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Marty Chilberg
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I'm a retired CPA who spent the majority of his working career in technology companies. My work included management stints at Atari Inc, Daisy Systems Corp, Symantec Corp and Visio Corp. My last position at Visio (VSIO) was as CFO and VP Finance and Operations.
  • Playing The Smart Car Market

    The next technology fortunes are being made on the road

    Kevin Cook, Editor Zacks

    We take our smartphones for granted now. And yet we know we "can't live" without them.

    At the same time, we still invest in the mobile revolution because we know three things: the technology and its interconnected utility keeps getting better, billions more citizens aspire to own a smartphone, and the replacement cycle is making them nearly disposable.

    A similar revolution is happening now with cars. Automobile makers are increasingly focused on safety, reliability, fuel efficiency, performance, and "being connected" at all times. And they are relying on advancement in semiconductor technology to create next-generation cars.

    Without a doubt, the car will continue its transformation from a "dumb" mechanical device to a "smart" electronic one. And while few people really want a driverless car anytime soon, there are major paradigm shifts occurring in safety, performance efficiency, and infotainment that will make the intelligent car irreversible.

    This is especially true as the shifts are being driven as much by government regulation push as by consumer pull.

    These innovations predict a lengthy growth opportunity for the "brain makers" of the smart-car: the automotive semiconductor suppliers and the companies who build the cars of the future with that power.

    In this report, we'll focus on three investable areas of the emerging smart-car: safety, infotainment, and performance/fuel efficiency.

    The Safety Trade

    You may have seen the news recently about cars with automatic braking and collision avoidance, or even cars that drive themselves, as Google is reportedly working on. Other technologies include warnings that the car has veered out of its lane and electronic stability control.

    Mercedes Benz has been running some impressive TV commercials about their innovations in this area, featuring a sedan avoiding pedestrians and other vehicles threatening a T-bone collision.

    The technology is commonly referred to as ADAS, or Advance Driver Assistance Systems.

    This is the arena where government regulation of auto and traffic safety is the main driver of new technology adoption. Few consumers want their car to take over their control and freedom, but when you think about the statistics of the rear-end collision in terms of costs to life, health, and financial well-being, you can quickly see why there is a push for automatic braking to avoid them.

    The National Transportation Safety Board (NTSB) has been recommending collision avoidance systems for cars for many years. This month in a 60-page report, they made the recommendation even louder, citing stats like these two...

    1. Between 2012 and 2014, almost half of all two-vehicle crashes were rear-end crashes. These crashes killed more than 1,700 people each year, while leaving 500,000 injured.

    2. A 2007 National Highway Traffic Safety Administration (NHTSA) study showed that 87 percent of rear-end crashes involved a driver failing to attend to the traffic ahead.

    The severity of more than 80% of those collisions could be mitigated, the report said, if vehicles were equipped with collision avoidance systems. The NTSB said only four passenger vehicle models last year included a complete forward collision avoidance system as a standard feature.

    According to Todd Spangler writing for the Detroit Free Press...

    "The progress on these recommendations has been very limited," the NTSB said in a news release, and the report "notes that a lack of incentives and limited public awareness has stunted the wide adoption of collision avoidance technology."

    "The promise of a next generation of safety improvements has been used too often to justify inaction," Hart said. "Because there will always be better technologies over the horizon, we must be careful to avoid letting perfection become the enemy of the good."

    The NTSB recommended auto manufacturers make collision avoidance systems standard equipment beginning with collision warning systems, then add autonomous emergency braking systems once the National Highway Traffic Safety Administration completes standards for those technologies.

    How to Play the Safety Trade

    Mercedes has developed this technology on their own. But the rest of the automotive industry is working with the stand-alone upstart in this field, Mobileye (MBLY), whose technology is integrated today in vehicles of the world's leading manufacturers such as Volvo, GM, BMW, Ford, Hyundai, Mitsubishi and many others.

