Alphabet Impresses while Meta and Tesla Disappoint

[00:00:00] Welcome back to the Canadian Investor podcast. I'm here today with Dan Kent. We're doing

[00:00:20] our news and earnings show that will be out this Thursday. I think it's going to be a fun

[00:00:25] one, Dan, because we have lots to talk about a little bit of macro, but a lot more earnings

[00:00:30] and it's always fun when we get into the quarterly earnings. I think we're in the thick of it right

[00:00:36] now. Yeah, especially big US companies where the earnings often drive the market really. There's

[00:00:42] not too much Canadian today, but that's also because there's not as many Canadian companies reporting.

[00:00:47] So it's definitely going to be a good episode. Yeah, I think so too. And obviously, I think

[00:00:52] we'll get more and more Canadian companies, I think as it goes on. When are the banks

[00:00:56] reporting? I know that's always top of mind for a lot of people. If I would guess they'd be end of

[00:01:02] May. End of May, a few weeks at least down the line. Yeah. Yeah, I'll look it up here. Yeah,

[00:01:09] okay, perfect. We'll get started. So first of all, we'll start with the macro because

[00:01:14] we had recently Canada and the US GDP figures. So I'll kind of talk a little bit about both

[00:01:20] and just say my thoughts on what I think the implications are for markets here and rates

[00:01:25] going forward. So Canada and US GDP. So Canada's GDP grew 0.2% in February, which was below market

[00:01:34] expectation. This followed a 0.5% gain in January. Now stats can mention in the release that GDP

[00:01:42] likely grew at a pace of 0.6% for the first quarter of the year, which would bring the

[00:01:49] annual ice pace at 2.4%. Now it was definitely helped by mining and oil and gas extraction,

[00:01:57] which increased 2.5% in February. Now in terms of the US GDP, so that came out last week, took the

[00:02:04] markets by surprise because it came in at an annual ice pace of 1.6% for Q1. And that's

[00:02:11] compared to expectations of 2.4% for the market. So a big miss here. What also worried

[00:02:18] markets during that time was the personal consumption expenditure, so PC, which is essentially

[00:02:25] a measure of it. It's another measure of inflation. It's one of the preferred measures of the US Fed

[00:02:31] as it tends to be broader than CPI. So if you do hear that, that's what it means. And that

[00:02:36] was higher than expected as well at an annualized rate of 3.4%. Now, what does this actually

[00:02:43] mean for the markets? Interest rates? Well, for the US there are fears that they are ensuring a period

[00:02:49] of stagflation. Stagflation would be when there is stagnant growth, higher unemployment, along with

[00:02:55] higher inflation. So the most kind of cited time period where this happened would be the 1970s.

[00:03:02] And clearly, even if you don't know too much about macro and the markets, I mean, most

[00:03:07] people know that the 1970s was not a bad time. Yeah, exactly. Not necessarily a great period. I mean,

[00:03:14] it was a bit before our time, but definitely not a great period for the economy in general.

[00:03:20] And that's because recent also, there's been recent CPI prints that have also been on the uptrend

[00:03:26] in the US and the lower economic growth is causing people to worry about this.

[00:03:31] Because you had higher CPI prints and the caveat was always well, the US economy is doing

[00:03:36] much better than the rest of the world. Well, now there's doubt that this might not continue, right?

[00:03:43] And the current unemployment rate in the US is 3.8%, which is historically low. The underlying

[00:03:49] numbers are a bit more worrying when you start digging through them, especially when it comes down

[00:03:54] to full-time employment growth and people holding multiple jobs for economic reasons,

[00:03:59] which is not a great sign. We'll have to see whether economic growth continues or not. I

[00:04:04] think it's still too early to be talking about stagflation. These numbers probably make the Fed

[00:04:09] more reluctant to cut rates at this point to make sure that obviously inflation is under control.

[00:04:16] And for the Bank of Canada, they're still, I think, stuck between a rock and a hard place.

[00:04:22] I mean, the GDP print probably gives them some ammunition for a rate cut or two this year,

[00:04:28] even if the Fed doesn't cut. But going beyond that, we talked about it time and time again

[00:04:33] would put a lot of pressure on the Canadian dollar, which could also lead to more inflation.

[00:04:38] And that's something they want to avoid. It could also risk reigniting the FOMO in the real estate

[00:04:44] market, right? Even a few interest rate cuts may encourage people to get into the real estate

[00:04:50] market, bit up prices because they're hoping that rates will go down further. So there's a

[00:04:54] lot of implications here and it'll be interesting what they'll be doing in the coming while

[00:05:00] they're coming meeting. Yeah, you summed it up pretty well. The one thing, I guess, maybe just like

[00:05:06] explanation on stagflation in general. So it's pretty much because you have three negatives. You

[00:05:12] have no economic output, high unemployment and high inflation. So typically the cure for lower

[00:05:18] inflation would be higher policy rates to slow the economy and slow prices down, which

[00:05:25] typically increases unemployment. In theory, prices should not be rising, at least not at an

[00:05:31] amplified pace during levels of higher rates and low economic output. So when you get all of this

[00:05:37] together, so when you have a low rate of growth raising policy rates even further to slow down

[00:05:43] inflation will ultimately hit the economy even harder. And I think that's why it's pretty

[00:05:49] devastating. And I think when you watch it in the 70s, I think it was like 15 some years in the

[00:05:55] markets. I think they lost 30, 40% over that period. It wasn't a good time at all.

[00:06:04] Yet the rate cuts, I mean, it doesn't look very positive. I mean even that Fed rate cut tool

[00:06:11] there, what is it? 13.5% for next year 2025 to be even 75 basis points lower?

[00:06:20] Yeah, yeah, exactly. Well, so we have so next year in 2025. So the way to look at this, I like

[00:06:27] to compare because in the span of two weeks, there's been a pretty big change in the CME Fed watch tool.

