October 31, 2024 | Read Online

October 31st - Previewing the Presidential Election

Our Election Deep Dive Plus A Busy Week of Earnings

In partnership with Hebbia

Welcome back!

We have a very lengthy piece today as we dive into the busy earnings season plus talk about the economic outcomes that could go down following a change in the Presidency.

Earnings Corner 📜

Alphabet (GOOG) reported earnings that beat estimates, with revenue of $88.27B up 15% y/y (vs. $86.3B expected) and EPS of $2.12 (vs. $1.85 expected). Cloud services helped drive outperformance, with segment revenue of $11.35B up 35% y/y. Mgmt. attributed the cloud growth to AI offerings, including subscriptions for enterprise customers. The stock was up 2.9% at Wednesday's close

Reddit (RDDT) reported earnings that beat estimates, with revenue of $348.8MM up 68% y/y (vs. $312.8MM expected) and EPS of $0.16 (vs. -$0.07 expected). Mgmt. raised its Q4 adjusted earnings outlook to $110MM-$125MM (vs. $85.2MM expected). The stock soared on the news and was up 42% at Wednesday's close

AbbVie (ABBV) reported earnings that beat estimates, with sales of its Skyrizi immunology drug up 51% y/y, driving the stock up 6.4% at Wednesday's close

Automatic Data Processing (ADP) reported earnings that beat estimates, while raising its 2025 revenue outlook, citing benefits from its recent acquisition of WorkForce Software. The stock was up 1.7% at Wednesday's close

Mondelez International (MDLZ) reported earnings that beat estimates, driving the stock up 0.9% at Wednesday's close

Stryker (SYK) reported earnings that beat estimates, with mgmt. raising guidance, driving the stock up 1.6% at Wednesday's close

Visa (V) reported earnings that beat estimates, with mgmt. noting that volumes remained stable through the quarter. The stock was up 2.9% at Wednesday's close

Microsoft (MSFT) reported earnings that beat estimates, with revenue of $65.59B up 16% y/y (vs. $64.51B expected) and EPS of $3.30 (vs. $3.10 expected). Cloud computing revenue was up 33% y/y, but projected Q2 revenue of $68.1B-$69.1B disappointed analysts' expectations of $69.84B. The stock was down 3.2% after Wednesday's close

Meta (META) reported earnings that beat estimates, with revenue of $40.59B up 19% y/y (vs. $40.29B expected) and EPS of $6.03 (vs. $5.25 expected). However, mgmt. reported weaker-than-expected user numbers (3.29B daily active users vs. 3.31B expected) and warned that AI infrastructure expenditures will accelerate in 2025. The stock was down 3.2% at Wednesday's close

Advanced Micro Devices (AMD) reported earnings in line with expectation, with revenue of $6.82B up 18% y/y (vs. $6.71B expected) and EPS of $0.92 (vs. $0.92 expected). Mgmt. projected Q4 revenue of $7.5B, in line with analysts' expectations. The stock was down 10.6% at Wednesday's close

Ford (F) reported earnings that beat estimates, with automotive revenue of $43.7B up 5.5% y/y (vs. $41.9B expected) and EPS of $0.49 (vs. $0.47 expected). However, mgmt. noted inflationary pressures, rising warranty costs, and high inventory levels and guided to the lower end of its FY EBIT forecast at $10B (vs. $10B-$12B previously). The stock was down 7.9% at Wednesday's close

Pfizer (PFE) reported earnings that beat estimates, with revenue of $17.7B up 31% y/y (vs. $14.95B expected) and EPS of $1.06 (vs. $0.62 expected). Stronger than expected Paxlovid and Covid vaccine sales drove the outperformance, which comes at a crucial time for mgmt. as it faces pressure from activist fund Starboard Value. The stock was down 1.7% at Wednesday's close

PayPal (PYPL) reported earnings that beat estimates, with revenue of $7.85B up 6% y/y (vs. $7.89B expected) and EPS of $1.20 (vs. $1.07 expected). However, mgmt. issued a disappointing Q4 revenue projection of "low single-digit growth" (vs. 5.4% expected). The stock was down 6.5% at Wednesday's close

