Most of us woke up to the news February 18 that Apple (AAPL) would be vigorously defending the privacy of its customers against a potential “overreaching” by the Federal Bureau of Investigation and/or others. The crux of the matter is whether Apple should unlock a phone that had been used by a shooter in the San Bernardino attacks early December, per the request of the FBI, as doing so may eventually jeopardize the personal safety and security of all Americans. Several tech CEOs have come out to support Apple, but any outcome on the matter will be difficult to predict.
In a day and age where privacy is a major hot-button issue, CEO Tim Cook knows he needs to step lightly, and reaching out to the American public, “A Message to Our Customers,” was the right move. It now puts the ball in the political courts, or the court of public opinion, hopefully removing any customer backlash toward Apple in the event of any outcome, whether the FBI backs off on its order under the All Writs Act of 1789 or is successful in commandeering software that could be used in the future to either hack into phones of all Americans, or potentially worse should such software fall into the wrong hands. By issuing its message, we think Apple hopes to avoid any backlash that could be quite damaging to product momentum and equity value.
We wanted to get two large cap companies on your radar. International Business Machines (IBM), the very poster child of poor earnings quality, “IBM Continues to Punish Optimists,” looks to be finally finding some support in the low $130s range, at the low end of our fair value estimate of the company, “,” and we’re paying close attention to the Buffett favorite. Though IBM has all the makings of a “value trap” or “falling knife” as it has for much of the past two years, we’re watching its share-price stabilization closely in the event market action precedes tangible fundamental operating improvement. Another Buffett favorite, Deere (DE), is one that we wanted to point out as well. We value shares of the agricultural equipment maker in the low $90s at the time of this writing, “,” and Mr. Buffett is now the company’s largest institutional shareholder. We’re watching them closely for a technical follow through after a strong start to 2016.
Walmart’s fourth-quarter fiscal 2016 earnings, ending January 31, weren’t great, even as the discount retailing giant noted that comparable store sales growth was positive for the sixth consecutive quarter thanks to higher traffic. Though revenue advanced on a constant-currency basis in the period, investments in its people and technology pummeled operating income nearly 14%, excluding foreign currency fluctuations. We believe Walmart’s business remains under attack on the social front with the ‘Fight for 15’ cause becoming ever more powerful. Workers are demanding more and more, and we don’t think Walmart or even most of American small business has a good answer for the trend. The extreme popularity of democratic socialist Bernie Sanders suggests the era of providing new-entrant opportunities at sub-$10 minimum wage may become an artifact of America’s past. Other companies from Target (TGT) to McDonald’s (MCD) to Chipotle (CMG) won’t be spared either. Our ~$60 fair value estimate for Walmart remains unchanged at this time, “.”
Though the jury continues to be out on the long-term gains related to McDonald’s all-day breakfast initiatives, at least one firm said that Mickey D’s new effort is taking a chunk out of its business, Jack in the Box (JACK). We’ve mentioned in the past that Jack’s Qdoba could benefit from Chipotle’s missteps, “Could Qdoba Be the One to Eat Chipotle’s Lunch?,” but we cautioned that shares were trading at nosebleed levels at that time. On February 18, Jack in the Box noted that first-quarter results came in below its expectations “as several competitors began promoting aggressive value offers.” The company called McDonald’s out specifically as being a negative catalyst to traffic in “the 10:30am to noon period.” Though Jack’s core business is feeling some pressure, Qdoba sales remained quite strong despite difficult “double-digit” comparisons. Shares of Jack in the Box have cratered to our fair value estimate of $63 at the time of this writing, “.”
In what appears to be yet another instance of insider purchases gone wrong, Chairman Omid Kordestani and CFO Anthony Noto of Twitter (TWTR) decided to up the ante by adding to their personal stakes. We reiterate our view that insider purchases are often “distractions” as many executive teams know that you know that many believe insider buying is a good thing, “We Like the News!” For this reason alone, we don’t pay much attention to such activity, and especially as it relates to equity that we believe cannot be valued without an extreme margin of safety, rendering the company un-investable, “Falling Knives among Internet-Based Equities.” Twitter’s market capitalization is over $12 billion, and the many reasons why the company may be “dead” continue to add up, “The Reason Twitter’s Losing Active Users,” “Twitter’s Countless Victims Await Ultimate Revenge.”
It looks like Yahoo (YHOO) may have a proxy battle on its hands with Starboard Value, which recently raised capital selling some of its Darden (DRI) holdings, and our guess is that its stake in Yahoo! is set to move higher, which could put even more pressure on CEO Marissa Mayer. We reiterate our opinion that shares of now-standalone eBay (EBAY) would fit extremely well with Yahoo’s core assets, and the long-term value generating proposition from a combination is quite compelling, “VALUENTUM ISSUES OPEN LETTER TO MARISSA MAYER, CHIEF EXECUTIVE OFFICER OF YAHOO!” Shareholders should consider who might be best to fill the recent vacancy of independent director Charles Schwab on the Yahoo board. Don’t forget to read our breakdown of the FANG stocks, “Netflix Shareholders Need to Get Real?”