Weekend Update #132
Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.
As investors repositioned based on indications of weakening economic activity and the potential for more rate hikes, the S&P 500 and Nasdaq snapped 5 and 8 weeks of positive performance, respectively. Fed Chair Jerome Powell told a Senate banking committee this week that “it will be appropriate to raise rates again this year, and perhaps twice,” in a message to markets that perhaps terminal rate projections will need to go higher. Central banks around the world also offered hawkish commentary about interest rate hikes needed to cool inflation in light of better-than-expected economic activity so far this year — most prominently demonstrated by the Bank of England’s surprise 50 basis point rate hike to 5%.
In economic news for the week, jobless claims came in at 264,000, above economists’ consensus expectation for 259,000, in a sign that financial tightening imposed by the Federal Reserve is starting to have an impact on what has been a historically tight labor market. The S&P Global Manufacturing PMI data for June also contracted at a quicker pace than last month as the index fell to 46.3, while the report had mixed indicators on inflation and showed that manufacturing activity fell to the lowest level in 6 months.
On Monday, FedEx Corporation reported Q4 2023 earnings that offered warnings on the consumer demand outlook and a 2024 profit outlook that fell below analysts’ estimates. An emphasis on cost reductions for the upcoming year in management’s commentary helped FDX shares retrace losses to end the week, but the global economic readthrough may have made investors more cautious. Ford Motor Company received a $9.2 billion loan this week — the largest since the global financial crisis — from the U.S. Department of Energy to help the company compete globally with its electric vehicle development. Cryptocurrencies were also aided this week by BlackRock Inc.’s filing for a Bitcoin exchange traded fund and digital asset platform EDX markets began trading, sending Bitcoin to its highest price since June 2022.
Friday’s Close (Weekly Performance)
S&P 500 4,348.33 (-1.39%)
Nasdaq 13,492.52 (-1.44%)
Dow Jones 33,727.43 (-1.67%)
—Please enjoy meeting our summer team—
—INTERN PROFILE—
SHREYA
ASHOK
Washington University in St. Louis Junior
Computational Biology/ Genomics
Finance
Hello! My name is Shreya Ashok, and I am a rising junior at Washington University in St. Louis, though I am originally from Bridgewater, New Jersey. I am pursuing a double major in Computational Biology/Genomics and Finance.
In my time at WashU thus far, I have discovered that my passion sits at the intersection of biology and business. I am captivated by not only the science behind the biotechnology and the pharmaceutical industries but their financial basis as well. For example, I recently wrote a paper published in WashU’s Frontiers Health Magazine comparing drug pricing methodologies among developed countries.
My previous experiences have primarily been with startups as both an intern and a founder. As an intern at Lyfe Health, a centralized medical records platform, I helped healthcare workers with integration of the platform into patient care. As a founder, I have partnered with Sling Health Biotechnology Incubator on a project aimed at improving patient-surgeon communication following invasive surgery. I am also a Ventures Analyst and Startup Consultant for Kodiak Ventures (WashU’s student-run venture fund) and an Analyst for Consult Your Community, where my team offers pro-bono consulting to local St. Louis businesses. I am fascinated by healthcare investing, and I love exploring how novel research and industry developments impact the production of new medical technologies.
I am thrilled to be participating in Blue Room’s Investment Analyst Internship because Blue Room’s close-knit environment offers ample opportunity for mentorship, and I am eager to learn about industry trends and the basics of stock trading from the expert analysts and portfolio managers on the team. I am also excited to dive into the pharmaceutical industry and its various trends and current events as I analyze potential investment opportunities for Blue Room. I am excited to see what the summer brings!
Betsy Graseck — Morgan Stanley
I think we'll just kick-off with a little bit of an overview question. How are you seeing/feeling about the macro environment and maybe give us a sense as to where things are trending this quarter?
Andy Cecere — Chief Executive Officer
Sure, Betsy. Good morning, everyone. So let me start giving the big picture and then Terry might update on our outlook.
So first of all, we have a big card-issuing and a big card-acquiring business. And I will tell you from a spend standpoint, people are still spending on travel and entertainment. That is up in a significant way year-over-year, but there's a bit of a slowdown in retail and discretionary items, sort of what we've seen in the last few quarters. So that continues to slow a bit. In that parallels, what we're seeing with deposit balances at the individual level, for a number of quarters, almost two years, Betsy, that was increasing, increasing, increasing, and again, per customer its starting to go back to pre-COVID levels, so probably be there in the third quarter. So the spend parallels the deposit balances, which is generally saying “slowdown”.
From a loan standpoint, loan demand is down versus where it was a year ago. For sure, utilization rates are relatively flat and a number of banks are being very prudent about capital allocation. So that is creating sort of a flattish loan activity. And deposits, and Terry will talk about that, are relatively stable. We're going to sort of parallel the H.8 data, which is down a little bit because of the quantitative tightening.