[00:06:34] So yeah, we talk about it every now and then. And basically it's just it takes different market

[00:06:39] indicators to assess probabilities what the market thinks will happen with the next Fed

[00:06:44] meetings. And it's constantly been pushing out rate cuts. That's the basically, you know, the

[00:06:52] without going into too much detail essentially that's what's been happening. The rate cuts have

[00:06:56] been pushed back and back and back. And then if you look at April 17, there was a 79% chance

[00:07:04] in the June meeting that's coming up that there'd be no change in the rate. And now that

[00:07:11] that chance is actually at 90%. So we're starting to see and for the following dates,

[00:07:17] it's kind of similar, right? You're seeing at the probabilities of no rate cuts getting higher and

[00:07:23] higher. And the rate cuts probabilities lower and lower obviously through the end of the year.

[00:07:28] So it'll be very interesting what happens but it's been pushed out. And now the first month

[00:07:33] where there's a higher than 50% probability that the rates will be lowered, the first meeting,

[00:07:39] is September 18. So it's the September meeting. And I've said it time and time again,

[00:07:44] if they get to that point, the Fed and they still haven't cut rate and they get to the September

[00:07:50] meeting, they would need something to break in the market to do a cut. If things are okay but

[00:07:57] not great, they probably will not for the main reason that they do not want to appear

[00:08:03] to influence the upcoming election that will be happening in November. So I've been saying that.

[00:08:09] So I actually think the market is a little bit off here. I think there should be a

[00:08:14] lower probability of a rate cut in September than they're actually assessing. I don't think it's

[00:08:19] a zero probability but I think it's probably much lower just because of the Fed wanting to appear

[00:08:27] politically independent. Yeah. And I guess the one thing I should mention that 13.5% that would be

[00:08:33] 100 basis points lower by next year. So they're not really predicting large rate cuts over the

[00:08:40] next year, at least a slim chance which is I think a lot of people are kind of banking on

[00:08:45] that right now especially here in Canada like mortgage rates, things like that. It doesn't

[00:08:51] look all that likely that we get big, big rate cuts over the next year which I mean a year ago would

[00:08:58] have been heavily predicted like heavily. Oh yeah. Well when we did our bold predictions,

[00:09:04] right? You thought my predictions weren't that bold with like six or I think six or eight rate

[00:09:11] cuts in Canada which would be like 150 to 200 basis point terms of rate cuts are going from

[00:09:17] I think we're at 5% right if I remember correctly for Canada. So going from 5% to like 3, 3.5%

[00:09:26] and now obviously I'll probably just call it now. I think this double prediction was just wrong.

[00:09:31] I think I said even more and yeah we'd be like it looks like we're going to be lucky to even get

[00:09:36] 50 basis points so yeah. Yeah I think that's the max they would do because then you start getting

[00:09:42] to gap especially if the US doesn't cut which seems to be more and more likely that they won't be cutting

[00:09:49] this year or if they do it'll be at the tail end of the year so if the US doesn't cut the Bank of

[00:09:54] Canada I think they just probably only have enough room to do one or two cuts and each cut

[00:09:59] is 25 basis points. So we'll have to see but having said that let's move on to the first

[00:10:08] company on the dock for earnings. They do want to talk about the good old small company called

[00:10:14] Google or Alphabet as their properly named now. Everybody calls them Google though. Yeah so

[00:10:22] they reported a pretty strong quarter I think last week they popped like almost 10%

[00:10:28] after the after the earnings came out so revenue came in 2.5% higher than expectations but

[00:10:34] earnings came in 26% ahead of estimates so revenue grew by 15% on a year over your basis 16%

[00:10:43] on a constant currency basis and earnings grew by 61% so it's a pretty significant well growth in

[00:10:51] pretty much all of its segments Google search by 14.3% and cloud revenues by 28.4% but the biggest

[00:10:59] probably the biggest surprise on the quarter was the return of YouTube ad growth so

[00:11:06] like during the pandemic when everybody was in lockdown like YouTube was seeing a big

[00:11:10] surge in activity ad revenues were climbing at a pretty rapid pace because I mean you just

[00:11:16] you have more time to sit down and watch a YouTube video than you do say scrolling a

[00:11:20] Google search and reading an article when you're at work or something but it's starting

[00:11:25] to see people don't do that they never do that but yeah like when a lot of people went back to work

[00:11:33] it kind of went through like a multi-year lull and it was kind of a drag but this quarter saw a

[00:11:41] 21% growth in YouTube ad revenue which is pretty much the largest increase year over year it had

[00:11:48] you know since the pandemic if you look from a sequential basis you might see like a large

[00:11:53] decline but this is pretty typical because it tends to peak in the final quarter of the year I would

[00:11:59] imagine you know like advertising wise as well a lot of advertisers you know they they kind of

[00:12:04] burn through their budgets in the last quarter of the year so there's typically higher rpms in

[00:12:08] terms of ads but it's also like if I were to guess it's maybe like a holiday thing people

[00:12:12] looking up reviews like product reviews types things like that so sequentially like it's

[00:12:18] going to decline so year over year is the most the most important basis and it's growing quite well

[00:12:24] the more surprising element on the quarter though was the company started to pay a dividend so it's

[00:12:29] only about 20 cents a quarter so annually the yield will work out to around 0.45% in terms of

[00:12:36] trailing free cash flow would work out to be around 10 to 12 percent in terms of a payout ratio

[00:12:41] if we assume they're going to be able to grow cash flow by double digits it's it's really it

[00:12:46] makes up a very very small portion of the company's overall cash flow and in addition to this like

[00:12:51] continual returns they announced it can buy back 70 billion of its shares outstanding and I mean

[00:12:58] overall they're you know just returning more value to shareholders I mean they obviously think

