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Let's get a beat on how the US farmer's doing here, and we can do that through Deer. Deer is a company obviously we all know and love, and their customers buy and large are farmers, and Deer reports some numbers a little bit disappointing here. Chris Chiolino joins us. He covers all the big ag and machinery companies for Bloomberg Intelligences, based down in Princeton, New Jersey. Chris, how did Deer do this quarter and what's their outlook?
The quarter was great, really much better than we anticipated across the board, beats both top line and margins for most of the businesses. But the outlook was the disappointment of the quarter. They cut net income guidance by about five percent, and that's largely reflective of incremental weakness in
the ag business, specifically the large jag business. And there's really two components to that one europe Deer now plans to underproduce production, underproduce retail demand due to some weakness in Central and Eastern Europe given the conflict there, So they're going to try to bring down inventories.
They're already under producing in Brazil as well.
And then the second component of the cut was really some additional softness beginning to transpire here in North America. We saw some of the order velocity start to moderate, So demand seems to kind of be trending towards the low end of their down ten to fifteen percent industry outlook.
When it comes to lar jag equipment.
Yeah, let's get through some of these here. Production precision ag net sales for their yearly forecast, they're looking down twenty percent worse, and estimated construction and forestry net sales down five to ten percent, bag and turfnut sales down ten to fifteen percent. Yiki, is this a early cycle, mid cycle or late cycle read on the economy.
I mean we're we're early in an ag downturn. Last
year was a peak production levels. You know, historically you don't have one year downturn, so I would suspect this is kind of the beginning of a multi year downturn, and some of the numbers that you're seeing that your reference on their guidance are well below you know, market retail demand expectations, suggesting that you know, they have some more work to do on bringing down inventory levels to more manageable levels, with really the goal of setting up
production for twenty five in line with retail demand.
All right, So if John Tucker goes on too a lot to get you know, maybe a backo for his estate in the Jersey Shore, he can get one, right, There's plenty of there on the lot. Can can he get some? Can he get a deal?
There's no shortage of tractors and equipment on the lot. You could get new, you could get used, kind of take your pick. Values continue to kind of come down here over the last twelve months, and I suspect you'll see further pressure on the US side new equipment pricing, you know, deers kind of guiding to one and a half percent, which is kind of below historical averages. And remember we're coming off of you know, three years of
really strong phenomenal pricing. So returning to I would say below normal historical trend, which will also be a drag on margins.
Caterpillar had a different kind of read, and I appreciate they also do metals and mining and stuff. So is it going to be the diversified players that are going to really win on this?
Yeah, So, I you know, constructions holding up certainly better than the farmer and then the ag economy a couple of different moving pieces there. I mean, you still have a tremendous amount of infrastructure related funds and government stimulus coming through the system that will not only be kind of a tail wind here in twenty four, but even twenty five. I've been twenty six, so I think that certainly helps offset some of the cyclical headwinds facing both.
The resie or non residential markets.
But if you look at the farm economy almost kind of a completely different story. You look at crop prices, which are ultimately the biggest driver of farm income and equipment purchases. Corn soy weeat down you know, twenty five thirty five percent plus, So that's beginning to trickle through to farm incomes. Farmer incomes are going to be down twenty six percent this year, and I suspect we'll be under further pressure as we exit the year too, all.
Right, Chris Gielino, thank you so much. We appreciate that. Chris Chilino. He covers all the big ag and construction, all those really cool companies that are industrial America. Again, our good friends of Deer had a good quarter. As Chris said, bro their guidance weaker than expected, and I guess with farmer incomes down so much. That makes a lot of sense because they don't have money in the pocket, they can't go out and buy new tractors and stuff like that.
You're listening to the Bloomberg Intelligence Podcast. We'll catch us a love I have week days at ten am Eastern on applecar Play and androyd Otto with the Bloomberg Business Act. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Let's go to a plet a discussion about retail sales. What we might We saw the government numbers come out for the month of January weeker than expected. I don't know how much of that is seasonal versus, you know, kind of something more substantial. But our next guest does, Mary Shore is a senior equity analysts at Colombia thread Needle Investments joining us via zoom from Boston, mass So, Marie, what what do you make of the you know, retail sales numbers we had today? How concerned should we be?
