Weekend Update #145
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.
Wednesday’s announcement of the September FOMC rate decision resulted in an expected “hold” on interest rates at 5.25—5.50% with the door open for another hike before year-end. However, the 0.5% shift up in the median expected Federal funds rate for 2024 and 2025 to 5.1% and 3.9%, respectively, among FOMC members and hawkish commentary during Fed Chair Jerome Powell’s press conference signaled a truly “higher for longer” path that had not been priced into the market. The meeting-to-meeting shift in tone to a more pronounced focus on upside risks to inflation as opposed to downside risks to economic growth also prompted conversations about a shift up in the long-term neutral rate — a structural shift that equity markets will need time to process. As a result, the S&P 500 and Nasdaq Composite suffered their worst weekly losses since March 2023.
In economic data for the week, Thursday’s weekly initial jobless claims figure was surprisingly low at 201,000 vs. economists’ consensus estimate of a rise to 225,000 — a double punch for equities as more labor market strength signals that further tightening by the Fed will be necessary if it fuels persistent inflation.
The Fed rate path worries induced a global equity selloff that coincided with the U.S. 10-year Treasury yield reaching a high since October 2007, closing the week at 4.43% on Friday. Adding to inflation worries, Brent crude closed the week at $93.61 per barrel (up 30% since June) with the weekly average price reaching levels not seen since November 2022. The market is also attentive to downside risks to consumer spending that will be pressured by the resumption of student loan payments as well as the depletion of consumers’ excess savings accumulated throughout the COVID-19 pandemic. In other words, the market is reacting to an incrementally higher probability of stagflation. On top of this, the looming potential of a government shutdown does not add confidence to the near-term outlook.
In stock-specific news for the week, Microsoft (MSFT) and Activision Blizzard (ATVI) were given the go-ahead by the UK antitrust watchdog to close the acquisition following further concessions around a sale of Activision’s cloud gaming rights to Ubisoft. ATVI shares drifted higher to $93.92 to end the week, just under the $95 per share acquisition price. Strikes further muddied the labor outlook as the Writers’ Guild of America and the United Auto Workers have yet to finalize any deals this week, pressuring media stocks along with Ford (F), GM (GM), and Stellantis (STLA).
Friday’s Close (Weekly Performance)
S&P 500 4,320.06 (-2.93%)
Nasdaq 13,211.81 (-3.62%)
Dow Jones 33,963.84 (-1.89%)
Thank you Blue Room Analyst JARED FENLEY
Earnings Summary
On September 20, 2023, General Mills reporting their First Quarter Fiscal 2024 earnings results. The company reported net sales of $4.904 billion, exceeding estimates of $4.88 billion. The results of its individual segments were a mixed bag, however. North America Retail and Foodservice net sales of $3.07 billion and $536.0 million exceeded Street estimates of $3.06 billion and $521.2 million, respectively. Meanwhile the Pet segment remained flat year-over-year, clocking in at $579.9 million of sales, below estimates of $592.2 million and International net sales of $715.8 million fell short of the median Street estimate of $719.2 million.
General Mills’ disclosures revealed that the segments that exhibited strength were able to achieve improving volumes and achieve growth in price and mix. International is struggling against tough post-pandemic boom compares, while Pet experienced a 5% year-over-year volume decline as pet parents have increasingly returned to the office and away from home thus dampening demand away from treats and toward more value-oriented brands and is trading down to smaller pack sizes.
The company reaffirmed their guidance and highlighted key items to watch moving forward, including moderating inflation (which will help spur volumes), a stabilizing supply chain, and a resilient but increasingly cautious consumer. Despite seeing share losses in North America Retail, the company is seeing green shoots in its club, discount and dollar store channels which will help spur growth in the remainder of the fiscal year. The company is responding to weakness in Pet by providing more “medium” sizes to accommodate consumer demand in this type of product. Additionally, the company is implementing HMM—Holistic Margin Management—which it stated will help achieve 4 points of margin improvement through the 2024 fiscal year. Indeed, the company achieved 36.1% of gross profit margin in the quarter—a 540 basis point improvement year-over-year. If it sustains this level then it is in fact on track to improve by its HMM goal, as its fiscal 2023 gross margin came in at 32.6%. Operating profit margin was 19%—a 405 basis point year-over-year decline, but it did improve sequentially by 270 basis points.
General Mills shares have struggled as of late. With a Friday closing price of $64.82, the stock is 0.5% above its 52-week low of $64.50. The company reported diluted EPS of $1.14 in the quarter. On a trailing-twelve-month basis the company has generated $4.10 of earnings per share, giving it a P/E of 15.8x—a 25% decline from its recent high of 20.8x back in May. It would be tempting to purchase shares at this price but historical precedence shows the stock has been priced as low as 11.9x. We will continue monitoring and investigating further to determine whether the measures the company is currently implementing to maintain and improve margin and revenue growth are enough to make its shares appealing from a value perspective.
