Weekly Business Roundup
Publication 6 - Jerome Powell Warns of Potential Recession, Buffett Boosts Energy Bet, and Drivers Feel the Impact of Surging Gas Prices
Published Sunday, June 26th 2022
This week, higher gas prices took it’s toll on drivers and electrical vehicle makers, U.S existing-home sales data showed a still-redhot housing market, and the Federal Reserve Chairman said that bringing down inflation may trigger a recession.
Business
Berkshire Hathaway Increase Bet on Energy
Warren Buffett’s company bought 9.6 million more shares of Occidental Petroleum Corp. in June, according to a regulatory filing released late Wednesday.
The transactions, which were made over two days, bring Berkshire’s stake in Occidental to about 16%.
Berkshire is Occidental’s biggest shareholder. It began buying shares in Occidental in late February, after Mr. Buffett said he happened to view an analyst presentation on the company. He was impressed by Occidental Chief Executive Vicki Hollub’s plans for the company, which include paying down debt, buying back shares and delivering dividend payouts to shareholders.
“What Vicki Hollub was saying made nothing but sense,” Mr. Buffett said at Berkshire’s annual shareholder meeting in May. “And I decided that it was a good place to put Berkshire’s money.”
Berkshire Hathaway Chairman, Warren Buffett
Days after Occidental’s February earnings call, Berkshire began rapidly buying shares. In the span of about two weeks, Berkshire wound up building a 14% stake in the company.
The moves have been a boon to Berkshire. Occidental shares were up 85% year-to-date on Friday, dramatically outperforming the S&P 500, which has fallen 21% over the same period. Like other energy stocks, Occidental has benefited from the spike in oil prices following Russia’s invasion of Ukraine.
EV Makers Increase Prices Following Surge in Cost of Parts and Demand
High gasoline prices are prodding more people to consider an electric vehicle. But car shoppers are likely to face sticker shock at the dealership, too.
Auto makers have been raising prices on electric cars, partly to offset the soaring cost of materials used in their large batteries. Car executives also are capitalizing on strong consumer interest in EVs, as a new wave of plug-in vehicles hits the market.
In the past few months, Tesla Inc., Ford Motor Co., General Motors Co., Rivian Automotive Inc. and Lucid Group Inc. have increased prices on certain electric models.
Last week, GM tacked on $6,250 to the price of GMC Hummer electric pickup-truck models, which now range from around $85,000 to $105,000, citing an increase in commodity and logistics costs. The waiting list for the recently released truck is about two years, a GM spokesman said.
Tesla this year has increased prices three times for a performance version of its top-selling Model Y SUV, adding a total of about 9% to the sticker price, which is now $69,900, according to Bernstein Research.
Overall, the average price paid for an electric vehicle in the U.S. in May was up 22% from a year earlier, at about $54,000, according to J.D. Power. By comparison, the average paid for an internal-combustion vehicle increased 14% in that period, to about $44,400.
The companies say they are trying to offset a recent price rise in raw materials that go into the batteries to power electric cars, by far the most expensive component of an EV. Prices for lithium, nickel and cobalt have roughly doubled since before the Covid-19 pandemic began, according to consulting firm AlixPartners LLP.
Ford finance chief John Lawler said last week that rising EV commodity expenses have wiped out the profit margin on Ford’s Mach-E SUV. Ford has raised prices in an effort to offset the cost inflation, he said.
Ford Finance Chief, John Lawler
Economics
Fed Chair Jerome Powell Says Higher Interest Rates Could Cause a Recession
Federal Reserve Chairman Jerome Powell said the central bank’s battle against inflation could lead it to raise interest rates high enough to cause a recession, offering his most explicit warning this year.
“It’s not our intended outcome at all, but it’s certainly a possibility,” Mr. Powell said Wednesday during the first of two days of congressional hearings. “We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to bring down inflation, which is running at a 40-year high.
His remarks underscore the challenge facing the central bank as it raises interest rates at the most rapid clip since the 1980s to slow the economy and cool inflation.
Federal Reserve Chairman, Jerome Powell
Rising fuel costs and supply-chain disruptions from Russia’s war against Ukraine have sent prices up in recent months. Those pressures have added to already-high inflation as demand surged last year from the reopening of the economy and aggressive government stimulus.