Yeah, it's a great question.
When I look at the pretty significant slowdown that we saw in January, I think it really reflects two things. Number one, unfavorable lab which is transitory, but also the shift back to the pre holiday trend. So when I really dig through the data, I see a continuation of three themes that we really discussed throughout last year, which is the consumer stretched and continues to spend more on services over goods and within goods on needs over once.
We also continue to see weak demand in categories that were strong during the pandemic, like home and sporting goods and electronics. And then the third theme is e commerce taking backshare from the stores. So I kind of look at this report and say, it's really more of the same as to what we saw throughout twenty twenty three.
So if we go to the needs over once and spending on services, when we start to get the retailers reporting, how do we read that dynamic into those retailers.
Yeah, it's a great question. It's really going to vary by categories. So I think we're going to see continued growth in categories like food and health and wellness and wellness. I would also include in there some of the active wear brands like a Lulu Lemon for instance, in some of the athletic footwear brands, and then again continued weakness in categories like home electronics, sporting goods, and I would
say kind of flatish results in apparel. The problem is that a lot of those latter categories tend to be the higher margin category, so they are weighing on the top line but also weighing on margin.
All right, I'm asking on behalf of Alex here talk to us about the luxury end of the market. That's where she plays. What are we seeing there?
Yeah, we're still seeing pretty weak results from the luxury players really globally speaking, of course, there's things happening in China, but also in North American Europe. They're talking more about macro pressures, and I think what's happening is that luxury consumer spending more on services like travel, and some of the luxury players that have more exposure to what I would call the aspirational luxury category. So maybe the kind of mid tier consumers that were stretching to buy some
of those higher price goods. You know, that consumer has really slowed, and so any luxury player with greater exposure to that kind of aspirational luxury part of the category, I think is feeling the pressure more than some of like the true luxury players, like I would say in our Mes or Chanelle, those are the brands that seem to be holding.
Up the best.
Yeah, their mez story is just amazing. Okay, just to be clear on myself, I don't do luxury. I only do sales. Okay, I like luxury on sale, but I like that the like out in it, that kind of stuff. This means nothing to the guys in the studio right now.
How many pairs of shoes do you have?
Let's star A nice question.
Oh, I know, I actually can do this from my old team. I don't think it's as many as you think it is. I think it's like maybe thirty.
What, wow, I have two.
Okay, Mari back me up.
Thirty is like a very reasonable amount. But I asked this because we only see a lot of sales when you got to get the inventory out the door. Am I going to be a happy consumer? Or am I going to be a sad consumer?
This year? Yeah?
Again, it really varies by category and brand, but I would say overall, the inventory this year was in a much better place than what we saw last year when demand really first started to slow and all of the companies found themselves sitting on access goods. I would say as we moved into twenty twenty three, the inventory was better controlled. So when you looked at a lot of the company's results, the gross margin rate was actually stronger
than a lot of investors were expecting. Part of that was, you know, lower promotions, lower markdowns.
Than what we saw the prior year.
So as we moved the the holiday, I would say most of the promotions we saw I would classify as in line with plan. I don't think we saw super aggressive promotions, and that really reflects the fact that most of the brands and retailers are sitting on pretty lean inventories right now and continue to manage their inventory very conservatively, just given the week demand backdrop.
This is said for me exactly, So Mari, how about like it's some of the dollar stores for example. I'm not sure how that really works out. Do they benefit when times get a little tough because maybe people trade down to the dollar stores order their typical customers, they feel it more acutely, How do they play these days?
Yeah, it's a great question.
Typically you see both happening simultaneously, right, so you would see their core customer come under pressure, but that be off set by the more kind of mill income consumer trading down into those discount formats, whether it be dollar stores or even some of the off pricers like Burlington
and Ross that cater to a lower income consumer. I think this cycle we saw kind of a delayed trade down from the middle income consumer, but as we kind of moved through Q four and into this year, I think that should be more pronounced and really help some of those discount formats. I also think what's happening with the dollar stores you've seen Walmart, I think take a lot of share, right. You can see it in their results when you compare Walmart to know the family Dollar business,
which is owned by Dollar Tree and Dollar General. So I think you have a lot of things happening at the same time, but overall, a weaker macro backdrop should be a positive for those discount formats.
