Copyright © Daniel Cullinane CPA.
Ford Motor Co. (NYSE: F) on Wednesday announced three vehicle recalls, including one for 1.48 million model year 2011 to 2013 F-150 pickups to fix a transmission problem that was the subject of a 2016 recall of some model year 2011 and 2012 trucks. The earlier recall also included some model year 2012 Ford Expeditions, Lincoln Navigators and Ford Mustangs.
The company also said Wednesday that it is recalling about 27,000 model year 2017 to 2019 Lincoln Continentals sold in the United States and 1,200 sold in Canada to replace door latch assemblies that could fail to engage fully and increase the risk that the door may open while driving.
The third recall includes about 4,350 model year Ford Mustangs, Lincoln Nautiluses and Lincoln Navigators in which the instrument panel cluster may be blank when the vehicle is started.
The F-150 recall includes about 1.26 million trucks sold in the United States and another 221,000 sold in Canada. The six-speed automatic transmission in these vehicles may, without warning, downshift into first gear. “Depending on vehicle speed, a downshift … could result in a loss of vehicle control, increasing the risk of a crash,” according to Ford’s recall notice.
The company said it is aware of five accident reports potentially due to this condition, including one report of “whiplash.”
In 2016, Ford recalled about 154,000 F-150 pickups and other vehicles to fix a similar problem. At the time the company said it was aware of three accidents and no injuries related to the issue.
In December 2017, the National Highway Traffic and Safety Administration (NHTSA) reopened its investigation into this issue after the Office of Defects Investigation received 123 reports from vehicle owners. One of those complaints, cited at CarComplaints.com, described what happens:
I was driving close to 50 mph on a street and the truck suddenly downshifted to first gear without warning. The rear wheels locked up and went into a skid. The engine revved to the redline. After several seconds the transmission shifted back up into a higher gear and resumed normal operation. It was a spontaneous problem and has not been able to be reproduced.
As in the 2016 recall, the current recall to repair the transmission will be done by updating the vehicle’s powertrain control module.
FEBRUARY NEWSLETTER 5
Daniel Cullinane CPA
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PRICE IS RISING
It really should be nothing new that too many Americans have far too little saved up for a rainy day. It also shouldn’t be all that shocking to hear about Americans having too much credit card debt. That said, it should be alarming that there are some 74 million Americans who have more credit card debt than they have in emergency savings.
According to Bankrate.com, only 44% of American households have more emergency savings than credit card debt. What else should be alarming from this survey of 1,044 people is that the reported 29% of Americans with more credit card debt than emergency savings was the highest rate in nine years.
Another issue is how many Americans have little or no credit and little or no savings. Bankrate’s survey showed that 18% have neither credit card debt nor emergency savings at all, and that is a three-year high and up from just 12% a year earlier. This study indicated that one-third of the lowest income households, those with under $30,000 income, have no credit card debt and no emergency savings.
There was shown to be a big deterioration in American households’ emergency savings relative to credit card debt from just a year ago. Bankrate also suggested that the larger deterioration was across genders, ages, education levels and income brackets. It even showed that the credit deterioration was present regardless of political party affiliation.
Currently, some 41% of Americans are said to be focused on paying down debt. While that was barely changed from last year, there was a notable decline (from 53% down to 43%) in those focused on boosting emergency savings. This is a serious mistake in the making, with slower economic trends and with the odds of a recession rising ahead. Bankrate suggests that having a larger cushion can help ride out a period of economic difficulty.
Greg McBride, chief financial analyst at Bankrate.com, said of the report:
Consumers should make hay while the sun shines. Now is the time – with unemployment low and wages rising – to right-size the equation by paying off high cost credit card debt and adding to emergency savings. Sadly, it looks like we’re collectively moving in the wrong direction… The sharp deterioration in the relationship between credit card debt and emergency savings is an ominous indicator of the financial health among American households.
Higher income households and those headed by college graduates are said to be two to three times more likely to have more emergency savings than credit card debt. Middle income and lower income households are more evenly split.
There are differences in priorities among ages as well. Those who are aged 55 and higher are twice as likely to have emergency savings exceeding their credit card debt. Millennials (23 to 38 years old) were the only generation shown to be more focused on paying down credit card debt than boosting emergency savings. Those in Generation X, baby boomers and those who are in their 70s and up were all more focused on increasing their emergency savings.
