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- [00:00]
MassMutual Announcer
This podcast is brought to you by MassMutual. For 175 years, MassMutual has stood for strength and stability, helping people secure their future and protect the ones they love. Learn more@massmutual.com that's massmutual.com.
- [00:20]
Michael Baker
Most of the products that are bought both from DIY and certainly the commercial business do require some level of interaction with the store associate. Even guys who know what they're doing with the car still like to go in and get a little bit of advice from the person behind the desk.
- [00:38]
Jack Howe
Hello, and welcome to the Baron Streetwise podcast. I'm Jack Howe and the voice you just heard, that's Michael Baker. He's an analyst at DA Davidson covering, among other things, auto parts retailers. Parts are in high demand because prices on new cars are nuts, which means old cars are staying on the road for longer. We're going to talk about that, and later we'll hear from a money manager about healthcare innovation and some of her favorite stocks. Let's get into it. Listening in is our audio producer, Emily Sumlin. Hi, Emily, welcome.
- [01:22]
Emily Sumlin
Hi, Jack. Happy to be here.
- [01:24]
Jack Howe
I want to make a good first impression vocally. How about I go through some of my warm ups? EBITDA, EBITDA, EBITDA,. EBITDA. Bold barons, bottom fishers of biotech. Do re, mi, fa, sell, hold, buy Strong buy.
- [01:42]
Thoughts?
- [01:43]
Emily Sumlin
I'm loving what you're putting down.
- [01:46]
Jack Howe
Now we're rolling and I want to talk about cars. I've got cars and car prices on my mind. Emily, you said you're not much of a driver. You do drive, but you're a city person. You said you go home once in a great while to Atlanta, and the driving comes right back to you. Except for maybe, maybe one detail.
- [02:06]
Emily Sumlin
I will say my dad always leaves the emergency brake on, and I'm always like, what's happening here?
- [02:11]
MassMutual Announcer
And then I remember, right, yeah, this
- [02:14]
Jack Howe
thing isn't moving like it used to.
- [02:16]
Emily Sumlin
When I smell the fumes, then I'm like, oh, let's check in.
- [02:21]
Jack Howe
I shared a story recently in Barron's about vehicular envy, which is something that I'm not typically prone to. And it wasn't a fancy sports car or a luxury car. It was a rickety Nissan Altima. What happened was I ordered up one of these rideshare services. It was Uber or Lyft, I can't remember. And I'm a tall fella. I'm about 6 foot 4, so I'll typically go with the XL car. But I was in a hurry. And the regular one was faster. So I took that. And so I crammed myself into the back of this thing, like Magilla Gorilla as a reference to a 1960s cartoon, just to show how with it I am. That reference is actually older than me, believe it or not.
- [03:02]
Emily Sumlin
I watched the Boomerang Channel and I don't remember. I remember Grape Ape. I don't remember Magilla Gorilla.
