Tag: Microsoft

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.

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 a small differentiator for Robin Hood when it took of during the pandemic, now every one 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.

Intuitive Surgical (ISRG) $449 – Good company, I would Hold for a better price.

The company’s primary product offering is the Da Vinci Surgical System, which enables complex surgery using a minimally invasive approach. 

Positives:

Recurring, and sustainable revenues – The majority of Intuitive Surgical’s revenue comes from instruments and accessories delivered to existing customers. These items are frequently replaced and provide a recurring revenue stream. Customers tend to be also “lifetime” customers of its instruments, accessories, and services, which includes maintenance, service contracts, and training provided to hospitals and surgical centers. This generates a flywheel effect. 

There is a long-term trend favoring minimally invasive surgeries, technological/AI advancements, and improved patient outcomes.

The new Da Vinci 5, their flagship product could jump start another major product upgrade/replacement cycle.

Market leadership, innovation, great cash flow and operating margins of over over 25%, because for the past 10 years there was little competition.

Negatives

Competition has picked up with Medtronic’s Hugo Surgical System and Johnson & Johnson’s Verb Surgical. Verb develops similar invasive surgical robots such as the Da Vinci robots. Verb developed the robot in collaboration with Verily, which is backed by Alphabet with its  enormous capital. Right now their surgical robots are currently still in development, but once approved, Intuitive Surgical could face significant headwinds.

Valuation – ISRG deserves a premium for market leadership, innovation, great cash generation and sustainable revenues but the big risk is the stretched valuation. We’re paying 19x sales for 16% growth, and ISRG’s past 10 year growth has been only 14%, even as a quasi monopoly in their field. The biggest gain has come since Nov 2023 when the stock was at $250, that’s an 80% run up. Getting in at this price means forward returns could be muted – it would make sense to wait for a decline.