Wheeling and dealing figured heavily in the fortunes – and misfortunes – of local stocks this year, and that story will continue for many into 2018.
The biggest deal was the one that didn’t happen. Sprint failed to merge with T-Mobile and now must go it alone against three larger, better financed rivals in the highly competitive wireless business.
Leawood-based Euronet Worldwide similarly failed in its bid to buy rival MoneyGram International, but its chances to land a deal may not be over.
Great Plains Energy begins the year with public hearings on its merger with Topeka-based utility Westar Energy and a key regulatory decision on the deal is due in early June. This comes after an earlier merger plan failed in front of regulators.
Cerner failed to close its $10 billion deal to provide the U.S. Department of Veterans Affairs with electronic health records but still expects to sign one. And rumors about a deal with Amazon’s web services helped lift Cerner shares in late November, but investors wait for confirmation.
Growth in Kansas City Southern’s rail business rides on President Donald Trump’s free trade dealing with Mexico in negotiations over the North American Free Trade Agreement.
The year that ended Friday was a mixed bag for local stocks, with roughly half losing money and half posting at least some gain. Only nine of 23 area stocks posted double-digit gains as Wall Street recorded a banner year.
The Dow Jones industrial average gained 25.1 percent, the broader Standard & Poor’s 500 index rose 19.4 percent and the tech-company heavy Nasdaq lead the pack with a 28.2 percent increase for the year. Smaller company stocks generally fared less well, represented by the Russell 2000 index’s 13.1 percent climb.
A merger between Sprint and T-Mobile would have changed everything in the wireless industry. Instead, the deal’s failure changed everything for Sprint and perhaps for wireless consumers.
A merger would have saved an estimated $30 billion that Sprint and T-Mobile could have funneled into a combined battle against industry leaders Verizon and AT&T.
Instead, Sprint CEO Marcelo Claure declared the Overland Park-based company will spend billions more each year to “once and for all do the right investment” in its network. It’s unclear where that money will come from especially as Sprint has billions of dollars of debt coming due in the next few years.
Craig Moffett of Moffett Nathanson Research said the end of the merger may spell the end of cheap deals that wireless consumers have been enjoying.
“Sprint is the most important player in our story here,” Moffett said to kick off a discussion of the wireless industry’s post-merger future.
Moffett reasons that tight finances means Sprint will have to take a “more rational and sustainable approach” to its prices on cellphone services and phones. The company had been an aggressive discounter leading up to the possible merger with T-Mobile.
Just before the merger talks ended, Sprint bumped its price for a single unlimited line by $10 amonth. Claure and finance chief Tarek Robbiati also have since signaled that price increases figure in Sprint’s 2018 strategy.
Investors have seen a steep discount on their stock since news of the impending death of the T-Mobile talks. Sprint shares peaked on Sept. 18 at $8.52 and finished the year at $5.89, down 30 percent for the year. It was a difficult reversal of the 132.6 percent gain Sprint shareholders saw in 2016.
But Moffett said investors shouldn’t count out a future deal with T-Mobile completely, and he cited the joint announcement the companies made that talks had ended.
“Reading between the lines,” Moffett said, “it’s pretty obvious that they would still like to do this deal.”
Euronet Worldwide had tried to buy competitor MoneyGram International in March but faced a deep pocketed rival bidder in Ant Financial Services Group. Ant Financial is affiliated with China-based e-commerce giant Alibaba and won the bidding contest.
Ant Financial, however, still hasn’t closed the deal. Three times it has been unable to gain approval by the Committee on Foreign Investment in the United States, according to The New York Post.
Analyst Peter Heckmann, with D. A. Davidson & Co., said Ant Financial may try again “but they can’t do that forever.” If its deal fails, Heckmann said, Euronet likely will be waiting in the wings.
Euronet shares jumped 16.3 percent in 2017, after a flat 2016.
Heckmann also follows Olathe-based NIC Inc., which is facing is own deal that doesn’t involve control of the company but would greatly influence its 2018 fortunes. The company builds and operates websites for states, allowing residents to renew drivers licenses or buy fishing licenses and the like.
Its biggest customer is Texas, supplying 20 percent of revenues, and Texas is seeking bids for a new website deal. Heckmann expects NIC to win back most of its business with Texas, but he’s staying neutral on the stock given the risk the company could lose the whole deal.
“Texas is just too big to step in front of,” Heckmann said.
Shares of NIC fell 30.5 percent in 2017.
H&R Block’s big acquisition in 2017 was a new CEO, Jeff Jones.
Jones, the former president of Uber, joined as the Kansas City-based tax preparation company was well into its planning for the upcoming tax season. Still, Credit Suisse analyst Anjaneya Singh wrote to clients that Jones’ “fresh set of eyes is what the company has needed.”
