Weekend Update #160
Thank you for your continued support and engagement. 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.
In a challenging start to 2024, the S&P 500 ended its longest winning streak since 2009 — following 9 straight weeks of gains — as investors reset expectations heading into the new year. On January 2nd, the first trading day of the year, the U.S. dollar had its biggest daily gain since March 2023, and Treasury yields rose this week as equities remained pressured. Forward equity performance will depend on the Federal Reserve’s navigation toward a soft landing and the balance of heightened valuations against a still challenging macroeconomic environment. In addition, risks to global trade have recently emerged as Houthi attacks on ships in the Red Sea continue to divert ships and raise transportation costs, and Wednesday’s bombings in Iran stoked geopolitical tensions.
Strategists published year-ahead views with a general emphasis on slowing growth and lingering risks while macroeconomic trends from 2023 continue to play out. Broadly, strategists refrained from bold downside or upside calls on equity markets, despite the prospect of rate cuts this year, potentially in response to a tricky-to-navigate 2023 while consensus called for a nearly certain recession ahead to start the year.
The December 2023 FOMC Meeting Minutes released on Wednesday didn’t sway trading as FOMC committee member remarks were seen as broadly in line with what was communicated at the December FOMC press conference. Commentary focused on the progress made toward restoring the target inflation rate while policymakers noted both downside risks to economic activity from too restrictive of a stance as well as upside risks to inflation requiring a “higher-for-longer” interest rate trajectory.
In economic news for the week, November JOLTS job openings fell to 8.790 million, which was a welcome sign that the Fed is succeeding at taking some tightness out of the labor market. On the other hand, Thursday’s initial jobless claims showed some labor market resilience with unemployment claims falling 18,000 to 202,000 in the week ended December 29. Friday’s Bureau of Labor Statistics employment data for December was taken as a negative by equity markets. The combination of higher-than-expected job additions (+164k vs. +130k expected), higher average hourly earnings YoY (+4.1% vs. +3.9% expected), lower participation rate (62.5% vs. 62.8% expected), and a resultingly lower unemployment rate (3.7% vs. 3.8% expected) presented some risks to early rate cuts and a soft landing for the economy. Market participants lowered their 2024 rate cut expectations — falling to an expected 135 bps of rate cuts from 150 bps earlier in the week.
Under the surface of the jobs report, the two-month net revision for November and December payrolls was down 71,000 and the household survey of employment showed a loss of 683,000 jobs in December — the largest drop since April 2020. The ISM Services Index slowed to 50.6 in December with service sector employment falling to its lowest level since July 2020 at 43.3, another sign that strong labor market conditions are starting to deteriorate. The sum of economic data shows a continually weakening labor market and declining economic activity while employment cost measures remain high — a confluence of factors that, if persistent, make the Federal Reserve’s dual mandate for price stability and employment that much harder to achieve.
Friday’s Close (Weekly Performance)
S&P 500 4,697.24 (-1.52%)
Nasdaq 14,524.07 (-3.25%)
Dow Jones 37,466.11 (-0.5
Thank you Blue Room Analyst JARED FENLEY
Earnings Summary
Procter and Gamble reported a relatively strong Q1 in their 2024 fiscal year. Revenues of $28.9 billion represented a 6% increase against $20.6 billion in the prior year period. The strongest segment in terms of net sales percentage change was Health Care, with an 11% gain comprised, among other things, of 2% volume, 6% price and 2% mix. Beauty was the “worst” performer, with a 3% net sales increase. As a whole, P&G’s 6% increase was primarily due to a 7% price and 1% mix which were offset by -1% in volume and -1% in foreign exchange.
P&G lowered the lower-end of their net sales growth guidance, from last quarter’s range of 3% to 4% to now an updated 2% to 4% range, reflecting their belief that their ability to continue passing along price will weaken, but they also anticipate that this will be partly offset by a rebound in volume as customers’ purchasing power catches up with inflation and enable them to purchase more from a unit growth perspective.
The company enjoyed earnings per share growth of 16% year-over-year, generating $1.83 per share versus the prior year period’s $1.57 per share figure. This was made possible due in part to their cost of goods sold leverage, reflected by 461 basis points of gross margin expansion, while operating margin for the quarter climbed to 26.4%—a 241-basis-point improvement from the prior year period’s 24.0% figure, indicating that that the company has indeed been realizing cost savings and implementing overall fiscal discipline measures. It remains to be seen how profitability will be impacted going forward as the price lever goes away and P&G becomes increasingly dependent on their ability to grow volumes.
On Thursday January 4th, Mobileye shares fell over 20% after the company pre-announced its fourth quarter and full year 2023 results and provided a full year 2024 outlook that came in well below investor expectations.
While the current quarter & FY23 earnings results were generally consistent with the outlook provided in the third quarter earnings report, selling pressure arose as a consequence of Mobileye’s poor fiscal year 2024 outlook:
4Q2023 Results
On a Q/Q basis, Mobileye came in essentially even with its third quarter guidance on the topline, estimating $636 million in revenue at the midpoint, against the $635.5 million at the midpoint of last quarter’s guidance range. When Mobileye first issued its guidance, the range actually missed consensus estimates for fourth quarter sales, which the company attributed to a combination of lower volumes and ASPs. If Mobileye’s fourth quarter comes in toward the lower end of this range when it reports at the end of January, the stock could trade lower as this would indicate weaker pricing and demand environment than investors were initially led to believe.
