Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
Speaker 2: weekdays at ten am Eastern on Apple Car playing Android
Speaker 2: Otto with the Bloomberg Business App. Listen on demand wherever
Speaker 2: you get your podcasts, or watch us live on YouTube.
Speaker 3: Let's get a beat on how the US farmer's doing here,
Speaker 3: and we can do that through Deer. Deer is a
Speaker 3: company obviously we all know and love, and their customers
Speaker 3: buy and large are farmers, and Deer reports some numbers
Speaker 3: a little bit disappointing here. Chris Chiolino joins us. He
Speaker 3: covers all the big ag and machinery companies for Bloomberg Intelligences,
Speaker 3: based down in Princeton, New Jersey. Chris, how did Deer
Speaker 3: do this quarter and what's their outlook?
Speaker 4: The quarter was great, really much better than we anticipated
Speaker 4: across the board, beats both top line and margins for
Speaker 4: most of the businesses. But the outlook was the disappointment
Speaker 4: of the quarter. They cut net income guidance by about
Speaker 4: five percent, and that's largely reflective of incremental weakness in
Speaker 4: the ag business, specifically the large jag business. And there's
Speaker 4: really two components to that one europe Deer now plans
Speaker 4: to underproduce production, underproduce retail demand due to some weakness
Speaker 4: in Central and Eastern Europe given the conflict there, So
Speaker 4: they're going to try to bring down inventories.
Speaker 5: They're already under producing in Brazil as well.
Speaker 4: And then the second component of the cut was really
Speaker 4: some additional softness beginning to transpire here in North America.
Speaker 4: We saw some of the order velocity start to moderate,
Speaker 4: So demand seems to kind of be trending towards the
Speaker 4: low end of their down ten to fifteen percent industry outlook.
Speaker 5: When it comes to lar jag equipment.
Speaker 6: Yeah, let's get through some of these here. Production precision
Speaker 6: ag net sales for their yearly forecast, they're looking down
Speaker 6: twenty percent worse, and estimated construction and forestry net sales
Speaker 6: down five to ten percent, bag and turfnut sales down
Speaker 6: ten to fifteen percent. Yiki, is this a early cycle,
Speaker 6: mid cycle or late cycle read on the economy.
Speaker 4: I mean we're we're early in an ag downturn. Last
Speaker 4: year was a peak production levels. You know, historically you
Speaker 4: don't have one year downturn, so I would suspect this
Speaker 4: is kind of the beginning of a multi year downturn,
Speaker 4: and some of the numbers that you're seeing that your
Speaker 4: reference on their guidance are well below you know, market
Speaker 4: retail demand expectations, suggesting that you know, they have some
Speaker 4: more work to do on bringing down inventory levels to
Speaker 4: more manageable levels, with really the goal of setting up
Speaker 4: production for twenty five in line with retail demand.
Speaker 3: All right, So if John Tucker goes on too a
Speaker 3: lot to get you know, maybe a backo for his
Speaker 3: estate in the Jersey Shore, he can get one, right,
Speaker 3: There's plenty of there on the lot. Can can he
Speaker 3: get some? Can he get a deal?
Speaker 4: There's no shortage of tractors and equipment on the lot.
Speaker 4: You could get new, you could get used, kind of
Speaker 4: take your pick. Values continue to kind of come down
Speaker 4: here over the last twelve months, and I suspect you'll
Speaker 4: see further pressure on the US side new equipment pricing,
Speaker 4: you know, deers kind of guiding to one and a
Speaker 4: half percent, which is kind of below historical averages. And
Speaker 4: remember we're coming off of you know, three years of
Speaker 4: really strong phenomenal pricing. So returning to I would say
Speaker 4: below normal historical trend, which will also be a drag
Speaker 4: on margins.
Speaker 6: Caterpillar had a different kind of read, and I appreciate
Speaker 6: they also do metals and mining and stuff. So is
Speaker 6: it going to be the diversified players that are going
Speaker 6: to really win on this?
Speaker 4: Yeah, So, I you know, constructions holding up certainly better
Speaker 4: than the farmer and then the ag economy a couple
Speaker 4: of different moving pieces there. I mean, you still have
Speaker 4: a tremendous amount of infrastructure related funds and government stimulus
Speaker 4: coming through the system that will not only be kind
Speaker 4: of a tail wind here in twenty four, but even
Speaker 4: twenty five. I've been twenty six, so I think that
Speaker 4: certainly helps offset some of the cyclical headwinds facing both.
Speaker 5: The resie or non residential markets.
Speaker 4: But if you look at the farm economy almost kind
Speaker 4: of a completely different story. You look at crop prices,
Speaker 4: which are ultimately the biggest driver of farm income and
Speaker 4: equipment purchases. Corn soy weeat down you know, twenty five
Speaker 4: thirty five percent plus, So that's beginning to trickle through
Speaker 4: to farm incomes. Farmer incomes are going to be down
Speaker 4: twenty six percent this year, and I suspect we'll be
Speaker 4: under further pressure as we exit the year too, all.
Speaker 3: Right, Chris Gielino, thank you so much. We appreciate that.
Speaker 3: Chris Chilino. He covers all the big ag and construction,
Speaker 3: all those really cool companies that are industrial America. Again,
Speaker 3: our good friends of Deer had a good quarter. As
Speaker 3: Chris said, bro their guidance weaker than expected, and I
Speaker 3: guess with farmer incomes down so much. That makes a
Speaker 3: lot of sense because they don't have money in the pocket,
Speaker 3: they can't go out and buy new tractors and stuff
Speaker 3: like that.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. We'll catch us
Speaker 2: a love I have week days at ten am Eastern
Speaker 2: on applecar Play and androyd Otto with the Bloomberg Business Act.
