Joseph DeNardi covers defense and airline companies. Mr. DeNardi says the defense industry has had another year of outperformance and has become a flight to safety for investors. However, he is cautious going forward because valuations have been pushed up. For airlines, Mr. DeNardi says it’s the opposite. He says pricing trends have been worse than expected, which has contributed to some of the underperformance.
Full interview available here.
Liam Burke covers diversified industrials that are global in nature. Most of his names are market leaders. Mr. Burke says stocks have performed well this year. He also says valuations on many industrial names have become high. Mr. Burke’s expectations are modest into 2017. He says the industry has been in a fairly low-growth environment, which is likely to continue. He adds that the bright spots are North America, in particular the automotive, housing and nonresidential construction areas.
Full interview available here.
Managing Director Arthur Norton of Araglan Capital Management says his firm’s largest position is in the energy sector and in Exxon Mobil Corporation (NYSE:XOM).
ExxonMobil is an extremely well-managed and diversified exploration and production company. They are the largest in the world. We highlight their management, which I think is very good, probably the best in the industry, and it has performed for us shareholders as long as we’ve owned it.
They have a highly manageable debt level. Although, we constantly look at their debt-to-equity ratios, even though they’ve used debt recently to be able to sustain the dividends that they want, which is very beneficial to us […]
One of the focuses that we have with a company is: Are they earning their cost of capital? And Exxon definitely is earning its cost of capital to allow it to pay the dividend. To the extent it does, it has an impact upon the committed deliveries, also its continued exploration. Yes, it has that potential, but it also has the financial flexibility to be able to use that, which is what they’re doing to be able to have that adequate resource both to pay the dividend they have as well as to do the explorations they do worldwide.
Amy Yong covers telecom and pay TV. Ms. Yong says consumers are becoming more demanding when it comes to better and virtual content as competition rises in the industry. She says consumers are using broadband more for their video consumption needs and are less tolerant of ads. Ms. Yong adds that the next trend will be a focus toward vertical integration or the idea of convergence.
Full interview available here.
Stephanie Wissink says the evolution of the toy industry comes down to two things: demographics and media convergence. She says the Millennial parent audience is digitally savvy about researching products before purchasing. When it comes to media convergence, she says there’s a strong divergence of performance between content-backed products and noncontent products. She says the vast majority of product discovery is now happening through new digital formats, and broadcast media that used to catalyze new product discovery has changed dramatically.
Full interview available here.
Benjamin Mogil covers three segments in the media sector: traditional large-cap media companies, theater chains and special situations. Within each segment, he likes some companies better than others. He says now he is most cautious on large-cap media names because of issues surrounding cord-cutting and cord-shaving, which is being driven by the rest of over-the-top video options.
Full interview available here.
American International Group Inc
President Brian Boyle of Boyle Capital says American International Group Inc (NYSE:AIG) is an example of an investment with activist involvement that has a clear and sensible plan to enhance value by returning capital to shareholders.
AIG was one of the poster children for the abuses of the financial crisis. They’ve spent a number of years working through their problems and repairing their reputation. They’ve had to sell a number of businesses along the way, and it remains a work in progress.
However, when you look at AIG today, it is a fairly simple story that comes down to management and its ability to execute. In early 2016, management announced an ambitious plan to return $25 billion to shareholders by the end of 2017. Over the past few quarters, we feel management has executed fairly well on that plan. However, waiting in the wings are Carl Icahn and John Paulson, both of whom have representation on the board of AIG.
Book value on AIG today is around $84 a share. Current share price is around $59. We believe that at the very least, AIG should trade at book value, given the type of franchise that they have. Icahn and Paulson have proposed that AIG sell off the life insurance assets, or at least parts of the life insurance business, and use that capital to buy back stock at a discount to book value.
Diversified industrials have had a good year, analysts say, but investor sentiment seems to be that the valuations of many of these companies is high in terms of historic multiples. These companies have seen more revenue growth and less currency pressure. Capital equipment has also performed well and analysts say there are value opportunities in the oil and gas industry now that prices seem to have stabilized. Analysts also focus on manufacturing efficiency and restructuring actions. Commercial airspace sector sales are expected to rise upper-single digits for most OEM companies and suppliers, analysts say. These companies are trying to bring the aftermarket in-house.
Full report available here.
Entertainment, toys and games companies are experiencing a shift from analog to digital that is changing the ways everything is consumed. Consumers are being more selective about what content they choose to watch. Analysts say they use more bandwidth — with 80% to 90% of traffic on the internet being video — and are less tolerant of advertising. There are differences by demographics on which kind of content and platform the audience prefers, with Millennials favoring mobile and preferring fewer ads; younger teens preferring content they feel is authentic, with digital-native content being perceived as more authentic than studio-produced content; and Baby Boomers preferring content that fits a living room setting, analysts say.
Another big theme in the space according to analysts is convergence, that being the blurring of the lines between what a cable company and a telecom do. The television ad market is quite strong, some analysts say, adding that advertising in general is strong. They say there’s been a focus on improving the existing system both in terms of measurement and in terms of how TV companies’ revenue streams. The last two years were weak for TV advertising, some of which was related to fears that viewership wasn’t accurately measured, but some analysts say there is more comfort with viewership-measuring methodologies now. Analysts say we are seeing early signs that advertisers are moving back toward traditional media or are having more sophisticated ad buy strategies than just digital. Others, however, say the pendulum hasn’t quite turned back and that ad spending remains focused on the digital realm.
Ad spending is not expected to grow faster than GDP because companies advertise for customers when they think they have money to spend. For operators, analysts say there has been consolidation, which has given them leverage to set lower rates for TV networks. Some analysts are positive on media and entertainment, saying these companies are either transitioning toward a digital future, or they are sticking to their traditional strengths. One example is the newspaper industry. As their cost structures are no longer tied down to printing plants and expensive downtown buildings, analysts say they are capitalizing on the heavy online traffic they get from their local markets and they are moving towards video content.
In the toys realm, analysts say the new parents of the Millennial generation do more research on the toys they buy and don’t necessarily shop at brick-and-mortar stores. Analysts also say the tie-ins or media convergence, where product is backed by content such as television programs or movies, is growing in the high single digits while commoditized product grows in the low single digits. Product discovery and brand creation isn’t happening in front of the television on Saturday mornings, but rather through digital formats. There are toys that have been moved away from basic learning and development, and they are moving toward elevated intellectual development such as STEM. Analysts add that the quality of toys is increasing as well.
Full report available here.
Rob Leuty says the philosophy of his firm is high-quality investment portfolios, consistency of returns and excellent client service. He says the firm uses a uniform investment process to minimize volatility and improve consistency of returns. Mr. Leuty works with fixed income, and views that as a complement to an investor’s overall portfolio. He says that in the current low-growth economic environment coupled with unconventional monetary policy, fixed income allocation is adding solid stability by way of diversification in conjunction with attractive levels of cash flow streams. He builds fixed income portfolios using high-quality and liquid securities.
Full interview available here.
