The Tesla Of The Industrial Sector With A Pulse On China Semiconductors

Blue Line Capital president Bill Baruch and analyst Jannis Meindl discuss the latest macro data points with inflation exceeding expectations across data releases. With economic activity buoyant for the time being, we share our outlook. We also talk about 3 stocks: John Deere DE as an industrial stock trading at all-time highs, Raytheon RTX with diversified revenues across defense, commercial airplanes, and aerospace electronics, and Marvell Technology MRVL with 39% of revenue from China.

John Deere - Industrial Stock At Record Highs

Between Q1 2023 and Q4 2016, John Deere grew its production & precision ag revenue by 130%; small ag & turf by 69%; construction & forestry by 169%; and financial services by 51%. Simultaneously, margins expanded from 12% to 22% in production & precision ag, from 11% to 15% in small ag & turf, from 5% to 18% in construction & forestry, and from 22% to 25% in financial services. The company has consistently executed across segments and is now focused on becoming a more data-intensive business that allows farmers to focus on efficiencies. In a world of food shortages, farmers spend 89% of their direct crop costs on seeds, fertilizers, and pesticides. On John Deere’s JDLink platform, data gets consolidated and compiled into efficiency gains for end-users. Furthermore, the company has ambitions to introduce fully autonomous tractors by 2030, which would lead to more productive farming operations.

Raytheon - Diversified Revenue Stream In Defense

With more than 13,000 operable engines, Raytheon’s Pratt & Whitney business acts as a diversifier amidst global geopolitical tensions. While the company has increased revenues from $10.9bn in Q1 2019 to over $18bn in Q4 2022, operating margins have had a tough time keeping pace as global supply chain problems have lifted costs (operating profit only increased by 18% while revenues went up by 65%). Operating margins have contracted in all segments outside of Collins Aerospace Systems on a quarterly comparison. As China is rapidly growing its defense budget, outpacing 13 nations in the Indo-Pacific combined, the U.S. and its allies around the globe are expected to ramp spending. While having increased the defense budget to more than $800bn, defense spending as a percentage of GDP is nowhere near Cold War levels. At a 19.8x NTM P/E, the company traded in line with peers and below Northrop’s 21x.

Marvell Technology - Chip Stock With China Exposure

Amidst the ongoing chip-inventory cycle, Marvell has noted that customers are working through inventory on the datacenter side while the company furthers its engagement with Nokia and other 5G providers. At a 23.4x NTM P/E, the company trades at a discount to Nvidia and roughly in-line with Texas Instruments at 22x. Given that 39% of the company’s profits come from China, there’s certainly country risk, depending on the what Chinese consumers decide to do emerging from lockdowns. Marvell’s quarterly report indicated a revenue slowdown in data center while carrier infrastructure as well as automotive were performing strong. The company was not profitable in its Fiscal Q4 2023.

Blue Line Capital maintains a long position in Raytheon and Marvell Technology. Blue Line Capital maintains no position in John Deere. Positions are subject to change.