John Crateau (4:00)

Yes, that's right, it was a classic fat cat, Wall street person, cigar in mouth, getting excited, looking at stock updates, coming over on a ticker tape machine. I had to laugh, it felt so archaic.

Ann Berry (4:09)

But I will always be nostalgic for the classic ticker tape machine. But we are glad to have Public, the investing platform that's been made for this century with a clean, intuitive modern design. And if you have questions about your investments, no problem. Public has Alpha, an AI powered research assistant that can help you find the answers you're looking for. Public combines a wide range of asset classes with the tools you need to build and manage your wealth, whether it's with stocks, options, bonds and crypto. Fund your account in minutes or less. Get started at public.com brewmarkets that's public.com.

John Crateau (4:39)

BrewMarkets paid for by Public Investing Full disclosure in Podcast Description well, we are.

Ann Berry (4:45)

Off to the races with earnings season. We've been digging in and we're going to get even deeper into a couple more of the big ones that caught our eye. Well, let's start with Hertz. John, give us a drive through of earnings today.

John Crateau (4:59)

Okay. Hertz did well.

Ann Berry (5:01)

It did well.

John Crateau (5:02)

They're in the middle of a turnaround for the last five years they've been down 70% the stock.

Ann Berry (5:07)

Yeah.

John Crateau (5:08)

But today the shares were up over 40%.

Ann Berry (5:10)

Amazing.

John Crateau (5:11)

And just as a reminder, Hertz is the global car rental company that also includes Dollar Thrifty and some other brands. Market cap $2.2 billion. All right, so let's look at their earnings. Earnings of 42 cents a share beat Wall Street's estimates of 3 cents. So a huge, huge global revenue of $2.5 billion was down 4% from last year, but that still also beat expectations.

Ann Berry (5:35)

Well, the big headline here was that the company returned to earnings per share profitability. And I'm going to get a little bit nerdy here for a moment because there is an accounting specific treatment here that we need to keep our eyes on. Now, in terms of the actual operations of the business, that return to profitability on a per share basis happened for the first time in two years. That's a big pivotal moment for this company. And underpinning that was the fact that Hert saw 84% utilization of its fleet, the highest since 2018. So that's huge news for a company that makes its money off of efficiency and making sure that all of its cars are actually being used. Now, the way that it did this from an accounting perspective, relates to something which is called the lower depreciation of assets. So when you think about an income statement, depreciation is a non cash item. Cash is queen. But this is a non cash item. That means when you buy a car, the accountants assume it only lasts a certain number of years. And so every single single year, you basically write off a piece of the value of that car. That is the depreciation. Now, if you go past the accounting piece of it and say, what does it mean in practice? It's a sign of the actual practical cash generating useful life of a piece of equipment. That's where it turns from accounting mumbo jumbo into real world applicability.

John Crateau (6:49)

Right. If you have a vehicle that has some damage to it or needs maintenance, it's sitting in a garage, it's not being rented out.

Ann Berry (6:55)

Yeah, exactly.

John Crateau (6:57)

And so the depreciation number went down by 50%. Yeah, it's huge this last quarter. And one way to keep those cars out of the garage is to have newer cars. So they announced that Hertz has a newer fleet. And that's been the key to this change.

Ann Berry (7:14)

There's also the kind of cars it has. So if we actually look back in time, Hertz got itself into a bit of a pickle because it was going really hard into this electric vehicle thesis, and I do remember last year swatting up, nerding out on all of these numbers. And basically Hertz had gone and bought a whole bunch of EVs.

John Crateau (7:30)

Tens of thousands.

Ann Berry (7:31)

Tens of thousands. Spent a ton of money on them, found, oh dear, they're actually really much more difficult to maintain, harder to get spare parts for, harder to get maintenance engineers around, depreciating more than we want to. And that was sort of part of the issue. And so one of the things that Hertz has been trying to figure out is twofold. One, when they are at a point where they want to sell their cars, how do they do that more quickly to get some cash in the door? And two, really trying to get to the bottom of what kind of fleet, what kinds of cars should they really want to try and hold?

