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Speaker 2: Bloomberg Intelligence with Alex Steinhl and Paul'sweenye on Bloomberg Radio.
Speaker 3: On Today's Bloomberg Intelligence Show, we dig inside the big
Speaker 3: business stories impacting Wall Street and the global markets.
Speaker 4: Each and every week, we're going to provide in depth
Speaker 4: research and data on some of the two thousand companies
Speaker 4: and one hundred and thirty industries our analysts cover worldwide.
Speaker 3: Today will take a look at Paramount Global and why
Speaker 3: they're said to be cutting jobs despite hosting a record
Speaker 3: breaking Super Bowl.
Speaker 4: Plus, we'll discuss why food and beverage company craft Times
Speaker 4: is experiencing weaker sales.
Speaker 3: But first we dive into a major deal that could
Speaker 3: redefine the US energy sector. Diamondback Energy has agreed to
Speaker 3: buy fellow Permian base and driller Endeavor Energy Resources and
Speaker 3: a twenty six billion dollar.
Speaker 4: Deal Love Me Energy Deals. We're joined by Vince Piazza,
Speaker 4: Bloomberg Intelligence senior energy research analyst, and we asked him
Speaker 4: first what he thought of the deal.
Speaker 5: I think the deal ticks all the boxes that we're
Speaker 5: going to need to see in this MNA.
Speaker 6: Wave in the Permian.
Speaker 5: It grows Diamondbacks acreage, it grows locations, so inventory is
Speaker 5: not going to be an issue.
Speaker 6: In terms of the price that they paid.
Speaker 5: Look, Diamondback, in my universe of coverage had the highest premium,
Speaker 5: so they're using their multiple to get this deal done
Speaker 5: and so elevated currency along with some.
Speaker 6: Cash and debt.
Speaker 5: They do have a fairly low leverage on their balance sheet,
Speaker 5: so I think the picks all of the boxes. They'll
Speaker 5: throw off significant free cash flow in twenty twenty four
Speaker 5: and twenty twenty five, so in terms of paying off
Speaker 5: whatever bank loans that they're going to take on for this,
Speaker 5: but also works out for the founding family of Endeavor,
Speaker 5: they get to monetize decades of hard work.
Speaker 4: Vince is this a merger of equals?
Speaker 6: Well, in this case, think about what Endeavor brings to
Speaker 6: the table.
Speaker 5: It almost doubles Diamondbacks Middlin acreage, and it brings sizeable
Speaker 5: oil production for the broader Diamondback franchise. So I would
Speaker 5: tell you that in terms of size, it is a
Speaker 5: merger of equals. But the family will get roughly thirty
Speaker 5: percent of Diamondback with selling off almost half the resource
Speaker 5: to Diamondbacks, so it basically doubles Diamondbacks total size, and
Speaker 5: the founding family gets about thirty percent of the new Diamondback.
Speaker 3: Let's say, Vince, are there any regulatory issues here? A
Speaker 3: lot of m and A going on in this space here.
Speaker 6: Yeah, you know it's going to get looked at.
Speaker 5: So Southwestern and Chesapeake getting together out in Apalachia, that's
Speaker 5: a gas deal. But that will get a very very
Speaker 5: clear look, a very very deep look by the regulators.
Speaker 6: This will as well.
Speaker 5: I don't see why it wouldn't because of the actual
Speaker 5: size of this entity. It's going to be an enterprise
Speaker 5: value of north with sixty billion. It will be the
Speaker 5: largest Permian pure play, so it'll get looked at.
Speaker 6: All these deals will get looked at and.
Speaker 5: It'll take a deeper look, same as Southwestern and Chesapeake.
Speaker 4: I was talking to jenre and she covers Antrust for
Speaker 4: Bloomberg Intelligence, and she's like, yes, like all of these
Speaker 4: are going to have to get looked at. They're particularly
Speaker 4: interested in the Exon Permian Pioneer deal and that all
Speaker 4: these deals are definite gonna have the FTC sort of
Speaker 4: wide eyed looking at it. But you have to wonder though,
Speaker 4: if they want more oil, they're going to have to
Speaker 4: do it, right, Vince, I mean it's gonna I'm just
Speaker 4: trying to think of like what the rationale will be
Speaker 4: to block say this deal, but like let exce On
Speaker 4: Pioneer and go through, Like you can't.
Speaker 5: This deal is much more North America centric, much more
Speaker 5: North America focused.
Speaker 6: So when you think about you know.
Speaker 7: Exon and Pioneer Pioneer fits within Exon's Permian portfolio, but
Speaker 7: Exon is a large, integrated multinational franchise.
Speaker 5: This is more US centric and Permian centric as well.
Speaker 5: But look, they're all going to get looked at. It
Speaker 5: is what it is. This is a very large transaction.
Speaker 5: Like I said, Southwestern Chesapeake is getting looked at. This
Speaker 5: will get looked at as well. It's an important resource.
Speaker 5: What you have here, though, is you have resources now
Speaker 5: in stronger hands. You have Exon Mobile, Chevron, you have Diamondback.
Speaker 5: You have very large entities with big balance sheets and
Speaker 5: the capability to take down even greater levels of capital
Speaker 5: in order to move production from the delineation phase into
Speaker 5: the production phase.
Speaker 3: Give me a sense, Vincent, I'm putting my banker hat on.
Speaker 3: Can I keep doing a bunch of deals here? I mean?