Speaker 2: You can also listen live on Amazon Alexa from our
Speaker 2: flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Speaker 3: Let's go to a plet a discussion about retail sales.
Speaker 3: What we might We saw the government numbers come out
Speaker 3: for the month of January weeker than expected. I don't
Speaker 3: know how much of that is seasonal versus, you know,
Speaker 3: kind of something more substantial. But our next guest does,
Speaker 3: Mary Shore is a senior equity analysts at Colombia thread
Speaker 3: Needle Investments joining us via zoom from Boston, mass So, Marie,
Speaker 3: what what do you make of the you know, retail
Speaker 3: sales numbers we had today? How concerned should we be?
Speaker 7: Yeah, it's a great question.
Speaker 1: When I look at the pretty significant slowdown that we
Speaker 1: saw in January, I think it really reflects two things.
Speaker 1: Number one, unfavorable lab which is transitory, but also the
Speaker 1: shift back to the pre holiday trend. So when I
Speaker 1: really dig through the data, I see a continuation of
Speaker 1: three themes that we really discussed throughout last year, which
Speaker 1: is the consumer stretched and continues to spend more on
Speaker 1: services over goods and within goods on needs over once.
Speaker 1: We also continue to see weak demand in categories that
Speaker 1: were strong during the pandemic, like home and sporting goods
Speaker 1: and electronics. And then the third theme is e commerce
Speaker 1: taking backshare from the stores. So I kind of look
Speaker 1: at this report and say, it's really more of the
Speaker 1: same as to what we saw throughout twenty twenty three.
Speaker 6: So if we go to the needs over once and
Speaker 6: spending on services, when we start to get the retailers reporting,
Speaker 6: how do we read that dynamic into those retailers.
Speaker 1: Yeah, it's a great question. It's really going to vary
Speaker 1: by categories. So I think we're going to see continued
Speaker 1: growth in categories like food and health and wellness and wellness.
Speaker 1: I would also include in there some of the active
Speaker 1: wear brands like a Lulu Lemon for instance, in some
Speaker 1: of the athletic footwear brands, and then again continued weakness
Speaker 1: in categories like home electronics, sporting goods, and I would
Speaker 1: say kind of flatish results in apparel. The problem is
Speaker 1: that a lot of those latter categories tend to be
Speaker 1: the higher margin category, so they are weighing on the
Speaker 1: top line but also weighing on margin.
Speaker 3: All right, I'm asking on behalf of Alex here talk
Speaker 3: to us about the luxury end of the market. That's
Speaker 3: where she plays. What are we seeing there?
Speaker 1: Yeah, we're still seeing pretty weak results from the luxury
Speaker 1: players really globally speaking, of course, there's things happening in China,
Speaker 1: but also in North American Europe. They're talking more about
Speaker 1: macro pressures, and I think what's happening is that luxury
Speaker 1: consumer spending more on services like travel, and some of
Speaker 1: the luxury players that have more exposure to what I
Speaker 1: would call the aspirational luxury category. So maybe the kind
Speaker 1: of mid tier consumers that were stretching to buy some
Speaker 1: of those higher price goods. You know, that consumer has
Speaker 1: really slowed, and so any luxury player with greater exposure
Speaker 1: to that kind of aspirational luxury part of the category,
Speaker 1: I think is feeling the pressure more than some of
Speaker 1: like the true luxury players, like I would say in
Speaker 1: our Mes or Chanelle, those are the brands that seem
Speaker 1: to be holding.
Speaker 8: Up the best.
Speaker 6: Yeah, their mez story is just amazing. Okay, just to
Speaker 6: be clear on myself, I don't do luxury. I only
Speaker 6: do sales. Okay, I like luxury on sale, but I
Speaker 6: like that the like out in it, that kind of stuff.
Speaker 6: This means nothing to the guys in the studio right now.
Speaker 9: How many pairs of shoes do you have?
Speaker 3: Let's star A nice question.
Speaker 6: Oh, I know, I actually can do this from my
Speaker 6: old team. I don't think it's as many as you
Speaker 6: think it is. I think it's like maybe thirty.
Speaker 9: What, wow, I have two.
Speaker 7: Okay, Mari back me up.
Speaker 6: Thirty is like a very reasonable amount. But I asked
Speaker 6: this because we only see a lot of sales when
Speaker 6: you got to get the inventory out the door. Am
Speaker 6: I going to be a happy consumer? Or am I
Speaker 6: going to be a sad consumer?
Speaker 7: This year? Yeah?
Speaker 1: Again, it really varies by category and brand, but I
Speaker 1: would say overall, the inventory this year was in a
Speaker 1: much better place than what we saw last year when
Speaker 1: demand really first started to slow and all of the
Speaker 1: companies found themselves sitting on access goods. I would say
Speaker 1: as we moved into twenty twenty three, the inventory was
Speaker 1: better controlled. So when you looked at a lot of
Speaker 1: the company's results, the gross margin rate was actually stronger
Speaker 1: than a lot of investors were expecting. Part of that was,
Speaker 1: you know, lower promotions, lower markdowns.
Speaker 7: Than what we saw the prior year.
Speaker 1: So as we moved the the holiday, I would say
Speaker 1: most of the promotions we saw I would classify as
Speaker 1: in line with plan. I don't think we saw super
Speaker 1: aggressive promotions, and that really reflects the fact that most
Speaker 1: of the brands and retailers are sitting on pretty lean
Speaker 1: inventories right now and continue to manage their inventory very conservatively,
Speaker 1: just given the week demand backdrop.
