Gravitas - Will They or Won't They: U.S. Stimulus Package

Oct 27, 2020 | The Newton Group


Market behaviour this week was very subdued. The US fiscal stimulus beat goes on in tired fashion. More importantly investors seem to be treating it as a binary event. If it doesn't happen now, it is bad. If it happens now, it is good. But that is not the case. For the millions of Americans with benefits expiring, this is truly critical. But if a deal doesn't come together this week, then a deal will likely happen before year end. So while there are high stakes from a social net perspective, there should be less at stake for equities. Given the fairly robust incoming economic data with excellent earnings reports and the high levels of cash on the sidelines, and given the high anxiety into elections, this surely seems to be a set-up for a pretty big post-election rally. The more we wander aimlessly here, the more impressive the post-election surge might be. In addition, we have some new drama in Canada. Odds have risen that there will be a federal vote in months, rather than years. We now know that Prime Minister Justin Trudeau is willing to risk an election and may call one himself.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Danaher (DHR-US)

Danaher, the global science and technology innovator delivered a good quarter with beats on revenue and EPS. DHR delivered a robust organic revenue growth of 14% in the quarter. DHR’s stock is at an all-time high and the price is up 48% YTD as the company’s Cepheid unit has benefited from the FDA approval for its rapid test to detect the coronavirus. This year’s results included the addition of Cytiva. That’s the new name for GE’s biopharma business, which Danaher bought last year.

Owned in the U.S. Portfolio

(+) AT&T (T-US)

AT&T matched estimates Wall Street forecasts. The company said the pandemic impacted revenue across all its businesses, but highlighted strong wireless growth and subscriber numbers for HBO and HBO Max that exceeded its own projections. Domestic HBO and HBO Max subscribers totalled more than 38M and 57M, respectively. The HBO figure beats the company's year-end target of 36M subscribers. Max activations more than doubled since Q2, and the ad-supported service is set to launch in 2021. Wireless postpaid growth was the strongest that it’s been in years with one million net additions, including 645,000 phones. 2020 free cash flow of $26 billion is expected and a full-year dividend payout ratio in the high 50% is still on track.

Owned in the Cash Flow Portfolio

(+) Pool (POOL-US)

The world's largest wholesale distributor of swimming pool and related backyard products reported revenue of $1.14B which was up +26.9% year over year. Sales benefited from continued elevated demand for residential pool products, driven by home-centric trends influenced by the COVID-19 pandemic, as working from home becomes routine and families create and enjoy safe social and entertainment alternatives in their own backyards.

Owned in the Opportunity Portfolio

(+) Sirius XM (SIRI-US)

SiriusXM added approximately 169,000 net new self-pay subscribers in the third quarter. Total net subscriber additions were 186,000, resulting in 34.4 million total SiriusXM subscribers at the end of the period. Paid promotional subscribers increased due to higher shipments from automakers offering paid trial subscriptions with the purchase or lease of a vehicle. SiriusXM Revenue increased 1% to $1.6 Billion. Third quarter revenue was up 1% to $1.6 billion with growth in subscriber revenue offsetting declines in advertising revenue. SiriusXM's new car penetration rate climbed to 78% in the third quarter 2020, an increase of over 5% from the third quarter of 2019. To date, the pandemic has not had a material effect on revenues and expenses, liquidity or the company’s cost of capital.

Owned in the Opportunity Portfolio

(-) Crown Castle International (CCI-US)

Revenues and earnings came in slightly below expectations with management lowering FY20 guidance largely reflecting a shift in the timing of leasing activity. CCI also provided preliminary FY21 guidance and expects organic revenue growth of 6% as customers continue to deploy 5G in response to rapid growth in mobile data traffic which should translate into strong demand for CCI’s towers and fibre infrastructure. CCI also announced an~11% dividend increase to $1.33/share. The company is well positioned to benefit from the gradual roll-out of 5G in the U.S. which remains the key driver of revenue growth for CCI’s assets long term as 5G deployment provides vital infrastructure to support secular growth opportunities in mobile video streaming, data centres, autonomous vehicles and internet of things.

Owned in the U.S. Portfolio

(+) Tesla (TSLA-US)

Tesla earned 76 cents per share for the third quarter, compared to a 57 cents a share consensus estimate. Revenue also topped analysts’ estimates. It was the fifth consecutive quarterly profit for Tesla, which said it remained on target to deliver 500,000 vehicles for 2020. Tesla generated $1.4 billion in free cash flow (FCF) in Q3, up sharply from $418 million in Q2 and $371 million. This FCF growth occurred even though Tesla’s capital expenses rose to $1.01 billion from $546 million in Q2 and $385 million in Q3 2019, as Tesla expanded capacity at its Fremont and Shanghai plants and continued building its planned Berlin plant. Tesla also added that it should have sufficient liquidity to fund its product roadmap, long-term capacity expansion plans and other expenses.

