Barron’s Weekend Summary: After a decade-long slump, US growers appear to be headed for a third consecutive year of healthy pay
Cover Story:
After a decade-long slump, US growers appear to be headed for a third consecutive year of healthy pay. Crop prices are down from last year’s highs but are expected to remain well above historical averages. The Department of Agriculture puts this year’s expected net cash farm income at $150.6B. Adjusted for inflation, that would be down from last year’s record $195.3B, but above the 20-year average of $130.5B. Farmland prices in Iowa shot up 17% last year and 29% the year before. The average acre recently went for $11,411, around triple the national price. Beneficiaries include more than locals. Farmland Partners, a real estate investment trust valued at close to $600M, has returned 82% cumulatively over the past three years, more than twice as much as the S&P 500 index. Pension funds are riding big gains on the vast farm acreage they’ve amassed. So are Bill Gates and Jeff Bezos.
Interview:
-Last week Barron’s interviewed Vincent Clerc, CEO of AP Moller-Maersk. Few executives have a better insight into the state of the global economy than Clerc, who heads the world’s second-largest container-shipping group. Clerc took charge at the start of 2023, just as shipping rates were collapsing from Covid-pandemic highs. Maersk is hoping an expansion into land-based logistics and e-commerce will pay off. It is also preparing for the end of its alliance with Mediterranean Shipping, the world’s biggest container-shipping group, in 2025. Barron’s spoke with Clerc on the sidelines of the Mobile World Congress in Barcelona about the outlook for the global economy, US-China tensions, and the potential of artificial intelligence.
Tech Trader:
-Stock-based compensation has been a noncash way for many tech companies to supplement employee salaries, primarily through awarding stock options or restricted equity grants—a promise to deliver stock at a future date upon predetermined conditions. The trend has particularly taken off in the last decade. The average stock-based compensation for the industry rose from just 4.2% of revenue in 2012 to 10.5% in 2020, accelerating to 22.5% in 2021, according to SVB MoffettNathanson. It’s “become part of the culture and the expectation from software company employees,” Ader says. Theoretically, there is an alignment of interest with overall company performance, giving an ownership incentive for employees to work harder. Management, meanwhile, appreciated the flexibility of paying less cash for staff salaries, enabling more resources to be shifted to R&D and marketing. As long as stock prices went higher, engineers and salespersons enjoyed ever-rising levels of total compensation. Investors didn’t complain about dilution as long as stock prices were rising. In Wall Street models, stock-based comp usually got stripped out of earnings figures, as if the payments didn’t exist. But those times are over. Revenue growth has slowed, and stock prices have tumbled from their peaks. Many newly public companies that used stock-based compensation still do not have earnings on a GAAP, or generally accepted accounting principles, basis. Now, even with stocks well off their highs, companies may be forced to issue more shares to their employees that have grown accustomed to substantial awards.
The Trader:
-Arconic investors got a pleasant jolt this past week after The Wall Street Journal reported the aluminum products company was in talks to be acquired by private-equity firm Apollo Global Management. Despite a big gain, the stock still looks like a buy.
The Journal reported Apollo (ticker: APO) submitted a bid in February at a “significant premium” to recent levels. Apollo didn’t respond to a request for comment, while an Arconic spokesperson said the company doesn’t comment on rumor or speculation. But many takeout offers start at about a 20% premium to a stock’s 30-day moving average which implies a price for Arconic of around $28 a share. It makes sense, then, that shares would jump about 30% off Tuesday’s lows and close at $27.20 on Friday.
-Once synonymous with Wall Street money-making, Goldman Sachs found itself on its back foot after failing to wow investors at its second-ever investor day this past Tuesday. Shares tumbled 3.8% in that day’s trading—and are off 3% for the week—after the bank announced plans to cut $1B in costs but failed to give clear guidance on the future of its wayward consumer business. The investor day was supposed to be an opportunity for the bank to reset its relationship with Wall Street. Instead, it ratcheted up concerns about the bank’s—and CEO David Solomon’s—credibility. Solomon in particular faltered this week, saying almost in the same breath that the bank was seeking “strategic alternatives” for its money-losing consumer-banking business while also declaring that he would push for it to break even on a pretax basis by 2025.