[00:13:04] the stock is cheap tons of buybacks but I mean this is kind of like it's an interesting thing

[00:13:11] like the situation that that Google search is going through like obviously being somebody in the

[00:13:15] online space I'm quite involved with this I mean there's a significant amount of pressure

[00:13:21] on the company right now over just concerns over the lack of quality with its with its current

[00:13:25] search results I mean it's kind of a mess right now to be honest over the last eight months or

[00:13:31] so they've decimated pretty much a lot of smaller publishers in terms of you know in

[00:13:37] place of a lot of major corporations and one of the main theories and this is just

[00:13:43] like pure speculation by a lot of people in the industry is that it's a bit of an intentional

[00:13:49] effort to get more people back on Google because ultimately as an advertising revenue

[00:13:54] as an advertising company I mean the lowest value of somebody searching on Google would be

[00:14:00] somebody finding something and leaving whereas if they got to go back and forth back to the

[00:14:03] platform ultimately more searchers more ad revenue so it's pure speculation as to what exactly

[00:14:10] they're doing but clearly it's working because Google search you know it's posted two pretty

[00:14:16] consecutive rock solid quarters with some of the highest you know year over year growth for

[00:14:20] the company since the pandemic and I mean in terms of you know what's going on I mean it's

[00:14:26] a pretty fine line here especially because like Google is effectively the conduit of information

[00:14:32] like with you know 90 plus market share so it's you know a lot of people are kind of

[00:14:37] thinking you know does this company have too much market share in that regard to the point where

[00:14:43] you know if it's all for profit is it clearly you know beneficial to the user I mean as a

[00:14:48] shareholder Google as I mentioned clearly they know what they're doing but as a user of Google

[00:14:54] you know it's pretty weird time in terms of you know their search engine overall

[00:15:00] but yeah I don't know your thoughts on the quarter yeah I mean I think overall obviously I think it

[00:15:05] was a good quarter in terms of the search engine I mean I think that's something they have to be

[00:15:10] real careful mainly because I don't know about you and I don't know about our listeners but we

[00:15:16] you know I subscribe to chat GPT and obviously I'll validate information because you want to

[00:15:22] make sure you know it's up to date and I think the training for chat GPT went up into

[00:15:28] probably mid-early 2023 I don't know the exact dates but I think it's you know it's not the most

[00:15:34] up-to-date information but as these large LLMs actually start getting more better and better

[00:15:41] and up-to-date and I think it could pose a you know people want to actually get the most accurate

[00:15:47] information they may start using those over Google if Google is diluting the quality of its

[00:15:53] search results so that's something I think they have to be very careful and I think it goes

[00:15:58] with any business looking at the short term the rewards of the short term but looking at the potential

[00:16:06] impacts an adverse impact of that behavior versus a long-term and it's like everything right we look

[00:16:11] at how governments are spending right now you know in the short term it might be good but the

[00:16:16] long-term effects might be terrible you know I think I can speak for the podcast business too

[00:16:21] we refuse advertisers obviously you know a lot of them was would have been nice sums of money

[00:16:28] but we refused it because we didn't think it was right for them to advertise on the podcast or

[00:16:32] didn't align with them and but I think longer term it helped our audience being you know

[00:16:38] I think it was good for the business long-term is what I'm saying right because people didn't

[00:16:42] lose confidence in us and I think this is the same thing here for Google where they really

[00:16:47] have a fine line to play in terms of maximizing profits in the near term which tends to be what

[00:16:53] the stock market is looking at you know the next six months to a year versus what investors should be

[00:16:59] looking at which is the next five to ten years if not longer yeah exactly like you have a company

[00:17:05] with you know such a large market share but it is a fine line to the point where you have to

[00:17:11] it's they're in a tough position they have to increase you know revenues which ultimately

[00:17:16] in terms of Google search like it's mostly due to more queries on the platform so

[00:17:23] I mean obviously as I mentioned that was just pure speculation but I mean there's a lot of

[00:17:28] things going around that just the overall quality of the results for a lot is it's

[00:17:33] relatively weak right now and it is a fine line between people sticking with the engine and

[00:17:38] going elsewhere I mean I don't really have a lot of you know fear about it I'm a

[00:17:43] relatively big holder of Google I like the company moving forward but it's just an interesting

[00:17:48] topic I thought I'd bring up because not a lot of people are you know they don't look into that end

[00:17:53] of things in terms of you know they look at the search revenue the search profits but I mean in

[00:17:56] terms of you know the actual strategic point of view from that Google search it's a very

[00:18:02] important industry for sure yeah well said now we'll move on to a company that's led by

[00:18:08] an outstanding person that clearly always has the best interest of humanity at heart

[00:18:13] and only a long-term vision and I'm being slightly sarcastic here I'm going to be talking about

[00:18:19] Mark Zuckerberg and meta earnings or Facebook so Q1 2024 people know that I've been listening

[00:18:25] to this podcast for a while I can be quite critical of Zuckerberg as I like to call him but

[00:18:31] you know I will give him some props here because I think there are some things that

[00:18:35] I think meta is doing well so revenues were up 27% to 36.5 billion on a year-over-year basis

[00:18:42] the rest of the world's segments saw the biggest increase with 42% Europe was 34% Asia Pacific

[00:18:49] 25% in Canada US 21% now net income was up 117% to 12.4 billion and EPS was up 114

[00:18:59] 14% free cash flow was up 78% to 12.9 billion and family daily active people which is a really

[00:19:09] weird metric I never realized because I was like looking I was expecting to see like you know

[00:19:15] daily active users or something like that I guess there's multiple people using one account I

[00:19:21] don't know but I didn't dig into the reason for it but the family daily active people was

[00:19:26] up 7% over a year to 3.24 billion and they spent 14.6 billion towards share repurchases during

[00:19:34] the quarter and on that point the share repurchases I think and I'd like to hear what you have to say

