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2017.10.04 Penn Wealth Report Vol 5 Issue 02

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20 PENN WEALTH REPORT VOLUME 5 ISSUE 02 04 OCT 2017 PENN WEALTH REPORT Copyright 2017. All Rights Reserved. WEEKLY BUSINESS REPORT The coolest thing about the perennial Apple event was the optics of the Steve Jobs Theater within the "spaceship" headquarters APPLE'S FALL EVENT: WE GIVE IT A "C" GRADE DUE TO LACK OF TRULY NEW PRODUCTS We've simply been spoiled by past Apple events which have unveiled revolutionary new products, like the iPhone, the iPad, and the Apple Watch. Those particular events set the bar very high for the company's peren- nial product roll-outs, so when we don't see something unexpected, we are a bit let down. At least this fall we got the visual treat of the above-ground portion of the Steve Jobs Theater, which sits in the middle of Apple's new 176-acre headquarters. The $5 billion HQ is really something to behold. As for the several-hour event itself, there were certainly some pretty cool introduc- tions. The feature that probably garnered the most attention was the new iPhone X (as in ten, as in tenth anniversary of the iPhone), along with its facial recognition technology. With an edge-to-edge screen, sans the home button, you simply hold the phone in front of your face and swipe up to unlock the device. The next-coolest thing was the new Apple Watch, Series 3. It truly has become the Dick Tracy watch of the classic sci-fi years. Forget the need to tether your nearby iPhone to make calls and access the Internet, as cellu- lar is now built directly into the device. That really is a leap forward. Tim Cook made a call out to a paddle-boarding employee who had nothing with her but an oar and an Apple Watch (and a swimsuit). The call quality was excellent. Oh, and the 40 million or so songs you can download to your watch at any given time was a big hit with the crowd. Those were the only real "wow" moments during the presentation. Apple TV 4K was introduced, but we don't consider that a huge leap forward. What did Wall Street think? Well, the stock didn't plummet. NORTHROP GRUMMAN TO BUY PENN MEM- BER ORBITAL ATK FOR $7.8 BILLION We have held mid-cap rocket-maker Orbital ATK (OA $72-$132-$112) in various Penn strategies for years; before, in fact, Orbital and ATK merged to form their current company. Now, in a new twist, aerospace giant (at least compared to OA) Northrop Grumman (NOC $208-$266-$275) has announced that it will buy Orbital for $7.8 bil- lion. OA popped 20% in the pre-market after the announcement. We hate to see one-less publicly traded aerospace firm to invest in, but this acquisi- tion makes a lot of sense for Northrop. Back on the 22nd of August we reported that NOC had been awarded a contract from the US Air Force to design the next generation of inter- continental ballistic missiles—the ICBM-X series US nuclear missile system. Orbital ATK already had a number of government contracts on the books for its rocket and pro- pulsion systems, and it certainly would have been providing assets to the new missile system. For its part, Northrop has been stuck in a bit of a rut, falling behind larger, more powerful peers Boeing (BA) and Lockheed- Martin (LMT). Another industrial giant, United Technologies (UTX), recently acquired aero- space company Rockwell Collins for about $23 billion. Stagnation is unacceptable in virtually any industry; it is a death knell in the aerospace and defense business. There are few certainties in life, but we can make two blanket statements with confidence. First, the world is a dangerous place, with new threats arising all the time. Secondly, the nascent private space business is about to blossom. Both of these certitudes portend good things ahead for the industry. TOYS R US HEADING FOR INEVITABLE BANK- RUPTCY THANKS TO MISMANAGEMENT It is so easy to write off the bankruptcy of a company like Toys R Us (which is probably coming in the next few weeks), or Radio Shack, or Borders, or so many others simply because of the industry they operate within. After all, critics would argue, there was once a thriving buggy whip business until technol- ogy made it obsolete. In the case of Toys R Us, however, that is a lazy and insincere answer. Have you been in one of the company's storefront locations lately? It reminds us of a great place we used to shop at as kids in the 1970s called TG&Y, which stood for toys, games, and yo-yos. It was a great place—two generations ago. Now, with the online shop- ping renaissance redefining how we spend our discretionary dough, management at multiline leisure companies need to be deep strategic thinkers, creating new and exciting experiences for shoppers; instead, walk into a store and it feels like a combination pig- sty/warehouse. Nothing magical. Nothing unique. Just aisle after aisle of boring. The company's management team might have just as well been selling reams of office paper. Toys R Us exited the public scene back in 2005 when two private equity firms—KKR, and Bain Capital—and REIT Vornado Realty Trust joined forces to buy the toy seller for $6.6 billion. Unfortunately, all that transac- tion did was buy the company a little time. Now, with a $400 million chunk of debt due next year, the firm has solicited Chicago- based law firm Kirkland & Ellis to help them through a Chapter 11 reorganization of debt. Here's our question: If the same manage- ment team remains in place at Toys R Us, what good is a debt restructuring? Time to hire someone who has seen the movie "Big." COMPUTERS & PERIPHERALS AEROSPACE & DEFENSE LEISURE PRODUCTS

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