Weekend Update #184

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.

Markets were mixed for the week as the S&P 500 and Nasdaq notched new records on Wednesday before faltering to finish up +0.66% and +0.00%, respectively. Meanwhile, the Dow Jones Industrial Average climbed 650 points throughout the week to end Friday with its best day of the month. The weakness in the back half of the week was led by NVDA as the AI leader shed $200 billion due to potential profit-taking as the firm achieved most-valuable-company status. The drop also comes amid broader market retreat as options expire in a so-called triple-witching session, when contracts fall off the board at the same time that S&P Dow Jones Indices shuffles company weightings and ETFs that track its gauges make similar changes.

In economic news for the week, retail sales rose marginally in May and prior months were revised lower, pointing to greater financial strain among consumers. Initial jobless claims dipped slightly from the prior week to 238,000. However, claims continue to creep up as the 4-week moving average reached its highest level since September 2023 and continuing claims reached a 5-month high. Sales of existing homes in the US fell for a third straight month in May while home prices set another record, underscoring persistent affordability challenges. Further, the inventory of existing homes for sale has crept up recently as the supply of homes on the market increased 18.5% Y/Y. US PMI Composite preliminary data suggests expanded by the most in over two years in June, driven by the service sector, where business activity grew at a rate not seen for 26 months. However, the manufacturing outlook dimmed as optimism slid to its lowest in over one-and-a-half years due to concerns over the demand environment in the months ahead as well as election-related uncertainty.

Other corporate highlights:

Nvidia surpassed Microsoft as the most valuable company in the world this week, reaching a market cap of over $3.3 trillion
Apple Inc. is shutting down its Pay Later program, which let customers make purchases on an installment plan, marking a retreat from efforts to offer more financial services in-house.
Airbus SE is edging closer to an agreement with Spirit AeroSystems Holdings Inc. to take over parts of the aerospace supplier’s business, paving the way for an acquisition of the bulk of the company by arch-rival Boeing Co. as early as next week.
American Airlines Group Inc. is suspending training for new pilots through the end of this year, the latest pullback by a major US carrier in the face of uneven travel demand and delayed aircraft.
EV startup Fisker filed for bankruptcy after investment talks with a major automaker ended with no deal.
Prime Minister Justin Trudeau’s government is preparing potential new tariffs on Chinese-made electric vehicles to align Canada with actions taken by the US and European Union, according to people familiar with the matter.

Friday’s Close
(Weekly Performance)

S&P 500 5,464.62 +0.61%
Nasdaq 17,689.36 +0.00%
Dow Jones ] 39,150.33 +1.45%

Thank you Blue Room Analyst NICK PEART

Although finishing slightly down on Friday, the S&P 500 reached another all-time high this week. Much of the strong market returns continue to be driven by AI-related technology stocks like Fund One holding Nvidia, which briefly surpassed Microsoft as the most valuable company in the world before settling lower to end the week. Economic data continues to generate mixed signals but the lower than expected retail sales data released this week is certainly keeping many on alert. Election years have traditionally been kind to investors and this year’s 15% gain in the S&P 500 may be one of the strongest 1H starts in history. We are keeping a close eye on that as well as performance remains concentrated in nature.

For Fund One, performance this week benefitted from a strong decline in short position Enphase. Solar shares in general were weak as another industry player, SMA Solar slumped after slashing earnings guidance. Our short position in Enphase has worked well for us as our thesis on its high valuation relative to its outlook is getting noticed by other investors. Also aiding performance was Exact Sciences. The stock took a nice bounce this week on no specific news which is comforting as we feel that the stock is extremely undervalued..

On the other side of performance were a couple of our other idiosyncratic positions, Precision Biosciences and Schrödinger. Precision did not have any particularly negative news. In fact, the company announced that it expanded its Hepatitis Scientific Advisory Board with the addition of two world-class investigators. Similarly, the major news this week from Schrödinger was that it registered a new Phase 1 trial for its study drug intended as a treatment for advanced solid tumors. We are highly encouraged by this announcement as it is a good sign that the program is progressing as planned.

Thank you Blue Room Investing President JOHN FENLEY

United States Producer Price Index YoY and MoM

PPI is a family of data that gauges the costs of production. There are three areas of PPI classification that use the same pool of data from the BLS: industry, commodity and commodity-based final and intermediate demand (FD-ID).

Finished Goods YoY~ Finished goods are goods that have completed the manufacturing process but have not yet been sold or distributed to the end user.

Final Demand ~ PPI for final demand measures the average change in prices received by domestic producers of goods, services and construction sold for personal consumption, capital, investment, government and export.

