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In an announcement released after markets closed on Tuesday, the U.S. Department of Justice said that its “preliminary determination” in a trade case brought by Boeing Co. (NYSE: BA) against Canadian aircraft maker Bombardier concluded that Bombardier received subsidies equal to 219.63% on its sale of new planes in the United States and that a countervailing duty of that amount was due. The decision was expected but the size of the tariff was a bombshell.
The actual dollar value of the April 20 sale of 75 with an option on another 50 Bombardier CS-100 passenger jets to Delta Air Lines Co. (NYSE: DAL) was not disclosed, but at list prices the 75 planes were valued at $5.6 billion. Adding 220% to that would run the total to around $12.3 billion.
That total is about double the $6.2 billion list price total for 75 Boeing 737-700s, the plane that Boeing had named in its bid for the Delta business. The first of the CS-100 deliveries to Delta is due next April.
In its complaint, Boeing had asked for a tariff of 79% to offset the value of the subsidies the company claimed the Canadian government made to Bombardier, subsidies that Boeing claimed are not allowed under international trade rules.
Commerce Secretary Wilbur Ross said:
The U.S. values its relationships with Canada, but even our closest allies must play by the rules. The subsidization of goods by foreign governments is something that the Trump Administration takes very seriously, and we will continue to evaluate and verify the accuracy of this preliminary determination.
The ruling was handed down by the U.S. International Trade Commission’s (ITC) Enforcement and Compliance Division and a final decision is currently scheduled to be announced on December 12. The Commerce Department will make a final determination by December 18 and, if it affirms the preliminary ruling, the ITC will issue its final ruling on February 1, 2018. A week later the ITC will issue the order and the tariff, if it is affirmed all along the way, will be imposed.
There are several possible paths of appeal for Bombardier now that the preliminary determination has been made. First, tariffs could be imposed and held in escrow while Bombardier appeals, as it surely will. The appeal would be made in the U.S. District Court in Washington, D.C., or in the U.S. Court of International Trade.
Alternatively, the Canadian government could appeal to a NAFTA review board. The review board would be made up of representatives from the United States, Canada and Mexico. This would probably not be Boeing’s first choice but may be Bombardier’s.
The least desirable outcome, probably for both Boeing and Bombardier, is an appeal to the World Trade Organization (WTO) that could take years to resolve.
In its statement, Bombardier said:
Looking beyond today’s and next month’s preliminary decisions, the International Trade Commission will determine next year whether Boeing suffered any injury from the C Series. Because Boeing did not compete at Delta and because Boeing years ago abandoned the market the C Series serves, there is no harm.
Boeing’s statement concluded:
The process that will continue to play out over the next several months at the International Trade Commission and Commerce is the longstanding, transparent course for examining and addressing situations where products are ‘dumped’ into the United States at below-cost prices for the purposes of gaining market share. We have full confidence that this will continue to be a fair and fact-based investigation, and we look forward to its conclusion early next year.
The Washington Post cited Richard Aboulafia, an aerospace industry analyst with the Teal Group, who described Boeing’s action as a “self-inflicted wound” that could damage the company’s business relationships with the Canadian military and with Delta:
This is a dangerous moment for Boeing. They clearly saw this as an opportunity to walk in tandem with Donald Trump and appeal to his nationalist economic base.
Canadian Prime Minister Justin Trudeau already has indicated that a potential deal for Boeing fighter jets could be scrapped as a result of the trade case, and British Prime Minister Theresa May raised concerns with President Trump regarding some 4,000 jobs at Bombardier’s Belfast wing assembly plant.
Boeing’s shares traded up about 0.4% Wednesday morning, at $254.70 in a 52-week range of $129.86 to $259.30.
BOEING WINS TARIFF FIGHT
It is no secret that the bull market is now well into its eighth year. When analysts issue or reiterate Buy and Outperform ratings, they are currently implying upside of 8% to 15% in the larger S&P 500 index companies. There are cases where the upside price targets can imply higher gains, and there are many instances where the upside targets are only 5% or even less above the current share price.
