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Micron’s Capital Spending Growth Overshadows Booming Sales · Bloomberg Intelligence

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  Speaker 2: One of the socks we've been talking about today, Micron
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  Speaker 2: Technology sales numbers really impressive. I think some folks are
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  Speaker 2: concerned about some of the spending that Micron was talking
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  Speaker 2: about on their earnings conference call. So let's get right
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  Speaker 2: to it. The stock is down three percent today, but
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  Speaker 2: it is just been a really strong performer over the
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  Speaker 2: last periods. Let's check in with somebody who does this
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  Speaker 2: stuff for a living. Jake Silverman, Bloomberg Intelligence Semiconductor analyst. Jake,
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  Speaker 2: what was your takeaway from Micron's earnings?
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  Speaker 3: Yeah? Thanks, I would say that I actually think it's
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  Speaker 3: not really the spending that is concerning investors. I think
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  Speaker 3: really what's going on with Micron is more so focus
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  Speaker 3: on where the cycle is at. We've seen now a
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  Speaker 3: couple of quarters of very aggressive price increases. For the
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  Speaker 3: May quartermanded quarter, We're going to see continued very strong
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  Speaker 3: double digit price and growth. And so what I really
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  Speaker 3: think is on the top of investors' minds is when
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  Speaker 3: does this cycle and how sustainable are these margins Because
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  Speaker 3: if I think about capex, just because capex is increasing,
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  Speaker 3: they need to increase capex in order to meet the
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  Speaker 3: high levels of demand because there's still a very strong
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  Speaker 3: supply and demand imbalance that we're seeing. So AI is
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  Speaker 3: really the major driver for that. It's the major tail
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  Speaker 3: and if they're unable to match spending, then they're not
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  Speaker 3: going to be able to meet the demand of their customers.
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  Speaker 4: Has the company shed any light on how high they
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  Speaker 4: think memory chip prices will go or at least stay,
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  Speaker 4: because this has huge group percussions for manufacturers of laptops
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  Speaker 4: and everything else that needs memory chips because all the
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  Speaker 4: memory chip makers are to is he putting together a
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  Speaker 4: high bandwid memory chips.
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  Speaker 3: Yeah, they don't really give a lot of details in
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  Speaker 3: terms of what their view on pricing is. Ultimately, our
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  Speaker 3: take is more so that we're probably going to see
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  Speaker 3: the peak of the pricing increases on a quarter to
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  Speaker 3: quarter basis. That doesn't mean that pricing won't continue to
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  Speaker 3: increase at a somewhat more modest rate. But going back
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  Speaker 3: to actually what I was talking about earlier with capital spending,
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  Speaker 3: the ability to actually increase supply is going to be
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  Speaker 3: a really important factor here, both in terms of actually
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  Speaker 3: how pricing moves around right higher or lower. But because
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  Speaker 3: there's actually a constraint in the ability to put up
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  Speaker 3: additional clean room space, new fab space, there's not going
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  Speaker 3: to be a lot of additional supply in the next
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  Speaker 3: twelve to fifteen months or until the next twelve to
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  Speaker 3: fifteen months. So as a result, we think pricing still
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  Speaker 3: has a few more legs to go again, it's really
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  Speaker 3: just more and so that we think pricing on a
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  Speaker 3: sequential basis, on a monthly basis, quarterly basis, will be
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  Speaker 3: a lot more modest in terms of the increases than
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  Speaker 3: what we've seen before.
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  Speaker 2: Jake, who does Micron really compete against day to day
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  Speaker 2: today and then in a couple of years going forward.
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  Speaker 2: Is it the in videos of the world. Who do
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  Speaker 2: they really compete against?
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  Speaker 3: No, in videos they're one of their biggest customers, but
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  Speaker 3: I think it was their biggest customer last quarter, and
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  Speaker 3: a lot of that for as you mentioned high bandwidth memory,
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  Speaker 3: really their competition is Samsung. It's s k Heinex, and
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  Speaker 3: then some extent sand Disc, Although DRAM is becoming an
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  Speaker 3: increasingly large portion of their business, of sand Disc really
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  Speaker 3: only competes with about twenty percent of their business.
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  Speaker 4: So in that regard, Micron has a lot of pricing power.