Speaker 3: How many players are left?
Speaker 6: Yeah, it's a very interesting question.
Speaker 5: So we put out last year the top twenty privately
Speaker 5: held PE sponsored names in the Permian. In this case
Speaker 5: Endeavor being the second largest, Mewborn, which has mentioned that
Speaker 5: it wishes to sell. That's the largest of the top
Speaker 5: twenty that'll go out, we think, because it has been
Speaker 5: mentioned as a takeover candidate. Similar situation Founding family looking
Speaker 5: to move the assets. If you think about the top five,
Speaker 5: three are now gone, so there is a great deal
Speaker 5: of interest. There's interest by the private players as well,
Speaker 5: especially the PE sponsored players. You're getting close to these
Speaker 5: vintages that are aged and now this capital needs to
Speaker 5: be recycled, so you will see more of that. You
Speaker 5: will see public buying private. Public does have the currency.
Speaker 5: In the case of Diamondback, they had a premium multiple
Speaker 5: elevated currency that they were able to use to monetize
Speaker 5: the founding families investment, and you'll see that as well,
Speaker 5: especially in the permium where you do have this difference
Speaker 5: of large cap premium valuations looking for assets and the
Speaker 5: smaller cap names trading at a relative discount to peers,
Speaker 5: but trading at a discount to the larger names as well.
Speaker 3: Our thanks to Vincent Piazza Bloomberg Intelligence and Senior Energy
Speaker 3: Research analysts, we go.
Speaker 4: Next to earnings and focus on Hasbro, the toy maker,
Speaker 4: reporting fourth quarter net revenue and adjuster earnings per share
Speaker 4: the trailed analyst estimates, and this comes that the toy
Speaker 4: industry continues to suffer from week consumer demand after that
Speaker 4: boom in the early days of the pandemic.
Speaker 3: For more on this, we talked with Lindsay Dutch Bloomberg
Speaker 3: Intelligence Consumer Hardlines Senior Analysts. We first asked Lindsay what
Speaker 3: she made of the quarter.
Speaker 8: Osbro definitely disappointed on the quarter as top and bottom
Speaker 8: line missing, but more importantly that outlook for twenty twenty
Speaker 8: four looks pretty rough. They're definitely thinking about the toy
Speaker 8: industry more bearish than some of their peers like Mattel.
Speaker 8: And this is coming from a place where they've had
Speaker 8: more challenges than Mattel. In twenty twenty three, and even
Speaker 8: at the very end of twenty twenty two, there's some
Speaker 8: concern about profitability improvement for this company. They've sort of
Speaker 8: struggled to raise that operating margin over the past year,
Speaker 8: and I think that's like a really big worry bead
Speaker 8: thinking about twenty twenty four. They posted an operating margin
Speaker 8: for twenty twenty three nine point five percent. It was
Speaker 8: the lowest in at least twelve years, So there's real
Speaker 8: concern there.
Speaker 3: So let's start with the top line in the toy business.
Speaker 3: Is this a GDP growth business? Less more, how does
Speaker 3: this business grew?
Speaker 8: Yeah, so typically, I mean the toy business. You know,
Speaker 8: you think about growth two to three percent a year.
Speaker 8: Toy business boomed with the pandemic, so we're still coming
Speaker 8: off of those twenty twenty twenty twenty one highs, and
Speaker 8: in twenty twenty three, the industry contracted about seven percent
Speaker 8: per Circana data. Mattel was thinking that, you know, this
Speaker 8: year twenty twenty four would be a little bit better
Speaker 8: than that, but still contraction. Hasbro is saying down eight percent,
Speaker 8: So definitely a more bearish view on the industry as
Speaker 8: a whole. But this year definitely looks rough in terms
Speaker 8: of toy demands, still coming off of those.
Speaker 4: Highs, and they don't have Barbie. I mean, I asked
Speaker 4: the CEO of Mattel this on TV. I was like,
Speaker 4: you know, do you need a Barbie two? Like, what's
Speaker 4: your next evolution here? I mean, I know the quarter
Speaker 4: was better than Hasbro, but it still has problems. There's
Speaker 4: still an activist investor that wants them to spin off
Speaker 4: their American Girl and Fisher Price business, et cetera. It's like,
Speaker 4: you have to sell more cars if you're not selling dolls.
Speaker 4: And Hasbro doesn't have Barbie. Pow Reliant is a toy business.
Speaker 8: On movies, yes, so content has been a big driver
Speaker 8: over the past couple of years. Barbie is a great
Speaker 8: example of that. I think we also know that you
Speaker 8: can't have that blockbuster type movie every single year, but
Speaker 8: a lot of the preschool brands, you know, you can
Speaker 8: link to a series. So Hasbro does own Pepa pig.
Speaker 8: So just getting like this the animated series there sometimes
Speaker 8: can help with toy sales, but there's a major connection
Speaker 8: with entertainment. Entertainment generally across the board, not just Hasbro
Speaker 8: specific is going to be light in twenty twenty four,
Speaker 8: so they do lose that driver. Hasbro is also different
Speaker 8: than Mattel in the key categories that they play in,
Speaker 8: so they own NERF So they're really big sort of
Speaker 8: on that outdoor category, which again that's an outsize grower
Speaker 8: during the pandemic. They play in arts and crafts with Plato.