Chipotle (CMG) reported earnings that beat estimates, with revenue of $2.79B up 13% y/y (vs. $2.82B expected) and EPS of $0.27 (vs. $0.25 expected). Same store sales growth of 6% disappointed expectations of 6.3%. The stock was down 7.9% at Wednesday's close

Eli Lily (LLY) reported earnings that missed estimates as its GLP-1 drugs Zepbound and Mounjaro disappointed sales expectations. Mgmt. also cut its FY profit guidance, driving the stock down 6.3% at Wednesday's close

McDonalds (MCD) reported earnings that beat estimates, reversing last quarter's decline in same-store sales, but analysts are concerned that the recent E. coli outbreak may hurt Q4 performance. The stock was down 1.8% at Wednesday's close

Amgen (AMG) reported earnings that beat estimates, on the back of reduced costs. The stock was down 0.2% after Wednesday's close

Caterpillar (CAT) reported earnings that missed estimates, with mgmt. cutting its annual sales outlook due to slowing demand, driving the stock down 2.1%

Chubb (CB) reported earnings that beat estimates, with solid underwriting income and improved investment income, but the stock was down 1.24% at Wednesday's close

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The Main Story 🔍

Measuring Outcomes based off of what happens November 5th: It's time for our election analysis snapshot. This isn't designed as an endorsement of either candidate. We don't do that here, but it is meant to lay out how you should think about the economy and markets should a certain candidate get elected.

Please note that none of what is in this newsletter constitutes financial advice and all conversations discussed in this newsletter are informal in nature. Again, this does not constitute a political opinion or endorsement.

4 Different Outcomes:

If there's a red sweep: While this may be a negotiating tactic, Trump has weighed a 20% tariff on all imports and a 60% tariff on Chinese imports. Corporate tax rates could go lower (as low as 15%), there will be a focus on the border and deportation, taxes on tips may be erased, and there would a push towards sweeping deregulation (especially as it relates to energy). Broadly, given that tariffs are inflationary, there are worries that inflation would tick back up and rates would push higher.
If there's a blue sweep: Corporate tax rates go higher (~28%), long-term capital gains rise for high-earners, there's $15k down-payment help for first time homebuyers, and there's a focus on expanding childcare support.
If Harris wins but Congress is divided: There is probably progress on small bipartisan issues. I would expect the 2025/early 2026 economy would look very similar to the current economy.
If Trump wins but Congress is divided: Small progress on bipartisan issues, with a focus on tariffs and the border.

We view the Presidential Election as a tossup that leans slightly towards Trump, while we generally think Congress will stay Red and the Senate is a toss up.

Given that a Kamala Harris administration would have similar market effects as the current administration, we're going to talk about what companies may be beneficiaries if Former President Donald Trump is in the White House come 2025.

Back in November 2016, futures were dumping following Trump's surprise victory. Notably, I remember reading this article where this move confused Carl Icahn. Icahn quickly went very long and not long after the market broadly realized that a President who wanted to decrease the corporate tax rates from 36% to 15% (ended up at 21%) was a pretty bullish indicator for corporate earnings. So, this newsletter follows the same spirit of trying to find any beneficiaries, as well as looking at companies impacted by speculated trade and tariff issues.

The thing is too, these are companies who may not even see their shares go up under a Second Trump Administration - if none of the hype regarding certain names materializes (despite having hype priced in) - then it may ultimately be a nothing burger.

Let's get into a high level look at winners/losers in the space.

The Anti-ESG Trade worked out for better or worse back in the late 2010s: Sin stocks like private prisons, gun stocks, and coal (although the coal industry is a shell of what it used to be) were the examples.
Traditional TV: The national television ownership rule that caps market share to 39% may change over time. Broadcasters face an uncertain future as the world continues to move more online. Ad $ heading to different mediums like streaming, cord-cutting, and an aging demographic are serious issues that are sinking the space. With the space not allowed to consolidate during the Biden administration (see Tegna & Standard General, which had their merger blocked), consolidation may be needed in order for legacy media companies to improve economies of scale given the shrinking market.
More M&A May Happen: M&A has been challenged aggressively by the current FTC. Presuming a change in government in 2025, the M&A market will generally become more robust.
Large Caps that are harder to digest: Activision Blizzard getting sold to Microsoft was a lengthy, dramatic process. It was also a massive acquisition of a $75B giant. There's other companies in this $25B-$100B market cap range who probably want to sell themselves, but due to the FTC's active campaigns, as well as higher interest rates, have likely hit the pause button.
Talk about Fannie Mae becoming privatized was a big focus but nothing ever happened. Although both Trump and Harris have touted privatization in their housing plans.
Onshoring instead of globalization & offshoring due to a more protectionist mentality is a big trend Trump has championed.

