Weekend Update #133
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.
The economic front delivered a mixed bag of data this week, beginning with the Dallas Fed’s Manufacturing Index, which came in at -23.2, below economists’ already-low median estimate of -21.8. The previous month’s reading of -29.0 marked the lowest reading of the survey since the depths of the COVID-19 pandemic in April 2020. Subcomponents of the survey including Outlook Uncertainty, Hours Worked, and Growth Rate of New Orders appear to be worsening which suggests economic storm clouds ahead for the region that encompasses southern New Mexico, Texas, and Northern Louisiana.
New home sales surprised on the upside, clocking in at an annualized 763,000 versus the 676,000 expected figure. The figure marked the third-straight monthly advance and beat out all but one estimate in a Bloomberg survey of economists. “While new homes make up a much smaller share of overall housing stock than older construction, owners’ reluctance to list their homes in a high-interest-rate environment has altered the makeup of home purchases,” per Bloomberg. Consumer confidence similarly rose, itself reaching the highest level (109.7, up from 102.3 in the prior month) since the start of last year on greater optimism about the labor market and economic expansion. GDP in the first quarter was upwardly revised to 2.0%, exceeding the 1.4% median economist estimate. Household spending rose at a 4.2% pace—the strongest in nearly two years—as services outlays were adjusted higher.
All economic measures seemed to point to a hawkish Fed, until Friday’s latest PCE numbers for May were released. Headline PCE increases 0.1% month-over-month and 3.8% year-over-year, in line with expectations, while core PCE increased 0.3% month-over-month and 4.6% year-over-year, below the median economist estimate of 4.7%, suggesting that perhaps the Fed may no longer need to be as hawkish as previously expected. To wit, Fed Chair Jerome Powell said on Thursday the Federal Open Markets Committee was prepared to raise rates at the Fed’s July 25-26 meeting, and that acting at consecutive policy meetings isn’t “off the table.” If we’re seeing inflation moderate, including services inflation excluding housing and energy service, which rose only 0.2%—its smallest advance since July of last year—then an argument could be made that the Fed can now begin “taking it easy” and let the lag effects of monetary policy continue playing out.
In terms of company earnings, we saw reports from Micron and Nike. Micron beat Q2 expectations, exceeding estimates for AI server memory chips while traditional data server demand remained soft. Nike beat revenue expectations but profitability declined due to higher product input costs, elevated transportation costs, higher discounts and unfavorable foreign exchange effects.
Weekly Performance
S&P 500 4,450.38 +2.82%
Dow Jones 34,407.60 +2.06%
Nasdaq 13,787.92. +3.34%
Key Economic Readings Next Week
Monday, July 3 — ISM Manufacturing and Prices Paid; Wards Total Vehicle Sales
Tuesday, July 4 — Independence Day
Wednesday, July 5 — Factory Orders and Durable Goods Orders
Thursday, July 6 — ADP Employment Change; JOLTS Job Openings
Friday, July 7 — Change in Nonfarm Payrolls; Unemployment Rate
Thank you Blue Room Team Leader OMAR GUZMAN
University of Michigan Consumer Sentiment: Final Results From the June 2023 Survey
Consumer sentiment rose 9% this month to 64.4, a consensus improvement across all demographic groups.
The year-ahead economic outlook soared 28% over last month, and long-run expectations rose 11% as well. Overall, this striking upswing reflects a recovery in attitudes generated by the early-month resolution of the debt ceiling crisis, along with more positive feelings over softening inflation.
Views of their own personal financial situation were unchanged, however, as persistent high prices and expenses continued to weigh on consumers.
Median One-Year and Long-Term Inflation Expectation Rates
The median expectation for one-year inflation (blue line) decreased to 3.3%.
The median expectation for long-term inflation (green line) decreased to 3.0%.
Year-ahead inflation expectations receded for the second consecutive month, falling to 3.3% in June from 4.2% in May. The current reading is the lowest since March 2021. Declines in short-run inflation expectations were visible across age, income, and education groups. These declines reflect consumers’ experiences and perceptions of prices across a variety of goods, including durables, cars, and homes. Long-run inflation expectations were little changed from May at 3.0%, again staying within the narrow 2.9-3.1% range for 22 of the last 23 months. These expectations remained elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.
