Big swinging “tech”: Tesla & Netflix
Tesla reported their profit increased by +20% to $2.7B, however its closely watched gross margins fell to 18%, as the carmarker slashed prices and continued a push toward higher manufacturing capacity. Not a lot has changed about this story — the company still trades at a very rich premium to peers, despite falling -9.7% on the result, eroding a month’s worth of gains as is still up +121% for the year. We expect the price war to continue to erode margins for the company. Remain hold rated. No value here.
Meanwhile, Netflix reported a gain in subscriber numbers of 5.9M as the streaming giant’s crackdown on password sharing started to show some results. The company raised its free cash flow forecast to $5B, while revenues fell 1% shy of the company’s own projections. It’s a mixed result with the stock down -8.4%, but still up +47% year to date. There’s also a bigger issue with the company which can’t be found in numbers — the company’s shows just aren’t that good. They’re content deprived. The endless glut of Netflix shows all feel seemingly the same and different, as if generated by AI.
That’s not to say Disney or WarnerBrothersDiscovery is in any better place — WBD has seen the failure of HBO’s The Idol, while Disney has seen a streak of bombs — most recently the latest installment of Indiana Jones. There’s a bigger conversation to be had about the state of content. On one hand, there is more content being made than ever. On the other, outside of Barbie and Oppenheimer, there seems to be an obvious amount of flops which the “industry” ought to be asking questions of. We still think content and IP holds value but we wonder if a radical rethink is needed — multiple streaming services and content which is audience-tested into oblivion doesn’t work. We remain buy rated on Disney and WBD. Staying away from Netflix.
The consumer life: Kenvue and JNJ
Kenvue, the consumer products spinoff of Johnson and Johnson, reported its first set of earnings as an individual entity today. Net sales increased 5.4% but under the hood margins were squeezed – gross margin fell ~1.2% to 55.5%, while EBITDA margin fell to 24.5% from 26.8% – in other words, the cost of making and selling has gone up. It’s only incremental but worth reading into as a measure of profitability going forward. Self care products did well, growing ~14%, thanks to increased demand for flu products, while skin care trudged along at ~3%. As a read-through for the other skin-care companies – L’Oreal, Estee Lauder – it isn’t too optimistic. Growth, but not much. We also thought it was interesting that sales in the Asia-Pacific region were the slowest growing – they only grew $10M to $781M (by way of comparison, LATAM and Europe/Russia/etc grew sales about $30M each). Not a bad result, but nor a good one either. Perhaps consumers have started to pull back on essentials buying.
Meanwhile, Johnson and Johnson (sans Kenvue) reported stellar earnings: EPS came in at $2.80 vs. analyst expectations of $2.62, mostly driven by sales in the MedTech sector – MedTech sales rose $12.9% to $7.79B. Good omen for our local MedTech companies – CSL, F&P Health, etc. Pharmaceuticals grew slower – ~3%. Kenvue is trading at ~25x earnings versus JNJ’s ~35x, with JNJ still owning 90% of the stock in Kenvue. The company said it plans to continually lower its Kenvue stake: when and if this happens we think it may provide an attractive entry point into Kenvue at a lower price point, given the selling pressure of moving a ~90% stake. Haleon, the direct competitor to Kenvue, trades at ~28x earnings. Even though Kenvue’s margins are being (lightly) squeezed, we’d really like to own a company that makes boring “no brainer” staples at the right price. It’s not there yet.
Sinking or Swimming: Pool Corp & Leslie’s
Pool Corp reported softer sales – net income of $5.91 vs analyst expectations of $6.00. Operating margin fell ~4% to 15% versus the year previous. We saw similarly weak results at Leslie’s, the pool chemical manufacturer, which has fallen an extraordinary 42% in the last month. We think Leslie’s looks oversold – they guided down for earnings, but only by ~12%. The question you should ask is how slow the outlook for pool chemicals is in the US. If you have a pool, you need chemicals. If your answer is “most people will continue to buy pool chemicals who have a pool”, then a company trading at 10x fwd earnings looks perhaps interesting. Remaining buy on Pool Corp, whilst having no formal view on Leslie’s other than it looks oversold.