Potential Losers: Tariffs: Tariffs are really bad news for retailers. For several retailers that depend on materials and products made in China, this will once again drive gross margin pressure. You can look at how margins were impacted for a lot of retailers back in 2018-2019 as a minimum baseline for how this may look, but Trump's tariff proposals are much higher this go around. Jerome Powell: ICYMI - Trump hates Powell's guts. The two beefed constantly during Trump's first term. While the Fed has a mandate to be non-political, Trump tried bullying the Fed into cutting rates, complaining a lot via tweets about monetary policy being too tight. Eventually, through tariffs, Trump was able to bully the Fed into cutting back in 2019. But who takes over? That's certainly less clear. The Trump administration struggled last time to get their Fed appointees approved, so maybe there's a slim chance they'll realize Powell isn't the worst guy in the world compared to the hawkishness, as well as different political leanings, of other Fed Governors.

General closing thoughts: Given the strength of the labor market and economy, plus inflation easing, it seems like we are "mid-cycle" as opposed to late-cycle (near a recession). Regardless of who wins, the next President will inherit a good economy and the government's deficit will almost certainly push higher regardless of the policies enacted. Lastly, it seems like generally rates should be coming down, which will be a tailwind regardless of who the President is.

This Week's Headlines 🍿

Meta is working on its own search engine for AI generation and to reduce dependence on Google and Bing. The new engine is designed to provide conversational answers about current events and will be made available on Instagram, Facebook, and Whatsapp
OpenAI has partnered with Broadcom and TSMC to build a new generation of chips designed in-house. The company had previously announced that it was considering building its own foundries but has pulled back from that extremely capital intensive plan
Elon Musk's xAI is in talks to raise a $40B round. The news comes after OpenAI secured a $157B valuation at the beginning of October and Alphabet and Meta continue to channel billions from their bottom line into AI programs
3Q US GDP came in at 2.8% slightly below expectations of 2.9% and vs. 3.0% last quarter. This isn't cause for concern in our opinion, this is still really strong GDP growth
Super Micro Computer's auditor Ernst & Young, quit as their public auditor following a DoJ probe around the server company violating accounting rules. Shares fell over 32% on the news.
Blackstone raised a $22B private credit fund, increasing their private credit AUM to $123B!
Blackrock is in advanced talks to acquire private credit giant HPS at a valuation north of $11B
Private Credit firm 5C Investment Partners, co-founded by two former Goldman Sachs partners, will start investing after amassing a $1.6 billion fund
There was a profile on Bending Spoons, an Italian tech company, that rolls up mobile apps & then aggressively cuts costs and raises prices
Struggling through a six week strike, Boeing is looking to raise as much as $24B in a share sale to stave off a downgrading of its credit rating
Starting in January, Starbucks expects its 3,500 corporate workers to be in the office at least 3 days a week; with the potential of losing their job if they don't follow this request
Apollo may move New Home, a portfolio company bought for $300mm in 2021, into a continuation fund. The move would be a major shift for Apollo, which has never before pursued a continuation vehicle
Meanwhile, Josh Harris, the former Apollo co-founder and founder of 26North Partners think private equity multiples have peaked which is hurting returns. Harris touted 26North as a beneficiary from their debt and insurance strategies
JP Morgan is suing customers that tried using a viral "infinite money glitch" that was actually checking fraud
Roaring Kitty has completely exited his stake in Chewy. Keith Gill previously held a 6.6% stake in the e-pet store
Robinhood is entering the presidential election betting market. Joining the likes Polymarket and Kalshi, the company is looking to tap into new growth areas expanding beyond its reputation as a simple commission-free platform for relatively inactive traders
PE Firm BC Partners has announced that it is selling its majority stake in Canada based Gardaworld. The security services company, now valued at $9.7B, will be controlled by executives along with a minority stake led by HPS Investment partners
Softbank's Son says NVIDIA is undervalued. Claiming that superintelligence will be 10,000 more advanced than humans by 2035, Son a trguedhis week that fears of an AI bubble are overblown
Volkswagen may close three German factories and is seeking 10% wage cuts. The carmaker has struggled through plans to overhaul its business and cut costs, hamstrung by negotiations with unions for weeks

M&A Transactions💭

Pino Midstream, operator of a mine treating facility, was acquired for $950.0M by Enterprise Products Partners (NYS: EPD). Piper Sandler advised on the sale.

