According to the Wall Street Journal this afternoon, the Justice Department is opening a broad antitrust review into whether dominant technology firms are unlawfully stifling competition.
“The new antitrust inquiry is the strongest signal yet of Attorney General William Barr’s deep interest in the tech sector, and it could ratchet up the already considerable regulatory pressures facing the top U.S. tech firms. The review is designed to go above and beyond recent plans for scrutinizing the tech sector that were crafted by the department and the Federal Trade Commission,” the Journal reported.
These companies could now face antitrust claims from both the Federal Trade Commission, which just socked Facebook with a $5 billion fine, and the Justice Department.
The Justice Department inquiry is likely to be very open ended with the parameters not limited to any cited act or practice that violates antitrust laws or even to antitrust compliance in general. Any violations of any laws are on the table in the inquiry, the Journal says.
Today I’m making Tyson Foods (TSN) the fifth and final value pick in my Special Report 5 Value Stocks for a Market at an All-time High.That Special Report ran on my subscription JubakAM.com site. And I’m adding the shares to my long-term 50 Stocks Portfolio.
It’s clear that shares of Tyson Foods are cheap. The stock trades at 14.57 times trailing 12-month earnings per share and at a forward PE of just 12.11, according to Morningstar or 13.85, according to Yahoo Finance. The stock sports a price to sales rate well below one at 0.74. The price to sales ratio for the stocks in the Standard & Poor’s 500 is 3.35.
And it’s clear why shares of Tyson Foods should be cheap. There’s the U.S.-China trade war that has disrupted demand of U.S. farm products such as the chicken and pork that Tyson’s sells. There’s the massive flooding in the Midwest that disrupted planting season and that has raised fears of a spike later this year in feed prices. And, finally, there’s the recently disclosed grand jury investigation into price fixing by chicken processors that include Tyson, Pilgrim’s Price and Sanderson Farms. The grand jury investigation adds to pile of civil lawsuits brought by consumers, distributors, grocery chains, and food processors including Kraft Heinz and Conagra.
What’s not so clear is why Tyson Foods should be so cheap–that is why the share price will be higher in the future than it is now. Tyson’s chart isn’t exactly a huge vote of confidence. In May the stock climbed to $82.49 and it looked like Tyson shares were going to take out the high they set back on December 4, 2017 at $83.62. But they’ve been in retreat since then and there’s certainly a case to be made that Tyson failed to put in a higher high and is now headed into retreat for a while.
So what is the case for this stock to move higher from here?
First, Tyson with its protein portfolio–20% of income comes from beef, 35% from chicken, and 15% from pork–will show a solid recovery whenever the trade war with China is settled. China and the rest of the world show a growing demand for protein and Tyson is a key factor in meeting that demand.
Second, Tyson is, recent data, argue successfully pursing a strategy to add prepared foods with their higher profit margins to its commodity protein business. In 2014 the company acquired Hillshire Brands, in 2017 it acquired AdvancePierre, a producer of ready to eat sandwiches and snacks, and in November 2018 it acquired Keystone Foods, a global distributor to quick service restaurant chains with about a third of its sales in Asia. Operating margins are about 2%-3% in beef and 8% for chicken and pork. Operating margins in the prepared foods segment are 10%-12%.
