A Merger of Equals
Given the current turn of events, it was a pretty good week for the stock market. Two of the three U.S. indexes finished higher with the exception being the Nasdaq, which has gotten pretty far ahead of itself this year. Earnings announcements have mostly been in-line with a large percent of companies meeting lowered expectations. What drove markets this week, as has been the case recently, is corporate guidance and news on the vaccine front. The latter has been mostly optimistic with many trials ahead of schedule, while the former can only be described as uncertainty bordering on despair.
One example of corporate guidance bringing down a stock is Netflix which prior to today had been up 69% this year. There's no question that the pandemic and the extra time at home that's resulted from it has been a tailwind for Netflix. It added 10.1 million subscribers in the quarter, its best-ever result for a second quarter. In this case, while Netflix did grow its subscriber base substantially, management quite reasonably believes it pulled subscribers forward from future quarters and said so much on the conference call. As is often the case, when a CEO says something perceived as negative, even if there is justification, investors head for the door. On this news the stock traded down as much as 12% in after hours, before closing down today almost 7%. It all comes down to expectations.
In other news, we learned that we’re one step closer to returning to supersonic travel. A newcomer to the space, Boom Supersonic, built a supersonic prototype in only six years and looks to demonstrate it to the public this October. The plane seats 55 passengers reaching a cruising speed of Mach 2.2, and use alternative fuels. The company expects to begin service next year and anticipates pricing the tickets for a quarter the price of a Concorde ticket, or about the same price you’d pay in business class. While I’m sure the company has many hurdles yet to overcome, I for one hope it succeeds.
For those of you on a health kick, cauliflower rice has been a staple for some time. Hoping to bring this to the masses is Chipotle, who is testing this healthier option in Denver and Wisconsin. Chipotle says a serving of the cauliflower rice has 4g net carbs, versus 45g in traditional white rice.
As for airlines, it goes without saying they’ve been in a world of hurt the past five months. Delta has been among the most successful in reducing costs, only burning through $25 million in cash per day. It had been rumored for some time that airlines were planning on cutting headcount by the tens of thousands this fall. Delta announced this week that it may be able to avoid involuntary furloughs after receiving indications of interest from more than 15,000 employees for early buyout packages. This is one industry that has a long road to recovery.
In closing I bring the last bit of company news which might leave you shaking your head. Speaking of struggling companies, Fiat, who merged with Chrysler in 2014, will now be merging with Peugeot. I guess if a merger between two weak companies doesn’t work, try merging with a third weak company? If all goes as planned, the deal will be completed early next year, and the company will be renamed Stellantis which means “to brighten with stars” in Latin. This merger will create the world’s fourth largest car maker by volume and should result in cost savings of $4 billion annually. Now you know.
Bruce J. Mason, MBA