Also, it's weird. It's like dollar stores are no longer really dollar stores, Like they're like five dollars stores and their inventory is like horrific, I mean in some of them.
Yeah yeah, I saw. Sorry, go ahead, Oh no, go ahead.
I was gonna say, like, going in one, you're like, this is like scrape and bottom of the barrel of inventory, like it is. It is not a pretty shelf site.
Yeah.
Yeah.
I think a lot of the dollar stores have kind of struggled with the store standards and the service levels to that point, and both Dollar Tree and Dollar General have talked about investing in vetter, inventory management systems, more labor in the stores to help improve the store shopping experience.
All right, Marie, thanks so much for joining us. Marie Shore, senior equity analysts at Columbia thread Needle Investments, joining us via zoom from Boston, Massachusetts. Thread Needle, originally a London based, UK based investment firm, announced Columbia Thread Needle because they were required by COMBIA.
They have great, great analysts.
They do. They're very good at best.
Yep, you know Bloomberg Intelligence.
Yea, all good.
Let's put it there.
All good, all good, Yeah, but good read on the retailers here. So I was like paying attention to the retailers, you know, whether it's the walmarts or you know, the luxury you just get a great view of kind of how the consumer's really hanging in there and generally has been hanging in there for the luxury. I'm waiting for them to say China's back, baby, they're buying mainland, they're traveling, and we haven't heard that.
I don't know if it's gonna happen, to be honest, if it hasn't happened at this time, it's really hard to make that case. Plus even if China, even if they say that, will investors be that willing to buy that narrative? When they got burned in the first quarter of last year from that, yeah.
Part of that was the Chinese traveler. They couldn't fly anywhere. But now that's getting a little bit better, so maybe that'll that'll help.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple car Playing and broud Otto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube.
But it's got a sense of where we're going with this market. I don't know whether it's time to jump off the big calf tech train that's worked so well for so long and maybe take a look at some of the smaller midcaps, maybe some value. You don't know where to go. Oh here, David Coodle's got some thoughts here because he does this stuff for a living. He's a founder, chief executive officer and chief investment officer Mainstay Capital Management, joining us of via zoom from Troy, Michigan.
It's a lovely town. I've been there once, David. What say you here? I mean for a lot of investors that Magnificent seven has worked so well for so many people. Do you just stay with the you know, with that horse, or do you try to maybe look for some value in small cap mid cap maybe some of the sectors that I have lagged.
Yeah, you know the in good morning, good morning, Paul I. When we look across the market and we know that the Magnificent seven had a great year last year of about one hundred and ten percent, and we now have a Fab five that excludes Tesla and Apple that's doing very well this year. And you know the concern is is, you know, can we see a sell off in a video with this meteoric rise? Can we see a sell off in these stocks?
Of course we can.
It wouldn't be surprised at five or ten percent or even more at any given time, given the rally that we've had and the Magnificent seven this year and the Fab five last year. But our overall thesis we like growth over value and mega cap tech and profitable tech is our most favorite sector last year and coming into this year. And we look forward, we look over the next three years. At the annual growth rate of the Magnificent seven, it's four times that of the rest of
the S and P five hundred. If we look at profit margins, they're going to expand at a lot higher rate than the other four hundred and ninety three stocks. You take out Apple and Tesla, those numbers get even bigger. So we're still on growth over value, all right, I'm sorry, growth over value, large over small. We had a rally in small at the end of last year. In small caps a little bit here recently, but small caps, you know the problem with small caps have if you become
a good small cap stock. Soon you become a good mid cap so you could become a good mid cap stock. So the Russell two thousand by definition has that kind of problem. And in the environment we're in with higher rates, it's tough for small caps. And then finally we like the US over foreign.
So David, to that point, what do you do then, Like all those trades are working, all those trades have been working, do you just kind of put the positions on and then sit tight and then wait for all that to play out.
Yeah, Well, the approach we're taking is yes, we are, you know, very dominant in Nasdaq one hundred. You know, those megacap gross stocks were dominant there. We're diversified in some other areas and need to be in the income portion of our portfolio. The thing that's worked so well last year and into this year is holding the ultra
short term bonds with high yields. The bond indecks, the us I agreated bond indecks was you know, was slightly or only slightly up last year when the we look at these ultra short term bonds with high yield of six or seven percent. So if that's the income portion with this growth dominant portion for equities. That's a formula that's still working for a diversified portfolio.