John Crateau (8:01)

And we heard this summer that Hertz partnered with Amazon's car business sales. And that was a big deal because previously rental car companies will sell a whole fleet of cars at wholesale auction. But while they're selling these used cars through Amazon one at a time, they're getting higher value for them.

Ann Berry (8:19)

Yeah, I think that's exactly right. Such an interesting way that they were doing that partnership there. There's also something else that was sort of interesting. I do like this quote, John, you quote CEO Gil west, been in the top job now for 18 months, rolled up the sleeves to dig in here, said quote, we're essentially a used car factory that rents to millions of loyal customers who test drive our cars every day. There is nothing more refreshing than a CEO willing to look at their business and call it a used car factory.

John Crateau (8:48)

Right, Exactly. They're no longer just renting, they're. They're renting for a while. And then it can be yours for.

Ann Berry (8:53)

The right price, the service, the shares. And Hertz, by the way, up 90% year to date. Again, though about 40% of that did come, so 50% up hurts year to date, even before. So getting its sea legs, figuring out what it wants to do. Let's move on to some food, actually, because the control rooms are team that work really hard to get the show out every day, are very excited to.

John Crateau (9:14)

Talk about pizza, right, because Yum Brands reported earnings today and they're the parent company for restaurants KFC, Taco Bell and Pizza Hut. Market cap of $41 billion. And I just wanted to throw this in there. I still associate Yum Brands with Pepsi. I don't know why, but Pepsi sp that company off in 1997. So I don't know Why I still have that association. Maybe because these restaurants still serve Pepsi products. You can get a Mountain Dew with your chalupa. But talk about the strong quarter.

Ann Berry (9:42)

Well, strong for KFC and Taco Bell. And we're going to focus on that magic metric which is same store sales, always the most important one for retail and for restaurants. And just a reminder folks that this is the four wall that's been opened for at least 12 months. So the sales really is like for like out of the same stores. Taco Bell up 7% year over year. KFC. I do love KFC by the way. Posted 3% year over year growth. Both have also on top of that been opening new stores at a pretty steady pace and just such an interesting contrast to some of the other fast casual, quick service restaurant chains that haven't fared quite so well. But these ones are pretty strong. On the other hand, and I'm really sad to say this because I love, I love this brand. Pizza Hut. I love Pizza Hut Pizza. Same store sales down 1%. U.S. sales overall down 7% year over year. Now Pizza Hut is seeing more competition. Domino's Pizza innovating much more these days around product. The stuffed crust for example, people love it. People I love, I love a good stuffed crust pizza.

John Crateau (10:43)

So it was no surprise perhaps today that the press statement came out that Pizza Hut team has been working hard to address business and category challenges. However, Pizza Hut's performance indicates the need to take additional action to help the brand realize its full value which may be better executed. And outside of Yum Brand, that is.

Ann Berry (11:02)

Such a long way of saying that is many, many words for the Yum Brands saying we are thinking of selling.

John Crateau (11:07)

Yes, just to be super clear, we're for sale. And this is interesting. Yum Brands has a new CEO, Chris Turner, who just took the seat Oct. 1. He replaced someone who had been at the company, not in the CEO seat but had been at the company for 36 years, had been CEO since 2020. So. And is it possible that we're looking at something, there's fresh blood there in Yum Brands. Maybe the lead person doesn't feel as beholden to some of these famous brands and they're looking to possibly jettison Pizza Hut.

Ann Berry (11:38)

That's a really interesting perspective. Yeah. I do think if someone hasn't been there for 36 years, they perhaps feel more dispassionate, more able to look objectively, to do big bold moves like selling off a brand as famous, as global, as well known as Pizza Hut. It is a big move there's also a question too, around Pizza Hut's identity. What is it really doing? Domino's has been such a strong brand, particularly in the United States. Pizza Hut, though, it was the restaurant that had a buffet. I love the Pizza Hut salad buffet. Now we're not really sure what it stands for.

