U.S.: Buenaventura Comp Ads ( BVN ), BWX Technologies ( BWXT ), Winnebago Industries ( WGO ), Hilton Worldwide ( HLT ), Tyson Foods ( TSN ), Nabors Industries Ltd ( NBR ), Umpqua Holdings ( UMPQ ), Signature Bank ( SBYN ), Mckesson Corp ( MCK ), Chicos ( CHS ), Deluxe Corp ( DLX ), Electronic Arts ( EA ), Allegiant Travel Company ( ALGT )Developed: Voestalpine ( VAS.AT; VOE AV ), Taisei ( TC@N.JP; 1801 JP ), Teijin ( TJ@N.JP, 3041 JP ), Gazprom ( OGZD.GB; OGZD LI ), KBC Group ( KB.BE; KBC BB ), Genmab ( GEN.DK, GEN DC ), Sino Biopharmaceutical ( SBIO.HK, 1177 HK ), Dollarama ( DOL.CA; DOL:CN ), Boohoo Group ( BOO.GB; BOO:LN ), Asm International ( ASIN.NL, ASM NA ), Myob Group( MYO.AU ; MYO AU ), Ryanair Holdings PLC ( RYA.GB; RYA LN )
Emerging: Natura Cosmeticos ( NAT.BR; NATU3 BZ ), Intau Unibanco Holding ( IU4.BR; INTUB4 BZ ), E-Mart ( EMA.KR; 139480 KS ), Mediatek ( MDT.TW; 2454 TT ), SK Hynix ( HYI.KR; 000660 KS )
Stocks worth focusing on in this week’s Global Laggards:
U.S.
Hilton Worldwide ( HLT ) – Consumer Cyclical ( $23B market cap ) – Hospitality company operating more than 5,300 properties (~879,000 rooms) through 14 brands across 106 countries. Its brands include Hilton Hotels & Resorts, Waldorf Astoria, Embassy Suites, and Hampton.
The stock has been trading along its 10-WMA since February and broke below its 40-WMA after reporting earnings in July. It is testing the lower end of its current consolidation at $74.84; should this break, the next level of support is ~$67.
HLT’s RS line has been declining from late April, with a current RS Rating of 39 (poor). It has a three-year earnings growth rate of -3% and an EPS Stability Factor of 26, which is the second weakest among its industry group peers. Its after-tax margin of 9.2% in the latest quarter was among the lowest of all U.S. lodging stocks.
The stock’s A/D Rating has remained negative for eight out of the past nine weeks, indicating ongoing distribution.
Unimpressive Guidance: after exceeding EPS expectations over the last several quarters, HLT’s Q2 EPS was in line with consensus expectations. RevPAR guidance for 2018 remains unimpressive at 3-4% y/y. Management expects Q3 system-wide RevPAR growth of 2.5-3.0% y/y, which is below the full-year guidance range.
Vulnerable to Cycle Downturn: HLT generates roughly 70% of EBITDA from U.S. hotels and we continue to believe that the U.S. lodging industry is near its peak. In 2019, supply growth in the U.S. lodging industry will surpass demand growth for the second time in 10 years.
HLT’s development pipeline continues to grow; it had a pipeline of 362,000 rooms (2,370 hotels) at the end of Q2. Slightly less than half of this pipeline consists of developments for the U.S., and this leaves HLT vulnerable to RevPAR underperformance in the coming years.
Winnebago Industries ( WGO ) – Consumer Cyclical ( $1B market cap ) – Manufactures recreational vehicles used in leisure travel and outdoor activities. 9M 2018 revenue by segment: towable, 57%; motorized, 43%.
WGO shares are trading below their 40- and 10-WMA after Q3 earnings in June.
We view near-term support at ~$35. Next support is near $29-30, suggesting 20% downside potential. Stop Loss at $43-44 (40-WMA).
WGO has reported declining sales for the past two years in the motorhome segment. Motorhome contribution to total revenue declined from 91% in FY 2016 to 43% as of 9M FY 2018.
