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Wage Growth Missing Piece of Labor Market, Pay Should Rise at `Moderate’ Pace, Wells Fargo Says

12:59 PM, May 22, 2018 — Wage growth has been the mostly missing piece of the labor-market improvement thus far, and though some industries are seeing labor costs rise faster than others, the correlation between unemployment and pay isn’t as strong as it’s historically been, Wells Fargo said in a report.

“An improving labor market historically has resulted in rising wages as the pool of available workers shrinks and employers must compensate employees with higher wages to help attract new workers,” analysts from the bank said. “Yet, since the Great Recession of 2008, wage growth has been much lower than was anticipated. This may be related to many factors, including fundamental changes in the US labor market and/or whether the historical relationship between low unemployment and higher wages still exists.”

The unemployment rate last month reached an 18-year low of 3.9% amid strong economic growth. Wages have increased since 2012, but not at the pace investors expect given the historically low unemployment rate and other signs of improvement in the labor market.

The current rate of wage growth is 2.6%, but if prior trends had held, the current level of wage growth would be 3.5% to 4.5%, the bank said. While economic growth has accelerated, labor productivity growth and inflation both remain low, making it difficult for wages to improve.

“Higher productivity increases corporate profits and also allows workers to command higher wages,” Wells Fargo said. “When inflation rises, wages tend to increase as labor contracts are negotiated or companies offer higher wages to attract applicants. The current slow pace of US inflation growth has contributed to slow domestic wage growth.”

Structural changes are also affecting improvements in pay. The oldest Baby Boomers reached retirement age in 2011, and the implications of the generation leaving the workforce will be “widely felt” as many older, experienced workers earning higher wages will be replaced by younger workers at lower wages, the bank said. As this trend continues, the exit of Baby Boomers will put downward pressure on wage growth.

The participation rate continues to decline due to the exit of Baby Boomers, but the ratio of prime age employees — those between 25 and 54 — versus the overall US population has recovered to near-prerecession levels, and that supports a healthy labor market, Wells Fargo said.

The largest gains in job growth have been in lower-wage sectors including education, health services, hospitality and leisure, also putting downward pressure on pay increases. A decline in the union base that traditionally negotiated higher wages is weighing.

Still, pay in the US should continue to improve at a “moderate” pace as factors holding down wage growth are resolved, Wells Fargo said.

“The low productivity rate currently seen in the US likely will rise as the labor market continues to tighten and new tax incentives for investing in equipment stimulate business investment,” the bank’s analysts said. “Looking ahead, the structural changes in the labor market are likely to take longer to resolve. Yet, Baby Boomers retiring from the workforce eventually will be replaced by subsequent generations.”

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Campbell Soup Cuts Earnings Guidance Amid ‘Challenges’ as CEO Morrison Leaves

11:30 AM, May 18, 2018 — Campbell Soup Company (CPB) said Chief Executive Officer Denise Morrison “has chosen to retire” in a decision that has immediate effect, as the food maker cut its earnings guidance for 2018 and said it’s reviewing its strategic plans and portfolio.

Morrison, a 15-year veteran of the company, will be replaced on an interim basis by board member Keith McLoughlin. She said in a statement that she’s “proud of Campbell’s accomplishments and how we have transformed our portfolio amid changing consumer tastes for food and health and well-being.”

The CEO change comes as the maker of Goldfish crackers, Prego sauce and Chunky soup said fiscal third quarter adjusted earnings rose to $0.70 per share from $0.59 a year earlier, beating the Capital IQ consensus forecast of $0.60. Net sales rose 15% to $2.13 billion, in line with analysts’ view.

“In the third quarter, we made some progress against our key priorities,” Chief Financial Officer Anthony DiSilvestro said. “However, we are not satisfied with our financial results. Our performance has been impacted by both execution-related and external challenges.”

The company lowered its full-year 2018 adjusted EPS guidance to a range of $2.85 to $2.90 from $3.10 to $3.17 that was projected in its second-quarter results. But the recent acquisition of Snyder’s-Lance lifted the outlook for net sales, which are now seen rising between 10% and 11% from $7.89 billion in fiscal 2017, compared to the prior outlook for down 1% to up 1%. Analysts are expecting 2018 earnings of $3.12 and revenue of $8.76 billion.

