It's a simple decision that will come out in mere seconds, but its impact could be very large. The FOMC announcement on Wednesday will give the market a decision on whether or not the Fed will begin to taper in September or delay further. The majority of market makers have been of the belief that the Fed would begin a tapering program this month, but recent data has not been as strong as the market would like, which has left taper in question. The taper decision should have quite an impact for several weeks, so it will be important to pay attention on Wednesday.
The chart of the S&P 500 (SPY) is important this week because it shows potential support and resistance lines. We have held an uptrend despite two corrections this year. There is not a ton of resistance above the market right now if we do get a major move to the upside on a taper delay. On the flipside, 1650 looks like the first level of support for the market. If that fails, it will be interesting to see how much further the market moves down. Similar action can be expected for the Dow Jones (DIA) and Nasdaq (QQQ).
Empire Manufacturing - September
Industrial Production - August
CPI - August
NAHB Housing Market Index - September
Housing Starts - August
Building Permits - August
FOMC Rate Decision - September
Initial Claims - 09/14
Existing Home Sales - August
Philadelphia Fed - September
Economic data is jam packed this week outside of just the FOMC Rate Decision on Wednesday. We get started on Monday with Empire Manufacturing for September as well as Industrial Production - two important reports of economic health in industry in the USA. On Tuesday, we will get an important look at consumer prices as well as the health of the housing market index. Wednesday is the big day with Housing Starts, Building Permits, and the Fed decision. Housing is crucial to the market recovery, and while this report will generally be overlooked, savvy investors need to watch these reports. Finally, we get key reports on Thursday with jobless claims and more housing data. It will be important to see these reports to finish out the week to direct upside/downside in response to the Fed taper announcement.
Outside of the USA, Europe and Asia will continue to be crucial to the market this week. The markets will be a bit lees important than other weeks with a packed week, but we should be paying attention to several developments. First, the Syria situation continues to be key to the market. While it appears to be at a less important inflection point currently, any developments there can have a large impact on the market. Further, we get an important German ZEW Economic Survey for September on Tuesday as well as a meeting for the BOJ on Thursday. Abenomics, so far, has not been extremely successful for Japan, and the conference should give some light into this situation.
Adobe Systems (ADBE)
General Mills (GIS)
Earnings are light this week, and the Fed steals the show. Yet, the market should watch FDX and ORCL reports. FedEx is an economic bellwether and will give some important information for how things are going so far in July and August. Further, ORCL will be important for the cloud-computing arena as well as tech in general, which has struggled as of late due to Apple (AAPL).
Well, we all know about the Fed decision, so no need to really dwell on it anymore. Outside of the Fed announcement, we should watch for three speeches on Friday in New York given by different regional presidents. Fed president George, Bullard, and Kocherlakota all will spear on policy in New York, which should be an important wrap up to the Fed week.
It is a make or break week for the market with the Fed decision. It will be a key week for the market, and if the Fed decides to taper, we are due for some correcting. We believe that the market has started to adjust to taper, but it will definitely correct the market. If we delay taper, we can expect a short-term pop, but the market will be wondering when it starts as well. Taper now will likely lead to a consolidation period for some time and then Q4 rally. While a delay could lead to more flat movement followed by a delayed correction period.
Ticker: Priceline.com (PCLN)
Priceline.com is a very appealing growth stock that has had amazing success since its turnaround from near bankruptcy. The stock continues to seem unstoppable, and we want to discuss today whether or no the stock has more upside or if it is priced appropriately. We will discuss whether growth rates can maintain at strong levels as well as price the company. Right now, PCLN has a 30+ PE but sub-20 future PE. Further, the company has a 1.6 PEG ratio, which is not very high. The company, therefore, seems to not be overpriced in comparison to future growth. Therefore, the success of future growth is key to PCLN.
To understand the company's future growth, it is important to understand that the company has success due to their high level of hotel bookings. The company gets a higher premium on hotel bookings, and the company gets 95% of their earnings from hotels. That compares to sub-80 for Expedia (EXPE). How do the two compare in margins - 30%+ in operating margin in PCLN versus sub-10% for EXPE. Therefore, we like catalysts for the company that further this aspect of the company, and they have two. The company's acquisition of Booking.com as well as their investment into Ctrip.com.
