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Shipping Stocks

Zim Integrated Is A Cyclical Dependent On Freight Rates

ZIM Integrated (ZIM) $23 (Shipping) 

Highly Cyclical dependent on freight rates. 

The short-term pop may continue for a while, I’m not investing in it because it’s too cyclical and difficult to predict freight rates, which are again tied to the global economy. 

This year is very good based on increased freight rates and the return of the dividend. Dividends return after higher freight rates, higher shipping volume, and lower fuel costs. 

Management said it now expects $2.6 billion to $3 billion in adjusted earnings before interest, taxes, depreciation and amortization for 2024, up from a previous range of $1.15 billion to $1.55 billion. 

During the second quarter, ZIM (ZIM) swung to a profit of $373 million, or $3.08 a share, from a loss of $213 million, or a loss of $1.79 a share, a year earlier. 

ZIM’s (ZIM) board declared a cash dividend of approximately $112 million, or $0.93 a share, payable on Sept. 5. 

In terms of downside risks, as aforementioned, ZIM’s underlying business is highly cyclical and responds sensitively to shipping rates. To wit, the rates were mostly in the range of $2,000 to $4,000 a year ago per 40-foot container. These rates have climbed substantially since then and peaked in the $8,000 to $10,000 range recently. 

There haven’t been enough improvements in 2-3 year forecasts which are still negative for sales and earnings, so definitely not a long term investment.  

Categories
Stocks

Cisco Has Potential And Is Taking Steps In The Right Direction 

Cisco (CSCO) $48.50  

I’m holding for now, let’s see progress on the new “Platformization” initiatives. 

The stock was flat for the last 5 years, but did return about 7% per year for the last 10 – no surprise. The past year its down 9%. 

As the older lumbering incumbent in networking, it was relegated to a commodity cyclical, more product sales instead of the bigger projects that Arista stole from under their nose with Microsoft and Meta, building out their platforms as a partner not as switch and routers or other networking gear seller. 

It will continue to grow in the low to mid-single digits for revenues and sales and the valuation too reflects that, so it’s not that underpriced to buy, and the job cuts mean they do want to increase the bottom line – but that’s not a growth story, then. 

This is a step in the right direction, basically getting to where Arista is now. 

“Management was clearly trying to message that the demand environment is returning to normal; Cisco will continue to shift investments towards AI, Cloud and Security that is resulting in a re-allocation of resources; the company is collapsing its product structure under Jeetu Patel as ‘platformization’ across categories is happening; and AI and datacenter modernizations are occurring,” said Piper Sandler analysts James Fish and Quinton Gabrielli, in an investor note. 

But, too little, too late? 

It’s going to be a show me story – there is enough growth in AI and datacenter, but everyone has or had their sights on it for a while now. 

Categories
Market Outlook

July CPI Report 

CPI rises 0.2% M/M in July, as expected, core CPI increase also in line 

  •  
  • July Consumer Price Index:  
  •  
  • +0.2% M/M vs. +0.2% expected and -0.1% prior. 
  • +2.9% Y/Y vs. +3.0% expected and +0.3% prior. 
  •  
  • Core CPI, which excludes food and energy:  
  •  
  • +0.2% M/M vs. +0.2% expected and +0.1% in June. 
  • +3.2% Y/Y vs. +3.2% expected and +3.3% prior. 

The 10 Year is at 3.87%, up from 3.84, futures are flat. I suspect that after the benign PPI report yesterday, perhaps there were expectations of even lower CPI growth. 

Categories
Power and Utilities Stocks

AES Corp Is A Decent Utility  

AES Corp (AES) $16.85 (Utility, decent dividend yield) Can buy on declines or accumulate don’t expect more than 7%-8% per year, though datacenter operations could be a nice surprise. 

Flat for a long time – 10 years the stock returned just 12%, it is down 12% in the past year. Revenues and operating earnings also went nowhere during the same time, selling some legacy coal, and switching to renewable energy, 

Earnings growth for the next three years is estimated at 8%, revenue at 4%. 

