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Market Outlook

Payrolls Report For March 2024

source:market outlook

The much-awaited payrolls report is out

Strong numbers, up 303,000 much higher than consensus estimates of 212,000

Wage growth, 0.03 MoM, +4.1% annual, as estimated.

The unemployment rate inched down to 3.8% from 3.9%. Economists, on average, had expected the jobless rate to hold steady at 3.9%. Labor force participation rate of 62.7% vs. 62.6% consensus and 62.5% prior. This is a good sign.

Treasuries yields are at 4.37% up 7 basis points – expectations of rate cuts fade.

S&P Futures up 0.4%

Nasdaq Composite up 0.49%

The past few days there was a lot of consternation in the market, with reports about Fed cuts delayed or as one Fed Gov, Neal Kashkari suggested yesterday

The markets had fallen the last three days and looks stable at least for now. 

Categories
Healthcare

Humana: A Healthcare Giant Facing Challenges but Offering Long-Term Value

source:humana

Humana (HUM) $302

Humana has fallen 40% in the past year to $302, after lower guidance and missing estimates, and 14% today, after a lower than expected reimbursement rate from Medicare Advantage, where it is the second largest player. Losses have extended to major players like United Health as well.

Revenue projections for the next three years on lower MA payments are already down to low single digits 2-4%.

However, Humana has better operations than most, better cost control and profit margins while low, are still better than other providers. It should have better growth in 2025, and consensus estimates are calling for $24 earnings per share and mid twenties earnings growth from such a low base. Most of this is already in the price.

That said, it is a $112Bn giant, and given how regulated this industry is and how difficult it is to make money, entrenched players like it will survive and recover, but expect 2024 to be volatile, there could be further misses.

It’s worth buying in the $270-$280 range, or starting and accumulating on dips. There is value at the current multiple of only 12x 2025 earnings of $24. It’s below their historical multiple of 15-16.

Returns should be muted though, it’s a healthcare company after all, but the discount should help get over 10% per year, including dividends over the next few years.

Categories
Stocks

 Solventum Has No Revenue Growth Prospects

Solventum (SOLV) $67

The valuation is reasonable, the price to sales ratio is just 1.5x with a $12Bn Market Cap and $8.2Bn in sales.

Solid profit-making company with 25% operating margins and an EPS of $6.25, which gives it a decent multiple of 67/6.25 or just 11 – this is a discount to comparable health companies for sure.

The big problem is the lack of revenue growth, Solventum has been struggling at $8.2MBn in sales for the last three years, and even post spin-off is guiding to zero growth. That is also a bit difficult to swallow with all their segments – MedSurg, dental, health information and drinking water filtration, having 4-6% annual growth opportunities. There seems to be an execution problem.

Pre-spin off this was a well-entrenched 70 year business within 100,000 global customers, with presence in 75% of US hospitals and 50% international sales

3M has saddled it with $7.7Bn of debt so there is an interest burden of $400Mn which will dent profitability, till they reduce it in the next two three years.

The low valuation is definitely interesting, but we don’t want to walk into a value trap, where the stock just stagnates because of zero growth. Right now, there needs to be better execution or at least a strategic plan to start growing again. 

It might make sense to buy a small quantity to take advantage of the low valuation and then add more with better growth visibility.

Categories
Enterprise Software

Long-Term Investment Opportunity: Solid Cash Flow, Strong Margins, and Growth Potential in Cloud Storage

ntnx

Solid company with big improvements in cash flow and gross margins in the past few years. Revenue growth has slowed to 15-16%, and shouldn’t grow much faster in the next three years. Renewals have been good and they have a decent pipeline with two possible upsides from customers either moving from VMware after Broadcom acquired it, and a strategic tie up with Cisco, that should help business growth.

There are ample opportunities in cloud storage though it is competitive, it’s a growing market with all the datacenter spend right now.

The stock has already moved up 149% in the past year, so that could restrict upside gains. Valuation is OK with 7x sales and 16% growth, a bit on the higher side, Buy on declines or Dollar Cost Average, this is a good long term investment.