John Crateau (12:11)

I texted a friend today.

Ann Berry (12:12)

Yeah.

John Crateau (12:12)

And he wrote back, oh, yeah, I think there's a Pizza Hut restaurant in my neighborhood. And he didn't even know what I was talking about. But the idea is you don't know anymore. Do you go there and sit down? Do you take out. You go to some Target stores in the past and they have those weird little pizzas that you can buy personal. It's a different product wherever you go. I think that's been a real challenge for pizza.

Ann Berry (12:32)

Yeah. Consistency is so important when you actually get one of these brands that you see everywhere, particularly when they're global. Well, there's a little bit more news in the pizza world and actually an interesting way in which to think about the context for this possible sale of Pizza Hut. Apollo Global Management, which is a large private equity firm, had bid last month to take private pizza chain papa John's at $64 a share for. Great ticker. Papa John's, by the way, can you guess what it is?

John Crateau (12:57)

It's Pisa.

Ann Berry (12:58)

Pisa. It's P. Zza. And this was an interesting one. Papa John's stock price, if you looked at it today, which we did, we were very close to looking at the share price chart. Papa John started up 7% this morning. It looks as though the market got excited about the sale of Pizza Heart, thinking this is a good comp. And then the share price subsequently tanked because Reuters reported this afternoon that Apollo has dropped its bid for Pizza Hut. No longer trying to take that. Sorry for Papa John's. No longer trying to take Papa John's private, citing deteriorating consumer spending, challenges in the quick service restaurant industry overall, and therefore wanting to abandon that takeover attempt, giving Papa John's stock price unfortunately a downward push down 18. In contrast, though, Yum Brands shares up over 6% today. Looks like the market does think trying to sell Pizza Hut is a pretty good idea for that one.

John Crateau (13:52)

That's right.

Ann Berry (13:53)

Let's talk about some music, John. Let's talk Spotify.

John Crateau (13:56)

You know, Spotify is the streaming platform that announced big growth last quarter. And it might be what you're listening to this show on or watching it on today. The share price started up today but eventually dipped down over 3%. The company delivered some highlights, subscriber count increased 12% year over year. 281 million monthly active users up 11% year over year to 713 million. And total revenue increased 12% year over year to 4.3 billion euro. And so there's positive numbers there.

Ann Berry (14:30)

There's a lot of positive numbers, and.

John Crateau (14:32)

A lot of that is due to upping subscription prices. In August, Spotify increased the subscription price by €1 in many markets, and analysts are suspecting that that increase is coming to the US Co President Alex Nordstrom said in the call today, price increases are part of our strategy. We'll continue to do so. But in a thoughtful way.

Ann Berry (14:50)

You know what I find so fascinating about this? Again, the share price dipping down 3% today. Let's just go back over some of those core numbers. The company is telling us that the number of users and subscribers has gone up double digits year over year, even though, and I say even though they've actually put prices up. So this really is proving out of business model. And we've seen this with the streamers. Pretty much all of them have put their prices up over the last sort of two years and yet they've still managed to get overall user growth. Which just goes to show they are tapping into this consumer desire to have curated content. Consumers are willing to pay for it.

John Crateau (15:24)

And Spotify, even if you're not willing to pay for it. But maybe you'd listen to an ad. They have introduced so many new features and this isn't an ad for Spotify, but I'll just mention some of them that you can now listen to any song you want to on the free tier. That was something that used to be part of Apple exclusively years ago. It used to be if you went on Spotify and you wanted to listen to the Beatles, they'd play music from the 60s that sort of was reminiscent of the Beatles. But you couldn't say, I want to listen to this one song in the free tier that is part of the paid tier. And the other thing that Apple has had for four years is lossless audio. And it's just a higher quality of streaming audio and that's being rolled out over Spotify over the coming months as well.

