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Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
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Speaker 1: of course on the Bloomberg Now. Ryanair has cut its
Speaker 1: fully your profit guidance today than the frills Carrier blames
Speaker 1: the impact of the slump in the pound following the
Speaker 1: brigs of vote. Let's get more from John Strickland's j
Speaker 1: LS Consulting, aviation analyst with US Paris On and head
Speaker 1: of European Equities Fidelity International. This would probably be very
Speaker 1: painful for Michael Leary because he had campaigned first of
Speaker 1: all for the UK to stay within the EU, and
Speaker 1: then he's held off right trying to not cut profit guidance,
Speaker 1: and then finally today was too much because of course
Speaker 1: a weaker pound ways on fairs that also has quite
Speaker 1: a big impact on yields. Yeah, well, pound Sterling is
Speaker 1: such an important currency for Ryan Air, with around about
Speaker 1: a quarter of their revenues being earned in GDP, their
Speaker 1: biggest flying activities out of the UK stands is by
Speaker 1: far their biggest base airport, even bigger their home market Dublin.
Speaker 1: And they're indicating they're going to work against this in
Speaker 1: terms of further pressuring cost reductions by driving volumes that
Speaker 1: they have a pretty stunning performance in filling their seats,
Speaker 1: they feel aboutcent of seats. But of course the fact
Speaker 1: they have to remit Sterling into Euros as a euro
Speaker 1: denominated company is a fundamental problem. Can they head They
Speaker 1: could have hedged already, but I guess at the present
Speaker 1: time difficult to say. I mean, because there's so much
Speaker 1: of volatility. We just can't tell how this thing is
Speaker 1: going to play out in terms of the next few
Speaker 1: weeks and months, all right, But there's nothing fundamentally wrongs, right,
Speaker 1: I mean, this is it's a currency play and we're
Speaker 1: going to see a lot of I mean, Ryan is
Speaker 1: wrong with how many people actually fly their planes paciety.
Speaker 1: I mean Ryan is the strongest of a lot. As
Speaker 1: you said, they were really once really who had until
Speaker 1: today maintained their guidance. We've seen other players like I
Speaker 1: A G and Easy yet already issue profit warning. So
Speaker 1: I'm sure it's with great reluctance that Ryan I did
Speaker 1: so today. But it's still in a very healthy position
Speaker 1: when you look at the airlines, right, So this is
Speaker 1: a play on okay, pound and currency for for certain
Speaker 1: of the non frill hairlines, but then it's also a
Speaker 1: commodity play in oil. A lot of them were hedged
Speaker 1: wrongly overall. Can they recover? Yeah? I mean, I think
Speaker 1: I think it really comes back to looking at the
Speaker 1: attributes of the business models long term. And we know
Speaker 1: that Ryan there, for example, have a cost advantage versus
Speaker 1: you know, lots of their peers. They're also expanding the
Speaker 1: roots of which they fly. I don't think that Brexit
Speaker 1: changes people's appetite for sort of traveling abroad. So you know,
Speaker 1: I think is is John was saying, you know, you
Speaker 1: have to sort of take a step back from looking
Speaker 1: at the very short term volatility and try and look
Speaker 1: at the longer term attributes of the business models. John,
Speaker 1: help me out your Anthony, bring up the chart if
Speaker 1: you would. Here. Now this is British air I A
Speaker 1: g that Mr Strickland just noted the circle is Brexit
Speaker 1: down we go and to be honest, that's an ugly chart.
Speaker 1: Or John, is this the mother of all buying opportunities?
Speaker 1: The excellence of what British air has done at terminal
Speaker 1: five and worldwide full disclosure folks, I'm a fan, but
Speaker 1: then down we go? So do you pause here or
Speaker 1: is it the mother of all Heathrow buying opportunities? Well?
Speaker 1: I a g that the parents are British Airways is
Speaker 1: still a tho strong performer. As I mentioned, they've also
Speaker 1: issued a profit warning. But he is sending their powerhouse
Speaker 1: in the powerhouse, as you said, a British Airways they are.
Speaker 1: They are also touched by Brexit that they have a
Speaker 1: very diverse exposure, of course to global markets. If you
Speaker 1: to come to the UK, and particularly a business travel
Speaker 1: that heat throws the airport you're going to come into,
Speaker 1: it's already very constrained, which is precisety why we've got
Speaker 1: this big debate now about new runway capacity. I literally
Speaker 1: said this that evening after Brexit, when in all of
Speaker 1: London was nunb isn't the first order condition for any
Speaker 1: new prime minister to say we're open for business, we're
Speaker 1: building Heathrow. I think it's absolutely imperative. It's it's the
Speaker 1: clearest signal that we want to be a global player
Speaker 1: of an increasing nature. If we're going to move away
Speaker 1: from the focus on EU markets and really truly want
Speaker 1: to develop further trading relationships for example, China, then we
Speaker 1: have to have a gateway which he is open for
Speaker 1: business and where where airlines can get in. We've seen
Speaker 1: airlines in recent years either struck me to get into
Speaker 1: London or if they've got in a to all, they've
Speaker 1: perhaps got slots of Gatwick and as soon as they've
Speaker 1: had a chance, they've up sticks and moved up the
Speaker 1: road to Heathrow Airport. Does Heathrow make money for the
Speaker 1: people of the United Kingdom. It's a massive contributor to
Speaker 1: the economy because of course it facilitates trade. It's it's
Speaker 1: an access point for tourism. Many people may not know
Speaker 1: it's one of the biggest sources of cargo and freight
Speaker 1: traffic too, because if we think of the belly hold
Speaker 1: capacity of these large wide bodied aircraft, it's not just
Speaker 1: freight aircraft fly cargo and it's Visa aircraft, two vis
Speaker 1: aircraft of the ones which are using Heathrow, so it's
Speaker 1: a massive net contributor to UK economic performance. Yeah, and
Speaker 1: this has been usually controversial because first of all, most
Speaker 1: of the Greens, a lot of the environmentalists were against this.