“We will be reviewing all aspects of our strategic plans and portfolio composition,” DiSilvestro said. “We anticipate that our review, which will take several months to complete, will lead to changes designed to improve our operating performance and create long-term shareholder value.”

Campbell also said Chief Operating Officer Luca Mignini will focus on the integration of Snyder’s-Lance and Pacific Foods along with “stabilizing the company’s US soup business.”

Companies: Campbell Soup Company
Price: 35.25 Price Change: -3.97 Percent Change: -10.12

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Roku Emphasizes Growing Viewership, Improved Inventory-Mix, Ad Monetization During Investor Meeting

10:24 AM, May 17, 2018 — Roku (ROKU) management said during a “well-attended” investor group meeting on Wednesday that viewership is rapidly growing and inventory mix is being monetized, Oppenheimer said in a note to clients.

Investor questions reportedly focused on the Roku Channel, video on-demand revenue and inventory sharing economics, ad monetization and Amazon’s (AMZN) deal with Best Buy (BBY), the firm said.

“On The Roku Channel, management emphasized fast viewership growth while noting that 100% of inventory on The Roku Channel was being sold by Roku, which was helping balance the company’s historical ad inventory supply constraint,” Oppenheimer said.

Management also noted the mix of inventory on the platform that’s being monetized is increasing with video advertisements expected to compose 50% or more of gross margins over time.

“As the company gains scale, management believes their negotiating position relative to content providers will improve,” the firm said.

Roku’s ability to covert “light-targeting” advertisers to advanced targeting products will help the company maintain a premium cost-per-viewer, management said, and the Amazon/Best Buy deal likely will mean increased number of Roku-enabled televisions in major retailers. The company said 25% of smart TVs sold domestically were enabled by Roku in the first quarter versus 20% in 2017.

Companies: Roku, Inc.
Price: 34.78 Price Change: +0.34 Percent Change: +0.99

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Home Depot Reports Light First-Quarter Results as Revenue, Full-Year Guidance Miss

9:10 AM, May 15, 2018 — Home Depot (HD) reported a light quarter amid worse-than-forecast revenue and full-year guidance but better-than-expected earnings.

The company reported first-quarter revenue at $24.95 billion, missing consensus compiled by Capital IQ of 25.17 billion. Revenue last year was 23.89 billion.

Home Depot reaffirmed its 2018 guidance of $9.31, short of Street projections of $9.38. The company said it expects sales to grow by about 6.7% from $100.90 billion in 2017, up from prior guidance 6.5%, implying an expectation of $107.7 billion, shy of the Street estimate of $107.7 billion.

First-quarter earnings, however, came in at $2.08 a share, up from $1.67 a year earlier and topping estimates compiled by Capital IQ for $2.04 per unit. Comps came in at a 4.2% gain versus 5.5% consensus and Wedbush’s view for a 5% increase.

“The top-line miss was driven by a late-breaking spring, with non-seasonal category sales growth still strong,” Wedbush said. “The company expects to capture `missed’ seasonal category sales in (the second quarter). Excluding an accounting change, gross margins were in line with expectations and SG&A deleveraged 10 basis points more than expected due to the soft comp.”

Shares were down more than 2% in early trading Tuesday.

Despite the top-line miss, the company “navigated well” in a challenging beginning to the season thanks to the unfavorable spring weather. Customer traffic, down 1.3%, fell for the first time since the first quarter 2011. Per-ticket items rose almost 6%. Outside of seasonal business, Home Depot saw “favorable” results in all of its markets and categories with stronger trends expected in May.

“Strength in pro-related sales and a mix shift away from lower-ticket lawn and garden products likely contributed to strong growth in average ticket growth,” Wedbush said. “HD adopted a new revenue recognition policy which resulted in the change of certain expenses and cost reimbursements associated with its private label program, certain expenses related to the sale of gift cards to customers and gift card breakage income.”

