Last Week:

The S&P 500’s record winning streak was snapped at eight weeks, as the index slipped 0.21%. Most of the damage came on Thursday, in response to fading optimism over the outlook for lower corporate taxes. Small stocks fared worse, with the Russell 2000 shedding 1.31%, and is now down 2.17% over the last month, during which period the Wilshire U.S. Micro-Cap Index is down about 5%. A possible explanation for the performance disparity would be the higher percentage of international revenues enjoyed by the larger companies, at a time when Global GDP growth is twice as high as domestic. In fact, companies that generate over 50% of their sales internationally are posting an earnings growth rate of 13.2% for the quarter, versus 2.3% for companies that generate less than 50% internationally. In general, earnings season continued to be strong, with the blended growth rate increasing to 6.1% from 5.7% the week earlier. The yield on the Ten-Year Treasury treaded water until Friday, when it jumped 7 basis points to 2.40%. A risk to the market would be a reversal of the 34-year (when through good fortune I got into this business) trend of declining interest rates, which has provided a cheap cost of capital to corporations therefore enhancing earnings, as well as expanding the price multiple on those earnings. As the chart below shows, over that time horizon the growth in corporate profits and the gain in the market have both been about tenfold, while the yield on the Ten-Year Treasury steadily declined from over 12% to around 2%. From that perspective, the level of the stock market seems rational.

With the great unwind of the Fed’s balance sheet, it seems likely that rates are going to rise. On the other hand, global rates are even lower with the rates in Germany at 0.39%, and Japan at 0.03%, and their central banks remain accommodative. As a result, the slope of our rate increases will probably be more gradual to prevent currency imbalances. A game changer would be surging input prices, such as energy or wages, as such inflationary pressures would create stress to the status quo and drive global rates higher. We have been monitoring the St. Louis Fed Financial Stress Index for evidence of those pressures and other warning signs. So far, so good. But when these changes come, they can be fast and furious.

In summary, whereas it makes sense to be cautious given the high valuation levels and the likelihood of rising rates and other pressures, it still seems as if the current environment provides support for equity prices. A balanced portfolio for most investors would seem prudent.

This Week:

The economic calendar is light, with October CPI, Industrial Production, Capacity Utilization, and Housing Starts all forecasted to support the slow and steady narrative. Investors will be watching the tax process closely, as the Senate would like to have something moved out of committee by Friday. Third quarter earnings season will wrap up.

Stocks in the News:

It was the last busy week of earnings releases, so bear with me. Speaking of the Bears, I had the pleasure of spending the afternoon on Sunday at Soldier field with my daughter Michelle and her husband David. It was 35 degrees and raining and the Bears lost to the Packers by a touchdown (par for the course), essentially ending any faint playoff hopes for the year. The hot chocolate was good ($13 for a “souvenir” cup?), and the company outstanding.

The Eastern Company (EML): Sales for the quarter were $56.0 million, compared to $33.5 million for the same period in 2016. Net income for the third quarter of 2017 was $2.2 million, or $0.35 per diluted share, compared to $2.4 million, or $0.38 per diluted share for the same period last year, a decrease of 7 percent. Mr. Vlak, President and CEO, stated that “The increase in sales in the third quarter of 2017 and the first nine months of 2017 over the same periods in 2016 reflect the acquisition of Velvac, which closed on April 3, 2017. In addition, all three of our business segments grew sales compared to the same period of 2016. Net income declined in the third quarter of 2017 from the comparable period of 2016 due to an increase in engineering cost of $1.2 million primarily related to the accelerated development of new technology vision products at Road-iQ, a division of Velvac, and gPay at Greenwald Industries. Road-iQ is a connected vehicle technology that provides both active and passive safety to drivers of RVs, trucks and other specialty vehicles. We expect these new products to be ready for market later in the fourth quarter of 2017. Eastern is a manufacturer and seller of industrial hardware, security products and metal castings. It operates in three business segments: Industrial Hardware, Security Products and Metal Products.