The 4% dividend yield is interesting 

​​BBB debt rated – middle of the pack, most utility dividend investors would prefer at least BBB+. 

Core player in the renewable sector, with a growing 25-30 GW portfolio of solar power until 2027 – The trend towards renewable energy helps them. 

Expected demand from Datacenters- Some of the company’s major customers include Amazon, Microsoft and Google, major IT businesses, all of whom have Co2-neutral commitments to their operations by 2030 or earlier – and the company’s backlog is over 40% with customers that are large tech companies. 

  • Transitioning from coal and gas-fired power plants to renewables and storage and still has impairment losses due to the coal exit.  
  • Low margins – not efficient, compared to its competitor Brookfield Renewables, AES has a lower dividend yield and a lower EBITDA margin.  
  • These are still high debt levels. $26.5B net debt equals more than two times the current market cap, about eight times the adjusted 2023 EBITDA, and about 26 times the 2023 free cash flow. Three peers BEP, AY and TEC have lower debt ration – some at slightly higher rates but this will improve once rates go down. 
Categories
Industrials Stocks

Caterpillar: A Well-diversified Market Leader 

Industrial cyclical – Caterpillar (CAT), Value stock Hold, can buy on declines. 

Has been a good value stock, returning 17% in the past year and 180% in the past 5 and 219% in the past 10, which is good for a cyclical barely growing revenues at 3% a year on average with peaks and troughs. Revenue and earnings estimates are also for low single digits for the next 3-4 years. 

Positives 

Increasing Service revenue stream will improve profit margins. They want to acquire more service companies and focus on this. 

They did manage to increase prices this year, not an easy task unless your product is superior in this industry – good brand recognition. 

Well diversified – lot of end user markets and customers from construction to O&G, and transportation. 

They will also get more revenue from AI – data center buildouts. 

Negatives 

  • Economic Headwinds: Global challenges like Europe’s manufacturing recession and China’s weak housing market could impact CAT’s performance, plus the US’ chances of a recession have now increased above 30% following a softer jobs market. 
  • Cyclical Nature: Despite diversification, its core industries are still cyclical, exposing CAT to economic downturns. 
  • Valuation Risks: The current stock price reflects much of its potential, potentially limiting the upside if we do not get a rebound in cyclical growth. 
Categories
Industrials Stocks

Deere – An Interesting Value Stock 

Deere and Co (DE) $345 Industrial cyclical, Value Stock. Hold for now. 

Deere underperformed CAT this year losing 20% but was OK in the last 5 and 10 with 135% and 308% share price growth. 

  • Deere’s focus is specializing in heavy equipment for agriculture, construction, and forestry sectors. 
  • This year is bad – Recent weak guidance and sales declines because of crop prices. The next two years’ forecast is also negative for both earnings and revenues 
  • But overall, in the last 10 years, Deere’s revenue growth has been far superior at 6% earnings in double digits as compared to CAT 
  • With a focus on cost reduction and expense management, Deere will improve but I suspect it could take at least year for some tangible results and its share price and valuation is not that low, we may see a bottom about 10-20% lower. 
Categories
Stocks

Lumen Tech (LUMN)

Lumen Tech (LUMN) $5.50 Cyclical,

Stock has appreciated a lot this year, 220%, but 5 year and 10 year stock returns were negative, because as a a Fiber Network Telco – it was a cyclical, commodity, capital intensive, high debt, low margin business. Sales have declined in the last 10 years by 21%.

What is different now – Corning and Microsoft has help it stave off bankruptcy, its debt load was too high for it to sustain its business, otherwise.

  • Lumen’s partnership with Corning for fiber network expansion will support business growth and increased free cash flow forecast for 2024; this may lead to debt rating upgrade and improved growth. Markets responded enthusiastically to the news, since Lumen significantly increased its capacity to key cloud data centers. AI has heavy workloads and uses high bandwidth applications since it involves massive amounts of data.
  • They have a similar customer supply deal with Microsoft.