    MBLY went public last August and quickly became a $10 billion company because their technology was already in development for a decade and they already had design relationships with a dozen automobile manufacturers.

    Besides a good running start, what makes Mobileye's technology so coveted by global auto OEM's is that it is a complete solution for ADAS, what semiconductor industry pros call a "system on a chip."

    This means that cameras are fully integrated with chips that are programmed to "see" and identify road hazards, surfaces, and obstacles and their distances. And then this system is integrated with the car maker's controls and indicators to provide warning information, or even automatic braking if desired.

    MBLY camera-based systems can even integrate with laser-radar sensors, known as LIDAR, a remote sensing technology that measures distance by illuminating a target with a laser and analyzing the reflected light.

    On June 8 when the NTSB released their renewed recos, MBLY shares were trading at $46. They subsequently launched up to $55 in two weeks, close to their all-time highs near $60.

    But I think shares have much more room to run in the next year. Here's why...

    50% Revenue Growth: Most analysts agree that with the long production cycles for cars, MBLY stands to see high double-digit sales growth for the next 5 years, average 50% CAGR. A flood of advanced cars with MBLY systems for GM won't even hit the roads until 2017-18.

    ASP Headed Up: Currently the average selling price (NYSE:ASP) for MBLY systems is about $45. This stands to head upwards as more complete packages with more features are adopted by OEMs. Car manufacturers will be in competition with each other to offer the latest and greatest capabilities. In their most recent conference call, company management cited some vehicles and systems were commanding an ASP of $100.

    Recommendation: Buy Zacks #2 Rank MBLY shares under $55.

    Disclosure: I own MBLY shares for the Zacks FTM Trader.

    The Performance/Fuel Efficiency Trade

    I remember as a youth hating the idea that computer chips were going to take over car engines and take away the ability and the fun of working on and repairing one's own machine.

    But I don't work on cars so much anymore. And semiconductor technology has proven its worth and reliability at every turn in the past 3 decades of automobile innovation. Besides, if car enthusiasts want a hotrod to play with, the rewards and virtues of an old muscle car are still there for the taking.

    And the "innovation frontier" for semiconductors in cars is still wide open with lots of cool stuff to come, from transistorized powertrains to fully electric cars.

    Just as innovators like Honeywell and Google try to make our homes more energy efficient with automatic monitoring and adjustments based relentless data and tireless software controls, so too car makers want to design machines that use the road with the least friction and the most power per pound.

    How to Play the Chips-On-Wheels Trade

    One of the most exciting companies in this space is the soon-to-be powerhouse combo of NXP Semiconductor (NXPI) and Freescale (NYSE:FSL). Dutch NXP and Austin, Texas-based Freescale agreed to a merger in March, making the combined companies worth $40 billion when FSL shares are absorbed into NXPI (Freescale shareholders will receive $6.25 in cash and 0.3521 of an NXP ordinary share for each Freescale common share held at the close of the transaction).

    The merger would establish the pair as the #1 automotive semiconductor supplier in the world with in excess of $10 billion in annual revenues. They are expecting $200 million in cost savings the first year with a clear path to $500 million in annual synergies.

    Both have extensive experience in the automotive market and they may be the closest rival to MBLY in the ADAS chip space, although they don't offer nearly the complete system-on-chip solutions.

    What they do specialize in are automotive system controls and processors. Here's how Freescale describes their powertrain and hybrid solutions from the battery to the gearbox...

    Powertrain and hybrid systems established electronic control technology in vehicles. Freescale has been there since the beginning of microprocessor implementation in vehicles and at every performance-enhancing milestone since. Built on industry-leading microcontroller technology and supported by sensors and analog/mixed signal ICs to provide a more complete system solution, we provided the enabling technologies to help you achieve improved performance and efficiency. Our long-term commitment to advanced powertrain technologies has resulted in a wide range of products that help you meet tomorrow's powertrain design challenges.

    And NXP will also have inroads into our next topic, the always-connected "infotainment" car. Here's how they see their innovation horizon...