Singh praised the “client-centric” approach that Jones promised shareholders during a Dec. 6 conference call. Jones promised a multiyear perspective on Block’s business in making his first public remarks to investors and analysts.
Jones also told investors that some changes will take time, such as reversing recent declines in the numbers of assisted tax returns Block handles.
“Ultimately we want to see that turn and grow but not for this year,” Jones said. “The growth in clients we continue to expect to come from the DIY (do-it-yourself) business.”
H&R Block’s marketing also will emphasize its do-it-yourself products, Jones said. The reason is that consumers still think of Block as tax preparers in offices despite the company’s slate of digital, mobile and hybrid products.
Singh wrote that he’s watching for evidence of success on the assisted business side but liked the new products the company has rolled out and wants to see more.
H&R Block shares already have turned around from their 2016 misfortunes, a nearly 31 percent drop in the stock’s price, by gaining 14.0 percent in 2017.
Cerner did better than that, gaining 42.3 percent in 2017, tops among area companies and a welcome return to form. The stock had fallen 21.3 percent in 2016 and lost 6.9 percent in 2015.
Cerner, based in North Kansas City, still faces questions that will demand answers in the New Year.
In a bit more than a month, Cerner will report its full 2017 financial results. Investors will want evidence that new business expected to have been booked in the third quarter was signed in the fourth quarter.
Analyst Nicholas Jansen told clients at Raymond James & Associates that winning those new business deals is assumed, given the company’s guidance on the matter. But he’s not thrilled about 2018’s outlook for profit margins.
Jansen said there is help in the long run from Cerner’s pending deal with Veterans Affairs. The market had been expecting the deal to be signed by the end of 2017, and Jansen said the deal should wrap up in the first months of 2018.
Even then, the Veterans Affairs business “will have a nominal impact upfront but build as work-orders increase,” he wrote, adding that profit margins will be similar to Cerner’s returns from large commercial contracts.
Jansen tossed cold water on Cerner investors’ chances of seeing a deal for the company itself. The speculated buyer might have been Amazon after reports that Cerner was close to forming a partnership with Amazon Web Services. No news has surfaced on the partnership.
He told clients that Amazon would be interested in working with Cerner in the population health field through the partnership but not interested in taking on Cerner’s core business of electronic health records.
Investors, Jansen suggested, should “take pause before contemplating a potential acquisition by Amazon.”
A year ago, Kansas City Southern shares struggled under then-president elect Donald Trump and his pledge to negotiate a better free trade deal or ditch NAFTA. The company’s stock has fared much better under President Trump.
A stronger economy, Mexico’s newly opened energy markets and good management helped lift Kansas City Southern shares 24.0 percent in 2017, second best on the local scene and well ahead of its trimmed 13.6 percent gain in 2016.
The New Year begins with a focus on those NAFTA talks, said Jon Braatz, an analyst at Kansas City Capital Associates which is a division of Oppenheimer & Co. Many tough decisions have been “pushed off,” he said, with negotiations scheduled into March 2018.
“Certainly, a demise of NAFTA is not in the stock price,” Braatz said. “But there is that continuing concern about what’s going to happen here in the first three months of the year.”
AMC Entertainment struggled in 2017 to cash in on its string of 2016 mergers that made it the nation’s and world’s largest theater chain. Its shares fell a staggering 55.1 percent – easily worst on the local scene.
Blame the movie makers.
The industry saw a 14 percent drop in box office receipts during the third quarter, including “an almost unimaginable 36 percent” decline in August, AMC CEO Adam Aron told investors in November. He’s looking for a better finish to the year.
Moviegoers may find some deals on seats at AMC Theatres in 2018. The company plans to roll out variable pricing, which is to say higher prices for the best seats and lower prices for those that typically fill up last or not at all.
“The first row or first two rows at most AMC auditoriums are almost always empty,” Aron said. “We shouldn’t be charging a premium price for a product that people only buy as a matter of last resort.”
Aron also said the Leawood-based company has more deal making ahead of it.
“We are currently seriously exploring the idea of an IPO (initial public offering of shares) of our European theaters on the London Stock Exchange sometime between July of 2018 and April of 2019,” Aron told analysts during a conference call.
The stock offering would cover only a minority stake in the European chain, a fourth or third of its ownership. AMC Entertainment would remain the main owner and collect the cash raised by selling shares.
“We share this idea with you because we expect it to happen,” Aron said.
The table accompanying this story has been corrected to show the adjusted Dec. 30, 2016, close for Commerce Bancshares stock and to show that the shares gained 1.4 percent in 2017. The original table and gain failed to account for a 5 percent stock dividend in December.
Kansas City Southern
Great Plains Energy
Waddell & Reed
QTS Realty Trust