Categories
Enterprise Software

Adobe: A Strong Franchise Facing Valuation Challenges Amid Slowing Growth

Source: Adobe

Adobe (ADBE) – $506

It has strong defensible franchises, great branding and leadership. Very profitable in all its segments with operating margins in excess of 30%.

The threat of AI replacing some of the video editing and other products is still in its infancy and Adobe is also working on its own AI initiatives; they’ve just been slow to roll it out.

Revenue growth has slowed to 10-12% for the next three years, and management did disappoint for the next quarter’s guidance. However, Adobe is also a good earnings story with 13-14% earnings growth.

The only problem is the valuation, and the market perception that this is a mature company with $20Bn in revenue. At 28x earnings and 10.5x sales there’s not much left for appreciation with that slowing growth.

I would prefer to buy on declines at around $470. At $506 I would expect a return of about 12% or so a year.

Categories
Semiconductors

Marvell Technology: Positioned for AI Growth but Priced for Perfection

source

Marvell Technology (MRVL) $74

Networking infrastructure – It had a down year, with cyclicality in China and slower data center growth. China is about 50% of revenues.

That said, the forecast for the next three years is good, with 24% revenue growth and 35 to 40% adjusted earnings growth. 

A lot of this is riding on growth from Nvidia and other AI investments in data centers. 

Like most companies in the sector Marvell has also appreciated 73% in the past year so valuations are a bit expensive, 11x sales, with cyclicality and China exposure, it’s definitely on the higher side. It has also financed its acquisitions with debt, carrying a lot of interest burden.

I would prefer to buy 10% lower in the mid sixties for a better return – there is an AI event on April 11th, which may have more specifics/catalysts. Will keep a look out for that.

Categories
Market Outlook

Fed’s Preferred Inflation Gauge Eases in February, Matching Expectations

source

Fed’s preferred inflation gauge subsides, in line with consensus, in February

Core PCE Price Index, which excludes food and energy, rose 0.3% M/M in February vs. +0.3% consensus and 0.5% prior (revised from +0.4%).

On a year-over-year basis, core PCE increased 2.8% Y/Y, compared with the +2.8% consensus and +2.9% prior (revised from 2.8%).

Including food and energy prices, the PCE Price Index grew 0.3% M/M, less than the +0.4% expected and slowing from +0.4% in January (revised from +0.3%).

Prices for goods rose by 0.5%, bolstered by energy prices, and prices for services rose 0.3%. Food prices edged up 0.1%, while energy prices jumped 2.3% during the month.

2.5% Y/Y vs. +2.5% expected and +2.4% prior.

Personal income increased less than expected, up 0.3% M/M vs. +0.4% expected and +1.0% prior, the U.S. Commerce Department said on Friday.

Personal outlays climbed 0.8% M/M, exceeding the +0.5% expected and accelerating from +0.2% in January.

Real disposable income, which is adjusted for inflation, declined 0.1% M/M in February, while real personal consumption expenditures increased 0.4%.

Categories
Leisure

Disney’s Rebound: A Hold for Steady Returns, but Limited Upside

Source

Disney (DIS) $122 Hold

Disney bounced back strongly in the last 12 months gaining 28% and 50% from its October now, a commendable rise reflecting the efforts of management to turn it around.

Going forward total revenues should be muted around 4 to 5% after the last three years gain of 8%. Entertainment and sports are slow growers, theme parks grew a lot after the pandemic ended, but won’t have that tailwind on a higher base.

Streaming while plateauing in the US will grow abroad, but the sluggish growth will not allow for major price increases. Besides Netflix and Prime, they should be the 3rd survivor, WSJ research indicated that there was resistance beyond 3 subscriptions per home.

Disney used to have over 20% operating margins, now they are like 10-11%, ESPN weakness, theme park shutdowns during the pandemic and all the expense of streaming really killed margins, but they are turning it around and the Dec quarter showed improvement.

Earnings will grow around 13% –  that’s the biggest positive, the brand value is tremendous and Disney will carry a premium multiple.

Valuation – Disney is already priced at 26x earnings, twice its growth rate, mainly because of the 28% gain in the past year. I would expect at least a 22-24 multiple of FY 2027 earnings of $7- that’s about $160-$170 per share, three years out, that’s a 10% return per year from the current price.