Bankrate’s suggestion is for Americans with higher credit card balances to start paying down that debt. This is for consumers to transfer high-interest credit card balances to 0% balance transfer cards and also to create a realistic plan for paying off the amount owed during the interest-free period. By focusing on the big four living expenses (shelter, transportation, food and social), the suggestion there is to start looking for ways to reduce those main expenses to help start paying off debt.
While some of these numbers look alarming, the reality is that this has been tracked by Bankrate.com only since 2011. There are other critical issues that are seen from time to time in various consumer credit reports. Some reports look more dire than others.
The last commercial supersonic flight occurred in 2003 when the Concorde made its final landing in the United Kingdom. Rising fuel costs and a crash near Paris that killed 109 passengers and crew plus four people on the ground finally ended the Concorde’s useful life.
In the more than 15 years since that final flight, no commercial jet flies at even half the Concorde’s top speed of roughly 1,350 mph. That doesn’t mean aircraft engineers have given up on supersonic flight, however.
On Tuesday, Boeing Co. (NYSE: BA) announced a “significant” investment in Nevada-based Aerion, which was founded in 2003 to develop new technologies for supersonic aircraft. The company introduced its first supersonic design, the AS2 12-passenger business jet, in 2014. In 2015, Aerion announced a firm order for 20 of the new planes from Flexjet, a lessor of private aircraft. The first AS2 flight is not scheduled until 2023 and commercial availability could be years beyond that.
While a commercial supersonic aircraft could make Aerion or one of its two competitors rich and happy, the prospect of supersonic air travel is not welcomed by all. Last week, the International Council on Clean Transportation (ICCT) published a working paper on the environmental impacts of supersonic transport (SST) aircraft. Sonic booms and increased carbon dioxide emissions were the focus of the ICCT’s study.
The ICCT study modeled the landing and takeoff noise, sonic boom and carbon dioxide emissions from a new, “unconstrained” fleet of 2,000 SSTs linking 500 city pairs by 2035. The two busiest airports would be Dubai and London Heathrow, both of which could see more than 300 take and landing operations every day. Los Angeles, Singapore, San Francisco, JFK, Frankfurt and Bangkok could see 100 operations a day. That much activity could double the area around the airports exposed to noise pollution compared to a subsonic fleet of the same size.
That SST fleet would emit an estimated 96 million metric tons of carbon dioxide per year, roughly the combined 2017 emissions of American, Delta and Southwest Airlines. The fleet would consume about 20% of the entire carbon budget available to commercial aviation under a climate goal of limiting a global temperature increase of 1.5 degrees Celsius.
Last October, Aerion selected a new engine from General Electric Aviation called the Affinity to power the AS2. The turbofan Affinity has been designed for efficient supersonic flight over water and efficient subsonic flight over land. The engine is also designed to beat current emission standards and will have a top speed of Mach 1.4 (about 1,100 mph).
Aerion CEO Tom Vice said:
The AS2 is the launch point for the future of regulatory-compliant and efficient supersonic flight. Together with Boeing, we’re creating a faster, more connected future with tremendous possibilities for enhancing humanity’s productivity and potential.
Airbus signed on as Aerion’s airframe technical partner in 2014, and it is unknown whether the Boeing rival’s deal is still on or not. Odds are that it isn’t, but we don’t know for sure.
One final thing: price. At the time the AS2 was introduced in 2014, the 12-seater’s cost was projected to top $100 million per copy. For comparison, Boeing’s 787-800 has a list price of $102.2 million, carries up to 210 passengers, and has a subsonic cruising speed of around 585 mph. The Airbus A320neo costs $110.6 million, has a maximum capacity of around 186, and a cruising speed of about 530 mph. The Aerion AS2 will cost more than $100 million, carry a maximum of 12 passengers, and have a maximum cruising speed of around 1,100 mph.
Boeing Co. (NYSE: BA) is expected to report its fourth-quarter results on Wednesday, and it is actually the most important stock in the entire Dow Jones industrial average when it comes to the construction of that index. Boeing also was up over 12% on a year-to-date basis ahead of its key earnings report.