Speaker 1: A lot of people living underneath this flight path, that
Speaker 1: which is actually one fourth of London, also have been
Speaker 1: arguing against this. I think no London mayor so far
Speaker 1: in the least fifteen years, has been for Heathrow. What
Speaker 1: I don't really understand, and I understand it's a great
Speaker 1: message to say we're open for business, is that the
Speaker 1: government seems to say, well, look we don't mind losing passporting,
Speaker 1: so we don't mind really hurting the city of London,
Speaker 1: but we'll give you Heathrow to make a little bit better.
Speaker 1: It doesn't match up, Yes, I think. I mean when
Speaker 1: you talk about sort of instructure places, I mean these
Speaker 1: are these are sort of very long term investments. I
Speaker 1: mean countries and economies reap the benefits of investment in
Speaker 1: infrastructure over decades, and so I think that this is
Speaker 1: as much a strong long term political message about the
Speaker 1: role of the UK in in the global economy, and
Speaker 1: I think that actually what it touches on is the
Speaker 1: fact that, you know, we could be in an environment
Speaker 1: where the investment in infrastructure more broadly actually starts to
Speaker 1: sort of move in a certain you know, in a
Speaker 1: more positive direction. Right. But but again, does the city
Speaker 1: not need pass But I mean you need to protect
Speaker 1: the city before building a new runway, to make sure
Speaker 1: that that people feel good about the fact that we
Speaker 1: have access to international business gen and I think I
Speaker 1: think the two go together. Obviously, a city and financial
Speaker 1: sector are are key users of Heathrow Airport, and we
Speaker 1: need to be able to access other key financial markets
Speaker 1: within Europe, around the globe and of course all other
Speaker 1: business sectors too. And we have airport capacity elsewhere, and
Speaker 1: it's been quite clear that airlines and not to use it,
Speaker 1: or they've moved out. Some airlines have decided not even
Speaker 1: come to the UK because of a lack of access
Speaker 1: to Heathrow. I got a killer question, you're John. Maybe
Speaker 1: you can help, Francing, you can help Why did they
Speaker 1: move the champagne and salmon bar that was right outside
Speaker 1: Terminal five British air It's such a long walk down.
Speaker 1: Francing helped me here you're starving. You get to the
Speaker 1: airport and there's just great little champagne samon. I'm you know,
Speaker 1: I'm a prep kind of girl. I mean they moved,
Speaker 1: they moved the bar, the restaurant. It was terrible. That's
Speaker 1: a that's a question probably have to put two British
Speaker 1: areways directly to a serious point. I'm trying to save
Speaker 1: Tom Keene out of you know, the champagne and solvent question,
Speaker 1: henceforth known as the pressing Keen question. But actually, how
Speaker 1: how do these terminals get built? I mean you kind
Speaker 1: of think, right, well, we're putting the perfumes after lipstick,
Speaker 1: after the champagne bar, so people drink and then buy
Speaker 1: more lip In an airport like Heathrow, I mean they can,
Speaker 1: they can literally have the pop up shops. The airport
Speaker 1: is a such a large scale and has such a
Speaker 1: I verse cly Ntell. There's an element by which the
Speaker 1: retail and then bevera jeoff has to vary almost by
Speaker 1: the hour, and that can be done in quite a
Speaker 1: sophisticated way. What outbound Japanese travelers might buy, or business
Speaker 1: executives to the US like Tom could be quite different
Speaker 1: to what the holiday brigade who are going to a
Speaker 1: Mediterranean would buy now. That cannot be done at small airports.
Speaker 1: But retail again is important in airports keeping their charges
Speaker 1: down to the airlines. That's a key driver to Salmon
Speaker 1: and champagne. John, do something about JFK. That's all I
Speaker 1: ask for, John Strangling, Thank you so much. The different
Speaker 1: spots between you throw and JFK is absolutely sharky. Heathrow
Speaker 1: has got a totally together. I wouldn't bring in Howard Ward.
Speaker 1: He is Gamecas chief investment officer of Growth Equities. It's
Speaker 1: great to have you here, Howard, and let me just
Speaker 1: start by me. I was looking at your most recent
Speaker 1: note and said, you're more concerned about the economic outlook
Speaker 1: and more cautious on the stock markets prospects than usual.
