Weekend Update #103
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.
After a shaky start to the week, markets finished higher this week with tech leading the rebound On Monday’s open, U.S. equities adopted a “risk-off” sentiment as protests in China over the weekend highlighted the country’s continued struggles with COVID-19 and quarantine lockdowns. Focus was on turmoil reportedly escalating in Zhengzhou, the city that is home to Apple’s key China manufacturing hub. Investors were concerned that unrest would escalate against any continued “zero-COVID” policies in the greater China region.
On Wednesday, however, Jerome Powell gave a speech at the Brookings Institution and indicated that the FOMC is intent on slowing the pace of rate hikes over the next several meetings. Specifically, Powell said, “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.” The perceived dovish communication from the Federal Reserve’s Chair sent the DJIA up +2.18%, the Nasdaq up +4.41%, and the S&P 500 higher by +3.09% from Tuesday’s close.
Against the strong market rally on Wednesday, it would appear that markets are definitely more concerned about the direction, pace and length of interest rates, but several economic indicators this week will have implications on the FOMC’s rate decision. Dallas Manufacturing Activity surprised to the upside on Monday and annualized GDP quarter-over-quarter was stronger than forecast on Wednesday. Personal Income rose and Personal Spending was in-line with economist expectations. Initial jobless claims came in lower than expected and declined week-over-week. Additional color into key economic updates are provided within this week’s newsletter.
Thank you Blue Room Analyst IAN CARTER
Hi everyone, this is Joshua from the Evercore ISI Biotech team at the second day of our fifth annual HealthCONx Healthcare Conference. Very pleased to introduce the management team of Compass Pathways. We have Kabir Nath, Chief Executive Officer; Mike Falvey, Chief Financial Officer; and Guy Goodwin, Chief Medical Officer, as well as Steve Schultz, Senior Vice President of Investor Relations, so, gentlemen, thanks so much for joining. Maybe let's just start with a very quick snapshot of where Compass is in advancing COMP360 and psychedelic therapeutics for medicinal purposes.
Kabir Nath
Great. Thanks Josh. And thanks for the invitation to be here. So I'll briefly summarize that.
So we, on October the 12th, on Capital Markets Day, announced the designs of our pivotal Phase 3 trials. Pleased to say that we are still on track to start those trials before the end of 2022. And a lot of the startup work in terms of starting to recruit the therapists we need and train those for the scale-up for 2023 is well underway. Also, Phase 2 studies in anorexia nervosa and PTSD are underway—both expected to read out in 2023. In parallel, work continues on the commercial side to identify potential partners, collaborators that we can work with, as extensive sites for treatment centers, acknowledging that providing the psychological support to patients during their psilocybin therapy is a key component of our offering.
So I would say we're in a good place, living up to what we said we would do at Capital Markets Day, and looking forward to a pretty active ‘23 focused on execution.
BLUE ROOM ANALYST TAKEAWAYS
Ambarella third quarter revenue was once again in-line with expectations anchored to previous quarter guidance. Customer demand has been readjusting to balance inventory, a trend which we continue to see throughout the industry.
Profitability was also in line with expectations (BLUE ROOM estimate of $21.0 million vs. $19.8 million actual). Although we saw fewer CV customers this quarter, we continue to be pleased with the overall diversity of customers and end-markets in design wins. The Continental CV3 announcement was more than enough to satisfy any concerns over CV SoC design win activity.
Additionally, Ambarella management raised its 6-year automotive revenue pipeline from $1.8 billion to $2.3. It was indicated that this boost to the automotive pipeline does not correspond to the Continental, meaning that additional potential auto OEM through this channel will only increase the current pipeline estimate.
Our ongoing concern around the U.S./China semiconductor export bans and security regulations remain. Ambarella has noted HikVision and Dawha, two former Ambarella IoT SoC customers, will represent zero revenue due to the U.S./Chinese IoT security technology regulations. The current macro has deteriorated from our perspective, increasing the risk of regulations expanding to automotive. We will continue to take into account other China-risk related factors in the semiconductor industry broadly.
Overall, not much has changed from an investment perspective, but we see upside to Ambarella’s business as more Tier 1 and OEM customers interface with CV3 demos and understand the power/cost savings of future iterations of Ambarella SoCs.
Ambarella management also gave a rare two-quarter ahead revenue guidance forecast due to their estimate of below seasonal growth in 1Q24 as a result of supply/demand rebalancing.
Key Takeaways:
1. Environmental Impact
Semi trucks are much heavier than passenger cars and can tow about 40 tons (Tesla Semi estimated capacity is 82,000 lbs). At the same time, semi trucks are used much more than passenger vehicles since they are in transit for the majority of the day with many trucks traveling up to 100,000 miles a year.
Because of this, the heavy duty truck market has an outsized impact on climate change. Semis generate a fifth of U.S. vehicle emissions and over a third of U.S. vehicle particulate emissions (according to Tesla), despite semi trucks accounting for only about 1% of the total vehicle population in the U.S.