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  Speaker 4: What advantages does Micron offer over a Samsung or an
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  Speaker 4: s k Heinex.
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  Speaker 3: Well, I'd say that advantages are tough because they build
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  Speaker 3: to spec for the jed X standard. Micron they do
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  Speaker 3: also build to in video specs for high bandwidth memory.
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  Speaker 3: One of the things though, to keep in mind is
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  Speaker 3: that the memory market, as I was talking about the
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  Speaker 3: cycle before, it's very cyclical. So really the key here
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  Speaker 3: is how much cost can they what's the better cost
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  Speaker 3: profile that they can drive relative to their competition, while
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  Speaker 3: also maintaining that R and D spend to keep up
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  Speaker 3: with the increasing demand of their customers, in Nvidia being
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  Speaker 3: one of them, but also a lot of other hyperscalers
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  Speaker 3: who need high bandwidth memory HBM three E but now
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  Speaker 3: we're moving to HBM force. Those standards keep going up,
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  Speaker 3: so their ability to compete on cost, their ability to
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  Speaker 3: compete on things like pin speed that help with bandwidth,
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  Speaker 3: their ability to compete with lower power consumption for their products.
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  Speaker 3: Those are really the keys. But again it is somewhat
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  Speaker 3: commodity like market for the products that aren't high bandwidth memory,
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  Speaker 3: so it really is competing on costs and the economics
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  Speaker 3: of their business.
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  Speaker 2: Hey, Jake, about thirty seconds left here. I'm just looking
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  Speaker 2: at your research and note customer agreements are now extending
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  Speaker 2: out up to five years in some cases. That seems
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  Speaker 2: really long.
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  Speaker 3: Talk to us about that, Yeah, very unprecedent. The company
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  Speaker 3: hasn't given us a lot of details. There's not really
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  Speaker 3: a lot to say unfortunately right now. But it does
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  Speaker 3: seem like these agreements are different than the ltas we
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  Speaker 3: saw just a few years ago during the last downturn
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  Speaker 3: or upcycle that ended up in the downturn. As things
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  Speaker 3: tend to go with Micron. So really, what I would
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  Speaker 3: say is that this may be something that could produce
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  Speaker 3: some of the cyclicality going forward. We don't expect all
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  Speaker 3: agreements to go out five years. Some might go one year,
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  Speaker 3: two year, three years. It's going to vary a lot
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  Speaker 3: by the customers to volume what the products they're requiring are.
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  Speaker 3: Stay with us.
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  Speaker 4: More from Bloomberg Intelligence coming up after.
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  Speaker 2: We still got a lot of companies reporting here. Now
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  Speaker 2: we're starting to hear from a lot of the restaurant companies.
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  Speaker 2: Dardan's coming up here, so we want to check out
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  Speaker 2: with Michael Halen. Michael Halen, he covers all the restaurant
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  Speaker 2: companies for Bloomberg Intelligency space down there in Princeton. One
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  Speaker 2: of the big ones darted, I think, is about the
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  Speaker 2: report here, mister Haylein's what are you looking for there?
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  Speaker 4: Mike?
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  Speaker 5: Yeah. Darden reported this morning. It was it was a
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  Speaker 5: strong quarter on the top line. So despite all of
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  Speaker 5: the fold weather and snow they had mentioned, you know,
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  Speaker 5: fort of their stores had been closed at some point
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  Speaker 5: during the quarter. Despite all that, they still were able
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  Speaker 5: to put up four percent seamstre sales comp The problem
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  Speaker 5: with the with the report was that they missed on
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  Speaker 5: the bottom line. So despite all of you know, the
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  Speaker 5: traffic they were able to drive into their stores. You know,
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  Speaker 5: they didn't really see the operational leverage from it. Right,
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  Speaker 5: Beef prices were a big headwind obviously in the quarter
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  Speaker 5: for Longhorn, which is which is their second largest chain.
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  Speaker 4: So how is the company planning to tackle that? Because
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  Speaker 4: I'm not sure that beef prices are going to come
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  Speaker 4: down anytime soon. This is going to be a assistant
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  Speaker 4: costs headwind for them.
