Barron’s Weekend Summary: The East African Crude Oil Pipeline (EACOP), the world's longest heated oil pipeline
Cover:
-The East African Crude Oil Pipeline (EACOP), the world's longest heated oil pipeline, faces challenges from forest fires and deadly snakes as it clears land from Africa to the Indian Ocean. The project, which will meander almost 900 miles and carry up to 246,000 barrels of crude a day to the Tanzanian port of Tanga, is a $10B steppingstone that could transform Uganda's economy and provide the world with a new source of oil at a time when conflicts in Ukraine and the Middle East have raised supply fears. Western lenders have shunned EACOP amid environmental and human-rights concerns, leaving Beijing as the obvious savior. China's decision on the pipeline will shed light on whether it still wants to regularly fund legacy megaprojects in the developing world. TotalEnergies, EACOP's biggest corporate backer, faces lawsuits from activists and pressure from shareholders on climate goals after years of delay on the pipeline.
Interview:
-Dev Kantesaria, founder and managing partner of Valley Forge Capital Management, has developed a concentrated strategy that has proven successful for the firm. Currently, the firm owns eight stocks and rarely holds more than 20. Kantesaria focuses on long positions in U.S. stocks that he expects to outperform the S&P 500 over the years. The money manager seeks companies with ample operating leverage and minimal capital-spending needs in industries with secular growth trends. Valley Forge's hedge fund has returned nearly 15% annually since 2007, beating the S&P 500 by more than five percentage points a year. Assets under management have grown to more than $3 billion from $500 million in 2019.
Tech Trader:
-Apple's earnings report for Q3 showed a 4% decline in revenue, the fifth decline in the past six quarters. However, Apple shares were down 10% on the year, indicating investors were prepared for the worst. Despite the disappointing results, Apple's performance was better than expected. The stock rallied 7% on the results, but it's likely that investors' questions about Apple's future will take more time to resolve. Key storylines from the quarter included a surprise in China, where iPhone sales in "Greater China" were up year over year, despite the initial feared loss of market share to Huawei. Apple is also lagging behind other tech giants in generative artificial intelligence software, with expectations growing for the unveiling of its AI strategy in a few weeks.
The Trader:
- Stocks have seen a boost following Friday's jobs report, with the S&P 500 index increasing 0.4% to 5120. The Nasdaq Composite is 1.3% higher, and the Dow Jones Industrial Average is rising 1.1%. The employment report showed fewer jobs than expected in April, but enough to indicate a growing economy. This could help keep inflation down, prevent the Federal Reserve from raising rates again, and potentially allow it to cut them. However, there isn't enough evidence that the central bank is about to cut rates, and the payrolls report doesn't significantly increase the odds of the Fed remaining on hold in July.
-Sherwin-Williams shares have fallen 12% since March, with shares down to $305. Higher inflation readings suggest the Federal Reserve is unlikely to cut rates soon, which may impact new-home sales and home-related spending. However, Sherwin continues to raise prices, with its largest and most profitable business, Paint Stores Group, expecting to ramp up throughout the year. Management expects total sales to range from flat to up in the low single digits for the full year, bringing full-year revenue to at least $23.1 billion. KeyBanc Capital Markets analyst Aleksey Yefremov upgraded the stock to Overweight with a $400 price target. The volume of paint sold is expected to recover soon, and mortgage rates are nearing their peak levels. Evercore ISI's "home improvement leading indicator" shows that broader home-improvement revenue dropped year over year at the end of 2023 but has recently flattened out and could rise into the low single digits.
Features:
-Shareholders are attending Berkshire Hathaway's annual gathering in Omaha, Nebraska, where Warren Buffett, CEO and investing mentor, will speak. The estimated attendance is between 30,000 and 40,000, depending on the year. Buffett once said he wish he knew who Berkshire shareholders were, as there was no comprehensive record of them. The annual meeting is a huge weekend for Omaha hotels, restaurants, Uber drivers, and other businesses. The local newspaper, the Omaha World-Herald, calls the meeting the "gift that keeps giving," quoting a local business person who describes it as "our Christmas." Berkshire board member and investor Chris Davis believes the meeting is a reminder about a certain value system and a way of looking at the world, becoming deeply part of the culture of the people attending and being a lot of fun.
