← Brew Markets
Loading summary
Transcript25 lines
- [00:03]
A
Warren Buffett not retired yet. How he's derailing dealmaking in trains, the S&P 500. We unpack who gets to join the market's prestigious club. And inside William Sonoma's playbook lessons for retail stocks for Wednesday, August 27th, it's Brew Markets Daily. And I'm Ann Berry. More market details to come. But first, Williams Sonoma's earnings are out. And I was really excited to wait for this to come into fruition today because there's a lot that this one company symbolizes, aside from the fact it's just fun to talk about home brands like Pottery Barn and West Elm and Rejuvenation, all of which are owned by Williams Sonoma itself famous for its chic kitchenware. It's picked some niche spots in which to play. And with its Stock up over 46% in the last 12 months, it's been doing pretty well in its niches. Well, just to set the stage with a quick whiz through the numbers, the company hit over $1.8 billion in revenue for the quarter, beating estimates and chalking up a 3.7% growth rate. Pretty healthy when it came to same store sales. Profit margins up by two whole points and overall guidance was raised for the year. So here's why this caught my eye and why I've been tracking it. And it's because what Williams Sonoma is doing has lessons for us around what could be winning with trends more broadly. So, so the first thing here, number one, a clear brand identity with the consumer. We've talked about other retailers just not getting this right. Target, for example, confusing the customer around what it represents. In contrast, Williams Sonoma getting this right pretty much across the board of its portfolio companies. We know exactly what West Elm stands for. We walk into a West Elm store, we know we're going to find modern in house design at affordable prices. We know that Pottery Barn has a classic aesthetic at middle to upper price points. We're not confused used as shoppers. So we're not disappointed. We're set up to have a good experience. Now when this is done well, this is what specialty retail, which is what this category is called, different from broad general merchandisers should have as its superpower. Now the second thing that this company is doing well is doing something that we think Intuit TurboTax Live is also doing right. Yes, it is possible to find ideas about good execution from sectors that look totally different from the outside. Retail can look over to see what good service providers are doing and take some of those tricks and use them themselves. So the Williams Sonoma brands offer digital design services that use AI. You're able to upload pictures of your room, for example, and get a sense for what kinds of products you can furnish it with. But customers can also go in store and they can get on video design consultations with human beings with store associates as well. I actually tried this recently with Pottery Barn to get some ideas for wallpapering. The consumers want the best of AI for input, but they also want human emotional intelligence. And so when something is proving to work in a field as intimate and as private as tax preparation, it could also work if done well with something as intimate as your home. And the third thing that I've been watching out for with Williams Sonoma is that it's branching out to serve businesses as well as consumers. Something, by the way, that Home Depot and Lowe's have been doing for absolutely ages, but are pumping money into now. We heard them talk a lot about that in their own earnings. The Williams Sonoma brand family is designing restaurants, cruise ship interiors and office spaces, saying we are going after a $2 billion new opportunity. So it's doing a lot right now. Despite consumer uncertainty, despite E commerce driving change, it's executing its niches. It's gaining share home furnishings as a mom and pop fragmented space. But here it is consolidating it. But there is one big risk out of its control and that is tariffs and a 50 day White House probe into US furniture imports. Let's listen quickly to what Williams Sonoma CEO Laura Alba had to say about this today.
- [04:06]
B
You know, I think with day five of a 50 day probe is not a lot of information on this subject. But I will say that, you know, it's going to be very difficult for the industry, even if tariffs are put on, to bring a huge amount back to the United States in a short window of time because there aren't the factories available to do a lot of production.
- [04:27]
A
So there it is. CEO Albert is doing all the things to offset the cost of tariffs, a rate that's effectively now 28% for the company from their mix of imports from China, China and India and Vietnam, double the rate it faced in its last earnings call. She's pushing suppliers for concessions, she's importing from different countries, she's cutting overhead, she's sourcing in the US she's finding efficiencies and she's increasing prices. It's a lot. I'm out of breath listing all the things this company is running to do and doing exactly the things it should. But at the end of the day, customers are used to lower prices and US Factories, as she said, just cannot produce much more anytime soon. And if this company, firing on all cylinders is feeling it, others will too. So that's home goods. It's nesting. We're going to keep watching. Coming up next, we take a journey through the roller coaster ride right now that is, yes, trains. But first, if you want to take a journey through investing, check out public.com Brew Markets Daily is sponsored by Public, the platform for those who take investing seriously. Our producer John was telling us this morning how his grandfather used to check his stocks and in the business section of the newspaper.
- [05:31]
C
That's right. I'd be sitting there eating cereal in the morning and he'd have those pages of tiny prints circling ticker symbols. It was a whole thing.