Speaker 1: Give us the lay of the land as you see
Speaker 1: it here. And the reason for for the caution, well,
Speaker 1: a lot of it UH has to do with the
Speaker 1: lack of significant GDP growth. Nominal growth is UH trendlining
Speaker 1: and you know three real growth two UH. My view
Speaker 1: is that higher labor costs are going to continue to
Speaker 1: pinch profit margins which peaked two years ago, and that
Speaker 1: the earnings expectations for next year are probably too high.
Speaker 1: There's even a risk that we end up resetting earnings
Speaker 1: expectations for next year at flat, possibly even negative. I
Speaker 1: think that if that were to happen, it would be
Speaker 1: very likely that the stock market would would go down.
Speaker 1: I think that globally things are weakening, and that while
Speaker 1: the base case expectation at this point is not a
Speaker 1: recession for next year, the risk of a recession has risen.
Speaker 1: I think it has to be in your conversation at
Speaker 1: this point, how concerned are you about business investment? I
Speaker 1: was listening to the vice chair the FEDS re Board,
Speaker 1: stand Fishery, speaking yesterday, something that that he talked about
Speaker 1: the need for for more of it. When you when
Speaker 1: you look at the prospects for earnings, when you look
Speaker 1: at the climate more generally, how big a concern is
Speaker 1: that for you? Well, business investment comes out of profits,
Speaker 1: and profits have been flat for a year, and as
Speaker 1: I just mentioned, I think the expectations for next year
Speaker 1: are too high. Uh. Another factor that's weighing on investment
Speaker 1: is business confidence, and business confidence has turned down. Uh,
Speaker 1: no surprise, I think given this election season that we're
Speaker 1: facing and policy uncertainty going forward, not just in terms
Speaker 1: of the election, but also in terms of FED policy.
Speaker 1: UM So, I think that right now the prospects for
Speaker 1: business investment growing are not great. It's been weak. I
Speaker 1: think it's gonna stay weak and until you get some
Speaker 1: better growth, which may take UH working with corporate tax code.
Speaker 1: I think that would be the first thing I would attack. UH.
Speaker 1: We need to free up business a bit from a
Speaker 1: regulatory standpoint as well, things that will result in higher profits,
Speaker 1: and that's how you're going to get businesses to invest.
Speaker 1: Have we been ignoring business confidency? Bring it up here.
Speaker 1: We talk a lot about consumer confidence. We look at
Speaker 1: the state of the consumer in the in the U. S.
Speaker 1: Economy and the global economy. Are we not paying enough
Speaker 1: attention to business confidence? Probably not. I think that. UM.
Speaker 1: When we've had some of the big headline risks over
Speaker 1: the macro headline risk over the last several years, you know,
Speaker 1: what we've seen is that the the CEO suite has
Speaker 1: paid much more attention to headline global headline risk than
Speaker 1: has the U. S. Consumer. And so we've had situations
Speaker 1: where the U. S consumer has gone about his business
Speaker 1: as usual for the most part, but the CEOs have
Speaker 1: pulled back because of their fears or their lack of
Speaker 1: confidence in the future, and I think that situation remains
Speaker 1: with us today, and it is worth paying attention to
Speaker 1: more attention to how are we were talking helpha, beta,
Speaker 1: gamma earlier in the basic idea of being more defensive.
Speaker 1: When you're defensive, do you go to cash or do
Speaker 1: you buy something different? Tom, I buy something different. And
Speaker 1: that's because in my forty years in this business, I
Speaker 1: have grown to believe with a lot of conviction that
Speaker 1: market timing is essentially a loser's game. And so when
Speaker 1: I become more concerned and more cautious about the outlook,
Speaker 1: the idea would be to reduce the so called beta
Speaker 1: or volatility of my returns relative to the market, and
Speaker 1: to do that by stock selection, focusing more on uh
Speaker 1: the less mostly the less economically sensitive parts of the
Speaker 1: market consumer staples, healthcare, utilities, telecom. Those areas are more
Speaker 1: likely to hold up well and market the client if
Speaker 1: it happens. And there are many occasions where people much
Speaker 1: smarter than I have expected the market to go down
Speaker 1: for all sorts of good reasons and it doesn't happen.
Speaker 1: And that's the danger in marketing? Is Jamie Diamond high
Speaker 1: beta or low beta? Well, Jamie Diamond as a CEO
Speaker 1: is low beta. JP Morgan as a bank within the
Speaker 1: banking sector is probably one of the lower beta names. However,
Speaker 1: financial services can be a dangerous place to be uh
Speaker 1: in a declining market. So I that's an area that
Speaker 1: I am underweight and would recommend that. I just did
Speaker 1: this because David girls looking at us like greek letters beta.
Speaker 1: What are we talking to? Your define BEATABTA is the
Speaker 1: price movement relative to the underlying index right right, So
Speaker 1: you can you can pick your index. For most investors,
Speaker 1: that would be the S and P five hundred and
Speaker 1: so it's you know, how much of the return of
Speaker 1: your stock can be explained by the enterlying volatility in
Speaker 1: that index? I you know, I know that politics is happening.