- [03:09]
Jack Howe
I think it's. I think it's kind. I think Grape Ape was bigger, but there's a. Yeah, it's the same thing. So you can picture what I'm talking about here and in the back. I had to tilt my head to one side. And while my head was tilted, I could just catch a glimpse of the odometer. And I squinted and I saw that it was about to cross a half million miles. And it stuck with me for two reasons. One, I didn't really know that odometers went that high. I am someone who. I've talked about this on this podcast before. I treat myself to a new car every few years. There's a whole discussion about what's the most economical way to own cars, like how buy them new versus used, and how long you should have them and so forth. That's not the plan I'm on. I've been on the plan where you have kids that, like, dump food and milk and weird things in the back, and every few years you just like to return that vehicle to the dealership and say, I'll take a new one of these, please. But suddenly I'm finding myself thinking about settling down with the vehicles I have. One has 40,000 miles, the other has 70,000 miles. The kids are a little older now, so there's not quite as much mayhem that has gone on in the upholstery and carpeting in the back. Also, the prices at the dealership, they're up there. Car manufacturers have basically canceled cheaper models. The average dealer price for a new car in America today is over $50,000. And insurance costs are way up, too. So what if I just keep driving these cars until either they stop moving or I stop moving? Hopefully them first. And I was thinking about how many miles can you realistically expect to get out of a car? I thought maybe quarter million if I got lucky. But then I took that ride with tight squeeze MC half mil. And now I'm thinking maybe I've been guessing too low. And it turns out that, as is often the case, the weird stuff that I've been thinking is weird stuff that a lot of us have been thinking because the average age of cars on US roads is hit 13 years. In 1970, it was under six years. Back then it was because cars fell apart or rusted out after that long. Then we had better build quality and rust proofing and the average age went to nine years by 2000. Since then there has been a continued expansion of the high miles club. And I think it's mostly due to economic effects. We had the Great Recession of 2008, 9. We had pandemic shortages and hot inflation since 2000. And as I say, carmakers have abandoned cheap models. They've gone all in on loaded pickup trucks and luxury sport utility vehicles. So a lot of drivers are just saying, you know what? I'll stick with what I have. And that makes now a good time to be in the auto parts business. Sales for AutoZone have expanded from 12.6 billion in the fiscal year ended August 2020 to an estimated 20.5 billion this fiscal year. In other words, more than a 60% increase since the pandemic. O'Reilly has seen similar growth and the shares have done well. O'Reilly has returned 150% over the past five years and Autozone 114%. That compared recently with 93% for the S&P 500. So car parts are outperforming, however, not recently. O'Reilly was recently down 12% over the past six months and Autozone was down 24%. Michael Baker, who covers auto parts retailers for DA Davidson, says that's an opportunity to buy the dip, especially in autozone. He says there's a disassociation now between how the company's doing and how the stock is doing. To learn more about that, I reached out to Michael. Let's hear part of that conversation now. I saw a note from you to investors and it was talking about an opportunity to buy the dip in AutoZone. And it got me thinking, why should there be a dip like this? Should be a great time to be in the auto parts business. This stock should be, should be riding higher. What's happening and it's not. There was a sell off just recently, but it's also part of a sort of downtrend that looks like it might have started last year. What's happening with the stock and why is it down from its peak as
- [07:33]
Michael Baker
it relates to stock? Sometimes there is a little bit of a disassociation between how the company is doing and how the stock is doing. And part of that is about expectations. So expectations have been pretty high for AutoZone. There is another dynamic, however, and it's another reason why the environment has been really strong right now. But the concern is that this may not continue. And that's inflation that tends to get passed right through to the end user, whether that's the mechanical or the DIY customer coming in. Because nobody shops around for auto parts. You go in, you know what you need, or you ask the associate in the store what you need. And generally speaking, you pay the price that's asked. You don't start to go to different, different locations to try to get a better price. So most of the inflation that, that the retailer sees in terms of their input costs gets passed on to the consumer. And so it actually is helpful to sales because you're generally selling the same amount of units, but now at a higher price. The concern is that they've seen a lot of that inflation and that's going to start to slow. And in fact, inflation helped them by about 7 percentage points in the last quarter. And they're already talking about that still being helpful, but maybe only 4 percentage points in the coming quarter. And that's starting to slow as we get into next year. And I think that's been one of the biggest concerns, that it's been a really good environment, as you talked about. But while some of those factors are still in place, it's one or two factors that might not be as good. And so looking ahead, it'll be a less perfect environment.
- [08:59]
Jack Howe
In a recent bold act of auto DIY ism, I Amazon some windshield wiper blades to myself and I put them on successfully, I might add. And it gets me thinking, are these businesses Amazonable or to what extent are they, or to what extent are they. Are they safe or insulated from Amazon type risk?