Speaker 8: Plato's like they've come out with some new products, but
Speaker 8: it's kind of really hard to come up with new
Speaker 8: innovative things in that category. Some of their outperformers were
Speaker 8: like Transformers in the past year again and entertainment linked product,
Speaker 8: you know that did well because of that.
Speaker 3: All Right, So if I've got a business where the
Speaker 3: demand is challenge, what do I do on the cost
Speaker 3: side to try to preserve my margins here?
Speaker 2: Right?
Speaker 8: So you know, Hasbro laid out a plan in October
Speaker 8: of twenty twenty two cutting costs. They kind of realized
Speaker 8: over time that wasn't quite enough, but they were planning,
Speaker 8: so they wint of double that goal, a lot of
Speaker 8: it coming out of SG and A. They're also offloading
Speaker 8: some of their brands and basically licensing out to other
Speaker 8: manufacturers to actually make the products, and that is going
Speaker 8: to be a key part of you know, their outlook
Speaker 8: for a stronger operating margin in that toy segment in
Speaker 8: twenty twenty four, and by that, they're expecting a four
Speaker 8: to six percent operating margin this year, whereas last year
Speaker 8: it was an operating loss. It's still a pretty low
Speaker 8: number below they're targeting twenty percent over the long term,
Speaker 8: so there's a lot of work to.
Speaker 4: Be done there. What's the Wizards of the Coast segment?
Speaker 4: Does that really hurt? What is that?
Speaker 8: That includes their magic of the gathering at tabletop gaming
Speaker 8: digital gaming brands, So that has been a top grower
Speaker 8: for this company over the past couple of years. They're
Speaker 8: again lapping difficult comparisons, only expecting three to five percent
Speaker 8: growth in twenty twenty four. But that business is a
Speaker 8: high margin business for them, So you're talking about thirty
Speaker 8: eight forty percent margins, but the problem is it's it's
Speaker 8: closer to thirty percent of their overall business. So as
Speaker 8: continued growth there is great, the margin is great, but
Speaker 8: it's still a smaller part of their mix, so it
Speaker 8: can't quite offset this weakness that they feel sort of
Speaker 8: in the traditional toy business.
Speaker 3: Thanks to Lindsey Dutch Bloomberg Intelligence Consumer Hardline Secret Analyst.
Speaker 4: Coming up, we're going to break down what Paramount Global
Speaker 4: said be cutting jobs.
Speaker 3: You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in
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Speaker 3: one hundred and thirty industries. You can access Bloomberg Intelligence
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Speaker 4: I'm Paul Sweeney and am Malling Steel and this is Bloomberg.
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Speaker 4: Let's turn out to the media and entertainment industry. Earlier
Speaker 4: in the week, we heard the Paramount Global is cutting
Speaker 4: roughly eight hundred jobs, or three percent of its workforce.
Speaker 3: We're told the cuts of our response to the continued
Speaker 3: loss of cable and satellite TV subscribers to streaming services
Speaker 3: like Netflix, and this comes despite Paramount hosting a record
Speaker 3: breaking Super Bowl TV audience.
Speaker 4: So for more, we're joined by either Maganathan Bloomberg intelligence
Speaker 4: analyst on US Media, and we ask Ether for her
Speaker 4: take on this week's news.
Speaker 9: This is really more of course, they did have a
Speaker 9: great Super Bowl, but I think this is really more
Speaker 9: about the future outlook for the company, and that is
Speaker 9: super super bleak. Yes, it was a great night for
Speaker 9: TV advertising. We think they gotten seven hundred million dollars
Speaker 9: in roughly about four hours. But then it's throughout twenty
Speaker 9: twenty three we've seen TV advertising decline by low double digits.
Speaker 9: It was down almost thirteen percent in the latest quarter
Speaker 9: that they reported, and it's not going to get too
Speaker 9: much better. And it's not just the challenges on the
Speaker 9: TV side of the equation for them. It's also about
Speaker 9: their streaming business and they've made good strides absolutely in
Speaker 9: terms of you know, streaming subscribers, and again I anticipate
Speaker 9: that they're going to have some good streaming numbers to
Speaker 9: report thanks to the Super Bowl, but it is burning
Speaker 9: a lot of money, almost one point seven billion dollars
Speaker 9: is what they will report in losses for twenty twenty three,
Speaker 9: and before that they lost about one point eight billion.
Speaker 10: So it's just been a continuous drain on the company.
Speaker 3: And I know they're there's a lot of talk around
Speaker 3: perhaps the controlling shareholder, Sherry Redstone, will consider selling all
Speaker 3: a part of the company. What's the latest on that?
Speaker 9: So the latest actually in that saga, and this has
Speaker 9: now been an ongoing drama for many months now, Paul,
Speaker 9: The latest is that Byron Allen actually came up with
Speaker 9: a bid for all of the company, not just for
Speaker 9: the controlling stake held through National Amusements.
Speaker 10: And he actually put up a pretty good bid.
Speaker 9: You know, it was fourteen billion dollars in terms of equity,
Speaker 9: so thirty billion dollars enterprise value. We think it was
Speaker 9: a pretty fair bid. The problem is, you know, Byron Allen,
Speaker 9: I don't think anybody is taking him too seriously. He's
Speaker 9: you know, had this track record of kind of coming
Speaker 9: up with these empty bids. So while it is a number, again,
Speaker 9: we've not really seen a whole lot of action that
Speaker 9: we would have expected.