Speaker 1: Obviously we're gearing up for this debate to tomorrow night.
Speaker 1: And a number of people we've spoken to recently, strategists
Speaker 1: and investors, have said, uh, either the elections priced in
Speaker 1: or they're not that worried about the risk? Are you
Speaker 1: worried about it? And and if you're not, UH is
Speaker 1: a proxy for it? That being what's going to happen
Speaker 1: with trade something of greater concern to you. Well, I
Speaker 1: haven't been worried about the debate because I've had the
Speaker 1: mindset that we're going to end I mean about the election,
Speaker 1: because I've had the mindset that we're we're going to
Speaker 1: have a divided government. I have seen, however, with some concern.
Speaker 1: The price action in the health care sector the last
Speaker 1: several days, however, has been decidedly negative. And it's been
Speaker 1: that way primarily because of the growing concern of a
Speaker 1: Democratic sweep, which would of course be more difficult for
Speaker 1: healthcare the healthcare industry given the the the Democrat Democratic
Speaker 1: parties designs to have greater control over pricing in that area.
Speaker 1: So there is some election risk, the risk being a
Speaker 1: Democratic sweep. However, I still don't think that is the
Speaker 1: most likely and most likely outcome. Are you worried about trade?
Speaker 1: Trade is of global GDP. Trade is slowing. Trade I
Speaker 1: think is going to slow further. Uh. If I'm right
Speaker 1: that the U. S economy is going to slow over
Speaker 1: the next several quarters, that's going to have a multiplier effect.
Speaker 1: Through ripple trade. We are through real trade, we are
Speaker 1: the world's largest importer. So if we sneeze, the exporters
Speaker 1: of the world are gonna feeling. Just to bring this up, David,
Speaker 1: predict wise, is this great summary of all the polls,
Speaker 1: somewhat like real clear politics. I think it has been
Speaker 1: widely reported Secretary Clinton, Mr trumpet ten percent is the
Speaker 1: likelihood of investing. David over predict was put out a
Speaker 1: note yesterday making clear ten percent is still a chance
Speaker 1: to win for Mr Trump. The Senate se uh, but
Speaker 1: the House has come in a little bit. It's not
Speaker 1: as grim as it was three or four days ago.
Speaker 1: But Howard, I still don't see it, you know, looking
Speaker 1: at predict Wise, I'd call it less than likely or
Speaker 1: even remote, that the Democrats would take the House. David, Yeah,
Speaker 1: it reminds me of what Stan Collinser from Corvius was
Speaker 1: signed to us last week. He was not exactly the
Speaker 1: most bright out optimist about what's going to happen in
Speaker 1: d C. In the prospects for any sort of change
Speaker 1: to taxes for infrastructure spending seems pretty bleak. Yeah, Tom,
Speaker 1: I would say that if the market truly believed in
Speaker 1: a Democratic sweep, the entire market would be getting hurt,
Speaker 1: not just the healthcare sector. I think you're getting some
Speaker 1: precautionary selling in healthcare. It may already be overdone at
Speaker 1: this point. Apple update, well, how do you spell relief?
Speaker 1: Apple seems to have decided that maybe they don't want
Speaker 1: to get into the business of building cars, and this
Speaker 1: is great news. The last thing the world needs is
Speaker 1: another automobile manufact extra, a business of tremendous capital intensity, global,
Speaker 1: globally competitive like no other, and it would have been,
Speaker 1: I think, just been an an abyss of throwing profits
Speaker 1: into a hole. Uh. And so I'm very, very hopeful
Speaker 1: now that Apple is going to restrain itself and focus
Speaker 1: on the software from automobiles created by Twitter software standards.
Speaker 1: I'm not an owner of Twitter. Um, I don't think
Speaker 1: the Twitter economic model is has is working yet they
Speaker 1: don't make any money time, So even as a bolt
Speaker 1: on Apple, I don't think that Apple and Twitter make
Speaker 1: a lot of sense. Personally, I'd rather see Apple go
Speaker 1: out and buy, uh something like a Time Warner and
Speaker 1: now folks a clinic. Howard Ward of gem COO knows
Speaker 1: as many others do, that scale is everything. The note
Speaker 1: Kochla Coasla rather of all sorts of entrepreneurial issues of
Speaker 1: two decades to go has maybe been the leader on this.
Speaker 1: Let me put things in scale. Time Warner is one
Speaker 1: tenth as big as Apple. Time Warners eb DA is
Speaker 1: less than a tenth of Apple. Their net income is
Speaker 1: less than a tenth of Apple, and on and on. Howard,
Speaker 1: if we lined up a hundred people who are smart, smart, smart,
Speaker 1: they wouldn't know that they know the Time Warners smaller,
Speaker 1: but we forget the scope and scale that allows for
Speaker 1: mergers and next acquisitions transactions to work. Well, Time, You've
Speaker 1: just told everybody, really what Apple's problem is. They're so big.