Owned in the Opportunity Portfolio

(-) Canadian National Railway (CNR-T)

Q3 results were only slightly below expectations and management characterized its outlook as “cautiously optimistic”. They also mentioned that they have brought back many of the employees furloughed because of the impact of the COVID-19 pandemic on freight trains. Operating leverage, which was somewhat lacking in Q3, will be the main focus for investors in CN as we head into 2021. CN Rail has delivered seven consecutive monthly records for grain movement and said it is on track to deliver a record month in October. With rail sector multiples at all-time highs, we remain relatively cautious on the sector. CN is leading the pack in terms of valuation, at a 2021 P/E of 23.3x vs. a peer average of 20.9x.

Owned in the Core Portfolio

(-) Netflix (NFLX-US)

Business is good, just not as good as investors thought. The streaming giant reported 2.2 million new memberships for the third quarter, about one million lower than expected, and said that subscriptions for the fourth quarter would be lower than analysts’ estimates. But thanks to its subscription surge earlier in the pandemic, Netflix expects to close the year with a record number of new members, about 34 million, giving it just over 200 million subscribers around the world. Revenue in the quarter was $6.44 billion vs $6.38 billion expected.

Owned in the Core, Opportunity and U.S. portfolios

(~) Brookfield Asset Management (BAM.A-T)

This week Brookfield was busy potentially shuffling its portfolio with multiple potential deals. Brookfield agreed to a strategic partnership with American Equity Investment Life Holding Company, a leading US retirement planning annuity provider. The partnership establishes BAM as a 19.9% cornerstone investor and reinsurance counter-party of AEL, supporting continued growth opportunities for the business. As outlined recently at BAM’s 2020 investor day, the transaction is consistent with BAM’s strategy of expanding over time into several new verticals, including Insurance. We also learned that the company is also exploring the sale of its life-sciences real estate portfolio and is seeking about $3 billion. In a separate transaction, the asset manager has also entered into a $2 billion purchase agreement with a privately-owned Indian real estate firm RMZ Corp, for acquiring 18% of the latter's portfolio. This deal is Brookfield's largest investment in India, and it includes RMZ’s CoWrks portfolio of rent yielding commercial properties and co-working spaces in the cities of Bangalore and Chennai.

Owned in the Core Portfolio

(+) Sleep Country Canada (ZZZ-T)

It was a strong week for Canada's leading specialty mattress retailer. It is hard to pinpoint the surge but perhaps its partnership with Purple Innovation, the creator of the renowned Purple Mattress, ranked #1 in J.D. Power 2019 Mattress Satisfaction Report was the catalyst. This exclusive partnership marks Purple's first retail expansion into the Canadian market and further elevates Sleep Country's extensive product assortment of premium sleep products that utilizes innovation and technology. Sleep Country’s position as Canada’s leading specialty mattress retailer with strong brand recognition, its exposure to the mattress-in-a-box category through its Endy and Bloom brands, and a multi-year opportunity to capture sales put into play following the closure of Sears Canada, should allow the company to generate terrific growth.

Owned in the Cash Flow Portfolio

Agora (API-US)

New Position

Agora provides real time real time video calling, voice calling, live audio and video streaming, recording, and real-time messaging. It serves gaming, retail, and education industries. The company operates in the China and the U.S. but the majority of its revenue is from China. Unlike Zoom, which is mainly focused on the end-consumers of the audio and video offerings, Agora is targeting software developers. Hence, Agora is not direct competition for Zoom, and yet it has emerged as the biggest threat to Zoom worldwide.

Owned in the Opportunity Portfolio

Herman Miller (MLRH-US)

New Position

When Herman Miller rolled out the original Aeron Chair in 1994, it also launched a new paradigm in furniture design. Today Miller Herman designs, manufactures, and sells furniture systems around the world. The company has 10 significant facilities in the U.S. and one in both the U.K. and Mexico. It also licenses manufacturing rights in Japan. North American operations generate roughly 64% of sales. Though weakened by COVID-related setbacks, performance has regained positive momentum. Efforts to revive global economic activity over the past few months have helped sales to bounce back and has prompted the company to ramp up production capacity and capitalize on opportunities that have emerged under current conditions.

Owned in the Opportunity Portfolio

Weekend Reading

A Rocky Night for Joe Biden — But Did it Change Anything? Notes from my Washington watcher Greg Valliere. [READ]

Must Read: What to Expect in the 2020 Elections One of my favourite slide decks from inside the beltway Mehlman Castagnetti, a full-service, bipartisan government relations firm. [READ]

Audio’s Opportunity and Who Will Capture It Spotify is an internet streaming music service, while iTunes is a download music service, SiriusXM is satellite broadcast music service, and radio is a terrestrial broadcast technology. [READ]

The 1987 Market Crash Anyone who woke up that Monday morning believing a 10% loss was impossible was shocked by the closing bell. The day ended with a 22.6% loss. [READ]

Twitter, Responsibility, and Accountability An interesting historical Dan Rather story. [READ]

The World’s Worst Investment Conference Over twitter this author asked for help in designing the world’s most horrendous investment conference agenda. [READ]

Are We in Control of Our Decisions? In this short presentation, Dan Ariely examines how default choices can influence our decisions in highly personal ways. [READ]

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