The consensus analyst forecast from Thomson Reuters was $4.58 in earnings per share (EPS) on $26.95 billion in revenue. The larger question is how Boeing views 2019 with ongoing concerns about U.S.-China trade tensions and with a slowing global economy. The consensus estimates of $15.13 EPS and $99.7 billion in revenues for 2018 then jump up to $18.31 per share and almost $107 billion in revenues for 2019.
Boeing has massive exposure to the growing global airplane demand. But given its classification as aerospace and defense, Boeing also has the government contracts for military and space operations from the United States and its allies. Boeing maintained its lead over rival Airbus in initial aircraft orders late in 2018, with a record of more than 800 airplanes delivered. An overwhelming majority of Boeing’s deliveries in 2018 came from the 737 family, accounting for 580 of those deliveries. That’s roughly 72% of all deliveries. The 787 Dreamliner program finished with 145 deliveries for the year.
Boeing is still not entirely insulated from China and is not insulated at all from the global economy. That said, earlier in January, Boeing reported that it had over 900 net plane orders on the books valued at over $143 billion at list prices, after taking in 200 orders in December. And Boeing also has a lot of visibility ahead with a reported backlog of thousands of airplanes that is now standing at seven years.
Because the Dow Jones industrial average is a price-weighted index, and with Boeing now the highest priced Dow stock, it is actually the most important stock when it comes to daily point and percentage move for the Dow. The website IndexArb showed that Boeing had roughly a 10% weighting of the Dow. One comparison here would be that Boeing has the same weighting as the bottom eight components combined (Walgreens, Exxon, DowDuPont, Verizon, Coca-Cola, Intel, Cisco and Pfizer).
Meanwhile, Boeing is a normal calculation when it comes to its weighting the S&P 500 Index, as that index is a market cap weighted index. Boeing’s $208 billion market cap equates to a rank of 23 in the S&P 500.
As noted in our review of all 30 Dow stocks in the 28,000 implied analyst target price for 2019, Boeing has moved far beyond the former boom-bust cycles of the past. Boeing’s stock had pulled back sharply in late 2018 to end the year at $322.50, and it does still have potential exposure to a recent airplane crash. Still, the shares were up a total of more than 9% in 2018, after its 2017 gain of 89% blew out the mere 4% expected by analysts a year earlier. At the end of 2018, Boeing’s trailing price-to-earnings (P/E) ratio was 21.0 and its forward P/E ratio was 17.5.
At the end of 2018, Boeing had a consensus analyst target of $417.60, but that target came down marginally to $415.71 immediately before this critical earnings report. Its year-end price target implied that analysts expected a gain of almost 30% in 2019, and that was without even considering its 2.5% dividend yield. The implied gain now would be closer to 15% due to its shares having risen handily so far in 2019.
Analysts also have been positive on Boeing ahead of the earnings report. Morgan Stanley raised its rating to Overweight from Equal Weight with a whopping $450 price target on January 10. And on that same day Susquehanna started Boeing as Positive with a $388 price target. Merrill Lynch and CFRA (S&P Global) both have $450 price targets as well.
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Boeing’s shares were changing hands around $365 ahead of earnings, and they have a 52-week range of $292.47 to $394.28.
With a 10% weighting in the Dow and having the same weighting as the bottom eight stocks of the Dow, it goes without saying that Boeing shares have the ability to single-handedly exaggerate any upward or downward move in the index
When Wynn Resorts Ltd. (NASDAQ: WYNN) released its third-quarter financial results after the markets closed on Wednesday, the company said that it had $1.68 in earnings per share (EPS) and $1.71 billion in revenue. That compared with consensus estimates of $1.77 in EPS and $1.64 billion in revenue, as well as the $1.52 per share and $1.55 billion posted in the same period of last year.
During the latest quarter, operating revenues from Wynn Palace were $730.6 million, a 39.1% increase from $525.0 million for the same period of 2017. Separately, operating revenues from Wynn Macau were $579.6 million, a 3.1% increase from $562.0 million. Operating revenues from Las Vegas Operations were $398.9 million for the third quarter of 2018, a 14.1% decrease from $464.3 million.
In terms of the segment revenue breakdown, the company saw:
Casino revenues increased 13.6% year over year to $1.22 billion.