On a unit basis for SuperVision (the company’s latest full-stack ADAS system) is still set to ship around 37,000 units in the fourth quarter, caveated by the fact that this figure was originally toward the low end of Mobileye's expectations. Mobileye’s EyeQ SoC (system-on-chip) volumes are forecast to be 20% above third quarter levels, with ASPs down sequentially due to mix.
On an operating margin basis, it appears that Mobileye benefitted from a few tailwinds in the quarter relative to the company’s initial expectations. GAAP and non-GAAPOperating income will actually be better by $34.5 million, which may be a function of the Scheckel’s depreciation through October after the Hamas attacks and other operating cost cutting measures as a result.
Ramy Farid — President & Chief Executive Officer
Thanks, Jaren. Okay. And the green button advances. Great. Thank you so much, everybody, for coming. We're really excited to present to you at our first Pipeline Day, our proprietary programs. And so I will keep this very short. I think you know I'm very excited. I would have loved to have been given an hour to talk about the platform and so on, but we did that last year at Platform Day, so I'm going to hand it over very quickly over to Karen and the team. But I got to — I have an allocation of just a few slides I wanted to go through.
So let me first remind you about our highly synergistic and balanced business model. You know that we have developed a really extraordinary platform over the past 33 years. We've been working on this for a long time. And we licensed that platform to life science companies and materials companies. You can see there how many customers we have. And to address a question that Mike asked us this morning through his report, we are still very confident about the full year guidance that we gave, the 15% to 18%. He's taking notes there. And so really happy to be reporting that. Things are going very well in the software business.
Now we also leverage our platform in a number of other ways. You've heard us talk a lot about it, and we're not going to talk too much about it today. So I'll just spend 30 seconds on it now. We have a number of collaborations, both on the drug discovery side and also on material science side. We have, as you see there, 19 active projects in drug discovery and material science. And you can see in a little tiny note there, and I'm going to touch on this in a moment. We also have 13 other collaborations that are at the stage of either being in the clinic or in IND-enabling studies.
And then, of course, what you're going to hear about today is our proprietary pipeline. You see there, there are at least 7 programs. There are more. We will show that there are some undisclosed, but we've disclosed 7. And again, this is where we're going to focus.
EXECUTIVE SUMMARY
Micron’s first quarter was sequentially positive, relative to the fourth quarter of last year, and the stock is benefiting from the pull forward in the memory pricing outlook. While DRAM and NAND pricing provided a lift to the company’s original 1Q24 sales guidance by about $200 million, the second quarter and full year impacts of improved memory pricing were beyond consensus expectations. This led to a forecast for 12.0% gross profit margin (above 4.4% consensus) and sales of $5.3 billion versus $5.2 billion consensus expected.
In a better pricing environment and with continued constraints to WFE CAPEX, we now forecast positive FCF in 4Q24 and the possibility of a return to profitability in that same timeframe.
While the world of crude oil continued to grab headlines as volatility remained elevated, the price of crude oil was relatively depressed throughout December. In poetic fashion, December acted as an apt summarization of what occurred throughout 2023; OPEC drama, continued upside risk stemming from the Middle East, macroeconomic sanguinity and continued consolidation of shale producers in the United States. In a year scarred by a seemingly endless barrage of headlines and constant updates to the world of oil, the themes of OPEC cuts, geopolitical risk, macroeconomic caution and mass consolidation stand out above the fray as the dominant themes that defined oil markets in 2023. Through this lens, December can be seen as a month of consistency.
December opened with the oil market still struggling to comprehend the vagaries in communication coming from the November OPEC+ meeting. The meeting itself was marred in drama, with the Saudi-led cohort struggling to reach an agreement about output cuts. Due to the poor communication on the part of OPEC, oil traders had great difficulty deciphering the cartel's updated mandate. While most market observers cited a 2.2 million barrels per day reduction in production, other pundits argued the true figure is closer to 2.7 million barrels per day. Algeria, Iraq, Kuwait, Saudi Arabia, UAE, Kazakhstan, Oman and Russia agreed to voluntary production cuts for the first quarter of 2024 with Saudi Arabia and Russia bearing the brunt of the production cuts, with 1.5 and 0.5 mb/d, respectively, of the total.
Despite the opaque announcement of production cuts, the price of crude oil fell precipitously following the meeting. From November 28 to December 11, the West Texas Intermediate benchmark fell from $78/bbl to $68/bbl – within striking distance of the benchmark’s 2023 low of $66/bbl that was realized in March. Oil prices cratered during this period for arguably many of the same reasons that have plagued the commodity throughout 2023: oil cuts as an implication of tepid demand; non-compliance within OPEC; macroeconomic conservatism; and a limited financial demand for oil.