- [09:22]
Michael Baker
Yeah, I do think they're pretty insulated. And this was a concern maybe 10 years ago when Amazon started adding some auto parts. And there was a concern that Amazon would take a lot of share from the auto parts retailers. And sure, Amazon gets their fair share of the business, much like Walmart, things like wiper blades and simple things like that. I myself just bought a. I needed a new spare tire and a new jacket and bought it from Amazon.
- [09:49]
Jack Howe
Look at us, a couple of gearheads here talking about our exploits. Go ahead.
- [09:54]
Michael Baker
Yeah, when I was growing up, I could change my headlights. I can't do that anymore on my Chevy Chevette. But really, most of the products that are bought both from DIY and certainly the commercial business do require some level of interaction with the store associate. Even guys who know what they're doing with their car still like to go in and get a little bit of advice from the person behind the desk. So it really is a consult to sell. And I actually think this is really interesting. One of the things that we see in this space is if you buy product online and have it shipped to your house from an Autozone or an O'Reilly or an Advanced auto for that for that matter, you actually get a discount. It changes every so often. But it's generally speaking if you spend $100, you get $20 off if you get but only if you get a shift to your house, not if you go into the store to pick it up. So that that's a great offer. Yet the percent of sales that occur that way for the big auto parts retailers is like 1%, 2%. So in other words, customers are actually paying an extra $20 to go into the store because they need to talk to the associates. So to me that's always been the best evidence that it really is Amazonable proof. And, and maybe the other way to say it too is if it were, if they were going to be impacted by Amazon we would have seen it already. And the, and all these guys have had particularly advanced in O'Reilly have had some very strong years since 2017 when Amazon first started getting aggressive in auto parts.
- [11:22]
Jack Howe
Thank you, Michael. Earnings estimates for AutoZone have risen in recent months as the stock price has fallen. And that has left the forward price to earnings ratio at 17 and a half. That's lower than the five year average which is over 19. It's also a discount to the broad stock market. Wall street sees double digit earnings gains in the fiscal years ahead for autozone. We'll see if that happens. I think at the very least a stock like this is kind of the opposite of what the market is fixated on right now. All things chips and AI have been going wild lately and these companies that provide more staples, they've fallen off. It will be interesting to see how AutoZone does from here. I hope there's a path where stocks like these can bounce back without chip stocks tumbling. What do you think, Emily? Should we take a quick break here before we come back with healthcare and how's my voice? Am I in voice? How's my timbre right now? Give me a phrase that the audio people say when they're trying to get their voices going. What should I say?
- [12:26]
MassMutual Announcer
Red leather, yellow leather.
- [12:27]
Emily Sumlin
Say it 10 times fast, I promise you you'll trip up.
- [12:30]
Jack Howe
Red leather, red leather, yellow leather, red leather, yellow leather. Cows all across America are cringing at that delivery. I'll work on it. We'll be right back.
- [12:49]
MassMutual Announcer
This podcast is brought to you by MassMutual. For 175 years, MassMutual has been there for policy owners, financial professionals and communities through economic shifts and societal change. In a world that changes fast, strength and stability still matters, especially when it comes to helping people secure their future and protect the ones they love. Learn more@massmutual.com that's massmutual.com.
