TP CHF 250+ (400%+ upside).
Woozle Research
Upgrades to Buy - Woozle’s primary research reveals new collections have received an extremely positive response and have been winning customers from other brands as well as attracting clientele beyond BRBY’s usual target age group. Following interviews with 37 BRBY Store Managers around the world, Woozle also found that footfall and average customer spending trends have continued to improve over the past 90 days. As store sales notably accelerated through October, Managers are very optimistic about the next 6 months that will be aided by easier comps and an improving international travel mix.
TT Equity Research
Q3 organic growth falls short, but once again management knows what the market demands by upgrading its margin and FCF outlook - Teun Teeuwisse continues to believe that ISS is a weak company with low profitability in a non-growing (even shrinking) market with high price competition. FCF generation was and remains unsustainable and eventually will lead to high cash outflows. In spite of all the artificial cash flow improvements, debt remains high and a serious issue.
French small caps expert Julien Onillon’s SOTP analysis implies a valuation 3x higher than today - Julien calculates QDT’s Software division to be worth €2bn; its Mail Related Solutions division €375m and its Parcel Locker division €400m. So, what is the key to unlocking this hidden value? Management should consider listing its Software division. A short video outlining Julien's thesis can be found here.
North America
Radio Free Mobile
Trip around the Digital Life Pie begins - FB's acquisition of VR fitness company Within will be the first of many as it looks to acquire the technologies and services that it lacks in order to have a complete ecosystem for the Metaverse (where the green shoots of early beginnings are springing up in VR and in Oculus particularly). While Richard Windsor believes the stock will remain under pressure in the near-term (PR problems), FB will be one of the cheapest ways to play the Metaverse theme.
Housing Research Center
Housebuilders & The Santa Claus Rally
Will it work this year? Yes! - sector expert, Alex Barron, explains why the fundamental set-up for builders is so compelling and believes the trade could outperform historical averages: 3-month hold (Nov 1-Jan 31), HB Index Avg. Return 20.2% (74% success rate in last 34 years); 2-month hold (Dec 1-Jan 31) Avg. Return 15.7% (74% success). Alex also sees substantial upside in the group over the next 12 months (Avg. Return 47.6%). Stocks with the biggest upside include Hovnanian Enterprises, M/I Homes and Meritage Homes.
Vision Research
Another timely short from Robert Prather - dismal earnings has seen $10bn+ wiped from PTON's market cap. Having initiated coverage mid Sep’21 at $112 (58-page report available on request), the shares are now languishing just above $50. PTON is the latest in several successful short calls from Vision Research. In fact, of the 23 ideas they have initiated on in the past 12 months, 20 have generated positive alpha (in a rising market), including UiPath, Vital Farms, Boohoo and Allegro (share price has fallen 40%+ from recent highs).
Clear gap between the valuation of ATD’s stock and the valuation of its new term loan - this gap is being driven by credit investors who not only are spooked by the still elevated LTM net leverage level of 5.6x (even though the company has reduced it from 9.1x (2Q20)), but also do not understand the structural importance of the distribution business in the tire industry. The safety margin for error for the term loan is material and the ~7% yield is attractive.
R5 Capital
The stock has doubled since listing last year, but remains incredibly inexpensive at just over 5.0x estimated FY22 EBITDA - ACI continues to be one of R5’s top Buy recommendations, due to the strength of its management team, the likes of which they have not seen before in the grocery industry. Scott Mushkin had anticipated a very strong 2Q and ACI did not disappoint. In his latest piece, Scott updates his thoughts on the firm’s omnichannel strategy, capital allocation, ROIC, pensions, real estate and, of course, risks. TP $42 (40% upside).
Paragon Intel
Takeover looming? Paragon’s JetTrack platform flags interesting flight activity from PNC to FITB’s HQ - PNC flew to Cincinnati on June 15, for the first time since December 13, 2019. It has flown back 5x since then. Following the recent US Bancorp deal, FITB is the last of the five largest regional banks by assets to receive significant acquisition interest in the past two years.
MDC Financial Research
ABUS should experience high volatility when the US Court of Appeals for the Federal Circuit issues its Decisions in Appellate Case Numbers: 20-1184 & 20-2329. Although Decisions may still be a few months away, these Patents relate to a Nucleic Acid delivery system comprising of a composite of multiple lipids. This delivery system appears to have ranges that overlap with Moderna's recent Covid-19 Vaccine; and therefore, ABUS may have grounds for an eventual Patent Infringement lawsuit.
