Fighting a Forest Fire with a Water Pistol
Will inflation expectations get out of hand?
Succinct Summary:
The real economy has stayed pretty resilient despite volatility in capital markets. Supply chains are not getting much better though and inflation is still high. The Fed has been very slow to react. Will inflation expectations get out of hand?
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Macro:
The economy is resilient
"...broadly speaking, the economy has demonstrated resilience to the impact of Omicron. GDP is growing. Companies are performing well and job creation continues, all of which underpin business, investor and consumer confidence." - Moody's (MCO) CEO Robert Fauber
The impact of Omicron is abating
“...the Omicron variant had a significant impact on ride volumes. The rapid surge in infections was correlated with reduced demand for rideshare. However, since the spike in the U.S. has now peaked, we expect demand will begin to recover. In fact, in the last week of January, we saw a pickup in rideshare rides that we see as a positive signal. Ultimately, given the expected impact of Omicron on Q1 and the unknown shape of the recovery, which could carry into Q2, our near-term revenue growth acceleration will likely be affected” - Lyft (LYFT) CEO Logan Green
"Despite the tougher January, we're happy to see COVID cases again on the downswing across the broader U.S. Cancellations are declining and group lead volumes are normalizing. Forward hotel book has been stable over the past few weeks and are once again starting to outpace 2019 levels. I expect that given positive COVID trends in Nevada, we will start to see a meaningful loosening of COVID restrictions in the very, very near future, consistent with what we have seen in other states." - MGM Resorts International (MGM) CEO William Hornbuckle
But inflation gauges are at 40-year highs
“As seems to be the case in most businesses right now, the big challenge in Q4 was cost inflation with COVID-related disruptions a close second - - U.S. inflation gauges are at 40-year highs, reflecting the impact of higher labor, transportation, energy, and commodities” - The Goodyear Tire & Rubber Company (GT) CFO Darren Wells
And inflation is pressuring profit margins
"The short answer to your question on margin pressure in 2022 is 100% yes, it is all about commodity cost inflation. Those are very widespread. We're seeing a doubling of costs on a variety of agricultural raw materials, petrochemical-derived raw materials, energy. You know the data on freight and distribution. It's up by multiples. Packaging components." - Unilever (UL) CEO Alan Jope
The Fed is “fighting a forest fire with a water pistol”
"...here we are on the fourth-quarter call and the Fed has finally woken up to the problem that they should have foreseen a year ago. The problem now is that the Fed is taking its sweet time putting in place their action plan to deal with the skyrocketing inflation and the overheating economy. Instead of doing something about the 7% year-over-year increase in the CPI, the Fed is only talking about it. And the Fed has led the market to perceive that they will raise Fed funds rates four times in the course of this year. That's 100 basis points this year, meaning that at this pace, it will take them seven years to get Fed funds to the current level of inflation. While I don't think that inflation will stay at the 7% level, I do believe that with our quicker and more decisive action by the Fed, it will be seen that they are fighting a forest fire with a water pistol. As long as interest rates are below the inflation rate, the proverbial punch bowl is still there for all market participants to grab a drink. I understand that the Fed doesn't want to cause a panic and that they have to be careful about what they say. But still, there's something to be said for acknowledging the scope of the problem and beginning the process of interest rate normalization." - Loews (L) CEO James Tisch
International:
The world is watching Ukraine
“Finally, in our business, we need to stay on top of cybersecurity issues globally. We are therefore watching the situation in Ukraine closely. Modern warfare increasingly includes the cyber battlefield. While they don’t generate meaningful revenue, we have onboarded a number of Ukrainian businesses, news outlets, and government organizations in anticipation of potential attacks. While we hope the current tensions will resolve peacefully, we have experienced mitigating nations-based cyberattacks and we are prepared to defend our customers and network whatever may come” - Cloudflare (NET) CEO Matthew Prince
Unilever is seeing high price elasticity in Latin America
