Copyright © Daniel Cullinane CPA.
Levi Strauss & Co (NYSE: LEVI) entered the market with a bang in its initial public offering (IPO). The stock launched at just over $22, well above its initial pricing at $17. The company originally expected to price its 36.67 million shares in the range of $14 to $16.
The underwriters for the offering are Goldman Sachs, JPMorgan, Merrill Lynch, Morgan Stanley, Evercore ISI, BNP Paribas, Citigroup, Guggenheim Securities, HSBC, Drexel Hamilton, Telsey Advisory Group and Williams Capital Group.
This company designs, markets and sells products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under the Levi’s, Dockers, Signature by Levi Strauss and Denizen brands. With $5.6 billion in net revenues and sales in more than 110 countries in fiscal year 2018, this is one of the world’s leading apparel companies, with the Levi’s brand having the highest brand awareness in the denim bottoms category globally.
The business is operated through three geographic regions that comprise its reporting segments: 1) the Americas, 2) Europe and 3) Asia, which includes the Middle East and Africa. Levi Strauss services consumers through its global infrastructure, developing, sourcing and marketing products around the world. The Americas, Europe and Asia segments contributed 55%, 29% and 16%, respectively, of net revenues in fiscal year 2018.
Levi Strauss detailed its finances as follows:
Net revenues have grown from $4.8 billion in fiscal year 2011 to $5.6 billion in fiscal year 2018, representing a compound annual growth rate, or CAGR, of 2.3%. Net income has grown from $135 million in fiscal year 2011 to $285 million in fiscal year 2018, representing a CAGR of 11.3%.
The company intends to use the net proceeds from this offering to increase financial flexibility, for working capital and for general corporate purposes.
Shares of Levi Strauss were last seen up over 34% at $22.86, in a range of $22.00 to $23.15 for the day thus far. Also, over 27 million shares had moved as of noon Eastern..
MARCH NEWSLETTER 3
ENTERS THE MARKET
Since the robust growth of the economy began to peter out in late 2018, economists, business owners and investors alike have looked to see if the jobs market would begin to slow the pace of its mega-growth trends as well. The weak February payrolls gains reported earlier this month are seeing at least some supporting data in weekly jobless claims and other metrics. 24/7 Wall St. has looked through all the recent jobs reports and related data points, most of which are continuing to show at least some cooling-off trends in the jobs market.
In the week ending March 16, the U.S. Department of Labor reported that seasonally adjusted initial claims fell by 9,000 down to 221,000. The previous week’s level was revised up by 1,000 from 229,000 to 230,000 and the consensus estimate from Dow Jones was 225,000.
Where things are looking less strong is in the four-week moving average. This smooths out the weekly gyrations and was reported as being up by 1,000 to 225,000. That average is up close to 20,000 from last September. The advance number for seasonally adjusted insured unemployment, or the continuing claims being measured for repeated claims, was down by 27,000 to 1,750,000. That figure comes with a one-week lag, and the previous week’s level was revised up 1,000 from 1,776,000 to 1,777,000.
It may seem a tad suspect to point to lower jobless claims in the same sentence as talking about a “peak jobs” scenario, but it’s expanding the basic report for a trend and looking at other data that matters here. There has been some added tempering of the jobs market in recent reports.
February’s payroll growth, which was reported earlier in March, was rather low as private sector payrolls rose by only 25,000 jobs in February. The number of jobless claims seen in the four-week average has ticked up by about 20,000 claims since September.
Another growing concern that may pressure employment growth is the recent spike in wages. Many states have recently raised minimum wages, and that trickles up the chain of command in workers for many businesses with multiple pay tiers.
The Labor Department showed that year-over-year wage growth hit 3.4% in February. That is nearly a decade high as average hourly earnings rose 11 cents to $27.66 per hour.
A non-government report from the private sector showed job market cooling in February as well. The ADP private sector payrolls report revealed much better gains than the government did by signaling that there was a gain of 183,000 payrolls in February. While stronger than the government number, this was also not as strong as other prior reports. The economists from ADP and Moody’s who co-author that survey also pointed to a modest slowdown in job growth, and with a sharp decline in small business growth from ADP. Moody’s noted that the economy has throttled back and so too has job growth, with that growth as likely having seen the high watermark for this expansion.
One last issue to consider is that labor force participation rate remains weak by historic and pre-recession standards, even if it has improved. This figure was flat in February over January at 63.2%, but it’s up just 0.2 points from a year ago, and it is not all that much better than the lowest reading of 62.4% from September of 2015. And historic levels ahead of recessions make it even worse for a comparison as the participation rate was measured as 66.2% in January of 2018 and 67.2% in January of 2001.
