Kuby's Commentary

The Theme Remains the Same

2018-08-06T09:27:20+00:00August 6th, 2018|

Last Week:

Our TIEs (Trade, Interest rates, Earnings) theme remained the dominate narrative, with relatively benign developments on the Trade and Interest rates front and continued spectacular Earnings. Unlike most quarters when analysts make downward revisions to earnings estimates as the reporting season approaches, in the first and second quarters of 2018 analysts increased expectations ahead of earnings reports. Even with elevated expectations, 78.2% of the index reported first quarter earnings above estimates and the second quarter is looking even better, with 78.6% of S&P 500 companies beating. If this holds, it will be the highest percentage of earnings beats on record (going back to 1994 Q1). The Energy sector has shown the biggest gains with over 125% growth in earnings, while the S&P 500 is on track for 24.0% growth in net income on a 9.8% rise in revenue.

As far as the “Trade War” goes, the Trump administration suggested that perhaps the proposed tariff on $200 billion of Chinese goods would be 25% rather than the 10% previously indicated. The U.S. market seems to have developed somewhat of an immunity to the daily tit for tat trade talk, while the Chinese market has been struggling, declining almost 5% last week and over 17% year to date. In that context I guess one could argue we are “winning”, but it also sets the table for an ultimate response that could disrupt the “game”.

As expected, the FOMC left interest rates unchanged, saying the economy was “strong”, leaving the odds very high that rates will be increased in the September meeting. The Employment report on Friday showed that 157,000 new jobs were added in July, with wage inflation holding at 2.7%. The yield on the Ten-Year Treasury was essentially unchanged.

A rally Thursday afternoon and Friday left the market in the green for the week, with the S&P 500 gaining 0.76%, largely driven by Apple’s 9.62% surge as it became the first U.S. company to reach a trillion dollars in market capitalization.

This Week:

Earnings season winds down, with only 47 S&P 500 stocks reporting second quarter results. The economic calendar is also light, with the Bureau of Labor Statistics releasing the June Jobs Openings and Labor Turnover Survey numbers on Tuesday, along with July PPI on Thursday and CPI on Friday, as the highlights.

Stock on the Move:

ARC Document Solutions, Inc. (ARC) +15.3%: Net sales were $104.2 million, a 1.9% increase compared to the second quarter of 2017, while EBITDA was $16.2 million versus $16.9 million in the year earlier period. “In the face of a shrinking print market, we were gratified to deliver year-over-year growth for the first time in three years, especially with the improvements in gross margin and operating cash flows that came with it,” said Jorge Avalos, Chief Financial Officer. “The exceptional increase in medical costs we predicted for the second quarter had a negative impact of $1.4 million on EBITDA and they decreased earnings per share by 2.1 cents, but despite these pressures, our results for the quarter were solid and we expect them to be sustainable for the balance of the year.” ARC Document Solutions is engaged in providing document management solutions to businesses, including non-residential segment of architecture, engineering & construction industry. Its offering includes; onsite, digital, color & traditional reprographics. ARC is a 1.7% holding in the North Star Micro Cap Fund.

Consolidated Communications Holdings, Inc. (CNSL) -13.1%: Revenues were $350.2 million, compared to $369.1 million for the second quarter of 2017. Adjusted EBITDA was $136.2 million compared to pro forma $137.2 million a year ago. “As we pass the one-year milestone following our FairPoint acquisition, we are on track with the integration, fast start network, customer service and branding initiatives which will allow us to achieve at least $55 million in synergies.” said Bob Udell, president and chief executive officer of Consolidated Communications. “I am also pleased with the continued growth in our commercial and carrier data and transport revenues. Our commercial sales team continues to gain good traction in both legacy and Northern New England markets as we experienced sequential quarterly growth of data and transport revenues.” Consolidated Communications Holdings Inc is a provider of telecom services in the United States. The company’s offering spans local and long-distance services, broadband Internet access and cloud data services. CNSL is a 2.7% holding in the North Star Opportunity Fund and a 1.8% holding in the North Star Dividend Fund.

Myers Industries, Inc. (MYE) +22.1%: Net sales increased 3.9% (or 3.6% excluding currency fluctuation) compared to the second quarter of 2017, while adjusted net income per diluted share from continuing operations was $0.27, compared to $0.18 in the second quarter of 2017. President and Chief Executive Officer Dave Banyard commented, “We are pleased with the continued improvement in our business during the second quarter, which demonstrated another consecutive quarter of year-over-year growth in both sales and earnings. Our focus on niche market strategies drove double-digit sales growth across three of our key end markets, including consumer, vehicle, and food and beverage. Continued strength of demand, combined with the impacts of recent pricing and operational improvement initiatives, resulted in strong gross margin expansion, operating income growth, and free cash flow generation during the quarter.” Myers Industries manufactures a range of polymer products for industrial, agricultural, automotive, commercial and consumer markets. It also manufactures plastic reusable material handling containers and pallets. MYE is a 2.8% holding in the North Star Dividend Fund.