So big picture, stepping back, what we're seeing is a bit of a slowdown. We project one more rate increase in the summer and then sort of flat rates. And we have a very soft moderate recession — slow, very short in terms of duration, and not very deep in terms of severity. So that's what our projections are. We're preparing for a number of environments but that's sort of our base case.
Ramy Farid — President & Chief Executive Officer
My name is Ramy Farid. I'm the CEO of Schrödinger. I've been at Schrödinger for 21, 22 years, something like that, starting with 21 years. Before joining Schrödinger, I was on the faculty, the chemistry department at Rutgers, so I came from academia.
Chris Shibutani — Goldman Sachs
And you guys are headquartered in New York and it really is kind of a melting pot, so investors should really try and bother Jaren, who's sitting in the front row here, the all-other investor relations person to actually sit down and talk to folks. I think that this particular trio has got a wealth of insight and knowledge that is really valuable because one of the things that's always really striking about you guys and others sort of broadly in your space, artificial intelligence, R&D, right?
Let's create that as just sort of like a Venn diagram type circle, is that there's different dimensions to the business, different business models, different approaches to that. It's very important, I think, that leadership have some degree of ability to sort of see across some of those while being also focused at the mission at hand. And so, I think one of the things that's been interesting, particularly with the recent stock performance that you are relevant and tangentially related to and in the glow of the current investor activation around investing in the way the world could change as shaped by information management, artificial intelligence, et cetera.
And it's kind of interesting to see these things happen. Ramy, you've been around forever with this, right? And at the same time, you're sort of we've had these smart tools to do things better, engineer things, et cetera. And yet it's really captured the imagination of folks. And you also did a recent financing. I think there may have been a little bit of marketing around that. So how are you positioning yourself? And how will you position yourself to this audience of healthcare investors and people who are listening when I bring up the word AI? It's actually two letters, but you know what I mean.
Ramy Farid — President & Chief Executive Officer
Yes. So AI has been around for a very long time. And what it actually is machine learning, right? What it's machine learning? And what that means is that it's all about identifying a training set, a bunch of information, and then trying to learn on it. Now that has some really exciting applications in quite a large number of fields, including in drug discovery. But it has a really severe limitation, which is what I just said. It requires a training set. No matter what you call it, you can call it generative AI, you can call it AI, you can call it whatever you want, deep learning, it requires a training set. And here's the thing. There are approximately 1060, one with 60 zeros, ways of combining organic elements into a drug-like molecule. So just call that infinite, is another way to describe 1060. It's infinite. The size of chemical space is infinite.
And what that means is that it's impossible to generate a training set that will capture an understanding of all of chemical space. It can't be done. This would be equivalent, by the way, the analogy is the amount of experimental data we have now for molecules that in the whole industry is equivalent to one drop of water in the ocean. So this would be equivalent to saying, I now understand everything about the ocean by analyzing one drop of water. It can't, that's obviously is silly.
BLUE ROOM Analysis
Eli Lilly EVP & CFO Anat Ashkenazi discusses how the company is on track to meet the goal to double manufacturing capacity of tirzepatide year-over-year by year-end 2023, the impacts of changes in Mounjaro’s copay card and gross-to-net dynamics, as well as potential impacts of the Inflation Reduction Act (IRA) on pharmaceutical sales in the coming decade. Importantly, Lilly reiterated the guidance for some of their long-term targets of 80% gross margins and mid- to high-30s margins, driven by projected strength in two upcoming products with tirzepatide in obesity as well as donanemab in Alzheimer’s.
Thursday
June 15, 2023
12 PM
__________
Hi everyone,
I hope you all are having a great week, and go Nuggets! We will be pushing back our global meeting to 1:00 PM Mountain Time today, and we hope to see everyone on the call.
Today's meeting agenda:
1. Blue Room Investing Updates
2. Blue Room Impact Updates
3. Icebreaker Question
How do you celebrate a big win? What has been one of your recent wins?
__________
Thank you Jared and Omar for organizing and conducting our 116th Meeting!
BLUE ROOM Analysis
AGCO Corporation SVP & CFO Damon Audia speaks about continued strength in large ag demand, supported by strong profitable farmer income and low stock-to-use ratios, being able to offset small ag and international weakness through the rest of 2023. Although they are seeing some areas of strength, supply chain and labor shortages continue to hurt the business and leave some unanswered questions about performance going into the next couple of years. AGCO lays out an argument for why this could be a stronger macroeconomic cycle for them and sets some goals of achieving a 12% mid-cycle margin as well as outpacing overall industry growth by 4-5%, regardless of the point in the macro cycle. The discussion also includes a preview of further innovation and expansion of precision agriculture and goes into reasons why this is such a promising area of growth.