Speaker 3: This is said for me exactly, So Mari, how about
Speaker 3: like it's some of the dollar stores for example. I'm
Speaker 3: not sure how that really works out. Do they benefit
Speaker 3: when times get a little tough because maybe people trade
Speaker 3: down to the dollar stores order their typical customers, they
Speaker 3: feel it more acutely, How do they play these days?
Speaker 7: Yeah, it's a great question.
Speaker 1: Typically you see both happening simultaneously, right, so you would
Speaker 1: see their core customer come under pressure, but that be
Speaker 1: off set by the more kind of mill income consumer
Speaker 1: trading down into those discount formats, whether it be dollar
Speaker 1: stores or even some of the off pricers like Burlington
Speaker 1: and Ross that cater to a lower income consumer. I
Speaker 1: think this cycle we saw kind of a delayed trade
Speaker 1: down from the middle income consumer, but as we kind
Speaker 1: of moved through Q four and into this year, I
Speaker 1: think that should be more pronounced and really help some
Speaker 1: of those discount formats. I also think what's happening with
Speaker 1: the dollar stores you've seen Walmart, I think take a
Speaker 1: lot of share, right. You can see it in their
Speaker 1: results when you compare Walmart to know the family Dollar business,
Speaker 1: which is owned by Dollar Tree and Dollar General. So
Speaker 1: I think you have a lot of things happening at
Speaker 1: the same time, but overall, a weaker macro backdrop should
Speaker 1: be a positive for those discount formats.
Speaker 6: Also, it's weird. It's like dollar stores are no longer
Speaker 6: really dollar stores, Like they're like five dollars stores and
Speaker 6: their inventory is like horrific, I mean in some of them.
Speaker 7: Yeah yeah, I saw. Sorry, go ahead, Oh no, go ahead.
Speaker 6: I was gonna say, like, going in one, you're like,
Speaker 6: this is like scrape and bottom of the barrel of inventory,
Speaker 6: like it is. It is not a pretty shelf site.
Speaker 7: Yeah.
Speaker 2: Yeah.
Speaker 1: I think a lot of the dollar stores have kind
Speaker 1: of struggled with the store standards and the service levels
Speaker 1: to that point, and both Dollar Tree and Dollar General
Speaker 1: have talked about investing in vetter, inventory management systems, more
Speaker 1: labor in the stores to help improve the store shopping experience.
Speaker 3: All right, Marie, thanks so much for joining us. Marie Shore,
Speaker 3: senior equity analysts at Columbia thread Needle Investments, joining us
Speaker 3: via zoom from Boston, Massachusetts. Thread Needle, originally a London based,
Speaker 3: UK based investment firm, announced Columbia Thread Needle because they
Speaker 3: were required by COMBIA.
Speaker 6: They have great, great analysts.
Speaker 3: They do. They're very good at best.
Speaker 6: Yep, you know Bloomberg Intelligence.
Speaker 3: Yea, all good.
Speaker 6: Let's put it there.
Speaker 3: All good, all good, Yeah, but good read on the
Speaker 3: retailers here. So I was like paying attention to the retailers,
Speaker 3: you know, whether it's the walmarts or you know, the
Speaker 3: luxury you just get a great view of kind of
Speaker 3: how the consumer's really hanging in there and generally has
Speaker 3: been hanging in there for the luxury. I'm waiting for
Speaker 3: them to say China's back, baby, they're buying mainland, they're traveling,
Speaker 3: and we haven't heard that.
Speaker 6: I don't know if it's gonna happen, to be honest,
Speaker 6: if it hasn't happened at this time, it's really hard
Speaker 6: to make that case. Plus even if China, even if
Speaker 6: they say that, will investors be that willing to buy
Speaker 6: that narrative? When they got burned in the first quarter
Speaker 6: of last year from that, yeah.
Speaker 3: Part of that was the Chinese traveler. They couldn't fly anywhere.
Speaker 3: But now that's getting a little bit better, so maybe
Speaker 3: that'll that'll help.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
Speaker 2: weekdays at ten am Eastern on Apple car Playing and
Speaker 2: broud Otto with the Bloomberg Business app. Listen on demand
Speaker 2: wherever you get your podcasts or watch us live on YouTube.
Speaker 3: But it's got a sense of where we're going with
Speaker 3: this market. I don't know whether it's time to jump
Speaker 3: off the big calf tech train that's worked so well
Speaker 3: for so long and maybe take a look at some
Speaker 3: of the smaller midcaps, maybe some value. You don't know
Speaker 3: where to go. Oh here, David Coodle's got some thoughts
Speaker 3: here because he does this stuff for a living. He's
Speaker 3: a founder, chief executive officer and chief investment officer Mainstay
Speaker 3: Capital Management, joining us of via zoom from Troy, Michigan.
Speaker 3: It's a lovely town. I've been there once, David. What
Speaker 3: say you here? I mean for a lot of investors
Speaker 3: that Magnificent seven has worked so well for so many people.
Speaker 3: Do you just stay with the you know, with that horse,
Speaker 3: or do you try to maybe look for some value
Speaker 3: in small cap mid cap maybe some of the sectors
Speaker 3: that I have lagged.
Speaker 8: Yeah, you know the in good morning, good morning, Paul I.
Speaker 8: When we look across the market and we know that
Speaker 8: the Magnificent seven had a great year last year of
Speaker 8: about one hundred and ten percent, and we now have
Speaker 8: a Fab five that excludes Tesla and Apple that's doing
Speaker 8: very well this year. And you know the concern is is,
Speaker 8: you know, can we see a sell off in a
Speaker 8: video with this meteoric rise? Can we see a sell
Speaker 8: off in these stocks?