Silk Road Research
China revenue could be cut in half over the next couple of years (vs. investor expectations of a 10-20% decline) - China growth has historically had a disproportionate impact on CMI's valuation multiple given the importance of the country to the company's growth prospects. Three key drivers that have helped stimulate sales are now in the rear-view mirror: 1) Above average replacement demand, 2) Lower prices, 3) Emissions regulations. At the same time, China is targeting 15-20% decline in infrastructure investment over the next five years. ~30% downside.
Veritas Investment Research
Unfinished business - if management can attain their longer-term objectives, shares could be worth C$4.00-C$6.00 by 2025 (vs. current price C$2.00). After unveiling its turnaround plan early this year, the group has successfully addressed near-term liquidity issues, made early progress on cost reductions, and booked several new and notable jet orders. As a result, the share price has appreciated by ~330%. In this update, Veritas reviews their original investment thesis and identifies where the company stands on key catalysts.
Alembic Global Advisors
Reports strong 3Q21 numbers while guiding to an above-consensus 4Q21 - Alembic continues to believe that Dow's near-term earnings power is underappreciated, its valuation multiple is unjustly depressed (FCF yield sits at an attractive mid-teens level), and its medium- to long-term earnings prospects look solid (trough-to-peak EBITDA guidance increased from $6-12bn to $9-15bn). Alembic raise their 2021 EPS estimate to $9.15 (from $8.60) and 2022 estimate to $6.65 ($6.30). 12-month TP $85 (45% upside).
280First
Detecting Meaningful Language Changes in Security Filings…
Analyses of text changes in 10Qs/10Ks offer unique insights into management intentions and company internal projects. Recent noteworthy changes include:
Arista Networks (ANET): Order cancellation concerns and customer price sensitivities.
Endo International (ENDP): Actively planning / preparing for a Chapter 11 Bankruptcy filing?
GoDaddy (GDDY): Uncertainty on customer demand and growth; plus FTC / CID issues re. regarding data privacy / security practices.
Herbalife (HLF): Unwilling or unable to increase prices due to supply chain issues / higher costs.
Japan
TobaccoIntelligence
Focusing on Ploom X - JTI reported a good performance from its reduced-risk products for the first nine months in its domestic market. JTI said that it would “strive to secure share growth” of its HnB device Ploom X in Japan for the rest of the year, which is receiving “encouraging feedback from consumers”. The company is very optimistic about the future of its heated tobacco portfolio despite the global semi-conductor shortage impacting the market worldwide.
LightStream Research
Mio Kato correctly predicted that Robomachine sales would collapse (Q/Q) and sees further downside risk to management’s new guidance. Fanuc’s downgrade also goes against the grain of Yaskawa and Nidec revising up their forecasts. Although there was some good news re. Factory Automation (FA), Mio believes investors should be nervous. He is increasingly confident that the peak is in for the FA sector (Keyence only company which will see growth next year, but too expensive); recommends a rotation into construction machinery.
Emerging Markets
New Street Research
Telcos or Towers
With so many EM Tower IPOs happening (Mitratel, IHS Towers, Sitio LatinoAmerica), investors need to ask should they participate in the Tower IPOs, or just buy the parents? New Street believes there are much higher equity returns available in EM Telcos (50-100% over the next few years). Most investors are negative on the space, but consolidation, diversification into Fintech and Broadband, and a new demand curve from Enterprise all coming together means the current environment is looking much more positive.
Propitious Research
Cheapest it has ever been - following an exceptionally volatile 12-months VIPS has derated from a peak forward PE ratio of 25.3x to only 6.9x. Wium Malan takes a closer look at the meaningful market events which have driven the sell-off as well as the short- and longer-term earnings outlook for the company. Trading on an estimated 5.3x ex-cash forward PE ratio, Wium believes we are nearing the point of peak pessimism.
Aequitas Research
Still needs a whole lot of hope to justify valuation - Sumeet Singh runs the rule over India’s biggest IPO which is backed by the likes of Alibaba, Softbank and Berkshire Hathaway. Paytm looks very expensive when compared to some of the superapps (SEA / MercadoLibre), which have all grown much faster. The declining take rate in its payment services segment is also a concern, while a drop in marketing and promotion costs could impact customer acquisition and growth. Paytm will have to keep a very tight lid on expenses to make a profit even in FY24. One to avoid.
Macro Research
Developed Markets
Delayed rate hikes will place economies in a tough position
A recent Bloomberg piece by an ex-Fed of NY President argued that the terminal rate of Fed funds may end up much higher than the market expects. To Eric Fill, this goes to the heart of the Average Inflation Targeting framework some central banks have adopted. By waiting to hike rates, they will tend into more extended asset valuations and potentially more overheated economies, making the elusive economic “soft landing” almost impossible. Volatility inbound.