Ann Berry (16:09)

Then you've also got Spotify now being introduced in ChatGPT. So let's on the flip side, talk about a feature that comes outside the Spotify app. In fact, moving over to another enabling folks using ChatGPT to get personalized music and podcast recommendations feels very similar to what ChatGPT is doing with retailers, right? Like Etsy for example, where you can go and purchase. So it feels like a different form of consumer transactions coming onto chat GPT now despite all of that, the platform, yes growing. But the company's got some fires starting to come to life that need to be putting out. It announced this quarter it's removed millions of tracks of AI slop from its platform, including sound alikes that could attract record label lawsuits. So that's the flip side of AI that Spotify is trying to navigate. And over the summer several high profile artists did announce they were leaving the platform because of the CEO Daniel X billion dollar investment in a military AI company called Helsing. So just goes to show this reminded me a little bit of Elon Musk and Tesla users being upset with his political involvement. Seeing a little bit of backlash here too when it comes to Spotify. Also, the company announced in September that EK will step down at the beginning of January to become executive chairman and is being replaced by the current co presidents bec CEO of this business. Just my personal view means not much change other than Daniel Eck can get more vacation time, right?

John Crateau (17:35)

Exactly. Spotify is an interesting company because they're constantly trying new things. They're introducing audiobooks, they're expanding, they're doing AI, they're changing their tears, they're throwing a lot at the wall and they still are remain targets for skepticism of artists leaving the platform or thinking they should be getting paid more. So it's a challenging a. It's a challenging business.

Ann Berry (17:56)

Share still up though, 40% year to date. So they're not experimenting their way to a downfall quite yet. But to your point, at some point figuring out where they're going to land is going to be important clarity that a consumer is probably going to want to have. Well, let's take a quick break and when we come back, Fiserv stock dropped off a cliff. Did the CEO prompt it on purpose? And now a word from our sponsor, Surf Air Mobility. Surf Air Mobility is doing something really intriguing with their platform designed to combine three things. A nationwide flight network enabled software and future electrified aircraft.

John Crateau (18:30)

That's right. Surf Air Mobility's whole mission is to reinvent short haul aviation, which as you can imagine represents an enormous market. They currently have over $100 million in annual revenue and they're targeting a $100 billion market opportunity by 2035.

Ann Berry (18:43)

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John Crateau (18:55)

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Ann Berry (19:05)

The Big Bath Theory. It's an interesting one, so stick with me on this one. Now my accounting professor, second time I've used the word accounting today, introduced me to this idea. That's the big Bath theory. And this is the notion that a management team may use the COVID of an economic downturn or an internal crisis to take a large, chunky one time write off in its financials. And the goal is to get all the bad news out there today to make future earnings look better. Now critics have argued that it's unethical because of its intent, which can mean deliberately trying to make today look worse in order to inflate comparable future performance and possibly compensation that a management team is going to get in the future. Others, though, believe that when the idea comes to taking real and actually justifiable action, such as removing costs in a recession or resetting expectations when a new CEO comes in, then they say it's fair game to, quote, wipe the slate clean. Well, for this week we're shining the spotlight on a new CEO who is wasting no time getting the market to wipe its expectations for one company. And that's for fiserv, the global payments business with a market cap today of $35 billion dollars. It is, however, down nearly 50% over the past five days. So let's see what's going on. Mike Lyons took the top CEO job at Fiserv in May, having been a senior executive at the bank PNC for over 13 years beforehand. Now he's just had his first full quarter as CEO at Fiserv, and in that three month period he's been pretty busy conducting, quote, a rigorous analysis of the company's operations, technology, financials and forecasting, including thousands of client and employee meetings and external benchmarking. Now he's already made a bunch of personnel changes, announcing on last week's earnings call two new co presidents, a new CFO and three new board directors. Now with all that as context, he's just big bathed earnings expectations, saying that, quote, fiserv's growth and margin targets need to be reset. Now he was clear that the company is not fundamentally broken, his words. And Lyons listed a slew of issues that are essentially the fault of the last CEO. And he said that prior guidance for 2025 growth of 10 to 12% was, quote, optimistic. So let's listen to him say in his own words what exactly was wrong with those forecasts.

