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Oracle’s Earnings Disappoint

The Oracle’s latest earnings report dropped this weekend, giving us fresh insight into his performance and assessment of market conditions. Spoiler alert: neither one is very good.

Author

Vyomesh Kumar
August 06, 2024

Silver banana goes to…

In this issue of the peel:

  • The Oracle’s latest earnings report dropped this weekend, giving us fresh insight into his performance and assessment of market conditions. Spoiler alert: neither one is very good.

  • Tyson Foods picked a bad day to report earnings, as even yesterday’s top performers weren’t looking good. 

  • AMD escaped the market rout by eating Intel’s lunch, but Coinbase got slammed by equity and digital asset markets. Meanwhile, the Carlyle Group’s earnings expose PE’s problem.

  • Don’t freak out about this market selloff. Come with us, take a chill pill, and read today’s Thought Banana.

Market Snapshot

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Macro Monkey Says

The Oracle’s Latest Vision

Nostradamus predicted the French Revolution, the Oracles at Delphi predicted the Greco-Persian wars, and I predicted I’d be a millionaire by age 25.

Not all predictions are right, unfortunately for me.

But, when they come from a reliable source and not from a guy who almost failed gym class in 10th grade, we can have some confidence in them.

This weekend, Warren Buffett, the “Oracle of Omaha,” made a few slight, little billion-dollar predictions of his own alongside his company’s latest earnings report.

Let’s get into it.

The Numbers

As a railroad, insurance, and ice cream conglomerate, among other things, there’s a lot we can learn when Berkshire lays bare all those juicy numbers.

In their latest quarter, Buffett & Co. beat earnings expectations by 11.4% while missing on sales by 3.8%. However, with Berkshire, nobody really cares.

Berkshire’s record revenue of $93.65bn was helped out primarily by the company’s sprawling insurance operations, including its ownership of Geico.

Geico—which Buffett has called his “favorite child”—more than tripled its operating income from last year, growing from $514mn to $1.79bn. However, most of that came from cost management and restructuring as revenue grew “just” 7.77%.

Total insurance revenues grew 10.8% when factoring in other brands and Berkshire’s reinsurance unit. 

However, clearly, the firm has not been working on the railroad(s) as Berkshire’s BNSF railroad holding company, which controls 32,500 miles of track in the U.S., saw revenues fall a slight 0.4%. 

Other segments fared worse, with the company’s truck stop business revenue down 11.9%, its distribution unit down 3.3%, and its retail unit off 1.91%.

In addition to insurance, manufacturing was a bright spot in Berkshire’s report. But again—hardly anybody cares.

What market watchers do care about is the company’s investment portfolio. Earlier this year, Buffett’s bag was worth $332bn, but after some recent changes, Berkshire has a new largest asset class: cash.

As of last quarter, Buffett set a record in addition to furthering his title as the oldest and longest-reigning CEO in the S&P 500. His company now holds more cash than any non-bank S&P 500 company, sitting on a whooping $276.94bn. 

Buffett and Berkshire have been dumping stock to amass such a cash pile.

The primary victim of this fire sale (by Buffett’s standards) might surprise some, but most of this cash was raised via sales of Apple. 

Buffett slashed his company’s ownership of the world’s most valuable business, selling 390mn shares, or about 49.4% of Berkshire’s remaining stake last quarter.

In Q1, Buffett cut the position by 12.7%, bringing this year’s total Apple sales to 505mn, or 55.8% of its end-of-2023 holdings. Hell, he may have even sold more since then… and we sure hope he did before yesterday’s 4.8% fall for the Kingping of Cupertino.

Clearly, the Apple is falling farther and farther from the tree. Buffett’s desire to keep the doctor away is ostensibly in decline unless selling Apple is as good as eating one. But the question on everyone’s mind is—why?

The Takeaway?

Referenced recently, one of Buffett’s most famous quotes is to “never bet against America.” He’s certainly not shorting the country but putting much less capital at risk on the country's companies.

Clearly, the move to raise a ton of cash has worked out well as the firm’s investment income continues to balloon.

But, the question for the rest of the Street is—what does Buffett see?

Selling Apple is one thing, as the iPhone makes sales of its marquee product continue to slow or decline, depending on the quarter. 

Macro-level worry emerges, however, when factored in with the recent disposition of firms like Bank of America and other (former) titans of the Berkshire portfolio, including last quarter’s sales of Coca-Cola, American Express, and more.

What's Ripe

Tyson Foods (TSN) 2.09%

  • Betting against our love for meat is like betting that the Secret Service would fail to protect a former Pres- oh wait… my bad. At least one of those bets worked out.