Pioneer Power Solutions, Inc. (PPSI): Nathan Mazurek, Pioneer’s Chairman and Chief Executive Officer, said, “This was our seventh consecutive quarter in which we generated more than $1.8 million of Adjusted EBITDA and the second quarter in a row exceeding $2.5 million, even as we navigated several challenges which temporarily impacted our top line. Our year-to-date results are unfolding as we anticipated from a revenue and Adjusted EBITDA standpoint.” “Our end markets remain robust and we are increasingly confident about the fourth quarter and 2018,” continued Mr. Mazurek. “Based on our quotation activity, we expect to double our service business in critical power during 2018, as well as growing our engine generator business by 30% due to our private label engine generators which can be sold in a far broader territory than our previous offering. Combined with continued growth from data center and distributed generation customers, plus orders related to hurricane recovery, we expect to deliver a strong conclusion to 2017 with continued profitable growth carrying us into 2018.” Pioneer Power Solutions manufactures, sells and services a broad range of specialty electrical transmission, distribution, and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets.

Motorcar Parts of America, Inc. (MPAA): Adjusted net sales for the fiscal 2018 second quarter increased 1.7 percent to $114.3 million from $112.4 million a year earlier. Adjusted net income for the fiscal 2018 second quarter was $9.7 million, or $0.50 per diluted share, compared with $12.4 million, or $0.64 per diluted share, in the same period a year earlier. “The first half of fiscal 2018 was a challenging period, even though we achieved market share gains.   As widely reported by industry observers, we are experiencing industry softness and related headwinds.  Nonetheless, we remain enthusiastic about our longer-term prospects within the $125 billion aftermarket hard parts industry — supported by organic growth, product line expansion and complementary acquisition opportunities,” said Selwyn Joffe, chairman, president and chief executive officer. Motorcar Parts of America is a manufacturer, remanufacturer, and distributor of aftermarket automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications.

Brooks Automation, Inc. (BRKS): “Our fiscal 2017 has been a year filled with key milestones and the fourth quarter was no exception. We achieved another record for gross margins in our Semiconductor segment and for the Company, while we continued to expand our Life Sciences business,” commented Steve Schwartz, CEO of Brooks Automation.  “Life Sciences revenue grew 20% quarter over quarter to comprise 24% of our fourth quarter revenue. In early October we purchased 4titude, which will complement our existing Life Sciences business and continue to drive our Life Science’s revenue growth.  For the full fiscal year 2017, we delivered 24% top-line growth and 163% adjusted EPS growth with both segments contributing materially to this solid performance.  We finished the year in a strong position and we are poised for continued momentum in fiscal year 2018.” Brooks Automation is a provider of automation and cryogenic solutions for multiple applications and markets. The company serves the semiconductor capital equipment market and sample management market for life sciences.

Crown Crafts, Inc. (CRWS): Net income for the second quarter of fiscal 2018 was $725,000, or $0.07 per diluted share, on net sales of $16.5 million, compared with net income of $999,000, or $0.10 per diluted share, on net sales of $15.8 million for the second quarter of fiscal 2017. We are pleased that our second quarter performance included a 4.1% increase in net sales, along with increases in gross margin and net income when you exclude the costs to acquire Carousel Designs and credit fees associated with the bankruptcy of a major customer,” said E. Randall Chestnut, Chairman, President and Chief Executive Officer.  “Despite the current retail market challenges, we feel that we are in a solid financial position going forward. We are excited about both our innovative new product designs that appeal to millennial parents and the addition of Carousel Designs as a key direct-to-consumer sales channel.” Crown Crafts through its subsidiaries operates in the infant and toddler products segment within the consumer products industry. It designs and distributes, infant and toddler bedding and blankets, bibs, disposable products and accessories.

