Category: Due Diligence

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Dividend Stocks Dividends Due Diligence Portfolio Trend Trade

Dividend Portfolio: 9/22/23 Weekly Update

Welcome back to the weekly Dividend Dollars portfolio review! This post is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever investment data you want to look at. I wouldn’t use any other website to dive into a stock’s fundaments. Click the link above or picture below to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Here at Dividend Dollars, our investing approach is a dividend growth strategy with aspects of value investing and fundamental analysis. I am a young investor in my 20’s and by sticking to this strategy over the long term, the magical powers of compounding are on my side. This allows me to more easily build substantial positions in dividend paying stocks over time, which will one day help me reach the ultimate goal of being financially free through the sources of passive income they provide. You can read more about the strategy here. Let’s dive into the portfolio review!

Portfolio Value

To date, I have invested $18,325 into the account the total value of all positions plus any cash on hand is $18,630.98. That’s a total gain of 1.66%. The account is down $578.89 this week which is a -3.01% loss. We added $145 in cash to the account this week, trades made will be broken out below.

We started building this portfolio on 9/24/2021 and when compared to the S&P 500 we are outperforming the market so far! Within that same timeframe, the S&P 500 is down -3.04% which puts us 4.70% higher than the market!

Portfolio

Above is a dashboard of the portfolio that tracks annual dividend income, yield, beta, dividend growth, and more.

Below is a table of everything we are invested in so far. There you can see my number of shares, shares bought through dividend reinvestments, average cost, gains, and more. The tickers in green are positions that I bought shares in this week, the blue ones are positions that I reinvested dividends into, the yellow ones are positions that announced a dividend increase this week, and the red are positions that I trimmed. Our PADI decreased from $657 to $643! The decrease is because of the sale of my bond positions.

Dividends

Over the last week I received three dividends: $6.35 from $SMHB, $4.91 from $LMT, and $0.48 from $NSSC. $LMT & $NSSC were received on Friday and will be reinvested on Monday.

Dividends received for 2023: $388.35

Portfolio’s Lifetime Dividends: $798.75

Trades

This week we did our weekly $10 buys into our ETFs of $SPY, $SCHD, and $XYLG.

We added to $INTC on Tuesday after watching their innovation conference. The event featured the announcement of the Meteor Lake generation, a demo of the Lunar Lake system, road map to the Panther Lake system by 2025, showed off the world’s first working UCIe-enabled chiplet-based process, transitioning away from resin to glass, and announced the 288 core Xeon processor coming 2024. A lot of good stuff! However, the stock price slid after the event as the items showed didn’t capture imaginations or impress on the AI leaning products. I think the conference laid out an awesome road map of things coming, what they are, and when to expect them. This is key as it reinforces confidence in Intel and their execution which has previously been plagued by delays and issues that disappointed investors.

Next, we sold off our bond exposure position in $AGG. I think the thesis for a rate pause is still valid, and that intermediate-core bonds will do well in the next year or so. However, I wanted the cash free to buy into things this week and next week. Read the thesis for that trade here, and if you stay in the play without me, I wish you luck!

Next (and this isn’t a trade but just something to mention), $NVO under went a 2:1 split. This was done to increase share liquidity in their domestic market and for the ADR. This change is reflected in the portfolio.

Lastly, we added to a newer position in $IBP. The stock is down 15% in a month, mostly due to selling pressure on housing-related stocks due to rate concerns. Market cycles aside, this company has a strong track record of executing on beneficial M&As to grow their operations and efficiencies. Regardless of the macro, they’ll continue to do this in the long-term, making it a solid cyclical compounder for the portfolio.

Then, we had some dividend reinvestments and continue to monitor our turtle trade in $URNM which bounced back amazingly this week and reached a 22% gain! We are fully scaled in and have our stop set at $40.37, giving us a guaranteed 7.6% win so far. We continue to move the stop up as the 10 day low moves higher with the trend! If you want to learn more about the turtle trend strategy, I have published a full article on it which you can read here. The below table is a log of the trades taken under the strategy so far.

Below is a breakdown of the trades I made this week:

  • September 19th, 2023
    • Intel ($INTC) – added 2 shares at $37.03.
    • Schwab US Dividend Equity ETF ($SCHD) – weekly $10 buy for 0.136537 shares.
    • SPDR S&P 500 ETF ($SPY) – weekly $10 buy for 0.022655 shares.
    • Global X S&P 500 Covered Call & Growth ETF ($XYLG) – weekly $10 buy for 0.366032 shares.
  • September 21st, 2023
    • iShares Core US Aggregate Bond ETF ($AGG) – sold full position at $94.65.
  • September 22nd, 2023
    • $SMHB dividend reinvested.
    • Installed Building Products ($IBP) – added 1 share at $123.27

Summary

That is it for the update this week. These weeks are my favorite. Very little moves to report, but all of the right positions are progressing and keeping us above the market’s performance! Looking forward to future.

Let me know what you think of the progress so far, share with me your progress and questions, interact with me on Twitter and CommonStock as well as the other socials using the links below! Also, tune into the Games N Gains Twitch Stream every Thursday at 6PM MST. I play games, hang out, and chat with y’all about stocks, charts, fundamentals, and anything else you like! I hope to see you in there!

Thank you for reading! See you next week and stay safe!

Regards,

Dividend Dollars

This post is brought to you by Sharesight, a portfolio tracking tool that I am happy to partner with. Their platform makes tracking trading and dividend history, understanding your performance, and saving time a breeze. I wrote a review of the product that you can read here if you’re interested in learning more! Click the link above or the picture below to get a special offer only for Dividend Dollar readers!

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Dividend Stocks Due Diligence Economics

New Play for Japanese Exposure: Recruit Holdings Co.

Today, I added 50 shares of the ADR to Recruit Holding Co. at $6.65 and wanted to do this impromptu article to explain my reasoning.

$RCRUY Is the ADR for Japanese company Recruit Holdings Co. With Japan having a fundamental shift in macro conditions this year, their market is performing better than most as you can see in the chart below.

Analysts expect their GDP growth to outperform. Even with recent gains, Japanese valuations are still more attractive than most established economies and offer better opportunities for positions with yields and buy-backs at cheaper valuations.

My thinking for $RCRUY specifically is that working age populations are falling in many key markets, especially Japan. As Japan’s economy reopens and labor markets remain tight in key areas, HR solutions & tech that Recruit offers (Indeed, Glassdoor, etc.) will be very important.

But $RCRUY isn’t primarily tied to Japan, as their products are global and roughly 70% revenues come from outside the country. So why look for a Japanese company if it’s not even focused in the country? Having exposure to the trend in Japan and the trend in the labor market seems like a winning combination to me, that’s why!

Many Japanese companies are experiencing a sea change in how they manage and operate due to changing governance rules. Companies have been encouraged to pay more attention to their P/B, buybacks and attractive dividend yields are tools they can use to prop up valuations.