-A legal case involving the director of a company tied to former President Trump is unfolding in a federal court in Manhattan. The case, filed in June 2023, alleges insider trading by a former director of Digital World Acquisition Corp., the blank-check company that took Trump Media public. The former director, Florida investor Bruce Garelick, left the position before the merger was completed and has pleaded not guilty to the charges. The trial is continuing, and his lawyers say he has reserved the right to testify in his own defense. Barron's stopped by the federal courthouse in lower Manhattan this week to catch a portion of the insider-trading case. Meanwhile, Trump is being tried on charges that he concealed payments to former adult actress Stormy Daniels. Both cases provide a window into the financial feeding frenzy that began when Trump's name became associated with a stock about three years ago.
Europe:
-Novo Nordisk shares fell on Thursday after sales of its weight-loss drug Wegovy fell short of estimates in the first quarter of the year. Sales were 9.4B Danish kroner ($1.4B), more than double the total from the same quarter last year, but short of consensus expectations for 10.4B kroner. Investor enthusiasm for Wegovy has ballooned Novo Nordisk's share price, making it Europe's most valuable company last year. However, the Danish pharmaceutical firm's earnings report showed a 22% increase in net sales to 65.3B Danish kroner ($9.1B) in the first quarter, beating estimates. Sales of the popular diabetes treatment Ozempic rose 42% to 27.8B kroner. The lower-than-expected Wegovy sales result might not mean much for the company over the long term, as sales are currently limited by supply. Novo's parent company agreed to buy drug manufacturer Catalent earlier this year and acquired three manufacturing sites to increase production. If successful, sales would quickly accelerate.
Emerging Markets:
-The G-7 Western economies have set a goal of achieving a sixfold increase in renewable energy storage by 2030, primarily through battery energy storage systems (BESS). The cost of storage batteries has dropped by 90% over the past 15 years, making the G-7 target realistic. Storage is a crucial link to a lower-carbon future, as solar generation matches fossil fuels on cost but remains unreliable. However, Chinese producers dominate utility-scale storage batteries, relying on lithium and iron and phosphate (LFP) for electricity storage. Contemporary Amperex Technology (CATL) supplies two-thirds of the world's larger LFP batteries, while South Korea's Samsung SDI and Stockholm-based Northvolt are distant runners-up. Although CATL shares have bounced 30% this year, geopolitics are a factor. The European Union is open to CATL producing on its turf, and the company has multibillion-dollar investments in Germany and Hungary. The furthest it's gotten in the US is licensing battery technology to Ford Motor, which has drawn ire on Capitol Hill.
Commodities:
-Hershey, a leading chocolate seller, reported better-than-expected profits and sales in Q1 2024, driven by higher prices. Adjusted earnings per share were $3.07, up 3.7% from last year, while analysts expected Hershey's earnings to shrink by 6.8% to $2.76 a share. Net sales of $3.25 billion also exceeded the consensus of $3.1 billion. The company said that sales were primarily driven by price realization. Ahead of earnings, investors were concerned about the high cost of cocoa, influenced by droughts in West Africa and rot-causing diseases, which could have affected Hershey's input costs and earnings. However, Hershey raised prices of its products to cover the elevated cocoa costs, with prices rising by 5.2% from a year ago on top of the 6.5% increase seen in the previous quarter. Volumes overall increased by 3.4% in the quarter from a year earlier.
Hershey is highly exposed to the cost of cocoa because most of its revenue is from chocolate. However, there may be a limit to how high prices can go or how much consumers are willing to pay when everything else is getting more expensive. Hershey has been diversifying its revenue by selling salty snacks such as pretzels and popcorn, but those products are not selling as well as the company had expected.
Streetwise:
-Bob Bakish is out as CEO of Paramount. He will be replaced by an executive trio of unlikeliness to counter Shari Redstone's plan to parlay her economic stake and voting control into a cash-out favoring herself. Bakish has been reportedly getting $50M on the way out, after presiding over losses for ordinary shareholders of 48% over the past year and 73% over the past five years.
The next episode involves Paramount Global entering a high-stakes standoff with cable provider Charter Communications over terms of a television carriage deal. The old one just expired, and historically, the network owner wants a percentage increase and the cable company says it will only pay y. Last fall, when Walt Disney wanted x, Charter said it would rather exit the subscriber-losing television business and just do broadband than keep getting squeezed by carriage hikes. Disney, which needs cash flows from legacy TV to support its streaming services until they're profitable, folded and agreed to cut Charter in on selling its streaming services.