- [13:25]
Jack Howe
Welcome back. The chip Stocks are chipping and it's getting pretty darn chippy. I saw a report this past week when I was going through my Wall street research. I think a lot of these analysts are getting chip envy and so they're seeing AI angles no matter what they cover. There was a report I saw that said there's an infrastructure boom right now and that's largely because there are so many new data centers being built and that's good for all manner of construction equipment and material. And they thought that was a great time to invest in aggregate as in rocks that have been broken up into smaller rocks. Crushed stone. When we're arguing the crushed stone is an AI play, maybe things have gotten too techy. It makes me want to look for pockets of the stock market that are not seeing rip roaring gains right now. Maybe ones that look cheap, maybe even ones that can be AI beneficiaries down the road. If I look at the S&P 500 and I break it down by sector price change year to date up about 12%. What's leading the charge? Obviously tech, that's up 28% but also energy, that's up even a little bit more, almost 30%. Those are companies that produce oil or sell equipment or services. For that they're making great money right now. Two other sectors that are doing a little bit better than the market as a whole, industrials and materials. And that has to do with that infrastructure boom I just mentioned. What is not doing so hot is health care, which is down 5% year to date and it's pretty cheap. The S&P 500 was recently trading between 21 and 22 times forward earnings estimates. But healthcare is about 17 times. So what looks good in healthcare? Let's get some picks. I had an opportunity to speak recently with Shivani Vora. She's a portfolio manager at Parnassus Investments. Let's hear some of that conversation. Can you tell me about some of the types of companies that you like, some of your favorites in healthcare right now?
- [15:30]
Shivani Vora
Of course, Eli Lilly There is the GLP1 side of the business and they just launched their pill as well, which is off to a strong start. But they're also doing a lot on drug discovery. They're doing a lot of innovation under the surface. They're putting the tons of cash that that GLP1 franchise is throwing off to work, doing M and A as well. And it's interesting, if you stripped out the GLP1 franchise, that underlying base business is still one of the fastest growing pharma companies out there. And so there's a lot of really exciting opportunities that they're going after, whether it's Alzheimer's, oncology, looking at some mental health issues, trying to improve sleep quality, really a large spectrum. So we're very excited both for the continued growth of the GLP1 franchise, which is still pretty low on penetration of where we think it can get, especially with the oral launch, but also all of the other work that they're doing and all of the other innovation that sits under the hood. Intuitive surgical is another one that we really like. And right now it happens to be on sale. It's training at the same multiple that it was coming out of March 2020 when hospitals and procedures were shut down. So it's a steal.
- [16:35]
Jack Howe
Let me tell you what I think it does and you tell me if I've got it right. It makes surgical robots. And people should not picture like a humanoid, like CP3O, C3PO, whatever his name is from the Star wars movies, doing surgery. It's more like these are sort of robotic arms that can downscale movements and make it more accurate for, for the surgeons who are operating these things. Is that, is that the idea?
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Shivani Vora
That is correct. It is a surgical robot. Think of it more as like an electronic tower that sits in the operating rooms. And their main platform is called the da Vinci. It usually operates through four incisions in soft tissue. So it's really going through the skin and trying to reach areas that don't require like sawing through bone, for example. And they're a really exciting, phenomenal company. I mean, bas a near monopoly. So they've been in this business for over 20 years. One of the only companies that provides this, they're in a lot of hospitals around the country and increasingly around the world.
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Jack Howe
And it's a whole, I would imagine that it's a whole like field of study, the ability to perform surgery with a da Vinci machine. Like if Black and Decker comes out with one of these next month, it's got, you know, you've got a, you've got a nation full of doctors who are trained to use the machines from intuitive surgery. I'm, I'm, you know, I wouldn't imagine it would be Black and Decker of course, but the, the idea is you have to train specially for these machines. Is that right?
- [17:58]
Shivani Vora
Yeah, that's right. And it's a, it's even a recruiting tactic for hospitals because surgeons have trained on intuitives machines on the da Vinci and if a hospital doesn't have one, it's almost like a why would I go there? They don't even have a da Vinci. So it actually really is a self reinforcing ecosystem. That's why having 8,000 machines and a 20 year lead makes it a near monopoly and really hard to displace from hospitals. These are mult, million dollar machines and ecosystems with doctors that have been trained on them, kind of consumables that are sold to specifically work with the da Vinci machine. It's not an easy thing or a cheap thing to rip out of hospitals at this point.
- [18:35]
Jack Howe
These are interesting to me. Do you have any others you want to share with us?