    The modern car increasingly resembles a circuit board on wheels. Customers are demanding smarter, more efficient and more connected vehicles all the time. We are supporting growth in this trend with state-of-the-art, reliable technologies that satisfy the latest design requirements from automotive engineers.

    Recommendation: Buy Zacks #2 Rank NXPI under $100.

    The Infotainment Trade

    All this talk about safety and efficiency is great. But our cars are supposed to be fun too! So let's put aside the responsibility factor for a moment and talk about what we'd love to have in our vehicles to make the driving experience more pleasurable.

    Music tops the list. But how can we stay in touch and actually get work done too without crashing or getting a ticket?

    That's where the "infotainment" providers come in. Because we want to be able to do just about everything in our cars that we do with our smartphones. And we intuitively sense that the technology should be there already. In fact, in many ways I'm surprise it's taking so long because it's also a no-brainer for safety to keep our hands on the wheel and our eyes on the road.

    There seem to be some design bumps-in-the-road. A recent story on Mashable sums it up...

    Car owners are frustrated by their fancy-shmancy infotainment systems
    June 4, by Chris Perkins

    Automakers have been installing increasingly complex infotainment systems in their cars for a number of years, but a recent study suggests that their efforts have not been very well received.

    Automotive consultancy firm SBD and Nielsen released a survey Wednesday, reported by Automotive News, which found that many car owners are frustrated with the infotainment features automakers are pushing so heavily. The survey, which polled 14,000 car owners in April and May, found that 43% of car owners felt automakers are adding too many tech features to their cars.

    The survey questioned car owners about their satisfaction with various individual components of their cars, with the bottom 10 being entirely made up of infotainment features. Voice recognition was the worst, joined by smartphone integration, configurable instrument panels and apps.

    As it turns out, carmakers are good at making cars, not smartphones. Who in a million years would have ever thought?

    Automakers started loading their cars with infotainment features in an attempt to attract younger buyers and drive up profit margins, but so far, it has mostly served to create dissatisfaction among customers.

    Why would you spend hundreds, if not thousands, of dollars on a subpar navigation system when you already have Google Maps installed on your phone? That's the problem Apple CarPlay and Android Auto are attempting to solve.

    I have to agree with the majority here. My son has a new Ford with many of these bells and whistles and I think it would take me hours to figure it all out. But I certainly can't do that while I'm driving. Somehow he does.

    How to Play the Infotainment Trade

    Yep, I'm going with Apple (AAPL) here. Not just because their design sense kicks butt and they will solve these problems quicker than most companies. And not just because they are working with Harman (HAR) who is already a superior designer of car console infotainment systems. But because Apple is still a great company at a good price and you can't go wrong buying it here under $125.

    And I would say that you also watch the earnings estimates for Zacks #3 Rank HAR as it dips under $120. The stock had a setback after their last report and some softer guidance. Consensus estimates were pared back about 2-4% for this year and next. But the analysts agree we are still looking at 20%+ growth into 2016.

    Here's how Harman describes their mission for the car experience

    An estimated 25 million vehicles on the road today are equipped with HARMAN audio and infotainment solutions, delivering the same premium experience that customers enjoy from our home and professional audio and multimedia. As the parent company of award-winning brands such as AKG, Harman Kardon, JBL, Infinity, Lexicon and Mark Levinson, we have the tools to create the ultimate mobile lifestyle.

    Our embedded infotainment solutions offer complete information, entertainment and communications capabilities -- including premium audio and video, route navigation, connectivity, Cloud services, and advanced driver assistance systems for a dynamic user experience wherever you may travel.

    We can efficiently guide you to your intended destination, and we'll help you keep in touch while keeping both hands on the wheel. We'll show you how to reach out to the Cloud for hands-free Internet, mobile office, and real-time information services. We'll even help you plan the most fuel-efficient route, avoid construction or detours along the way, and find a convenient parking space when you arrive.

