Discover more from Rate of Return by Austin Hankwitz
Week in Review: 12/19/21
Everything worth commentating on regarding this past week in the markets.
Happy Holidays to each of you!
As the workflows of many begin to slow down, that doesn’t mean the movement of the markets have taken a break just yet. Let’s break down everything you need to know from the last full week of the business year.
ICMYI - posts from this week:
The Investing Week Ahead - what we’ll be referencing back to in this post
2022 Portfolio: Mega-Caps - detailing the largest companies that will make up ~50% of my 2022 portfolio
My Favorite Stocks: 12/16/21 - the plays I’m currently focusing on and why
Upcoming: The first edition of our ‘Startup Spotlight’ series, where I’ll be introducing you to some incredible founders and their products that may be useful to you. This is also a chance for you all to peruse their job openings if you’re currently looking!
Week in Review - Too Long; Didn’t Read:
A polarizing fintech IPO, Accenture impresses, Rivian revenue is worth less than most houses in the nicer neighborhoods of Nashville, Lowe’s Investor Day gives a positive outlook, Wall Street is bullish on airline stocks, a thoughtful interpretation of the Fed’s critical meeting, retail sales disappoint, building permits surge.
Touching on the one notable initial public offering of the week - a connected operations platform for enterprise vehicle fleets.
The San Fran fintech successfully raised $800 million when they made their public debut on Wednesday. While the company is interesting, the couldn’t have picked a worse week to IPO - as we see continued volatility in the markets given interest rates, inflation, and job report data. The stock ended the week trading down -9.5%.
I spent some time this week looking more into other investors’ opinions in this company, so here are their bullish and bearish cases:
Bullish - backed by rockstar VCs (Andreesen Horowitz & General Catalyst) to help with strategic decision making, sales and marketing expense as a percent of total revenue is declining, 115% dollar-based net retention rate, strong revenue growth, increasing gross profit margins, continually reducing operating losses, all while operating in a market (fleet vehicle telematics) growing +15% compounded annually.
Bearish - they’re burning cash like crazy (-$170 million during the last 12 months), operating losses have been lowered.. but they’re still massive, the company wasn’t so clear as to what the cash raised from the IPO will be spent on, and the fact the company is trading at a rich multiple right now.
Personally, I like what this company is doing as well as their size. They’ll do some $500 million in revenue next year, certainly nothing to scoff at, all while maintaining some 72% gross profit margins. I agree, their stock is trading on the rich side right now and will likely see continued volatility throughout this market uncertainty - but if I were to open a position in this company it would be a “close your eyes for 4 years” position.
Key Earnings Announcements:
Reporting on the five biggest earnings calls of the week, with one standing out as the biggest ‘winner’ of the week.
Revenue: $4.11 billion, an increase of +20% YoY
Digital Media ARR: $12.24 billion, an increase of +5% YoY
Creative Studio ARR: $10.30 billion
Cash Flow from Operations: $2.05 billion
Remaining Performance Obligations: $14.00 billion (+23%)
Press Release Callout
“Adobe’s record performance in Q4 resulted in fiscal 2021 revenue exceeding $15 billion. Adobe’s financial performance in fiscal 2021 was outstanding, with top-line acceleration resulting in more than $7 billion in operating cash flows.
With an estimated $205 billion addressable market, we are well positioned for significant growth in the years ahead with our industry-leading products and platforms.”
Good news; bad news. The good news is Adobe is firing on all cylinders and they’re absolutely seeing upside from multiple secular growth trends (digital marketing, creator economy, etc) - which led to their record quarterly revenue and record cash flow from operations.
The bad news is the company’s outlook for 2022 was disappointing to say the least - causing a flurry of downgrades from our favorite analysts on Wall Street. The company expects revenue to grow +13% at the top ($17.90 billion) and earn profits of $13.70 per share on that revenue. These figures come in marginally lower than Wall Street’s $18.20 billion in revenue expectations and $14.20 in earned profits per share.
