Comparing Inflation Using Producer Price Index (PPI)

The Bureau of Labor Statistics does a world-class job of compiling the producer price index (PPI) across multiple industries and product groups. I wanted to better understand inflation from one category - Fruit and Vegetable Canning. 

We know 2020 was a year like no other in world history. Demand slumped initially when the pandemic shut down the economy. But, the stimulus that was unleashed in the U.S. and across the world helped stimulate demand for products. The work-from-home trend added to the need for furniture and laptops. Comparing the producer price index between 2020 and 2021 may not accurately picture inflation. So, I have compared the change in the index between 2019 and 2021 for the fruit and vegetable canning industry. That shows a sharp increase in inflation (See Exhibit: Increase in Producer Price Index Between 2019 and 2021). The graph also shows the trend line and the equation. The slope for the change in PPI between 2019 and 2021 is 0.0037. The data used is for January to November for each year.   

Exhibit: Increase in Producer Price Index Between 2019 and 2021 (%)   

(Source: BLS, Author Calculations)

We compare this producer price index year-over-year change with change in PPI for the fruit and vegetable canning industry between 2007 and 2009 (See Exhibit: Increase in Producer Price Index Between 2007 and 2009 (%)). The year 2009 was when the world was coming out of the deep recession caused by the U.S. subprime mortgage crisis. Inflation for the fruit and vegetable canning category saw a year-over-year increase of 14% between 2007 and 2009. The slope was -0.0021 showing that the inflationary pressure tailed off by the end of the year in 2009. In 2021, the price index is still increasing.   

Exhibit: Increase in Producer Price Index Between 2007 and 2009 (%)  

(Source: BLS, Author Calculations)

In the first half of 2022, the stimulus-driven demand should be fading. That should lead to moderation in the growth of the producer price index.  

      

 

Oracle: Excelling in Financial Engineering.

Oracle (ORCL) faced its first real challenge to its business model from Amazon AWS (AMZN). For a long time, Oracle's relational database has been the standard for many companies in the Global 2000. Oracle's database is still so entrenched in many corporations across the globe that they pay millions of dollars in Oracle license and support fees each year to keep the right to use their software. But, companies formed in the last 10-15 years have shunned the Oracle database. Instead, they have relied on myriad open-source database options and cheaper databases from other companies. The advent of AWS made it easy for any company to manage databases in the cloud. 

Oracle has lagged behind the prominent three cloud vendors in offering infrastructure-as-a-service (IaaS). The company has a reasonably significant market share position in SaaS software, where it competes against the likes of Salesforce (CRM), Workday (WDAY), and SAP (SAP). But, Oracle is still heavily dependent on revenue from its database software. Since Oracle cannot attract new customers to its database, it has resorted to using its existing database install base as an annuity business. In essence, the Oracle database software generates much rental income from its remaining customers.  

In the face of Oracle management's inability to innovate and compete, they have resorted to financial engineering to prop up their share price. A company innovating and competing well in the marketplace is most likely growing revenues. At the very least, revenue growth needs to keep up with GDP growth. Unfortunately, there is no revenue growth at Oracle. In the fiscal year ending May 31, 2011, Oracle had total sales of $35.622 billion. In the fiscal year ending May 31, 2021, Oracle had total sales of $40.479 billion. That equates to a 13.6% growth in revenue over 11 years. The 13.6% rate amounts to a compound annual growth rate (CAGR) of 1.16%. 

Exhibit: Oracle Annual Sales Revenue from Fiscal Year Ending on May 31, 2011

(Source: SEC.GOV)

How does a company show earnings per share (EPS) growth when revenue growth is nonexistent? Investors react positively to a growing EPS number. One way to show an ever-increasing EPS number is to repurchase the company shares and retire them. The repurchase transaction reduces the outstanding shares, and thus when stagnant net income is divided by outstanding shares, the resulting EPS number looks as if it is growing. 

The company has spent billions of dollars each year repurchasing its stock. The company has spent $137.65 billion in repurchasing its shares in 11 years. Initially, the share repurchases did not do much to the stock price. So, in recent years, the company has gotten even more brazen in buying back its stocks (See Exhibit: Annual Amount in Billions Spent by Oracle on Share Repurchase).  