Rooms revenues increased 7.4% to $183.0 million.
Food and Beverage revenues decreased 3.1% to $193.9 million.
Entertainment, retail and other revenues increased 4.5% to $110.1 million.
On the earnings call, the company announced that it will not be going through with its plans for an artificial lake that would have taken the place of its 18-hole golf course. At the size of nearly 100 Olympic swimming pools, the lagoon plan was pitched in 2016 as a more conservative use of water for the company’s Wynn and Encore casino-resorts complex on the Strip.
Wynn Resorts also said Wednesday that casino industry veteran Phil Satre has been named chair of its board of directors, replacing D. Boone Wayson. The appointment is part of a previously announced agreement between the company and its largest shareholder.
Shares of Wynn were last seen down 13% at $99.45, with a consensus analyst price target of $169.13 and a 52-week trading range of $92.50 to $203.63.
The U.S. Energy Information Administration (EIA) released its weekly petroleum status report Wednesday morning showing that U.S. commercial crude inventories increased by 3.6 million barrels last week, maintaining a total U.S. commercial crude inventory of 450.8 million barrels. The commercial crude inventory remains about 6% higher than the five-year average for this time of year.
Tuesday evening the American Petroleum Institute (API) reported that crude inventories decreased by just under a million barrels in the week ending February 8. For the same period, analysts expected crude inventories to rise by about 2.3 million barrels.
EIA reported that gasoline inventories increased by 400,000 barrels and remained about 4% above the five-year average range and distillate stockpiles rose by 1.2 million barrels. The API said gasoline inventories increased by about 750,000 barrels and distillate stockpiles dropped by about 2.5 million barrels. Analysts were expecting gasoline inventories to rise by about 508,000 barrels, and distillate inventories were expected to drop by about 1.1 million barrels.
Following the Obama administration’s 2016 lifting of the ban on U.S. crude oil exports, about 20% of U.S. crude is now exported, compared with about 4% when the ban was in effect. Most of the pre-2016 exports were directed to Canadian refineries, which then exported much of their products back to the United States. U.S. exports of crude have averaged about 2.3 million barrels a day for the past three months and analysts at RBN Energy think that if West Texas Intermediate (WTI) prices rise to the mid-$60 range, exports could total 6 million barrels a day by 2024. That’s about 35% to 40% of total U.S. crude oil production.
Other highlights from this morning’s EIA report:
U.S. crude oil exports fell by 506,000 barrels a day last week, and U.S. production was unchanged at 11.9 million barrels a day. Daily crude exports totaled 2.36 million barrels a day.
Exports of refined products rose by 25,000 barrels a day last week to about 5.18 million barrels a day.
U.S. refineries produced about 9.6 million barrels of gasoline a day last week.
Crude oil imports averaged 6.2 million barrels a day last week, down by 936,000 barrels compared with the previous week.
Refineries were running at 85.9% of capacity, with daily input averaging 15.8 million barrels a day, about 865,000 barrels less than the previous week’s average.
According to AAA, the current national average pump price per gallon of regular gasoline is $2.273, down less than half a cent from $2.277 a week ago and up by nearly three cents compared with the month-ago price. Last year at this time, a gallon of regular gasoline cost $2.56 on average in the United States.
Before the EIA report, benchmark WTI crude for March delivery traded up about 2.2% for the day at around $54.27 a barrel, and it traded at $54.12 shortly after the report’s release. Crude prices were rising following a report of supply cuts and encouraging news on U.S. trade talks with China.
Here is a look at how share prices for two blue-chip stocks and two exchange-traded funds reacted to this latest report.
Exxon Mobil Corp. (NYSE: XOM) traded up about 1.1%, at $76.26 in a 52-week range of $64.65 to $87.36. Over the past 12 months, Exxon stock has traded down by about 0.7%.
Chevron Corp. (NYSE: CVX) traded up about 1.3%, at $120.20, in a 52-week range of $100.22 to $131.08. As of last night’s close, Chevron shares are trading up about 6.2% over the past year.
The United States Oil ETF (NYSEARCA: USO) traded up about 2.3% to $11.42, in a 52-week range of $9.23 to $16.24.
