Thanks for reading this week’s Idea Roundup, published each Thursday. As always, nothing here is investment advice. Be sure to read the disclaimer at the end—this is a work of opinion and not investment advice! Cheers—IR.
1. The Boeing Company (BA) BA 0.00%↑
Ah, Boeing. Where to start? It’s not every day that a beloved company has its name tarnished via a long, baffling series of self-owns. While the issues with its manufacturing and planes are well-known, there are plenty of non-headline worthy reasons to not like the stock. Exhibit A: the company cut its dividend in 2020 and has yet to bring it back.
Add to the laundry list of woes a hemorrhaging of cash, and I don’t think anyone would fault an investor for declaring Boeing DOA. Per Bloomberg:
Cash outflow will reach $4 billion to $4.5 billion in the first quarter, Boeing Chief Financial Officer Brian West told a Bank of America conference in London on Wednesday. For the full year, free cash flow will be in the low-single-digit billions of dollars, West said. Analysts expected $5 billion, according to data compiled by Bloomberg.
West went on to say:
“We’re not at the moment where we can manage the near term for these financial outcomes because of the work at hand around stability,” West said. “Our expectation is that we’ll get more predictable and better positioned, but it will take time.”
This is not good. Markets mercilessly punish uncertainty and reward certainty (or the perception of certainty). The big question mark around Boeing is going to continue to sting for a long time.
And yet, the stock has held up surprisingly well.
I say “surprisingly well” because I personally wouldn’t expect a company whose product has launched hundreds of people to their harrowing deaths, seen doors randomly pop out mid-flight, and had its flagship airplane nosedive out of nowhere (there is speculation it was a problem with a seat latch…?) and injure multiple people to only be down 47% in the last five years.
The reason for this, of course, is not difficult to understand: Boeing is in a business with a high degree of national security interest and is, essentially, a duopoly with a quasi-government backed competitor in Airbus. Therefore, the broad perception is that either:
The government will step in before Boeing does irreparable damage to itself (which they [the government] kind of are), or
These issues will work themselves out as new leadership moves in.
The first one seems more plausible to me than the second. Boeing’s corporate culture has a long and storied history of McKinsey-fication (I would highly recommend Flying Blind for those interested in a bigger backstory), and while an MBA-led, synergy-seeking, micro-aggression hounding, you-better-deliver-this-quarter mentality might fit well in, say, the software business, it isn’t exactly a good fit when you’re designing a product meant to propel people through the sky at 30,000 feet.
Will Boeing ultimately fail? No, I don’t think so. Is there likely to be a lot more pain on the horizon for the organization? Yes, I think so. (Not investment advice!)
Also worth your time to read when it comes to Boeing is a quick, insightful overview from the great
:2. DICK’S Sporting Goods, Inc (DKS) DKS 0.00%↑
So much for Death By Amazon…? AMZN 0.00%↑ On March 14th sporting goods retailer Dick’s dropped its earnings, and boy, were they good. Net sales from the comparable period the year prior were up 7.8%, while net income surged 26% in the same time frame.
Not all of this increase was driven by rising prices—management made sure that the first line of the press release noted that of the 2.4% full year growth achieved in 2023, 1.6% came from an increase in transactions. In other words, they aren’t just endlessly increasing prices on baseball mitts, they selling more as well.
The stock surged 15% on the back of this news, propelling the stock across the $200 line (it has since surged to just over $221 as of this writing).
To any long-term holders of Dick’s out there—go ahead and take a bow. You’ve successfully bet on a company whose business model has been ridiculed as hopelessly out of date in an e-commerce world; a physical retail business with a stock chart that resembles that of a tech company. Bravo.
But of course, now shareholders have to wonder if the good times can continue (which they can, of course, until they don’t). 2024 guidance from management indicates a 1-2% increase in store sales growth, which isn’t as strong as what was delivered in 2023.
Further, on a forward basis, Dick’s EV/EBITDA is now hitting the upper ranges for the last 10 years.
The last time Dick’s traded at this valuation was the period immediately preceding the COVID-19 pandemic, and the air appeared to be pretty thin for the stock at those levels, judging by its steady drop before bottoming out in 2022.
I guess the question becomes: is this a legitimate re-rating of the business by the market, or is this just earnings euphoria propelling things along? Of course, I can’t answer that question for you, but a wise man once told me that when it comes to stocks, don’t chase.
Check out my latest deep dive on MasterCraft Boat Holdings MCFT 0.00%↑. I try to publish a deep dive every two weeks. This particular stock has done well, up 14% (as of this writing) since publication in February 2024. Cheers, and enjoy!
3. Abercrombie & Fitch Co (ANF) ANF 0.00%↑
Another retailer that has defied the once-certain Death By Amazon is Abercrombie. The retailer’s stock has surged by almost 400% in the last year, all while maintaining a reasonable valuation.
Today’s 9x forward EV/EBITDA is not out of line with historic precedent when looking back over the last five years. That’s likely to be cold comfort to those who bailed on the stock in recent years, however. CEO Fran Horowitz’s turnaround of the chain that was once known (and maybe it still is? I don’t know, I’m not a kid anymore.) as the exclusive store for really really really ridiculously good looking people—
—has been nothing short of spectacular (I wrote about the company back in January over on Seeking Alpha).
Now, the question is: can the success be maintained? Teenagers are not known for predictability and fashion changes like the tides, so its not inconceivable that the retailer’s resurrection is short-lived. I doubt, however, that this is the case given the robustness of the turnaround and the new emphasis by management on a more open, more accessible (read: $$$) brand.
Investors should know, however, that analysts have tempered expectations a bit going forward. After posting top-line revenue of $4.28 billion (a 15% increase over the prior year), analysts expect $4.54 billion in FY2025, a 6% increase. So, as with so many things, buyer beware.
4. Apple (AAPL) AAPL 0.00%↑
The Justice Department made a splashy headline last week when it announced it would be going after Apple for have an illegal iPhone monopoly. The stock fell roughly 3% on the news.
Apple “has maintained its power, not because of its superiority, but because of its unlawful exclusionary behavior,” Attorney General Merrick Garland said at a press event.
The tech company controls more than 65% of the U.S. smartphone market, Garland said.
Now, I’m no lawyer, but the recent string of anti-trust suits brought by the DOJ against tech giants seems to be a bit different than, say, breaking up Standard Oil. Those 65% of smartphone users, it should be said, paid a premium get to their hands on an Apple product, and didn’t need to do so. There are plenty of people out there (35%, according to Garland), who love clogging up group chats with green-bubbled messages. You know who you are.
Anyway, it doesn’t seem at all obvious to me, for whatever that’s worth, that the DOJ has a slam-dunk case here. There’s a lot to prove, plus the obvious issue that there is no mass consumer complaint out there that no real choice in the smartphone market exists (Exhibit A: the aforementioned green bubbles).
Despite the fact that regulators want to take a bite out of Apple, the almost certainly years-long ordeal of an antitrust suit shouldn’t be too much of a worry for investors. The company, in my view, remains robust, and despite the fact that the DOJ stance on big tech is unlikely to turn more favorable should the U.S. have a change in administration come November, prosecuting a more or less benevolent monopoly whose users by and large enjoy the product immensely is probably a tough case to make.
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