Executive Summary
Highlights from Precision BioSciences’ In Vivo Gene Editing R&D Day presentation include head-to-head trial data showing ARCUS has a 17-fold greater insertion rate compared to CRISPR and lots of scientific detail around how ARCUS’ cut, size, and simplicity provide numerous competitive advantages to all other gene editing approaches. Precision’s management shared new data from the PBGENE-HBV program in Chronic Hepatitis B as well as data from the PBGENE-DMD Duchenne Muscular Dystrophy program in collaboration with Eli Lilly. Precision also announced a new wholly-owned gene editing program PBGENE-PMM targeting mitochondrial DNA and literally going to parts of the body that no other gene editor is able to go. Within the 12-month outlook for Precision, there is a potential for new partnerships on various assets, and investors can expect a CTA/IND for PBGENE-HBV in 2024, clinical data as soon as 1-3 months after the first patients are dosed, new data on the DMD program, and further data on the progression of PBGENE-PMM leading up to its 2025 CTA/IND.
On Wednesday, September 13, Moderna hosted its annual Research and Development Day to discuss business and pipeline updates across its most advanced candidates. Moderna’s management highlighted progress across its clinical portfolio – from respiratory disease to latent disease to cancer and to rare disease. While the most headline grabbing news came from the company’s new positive flu data, Moderna’s management team clearly wanted investors to take away the idea that Moderna is a platform company; it continues to provide proof of concept data across all of its modalities. To this end, it showed the following slide three times throughout the presentation:
Even though the company continues to expand its focus at breakneck speed, this is only possible due to the iterative and programmable nature of mRNA science. It took Moderna 2.5 years to go from an IND to positive Phase 3 clinical results for its flu vaccine. After posting less-than-desired Phase 3 results for that vaccine in April, it took the company only four months to reformulate the vaccine and then post positive Phase 3 data. Never in the history of medicine has a company been able to produce at the speed of Moderna, and this is largely due to its incredibly powerful mRNA platform. Indeed, through this lens, Moderna should not be viewed as a “COVID company.” COVID just so happened to be the perfect test case for displaying the potential mRNA vaccines. mRNA as a class is just beginning to show its potential, and that is what Moderna’s management team showed on the R&D Day.
Q2 FY2023 Results:
Total revenue of $4.89 billion, 10% year-over-year or 13% in constant currency.
Diluted EPS of $3.05 on a GAAP basis and $4.09 on a non-GAAP basis.
GAAP operating income $1.70 billion and non-GAAP operating income of $2.26 billion.
GAAP net income of $1.40 billion and non-GAAP net income of $1.88 billion.
Cash flows from operations of $1.87 billion.
Remaining performance obligations (“RPO”) exiting the quarter of $15.72 billion.
Repurchased ~2.1 million shares.
Guidance for Q4 FY2023:
Total revenue $4.975 billion to $5.025 billion
Digital Media net new ARR ~$520 million
Digital Media segment revenue $3.67 billion to $3.70 billion
Digital Experience segment revenue $1.25 billion to $1.27 billion
Digital Experience subscription revenue $1.11 billion to $1.13 billion
Tax rate GAAP: ~18% | Non-GAAP: ~18.5%
Earnings per share GAAP: $3.10 to $3.15 | Non-GAAP: $4.10 to $4.15
David Kirn — Co-Founder & Chief Executive Officer
Thanks, Matthew, pleasure to be here. Thanks for having us. And I'm joined by Julian Pei, our Head of IR at 4D. So at 4D, we're harnessing the power of directed evolution for next-generation gene therapies. We hope to unlock the full potential of gene therapy and genetic medicines for large market disease opportunities. We went public in December of 2020. We're based in the San Francisco Bay Area, and we're about 150 employees with both R&D and GMP manufacturing facilities on site.
We're a platform and a product company. Our platform is directed evolution, which is the Nobel Prize-winning technology that allows us to invent novel capsids that are customized for any therapeutic area we want to address. These are modular vectors.
So with a single vector, we can swap in and out different transgene payloads to build an entire portfolio of products, in a specific therapeutic area with a customized vector. We're currently in retinal diseases, lung, and cardiology. We have five clinical candidates currently for seven different patient populations in development and our strategy is to become a fully integrated large-market genetic medicines company.
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remain uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would impede the attainment of Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Phillip N. Jefferson; Neel Kashkari; Adriana D. Kuglar; Lorie K. Logan; and Christopher J. Waller.
Messenger RNA, or mRNA, was discovered in the early 1960s. It was during this time that scientists discovered how mRNA can either activate or block protein production in cells. It took nearly thirty years after the initial discovery of the power of mRNA for scientists to begin to yield its power. The first successful transfection of designed mRNA packaged within a liposomal nanoparticle into a cell was published in 1989. A year later, lab-made mRNA was injected into the muscle of mice. The protein production lasted for only a few weeks. These studies served as preliminary evidence that a viral or bacterial protein could be created by a living animal’s cells, and that the immune system of the animal would then react against it. These findings eventually led to the concept proposal of messenger RNA vaccines. However, despite this promising scientific breakthrough, mRNA was an inherently unstable compound that did not survive outside of cells – greatly inhibiting further development of any sort of mRNA therapeutic.
mRNA vaccines continued to develop slowly, on the fringes of scientific research. In the 1990’s, academic researchers sought to develop a way to deliver mRNA without it becoming unstable. In the face of this large hurdle, progress surrounding the field of mRNA-based therapeutics steadily progressed. Liposome-encapsulated mRNA encoding a viral antigen was shown in 1993 to stimulate T cells in mice. The following year, self-amplifying mRNA was developed by including both a viral antigen and a replicase encoding gene, leading to elicitation of both a humoral and cellular immune response against a viral pathogen in mice. In 1994, mRNA encoding a tumor antigen was shown to elicit a similar immune response against cancer cells in mice. But despite researchers finding promising new use cases for potential mRNA therapeutics through mouse models, the issue of stabilization remained too high a barrier for practical use in humans.