This is huge news, especially in a country that already has a strong investing culture. Capital inflows into Japan have been growing. Hell, it even caught Buffett’s eye! He’s been growing his Japanese positions substantially.

$RCRUY is positioned like a growth stock, so it’s valuations may be higher than what others are looking for when they stock pick in Japan. Though $RCRUY has higher valuations than most, their valuations are not close to average valuations they have seen prior to the pandemic. Volume and chart seems indicative of price appreciation and the marco trends should prove to be additional winds in their sails.

I will be swinging this around the 6-12 month time frame as macros progress. I am open to adding to the position on potential downsides.

That’s all! I’ll catch you guys tomorrow for the Games N Gains twitch stream!

Regards,

Dividend Dollars

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Dividend Stocks Due Diligence Portfolio

Microsoft’s Acquisition of Activision Blizzard Gets a Green Light From the US

Today was a big day for the Dividend Dollars portfolio! So I just wanted to write this quick article to inform you on the news and update you on a sell in the portfolio. That way you don’t miss the sale by a couple of days by waiting for the portfolio update to come this weekend.

So the news is obvious via the headline of this post, the Microsoft/Activision Blizzard merger made huge progress today after 18 months of battling legalities. During the morning trading hours, US District Court Judge Jacqueline Scott Corley ruled that “the FTC had not raised serious questions regarding whether the proposed merger is likely to substantially lessen competition in the console, library subscription services, or cloud gaming market.”

Now, they’re not out of the woods yet. Microsoft/Activision still face the final boss of the UK’s Competition and Markets Authority, who had blocked the deal prior. Microsoft/Activision were set to appeal the ruling later this month, however both the company’s and the regulator have agreed to put a hold on the appeals and potentially find a way for the deal to continue without further battles.

Having said that, the stock price of $ATVI had opened at $82.56 and jumped to a high of $92.91, before settling at $90.80 at the time of this writing. That is roughly a 10% in one day which left the stock just a mere 4.6% away from the planned $95 per share acquisition price. That move in price and the proximity with which it approached the $95 mark tells me the market has a lot less uncertainty about the outcome of the deal.

Because of this, I sold my position in $ATVI at $92 a share today. At that level, I only had roughly 3% more to gain by holding on. That 3% boost to my profit was not worth it for me to hold through to the end.

This win was a long time coming for me as I had started my position back on 6/13/2022. Over a year ago! On 7/17/2022, I had shared my analysis of the company and the acquisition as a potential arbitrage play through this article. That analysis was nearly 2,000 words and hours of hard work. Work that earned me a third place victory in a stock competition on CommonStock! Afterwards, I continued to grow the position and wrote blog posts on the regulatory happenings throughout.

In the end, at a $74.07 cost basis, I happily took my 24.2% gain on the position and ran! That cash now sits in my portfolio as I evaluate potential places to put it to work. Thanks for experiencing this win with me, I hope y’all are celebrating!

Regards,

Dividend Dollars

PS – in honor of all things video games, come hang out with me this Thursday at 6PM MST on the Games N Gains Twitch Stream to celebrate!

Categories
Due Diligence Economics Market Outlook Market Recap Market Update Stock Market

Stock Market Recap & Outlook (6/16/23) – Another Upbeat Week

This weekly market recap is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever data you want to look at including stocks, ETFs, mutual funds, currencies, economic data releases (one of my personal favorites used often for these posts), crypto, and even transcripts of company events! Click the link above to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Dividend Dollars’ Outlook & Opinion

Last week we called for more bullishness, under the caveat that CPI and the Fed do what we expect. And they did not disappoint. I wanted to see the S&P 500 close above 4,340 and it did by a fair margin. Funny enough, Monday’s high touched my level and then gapped well above it at the open on Tuesday. It came back down to test it on Wednesday and it proved to be a solid support line.

Despite Friday’s choppiness, this was one of the best weeks for the market in some time. 52 week highs were being handed out like goodie bags at an Oprah show with $AAPL, $AI, $DAL, $META, $NFLX, $WMT, $UBER, $NVDA, $MSFT, $ORCL, and many others hitting yearly highs.

The hawkish language that was dolled out by the FOMC on Wednesday didn’t seem to scare investors much. I don’t know if it’s a belief that corporate earnings and the general economy will be able to handle a few more hikes, or if they’re calling the bluff on the Fed’s hawkishness. Only time will tell, but the disbelief was obvious this week. Are stocks suggesting the worst is behind us or are there too many of us with FOMO buying up equities right now?

Technical-wise, the S&P 500 is continuing its streak of new 52-week highs as resistance levels seem feeble. After breaking through the firm resistance at 4,200, there has not been much standing in the way of the bulls. However, the market is running very hot with a high RSI reading of just under 77 on Thursday. The last time the RSI read higher than 77 was back in September of 2021 when it hit 82. After that RSI peak, the market experienced a 10% correction over the next three weeks. Could history repeat itself? Usually it does, but the timing is the tricky part. I am loath to call a correction, but I am trying to give you a sense of when one could over the horizon.

However, RSI aside, the chart still looks quite bullish to me. We have a little area of resistance that was generated by some slight consolidation last April, this is noted in the light red channel in the chart below. We absolutely plowed through the 0.618 level (4,312) of the Fibonacci retracement produced from the high of January 2022 to the low of October 2022. This bit of resistance could push us back down to that level or we continue higher to the next level. The market could lose some steam, making a re-test more likely. However, except for Friday, the market’s price action is not exhibiting much weakness!

Overall, this week was heavy with economic data that mostly came in with readings that supported a market move higher. However, in the last hours of the final trading day for the week, some profit taking occurred ahead of the three-day weekend. Inflation has continued to trend down, technicals are still mostly bullish, there is a healthy amount of skepticism among investors, stocks are fully valued at a forward P/E of 19 for the S&P 500, recession risk is not out of the question yet, and we appear to be nearing a reasonable consolidation period. Lots of things to consider. Its hard to time an expected consolidation move, but one seems increasingly possible. On the other hand, I still respect the bullish momentum we’ve been seeing, even though they are starting to appear stretched. Therefore, my outlook for next week is neutral. I equally could see a move higher to the next fib level just above 4,500 or a move to test the 4,300 area. Next week is light on the economic data front as long as we don’t get a jobless claims surprise. So be ready to play either side.

Weekly Market Review

Summary:

This week another bullish one for the market as the major indices hit gains. The S&P 500 had its 5th winning week in a row and closed above 4,400. Mega-caps were leading as $AAPL and $MSFT hit new all time highs. Small and mid-caps trailed them after a big run recently. The Russell 2000 had the smallest gain among the indices for the week but shows the largest gain on the month so far.

This improvement in market breadth saw the $RSP rise 2.5%. Also, all but 1 of the 11 S&P 5000 sectors made gains this week. Energy was the lone loser (-0.6%) while technology (+4.3%) and materials (+3.5%) lead.