- [05:38]
A
I actually used to love that. I'm nostalgic in general, but also for print newspapers in particular because they're my luxury read with a cup of coffee on the weekends. However, times have changed and for the serious business of investing, we have Public, the investing platform made for this century with a clean, intuitive, modern design. And you have 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 can buy a wide range of asset classes with the tools you need to build and manage your wealth, whether it's with stocks, options, bonds or crypto or more. So find your account in minutes or less. Get started at public.com brewmarkets that's public.com.
- [06:15]
C
BrewMarkets paid for by Public Investing. Full Disclosures and Podcast Description now, to.
- [06:20]
A
Railroads, which may seem dull, but I got to tell you, they have been a cornerstone of American industrial growth and they still generate more than 200 billion in total economic output each year, which just to give you a sense, is the same size as Greece, the country's annual gdp. Well, recently trains have been making headlines, and that is thanks to Warren Buffett, because the Oracle of Omaha recently made a big decision about his investments in the railroad industry. We're going to get to that. But first, John is going to set the stage for us with what's been going on.
- [06:54]
C
That's right. Okay. We learned in school that railways from the east and west coast of the United States were linked in 1869 with the ceremonial golden spike driven into the ground, the birth of the transcontinental railroad. And that means that railway tracks span the country, but multiple companies owned and operated chunks of them. No single Company has ever operated a coast to coast railway entirely on its own tracks. So after years of mergers and consolidation in the industry, there are now only four major railroads in the U.S. they account for more than 90% of U.S. rail traffic. There are two other Canadian players. But back to American players, Union Pacific and BNSF operate west of the Mississippi river, while Norfolk Southern and the CSX are to the east. So it was industry shaking news late last month when Union Pacific on the west announced it would acquire Southern Norfolk in the east, which if approved by regulators, would create for the first time that coast to coast single route operator joining 50,000 miles of railroad track from the Jersey shore to the ports of California.
- [07:57]
A
Got it. So just to take a big step back, we actually put up, for those of you who are listening, as opposed to viewing, we put up a map of these two companies coming together. The map of the Norfolk Southern rail network, which is over to the east, and the map of the Union Pacific rail network. And we show where they start to come together. It's a very powerful map. I'm actually going to post it on my Instagram feed so you all can look it up later. It's a really strong visual to show the scale of the deal that is being talked about here. Again, one single railroad network that if this merger goes through, means you can get from the gateway to global trade out of New Jersey to the gateway of global trade in the ports of California. So this is a really big deal. It's such a big deal, it's getting a ton of attention. So if we go from having these four railway players to just three, where one is the absolute monster with the single transcontinental infrastructure, then it really does risk changing the game completely for customers wanting to ship product across the United States using these rail systems. Now, csx, which is public, it publicly trades, is one of the players left. And then you've got bnsf, which is owned by Berkshire Hathaway. Yes, the Oracle of Omaha is popping back up. So what happened, John, is the market started to speculate that if CSX and BNSF wanted to compete against those two merging companies, then they themselves were going to have to merge as well. So strong actually was a speculation that shares in CSX popped up 9% on the possibility that a deal would get done with these remaining players. Those expectations, though, were dashed because Warren Buffett, the CEO of Berkshire, made it completely clear he is not interested not only in acquiring csx, he has no interest in Berkshire Hathaway buying any more railway companies. So that merger that Speculated second merger completely off the table. And instead, these two companies, BNSF and csx, will work together to introduce, quote, a new coast to coast direct domestic intermodal service. No merger. A partnership.
- [10:03]
C
Right. And I think that's the key word, intermodal. So they're going to work together, but it's going to still mean that your product is going to, at some point, transfer from one system to the other. All right, so you've got two sets of train lines. One that has announced that they want to get married, and the other one that just wants to go steady. So, Ann, what do you think these two sides are thinking?
- [10:24]
A
Okay, so let's start with the two companies that want to get married. And just to repeat, that is Union Pacific and that's Norfolk Southern. And I went down the rabbit hole, which is what I always do. And it turns out that Union Pacific has actually put up a whole website dedicated to explaining why it thinks that this is a good deal for America and why it thinks it's a good deal for all the shareholders involved. So starting with the economics, the combined Union Pacific Norfolk Southern company would have revenue of 36 billion and profit of about 18 billion. Big combined business cash flow of about $7 billion. Cash is queen. I say this all the time. That is a lot of cash to invest. And that's key to one of the ways in which Union Pacific is trying to sell folks on buying into getting this deal done. When mergers happen, there's often concern about job security. And what Union Pacific is claiming is that this move will preserve Union jobs. Now you've got other people, the unions themselves, saying, not sure that's going to happen. Often these kinds of deal means jobs are lost as opposed to preserved or created. But at least for now, Union Pacific saying this is a good thing for employment. The other thing they're saying is by virtue of coming together, it believes it will unlock value of $30 billion, mostly coming from synergies, procuring the same things, finding cost reductions, finding efficiencies. And they argue that this creation of value, the extra cash, the extra savings, means that they can reinvest back in things like safety and innovation and in technological improvements. So that's one of the reasons why Union Pacific and Norfolk are saying, we want to get married.
