Yesterday (05/24/19), Bloomberg reported that GPN and TSS have held talks about a potential deal, joint-venture or other form of partnership arrangement. With shares up 43% YTD as of yesterday’s close, GPN boasts a market cap of $23bn vs. TSS’s $17-$18bn (shares up 23% YTD), which compares to the $34bn and $22bn deals FIS and FISV struck earlier this year respectively. While we are not convinced anything material is happening yet, we are not surprised that both companies recognize the importance of scale and exploring options to stay competitive with FISV/FIS once their respective deals with FDC/WP close.
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Refiners in Risk-Off Mode but IMO 2020 Continues to Creep into Physical Commodity Markets – Refining equities have been under pressure with the rest of the energy sector, but positive data points with respect to IMO 2020 continue to emerge. Most recently, Argus reported a sale of 0.5% sulfur (IMO 2020 compliant) bunker fuel off the East Coast of Russia for $550/ton. The report indicates the blender that produced the fuel likely sourced feedstock from multiple Russian refineries and could potentially have the capacity to produce 10,000 metric tons of similar fuel per month.
DXC’s 4Q results were largely in-line as revenue came-in slightly below the Street (primarily due to FX), EPS beat on buybacks and bookings trends were sound with a 1. 1x book-to-bill. The company introduced FY20 guidance (see below), with revenue growth slightly below our estimate, however, we believe largely in-line-to-better than buy-side expectations, and EPS below expectations on investments and tax assumptions. The Company also reiterated its medium-term targets and emphasized its strategy to concede legacy revenue in order to secure future digital/cloud migration engagements, evidenced by strong bookings. Encouragingly, DXC’s digital challenges appear to be in the rear-view, as digital revenues accelerated to 22% Y/Y (from 17% in 3Q) and 2,000 digital employees were hired. Based on peer results, IT services appear to be shifting from legacy models at an accelerated rate. Management appears committed to changing the cost-cutting narrative by investing heavily in digital in order to accelerate growth. We believe sentiment should improve and drive multiple expansion if the Company remains on its current trajectory, which includes sequential organic revenue growth in each quarter of FY20 and executes on an achievable guide. Overall, given the recent underperformance in shares we suspect mixed guidance was largely priced in and believe a relatively low bar/conservative guide may be what’s needed. With shares below 6x the FY20 EPS guide, sound bookings, and signs of revenue stability, we see the risk/reward as favorable. On revised EPS, we lower our PT from $90 to $75, or 8x our CY20 EPS of $9.12.
This week we hosted all the airlines we cover (and some we don’t), at our 12th annual Global Transportation Conference. Thanks for coming, if you did. We recap the conference at a high level here and add company-specific takeaways in some depth.
We wanted to flag a few highlights in today's (05/24/19) Wolfe Research Auto Daily....
Expecting a modest improvement in US retail sales for May, with Lg Pickup demand accelerating
Looks like the May LV SAAR could climb back up to 16.9 MM (or a bit better), an improvement vs April at 16.4 MM. But perhaps more importantly, industry pricing remains strong, and Lg Pickup demand appears to be accelerating (which could bode well especially for GM).
VNE - Funding provides breathing room, but path to breakeven will be very challenging
Fixes intended to improve numbers in the near-term are going to be challenging. We still see downside in the shares with a few possible negative catalysts in the near-term.
Margin durability makes for a soft landing. HPE had a challenging quarter on the top-line and showed that it was not insulated from an increasingly uncertain purchasing environment—it missed all of our segment level revenue estimates. But it showed that the margin story initiated in F1Q is sustainable with a 50bps beat on gross margin. Management raised F19 guidance by $0.07 despite a $0.06 beat on the quarter. Although there were unusual OIE benefits, higher equity income from H3C should continue and provide upside to guidance.
Solid quarter as management works to turn around supplies. Flat revenue was slightly below our forecast while non-GAAP EPS of $0.53 was a penny ahead. The full year EPS range was tightened and FCF of $3.7bn reiterated. Unlike HPE, HP Inc did not see a deferral of demand in commercial PCs or printers. The issue is whether and when it can return supplies to growth. A global task force has been formed to address supplies, but investors fear the underlying issue is secular pressure on printed pages. In our view, 3D printing potential is most interesting but 3-5 years away from materiality.
WIW #595: This is the second consecutive down week as the market starts to deal with the art of the trade war. This week's Leader looks at how valuation spreads are faring in the midst of the volatility and we highlight that short-cycle stocks have now moved to a 7% discount following recent performance, thus starting to price-in greater EPS revision risks. We also analyze 17 stock pair spreads and highlight GE/SIE, HON/UTX, ITW/MMM, FTV/AME and GWW/FAST as most interesting.
Veoneer used a combination of new shares and convertible notes to raise $690mln gross (incl greenshoe) …upsized 20% from the original announcement. The equity transaction priced at $17.50 and is 32% dilutive. If converted, the notes add another 10.5% to the share count. We expect VNE to burn cash until 2023. Based on our modeling, another raise is likely in 2nd half of 2020.
Post the company’s 1Q19 earnings miss, guidance reduction and stock swoon, we have taken a step back to review our thesis around Lowe’s, and why we made it one of our top picks for 2019. The one obvious mistake the company, we believe, made when it laid out its 2019 outlook was not taking the mulligan we suggested, around 2019 financial performance. Indeed, while we believe that there is meaningful upside to LOW’s earnings and equity over time, it was and continues to be abundantly clear that there is a tremendous amount that needs to be fixed at Lowe’s. With that said and understanding that the gross margin challenges encountered in 1Q19 should have been identified before turning into a crisis, our research indicates that there are a lot of good changes happening, and happening faster than we previously anticipated – mainly around sales and cost control. Weighing the challenges of a substantial turnaround against significant equity upside driven by better earnings and the potential for an expanding valuation, we are strongly reiterating our Outperform rating.