KMX reports Q418 results on 3/29. We lowered our unit comp to 2.5% from 6% our EPS to $4.99 (was $5.17) with lower SBC helping EPS. We also make modest cuts to 2019 and 2020 est. (Exhibit 20).
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Apple is not making a dramatic shift toward a services strategy. Apple TV+ is not a Netflix killer. Apple Arcade and Apple TV+ did not provide pricing details, and the celebrities spoke about but did not provide clips from their shows. The announcements probably will not avoid a correction in the stock, which has been overbought and is right on the 200-day MA after 34% recovery from the bottom.
On March 22, we held our first NLP (Natural Language Processing) and Machine Learning Investment Conference in New York City. Almost 150 buy-side investment managers and researchers from around the world attended the event.
It has not been a pleasant few days for the bulls. First the rally in small caps has been aggressively sold beneath resistance, then my University at Buffalo Bulls got smoked in their 2nd round match-up against Texas Tech spoiling what had been a fantastic season. With respect to the former, the past couple of weeks are exactly what you didn’t want to see, as hopeful price action to start the year gave way to negative momentum beneath resistance. Keep an eye on the 1450 level for the Russell - failure here and the December lows won’t feel so distant.
This afternoon (3/25/19) CMS released its final report for the 2019 Open Enrollment Period. Approximately 11.4M consumers enrolled in an Exchange plan vs. ~11.8M in 2018 (~2.6% decline) as higher # of automatic re-enrollees (~+500K y/y) partially offset the decline in new consumers (~-500K y/y) and active/unknown re-enrollees (~-300K y/y). See Exhibit 1 on Page 2 for more details. CMS noted that the y/y decline in enrollment could be due to the strong economy and growing employment as well as the new Virginia Medicaid expansion which made previous ~100K exchange members eligible for Medicaid. We note the demographic and plan characteristics for 2019 enrollees were similar to 2018 enrollees.
D’s analyst day focused on the big picture, not the nitty-gritty. In fact the slides came at the end so that investors focused on the strategic message that D is now a 95% regulated and regulated-like company. D also announced a re-segmentation of its businesses effective in 2020 (all internal) that should provide better transparency into the company. Post the investor day, management hosted the first ESG-specific analyst presentation we are aware of. Overall, D seemed very focused on showing investors that it should be viewed as a high-quality company.
Last week at its Markets & Reliability committee meeting, PJM discussed the upcoming capacity auction currently scheduled for August. PJM pointed to the uncertainty that has been created by FERC’s ruling that prior auction rules were unjust/unreasonable, but failing to set new rules that would address subsidized bidding. PJM put forth four potential options and expects to make a decision at its 4/10 Market Implementation committee meeting.
Heading into RH earnings, we want to point out the impact of the implementation of Accounting Standard Change 842 – Lease Accounting (“ASC 842”). For most retailers this change has little to no impact on the income statement. However, RH has a portion of build-to-suit leases which ASC 842 eliminates and therefore has a direct impact on the income statement. While this change does not impact EPS, it is a reclassification of build-to-suit interest expense to the rent line in COGS. As such, we estimate ~100 bps reduction on both GM and OM, offset by a roughly $28 million reduction in interest expense. Per RH’s 10-K, “certain of our store leases are accounted for as build-to-suit lease transactions which result in our recording a portion of our rent payments under these agreements in interest expense on the consolidated statements of income.” Please see Exhibit 3 for detailed analysis on the ASC 842 impact. RH will report 4Q18 earnings after market close on 3/28/19; dial in (866) 394-6658.
Scheduled system seat capacity for the May-Aug four-month period shows seats +4.6% y/y, flat w/w. Domestic seat growth came up 2bp w/w to +4.7% y/y from +4.6% y/y due to rounding as additions by LUV and AAL were slightly offset by cuts from UAL. Pacific capacity was flat w/w at +0.2% y/y (technically down 7bp), transatlantic was flat w/w at +5.7% y/y, and Latin was flat w/w at +4.6% y/y (technically down 2bp w/w). Int’l capacity growth as a whole was flat w/w at +4.4% y/y (technically down 2bp w/w). Domestic competitive capacity was flat w/w at +4.4% y/y (technically up 3bp w/w).
Over the near term, we see tailwinds in place for yield-focused investors as longer-term rates are likely to remain range bound, including the U.S. 10-year yield in a 2.4%-2.7% range, as the global economy works through the current ‘soft patch’ and the Fed remains on the sidelines. However, these tailwinds are likely to turn into headwinds as longer-term rates increase around the globe in the second half of the year on the back of a U.S.-China trade deal and as Chinese policymakers’ stimulus measures begin to take hold.