Weekly Brief #35
Analysis on an underlooked stock...Eli Lilly acquires Morphic Holding, Boeing pleads guilty to fraud, BMW recalls 400,000+ cars, TSMC becomes a $1 trillion company, French parliament elections (cont).
Good morning investors 👋,
Happy Friday and welcome, or welcome back, to the 35th Weekly Brief.
Some of this week’s highlights: Costco raised its membership by $5 for the first time in over 7 years, the Samsung Galaxy Unpacked event announced five new products with a nearly identical-looking design to the Apple counterparts, and George Clooney said Joe Biden should quit the presidential race.
Let’s get into it.
In this issue:
🖥️ Ever heard of CDW?
🛩️ Boeing pleads guilty to fraud
🇫🇷 French parliament elections (cont)
FEATURED STORY
🖥️ Ever heard of CDW?
I personally hadn’t heard of CDW before this week. But as the week ends, it ends with the stock added to my watchlist, and I thought I’d share why I did that and why I believe the company is an underlooked, fundamentally great business. I don’t know much about the company, but I spent about an hour of my free time looking into some things, and those things are what I’ll be sharing today.
What the hell is CDW?
CDW, or CDW Corporation, is a provider of technology products and services for business, government, education, and healthcare customers. (Don’t worry, I’m not going to leave the explanation at that because that’s a very corporate definition.) In simple terms, CDW provides IT services and sells electronics and licensed software to schools, governments, hospitals, and other businesses.
CDW’s revenue is broken down as follows:
Corporate: 41.9%
This segment provides IT services to large and medium-sized businesses. It includes hardware and software sales along with a variety of services designed to support the technology infrastructure of companies.
Public: 38.8%
This segment offers the same services as the ‘Corporate’ segment but applies them to government agencies, educational institutions, and healthcare organizations.
UK and Canada (Other): 12.0%
This segment provides the same services as the ‘Corporate’ and ‘Public’ segments but to customers in countries outside the United States, specifically the UK and Canada.
Small Business: 7.3%
This segment is essentially a copy and paste of the ‘Corporate’ segment but is tailored for smaller businesses with lower technology and IT budgets, which results in lower revenue per customer. (Which is why this segment is CDW’s lowest revenue contributor.)
It’s much easier to understand what a company does by explaining it through a hypothetical scenario (at least in my opinion). So, here’s a rough overview of what CDW does:
Let’s say I want to start a law firm (I’ve been watching Suits, don’t hold it against me). This law firm will need some sort of technology to run things. I need laptops, PCs, and some sort of legal software. (“Nicholas & Partners Ltd.” is the name of the firm, by the way. This name is irrelevant throughout this explanation, but it adds some jazz to the scenario, so I needed to mention it.)
I look around online and find out that CDW is able to help me with what I need. So, I call CDW and inquire about their services. CDW convinces me successfully, and I decide to use their services.
CDW sells me the hardware I need (laptops, PCs), the software I need, and IT services to help me with future concerns related to what they sold me. Like a retailer, CDW buys laptops and PCs at wholesale prices from manufacturers like Apple and Lenovo, licenses software from companies like Clio and Microsoft, and sells these products to businesses, governments, and schools etc. As an added bonus, CDW provides IT services to assist with any future issues.
It’s a pretty great business model on the surface. Companies will always need what CDW sells, and CDW can sell it all at once. The hardware you need, the software you need, and the services you need to fix any future issues you have with the hardware or software. (And remember, most of CDW’s customers are businesses, which means there’s a high likelihood that customers are buying a bundle of services and products from CDW at once.)
Fundamentally great
Over the past five years, and even the past decade, CDW has experienced significant growth. Every major fundamental aspect of the company — revenue, earnings, and free cash flow (FCF)1 — has grown year-over-year.
Here are some of CDW’s metrics (in the past 5 years, unless not applicable):
Stock CAGR2 of 18.52% (S&P 500 was 17.06%)
ROCE3 of 21.43%
Annual revenue growth: 5.65%
Annual earnings growth: 11.42% (14.02% on a per-share basis)
Annual FCF growth: 12.09% (14.68% on a per-share basis)
Dividend increased: 64.16%
Shares outstanding decreased (buybacks): 7.79%
These are some amazing metrics. Definitely not “outstanding,” but a greatly growing company with a decent business model based on my rough research.
CDW has been struggling with declines in revenue in the past few quarters, which has led to a 13% drop in the stock price from its high in February of this year. However, according to analysts, the company is still expected to continue growing revenue at 6%, and earnings at 12% in the next few years, so this revenue decline is probably short term. Overall, I thought I’d share this new add to my watchlist. I’ll be looking into the company more over the next few months.
FINANCE
📟 TSMC becomes a $1 trillion company
The Taiwan Semiconductor Manufacturing Company (TSMC) briefly surpassed a $1 trillion market cap on Monday after its shares on the New York Stock Exchange rose 4.8%, pushing the stock up over 80% year-to-date.
Nvidia’s success in artificial intelligence has boosted its suppliers’ stock prices, including TSMC, which produces advanced chips crucial for Nvidia. ASML, TSMC's equipment supplier, also benefited from the hype surrounding Nvidia. Both companies are expected to continue on an upward trajectory as demand for advanced chips remains strong due to the AI craze.