The rally for the week picked up steam as the CPI release on Tuesday, the PPI on Wednesday, and the FOMC meeting all went the market’s way in feeling better about inflation and the economy. The FOMC voted to not change the fed funds rate. The latest dot-plot shows an increase in the median projection for the rate in 2023, meaning there may be at least two more hikes this year. The forecasts for 2024 and 2025 also saw an increase, meaning we have a higher for longer policy rate outlook.

After the minutes release, Fed Powell’s press conference made no promises for the July meeting. In spite of the hawkishness of the Fed materials, the market’s response reflects a belief that the Fed may actually pull off a soft landing and get inflation back down to 2% without too much damage. The market seemed to believe that the Fed may be done, or close to done, with raising rates.

Monday:

Monday looked positive in the beginning of the day, but really started to pick up steam in the afternoon as the S&P closed at its highest level since April 2022. The stock market kicked it into gear as rates declined after the Treasury market did a good job of absorbing the $200B worth of bills and notes, with another $101B scheduled to be sold on Tuesday.

Mega-caps lead the way with many others following as $MGK was up 1.5% and $RSP was up 0.7%. The energy sector, however, failed to perform with its -1% loss. Oil prices fell -4.6% in response to Goldman Sachs cutting its Brent Crude forecast by nearly 10%, citing higher oil supplies.

Tuesday:

Tuesday’s market continued the positivity as indices closed near their best levels of the day. The CPI report released in the morning seemed to enhance the view that the Fed will not raise rates this week and lessened expectations of a hike in July.

Again, price action seemed to show a belief that the Fed may not overtighten on their path to bring inflation back down. That belief was reflected in a more pro-cyclical trade and led to a better performance in domestic small caps and value stocks than growth stocks for the day.

Economic data for the day included the NFIB Small Business Optimism Survey and the CPI report.

The NFIB survey rose to 89.4 up from 89.0 in April. This reading was the 17th consecutive reading below the 49-year average of 98. The survey showed that the difficulty to fill jobs is still historically high, business owners are slightly slowing with raising prices, and sales increase expectations have fallen slightly.

The CPI report was up 0.1% MoM, just under expectations of 0.2%. Core CPI was up 0.4% MoM, as expected. It was driven by an increase in the shelter index and the vehicle index. On a YoY basis, the CPI is up 4% versus 4.9% in April, the smallest change in the 12 months ending March 2021. The Core CPI rose 5.3% YoY, down from 5.5% last reading. The shelter index accounted for over 60% of the total increase. The key takeaway here is that inflation rates are moving in the right direction, but core inflation is still too high for the Fed’s liking which is why future rate hike prospects are still alive.

Wednesday:

The market was in a narrow range, leading up to the FOMC decision in the afternoon and the press conference that followed. They voted unanimously to keep rates, yest stocks fell a bit with the release of their projections which showed an upward adjustment in the median rate for 2023.

The market started to climb as the press conference began. Stocks recovered as Powell said the July meeting is a “live” meeting, meaning its outcome is not predetermined. There are 4 Fed meetings left, and no rate hikes are being frontloaded. The market is making some allowance for the chance that they don’t push the rate as high as the dot plot suggests.

Economic data for the day included the weekly MBA index and the PPI.

The mortgage applications index rose 7.2% with purchase applications jumping up 8% and refinancing up 6%.

The Producer Price Index reading for final demand fell 0.3% MoM, under the -0.1% consensus, while the core PPI rose 0.2% MoM as expected. YoY the index was up 1.1% versus 2.3% last month, and the core was up 2.8% versus 3.2% last month. The key here is that wholesale inflation is trending in the right direction, which should help with decreasing future rate hike probabilities and positivity for corporate margins.

Thursday:

Thursday was strong as the market rallied on a spattering of economic data releases. The indices closed near their highs of the day.

The economic data was mixed overall, but some highlights fueled the run of the day. $CAVA’s IPO also helped to boost investor sentiment after it opened at a huge premium above is $22 IPO price.

Economic data for the day included retail sales, jobless claims, the May import and export prices, and industrial production.

Total retail sales increased 0.3% MoM, above flat expectations. Spending was flat or higher in May for nearly every category with the exception of gasoline stations and miscellaneous retailers, which shows the resilient spending capacity of consumers who continue to benefit from a strong labor market.

Initial jobless claims were flat at 262k, but above the expected 251k. Continuing claims increased by 20k to 1.775M. Even though these unemployment levels have been higher in recent weeks, they still are well below levels seen in all recessions of the past 4 decades that saw levels read higher than 350k.

May import prices fell 0.6% MoM after a 0.3% increase in April. Excluding fuel, import prices were down 0.1%. Export prices fell 1.9% MoM after a 0.1% decrease in April. Excluding agriculture products, export prices fell 1.8%. Deflation can be seen in the import prices as they are down 5.9% YoY, nonfuel import prices down 1.9% YoY, export prices down 10.1% YoY, and non-agricultural products down 10.5% YoY.

Total industrial production fell 0.2% MoM, falling short of a +0.1% expectation. The capacity utilization rate fell to 79.6% from 79.8% reading in April. The report shows that manufacturing output is still positive, helping to mitigate weakness in mining and utilities output.

Friday:

The market closed out this quad witching day on a lackluster note, with major indices making moderate losses and spending most of the session near their flat lines. Mega-caps pulled down the indices with their outsized losses.

Pleasing earnings and guidance from $ADBE and Morgan Stanley calling $NVDA its top AI pick with a raised price target continued to drive the AI fever. The fever was not enough to offset the underlying weakness in the market for the day though.

Economic data for the day was only the Consumer Sentiment Index. It came in at 63.9, above a 60.2 expectation and its 59.2 prior reading. A year ago today, the index was at 50.0. The report shows an easing inflation expectation underpinned by consumer sentiment, however, the report notes that many consumers still expect difficult economic times over the next year.

That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Have a happy Father’s Day and enjoy your three day weekend!

Regards,

Dividend Dollars

Categories
Due Diligence Stock Analysis

UK’s CMA Blocks the Microsoft-Activision Merger

I’ve been spending some time this morning digesting the news that the UK’s Competition and Markets Authority (CMA) has blocked the $MSFT acquisition of $ATVI. The announcement from the CMA is linked here and is about twenty pages long. After reading and organizing some thoughts, I decided I want to share major points on the decision.

CMA’s Conclusions

After the CMA’s investigation and assessment of the acquisition, they concluded that the action may result in a “substantial lessening of competition” (SLC) in the cloud gaming services within the UK. This is a very different reasoning from the initial concerns surrounding the ideas that Microsoft would withhold the large Call of Duty franchise from competitor’s platforms. The CMA says that the deal could change “the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers over the years to come.”

Microsoft provided a Cloud Remedy Proposal to the CMA in which they would be committed to license Activision games royalty-free to specific cloud gaming providers for 10 years. A proposed change in consumer licenses of the games would also give the right to stream an Activision game within the cloud service provider’s online store. This essentially means that if Steam’s online store was selling Activision games, the consumers of those games would be able to play it on Steam’s cloud service (assuming they have one) and wouldn’t be forced to use Microsoft’s cloud gaming service. Microsoft also offered to appoint a monitoring trustee to ensure compliance with the proposed remedy.