Speaker 4: So this is a totally unfair question to Paul. Let's
Speaker 4: pretend you're still an M and a banker here, investment banker.
Speaker 4: What would you be talking to Paaramount about.
Speaker 3: I would I would say, I think the best buyer
Speaker 3: here there's a strategic buyer, maybe Warner Brothers, the Discovery,
Speaker 3: But both of those companies, as keitha Wall and those
Speaker 3: bound sheets are not great. I think I would be
Speaker 3: shopping into a private equity because they're still good for
Speaker 3: free cash flows here and let them deal with it.
Speaker 3: So Githay, what is the sense here as to I
Speaker 3: think about Paramount, I think about Warner Brothers, Discovery, what
Speaker 3: happens to these companies because it just feels like against
Speaker 3: some of the big tech companies, they're just not big
Speaker 3: enough here, against Netflix, are just not big enough. What
Speaker 3: did they do?
Speaker 11: So?
Speaker 9: I think Warner Brothers Discovery actually had a pretty interesting
Speaker 9: move last week Pall, which was they banded together with ESPN,
Speaker 9: Disney and Fox to kind of create this sports super
Speaker 9: app which will launch in the fall. And that's one
Speaker 9: way for them to kind of protect at least some
Speaker 9: part of their linear revenue stream, because I mean they've
Speaker 9: kind of everybody's seeing the writing.
Speaker 10: On the wall here.
Speaker 9: We're seeing cord cutting, we're seeing about ten percent of
Speaker 9: the subscriber base get eroded ear after ear We've already
Speaker 9: lost thirty million subscribers. So that's one good way for them,
Speaker 9: I think, to kind of control their destiny a little
Speaker 9: bit in terms of distribution. Again, remember Paramount is not
Speaker 9: part of that bundle, so that again is a little
Speaker 9: bit of you know, a strike against them. But you know,
Speaker 9: you bring up a good point. I think at the
Speaker 9: end of the day, we are going to have to
Speaker 9: see consolidation. Of course, as you just pointed out, there
Speaker 9: were rumors of actually Warner Brothers Discovery being interested in Paramount,
Speaker 9: but that would be about more than you know, sixty
Speaker 9: billion dollars I think in debt for those combined companies.
Speaker 9: So yeah, it is it is definitely going to be challenging,
Speaker 9: but I think consolidation is definitely on the cards.
Speaker 4: Okay, So then how does that happen? Because if like,
Speaker 4: three wrongs don't make a right, and you're not going
Speaker 4: to put all the media companies together because it's going
Speaker 4: to create more problems. So is it private equity like
Speaker 4: to split up different areas of media within the company.
Speaker 9: Yeah, I think Paramount I think one of the things
Speaker 9: has been you know, to sell it for parts. Right,
Speaker 9: there are some parts of the company, the TV networks
Speaker 9: that could be very, very attractive to private equity, as
Speaker 9: you just pointed out, because of the cash flows. Right,
Speaker 9: it's still a business. It used to throw out about
Speaker 9: six billion dollars in ebit dah, but it will still
Speaker 9: throw out about four and a half to almost close
Speaker 9: to four point eight billion dollars in ebit DAH. So
Speaker 9: again cash highly cash generative. Of course, the future you
Speaker 9: know flows don't look so great. But then there has
Speaker 9: been a lot of interest in the studio part of
Speaker 9: the business, right, whether that's you know, David Ellison with
Speaker 9: his guy Dance Media, maybe.
Speaker 10: Somebody else, maybe even an Apple.
Speaker 9: We haven't necessarily seen any of those you know, bids
Speaker 9: kind of come to fruition, but there definitely will be
Speaker 9: a lot of interest. But I think the one thing
Speaker 9: that we kind of have to wait to get some
Speaker 9: clarity on is definitely the regulatory environment. We've seen big
Speaker 9: tech kind of really shy away from anything too splashy,
Speaker 9: but who knows, maybe when the government changes, all of
Speaker 9: that will change as well.
Speaker 3: You know, Githa, When these networks bid and pay billions
Speaker 3: of dollars for sports rights. And even if you you know,
Speaker 3: you put up that seven hundred million dollars of bad
Speaker 3: revenue that you reference, you know, it's tough to make
Speaker 3: a profit on that kind of business. So what the
Speaker 3: networks have always said is, yes, but we promote other
Speaker 3: shows on our networks, and that value is really worth
Speaker 3: paying these big rights fees. But if you're promoting all
Speaker 3: these shows on the CBS network that nobody's watching because
Speaker 3: of chord cutting, how valuable is that? I mean, I
Speaker 3: thought about that they were promoting all their shows that
Speaker 3: I don't think anybody's watching because they've already cut the cord.
Speaker 10: Yeah, you're absolutely right for them. Though.
Speaker 9: The one thing that Paramount has done really kind of well,
Speaker 9: and I don't know whether this is a plus or
Speaker 9: a minus.
Speaker 10: But it definitely helps them at least shore up.
Speaker 9: I think the total value of their assets is they've
Speaker 9: actually all of their sports properties, including the NFL, they've
Speaker 9: actually kind of leaked it outside the bundle, so they
Speaker 9: were showing it on Paramount Plus Day one, and they
Speaker 9: did the same thing with the Super Bowl as well.
Speaker 9: So I think even if they're you know, even if
Speaker 9: you have cord cutters. They could make the argument that yes,
Speaker 9: you know, people can potentially sign up for that service.