The central bank is seeking to engineer a so-called soft landing by cooling the economy’s growth enough to lower inflation, but without causing a downturn.
During two hours of testimony Wednesday and at a nearly hourlong news conference last week, Mr. Powell never mentioned a soft landing and instead only referred to it as a goal when he was asked about it.
“The events of the last few months around the world have made it more difficult for us to achieve what we want,” Mr. Powell told the Senate Banking Committee on Wednesday. Achieving the Fed’s 2% inflation goal with a strong labor market would be very challenging, he said. “We’ve never said it was going to be easy or straightforward.”
“We are not trying to provoke and do not think we will need to provoke a recession, but we do think [bringing down inflation] is absolutely essential”
U.S. Existing-Home Sale Prices Hit Record of $407,600 in May
The relentless climb in U.S. home values continued in May, when median prices shot above $400,000 for the first time while sales activity slowed under pressure from higher mortgage costs.
Rapidly rising interest rates are rippling through U.S. markets as the Federal Reserve tries to combat inflation. Stocks entered a bear market this month, consumer sentiment has taken a hit, and economists are forecasting an increasing likelihood of recession as higher rates threaten to choke off growth.
But home-buying demand continues to exceed unusually low levels of supply and propel prices higher. The median existing-home price rose 14.8% in May from a year earlier to $407,600, a record high in data going back to 1999, the National Association of Realtors said Tuesday. That rate was up slightly from the previous month.
The combination of rapidly rising rates and record home prices is squeezing many buyers out of the market and making it especially challenging for first-time buyers.
These factors are cooling off the frenetic sales pace that started two years ago when pandemic-related restrictions eased and buyers scrambled to find homes with more space. Sales of previously owned homes slid for a fourth straight month, declining 3.4% in May from the prior month to a seasonally adjusted annual rate of 5.41 million, the weakest rate since June 2020, NAR said. May sales fell 8.6% from a year earlier.
Many housing economists expect steeper borrowing rates to slow home-price growth in the second half of the year. The average rate on a 30-year fixed-rate mortgage was 5.78% in the week ended Thursday, the highest level since 2008 and up from 2.93% a year earlier, according to housing-finance agency Freddie Mac. The May sales data largely reflect purchase decisions made in April or March.
“The impact of higher mortgage rates have not been fully reflected in the data,” said Lawrence Yun, NAR’s chief economist. “In the upcoming months, I do anticipate a further decline in home sales.”
NAR chief economist, Lawrence Yun
Mortgage applications to purchase homes have declined in response to rising rates. Two real-estate brokerage companies said last week they would lay off hundreds of employees due to decreased home-buying demand.
“In the upcoming months, I do anticipate a further decline in home sales”
High Gas Prices Take Toll on Driver Demand
American drivers are starting to buy less gasoline as they feel the economic burden of record prices that continue to hover near $5 a gallon.
In the first full week of June, gasoline sales at U.S. stations were down about 8.2% compared with the same week last year—the 14th consecutive week that sales have lagged behind 2021 levels, according to surveys by energy-data provider OPIS.
President Biden proposed Wednesday that Congress suspend federal gasoline and diesel taxes for three months, in hopes of alleviating the pain for U.S. drivers. But Mr. Biden is unlikely to find enough support among U.S. lawmakers for the so-called gas tax holiday, which economists said would do little to ease prices anyway. Some Democrats have joined Republicans in voicing opposition to the plan.
U.S President, Joe Biden
In the week ended June 10, the Energy Information Administration’s measure of implied demand—an estimate of products supplied to consumers—declined by roughly 110,000 barrels a day from the prior week, to about 9.1 million barrels a day. That figure is down from about 9.4 million barrels a day the same time last year.
Drivers have begun consolidating trips or filling up their tanks with only as much fuel as they need to get by for a few days. Some are carpooling or taking mass transit, while others are working from the office for fewer days each week, analysts said.
Gasoline demand isn’t just trailing last year. The EIA’s estimate for implied demand for months has declined compared with the average for 2017 to 2019, sliding from 99% of that average in late February to 93% by late May, and to 95% in June.
Investing
Analyst’s Report- Netflix Inc. (NASDAQ:NFLX)
By Ben Slye
Business Explanation
Netflix, Inc. is one of the world’s leading entertainment services with approximately 222 million paid memberships in over 190 countries who can watch TV series, documentaries, feature films and mobile games across a wide variety of genres and languages. Members can engage as much as they want, anytime, anywhere, on any internet-connected screen. Members can play, pause and resume watching, all without commercials.