Credit Suisse has updated many of the targets and valuations for its large cap precious metals producers, and even as some targets have been trimmed the implied upside comes with a range of 22% to 35%. The firm’s updating estimates for the third quarter and beyond were to be ahead of the Denver Gold Forum. They are calling for capital allocation to projects and for more potential in M&A with stronger sector balance sheets and an ability to add value in the existing portfolio.
What has happened in the past year is that the gold-mining stocks have by and large come down considerably from their 52-week highs. Specifically, the key exchange traded funds that track gold have rocketed higher in 2017 but are down handily from a year ago. The key gold price ETF (GLD) is up 12% so far in 2017 but down over 3% from a year ago. The key gold mining stock ETF (GDX) is up 12% year to date but down 15% from this time last year. It is normal to see analysts trim target prices after big sell-offs. After all, you can’t expect a whole group of stocks to easily rise 50% even if they have pulled back handily.
24/7 Wall St. has included trading history and how each new Credit Suisse target price compares with the Thomson Reuters consensus analyst target. Additional commentary has been included as well. Most of the firm’s investment views come with risks that range from commodity prices to operational to geopolitical.
Agnico Eagle Mines Ltd. (NYSE: AEM) was worth over $10.6 billion, and Credit Suisse’s target price went to $59 from $64. This is still about 28% higher than the prior closing price of $46.14. Its rating at Credit Suisse is Outperform, and the firm’s $59 target price is above the consensus analyst price of $56.71. Agnico Eagle Mines has a 52-week trading range of $35.05 to $56.08.
Agnico Eagle is considered a top pick from Credit Suisse. The firm’s report noted:
Agnico Eagle is a top pick for its strong exploration and project pipeline, strong balance sheet, track record and valuation which is more attractive versus peers on net asset value than investors realize due to Agnico Eagle mining below reserve grade (provides tailwind for future cash flow) and robust resource base which has higher than usual potential to convert into reserves over time. Commodity prices are the key risk to our view.
Barrick Gold Corp. (NYSE: ABX) was last seen trading at $16.33. Credit Suisse has an Outperform rating, and its prior $22.50 target price was trimmed to $22.00. This still implies upside of 35%, and its consensus target price is only $20.22. Barrick’s market value is $19 billion. Its shares have traded in a range of $13.81 to $20.78 over the past year.
A popular feature of Amazon.com Inc.’s (NASDAQ: AMZN) Alexa voice-control software on the company’s Echo and Echo Dot devices is its ability to understand commands to play music. Amazon has now made that feature available on smartphones running either iOS from Apple or Google’s Android.
The company rolled out the feature Tuesday morning. It allows users to ask for music based on genre, decade, mood, tempo, activity or even a snippet of a song’s lyrics if they can’t remember its name. Amazon Music app users can access the feature with the push-to-talk button on their mobile devices after they update the app.
Will this give consumers another reason to sign up for Amazon Music Unlimited at an annual subscription rate of $79 for Amazon Prime subscribers ($99 a year)? Non-Prime subscribers pay $9.99 a month. Amazon also offers the Music Unlimited service for $3.99 a month on its Echo, Echo Dot and Tap devices, but only on the one device.
Streaming music has now become the largest driver of recorded music revenues. The Recording Industry Association of America (RIAA) reported recently that in the first half of 2017 streaming revenues accounted for 62% of the total market for recorded music. That’s $2.5 billion on total revenues of $4 billion.
By far the largest share of the industry’s revenues from streaming — $1.71 billion in the first six months of this year — comes from paid subscriptions. According to a report from music industry researchers at Midia, Amazon Music is the third largest music streaming service in the world, with a 12% share of the market compared to 40% for Spotify and 19% for Apple Music. The firm reported that 35% of Prime subscribers also pay for Music.