Speaker 9: We saw, of course Peacock do that with that wildcard
Speaker 9: NFL game. Again, what they know that they're losing subscribers
Speaker 9: on the PATV bundle, so they're trying to they're trying
Speaker 9: their best, I don't know how successfully to kind of
Speaker 9: make it up on the streaming side, but you're right,
Speaker 9: I mean it is kind of a lose.
Speaker 4: Lose, Keitha. So what's next? Like, what are you watching?
Speaker 4: Preparea amount now?
Speaker 10: For Paramount, It's definitely it is an M and a place.
Speaker 10: Something has to happen. It has to happen fast. Bob Backish,
Speaker 10: the CEO, has pretty much said it. You know, he
Speaker 10: said he's.
Speaker 9: Evaluating Bayern Allen's proposal again, not sure whether that will
Speaker 9: necessarily pan out, but somebody has to come up with
Speaker 9: something and it has.
Speaker 10: To happen quickly.
Speaker 3: Our thanks to Keitha Ranganathan Bloomberg intelligence analyst on US
Speaker 3: Media fall.
Speaker 4: Let's turn out of Cisco So the largest maker of
Speaker 4: computer networking equipment, Cisco announcing plans to cut thousands of jobs,
Speaker 4: saying the cuts will affect roughly five percent of its workforce.
Speaker 3: This all comes after a slow down and corporate tech
Speaker 3: spending wiped out Cisco's sales growth last quarter. For more
Speaker 3: on all of this, we spoke with Woojin Hoo, Bloomberg
Speaker 3: Intelligence senior technology analysts. We first asked him if anything
Speaker 3: stood out from Cisco's quarterly results.
Speaker 1: I think after the job cuts league from last quarter,
Speaker 1: I think there were expectations that there were going to
Speaker 1: be cut the estimates. Quite frankly, the big standout for
Speaker 1: me was that the cuts were big enough. You know,
Speaker 1: five percent op X cuts. That's part of the course
Speaker 1: for what Cisco typically does. But at the end of
Speaker 1: the day, I mean, based on reports, it looks like
Speaker 1: a lot of this was expected.
Speaker 3: You know which I've followed the Cisco name for decades.
Speaker 3: I mean it's one of the founding Silicon Valley tech
Speaker 3: names based in San joseric smack in the middle, you know,
Speaker 3: Silicon Valley. What are they not getting right here? This
Speaker 3: SoC hasn't worked for a long time, and it just
Speaker 3: what from your perspective, what are they just missing here?
Speaker 1: Well, let's talk about large cap stocks in general, right,
Speaker 1: If we if we think about the big bangs let's
Speaker 1: say Microsoft, the old tech guard of the Microsoft Google, Right,
Speaker 1: they all really led on a cloud software transition. If
Speaker 1: we think about it, from the hardware old guard Cisco, Dell,
Speaker 1: HPE or the old HP, there's still relatively a hardware business.
Speaker 1: So you're not going to get the fast, sexy growth
Speaker 1: from the hardware business. I mean, if you look at Cisco,
Speaker 1: you know, after the estimate cuts fifty two billion for
Speaker 1: fiscal twenty four, that brings them back to twenty twenty
Speaker 1: four levels, right, So you're not getting the growth that
Speaker 1: people want, and also you're not getting the margin profiles
Speaker 1: that you want as well. So that's why the multiples
Speaker 1: are lower and the growth of shallower.
Speaker 3: So over the last five years, this stock has compounded
Speaker 3: three percent per year, Cisco S and P five and
Speaker 3: fourteen and a half percent, the S and P information
Speaker 3: technology sector twenty six percent. So it's really really underperformed
Speaker 3: going forward, which I guess over the next several quarters.
Speaker 3: What Cisco's saying about their customers and inventory and cutting
Speaker 3: this forecast suggests that they don't have a lot of
Speaker 3: great visibility here.
Speaker 1: If you remember the server and storage cycle from a
Speaker 1: year ago, Cisco is going through that right now. Part
Speaker 1: of it is because of the supply chain glut all
Speaker 1: of a sudden, Their customers got their equipment two quarters
Speaker 1: ago and they're taking their time implementing it. So typical
Speaker 1: cycles are roughly five to six quarters. I was running
Speaker 1: through the numbers and when we're talking about anywhere between
Speaker 1: twenty seven to thirty percent declines for the next two
Speaker 1: to three quarters for Cisco for the networking business, not sales.
Speaker 1: But they won't get out of this decline until the
Speaker 1: second half of fiscal year, which is about a year
Speaker 1: from now. Right again, the model's going to be reworked,
Speaker 1: primarily because of this Plunk deal. The hope is is
Speaker 1: that they're going to have more recurring revenues to boost
Speaker 1: up the multiples going forward.
Speaker 4: Where's the AI component for Cisco.
Speaker 1: I will tell you they're making a lot of good progress.
Speaker 1: They had a billion dollars in bookings in black black
Speaker 1: orders with Cloud customers, and the issue is is that
Speaker 1: that only represents two percent of total orders, right so
Speaker 1: it's still relatively small. It is going to be growing,
Speaker 1: and they're probably going to bang the drum louder on
Speaker 1: the AI the over the next couple of quarters As
Speaker 1: these deals really start to balloon. The one thing is, again,
Speaker 1: it's still a corporate IT name. If I were to
Speaker 1: pick one AI name on the networking side, it's probably
Speaker 1: going to be more Arista than Cisco for now.