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  Speaker 5: Well, you know, the entire commodity complex is starting to
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  Speaker 5: become a real concern for these restaurant chains, and that's
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  Speaker 5: why we've seen them kind of reverse their strong gains
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  Speaker 5: of the previous three months. But yeah, so what they're
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  Speaker 5: going to do is raise prices. And they feel that
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  Speaker 5: they can because they have not raised prices much over
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  Speaker 5: the you know, post pandemic period, right, so they've underpriced competitors,
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  Speaker 5: they've underpriced you know, food away from home inflation, right,
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  Speaker 5: So they think they have some room. But you know,
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  Speaker 5: if we continue to see you know, elevated gasoline prices,
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  Speaker 5: if we see a prolonged conflict in the Middle East,
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  Speaker 5: you know, it's really going to weigh on restaurants spending.
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  Speaker 5: So you know, we think they're going to have to
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  Speaker 5: be careful raising prices. But It's it's an interesting time
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  Speaker 5: right now. There's a lot of crosswinds, right, Like, you know,
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  Speaker 5: they are seeing people spend more when they get their
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  Speaker 5: refund checks. Refund checks are ten to eleven percent higher,
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  Speaker 5: right But unfortunately the spike and gas lean prices up
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  Speaker 5: thirty percent plus now in just a few weeks is
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  Speaker 5: going to eat into some of that spending, you know,
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  Speaker 5: excuse the pun, you know, and then just overall inflation
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  Speaker 5: is going to cause prices to go higher, which is
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  Speaker 5: not a good situation for you know, stacklation is not
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  Speaker 5: a good situation for restaurant consumers. We saw that in
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  Speaker 5: the stocks performances last year. Right When people's budgets get pinched,
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  Speaker 5: they spend less at restaurants, margins get squeezed for the restaurants.
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  Speaker 5: It's it's just a tough climate to operate.
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  Speaker 2: In, Mike. What are your companies telling me about labor,
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  Speaker 2: labor availability, sustainability, How's how's the labor side of the
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  Speaker 2: creation because that's a big part of their calls structure
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  Speaker 2: as well.
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  Speaker 5: Yeah, labor's been okay. There's a lot of the companies
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  Speaker 5: we cover are seeing a lot less turnover. Wage inflation's
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  Speaker 5: been you know, it looks like about three for some
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  Speaker 5: of the companies that have reported recently versus you know
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  Speaker 5: this four percent to five percent range that we've seen
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  Speaker 5: since about twenty twenty. So the labor piece of the
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  Speaker 5: equation has definitely improved a bit for the companies in
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  Speaker 5: our sector.
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  Speaker 4: What will you be listening for from the other restaurants
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  Speaker 4: that report? Are we going to see similar themes play
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  Speaker 4: out for them?
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  Speaker 5: Yeah? So Dardens is a little bit Darden's a little
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  Speaker 5: bit off cycle. So uh, They're are the first ones
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  Speaker 5: to report, you know, almost into this next cycle, right,
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  Speaker 5: so because their quarter ended late February, right, so they
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  Speaker 5: we have they're giving us an early read. So when
• 9:43
  Speaker 5: our other names report, right, we've gotten a feel for
• 9:50
  Speaker 5: what the first quarter was, and we think it will
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  Speaker 5: be as like stronger, pretty strong considering all of the
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  Speaker 5: winter weather, considering the snow, still putting up pretty solid
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  Speaker 5: same source sales, you know, over four percent here for Darden.
• 10:06
  Speaker 5: You know, a month ago, the question was you know,
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  Speaker 5: really about the top line and how you know and
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  Speaker 5: how much better things we're looking and how much people
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  Speaker 5: were going to be spending in their restaurants, how much
• 10:21
  Speaker 5: of those tax refund checks, we're going to get spent
• 10:23
  Speaker 5: at restaurants. But now I think the questions are going
• 10:26
  Speaker 5: to shift more to the margin side. Right, Like this,
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  Speaker 5: higher guess Lian prices mean commodias are higher for longer. Right,
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  Speaker 5: Stay with us.
• 10:35
  Speaker 4: More from Bloomberg Intelligence coming up after this.
• 10:40
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android
• 10:47
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• 10:50
  Speaker 1: you get your podcasts, or watch us live on YouTube.