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Michael Feniger — Bank of America

Thanks everyone for joining. Andrew, I love if we could kick off this conversation really talking about Caterpillar relative to prior cycles. Your revenue this year based on estimates is again nearing that prior peak revenue observed over a decade ago, yet unit volumes are still below that period, suggesting strong pricing. Just to help provide context for everyone on the line, how far below are volume units now from that prior peak? What areas of the portfolio have fully recovered? What areas of the portfolio are still operating below those prior peak levels?

Andrew Bonfield — Chief Financial Officer

Yeah. So Mike, I mean, obviously, overall, as you know over the last couple of years, price has been very significant driver of our sales and revenue growth, particularly in '22 and '23. Overall, volumes still in total are still below the 2012 levels, the peak of the last cycle as you referred to, and most of that obviously is in Resource Industries. If you remember at the time, Resource Industries was — revenues were nearly double the size they are today, even taking out-price. So that is the major change. Both from a CI and an E&T perspective, they're broadly more likely in line with where they were in that 2012 timeframe. Obviously, there's mix effects in there. There's lots of other things which obviously take — you have to take into account.

I think one of the things that obviously has been the biggest change though versus where we were in that 2012 timeframe is really around profitability. And if you look at the significant improvement in margins and free cash flow that we are able to generate today, that reflects the benefit of the operating and execution model, which has enabled us both from a margin perspective and also from a free-cash-flow perspective to really more than double performance over that timeframe. And that's probably the most significant change.

Other factors in there are things like our ability to drive more services revenues. Services revenues are higher today than they were back in that time period. That focus on services is important because it helps to dampen cyclicality and actually helps us to generate a more consistent stream of revenues and margins as we move forward as well.

Michael Feniger — Bank of America

Great. And Andrew, you alluded to this before, but CAT reported some of the strongest pricing in its history. Investors believe most of the pricing is due to inflation. I mean, bigger picture, is there a change going forward in terms of how CAT views pricing in some of its markets? For example, if we look at resources and energy, are market dynamics different now, which may drive pricing stronger longer-term? Do you see any inflection where your customers are paying up to replace fleets with certain features and technology that maybe was not there in years past?

Andrew Bonfield — Chief Financial Officer

Yeah. I think that's a really important thing. I mean, obviously, the most important thing and you will have heard us consistently say this is we price for value. We have to be able to provide customers value in order to be able to justify any price that we are selling for a machine. And that value is really what we call and focus on is total cost of ownership. And that total cost of ownership comes from a number of things through that time period. It is not purely just the upfront price. It's about the productivity that the customer can have over the time lifetime of the machine, it's the services that we are able to provide, and it's the value that we're able to give to the customer by that quality and durability of the machine that enables the customer to see that total cost of ownership being lower than it would be from maybe a machine which has a lower price point.

So that's always been the focus on ability to price. Obviously, there are some great technologies we're now adding to machines, a lot more sensors, for example, which enables us to track data. I mean, all the digital tools we've done, which enables us to do things like our Prioritized Service Events, which is really the start of conditioning — condition monitoring, which is like really helping a customer say, wait, you've been using this machine for X number of hours, you need to think about servicing or your oil needs to be changed, tie the different pieces of data together to enable them to actually operate their machine more efficiently.

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Arun Jayaram – JP Morgan – Analyst
All right. Good afternoon and welcome to day one of our 9th Annual Energy Conference. [We’re] excited to have EOG Resources to kick off our E&P presentations from day one. Joining us today is EOG Resources' EVP and COO, Jeff Leitzell, who has been one of the pioneers in the shale industry with a strong track record of operational execution and returns. Jeff has had various roles in the company and was recently named COO in December, and so he has been all around the organization. So really, really excited to have Jeff to participate in the fireside chat with me this afternoon. Jeff, how are you?

Jeff Leitzell – Chief Operating Officer
Yes, I'm doing good. Glad to be here, Arun.

Arun Jayaram – JP Morgan – Analyst
Great. Well, Jeff, any investment in E&P involves understanding the macro picture because at the end of the day, you're a price-taker, right, at the end of the day. I was wondering if you could highlight the macro picture because I know EOG's fundamentals team does a lot of great work in terms of both [oil and natural gas].

Jeff Leitzell – Chief Operating Officer
Yes. So there's obviously been a lot of volatility here over the past years, and it feels like a lot of that's worked out of the system and we really have a real good feel of where spare capacity is at right now. And with the OPEC+ cuts that are out there, it feels like the market is fairly balanced at this point in time. And what we really see is pretty strong demand around the world and continued growth. So we think that OPEC will probably start bringing some of those barrels back on outside of the voluntary barrels, maybe towards the back-end of this year or even into next year. So I think everything is looking very, very good and bullish from the oil side. And we're really excited about the future from that aspect.