Speaker 3: So again, is there a way WOODS is broadly defined
Speaker 3: On the hardware side, Have investors embraced any of the
Speaker 3: hardware's names as AI plays?
Speaker 5: Is it?
Speaker 3: Because it just doesn't feel like it. It feels like what
Speaker 3: I'm hearing from 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 1: I can name for Arista Networks, Wow, super Micro and Dell.
Speaker 1: And they reported in a couple of weeks there's a
Speaker 1: growing AI story there and one name that's been underappreciated
Speaker 1: is probably Hpe. They have a high performance computing business,
Speaker 1: but the story is a little muddled because of a
Speaker 1: pending Juniper deal. And then there's you know, my colleague
Speaker 1: Steve saying he covers the white box vendors, and there's
Speaker 1: some white box vendors that may potentially benefit because they
Speaker 1: sell server equipment to the cloud guys.
Speaker 3: Our thanks to Wu Jinho, Bloomberg Intelligence senior technology analysts.
Speaker 4: Coming up on the program, we'll discuss why food and
Speaker 4: beverage company Craft Tines is experienced in weaker sales.
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Speaker 4: We move next to the food and beverage industry. So
Speaker 4: earlier in the week, Craft Times reported first consolidated organic
Speaker 4: sales declined since the second quarter of twenty twenty one.
Speaker 3: We heard from Jennifer Bartashi's Bloomberg Intelligence senior analysts retail,
Speaker 3: staples and packaged food. We first asked Jennifer for her
Speaker 3: key takeaways from Craft's earnings results.
Speaker 12: The big surprise for Craft was that volume was down,
Speaker 12: which was not a surprise, but it was down more
Speaker 12: than prices rows and that really put pressure on the
Speaker 12: ability to generate sales growth. And so organic sales were
Speaker 12: negative for the first time since twenty twenty. And although
Speaker 12: there's some momentum in the business, it's got people concerned.
Speaker 3: So, jenn as I understand the package food business from
Speaker 3: reading your research and talking to you, you know, I
Speaker 3: guess post pandemic volumes were down, but they've been able
Speaker 3: to make up for it by raising prices. More so,
Speaker 3: is that game kind of played out now?
Speaker 12: Yeah. Basically a lot of these companies have run out
Speaker 12: of their pricing power. And what that means is, you know,
Speaker 12: they were able to raise prices because their input costs
Speaker 12: were hire, whether it was ingredients or transportation or packaging.
Speaker 12: But as inflation is coming down, they're losing the ability
Speaker 12: to pass through additional price increases, which means that if
Speaker 12: you want to have top line growth or organic sales growth,
Speaker 12: you have to have positive volume growth because you're not
Speaker 12: getting it from just higher price anymore. And the problem
Speaker 12: for craft tind size right now is that volume is
Speaker 12: still down, price is lower than it's been and they're
Speaker 12: not seeing that bounce back in volume that typically lower
Speaker 12: pricing would encourage.
Speaker 4: Okay, so a couple things to focus on. Let's go
Speaker 4: to the product side then, because you mentioned that a
Speaker 4: few times so volumes are down, it doesn't seem like
Speaker 4: that's just a pricing power thing. Do they not have
Speaker 4: the right products right now?
Speaker 12: Well, I think their portfolio is actually pretty good. It's
Speaker 12: just that the consumer is not buying as much as
Speaker 12: they were before. So if you think back to pre pandemic,
Speaker 12: people had huge pantries and everything was stocked. They had
Speaker 12: lots of boxed goods in there. And now people are
Speaker 12: still a little bit more conservative and buying more on
Speaker 12: a need basis rather than a stockpiling basis. And so
Speaker 12: until people start to bulk up those pantries again, it's
Speaker 12: hard to entice them to buy more than what they
Speaker 12: just need for this week.
Speaker 3: So as I look at the analyst forecast, jen, I
Speaker 3: kind of see the one and a half to two
Speaker 3: to two and a half percent revenue growth in the
Speaker 3: next several years. That really is the story for most
Speaker 3: of these consumer package goods companies, isn't it.
Speaker 12: It really is, especially for companies where the bulk of
Speaker 12: their portfolio are what you would call center of the
Speaker 12: store items, so that's the candle items, the boxed items.
Speaker 12: That type of outlook for top line growth is pretty
Speaker 12: much in line with where you would expect normal inflation
Speaker 12: rates to be, and so that in and of itself
Speaker 12: is probably a reasonable expectation for where these companies can
Speaker 12: go over the next few years.
Speaker 4: Do you think that prices then will come down or
Speaker 4: do you think that they stay sticky?
Speaker 12: Prices will slowly come down. Retailers are looking to pass
Speaker 12: through cost savings to their customers, so there will be
Speaker 12: higher pressure on package food companies to low prices as well.
Speaker 12: And as their input costs and packaging costs come down,
Speaker 12: it's harder for them to justify holding prices at a
Speaker 12: higher level and not passing through some of those savings.
Speaker 12: So while prices may never come back down to where
Speaker 12: they were pre pandemic, they should come down a little
Speaker 12: bit from where they were in terms of peak pricing
Speaker 12: in the last eighteen months.
Speaker 4: A little bit.