Speaker 1: The iPhone, which generates about their profit, is so such
Speaker 1: a mammoth product that even if you were to buy,
Speaker 1: as I've suggested, a company like Time Warner, it's not
Speaker 1: going to have a material uh packed on the bottom
Speaker 1: line right away. It may over time, but right away
Speaker 1: the impact would not do that great. That's actually not
Speaker 1: so bad because that means the risk of that kind
Speaker 1: of investment would not be right. How do you suggest
Speaker 1: a set of boltons something? I think I think that
Speaker 1: it's there. Their only choice is to go after and
Speaker 1: you know, you know, they have the luxury of considering
Speaker 1: companies of the the size of Time Warner as a bolton.
Speaker 1: But that's what the numbers would suggest, and I think
Speaker 1: that that is the route you need to go. I
Speaker 1: think content is king. I think Apple is going to
Speaker 1: want to have their own content, uh, to differentiate some
Speaker 1: of their products. So I do think that's the direction
Speaker 1: they should be going in. And if you want to
Speaker 1: innovate with software on the aunomobile side, find But otherwise
Speaker 1: let's go back to more of the the t MT
Speaker 1: kind of business that we would associate Apple with. David
Speaker 1: Guru Time owners cash is approximately one eight zero of
Speaker 1: Time Warner. It's not you say that the Apple should
Speaker 1: be getting into content. What explains the delay in doing that?
Speaker 1: We were talking about the car falling falling to the
Speaker 1: wayside here perhaps wisely. Why has as Apple seemingly lost
Speaker 1: sight of that? You look at the problems they've been
Speaker 1: having with their services just generally over these last few years.
Speaker 1: How worrisome is that to you? Well, I don't think
Speaker 1: that they probably haven't lost sight of it. I think
Speaker 1: that they you know, it's been reported in the media
Speaker 1: previously that they've had conversations with Time Warner and others. Uh,
Speaker 1: you know, who knows where those stand or where what
Speaker 1: happened to them. I do think that maybe they have
Speaker 1: decided to wait and see how this whole evolution of
Speaker 1: the skinny bundle plays out versus versus today's big bundle. Uh.
Speaker 1: For for for cable programming. I think that in the
Speaker 1: case of Time Warner, the Time Warner wins under any scenario,
Speaker 1: whether it's all a card or bundle. They're going to
Speaker 1: win because of the channels they have and they're not
Speaker 1: burdened with the ESPN problem where they're getting where where
Speaker 1: Disney is getting about seven dollars a subscriber for ESPN,
Speaker 1: and if you go to the skinny bundle, it would
Speaker 1: be hard to perhaps replicate that, So uh, Time One,
Speaker 1: I think wins under either condition. Uh. And there may
Speaker 1: be other media companies that Apple could be interested in,
Speaker 1: but I clearly think that the future for Apple, given
Speaker 1: their primary devices are used for viewing content and listening
Speaker 1: to content, that media would would have some synergy. And
Speaker 1: as Time said earlier, scale is important. So I think
Speaker 1: moving in that direction is the logical scenario for them,
Speaker 1: and I wouldn't be surprised if that were to happen.
Speaker 1: What we're in this space I just want to get
Speaker 1: your sense of what's been going on with Viacom and
Speaker 1: CBS and that whole empire looking against the non passive observers.
Speaker 1: You are of that space, what do you make of
Speaker 1: of what's been happening there. Well, that's a drama. That's
Speaker 1: hard for me to talk about, uh in any real
Speaker 1: sophisticated way. I don't own Viacom. I do own CBS.
Speaker 1: You probably know Mario and the values side of our firm,
Speaker 1: our big holders of Viacom. Mario is one of the
Speaker 1: largest in our firm, is one of the largest holders
Speaker 1: of the voting stock of Viacom. So there's a drama
Speaker 1: they're playing out that I'm I'm not part of it,
Speaker 1: and I'm hesitant to comment about that too much or enough.
Speaker 1: You did well, their days tried. However, before we let
Speaker 1: you go, there's a caution on the market you mentioned earlier.
Speaker 1: You don't do cash, you go down to more conservative stocks.
Speaker 1: Are electric utilities today like they were in our ute?
Speaker 1: That's a great question, Tom, because you know, we have
Speaker 1: had a bit of a backup and the interest rates
Speaker 1: in recent months, and the utilities have generally sold off
Speaker 1: intent intandem with that and um, I think that the
Speaker 1: consensus opinion right now or more people than not believe
Speaker 1: interest rates are heading higher. I happen to take the
Speaker 1: other side of that bet. Right now, I think rates
Speaker 1: have have peaked or close to peaking, and consequently, anything
Speaker 1: that's a bond proxy I think represents better value than
Speaker 1: the market believes right now. And I'd be a buyer
Speaker 1: these stocks. The business itself is has changed at the margin.
Speaker 1: Howard Ward, thank you so much. Ever the optimist from
Speaker 1: New York, This is Bloomberg. Who you put your trust in? Matters.
