Individual Stock Picks As The Fed Tightens Financial Conditions Further Despite Banking Stress

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Illumina - Activist Involvement & Life Science Trends

Illumina’s ILMN stock has been cut in half since making a double top in 2021. At a 155 NTM P/E, the stock is not cheap after making a loss over the trailing twelve-month period (resulting in a -7.7 TTM P/E). Barely generating free cash flows, the company’s NTM market cap/FCF ratio at 92.91x paints a dire picture. As a life science company producing next-generation sequencing devices, the company is also dealing with Carl Icahn as an activist investor. Pointing to the massive failure of its GRAIL division, Icahn is pushing for three new board members. Broader macro trends remain encouraging for the company’s products as the United States and the globe deal with an aging population and a need to detect diseases earlier. Through integration with data-centered companies, Illumina is operating in a growth market that’s yet to experience operational excellence by the company.

Intuit - Mission Critical SaaS

Intuit INTU offers mission-critical applications to small and medium businesses that range from products like QuickBooks to the email service MailChimp. Mainly known for TurboTax in the retail space, the company has compounded revenues by 12.8% annually since 2012. Having more than tripled revenues since 2012, the company's latest focus is on B2B payments, which remain rather manual. While a 28.6x NTM P/E is above Adobe’s or other Mega-Cap Tech names, the P/E is below high-growth firms like ServiceNow; over the next 12 months, analysts expect ~11% revenue growth with another 11% growth rate in 2024. While return ratios have contracted since pre-Covid, margins have remained steadfast, with a free cash flow yield of 25.5%, an improvement from 2019 at 25%.

Pioneer Natural Resources - Shale Drilling In The Permian

With one of the deepest resource bases in the Permian, Pioneer Natural Resources PXD is positioned to produce oil for decades to come. Valued at a 7.87x NTM P/E, the question is whether we’ve seen peak cycle oil; while reserves are significant, one can’t deny a 40% decrease in the Net Property Plant & Equipment base of oil service providers, indicative of massive underinvestment in the space. As the world consumes more than 100m bbl of oil daily, shale producers are ideally positioned as shorter-cycle producers without long-cycle commitments provide more flexibility. While the company has generated a free cash flow yield of 15.4% over the last 12 months, Pioneer’s CEO Scott Sheffield shared on CNBC that he expects 2023 Free Cash Flows to be about ½ of what it was in 2023 due to the massive increase of oil services costs. Nevertheless, the company is much less levered than in the past (net debt/EBITDA of 0.4 compared to 2012 at 2.0 coming into shale), given that investors have disciplined E&P companies while distributing more cash to shareholders.

Blue Line Capital maintains no position in Illumina, Intuit, and Pioneer. Positions are subject to change without further notice.