So, David, I know you prefer us over international markets, but I see you mentioned China here in your notes, and I'm sorry Japan, and I've heard more about Japan in the last six months that I have in the last twenty years. What's going on in Japan from an investment peru.
Yeah, we've heard more about Japan in the last six months than we have in the last thirty five years. Because we're right, we're bumping up. We're bumping up against that high that was set in December of you know, nineteen eighty nine when I was walking around the Stanford campus learning about investing, right, I mean, it's that long ago. That giant trough that that we're coming into in Japan has some things going for it. You know, it's still
the easy monetary policy. Uh, they have the capital flows coming from China. You know, China is nearly uninvestable at this point. And then President Trump comes out and says, if he gets elected, I'm going to put his sixty percent tariff on all Chinese goods, I mean, with everything else that's wrong in China with evergrand the real estate
sector all that, you know, more bad news coming. And you know, so they've they've been doing a lot from a stimulus standpoint, but that stock market continues to be, you know, mired in a down draft. The if we look at Europe, Europe is is near recession, kind of in and out of recession. The UK is in recession and actually just found out that Japan unexpectedly got it second quarter of negative growth. But we've just got a
easy monetary policy. Capital flows there, Valuations are starting to get a little bit lofty, but it's it's still investible.
What do you make of the BOJ and then getting off of you'll curve control? Like does that factor in to like you're thinking, like, clearly there's a carry trade that's going to unwind really fast. Clearly that's going to affect the treasury market. Does that affect you, David?
It affects us in that we're watching what the yen is doing because the end it just continues to weaken and and they've come in, they've intervened. The BOJ has intervened several times. But you know when they do, those tend to be temporary fixes. Those tend to be just temporary in nature, and you know, our concern there, really our concern now is with the economy in a more fragile state. You know, what will they do in April?
Will they finally raise rates? I mean what they've continued to do while the US went through their mass of you know, five hundred and twenty five basis point increase in rates from zero, Europe raising rates. We have Japan there that's just maintained this easy monetary policy. They've made some adjustments, but they've got a weak currency that continues
the weaken easy monetary policy. And you know, we'll see but that the moves that they've made have been have been just just minor, almost you know, non events in terms of if they really started the type monetary policy, which they haven't.
So, David, we're about seventy five percent of the way through the S and P five hundred earnings. Any themes for you, any takeaways for you, any any changes to your portfolio based on what you're seeing.
No, I mean, we know we're beating expectations again, earnings coming out better than expected. We're beyond that earnings recession we had last year. And now seeing earnings doing quite well. So I mean we're encouraged by that because that's what we want to see with the FED. Well, we're so concerned about the FED, obviously, but no, we're it's really supporting where we're at in terms of growth versus value.
I think, you know, as we get into the second half of the year, we think we have some volatility here for a few more months. We get into second half of the year and we start to see the rate cuts come. If that's June, let's say that they start, and just and remember that just weeks ago we were looking at March for rate cuts to start. If rate cuts do start that soon, and I think it could maybe even be longer, then then we can come in. Then we can feel more comfortable about dipping into small cap,
dipping into cyclicals. But right now, I mean, we're encouraged by earnings and it's supporting the areas that we like.
Right all right, David, If I find myself in Troy, Michigan this summer, would you recommend to pay a visit to the Waterford Oaks wave Pool.
Well, I love wave pools, even though they're creepy and weird.
I think you should, and if you do, give me a call and we'll go down there and have some fun. That sounds like a lot of fun.