💊 Eli Lilly acquires Morphic Holding
This week, Eli Lilly agreed to buy biotech Morphic Holding for $3.2 billion in cash to ‘enhance its portfolio of inflammatory bowel disease (IBD) drugs.’ Morphic’s shares rose nearly 75% to $55.62 following Lilly’s offer of $57 per share, a 79% premium to the last closing price.
This acquisition includes an experimental oral IBD treatment, providing a more convenient dosing option compared to injectable therapies like Lilly’s Omvoh. The deal is expected to close in the third quarter of 2024 and aligns with Lilly’s strategy to diversify beyond obesity treatments.
BUSINESS
🛩️ Boeing pleads guilty to fraud
Boeing has agreed to plead guilty to a criminal fraud conspiracy charge and pay a $243.6 million fine to resolve a U.S. Justice Department investigation into two 737 MAX crashes. This deal will brand Boeing as a convicted felon for the crashes in Indonesia and Ethiopia in 2018 and 2019. Crashes that killed 346 people.
The deal also includes spending at least $455 million over the next three years on safety and compliance programs, meeting with crash victims’ families, and being overseen by an independent monitor. Lawyers for some victims’ families plan to tell the judge in charge of the case to reject the deal, calling it a “slap on the wrist.” (Which is true, as this fine is not even 1/4 of Boeing’s annual free cash flow.) The plea agreement will be finalized in Texas federal court by July 19, 2024.
🚙 BMW recalls 400,000 cars
BMW is recalling a whopping 394,000 vehicles in the U.S. and 44,131 in Canada due to faulty airbag inflators. The faulty inflators are made by a company called Takata, which filed for bankruptcy in 2017. Owners can take their vehicles to dealers for inspection and replacement if needed, said BMW.
According to the National Highway Traffic Safety Administration, the airbag inflators can explode, sending sharp metal fragments flying through the air. The issue affects airbag inflators that were previously recalled, but vehicles might have received a replacement steering wheel with an affected airbag as well. The recall involves BMW 1 and 3 Series vehicles (2005-2012) and X3 and X5 models (2005-2016). The J. Nicholas Vroomsday Counter is now at 7.22 million.
What is the vroomsday counter? Vroomsday is doomsday but for car recalls. The vroomsday counter is the total of all cars mentioned in recalls since the inception of the J. Nicholas newsletter.
POLITICS
🇫🇷 French parliament election (cont)
The second round of France’s parliamentary elections ended on Tuesday. The result? Well, there was no result. No party or coalition secured the 289 seats needed for an absolute majority in the National Assembly. To break the deadlock, coalition talks are being considered, hopefully before the presidential election.
The New Popular Front alliance led with 188 seats, followed by President Emmanuel Macron’s centrist Ensemble alliance with 161 seats. The National Rally finished third with 142 seats and is the largest single party. The next part of the French election is dated for July 18, when the National Assembly will elect the president of France.
🇷🇺 Russia’s uncovered assassination plot
American intelligence agencies this week uncovered a Russian plot to assassinate Armin Papperger, the CEO of German weapons manufacturer Rheinmetall, a company selling weapons to Ukraine, amid efforts by Moscow to cut off support for Ukraine.
As soon as they found out, the U.S. alerted Germany, prompting increased security for Papperger, whose company supplies Ukraine with artillery and tanks. NATO and U.S. officials condemned Russia’s tactics but declined to share many details of what the plot consisted of.
📚 Book of the Week
Note: I don’t recommend books that I haven’t read or that I would never read. The books I recommend are books I have already read or that I will eventually read.
The House of Morgan — Ron Chernow
Book Description:
Published to critical acclaim twenty years ago, and now considered a classic, The House of Morgan is the most ambitious history ever written about American finance. It is a rich, panoramic story of four generations of Morgans and the powerful, secretive firms they spawned, ones that would transform the modern financial world.
Tracing the trajectory of J. P. Morgan’s empire from its obscure beginnings in Victorian London to the financial crisis of 1987, acclaimed author Ron Chernow paints a fascinating portrait of the family’s private saga and the rarefied world of the American and British elite in which they moved a world that included Charles Lindbergh, Henry Ford, Franklin Roosevelt, Nancy Astor, and Winston Churchill.
A masterpiece of financial history, it was awarded the 1990 National Book Award for Nonfiction and selected by the Modern Library as one of the 100 Best Nonfiction Books of the Twentieth Century The House of Morgan is a compelling account of a remarkable institution and the men who ran it, and an essential book for understanding the money and power behind the major historical events of the last 150 years.
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— Jacob
Free cash flow (FCF): the money left over to shareholders after subtracting a business’s operating income by its capital expenditures.
Compound annual growth rate (CAGR): a metric to determine how much a stock’s price has returned every year over a certain period of time. (CAGR can also be used to determine revenue growth, profit growth, etc.)
Return on capital employed (ROCE): a financial ratio that is used to measure the profitability of a company and the efficiency with which it uses its capital. Put simply, it measures how good a business is at generating profits from your money.