A good hold if 10% a year is good enough, I wouldn’t add more unless there is a major drop in price or a big improvement in strategy. 

Categories
Enterprise Software

nCino: A SaaS Player Focused on Profitability but Facing Valuation Hurdles

source: ncino

nCino Inc (NCNO) $35.75

The stock jumped 15-20% post earnings on an earnings beat and slight revenue miss, from $30 yesterday. Guidance is also decent with 15% revenue growth for 2024.

You could buy around $32 or in installments.

Positives

Focusing on profitability, makes decent cash flow of 15% and adjusted operating of 3-5%, showing an improving trend with good estimates of earnings improving 35% in years 2025-2026. 

They have the leverage to do that, it’s a SaaS business but I would have preferred gross margins in the high 80’s. That must happen over time.

They are selling to higher cohort customers, growth in customers over 100K and $1Mn is much higher than baseline growth.

There is a switching cost competitive advantage, especially when you’re dealing with larger customers, and have more than one offering.

Negatives

Sales cycles are longer given the higher value customer.

Banking and financial services software is very competitive, not much to differentiate from one another.

Price has gotten a little expensive at 6x sales with 15% revenue growth so returns going forward will be muted in comparison.

Given the weaknesses in banks and the financial services sector, I don’t expect multiples to be more rewarding than the market, even though this is a tech company, but focused on one vertical.

Categories
Fintech

Pagaya: Navigating Capital Raise Challenges While Aiming for Profitability

source:pagaya

Pagaya (PGY)

It was an interesting call and some questions were answered, which is kind of normal for these meetings. 

  • Guidance is reaffirmed for Q1-24 and full year 2024, which is about $170Mn in adjusted EBITDA.
  • Pagaya will be operating cash flow positive in early 2025 – reaffirmed. This was given with enough specifics, there will be enough margins from credit lending to tide over retention requirements.
  • There was a certain amount of naivete about getting a good deal from Wall Street for the recent capital raise, from both Pagaya and several of us bullish analysts. Wall Street never overpays and Blackrock, most definitely never does. And as the market was driven down, two other institutions besides Blackrock, who were part of the raise also bargained much lower than the original price. 
  • In terms of risk – there was a fair amount of detail provided on 2021-2022 vintages, which had weaker loans than 2023 and current cohort, but management again reiterated that this was significantly lower than the rest of the market. I suspect that this weakness was well taken advantage of by the investors in the current capital raise.
  • In securitization even though the issuer has to retain only 5% for compliance, the performance of the loans still matters because the underwriter will not come back to you as the issuer keep piling on bad loans, and because securitizations work in tranches – the top tranche has the best loans and so on, the weaker tranches cannot afford to have too many delinquent loans..in which case the issuer will have to take up that slack to just to stay in business. The general impression we got was that some of the 2021 vintage was slow to be taken off the books at a decent price.
  • Bottom line – I’m staying invested till the next quarters’ earnings call in May.
  • I have submitted these questions:

“1) Please address the surprise, blindsiding nature of the capital raise (3 days after the Reverse Split). Also, the midstream lowering of the price of the offering while increasing the number of shares you offered.

“I believe the original estimate was $14.70, then it was $12.70, and I watched the volume that day of the offering: the majority of it was under $12, and the share price closed a little above $11. Institutional participation seemed hesitant, even lacking. Today the share price is $9.12

“The timing and execution of this offering has been an unmitigated disaster for your shareholders, somewhere around a $600ML loss for a $90ML capital raise.

“How do you square that? Now that the damage has been done, it’s time to be honest with your investors about the capital raise. What happened?

“2) Since the bearish analyst at Wedbush Morgan downgraded your price target to $11.50, while remaining neutral, citing “losses in risk-retention assets” there has been a horde of relatively-inexperienced DYI accountants pouring through your past financial statements, looking for buried losses that you have not explicated for investors.

“You stated them, yes, in the March 8th 20-F, but now the investing world wants an explanation.

“What is the performance of your risk-retention assets? Are they insured? What is their current status? Do you now have sufficient capital to steer Pagaya to the end of the year? And cover the 5% needed for future ABS investments? Can you reaffirm your 1Q24 guidance and your full year estimates? Thank you.”