🏀 The Dolan Discount
Plus, cars are back in stock but no one is buying.
Happy Sunday to everyone on The Street.
It was another eventful week on Wall Street with plenty of headlines that caught our attention.
The holiday season is essentially here and although major retailers have been rolling out deals earlier and earlier there might be some “discount fatigue” setting in.
Meanwhile, on the streaming front, Netflix made a bunch of noise across multiple fronts.
- The company's upcoming Knives Out sequel will screen in 600 theaters nationwide around Thanksgiving. Definitely curious to see the turnout.
- Netflix is also moving forward with its plans for an ad-supported tier, which will launch in the US on November 3.
- Also, for those of you interested in the real estate sector, Netflix just bought a former Army Base in New Jersey to build a studio. Silly you say? Studio funds are a big deal. In fact, Hackman Capital Partners just raised $1.6 billion to expand its empire of studio and media properties.
And finally, the clicker that really got us was this fun fact from a Lending Tree survey. Apparently, 22% of millennials (ages 26 to 41) and 19% of Gen Zers (ages 18 to 25) have gone into debt from what they’ve spent on dating. We understand everything is getting more expensive, but where are you guys going?? If you're young and feeling pinched on dates, remember what Paul Mccartney and John Lennon once said: "Money can't buy me love."
Before we dive in, here are the poll results from last week.
- Which stock do you think will outperform over the next 12 months? 70% said UBER, 30% said Lyft
- Are you bullish or bearish on Olaplex? 80% of you said BULLISH, 20% said Bearish. (Bonus: Someone said, it “feels a bit like a profitable version of SDC." Interesting take, keep 'em coming.
US stocks fell Friday, giving up early gains as the fall volatility continues. The session followed a head-spinning Thursday during which the market performed a record intraday turnaround.
Selling intensified at week’s end in response to the University of Michigan’s consumer inflation expectations survey, which showed inflation increasing. This matters because the Federal Reserve pays close attention to inflation data like the CPI as well as where consumers expect prices to go.
Zooming out, investors are closely scrutinizing economic data and earnings reports to get a sense for what the central bank might be thinking. After Thursday’s September CPI report showed prices rose 0.4% month-over-month while the labor market held strong, most think the Fed will remain hawkish in its bid to combat inflation. That means additional rate hikes are likely in the coming months, which could put more downward pressure on equities.
Elsewhere on the economic data front, retail sales were stagnant in September, likely as a result of persistent price increases pushing down demand. This trend weighs on the economy as a whole.
Overseas, British Prime Minister Liz Truss fired the nation’s treasury chief and reversed parts of her tax plan as the UK bond market continues to be in turmoil. Meanwhile, the British pound fell 1% against the U.S. dollar.
In company-specific news, grocery giant Kroger announced it had agreed to purchase rival Albertsons for $34.10 per share, valuing the company at $24.6 billion. Provided the deal is approved by regulators, the newly-formed entity will challenge Walmart’s established dominance in the grocery game.
Unitedhealth Group beat expectations on the top and bottom lines and raised its outlook. Heavy equipment manufacturer Caterpillar waived its mandatory retirement age, meaning CEO Jim Umpleby can stay at his post past his 65th birthday.
Earnings kicked off on the final day of the week as well. JPMorgan Chase beat estimates on the top and bottom lines, with interest income up as a result of higher rates. But Morgan Stanley missed profit expectations in its third quarter, as investment banking revenue fell 55%. Citigroup reported that its third-quarter profit declined 25% year-over-year, which executives blamed on an increase in loan loss reserves. Wells Fargo beat expectations even though it set aside $784 million for credit losses.
For the week as a whole, the Dow Jones Industrial Average fell 403.89 points, or 1.34%, on Friday but ended the week up 1.15%. Both the S&P 500 and the Nasdaq ended the week lower, falling 1.55% and 3.11%, respectively.
Tomorrow, the New York Fed will release the Empire State Manufacturing Index for October. This is a snapshot view of the region’s manufacturing activity. The September survey showed business activity holding steady, with new orders and shipments up from the previous month.