Speaker 3: I don't know if we like a little bit, No,
Speaker 3: we don't, And that's and that's what the problem. That's
Speaker 3: a problem for a lot of people and it's a
Speaker 3: problem for the politicians who are saying inflation is still
Speaker 3: a bad story here. So all right, So Jen, with
Speaker 3: these names like Craft Hids and General Mills and Kellogg's,
Speaker 3: I got a you know, low single digit revenue growth.
Speaker 3: I'm looking. I got dividend yields for Craft Highs about
Speaker 3: four point seven percent. I mean, what am I owning
Speaker 3: this thing for? Am I owning it for single digit
Speaker 3: kind of maybe stock price return plus some dividend yield
Speaker 3: And that's my game.
Speaker 12: That's probably the value play at the moment, right, Meaning
Speaker 12: you've got steady kind of slow and steady growth, you've
Speaker 12: got a reasonable dividend. They do do share buybacks, you know,
Speaker 12: so there's some some shareholder benefit there, and you know,
Speaker 12: as consumers start to pick up their spending, then we
Speaker 12: may see a better outlook for these companies as well.
Speaker 4: Who does Craft compete with, like the cokem PEPSI I
Speaker 4: know that PEPs was all like snack snack snacks, but
Speaker 4: they have the soft dam business. Who's like a straight
Speaker 4: up Craft competitor.
Speaker 12: Someone like Canagra would be, you know, or Campbell Soup.
Speaker 12: You know, those would be kind of those center type
Speaker 12: store companies. That would compete most directly with the Craft Times.
Speaker 3: Hey, Jen, I look at the at the holder's list
Speaker 3: here and I forgot about this. Berkshire Hathway Warren Buffett
Speaker 3: by far the biggest shareholder of this company with about
Speaker 3: twenty six twenty seven percent ownership. What is Berkshire Hathway
Speaker 3: publicly said about this investment? How long have they owned it?
Speaker 3: What do they say about their stake here?
Speaker 12: They've been involved for a very very long time. Haven't
Speaker 12: made a lot of public comments lately. But when Kraft
Speaker 12: Times began its transformation plan, which was now a little
Speaker 12: over three years ago, Berkshire Hathway was very positive on
Speaker 12: that transformation story. And to be fair, Kraft Times has
Speaker 12: executed on that transformation plan and generally ahead of schedule
Speaker 12: when it comes to cost savings initiatives, streamlining things, rebalancing
Speaker 12: their portfolio. So they really have been sticking to that
Speaker 12: plan and delivering ahead of schedule. It's just that it's
Speaker 12: a multi year process. Jen.
Speaker 3: In your coverage area, you know you got to Staples,
Speaker 3: the package food companies. What's the kind of the best idea.
Speaker 3: What do you talk to clients about most often?
Speaker 12: Well, right now, we're talking to people about you know,
Speaker 12: who is it that has taken the least amount of
Speaker 12: price increases over the last say, eighteen months, and where
Speaker 12: are volumes holding up? Because to be successful over twenty
Speaker 12: twenty four and into twenty twenty five, it really is
Speaker 12: that question of how are you going to actually drive
Speaker 12: overall growth and profitability? And so the companies that have
Speaker 12: been more conservative and been more prudent in that approach
Speaker 12: are the ones who are positioned right now to maybe
Speaker 12: benefit from that.
Speaker 3: So you haven't benefit from those Actually, what's a representative
Speaker 3: name there?
Speaker 12: So a good example there would be Mandolies where they
Speaker 12: took a lot less price than and actually the spinoff
Speaker 12: from Craft Times. Yeah, they've been a little bit more
Speaker 12: prudent in terms of their price increases, and what we've
Speaker 12: also seen is that their volume has held up better.
Speaker 4: Hey, Jen, what's something you really don't like right now?
Speaker 4: Like what sort of a negative trend? Because I'm also
Speaker 4: trying to understand for some of these names and normalization
Speaker 4: that we've seen sort of backtrack the last four years
Speaker 4: and erase that, and that's where we have to kind
Speaker 4: of pick up and go from there.
Speaker 12: I think one of the things that is an issue
Speaker 12: for the industry is that everyone still believes that they
Speaker 12: can optimize their portfolio and that they're going to find
Speaker 12: a buyer for the products and the product lines that
Speaker 12: they don't want at a good multiple. At the end
Speaker 12: of the day, there aren't a lot of buyers out
Speaker 12: there for you know, categories that are slow growth or declining,
Speaker 12: and so there's maybe a little bit of a mismatch
Speaker 12: in terms of the belief that they can streamline their portfolio,
Speaker 12: get up you know, all the value that they think
Speaker 12: they deserve out of it, and yet I don't see
Speaker 12: a whole, you know, a whole suite of buyers lining
Speaker 12: up to look at those products.
Speaker 3: Hershey, this company went public in nineteen twenty seven. Oh boy,
Speaker 3: they did one follow on offering m HM, and then
Speaker 3: for about a period about twelve months in nineteen ninety
Speaker 3: three or four, we pitched them hard on doing another
Speaker 3: follow on. We actually had a good analyst on the
Speaker 3: name in the company. Like this, We went to Hershey
Speaker 3: probably six or seven times in a space of a year,
Speaker 3: pitching a following off, pitching a nothing, didn't get paid,
Speaker 3: but got the Hershey and got a lot of Hershey
Speaker 3: chocolate there's that, So, Jen, what does a company like
Speaker 3: Hershey do. It's one of those things. I know they've
Speaker 3: gotten bigger through some acquisitions, but there's still relatively a
Speaker 3: small player relative to some of the other big names.