—INTERN PROFILE—
RILEY
CLARKE
Washington University in St. Louis, Junior
Finance
Supply Chain, Operations and Technology (SCOT)
Psychological & Brain Sciences
Hello everyone! My name is Riley Clarke, and I am most recently from Minneapolis, Minnesota. I am currently a rising junior at Washington University in St. Louis double majoring in Finance and Supply Chain, Operations, and Technology (SCOT) as well as minoring in Psychological & Brain Sciences. At WashU, I am a member of the Student Investment Fund, where I work on the industrials team. I have been interested in finance for most of my life due to my dad, and I’m excited to continue on my own journey and ultimately become an investment banker.
I am super excited to be interning with Blue Room this summer. I was drawn to their emphasis on collaboration, culture, and learning. Throughout my first couple of weeks here at Blue Room, I have been able to learn so much through the investment team bullpen meetings where we get to hear the analysts present on the companies they’re covering as well as macroeconomic events happening each day. Some of my goals for this summer are to continue to practice historical projections, modeling, and putting together a company profile, and I can’t think of a better place to grow my knowledge than at Blue Room! Most importantly, I am hoping to learn as much as I can from everyone on the team.
I am also excited to be given the opportunity to research and follow two companies this summer, W.W. Grainger (GWW) and Best Buy (BBY). I’m very interested in industrial companies and how the little pieces in our everyday lives that we may not think about can affect the bigger picture within the economy. Additionally, I love learning about transportation and logistics companies, and I have been starting to get more into researching the technology sector.
Outside of work and school, I enjoy watching Formula 1, basketball, and football. My favorite F1 drivers are Max Verstappen, Yuki Tsunoda, and Charles Leclerc. My dad used to be a competitive cyclist for around twenty years, so I’m always up for a bike ride, and I also love going for hikes and long walks around Minneapolis. A fun fact about me is that my family and I hiked to the bottom of the Grand Canyon and back up when I was only ten years old!
I am very grateful to be here at Blue Room, and I’m looking forward to the rest of the summer!
BLUE ROOM Analysis
Precision BioSciences CFO Alex Kelly and VP of Gene Therapy Discovery Cassie Gorsuch discuss both the upcoming allogeneic CAR T updates as well as the company’s in vivo R&D Day in July. Diving into some of the scientific backing around Precision’s azer-cel program and requested FDA meeting to discuss a pivotal trial, experience gained from the ZUMA-1 trial that eventually led to support for Kite Pharma’s Yescarta backs up Precision’s use of MRD negativity as a predictor of a durable complete response. This means that the data presented so far in azer-cel and stealth cell PBCAR19B should have positive readthrough for longer-term followup in patients treated, and investors will have a look at 19B durability at year-end 2023 to see how well the scientific theory holds up. Other topics discussed include Precision’s preliminary thoughts on the structure of their pivotal azer-cel trial including 75-100 patients as well
Thursday
June 22, 2023
12 PM Mountain
Summer Solstice
We discuss the missing submarine from many aspects.
Also, with the start of summer, the team shares their feelings on the season as well as favorite summer activities.
Jim Umpleby — Chairman & Chief Executive Officer
Well, thanks, Michael. It's great to be with you today and really I am proud of our team. I believe they have done a lot of great work over the last six-and-a-half, seven years or so. We did introduce a strategy, a new strategy for profitable growth back in 2017 and we laid out some targets that we said we would achieve. We laid out higher margins — operating margins and free cash flow compared to different — to our reference period and then we chose at that time a reference period between 2010 and 2016 and we said at different levels of revenue we will achieve higher operating margins and higher, more consistent free cash flow.
That strategy was based on a few key elements. One is operational excellence, which is safety, quality, lean, and competitive and flexible cost structure. The other is services, everything we do to support our customers after the initial sale expanded offerings, having the right product at the right price point to meet our customer needs. And then more recently, we've added sustainability which I'm sure we'll talk about here later on during our time, which represents an outstanding opportunity for future profitable growth.
And I must admit, we met with some skepticism when we put out those initial margin and free cash flow targets and we did achieve them in 2017, 2018, and 2019, and then even in 2020 when COVID hit and we had a 22% decrease in our top-line, we still achieved our margin target and produced $3 billion of free cash flow in that year.
Between 2017 and 2022, except for that one year I mentioned, 2020 when we achieve $3 billion of cash flow, we've achieved $5 billion to $6 billion of free cash flow, which again very proud of the team. So I would argue that our strategy has paid off and it showed up in our results in terms of both higher margins and higher free cash flow. And if you like, I can talk about each of the elements of the strategy that, if you'd like me to, or I'll let you ask your next question.
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