PCTEL, Inc. (PCTI): Revenue of $23.7 million in the third quarter and $68.1 million year to date, an 13% increase in the quarter and a 11% increase year to date compared to last year. Net income per diluted share of $0.04 in the third quarter and $0.04 year to date, compared to net income per diluted share of $0.01 per share in the quarter and a loss of $0.51 year to date last year. “We are pleased to see revenue growth in both segments. Fleet and utilities markets continue to lead the growth in antennas and we closed several large scanning receiver deals through our OEM partners in the quarter.” said David Neumann, PCTEL’s CEO. “PCTEL is well positioned to take advantage of the long-term growth opportunities in Industrial IoT, small cells and 5G, which require both performance critical antenna solutions and RF test equipment.” PCTEL designs and delivers Performance Critical TELecom technology solutions to the wireless industry. It supplies wireless network antenna and testing solutions.

Alaska Communications Systems Group, Inc. (ALSK): Revenue increased to $56.7 million, up 0.4 percent from $56.5 million. Net income was $0.3 million in both periods. “Our sales performance in Business and Wholesale is consistent with our expectations and reflects a robust delivery funnel that gives us visibility into revenue for the quarters ahead. We posted growth in both Total revenue as well as Business and Wholesale revenue, and continue to see growth prospects in the long-term as demand drivers like video streaming, wireless backhaul and cloud migration continue in their robust trajectory. “Additionally, we are advancing our fixed wireless technology strategy. Fixed wireless provides a capital efficient mechanism to meet our CAF II deployment obligations as well as a strong foundation for competitive broadband to serve our mass market consumer and small business customers in non-CAF II areas. We look forward to reporting progress over the upcoming quarters,” said Anand Vadapalli, president and CEO of Alaska Communications. Alaska Communications provides integrated communications services in Alaska. It provides local, long-distance, and wireless telephone services, Internet access, and data services to residential and business customers.

Farmland Partners, Inc. (FPI): Reported total operating revenues of $12.0 million for the three months ended September 30, 2017, a 73% increase over the same period in 2016. Adjusted Funds from Operations (“AFFO”) was $3.3 million for the three months ended September 30, 2017, as compared to $1.7 million for the three months ended September 30, 2016. “The Olam acquisition was an excellent start to investing our Series B participating preferred proceeds at yields exceeding our cost of capital,” said Paul Pittman, CEO of the Company. “Leasing trends are positive this fall. We are seeing material increases in rents on the new leases we are currently negotiating in the Corn Belt.”  Farmland Partners owns and aims to acquire high-quality farmland throughout North America. The company is an internally managed real estate company and owns and contracts for over 120,000 acres of farm land, along with storage facilities.

Orchids Paper Products Company (TIS): Net sales increased $5.5 million, or 14%, in the third quarter of 2017 compared to the same period in the prior year. Converted product sales increased $3.7 million as a result of the continuing ramp-up of previously announced new private-label business. Net income of $0.7 million, or $0.07 per basic share, was recognized in the third quarter of 2017 compared to net income of $2.2 million, or $0.21 per basic share, in the third quarter of 2016. Jeff Schoen, President and Chief Executive Officer, stated, “Sales in third quarter experienced strong growth due to incremental volume from new business that started shipping in June.  In August, we announced the addition of a significant new customer in a new distribution channel for new ultra-premium products to be manufactured in the Barnwell, South Carolina facility.  We are on track to begin shipments for this new customer late in the fourth quarter of 2017, with full implementation expected by second quarter 2018.  We expect to ship at 50% of the final run rate in December and ramp to full production in the first quarter of 2018. When this new business is fully implemented, total Company sales are expected to be between $220 and $240 million annually.” Orchids Paper Products manufactures bulk tissue paper, known as parent rolls, and convert parent rolls into a line of finished products, including paper towels, bathroom tissue and paper napkins, for the consumer, or at-home, market.