• 10:55
  Speaker 4: All right, let's stay with this global theme because FedEx
• 10:58
  Speaker 4: reported results and clearly it's not just parometer for the
• 11:01
  Speaker 4: US economy, but really for the global economy at large.
• 11:04
  Speaker 4: Lee Cosco is our senior transport, logistics and shipping analysts,
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  Speaker 4: and he is joining us to give us a preview
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  Speaker 4: of what FedEx is likely to say. So FedEx, Lee,
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  Speaker 4: when it comes to FedEx, they have their own issues, right,
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  Speaker 4: They've been trying to turn things around, overhaul the business.
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  Speaker 4: How much of the results reflect that effort versus what's
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  Speaker 4: happening globally?
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  Speaker 6: Yeah, I mean, we all have our own issues, but
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  Speaker 6: FedEx certainly does have a number of them, and you know,
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  Speaker 6: they've been busy trying to restructure their European business and
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  Speaker 6: you know, they're kind of combining their ground and express
• 11:40
  Speaker 6: networks and they're kind of going through a transformation right now,
• 11:45
  Speaker 6: and they're really hoping that they'll come out of this
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  Speaker 6: transformation a more nimble parcel provider that can really take
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  Speaker 6: advantage of some of the strong B to B markets
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  Speaker 6: that they're going after and higher margin B two C
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  Speaker 6: business also as well. You know, volume looks like it's
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  Speaker 6: probably going to grow. During the earnings, We're not really
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  Speaker 6: expecting that much new news because they just had an
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  Speaker 6: investor day the other month, but we do expect to
• 12:09
  Speaker 6: get a lot more color about what's going on in
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  Speaker 6: the Middle East and how that's going to impact FedEx
• 12:14
  Speaker 6: and it's and it's business going forward. So that's what
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  Speaker 6: you know, I'm most interested to hear about. You know,
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  Speaker 6: the company, like I said, does have a large European operation.
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  Speaker 6: You know, the Middle East has become a huge hub
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  Speaker 6: for freight between Europe and Asia and that has been dislocated,
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  Speaker 6: uh and so they're obviously dealing with higher costs associated
• 12:36
  Speaker 6: with some of that business. There's lost volumes that will
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  Speaker 6: be involved because the area is not safe to fly into.
• 12:42
  Speaker 6: So we expect to get an update on how the
• 12:47
  Speaker 6: you know, the conflict the Middle East will unfold for
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  Speaker 6: carriers like a FedEx.
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  Speaker 2: So what's FedEx saying today about just the their business
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  Speaker 2: in general in terms of volumes and things like that.
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  Speaker 2: I mean, because it's such a bell weather for many
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  Speaker 2: parts of the economy, as you well know what a
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  Speaker 2: saying just about core fundamental business trends.
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  Speaker 6: Yeah, so you know, FedEx has two main businesses. The
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  Speaker 6: business that we all probably know when you get something
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  Speaker 6: at your doorstep, you know, letters going to lawyer's offices,
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  Speaker 6: and they also have a less than truckload business. They're
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  Speaker 6: the largest LTL carrier in the United States. They're actually
• 13:23
  Speaker 6: planning to spin that business. I would spin that out there.
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  Speaker 6: They are spinning that out. We're they're doing an analyst
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  Speaker 6: day next month. We're excited to attend that and find
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  Speaker 6: out more. But you know, that business has been suffering
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  Speaker 6: significantly because of the weak industrial economy. I don't need
• 13:39
  Speaker 6: to tell you the ism has been a contraction territory
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  Speaker 6: a lot more than an expansion territory over the last
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  Speaker 6: two and a half years, and that's really weighing on
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  Speaker 6: that business. But you know, looking pivoting towards you know,
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  Speaker 6: they're a larger business, their parcel business. That business has
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  Speaker 6: been okay, it's growing, Volumes are growing by load of
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  Speaker 6: mid single digits. They're getting pricing and load of mid
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  Speaker 6: single digits. The problem that they're facing right now is costs,
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  Speaker 6: and they're trying to you know, kind of if you will,
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  Speaker 6: reduce their overall cost curve to help, you know, drive
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  Speaker 6: better margins going forward. And some of the things that
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  Speaker 6: you know I kind of alluded to earlier, you know,
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  Speaker 6: whether it's restructuring their air network, whether it's combining their
• 14:18
  Speaker 6: ground and air network, these things will benefit the company
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  Speaker 6: a in a better demand environment globally, and B it's
• 14:27
  Speaker 6: going to take time for those benefits to come down
• 14:30
  Speaker 6: to the bottom line.