Federal Reserve Chair Jerome Powell signaled that the Federal Open Market Committee (FOMC) was out of the rate hiking business in 2019 and that the data available today indicate only one more expected rate hike in 2020. And the Fed’s own forecasters now have gradually increased the 2019 unemployment outlook to 3.7% from the 3.5% forecast in December.
It is always important to consider the other side of the coin as well, and that brings up the number of job openings. The Labor Department’s most recent data is January’s JOLTS (Job Openings and Labor Turnover Survey) reading, showing a fresh high of 7.6 million job openings. This was the January data, and many job openings may not be easily fillable due to geographic mismatch, discrepancies over wages offered by companies versus wages expected by workers, ongoing job skill gaps and many other factors.
While the jobs market remains strong, there are some signals out there that the robust jobs market of the past two years is finally starting to see the beginnings of cooling off. That said, these numbers are not indicative of any broad panic or serious concern yet.24/7 Wall St.
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Wedbush Securities has been quite positive on Apple Inc. (NASDAQ: AAPL) over time, continually being above the consensus price targets. The firm’s Daniel Ives has an Outperform rating for the technology giant, but he now sees Apple being worth billions of dollars more based upon what he expects to come from the press event on Monday, March 25, when Apple is set to unveil its long-awaited streaming video service. That service is Apple’s answer to competing against streaming media giants Netflix, Disney, Hulu and others.
Ives raised his $200 price target to $215. A price target being raised by 7.5% might not seem exceeding aggressive on the surface, but when you are talking about a company worth almost $900 billion, that is more than $60 billion in added value. And that $60 billion in added value in market capitalization would be more than the entire market cap of over 80% of the S&P 500.
Note that Ives has been much more bullish on Apple in the past than the more recent target. He once had a $310 price target in 2018, which was lowered to $275 last November to reflect reduced estimates and softer near-term iPhone data points. Ives then joined other Wall Street analysts in trimming that target handily, to $200, after Apple’s early January warning.
Ives said of Apple’s coming release:
We view this as a pivotal step for Cupertino in further driving its services flywheel and entering the “streaming content arms race” which is clearly starting to take form. While the first step in this video content framework will be its announcement on March 25th and adding content partners (likely Apple will get a 25%-35% cut of monthly subscriber fees), we believe this will only be the drumroll to a more transformative content acquisition during the course of 2019 for Apple. We believe Monday’s announcement is just the tip of the iceberg for Cook’s broader streaming content strategy to take hold and in our opinion adds a significant potential catalyst to the Apple services growth story for years to come.
Another issue is the services business, for which so many other analysts and investors have been holding high hopes. Ives estimates that the valuation of the services franchise for the company is worth roughly $400 billion on a standalone basis. He sees this as a highly profitable segment with revenues north of $50 billion by fiscal year 2020.
Ives also sees the new streaming video content service launching this fall with a slew of content partners and original content. Noted deals are with Oprah, Reese Witherspoon/Jennifer Aniston, Steven Spielberg and others. Apple is said to be spending roughly $1 billion on original content this year alone.
And the expected mass? About 100 million potential subscribers over the next three to five years. That said, Ives does note that the Apple streaming service is late to the market:
However the company is definitely playing from behind the eight ball in this content arms race with Netflix, Amazon, Disney, Hulu, and AT&T/Time Warner all going after this next consumer frontier investing significantly more dollars ($20 billion combined and counting per annum) on content. While acquisitions have not been in Apple’s core DNA, the clock has struck midnight for Cupertino in our opinion and building content organically is a slow and arduous path, which highlights the clear need for Apple to do larger, strategic M&A (a24, Lionsgate, Sony Pictures, CBS/Viacom, Netflix, MGM) around content over the coming year to “double down” and drive the services flywheel especially with its new video subscription service set to be rolled out.
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Ives believes that the opportunity could translate into a $7 billion to $10 billion annual revenue stream for Apple over time. This would also further cement Apple’s installed base and halo effect. As for the price hike, that comes from the added value in a sum-of-the-parts valuation of Apple.
Apple shares closed up 0.87% at $188.16 on Wednesday and were indicated up 0.5% at $189.26 on Thursday. Its 52-week trading range is $142.00 to $233.47, and its consensus target price is lower than the current price at $180.85. The street-high price target is still up at $245.
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778