Third, Tyson is moving into the very hot plant protein as beef market. Just before the Beyond Meat (BYND) IPO in April, Tyson’s venture capital arm sold its 6.2% stake in the producer of the pea-protein Beyond Burger that tastes and looks like a beef burger after cooking, (I’ve tried it and the product by and large delivers on that claim.) Given that Beyond Meat saw its first public trade act $46 a share on April 29 and closed today at $272.59, you might think this was a gigantic mistake by Tyson. I’m sure nobody at the company is especially thrilled at having given up the recent gains, but the sale of the Beyond Meat position was a necessity.On June 13 Tyson Foods announced that it would enter the plant-based mean alternatives market under the Raised & Rooted brand. The first product will be plant-based alternative “chicken nuggets” this summer with a plant-based alternative burger to follow in the fall. The market for meat alternatives will hit $22.9 billion globally by 2023, projects Euromonitor International. That’s small potatoes compared to traditional animal agriculture has a global worth of $1.4 trillion. But it’s the hot market of the moment because of its growth potential and everyone wants a piece of it. Tyson Foods. Nestlé will launch a pea-protein-based burger this fall in the United States under Sweet Earth brand. (Scorecards here. Can’t tell your burger formula’s without a scorecard. Beyond Meat uses pea protein as Nestle’s product will. Major competitor Impossible Foods uses a soy-based protein.) Another meat giants Cargill has invested in cell-cultured-meat company Memphis Meats, which is close to a product launch.
Tyson reports quarterly earnings next on August 5.
I don’t expect big things from Tyson until the trade war with China gets settled–and I don’t anticipate that happening until late 2020. But I’d like to get in now while the stock is cheap.
I’ll be adding these shares to my long-term 50 Stocks Portfolio tomorrow July 17 on all three of my sites.
Recently in my Special Report on Disrupted Sectors on the coming 5G disruption to the telecom and Internet space on my subscription JubakAM.com site, I noted that China would be relatively early to roll out 5G capacity and handsets and that because of that timing and China’s huge wireless phone market, the country would be a leader in 5G technology and its global consequences. And I said that I would be adding China’s largest phone operator China Mobile (CHL) to my long-term 50 Stocks Portfolio.
Which I did today July 11.
But China Mobile crossed my radar screen for another reason. The stock is value-priced and today again on my subscription JubakAM.com site I’ve made it the #4 pick for my 5 Value Stocks Special Report. Morningstar calculates that the shares are 26% undervalued.
China Mobile currently trades at 10.36 times trailing 12-month earnings per share and 10.87 times the projected forward earnings per share.
That puts the stock well below the current average forward price per share for the Standard & Poor’s 500 of 16.9. (The average fit e-year forward Price to Earnings for the S&P 500 is 16.5 and the 10-year average is 14.8. Just for some context. The S&P 500 isn’t especially over-valued right now unless you factor in where we are in the business cycle as the Cyclically Adjusted PE Ratio (CAPE Ratio but also known as the Shiller PE Ratio) does. By that measure the PE for the S&P is 30.52, almost double the average for that indicator of 16.64.)
There is no reason that China Mobile should trade at a market average forward PE. It is a deeply flawed stock due to the role of the Chinese government in the country’s wireless phone sector.
But the current PE of 10.87 times projected earnings is well below the stock’s five-year average of 13.13. Or the 2016 PE of 13.34 or the 2015 PE of 13.75.
A return that 2015 PE of 13.75 would still mean the stock trails the valuation of the U.S. S&P 500 but would likely mean a gain of 20% to 30% or better for the stock.
Sometimes a value stock is cheap enough so that it doesn’t have to become perfect to make you money. All it has to do is be better than it has been recently.
Much of the problem with China Mobile is that the company has been caught behind the technology curve. The company dominated China’s market back in the days if 2G. But in the era of 3G and 4G, the company’s technology was decidedly inferior to that of its competitors. That began to change with the transition to 4G where China Mobile began its rollout about a year earlier than competitors who only got their national 4G license in February 2015. At this point China Mobile has more 3G and 4G customers than its competitors. But those companies have worked hard to overcome that lead and to a degree they’ve succeeded with China Mobile’s market share by service revenue dropping to 63% from 67% from 2017 to 2018.
5G brings China Mobile an opportunity to leapfrog competitors. Its 925 million customers provide the company with huge free cash flow.That plus its significant cash balance should let the company build out its network faster than competitors. At the end of December 2018 China Mobile had net cash and cash equivalents of $63 billion.