If you move over and you look at the gas side, now obviously that's a little bit more interesting. When we look at the beginning of the year, we kind of started going through the first quarter. We saw a pretty big drop-off in prices – we had $1.60, $1.70. And so we actually kind of used the flex of our multi-basin portfolio and we pulled back some of our gas production down there in the Dorado asset to defer a handful of completions to the back end of the year, and obviously that's worked out. We've seen prices kind of peak up here a little bit. Really what we want to watch now is, I mean, we still have pretty high storage levels. So we'll see what type of summer we have from a weather standpoint and then moving into winter what kind of power demand draw we have from there.

And then looking forward to 2025, we're obviously really excited because we're going to start seeing quite a bit more LNG come online. So right now, there's about 14 BCF of feed gas that's going offshore and being exported. There's another 10 to 12 that's being built out right now that's going to be coming on over the next three years or so. And we really think that's going to be a great opportunity. It's going to be kind of a pressure relief valve here for Henry Hub and some of the domestic prices.

We're really excited about our portfolio with that because we've kind of stood up a separate gas business with our Dorado asset down there in South Texas, which is really close to the market center with quite a bit of LNG offtake there.

Arun Jayaram – JP Morgan – Analyst
Great. I want to shift gears a little bit and talk a little bit about organic exploration opportunities. More recently, EOG has highlighted entries in three emerging plays: Dorado, the Powder River Basin and Utica. Let me start with just questions outside of North America or the United States, what do you think about exploration opportunities outside of U.S. shale?

Jeff Leitzell – Chief Operating Officer
Exploration is one of our kind of core values. I mean it's one of the things we focus on both domestically and internationally. So with the international front, we have a lot of excitement there because one thing that we've seen is in our expertise, we really focus more on shallow offshore, like our Trinidad assets, and then also onshore unconventional, which we really haven't seen a lot of the different countries utilize the technologies and exploit it. So we feel that there's obviously going to be a lot of opportunities out there. But with any of our exploration plays, we look at it through a returns-focused lens. It's got to compete with our portfolio.

And on top of that, there's really – it needs to mark three boxes of four. So it needs to have basically a scale, enough size to be able to get into it; it's got to have a shallow decline; it's got to have a high return; or it's got to have a low [Finding & Development] costs. And those are really – if you can mark three of those boxes and you put together multiple plays within your portfolio, it really builds up to kind of one perfect play is how we look at it. So we're extremely excited. We think there's going to be a lot of opportunities internationally. We have an international group in our headquarters that's constantly exploring and I think they've got a prospect list that is about as robust as we've ever seen. And the same thing goes for our domestic. We're always exploring 5 to 10 different prospects. And we think there's a lot of upside and a lot of bypassed opportunities here in the U.S.

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Salveen Richter — Goldman Sachs

Good afternoon everyone. Thank you so much for joining us. So, to start here, David, could we speak to your directed evolution gene therapy platform, the pipeline progress across the three disease verticals to date and your 12 month catalyst path?

David Kirn — Chief Executive Officer & Co-Founder

Sure. So thanks for having us. It's great to be here. So we're very much a platform and a product company. Our underlying platform is directed evolution which allows us to invent customized vectors for any tissue in the body essentially and get away from just using the standard conventional vectors which are non-specific. So it's really been a game changer. We developed a a diverse pipeline of vectors and products by design because we thought that diversification was a good idea when it's new biology. And we're thrilled to say now that all 3 of the vectors that we've taken into the clinic in 3 different therapeutic areas have all been validated. So R100 with Intravitreal injection in the retina into the vitreous for retinal transduction, A101 with aerosol delivery to the lung and then C1O2 for IV delivery to the heart. These have all shown high level transduction at much lower doses than are typically used and a high degree of gene expression and clinical activity. So we're thrilled that the platform now has borne out in humans.