- [12:01]
C
But I could think that if there's less competition, then how could there be more focus on safety? You know, sometimes those things don't always go hand in hand, that if there's less competition, then price can suffer and safety can suffer.
- [12:14]
A
Yeah, well, I look I think the safety piece of it's very speculative. Right. So I want to be an optimist and hope that there'll be more investment behind safety. But this issue of price is an important one. Antitrust voices, antitrust observers are saying we really need to make sure the regulators have eyes on this deal. Because their concern is if you have one single monster company controlling the way in which the railways get together across the United States, then prices will go up for all of these consumers because there's just less competitive tension. So that when you unpack, it is why the companies are advocating to try and get together. That's Union Pacific and North Norfolk Southern.
- [12:49]
C
So that begs the question. Yeah, why would Warren Buffett hear all of that?
- [12:52]
A
Yeah.
- [12:53]
C
Think through that and say, no, I'm.
- [12:55]
A
Not interested, no, he doesn't want to get married, he wants to cohabitate or he wants to just sort of date. And it's very interesting. Basically, Warren Buffett looked at this deal and said, well, the other company out there left standing, we, Berkshire Hathaway owned BNSF worth about 10 to 15% of Berkshire Hathaway's overall value. That by the way, is a trillion dollar company right there at the parent company. And he said, well, to get the benefit of synergies, to get the benefit of providing our customers a fluid service, to go to one side of country to the other, we don't need to go buy a competitor, we can just talk to them and have a commercial partnership and make sure that our systems talk to each other, make sure that we have pre arranged routes, for example. That makes it an easy, seamless experience for a client. And sure enough, there it is. About six days ago, BNSF and CSX did indeed announce that they were going to have their own service uniting without a merger to provide this coast to coast solution. Now, now why are they doing that? Well, first of all, Buffett I think is famous more than anybody else for being extremely disciplined around price. And we said earlier that merely on the rumors, the speculation that a deal could be done, CSX saw its share price pop up. And I think Warren Buffett saying, I'm not paying CSX shareholders because there are rumors and murmurs and maybe they're synergies and so they deserve a premium. I'm just not doing that. I can get the synergies without having to pay up for them. So that's number one. Number two, he actually said in an interview or a call with Becky Quick on CNBC that he's got deep pockets that if BNSF needs any money, it can go to Berkshire Hathaway. It doesn't need to scrabble around and find potential synergies to do this. The third thing I would say is the following. Big mergers, as much as there could be cost savings, they are also expensive to do. And I'm going to explain what that means. There's not only the whopping fees you pay to bankers to get this done and the whopping fees to lawyers, there is also cost to trying to find efficiencies. Right. And so, and there's risk to it. It may not go well. Company cultures can clash. People may not get along, you may lose important talent, you may lose clients if they get disgruntled and they do find other places to go. And I think Buffett is saying as a public company, Berkshire Hathaway, we don't need to take this risk. There's another way to do it. Hence this announcement.
- [15:12]
C
And you said that CSX stock had been up over the summer on the rumors. Well, it's down 10% since Buffett's decision, which is back to where it was at the beginning of the summer. And so it looks like we're in a holding pattern right now, waiting for regulators to sort through all this.
- [15:26]
A
Yeah. And it's going to take a long time. So this deal does have to go through regulatory review. It's unlikely to close if it does close until 2027. So this isn't going to go away. It's going to be at least an 18 month long process where we're going to take a quick break. And when we come back, we're going to ask the question who gets to decide who joins the market's prestigious club, the S&P 500? We answer your questions. John, we have a question from the audience.
- [15:52]
C
That's right. Jamie in San Diego wrote in and said, hi, Ann. I read that Interactive Brokers is joining the s and P500 and so its stock is up. How does a stock get included in that index and why does it matter?
