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Kuby’s Commentary

TIDE Rolls In

May 14, 2018

Last Week:

Following up on the theme from our last blog, the TIDE rolled in for four of the five trading days, and the S&P 500 finishing 2.4% higher. On the positive side, the trade talks moved towards deal making, as speculation grew that the Chinese are prepared to commit to import more U.S. goods. Additionally, the inflation numbers came in slightly below consensus, although raw materials, labor costs, and transportation costs are all rising faster than the prices of consumer goods and services. That dynamic can’t continue without eating into corporate profits, which by the way remained extremely strong as the first quarter earnings season approached conclusion with 24.9% growth. The massive, and growing, government debt remained in the background, but as they say in the Game of Thrones, “winter is coming”. The yield on the Ten-Year Treasury was unchanged, while Crude Oil reached its highest level since 2014, closing at $70.70 a barrel. The most recent catalyst for the rise in oil prices came on Tuesday, when President Trump pulled the U.S. out of the nuclear-weapons agreement with Iran, leading to supply concerns from the world’s fifth largest producer. Upward pressure on energy prices will have an inflationary impact on the economy, as energy is an input to pretty much everything.

My predictions for the NBA conference finals match-ups were 100% accurate. A Warriors/Cavaliers finals rematch is widely anticipated, but my contrarian instincts are in full swing. Perhaps the Celtics crash King LeBron’s coronation?

I hope that everyone enjoyed a pleasant Mother’s Day. It was great having brunch with my mom, Alma Kuby, at the Standard Club. An interesting fact is that Anna Jarvis, who Wikipedia credits as being the founder of the Mother’s Day holiday, later in life petitioned to rescind the holiday. Her efforts were halted when she was placed in the Marshall Square Sanitarium in Pennsylvania. People connected with the floral and greeting card industries paid the bills to keep her in the sanitarium. 75 years later, Mother’s Day spending exceeds $20 billion annually, with 78% of Americans buying greeting cards, and 67% buying flowers. (Disclosure: (FLWS) is a 3.4% holding in the North Star Micro Cap Fund).

This Week:

Earnings season is essentially over, with only 10 S&P 500 companies scheduled to report results. The economic calendar is also light, with April retail-sales on Tuesday and leading indicators on Thursday as possible highlights. Trade might be in focus, as Chinese Vice Premier Liu will visit Washington and continue talks with Treasury Secretary Steve Mnuchin.

Stocks on the Move:

Alaska Communications Systems Group, Inc. (ALSK) +14.8%: For the first quarter of fiscal 2018, revenue was $56.0 million, compared to $56.7 million in the year earlier period, and net income was $2.1 million compared to a net loss of $0.7 million. According to Anand Vadapalli, president and CEO of Alaska Communications. “Our first quarter performance met our expectations and creates the foundation to achieve our annual goals. Our revenue decline for the quarter is attributable to compression in our health care vertical. The cost control measures we proactively put in place mitigated the impacts of this revenue compression resulting in stable Adjusted EBITDA performance for the quarter.”  Alaska Communications provides integrated communications services in Alaska. It provides local, long-distance, and wireless telephone services, Internet access, and data services to residential and business customers. ALSK is a 1.9% holding in the North Star Opportunity Fund.

Farmer Bros. Co. (FARM) -12.1%: Net sales were $157.9 million in the third quarter of fiscal 2018, an increase of 14.3%, or $19.7 million, over the prior year period. This increase compared to the prior year period was driven primarily by a $11.5 million increase in net sales of roast and ground coffee products, a $4.4 million increase in net sales of other beverages, a $3.0 million increase in net sales of culinary products, and a $0.4 million increase in net sales of frozen liquid coffee.  The addition of the Boyd business contributed $22.8 million to net sales, offset by a $3.2 million decline in their base business primarily due to price decreases to their cost-plus customers, a shortfall in sales from our DSD organization and softness in a few large direct ship accounts. Adjusted EBITDA was $10.5 million in the third quarter of fiscal 2018, as compared to $12.2 million in the prior year period. “We continue to make meaningful progress in executing our strategy and working to leverage our solid platform for growth,” said Mike Keown, President and CEO. “While we did not achieve year-to-date results at the level we had initially projected to reach our Adjusted EBITDA objective for the fiscal year, we expect that our recently achieved SQF certification and the continued ramp-up of our state of the art Northlake, Texas facility will position us well to secure more national accounts. Further, we are pleased with the continued integration of the Boyd’s business, which remains on-track. Looking ahead, we continue to be focused on leveraging the investments we have made in our roasting facilities, expanding our distribution network, adding new customers, and increasing business with existing customers. Our pipeline remains robust and we believe that Farmer Brothers has the right foundation and strategy in place for long-term growth.” Farmer Bros. is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products serving restaurant and convenience store chains, hotels, casinos, hospitals, and gourmet coffee houses, and grocery chains. FARM is a 2.0% holding in the North Star Micro Cap Fund.