Features:
-The scramble for shearling-collar coats and snap-button shirts, brought on by the success of TV shows like Yellowstone, is one more feather in the cap of Western-wear retailer Boot Barn Holdings. But it’s worth noting that cowboy chic has cycled in and out of fashion over the decades, and Boot Barn has done just fine. That’s because it caters to an increasing number of shoppers who are less concerned with trends, as well as others simply trying to look the part. As the meteoric rise of Tractor Supply (TSCO) has shown in recent years, investors overlook more rural-themed retailers at their own risk. “Right now, Boot Barn is one of the most attractive names in retail,” says David Swank, co-manager of the Hood River Small-Cap Growth fund, who notes that the company is finding success in the Northeast, a previously untapped geographic region for the brand.
-Bulls on Hertz Global Holdings should consider the rental car company’s unusual and attractively priced warrants, which offer an alternative to Hertz common shares. First, some details on Hertz Global Holdings warrants. They amount to long-term call options on the stock and trade around $10.50 while the stock changes hands at $18.77. The warrants have an exercise price of $13.80, meaning investors can buy Hertz shares at $13.80 through the maturity date in 2051. One way to play Hertz is to buy two warrants instead of one share of the stock. The warrants should deliver most of the gains in the stock. On Friday, the stock rose 42 cents and the warrants were up 33 cents.
European Trader:
French catering giant Sodexo is once again facing headwinds after the reopening of offices, universities, and sports venues helped it bounce back from the coronavirus pandemic. The stock rose 12.1% in the past year, but has slumped almost 5% in the past month to 87.96 euros ($93.44). The likely culprit is investor disappointment that 2023 guidance was only in line with forecasts amid the prospect of a recession and spiraling inflation. Much of the impact of a downturn has already been priced into the stock. Sabrina Blanc, an analyst at Société Générale, wrote in a recent note that Sodexo has hiked its prices 5% to 6%, which will help mitigate the rising cost of ingredients.
Emerging Markets:
-Everyone who matters in Chinese politics will converge on Beijing this weekend for the so-called Two Sessions, an annual joint meeting of the National People’s Congress and the Chinese People’s Political Consultative Conference. Two guys who won’t make it: Jack Ma and Fan Bao. Ma, of course, is a founder of Alibaba Group Holding, the charismatic face of Chinese capitalism until some rude remarks to state bankers forced him into exile two years ago. Bao, CEO of investment bank China Renaissance, was the country’s best-known rainmaker until he vanished two weeks ago. His company subsequently revealed that “he is cooperating in an investigation being carried out by certain authorities.”
Commodities:
-Oil companies are making more money than ever, but they’re spending less of it on exploration. One reason: Executive compensation packages today favor cash flow over production. The change is helping to curb the amount of oil that comes out of U.S. soil at a time when President Joe Biden and others are urging producers to pump more. Indeed, despite high prices and big profits, output is likely to grow just 3% this year, says Morgan Stanley analyst Devin McDermott. Investors don’t want to return to the old days of “drill, baby, drill,” which often led to poor returns.
Streetwise:
-In the decade through 2021, most days for Tesla felt like investor days. The stock gained 18,000%. The company stuck to shareholder meetings and events themed around technology—like a battery day and an AI day. Then, last year, rising interest rates shook frothy stocks, and Tesla dropped 65%. So, on Jan. 2, the company announced a day just for equity enthusiasts. Speculation began immediately that Tesla would give details on a new, cheap car—maybe not Honda Civic cheap, but Accord-ish, say $30,000. That didn’t happen—hence the disappointment. In February, CEO Elon Musk tweet-promised to share his Master Plan 3, and he did just that. Sort of.