Speaker 3: Of course we can.
Speaker 8: It wouldn't be surprised at five or ten percent or
Speaker 8: even more at any given time, given the rally that
Speaker 8: we've had and the Magnificent seven this year and the
Speaker 8: Fab five last year. But our overall thesis we like
Speaker 8: growth over value and mega cap tech and profitable tech
Speaker 8: is our most favorite sector last year and coming into
Speaker 8: this year. And we look forward, we look over the
Speaker 8: next three years. At the annual growth rate of the
Speaker 8: Magnificent seven, it's four times that of the rest of
Speaker 8: the S and P five hundred. If we look at
Speaker 8: profit margins, they're going to expand at a lot higher
Speaker 8: rate than the other four hundred and ninety three stocks.
Speaker 8: You take out Apple and Tesla, those numbers get even bigger.
Speaker 8: So we're still on growth over value, all right, I'm sorry,
Speaker 8: growth over value, large over small. We had a rally
Speaker 8: in small at the end of last year. In small
Speaker 8: caps a little bit here recently, but small caps, you
Speaker 8: know the problem with small caps have if you become
Speaker 8: a good small cap stock. Soon you become a good
Speaker 8: mid cap so you could become a good mid cap stock.
Speaker 8: So the Russell two thousand by definition has that kind
Speaker 8: of problem. And in the environment we're in with higher rates,
Speaker 8: it's tough for small caps. And then finally we like
Speaker 8: the US over foreign.
Speaker 6: So David, to that point, what do you do then,
Speaker 6: Like all those trades are working, all those trades have
Speaker 6: been working, do you just kind of put the positions
Speaker 6: on and then sit tight and then wait for all
Speaker 6: that to play out.
Speaker 8: Yeah, Well, the approach we're taking is yes, we are,
Speaker 8: you know, very dominant in Nasdaq one hundred. You know,
Speaker 8: those megacap gross stocks were dominant there. We're diversified in
Speaker 8: some other areas and need to be in the income
Speaker 8: portion of our portfolio. The thing that's worked so well
Speaker 8: last year and into this year is holding the ultra
Speaker 8: short term bonds with high yields. The bond indecks, the
Speaker 8: us I agreated bond indecks was you know, was slightly
Speaker 8: or only slightly up last year when the we look
Speaker 8: at these ultra short term bonds with high yield of
Speaker 8: six or seven percent. So if that's the income portion
Speaker 8: with this growth dominant portion for equities. That's a formula
Speaker 8: that's still working for a diversified portfolio.
Speaker 3: So, David, I know you prefer us over international markets,
Speaker 3: but I see you mentioned China here in your notes,
Speaker 3: and I'm sorry Japan, and I've heard more about Japan
Speaker 3: in the last six months that I have in the
Speaker 3: last twenty years. What's going on in Japan from an
Speaker 3: investment peru.
Speaker 8: Yeah, we've heard more about Japan in the last six
Speaker 8: months than we have in the last thirty five years.
Speaker 8: Because we're right, we're bumping up. We're bumping up against
Speaker 8: that high that was set in December of you know,
Speaker 8: nineteen eighty nine when I was walking around the Stanford
Speaker 8: campus learning about investing, right, I mean, it's that long ago.
Speaker 8: That giant trough that that we're coming into in Japan
Speaker 8: has some things going for it. You know, it's still
Speaker 8: the easy monetary policy. Uh, they have the capital flows
Speaker 8: coming from China. You know, China is nearly uninvestable at
Speaker 8: this point. And then President Trump comes out and says,
Speaker 8: if he gets elected, I'm going to put his sixty
Speaker 8: percent tariff on all Chinese goods, I mean, with everything
Speaker 8: else that's wrong in China with evergrand the real estate
Speaker 8: sector all that, you know, more bad news coming. And
Speaker 8: you know, so they've they've been doing a lot from
Speaker 8: a stimulus standpoint, but that stock market continues to be,
Speaker 8: you know, mired in a down draft. The if we
Speaker 8: look at Europe, Europe is is near recession, kind of
Speaker 8: in and out of recession. The UK is in recession
Speaker 8: and actually just found out that Japan unexpectedly got it
Speaker 8: second quarter of negative growth. But we've just got a
Speaker 8: easy monetary policy. Capital flows there, Valuations are starting to
Speaker 8: get a little bit lofty, but it's it's still investible.
Speaker 6: What do you make of the BOJ and then getting
Speaker 6: off of you'll curve control? Like does that factor in
Speaker 6: to like you're thinking, like, clearly there's a carry trade
Speaker 6: that's going to unwind really fast. Clearly that's going to
Speaker 6: affect the treasury market. Does that affect you, David?
Speaker 8: It affects us in that we're watching what the yen
Speaker 8: is doing because the end it just continues to weaken
Speaker 8: and and they've come in, they've intervened. The BOJ has
Speaker 8: intervened several times. But you know when they do, those
Speaker 8: tend to be temporary fixes. Those tend to be just
Speaker 8: temporary in nature, and you know, our concern there, really
Speaker 8: our concern now is with the economy in a more
Speaker 8: fragile state. You know, what will they do in April?
Speaker 8: Will they finally raise rates? I mean what they've continued
Speaker 8: to do while the US went through their mass of
Speaker 8: you know, five hundred and twenty five basis point increase
Speaker 8: in rates from zero, Europe raising rates. We have Japan
Speaker 8: there that's just maintained this easy monetary policy. They've made
Speaker 8: some adjustments, but they've got a weak currency that continues
Speaker 8: the weaken easy monetary policy. And you know, we'll see
Speaker 8: but that the moves that they've made have been have
Speaker 8: been just just minor, almost you know, non events in
Speaker 8: terms of if they really started the type monetary policy,
Speaker 8: which they haven't.
