Transcript Notes: August 2024
Alphabet may be overbuilding capacity, but believes it is worth the risk.
I think the one way I think about it is when we go through a curve like this, the risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where if it turns out that we are over-investing, we clearly -- these are infrastructure which are widely useful for us. They have long useful lives, and we can apply it across, and we can work through that. But I think not investing to be at the front here, I think, definitely has much more significant downside.
Of course all this capex will increase Alphabet’s non-cash D&A expenses. Management is reducing expenses elsewhere to “make room” for elevated D&A. It’s hard to imagine Buffett and Munger endorsing managing the optics of earnings like this.
Our leadership team remains focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure.
MBI Deep Dives (aka Abdullah Al Rezwan) observed that Alphabet continues to spend billions of dollar on repurchases but the company’s share count is hardly budging. That means most of the company’s profits are acruing to employees, not owners.
Despite buying back $15.7 Bn shares, share count only declined by 13 bps QoQ which is of course disappointing. It is not 100% clear why that’s the case; Google issued 32 mn RSUs in 2Q’24 vs 33 mn in 1Q’24 and bought back 111 mn shares in 2Q’24 vs 92 mn in 1Q’24. My best guess is they also issued some contingent shares from some earlier acquisitions (Mandiant maybe?) in 2Q’24.
Arch Resources - July 25, 2024
Arch thinks met coal prices are unsustainably low.
We believe that the current coking coal prices are below the marginal cost production on a global basis
They see a supply/demand imbalance as strong demand from China has not been met with increase supply from the US, Canada, and Australia.
The Chinese seaboard imports are on track to be up 10 million tons. And while 1/3 of that or so is sort of lower-quality volume from Russia and they're being opportunistic, 2/3 of that is higher quality seaborne. So that's a positive -- on the supply side, you've got Australia, the U.S. and Canada in aggregate, which is, of course, where all the high-quality coal comes from the seaborne market, up only about 1 million tons.
Allison Transmission — July 25, 2024
Allison is seeing “unprecedented demand.”
Funding and spending for infrastructure projects has led to extraordinary demand for Class 8 vocational vehicles in North America. With Allison share in 2023 at roughly 80% in these locational vehicles, we are seeing unprecedented demand for our 3000 Series and 4000 Series On-Highway products.
There are two reasons. First, the infrastructure bill increased demand for vocational trucks but production remains hamstrung because of COVID.
Vocational, if you go back to COVID and the lack of production probably suffered more than other areas. So post-COVID, as the infrastructure bill was signed and other funding was being provided, it was clear you were coming into an up cycle in terms of demand without the vehicles. So you're now working through -- the industry is working through a very soft period of vehicle production in a period of very high demand. So you have an aged fleet with very high underlying demand.
Second, during COVID, a lot of the drivers who could drive manuals retired. Labor is tight and the only people available to work don’t know how to drive manuals. Companies need automatic transmissions to fix their labor problems.
At the same time, from a labor perspective, what you have seen is through COVID, as you know, a number of retirements where you've -- the workforce has shed a number of more experienced workers and specifically drivers. So from an equipment perspective, whereas used -- some fleets could use with manuals per se. Those drivers are now retired. So you're looking at not only the shortage in vehicles coming into a pretty significant uptick in overall vehicle demand, but also a change in the demographics of the driver base. So we're seeing the combination start to drive its way through, so to speak, the market.
O’Reilly Automotive — July 25, 2024
O’Reilly was more upbeat about consumer health than almost any other retailers. That probably speaks to their non-discretionary products and almost counter-cyclical business.
We still view the average consumer as relatively healthy with strong employment and wage rates underpinning the ability of our customers to invest in the repair and maintenance of their vehicles. However, we also believe we're seeing some level of conservatism in how consumers are managing their spend as they face the cumulative impact of elevated price levels and uncertainty about the broader macroeconomic conditions.
Inflation might have finally killed the $1 $2 $3 value menu. McDonald’s is looking to borrow a successful program from abroad to replace it.
Germany with McSmart, you've got Canada with McPick, you've got the U.K. with Savers menu, Australia has McSmart and also lose Change menu, France as McSpart. We have the value platform established in those markets, and there's good consumer awareness of those value platforms.
A wide price gap between food at home and food in restaurants has caused consumers to eat in more.
we're looking at a continued gap between food at home and food away from home inflation. The gap is about 3% right now or a 300 basis point gap between the two.