[00:19:40] because I think that's a bit of a headscratcher given how multiples had expended for meta and

[00:19:46] the shares not being exactly what I would call cheap on a valuation basis so I'm not sure

[00:19:51] that's actually the best value for shareholders what's your thought on that yeah I mean the price is

[00:19:57] at well near not all-time highs but pretty close to but on a free cash flow basis just because

[00:20:03] they've grown it so much it's virtually the the same price as it was you know six to eight

[00:20:08] months ago but I mean it definitely is there's you know when stocks are hitting all-time highs

[00:20:14] you kind of wonder if you know the best option is to continually buy back shares but

[00:20:18] if they don't really have anywhere else to spend the capital but especially when you probably know

[00:20:25] that you'll be coming out with the guidance that you'll be coming out with that'll probably send

[00:20:30] the share is lower and I'll talk about that and that's where my point was a little bit is because

[00:20:35] they clearly knew like what they would provide for guidance like probably they've known this for

[00:20:39] several months so that's where I'm a bit a little confused but I'll expand a little more on

[00:20:45] that once I get to the guidance and reality labs is still bleeding quite a bit of money so that's their

[00:20:51] metaverse kind of venture AR yeah exactly that's that's the best way to put it so I lost 3.8

[00:21:00] billion on 440 million in revenues and that's compared to a loss of four billion last year

[00:21:05] on 339 million in revenue so slight improvement but still bleeding tons of money operating margins

[00:21:12] were 37.9 percent which is a massive jump from the 29.2 percent last year overall I mean very solid

[00:21:20] quarter by Meta based on the numbers the reason this sock tank was because of the guidance which

[00:21:25] I alluded to so for guidance revenues to be between 36.5 billion and 39 billion in Q2

[00:21:34] that would be an increase of between 14 and 22 percent now for the full year expenses are

[00:21:40] expected to be higher than their previous guidance they just they adjusted the bottom end of the

[00:21:46] guidance here from 94 to 96 and left the top end unchanged but still they're narrowing that range

[00:21:53] upwards for reality labs they mentioned that we continue to expect operating losses to increase

[00:21:59] meaningfully year over year due to our ongoing product development efforts and our investments

[00:22:05] to further scale our ecosystem and they also said that capex for the full year will be 12 percent higher

[00:22:12] than previous guidance and I'm using the mid-range of the guidance here and the reissued one

[00:22:18] they now expect it to be between 35 and 40 billion up from 30 to 37 billion so a pretty

[00:22:25] significant increase and this is to accelerate the buildup of their AI infrastructure and they

[00:22:31] expect capex or capital expenditure will continue to increase next year as they continue to invest

[00:22:37] aggressively into AI and that's the part here the aggressive investments I think long term I mean for

[00:22:44] what they're trying to build I actually think that's a pretty smart decision to do I think

[00:22:49] you can say whatever you want about Zuckerberg is that he tends to have a long-term vision

[00:22:54] so I think he's not always just focused on the near term so I'll give him props for that

[00:22:59] but to go back on the share buyback if you know you're going to be increasing your expenses

[00:23:06] you know the markets will probably react negatively for that like why would you not wait a little bit

[00:23:13] and then start buying back your shares after those news kind of that news comes out yeah and it did

[00:23:18] tank it went from five hundred and twenty seven dollars to I think right now it's sitting at

[00:23:23] like 432 so yeah I guess there's there is logic there because like you said they would have known

[00:23:29] about this you know beforehand like they didn't decide this like the day before yeah you know doing

[00:23:35] the earnings announcement like I'm sure that's something they probably were doing like since

[00:23:41] the start of the year maybe even last year they were thinking about ramping up those investments

[00:23:46] in AI so that's why I'm just I'm a bit critical to you know share buybacks because

[00:23:51] share buybacks can be great if they're done properly yeah and I'm just kind of questioning the

[00:23:56] properness of these yeah it's definitely like just the the reality labs like that is a lot of money

[00:24:05] for you know they spent what four billion dollars for a hundred million in revenue growth so like

[00:24:11] that must be a long-term thing there like what I'm wondering like what infrastructure are they

[00:24:17] actually building out for that type of money that's uh that's pretty crazy yeah I think it's

[00:24:22] probably just an ecosystem and having like developers get on board I'm gonna assume it's

[00:24:28] that and obviously you know developing more and more products like the actual hardware so

[00:24:32] I think it's probably a combination of all of these but anyways I think overall you know if

[00:24:38] you own this stock not you know pretty good quarter if you're interested in buying this stock

[00:24:44] I mean keep an eye on it because you know say what you want again about him but he does have a

[00:24:49] long-term vision whether that will come to fruition or not we'll have to see but he does

[00:24:55] definitely think more in years rather than just the next quarter so I guess anything else there or

[00:25:01] we're gonna go with the uh tweeter or exer in chief yeah no that's it for meta tesla is

[00:25:08] definitely interesting right now I mean it was a pretty pretty soft quarter uh they missed expectations

[00:25:15] by a reasonable amount on you know earnings and revenue but it ended up popping post earnings

[00:25:21] so I'm not really sure like maybe people thought it would be a bit worse than it was or or

[00:25:26] some positive outlook in the rest of 20 so they mentioned in 2024 that the next or sorry

[00:25:32] they mentioned in the conference call that that next quarter is going to be a bit better so maybe

[00:25:36] that's uh kind of what propped it up automotive revenue which makes up more than 82% of revenues

[00:25:43] dipped by 13% its energy generation and storage segment grew by 7% and services segment by 25%

[00:25:51] they continue to see some pretty big gross margin decline so they fell another 200 basis

[00:25:57] points on the quarter the company's gross margins have gone from over 27% in 2022 to 17%

[00:26:04] 17.4% as of the most recent quarter operating margins continue to shrink they've been effectively