The VanEck Vectors Oil Services ETF (NYSEAMERICAN: OIH) traded up about 1.4% to $17.25, in a 52-week range of $13.13 to $29.87.
Aerospace and defense stocks were crushed along with the rest of the market in the fourth quarter, but unlike tech stocks that get caught up in global trade concerns, the top stocks are rarely subject to tariffs. Yet the sector is down a stunning 23% since October 1, compared with a more than 11% decline in the S&P 500. With investors concerned over the prospects for many companies going forward, the defense and aerospace sector may offer some of the best value now.
SunTrust analysts feel that an assumption that spending on the sector has peaked contributed to the massive sector sell-off. They noted this when discussing defense-related stocks:
The global threat environment remains elevated, defense spending outlays should grow at a solid rate, and we believe the release of the fiscal year 2020 budget will alleviate concerns that the defense budget has peaked. Moreover, we think the sector remains largely insulated from broader global macro risks offering unmatched visibility, relative to its broader industrial peers, over the next 24-36 months.
These four top defense stocks are rated Buy at SunTrust, and all make sense for long-term growth accounts.
While perhaps a lesser known name to investors, this stock may offer among the best value going forward. Aerojet Rocketdyne Holdings Inc. (NYSE: AJRD) engages in the provision of innovative solutions in the field of aerospace and defense, as well as in the field of real estate.
The Aerospace & Defense segment operates through the Aerojet Rocketdyne in the developing and manufacturing of aerospace and defense products and systems for the U.S. government, the National Aeronautics and Space Administration (NASA), major aerospace and defense prime contractors and portions of the commercial sector.
The Real Estate segment operates through Easton Development Company in re-zoning, entitlement, sale and leasing of excess real estate assets.
The SunTrust price target for the stock is $40, and the Wall Street consensus target is $38.33. The shares closed Thursday at $36.68, up almost 3% on the day.
This stock offers excellent upside potential and a more moderate valuation. FLIR Systems Inc. (NASDAQ: FLIR) designs, develops, markets and distributes thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems and threat-detection solutions. The company’s segments include Surveillance, Instruments, Security, OEM & Emerging Markets, Maritime and Detection.
The Instruments segment provides devices that image, measure and assess thermal energy, gases and other environmental elements for industrial, commercial and scientific applications under the FLIR and Extech brands. The OEM & Emerging Markets segment provides thermal imaging camera cores and components. The Maritime segment develops and manufactures electronics and imaging instruments, and the Security segment develops and manufactures a range of cameras and video recording systems.
Investors receive a 1.5% dividend. SunTrust has a $55 price target, and the consensus target is $58. Shares closed on Thursday at $44.64.
Many analysts across Wall Street like this company. L3 Communications Holdings Inc. (NYSE: LLL) provides aerospace systems and a range of communication and electronic systems and products used on military and commercial platforms in the United States and internationally.
The company operates in three segments: Electronic Systems, Aerospace Systems and Communication Systems. It offers a range of products and services, including components, products, subsystems and systems, as well as related services to military and commercial customers in business areas, including precision engagement and training, power and propulsion systems, aviation products and security systems, sensor systems, warrior systems, and optics, telescopes and precision optical subsystems.
L3 Technologies produces electro-mechanical and mechanical fuzes to support missiles and artillery systems that enable for high-speed and high-accuracy sensors. Raytheon’s AIM-9X Sidewinder missiles bolster L3’s fuzing capabilities. It is expected to see some ancillary revenue from the huge Saudi deal signed last year.
Investors receive a 1.9% dividend. The $224 SunTrust price objective compares with a $233.85 consensus figure and the most recent close at $173.20.
SunTrust sees this as one of the only pure-plays on defense electronics. Mercury Systems Inc. (NASDAQ: MRCY) provides secure processing subsystems for various critical defense and intelligence programs in the United States. Its products and solutions are deployed in approximately 300 programs with 25 defense prime contractors.
Principal programs include Aegis, Patriot, Surface Electronic Warfare Improvement Program, Gorgon Stare, Predator, F-35 and Reaper. Mercury Systems also designs, markets and licenses software and middleware environments under the MultiCore Plus name to accelerate development and execution of signal and image processing applications on a range of heterogeneous and multi-computing platforms.