Speaker 3: So, David, we're about seventy five percent of the way
Speaker 3: through the S and P five hundred earnings. Any themes
Speaker 3: for you, any takeaways for you, any any changes to
Speaker 3: your portfolio based on what you're seeing.
Speaker 8: No, I mean, we know we're beating expectations again, earnings
Speaker 8: coming out better than expected. We're beyond that earnings recession
Speaker 8: we had last year. And now seeing earnings doing quite well.
Speaker 8: So I mean we're encouraged by that because that's what
Speaker 8: we want to see with the FED. Well, we're so
Speaker 8: concerned about the FED, obviously, but no, we're it's really
Speaker 8: supporting where we're at in terms of growth versus value.
Speaker 8: I think, you know, as we get into the second
Speaker 8: half of the year, we think we have some volatility
Speaker 8: here for a few more months. We get into second
Speaker 8: half of the year and we start to see the
Speaker 8: rate cuts come. If that's June, let's say that they start,
Speaker 8: and just and remember that just weeks ago we were
Speaker 8: looking at March for rate cuts to start. If rate
Speaker 8: cuts do start that soon, and I think it could
Speaker 8: maybe even be longer, then then we can come in.
Speaker 8: Then we can feel more comfortable about dipping into small cap,
Speaker 8: dipping into cyclicals. But right now, I mean, we're encouraged
Speaker 8: by earnings and it's supporting the areas that we like.
Speaker 3: Right all right, David, If I find myself in Troy,
Speaker 3: Michigan this summer, would you recommend to pay a visit
Speaker 3: to the Waterford Oaks wave Pool.
Speaker 6: Well, I love wave pools, even though they're creepy and weird.
Speaker 8: I think you should, and if you do, give me
Speaker 8: a call and we'll go down there and have some fun.
Speaker 8: That sounds like a lot of fun.
Speaker 3: I've been to Troy. I did one of my internal
Speaker 3: audit visits when I was a pain Webber to the Troy,
Speaker 3: Michigan Pain Webber branch. Had had a good time there
Speaker 3: for a week. Good good folks at there. David Kodla,
Speaker 3: thanks so much for joining U. David Coudla, Founder chief
Speaker 3: executive officer and chief investment strategist at Mainstay Capital. Manage It.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
Speaker 2: weekdays at ten am Eastern on applecar Play and androyd
Speaker 2: Otto with the Bloomberg Business Act. You can also listen
Speaker 2: live on Amazon Alexa from our flagship New York station
Speaker 2: Just Say Alexa playing Bloomberg eleven thirty.
Speaker 3: Big TAKEE story yesterday was about commercial real estate in
Speaker 3: this country, particularly office space, and how we're seeing that
Speaker 3: marked down pretty substantially. There's some trades actually happening, and
Speaker 3: then Alex and I were just talking to earlier this
Speaker 3: morning saying, boy, when are some of these smart real
Speaker 3: estate equity dudes going to comment or do debts coming out,
Speaker 3: come into the market and start making some long term investment.
Speaker 3: Scott Kelly is one of them. He is a founder
Speaker 3: and CEO of Ato's Capital real Estate. He joins us
Speaker 3: here in a Bloomberg Interarctive Broker Studio. Were also joined
Speaker 3: by Abigail Doolittle, markets reporter for Bloomberg News. She's going
Speaker 3: to help us here kind of get through this story. Here,
Speaker 3: Scott talk to us about how you guys at your
Speaker 3: firm are kind of viewing the commercial real estate market
Speaker 3: in this country. Is it time to maybe start bottle fishing?
Speaker 10: I think it is. I think it's the beginning of
Speaker 10: what's going to be a long process of working things out.
Speaker 10: We have a company called waiver Tree Property Partners, which
Speaker 10: is in the business of buying distressed real estate loans
Speaker 10: and properties here in the US, and interestingly, the loans
Speaker 10: are not as concentrated as they have been in the past.
Speaker 10: When you look at the big real estate investment opportunities,
Speaker 10: whether it was the RTC, whether it was Lehman's bankruptcy,
Speaker 10: Bear Starns Lehman, the loans tended to be pretty con
Speaker 10: and traded. Today, I think you find a wide variety
Speaker 10: of lenders, including a lot of regional banks which are
Speaker 10: which which hold a lot a lot of these real
Speaker 10: estate loans. So we think it's going to be a
Speaker 10: big opportunity. It's not just going to be an office.
Speaker 10: Apartments are going to be a big opportunity as well.
Speaker 10: We think that it's important to buy good real estate.
Speaker 10: At the end of the day. You know, cheap doesn't
Speaker 10: get cheap enough if you don't buy the right thing.
Speaker 10: So you know, the better properties are going to continue
Speaker 10: to perform, okay, But I think there's a real opportunity
Speaker 10: for bottom fishing now and over the next several years.
Speaker 11: So speaking of cheap Scott, the last time you've joined us,
Speaker 11: and you've been kind enough to give us your time
Speaker 11: over the last six months or so preparing for what
Speaker 11: you've called an epic opportunity last year, both from the
Speaker 11: gain side and the pain side. I think that we've
Speaker 11: talked about office buildings here in New York going as
Speaker 11: cheap as twenty five cents on the dollar. I know
Speaker 11: it's very regional. What are our buildings, are properties loans
Speaker 11: starting to trade, and what our valuation is looking coming
Speaker 11: in as so far in the first wave of this well.