[00:26:11] cut in half so first quarter of 2023 they were 11.4% year later they sit at 5.5%

[00:26:20] so they said they're starting to see a reduction in production cost the production cost of a

[00:26:26] vehicle primarily due to lower material and freight costs so overall cost of goods sold per

[00:26:31] vehicle declined by about 2% but just the overall decline in selling price and deliveries are more

[00:26:38] than offsetting this along with you know higher than expected cyber truck ramp up costs adjusted

[00:26:44] earnings came in at 45 cents a share so this is a year over year decline of 48% total production

[00:26:50] fell by around 2% on a year over year basis and total deliveries are down 9% over the same time frame

[00:26:56] and the average selling price of the vehicle declined by 5% so I mean they're reducing

[00:27:00] the costs of one but I mean it's also the vehicles are also falling in price pre-casual for the company

[00:27:07] is effectively in freefall it has been for nearly two quarters or two years now and I had mentioned

[00:27:13] I think it was last week or maybe two weeks ago that you know Elon possibly has a bit too many

[00:27:17] irons in the fire when it comes to to companies he's leading and an analyst I'm shocked yeah

[00:27:23] and an analyst asked him the same thing in the conference call that he actually asked him where

[00:27:30] his heart is he's like where is your heart at in terms of Tesla and apparent must said that you

[00:27:35] know Tesla takes up the majority of the time and he's going to make sure it's prosperous so

[00:27:40] we can probably put that out of the question on you know whether or not he's gonna pass it off

[00:27:45] or anything like that like he's he's sticking around he also stated he's fairly confident

[00:27:51] that Tesla will have higher sales this year than last year but for a company that is still you know so

[00:27:59] expensive and in relative to you know its earnings and cash flow I think just simply stating sales

[00:28:04] would be higher wouldn't really be much of an assurance for me I mean sales higher they could

[00:28:09] be 1% higher 2% higher 20% higher I mean just overall demand is falling falling materially for

[00:28:16] their products and just EV in general I know they they're planning on ramping up like a I think

[00:28:22] they I don't know if you've heard of that robo taxi yeah you know yeah I heard about it yeah

[00:28:27] and they got they're putting out they're trying to put out a like a lower production vehicle

[00:28:32] I think they said the the starting price will be around 25 000 so well I mean it's yeah I heard

[00:28:38] that as well yeah and they're they're also I think they're trying to push to launch full

[00:28:44] self-driving in China I think he's there yeah right now to try and push that yeah I think there was a

[00:28:48] bit of news on that the last week or so yeah there were some approvals over there for but yeah it's

[00:28:54] it's uh it's been tough for Tesla over the last I mean I think it's what the worst performing

[00:29:00] S&P 500 stock over the last two years by by quite a bit oh really yeah I mean and I have it

[00:29:06] for a joint TCI listeners because you were mentioning free cash flow and we can see

[00:29:11] that they were losing money up until 2018 on a free cash flow basis and then it really ramped up and

[00:29:18] peaked in 2022 surprise surprise obviously that's kind of when rates started coming down so and then

[00:29:26] it's been steadily going down it peaked at 7.5 billion roughly and now it's down to 1.3

[00:29:33] billion in the trailing 12 months so it's definitely you know almost done a round trip and

[00:29:39] look it's I think I would not bet against Elon I'll just say that I mean when people bet against him he

[00:29:46] ends up yeah you know proving them wrong but there are definitely challenges and I think it's

[00:29:52] for the auto industry as a whole because I think Volkswagen also came out with some lackluster

[00:29:58] results so I think they're starting to see more pressure there which I think logically to me is not

[00:30:03] surprising I mean people are getting kind of feeling the pinch right so they're spending less like why

[00:30:10] would you go buy a new car when you want to cut back on expenses so that's kind of logically where

[00:30:16] my brain goes especially you know expensive cars like even though prices are declining Tesla's are

[00:30:22] are not cheap right now and it's actually yeah it's interesting like when you'll go over Canadian

[00:30:28] Pacific like the trend of auto shipments like I was actually quite surprised to see that they're

[00:30:33] actually holding up quite well but yeah it's Tesla I mean it's just right now I don't think people

[00:30:40] are willing to spend the money especially like Musk even said that himself like you know when

[00:30:46] interest rates make up a the bigger chunk interest rates make up of the payment the

[00:30:50] less demand there's going to be for the vehicles especially when they cost as much as they do but

[00:30:54] they definitely got a lot of things on the go like I wouldn't bet against them either but it's

[00:30:59] it's you know they I think they need economic activity to pick back up again rates to go down

[00:31:03] I mean people to you know be willing to spend more money in terms of EV I mean like I said

[00:31:09] everybody on my street drives a Tesla but I just got the Volkswagen Jetta yeah yeah me too

[00:31:14] good old my good old Jetta standard yeah it's uh in the top 500 cars most stolen Canada it's at

[00:31:22] the bottom of the list so I just it's not I don't think it's that much or it's like getting stolen

[00:31:28] so especially because a lot of people don't know how to drive standards I think you'd have

[00:31:33] trouble reselling it anyways they couldn't get it off the driveway yet that's it no I think

[00:31:38] that's always good to report I think too the last thing for Tesla is you know reality is as

[00:31:43] they're facing intense competition from China like BYD in particular and you know I think that's why

[00:31:50] they're adjusting their pricing but I think that is one thing that Elon said like the China competition

[00:31:56] factor will be you know an issue for years to come and I would not be surprised to see

[00:32:02] Western government slide by the US starting to impose some pretty steep tariffs like I wouldn't

[00:32:08] be surprised if that starts happening in the US and also Germany for obvious reasons because they

[00:32:13] have you know a big auto industry yeah to protect those so that'll be interesting especially if

[00:32:19] Trump comes into office I think he's been pretty outspoken with slapping tariffs on China specifically