John Crateau (21:36)

It became clear that there were incremental assumptions embedded in our guidance, including outsized business volume growth, record sales activity and broad based productivity improvements, all of which would have been objectively difficult to achieve.

Ann Berry (21:48)

Even with the right investment and strong execution. He went on to say that the last regime had cut costs to the point where the ability to serve clients was impacted and that Vysev had been too focused on short term initiatives. All in this was pretty polite, but be totally clear, he just panned his predecessor and wiped out half of Fiserv's market cap in the process. It's a bold opening salvo, but one that does give Lyons permission to keep making tough calls to fix issues like client frustration with high fees that he's just identified. Look, no doubt that there is going to be more action coming here. And just one thought on this too. There are lots of new CEOs coming in now. We are seeing high CEO turnover. We will continue to watch to see if others follow this playbook. Well folks, it's 4pm on the east Coast. The markets have closed. We don't have a ticker tape, but we'll throw it over to our human ticker, our producer John, thank you.

John Crateau (22:44)

Indices were down across the board today. The S&P 500 finished down one and two tenths of a percent, the Dow was down over half a percent and the Nasdaq finished down 2%. Bitcoin sank below 100,000 for the first time in more than four months today, down over 18% in the last month alone. There is thinking that the popularity of bitcoin is pegged to AI trading. And as you covered at the top of the show, Ann, there's a growing chorus of those questioning if AI driven tech valuations are just too high. Some Market Headlines Norway's sovereign wealth fund disclosed it voted against the proposed $1 trillion pay package for Tesla CEO Elon Musk. With a 1.2% stake in Tesla, the fund is the sixth largest institutional investor behind Vanguard, BlackRock and others, and it's the first major institutional investor to disclose how it voted. On Thursday, Tesla will host its annual shareholder meeting and announce the results of the vote. For some context, Musk, who is Tesla's largest shareholder with a voting stake of around 15%, can also vote on the proposal. Shares in Tesla were trading down over 4.5% today. And finally, I think we saw this one coming. Starbucks has agreed to sell 60% of its China business to private equity firm Bayou capital for about $4 billion. Starbucks has 8,000 locations in China and hopes the joint venture will help shore up sales and eventually lead to expansion in the country. Shares in Starbucks initially were up on the announcement, but dipped over three and a half percent as the day went on.

Ann Berry (24:11)

There's a lot going on and actually not just in earnings, but so much other news. Tomorrow, for example, we've got the Supreme Court ruling on the tariffs. Now, one final thought. We've been eyes locked on the battle for Metsera. That's the biotech company that Pfizer and Novo Nordisk are at war to buy. I'm going to post a link to my full breakdown of that situation, the drama and the intrigue. Well, a bit of an update today. Pfizer has upped its bid from its $7.3 billion initial position to 8.1. Novo Nordisk, in response, has moved up from its counter proposal of 9 billion to $10 billion. I feel like an auctioneer reading this off. Meanwhile, legal action continues. Pfizer suing both Metcera and Novo for throwing its original September bid off course. It had filed for legal action on Friday. It did so again this week. So much drama around this one, creative structuring by Novo that Pfizer claims is illegal in trying to suppress competition in an antitrust way. We are absolutely going to keep watching that one. Come back for more updates. That's it, folks, for today's Brew Markets Daily.

John Crateau (25:13)

Brew Markets Daily is hosted by Anne Barry and produced by John Crateau, Tarka Bellatief and Emily Milian. Our technical director is Uchena Wagu and the president of Morning Brew Inc. Is Devin Emery.

Ann Berry (25:22)

Wake up tomorrow with the Morning Brew News, Lester, and tune in to Neil and Toby on Morning Brew Daily. We'll see you back here tomorrow, same time, same place. It.