Honestly, I was surprised to see such a stable company’s stock sell off so violently. A few analysts were quoted saying they’re still bullish but are lowering their PTs given investor sentiment and short-term reopening fears, while others didn’t lower their PTs at all stating “Adobe usually guides conservatively to start the year.” Personally, I’m not as worried as Adobe has shown over long periods of time their ability to create value for their shareholder (below).
Revenue: $15.0 billion, an increase of +27% YoY
Earnings: $2.78 per share, an increase of +20% YoY
Operating Income: $2.43 billion, an increase of +29% YoY
New Bookings: $16.8 billion, an increase of +30% YoY
Press Release Callout
“Our outstanding first-quarter financial performance and ability to capitalize on the market opportunity reflects continued market share gains. This is the direct result of having executed for years a strategy to rotate our business to digital, cloud and security, both hiring and upskilling exceptionally talented people across the globe and fostering deep relationships with both the world’s leading companies and our technology partners.
I am especially proud that we added 50,000 people to our workforce this quarter, now at 674,000, reflecting our strong employee experience, which enables us to attract and grow great people.”
Wow! This company crushed it, which surprised me considering Accenture is a global consulting firm - but I guess given the business transformation we’ve seen over the last few years it makes sense. The company’s stock ran high as they guided to a +20% increase in revenue for 2022, and a free cash flow increase of about +12%. Given their $220 billion market cap, I’m going to spend some time this weekend learning more - with the goal of making the decision to add them (or not) to the “Mega-Caps” section of my 2022 portfolio.
Revenue: $23.5 billion, an increase of +14% YoY
Operating Income: $1.6 billion, an increase of +11% YoY
Profits: $1.04 billion, a decrease of -16% YoY
Press Release Callout
“FedEx operating income grew in our second quarter, driven by strong revenue growth and effective management of our cost and expected labor availability challenges.”
Here’s the deal - Fedex stock has been trending lower over the last year or so given the increased demand of shipments (people ordering online due to COVID + other reasons for this) and the decrease in available employees to service the shipments. In case you all forgot, we’re living in a time where everyone is quitting their job to work somewhere else allowing for remote work and even getting paid more to do it.
As you can imagine, Fedex’s services are very labor intensive - so the company has had challenges recruiting employees (which costs money) and have been paying their current staff more to retain them (which also costs money.. $470M to be exact). Their stock traded higher after this report because the company reported on higher revenue per shipment, which is effectively offsetting the higher labor costs.
I’m not running to buy Fedex right now - I think there are better places to allocate new capital at the moment.
Rivian Automotive (RIVN):
Revenue: $1.0 million .. yep, a million bucks
Net Pre-orders: 71,000
Amazon Pre-orders: 100,000
Annual Capacity for IL Factory: 200,000
Annual Capacity for GA Factory: 400,000
Press Release Callout
There’s not really a main callout here, so I’ll share the milestones listed in their Shareholder Letter below:
Delivered first vehicle (386 of 652 total produced cars have been delivered)
MotorTrend 2022 Truck of the Year
Major callout from this award was the fact that all of these Rivian vehicles are run on American-made parts, built by Americans
Completed their IPO
Raised some $13.7 billion by doing this - spending the money on building factories in Illinois and Georgia
Grew their number of pre-orders from 48,000 in Q3 to 71,000 now in Q4
Who knows what this company is going to do. It seems to me like they’re gunning for that enterprise EV market (Amazon now, maybe USPS, UPS, and FedEx next?) - but at what cost? To invest in Rivian without material revenue and purchases is a roll of the dice. I’ll keep my exposure to less than 1% for the foreseeable future.
Darden Restaurants (DRI):
Revenue: $2.27 billion, an increase of +35% YoY
Net New Restaurants: +34
Press Release Callout
“Our restaurant teams did a fantastic job executing at a high level once again this quarter, resulting in strong sales and earnings. Our people fuel our success, which is why we have invested more than $200 million in our team members over the past two years.
Given the strength of our performance, we are accelerating a commitment we announced earlier this year to increase the minimum hourly earnings for restaurant team members to $12, which includes income earned through gratuities, effective January 1, 2022. With this change, we expect our restaurant team members will earn, on average, approximately $20 per hour.”