Tuesday, watch for the NAHB/Wells Fargo Housing Market Index for October. This tracks confidence among builders of single-family homes. In September the index fell for the ninth-straight month. Also, keep an eye out for September’s capacity utilization rate and industrial production index.
On Wednesday, September’s housing starts and building permits are due from the US Census Bureau. These are key indicators of demand within the housing market. In August, building permits declined month-over-month to hit the lowest reading in two years. Meanwhile, housing starts increased unexpectedly in August, buoyed by an increase in multi-family projects. That same day, the Fed is set to release its Summary of Commentary on Current Economic Conditions, also known as the Beige Book.
Expect Thursday to be a busy day with last week’s jobless claims and October’s Philadelphia Fed manufacturing index due, as well as both existing home sales, and leading economic indicators for September. It’s worth noting the Conference Board’s Leading Economic Index declined 0.3% in August. This marked the sixth consecutive month of declines and arguably signals the US is entering a more severe recession. An increase for October could be a sign of relief.
There is no major economic data scheduled for release on Friday.
Earnings season keeps rolling this week with reports from Bank of America (BAC), Charles Schwab (SCHW), and Goldman Sachs (GS) due tomorrow. Netflix (NFLX) is up on Tuesday and Tesla (TSLA) reports on Wednesday. Rounding out the week on Thursday and Friday are AT&T (T) and American Express (AXP), respectively.
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Can the Knicks and Rangers Save MSG Sports' Stock?
MSGS is Worth Less Than the Two Teams it Owns
The New York Rangers and New York Knicks haven’t won championships in years. However, they may hold the key to unlocking value in the corporate entity that owns them both: Madison Square Garden Sports (MSGS).
Currently, MSGS is worth less than half the estimated value of the two teams combined. According to Forbes, the Knicks are worth roughly $5.8 billion and the Blueshirts are valued at about $2 billion. MSGS’ market cap, meanwhile, is hovering around $3.59 billion.
Shares are down over 15% in 2022 despite the fact the Rangers made a playoff run last year and Knicks fans still pack the house. Basketball attendance at MSG averages 95% and good tickets can cost more than $300.
With the stock well off its 2020 high of $220 (that’s a mouthful) bulls see an opportunity to get access to two premier sports teams for a discount.
A Massive Arb Trade
Wolfe Research analyst Peter Supino says MSGS is currently trading at a massive discount of over 50% to his estimate of net asset value. This is why he has a $215 price target and Outperform rating on the stock.
Some believe even more value can be unlocked if the owner of the teams, James Dolan, would consider selling a portion of either or both and then using the proceeds to repurchase shares. Supino himself thinks there's a massive arbitrage trade available. “Selling an interest in the teams at near full value and buying back stock at 50 cents on the dollar would be brilliant,” he says.
Speaking of shareholder-friendly activity, just last week MSGS announced a one-time dividend of $7 per share along with a plan to buy back about $75 million of stock. This is the first pair of capital returns for shareholders since MSGS spun out in April 2020.
The Dolan Discount
It’s fun to think about the Rangers winning the Stanley Cup or the Knicks taking home the title. It’s also fun to entertain the idea of Dolan actually getting serious about selling an interest in either team. While we’re all allowed to daydream a little, many out there say, “get real.”
The Dolan family owns roughly 20% of the shares outstanding, but these are nontraded supervoting shares. This special class of shares gives the Dolans voting interest of over 70%, or veto power. A similar structure exists with Madison Square Garden Entertainment (MSGE), another Dolan-controlled company. This entity owns the physical MSG arena in New York City, a cable network, and the Sphere, which is a multi-billion dollar concert arena in Las Vegas that is currently under construction.
This is why the valuation makes no sense, according to Jonathan Boyar, president of Boyar Research. In fact, it’s given rise to what Wall Street calls the “Dolan Discount.” Dolan, for his part, has sent mixed signals to the market. He’s made comments that the family is not going to sell, but he also leaves the door open, saying he would consider it.
Whether he does it or not, some think the stock is still worth betting on. If he does get serious about selling off a portion of either team, well then it could be a slam dunk.