• 14:32
  Speaker 4: So Lee, we have FedEx reporting and then UPS will
• 14:36
  Speaker 4: report probably in about another five weeks or so. How
• 14:40
  Speaker 4: much of what FedEx tells us, especially when it relates
• 14:42
  Speaker 4: to global trends, can be applied to UPS, I.
• 14:47
  Speaker 6: Think a lot. You know, they're both very very similar,
• 14:50
  Speaker 6: they're both going after similar growth businesses. They both want
• 14:53
  Speaker 6: to get more into healthcare logistics, which just tends to
• 14:56
  Speaker 6: be more profitable. They obviously have their fa anger on
• 15:00
  Speaker 6: the pulse of the consumer. UPS is tied to a
• 15:05
  Speaker 6: little more to companies like Amazon. You know, they are
• 15:08
  Speaker 6: trying to wind down that business, but you know they're
• 15:11
  Speaker 6: more tied to it. There are some differences, but I
• 15:13
  Speaker 6: think there's more similarities than there are differences about you know,
• 15:16
  Speaker 6: what it's going to tell us about the overall economy.
• 15:18
  Speaker 1: Stay with us.
• 15:19
  Speaker 2: More from Bloomberg Intelligence coming up after this.
• 15:25
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android
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• 15:35
  Speaker 1: you get your podcasts, or watch us live on YouTube.
• 15:40
  Speaker 4: We had a fad day yesterday.
• 15:42
  Speaker 7: We did.
• 15:42
  Speaker 2: Yeah, I mean, in all the news flow, it kind
• 15:44
  Speaker 2: of gets dround out.
• 15:45
  Speaker 4: A little bit. Yeah, And you know, coming into this,
• 15:47
  Speaker 4: I was just talking with Michael McKee. He was saying
• 15:48
  Speaker 4: that for the most part he didn't think it would
• 15:50
  Speaker 4: be anything big, you know, a couple of weeks ago.
• 15:52
  Speaker 4: Certainly we didn't think it would be anything big, but
• 15:54
  Speaker 4: some news was made. Certainly j Pal making clear that
• 15:58
  Speaker 4: he is in no rush or the committee and no
• 16:00
  Speaker 4: rush to cut interest rates. Ira Jersey is our Bloomberg
• 16:03
  Speaker 4: Intelligence Chief US interest rate Strategies. He talks to us
• 16:06
  Speaker 4: about the FED, about the economy, about rates and where
• 16:09
  Speaker 4: they're headed. What surprised you the most from yesterday's news conference.
• 16:13
  Speaker 7: That it was probably the least important of the seventeenth
• 16:16
  Speaker 7: central bank meetings this week. That's you know, the Bank
• 16:21
  Speaker 7: of England meeting obviously is what's really royal the rates
• 16:24
  Speaker 7: market today. Yeah, So I don't know if it was surprising,
• 16:27
  Speaker 7: but I think the clarity that you know, Jay Powell
• 16:30
  Speaker 7: said that he intends on staying on until Kevin Moorsh
• 16:33
  Speaker 7: is confirmed by the Senate. I think that that was
• 16:36
  Speaker 7: something that you know, most people we had speculated about,
• 16:39
  Speaker 7: but he can. You know, the fact that he confirmed
• 16:41
  Speaker 7: that I think is important. Will that have an effect
• 16:44
  Speaker 7: on you know, President Trump and how what's his reaction
• 16:48
  Speaker 7: going to be to that? I think is a an
• 16:51
  Speaker 7: open question and clearly there's going to be a lot
• 16:54
  Speaker 7: of debate about it. And then the other is his
• 16:57
  Speaker 7: comment and which really is what to set the markets?
• 16:59
  Speaker 7: So saying that basically oil was going to determine whether
• 17:03
  Speaker 7: or not they cut interest rates again, right, if oil
• 17:05
  Speaker 7: prices continued to go higher, that they probably wouldn't wouldn't
• 17:09
  Speaker 7: cut again. And that's that's where you saw the bear
• 17:12
  Speaker 7: steepening the yield curve, so two year yields going up
• 17:14
  Speaker 7: much faster than longer maturity debt.