Speaker 10: Again, it goes market by market. But you know, particularly
Speaker 10: for absolute office buildings or going to be minus office buildings,
Speaker 10: the big talk in the industry is to convert. If
Speaker 10: you look at Manhattan as example, too much office space,
Speaker 10: too little residential. You know, it's too expensive to live
Speaker 10: here and there's too much office space. And the notion
Speaker 10: is that some of these buildings are going to be
Speaker 10: converted from office to residential. That is a very tall
Speaker 10: order you're.
Speaker 6: Going to do right, like you just don't like flip
Speaker 6: a switch and say bye.
Speaker 5: Right.
Speaker 10: And because light and elevators are the too big light
Speaker 10: access and elevators are the big issues. The floor plates
Speaker 10: on office buildings tend to be too big to be
Speaker 10: laid out really well for apartment Interestingly, the older office buildings,
Speaker 10: which have smaller floor plates are easier to adapt. But
Speaker 10: we did one through PTM in Washington, d C. It's
Speaker 10: not easy to do, and I think it's really kind
Speaker 10: of overblown in terms of how big an opportunity that is.
Speaker 10: The Other thing I would say, just in terms of converting,
Speaker 10: is it's going to take a lot of public private
Speaker 10: cooperation to make that happen. The economics in terms of
Speaker 10: tax breaks, help and financing. You know, governments are going
Speaker 10: to have to find a way to get these buildings viable,
Speaker 10: and it's going to mean working with the private sector
Speaker 10: in a way that might appear to some to be
Speaker 10: too generous to the private sector.
Speaker 11: But so in terms of those values though, and understanding
Speaker 11: that it is market by market, region by region. If
Speaker 11: you had to put just a spectrum on it, twenty
Speaker 11: five cents if that's New York City, but if you
Speaker 11: are you able to say some sort of average, just
Speaker 11: to give our listeners an idea of how painful it
Speaker 11: is and could be.
Speaker 10: Well, I think previous less than half. And you know
Speaker 10: you're going to see things that go for buildings that
Speaker 10: in their current use can barely pay their property taxes.
Speaker 10: So you know you're going to see it values at
Speaker 10: a at a low But but again, is it good
Speaker 10: value even if it appears cheap.
Speaker 4: Sale?
Speaker 11: We're not closed, but doledge, there's a few properties buildings
Speaker 11: out there pretty.
Speaker 6: When my mortgage rate is three year percent or lower.
Speaker 7: So I'm not your target audience.
Speaker 3: So do you prefer to buy the actual real estate
Speaker 3: itself or the mortgage behind it?
Speaker 10: It is really deal by I think you have to
Speaker 10: be flexible because you've got to deal usually with the
Speaker 10: senior lender with a refinancing UH package and with squeezing
Speaker 10: out the equity, partnering with the equity, cramming down the
Speaker 10: equity that the structure needs to be I think typically
Speaker 10: up in the capital structure, so either buying the real
Speaker 10: estate if the senior lender you know, wants to go
Speaker 10: through the FOK and just sell the real estate, or
Speaker 10: coming into a structured alternative. But I think importantly our
Speaker 10: perspective is that we have to be able to get
Speaker 10: control of the operations of the real estate because again,
Speaker 10: particularly through this syndicator model, a lot of people that
Speaker 10: really didn't know what they were doing, that would never
Speaker 10: would have passed the muster for institutional real estate capital,
Speaker 10: got into the business and they're the ones that are
Speaker 10: in the deepest trouble.
Speaker 6: So because of people like you, though, that can do
Speaker 6: that homework and then step in, will there not be
Speaker 6: a gigantic commercial real estate crisis. It's just going to
Speaker 6: be like years of sussing out this stuff and finding
Speaker 6: the right price.
Speaker 10: Yes, I think there will be years of.
Speaker 6: But nothing disastrous.
Speaker 10: Well, it will be disastrous for the people to get
Speaker 10: wiped out, you know what I mean, whether that happens
Speaker 10: overnight or over a period of a couple of years,
Speaker 10: a lot of these people are going to get wiped out.
Speaker 10: And you know, I think, I think it a disaster
Speaker 10: for some is an opportunity for others.
Speaker 11: And speaking of disaster, Scott, when you joined us in August,
Speaker 11: you alluded to the idea that the regional banking that
Speaker 11: there could be some kind of a banking crisis worse
Speaker 11: than what people were anticipating in lo and behold the
Speaker 11: second most popular article on the Blueberg terminal Today, dozens
Speaker 11: of banks rapidly piled up commercial property loans. Speak to
Speaker 11: us about the regulation and what you see ahead here.
Speaker 10: Well, I think, interestingly, the big banks aren't that exposed
Speaker 10: to commercial real estate. If you look at JP Morgan, Goldman, Sachs, Morgan, Stanley.
Speaker 10: We've done the analysis on those banks and there I
Speaker 10: think they've learned their lessons and they're not that exposed
Speaker 10: to commercial real estate. The middle sized banks a little
Speaker 10: bit more so. It's the smaller banks that have an
Speaker 10: inordinate concentration of commercial real estate loans. And I think
Speaker 10: part of the reason was that there was very little
Speaker 10: commercial loan demand during COVID. People weren't starting new businesses.
Speaker 10: They weren't you opening new restaurants and stores, and the
Speaker 10: sort of bread and butter business of a smaller bank
Speaker 10: didn't really exist. So they poured a lot of money
Speaker 10: into real estate, and they did so with floating rate debt.