—INTERN PROFILE—
MIAOXUAN
HUANG
Dartmouth College Sophomore
Quantitative Social Science
Music modified with Computer Science
Hi everyone! My name is Miaoxuan Huang (she/they) from Beijing, China. I’m a rising sophomore at Dartmouth College double majoring in Quantitative Social Science and Music modified with Computer Sciences. My major areas of interest include effective altruism, machine creativity, and art activism. Growing up in post-Socialist China, I’m especially interested in how regional policies affect economic development. At Dartmouth, I’m involved with Magnuson Center of Entrepreneurship, the Dartmouth Political Economy Project, and the Hood Museum of Art. In my free time, I enjoy backpacking around the world and drumming for my band “MINX”, the only active all-female rock band in Dartmouth College. (We are currently working on an original folk/indie album!) I’m also working on developing my own body of creative work. Last year, my AI-assisted music piece “Breathe!” premiered at the Dartmouth Technigala and I’m hoping to explore the role of machine creativity in fields beyond music.
The Blue Room internship program stands out to me as a wonderful opportunity to build my skill in equity research. With hands-on mentorship and conversations with experienced investors, I hope to learn Blue Room’s unique strategy of combining idiosyncratic risks and macroeconomic environments in fundamental analysis. More importantly, I’m excited to work with the Blue Room people, who are passionate about making impact through investment.
Third Quarter Performance vs. Expectations
ANALYST TAKEAWAYS
Revenue, operating expenses and diluted EPS came in-line with guidance forecasts, while gross margins beat guidance. Pricing in DRAM and NAND struggled again, and will likely continue to see pressure in 1H CY2024. Bit shipments improved sequentially, but the fourth quarter outlook implies more muted growth than initially indicated in the prior quarter.
Changes in industry outlook:
CY industry bit demand growth expectations:
New: Our expectations for calendar 2023 industry bit demand growth have been further reduced to low to mid-single digits in DRAM and high-single digits in NAND.
Prior: Calendar 2023 bit demand growth expectations of 5.0% in DRAM to 13-14% in NAND.
The CAC regulation will be a challenge to Micron’s recovery into next year, with more negative impacts felt in 1H24, than in 4Q23. The company estimates that about 15% of company revenue will be subject to these regulations.
Micron holds the CAPEX forecast steady.
What is Leadership?
Leadership can be defined as the process of social influence, which maximizes the efforts of others, towards the achievement of a goal. In other words, leaders can inspire and motivate to raise the levels of those around them. It is not innate, but rather a powerful skill that can be developed over time. This is accomplished through being accountable, empathetic towards others, and having role models/mentors along the way.
As a hockey player, growing up in New England, the Bruins were always appointment television for me. At the center of my attention was the captain, Zdeno Chara. Admittedly, it is hard to take your eyes off of the 6’ 9” defenseman hitting people into the boards. But what I admired most was his effort on the ice and his humility off the ice. It was never about him, but about the team.
Therefore, wearing the “C” on the jersey always seemed special to me.
My first two years of lacrosse at Wesleyan were a disaster. COVID cut my Freshman year short, just 4 games in, and in my sophomore year most of the team, including myself, decided not to go back to school in the spring. I felt lost. A sport that I grew up dreaming about playing in college was quickly fading away. It caused me to question a lot about my decision to go to Wesleyan and whether I even wanted to continue playing lacrosse.
Luckily, my junior year went back to normal. However, we were now a team filled with little to no experience. It had been two years since any of us had stepped on the field for an actual game. Therefore, our team lacked guidance and maturity going into the season. It forced guys to step up and become leaders. For me, it has never been in my nature to defer to others, so I fortunately found myself in a position to help give the team some direction. While I was not given the title of “captain,” I tried to do everything I could to encourage and lead-by-example.
This effort was recognized by the team and I was elected Captain the following season, which was an honor. However, my first year as a captain in college was filled with some ups and many downs. As a team, we underperformed and did not reach our goals we set for ourselves. It was devastating for me. There is a sense of ownership of the team as a leader and I felt that I had let the team down. Being accountable, being understanding of your teammates, and being focused on the goals we set were all attributes that I had to improve on.
Through lots of reflecting on what went right and wrong, it forced me to evaluate what my values were and how to improve going forward. I have always respected those who are accountable, motivated, and have strong work ethics. I tried my best to instill these values into my teammates, but our team is comprised of 56 players, who all have unique personalities. This caused me to struggle because you have to approach and lead each person differently in order to do your job as a captain, which is getting the best out of them. For instance, some guys you have to be hard on in order to motivate, while others need to be positively reinforced in order to boost their confidence. Balancing this dynamic, while also being more empathetic to my teammates and their personal situations, is something that I will put more of an emphasis on next year.