Exhibit: Annual Amount in Billions Spent by Oracle on Share Repurchase 

(Source: SEC.GOV)

One way to analyze how much the company has spent on its repurchase is to compare its operating cash flow to the repurchase amount. The company had $155.212 billion in operating cash flow in 11 years and it spend 88.6% of that in buying back its own shares.

 

Exhibit: Oracle's Annual Operating Cash Flow

(Source: SEC.GOV)

In the end, Oracle's management led by Safra and the company's largest shareholder - Larry Ellison - benefit the most from these buybacks. Larry is now on the list of the top-10 wealthiest people in the world solely due to these buybacks. Due to these buybacks, the stock has risen a lot, and ordinary investors should prudently book profits. You do not want to be in this stock when the music stops.  

        

 

   

Why ViacomCBS's Preferred Shares (VIACP) are a Great Buy Currently Offering 10.68% Dividend Yield?

In January 2021, during the start of the meme stock bubble, ViacomCBS (VIAC) stock started climbing from about $36. The stock kept on climbing until March 22, 2021, when it traded briefly above $100. Other than a few Wall Street banks, nobody knew why it was rising. Even the Wall Street banks did not have a complete picture. It was also around the Super Bowl, so CNBC host Jim Cramer speculated that it might have had something to do with all the Paramount+ ads that aired during the Super Bowl. Paramount+ is ViacomCBS's streaming brand. 

But, Bob Bakish, the CEO of ViacomCBS, did not care about why the stock was rising. He needed all the money he could get to feed his company's push into the streaming business, and with the stock trading at an all-time high, he decided to make use of the opportunity. So, the company sold 10 million preferred shares at $100 with a 5.75% yield and issued a further 20 million of class B common stock. The class B common stock causes immediate dilution of existing shareholders.

Exhibit: The Spike in the Price of ViacomCBS During the Archegos Scandal 

(Source: Seeking Alpha)

The dividend on the preferred works out to a quarterly dividend of $1.435. The preferred shares have a mandatory conversion clause that would take effect in April 2024. The preferred shares will convert between 1.0013 and 1.1765 into ViacomCBS common shares. Since the preferred stock is currently trading below the offer price of $100, each preferred share would be converted to a maximum of 1.1765 shares of the ViacomCBS common shares.  

Once Bob made this announcement about the issuance of the common and preferred shares, the stock promptly tanked. Soon it became clear that ViacomCBS and Discovery (DISCA), Inc (home of HGTV, Food Network, and other channels, were both caught up in the Archegos Capital Management scandal that nearly brought down Credit Suisse. Other Wall Street banks booked millions of dollars in losses when they allowed Bill Hwang (owner of Archegos Capital Management) to speculate on the stocks of ViacomCBS and Discovery. Credit Suisse booked over $5 billion in losses due to the scandal.

Exhibit: Spike in Discovery Shares During the Archegos Scandal

(Source: Seeking Alpha)

The stock has flat-lined lately due to increased competition in the streaming business and the increased cost of customer acquisition. Did you notice the deal that Discovery was offering during the 2021 Thanksgiving break? Discovery offered three months of subscription at $0.99 per month.     

ViacomCBS is a solid company with good cashflows, and its content library is top-notch. The preferred stock now offers a 10.6% dividend yield, which you can get until 2024. In early 2024, we can decide to either stay invested in the preferred shares or exit before the mandatory conversion date in April.

The debt to EBITDA multiple is at 4x. So, debt is a concern, and I prefer to see companies at a debt to EBITDA multiple 2x. One caveat to remember is that Discovery is acquiring Warner Media from AT&T. Discovery will have a 5x debt to EBITDA after the acquisition.

Exhibit: Debt to EBITDA Ratio for ViacomCBS, Walt Disney Co., and Discovery 

(Source: Seeking Alpha)

The high level of debt may be negative, but the company has the cashflows to cover it. Its quick ratio is above 1 indicating that the company has the liquidity to cover the current liabilities.  

Exhibit: Quick Ratio for ViacomCBS, Walt Disney Co., and Discovery

(Seeking Alpha)

 

The company's return on equity is much higher than that of Walt Disney and Discovery and comes in at around 18%. 