InnerWorkings, Inc. (INWK): Record gross revenue was $288.4 million in the third quarter, an increase of 3% compared with $280.0 million in the third quarter of 2016. Record non-GAAP adjusted EBITDA was $18.8 million in the third quarter, reflecting 11% growth as compared to $16.9 million in the third quarter of 2016. “The investments we have made to build our global capabilities and technology platform are paying off in a meaningful way,” said Eric D. Belcher, Chief Executive Officer of InnerWorkings. “Our large backlog of new business awards and pipeline of pursuits position us well for 2018 and beyond.” InnerWorkings is a marketing supply chain company that provides marketing execution solutions including advertising materials, branded merchandise, product packaging, and retail displays.

Salem Media Group, Inc. (SALM): For the third quarter, total revenue decreased 8.2% to $65.4 million from $71.3 million and Adjusted EBITDA decreased 24.2% to $9.6 million from $12.6 million. For the fourth quarter of 2017, the company is projecting total revenue to decline between 4% to 6% from fourth quarter 2016 total revenue of $70.7 million. Excluding the impact of political revenue and the revenue of the eliminated loss-making magazines, the company would be projecting revenue decline between 1% and 3%. The company is also projecting operating expenses before gains or losses on the sale or disposal of assets, stock-based compensation expense, changes in the estimated fair value of contingent earn-out consideration, impairments, depreciation expense and amortization expense to be between flat and a decline of 3% compared to the fourth quarter of 2016 non-GAAP operating expenses of $55.5 million.  Salem Media is a domestic multimedia company with integrated operations including radio broadcasting, digital media, and publishing.

Myers Industries, Inc. (MYE): The Company reported net sales of $144.1 million, compared to $132.7 million in the third quarter of 2016, and net income per diluted share from continuing operations of $0.11, compared to $0.04 in the third quarter of 2016.  President and Chief Executive Officer Dave Banyard commented, “We are very pleased with the progress we are making towards transforming Myers Industries. Our third-quarter results continue to demonstrate the improved cash flow generation potential of our business. Strong revenue growth in the quarter was driven by improved demand in our food and beverage end market, as well as increased sales of fuel cans in our consumer market associated with the recent hurricane season. Lean initiatives implemented over the prior year resulted in operating margin expansion and stronger cash flow during the quarter, and we are pleased with our free cash flow of $31.0 million year-to-date as compared to $7.1 million last year. We will continue to pursue opportunities to grow our business in targeted niche markets, and we are well positioned for sustained improvements in long-term financial and operating performance.” Myers Industries manufactures a range of polymer products for industrial, agricultural, automotive, commercial and consumer markets. It also manufactures plastic reusable material handling containers and pallets.

NTN Buzztime, Inc. (NTN): Total revenues were $5.2 million, compared to $5.5 million for the second quarter of 2017 and $5.4 million for the third quarter of 2016. Direct costs were $1.5 million, down from $1.7 million for the same period in 2016 due to decreases in depreciation, equipment and service provider expenses. As a result, gross margin increased to 70%, up from 68% in the prior year quarter. Selling, general and administrative expenses were $3.6 million for the third quarter of 2017, compared to $4.0 million for the third quarter of 2016. Net loss was $184,000, or $0.07 per share, which improved from a net loss of $573,000, or $0.31 per share, for the third quarter of 2016.  EBITDA was $517,000, which improved from $288,000 in the same period last year. “During the third quarter, we continued executing consistently, expanding gross margin to 70% and posting our sixth consecutive quarter of positive EBITDA,” said Ram Krishnan, NTN Buzztime CEO. “Transitioning the company from a one-dimensional entertainment business to a multi-dimensional platform company, we have added new capabilities with point of sale integration and payment; built entertainment content that can be licensed and re-purposed; and improved the cost and quality of our hardware. In fact, our platform is becoming a formidable asset to our business. As each of these parts comes together, we are developing new offerings designed to help us tackle new markets.  NTN provides interactive entertainment and dining technology to bars and restaurants in North America. Its main products are Buzztime, Playmaker, Mobile Playmaker, BEOND Powered by Buzztime and Play Along.

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