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APPLE BEST PERFORMING STOCK OF 2017
Either Wall Street is wildly enthusiastic about the future prospects of Tesla Inc. (NASDAQ: TSLA) or pessimistic about Ford Motor Co.’s (NYSE: F). It could be some mix of the two that has brought Tesla’s market cap of $43 billion, which is 88% of Ford’s $49 billion.
The contrast in size between the two is massive. Tesla barely produced 83,000 cars last year. Ford produced over 6.6 million. Even if Tesla hits its near-term forecasts, its production will barely top 500,000 in two years.
Tesla claims it is on the cutting edge of not just electric cars, but also self-driving vehicles. Ford last year announced it would invest $1 billion in Argo AI, a venture that also includes Uber and Google. This is only one Ford initiative. Last year Ford said it would build autonomous cars for ride sharing and that production levels would be significant. As it made this announcement, management said:
This year, Ford will triple its autonomous vehicle test fleet to be the largest test fleet of any automaker – bringing the number to about 30 self-driving Fusion Hybrid sedans on the roads in California, Arizona and Michigan, with plans to triple it again next year.
If the world of self-driving and autonomous cars comes as quickly as optimistic experts suggest, Ford has two problems. The first is that the electric car and self-driving car sectors are crowded with at least two dozen major start-ups and every large car company in the world. There is not a single guarantee Ford will be in the vanguard of this work. If not, it will have spent billions of dollars and not taken a leader’s position.
Ironically, Ford’s other problem may be its legacy business, which is the development, production and sales of those 6.6 million cars. The vast majority of them are gasoline driven and configured to be driven by humans. Reconfiguring a company for the future, when it is as big as Ford, may be nearly impossible.
Tesla maybe overvalued. There is certainly a case to be made that is true. However, its stock price was about what it is today in both August 2014 and June 2015. Its market cap level is “resilient.”
Ford’s stock price story is less attractive by a wide margin. Over the past two years its stock has fallen 23% to $12.50. Over the same period, Tesla’s has risen 32% to $269. The S&P 500 is up 11% in that time.
The Tesla and Ford market cap gap is not a fluke.
TAKATA PLEADS GUILTY
$1 BILLION IN PENALTIES
In its monthly Oil Market Report for January released Friday morning, the International Energy Agency (IEA) said that global crude supplies plummeted by 1.5 million barrels per day, primarily due to lower output from both OPEC and non-OPEC producers. Total January supply came in at 96.4 million barrels a day, some 730,000 barrels a day below the January 2015 total.The IEA projects global demand growth of 1.6 million barrels a day for 2016, up from 1.5 million barrels a day in the December report.
For 2017, however, the IEA forecasts demand growth of 1.4 million barrels a day, up by 100,000 barrels a day month over month. The agency attributed the upward revision to recent improvement in industrial activity.OPEC crude oil production fell by 1 million barrels a day to 32.06 million barrels, indicating a 90% compliance record with the agreed-upon production cuts announced last December. Declines in OPEC production were partly offset by rising production among non-OPEC nations. The IEA expects non-OPEC production to rise by 400,000 barrels a day in 2017, a swing of 1.2 million barrels from the 2016 production decline of 800,000 barrels a day.December-end commercial inventories in OECD nations dropped by nearly 800,000 barrels a day to below 3 billion barrels. Commercial inventories posted a record 3.111 billion barrels last July. Stockpiles continued to build in China and other emerging economies and volumes of oil at sea also increased.
Regarding non-OPEC production going forward the IEA said:
For non-OPEC countries outside of the output deal, we expect significant increases in production in, for example, Brazil, Canada and the US whose combined output is expected to grow by 750 kb/d in 2017. The net change for non-OPEC production in 2017, taking into account cuts by eleven countries, is close to a 400 kb/d increase. For US [shale oil], recent increases in drilling activity suggest that production will recover and the IEA’s forecast is growth of 175 kb/d for the year as a whole with production in December expected to be 520 kb/d up on a year earlier. …
We do not forecast what OPEC production will be during the six months covered by the output deal; but if the January level of compliance is maintained, the difference between global demand and supply implies a stock draw of 0.6 mb/d. It should be remembered, though, that this stock draw is from a great height. OECD stocks of crude and products have fallen for five consecutive months and in 4Q16 they drew by nearly 800 kb/d. At the end of the year they were still 286 mb above the five-year average level and by the end of 1H17 they will remain significantly above average levels.
Just before noon Friday, West Texas Intermediate crude for March delivery traded at $53.99 a barrel, up 1.9% from Thursday’s closing price of $53.00. Brent crude for April delivery traded up slightly more than 2% at $56.78 a barrel in London.
It never fails when we have a crisis in America. The tendency for the governing or regulating bodies isn’t to try to get things from over-exuberant back to the mean, it’s to over-regulate, so it can never ever happen again. While that always seems like a good solution at the time, it is usually so stifling that in the normal course of events, transactions and business can be bottlenecked for years.
A new Merrill Lynch research report makes the case that some regulatory relief is possibly on the way, and the resignation in April of this year of Fed Governor Daniel Tarullo, who is said to be the de facto head of bank supervision, could pave the way for an improved administration of the Comprehensive Capital Analysis and Review (CCAR) process. The analysts also feel this could free up some of the tremendous amount of capital the banks are forced to hold. In fact, they estimate that there is as much a $230 billion in what they call “dead weight” capital from the CCAR process.
While two banks immediately hit the Merrill Lynch screens as possible winners from the rules changes, only one is ranked Buy at the firm. We suspect this would to a large degree help all banks, so we screened the Merrill Lynch research database for the large money center banks also rated Buy.