Exhibit: Return on Equity for ViacomCBS, Walt Disney, and Discovery

(Source: Seeking Alpha)

Its return on invested capital is higher than that of Walt Disney and Discovery.  

Exhibit: Return on Invested Capital for ViacomCBS, Walt Disney, and Discovery

(Source: Seeking Alpha)

I own both ViacomCBS Class B (VIAC) and the preferred stock (VIACP).  I also own Discovery (DISCA), and Walt Disney (DIS). But, I am most bullish about ViacomCBS. They have already acquired over 43 million customers. They have a customer acquisition deal with T-mobile to offer their Paramount+ subscription as part of their plan. That should bring in millions more customers to ViacomCBS.  

Exhibit: Paramount+ Subscription Included in T-Mobile Cell Phone Service 

(Source: T Mobile)

Finally, the company is trading at an EV to EBITDA multiple of just 6x and Discovery is trading at just around 3x. Disney is trading at an EV to EBITDA multiple of 34x. Both ViacomCBS and Discovery are trading at steep discounts. Yes, the competition is intense and the customer acquisition cost is high, but the content is top-notch. All media companies need content more than ever. But ViacomCBS will thrive in the long term.  The ViacomCBS' dividend on the preferred and the common is too good to pass up.       

 

    

    

Can Salesforce (CRM) continue growing to justify its valuation?

Salesforce (CRM) grew at a breakneck speed over the past two decades. The is hoping that the growth will continue in this decade.

The company's free cash flow yield is very similar to that of Microsoft (MSFT) and Adobe (ADBE). Salesforce's free cash flow yield has been consistently around the 2% level over the past decade. Microsoft and Adobe have seen their market capitalization and earnings multiple expand over the years causing their free cash flow yield to drop. I might have to look into their number more closely. 

Exhibit: Free Cash Flow Yield

(Source: Seeking Alpha)

Salesforce is lagging behind Microsoft (MSFT) and Adobe (ADBE) on return on equity. Both those companies have more than 8x more return on equity than Salesforce.  

  Exhibit: Return on Equity

(Source: Seeking Alpha)

Microsoft and Adobe have 6x and 8x more return on invested capital (ROIC) compared to Salesforce. 

Exhibit: Return on Invested Capital 

(Source: Seeking Alpha)

Salesforce's EBITDA margin is much lower than that of Microsoft and Adobe.  

Exhibit: EBITDA Margin

(Source: Seeking Alpha)

Salesforce's EV to EBITDA multiple is higher than that of Microsoft and Adobe.  

                               Exhibit: EV to EBITDA Multiple for Salesforce, Microsoft, and Adobe.  

                                        

   (Source: Seeking Alpha)                                         

Salesforce's year-over-year quarterly revenue growth (See Exhibit: Year-over-Year Revenue Growth) has converged with Microsoft and Adobe.  

    Exhibit: Year-over-Year Revenue Growth

(Source: Seeking Alpha)

Salesforce's price to earnings growth ratio (See Exhibit: Salesforce, Microsoft, and Adobe PEG Ratio) was attractive during the past decade compared to Microsoft and Adobe. If the company's growth can continue, that would justify its higher valuation multiple compared to Microsoft and Adobe. Salesforce's revenue is already in the high $20 billion, so for it to grow at a 20% rate would take some work.  

                                        Exhibit: Salesforce, Microsoft, and Adobe PEG Ratio

(Source: Seeking Alpha)