Speaker 1: Investors have put their trusted, independent registered investment advisors to
Speaker 1: the two and of four trillion dollars. Why they see
Speaker 1: their roles to serve, not sell. That's why Charles Schwab
Speaker 1: is committed to the success over seven thousand independent financial
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Speaker 1: This is a real pleasure, folks. For the next half hour,
Speaker 1: we're gonna speak to one of the grizzled prose of
Speaker 1: the heart of America, which is the Midwest. Our agriculture
Speaker 1: or food business and frankly those of us in three
Speaker 1: zip codes in New York Day for granted, and the
Speaker 1: expert on this is one and dignent of JP Morgan.
Speaker 1: We speak first of Caterpillar in the showing of the
Speaker 1: door to Mr Oberhelman, and then we move on to
Speaker 1: the state of our Midwest agriculture economy and thrilled to
Speaker 1: have you with us um this morning. Caterpillar was such
Speaker 1: a juggernaut, and about six years ago it ended you've
Speaker 1: been way out front on tepid revenue growth. Let's begin
Speaker 1: with their chairman and CEO, Douglas ober Hellman. Was he
Speaker 1: shown the door? Well, I think you could answer that
Speaker 1: either yes or no. I suspect that the timing surprised
Speaker 1: people yesterday a little bit. Caterpillar will report its earnings
Speaker 1: two three earnings next week, and they usually give guidance
Speaker 1: for revenue for the following year on that call. And
Speaker 1: so perhaps the interpretation is is that Caterpillar is facing
Speaker 1: a fifth tier of a downturn, and that's unprecedented. So
Speaker 1: if I wanted to put the bear case together, I'd say,
Speaker 1: maybe that's why Doug is leaving earlier than we might
Speaker 1: have expected. What part of securities analysis. Do you judge
Speaker 1: any of the commodity equities on is it is it
Speaker 1: a price to sales? It's the cheap Is it revenue
Speaker 1: growth that isn't there? Do you move down the income
Speaker 1: statement to cash flow or the EBITDA. Yeah, that's a
Speaker 1: good question. We generally for machinery stocks, we think of
Speaker 1: them as being highly cyclical, and so we tend to
Speaker 1: look at a price to earning, so a p E
Speaker 1: and for machinery stops usually when the earnings is at
Speaker 1: the lowest, that's when the multiple PE multiples at its highest,
Speaker 1: generally about twenty times the trough earnings. And then when
Speaker 1: earnings are at the highest, we put the lowest multiple
Speaker 1: on those earnings, and that's generally a ten multiple on
Speaker 1: the PE. So it's a cyclical business. We look at
Speaker 1: how well we're able to manage the earnings through the cycle.
Speaker 1: Let's talk about the last cycle featuring Doug over Helman.
Speaker 1: It was not a good one when you look at
Speaker 1: commodity prices. This was a tough market in which to
Speaker 1: be the chief executive of Caterpillar to be pursuing the
Speaker 1: kind of emana that he was pursuing. Yeah, there's no question.
Speaker 1: When we look back and look at what happens, we
Speaker 1: he did buy be Cyrus, one of the two remaining
Speaker 1: machinery names in mining, and he bought that at the
Speaker 1: peak of the cycle. But you don't did any of
Speaker 1: us see the peak of the cycle at that point,
Speaker 1: at any of the stock on that acquisition. No, I mean,
Speaker 1: I think we were all caught up a little bit
Speaker 1: on the never ending growth in China and the build
Speaker 1: out of infrastructure in China. If there was ill timed
Speaker 1: David Girl from peak, they've taken twenty billion revenue. You know,
Speaker 1: it's it's a crutch to say how's this playing in Peoria?
Speaker 1: But in the case of Caterpillar, we can say how's
Speaker 1: this playing Pory. I wonder what what the folks that
Speaker 1: make of this change? And what you can tell us
Speaker 1: about Mr Overhelman's successor that's been one Jim mump will
Speaker 1: be what do we know about him and how he
Speaker 1: might change course here at Caterpillar. Well, the good news
Speaker 1: is that uncle we ran at the business that's called
Speaker 1: energy and transportation, and that business has been the crown
Speaker 1: jewel of Caterpillar. Or within that business, there's a business
Speaker 1: turbine engine business called solar and that's always been extraordinarily
Speaker 1: well run. Um, so that's the good news. We have
Speaker 1: a good operations guy coming in to take the place
Speaker 1: of Doug, and that's probably what Caterpillar needs as we
Speaker 1: go through this cycle because we don't really know what
Speaker 1: the duration is going to be. So I got a
Speaker 1: good operations gagling in there, that's public, you know. And
Speaker 1: I was going to go out this weekend and look
Speaker 1: for a D three K to Tier four final dozer
Speaker 1: this or the cats C four point four, a certain
Speaker 1: engine eighty horsepower net operating weight you know, seventeen thousand
Speaker 1: pounds what is it eight tons or so? Yeah, put
Speaker 1: it right out there by run it, run it up
Speaker 1: there to the trump rank and then take that puppy
Speaker 1: up to the reservoir. And when you look at this
Speaker 1: in the romance of Caterpillar, and you're the pro on this,
Speaker 1: was it a mistake to have a chairman and the
Speaker 1: CEO together? Would there would would there have been less
Speaker 1: ill decisions, bad decisions, miss decisions if there had been
Speaker 1: a check of a separate chairman. I don't think so.
