3 Stocks At An Inflection Point

With consumer and producer prices surprising to the upside, multiple research outlets are starting to call for more aggressive Fed against. We talk about the implications of higher than expected producer and consumer prices this week and what it means for monetary policy going forward. We also talk about 3 stocks, all of which have their unique tailwinds & headwinds. AbbVie just lost its U.S. patent for its blockbuster drug Humira, Disney tries to make streaming profitable while spending billions, and Intel aims to restore its iconic brand name after a rough quarterly earnings report. 

• AbbVie to replace $20bn in Humira sales

AbbVie ABBV has benefitted from more than $20bn in annual sales coming from its Humira arthritis drug. As the world’s predominant blockbuster pharma, the company fought hard, introducing more than 100 patents in the U.S., that had kept the company’s Humira drug protected from biosimilars. Starting in January 2023, the company lost Humira’s patent protection in the U.S. after losing it much earlier in places like Europe back in 2018. With analysts projecting Humira’s sales to decline to $8.2bn/year by 2024 and $6.2bn/year by 2025, investors are eager to hear about drugs that will replace the blockbuster’s sales. Rinvoq, another arthritis and Chron’s disease drug, and Skyrizi, a psoriasis drug, are expected to achieve $20bn+ in sales by 2027 with 13 oncology drugs in stage 3 of testing. Coupled with indications that the company would lift its $2bn M&A cap, investors are hopeful to see more acquisitions on the back of a $63bn acquisition of Allergan back in 2020. Further reducing the company’s debt by $4bn this year should help to enable the company’s new acquisition strategy.

• Disney's story as Bob Iger returns to the company

Disney DIS is the world’s most prestigious story-telling brand with some of the world’s greatest blockbusters. The entertainment industry is experiencing a paradigm shift, however, which Disney must grapple with. While revenues and operating income attributable to parks and merchandise are trending very strong, the entertainment industry is shifting from linear TV to streaming. The shift is largely due to consumer preferences, which have led to a reallocation of global advertising spend from linear to digital formats. As a result, Disney’s linear business mix will slowly but surely erode with more value to be captured by services like Disney+. With more than 104 million Disney+ Core subscribers, Bob Iger refocused the company to quality-subscriber growth on last week’s earnings call. Moreover, he addressed many of the concerns that Trian, a large investor in the stock, laid out in an activist campaign. From a succession planning committee to a focus on higher ARPU, Bob Iger is realigning the company. Simultaneously, reporting ESPN+ subscriber metrics separately shows potential willingness to spin off one of the premiere sports entertainment brands, which could in turn help to de-lever the parent (as demanded by activist Dan Loeb in 2022.)

• Intel is losing market share, but can the company return to its status as an iconic chip brand?

Intel INTC has lost its iconic status as a leading chip brand to AMD in CPUs and Nvidia in GPUs. Intel, through its foundry & design strategy, has lacked focus and therefore fallen behind competitors in the race to more efficient chips. As a result, the company has lost foundry customers to TSMC and Samsung, with Taiwan Semi as the leading service-provider in chip manufacturing. Moore’s second law states that the cost of a semiconductor chip fabrication plant doubles every four years, which means Intel’s parallel strategy, which includes design & manufacturing, becomes ever more expensive. Analysts estimate that Intel runs its fabs at 40-50% utilization while 80%+ utilization is needed to be profitable. While CEO Pat Gelsinger may be in for a turnaround, it will require more focus on business optimization going forward.

Blue Line Capital maintains a long position in AbbVie and Disney, but does not hold Intel in its portfolios.