TheChek News Flow

* Features: 1) Cautious on GRUB: Online food-ordering service has seen strong revenue and profit growth since 2013, but new rivals with deeper pocks could grab market share and dent earnings; 2) Positive on PHO, CGW, TTEK, XYL: There isn't a single dominant company to bet on in the water sector, but these exchange-traded funds and companies are a good way to gain exposure to it; 3) Positive on DIS: Company's film and parks divisions are doing well, and an upcoming ESPN service viewers will be able to access outside of cable packages should boost earnings growth next year.

Exclusive: Disney’s Iger On Movies, Parks, ESPN

Walt Disney’s chief tells Barron’s about Beauty and the Beast, plans for China and its answer to cord-cutters.

This was supposed to be an in-between year for films at Walt Disney (ticker: DIS).

In fiscal 2016, which ended last September, the company set the bar high with the record-breaking Star Wars: The Force Awakens, plus Captain America 3 and a surprise billion-dollar hit, Zootopia. Studio revenue jumped 28% to $9.44 billion. Next year will bring dependable hits from the Star Wars and Avengers franchises.

This fiscal year’s slate looks sparse by comparison. But already, Doctor Strange, based on a minor Marvel character, has made $677 million worldwide. Moana, a new princess release, brought in $596 million. Rogue One, a Star Wars spinoff, did over $1 billion. The consensus estimate for fiscal 2017 studio revenue has crept up to $8.78 billion from $8.5 billion over the past year.

Opening today, Beauty and the Beast has the makings of another outperformer. The trailer was viewed 127 million times in the first 24 hours, breaking the record set by last year’s Star Wars revival. The closest comparison would seem to be another live-action (that is, nonanimated) fairy tale film, Cinderella, which opened two years ago and brought in a solid $544 million. But perhaps not.

“The original, animated Cinderella came out before I was born,” Disney CEO Robert Iger, 66, tells Barron’s. “With Beauty and the Beast, you have parents today who grew up watching the animated movie.” Cinderella released in 1950 and Beauty and the Beast, 1991. Another trend that bodes well is the recent popularity of musicals. “There was Frozen and Moana for us but also La La Land,” says Iger. “I’m not one to predict but we think we have a solid hit on our hands.”

Remaining releases this fiscal year include Guardians of the Galaxy 2 and Pirates of the Caribbean 5 in May, and Cars 3 in June.

The parks business is a standout performer. After 5% growth last year, revenue there is expected to rise 8.7% this year on ticket price hikes, park expansions, and the swelling contribution from Shanghai Disney, which opened last June. Disney’s goal there is to bring in 10 million visitors the first year. “We just hit eight,” says Iger. That compares with just under 20 million yearly visitors at Disneyland in California and Magic Kingdom, part of the Disney World cluster of parks in Florida.

It bodes well that Disney is already expanding in Shanghai, announcing in November it will add a Toy Story Land. “We have great land there and ambitious plans we haven’t announced,” says Iger. “And there are opportunities for other places in China given the response we’ve gotten from the Chinese people.”

While casual Disney observers focus on the movies and parks, Wall Street pays careful attention to a bigger moneymaker: television, especially the lucrative ESPN sports network. Cable profits are expected to dip this year, in part because of a big step-up in the cost of pro basketball rights. Analysts are more concerned with a slow leak in the number of ESPN cable subscriptions, although rising fees charged to cable carriers are expected to keep overall revenue there rising.

Later this year, Disney will launch an over-the-top ESPN service, so-called because viewers can sign up outside of their cable packages. It will use technology from BAMtech, spun off from MLB Advanced Media, the Internet arm of Major League Baseball. Disney announced in August it was buying a one-third stake in BAMtech and has the option of taking control in the future.

“You’re seeing a lot of disruption in television,” says Iger. “Some people want their television more mobile-friendly. Some new entrants offer an over-the-top experience that’s modern and satisfying. Young people especially are less interested in the big bundle.” The new ESPN offering could help scoop up some of those younger, bundle-averse sports fans.

Iger points out that ESPN is already being included in most other over-the-top offerings. For example, Alphabet (GOOGL) last month announced a so-called skinny bundle for live TV with 40 channels including the major networks and ESPN, all priced at $35 a month. “A lot of the platforms out there now are only starting to be counted by Nielsen,” says Iger. “That’s going to help.”

All told, Disney’s earnings per share are expected to rise only 4% this year to $5.94, which breaks a long string of double-digit yearly growth and leaves shares, recently $111.71, at 18.8 times earnings. But next year the company is expected to return to 13% growth.

Investors seem cheered by recent developments. Shares are up 21% in six months, versus 12% for the Standard & Poor’s 500 index. In a note last month, JPMorgan analyst Alexia Quadrani called the stock “more beauty than beast” and reiterated a price target of $124 by year’s end, suggesting 11% more upside.