David Westenberg — Piper Sandler
You came off a consecutive beat and raise quarter, where operating margins, frankly, probably surprised even to you guys. As we approach the top cost, how should we think about the momentum in the business, and what your potential is to beat expectations?
Kevin Conroy — Chief Executive Officer, President & Chairman of the Board
Not a lot surprises us about our business, and thanks for having us. We are really happy to be back at the Piper Conference.
And Dave our business continues to grow. It's a strong business, and it starts with our lead colon cancer screening opportunity. There are 60 million people in America that aren't up to date with colon cancer screening. Colon cancer is the number two cancer killer in the U.S.
Just last week, an old good friend of mine told me he has stage 4 colon cancer, late 50s. There are just so many people who are not up to date with screening, and they're finding out that they have the disease when it's metastatic. So the opportunity here continues to be one where we just have a passion. Our mission is to help eradicate this disease, cancer, broadly with tests that help prevent it, detect it earlier and guide treatment. That's our Cologuard, our screening business on one side, our precision oncology business with Oncotype DX on the other.
And as we look at this business, we see growth this year over last year, we see growth next year, we see growth out in the future. And every January, as a team, we sit down, we map out our 5-year plan, give that to the Board of Directors, and that's an aggressive, exciting path forward for us.
EXECUTIVE SUMMARY
Nike shares traded lower into market open on Friday (12/22) as the company pointed to demand headwinds driving lower sales in the current quarter and forecasting lower sales growth for 2H24, which ultimately drove full year sales roughly $2 billion lower than the previous guide. This lower revenue expectation led to the company implementing a cost savings initiative of $2 billion, deployed to preserve margins and earnings.
Revenue for the quarter came in slightly below the prior quarter’s guidance for “slightly up year on year”, with sales in the period actually coming in flat at +0.55%. For the third quarter the company is guiding to negative year on year comps, while the street forecast +5% growth year over year and BLUE ROOM forecast +7%. Fourth quarter revenue to grow low-single digits which compares to consensus expectations for +4% growth and BLUE ROOM expectations for +9.0%.
For the full year of 2024, the company now expects revenue to grow ~1.0%, lower than the previous guidance given in the prior quarter for an increase of mid-single digits. This also is lower than the market estimate of ~4.0% y/y.
The company cited macro headwinds from Greater China and EMEA, digital traffic softness, higher promotions, lifecycle management of key products and a stronger US dollar as the main drivers of go-forward revisions. Consumer spending in the U.S. continues to shift away from athletic apparel and that is reflected in a -3.5% year over year growth figure for Nike’s N. America segment. Consumer volume appears to be weaker when there are no promotions active, in both North America and China.
Despite topline weakness, the company is aiming to continue driving gross margin expansion in the third and fourth quarters based on improving variable headwinds, offset by increases in product costs and foreign exchange headwinds. This includes a projected $2 billion in cost savings by the company primarily in the form of employee reduction, leading to a forecasted restructuring charge between $400 to $450 million in the second half of the fiscal year. Excluding the restructuring costs, the company is lowering its OPEX growth from mid-single digits to low-single digits growth year-on-year.
2024 01 04
BLUE ROOM Global Meeting
#137
Hello Everybody and Happy New Year!
The Boys in the Boat reminded me very much of what I hope we can achieve at Blue Room by working together in sync to be the best in the world, in all of our endeavors.
Agenda
I. Blue Room Updates
II. Fund One Update + New Long Only SMA
III. Blue Room Agriculture: Dry Storage
IV. Blue Room Housing
V. Blue Room Art
Icebreaker Topic: What are your 2023 Highlights and 2024 Look Forwards?
CONGRATULATIONS IE HOSPITALITY & DRY STORAGE FOR POWERING
>>
HEARTH BREAD
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— FEATURED IN THE NEW YORK TIMES —
23 of the Best American Dishes of 2023
>> ARTICLE >>
Each year as we travel the country to scout out candidates for our many best-restaurant lists — whether the big national listing in the early fall or the new “best of” city lists we’ve begun rolling out — our reporters and editors eat hundreds of meals in dozens of states. Inevitably we come across that one dish that we almost wish we’d ordered two of, and wish we could find closer to home.
Some are high-concept — a Dungeness crab doughnut, for instance — while others are just perfect examples of beloved familiars like brisket tacos or fried chicken. What they have in common, though, is that months later they still jump to mind when we're asked, “What were your favorite dishes of this year?”
And if we’re back in Denver, Seattle, Burlington, Vt., or Grand Rapids, Mich., you can be sure we’ll seek them out — and you should, too. BRIAN GALLAGHER
Photo taken by Jeff Fierberg
Fresh-baked bread service is fairly common these days, but the version here is something special. Made from Colorado grain milled nearby, the personal-size boules are popped into an oak-fired oven for a mere minute and a half before being handed across the counter to you, piping hot, dotted with char and served with rotating pairings like housemade achiote butter or mole blanco dipping sauce.
10% OF ALL BLUE ROOM REVENUES GO DIRECTLY TO FUND OUR NON PROFIT TOGETHERISM.
WE CAN ACCOMPLISH ANYTHING TOGETHER.
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