Emissions from semi trucks also lead to worse air quality in cities, especially communities near highways which means electric semi trucks can also provide benefits to overall health in addition to climate change
Consumer sentiment fell 5% from October to 56.8 in November — offsetting about one-third of the gains posted since the historic low in June.
Along with the ongoing impact of inflation, consumer attitudes have also been weighed down by rising borrowing costs, declining asset values, and weakening labor market expectations. Buying conditions for durables, which had markedly improved last month, decreased most sharply in November — falling back 19% to its September level on the basis of high interest rates and continued high prices. Long-term business conditions declined a more modest 6%, while short-term business conditions and personal finances were essentially unchanged.
For the sixth straight month, over 40% of consumers reported that their living standards are being eroded by inflation, with few differences across the income distribution. For lower-income consumers, the pain of high prices is partially offset by favorable incomes — a reflection of continued labor market strength for jobs at the lower end of the wage distribution. On the other hand, higher-income consumers are exposed to turmoil in financial markets. About 16% of middle-income and higher-income consumers spontaneously mentioned the negative effects of declining asset prices on their personal finances. While lower-income consumers posted an 11% improvement in personal finances this month, that of higher-income consumers deteriorated 10%.
The 34th OPEC and non-OPEC Ministerial Meeting is set to take place on Sunday, December 4, and the world is watching to see how the cartel is going to react to the many complexities that are impacting global energy markets. The looming Russian oil ban and accompanying price cap, protests concerning Zero-COVID policy in China, seasonal demand increases, financial demand for oil and a Western response will be top of mind for decision makers as they determine the actions necessary to “maintain stability” in the global oil market. Two weeks ago, I wrote an article that discussed the mindset of OPEC members through the lens of the European ban on seaborne Russian crude that is set to come into effect on December 5. While this will still have a significant role in the production quota, recent events have come to pass that will surely play a role in discussions held by the cartel’s leadership.
Summary
Kroger reported results that beat Street expectations on the sales and adjusted EPS fronts. Top-line revenue was aided by 6.9% identical-store sales growth, which was a reflection not just of inflation but also loyal customer growth, as the business attracted more affluent customers who find themselves consolidating their shopping and doing more of it at Kroger. The company also maintained profitability, with LIFO gross profit growing 6% year-over-year and clocking in at 21.4%, roughly in-line with historical profitability. Margins were aided by Kroger’s cost saving initiatives, which are on track to deliver a fifth consecutive year of $1 billion in savings.
KEY TAKEAWAYS:
92.7% y/y revenue growth was strong for the quarter, and represents the fourth straight quarter of +90.0% y/y growth in topline. Although the topline grew at a very strong rate, topline performance for the quarter was below the midpoint of previous quarter guide, which disappoints. Network charging systems and subscriptions both grew at solid y/y rates of 105% and 62%, respectively. Subscriptions contracted as a percentage of total revenue, which is flagged as a concern.
Gross margin decreased y/y but increased sequentially, highlighting supply chain recovery. Gross margin has been significantly impacted this year primarily due to supply chain disruptions, which affects both cost and supply availability, and increased new product introduction and transition costs. AC station product shortages, new product rollouts in Europe, and purchase price variance (PPV) were specifically cited as gross margin detractors. Also to note is that DC chargers drive higher top-line, but are a burden to margins relative to AC, so the increased mix of DC due to AC shortages had a negative impact. ChargePoint management views DC chargers as a percentage of total deployed to remain flat over the long-run, peaking with NEVI funding rollouts.
Price increases on hardware units that were implemented in June of 2022 should begin to provide additional leverage to gross margins, based on higher dollar sales. Based on management commentary, the full effects of the price increase should manifest in margin improvement by 2Q24 for ChargePoint.
Stuart Arbuckle — Executive VP and Chief Operating Officer
All right. Certainly, Liisa. Well, firstly thank you to you and Evercore ISI for inviting us. Really pleased to be here. Hello to everybody who is on the webcast. Just a reference, we will be making forward-looking statements on our call. Obviously, there are inherent risks and uncertainties, and I would refer you to our SEC filings to read more about those. But yeah let me give you a quick update, Liisa on where we think we are. We do think we're at a really important strategic inflection point for Vertex as a company and I'll explain why I think that. And what we see as some of the really exciting things ahead of us in the future. And let's start with our corporate strategy and our research strategy because I think those are incredibly important to understand -- to understand why we think we're at this really important inflection point.
So our corporate strategy to invest in scientific innovation to discover and develop transformative medicines for people with serious diseases that can be served through specialty markets and every word in that corporate strategy statement is important. Invest in scientific innovation. We invest well over 70% of our operating expenses in R&D because we believe that is the best way of driving value for patients and for our shareholders.
