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- 🍿 A Box Office Bounce Back? JPM Thinks So
🍿 A Box Office Bounce Back? JPM Thinks So
Plus, a short report that caught our eye and a taco stock to watch.
Happy Sunday to everyone on The Street.
There is a lot about life that is really good. It's not always perfect though, and there are definitely small things that are bothersome in a big way.
It's hard to find anyone who likes traffic, for example. And what about mosquitos? Pretty much unanimously despised by humans. Slow-walkers are frustrating, and I can't stand when people have their heads buried in their phones at a green light.
While these aspects of our existence are annoying, there is one thing that is particularly bothersome: subscriptions that are extremely difficult to cancel.
This is why Edwin Dorsey's recent short report on Planet Fitness (PLNT) caught my eye. For context, Dorsey points out that Planet Fitness has been a hit with both consumers and investors. "... Shares are up ~350% since the company’s August 2015 IPO propelled by a growing franchise base that’s nearly doubled from 1,066 in 2015 to 2,091 franchised gyms today. At ~40x forward earnings, investors believe the franchise network is healthy and has room to grow. The Bear Cave doesn’t."
Through Freedom of Information Act requests Dorsey found "hundreds of consumer complaints concerning overbilling, fraudulent transactions, excessive fees, and uncancellable memberships."
I'm not a Planet Fitness member, so I can't speak from first-hand experience, however, something similar happened when I tried to cancel my New York Times (NYT) subscription a while ago. It's infuriating and I have to think it negatively impacts a company's Net Promoter score.
Anyway, Dorsey's report was released Thursday morning when the stock opened at $82.25. It ended the week at $79.22. Not everyone agrees with Dorsey's report so time will tell if this is the start of a trend or just a blip.
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Review
US stocks rose Friday, but the major indexes slipped for the week as a whole as recessionary concerns grow on Wall Street. Disappointing corporate earnings and economic data combined to sour sentiment as last week advanced, stalling the New Years rally.
While there had been optimism regarding cooling inflation and hopes for a less hawkish Fed, that’s given way to worries about the health of the economy. Still, regarding central bank policy, Philadelphia Fed President Patrick Harker said he anticipates 25-basis-point hikes in the coming months.
Investors’ broader concerns are partially tied to economic data, including retail sales, which fell just over 1% in December. Elsewhere, the National Association of Realtors reported existing home sales fell in December, marking the 11th straight month of decline.
In company-specific news, Google-parent Alphabet will lay off 12,000 employees, according to an email sent by CEO Sundar Pichai. Amazon and Microsoft also recently let go a combined 28,000 workers. All of this highlights the market’s ongoing trepidation concerning a protracted slowdown.
Meanwhile, crypto lender Genesis filed for bankruptcy late last week, as the impact of the FTX implosion continues to disrupt the sector. In November, Genesis froze withdrawals following FTX’s collapse. The company filed for Chapter 11 protection in hopes of achieving what they called “an optimal outcome” for the firm’s clients.
On the flip side, PagerDuty was the subject of a positive report from Morgan Stanley, suggesting the cloud computing company is pushing toward better profitability. Finally, Costco announced it will reauthorize a stock buyback program of up to $4 billion, over the next four years.
For the week as a whole, the Dow Jones Industrial Average fell 2.7%. The S&P 500 also posted a loss, finishing 0.66% lower. The Nasdaq Composite was the outperformer, finishing higher by 0.55%, notching its third positive week in a row.
Preview
Tomorrow, the Conference Board will release December’s Leading Economic Index, which aims to forecast future economic activity. The index declined 1.0% in November, following a 0.9% drop the month before.
Tuesday, three major purchasing managers’ indexes, or PMIs, will be released by S&P Global: Services, Composite, and Manufacturing. The Composite PMI hit 45 in December, signaling a strong monthly decrease in private sector business activity, led by drop-offs in manufacturing and services output.
On Wednesday, the MBA 30-year mortgage rate will be released. This weekly interest rate metric hit 6.23% for the week ended January 13th, continuing its decline from its peak of 7.16% last October. This is a sign that inflation is continuing to level off.
Thursday will be a busy day, culminating as investors get advanced insight into the US GDP growth rate for the fourth quarter 2022. In Q3, the US economy grew at an annualized rate of 3.2% after shrinking for the previous two quarters.
Friday will give investors a look at how US consumers are faring, with December releases for personal income and spending. In November, personal income rose 0.4% from October while personal spending essentially stayed flat, increasing only by 0.1%.
Earnings
Tomorrow, oil field services company Baker Hughes (BKR) is scheduled to hold a conference call discussing its results for the fourth quarter and 2022 as a whole.