Minus the margin impacts from the policy change, gross margins of 34.1% were down 7 basis points year-on-year, in line with estimates and better than consensus. Wedbush said it believes gross margins likely fell due to mix as the company drives sales in big-ticket categories.

Companies: Home Depot, Inc. (The)
Price: 186.85 Price Change: -4.31 Percent Change: -2.25

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Lenders Need to Keep Eye on Risk Even as Strong Financial Health Makes Corporate Borrowing Attractive

2:51 PM, May 9, 2018 — Strong financial health has helped drive down corporate defaults, making investors more willing to lend at attractive rates, but trends need to be continually watched for rising risks, Washington Crossing Advisors said Wednesday.

Low corporate bond yields relative to Treasury bonds indicate investor willingness to led to companies amid rising commodity prices, strong cash flow and tax cuts. Borrowers are using the funds to refinance at more attractive rates, the firm said. Some companies are locking in lower-cost debt as interest is expected to rise.

With the economy booming, borrowers aren’t at risk of defaulting on loans, but investors need to remain vigilant in the event that investment risks increase, said, WCA, which is a wholly owned subsidiary and affiliated investment adviser of Stifel Financial.

“The increase in indebtedness of US non-financial companies is manageable in the current environment,” the firm said in a note to clients. “Steady growth, strong cash flow and investor confidence supports today’s low default rates. Still, it is important to keep an eye on how these trends evolve and recognize potential for increased risk, especially among weaker credits, should conditions change.

Moody’s Investment Research data shows defaults by corporate borrowers are now below average with only about 1.4% of borrowers defaulting. The average since the early 1980s is 1.5%, and the high-water mark was in 2009 at 5%, WCA said. The increase in corporate indebtedness has correspondingly risen to a record high of GDP, the firm said.

While borrowing to invest in profitable projects or refinance existing debt makes sense, other motives could be problematic, the firm said.

“At this point in the cycle, companies facing intense pressure to boost otherwise weak organic growth may turn to buybacks and acquisitions,” WCA said. “Strong levels of these activities, which can convey benefits in some environments, could prove damaging if done for the wrong reasons. By leveraging a balance sheet to achieve near-term growth targets, a business increases risk and decreases flexibility, especially if interest costs rise or business conditions worsen in the future. While not a problem at this point, we have seen many times before how debt growth can lead to trouble for the economy.”

If the economy takes a turn for the worse, default rates on lower-quality, non-investment grade issues will double or triple versus those of investment-grade debt. Increasing exposure to higher-quality investment grade and Treasury bonds is one way to decrease credit risk in the even the economy suffers a downturn, WCA said. The firm doesn’t expect such an outcome, but it reduced its natural exposure to high-yield corporate bonds last year and raised its US Treasury exposure from neutral to underweight.

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Starbucks Sells Distribution Rights to Nestle for $7.15 Bln; Plans to Return $20 Bln Cash to Shareholders

5:36 AM, May 7, 2018 — Starbucks (SBUX), the global roaster and retailer of specialty coffee, disclosed early Monday an earnings accretive deal under which Switzerland’s Nestle will pay the company $7.15 billion for the rights to market, sell, and distribute the Starbucks product range across its international channels.

As part of the move, which will help expand Nestle’s “at-home and away-from-home coffee” categories globally, Starbucks will retain a “significant stake” as a licensor of the global coffee alliance and supplier of roast and ground products, according to a statement.

Starbucks said it intended to use the after-tax proceeds primarily to accelerate share buybacks. It now expects to return about $20 billion in cash via share repurchases and dividends through fiscal year 2020.

Additionally, the transaction is expected to be earnings-per-share accretive by fiscal year 2021 at the latest, with no change expected to Starbucks’ current long-term financial targets, the statement noted.

The statement further added that the global alliance aims to leverage the strength of the Starbucks brand with Nestle’s global reach, creating new growth opportunities in the established North American markets and unlocking expansion in international markets.

The deal “is part of our ongoing efforts to evolve our business to meet changing consumer needs,” said Kevin Johnson, the chief executive officer of Starbucks.