Salesforce Q2 FY 2022 Earnings Call Highlights

• Salesforce (NYSE: CRM)
• Slack acquisition has been closed.  
• The company's first $6 billion in revenue in a single quarter.
• 23% year-over-year (y-o-y) revenue growth with a total of $6.34 billion in revenue for the quarter.
• Operating margin of 20.4%. It's an improvement of 20 basis points year-over-year.   
• "I'm very excited that 5 out of the last 5 quarters that we've had that 20% or greater revenue growth. And that 3 of the last 5 quarters, we're having greater than 20% operating margin." - Marc Benioff, CEO.  
• Sales Cloud grew at 15% y-o-y.  
• Service Cloud is now a $6 billion business.
• Service Cloud grew at 23% y-o-y.
• Marketing & Commerce Cloud grew at 28% y-o-y.  
• "And every one of these digital transformations is also a data transformation, which is driving the unprecedented success we're seeing in Tableau and MuleSoft. Tableau is within 9 of our top 10 deals this quarter, and MuleSoft is within 8 of our top 10 deals." - Bret Taylor, COO, Salesforce.  
• Industry Cloud grew at 58% y-o-y.  
• Salesforce is aggressively launching a "Slack-first" customer 360 project. All Salesforce products will be integrated with Slack.  
• Slack's revenue grew by 39% y-o-y.    

(Source: Salesforce)

Exhibit: Marc Benioff - CEO Salesforce.  

(Source: Salesforce)

Published: August 26, 2021.

 

Metrics in the Home Health, Hospice, and Personal Care Industry

Amedisys (NASDAQ: AMED) is one of the companies serving in the home health, hospice, and personal care industry. Here are some of the metrics in the industry:

Length of Stay (LoS)

Length of stay (LOS) is an important measure for hospice care because it represents
the time available to provide appropriate and needed services near the end-of-life.

Average Daily Census (ADC)

ADC or Average Daily Census = Total patient days in a period/number of period days.

(Source: Amedisys)

MongoDB: Number of $100,000 or greater ARR Customers

Here's how MongoDB (NASDAQ: MDB) defines Annualized Recurring Revenue (ARR):

"We define ARR as the subscription revenue we would contractually expect to receive from customers over the following 12 months assuming no increases or reductions in their subscriptions."

Number of  $100,000 ARR Customers each year:

• 2016: 164
• 2017: 246
• 2018: 354
• 2019: 557
• 2020: 751
• 2021: 975

42.8% Compound Annual Growth Rate in $100K or greater ARR customers.  

(Source: MongoDB.com)

The company also closely monitors ARR expansion rate and here's is what they have to say how that:

"We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120%."

The ARR expansion rate is another critical metric for software subscription companies. It shows whether the customer is willing to buy more of the product and/or expand its use within the company.  

Sources:

• Form 10-K (Annual Report) FY 2021
• Form 10-K FY 2018

Does data prove that the "low" jobs additions in April '21 is due to extended unemployment benefits?

 The U.S. Chamber of Commerce tweeted that the extended unemployment benefits should be stopped given the "low" number of job additions during April 2021.

“The disappointing jobs report makes it clear that paying people not to work is dampening what should be a stronger jobs market."

See the full statement from our EVP @NeilBradleyDC on this morning's @BLS_gov jobs report: https://t.co/uE1557IKt3 pic.twitter.com/HIeDFwoZb5

— U.S. Chamber (@USChamber) May 7, 2021

There's lot of chatter that people are getting more in unemployment benefits and that's keeping them from taking a job. April saw addition of 266,000 jobs. In a normal economy, 266,000 jobs would be a very good report. There could be multiple reasons for why the jobs report came in well below the expectation of a 1 million jobs. 

• Many parents still have kids who are remote learning. So, they may not have the flexibility to take-up employment while they are caring for their kids.    
• Vaccines were only widely available in the middle of April. So, people who were waiting to get vaccinated before heading to work, can only now get fully vaccinated.  

The best response to US Chamber of Commerce was provided by Ben Zipperer:

Hard to single out unemployment benefits as "dampening" job growth in the lowest-wage industries when those same industries are the ones with the fastest job growth https://t.co/4OqlLBc7PW pic.twitter.com/EjXJI7aswl

— Ben Zipperer (@benzipperer) May 7, 2021

        

Equinix: Technical Set-up Looks Good

 Equinix (EQIX):

EQIX has been on BofA US 1 list for a long time. It seemed to be very expensive, finally it has come back down and I have opened a position today at $640. Actually, I wish I had picked it up yesterday.

$EQIX's Technical Set-up 

1. Trading near the bottom of the bollinger bands
2. Money Flow Indicator flashing oversold
3. RSI just coming-off of oversold territory.  
4. On-balance Volume is negative indicating oversold

Exhibit: Equinix Technical Indicators

(Source: E*Trade)