Wish I had more metrics to share with you, but the only other metric is their revenue by business segment. Regardless, their stock traded lower after the report given this increase in minimum hourly earnings for restaurant team members. The company guided toward accelerating revenue in relation to expectations, but profits next year were much lighter than hoped for because of this hourly earnings bump.
The company’s stock recovered beautifully coming out of the pandemic, but has seen stagnation since March. The average price target is $168 / share with a high of $200 / share. Meaningful upside.
Let’s highlight the main takeaways from last week’s Investor Days.
Campbell Soup (CPB) Investor Day:
I honestly had no idea that Campbell’s owned all of these brands. This helps explain how the company increased its cumulative operating cash flow from $1.4B in FY19, to $2.8B in FY20, and now at $3.8B for FY21.
Shares of CPB currently trade at $44.18, down -8.62% YTD. Wall Street price targets have CPB coming in at just north of $45. I don’t find this to be an interesting play.
While I understand the “probably never going away” factor that a consumer goods Goliath of this nature carries, and appreciate the healthy 3.43% dividend yield - I’ll pass. However, I will be buying Goldfish and Milanos out of respect. Simply delicious.
Lowe’s (LOW) 2022 Financial Outlook:
I love how Lowe’s leadership ‘call a spade a spade’ regarding the company’s retail boom from Covid and the explosive housing market. Instead of pretending that these agreeable interest rates and cash-heavy conditions will continue for the customers of their stores, they highlighted “Pro” brands and products. These focus on Lowe’s connections with contractors, suppliers, tool manufacturers, and other companies.
Sales within Lowe’s Pro category rose +24% in FY21, with a total addressable market of ~$450B. After introducing new brands / products to the Pro ecosystem and re-platforming Lowes4Pros.com to the cloud, they’ve officially doubled down on their conviction of expanding enterprise relationships.
On the everyday retail side of things, CEO Marvin Ellison did touch on a transition from the current store delivery model to a more streamlined market delivery model. This seems to be the company’s plan to retain all of the first-time / less frequent customers that they’ve accumulated throughout the pandemic.
Shares of LOW currently trade at $253.24, up +57.77% YTD. Wall Street price targets have Lowe’s coming in at $275.75, representing +8.8% upside.
Shares of Home Depot (HD) currently trade at $399.53, up +50.41% YTD. Wall Street price targets have Home Depot coming in at $417.16, representing +4.4% upside.
I’m not sure there’s a better head-to-head “duopoly” match-up in all of the market than that of Lowe’s and Home Depot (HD). I currently hold both - with 3.7% and 3.1% weighting in my overall portfolio, respectively. The limited upsides of WS price targets have me thinking it may be wise to slightly trim the positions, but I likely won’t because these are anchors of my dividend portfolio. I’ll be keeping an eye on developments coming from Home Depot’s sideline to reassess if I should alter these weightings at all in the coming months.
Delta Air Lines (DAL) Capital Markets Day:
After breaking down Southwest Airlines (LUV) in our most recent Week in Review, Delta’s Investor Day seemed to follow suit with my past assumptions. While LUV is doing an incredible job of expanding its operations and having a generally healthy balance sheet, DAL dominates when it comes to customer satisfaction. Delta leadership laid out an impressive ‘road to full recover’ - showing that the company will see higher capacity, less overall capital expenditures (CapEx), and increased earnings per share (EPS) over the next 12-18 months.
Shares of DAL currently trade at $35.80, down -10.97% YTD. Wall Street price targets have Delta coming in at $53.86, representing +49.94% upside.
Shares of LUV currently trade at $39.53, down -15.19% YTD. Wall Street price targets have Southwest coming in at $57.32, representing +45% upside.
I absolutely love Delta and it’s my preferred airline for both business and leisure travel. However, I generally don’t like investing into airline stocks for the long-term. The price targets above clearly show that there’s significant bullishness surrounding the industry, so I may consider opening small positions for some short-term gains. Regardless, Delta earns an A+ for the comfiest seats and best snacks in the game.
Major Economic Updates:
Interest rates remain low, supply chain issues are still eating away at retail sales, and we’re still building as fast as ever.