The CAM determined that the proposed remedy was unlikely to provide structural remedies to the SLC. Their reasoning for this is that the proposal limits different types of commercial relationships between cloud gaming service providers and game publishers, restricting arrangements like exclusive content, early access, or gaming subscription services. They also conclude that this proposal lessens the incentives for Activision to make their games available on non-Windows operating systems which may exclude or restrict cloud service providers who wish to use other operating systems now and in the future.

The CMA ends their conclusions by stating that the “only effective remedy to this SLC and its adverse consequences is to prohibit the Merger.”

My Opinions

I was shocked to read that this rejection was literally only about cloud gaming. The CMA even recognized that they understand the public support for deal as it would

It is extra odd when considering the fact that cloud gaming is such a small part for the entire video game industry, let alone Microsoft. Google’s cloud gaming attempt with Stadia failed and was officially discontinued in January of 2023, only three years after it was launched in November of 2019. Amazon’s attempt at cloud gaming, called Luna, is still up and running but has mixed reception and not a huge base due to major complaints around impracticality, lag issues, and extra monthly fees to access all the content.

These other players aren’t struggling because Microsoft is out-competing them, its because cloud-gaming just isn’t as good compared to console or PC gaming. I’ve messed around with Xbox’s cloud service called X Cloud Gaming. It’s not mind-blowing.

As internet speeds improve over time and as it becomes more cost effective for companies to house all of the necessary computing power that is needed to offer cloud gaming services, I’m sure the sector will grow. With Microsoft having a 60-70% market share in cloud gaming, the CMA is concerned that this deal would make their market share greater, and as a result make the industry less competitive. The CMA seems to believe they are forward-looking in terms of the potential growth in cloud gaming, but given the context of the small size of cloud gaming relative to the entire industry and the significant time and money it will take to get cloud gaming anywhere close to being competitive with console/PC gaming, it seems the CMA’s focus on cloud is extremely misled.

Moving Forward

Next steps lie at the Competition Appeal Tribunal (CAT). This is the special judicial body within the UK that hears and decides on cases involving competitive regulatory issues. Just last November, the CAT overruled the CMA’s decision on a case involving Apple for disregarding statutory time limits. In Apple’s case, this was a procedural error and was overrule quickly. Microsoft’s case does not have any procedural issues (though if there are some they may appear in the near future).

The CMA’s initial key concern when the merger was first reviewed was regarding foreclosure in the console market. Their concerns then of Activision games becoming exclusive to Game Pass or removed from Playstation were entirely misinterpreted on the CMA’s part. Now the focus is on cloud gaming and their decision to block a merger over an infant market at the expense of greater aggregate consumer benefit within PC and console gaming. The CMA may have a hard time explaining to the CAT why this is reasonable.

Immediately following the CMA’s decision, Microsoft and Activision reaffirmed their commitment to this deal and that they would appeal the decision. Lulu Cheng Meservey, CCO of Activision Blizzard, tweeted that “the UK is closed for business”. Brad Smith, Vice Chairman of Microsoft, tweeted that they will appeal the CMA in an offical statement. Their statement says that the decision “reflect[s] a flawed understanding of this market and they way the relevant cloud technology actually works.”

The deal has been cleared in other jurisdictions such as Japan, South Africa, Brazil, Saudi Arabia, Serbia, and Chile. It should be cleared by others in the near future as the European Union has a May 22nd deadline, an August trial within the US is expected, and Australia and New Zealand appear to be waiting further outcomes from the CAT as their historical ties with UK show.

Microsoft has been more cooperative and friendly with regulators than nearly any big tech company I can think of. Now, they have no choice but to fight to back as they have shown they dedicated to this deal and will see it to the end. I hope we get to see this to fruition, however, there is always the risk impatient and despairing investors push Activision to take the $3 billion break up fee. Only time will tell.

In the meantime, $ATVI is down over 11% in today’s trading session, wiping out almost three months of uptrending gains for the stock. My current position is still up over 3% with a cost basis of $74.07. If prices manage to drop below my cost basis before more news develops, I may look to add to my position.

Categories
Dividend Stocks Due Diligence Earnings Economics Stock Analysis

Soft Lines – The Retail Segment for Early Cycle Moves

This article is brought to you by 3X Trading, a community that highlights experience and expertise of the professionals within. While other groups rely on algorithms or inexperienced traders, 3X relies on its team of seasoned professionals to navigate markets, providing you with analysis, classes, and a personal service to ensure you are always informed and making good trading decisions, for any strategy. Join the Discord server for free and learn from dividend investors and day traders alike. I frequently share analysis and insights throughout the week, so I hope to see you in there! Thank you Discord members @Jenlevit and @Alladin for working on the marketing and the charts of this piece!

Market Cycle

The market is in a weird spot to kick off 2023. So far, this year feels like the inverse of 2022. High inflation, which defined most of the last year, seems to have given way to a narrative of falling inflation. Wages data, small business surveys, CPI, and ISM data (all items we cover regularly on the weekly market recaps) suggest softening.

The graph above is called “The Psychological Pitfalls Of A Market Cycle”. It’s broken up into four distinct areas indicated by the colors. The orange color on the far left is the Mark Up phase of a cycle, next is Distribution, followed by Mark Down, and ending with Accumulation in the dark red before the cycle repeats again with Mark Up.

We have had three consecutive inflation reports that showed no major inflation concerns. In fact, two of those three reports actually contained negative surprises! The Fed on Wednesday acknowledged weakening inflation while also mentioning that they still have work to do. Anyways, it is clear that the market’s narrative has shifted to declining inflation and that the Fed will pivot dovish sooner or later. Therefore, now is a great time to look for some early cycle outperformers.

The Soft Line Industry

Before I dive into why this sector could be good for cycle moves in the near term, lets discuss what soft lines are. If you google what the soft line industry is, you will see a site that says they sell primarily soft merchandise. Not a very helpful explanation, but it is technically correct and is a term that is used in retail quite often.

Soft lines are retailers that sell smaller items that are usually soft. Consumer items like linens, clothing, shoes, bags, towels, mats, pillows, and sometimes even beauty products. These kinds of goods may be called soft items. They are typically more difficult to handle in the supply chain than hard goods. Hard goods are stackable, easy to store, and easy to transport while soft goods need to be packaged carefully, they can wrinkle, they need to be presented aesthetically in stores, and are more sensitive to restocking.

Soft Line – Early Cycle Mover

Now back to the cycle. The uncertain backdrop of the economy appears to be closely tied to the health of the US consumer. With that said, I believe the soft line industry is at an interesting value point. Morgan Stanley’s US Soft Lines Retail Equity Analyst, Alex Straton, called the coming year a ‘tale of two halves’ in a Thoughts on The Market Podcast last week when discussing soft lines.