Speaker 10: Although everybody's against their cap. The floating rate debt pretty
Speaker 10: much with very short maturities, So that's the big refinancing
Speaker 10: wave that's hitting these smaller in regional banks.
Speaker 6: All right, thanks so much, really appreciate you guys. Scott Kelly,
Speaker 6: founder and CEO of ATOS Capital real Estate, and Abigail
Speaker 6: thank you so much, Bloomer correspondent for bringing us this interview.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
Speaker 2: weekdays at ten am Eastern on applecar Play and Android
Speaker 2: Auto with the Bloomberg Business. You can also listen live
Speaker 2: on Amazon Alexa from our flagship New York station Just
Speaker 2: Say Alexa playing Bloomberg eleven thirty.
Speaker 6: We're gonna talk about Cisco. Do you have a tidbit thing?
Speaker 9: Did you just remember this is Cisco with a C,
Speaker 9: not Cisco with an ass the food services and distribution
Speaker 9: company whose trucks are always ahead of me in the
Speaker 9: Lincoln Tunnel, slowing my commute.
Speaker 6: That Cisco is also quite interesting. They have a huge,
Speaker 6: huge business model. It's enormous. It's like a company. I
Speaker 6: want to get in there and figure out what's going.
Speaker 9: So if you like a particular restaurant and see a
Speaker 9: Cisco with an S truck parked out front, they have
Speaker 9: the food services company? Does that mean the fund is tablecloths,
Speaker 9: all the things, but also like prepared foods, don't they?
Speaker 6: But like I think they're real businesses like tables and
Speaker 6: silverware and the stuff. The guts. Okay, see we got
Speaker 6: something there. Let's go to Cisco though, the one with
Speaker 6: the sea that's stock down about two percent, it's it's
Speaker 6: off its lows though. Let's bring in a woojin Ho.
Speaker 6: He's Boomberg Intelligence senior technology analysts to break it all down.
Speaker 6: Wujin Is did anything really surprise you with Cisco? Like,
Speaker 6: in some ways we knew the environment was going to
Speaker 6: be soft, We knew they were going to have to
Speaker 6: integrate a takeover and that was going to have some churn.
Speaker 6: What was a big standout?
Speaker 12: Well, I think you're you're right there, Alex. I think
Speaker 12: the after the job loss leak or job cuts leak
Speaker 12: from last quarter, I think there were expectations that there
Speaker 12: were going to be cut the estimates, uh, you know,
Speaker 12: and you know quite quite frankly, the big standout for
Speaker 12: me was that the cuts were big enough, you know,
Speaker 12: five percent op x cuts. That's part of the course
Speaker 12: for what Cisco typically does. But at the end of
Speaker 12: the day, I mean, given the stock reaction based on reports,
Speaker 12: it looks like there were a lot of a lot
Speaker 12: of this was expected, you.
Speaker 3: Know, which I followed the Cisco name for decades. I mean,
Speaker 3: it's one of the founding Silicon Valley tech names based
Speaker 3: in San joseric smack in the middle, you know, Silicon Valley.
Speaker 3: What are they not getting right here? The stock hasn't
Speaker 3: worked for a long time, and it just what from
Speaker 3: your perspective, what are they just missing here?
Speaker 12: Well, let's let's talk about large cap stocks in general, right,
Speaker 12: If we if we think about the big bangs, right,
Speaker 12: or let's say Microsoft, the the old tech guard, Microsoft, Google, right,
Speaker 12: they all really lead on a cloud software transition. If
Speaker 12: we think about it from the hardware old guard, Cisco, Dell,
Speaker 12: HPE or the old HP. There's still relatively a hardware business,
Speaker 12: so you're not going to get the fast, sexy growth
Speaker 12: from the hard hardware business. I mean, if you look
Speaker 12: at Cisco, you know, after the estimate cuts fifty two
Speaker 12: billion for fiscal twenty four, that brings them back to
Speaker 12: twenty twenty four levels, right, So you're not getting the
Speaker 12: growth that people want, and also you're not getting the
Speaker 12: margin profiles that you want as well. So that's why
Speaker 12: the multiples are lower and the growth is shallower.
Speaker 6: So has the stock then rerated for that? I mean
Speaker 6: from what we say, we kind of knew that was coming.
Speaker 6: So are we at a right level right valuation for it?
Speaker 4: Yeah?
Speaker 12: So if I look at the historical evaluation for for Cisco,
Speaker 12: it's trading around thirteen times right now. GO typically trades
Speaker 12: roughly around fifteen to seventeen times, so it was it
Speaker 12: was priced to be cut right now. Now, the question
Speaker 12: is what does the pending Splunk deal do and does
Speaker 12: that help reinvigorate growth. Now, what I will say is
Speaker 12: that estimates, consensus estimates probably won't bake in this Splunk deal,
Speaker 12: which adds about another eight percent on sales, neutral to
Speaker 12: earnings their term, but it could spark earnings growth if
Speaker 12: they start bringing op x or operating margins for Splunk
Speaker 12: more in line to where Cisco is today.
Speaker 3: So you know it's alex I mean over the last
Speaker 3: five years, I'm using the comp function comp which is
Speaker 3: one of Matt Miller's favorite functions. So over the last
Speaker 3: five years, this stock has compounded three percent per year,
Speaker 3: Cisco s and P five and fourteen and a half percent,
Speaker 3: the S and P information technology sector twenty six percent.
Speaker 3: So it's really really underperformed going forward, which I guess
Speaker 3: over the next several quarters. What what Cisco's saying about
Speaker 3: their customers and inventory and you know what are they
Speaker 3: I mean cutting this forecast suggests that they don't have
Speaker 3: a lot of great visibility here.