Tuesday, Microsoft (MSFT) will deliver a much-anticipated report. The tech giant may field questions regarding its investment and future plans for OpenAI’s ChatGPT, its ongoing acquisition of Activision Blizzard (ATVI), and its decision to lay off 10,000 employees, announced last week. Additionally, expect reports from major defense contractors Raytheon (RTX) and Lockheed Martin (LMT), as well as dominant conglomerates 3M (MMM) and General Electric (GE).
On Wednesday, Boeing (BA) will offer further insight into the defense industry. Meanwhile, Tesla (TSLA) will expand on its full-year numbers after releasing the initial figures at the top of the year. The EV giant delivered over 1.3 million EVs in 2022, a year-over-year increase of 40%.
Thursday will shift investors’ eyes toward the turbulent air travel sector, with American Airlines (AAL), Southwest (LUV), and JetBlue (JBLU) all set to release their reports. All three companies will be expected to speak on the Department of Transportation’s decision to hold airlines accountable for canceled flights. Additionally, reports from the payment processing duopoly of Visa (V) and Mastercard (MA) will cast light on American spending habits.
On Friday, American Express (AXP) will build off its competitors’ reports, while Chevron (CVX) reflects on the oil industry’s highly-profitable 2022.
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A Box Office Bounce Back? JPM Thinks So.
Potential for More Blockbusters
Movie releases aren’t at pre-pandemic levels, but they are getting closer. This should bode well for big movie powerhouses, particularly Disney (DIS), which has a slate of new releases scheduled for 2023.
As a result, JPMorgan analyst David Karnovsky thinks movie ticket sales in North America will increase 15% this year, hitting $8.49 billion. In 2022, gross receipts were $7.4 billion, up 65% compared to 2021, but still 36% lower than the three-year average before the pandemic.
“We see at least 30 films with potential for ~$100m plus in revenue vs 18 which reached that mark in 2022,” wrote Karnovsky in a recent research report.
Get Your Popcorn Ready for 2Q
Further boosting his thesis, Karnovsky pointed to recent comments from Cinemark (CNK) that bode well for the year ahead.
The Plano, Texas-based movie theater chain said it’s expecting the number of films in wide release to increase as more small and mid-tier studios return to theater releases in 2023.
Interestingly, the number of new releases should have more of an impact on the industry than the overall economy. History has shown that even in recessionary times people go to the movies.
The second quarter, according to Karnovsky, is expected to be a big one for ticket sales with the impending releases of “The Super Mario Bros Movie,” “Guardians of the Galaxy: Volume 3,” “Fast X,” “The Little Mermaid,” “The Flash.” and “Elemental.”
Disney to See Biggest Gains
The third quarter also promises to be a busy stretch with titles like “Indiana Jones and the Dial of Destiny,” “The Marvels” and “Oppenheimer,” all slated to be released. Sales in the fourth quarter may be more muted unless additional movie release dates are pushed forward. If this happens, this could bring even more upside to the JPMorgan analyst’s forecast.
Of all the movie studios, Karnovsky thinks Disney will see the biggest percentage gains in global box office revenue. Paramount (PARA) and NBC Universal (CMCSA) have tough comps to compete with this year thanks to the strength of Paramount’s “Top Gun: Maverick” and NBC’s Jurassic Park and Minions films. They are both expected to see declines in movie ticket revenue in 2023.
The movie industry hasn’t returned to pre-pandemic levels but it's getting there. At the end of the day, more content means more options for consumers. Big movie houses and studios are doing their best to get back to a busy release calendar in 2023. Investors may want to have their popcorn ready.
Are you bullish or bearish on the box office in 2023? |
Switching Software Systems Sucks. Call in the Experts.
Everyone Throws Everything Out
Discretional spending on IT is a tricky business in an economic downturn. Many companies are reining in expenses in an effort to stay lean. That’s not a great environment for software stocks, but there is one small-cap name that a few Wall Street bulls have their eyes on.
Hailing from the United Kingdom, Endava (DAVA) is an IT consulting firm based out of The Smoke (London). It helps companies install new software and integrate updates with old systems. Over the past 12 months, the stock has tumbled roughly 30%, but that may present a buying opportunity.
Although broadly speaking software sales are expected to slow, not all areas will be hurt. Companies will continue to buy new software if it can save them money or improve efficiency. Switching from an old system to a new one is extremely difficult, which means many companies rely on experts. Enter Endava.
“As we come out of a bubble burst, everyone throws everything out,” Scott Davies, chief investment officer at fund manager CDAM said in a recent interview. “That’s where we like Endava.”