The two moves by PCLN have allowed the company to move into two markets where they can continue to see very strong growth. The domestic market is crowded for PCLN, and they are looking at other markets to provide growth. Booking.com is Europe-based while CTRP is Chinese-based. Europe is a much better growth market for travel due to the recessionary effects there that are starting to reverse as well as the nature of the market there. PCLN has a lot of potential in Europe. Hotels are much different in Europe as the market is more fragmented with fewer chains. For that reason, these hotels need marketing and booking help over chains in the USA. Online travel agents are appealing for that reason. Further, Eastern Europe is a much better growth market overall than the USA. We like this move and believe it can provide 10-15% of growth for PCLN per year for several years.
Another smart move by PCLN was investing into CTRP. The Chinese travel market is tremendous with 20% growth per year right now, and it will continue to stay very strong. Outbound travel is growing with Chinese growing in wealth and inbound travel is growing as the company becomes more open and interests travelers. What PCLN has done with Booking.com is they have done a sharing program for hotels with CTRP that will give them exposure to Chinese citizens outside of the USA.
Let's take these catalysts and put them in a pricing model to see just how much growth is left in shares. For the company, we will price in about 25% growth this year and then 20% in 2014. From there, we will be conservative with a 12-18% growth model for the next three years.
Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for PCLN: 8.4%
PV Factor of WACC
PV of Available Cash Flow
For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for PCLN: 3.4%
Available Cash Flow
Divided by Cap Rate
Multiply by 20167PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
Divide equity value by shares outstanding:
In the model, we see DIS worth $1215, showing 26% potential in the company over the next twelve months. This stock still has lots of room to run, and that is in a conservative model!
Apple got hit hard last week after the release of their latest iPhone series. The problem many analysts have made so clear is that the new phones did not wow them and the estimates they had for China sales were based on a cheaper phone that they believe did not come out. The iPhone 5C's price point was too high for Chinese citizens. We want to focus less on this issue for Apple and more on what the decision means for AAPL.
For us, the decision to not offer a cheaper iPhone is a very smart move. The mistake that we believe most analysts are making is underestimating what Apple is creating. Some believe that Android has an upper hand, and they do. That's okay though. What Apple is doing is they are continuing to offer a premium product with high margins. Apple has never noted that they want to be the cellphone for all, and what has allowed Android to take over market share is that they have phones for every consumer. An easy comparison is Mercedes Benz versus General Motors (GM). GM has bigger seats, bigger cars than Benz in some classes. They have features that perhaps Benz does not have, but they do not have the superior image. Both are formidable companies with solid businesses. There is room for both.
Some might say that Android is a better product, and that may be the case. Some may say (though they are wrong) that certain GM products are superior to Benz. The question is more what can you get consumers to pay. Further, we believe that consumers in China don't need to be undersold on products. Sure, they may not sell a higher volume right now, but they are not sacrificing their image as a premium product, and that is crucial.
What does all this mean as far as actual investing and trading?
First off, shares are very cheap now. The company's current PE is 11.6 and future PE is under 11. Both rates are extremely cheap, and Apple is growing. We all know this. Why, if it's a premium stock, can it not attract a premium valuation like Williams-Sonoma (WSM), Tesla (TSLA), and Tiffany (TIF)? It is a strange environment. We believe that Morgan Stanley and Oppenheimer noted it best:
Morgan Stanley analyst Katy Huberty put Apple's iPhone 5c pricing at 4,488 RMB, which rates as expensive in China. The catch: 4,000 RMB is the "acceptable" price in China. Apple can see if Chinese buyers will pay up and has options if they don't. Support for China's version of LTE may also help sales. Oppenheimer analyst Ittai Kidron noted that the iPhone 5C probably won't lead to a major expansion cycle that can ding the Android value devices. Has anyone seen the bloodbath in the low-end Android market? What company would want to enter that mix? It's a game only ZTE, Huawei and Lenovo can really win. Samsung can play along based on scale.
Apple does not want to be a low-priced phone, and while they may lose some customers, they maintain their "image." How much that means for shares it is tough to say. What it means for us is not that the company is stubborn, but that the company has an image that they want to maintain. The bloodbath for the low-end market is just not something Apple is interested in. Over time, we believe that this will play out for Apple well. The company is at the top of the technology revolution, and they have another huge cycle of growth with a new iPad on the way, Apple TV potential, and much more.
What Google has done with Android is tried to appeal to anyone and everyone, playing catch up to Facebook (FB) and Apple. They have seen ROA drop from 18% in 2009 to 12% in the TTM. Apple, at the same time, has gone from 18.9% to nearly 21%. It's time that Apple's stock becomes the premium product it has developed and continues to develop no matter what analysts want them to do.