"The biggest elasticity we're seeing to date is in Latin America, where we've taken rounds of multiple high levels of price increase. And as you know, that is very much the norm in Latin America, although, with these levels of inflation, there has been higher levels of price. And you see that reflected. Volumes have gone negative, for example, in Home Care. That's the right thing to do, we believe. I do want to emphasize we carefully manage it. But as the price leader, we need to balance that out. So it is simply that there is elasticity." - Unilever (UL) CFO Alan Jope Graeme Pitkethly
International guests haven’t returned to Disneyland yet
"We haven't yet seen the return of our international guests. And remember, historically, and we always hit this historical boundary of our band of 18% to 22% of our Walt Disney World guests came from outside of the U.S., and they haven’t even yet started to return." - Walt Disney (DIS) CFO Christine McCarthy
Financials:
There may be some signs of slowing in private capital markets
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There’s a backlog of companies waiting to IPO
"...everybody can see the deal logic data for ECM and the first five or six weeks of this year has been incredibly slow. But most of those backlogs and clients are out there relative to IPOs. They want to do the transaction, and you just need less volatility and it takes a few weeks after the market stabilizes. And then you start to see clients to go. I would say, relative to the follow-on market, and capital raising, which is a little more relevant to healthcare and biotech." - Piper Sandler Companies (PIPR) CEO Chad Abraham
Debt capital markets have also slowed
"We forecasted tight spreads, M&A transactions, ongoing refinancing needs, and disintermediation will support global debt activity above medium-term historical levels, but with issuance slightly moderating versus record levels in 2021." - Moody's (MCO) CEO Robert Fauber
Office utilization is “way up”
"I think we're already seeing that office, at least on the leasing front recovery. Now you already know that we've told you that we think the utilization's way up." - Douglas Emmett (DEI) CEO Jordan Kaplan
Consumer:
Home and Auto Inventories are still tight
“Movers are feeling a big pinch. There is nowhere for them to run from increasing housing costs now that mortgage rates are rising and inflation has spread to the rental market. Homebuyers feel uneasy making offers on homes with such high asking prices, but there is no better alternative. Would-be homebuyers who bowed out last year are kicking themselves, but delaying purchasing a home another year could be a costly mistake - - Given how tough the housing market is for movers, it makes sense that so many homeowners are staying put. It’s also contributing to the shortage of new listings and making the market even tougher for buyers.” - Redfin (RDFN) Chief Economist Daryl Fairweather.
"Our Q3 inventory receipts grew each month throughout the fourth quarter on a same-store basis. However, our inventories are still tight and led to a majority of units being presold." - Group 1 Automotive (GPI) President of US & Brazilian Operations Daryl Kenningham
People are eating less at home again
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E-comm still growing rapidly though
"E-commerce grew 44% on the back of an exceptionally strong year of growth in 2020. And this growth came from all of the main subchannels of e-commerce. It was driven by growth ahead of the market in the U.S., India, and China. In just 5 years, the channel has gone from 2% of Unilever's turnover to 13% in 2021." - Unilever (UL) CEO Alan Jope
Chipotle is expanding into more small towns
"Our last strategic driver is to expand access and convenience, which today is the #1 request from consumers. And we're listening. I'm excited to share that over the long term, we now believe we can operate at least 7,000 Chipotle restaurants in North America, up from our prior goal of 6,000 based on the success of small-town opportunities that are delivering unit economics at or better than our traditional locations. We're also in the early stages of testing alternative formats, including seam locations, which, if successful, could further expand our addressable market." - Chipotle (CMG) CEO Brian Niccol
Disney is turning 100
"It is perhaps fitting that our 100th anniversary comes at a time of significant change for us and our industry." - Walt Disney (DIS) CEO Bob Chapek
And joining the metaverse
"While multiplatform television and streaming will continue to be the foundation of sports coverage for the immediate future, we believe the opportunity for The Walt Disney Company goes well beyond these channels. It extends to sports betting, gaming and the metaverse." - Walt Disney (DIS) CEO Bob Chapek
Technology:
Chip supply will still be challenged for a while
"The current supply-demand imbalance in the semiconductor industry will likely persist through 2022 and continue into 2023. Based on interactions with our customers and channel partners, we believe that the semiconductor inventory throughout the supply chain remains low and lead times are stretched for the industry." - ON Semiconductor (ON) CEO Hassane El-Khoury