I've been to Troy. I did one of my internal audit visits when I was a pain Webber to the Troy, Michigan Pain Webber branch. Had had a good time there for a week. Good good folks at there. David Kodla, thanks so much for joining U. David Coudla, Founder chief executive officer and chief investment strategist at Mainstay Capital. Manage It.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and androyd Otto with the Bloomberg Business Act. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
Big TAKEE story yesterday was about commercial real estate in this country, particularly office space, and how we're seeing that marked down pretty substantially. There's some trades actually happening, and then Alex and I were just talking to earlier this morning saying, boy, when are some of these smart real estate equity dudes going to comment or do debts coming out, come into the market and start making some long term investment. Scott Kelly is one of them. He is a founder
and CEO of Ato's Capital real Estate. He joins us here in a Bloomberg Interarctive Broker Studio. Were also joined by Abigail Doolittle, markets reporter for Bloomberg News. She's going to help us here kind of get through this story. Here, Scott talk to us about how you guys at your firm are kind of viewing the commercial real estate market in this country. Is it time to maybe start bottle fishing?
I think it is. I think it's the beginning of what's going to be a long process of working things out. We have a company called waiver Tree Property Partners, which is in the business of buying distressed real estate loans and properties here in the US, and interestingly, the loans are not as concentrated as they have been in the past.
When you look at the big real estate investment opportunities, whether it was the RTC, whether it was Lehman's bankruptcy, Bear Starns Lehman, the loans tended to be pretty con and traded. Today, I think you find a wide variety of lenders, including a lot of regional banks which are which which hold a lot a lot of these real estate loans. So we think it's going to be a big opportunity. It's not just going to be an office. Apartments are going to be a big opportunity as well.
We think that it's important to buy good real estate. At the end of the day. You know, cheap doesn't get cheap enough if you don't buy the right thing. So you know, the better properties are going to continue to perform, okay, But I think there's a real opportunity for bottom fishing now and over the next several years.
So speaking of cheap Scott, the last time you've joined us, and you've been kind enough to give us your time over the last six months or so preparing for what you've called an epic opportunity last year, both from the gain side and the pain side. I think that we've talked about office buildings here in New York going as cheap as twenty five cents on the dollar. I know
it's very regional. What are our buildings, are properties loans starting to trade, and what our valuation is looking coming in as so far in the first wave of this well.
Again, it goes market by market. But you know, particularly for absolute office buildings or going to be minus office buildings, the big talk in the industry is to convert. If you look at Manhattan as example, too much office space, too little residential. You know, it's too expensive to live here and there's too much office space. And the notion is that some of these buildings are going to be converted from office to residential. That is a very tall order you're.
Going to do right, like you just don't like flip a switch and say bye.
Right.
And because light and elevators are the too big light access and elevators are the big issues. The floor plates on office buildings tend to be too big to be laid out really well for apartment Interestingly, the older office buildings, which have smaller floor plates are easier to adapt. But we did one through PTM in Washington, d C. It's not easy to do, and I think it's really kind of overblown in terms of how big an opportunity that is.
The Other thing I would say, just in terms of converting, is it's going to take a lot of public private cooperation to make that happen. The economics in terms of tax breaks, help and financing. You know, governments are going to have to find a way to get these buildings viable, and it's going to mean working with the private sector in a way that might appear to some to be too generous to the private sector.
But so in terms of those values though, and understanding that it is market by market, region by region. If you had to put just a spectrum on it, twenty five cents if that's New York City, but if you are you able to say some sort of average, just to give our listeners an idea of how painful it is and could be.
Well, I think previous less than half. And you know you're going to see things that go for buildings that in their current use can barely pay their property taxes. So you know you're going to see it values at a at a low But but again, is it good value even if it appears cheap.
Sale?
We're not closed, but doledge, there's a few properties buildings out there pretty.
When my mortgage rate is three year percent or lower.
So I'm not your target audience.
So do you prefer to buy the actual real estate itself or the mortgage behind it?
It is really deal by I think you have to be flexible because you've got to deal usually with the senior lender with a refinancing UH package and with squeezing out the equity, partnering with the equity, cramming down the equity that the structure needs to be I think typically up in the capital structure, so either buying the real estate if the senior lender you know, wants to go through the FOK and just sell the real estate, or
coming into a structured alternative. But I think importantly our perspective is that we have to be able to get control of the operations of the real estate because again, particularly through this syndicator model, a lot of people that really didn't know what they were doing, that would never would have passed the muster for institutional real estate capital, got into the business and they're the ones that are in the deepest trouble.
So because of people like you, though, that can do that homework and then step in, will there not be a gigantic commercial real estate crisis. It's just going to be like years of sussing out this stuff and finding the right price.