Minack Advisors
Reasons to be structurally bullish on investment
Investment spending has declined as a share of GDP in most developed countries in the past 30 years, but Gerard Minack sees this trend reversing: globalisation has run out of steam and the aim for greater supply chain security will bring back investment from EM to DM; infrastructure, defence and climate-related investment will rise; and businesses will increase labour-saving investment. The forces of secular stagnation are weakening.
Greenmantle
UK: Equities not yet worth it
Markets may have been taken by surprise at the Bank of England’s decision to leave rates unchanged. Nevertheless, Niall Ferguson remains confident a rate hike is due soon; strong wage pressures are prevalent, the labour market is tight; and new Covid restrictions are unlikely. Yet growth will remain anaemic throughout winter. Currently, UK equities are still not yet cheap enough to justify a value trade.
RDQ Economics
US: No sign of easing inflation pressures
Conrad DeQuadros discusses revealing stats in the October PPI report. The 5.5% y.o.y reading in the old methodology core finished goods PPI hasn’t been seen since 1982, and the 22.6% y.o.y intermediate inflation rate is the highest since 1975. Even new methodology data, which includes services, tells the story of rising input cost pressures and fast headline gains. Construction costs are surging (30.8% annualised over three months) which will rapidly eat into the infrastructure bill.
US: Build Back Better doomed to fail
If BBB ultimately passes the House, which Donald Luskin doubts, the hurdles it has to clear next are insurmountable. For House Democrats in swing states, a yes vote will be toxic in next year’s competitive midterms. Even if it reached the Senate, it would be substantially changed by Democrats both on the left and the right, and then a very different bill would go back to the House for another difficult vote. Markets are watching because trillions in tax hikes are at stake. TrendMacro’s call is that BBB will continue to shrink and ultimately fail.
Surprise! Inflection point bolsters case for faster economic growth
An inflection point in the Citi Surprise Index confirms the recent momentum in equity indices and collapse in volatility structures. John Karle has crunched the data to find that, after such events, six month returns average +8.48% for the S&P500 and +11.36% for the Russell 2000. It is yet another event that bolsters the case for accelerating economic growth expectations, and it won’t be idiosyncratic to the US!
Alquant
Caution ahead!
Since October 5, Alquant’s Vega indicator has been consistently risk-on. However, Guillaume Bourquenoud advises investors to be more cautious and perhaps even realize their recent gains. Indeed, the pace at which equity markets have moved higher since early October, with almost no downside, is likely unsustainable. It is never a good sign when the stock market and the VIX move up at the same time (sign of melt up and panic buying).
Churchill Research
Chart of the fortnight: UST bond yields and CPI break-evens, a weird dynamic
Treasury bond yields are falling, but CPI break-evens aren’t! The 5yr T-bond yield is down 17bps in the past three weeks, but the 5yr TIPS yield is down too by 27bps. As T-bond yields have fallen, Michael Churchill points out that the breakeven has actually widened. You don’t see that too often. It is clear the Covid scare has had an impact: bond yields up and TIPS flat (which is why gold never does anything).
Emerging Markets
Talking Heads Macro
EM-heavy portfolio in 2022
Inflation will fall everywhere next year (especially in EM). Rates will obviously follow, and curves will shift lower and steepen. In order to prepare for 2022, your portfolio needs to be EM-heavy according to Manoj Pradhan. Worry not about potential Fed hikes, EM central banks will cut rates nonetheless! Manoj also reveals an exciting prediction: the long-awaited market for FX is finally about to arrive.
4X Global Research
Early EM rate hikes supporting EM currencies
EM central banks, as a whole, have got a handle on inflation. The spread between the EM and DM central bank policy rate has widened to a 3-year high of 423bp, with the EM GDP-weighted real rate at least twice as large as in DM. Olivier Desbarres sees this divergence as a key reason behind EM currencies’ recent outperformance. If the inflation gap continues to widen, short-end govt yields may start to rise again.
PRC Macro
China: Can decarbonisation QE offset the property contraction?
William Hess believes that the PBoC’s new decarbonisation relending facility will eventually morph into broader QE, with the central bank accepting CP, collateralised loans, receivables and even emissions quotes as qualifying collateral from commercial banks. The key question is whether or not renewable energy borrowers can offer enough collateral to offset what developers used to provide to support this “Green Leap Forward”. Watch closely.