Speaker 1: In this case. Quite honestly, they've got a very strong board,
Speaker 1: and the board approved the acquisition of peace IRUs. And
Speaker 1: you know again at the time when the acquisition was made,
Speaker 1: you know, construction Glubly was very strong, mining was very strong.
Speaker 1: China's GDP growth was accelerating, not decelerating. So I don't
Speaker 1: think that having a separate CEO and Sherman would necessarily
Speaker 1: have made any difference in this case. I think it
Speaker 1: was just everybody got excited about the up cycle. And
Speaker 1: you know, remember other companies like he were considering getting
Speaker 1: into the mining equipment also, so you know they weren't
Speaker 1: the only ones chasing their dreams. Let's get to our
Speaker 1: next action. We've got a couple more minutes here in
Speaker 1: dining with JP Morgan. What's the state of the American
Speaker 1: farmer right now? The American farmer is facing fourth here
Speaker 1: of probably losing money, if our at least break even
Speaker 1: to losing money. I would say, to excuse the pond,
Speaker 1: our farmers in the Midwest looked like deer headlights. They
Speaker 1: are not buying equipment and they will not be buying
Speaker 1: equipment for what could be several years. We've had seven
Speaker 1: great years. And when you asked farmers, what in agricultural
Speaker 1: cycle looks like they say, uh, maybe seven years like
Speaker 1: the Bible. So we've had seven great years. We're probably
Speaker 1: looking at seven horrible years. So it's not looking good
Speaker 1: at there in the Midwest for our US farmers. Having
Speaker 1: reported in the Midwest on agriculture, I'm always struck by
Speaker 1: how involved farmers are in studying those cycles. How on
Speaker 1: top of those cycles they seem to be here. Uh
Speaker 1: your sense as well that they have a pretty keen
Speaker 1: sense of where we stand, where we're headed. Yes, actually, um,
Speaker 1: you know, some of them have told me over the
Speaker 1: years that they are always pessimistic because they know that
Speaker 1: somebody is going to squeeze the profit from them somehow.
Speaker 1: So I think they recognize you know, they most of
Speaker 1: them lived through the eighties when the farming economy was horrendous,
Speaker 1: so they have long memories, and so you know, they
Speaker 1: tend to be they spend when they have money, and
Speaker 1: they don't spend when they don't have money. Do you
Speaker 1: have a by Holt sell anything and what you're strong
Speaker 1: by right now? Given the dignant bloom imry, I'm not
Speaker 1: very upbeat on our group in general and in particular
Speaker 1: part machinery. If we look forward into you know, if
Speaker 1: interest rates start to rise, that is not the same
Speaker 1: for the purchase of machinery. So I'm pretty neutral to
Speaker 1: negative the group. Let's just John Dear okay, and diged
Speaker 1: in with us, so JP, Morgan, David Gerr and Tom
Speaker 1: Keene and we said good morning to everyone across the Midwest.
Speaker 1: And hundred and forty nine acres in Fulton County, Illinois.
Speaker 1: And you know, I got a lot of family that's
Speaker 1: from out there, David, I'd say like a quarter of
Speaker 1: my family, the rich ones are from Fulton County, Illinois.
Speaker 1: Hundred and forty nine acres for four and SEVD. It's
Speaker 1: some you know pasture in in in acreage I should say,
Speaker 1: cut out of a forest and then there's some rough
Speaker 1: pasture in the back side. I mean. And that's the
Speaker 1: dynamic that we perceive of America. That's not the world
Speaker 1: of vandignon is. I mean, we look at that like
Speaker 1: as farmland for sale, but it really isn't. What's the
Speaker 1: normal land you look at across the Great Midwest. How
Speaker 1: much acreage is a real farm? Oh? I would say
Speaker 1: that ten or fifteen years ago, two thousand acres was
Speaker 1: considered a large farm and then we had the agricultural
Speaker 1: cycle and farmers started to buy acres or rent acres.
Speaker 1: And I would say today a large farm is considered
Speaker 1: about three thousand acres, and I have spent time with
Speaker 1: farmers in Iowa who farm as much as ten thousand acres,
Speaker 1: So you know, we've really seen acres grow and farms
Speaker 1: get larger over the years. You know, when you look
Speaker 1: at a company like Caterpy, let's just use that as
Speaker 1: the as the perch from which to look at at
Speaker 1: this sector. Where's the growth is it in agriculture, is
Speaker 1: it in mining? What? What what's the future look like
Speaker 1: in terms of growth? Well, I think that that's unclear
Speaker 1: right now. You know, what we are seeing in mining,
Speaker 1: for sure, is a lot of supplies coming out on
Speaker 1: the mining side. So we've closed a lot of US
Speaker 1: coal mines, We've closed a lot of minds around the world,
Speaker 1: and so we're resetting supply and demand. What we really
Speaker 1: need to see now is demand accelerate. China is consuming
Speaker 1: hard commodities, but its economy is kind of stabilizing at
Speaker 1: about six percent growth, and that's still growth, but it's
Speaker 1: just slower growth than everyone had anticipated. So I think
Speaker 1: mining might be the first end market that we could
Speaker 1: see some light at the end of the tunnel, because
Speaker 1: mining companies are now beginning to make a little bit
Speaker 1: of money, and perhaps in seventeen or eighteen, if you're
Speaker 1: making a little bit of money, you opened the purse
Speaker 1: strings a little bit. So I think of all the
Speaker 1: end markets we look at, mining might be the first
Speaker 1: one to put a bottom in. So we've gotten a
Speaker 1: sense of sentiment among farmers. Let me ask you here,
Speaker 1: Ann about sentiment among the companies themselves. You were out
Speaker 1: at a big conference in Las Vegas last month wandering
Speaker 1: around talking to two companies, to folks who are buying equipment.