FOMC Meeting Takeaways
The Federal Open Market Committee (FOMC) recently conducted its most anticipated meeting of the second half of 2021. The committee announced that the federal funds (interest) rate will remain unchanged at 0.00%-0.25%. In addition, the Federal Reserve (Fed) announced that it will double the speed of tapering, implying that the expansion of the Fed’s balance sheet will conclude after March 2022.
“Tapering” is one of those phrases that everyone has heard over the last year, but few do a good job of explaining. Let’s start with what the Fed is even doing when it’s “expanding the balance sheet.”
The Fed’s program has purchased billions of dollars worth of Treasury bonds and mortgage-backed securities (MBS) - every month - throughout the pandemic.
To prevent the bankruptcy of government-sponsored entities by propping up the prices of their securities.
Well that sounds bad. What happens if they stop propping them up?
Hopefully…not much. Many argue that the foundation of the hot housing market no longer needs support in the form of monthly Fed purchases. For many, avoiding a “boom and bust” housing cycle is the central thesis surrounding asset purchases. If that was the goal, then the Fed seems to have done a quality job of propping up the housing market during a time of need - and can begin to pull back its ‘assistance’ now that it’s no longer necessary.
On the other hand - some economists and members of the Fed argue that targeting the housing market was never the central purpose.
Matthew Klein, founder of The Overshoot, suggests that it’s more about the Fed “effectively absorbing interest rate volatility on its own balance sheet.”
Fed Chair Jerome Powell: “We are phasing out our purchases more rapidly because with elevated inflation pressures and a rapidly strengthening labor market, the economy no longer needs increasing amounts of policy support. In addition, a quicker conclusion of our asset purchases will better position policy to address the full range of plausible economic outcomes. We remain prepared to adjust the pace of purchases if warranted by changes in the economic outlook. And even after our balance sheet stops expanding, our holdings of securities will continue to foster accommodative financial conditions.”
In summary, tapering is all about the Federal Reserve rolling back its asset purchases that are propping up certain parts of the American economy.
Regardless of the interpretation of the methods, most analysts agree that interest rate changes are much more pivotal than the tapering itself - as this more directly impacts credit & loan providers, commercial bank cashflows, and the overall financial decisions of Americans.
My Take: I’ve been very critical at times of massive money printing and superfluous monetary policy intervention. However, I think it’s important to note that I actually watched the majority of Chair Powell’s press conference - and he was flawless.
His job is to communicate the collective sentiment of the FOMC’s 12 members, and it’s extremely difficult to get it right. I believe they should have begun tapering months ago, but Powell handled his stressful announcements with both clarity and reassurance. The markets responded relatively well, which I found appropriate.
US Retail Sales for November 2021:
According to the US Census Bureau, retail sales rose +0.3% from October to November. With the surge of +1.8% the month before and expectations of November’s figure coming in around +0.8%, it’s certainly a surprise.
The largest gains were seen at building material & garden equipment dealers, food & beverage stores, gasoline stations, clothing stores, sporting goods, hobby, musical instruments & book stores, and restaurants & bars.
This can generally be considered a disappointing drag from inflation and supply chain impacts. More broadly, consumer demand is still wildly strong - with retail sales up +18.2% in November from a year-over-year basis. The lackluster results are fairly odd, given the holiday season, but the increased cost for essentials like energy and transportation likely impacted spending on accessories, electronics, and gifts.
US Building Permits for November 2021:
According to the US Census Bureau, building permits rose +3.6% from October to November - basically matching the 8-month high.
The seasonally adjusted annual rate of 1.712 million permits in November beat market expectations of 1.663 million. Permits for buildings with five units or more surged +6.1% to a rate of 560K and single-family authorizations rose +2.7% to a rate of 1.103 million.
Going back to the earlier discussion on tapering, this data further proves that the housing market likely doesn’t need the full assistance of the Fed. However, there is a bit of a paradox here.
The housing market may be fine without extensive asset purchases, but data could significantly change as the Fed adjusts its policy on rates. Most see this coming in the middle of 2022, so there may be a sprint to take advantage of the favorable interest rate environment while it’s here.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.