What they meant by this is that the first half of what retailers are facing is harder expectations from an income statement perspective caused by an ongoing excess inventory overhang (Nike’s large inventory in the end of 2022 is a great example of this) and possible recessionary conditions from a macro perspective. An article from Morgan Stanley claimed that census forecasts for the S&P 500 have earnings growth at almost 4%, this is overly optimistic in their view. Consensus earnings growth expectations specifically for soft lines are even more optimistic at 15%.

These stocks can be moved significantly based on earnings revisions. If we have negative earnings revisions ahead based on the assumption that expectations are unrealistic, it’s likely that the stocks move downwards from here, hitting a bottom sometime in the first half of the year.

The second half of the year presents a very different story – hence the tale of two halves. If earnings revisions/expectations become more realistic, the industry will be in a position to more easily meet top line returns and margins may receive year-over-year relief. This relief may come from falling fright costs, falling price of cotton, promotions, etc. On top of that, as we go through the year, inventory should mostly reach normalization. Lastly, a recovering macro perspective should be more solidified in the second half of the year. With this improving backdrop and the fact that soft lines are early cycle outperformers, they could quickly pivot off the bottom and see gains.

It is impossible to ever call a bottom accurately and consistently on anything. But given the case for the industry turn around as we have laid out, there are a few data points to keep an eye on to help you realize when the time to initiate might be near. The first indication is 2023 guidance, and we should get more information on this in the coming weeks as earnings season continues.

The other item that we will spend more time explaining is inventory levels. Cleaner levels are essential to having a view on how long the margin risk that hit retailers in the second half of 2022 could potentially linger into this year. Last year, there was a lot of market discussion around the inventory problem. It was seen as a key risk to earnings with oversupply and lagging demand creating the perfect storm for pressuring margins.

Today, retailers have made good progress of working down inventory levels in the third quarter of 2022, but there’s still much room to go. Look at the examples below from Tapestry’s ($TPR) Q1 2023 earnings report, Ralph Lauren’s ($RL) Q2 2023 earnings report, Nike’s ($NKE) Q2 2023 earnings report, and VF’s ($VFC) Q2 2023 earnings report. What we would rather see here is that inventory levels are in line with forward sales growth.

How To See The Opportunity

As we look across the soft line space for opportunities to take advantage of for an early cycle move, make sure that you’re sticking to sound fundamental and intangible analysis. What I mean by fundamental is if the company is growing or outperforming (beauty stores like Ulta are a great example of this), look for diversification in selling channels, be aware of company events such as restructuring or leadership changes, understand if their margins reasonable, and look to see if investors are rewarded with buybacks, dividends, and/or sufficient price appreciation. What I mean by intangible is if the company has a strong brand, if the brand has value, if that brand value had an upward trajector, and do the products speak to the consumer.

If you can answer most of these items in a positive light, then you may have located a good company for this early move.

For me, certain subsectors of this industry particularly interest me and others that don’t. One to avoid, in my opinion, is activewear. These items saw strength in Covid as people gained a higher affinity for staying healthy, exercising, and taking care of their bodies. Long term, the category has really nice upside potential, but for the purposes of getting early cycle returns, the lingering strength from Covid may negate the strategy.

My other point is on mid-tier brands vs luxury/high-tier brands. A debate as old as time. I lean high-tier, for a couple of reasons. One is that higher wealth consumers will be less affected by a recession if one happens. The global economy is growing, China is opening, and India looks to be on the verge of its most performative decade ever. These items will boost attention to and desire for world-renown luxury brands. Another point I have is called revenge shopping. The Economist touched on this phenomenon which is where people are more willing to splurge on high-end items currently because they have been pinching pennies and living a stressful life since Covid that they feel they should treat themselves.

My Picks

Having said this, here are a couple of stocks I have my eyes on:

Tapestry ($TPR), the luxury brand company that operates through Coach, Kate Spade, and Stuart Weitzman. P/E ratio of 12.3, pays a 2.57% dividend, and has had decent sales growth over the last five years.

Ralph Lauren Corp. ($RL) sells premium lifestyle products including the well-known Ralph Lauren clothing brand but also sells accessories, home furnishings, and many other soft line products. P/E ratio of 17.3, pays a 2.35% dividend, and has performed great share buybacks of the last 10 years.

Steven Madden Ltd. ($SHOO) designs, markets, and sells fashion-forward footwear through several well-known brands including Steve Madden, Anne Klein, GREATS, and others through wholesale and direct-to-consumer segments. P/E ratio of 11.4, pays a 2.3% dividend, and has shown impressive sales growth over the past decade with the exception of 2020.

Burberry Group PLC ($BURBY) is a holding company that designs, manufactures, and sells apparels and accessories under the luxury Burberry brand. P/E ratio of 21.18, dividend yield of 2% that pays semi-annually, and touts some very stable margins and impressive FCF per share.

I also like Columbia Sportswear ($COLM) but did not dive into them too much as I believe seasonality may dampen the early cycle mover strategy discussed here.

Of these five, I have initiated a small position in Steven Madden Ltd. ($SHOO) and will wait for their earnings report on February 23rd before adding heavy. The reason for this is so that I can get another temperature check on the inventory levels, sales levels, and the margins are trending in the right direction. So far, sales and margins are. Inventory, which is the key, still needs improvement however.

Thank you for reading! If you like pieces like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week. And go check out the 3X discord where I’m actively conversing about ideas like this!

Regards,

Dividend Dollars

Categories
Due Diligence Earnings

Bank of America Q3 Earnings: Strong Consumers = Strong Bank

UNITED STATES - FEBRUARY 23: A Bank of America logo hangs above a bank branch entrance in New York, U.S., on Monday, Feb. 23, 2009. Citigroup Inc. and Bank of America Corp., two of the three biggest U.S. banks, climbed in New York trading after regulators said they may give lenders more capital to revive the banking system. (Photo by Jin Lee/Bloomberg via Getty Images)

I wrote this on October 17th for a CommonStock post and totally spaced putting it up on the website! So here it is one week late, my apologies!

Bank of America $BAC released their Q3 earnings report pre-market this morning, October 17th. The report surprised (in more ways than one) and sent the stock up 5.62% at the most in pre-market and closed 7.07% after-hours this evening.

I read the earnings transcript and reviewed the earnings presentation and can tell you that a key set of highlights shows that there is great operating performance behind this move higher and hint to a couple tailwinds that make the bank and the economy look good despite looming inflation and recession concerns. Read the transcript and presentation for yourself here, all of the presented information comes from that.

Those key items include:

  • Net Interest Income & Improved Outlook
  • Excess of Leverage and LTAC Ratios
  • Strong Consumer Spending & Growing Deposits

Net Interest Income

Net interest income (the primary measure for how profitable a bank is) increased $2.7 billion or 24% year-over-year. This is driven primarily by benefits from higher interest rates and loan growth. NII is up $1.3 billion over the last quarter. Thanks to rapid rate hikes by the Fed, short-term interest rates have risen over 200 basis points in the last year. This drives up the interest that $BAC earns on their assets with adjusting rates, when that is coupled with disciplined deposit pricing this drove nearly $1 billion in NII growth this quarter.