  • The giant—I mean—*meat giant posted a solid Q2 on strong poultry performance despite beef market pullbacks. Sales grew 1.6% YoY while…

  • Tyson’s bottom line swung to a $191mn profit from a $417mn loss last year. Free cash flow improved, and the pork segment narrowed losses.

Advanced Micro Devices (AMD) 1.75%

  • Like an honors student walking through O Block, AMD was the only place on Monday to find some hope amid a collapsing tech market—and it was Intel’s fault.

  • Intel’s earnings were quickly summed up as a bad omen for the entire chip sector. But one firm’s f*ck up is another’s opportunity, and AMD is all over it.

  • The fear/hope is that Intel’s historic partners like Dell and HP could flee to AMD as the former figures out how to take one step forward without two steps back.

What's Rotten

Carlyle Group (CG) 7.51%

  • Fed Chair JPow’s alma mater fell almost as fast as confidence in the Fed after July’s jobs reports. Fees were fine, but distributable earnings are plummeting.

  • The PE firm reported a 32% jump in fee-based earnings on a 13% jump in AUM. However, a tough exit environment caused distributable earnings to fall 11.8%.

  • Fortunately for them, this is a market-wide issue. In Q1, global exits fell 22% YoY and likely performed similarly in Q2, causing the firm to miss across the board.

Coinbase (COIN) 7.32%

  • Multiple wars around the world? No problem. Economic slowdowns? Light work. Fraught elections? Too easy. But falling BTC prices… now we’re really f*cked.

  • With how important BTC is to the global financial system, I can’t believe we almost forgot about this sector until prices fell 26% in a week to <$50k.

  • That caused history’s most rational investor, Cathie Wood, to dump Coinbase. Falling BTC prices for the exchange are like falling oil prices for Chevron.

Thought Banana

The A-stock-alypse

Is anybody else feeling like Dave Portnoy after his esteemed hedge fund, Davey Day Trader Global (Global), when 2022 hit?

I almost forgot stocks could go down. But, when I opened my portfolio and saw more red than a medic in the Civil War, I knew something had to be up.

Obviously, the problem couldn’t be me or my stock picks. Clearly, something’s going on with the market, so let’s dive in.

What Happened?

Just a few short weeks ago, U.S. stocks were unstoppable.

Now, they’ve been stopped.

Since July 16th, the S&P 500 has gone from a YTD return of 19.51% to 9.46%. The drawdown for the small-cap Russell 2000 index currently sits at 9.91%, and, worst of all, the large-cap Nasdaq 100 index has been beaten down 13.45% in just 19 trading days.

Two obvious questions emerge: why is this happening, and how f*cked are we?

Thankfully, we can have some confidence in answering the first question. Bringing stocks down over the past 3 weeks has primarily been the fault of:

  • A weaker than average earnings szn,

  • Worsening economic data,

  • A politically charged news cycle, and

  • Brittle valuations finally breaking.

Those first three have essentially all caused that last one. Brittle valuations can only survive in an era of optimism. Given the recent data and news that has plagued our eyes and ears, it’s no surprise traders are becoming more pessimistic.

Unfortunately, that second question is impossible to answer.

With the S&P in a correction, I’m surprised JPow hasn’t dumped another $10tn on the market yet. Rate cuts may save us, but the question itself is flawed.

Pullbacks don’t mean a bear market or recession must be on the horizon. Markets are a game of probabilities, not certainties.

All that’s happened over the past few weeks has been a decrease in market-assessed probabilities of positive outcomes, ranging from economic to earnings data.

Now, the probabilities for slower consumer spending, increasing unemployment, and weaker Q3 and full-year earnings than anticipated at the start of the year have increased. As a result, valuations have retreated.

The Takeaway?

Pullbacks like this are totally normal. What was abnormal was going this long without one. July 23rd was the first >2% decline in a single day since Feb 21st, 2023, so the really weird part was how good things have been since then.

That’s not to say that the worst is behind us. But, it is to say this: don’t freak out.

Sharp, sudden pullbacks like this are where the market separates the apes from the analysts. Plus, if you’re under 40 years old, like 90% of us apes, this may be a great chance for you to buy on the cheap.

Act wisely.

The Big Question: You buying this dip?

Banana Brain Teaser

Previous

What is the perimeter, in meters, of a rectangular garden 6 meters wide that has the same area as a rectangular playground 16 meters long and 12 meters wide?

Answer: 76

Today

Five machines at a certain factory operate at the same constant rate. If four of these machines, operating simultaneously, take 30 hours to fill a certain production order, how many fewer hours does it take all five machines, operating simultaneously, to fill the same production order?

Send your guesses to [email protected]

❝

Everyone has the brainpower to make money in stocks. Not everyone has the stomach.

Peter Lynch

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