Illumina Investors Need to Brighten Up
Although biotech has fallen out of favor with some investors it’s not all bad news for Illumina (ILMN), the leader in genome sequencing. Yes, shares are 60% lower since the middle of last year. And yes, Wall Street is still waiting to see if it’s $8 billion acquisition of Grail, a cancer testing tech company, will beat the antitrust busters. Despite the headwinds, however, there is reason to be optimistic.
Illumina just unveiled a new genome sequencer that it says is three times faster than its current top model. If history provides a clue for what happens next, speedier sequencing should reduce costs and help expand the market. In a note published last Tuesday, J.P. Morgan’s Julia Qin said the last cost reduction grew sequencing volumes by five times. Illumina’s stock popped on the news and is hovering around $199. Although Qin is watching the Grail acquisition carefully, her price target is still $300.
Sharks in the Water
Making genome sequencing cheaper is key to expanding the market and boosting Illumina’s stock. For context, in 2010 it cost $10,000 to sequence a person’s genome. Today the figure stands at $600. Illumina’s latest technology, which ships in February 2023, is supposed to bring this number down to $350 and then ultimately $240 later next year.
There are sharks in the water, though. The start-up Ultima Genomics and China’s BGI Genomics are promising to bring the cost down to under $200.
Nevertheless, Illumina’s latest release should be enough for it to keep existing customers from jumping ship to cheaper alternatives. Switching to a new sequencer technology can be expensive, especially if the lab has a lot of machines already installed.
The first of these new gene sequencing systems will land at Broad Institute, a research lab that uses genome tools to track the causes of cancer and mental illness. Regeneron Pharmaceuticals (REGN) and deCODE, which is owned by Amgen (AMGN) are also planning to use the new tech.
Illumina is upbeat about its prospects. At a recent analyst meeting it predicted sales of its products could hit $120 billion by 2027. Next year is expected to be “choppy” as the company ramps up production of the new machines but after that, Illumina sees smooth sailing ahead.
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New Car Sales Are Sputtering
Inventory Finally Improving
Timing is everything, and that’s particularly true when it comes to new car sales. For the first time in months, more cars are finally available.
As of the end of September, total vehicle inventory clocked in at 1.43 million units, the highest since May 2021, according to BofA Securities. This means consumers are finally able to get a new ride without having to wait months or pay above the sticker price.
That should be welcomed news to car companies which have scrambled for months to keep showrooms full. Thanks to high inflation and rising interest rates, however, there are now other factors at play that could dampen demand.
Two Massive Potholes: Rates and Inflation
The Fed’s aggressive rate hike campaign is playing a big role in declining demand for new vehicles. At the end of the third quarter, consumers were paying 7% to finance a new car. That’s 2 percentage points higher than the same period a year ago.
After the latest CPI reading this past week, the market is now pricing in another 75-basis-point rate hike, with the possibility of 100 basis points in November. This means auto loans are only going to get more expensive.
Higher loan costs are coming at a time when many Americans are feeling the pinch from historically high inflation. Big ticket purchases may have to be put on the backburner, which will likely weigh on the prospects of many auto manufacturers.
In a blog post, Cox Automotive Chief Economist Jonathan Smoke said, “The irony for the auto market is that just as the industry is poised to start seeing volumes increase from supply-constrained recession-like low levels, the rapid movement in interest rates is reducing demand.”
Ford Particularly Vulnerable
These macro-level movements aren’t great for any car company, but Ford (F) in particular could feel it the most. According to UBS analyst Patrick Hummel, Ford’s North American operating profit margins will be in a much worse position than General Motors (GM) and Chrysler parent Stellantis (STLA), especially during a recession.
Hummel downgraded Ford this past week, slapping a $10 price target on the stock. If a more severe economic downturn is on the way, the UBS analyst doesn’t think Ford will be able to achieve its goal of 10% operating-profit margins.
Automakers had their moment during the pandemic with consumers clamoring to get their hands on new vehicles. That outsize demand has dissipated as interest rates rise and the economy slows.