We firmly believe the move from cash (physical notes and checks) to cashless ( digital, mobile, ecommerce ) is a multi-year secular change that provides major growth opportunities for payment processors. In the U.S., we have GPN, FLT, PAGS, PYPL, SQ, and WP on our Focus List. In Europe, WDIX.DE is on our Focus List. In the attached note we review our preferences and technical setups.
Author: Dean Kim
Dean Kim is an Executive Director, Research Analyst for William O’Neil + Co..
Mr. Kim joined the firm to establish equity research coverage of the financial technology (“fintech”) sector. He has unique insight into the industry’s growth drivers, with broad experience covering the financial sector as an analyst and overhauling corporate business processes as a management consultant.
Most recently, Mr. Kim served as Chief Financial Officer of Jios Aerogel Limited, a leading producer of the aerogel nanotechnology-based insulation material. As CFO, he raised more than $5 million in capital and managed liquidity, budgeting, and forecasting. Previously, he was an equity analyst for more than a decade. From 2007–2011, Mr. Kim headed equity research for BNP Paribas’ Korea office and simultaneously covered the banking sector, for which he was ranked number one by the Thomson Reuters/Joong-Ang Daily poll. He was also an equity analyst on Lehman Brothers' proprietary trading desk in Hong Kong, and on an Institutional Investor-ranked small cap team at UBS. Earlier in his career, Mr. Kim, an engineer, worked as a business process redesign specialist at Deloitte Consulting, analyzing the organization-wide processes of utilities and manufacturing companies.
Mr. Kim earned a Bachelor’s degree in Electrical Engineering at Yale University, and an MBA from Columbia Business School.
Outside of work, Mr. Kim enjoys coaching his kids’ soccer teams and traveling with his family.
PagSeguro Digital
PagSeguro Digital recently broke out of an IPO base and is currently extended. The Company has registered triple-digit top- and bottom-line growth over the trailing four quarters, with an EPS Rank of 99, an SMR Rating of A, and a Composite Rating of 96. Its ROE has accelerated over the trailing three years. Consensus expects 2017 and 2018 EPS growth of 375% and 70%.
Global Capital Equipment Sector
Some highlights from the report:
Since our last Capital Equipment Sector report in December, we have added two stocks and removed 10, largely due to technical breakdowns of the stocks amidst the global market correction in late January.
The stocks added were: FLIR Systems ( FLIR ) and United Tractors ( UTR.ID ). The stocks removed were: Eagle Materials ( EXP ), Pulte Group ( PHM ), and U.S. Concrete ( USCR ) in the U.S.; Alimak Group ( ALIG.SE ), Breedon Group ( BREE.GB ), and Elbit Systems ( ESL.IL ) in EMEA; and Beijing Enterprises Water ( WANO.HK ), Bharat Electronics ( BHE.IN ), Hirata ( HIRT.JP ), and Scientex ( STEX.MY ) in APAC.
In this report, we screened for potential winning Capital Equipment stocks in the U.S., EMEA, and APAC regions.
Our top Focus List picks are: AIG.TW, FLIR, HEI, KOMN.CH, PMET.MY, and UTR.ID.
Cash vs. Cashless
In this note Executive Director, Research Analyst Dean Kim examines the structure shift to non-cash mobile and digital payments (cashless) from cash transactions. Beneficiaries of this shift include payment-related stocks on our Focus Lists, including PYPL, FLT, GPN, VNTV, and WDIX.DE. BABA and TCNT.HK have significant opportunities as well. Vulnerable stocks under this theme include WU, NCR, DBD, and CATM.
Global Financial Sector
U.S. banks kicked off Q3 2017 earnings on October 12 with JPM and C reporting in-line revenue with EPS beats. The bottom-line beats were a function of in-line performance of interest and non-interest income generation as well as OPEX management, particularly for C. However, the pickup in provision for credit expenses had the street revising forward EPS down. Even though these banks reported well on the surface, their shares still sold off from upside reversals. The trading action could also have been profit taking as the group has rallied 12% since its recent low on September 8. Both KBE and KRE reacted positively to the sharp rise of the 10-year bond yield as a result of the hawkish tone from Federal Reserve Chairwoman Janet Yellen. In addition, a discussion of a potential tax reform by the Trump administration pushed the 10-year yield higher to 2.37% on October 9, from a low of 2.05% on September 7. As the chart on the previous page shows, KRE and KBE have traded in tight correlation with the 10- year yield since the end of 2016. As economic indicators continue to be mixed, the equity market is looking to the bond market to determine the fate of the
banks.
Global Capital Equipment Sector
U.S.
· The Sector is improving relatively over the short term and is trading at all-time highs.