    Recommendation: Buy Zacks #2 Rank AAPL under $125 and watch HAR estimates for any move upward that could move its Rank. I'd be a buyer of HAR under $120.

    Smart Cars for Smarter Investors

    As I finish up this report, US equity markets are having a bit of a meltdown on worries about how Greece falls out (or stays in) the great euro experiment. While this volatility is unsettling to our portfolios and confidence, I think it is presenting excellent buying opportunities in the companies we've talked about here. Greece's woes won't end our bull market. Not by a long shot.

    Talk with you next time!

    Jun 29 11:20 PM | Link | Comment!
  • Investor Insights: Analyzing The Commodities Cycle

    JEREMY FRIESEN
    Commodity Desk Analyst
    Morgan Stanley & Co. June 2015

    Commodities have finally healed from the financial crisis and are again driven by idiosyncratic shocks that have sparked lower correlations across commodities and against other asset classes. Still, when you step back and look at the bigger picture, their price action appears to indicate a larger multiyear "supercycle." What markets have called the commodity supercycle peaked in 2008, with annual returns remaining weak since the Great Recession. The US dollar appears to be in a mirroring multiyear super cycle, troughing in 2008, but appreciating over the past four years and surging over the past year. On a five-year-average basis, commodity returns are near historical cyclical lows. On an economically weighted G20 currency basis, the dollar is just off of its historic high, with median market forecasts now pointing to a broad reversal of the dollar into next year. The inflection point for these important and related cycles appears to be at hand, suggesting the start of a sustained reversal.

    SUPPLY AND DEMAND DECISIONS. Commodities priced in US dollars-as all the major commodities are-should be strongly related to the strength of the global economy in US dollars. This is not just a foreign exchange tautology. Dollar changes are driven by relative shifts in US versus non-US economic and monetary conditions, and these dollar changes impact global commodity supply and demand decisions.

    Take, for instance, a Brazilian soybean farmer whose expenses are in the local currency, the real. Since soybeans trade in dollars, if the dollar appreciates against the real, the farmer will get more money for his crop. That could well encourage him to produce even more the next year. That, in turn, could result in oversupply and falling prices, an example of how an appreciating dollar can depress commodity prices.

    The strong dollar's headwind on global growth is addressed in the International Monetary Fund's (IMF's) latest World Economic Outlook, published in April. In the outlook, the IMF revised downward its US-dollar global GDP forecast for 2015. The revision indicates the largest contraction in global GDP since 2009, the second-largest contraction on record-and consistent with the decline in commodity prices. IMF estimates of global US-dollar GDP growth have been particularly weak and slow income growth has resulted in poor demand for commodities.

    IMPROVED OUTLOOK. If the dollar stabilizes and eventually reverses, as the IMF implicitly projects, the global growth outlook and the commodity cycle become a lot more bullish. The IMF's new outlook projects stronger annual US-dollar global growth from 2016 through 2020, resulting in a rebound in this five-year commodity cycle. This growth is consistent with near-double-digit average annual excess returns through this period, regressing returns of the Morgan Stanley Backwardated Basket Index on 20 years of IMF estimates (see chart). (Backwardation is when forward prices for a commodity are below the spot price, offering a risk premium to long-only investors.) Adjusting IMF estimates using the market's median G20 currency forecast would suggest a stronger cycle for excess returns, with total returns even higher in a rising interest rate environment.

    If the dollar cycle is ready to turn, as indicated by the markets, and the related global dollar-income cycle is rebounding, as the IMF believes, global commodity markets may be poised for another supercycle based on commodities' strong fundamentally and empirically supported relationship with global dollar income.