Canada Goose Shares Could Fly South

The luxury-parka maker came public last week and swiftly acquired an outsize valuation. But shifting fashion trends could clip its wings.

Canada Goose Holdings turned its $1,000 down parkas into a hot fashion item favored by rappers and movie stars. Turns out the company is no featherweight on Wall Street, either. Investors eagerly bid up Canada Goose shares after last week’s initial public offering, endowing the company with a market value of $1.8 billion.

Buyers, beware.

Canada Goose (ticker: GOOS) looks richly priced at $17.23, or 39 times adjusted net income of 44 cents a share for the nine months ended Dec. 31. That’s a rich valuation for a one-product company with potential fashion risk. Earnings for the fiscal year ending this month are likely to be lower than 44 cents, given a seasonably weak March quarter.

“The Canada Goose valuation is related to the scarcity of growth in consumer retail,” says Faye Landes, a co-founder and general partner of Back to the Future Ventures, a New York retail consulting firm. A former equity analyst, Landes speculates that the popularity of the puffy coats with an Arctic disk logo among Wall Street types probably helped the IPO.

Canada Goose, which is 57%-owned by Bain Capital, issued 20 million shares at 17 Canadian dollars, or roughly $12.75, apiece. The stock began trading Thursday on the Toronto and New York stock exchanges.

The company’s success is a spot of warmth in a chilly apparel landscape. Sales rose 41% to $264 million in the nine months ended Dec. 31. Adjusted net income increased 51% to $44 million (the company reports in Canadian dollars, which we have translated into the U.S. equivalent). The growth reflected the opening of a retail store in Manhattan in late 2016 and an increasing online presence.

Given its high prices and a dearth of discounting, Canada Goose had an outsize Ebitda (earnings before interest, taxes, depreciation, and amortization) margin of 26.2% in the nine months ended Dec. 31—double those of Under Armour (UA) and Deckers Outdoor (DECK), which sells Uggs boots. Its margins will come under pressure if the coats’ popularity fades. Canada Goose is expanding into lighter-weight jackets and looking into fleece and footwear.

Deckers and Under Armour show the risks in apparel companies. The former has seen its shares cut almost in half to $54 since a 2014 high as sales of Uggs have flattened. Shares of Under Armour, a maker of upscale athletic apparel, sank to $18 from $45 last April as growth slowed.

Landes has no view on the stock, but says there are two questions to ask about Canada Goose: “How much can it grow given its price points?” And how long is the replacement cycle? Since the coats are so well-made, owners might wear them for a decade.

Yet the nature of faddish fashions—and Canada Goose—is that the coats’ cachet isn’t likely to last. The company might have a strong 2017, but its stock discounts many years of success—and not much risk.

Dutch Vote Allays Fears of a Euro Breakup for Now

Dutch voters keep populist at bay, kicking off a rally in the euro and stocks. Next up: France and Germany

European markets cleared the first of a cluster of potential political pitfalls last week when the Netherlands’ incumbent center-right party saw off an anti-immigration, anti-euro opponent in the country’s general election.

When the results were announced on Thursday, the euro rose above $1.07 to its highest level against the dollar since early February. Stocks gained across the region, with the Stoxx Europe 600 index rising more than 2.6% to hit a 52-week high.

The Dutch vote was widely regarded as a litmus test of populist party support in Europe ahead of elections in France and Germany, the euro zone’s two biggest economies, later this year. Italy may also go to the polls, though no date has been set so far.

Dutch Prime Minister Mark Rutte’s main challenger was Party for Freedom founder Geert Wilders, who wants the Netherlands to halt Muslim immigration and quit the European Union. Despite his victory, Rutte won by a narrower margin than in his previous election in 2012, as he gave up votes to second-place Wilders and several other upstart political parties.

Daniel Adams, a senior investment analyst at British fund manager Psigma Investment Management, says that although there was some trepidation ahead of the Dutch vote, Wilders had only a slim chance of heading a government, even if he had drawn the most votes.

“That’s mainly because of the way Dutch politics works,” he says. “With no single party likely to win outright, the one with the most votes would have to form a coalition. It seems nobody was willing to team up with Wilders.”

IN FRANCE, WHICH GOES to the polls at the end of April, the situation is slightly different. Far right National Front leader Marine Le Pen, who is campaigning for France to ditch the euro and pull out of the EU, leads most recent opinion polls with around 27% of the vote. Her closest rival is Emmanuel Macron with around 25%. Macron was previously Socialist President François Hollande’s economy minister and went on to launch the centrist En Marche political movement.

Trailing those two, with around 19%, is former conservative prime minister François Fillon, whose popularity has been battered by allegations that he used public money to fund fake jobs for family members. He has denied any wrongdoing.