Ø Aerospace/Defense: On September 18, the U.S. Senate passed the 2018 National Defense Bill under NDAA, increasing the country’s defense budget by $80B to $700B for the next fiscal year. This allocation is a sharply higher than 2017’s $619B. Top pick is Heico). It is a bit extended but actionable as it bounces off its 50-DMA.
Ø Infrastructure and Housing: According to Moody’s Analytics, those two recent hurricanes could inflict as much as $200B damage on the private and public sectors, which is equivalent to 0.5% of the U.S. GDP. The aftermath of these hurricanes will generate massive clean-up and rebuilding operations. Top pick Pulte
) builds in both Florida and Texas. Stock is extended, but we would add on a low-volume pullback to the 50-DMA.
EMEA
· EMEA Staples sector is outperforming over long-term, but moderately weakening in short-term.
· NATO Increases Defense Expenditures: Key for Europe’s Defense Subsector Growth
· The U.K. government announced its intent to invest 1-1.2% of GDP on economic infrastructure from 2020, compared with 0.8% currently.
· Companies offering solutions to improve the flow of goods and logistics are performing well in Europe. This is especially true for ecommerce companies and existing retailers looking to expand and modernize their distribution networks, including warehouses.
Ø Aerospace/Defense Focus List: Elbit Systems (ESL.IL; ESLT:IT), Thales (CSF.FR; CSF:FP)
Ø Infrastructure Focus List: Breedon Group (BREE.GB; BREE:LN), CRH (CRH.GB; CRH:LN)
Ø Automation/Machinery Focus List: Alimak Group (ALIG.SE; ALIG:SS), IMA Industria Macchine (IMA.IT; IMA:IM), Kion Group (KGXX.DE; KGX:GR), Komax (KOMN.CH; KOMN:SW)
APAC
· The APAC Staples sector is improving in the short term but still underperforming over the long term. Still, we favor a couple key areas of growth including:
Ø Robotics: Harmonic Drive Systems (HARM.JP; 6324:JP), Hirata (HIRT.JP; 6258:JP)
Ø Defense: Bharat Electronics (BHE.IN; BHE:IN)
Ø Machinery: Airtac (AIG.TW; 1590:TT), Chroma (CMA.TW; 2360:TT), Press Metal (PMET.MY; PMAH:MK)
Ø Packaging: Scientex (STEX.MY; SCI:MK)
Ø Others: Beijing Enterprises Water Group (WANO.HK; 371:HK), Xinyi Glass (XINY.HK;868:HK)
Global Financial Sector
Offers the world’s leading institutional investment managers a distinct blend of quantitati ve, fundament al, and technical expertise in global stock buy-and-sell recommendations. Its core method profiles stocks displaying the characteristics of outperformance proven persistent over market history—drawn from the firm’s industryleading database.
William O’Neil + Co., Incorporated is a Registered Investment Advisor wit h the State of Cali forni a and certain other states. The fi rm and its affiliates may now or in the future have positions in the securities mentioned in this or other publications. Charts are intended to be used as tools to assist institutional investors in identifying equity ideas worthy for further review. Charts provide certain current and historical information, but are not a substitute for comprehensive analysis of the individual stocks. For further information about our business and legal policies, please see williamoneil.com/legal.
Global Capital Equipment Sector
Offers the world’s leading institutional investment managers a distinct blend of quantitative, fundamental, and technical expertise in global stock buy-and-sell recommendations. Its core method profiles stocks displaying the characteristics of outperformance proven persistent over market history—drawn from the firm’s industryleading database.
William O’Neil + Co., Incorporated is a Registered Investment Advisor with the State of California and certain other states. The firm and its affiliates may now or in the future have positions in the securities mentioned in this or other publications. Charts are intended to be used as tools to assist institutional investors in identifying equity ideas worthy for further review. Charts provide certain current and historical information, but are not a substitute for comprehensive analysis of the individual stocks. For further information about our business and legal policies, please see williamoneil.com/legal.
Global Financial Sector
U.S. banks continue to consolidate, a process that began in early March. The KRE is now retesting its 50-DMA, which is 3% above its rising 200-DMA. Recently, the KRE broke through 50-DMA resistance on June 8 when the U.S. House of Representatives passed the Financial CHOICE Act, which aims at providing greater flexibility on a liberalized set of policies for capital distribution and SIFI designations, among other changes. However, recent disappointing macro data put a damper on the breakout and the KRE has once again settled beneath its 50-DMA.
Global Financial Sector
Banks are in consolidation stage after a massive 38% move since November of 2016. Since beginning of this year, however, banks have underperformed the S&P500 by 8% YTD. The KRE (regional banks ETF) has started to build a flat base starting early March with a pivot at $59.68 and clear price support at $51 range. The index tried to break through the 50-DMA resistance on April 26 when geopolitical risk arising from the French election subsided. But the index failed to break through as other noise such as the North Korea threat and lackluster Q1 GDP growth (0.7%) threw cold water on the advance.
