We continue to pay very close attention to the benchmark 10-year Treasury yield as it has implications on borrowing costs and discount rates across valuation methodologies.
By Kris Rosemann
The 10-year US Treasury yield (TLT, TBT) continues its recent climb, hitting its highest level in nearly four years as of the morning of January 29, and some equity bears have begun to wonder when the soaring stock market will begin to take notice. With central banks around the globe expected to continue cutting back on bond purchasing activity, yields may be poised for a prolonged rise and equity prices could be headed for a similar fate as bond prices. It’s important not to forget, “Why the Fed Matters.”
President Trump continues to shake up global trade relations with his most recent comments regarding the EU-US relationship, claiming the current trade relationship is very unfair to the US, which, according to Trump, “will turn out to be very much to their detriment.” The Trump administration is also reportedly considering taking at least part of the development of 5G networks in the US to the public sector in hopes of guarding against “dominant malicious actor” China (FXI). According to an Axios report, two options exist: the US government will pay for and build a single nationwide network in an unprecedented nationalization of private infrastructure, or US wireless providers will build their own 5G networks.
In M&A news, Dr Pepper Snapple (DPS) has agreed to merge with Keurig Green Mountain to create Kuerig Dr Pepper. Keurig Dr Pepper will be a new beverage company with a portfolio of iconic consumer brands and distribution capability to reach virtually every point-of-sale in North America. Dr Pepper Snapple shareholders with receive a $103.75 per share cash dividend and will retain shares in Dr Pepper Snapple, ultimately resulting in the group owning ~13% of the to-be-combined entity. The new company expects to deliver $600 million in annual synergies by 2021, and it is targeting a net debt-to-EBITDA ratio of less than 3.0x with in two to three years after the deal closes. Dr Pepper Snapple will pay its typical quarterly dividend of $0.58 in the first quarter of 2018, but the company expects to pay an annual dividend of $0.60 per share moving forward.
Newsletter portfolio idea Apple (AAPL) has been facing some selling pressure after reports that it has halved its iPhone X production target to 20 million units for the first quarter of calendar 2018. The tech giant expects its production target for lower-priced models (8, 8 Plus, and 7) to remain at 30 million units. Suppliers such as Finisar (FNSR) and II-VI (IIVI) are facing selling pressure in sympathy to the development.
After its peers turned in strong fourth quarter earnings reports last week, “The US Dollar, GDP Expansion, and Earnings,” Lockheed Martin (LMT) took its turn before the open January 29. Excluding a one-time charge related to the new tax laws, the company reported adjusted earnings from continuing operations of $4.30 per share, up considerably from $3.25 per share a year earlier. Strength in its ‘Aeronautics,’ ‘Missiles and Fire Control,’ and ‘Rotary and Missions Systems’ led the way to sales growth of more than 9% on a year-over-year basis, and solid booking rates helped the firm to a record backlog of nearly $100 billion at the end of 2017. Management expects sales of $50-$51.5 billion and GAAP diluted earnings per share of $15.20-$15.50 in 2018.
In public health-related (XLF) news, this year’s flu outbreak is the worst since the 2009 swine flu pandemic, and it continues to gain in intensity. Schools in at least 11 states have closed over concerns of the spreading disease. Take care of yourselves out there!
Related: DNKN, PEP