While costs are up 20-40% over the last couple of years, there' is some good news. Franchisees’s are in a strong financial position.
If you actually look at gross margin in the 20 years pre-COVID, we're actually at a high right now versus those 20 years. So we feel very good about the ability of our franchisees to invest via their P&L or otherwise.
Altria — July 31, 2024
Vapor continues to explode in the US, but the growth is exclusively in illegal products.
Through the first half of 2024, we estimate the category grew by approximately 40%, driven by illicit flavored disposable products which we believe now represent more than 60% of the category. We estimate pod-based volumes declined by approximately 15% in the first half of 2024. And now represents approximately 15% of category volumes.
But don’t fear, the government is here to help!
in June, the Justice Department and the FDA announced the creation of a federal multi-agency task force, which is expected to coordinate and streamline efforts to bring all available criminal and civil tools to bear against the illegal distribution and sale of e-vapor products.
Altria thinks that the growth of illicit vapes is one of the many factors weighing on domestic cigarette demand.
we believe that cross-category movement has been higher in recent quarters than our previously estimated range (1.5-2.5%). We estimate that cross-category movement from cigarettes primarily to illicit disposable e-vapor products contributed an estimated 2% to 3% of the cigarette industry decline over the last 12 months
Fortunately, Altria has incredibly high margins. Management explains that the rising cost of tobacco leaf really has no impact on their margins. Fees paid to the government are their primary expense.
We have high margins in the cigarette category as an example, it's really MSA, FET, fees like that, that are the primary cost drivers in the cigarette business.
Wyndham Hotels — July 25, 2024
Historically RevPar has grown 2.6%, and the future should resemble the past.
Historically, since 2000 and through 4 lodging cycles, U.S. RevPAR for the select service segments, which makes up the majority of our domestic system has grown at a CAGR of 2.6%, despite the occasional downturn. Last month, Smith Travel reaffirmed this perspective in their latest outlook, projecting 2.7% U.S. RevPAR growth in 2025 for the select service segments. We've been through similar situations before, and we're confident that the select service RevPAR will bounce back as it always has, historically.
Long term, Wyndham expects new unit growth of 3-5%. Growth should therefore total 5.6-7.6%. Buybacks and dividends will only add to that. Management thinks the stock is too cheap.
At our current trading levels, our free cash flow yield of over 6% is the highest in the lodging sector.
…we also reaffirmed our multiyear outlook through 2026, including an adjusted EBITDA CAGR of 7% to 10% and a potential adjusted EPS CAGR in the mid-teens after capital deployment.
Vector Group sells discount cigarettes, and business is booming.
During the second quarter of 2024 based on Management Science Associates, retail data volumes in the deep discount category increased 5.4% while industry volumes declined 10% compared to the prior year period. The deep discount segment comprised 16.3% of the overall market in the second quarter, up from 13.9% in the same period a year ago and 15.9% in the first quarter of 2024.
Dollar stores are some of the company’s best performing channels.
we've got very strong presence in both Dollar General and Family Dollar, and those kind of discount stores at the moment are performing very, very well. And our placement and the visibility that we have in those stores and the partnerships that we have are really paying dividends.
The states cracking down on illicit vapes using directory laws are seeing some success.
In the first state that has actually cracked down on illicit vapor products, we have already seen a strong resurgence in our volume to the products that the FDA has approved.
Alpha Metallurgical Resources — August 5, 2024
AMR bought back a third of its shares since 2021. But its since paused buybacks to strengthen the balance sheet. If prices take another leg down, it may begin burning cash.
I mean, right now, at a roughly [ $215 ] PLV, we're at the lowest point we've been in 2 years. And if you exclude, by my math, about an 11-day period in 2022, it's -- this is the lowest price in 3 years. And so, we're back into some territory we've not had to deal with for quite a while. And that's -- as long as we remain in that band, I think we're going to have to stay focused on keeping the balance sheet strong, giving us plenty of buffer because another turn down, and you could quickly go from producing some cash to producing no cash or consuming cash. And that's going to be the real indicator of when it's time for us to start jumping back into the capital returns.
Met coal prices are near the average global cost of production, but that doesn’t mean prices have to go higher anytime soon.
