Himax outlook, macro weekly wrap, plus M&A thoughts ?3

19:27 07-Aug-20

CenturyLink has priced the $840M of 9-year debt referenced at the end of this note at 3.625%.  This represents substantial savings relative to the 5.625% & 5.125% 2023 bonds being refinanced, and a full percentage point of improvement over the debt it sold less than a year ago, despite the extra year to maturity.  All of this is good, though none of it is very surprising.

However, I think there's another observation to made here.  CenturyLink could have refinanced the 6.75% bonds maturing at the end of 2023 instead of the less expensive ones.  It may be simply that this debt matures first, but the bonds were originally issued by Level 3 and also carry an obligation to repay 101% of principal, plus interest, on a change of control.  Consequently, this refinancing could be taken as sign that some divestment, probably in the Consumer segment, is likely.  The longer we go without seeing the more expensive bonds redeemed, the more certain of that I think we can be.

With the rush of other earnings late this week, I neglected to document the official earnings press release from Himax.  The results were an improvement over the pre-announcement, but the only thing really new was the outlook, and even the financial guidance for around 4 cents of profit from ~$224M of revenue isn't especially important.  Management sees tremendous opportunity in its sensor business from the Google collaboration.  I've already written about how that's where Google's future lies, but first it has to deal with the structural shifts I talk about below.  Pushing its music users to YouTube is NOT an ethical way to do this! 

What matters more to me from the Himax report is the characterization of the existing business trends, which forecasts the strong demand in laptops shifting toward tablets and TVs.  Though tablets are Himax's bread and butter, this is isn't enough to tempt me into HIMX stock.  However, it is still much better display industry information than we got from UDC management.  On one hand, it lends some support to UDC's claim of better demand in July.  On the other, the existing numbers from UDC re-raise my serious concern about Chinese production either not using UDC's emitters.  Time will tell whether or not the issue is simply be timing.  My take is that any upside from tablets for UDC is limited as tablets aren't enough, and the TV thesis has most likely failed. 

The more important takeaway is that the work-from-home boost has crested.  Like the weekly claims, this morning's jobs report was better than feared, but hardly strong.  Furthermore, it is trailing data.  To my eye the most interesting statistic is that although the labor force participation rate hasn't changed much, at 61.4%, the employment population ratio is still down at 55.1%.  The former is the percentage of working age people supposedly looking for a job (through government unemployment programs), whereas the latter is simply the percentage of working age people with jobs.  This signals that the composition of the workforce is either permanently changing, and/or that we're going see a rebound in unemployment.

The payroll data is also worth noting, if unsurprising to me.  Average hourly earnings rose by 7 cents to $29.39 across the private sector, but production pay declined by 11 cents to $24.63.  This is even though the private sector work week decreased by 0.1 to 34.5 hours, while in manufacturing it rose by 0.7 hour to 39.7 hour, and overtime increased by 0.3 hour to 2.8 hours.  Is there anyone who still doubts the decline in American living standards and has faith in plans the country to become an industrial leader?  You can't your cake and eat it too, especially with a MIA Congress at odds with FOMC efforts.  We'll see what the White House can do, but the latest chart from the IMF highlights that only a permanent policy recognition of the structural changes in the labor market would really be effective.

Until that is recognized, companies are going to prosper relative to the average individual, which makes the market still the place to be, no matter how disconnected it is.  In such an environment, I have to wonder if OEG might be Xebec's next acquisition.  It's a much longer shot than the eMagin gamble but M&A is more lucrative than trying to front run the government.  We'll also see what rate CenturyLink gets on its latest refinancing, but otherwise, hopefully that's it for the week.  I'll leave you with another M&A subscriber thought on BGC following the Virtu report:

On 8/7/20 9:53 AM, a subscriber wrote:

Thanks for the update. I used the drop at the open to start a position. Lets hope it re-rates sooner, rather than later. I can dream of VIRT and BGCP merging to create a brokerage powerhouse across equities, treasuries, rates and credit.

On 8/7/20 10:01 AM, Esekla wrote:

That is a very interesting idea, though probably purely a dream.  It wouldn't be a merger, though; BGC's market cap is $1.5b, Virtu's is $4.6b and I've already documented Virtu's cash on hand.  If anything were to happen, BGC selling off Fenics and focusing on building the insurance business, perhaps with Lutnick retiring, seems most likely.