Yes, I think there will be years of.
But nothing disastrous.
Well, it will be disastrous for the people to get wiped out, you know what I mean, whether that happens overnight or over a period of a couple of years, a lot of these people are going to get wiped out. And you know, I think, I think it a disaster for some is an opportunity for others.
And speaking of disaster, Scott, when you joined us in August, you alluded to the idea that the regional banking that there could be some kind of a banking crisis worse than what people were anticipating in lo and behold the second most popular article on the Blueberg terminal Today, dozens of banks rapidly piled up commercial property loans. Speak to us about the regulation and what you see ahead here.
Well, I think, interestingly, the big banks aren't that exposed to commercial real estate. If you look at JP Morgan, Goldman, Sachs, Morgan, Stanley. We've done the analysis on those banks and there I think they've learned their lessons and they're not that exposed to commercial real estate. The middle sized banks a little bit more so. It's the smaller banks that have an inordinate concentration of commercial real estate loans. And I think part of the reason was that there was very little
commercial loan demand during COVID. People weren't starting new businesses. They weren't you opening new restaurants and stores, and the sort of bread and butter business of a smaller bank didn't really exist. So they poured a lot of money into real estate, and they did so with floating rate debt. Although everybody's against their cap. The floating rate debt pretty much with very short maturities, So that's the big refinancing wave that's hitting these smaller in regional banks.
All right, thanks so much, really appreciate you guys. Scott Kelly, founder and CEO of ATOS Capital real Estate, and Abigail thank you so much, Bloomer correspondent for bringing us this interview.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
We're gonna talk about Cisco. Do you have a tidbit thing?
Did you just remember this is Cisco with a C, not Cisco with an ass the food services and distribution company whose trucks are always ahead of me in the Lincoln Tunnel, slowing my commute.
That Cisco is also quite interesting. They have a huge, huge business model. It's enormous. It's like a company. I want to get in there and figure out what's going.
So if you like a particular restaurant and see a Cisco with an S truck parked out front, they have the food services company? Does that mean the fund is tablecloths, all the things, but also like prepared foods, don't they?
But like I think they're real businesses like tables and silverware and the stuff. The guts. Okay, see we got something there. Let's go to Cisco though, the one with the sea that's stock down about two percent, it's it's off its lows though. Let's bring in a woojin Ho. He's Boomberg Intelligence senior technology analysts to break it all down.
Wujin Is did anything really surprise you with Cisco? Like, in some ways we knew the environment was going to be soft, We knew they were going to have to integrate a takeover and that was going to have some churn. What was a big standout?
Well, I think you're you're right there, Alex. I think the after the job loss leak or job cuts leak from last quarter, I think there were expectations that there were going to be cut the estimates, uh, you know, and you know quite quite frankly, the big standout for me was that the cuts were big enough, you know, five percent op x cuts. That's part of the course
for what Cisco typically does. But at the end of the day, I mean, given the stock reaction based on reports, it looks like there were a lot of a lot of this was expected, you.
Know, which I followed the Cisco name for decades. I mean, it's one of the founding Silicon Valley tech names based in San joseric smack in the middle, you know, Silicon Valley. What are they not getting right here? The stock hasn't worked for a long time, and it just what from your perspective, what are they just missing here?
Well, let's let's talk about large cap stocks in general, right, If we if we think about the big bangs, right, or let's say Microsoft, the the old tech guard, Microsoft, Google, right, they all really lead on a cloud software transition. If we think about it from the hardware old guard, Cisco, Dell, HPE or the old HP. There's still relatively a hardware business, so you're not going to get the fast, sexy growth
from the hard hardware business. I mean, if you look at Cisco, you know, after the estimate cuts fifty two billion for fiscal twenty four, that brings them back to twenty twenty four levels, right, So you're not getting the growth that people want, and also you're not getting the margin profiles that you want as well. So that's why the multiples are lower and the growth is shallower.
So has the stock then rerated for that? I mean from what we say, we kind of knew that was coming. So are we at a right level right valuation for it?
Yeah?