As far as marginal cost and the cost curves, I know there's been a lot of conversation about that. I do think that the cost curve number, the, call it, [ $200 to $225 ] zip code is probably reasonable for where the all-in cost is sitting globally. I don't think that kind of data is terribly predictive on how companies are going to behave because it doesn't take into account the relative strength of their balance sheets. It doesn't take into account their ability or their desire to capture market share, while they might be losing a little bit of -- sacrificing some EBITDA. And it also doesn't necessarily take into account fixed and variable cost splits, which also become pretty important when you're looking at thinking about idling or shutting down an operation.
CONSOL Energy — August 8, 2024
A recent PJM electricity capacity auction shows that electricity demand is indeed growing.It’s not just talk or a forecast, people are putting real money behind it.
Looking forward domestically, along with the recent heat wave, there are long-term indicators for potential growth and demand. In late July, the latest PJM 2025, 2026 capacity option settled at just under $270 per megawatt day, an increase of more than 800% compared to prices just 1 year ago.
This appears to be a clear message that the supply-demand balance is tightening, a sharp increase of electric demand to meet the requirements of factories, data centers, and broader electrification needs, risk straining our electric grids and underscores the need for maintaining our existing coal fleet.
These capacity auctions provide a critical revenue source for power plants in the region and lease payments aim to ensure that generators are ready to solve the grid whenever the PJM RTO needs them. As such, a significant increase of pricing in the most recent auction is a clear investment signal and could very well extend the life of coal-buyer power plants in the PJM.
CONSOL has been quite the cannibal and continues to carry on.
Year-to-date, through the end of Q2 '24, we have spent $71 million return on free cash flow to our shareholders in the form of share buybacks. Since restarting our share repurchase program in late 2022, we've retired 6.1 million shares, or approximately 18% of our public float through June 30, 2024.
Davita has been trying to figure out why its growth its 150 bps slower than pre-COVID. They came up with two reasons.
The first is mortality.
About 50 to 100 bps of that gap is related to mortality. Mortality is just running higher than it was. It's actually up this year relative to where it was 6 months ago. And we think structurally, that's the biggest component of why we're not 150 basis points higher.
The second is a decline in clinic share.
We pulled back on de novos before others did, and we closed roughly 200 clinics over the last few years.
The result of all that was a decline in our clinic share over the last few years, of call it, [ 1.25 ] roughly. And with that, we believe we have lost some volume. It's hard to quantify, but if we had to put a range on it, it would probably be somewhere in the range of 40 to 60 basis points. So you put those 2 things together, 50 to 100 basis points of mortality higher than historical combined with 40 to 60 basis point impact from our clinic footprint management, and we think that explains the majority of the 150 basis point gap.
New admits remain strong, which bodes well for the future.
I will note one important thing, new to dialysis admits is not on our list of the gap. As I've said before, those remain strong.
Restaurant Brands International — August 8, 2024
While analysts are busy fearing a price war, QSR thinks that the $5 meals advertised everywhere are a good for everyone.
And frankly, the fact that there are others out there that are advertising around $5 on meals is probably overall a positive because it is getting consumers to understand that there is good value in the category overall. That's a positive.
We need to not only be focused ourselves on seeing if we can take share, but we also need the category to be healthy. And the fact that there is a lot of messaging out there right now around that $5 price point, I think, is overall a positive for the category.
QSR thinks promotional pricing will last through the end of the year.
So we feel pretty good about where we are, but we're taking actions on the business as if this is going to continue for at least another quarter or 2 through the end of the year.
Domino’s Pizza — July 18, 2024
Domino’s is a convenience business which is why fortressing works. The closer you live to a Domino’s, the more likely you are to carry out.
when you split a store, 80% of the carryout volume is incremental. And so that right away when you're splitting a territory, you're getting all these customers. Those customers, they don't want to drive past 4 pizza places on their way to a Domino's. And so the more Domino's we have, the more carryout business we drive
British American Tobacco — July 25, 2024
BTI thinks that the normalized rate of decline in the US cigarette market is 5-7% now. That would still be a big improvement over current conditions.
We used to see secular decline in the U.S. around 4% to 5%. I think that this high end of the range now will be as soon as things stabilize on the macroeconomic side become the low end of the range, a new range around 5% to 7%. I would say that is the best guess that we have moving forward when things start stabilizing and we see at least a minimal level of enforcement on the illegal products.
Yum is beginning to see an improving US consumer.
The second quarter offered signs of improving fundamentals. For example, at Taco Bell, we've begun to see sensitivities to check management stabilize to improve from Q1 into Q2, and have witnessed year-over-year check growth led by items per transaction.
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