Companies: Starbucks Corporation
Price: 59.50 Price Change: +1.82 Percent Change: +3.16

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3M’s Recent Financial Report Woes Belie Underlying Value in Company, RBC Says

8:58 AM, May 3, 2018 — 3M Company’s (MMM) four-month swoon has broached historical relative price/earnings support levels, making the stock more attractive, RBC said in a note on Thursday.

The bank upgraded 3M to an outperform rating from sector perform. The company’s first-quarter disappointment “looks contained” to familiar and shorter duration pressures in auto, dental and consumer electronics. The company’s chief executive handoff in July also looks like it’ll be smooth, RBC said.

Guidance was lowered for the year and a sharp drop in first-quarter earnings were reported by the company last week. 3M took charges relating to a lawsuit in Minnesota and US tax reform, though results on an adjusted basis beat expectations.

The company, which makes everything from school supplies to wound dressings, said earnings fell 55% year-over-year to $0.98 a share after recording an expense of $217 million, or $0.36 a share, from the Tax Cuts and Jobs Act. The Minnesota lawsuit settlement cost it a pre-tax charge of $897 million, or $1.16 a share, the company said.

Still, 3M recorded its best pricing quarter since 2016, and while it may contradict the high road it usually takes, RBC said it has to consider whether the bar was purposefully moved lower for incoming Chief Executive Mike Roman. The bank said the company is “in good hands” with Roman at the helm.

“Attractive entry point for one of the highest-quality multi-industry names,” the bank said of 3M. “In the past four months, 3M shares have been on a re-rating downslope to where they have now reached what we have found to be a compelling support level at a minus-5% relative P/E discount to multi-industry peers.”

The recent first-quarter earnings pressure was from familiar and “contained” dynamics rather than widespread macro deterioration, the bank said. Support levels are skewing the risk-reward “demonstrably” to the upside, and at this stage of the economic cycle, RBC said its bias is to recommend higher quality names to its multi-industry coverage.

Analysts at the bank also like the longevity of the positive rating.

“Our experience has been that 3M shares often act as a must-own consumer staple to ride recessions, whenever that next phase arrives,” said RBC, which raised its price target on the stock to $238 from $227 a share, implying 25% upside.

There are risks to the upgrade, however, as the “don’t try to catch a falling knife” mentality comes into play, as does the risk of upgrading so near the first-quarter operating miss and guidance cut, the bank said. The tariff battle between the US and China also weighs on the stock.

Companies: 3M Company
Price: 194.50 Price Change: 0.00 Percent Change: 0.00

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Snap Has Growing Up to Do as First-Quarter Financials Miss; Shares Plunge 19%

8:04 AM, May 2, 2018 — Snap (SNAP) has some growing up to do after first-quarter results missed expectations, Wedbush analysts Michael Pachter, Matthew Breda and Nick McKay said in a note on Wednesday.

The company reported a non-GAAP net loss of $0.17 per share in the quarter, in line with consensus compiled by Capital IQ but better than a loss of $0.20 a year earlier. Revenue rose 54% to $230.7 million, missing estimates for $244.6 million. Daily active users were up 15% year-on-year to 191 million, the company said.

Wedbush said revenue and daily active user growth missed expectations due largely to fallout over the company’s recent redesign.

“The revenue shortfall relative to expectations was driven by lower-than-expected DAU growth and advertiser concerns associated with the Snapchat redesign initially rolled out in January,” the analysts said. “Management noted `a lot of work to do to optimize the new design,’ particularly for Android users, and highlighted pushback from advertising partners as contributing to the revenue headwind in (the first quarter).”

Wedbush lowered its price target to $10 from $12.50 per share. Shares plunged 19% in pre-bell trading to $11.45 a share.

Management didn’t provide guidance but said they expect annualized revenue growth in the second quarter to decelerate relative to the first quarter, the analysts said. That would imply revenue growth of less-than 54% compared with Webush’s estimate of 58% and consensus of 62%.

Pivotal Research, meanwhile, maintained its sell rating and end-of-year price target of $9 on Snap after the company released its results.