Speaker 3: But is there a brand so good that they can
Speaker 3: kind of remain independent?
Speaker 12: Yeah, I believe that the Hershey brand is really iconic,
Speaker 12: and if you think about some of their biggest chocolate lines,
Speaker 12: there really aren't a lot of mass targeted competitors out there.
Speaker 12: When it comes to kind of that mass market. It's
Speaker 12: hard for an external brand to come in and get
Speaker 12: the kind of penetration that her She has. And in addition,
Speaker 12: Hershey has really done a good job of diversifying into
Speaker 12: the broader snacking. So they own you know, they own
Speaker 12: popcorn brand, they own you know, pretzel brand. They've done
Speaker 12: a good job of diversifying and that'll help them with
Speaker 12: their long term growth as well.
Speaker 3: Our thanks to Jennifer Bartash is Bloomberg Intelligence Senior Animals.
Speaker 3: She covers retail, stables and packaged food.
Speaker 4: We turn out to earnings from deer so the world's
Speaker 4: biggest farm machinery producer trimmed its profit outlook for this
Speaker 4: year and this comes as crop prices are giving farmers
Speaker 4: less money to use on those equipment purchases to help recap.
Speaker 3: We were joined by Christopher Cilino, Bloomberg Intelligence Senior US
Speaker 3: machinery analyst. We first asked Chris his take on Deer's earnings.
Speaker 11: The quarter was great, really much better than we anticipated
Speaker 11: across the board, beats both top line and margins for
Speaker 11: most of the businesses, but the outlook was the disappointment
Speaker 11: of the quarter. They cut knit income guidance by about
Speaker 11: five percent, and that's largely reflective of incremental weakness in
Speaker 11: the ag business, specifically the largejag business. And there's really
Speaker 11: two components to that. One Europe Year now plans to
Speaker 11: underproduce retail demand due to some weakness in Central and
Speaker 11: Eastern Europe given the conflict there, so they're going to
Speaker 11: try to bring down inventories. They're already under producing in
Speaker 11: Brazil as well. And then the second component of the
Speaker 11: cut was really some additional softness beginning to transpire here
Speaker 11: in North America. We saw some of the order velocity
Speaker 11: start to moderate, so demand seems to kind of be
Speaker 11: trending towards the low end of their down ten to
Speaker 11: fifteen percent. Industry outlook when it comes to LARGEAG equipment.
Speaker 4: Yeah, let's get through some of these here. Production precision
Speaker 4: AGNET sales for their yearly forecast, they're looking down twenty
Speaker 4: percent worse. An estimated construction and forestry net sales down
Speaker 4: five to ten percent, small EG and turf net sales
Speaker 4: down ten to fifteen percent. Yiki, is this a early cycle,
Speaker 4: mid cycle or late cycle read on the economy.
Speaker 11: We're early in an AG downturn. Last year was a
Speaker 11: peak production level. You know, historically you don't have one
Speaker 11: year downturn, so I would suspect this is kind of
Speaker 11: the beginning of a multi year downturn. And some of
Speaker 11: the numbers that you're seeing that your reference on their
Speaker 11: guidance are well below you know, market retail demand expectations,
Speaker 11: suggesting that you know, they have some more work to
Speaker 11: do on bringing down inventory levels. Values continue to kind
Speaker 11: of come down here over the last twelve months, and
Speaker 11: I suspect you'll see further pressure on the use side.
Speaker 11: New equipment pricing, you know, deers kind of guiding to
Speaker 11: one and a half percent, which is kind of below
Speaker 11: historical averages. And remember we're coming off of you know,
Speaker 11: three years of really strong phenomenal pricing, So returning to
Speaker 11: I would say below normal historical trend, which will also
Speaker 11: be a drag on margins.
Speaker 4: Caterpillar had a different kind of read, and I appreciate
Speaker 4: they also do metals and mining and stuff. So is
Speaker 4: it going to be the diversified players that are going
Speaker 4: to really win on this?
Speaker 2: Yeah?
Speaker 11: So, I you know, constructions holding up certainly better than
Speaker 11: the farmer and then the ag economy A couple of
Speaker 11: different moving pieces there. I mean, you still have a
Speaker 11: tremendous amount of infrastructure related funds and government stimulus coming
Speaker 11: through the system that will not only be kind of
Speaker 11: a tail wind here in twenty four, but even twenty
Speaker 11: five and twenty six. So I think that certainly helps
Speaker 11: offset some of the cyclical headwinds facing both the rezie
Speaker 11: or non residential markets. But if you look at the
Speaker 11: farm economy almost kind of a completely different story. You
Speaker 11: look at crop prices, which are ultimately the biggest driver
Speaker 11: of farm income and equipment purchases, corn, soy, wheat down
Speaker 11: you know, twenty five thirty five percent plus, So that's
Speaker 11: beginning to trickle through to farm incomes. Farmer incomes are
Speaker 11: going to be down twenty six percent this year, and
Speaker 11: I suspect will be under further pressure as we exit
Speaker 11: the year.
Speaker 4: Too our thanks to Chris Gillino, a Bloomberg Intelligence Senior
Speaker 4: US Machinery analyst.
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