In Q3 FY 2018, the Company reported 3% y/y growth in the motorhome segment revenue and a 36% y/y decline in segment adjusted EBITDA.
On May 31, the Trump Administration announced a 25% tariff on imported steel and a 10% tariff on imported aluminum, both of which are critical raw materials for motorized and towable RVs. This led to a decline in the stocks of RV companies: Thor Industries (-4.9%), LCI Industries (-4.4%), Winnebago Industries (-4.2%). The increase in commodity prices will create inflationary cost pressures for the companies and will hamper profit margins.
On July 24, WGO declined 8.8% after Crane (
), a fiber reinforced plastic panel supplier to the RV industry, reported a 18% decline in its RV sub-segment, citing channel inventory correction.
Total RV wholesale shipments in North America are expected to be grow 7.5% in 2019 and slow to 0.5% in 2020, led by the decline in the motorhome segment.
Consensus expects revenue to decelerate going forward; EPS growth estimates for FY 2018 and FY 2019 have been revised down to 15% and 25%, respectively.
Emerging
SK Hynix ( HYI.KR; 000660:KS ) – Technology ( $51.1B market cap ) – The company is a manufacturer of memory chips such as DRAM, NAND flash, and SRAM chips. DRAM chips accounted for 76% of 2017 revenue. Competitors in this cyclical industry include Western Digital ( WDC ), Micron Technology ( MU ), and Samsung Electronics ( SGL.KR; 005930:KS ).
Shares of makers of memory chips have been under selling pressure and have broken below key support levels amid ongoing concerns over peaking memory prices.
Traditionally, the third quarter represents peak season for memory makers, but the global NAND flash market has remained in oversupply during the quarter, according to a report published by Taiwanese media on September 6. Headwinds include ramping 64- and 72-layer 3D NAND flash production and softer demand from the notebook and smartphone end markets. As a result, NAND flash contract prices are anticipated to decline 10-15% sequentially in Q3 and fall another 15% in Q4. The report warned that DRAM contract prices have also shown signs of being past peak levels. NAND flash and DRAM memory prices are expected to face downward pressure through the first half of 2019.
The report noted that SK Hynix and Samsung Electronics plan to delay their respective capacity expansion plans due to softer demand for memory chips.
Samsung, the largest player in the memory industry, is slowing down the pace of expanding its 3D NAND chip output, with new production capacity unlikely to go online until next year. It has also delayed its plans to build additional capacity for DRAM chips in Hwaseong and Pyeongtaek.
SK Hynix has decided to slow down the pace of its new 3D NAND chip capacity expansion project.
As a result of inventory build outs, Samsung has begun shipping 3D NAND memory chips externally. Samsung was previously using production of these chips for its own SSDs and other products.
Per inSpectrum, August monthly memory contract pricing for DRAM (8Gb DDR4) was flat m/m and up 27% y/y. NAND contract pricing (128Gb TLC) fell 3.6% m/m and was down 41% y/y.
Despite having strong fundamentals, shares of SK Hynix have broken below the 200-DMA for the first time since mid-2016. Between June 2016 and June 2018, SK Hynix shares recorded a gain of +300%, reaching a peak of KRW 97,700 on May 25.
Shares are 19% off highs despite the strong fundamental profile of the Company (EPS Rank: 97). EBITDA margin is expected to reach a record 70% this year.
RS Rating has deteriorated from 77 eight weeks ago to 56.
Weak A/D Rating of D-.
Deteriorating Industry Group Rank: SK Hynix belongs to the Computer-Data Storage group, which is currently ranked 68. Eight weeks ago, it was ranked 10th.
Per consensus estimates, EPS growth is expected to increase 51% in 2018 and fall 4% y/y in 2019. Growth and margins may have reached peak levels in H1 2018.
We believe shares of SK Hynix can be shorted as they break below the 200-DMA and the KRW 80,000 level. Should conditions in the memory industry continue to deteriorate and the stock continue its downward trajectory, key levels to watch include ~KRW 73,000 and ~KRW 55,000.
Investors with long-term time frames should consider trimming positions.
