(A 1960 Citroen in the London Science museum that has some driverless capabilities. Wikipedia)
Two down days in a row for the tech sector and the broad equity asset class it leads had created some hubbub and questions about where the market is headed, but that narrative is taking a breather today with stocks looking to close slightly up today. Here are the quick squibs. Autonomous driving appears to be a main talking point in today's news.
Tim Cook confirms Apple developing autonomous vehicle tech: This had been rumored for so long and at such intensity that I had not realized Apple (NASDAQ:AAPL) had never confirmed its foray into autonomous vehicles. Well, today, the open secret became an open announcement. We get a good sense from this background paragraph in the Bloomberg report the scale of Apple's ambitions.
Apple had initially been seeking to build its own car, before recalibrating those ambitions last year to prioritize the underlying technology for autonomous driving, Bloomberg News reported. The iPhone maker had hired more than 1,000 engineers to work on Project Titan, as the car team is known internally, after it started in 2014.
A senior software engineer makes $150,000 a year at Apple, according to Glassdoor, which with a 33% benefits increase means annual expenses of $200 million. For some non-comprehensive context, Ford (NYSE:F) announced a $1 billion investment in driverless AI company Argo. Obviously, the engineers aren't the whole outlay for Apple. Meanwhile, in the automotive sector:
Uber CEO takes leave: Travis Kalanick was already clearly on the ropes. Proposed changes from Eric Holder, ex-AG turned Uber (UBER) investigator, seem to contain fairly standard corporate governance, culture, and HR material. The 14 core cultural values also need to go, according to the report. Here's the lead from a February New York Times article on those values:
When new employees join Uber, they are asked to subscribe to 14 core company values, including making bold bets, being “obsessed” with the customer, and “always be hustlin’.” The ride-hailing service particularly emphasizes “meritocracy,” the idea that the best and brightest will rise to the top based on their efforts, even if it means stepping on toes to get there.
"Always be hustlin'." Not how I would've worded that. Diversity is another theme of the report.
The biggest headline I can remember concerning Uber and driverless technology addressed its feud with Waymo.
Insider Buy At SodaStream
(Is this some SortaDream about SodaStream? Wikipedia)
SodaStream's (NASDAQ:SODA) CEO bought about $1 million in stock yesterday. What do we think? Revenue's up 9% in five years after a few ups and downs. Gross margin sits around 50%, SG&A around 40%, net margin ranges from 2% to 10% in the past five years. All this is better than I would've expected, but I don't know about a 20 PE. In today's market, maybe that qualifies as cheap. Would you be concerned that SodaStream has had its day in the sun, new entrants may emerge, or people could simply go back to drinking soda water out of cans? Did you know the stock traded around $12 to $13 in early 2016? That's a 4x return. Good job to anyone who spotted that opportunity.
See also: New highs for stocks.
(Cheesecake Factory's Miso Salmon. Wikipedia.)
This guest item was written by PRO Managing Editor Daniel Shvartsman.
The Cheesecake Factory (NASDAQ:CAKE) was one of the big losers today, down 10% due to lowered guidance. Despite the coincidence with the end of the National Basketball Association season, it seems unlikely that triggered the lowered guidance.
The death knell of retail gets talked up a lot. I don’t think restaurants are immediately affected by those trends, real or exaggerated, though there is some tangential impact as it becomes so easy to order from home. But restaurants do seem to be a decent leading indicator of customer spending, and the restaurant sector’s continued struggles – CAKE’s -1% comparable sales guidance for Q2 is in line with industry numbers (h/t Jonathan Weber) – bode ill for the broader US economy.
As a dumpster diver sort of investor, I’ve looked at the restaurant sector a bit over the past year. I owned Fogo de Chao (NASDAQ:FOGO) shares for about a quarter, swayed by the positive memories my wife had of living in Brazil (several of her current colleagues worked with her in Brazil, and Fogo de Chao was the chain you went to when you couldn’t go to your local, good churrascaria – this was not my best buy). I’ve peeked at DineEquity (NYSE:DIN), but decaying to severely decaying comps and a lever up and pay out all your FCF strategy scares me.
CAKE is considered a leader in the industry, so it’s worth looking at what we might be paying for the company after the 10% sell-off. BTD?
|As of Q1 2017||CAKE|
|NWC + Fixed Assets||723396|
|YOY Q Revenue Growth||1.76%|
|YOY Q SSS Growth||-1%|
|Operating Margin (MRQ)||7.73%|
|Operating Margin (Year prior)||8.78%|
|Yearly Revenue Growth (Past 5 Yrs)||5.90%|
|TTM FCF (EBITDA - Capex)||173101|
|TTM FCF (OCF - Capex)||155679|
|TTM FCF (EBITDA - Capex - Interest - Tax)||116742|
|TTM MC/FCF (2)||16.2|
|TTM MC/FCF (3)||21.6|
Numbers as of Q1 2017, sources are 2017 Q1 10-Q and 2016 10-K. One exception
My quick math suggests the company is trading between 16 and 21x FCF and 18x trailing earnings. If we’re heading into a downcycle and it’s not clear how long the growth story for CAKE runs, that would strike me as a filling price. On the other hand, the company earns 25-27% return on capital or equity, which are very strong numbers (When I crunched the numbers for FOGO as of Q2 2016, I got 4-8%).
So someone looking into this might check out what the growth story looks like for CAKE over time – how many more units can they open in the US or elsewhere – and where traffic trends look like they’re going. I would not buy yet, but I haven’t spent much time on this either. I’ve also only been to The Cheesecake Factory once or twice, at the Burlington Mall in my hometown. I don’t have strong memories of it either way. Is it dangerous to consider investing in restaurant stocks because we may be biased by our palates, the way it’s dangerous to go grocery shopping on an empty stomach?
(Daniel Shvartsman is long Ford and has no positions in any other stock mentioned in this article.)
- Connor Leonard (@Connor_Leonard) excerpts from a short thesis on Advance Auto Parts (NYSE:AAP).
- A VIX trade update from Peter Atwater (@Peter_Atwater).
- A chart on valuation from Michael Santoli (@michaelsantoli).
- John Hempton (@John_Hempton) has a blog post about Canadian non-standard mortgages.
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