They are a pioneer in the delivery of streaming entertainment, launching their streaming service in 2007. Since this launch, they have developed an ecosystem for internet-connected screens and have added increasing amounts of content that enable consumers to enjoy entertainment directly on their internet-connected screens. As a result of these efforts, they have experienced growing consumer acceptance of, and interest in, the delivery of streaming entertainment.
By The Figures
(as at close, Friday, June 24th)
Price: $190.85
Market Cap: $84.79 billion
P/E Ratio: 17.37
Dividend Yield: N/A
52-Week Range: $162.71 - $700.99
ROE: 38%
ROIC: 17.5%
10-Year Revenue CAGR: 24.9%
10-Year FCF CAGR: N/A
10-Year Equity CAGR: 37.8%
Management
As of 2022, Netflix have elected to have two co-chief executive officers instead of one CEO. These co-CEO’s are Reed Hastings & Ted Sarandos. Spencer Neumann serves as the company’s CFO.
Mr. Hastings, as co-founder and Co-Chief Executive Officer, deeply understands the technology and business of Netflix and brings strategic and operational insight to the Board. He is also a software engineer, holds an MSCS in Artificial Intelligence from Stanford University, and has unique management and industry insights. Mr. Hastings is an active educational philanthropist: he served on the California State Board of education from 2000 to 2004, and after receiving his B.A. from Bowdoin College in 1983 served in the Peace Corps as a high school math teacher in Swaziland. Mr. Hastings previously served on the board of Facebook, Inc. from 2011-2019.
Mr. Sarandos, as Co-Chief Executive Officer and Chief Content Officer, is integral to developing corporate strategy and oversees the teams responsible for the acquisition, creation and promotion of all Netflix content including original series from around the world. His in-depth knowledge about Netflix and experience in the entertainment industry provide a unique business perspective to the Board. Mr. Sarandos has been responsible for all content operations since 2000, and led the Company’s transition into original content production that began in 2013 with the launch of series such as House of Cards, Arrested Development and Orange is the New Black. With more than 20 years’ experience in home entertainment, he is recognized in the industry as an innovator in film acquisition and distribution and was named one of Time Magazine’s 100 Most Influential People of 2013.
Spencer Neumann was named CFO of Netflix in January of 2019, utilizing his finance, strategy, and accounting experience in media, entertainment and service oriented companies to continue to build on the company’s track record of success and innovation. Neumann also worked at the private equity firms of Providence Equity Partners and Summit Partners. Additional positions at The Walt Disney Company, which he initially joined in 1992, included executive vice president of the ABC Televisions Network and CFO of the Walt Disney Internet Group. Neumann holds both a B.A. in economics and an M.B.A. from Harvard University.
Competetion
Netflix’s main competition includes Amazon, Apple, Roku, Comcast Corp, Walt Disney Co, Fox Corp and Paramount Global. The combined revenue of Netflix and it’s competitors for 2021 is $1,093.40 billion.
A massive indicative in market power when it comes to an industry like Netflix’s is customer retention. Between 2021 & 2022 Netflix retained 83% of its subscriber’s month after month. Walt Disney Co’s Disney + had a retention rate of 85% and Hulu had a retention rate of 67%. Amazon prime has a retention rate of 51.3%, Comcast has a retention rate of 35.47%, Apple’s platform Apple Tv has a retention rate of 21.18% & Paramount’s Paramount+ service coming in with a retention rate of 45%.
Roku and Fox are not subscription based platforms as such but do have large followings. Roku has 61.3 million active users as of Q1 2021, and Fox averages 1 million viewers a day. Netflix clearly is the most dominant of these companies in terms of customer retention.
However as of late, things have not been looking good for Netflix. Netflix predicted for 2022, that it would add 2.5 million people to its subscriber list. However, so far, they have had a loss of around 200 thousand subscribers this year, and it’s stock is down roughly 64% year-over-year.
Netflix at the moment for me isnt worth it. Its constantly bleeding capital but its moat is an interesting one that has quite a bit of strength to it. If they can cut down on expenses it would be a serious buy at its current price!