Endava’s Enviable Position
According to Davies, Endava’s deep pool of workers puts it in an enviable position in 2023. The job market is tight and even more so for IT. Companies may have no choice but to outsource because of a shortage of workers.
“[Demand] for developers will likely remain elevated vs. historical averages as companies across all industries continue to invest in technology,” said Cowen analyst Bryan Bergin in a recent research report. The analyst thinks there could be a shortfall of 5.3 million IT workers by 2026.
Endava has been in growth mode for some time, with revenue increasing 29% annually over the past three years. Analysts expect sales to have a compound annual growth rate of 28% to $1.44 billion over the next 24 months.
With low overhead, earnings should be able to match that growth as well. It's also in a good position to raise prices. If companies can’t find IT workers to hire they won’t have any choice but to pay more for tech services and consulting.
Bulls Chomping at the Bit
So what does this concoction of factors mean for Endava’s stock? For bulls, it's a bargain. Shares are currently trading at a price/earnings-to-growth, or PEG ratio of slightly under one times.
The Russell 2000 small-cap stock index’s PEG ratio is just over one times. Bergin thinks Endava could hit $95 per share. On Friday, shares closed at $86.42.
The company is slated to report earnings in February and if it beats expected profit of 69 cents and $249 million in sales, the stock could pop.
Companies are cutting their IT budgets as they look for ways to save. A bust for some software companies but a potential boon for Endava. With the stock down double digits, bulls are chomping at the bit.
Options Pro’s Next Top Pick Drops Monday
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It is the most transparent, reliable tool you will find for becoming a sharper, better-educated trader.
And the picks? They are awesome! He recently alerted option trades that went up over 320% on NFLX, 400% on CELH, and a whopping 700% on AMZN – all in just a few days!
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Ride Out the Recession With Chipotle
Chipotle Poised to Recoup its Losses
Chipotle (CMG) is done raising prices (for now) and that should bode well for its stock with a recession looming. Last year the fast-casual chain bumped up prices three times to counter record-high inflation. For the most part, customers took the price hikes in stride, helping its sales and margins stay relatively steady. Still, with consumers’ budgets getting tighter, investors feared too many hikes would hurt sales. The stock fell 20% last year in response.
With price hikes hopefully out of the way, some investors are changing their tunes. According to FactSet, the consensus analyst rating is overweight with an average price target of $1,778. On Friday, the stock closed at $1,555.19 implying a decent upside.
“Attracting high-income consumers, leveraging a strong debt-free balance sheet to fuel growth, and with a track record of growth stickiness during past recessions, CMG should compound even in softer macro conditions,” Bernstein analyst Danilo Gargiulo wrote in a recent research report.
Gargiulo is even more optimistic than the rest of the pack, slapping an Outperform rating on the stock with a $1900 price target.
Sourcing Power
Bernstein isn’t alone. David Palmer, an analyst at Evercore ISI, is even more bullish. He rates Chipotle a buy, named it his top pick of 2023, and has a $2,000 price target on the stock.
It's among the highest price targets for Chipotle on The Street. The analyst sees foot traffic in Chipotle's stores increasing in the second quarter and delivery pricing improving. The latter weighed on its stock last year.
The fast food chain sources ingredients via small farmers and signs multiyear contracts which gives it pricing protection. It can avoid the big food suppliers which may cost more and limits its exposure to fluctuating commodity prices.
As a result, analysts can get a better sense of how margins will do in 2023, something that can’t be said for many of its competitors and a big reason they are bullish on CMG.
Pronunciation the Only Problem
Chipotle also gives off the perception that you are getting value when you buy its burritos and tacos. That will be increasingly important this year as investors and consumers await the much-discussed downturn.
Even if the economy doesn’t fall into a traditional recession the perception that one is coming may prompt consumers to pull back spending. If they think they are getting a deal at Chipotle they will continue to frequent the chain.
Value may matter more in 2023 which puts Chipotle in a good position. The only question left to answer with the company is why Baby Boomers can’t seem to pronounce its name right.
Are you bullish or bearish on Chipotle in 2023? |
Last Week's Poll Results
Are you still bullish on the energy sector heading into 2023?
🟩🟩🟩🟩🟩🟩 👍Yes
🟨⬜️⬜️⬜️⬜️⬜️ 👎 No
Are you bullish or bearish on Uber over the next 12 months?
🟩🟩🟩🟩🟩🟩 🐂 Bullish
🟨🟨🟨⬜️⬜️⬜️ 🐻 Bearish
Are you bullish or bearish on Zillow over the next 24 months?
🟨🟨🟨🟨🟨⬜️ 🐂 Bullish
🟩🟩🟩🟩🟩🟩 🐻 Bearish
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