I expect to see China Mobile continue to close the revenue growth gap with competitors. In the first quarter of 2019, for example, competitor China Unicom (CHU) reported service revenue growth of 0.3%. China Mobile saw service revenue drop by 0.5%. That’s not great but still better than the gap for all of 2018 when China Unicom reported services revenue growth of 5.9% while China Mobile reported service growth of just 0.4%. (China Unicom trades at a forward PE of 19.53 times projected revenue, almost twice the multiple of China Mobile.)
If the era of 5G will be so positive for China’s wireless companies–more streaming means more revenue–then why look for a value stock?
Because the Chinese government has a history of intervening in this sector to move revenue around among players. The Chinese government is the controlling shareholder in not just China Mobile but also in competitors China Unicom and China Telecom (CHA.) Twice in the last 10 years, the government has swapped CEOs among the companies in an attempt to make sure that all the players were operating with roughly the same level of knowledge and managerial competence. At the time of the roll out of 3G technology, the government forced China Mobile to use inferior home-grown technology and limited the variety of handset choices the company could offer. The transition to 4G and now to 5G looks likely to remove some of the handicaps the government had imposed. (Although in 2017 the government made life harder for all wireless operators by reducing the prices they can charge small and medium size enterprises for Internet service.) I also like it the China Mobile owns a stake in China Tower (CHWRF), which provides tower infrastructure. The Hong-Kong-traded shares of China Tower are up 39.08% in 2019 through July 10.
China Mobile currently pays a 4.54% dividend.
I’d be willing to be dollars to donuts that U.S. stocks won’t repeat their first half performance–up 17.4% on the Standard & Poor’s 500–in the second half of the year. It’s hard for me to find a catalyst that isn’t already priced into the market–from interest rate cuts from the Federal Reserve to an agreement to end the U.S.-China trade war to Goldilocks growth of 2% with inflation below 2%. My opinion is that the second half of the year is likely to see a consolidation of the gains of the first half with U.S. stocks wandering but not finishing much higher than they are now.
Which is why I’ve been looking for value stocks lately, especially value stocks that pay dividends.
And that’s why I made DuPont (DD) the third pick in my Special Report 5 Value Stocks for a Market Near All-time Highs on my subscription JubakAm.com site, and why I’ll be adding it to my 50 Stocks Portfolio on July 8. (In the original version of this post I said I was adding the shares to my Dividend Portfolio. As you’ll note in this correction below DuPont will pay only a 1.63% forward dividend instead of a 4.07% trailing dividend so while I still like the stock for its business fundamentals, it doesn’t make the grade on yield for the Dividend Portfolio.)
DuPont shares closed at $75.82 today, July 1, and pay a 1.63% dividend. The stock trades at 9.33 times trailing 12-month earnings per share and at 15.75 times projected forward earnings. Morningstar calculates that the stock was 19% undervalued on July 1. (Please note the correction here: In my July 1 version of this post I incorrectly wrote that the dividend was 4.07%. That was the trailing dividend–the company declared a 30 cent per share dividend on June 27 for payment in September. That works out to a 1.63% forward dividend.)
DuPont is the third company–along with Corteva (CTVA), a seed and agricultural chemicals company, and Dow (DOW), a commodity chemicals company–to spin out from the merger of DuPond and Dow after the reorganization of the two companies into three sector verticals.
DuPont is the speciality chemicals vertical of the spin off. During its 200-year history it has specialized in the research and development of patented chemicals such as Lycra, Kevlar, Teflon, and Tyvek (a building moisture and insulation barrier.) It’s future depends on the company’s researchers continuing to develop new chemicals to replace those that go off patent.
On my projections that future looks very reasonably priced. The company is working with automakers to develop new lighter plastic parts to replace heavily metal components. In electronics and imaging, the company is exposed to the growth of electronic components in cars. (DuPont generates 50% more revenue per electric car versus an internal combustion vehicles.) DuPont is also the second largest industrial enzyme producer with a 20% global market share behind Novozymes. Industrial enzymes are increasingly used to turn plant materials into fuel, chemicals, and food.