Speaker 1: What what did it feel like out there in Las
Speaker 1: Vegas last month when you're there for that conference. You know,
Speaker 1: we were kind of hoping to find a bright spot.
Speaker 1: We were hoping that, you know, somebody would come and say, yes,
Speaker 1: we're buying equipment and things look great. I actually sat
Speaker 1: beside a gentleman who was on his way to the
Speaker 1: Mine Exposure show on the airplane when I was heading
Speaker 1: out there, and he was from Kazakhstan, uh And I
Speaker 1: think he said it best. He said he was coming
Speaker 1: to the show to look and talk and see what
Speaker 1: equipment was out there, but he wasn't going to be
Speaker 1: buying anything. So I think there's still a lot of
Speaker 1: hesitancy as they're around the world in terms of actually
Speaker 1: spend money. And I just said with the Chicago Fed,
Speaker 1: and of course all of our federal reserve systems is great,
Speaker 1: great research on land costs in that and the Chicago
Speaker 1: Fed has a great district farm loan portfolio with major
Speaker 1: or severe repayment problems. The good news is we're not
Speaker 1: back to the eighties. But regarding back where we were
Speaker 1: fifteen years ago, rather rapidly, how sustained do you see
Speaker 1: these challenges on farm loans and do we have a
Speaker 1: risk getting back to the ugliness of the nine eighties?
Speaker 1: You know, the only thing we can say about the
Speaker 1: difference this cycle versus the nineteen eighties is that farmers
Speaker 1: did not leverage up as much as this cycle. I
Speaker 1: think they learned their lessons in the eighties when they
Speaker 1: had interest rates at about eighteen percent and debt to
Speaker 1: total capital on the farmer's balance sheet was north of
Speaker 1: so the psycle farmers did not leverage up. They had
Speaker 1: a good time. They spent cash as some of them
Speaker 1: did take on debt to expand, but we're nowhere close
Speaker 1: to where we were in the eighties. Now, all that
Speaker 1: being said, it doesn't mean that we don't have a
Speaker 1: long down cycle ahead of us, and farmers are going
Speaker 1: to have to continue to tighten their belts. So it
Speaker 1: doesn't mean that it's going to be all roses for
Speaker 1: somebody like John Deer. But the farmers themselves, you know,
Speaker 1: they're not nearly as in as bad a position as
Speaker 1: they were back in the eighties. John Deer hasn't had
Speaker 1: a bear market. It's basically a two thousand eight two
Speaker 1: thousand seven valuations is really held up quite well. Why
Speaker 1: is that and why are you so cautious? Well, I
Speaker 1: think investors keep looking at demand and as long as
Speaker 1: the world's population continues to grow, there is this pieces that,
Speaker 1: you know, we have to feed the world, and eventually
Speaker 1: supply and demand will come back into balance. John Deer
Speaker 1: had expected perhaps one weather event would help the supply
Speaker 1: side of the equation, but instead this year we got
Speaker 1: almost perfect weather in the Midwest, and so you know,
Speaker 1: farmers are very crowd when they grow a great crop,
Speaker 1: and when they grow record crops. However, it doesn't help
Speaker 1: when everybody has a great crop. So you know, we're
Speaker 1: now looking into seventeen and eighteen is maybe, you know,
Speaker 1: maybe the weather will help them next year or the
Speaker 1: year after. Michael sends in a message and also Carl
Speaker 1: North of New York City and dignant, is there money
Speaker 1: in chickens? Yeah? I don't think there's a lot of
Speaker 1: money in the livestock side right now. What happened when
Speaker 1: corn got to seven dollars, we saw a lot of
Speaker 1: the protein side contract. You know, you killed all your beef,
Speaker 1: you killed all your dairy cows, you killed all your pork,
Speaker 1: and and and your and your chickens. And now we
Speaker 1: have rebuilt all of the supply side on the protein side.
Speaker 1: So I would be cautious on the protein side in
Speaker 1: the new term. And never enough time, And thank you
Speaker 1: so much for JP Morgan. We get a ginormous response
Speaker 1: when Ms Dagon joins as she is with JP Morgan
Speaker 1: and she's well, folks, there's there isn't a fireplace mantle
Speaker 1: that could hold the trophies that she has brought home
Speaker 1: with her dedicated work. Again, we protect the copyright of
Speaker 1: all of our guests. I've got fifty five pages here
Speaker 1: of Van Dagden. I'm not going to send it out.
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