Companies: Snap Inc.
Price: 11.45 Price Change: -2.68 Percent Change: -18.99

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T-Mobile US Poised to Merge with Sprint in $26 Bln Deal

6:28 AM, Apr 30, 2018 — German telecommunications major Deutsche Telekom (DTE.DE) said on Sunday that T-Mobile US Inc (TMUS), in which it holds a 62% stake, and Sprint (S), which is 83% owned by shareholder Softbank, will merge in an all-stock transaction which values the new company at around $150 billion.

The agreement between the four companies will see T-Mobile US take over all Sprint shares in a stock swap, according to a release issued by Deutsche Telekom. For every 9.75 Sprint shares, the company’s shareholders will receive one new share in T-Mobile US. The number of T-Mobile shares issued will therefore increase from around 865 million to around 1.29 billion shares based on fully diluted shares.News agencies Reuters and the Wall Street Journal have valued the deal at $26 billion.

The combination is expected to result in expected synergies with a net present value of $43 billion, with the main areas being integration of the mobile communications networks of T-Mobile US and Sprint, savings in network build-out and the build-out of a nationwide 5G network, savings in sales and marketing costs and increased efficiency in internal IT systems and billing.

Deutsche Telekom said that the new, larger T-Mobile US would have around 127 million branded customers and revenue of $76 billion, based on expected figures for 2018.

“Together with Sprint, the new T-Mobile US will be the most powerful mobile communications company in the United States,” Timotheus Hoettges, chief executive of Deutsche Telekom said.

“Even more customers will benefit from the best value for money and the fastest LTE [long term evolution] network in the United States in the future. Speeding up the build-out of 5G technology will benefit American economic growth, and also creates value for T-Mobile US shareholders,” Hoettges added.

Price: 30.94 Price Change: +0.30 Percent Change: +0.98

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Comcast Submits $31 Billion Offer For UK’s Sky, 16% Premium to Fox’s Earlier Bid

9:53 AM, Apr 25, 2018 — Comcast (CMCSA) said on Wednesday it submitted a superior cash offer for British television company Sky, coming in over the top of an offer by Rupert Murdoch’s Twenty-First Century Fox (FOXA).

Comcast has offered $31 billion (22 billion pounds), a 16% premium to Twenty-First Century Fox’s offer. If approved, the acquisition would increase Comcast’s free cash flow per share in the first year, excluding one-time transaction-related expenses. Comcast said it expects the return on invested capital of the transaction will exceed the average cost of capital.

Sky shareholders would received 12.50 pounds per share in cash, and would be entitled to any final dividend from the company’s financial year that ends on June 30, up to 21.8 pence per Sky share. Comcast Chief Executive Brian Roberts said the company is “delighted” to formalize its offer.

“We have long believed Sky is an outstanding company and a great fit with Comcast,” he said. “Sky has a strong business, excellent customer loyalty, and a valued brand. It is led by a terrific management team who we look forward to working with to build and grow this business.”

Comcast shares rose 1.3% in early trading while Fox was up 0.8%.

Sky, based in the UK, has 23 million customers in Europe. If the transaction goes through, Sky will be Comcast’s platform for growth across Europe. The companies will have a combined customer base of 52 million that will allow it to invest in new and acquired programming and increase innovation, Roberts said in a statement.

Comcast said if the deal is approved, it will maintain expenditures in Sky News for at least 10 years, establish an editorial board to ensure independence and maintain the company’s headquarters in Osterley for five years. It also won’t acquire any majority interest in a UK newspaper for five years.

To complete the purchase, Comcast said in the statement that it would enter into an unsecured bridge loan for up to 16 billion pounds and an unsecured term loan credit agreement for up to 7 billion pounds ($22 billion and $10 billion, respectively). The acquisition is subject to a number of conditions including anti-trust and regulatory approvals. It also must secure valid acceptances of more than 50% of voting rights than normally exercisable at a general meeting of Sky.

“Comcast believes that, combined, Comcast and Sky will create a business equipped to compete more effectively in a rapidly changing and highly competitive industry,” Comcast said. “Together, the companies would be well positioned to drive growth to provide attractive returns to Comcast shareholders and to benefit the employees and customers of both organizations.”

Companies: Comcast Corporation
Price: 33.78 Price Change: +0.43 Percent Change: +1.29

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