[00:32:25] so you know we don't want to get in politics but the reality is uh you know we have a behemoth

[00:32:30] down south next to us in Canada and we have to take notice when there's a presidential election

[00:32:37] especially if there's going to be a big change in policy yep absolutely do you want to go on to

[00:32:44] Canadian Pacific CP yes so Canadian Pacific earnings a little bit of Canada here in the

[00:32:52] earnings now CP their revenues were up 2% when factoring the kansas city southern acquisition

[00:33:00] because the acquisition was closed around this time last year so I really like what they're doing

[00:33:05] is they're factoring that in so they're basically comparing as if the acquisition had already been

[00:33:09] made in q1 because if not clearly like I don't know what it would be but revenues would be up like 30 40

[00:33:15] percent some ridiculous figure yeah or 55 yeah so I I mean that kind of shows you that I like really

[00:33:22] don't pay attention to those because I think you're not comparing apples to apples but so I do

[00:33:27] like that they present that they had strong US grain shipments that were partially offset by

[00:33:32] weaker Canadian grain shipments due to weather higher pot ash export volume so you know nutrient

[00:33:39] nutrient investors that's probably because of you right there yeah I'm gonna say it's mostly

[00:33:45] nutrient strong auto performance despite production holds strong international intermodal

[00:33:52] shipments but flat on the domestic side now intermodal is shipments that are used more

[00:33:58] than one form of transportation so think of it as the large containers that would come from a ship

[00:34:04] then be put on to a train so on CP and then you know for the last kind of little bit goes on to a

[00:34:12] truck to be delivered at their destination so that's intermodal typically they'll just be using

[00:34:17] reusing keeping the goods in the same big container and then just transitioning them from

[00:34:23] the different modes of transportation shipment volumes were up 1% year over year the operating

[00:34:29] ratio was a 400 basis point to 67.4% now this you compare operating expenses to revenue so lower is

[00:34:38] better it's kind of the opposite of operating margin where it measures operating profits versus

[00:34:45] revenue so keep that in mind because sometimes people may see like oh it's getting up but it's

[00:34:49] not a good thing earnings per share was up 3% when factoring the acquisition of KCS Kansas City Southern

[00:34:57] they saw good progress on most operating metrics including average train speed and average terminal

[00:35:03] dwell the average terminal dwell is the time where the trains actually aren't moving and are at

[00:35:09] terminal so if you can lower that obviously it's better because it keeps moving to destination

[00:35:15] they continue making progress although slow towards reducing their debt their total debt peaked at

[00:35:20] 23.9 billion last year and now it's down to 22.7 billion I mean this is something that management

[00:35:28] said they would be looking to reduce if I remember correctly they're also kind of saying they won't

[00:35:35] be increasing the dividend for some time to focus on that debt reduction which I think is

[00:35:40] right strategy I don't know about you but I think that's the right strategy to do is reducing that

[00:35:44] debt yeah CP has never really been like unlike uh Canadian national who's I think they've raised

[00:35:50] a dividend for 27 or 28 straight years now CP's kind of been if they don't really have a particular

[00:35:57] dividend strategy so they'll be you know they typically raise they have been an aristocrat

[00:36:02] before which is five plus years our aristocrat like leniency is is ridiculous here in Canada I mean

[00:36:09] you got to raise it for five years and then you can not raise it for two and still be in the index

[00:36:14] but it's ridiculous but CP is hitting that two-year mark so I'm pretty sure because they didn't

[00:36:20] raise last year they will be removed from the aristocrats index which I mean ultimately isn't

[00:36:26] a big deal it does remove them from some you know index funds you know that track particular

[00:36:33] aristocrats but I mean the debt reduction should be a priority at this point and it's actually

[00:36:39] better that they're doing this rather than uh rather than raising the dividend yeah yeah and

[00:36:45] you know for the joint TCI listeners I have the chart here you'll see it slowly coming off

[00:36:49] after peaking and I mean I think to me that's just the right approach considering where interest

[00:36:55] rates are even if companies have fixed rate debt at some point they'll have to renew

[00:37:00] and like we've talked at the beginning people can try to guess when interest rates will be coming

[00:37:06] down but the reality is Dan and I don't know even the most prominent economists don't know because

[00:37:13] they've constantly been wrong some have probably been right it's probably 50 50 but the reality

[00:37:19] is like people don't know so one thing that you know is you'll have to renew that debt

[00:37:24] so why not you know do everything in your power to reduce it so if it is higher then you're paying

[00:37:31] less interest when you are new on that debt you'll still you know you'll still pay probably a decent

[00:37:37] amount of interest costs because the interest rates will be higher but it'll be more manageable

[00:37:41] and if rates happen to be much slower then you probably have more cash to invest elsewhere

[00:37:46] down the line like I just don't see really the downside and you know being removed from

[00:37:52] certain little index like for a company as massive as CP like it won't move the needle at all no no I

[00:37:58] mean this is in pretty stark contrast to what a company like BCE is doing they like they should be

[00:38:09] you know like at the absolute minimum not raising the dividend and maybe you know

[00:38:14] dedicating some some money towards debt but they're they're not only not cutting it they're

[00:38:18] continuing continuing to raise the dividend despite you know some pretty you know dire financial

[00:38:24] numbers but I mean this is this is the best route to go I think for CP I mean they'll just get back

[00:38:30] to they'll get back to raising the dividend you know when they have room to do it and I mean

[00:38:34] as you mentioned exactly the Canadian dividend aristocrat index is yeah it's not going to move

[00:38:40] the needle yeah and and that's one thing that I don't understand about BCE is when you know

[00:38:47] they tried to justify this they basically use the interest rate card they're like well we anticipate

[00:38:52] that rates will come down well how's that looking for you right now so that's yeah and that's why I