So if I look at the historical evaluation for for Cisco, it's trading around thirteen times right now. GO typically trades roughly around fifteen to seventeen times, so it was it was priced to be cut right now. Now, the question is what does the pending Splunk deal do and does
that help reinvigorate growth. Now, what I will say is that estimates, consensus estimates probably won't bake in this Splunk deal, which adds about another eight percent on sales, neutral to earnings their term, but it could spark earnings growth if they start bringing op x or operating margins for Splunk more in line to where Cisco is today.
So you know it's alex I mean over the last five years, I'm using the comp function comp which is one of Matt Miller's favorite functions. So over the last five years, this stock has compounded three percent per year, Cisco s and P five and fourteen and a half percent, the S and P information technology sector twenty six percent. So it's really really underperformed going forward, which I guess
over the next several quarters. What what Cisco's saying about their customers and inventory and you know what are they I mean cutting this forecast suggests that they don't have a lot of great visibility here.
Yeah, so if you remember the server and storage cycle from a year ago, Cisco is going through that right now. Part of it is because of the supply chain glut all of a sudden, Their customers got their equipment two quarters ago and they're taking their time implementing it. So you know, typical cycles are roughly five to six quarters.
I was running through the numbers and we're talking about anywhere between twenty seven to thirty percent declines for the next two to three quarters for Cisco, and they're probably not going to get out of it and return to growth until I'm sorry for the networking business, not sales for the networking business, but I don't think they won't get out of this decline until the second half of fiscal year, which is about a year from now.
Right.
So yeah, again, the model is going to be reworked, primarily because of the this Plunk deal, and the hope is is that they're going to have more recurring revenues UH to boost up the multiples going forward.
Right, So subscription is basically rather than just here's your bit of hardware, see you guys later, where's the AI component?
For Cisco, I will tell you they're making a lot of good progress and they had a billion dollars in bookings in black black orders with Cloud customers, and uh. The issue is is that that only represents two percent of total orders, right, so it's still relatively small. It is going to be growing, and they're probably going to bang the drum louder to the on on the AI on the AI theme over the next couple of quarters as these deals really start to balloon. The one thing
is again, it's it's still a corporate IT name. If I were to pick, if I may, if I were to pick one AI name on the networking side, it's probably going to be more Arista than Cisco for now.
So again, is there a way which is broadly defined on the hardware side, have investors embraced any of the hardware names as AI plays? Is it? Because it just doesn't feel like it. It feels like what I'm hearing from you know, a lot of your folks on the tech team of Bloomberg Intelligence. It's kind of software applications, that kind of thing.
Yeah, so so so I can name four yep, right, Arista Networks, Right, if you look at that stock that's been up eighty eighty eight percent, super Micro that's been up eight hundred and forty six percent over the past year, right, and Dell that's been up ten percent. There's and they reported in a couple of weeks there's a growing AI story there and one name that's been underappreciated is probably HPE.
They have a supercomputing business, high performance computing business. But the story is a little muddled because of a pending Juniper deal. And then there's you know, my my colleague Steve saying he covers the white box vendors, and there's some white box vendors that may potentially benefit from the from because they sell server equipment to the cloud guys.
So you were saying that the AI stuff growing about two percent a year kind of thing. Is that considered good when you obviously compared to a different kind of company like and Video, it's not. But for Cisco in this area, would that be good?
It's two percent of total sales, Okay, right, I suspect that's those that sales rate could potentially grow well into the double digits over the next couple of years.
Uh.
They are one of the arms players for AI. And you've had me on the show before. We've had this conversation, a technology conversation between Ethernet and infinite band. You're going to start seeing this burgeoning shift from Nvidia's infinite band technology to an open standard called Ethernet, and that's where Cisco is going to benefit over the next several years.
Okay, So short term, what's next, like, what are us interested in? It's going to be this plunk like acquisition and getting that done, and how that's going to be merged exactly.
I mean, look, it's probably well. First of all, I think that earnings cuts may have bottomed earnings a bottom from here. The next thing I need to do is fold in the bunk estimates when once they announce that deal and then and just keep track of where it spending is as a relative to Cisco, as well as keep track of where the AI story goes. Right, they had had a couple of nice announcements. We just need more and start to see it in the numbers in fiscal twenty five.
All right, Booch, thanks a lot, really appreciate it. Ushinho joining us from Bloomberg Intelligence.
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