This is one of the banks that Merrill Lynch feels could benefit among the most if the CCAR is modified. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.Trading at a still very cheap 10.9 times estimated 2018 earnings, this company still looks very reasonable in what is becoming a pricey stock market. A continuing stock buyback program at the bank is a positive, which could be increased if some of the restrictions were relaxed. While fourth-quarter results were generally in line with estimates, management was conservative looking forward and some were disappointed.Citigroup investors receive a 1.2% dividend. The Merrill Lynch price target for the stock is $64. The Wall Street consensus price objective is $64.61. Shares closed most recently at $59.90.
This stock trades at a still low 11.8 times estimated 2018 forward earnings and could respond good in a rising rate scenario. JPMorgan Chase & Co. (NYSE: JPM) is expected to continue to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on estimated price-to-earnings and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide earnings headwind going forward.With $2.6 trillion in assets on a worldwide basis, and one of Wall Street’s savviest leaders in Jamie Dimon, the stock is a solid buy for investors. Last year, Dimon put his money where his mouth was and bought a stunning 500,000 shares of the stock for a massive $26 million.The company reported solid fourth-quarter results that came in a touch above estimates. The analysts feel the company is able to take advantage of revenue opportunities while still improving efficiency. The firm’s forward estimates are above current Wall Street expectations. JPMorgan investors receive a 2.5% dividend. Merrill Lynch has a $95 price target, and the consensus target is $89.21. The shares closed Monday at $88.24.
BANK STOCKS READY TO RISE
This is another stock for investors to look at now for safety, dividends and solid upside potential, and the large cap bank is also a top sector pick at Merrill Lynch. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding, and he raised his holdings in the bank to 10% on the stock’s weakness last year.The stock had a public relations headache last year when it was revealed that employees allegedly opened up client accounts that were not approved. Things got even worse when the chief executive was absolutely eviscerated by politicians at a congressional hearing and he ended up resigning. While the stock has rallied off the lows, it remains probably the most affordable of all the major banks.Though fourth-quarter numbers initially disappointed, the primary cause for this was a one-time charge of $592 million linked to its interest rate hedges. On the bright side, the bank’s net interest revenues reached a record high, while its push into wealth management and card lending continued to drive fee incomes.Wells Fargo shareholders receive a 2.66% dividend. The $65 Merrill Lynch price target is well above the consensus target of $58.15. The stock closed Monday at $56.86.
Bank of America
Bank of America Corp. (NYSE: BAC) posted very solid fourth-quarter results, and the overall trend for the company looks very solid for 2017. While not covered by the Merrill Lynch, as the bank owns the firm, the company is also expected to benefit from the potential looser regulation and higher interest rates.Bank of America is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, corporations and governments in the United States and internationally. It operates 5,100 banking centers, 16,300 ATMs, call centers, online and mobile banking platform.The company is one of the larger lenders to the oil and gas industry, and it told analysts earlier this year that it had set aside more money for coverage of loans to the industry that may go bad. Overall credit quality remained strong, while consumer portfolios continued to improve and commercial portfolios remained stable with energy improving. The equity and debt trading at the firm helped boost bottom-line results.Investors receive a 1.28% dividend. The consensus price target is $24.86, and shares closed Monday at $23.40.
Shares of Apple Inc. (NASDAQ: AAPL) posted a new 52-week high on Friday that is just pennies short of its all-time high posted two years ago. A strong first fiscal quarter earnings report and speculation about the next round of products are driving the stock higher.Even CEO Tim Cook’s outspoken comments on President Trump’s travel ban have not been enough to chill investors’ enthusiasm for the stock. Shares have added about $16 to date in 2017, an increase of 14.07%.
In Apple’s most recent quarter, sales of its core products did well. Cook said:We’re thrilled to report that our holiday quarter results generated Apple’s highest quarterly revenue ever, and broke multiple records along the way. We sold more iPhones than ever before and set all-time revenue records for iPhone, Services, Mac and Apple Watch.The overall financial results, however, were not particularly strong compared with the same quarter a year ago. Apple’s revenue for its first fiscal quarter, which ended December 31, 2016, was $78.4 billion, against $75.9 billion last year. Per-share earnings were $3.36, compared with $3.28 last year.
Compared to the year-ago quarter, iPhone sales rose 5% to 78.29 million units. iPhone revenue rose at the same pace to $54.38 billion.The company’s forecast, which is always considered conservative, was also relatively strong:
Apple is providing the following guidance for its fiscal 2017 second quarter:
revenue between $51.5 billion and $53.5 billion
gross margin between 38 percent and 39 percent
operating expenses between $6.5 billion and $6.6 billion
other income/(expense) of $400 million
tax rate of 26 percent
Apple shares closed at $132.94 on Friday, a new 52-week high. The 52-week low is $89.47 and the consensus 12-month price target is $139.19. The price target range stretches from $102 to $185 per share.
OIL DEMAND UP PRODUCTION DOWN
TESLA'S VALUE IS 88% OF FORD
Japanese automotive suppler Takata Corp pleaded guilty to criminal wrongdoing and agreed to pay $1 billion in penalties for providing misleading testing reports to auto makers on rupture prone air bags installed in millions of vehicles. Takata pleaded guilty to one count of criminal wire fraud in a Detroit federal court Monday, settling a Justice Department probe of the company's mishandling of air bags that risked exploding and spraying shrapnel in a vehicle cabins.
Auto makers are in the process of recalling an unprecedented 42 million vehicles and nearly 70 million Takata air bags in the US alone. The safety crisis linked to 11 deaths and roughly 180 injuries in the US has dented Takata's finances and prompted the automotive supplier to seek a sigificant investment from a rival supplier and weigh bankruptcy.
FEBRUARY NEWSLETTER 2