[00:39:01] think you know if I was a major shareholder of a company like that I would be pushing to remove

[00:39:08] management like that's the kind of statement that tells me like okay your strategy is hope

[00:39:14] hope is not a strategy like that is not what good management good management plans for the worse and if

[00:39:21] you know it happens to be better than that then you're in a fantastic position you pray can actually

[00:39:25] take advantage of it versus competitors that haven't but anyways I think we we've talked a lot about

[00:39:32] yeah we probably do a whole episode on on on BC for sure but yeah it gets me gets my blood boiling

[00:39:39] but let's do speaking of dividend cuts you want to talk about 3m yeah so I thought 3m would be

[00:39:47] would be good to go over like a quick recap I mean not solely on an earnings basis but just

[00:39:52] you know on the idea of historical dividend payments and how you know a dividend cut a

[00:39:58] you know is it's never impossible I guess to say that a company will cut their dividend

[00:40:05] a lot of people believe that you know past history past growth past dividend payments

[00:40:09] means that a cut is like nearly impossible I mean not only is it always possible it's not

[00:40:14] necessarily a bad thing so they they reported sales of eight billion dollars which are down

[00:40:20] around 0.3% and adjusted earnings per share of $2.39 or up double digits on the year so the

[00:40:27] company completed its spin-off of Solventum which is a healthcare company that makes products

[00:40:32] for wound care supplies supplies for doctors and surgery you know even products in the dental

[00:40:37] industry and the reason why I mentioned that spin-off is you know they they attributed this

[00:40:44] spin-off you know in kind of a way in terms of like adjusting the dividend down so like they

[00:40:49] would always say as a result of the Solventum spin-off or you know after the Solventum

[00:40:55] spin-off there you know they state the company will the dividend will make up 40%

[00:41:00] of adjusted free cash flows and I mean it's it's kind of weird like I don't know why that

[00:41:06] spin-off is is impacting the you know the decision to cut the dividend but they

[00:41:11] they said that it's going to make up 40% of adjusted free cash flows moving forward with

[00:41:17] the opportunity for growth so their their trailing 12 month free cash flows their payout ratio

[00:41:23] was around 65% so on the surface it doesn't look like a huge cut but cash flows will

[00:41:29] likely be impacted moving forward from the spin-off and I think that's why they're kind of

[00:41:33] integrating the two for you know to give an idea of how much cash flow they're going to pay moving

[00:41:38] forward but this was a company with you know 60 plus years of consecutive dividend growth and

[00:41:44] 100 plus years of paying a dividend obviously the 100 plus year streak of paying one continues

[00:41:50] on but the 60 plus years of dividend growth you know is effectively done now but the thing

[00:41:56] the thing here is I mean the market reacted positively to the dividend cut because the results

[00:42:02] were the results were not all that good and I know a lot of people I hate to bring up BCE again

[00:42:07] but they they also say you know if BCE were to cut the dividend the stock would tank the stock

[00:42:12] would tank like people would sell which you know it's not necessarily the case at all times but

[00:42:18] the other thing which kind of you know it was a bit weird as they they kept they didn't call

[00:42:24] it a cut they kept calling it a reset like come on you're cutting the dividend

[00:42:29] sounds like uh sounds like one of them has been in the front office of a uh NHL hockey team

[00:42:36] when they're they have to you know get younger it's like no no it's not a rebuild it's just

[00:42:40] a reset I think yeah a retool yeah retool I think Macbeth Chavain when he was GM of

[00:42:46] Montreal Canadians did uh did a couple of reset or retools or whatever the term they

[00:42:51] were using instead of just being straight up and say like okay we're rebuilding it's gonna take time

[00:42:56] it's like it seems like diversion of that oh yeah the the retool is a way to get people to continue

[00:43:02] those uh those season's ticket renewals because it's going to turn around exactly but yeah it was

[00:43:07] the the reset versus the cut is is a bit odd I mean the company is like it's so the thing

[00:43:15] about it here is like so the free cash flows they were they covered the dividend like they more than

[00:43:21] covered the dividend like on a surface level if you were to just dig into some like raw numbers on

[00:43:26] this company you would look at the dividend and and not necessarily feel that it needed to be cut

[00:43:30] but I mean they did it anyway so it's well was it at again like 60 percent something like that

[00:43:36] like I'm just looking at the chart here I have up for uh for uh the viewers on joint TCI and

[00:43:41] that's kind of roughly so the blue is the dividend and the orange is the net income

[00:43:46] and then free cash flow is the red so it seems like yeah even for both free cash flow and net

[00:43:51] income they were probably around what like 60 percent ish 65 percent yeah and they they said on

[00:43:57] a forward basis they're gonna go down to 40 percent like I don't exactly know how big that spin-off

[00:44:04] will affect them so you don't really know truly how much the dividend is getting cut because

[00:44:09] that will obviously take away some cash flow so it'll be interesting as to as to what they

[00:44:14] decide to actually pay they did I don't think they issued an actual number they just said

[00:44:18] they're gonna declare it next quarter and I mean the the other interesting thing about this company

[00:44:22] is it's been in a ton of lawsuits over the last while it settled it settled a few of them so

[00:44:28] the one I looked up was was with public water suppliers so apparently they had like

[00:44:34] some chemicals bad chemicals in like fire water or something that like don't don't degrade so they

[00:44:41] got sued for that and then um combat arms earplugs so the earplugs were defective which pretty much

[00:44:47] led to like military people with with permanent hearing damage from the earplugs not doing their

[00:44:52] job yeah yeah so they settled on both of those and they'll have to pay public water suppliers

[00:44:58] I think it's like a 10 plus year payment for like 11 billion dollars and then the the earplugs one is

[00:45:04] like 6 billion and I think they they have more litigations that are currently in the process too

[00:45:10] but yeah it's it's been a rough go for uh for 3m over the last bit yeah they make a whole slew of