Adding voice-control to Amazon Music on mobile devices sets the table for an expected expansion of streaming music subscribers in countries like Japan and Germany, where sales of physical CDs remain the music industry’s largest revenue generator.
While adding Alexa to its mobile app may seem like a small thing, it could well turn out to be a big deal for Amazon in the months ahead. We’ve said it before and we’ll say it again: no one ever got rich betting against Amazon.
Many on Wall Street feel this top company has virtually no competition in its space. Abiomed Inc. (NASDAQ: ABMD) engages in the research, development and sale of medical devices to assist or replace the pumping function of the failing heart. It also provides continuum of care to heart failure patients.
The company offers Impella 2.5 catheter, a percutaneous micro heart pump with integrated motor and sensors for use in interventional cardiology. Its Impella CP provides partial circulatory support using an extracorporeal bypass control unit. The Impella 5.0 catheter and Impella LD are percutaneous micro heart pumps with integrated motors and sensors for use primarily in the heart surgery suite, while the Impella RP is a percutaneous catheter-based axial flow pump.
Abiomed has continued to post a string of positive catalysts, and the Jefferies analysts noted:
The company received a premarket approval (PMA) application clearance for Impella RP to treat right side heart failure. The PMA removes the 8000 patient cap and removes adoption hurdles for hospitals. The accelerated adoption that we expect should result in an annual opportunity closer to $375 Million per year in revenues and supports upside to our current forecasts (company did $475 million in revenues over the last 12 months). The analyst believes Abiomed remains his best growth story.
The $175 Jefferies price target is well above the $164 consensus target. The stock closed Monday at $160.31 a share.24/7 Wall St.
5 Blue Chip Stocks to Buy That Pay at Least 5% Dividends
This is a top large cap biotech pick with big upside potential. Celgene Corp. (NASDAQ: CELG) is a very profitable biopharmaceutical company that develops and markets therapies for the treatment of hematologic malignancies, solid tumors and inflammatory conditions. The company’s key growth driver and contributor to the top line is Revlimid for the treatment of multiple myeloma and myelodysplastic syndromes.
Its blockbuster blood cancer drug Revlimid continues to dominate. Pomalyst sales also continue to be solid, and cancer drug Abraxane is growing at a respectable rate. So the company continues to have a strong lineup of top-selling drugs. Top Wall Street analysts feel that Celgene is best large-cap de-risked growth story, with possible 15% to 20% earnings growth over the next five years, two new growth drivers (new oral pills for UC and Crohn’s), and the large pipeline of more than 35 partnerships of early-stage next-generation cancer drugs.
The company continues to show promise partnering with peers, and the analysts commented on that:
Celgene’s partner Acceleron Pharma Inc. (NASDAQ: XLRN) hosted an R&D day to detail the long term plans for luspatercept, which Celgene has commercial rights on and is not well accounted for in consensus. We believe the company’s long-term partnerships with 25+ companies are nearing potential to bear fruit and combined represent $50-$90/share net present value.
Jefferies has set its price target at $160. The posted consensus price objective is $153.48, and the stock closed most recently at $144.94.
It has been widely speculated that a merger of T-Mobile US Inc. (NASDAQ: TMUS) and Sprint Corp. (NYSE: S) would create a very powerful number-three wireless telecom carrier in the United States. T-Mobile was worth about $53 billion and Sprint about $34 billion prior to Monday’s open.
Now it seems that a reality check is settling in over what Sprint actually may be worth in a merger. While it is unconfirmed yet that the buyout premium hope was exaggerated, it should temper those who were hoping Sprint would see a huge premium.
T-Mobile has managed three years of operating profits and net income from ongoing operations. On the other hand, Sprint has struggled for profits as the number-four player and has had massive debt and been under Softbank for some time now.
24/7 Wall St. expected this merger to be a true one rather than a big premium acquisition. After all, Sprint’s bargaining power as a standalone and holdout may be compromised due to its operating history and to its balance sheet with its $34.5 billion in long-term debt still larger than Sprint’s annual revenues.