Speaker 12: Yeah, so if you remember the server and storage cycle
Speaker 12: from a year ago, Cisco is going through that right now.
Speaker 12: Part of it is because of the supply chain glut
Speaker 12: all of a sudden, Their customers got their equipment two
Speaker 12: quarters ago and they're taking their time implementing it. So
Speaker 12: you know, typical cycles are roughly five to six quarters.
Speaker 12: I was running through the numbers and we're talking about
Speaker 12: anywhere between twenty seven to thirty percent declines for the
Speaker 12: next two to three quarters for Cisco, and they're probably
Speaker 12: not going to get out of it and return to
Speaker 12: growth until I'm sorry for the networking business, not sales
Speaker 12: for the networking business, but I don't think they won't
Speaker 12: get out of this decline until the second half of
Speaker 12: fiscal year, which is about a year from now.
Speaker 5: Right.
Speaker 12: So yeah, again, the model is going to be reworked,
Speaker 12: primarily because of the this Plunk deal, and the hope
Speaker 12: is is that they're going to have more recurring revenues
Speaker 12: UH to boost up the multiples going forward.
Speaker 6: Right, So subscription is basically rather than just here's your
Speaker 6: bit of hardware, see you guys later, where's the AI component?
Speaker 12: For Cisco, I will tell you they're making a lot
Speaker 12: of good progress and they had a billion dollars in
Speaker 12: bookings in black black orders with Cloud customers, and uh.
Speaker 12: The issue is is that that only represents two percent
Speaker 12: of total orders, right, so it's still relatively small. It
Speaker 12: is going to be growing, and they're probably going to
Speaker 12: bang the drum louder to the on on the AI
Speaker 12: on the AI theme over the next couple of quarters
Speaker 12: as these deals really start to balloon. The one thing
Speaker 12: is again, it's it's still a corporate IT name. If
Speaker 12: I were to pick, if I may, if I were
Speaker 12: to pick one AI name on the networking side, it's
Speaker 12: probably going to be more Arista than Cisco for now.
Speaker 3: So again, is there a way which is broadly defined
Speaker 3: on the hardware side, have investors embraced any of the
Speaker 3: hardware names as AI plays? Is it? Because it just
Speaker 3: doesn't feel like it. It feels like what I'm hearing
Speaker 3: from you know, a lot of your folks on the
Speaker 3: tech team of Bloomberg Intelligence. It's kind of software applications,
Speaker 3: that kind of thing.
Speaker 12: Yeah, so so so I can name four yep, right,
Speaker 12: Arista Networks, Right, if you look at that stock that's
Speaker 12: been up eighty eighty eight percent, super Micro that's been
Speaker 12: up eight hundred and forty six percent over the past year, right,
Speaker 12: and Dell that's been up ten percent. There's and they
Speaker 12: reported in a couple of weeks there's a growing AI
Speaker 12: story there and one name that's been underappreciated is probably HPE.
Speaker 12: They have a supercomputing business, high performance computing business. But
Speaker 12: the story is a little muddled because of a pending
Speaker 12: Juniper deal. And then there's you know, my my colleague
Speaker 12: Steve saying he covers the white box vendors, and there's
Speaker 12: some white box vendors that may potentially benefit from the
Speaker 12: from because they sell server equipment to the cloud guys.
Speaker 6: So you were saying that the AI stuff growing about
Speaker 6: two percent a year kind of thing. Is that considered
Speaker 6: good when you obviously compared to a different kind of
Speaker 6: company like and Video, it's not. But for Cisco in
Speaker 6: this area, would that be good?
Speaker 12: It's two percent of total sales, Okay, right, I suspect
Speaker 12: that's those that sales rate could potentially grow well into
Speaker 12: the double digits over the next couple of years.
Speaker 8: Uh.
Speaker 12: They are one of the arms players for AI. And
Speaker 12: you've had me on the show before. We've had this conversation,
Speaker 12: a technology conversation between Ethernet and infinite band. You're going
Speaker 12: to start seeing this burgeoning shift from Nvidia's infinite band
Speaker 12: technology to an open standard called Ethernet, and that's where
Speaker 12: Cisco is going to benefit over the next several years.
Speaker 6: Okay, So short term, what's next, like, what are us
Speaker 6: interested in? It's going to be this plunk like acquisition
Speaker 6: and getting that done, and how that's going to be
Speaker 6: merged exactly.
Speaker 12: I mean, look, it's probably well. First of all, I
Speaker 12: think that earnings cuts may have bottomed earnings a bottom
Speaker 12: from here. The next thing I need to do is
Speaker 12: fold in the bunk estimates when once they announce that
Speaker 12: deal and then and just keep track of where it
Speaker 12: spending is as a relative to Cisco, as well as
Speaker 12: keep track of where the AI story goes. Right, they
Speaker 12: had had a couple of nice announcements. We just need
Speaker 12: more and start to see it in the numbers in
Speaker 12: fiscal twenty five.
Speaker 6: All right, Booch, thanks a lot, really appreciate it. Ushinho
Speaker 6: joining us from Bloomberg Intelligence.
Speaker 2: This is the Bloomberg Intelligence podcast, available on Apples, Spotify,
Speaker 2: and anywhere else you'll get your podcasts. Listen live each
Speaker 2: weekday ten am to noon Eastern on Bloomberg dot Com,
Speaker 2: the iHeartRadio app, tune In, and the Bloomberg Business app.
Speaker 2: You can also watch us live every weekday on YouTube
Speaker 2: and always on the Bloomberg terminal