But there may be some improvement
“The supply of semiconductors is improving, but auto production remains well below consumer demand. While this dynamic creates uncertainty for our OE volume in the near term, our robust OE pipeline positions us for continued share gains regardless of the level of auto production this year” - The Goodyear Tire & Rubber Company (GT) CEO Rich Kramer
We’re still far away from oversupply
The US, China, and the EU, as well as Japan and South Korea, are expected to nearly double the industry’s (2021) annual capital expenditures (CAPEX) of $150 billion based on external source data. We are aware that this has created concerns about potential oversupply. However, we believe that the significant growth prospects of the semiconductor industry do require substantially more capacity and that given the high levels of capital expenditure to support all this, industry partners will apply sufficient effort to sustain an accessible and efficient innovation ecosystem”- ASML (ASML) CEO Peter Wennink
Cloudflare had a most excellent quarter
"In the immortal words of Bill and Ted, we had a most excellent quarter. In Q4, we achieved revenue of $194 million, up 54% year-over-year - - If we can make it so that you as a – one of our customers, really never touches the public Internet, you go straight from your office and router there to ours, that isolates you from attackers. And so we think that that’s something that is extremely attractive, again, at checking all those boxes” - Cloudflare (NET) CEO Matthew Prince
Healthcare:
CVS expects COVID testing and vaccines to drop drastically in 2022
"We expect that COVID-19 testing both in-store diagnostic and over-the-counter will continue at higher volumes than anticipated at Investor Day, offset by a reduced outlook on vaccines. In 2022, we expect vaccine volumes to decline approximately 70% to 80% and in-store diagnostic testing volumes to decline 40% to 50% compared to 2021. For over-the-counter test kits, we expect modest full-year volume growth versus 2021." - CVS Health (CVS) CFO Shawn Guertin
Industrials and Transport:
Supply chain bottlenecks persist
"We have some work to do. Economy-wide bottlenecks and shortages persist." - Kellogg Company (K) CEO Steve Cahillane
"In terms of the inventory flow, this supply chain situation is going to continue on for at least the next 6 months. We don't see it actually improving. Many of the ports are quite backed up." - Capri (CPRI) CEO John Idol
Bottlenecks are leading to inventory bloat
"Our year-end inventory balance was $333 million or 92 days. In 2020, the year-end inventory was $182 million or 55 days. I'd like to spend a moment on this topic because the inventory balance is higher than historical norms. As I mentioned earlier, Q4 was particularly difficult due to both extended shipping time frames and supply constraints. Our year-end 2021 inventory balance and DII increase was primarily driven by a meaningful increase in in-transit inventory, which added 22 days to our DII." - iRobot (IRBT) CFO Julie Zeiler
RFID is replacing barcodes
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Supply chain constraints expected to improve
"We do anticipate improved supply chain constraints throughout the year. It's obviously a dynamic environment, but we've secured commitment and we do see improved visibility here over the next few months." - Zebra Technologies (ZBRA) CFO Nathan Winters
Nuggets of Wisdom:
Q: What does it mean when a fast-growing company slows the pace of reinvestment?
“Over the years, our team is asking about profitability. The story I told them was to imagine every year you saw your neighbor shoveling money into a machine. A year later, a lot more money came out. Year after year, the money kept piling up and getting shoveled back in. If one year, you look at your window and didn’t see your neighbor shoveling all the money back into the machine you would worry, what’s wrong with the machine? To be clear, there is nothing wrong with our machine. We will continue to shovel money back in to drive innovation and reach new customers as long as we can achieve exceptional growth” - Cloudflare (NET) CEO Matthew Prince
A: Peloton
"I love the role we play in connecting the world through fitness. Our goal has always been to bring immersive and challenging workouts into people's lives in a more accessible, affordable, and efficient way. We've done a great job of delivering on that vision and our large and loyal member community is proof of that. But we also acknowledge that we have made missteps along the way. To meet market demand we scaled our operations too rapidly and we overinvested in certain areas of our business. We own this. I own this and we are holding ourselves accountable. That starts today. Early today we announced several important leadership changes. I will be taking a new role as Executive Chair of the Board and Barry McCarthy will be assuming the role of CEO." - Peloton Interactive (PTON) CEO John Foley