“Are we going into a situation a little bit like the 70s where there will be ongoing, repeat shocks? Which would tend to put more upward pressure on inflation over time. We don’t really know. It’s a great question.”
— Jerome Powell, November 30, 2022
Key Takeaways:
Overall Best Buy 3Q23 performance was a surprise against BLUE ROOM, markets, and company expectations. Comp sales declined less than the 12.1% originally guided in the 2Q23 earnings call, and above our forecasted -14.0% range. On a GAAP basis, operating margins compressed 218 bps on a year-over-year basis, and about 14 bps sequentially. Increased promotionality and lower sales were the primary drivers. In gross profit, Best Buy has been relatively resilient to inventory cost challenges like competitors. To that point, inventory was down this quarter and the company plans to be more “flexible” with longer lead-time items in order to keep balance sheet volatility low. Third quarter performance provided a solid valuation boost to our model, and with margin trends expected to recover to at least pre-pandemic levels, the stock got an effective re-rating in pricing today. That is encouraging, as the equity has underperformed our baseline expectations.
With that, however, comes the near-term risk profile in the fourth quarter outlook that indicates that the worst may have yet to come, economically. Although all consumer oriented industries are calling out inflation, macro, and interest-rates contributing to a slowdown in spending, none have expressed confidence that the next several quarters will show a bounce-back in growth. For us, this dynamic offsets the de-risking of the stock that we saw in the buying action today. Added evidence for this position is the fact that Best Buy is maintaining its fourth quarter expectations, which imply a non-GAAP operating rate of around 4.30% and comp sales of about -9.22%, in our model. [Further detail around the quarter is provided in the “Analyst Notes” Ksection of this report.]
Rachel Bach — Manager of Investor Communications
Deere finished the year with a strong Q4 due to a 40% increase in net sales
Including an 18.5% margin on Equipment Operations
The business was driven by strong demand, higher production rates, and progress on reducing inventory and partially completed machines
Looking ahead, ag fundamentals remain positive, continuing to drive healthy demand
As evidenced by Deere’s full order books into Q3 2023
Construction and Foresty segment continues to see strong demand
Similarly, order books are extended into the second half of 2023, providing visibility and confidence in the new year
FY 2022 Results:
Net sales and revenues were up 19% to $52.6 billion
Net sales for Equipment Operations were up 21% to $47.9 billion
Net income was $7.1 billion or $23.28 per diluted share
Q4 2022 Results:
Net sales were up 37% to $15.5 billion
Net sales for Equipment Operations were up 40% to $14.4 billion
Net income was $2.2 billion or $7.44 per diluted share
David Sherwood -- AVP of Finance and Investor Relations, Costco
AVP of Finance and Investor Relations. and I will review our sales results for the four-week retail month of November, which started on Monday, October 31st, and ended on Sunday, October 27th. This period is compared to the four weeks that began last year on Monday, November 1st and ended on Sunday, November 28th.
This call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include but are not limited to those outlined in today's call and sales release, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made and the company does not undertake to update them except as required by law.
Ramy Farid — Chief Executive Officer
Overview:
Schrödinger developed a computational platform over the past 30 years based on physics that they’ve shown is enabling the discovery of novel molecules much faster than traditional methods
They will show very compelling data that shows they’ve increased the probability of success
Schrödinger has 1,600 customers worldwide
They establish collaborations in drug design and materials design
They have 12 active collaboration projects now
Schrödinger also has an internal proprietary pipeline of drugs
asdjfadsfKevin Conroy — Chief Executive Officer, President & Chairman
Normalization is key
Exact said in the first quarter of the pandemic that it had the potential to bring forward adoption of Cologuard
It’s a real challenge to demonstrate the evidence that a new screening test works
Now, you see the net promoter scores for Cologuard are through the roof — they’ve doubled since the start of the pandemic
They’re seeing broader and deeper utilization
The infrequent user is using more frequently than early adopters in past years
150,000 physicians ordered in the last quarter alone
They’re ordering more frequently
Now, they’re starting to offer it on their own
In addition to sensitivity and specificity, a big benefit is the ability to use Cologuard in the comfort of your own home
In Q3, Cologuard grew 25% and sales and marketing expense was down 5% YoY. Historically, every stage of incremental growth of Cologuard has come with incremental spending too. What’s unique about this point in time of the evolution that’s enabling this leverage
Cologuard has been available to patients for 8 years
For 8 years, Exact has been heavily investing in education around this new DNA-based way to screen for colon cancer
Investors have been incredibly patients
During that time, they’ve reached 300,000 primary care providers
Exact has seen customer satisfaction in the past 2 years go from an NPS score of 20 to an NPS score of 42
The brand has become powerful
It’s in all of the key guidelines
It’s fully reimbursed
Finally, in Q3, you saw the separation between the flat sales and marketing expense
What you can expect next year is reasonably flat sales and marketing expenses
They don’t expect any big additions to the sales force or any direct addition to consumer advertising
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