Pioneer Power Solutions, Inc. (PPSI) -15%: There was no news. The Company will be reporting second quarter earnings this Thursday. The stock is somewhat illiquid, and apparently another holder has decided to exit their position. We continue to have confidence in the management and their ability to create shareholder value. Pioneer Power Solutions manufactures, sells and services a broad range of specialty electrical transmission, distribution, and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. PPSI is a 1.7% holding in the North Star Opportunity Fund and a 0.9% holding in the North Star Micro Cap Fund.

Rocky Brands, Inc. (RCKY) + 14.2%: Second quarter net sales were $58.2 million compared to $58.5 million in the second quarter of 2017. The Company reported second quarter net income of $2.6 million, or $0.35 per diluted share compared to a net income of $1.5 million, or $0.20 per diluted share in the second quarter of 2017. Jason Brooks, President and Chief Executive Officer, commented, “We had an excellent second quarter highlighted by high-single digit growth in wholesale sales combined with continued strength in our retail division. Our focus on introducing innovative new products into the marketplace, supporting our retail partners with great service and enhancing our use of digital advertising is driving increased direct sales of Georgia Boot, Durango, and Rocky’s current offerings at higher gross margins. At the same time, our internal manufacturing capabilities are providing us with a great opportunity to expand our commercial military operations both in the U.S. and overseas. We are also encouraged with the ongoing success of Lehigh, our differentiated direct business-to-business model, which continues to grow through key account wins and increased participation and retention with existing accounts. Looking ahead, I’m confident that we have the right strategies and people in place to build on our recent accomplishments and deliver improved profitability and greater shareholder value for years to come.” Rocky Brands Inc is a designer, manufacturer and marketer of footwear and apparel marketed under a portfolio of brand names including Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation and the licensed brand Michelin. RCKY is a 4.7% holding in the North Star Dividend Fund and a 4.4% holding in the North Star Micro Cap Fund.

Transact Technologies, Inc. (TACT) +21.2%: Generated 2018 second quarter net sales of $14.8 million compared with 2017 second quarter net sales of $13.6 million, and net income of $1.2 million, or $0.16 per diluted share, compared to net income of $867 thousand, or $0.12 per diluted share, in the prior year period. Bart Shuldman, Chairman and Chief Executive Officer of TransAct, commented, “We are extremely pleased with our strong 2018 second quarter results, as growth initiatives for our restaurant solutions and casino and gaming operations took hold. Our restaurant solutions net sales grew 23% year over year reflecting the momentum that we are achieving with a growing number of restaurant and food service operators as we continue to lead the industry in product innovation. We are also thrilled with the success that we have had taking over direct responsibility for sales and support for our international gaming and casino customers, which drove a 267% improvement in international casino and gaming sales for the second quarter of 2018 as compared to the prior year period. Transact Technologies is engaged in developing and selling software-driven technology and printing solutions for restaurant, POS automation and banking, casino and gaming, lottery, mobile and oil and gas. TACT is a 1.5% holding in the North Star Dividend Fund.

WisdomTree Investments Inc (WETF) -13.5%: Shares of most asset managers fell after Fidelity introduced a plan for zero-fee index funds. WisdomTree Investments Inc. is an exchange traded fund (ETF) and exchange traded product (ETP) sponsor and asset manager. It offers Equity ETFs, International Hedged Equity ETFs, Currency ETFs, and Fixed Income ETFs. WETF is a 2.7% holding in the North Star Opportunity Fund.

The information provided in this commentary is not an offer to sell or the solicitation of an offer to purchase any security, product, or brokerage service. The information is not intended to be used as the basis for investment decisions, nor should the information be construed as advice designed to meet the particular needs of any investor. This commentary is presented to illustrate examples of the securities that North Star Investment Management Corporation and/or its affiliates (“North Star”) may have bought for client accounts and the diversity of markets in which North Star Investments may invest, and may not be representative of current or future investments. You should not assume that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary will be profitable or will be equal to any corresponding performance levels that might be indicated. Past performance is no guarantee of future results. Investments in securities involve risks including the possible loss of the principal invested. North Star and others associated with it, including employees, may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary. North Star may buy, sell or hold these securities in proprietary or client accounts. North Star will not be providing regular updates or advising you of any changes in the views expressed herein. Investors should consider their investment objectives, risk tolerance, and financial situation and needs before investing in any security. Tax considerations, commissions, fees and other costs should be carefully evaluated with one’s investment and/or tax advisors. Information provided is obtained from sources deemed to be reliable, but North Star cannot guarantee the accuracy or completeness of the information. This material may not be reproduced, distributed or transmitted to any other person in whole or in part without the prior written consent of North Star. A copy of North Star Investment Management Corporation’s Form ADV Brochure, Privacy Notice and Business Continuity Plan summary can be obtained by calling 312-580-0900.