• 17:16
  Speaker 2: You mentioned the Bank of England is the call there
• 17:18
  Speaker 2: ire that they held rates the same, but they said, hey,
• 17:22
  Speaker 2: we'll raise them if inflation gets warrant.
• 17:24
  Speaker 7: Well, they basically implied fifty bases points of interest rate hikes,
• 17:27
  Speaker 7: which you know, the market was pricing in for some
• 17:30
  Speaker 7: chance of n interest rate hike over the next twelve
• 17:32
  Speaker 7: months or so, but two really set the market off.
• 17:35
  Speaker 7: That's why you know, currently the two year two year
• 17:40
  Speaker 7: guilt so two year GBP bonds are hired by about
• 17:44
  Speaker 7: thirty bases points, like twenty nine basis points. I think
• 17:46
  Speaker 7: at the moment they were a little bit higher earlier today.
• 17:50
  Speaker 7: And that's really is what's royal the entire US market.
• 17:54
  Speaker 7: When I came in and I sat down in my
• 17:55
  Speaker 7: terminal this morning, two year yields were off US two
• 17:58
  Speaker 7: year yields were off seventeen basis points. You know, now
• 18:00
  Speaker 7: we're only off you know, four and this happens pretty
• 18:03
  Speaker 7: regularly right where you'll see that effectively the tail wagging
• 18:06
  Speaker 7: the dog. Right. Obviously, US treasuries are the global benchmark
• 18:09
  Speaker 7: for interest rates. That's still the case. But when you
• 18:12
  Speaker 7: have something that happens in Japan or something that happens
• 18:14
  Speaker 7: in the UK that really sets off the developed market
• 18:18
  Speaker 7: interest rate complex that filters into US treasuries overnight because
• 18:22
  Speaker 7: people just sell risk and sell whatever's liquid and they
• 18:25
  Speaker 7: can sell. But then once you get into US trading hours,
• 18:28
  Speaker 7: then you know, I don't want to say cooler heads,
• 18:30
  Speaker 7: but kind of more rational heads prevail at that point.
• 18:34
  Speaker 4: So how are you rethinking everything now? Given what Palace said,
• 18:37
  Speaker 4: given what we heard from the BOE, the ECB h
• 18:40
  Speaker 4: this morning as well.
• 18:41
  Speaker 7: Yeah, you know, we had thought that the FED would
• 18:44
  Speaker 7: probably cut interest rates to just below three percent. Just
• 18:47
  Speaker 7: the way that we were thinking about it was, you know,
• 18:49
  Speaker 7: real yields. The FED things that the real funds rate
• 18:52
  Speaker 7: should be about one hundred bases points plus or mind
• 18:54
  Speaker 7: us a little bit. So if inflation is going to
• 18:56
  Speaker 7: be two two and a quarter, which is what we
• 18:58
  Speaker 7: were implying for the pe to flator for your end,
• 19:01
  Speaker 7: that they would be able to cut interest rates down
• 19:03
  Speaker 7: to three percent more or less. Well, guess what. The
• 19:06
  Speaker 7: inflation situation's far different now than it was before. I
• 19:09
  Speaker 7: don't think they're going to hike because they don't want
• 19:11
  Speaker 7: to necessarily be the impetus for a major recession. But
• 19:15
  Speaker 7: I think that they're going to be much much more
• 19:17
  Speaker 7: cautious now in their easing campaign. And if they ease,
• 19:22
  Speaker 7: what would cause them to ease At this point it
• 19:24
  Speaker 7: has to be the job market, right. You have to
• 19:25
  Speaker 7: see like negative one hundred thousand job prints for two
• 19:28
  Speaker 7: or three months. That would certainly scare them and make
• 19:31
  Speaker 7: them probably rethink about a cut again. But when inflation
• 19:36
  Speaker 7: expectations arising as dramatically as they have the last three weeks,
• 19:39
  Speaker 7: that's going to let them take their foot off the
• 19:41
  Speaker 7: gases a little bit.
• 19:43
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