SunTrust has set its price target at $54. The consensus target is $55, and shares closed Thursday at $47.95.
STOCK PRICE BOEING
Some people compare the stock market to gambling and casinos. This is certainly debatable, considering that millions of Americans have saved and saved and seen their assets grow in the stock market versus gambling at the casino. But what about when it comes to investing in a casino stock? That’s a fair question for the case of Caesars Entertainment Corp. (NASDAQ: CZR).
Monday’s top analyst upgrades, downgrades, and initiations included Caesars, as Credit Suisse initiated coverage at Outperform. The firm also assigned a $13 price target based on its own sum-of-the-parts analysis. If the firm is correct, that represents roughly 30% in implied upside to the target.
Cameron McKnight, the Credit Suisse analyst behind the call, also named Caesars the top pick in gaming. The firm’s view is that Caesars re-emerged from bankruptcy as one of the largest U.S. gaming operators. It has eight properties around the Las Vegas Strip and 22 more regional properties. The report also called Caesars a pioneer of loyalty marketing and said that its Total Rewards program is a significant advantage.
Additional positives after considering a favorable long-term outlook for the Las Vegas Strip were listed as diversified revenue drivers, market share growth and a healthy corporate and meeting business. McKnight’s strong views further said:
Bulls point to upside from reinvestment following bankruptcy. Caesars is taking market share, with a mix of near- and medium-term projects. Caesars is reducing costs across the business, it is cash generative and should continue to deleverage. Valuation is very attractive relative to close peer MGM. Bears point to risks from supply growth and irrational competition, especially in a recession. Bears note Caesars’ already leading margins, and some note that Caesars is locked into expensive leases and sale-leasebacks.
Credit Suisse also is calling for 7.5% in annual EBITDA growth each year from 2017 through 2020 and a slight margin improvement from continued efficiency initiatives.
The 30% in implied upside to the $13 price target is already far higher than a traditional 8% to 10% upside call in most Dow Jones industrials or S&P 500 types of stocks at this time in the bull market. The firm’s $13 target was also shy of the $13.75 consensus analyst target price from Thomson Reuters.24/7 Wall St.
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One thing that Credit Suisse does differently from many other brokerage firms is offering a Blue Sky and Grey Sky scenario. Put simply, even more up or what happens if things don’t go its way. The firm’s Blue Sky scenario is $17 and its Gray Sky scenario is $9. In gambling terms, that’s $1.00 of risk for $3 of upside, and maybe as much as $7 upside if things go even better.
Obviously, investors have to consider a lot in investment banking and analyst research reports. Sometimes analysts are wrong, or sometimes their knowledge about a scenario is already more reflected in a share price than they might think.
Caesars shares were trading up almost 2% at $10.03 late on Tuesday, and they have a 52-week range of $8.55 to $14.50.
On Wednesday, Johnson & Johnson (NYSE: JNJ) announced that its subsidiary, Ethicon, had entered a definitive agreement to acquire Auris Health, a robotic technology firm, initially focused on lung cancer.
Management believes this acquisition will accelerate Johnson & Johnson’s entry into robotics, with potential for growth and expansion into other interventional applications.
Under the terms of the agreement, Ethicon is acquiring Auris for approximately $3.4 billion in cash. Additional contingent payments of up to $2.35 billion, in the aggregate, may be payable upon reaching certain predetermined milestones.
Johnson & Johnson is creating a connected digital ecosystem centered around using data to improve patient outcomes that leverages world-class robotic technology. This ecosystem will empower patients to take charge of their health, guide surgeons through procedures and help them advance their skills and enable health care systems to deliver more consistent procedures while also managing costs.
The transaction is expected to close by the end of the second quarter of 2019.
Ashley McEvoy, executive vice president and worldwide chair of Johnson & Johnson’s Medical Devices unit, commented:
In this new era of health care, we’re aiming to simplify surgery, drive efficiency, reduce complications and improve outcomes for patients, ultimately making surgery safer. We believe the combination of best-in-class robotics, advanced instrumentation and unparalleled end-to-end connectivity will make a meaningful difference in patient outcomes.
Shares of Johnson & Johnson were last seen trading at $134.61, in a 52-week range of $118.62 to $148.99. The consensus analyst price target is $144.22.