- [16:03]
A
Well, that is exactly right, because Walgreens is going private. It's leaving the public markets and The S&P 500 and Interactive Brokers is taking its place. So here's how it gets included. Key to this is the S and P Global, which is an independent financial information company which by the way, is itself public. And it puts together the S and P Dow Jones indices, including the magical S&P 500. Now there's a committee over there at S P Global that reviews the companies in the S&P 500 every quarter typically announces changes, if there are any, on the second Friday of March, June, September and December. And then the actual changes become official the following Friday's close. And that time in between gives track of funds. I'm going to come back to that time to buy shares of stocks that will now be included and to get out of ones that are going to be kicked out. Well, to be included, there's a couple of criteria. Number one, a company must be profitable not just for the most recent quarter, but cumulatively over the past four quarters. It also needs a market cap of at least $22.7 billion with a specific amount of liquidity, meaning their shares need to be freely available to be traded publicly. And there needs to be a history of trading actually happening and an accessibility to the stock. The company also needs to be US based. It needs to be listed on an approved exchange like the New York Stock Exchange, the NASDAQ or the CBOE. So it's not as simple as the S&P 500 being just the biggest 500 companies by market size. Because even if a company checks all these boxes, the selection committee has discretion over who to include. It can consider sector balance. It may try to get broad representation of the US economy with the index. So there's an element of judgment that just be put down on a piece of paper and put a pin in. Now it's been harder to get broad representation because tech valuations have gone up so quickly and market caps of tech stocks have become so big. And we talk a lot about that when we refer to the concentration of the MAG7 stocks, for example. So here's why this matters. Companies still want to be included in the S&P 500. And here's why. It's still a badge of honor. Because the level of scrutiny around your scale and your stability and the desirability of your stock all feeds in the decision to be welcomed into the club. Sort of the market's equivalent of joining Team usa. Inclusion also gives companies automatic exposure to trillions of dollars in passive investment funds and global money that tracks these index like ETFs do. So it means when a company is announced to be joining the S&P 500, it automatically gets purchased by large institutional investors. And that's what creates a pop in at share price when it's included. Tesla, for example, rose nearly 60% simply between the news it would be welcomed into the S&P 500 and it actually joining in December of 2020. And then the fact there's also steady demand from a stable global investor base means it's very desirable because it can help future fundraising, because institutional investors are more likely to support an S&P 500 company when it goes out trying to raise more capital. So with all of these benefits, folks can get a little bit snippy when their favorite stock is not included. And here's where it's happened. Applovin and Robinhood, who have met all the inclusion metrics at various points in time, have still been snubbed. They haven't been included and their stocks have actually fallen when people hoped that they would be. And then those hopes were dashed because the announcement came out and they weren't there. Now, one possible reason for them not making The S&P 500 could be their volatility. They're called high beta stocks, and the S and P committee also evaluates regulatory risk and other measures of stability. And these kinds of names have had questions over their consistency. Now, no one likes to be left outside the club. Coinbase got past the velvet, wrote Robinhood didn't. So Jamie, this isn't just a money matter. When you ask why do we care? It's a massive ego one as well. We're heading into the bell, folks, because it's 4pm on the east Coast. The markets have closed. We don't have a ticker tape, so we're going to throw it over to our human ticker John with a quick roundup on how the markets did today.
- [20:05]
C
That's right. Major indices were up across the board. The S&P 500 was up a quarter of a point. The Dow up a third of a percentage. Pardon me, those are both percents. And the NASDAQ up 0.2%. Some market headlines. EchoStar was up another 15% today. This on top of its 75% bump yesterday on news that AT&T would be purchasing some of the company's spectrum licenses. And folks can check out our episode from yesterday where we broke down all the details of that deal. And finally, shares in Krispy Kreme, ticker symbol D nut, were down as much as 6% today after JP Morgan downgraded the company to, quote, underweight, citing challenges to its turnaround plan. And that caught my eye to see Krispy Kreme and underweight in the same sentence.
- [20:46]
A
Well, we are fueling up. I've got the coffee on the boil because we're going to bounce from here and we're going to go straight to seeing what chip maker Nvidia had to say in its latest quarterly earnings. Big, big, big anticipation around this one, Everyone waiting to hear what CEO Jensen Huang has to say around what's going on with sales into China, whether the hyperscalers are still buying, if he's got any commentary on the White House pushing for an investment in intel and potentially other st. And overall, we want to hear what he has to say around robotics, quantum AI and more. That's it, folks, for today's Brew Markets daily.
- [21:19]
C
Brew Markets Daily is hosted by Anne Barry and produced by John Cotto, Tarek Elatif, and Emily Milian. Our technical director is Uchena Waugh, and the president of Morning Brew, Inc. Is Devin Emery. If you'd like to get in touch, send an email or voice memo to brewmarketsorningbrew.com Wake up tomorrow with the Morning.
- [21:36]
A
Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. We'll see you back here tomorrow, folks. Same time, same place.