When looking towards my final season of college lacrosse, I am grateful that I have another opportunity. Not only to fix what went wrong last year, but to improve as a leader and person. Specifically, I hope to accomplish this by instilling an identity into our team and developing stronger connections between all of our players. From watching successful professional teams and my own experiences, having an identity for the team to rally around, especially when facing adversity, is crucial. It can be as simple as a phrase, but having that identity sets a standard and makes everyone feel like they are a part of something bigger. Moreover, it provides a sense of belonging, which will help with our team chemistry. Finally, I want to develop more curiosity as well. I think it is so easy to be complacent when things are going well on and off the field. But constantly wanting to learn about different offensive sets or emulating successful players will hopefully allow myself and the team to get to those next levels. As much as last season stung, I know that the championship potential our team has which makes this such an exciting time for me.
Now that you have gotten my personal story, I want to relate it to the workforce I will soon be entering. I believe there are many parallels and transferable characteristics between business and sports. As a leader in business, you want to motivate your peers daily to accomplish the common goal of the company. Therefore, similar to a team having an identity, there needs to be a vision and strategy laid out to have success. Then, to have that success, leaders in business must act as the “connective tissues” to bring together people with unique skills and backgrounds in order to produce positive results. So, what I seek in a work environment is a place where everyone feels included and is working hard toward a common goal. So far at Blue Room, I have felt that. From giving company updates in investment bullpens as an intern to discussing weekend plans, I feel that everyone’s opinion is valued. Therefore, I am excited for the opportunity to work here and I look forward to helping the company achieve success in the Fund and in its impact projects for the rest of the summer.
Matt Sykes — Goldman Sachs
Maybe if you could just kind of set the stage for us a little bit and give us an overview of the state of the business post your first quarter results. I know you've got an Investor Day coming up, but just sort of what are you seeing the trends you saw in Q1? How are you seeing the year play out? What are some of the highlights that you want to go over?
Kevin Conroy — Chief Executive Officer, President & Chairman of the Board
It's been a wonderful time of strength across all of our businesses at Exact, our screening business with Cologuard growth of 45% year-over-year in the first quarter, our incredible strength with our precision oncology business, and the platform that both businesses give us for achieving our mission of eradicating cancer through tests that help prevent it, detect it earlier and guide therapy and — so what are we most excited about?
Well, we're excited about the progress that we're making in precision oncology with our MRD test more to come there. We're tremendously excited about the continued growth in Cologuard. It's still, believe it or not, nine years later, we saw a 45% year-over-year growth. We believe we have the ability to get to $7 billion to $8 billion in revenue with Cologuard. We've guided to just over $1.7 billion today and this year. We just — it's time. Everybody is busy. Everybody is making progress at Exact. There's a lot of strength, a lot of reasons to be happy.
Nike beats on fourth quarter sales expectations and comes in-line with EPS estimates:
NIKE Direct sales grew 15.0% on a reported basis, offsetting a decline in Wholesale revenue of -2.0%
Gross margin comes in slightly above expectations and operating expenses were in-line as well
Flattish sequential gross profit margin indicates heightened levels of discounting, but inventory levels were flat year-on-year
Demand creation expense was up 3.0% primarily due to sports marketing and advertising & marketing expenses.
Operating overhead expense increased 10.0% due to wage-related expenses and NIKE Direct variable costs
China fell sequentially, but showed positive signs of reacceleration on a year-on-year basis, the first time since 1Q22:
After having a positive sequential increase in the third quarter, Nike sales in Greater China fell 9.0% in the fourth quarter. Footwear sales led the sequential decrease at 11.0%, while apparel fell 5.0% and equipment fell 3.0%
In Lululemon’s report, strength in apparel in China was a key factor in positive sentiment, while Nike was unable to elevate demand across a broader demographic. The rebound in Y/Y sales reflects comparisons to the lowest quarterly revenue in China since 3Q20, when COVID-19 first broke out in the region. For this reason, 15.0% growth Y/Y in China seems less meaningful relative to the low comp and the 79% Y/Y growth that Lululemon experienced in their first quarter.
NIKE N. America experienced the most sequential strength in the quarter, led by equipment growth of 16.0%:
Footwear sales had the most impact, with sales increasing 485 million in the quarter, or +15.0%.
Full year reported revenues of $51.2 billion, grew 10.0% on a reported basis, above the forecast provided in the third quarter.
Salveen Richter — Goldman Sachs
So maybe to start here David, I'd have you just introduce the company — kind of the situation that's played out through IPO until now with regard to the directed evolution platform, the disease verticals, and where we've seen the progress play out across the programs to date.