In France, as in the Netherlands, the voting system is expected to tell against the far right. Unless Le Pen can win an outright majority in the first round there will be a second-round run-off between the two top candidates. While she is expected to make it through to the final round, polls suggest that the vote will go to her opponent.

Her father, Jean-Marie Le Pen, who previously led the National Front in France, made it through to the second round of the presidential election in 2002, but lost at that point in a landslide victory for conservative incumbent Jacques Chirac.

THE GERMAN ELECTION is scheduled for the end of September, but populists have so far made very little headway against Chancellor Angela Merkel. Her center-right Christian Democratic Union leads the polls, with the far right Alternative for Germany party trailing in third place, a good distance behind the center-left Social Democrats in second.

Adams says that although the risk of a populist party victory in Europe seems unlikely, it has weighed on the region’s stocks. With the downside already priced in, Wilders defeat was bound to send stocks higher as the threat to the euro and the EU diminished.

But with other key elections still to come in Europe and the United Kingdom expected to launch the formal two-year process to leave the EU later this month, European equity values continue to lag behind the U.S., where markets have hit record highs in recent months. In other words, European stocks offer considerable upside if the region’s political concerns ease.

Adams says U.S. stocks currently trade on a price/earnings ratio of 18 times on average net-profit margins of around 10.5%, while in Europe the P/E is 14.5 on margins of about 7%. “You’ll probably get some sort of catchup trade, particularly in some of the previously distressed areas like financials,” Adams says.

In the U.K., he says Brexit and the government’s expected launch of the so-called Article 50 initiating the process of leaving the EU have been well flagged and won’t have much impact. “You might get some volatility in currencies initially, but I would have thought most of it is priced into the market now,” he says.

Adams says he is currently neutral on British stocks. “We took some profit going into Brexit, and then on the way out we were adding risk,” he says. “We’re kind of balanced now.”

- Should not read too much into the change in G20 communique language; wanted to ensure that it reflected the issues that were discussed

Watered-down commitment to free trade reflects Trump’s America First agenda

Finance ministers from the world’s biggest economies have dropped pledges to renounce protectionism in a meeting marked by tension over trade between the US and China.

G20 finance ministers meeting in the German resort town of Baden-Baden noted the importance of trade to the global economy, but dropped tougher language from last year that vowed to “resist all forms of protectionism”.

The new communique said: “We are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth.”

The watered-down commitments on free trade reflected the anti-globalisation mood that Donald Trump has brought to Washington and came in the first G20 meetings between Steven Mnuchin, the new US treasury secretary, and his foreign counterparts.

While representatives from China were particularly vocal in urging forthright language on protectionism, the US was unwilling to comply, in a turnround from America’s traditional position as a standard-bearer for globalised capitalism.

Japan was said to be one of the few countries that struck a more supportive tone towards the US approach.

Wolfgang Schäuble, Germany’s finance minister, said: “It will take some time for the US finance ministry to come forward. It may be sensitive for some, for others less so. We really tried on all levels.

“We have reached an impasse,” he said. “That’s why at the end we said nothing on [avoiding protectionism], because it meant different things when we said we didn’t want protectionism.”

The mood from the US towards the G20 has shifted dramatically since the arrival of Mr Trump, whose America First economic strategy clashes with traditional promises that G20 leaders have willingly signed up to in the past. It heralds a harsher approach in US relations with its counterparts — as seen this week by the tense meeting between Mr Trump and Angela Merkel, the German chancellor, on Friday.

The haggling over the trade language went late into the meeting, underscoring strong feelings on both sides of the debate.

As late as noon on Saturday, there was speculation that the statement would make no mention of trade at all. The compromise was proposed by the Canadian delegation and backed by the presidency, held by the German delegation. Britain and other European delegations had sought strong language committing to a rules-based multilateral trading system.

However, several delegations wanted to avoid forcing the US Treasury into a corner so soon after Mr Mnuchin had taken office.

- As part of effort to comply with its $7.2B mortgage settlement with the US govt, DB is offering favorable financing terms to help investors and banks buy delinquent home loans. The settlement allows DB to get credit toward the settlement by lending to other entities that buy delinquent loans as long as those loans are later modified.

There were more hedge-fund closures last year than during the 2009 recession, according to data provided by HFR.

In 2016 1,057 funds shut down — slightly higher than the 1,023 funds that closed in 2009, although still well below the 1,471 that shuttered in 2008 during the onset of the financial crisis.

The closures came as several large public pension funds pulled their investments in hedge funds, saying that the funds’ subpar performance did not merit the high fees they charged.

“The hedge fund industry fee structure continues the process of evolving to meet increased investor demands,” Kenneth Heinz, president of HFR said in a statement Friday.

And despite the hedge fund industry topping $3 trillion for the first time ever, the number of new hedge funds launched fell short of crisis-era figures.

There were 729 hedge fund launches in 2016, fewer than the 784 opened in 2009 and dramatically less than the 968 launches in 2015.