Our pipeline is primary value driver as large market ophthalmology so 4D-150 for wet AMD, DME, and we think ultimately for DR, Diabetic Retinopathy. We also have 4D-175 where we're filing the IND this month to go into the clinic for Geographic Atrophy. And we have 4D-710 for Cystic Fibrosis lung disease that's starting in the patients who are ineligible or intolerant of modulators, but eventually moving into the combination space there. And then 4D-310 for Fabry Disease Cardiomyopathy is also — looks very promising. We expect to get off clinical hold with that shortly. In terms of upcoming catalyst is a very catalyst rich 9 months for us. So what we're looking at is again filing the IND for 4D-175. Then 4D-150 we're going to be presenting Phase 2 data in a broad Phase 3 like population at ASRS in Stockholm on July 17th. We're looking forward to that. After that we plan on giving an update on phase 3 design for 4D-150 in wet AMD. We've had a lot of interactions under the PRIME designation in Europe and RMAT in U.S. We think we're the only company and product to have that dual designation. So we're having a lot of Interactions around Phase 3. So we expect to update that in Q3. And then an exciting new opportunity for us with 4D-150 is Diabetic Macular Edema. So this is an area where there's huge unmet need, a real need for a long-term durable product, but there's no other gene therapy competition there. So we view that as very exciting and that's in Q4. We'll give a update on the Phase 1, Phase 2 dose confirmation phase of that study and then initiating Phase 3 in Q1 of 2025. So, it's a busy nine months.

Uneek Mehra — Chief Financial & Business Officer

Very busy.

Salveen Richter — Goldman Sachs

And Uneek, how — given you have these three distinct verticals and there's decent amount of expenditure that will go alongside these Phase 3 trials that you have to run. How are you allocating across them and how are you thinking about partnerships and just long term strategy here?

Uneek Mehra — Chief Financial & Business Officer

Yes, I mean — I think based on what David just said, our primary focus or big part of allocation is the ophtha portfolio. So, we've just raised capital earlier this year that allows us to take Wet AMD, both Phase 3 studies into fusion, so we are well covered for that. On the CF and on the cardio side, it's a slightly separate model for allocation. On the CF we have the partnership with Cystic Fibrosis Foundation. So, we do expect as the program continues to mature that we will have both thought leadership as well as financial support from the CF Foundation. Our Phase 1 and Phase 2 studies for CF are already covered in the cash balance, we have about $589 million as of the end of last quarter, so that takes into consideration both the Phase 3 studies for Ophta, for Wet AMD. Mind you DME is not yet covered in that. So, as we announce data, we will have to plan for that. But at least for Wet AMD and the optha portfolio, all the ongoing Phase 1, Phase 2 are well covered. Cystic Fibrosis, we've covered it through the allocation from the current asset we have. And then as we lift the clinical hold on Fabry disease. That's an exciting area for us to continue to think about partnerships. So, in terms of allocating capital, I think it's largely large market optha. But from a partnership perspective, we are open for both pulmonology CF as well as for cardiology as these programs perform.

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Betsy Graseck — Morgan Stanley

We were just chatting a little bit up here before we went on the live mic that this is our 15th Annual Morgan Stanley Financials Conference which I was the instigator of, and Andy Cecere, you should be getting a Gold Star Frequent Flyer pen because I think you've been to every single one of them.

Andrew Cecere — Chairman & Chief Executive Officer

All of them. Yes. Yes, I'll wait for it.

Betsy Graseck — Morgan Stanley

Thank you so much. So, John, why don't we kick-off the conversation here with you just to talk about what's going on with the quarter. So, with most of the quarter behind us, could you provide us with some update on what you're seeing in business trends and in the operating environment?

John Stern — Senior Executive Vice President & Chief Financial Officer

Sure. Absolutely. Good morning, everyone. Good to have you all here. In terms of overall economy, we feel that the economy is quite constructive at this time and resilient. On the consumer side, spending levels remain healthy. Although they are normalizing on the commercial side, businesses are still uncertain about the outlook. And so, loan growth has been more or less tepid. But overall, it's very conducive to our soft landing view in our base case where interest rates and inflation are normalizing. And so we feel good about the economy. Obviously, there are risks with that.

As it relates to guidance and thinking about the quarter and the full year, there is no change to our guidance for either the quarter or for the full year. It's coming in as expected. So, what that means from a net interest income standpoint for the second quarter is, we're going to be relatively stable on a net interest income standpoint with the first quarter there, which is about $4 billion. On a full year basis, we'll be between the range of $16.1 billion and $16.4 billion for the full year.

And then as we think about fees, we continue to make great progress on our fee accounts, and building deeper relationships and growing with our customers. And so we continue to anticipate mid-single-digit growth on a core basis on a year-over-year basis. Now where we land in that range is going to be dependent upon a couple of things, principally in underlying trends in capital markets activity as well as consumer spend. So, those are the things that we'll be watching out for.

As we think about expenses, we continue to expect $16.8 billion or lower for the full year from an expense standpoint. And then as we think about charge-offs, we will — we anticipate for the second quarter being in the high 50s from a net charge-off perspective in the second quarter and approaching 60 basis points as we get into the latter half of the year. So, those would be our updates, Betsy.

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Weekend Update #184

Weekend Update #185

Weekend Update #183