Now CNBC’s David Faber has reported that T-Mobile and Sprint have entered into due diligence in what would be a stock-for-stock transaction that would make majority owner Deutsche Telekom the larger parent company.
According to the CNBC report, the exchange ratio of shares would be more of an at-the-market offer. That would crush the hopes of a large cash buyout or a big stock premium deal. Such a deal also reportedly may not occur for close to another month.
One issue that Faber did highlight here was that the minority shareholders would have an ownership in the mid-thirties as a percentage of the combined company. When you compare the market caps that implies a lack of a major premium.
Bloomberg also reported that majority owner Softbank would be willing to accept a deal at or close to the current Sprint valuation.
T-Mobile US’s shares were last seen down 1.1% at $63.33 on Monday, in a 52-week trading range of $44.91 to $68.88. Its consensus analyst price target from Thomson Reuters is $71.96.
Sprint shares were taking it more on the chin due to a lack of hope for a big premium. Sprint shares were down 6.5% at $7.97 on Monday morning. It has a 52-week range of $5.83 to $9.65, but the consensus analyst target for Sprint was last seen at only $7.28.
Investors have another consideration here. Sprint shares entered 2017 at about $8.50, but this was a $6.27 stock on the 2017 presidential election day. Its shares popped immediately to $7.11 when it was deemed that regulatory reviews from the U.S. Department of Justice and Federal Communications Commission under the new administration likely would be looser than the tighter merger regulations under the Obama administration.
A lot of upside already had been factored in long before this merger seems to be finally coming to a head. Now that upside is being tempered, there are still many unknowns about the actual price and how the current administration actually will treat a merger of the third and fourth largest carriers.
SEPTEMBER NEWSLETTER 4
Over the past several years, the two dominant internet companies have moved into one another’s businesses. The activity seems to be more pitched recently. Facebook Inc. (NYSE: FB) said it will enter the online video business, which has been ruled by Alphabet Inc.’s (NASDAQ: GOOGL) YouTube.
According to a blog post by Daniel Danker, the Director of Product for the new service called Watch:
We’re introducing Watch, a new platform for shows on Facebook. Watch will be available on mobile, on desktop and laptop, and in our TV apps. Shows are made up of episodes — live or recorded — and follow a theme or storyline. To help you keep up with the shows you follow, Watch has a Watchlist so you never miss out on the latest episodes.
Watch is personalized to help you discover new shows, organized around what your friends and communities are watching. For example, you’ll find sections like “Most Talked About,” which highlights shows that spark conversation, “What’s Making People Laugh,” which includes shows where many people have used the “Haha” reaction, and “What Friends Are Watching,” which helps you connect with friends about shows they too are following.
Facebook said the new product was aimed at shows that have a lot of fans on Facebook, shows that have a constant theme over their installments and sports. Facebook will fund some of the shows that will appear on the service.
Competition with YouTube is an uphill battle. It has hundreds of millions of visitors worldwide who visit it each month. These people watch tens of billions of videos. For Facebook to match the traffic seems impossible.
There have been several failed attempts by the two companies to compete with one another. One launched with great fanfare was Google+, which was meant to compete directly with Facebook. It has gone away. Facebook’s ads are targeted directly at users with specific interests. Google’s ad system has been based on the same sort of targeting for years. Both companies have means for users to speak to one another directly, Gchat and Facebook Messenger. Each has a calendar function. The overlap, in smaller projects, is more evidence of rabid competition.
It is no wonder the two companies are locked in competition beyond Facebook’s social network and Google’s search. The two are known as the “duopoly” that dominates online advertising to the level that they smother many other companies in the industry. Each would rather have this become a monopoly, at least to the extent that such moves would not catch the interest of regulators.
Facebook Watch is in its infancy, and as such may fail dismally. That will not keep each company from trying to move into the other’s core businesses.