    Jun 29 11:14 PM | Link | Comment!
  • Investor Insights: Burning Down The Cash

    DAN SKELLY
    Senior Equity Strategist
    Morgan Stanley Wealth Management June 2015

    With slower-than-expected GDP both in the US and abroad, and a stronger US dollar weighing on multinationals' and exporters' earnings power, many investors are wondering if US companies can use their tremendous cash reserves, nearly $2 trillion, to drive further growth and earnings. Moreover, as we've written before, activist investors are also shining a brighter light on how companies allocate capital and organize themselves (see page 4, On the Markets, November 2014). Notably, in recent weeks-and even before any formal activist involvement- two megacap US blue chips announced significant restructurings that mark changes in their capital allocation strategies. Given this backdrop, we want to examine recent trends regarding capital allocation and how the market is rewarding varying strategies. We will also outline the likely implications for equity investors going forward.

    Our broad conclusion is that we are shifting toward an environment in which the equity market is rewarding companies that invest more in growth, including cash-driven mergers and acquisitions (M&A) and spending on research and development (R&D) (see table below). For instance, from 2013 through April of this year, R&D spending was rewarded handsomely, 9.1%. This represents a notable shift from the post-financial-crisis years (2009 to 2012) when the market rewarded companies that returned cash to shareholders via dividend and buybacks (see table below).

    We also note that CEO confidence was lower in those years given various foreboding macro risks at the time-the US fiscal situation, a possible Euro Zone breakup and the "bunker mentality" that lingered in the aftermath of the financial crisis. Therefore, it is only natural that six years into the recovery, with higher equity markets, not only are corporate managements more willing to invest more in growth opportunities, but also the market is more likely to reward those capital allocation strategies.

    M&A SURGES. After a three-year lull, M&A activity jumped 23% to $3.7 trillion last year. Volume continues to be robust this year, too, with $620 billion in announced deals thus far and notable "megadeals" in energy, health care and packaged foods. With CEO confidence improving and interest rates-and with them, financing costs-likely rising before the end of this year, we believe merger activity will continue to build. Some may be concerned that rising merger activity has typically occurred just before a market top, but we note that, while overall volume is increasing, the important metric is M&A as a percentage of GDP. By this measure, the latest reading of 2.6% is still far below the prior peak of 5.4% that occurred in the second quarter of 2007 (see table below).

    MODEST CAPEX IMPROVEMENT. While we see M&A as being a prominent use of cash going forward, we are less certain about capital expenditures. Our view is consistent with that of Adam Parker, Morgan Stanley & Co.'s chief US equity strategist, who believes capex-to-sales ratios will likely only rise modestly through 2016. Digging deeper, Nigel Coe, industrials analyst for MS & Co., notes that several capex cycles are in longer-term declines; the mining and metals cycle has been driven downward by China's shift toward a more consumer-focused economy while the collapse in oil prices has depressed energy sector spending. Additionally, companies that are big spenders have not been rewarded by the market longer-term, according to Parker- another reason why managers may make capital spending a low priority. Last, we live in an investment and business culture that is increasingly driven by the need for instant gratification, and it's clear that managements can see a quicker stock-price reaction for an acquisition than for an investment in a new factory, which takes several years before the payoff materializes.

    BUYBACKS REWARDED. As another use of cash, we believe buybacks will continue to be important, especially where companies use them as a means to complement healthy organic growth trends and where there are no clear strategic deals to be made. Indeed, according to Parker, buybacks continue to be rewarded by investors. We believe buyback programs should be in excess of 5% of available shares to garner the most attention from investors.

    DIVIDEND GROWTH. With interest rates likely heading higher by the end of the year, we would expect the market to reward stocks with high dividend growth more than stocks with high dividend yields. Broadly speaking, companies are boosting their dividends; 86% of S&P 500 companies raised their payouts in 2014 and this year, the amount paid out in the first quarter was up 14% from the first quarter of 2014.

    In our view, the sectors likely to provide the most robust dividend growth are technology, consumer discretionary and financials. Our bias toward dividend-growth stocks and a tilt away from conventional high yield equity exposure is consistent with our positioning in the Dividend Equity model portfolio as well as Adam Parker's underweights on consumer staples and telecom.

    Jun 29 11:12 PM | Link | Comment!
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