- [18:39]
Shivani Vora
Yeah, there's another company that actually just went public towards the end of last year. It's called Medline. Think of them as sort of the Costco of healthcare suppliers. So they have long term contracts with hospitals. These are pretty sticky, it's hard to replace. You really need a reliable supplier that gets you the surgical trays and the baby blankets and the gloves in time. And kind of like Costco, they have a really big private label where they take their learnings from the hospitals of what's working, what isn't working. And they create their own Medline branded product and they sell it at a slightly lower price but significantly higher margin for them. And a great example of this would be surgical gloves which they noticed that hospitals were complaining a doctor would take a glove out. Five will stick together, four end up on the floor, there's a lot of waste. And so they just redesigned the packaging so that one glove gets pushed up at a time to the top. And now it's the most popular surgical glove brand. And so it's innovative in its own way where it's taking these really small pain points and trying to make them better and lower price, higher margin, win win for them in the hospital. And as they onboard customers they slowly but steadily increase their penetration of Medline branded products over time.
- [19:49]
Jack Howe
I guess the growth opportunity there must be fairly open ended. I guess there's no, no end of, you know, little doodads that they use in the hospital that they can turn into one of their own private brands. What do you think?
- [20:02]
Shivani Vora
Yeah, it's hundreds of thousands of SKUs. And after they expand into hospitals, they can expand into outpatients, into doctor's offices. And I actually recently had twins, and I checked their baby blankets are Medline branded. So they're. They're coming in everywhere.
- [20:19]
Jack Howe
Thank you, Shivani. And double congratulations on the twins.
- [20:24]
Shivani Vora
Thanks for having me on.
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Jack Howe
I want to give everyone some ticker symbols for the three stocks that Shivani mentioned. And also there are a couple others that came up during the conversation that you didn't hear about. Let me give you those, too. Eli Lilly is lly intuitive, Surgical is isrg, and Medline is mdln. Now, you didn't hear about Edwards Life Sciences.
- [20:47]
That's ew.
- [20:49]
They do something called Tavr or transcatheter aortic valve replacement.
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Oh, boy.
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And they're expanding into something called tmtt, which is transcatheter, mitral, and maybe tricuspid therapies. Folks, I'm not a doctor, but these things fix or replace valves without doing open heart surgery. You have to go in through the femoral artery in the groin, I think. Don't try this yourself. The other one is Natera. That one is fast growing but not yet profitable. They have a blood test for pregnant women that can give some of the insights that previously required drawing amniotic fluid. In other words, it's a less invasive way to learn these things. And they have a blood test for cancer that can give doctors an early read on how thoroughly their treatments have removed the disease. Okay, thanks again, Shivani. And I also want to thank Michael from earlier about car parts and Magilla Gorilla and Grape Ape. Right, Emily?
- [21:49]
Emily Sumlin
You know, the industry always pitted them against each other, but I appreciate that they really just kept it professional.
- [21:55]
Jack Howe
And thank all of you for listening. Emily Sumlin is our audio producer. She sometimes drives with the emergency brake on, but only out of an abundance of caution. If you have a question that you'd like played and answered on the podcast, send it in. It could be in a future episode. Just use the voice memo app on your phone. I say that every week and people don't record their voice. They just type out a question, which is, fine, we don't love you less when you do that, but this is your moment to shine. We want to hear your timbre. Send it to Jack. How that's H o u G H eharrons.com youm can subscribe to the podcast on Apple Podcasts Spotify, wherever you listen to podcasts. If you listen on Apple, write us a review. Red Leather, Yellow Leather. See you next week.
- [22:48]
MassMutual Announcer
This podcast is brought to you by MassMutual. It began in 1851 when neighbors came together to create something steady protection for the unexpected and security for the long term. 175 years later, that same purpose continues, helping people plan, protect, and move forward with confidence. This anniversary is a moment to recognize the value of a company that has stood the test of time and what that can mean for families, financial professionals and communities. Learn more@massmutual.com again. Massmutual.com.