$BAC provided forward guidance on their NII as they did last quarter. Previously, investors were told to expect consecutive NII increases of $1 billion in both Q3 and Q4. Q3 just put up $1.3 billion. With this outperformance and the expectation that rates will continue to increase, loan volume will keep growing, and deposit prices are baked in, $BAC updated their Q4 expectation to $1.25 billion. That would put Q3 and Q4 total NII to $2.55 billion compared to the prior $2 billion.

Excess of Leverage and LTAC Ratios

Regulatory capital can sometimes be a negative throttle on the growth of banks and is something I like to keep an eye. I’d like to highlight $BAC’s supplemental leverage ratio (SLR). Introduced in 2010 as part of the Basel III requirements, a SLR applies to banks with $250 billion or more in total consolidated assets. It requires that they hold a minimum ratio of 3%. Enhanced supplementary leverage ratios apply larger and more systemic financial institutions and require a larger ratio. This ratio calculates how much capital a bank must hold relative to their total leverage exposure

In regard to $BAC’s regulatory capital, their supplemental leverage ratio increased to 5.8% versus the minimum requirement of 5%. This leaves some very positive room for balance sheet growth. The bank’s TLAC ratio (total loss absorbing capacity a standard to minimize the risk of a bailout) is well above the requirement which can support balance sheet growth as well.

Strong Consumer Spending & Growing Deposits

This last section is the most important! $BAC’s earnings show some great stats about the overall health of their consumer base.

First, consumer spending is strongly up 12% year-to-date. One could say this is on account of inflation. To counter, I would direct your attention to the top right graph below, not only is payment dollars up 10%, but the number of transactions is up 6% as well. That increase in sales volume is a positive sign that inflation is not slowing purchasing.

Second, consumer deposit levels (bottom right graph) are multiples above pre-pandemic levels. These levels are higher compared to a year ago as well. These deposit levels suggest continued spending capacity, even with inflation. $BAC opened 400,000 new consumer checking accounts for the 15th consecutive quarter of growth which is helping push deposit levels consistently higher.

Third, total credit and debit and usage are 12% above pre-pandemic levels. The payments on those credit cards are 1,000 basis points higher than pre-pandemic. More purchasing activity in a higher rate environment is the perfect position for a bank to be in. Add to that the fact that credit days past dues are significantly trending downward and we get a picture of a very strong consumer at the moment.

Summary

In sum, consumer activity is stellar. I didn’t review the wealth and investment leg of the bank in this post, but those branches showed great activity as well. NII has improved quickly and appears to be able to continue that trend. The average consumer is healthy and strong. $BAC’s balance sheet has room for growth and responsible income statement management looks to show that margins will continue to grow as well.

In addition to all of that, $BAC increased their dividend last month by 4.8%. They also bought back $450 million in share repurchases that covered employee issuances so as to not dilute.

Categories
Dividend Stocks Due Diligence

Cummins ($CMI) The Diesel Giant That Is Ready For The Green Revolution

This post comes from CommonStock and is my submission to their September Stock Idea Competition. I wrote another one of these in July for their last competition. Last time, I researched Activision ($ATVI) and won third place! I am hoping to move up the ladder board this time. Below is my report, if you like it please go over to CommonStock and upvote and comment on it to help me win! The competition ends Monday, so thank you for checking it out during your busy weekend! Now to Cummins!

Intro:

Tesla ($TSLA) pioneered EVs, and now the industry is packed with competition. EVs are great for the average commuter, but will Tesla/others have solutions for powering the trains, boats, construction vehicles, etc that make the world go ’round? Unlikely.

​My stock pick might be the solution.

Cummins is a global power leader that designs, manufactures, distributes, and services diesel, natural gas, and now electric and hybrid powertrains. They sell to original equipment manufacturers (OEMs), distributors, and dealers in 190 countries for various uses from Ram pickups, heavy machinery, trains, and more.

Since 2002, Cummins has outgrown competition and the segments they serve with 6.3% revenue CAGR. Cummins has also grown total revenues from $5.6B to $24B and net income from -$103M to $2.1B with 6.7% average net income margin and 22.2% average ROE.

Cummins has great capital allocation with $3B cash, $4.9B debt (1.3% is current), great credit access, strategic acquisitions (recently OEM Meritor) and $1.3B FCF which they use for dividends (2.29% yield) and $2B of share buybacks.

Thesis:

Attractive valuation and economic and political tailwinds are at Cummins’ back as potential catalysts for growth.

  1. New Power

Cummins commercialized diesel engines in 1919 and continues to make innovations and improvements to powertrains. They offer the most fuel and emission efficient engines in the market and invest heavily in R&D to anticipate, prepare for, and exceed the changing regulations in advance (EPA regulations have reduced emissions by 90% this decade).

Some states, China, Germany, and other countries have announced plans to ban the use of diesel or other internal combustion engines by 2030. Cummins knows that zero emissions is the goal in the coming decades and are investing now to ensure they remain the power leader for a changing world.

“New Power” is Cummins’ newest operating segment. It is focused on zero emission and zero carbon solutions. Cummins has a large customer base and strategic partnerships, all needing decarbonization answers.

Cummins believes the path to zero emissions creates a market opportunity of $100B for 2030. They will service that market by being an integrator and component supplier. Their components business will grow by providing efficient filtration, emissions collectors, and other components to aid emission reduction efforts. When regulations require net zero, Cummins will have already accelerated adoption of FCEV, BEV, and hydrogen systems among their customers before the regulations occur.

Cummins’ New Power financial targets are $6-13B revenue in 2030 (approx. 15%-28% total projected revenue) with ~$1.3B cash outflow of operations from 2022-2027 reaching breakeven in 2027. With continued worldwide engine population growth and a high-margin component segment, Cummins forecasts EBITDA to grow >20% by 2030. I believe these goals are not overly ambitious.

  1. Food Prices

Global food prices have jumped 54% since the Russia-Ukraine war began. They are two of the world’s most important agriculture commodity exporters. Russia has 18% global wheat market share, Ukraine has 10%. Collectively, Russia and Ukraine have 26% of the barley, 63% sunflower oil, and 17% fertilizer market share. Their war has closed Ukrainian ports and sanctions strangle Russian exports.

Cummins has over 1 million agricultural engines in operation worldwide. Their products provide greater fuel efficiency, horsepower, durability, and less ownership costs than competitors. During periods of rising food prices, farmers can widen margins if they manage COGS and I expect this benefit to extend to Cummins as farmers look to their products to unlock efficiencies and savings.

  1. Valuation

Using a 10-year timeframe and above assumptions, $CMI appears undervalued with potential long-term and short-term returns per the model and thesis.

Risks:

  • Freight Demand: Cummins is sensitive to freight demand. With a looming recession, consumer spending could slow causing truck operators to delay new fleet purchases.
  • Regulation: Though regulation is my main bull case, strict regulation could push competition to invest in technologies and dull Cummins’ edge.
  • Inflation: Cummins’ COGS has increased via more expensive materials and shipping costs. They have raised prices to counter, improving margins for two quarters. However, continued price increases could pose a problem.