The Permian Basin, home to many of America’s oldest oil fields, covers 75,000 square miles of West Texas and southeastern New Mexico. Discovered in 1921, the formation has produced more than 40 billion barrels of oil, including much of the oil used during World War II. Until recently, the Permian Basin’s largest challenges were to slow the loss of production – which began ebbing in 1973 – while squeezing out the last 30 billion barrels of “mobile” oil as economically as possible. However, due to technological breakthroughs and a period of sustained high crude oil prices, the basin was given a second life.
The breakthrough arose in the Midland area’s Spraberry oil field, among the Permian Basin’s most venerable locations. Spraberry formations were fractured for decades, usually in one or two zones, for vertical wells. However, an innovation that involved drilling vertically while emulating the multistage fracturing typical of horizontal wells spawned a boom in the eastern Permian Basin in 2005, reversing years of steady declines. Horizontal drilling and fracturing could produce oil from shale – and the Western Permian Basin is rich in shale. While horizontal drilling in the eastern Permian was technologically important, it was the horizontal drilling in the Western shale that gave rebirth to the oil industry in the United States. The so-called “Shale Boom” effectively doubled United States crude oil production and further emphasized the country’s geopolitical role. Crude oil production increased nearly 100% from 2005 to 2015 – largely off the back of the Permian.
Patrick Trucchio — H.C. Wainwright
Maybe we could first start with an overview of Precision’s platform and how the platform is differentiated, particularly compared to other gene editing platforms like CRISPR?
Michael Amoroso — Chief Executive Officer
They have the all-star gene editing team here today, so they’re excited to talk about the platform
ARCUS is the foundation of the house
Not too long ago, they had an ex vivo side of the business
They recently completed a deal where they put the CAR T business in the hands of a partner
Now, they are solely focused on gene editing, which has been the plan over the last 18 months
ARCUS is the gene editing platform that is the most unique in the field
It’s derived from a different background than other gene editors, like CRISPR, which all come from bacterial restriction enzymes
ARCUS is from the homing endonuclease, which gives some unique advantages of what it does and how they can use it therapeutically
Cassie Gorsuch — Vice President, Gene Therapy Discovery
Speaking from a technological perspective, ARCUS is really differentiated in 3 key areas
First, the type of cut that ARCUS makes
It’s really unique as most tools create a blunt cut or a single-strand cut
You hear a lot about the potential downsides of double-stranded breaks
She wants to reassure everyone that double-stranded breaks happen all the time in nature
It happens when you fly in an airplane, when you go out into the sun
Our bodies have a great way of handling that
The type of cut ARCUS makes enables them to do unique types of gene editing that result in predictable, error-free outcomes
The other key feature is the size
ARCUS is among, if not the smallest gene editor in the entire field
This gives Precision a lot of flexibility on delivery
They can deliver 2 nucleases in a single AAV
The last advantage is the simplicity of the enzyme
The origin of the enzyme is unique in that it is meant to due gene editing in nature
All other editors were meant as a bacterial defense mechanism system, meant to destroy DNA, not edit DNA
That gives Precision a great starting place for developing therapeutics
Consumer sentiment inched down a scant 1.8 index points to 67.7 this month and has been essentially flat for the past two months. At 67.7 points, sentiment is currently about 35% above the all-time historic low reached in June of 2022 but remains shy of the historical average reading of 86. Sentiment this month was characterized by divergent movements across index components and across demographic groups with little net change from last month. Notably, though, both short-run and long-run expectations for economic conditions improved modestly this month — though on net consumers remain relatively tentative about the trajectory of the economy. So far, few consumers mentioned the potential federal government shutdown, but if the shutdown comes to bear, consumer views on the economy will likely slide, as was the case just a few months ago when the debt ceiling neared a breach.
Throughout the survey, consumers have taken note of the stalling slowdown in inflation. Buying conditions for durables — which have been particularly volatile over the past year — tumbled nearly 11% from last month to June 2023 levels, with consumers citing both high prices and interest rates. Relative to last month, a higher share mentioned high prices for poor buying conditions for durables and vehicles, as well as the erosion of their living standards. Consumers’ mentions of food or gas prices have risen since June. In spite of these recent upticks, though, consumer views are broadly similar to just a few months ago. Indeed, this month’s trends in gas prices did not pass through to expectations; one-year expectations over gas prices were little changed from August. In fact, consumers expect the slowdown in overall inflation to resume.
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