Let’s take a look at some of the top stories across the market, including the impact tariffs are having on capital spending plans and bottom lines and recent developments in big tobacco.
By Kris Rosemann
As Hurricane Florence bears down on the East Coast of the US, risk modeling firm RMS believes US insurers should be bracing for $20 billion in losses. More than 1 million people have been ordered to evacuate the area, and the threat of a combination of storm surge, wind, and inland flooding may prove to be significant as Duke Energy (DUK) estimates 1-3 million customers may be left without power across North and South Carolina.
Privately-held Liberty Mutual Insurance and Nationwide Mutual Insurance are leaders in Carolinas commercial property insurance coverage, but other top commercial property insurers in the region include The Travelers Companies (TRV), Chubb (CB), and Zurich Insurance Group (ZURVY). Though Florence could be painful for the insurers, should the hurricane be devasting to residential properties, home improvement retailers such as Home Depot (HD) and Lowe’s (LOW) could see a nice boost in comps for the period.
While some regions of the country prepare for massive storms, businesses across the country are reportedly curbing or postponing capital spending as a result of uncertainty related to trade tensions. Such a sentiment is an easy one to understand as business owners and investors have been whipsawed by a dynamic news stream, and yet another example came September 12 as the market was helped by a report of a new round of trade talks proposed by the US. According to a Fed survey, the US economy is showing tight labor market conditions and is expanding at a moderate pace, but rising input costs related to trade disruptions are forcing some businesses, manufacturers in particular, to reconsider their investment strategies despite generally being optimistic about the near term.
According to the Philadelphia Fed in the aforementioned Fed survey, which offers only anecdotal evidence and should not be taken as gospel, “nearly two-thirds of the firms that offered general comments noted that price hikes and/or supply disruptions had already occurred or were anticipated because of tariffs.” Input costs are rising faster than selling prices according to the survey, and overall price gains in goods and services are showing some signs of deceleration. Another piece of anecdotal evidence on the impact of tariffs came from 3M (MMM) CFO Nick Gangestad’s comments at a recent conference as he noted that raw materials prices could trim $0.10 per share from the company’s earnings this year.
Grocery-store chain Kroger (KR) is also facing rising costs, though not in the same vein as 3M, as margin pressure and disappointing guidance drove shares down significantly during the trading session September 13. Its gross margin contracted 36 basis points as a result of price investments, higher transportation costs, and growth in its specialty pharmacy business, and its operating, general, and administrative spending advanced by the same amount due to higher expense for incentive plans. The company still expects identical sales growth, excluding fuel, to be 2%-2.5% in fiscal 2018, and adjusted earnings per share guidance was reiterated in a range of $2.00-$2.15. Shares are currently changing hands just above our fair value estimate of $27.
Simulated newsletter portfolio idea Altria (MO) and its big tobacco peers rallied during the September 12 trading session as the FDA threatened to pull e-cigarettes from shelves if manufacturers don’t alter their practices to help curb teenager use of their products. The FDA also issued warnings to retailers of e-cigs, but many of the names that rallied have begun to correct as investor digest the implications of the announcement, which targeted more than 1,300 retailers and five major manufacturers.
The five manufacturers targeted were Juul, British American Tobacco’s (BTI) Vuse, Altria’s MarkTen, Imperial Brands’ (IMBBY) Blu, and Japan Tobacco’s (JAPAY) Logic brands, and the FDA will require them to submit teen use prevention plans within 60 days. Altria’s big move on the initial news was largely due to speculation that privately-held Juul may be most at risk from the FDA’s actions as it holds approximately 72% share in the e-cig market and traditional big tobacco companies have yet to find an effective way to compete with it.
Such a notion is supported by the FDA’s obsession with the impact flavored e-cigs are having on youth consumption as Juul offers a range of nicotine-packed flavors. While these developments are still unfolding, the increased penalization on flavored e-cigs bodes well for US cigarette consumption and Altria’s Marlboro brand by extension as it holds 43.2% market share as of the end of the second quarter. Our fair value estimate for Altria sits at $67 per share.
Tobacco: BTI, MO, PM, SWM, VGR
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.