Author’s Statement

I have a position of 2.372312 shares with $209.56 average cost. Understanding the potential upside and risks, I plan to hold, buy more shares, and reinvest dividends long-term. Below is a screenshot of $CMI trending in Commonstock mentions (sub-category for competition prizes).

Thank you for reading, and again please go over to CommonStock and upvote and comment on it to help me win! I have been out of town all week, so not much investing activity aside from writing this. I will post a portfolio update this weekend, but it won’t show much activity. Anyways, Have a great weekend and thanks again!

Categories
Dividend Stocks Due Diligence

Stock Analysis: Activision Blizzard ($ATVI) Acquisition Opportunity

Quick foreword for you before you continue reading. I wrote this analysis for a stock pitch competition on a platform called CommonStock. The competition has a grand prize of $5,000 dollars. Winning that prize would be absolutely a huge blessing for my life right now. I also pay for this website and work hard to make my information accessible here and on social media. So if you read this article, appreciate the information, and want to show me some support please go over to CommonStock and upvote and comment on my post using this link to help me in the competition. Thank you and lets get to the analysis!

If you don’t know, Activision is a giant gaming company and thus I thought that it was only right to slide in as much gaming slang as I can into this pitch. So if you’re not a gamer, pull up Urban Dictionary or click the links to look up the gaming terms in italics and dive into the analysis!

Thesis:

Activision stock ($ATVI) presents a poggers merger arbitrage opportunity with Microsoft announcing on January 18th, 2022, their agreement to purchase Activision Blizzard for $95 cash per share with an expected closing date of July 2023. At a current share price of $77.30, this arbitrage opportunity boasts roughly 25% upside in less than a year if the deal goes through. Several analysts predict that the FTC is unlikely to stop the deal, which makes this attractive acquisition play the perfect spot to buy into a stock that is down over 25% from the highs of last year and let your position sit with a safe amount of risk and reward in this volatile market.

Business and Industry Review

Activision Blizzard is one of the world’s largest video game publishers and owns an OP lineup of some of the biggest and well-known video game franchises around including Call of Duty and Crash Bandicoot from the Activision segment, World of Warcraft and Diablo from the Blizzard Segment, and Candy Crush from the mobile focused King segment.

Through strategic acquisitions of studios and development of diverse product lines, Activision has built multiple revenue streams which include premium full game sales, free-to-play offerings which offer in-game content and currency for purchase, game subscriptions for ongoing access, and ad revenue from mobile game offerings. Activision Blizzard also has ownership of Major League Gaming (MLG), the professional esports organization that holds official video game tournaments for sweats throughout North America. The company plans to build an e-sports focused television network and leverage Activision’s competitive titles in the process.

As of 2021, the global video game market value was $178 billion in U.S. dollars and is predicted to reach $268 billion by 2025 with roughly 26% of the global population regularly playing video games. This number has grown significantly in the last few years due to the growing popularity of mobile games, with 69% of gamers saying a smartphone device is their platform of choice, followed by PCs and then consoles.

As the sixth largest video game publisher in the world and publisher of some of the most lucrative franchises of all time, Activision is strategically positioned with their diverse lineup of titles available on most platforms to benefit from that worldwide growth. Though plagued with game delays last year caused by COVID-19 and workplace issues, it appears that Activision may even be able outpace the industry’s growth this year as they push hard to develop new versions of their existing franchises and introduce new ones. For example, the new addition to the Diablo franchise, Diablo Immortal, was just released last month on mobile and PC, Overwatch 2 is coming October 4th 2022, Warcraft Arclight Rumble (a WOW mobile game) is set to release later this year, followed by the next World of Warcraft expansion, both the much awaited Diablo IV and the next Call of Duty: Modern Warfare installment are scheduled to release 2023, plus an unannounced survival game that information has yet to be released for.

Financials

Activision Blizzard appears to be very well managed with a balance sheet of nearly $11 billion in cash and cash equivalents which easily covers their $3.6 billion of long-term debt as of March 31st, 2022. The firm generated $627 million in free cash flow for Q1 2022 and $2.3 billion for its fiscal year 2021, averaging a free cash flow of $2.07 billion per year for the last three years. Given their hefty amount of cash and their ability to generate more of it year after year, it is reasonable to assume the firm can issue a large amount of debt to finance any potential acquisitions or pay down their current long-term debt.

The company’s last big acquisition was when they purchased King Digital, the mobile development company behind the hit Candy Crush game series, for $5.9 billion. For 2021, the King segment continues to be their fastest growing segment with $2.58 billion in net revenues, a $416 million increase from the prior year and a $549 million increase from the year before that. While some argue that capital may have been better allocated toward organic growth, the $5.9 billion dollar bet on King has paid off. Similar large acquisitions are not likely to continue as the company continues to focus on growing their reach and player investment in their franchises by producing “more frequent cadence of compelling content, introducing new free-to-play and mobile experiences, and making our franchises more social” as read from the 2021 annual report.

For their bottom line, Activision Blizzard has averaged a net income of $2.13 billion per year over the last 3 years with average net income margin of 27%. Such financial success has allowed the company to pay a small yearly dividend that has not yielded higher than 1% since 2015. Currently, the yield is sitting at 0.62%, just above its five-year average of 0.56%. The firm’s P/E ratio is at 24.6 just under the five-year average of 24.9. Looking at both metrics, it appears that the stock is fairly valued… luckily for us, tech and gaming giant Microsoft thinks otherwise.

Acquisition

Management Scandals:

Prior to the agreed acquisition, Activision experienced a workplace discrimination and harassment lawsuit that caused activist employees to attempt to remove CEO Bobby Kotick as CEO for falling “short of ensuring that all employees’ behavior was consistent with [Activision Blizzard’s] values” through a petition calling for his resignation that more than 1,800 employees signed. A Wall Street Journal story later revealed that Kotick knew about prior allegations and had protected certain executives from repercussions.

Despite this call to action, Kotick still remains CEO mostly due to his track record with the company. Kotick pulled the company out of bankruptcy three decades ago and positioned it to capitalize on booms in computing, video games, and now e-sports. His reputation as having one of the most revered minds in business has made him one of the highest paid executives in America and has earned him the full support of the board.

However, despite his history of successfully leading the company, this lawsuit portrayed the toxic work environment that developed over the years and caused the stock to drop from the high $90s down to $56.40 per share at the lowest.

Microsoft Deal:

It was at this point that Microsoft saw an opportunity to grow their gaming segment. On January 18, 2022, with the stock sitting at $65, Microsoft announced $68.7 billion deal to acquire Activision. Microsoft feels confident in their ability to improve Activision’s workplace environment and made their offer of $95.00 per share. The deal is expected to close in July of 2023 assuming regulatory approval is provided.