Gannett Co., Inc. (GCI) +19.3%: Operating revenues were $723.0 million, compared to $773.5 million in the first quarter of 2017. Adjusted EBITDA totaled $55.1 million compared to $69.7 million in the first quarter of 2017. “We are pleased with the momentum we saw this quarter in digital advertising revenues, which reached 43.6% of total advertising revenues in the quarter,” said Robert J. Dickey, president and chief executive officer. “Overall, first quarter results were ahead of our expectations driven by solid growth in digital advertising revenues, especially within the digital marketing services category.” Gannett operates as a multi-platform news and information company. It spreads the news all over the USA and UK through digital, mobile, and print products. GCI is a 1.9% holding in the North Star Dividend Fund, and GCI corporate bonds are a 2.2% holding in the North Star Bond Fund.

National CineMedia, Inc. (NCMI) +29.6%: National CineMedia is a holding company. Total revenue for the first quarter ended March 29, 2018 increased 11.5% to $80.2 million from $71.9 million for the comparable quarter last year. Adjusted OIBDA increased 32.4% to $23.3 million for the first quarter of 2018 from $17.6 million for the first quarter of 2017 Commenting on the Company’s first quarter 2018 operating results, Andy England, NCM’s CEO said, “It has been an excellent start to 2018, with first quarter results coming in better than our expectations and second quarter also off to a good start. We continue to attract new and returning advertisers, proving that the power of cinema advertising is alive and well. The launch of the first app in our Noovie digital ecosystem, Noovie ARcade, is bringing interactive augmented reality gaming to the big screen, enhancing the moviegoing experience and giving audiences a reason to arrive early to discover what’s next in entertainment – which is good for both consumers and brands.”. The company through its subsidiary, operates digital in-theatre media network in North America, through which it sells in-theatre and online advertising and promotions. NCMI is a 1.6% holding in the North Star Dividend Fund, a 2.3% holding in the North Star Opportunity Fund and NCMI corporate bonds are a 2.6% holding in the North Star Bond Fund.

U.S. Auto Parts Network, Inc. (PRTS) -20.9%: Net sales in the first quarter of 2018 were $78.4 million compared to $80.8 million in the year-ago quarter. The decrease was largely driven by a 13% decrease in e-commerce sales, partially offset by an 11% increase in online marketplace sales. Adjusted EBITDA in the first quarter of 2018 increased to $4.1 million compared to $4.0 million in the year-ago quarter, driven by the aforementioned increase in online marketplace sales and prudent cost management, partially offset by higher compliance costs related to the company’s accelerated filer status and litigation costs. U.S. Auto Parts recently filed a lawsuit against the United States Department of Homeland Security in the U.S. Court of International Trade.  The lawsuit asserts that the United States Customs and Border Protection, an agency of the Department of Homeland Security (“Customs”), has been wrongfully seizing automotive grilles being imported by U.S. Auto Parts on the basis that the grilles are allegedly counterfeit and infringe trademarks held by the original automobile manufacturers.  U.S. Auto Parts intends to vigorously defend its right to sell aftermarket automotive grilles under well-established trademark doctrines as the grilles are neither counterfeit nor is there a likelihood of confusion between our aftermarket products and OEM parts.  While the number of seized automotive grilles currently represents less than one percent of U.S. Auto Parts’ overall revenue and product assortment, U.S. Auto Parts has taken this action to remove overly burdensome bonding requirements arising from the wrongful seizures and to ensure that Customs expeditiously processes the flow of its goods into the United States. U.S. Auto Parts is an online provider of automotive aftermarket parts and repair information. Its products are classified into three subcategories: collision parts, engine parts, and performance parts and accessories. PRTS is a 1.8% holding in the North Star Micro Cap 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.

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