FMC Corporation (FMC) today (3/1/19) will complete the separation of its remaining interest in Livent (LTHM). Livent (LTHM) manufactures and sells performance lithium compounds that are used in energy storage, specialty polymers, and chemical synthesis applications. For fiscal year 2018, Livent had revenues of $443 mm.
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Yesterday (2/28/19), the IRS reported that average tax refunds (through 4 weeks of tax season) are now up ~1% y/y in a dramatic turnaround from -17% the prior week. Tax refunds ($) have still fallen ~4% while returns processed are down -5% y/y. This suggests that if refunds from here track the same historically, they will be flat year-over-year. The material improvement since last week’s drop was heavily influenced by timing issues around February 15th and fully incorporating the tax returns with refundable credits (Earned Income Credits and Child Tax Credits). For this group of taxpayers, our detailed work suggests that refunds should be up 8-10% y/y ($24b) and that likely explains the large week-over-week swing. Now the bad news…
Late Friday (2/22/2019), the IRS reported that tax refunds have fallen 39% (reported one week in the arrears), and the average tax refund (through 3 weeks of tax season) is down 17% y/y. Returns processed are down 7% y/y suggesting a slower start to tax season likely due to the complexity in interpreting new rules and some tax payers previously receiving refunds now owing taxes and waiting to pay Treasury. The latest weekly drop is also likely influenced in part by February 15th falling on a Friday and being the first day on which tax returns with refundable credits could be processed. This upcoming Friday’s data will be a deciding factor on the ultimate trend in tax refunds this year as timing issues should be anniversaried. Unless weekly tax refund trends improve materially over the next two weeks, we expect overall tax refunds for incomes below $100k to be down mid-to-high single digits y/y in addition to higher end incomes down a similar percentage.
Devon Energy (DVN) announced that it is pursuing the separation of its Canadian and Barnett Shale assets, which is expected to be completed by the end of 2019, to complete its transformation to a high return U.S oil growth business. Possible methods to separate the assets include a potential spin-off or sale. With Devon’s new focus as a U.S. oil business, the company is expected to deliver at least $780m in sustainable annual cost savings by 2021.
As we’ve previously discussed, we are concerned about leveraged loans, given that deals have been increasingly debt-laden and covenant-lite in recent years. That said, we believe that that biggest risk within the U.S. corporate debt market lies at the low-end of the investment grade spectrum (Baa/BBB), which now accounts for roughly half of the $6 trillion IG segment.
With the benchmark index now up +18% from the Christmas Eve low, our sense is that the ‘risk on’ rally that has occurred over the past eight weeks has largely run its course, and that fundamentals will be primary driver of market returns, sector rotation, and thematic performance in the months ahead. While incoming data is likely to remain choppy over the near term, we continue to see signs of a rebound in many of the most important forward-looking economic indicators and believe that our bullish base case remains intact. That said, as discussed in our 2019 Market Outlook report, our bias will be to recommend paring back risk exposures when the VIX falls below 12 (currently at 14.91).
Tenneco (TEN) announced that the name of its aftermarket and ride performance spin-off, which will occur in 2019 H2, will be DRiV Incorporated. DRiV will serve as one of the largest global multi-line, multi-brand aftermarket suppliers and one of the largest global equipment (OE) ride performance and braking suppliers to aftermarket, light vehicle, and commercial vehicle customers. After the spin, Tenneco will focus on powertrain systems technology.
Increasingly, over the past year, we’ve been focused at identifying potential short stock ideas/avoiding stock blow-ups. Our short screens comprise the 10 most potent valuation, earnings quality, capital creation, capital allocation, and sentiment metrics we’ve found to be most useful in searching for ideas on which to complete additional fundamental analysis. These short screens represent the backbone of the process that we use for which to dig deeper and identify the most compelling short ideas.
Our Global Materials sector Drilldown focuses on (1) identifying key indicators of S&P 1200 Global Materials subsectors’ relative performance; and (2) identifying stocks likely to be influenced most by these trends. Our regular readers will notice that this morning’s piece is in a presentation deck format, rather than our typical note template. Please let us know what you think!