David Kirn — Chief Executive Officer & Co-Founder
Perfect. Well thanks for having us here today. We're pleased to be here. I'm Dave Kirn, Co-Founder and CEO. This is Julian Pei, our Head of Investor Relations. So we're thrilled to be here.
So 4D Molecular Therapeutics is a next-generation gene therapy company that's built on the power of the directed evolution platform to invent customized AVV delivery vectors for any tissue in the body essentially.
And so what this allows us to do is have best-in-class products, best-in-class vectors, which translates into best-in-class products. It's an extremely versatile platform so we can use directed evolution to invent customized vectors for essentially any tissue in the body by any route of administration.
So what we do for every therapeutic area is we start with what's called the target vector profile, which is basically what features do we want the vector to have to be best-in-class and serve the unmet needs with the existing vectors. So that's everything from route of administration, the cells we want to transduce the dose levels we want to be in, immunogenicity, and ramping that down.
And so where we are today is we have three vectors that we've invented that have now entered the clinic across five different products. So we're in ophthalmology, lung, and cardiology. We're really excited to say that over the last nine months, we started releasing clinical data that shows that we're validating these vectors, validating these products in the clinic, showing not only the promise of each of these products, but also of the platform.
And so we've released data on our product 4D-150 for wet AMD. This is a unique and, we believe, best-in-class gene therapy in the sense of being intravitreal an outstanding safety profile with no evidence of inflammation across three different dose levels. And the transgenes that we're expressing are secreted aflibercept, so vectorize aflibercept which hit three different molecular targets. Then we've also inserted into the same transgene payload a second transgene that knocks out VEGF-C and that's in a large randomized study at Opthea they've shown that, that's an attractive target to knock out as well.
—INTERN PROFILE—
HARRY
KIM
Wesleyan University, Junior
Math
Economics
Hello everyone, my name is Harry Kim and I am a rising junior at Wesleyan University in Middletown, CT, studying math and economics. At Wesleyan, I am a sprinter and jumper for the Men’s Track & Field team. In addition, I am a board member of the Korean Student Association. I was originally born in South Korea, before moving to Old Tappan, New Jersey in 2015.
This summer I am very thrilled to being part of the Blue Room team. Having worked in boutique bank and private equity in the past, I’m excited to discover the intersecting avenues between various financial institutions and Blue Room. At school, I took a number of economics and math courses that allowed me to capture a general understanding of the economy as well as math is utilized to quantify economical phenomena. Using that knowledge as a framework, I am particularly interested in learning about financial modeling and understand how it can contribute to investment decisions.
With Blue Room’s unique culture and collaborative environment, I am learning invaluable lessons on a everyday basis. From attending investment bullpen meetings and learn about the current news in the market to learning how to perform robust equity research on stocks, I’m fortunate to be part of this team and grow my knowledge over the summer. I’m set to research and follow the following two companies: NIKE (NKE) and CHIPOTLE (CMG), which I’m particularly excited as I interact with their products and dishes very often.
Outside of school and work, I enjoy going on running/hikes, working out, and playing classical/jazz piano. I also enjoying cooking occasionally; my speciality is Steak Frites with Béarnaise sauce. Also, I am a huge fragrance enthusiast, currently in works of building a collection.
Matt Sykes — Goldman Sachs
Maybe if you could just help us kind of set the stage first. Talk about some of the more recent results you've had and what trends you're seeing in your business as we enter into the second half of this year?
Helmy Eltoukhy — Co-Chief Executive Officer
Yes. No. I mean we're really pleased in terms of how we started the year. We started very strong in our core with some of the approvals in terms of ESR1, some of the coverage decisions that were very positive with United, Aetna, and Anthem now.
And I believe we have coverage or partial coverage with every plan that's more than 1 million lives in the United States now, which — it took a while, but we're finally there with 360, and I think bodes well for continued sort of positive coverage decisions over time.
And I think the nice thing about this year is with some of the macroeconomic backdrop, we think there's a little bit more rationality ruling in terms of how companies are really managing their businesses and we've always tried to focus on both the top and bottom line and be very judicious in terms of where we spend. So we built our business the right way and I think we're reaping some of those rewards now this year in terms of seeing some of our competitors have some layoffs with some of their teams and we just continue to grow organically as our volume continues to increase.
Then obviously we've made great progress on the screening side as well with the submission of our package to the FDA and some of the staging data that came out that I think showed really an impressive profile in terms of what the future of screening with blood could mean.
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