The US Federal Trade Commission and UK Competition and Market Authority are currently evaluating the deal and its impact on the gaming industry. If the deal goes through, Microsoft’s gaming market share will grow from 6.5% in 2020 to 10.7%.

Given the fact that Microsoft has promised to deliver the game lineup to all platforms as noted in a statement from Microsoft President Brad Smith, they have committed to respecting data privacy of consumers, and their presence in the gaming industry is still smaller than Tencent’s ($TCEHY), Sony’s ($SONY), and Apple’s ($AAPL), I believe the likelihood of the deal being stopped by authorities is slim.

Deal Outcomes:

The best-case scenario is an investor purchases $ATVI shares today, the deal goes through next year, and they are paid out $95 dollars per share, a roughly 25% increase on today’s price.

Next best scenario is an investor buys $ATVI shares today, the regulators terminate the deal, and say “GGs”. In this scenario, the investor still owns an extremely profitable and undervalued video game company based on the firm’s performance and financials detailed above. In addition to that, depending on the date when the deal is terminated, Activision Blizzard is entitled to a $2 to $3 billion reverse termination fee from Microsoft on top of the ~$2 billion in revenue that the company is already poised to make in 2022, giving them huge profits for fiscal year.

Worst case scenario is an investor buys $ATVI today and the deal gets terminated on Activision’s end for breaching any of the various merger agreement terms. This is unlikely to happen as the board and shareholders have already voted in approval of the acquisition.  However, for the sake of analysis, if this does happen Activision must pay Microsoft a $2.27 billion termination fee effectively wiping out any expected profits for the year.

Expected Value:

Using these scenarios and a Barron’s article on the likelihood of the deal going through, we can make a straightforward arbitrage calculation to determine the expected value of the deal. Referencing the table below, the three scenarios are represented with my best guess on probabilities and share value with the information presented. With analyst consensus on the deal closing and a margin of safety if the regulators terminate the deal, the arbitrage play has inherent value above the current stock price.

As we get closer to the deal date and as regulatory entities issue their decisions, the arbitrage gap should tighten presenting a rare opportunity to camp cash in a stock with potential for a 25% gain if the transaction closes. On the other hand, if the deal does not close, Activision continues to operate with their current positive momentum that may one day grow them into an even larger video game company with a dividend to match.

Conclusion:

Activision presents an attractive merger arbitrage opportunity with Microsoft offering to purchase Activision Blizzard for $95 cash per share with an expected closing date of July 2023. At a current share price of $77.30, this arbitrage opportunity boasts roughly 25% upside in less than a year if the deal goes through, which looks more likely to happen than not. If the deal fails, the stock still looks like a great long-term hold due to its diverse product line and impressive financials, regardless of which way the termination fee falls.

Overall, the company provides an attractive opportunity to buy into a position with risk and rewards that are easy to understand, which is a factor that I greatly appreciation in today’s tumultuous market. The deal is so attractive that I have already bought into it!

How do you think the merger will play out? Do you think my valuation is correct? What are your opinions on the management scandal? Let me know your thoughts and questions below!

Categories
Dividend Stocks Dividends Due Diligence Earnings

Comcast (CMCSA) – Q1 2022 Earnings Beat But Muddled Broadband Growth Leaves Investors Wanting

Comcast (CMCSA) reported earnings before the bell on 4/28/2022. The company performed fairly well, however the stock dipped more than 5% after the earnings call.

Here are the key points:

• EPS: 86 cents per share adjusted vs. 80 cents per share unadjusted, average analyst estimate was 81 cents.

• Revenue: $31 billion versus estimates of $30.5 billion

• High Speed Broadband Customers: 262,000 vs. 229,000 new customers. However, 80,000 of the 262,000 were free subscribers from COVID relief connection programs.

Now let’s go into more detail about the call.

On the earnings call Brian Roberts, CEO and Chairman, provided a statement that provides high level insight into the company’s performance for the quarter: “2022 is off to a great start. Each of our businesses posted healthy growth in adjusted EBITDA, contributing to a double-digit increase in adjusted EPS as well as significant free cash flow generation in the quarter. And we achieved all of this while continuing to invest in our businesses for the long term, while also increasing our return of capital to shareholders.”

As you can see in the image above, revenue is up 14%, adjusted EBITDA increases 8.8%, and adjusted EPS increases 13.2%. Through the quarter, Comcast returned $4.2 billion to shareholders through $1.2 billion in dividend payments and $3 billion in share repurchases.

The NBCUniversal segment (see above), which includes their media, studios, and theme parks, had posted total revenue of $10.3 billion and an adjusted EBITDA of $1.6 billion, 46.6% and 7.4% respective increases on the first quarter of 2021.

Roughly 21% of media revenue was broken out as incremental revenue from the 2022 Beijing Olympics and the NFL’s Superbowl. The organic 6.9% increase in media revenue was attributed to higher advertising and distribution revenue.

Comcast’s streaming service Peacock is showing good growth. Their platform added 4 million paid subscribers, bringing the total to 13 million. Total active monthly users rose to 28 million from 24.5 million previously. With 13 million paid subscribers and 15 million active free users, Peacock is uniquely positioned in the market. Their platform is a natural extension of their existing video business with 2 revenues streams (subscribers and paid advertising to free users). Peacock has seen a 25% increase in hours of engagement year over year which shows that the increase in users, which is partly driven by events like the Olympics and the Superbowl, is being retained.

More modest growth for Peacock is to be expected as events slow down in the next two quarters. Once sporting events in the fourth quarter kick off (Sunday night football, premier league, and the world cup), Peacock activity should show more momentum. Studio revenues should increase as well with titles like Minions, Jurassic World Dominion, and the Vampire Academy series kicking off.

The cable communications segment (see above) showed modest growth, with revenues gowning 4.7% to $16.5 billion and adjusted EBITDA growing 6.5% to $7.2 billion.

This growth was driven by increases in broadband, business services, wireless, and advertising revenues. For the quarter, total broadband customers increased by 262,000 which beat the 229,000 average analyst estimate.

However, about 80,000 of those subscribers were free Internet Essential customers. Without those subscribers being included, the actual number of paying customers added to the business is actually around 180,000 which falls far short of the analyst estimate.

On the call, when asked about this, Michael Cavanagh CFO stated that this transitional impact in the net subs added is a result of the ending of the COVID programs where used could come into the service for free. During COVID, they were conservative with how they counted these free subs, however, after ending the program in the end of 2021 only about a third of those customers transitioned to being paying customers. Michael Cavanagh said that there won’t be any ongoing roll forward into the second quarter, therefore he doesn’t think Comcast will experience any negative impact going forward as a result of ending the program. It is essentially cleaning itself out this quarter.

With the performance beating most estimates by a modest amount and the muddled growth of broadband subscribers working itself out through the termination of the COVID relief connection program, I think the dip in stock price is unreasonable. If the second quarter earnings report shows that the free users have been cleaned up and broadband growth continues to trend in the right direction, this dip will have been an overreaction by the market and a great time to add to this dividend paying position at a current yield of 2.6%.