Demavant Sciences, a clinical stage biopharmaceutical company, was acquired for $1.2B by Organon & Co. (NYS: OGN). Goldman Sachs advised on the sale.

AOC Resins, producer and supplier of resins, has reached a definitive agreement to be acquired for $4.24B by Nippon Paint Holdings (TKS: 4612).

Aliada Therapeutics, developer of drug development therapy designed to treat central nervous system diseases, has reached a definitive agreement to be acquired for $1.4B by AbbVie (NYS: ABBV).

Profire Energy (NAS: PFIE), an oilfield technology company, has reached a definitive agreement to be acquired for $125.0M by CECO Environmental (NASL CECO). EV/EBITDA was 11.47x and EV/Revenue was 2.15x. Stephens advised on the sale.

FingerCheck, Developer of cloud-based resources, was acquired for $115.0Mm by Edison Partners, Columbus Capital, and StepStone Group.

Compass Group, operator of a leading independent investment advisory firm, was acquired for $134.76M by Vinci Partners (NAS: VINP). Goldman Sachs advised on the sale.

Clear Line, provider of curtain wall installation services, was acquired for $157.03M by Fasadgruppen Group (STO: FG). E/EBITDA was 5.71x and EV/Revenue was 2.53x.

FullCircl, developer of a customer lifecycle intelligence platform, has reached a definitive agreement to be acquired for $176.81M by nCino (NAS: NCNO).

Eckoh (LON: ECK), provider of customer engagement data security solutions, has entered into a definitive agreement to be acquired for $221.73M by Bridgepoint Group (LON: BPT). Singer Capital Markets and Stifel advised on the sale.

AdvancedMD, provider of cloud-based practice management, has entered into a definitive agreement to be acquired for $300.0M by Francisco Partners. Bank of America advised on the sale.

Paladini Financial, provider of planning and investment advisory services, was acquired for $154.6M by Cerity Partners.

7,000 Consumer Sites in Central America of Millicom International Cellular (NAS: TIGO) has entered into a definitive agreement to be acquired for $975.0M by SBA Communications (NAS: SBAC). J.P. Morgan and Lazard advised on the sale.

Evofem Biosciences, a commercial-stage biopharmaceutical company, was acquired for $100.0M by Aditxt (NAS: ADTX). EV/EBITDA was 1.62x.

Altair Engineering (NAS: ALTR), a provider of enterprise-class engineering software, has reached a definitive agreement to be acquired by Siemens (ETR: SIE).

Private Placement Transactions💭

Sierra, developer of a conversational AI platform, raised $175.0M of venture funding led by Greenoaks Capital Partners at a pre-money valuation of $4.33B.

Moniepoint, developer of an all-in-one digital banking and payment financial ecosystem, raised $110.0M of Series C venture funding led by Development Partners International.

Finova Capital, provider of loans, raised $135.0M of Series E venture funding led by Avataar Venture Partners, Madison India Capital, and Sofina.

DoorLoop, developer of customizable property management software, raised $100.0M of Series B venture funding led by JMI Equity at a pre-money valuation of $400.0M.

Crusoe, operator of mobile modular data centers, raised $500.0M of venture funding led by Founders Fund at a pre-money valuation of $2.5B.

SynOx Therapeutics, developer of humanized monoclonal antibodies, raised $127.0M of venture funding led by Gilde Healthcare, Forbion, Healthcap, and Bioqube Ventures.

Axonis Therapeutics, developer of neurological disorders therapy, raised $115.0M of Series A venture funding led by venBio and Cormorant Asset Management.

Melio, developer of a payment platform, raised $150.0M of Series E venture funding led by Fiserv at a pre-money valuation of $1.85B.