[00:45:17] different things I mean I know they're kind of known for like scotch tape and they had a lot of

[00:45:22] PPE equipment I think masks and stuff like that during the pandemic I think they did quite well

[00:45:28] because of it but it's also very mature company so you could have made a case easily that they could

[00:45:34] have kept the dividend you know keep it growing slowly you know pay out ratio in the 65 percent for

[00:45:41] mature company like that is actually pretty sustainable you know for a tech company I'd be

[00:45:47] a bit more concerned because tech is can is highly vulnerable to disruptions right so having a

[00:45:53] pay out ratio that that's high but company like that you know without knowing it very well yeah it's

[00:45:59] a bit surprising but again I think you're right the market at some point you know investors are

[00:46:04] not stupid like they'll see if a company's dividend is at risk and if management take the

[00:46:10] right decisions I think long term you know the you know shareholders will be rewarded I think

[00:46:16] that's my firm belief is when management thinks long term and not you know satisfying the

[00:46:21] market in that quarter to quarter basis there tends to be good things yeah like the one thing about

[00:46:28] 3M is if we if you look to their you know actual top and bottom line growth it's it's really not

[00:46:35] all that good I mean their revenue has only grown by 2.7 percent over a 10 year period I mean

[00:46:42] it's effectively flat and you know earnings are kind of the same so I mean eventually you

[00:46:48] know if revenue is flat you can only do so much to increase free cash flows like you need to you

[00:46:54] know you need to grow the top line eventually and I mean they just haven't grown all that well and

[00:46:58] I mean I'm not exactly sure what they're gonna do with the uh money coming out you know post

[00:47:05] dividend cut but um I mean I think it was just important to highlight the fact that dividend

[00:47:11] dividend cuts can happen from even you know 60 plus years of consecutive growth is a very long

[00:47:16] time to grow the dividend for 60 plus years and you know pay it for 100 plus I mean those are some

[00:47:23] really big numbers and when you would combine those big numbers with you know payout ratios on the

[00:47:28] surface that don't look that bad you know this company cut the dividends so it's never impossible

[00:47:35] yeah and that's why I think I get into it sometimes with on thin twit with people that just

[00:47:42] look at dividend income and you know it's fine if that's a strategy you want to adopt but my argument

[00:47:48] is always like just make sure you understand the business and you know that the dividend is

[00:47:54] sustainable even if your goal is not to maximize total returns it's fine that's my goal but if

[00:48:00] that's not your goal that's okay you know a lot of them I've noticed is they don't even take a

[00:48:05] look at the payout ratio no which I think to me if you're a dividend investor and that's your main

[00:48:11] focus I think it's probably right up there in terms of the most important metric to look at

[00:48:17] you should be looking at more than that don't get me wrong but if you're not at least looking at

[00:48:22] the payout ratio like why are you investing in dividend stocks like you should not be at that

[00:48:26] point you should just just buy an index ETF that follows the you know dividend or risk

[00:48:32] record ads or whatever right at least you won't have to look at each business kind of company by

[00:48:37] company but that to me is the absolute minimum that you should be doing is making sure the payout

[00:48:45] ratio is sustainable and even from like you know even some specific businesses in terms of

[00:48:50] payout ratios like telecom is a prime example like earnings like they have a ton of of non cash

[00:48:56] expenses which will hit earnings but not cash flow right so I mean even you know standard payout ratios

[00:49:03] on some websites that just you know utilize earnings they might you might even need to go further than

[00:49:07] that and start to look at free cash flow and you know maybe even operating cash flow depending

[00:49:13] but yeah I mean it's like you said you know invest however you want but I mean I kind of like to

[00:49:20] educate people to the point and then they can do what they want but yeah it's

[00:49:25] it's a strategy it's actually I would say it's the most popular strategy in the country like

[00:49:29] there's so many dividend investors here it's kind of a it's definitely an ingrained mindset and

[00:49:35] primarily because we have a ton of blue chip dividend payers here in Canada I mean if you

[00:49:40] look at the index that's pretty much all it is for the most part whereas you know in the US you've

[00:49:45] got big tech just dominates none of them pay dividends yeah well they do yeah and I mean like

[00:49:52] and I get it look who look who doesn't like to get paid for doing nothing which is you know what a

[00:49:57] dividend is my point is always like make sure you still do your research because you know it's

[00:50:03] one thing to have that strategy and it's another to like actually do your proper research and

[00:50:08] picking the right companies instead of just identifying you know a high yielding company

[00:50:14] and just going based on the yield oftentimes there's a like a very good reason for that company to be

[00:50:21] yielding so high and it's usually not that great so that's kind of my big point here but anything

[00:50:27] else you want to talk about before we let people go because I do have another recording to get to

[00:50:33] soon so nope that is it no that's it well I mean I think it was a fun episode you know it's always

[00:50:40] fun when earnings are coming in from companies we'll have probably another like four weeks of

[00:50:45] earnings solid four weeks so it'll be fun going forward do appreciate everyone listening to us if

[00:50:50] you haven't done so if you can give us a five-star review on Apple podcast Spotify or whichever

[00:50:56] platform you listen to you can find me at fiat underscore iceberg on twitter slash x you know our

[00:51:04] handles are in the description of the show you can find that at stocktrades underscore

[00:51:10] c a yeah yeah perfect and stocktrades dot c obviously yes so you can find them on both both

[00:51:17] platforms here and yeah like to thank everyone for listening to us and we'll be back next week with

[00:51:23] another one of these earnings and news episode yeah thanks for listening everybody the Canadian

[00:51:28] investor podcast should not be construed as investment or financial advice the host and

[00:51:34] guest featured may own securities or assets discussed on this podcast always do your own

[00:51:40] due diligence or consult with a financial professional before making any financial

[00:51:45] or investment decisions