I think its reasonable to forecast low- to mid-single-digit compound annual organic sales growth during the next five years, slightly outgrowing the global economy. Operating margins are likely to expand slightly to the mid-20% range over the next five years. The auto industry accounts for about 15% of sales with no other end-market making up more than 5%. That provides the company with diversification that makes sales and earnings relatively less volatile.
In my first three picks for my Special Report 10 Best Picks for the Next Six Months of 2019 on my subscription site JubakAM.com I’ve focused on index ETFs that, in my opinion, will ride the big trend of lower interest rates higher in 2019. In other words, these are picks that go with the dominant market and economic trend.
For my next three picks, I’m looking for stocks, ETFs, or whatever that do indeed have the macro trends at their backs but that also have significant internal catalysts that will drive the price higher even if trends turn out to be weaker than (or contrary to) expectations.
China’s Tencent Holdings (TCEHY) is a good example of this group. It look like first quarter results put in a bottom for a horrible period when a government crackdown on smartphone games took a huge toll of revenue and profits at the world’s largest game maker. I don’t think regulators are about to completely go away, but the crackdown that led to fewer new game releases does look to be easing. (Smartphone revenue in the first quarter did still drop but the year over year decline was just 2%.) That resulted in a 17% year over year jump in profits to 27 billion yuan, well above the 19.4 billion expected by analysts.But the company’s reorganization looks to be taking hold and the new emphasis on finch and business services showed company leading growth with that new segment, representing 26% of revenue, showing 44% growth year over year. Tencent has also created new standalone units for its its cloud business and enterprise-facing services such as smart retail. Tencent merged advertising and sales efforts to form a new Advertising and Marketing Services unit. The Platform and Content Group is a new group to connect traffic from platforms such as QQ and YingYongBao to content services such as Tencent News and Video. Monthly active users for WeChat and QQ had reached 962 million and 850 million as of June 2017. (China’s total population is 1.38 billion.) WeChat trails only Facebook and WhatsApp in monthly users.
The stock is up 15.58% for 2019 as of June 20. I think the recovery has a long way to run. The ADRs closed at $45.49 today. Tencent is a member of my long-term 50 Stocks Portfolio where it is up 73.30% since I added it to that portfolio on February 14, 2017. Tencent is also a member of my 12-18 month Jubak Picks Portfolio where it is up 9.82% since my October 2, 2018 pick. As of June 20, the date I added it to this 10 Best Picks list, I’m raising the target price on Tencent in that Jubak Picks Portfolio to $65 from the prior $51 per ADR.
President Donald Trump has argued that slapping higher tariffs on Chinese goods exported to the United States would bring jobs back to this country–if China didn’t agree to a new trade deal–as companies moved factories in order to avoid the higher tariffs.
According to a report today from Japan’s Nikkei, however, companies that supply Apple (AAPL) are indeed thinking about moving production lines from China–but not to the United States. The “what-if” exercises look to calculate the costs of moving 15% to 30% of manufacturing to Southeast Asia from China.
The Nikkei story says Apple has asked major suppliers such as iPhone assemblers Foxconn Technology, MacBook maker Quanta Computer, and iPad producer Compal Electronics to run the numbers for such a move.
Two of those companies have pushed back on the Nikkei story with both saying that Apple has not asked for cost estimates for shifting production out of China. Taiwan’s Hon Hai Precision Industry, who as FoxConn is a primary iPhone manufacturer and the largest private employer in China, said that it has enough capacity to make all U.S.-bound iPhones outside of China, according to Bloomberg.
“Twenty-five percent of our production capacity is outside of China and we can help Apple respond to its needs in the U.S. market,” Hon Hai semiconductor division chief Young Liu told investors in Taipei last week. “We have enough capacity to meet Apple’s demand.”