High Frequency Economics
China’s trade miracle
Carl Weinberg comments that China’s latest trade and balance of payments data bear some scrutiny. Indeed, how is it possible for China to report a record October trade surplus at a time when global trade is seizing up? Trade along Silk Routes can perhaps explain away some of the conundrums, including unusual current account and FX reserves trends, but Carl still sees something amiss.
Alberdi Partners
Brazil: Longer-term outlook will fare better than markets expect
President Bolsonaro’s government will tout the spending ceiling as he remains determined to spend what is necessary to secure re-election, but even then, it won’t guarantee an already unlikely win. Marcos Buscaglia agrees with market concerns over the short-term, but he expects Lula should moderate to win the election. In this vein, he is more bullish than the consensus on the BRL at yearend 2022.
Intelligence Research
Nicaragua: Ortega claims victory in contentious vote
With 75% of the vote, President Ortega has been re-elected. However, the election has been widely slammed as a sham: genuine opposition parties have been excluded; nearly 40 opposition figures have been imprisoned since May; credible electoral observers were nowhere to be seen; and electoral reforms failed to go ahead. Nicaragua’s isolation on the international stage is guaranteed, expect international sanctions to follow.
Andrew Hunt Economics
Taiwan is slowing
Growth in Taiwan has slowed recently after a strong H1/2021, with a slightly weaker export sector and notably softer domestic economy. With a strong BoP, Andrew Hunt expects the CBC to target a stable TWD/USD rate and keep interest rates stable despite imported price inflation. Domestic liquidity trends are supportive but, with the economy slowing, Andrew expects the equity market to take its lead from external factors.
ESG
Llewellyn Consulting
The public should not pay for a carbon levy
Despite the enthusiasm surrounding COP26, the world’s approach to reducing emissions will simply not work. What is required is a tax on all greenhouse gas emissions, according to John Llewellyn, providing unequivocal certainty to investors and producers that sustainable alternatives are a necessity to remain profitable. For this to work, revenue gained should be returned to the electorate in its entirety, else public opposition will always remain rampant.
Forefront Advisers
COP26: The huge potential (and necessity) of Article 6
Article 6, which concerns the possibility for countries and businesses to transfer credits for emissions reductions, could bring down the costs of decarbonisation by $320bn a year by 2030. Additionally, a global voluntary carbon trading system has enormous potential in helping bring in new investments to green the local economies of nations whilst also allowing firms and governments to achieve emissions targets without breaking the bank.
Commodities
CPM Group
Silver’s shortage: Is it all lies?
In his latest video, Jeffrey Christian discusses the seemingly false narrative around the silver shortage which doesn’t match up with reality. Consequently, the semiconductor shortage isn’t a result of such “shortages” but rather a combination of factors, including demand for specialised chips and an increasingly concentrated industry. Jeffrey also explores the implications for investors and the economic outlook. Click here
Global Mining Research
LatAM gold producers
One-fifth of global gold production is sourced from Latin America, but investors should be wary of the higher risk regions. David Radclyffe’s latest report examines these small but important nations. Key takeaways include Newmont remaining the preferred senior gold stock, and Torex (in Mexico) and Lundin Gold (in Ecuador) named as preferred mid-sized gold stocks with growth and value appeal in the region.
BlackRobin Group
High conviction LNG
LNG producer and shipping company Golar LNG offers an interesting high-yield trade in the credit and commodity liquid natural gas market. Gas futures remain volatile but the energy crisis is here to stay. The UK, for example, has asked Qatar to be its LNG supplier of last resort and diverted 4 tankers last week to the UK. With favourable market trends, the risks rely on management’s ability to execute successfully their strategy with no operational mishaps.
Ironsides Macroeconomics
ETF launch helped the Bitcoin rally, but more is at play
Crypto could become integral to international trade and Bitcoin will become known as digital gold, according to Barry Knapp. The latest Bitcoin rally reaffirms this point, driven by market expectations of inflation and a growing sense the Fed is behind the curve and trapped. That isn’t to say the launch of the futures-based ETF didn’t play its part, but Barry sees this as just another step towards crypto’s ever-growing influence in global trade and finance.
Global Macro Investor
Crypto market shows no signs of stopping
Ethereum is continuing to soar as it reaches $6,000, which Raoul Pal has long foreseen. Once it hits $6k quick a correction will come into play, but then it will hit lift off to 5x the current price. Bitcoin will triple, and Solana and Luna will rise ten-fold. Raoul sees Luna as a must-have in any crypto portfolio.