I tend to avoid commodity cyclicals because they don’t have sustainable, recurring growth, you have to constantly watch over your shoulder, and in Telecom and Networks capital requirements are usually very high. Plus in Lumen’s case the stock has jumped for a bottom of $1, so much of the good news is in the price. If you decide to buy on a dip you may get a solid bump for a year or two, but not a long term great company. High Risk/High Reward for a year. If they continue to get more deals and AI network expansion continues yes this could be a good deal, but this industry is intensely competitive and price sensitive.

Categories
Stocks

Industrial cyclical – Caterpillar

Industrial cyclical – Caterpillar (CAT), Value stock Hold, Can buy on declines.

Has been a good value stock, returning 17% in the past year and 180% in the past 5 and 219% in the past 10, which is good for a cyclical barely growing revenues at 3% a year on average with peaks and troughs. Revenue and earnings estimates are also for low single digits for the next 3-4 years.

Positives

Increasing Service revenue stream will improve profit margins. They want to acquire more service companies and focus on this.

They did manage to increase prices this year, not an easy task unless your product is superior in this industry – good brand recognition.

Well diversified – lot of end user markets and customers from construction to O&G, and transportation.

They will also get more revenue from AI – data center buildouts.

Negatives

  • Economic Headwinds: Global challenges like Europe’s manufacturing recession and China’s weak housing market could impact CAT’s performance, plus the US’ chances of a recession have now increased above 30% following a softer jobs market.
  • Cyclical Nature: Despite diversification, its core industries are still cyclical, exposing CAT to economic downturns.
  • Valuation Risks: The current stock price reflects much of its potential, potentially limiting the upside if we do not get a rebound in cyclical growth.
Categories
Industrials Stocks

Robin Hood: Too Expensive To Buy Now. 

Robin Hood (HOOD) $17.73 HOLD – Its trading at a premium to its peers, will take another look if the price drops significantly.  

Positives 

Has a decent strong hold with retail trading community, a preferred broker to those who started trading during the pandemic – First Mover advantage. 

Wide offerings in crypto trading and services – crypto is the largest revenue stream. 

Negatives 

Cyclical, commodity, not much difference between brokerages, at one time commission rates used to be a differentiator, then it was ease of online trading, which was a small differentiator for Robin Hood when it took of during the pandemic, now everyone catering to retail seems to be on par. 

  • Interest rates from the customers float drive a big chunk of revenue, and a large recessionary rate cut would likely erase most of that revenue segment. 

Too much exposure to crypto volumes tank when crypto is down 

Valuation 

The stock is trading at a premium to its peers like Interactive Broking IBKR, which doesn’t seem justified. 

Categories
Industrials Stocks

Lumen Tech Could Be A Turnaround Stock. 

Lumen Tech (LUMN) $5.50 Cyclical, 

Stock has appreciated a lot this year, 220%, but 5- year and 10-year stock returns were negative, because as a Fiber Network Telco – it was a cyclical, commodity, capital intensive, high debt, low margin business. Sales have declined in the last 10 years by 21%. 

What is different now – Corning and Microsoft has helped it stave off bankruptcy, its debt load was too high for it to sustain its business, otherwise. 

  • Lumen’s partnership with Corning for fiber network expansion will support business growth and increased free cash flow forecast for 2024; this may lead to debt rating upgrade and improved growth. Markets responded enthusiastically to the news, since Lumen significantly increased its capacity to key cloud data centers. AI has heavy workloads and uses high bandwidth applications since it involves massive amounts of data. 
  • They have a similar customer supply deal with Microsoft. 

I tend to avoid commodity cyclicals because they don’t have sustainable, recurring growth, you have to constantly watch over your shoulder, and in Telecom and Networks capital requirements are usually very high. Plus, in Lumen’s case the stock has jumped for a bottom of $1, so much of the good news is in the price. If you decide to buy on a dip, you may get a solid bump for a year or two, but not a long-term great company. High Risk/High Reward for a year. If they continue to get more deals and AI network expansion continues yes this could be a good deal, but this industry is intensely competitive and price sensitive.