👴 Not Your Grandpa’s GE

Happy Sunday to everyone on The Street. Inflation took a breather during July, but that doesn't mean prices for various items aren't continuing to march higher. Average Manhattan rents hit a new record of $5,113 in July, Peloton bikes will now be $500-$800 more expensive, and Disney is not so discreetly increasing monthly payments for Disney+. Here's our question for you this week:

Review

US stocks rose Friday as the market reacted to upbeat inflation data. July’s CPI and PPI both slowed on a monthly basis. The CPI was flat, while the PPI declined from June. To close out the week, that sentiment was buoyed further as the import price index also fell more than expected.

Zooming out, investors remain keenly focused on inflation and the Federal Reserve’s corresponding monetary policy. As the central bank has enacted rate hikes and offloaded assets from its balance sheet, equities have come under pressure, given associated recessionary concerns.

Last week’s somewhat positive inflation news may have convinced the market that the Fed will take on a less hawkish stance in the coming months. On the flip side, many Wall Street veterans caution it’s overly optimistic to expect the Fed to dramatically slow down its plan to raise interest rates.

To that end, Richmond Fed President Thomas Barkin spoke and said rate hikes need to continue until inflation is down near 2% on an annualized basis, which is the central bank’s target.

Broadly stated, the economy continues to face significant headwinds including supply chain constraints tied to the ongoing pandemic, and the war in Ukraine. The yield on the benchmark 10-Year US Treasury edged down to close out the week and continues to trade below 3%, which has been the case since late July.

Crude oil prices fell yet again as the average price for gasoline in the US has dipped below $4 per gallon.

In company-specific news, EV maker Rivian posted a second-quarter loss of $1.7 billion. Toast, which provides digital technology to restaurants, boosted its outlook for 2022. Property-management firm SmartRent missed on profit in its second-quarter and cut its guidance. Spectrum Brands fell short of expectations on the top and bottom lines, which executives blamed on tepid demand, adverse weather, and costs related to higher-than-expected inventory levels.

For the week as a whole, the S&P 500 advanced 3.26%, posting its longest weekly winning streak since November 2021. The Dow Jones Industrial Average jumped 2.92% for the week, while the Nasdaq Composite rose 3.08%. This was the Nasdaq's fourth positive week in a row.

Preview

Tomorrow the NAHB/Wells Fargo (WFC) Housing Market Index is due for August. This monthly survey provides a snapshot view of the single-family housing market, from the perspective of builders’. The index declined in July for the seventh consecutive month. Also be on the lookout for August’s Empire State Manufacturing Index, which is released by the New York Fed and looks at the region’s output.

Tuesday, more housing market data is on the way in the form of July’s building permits and housing starts. In June housing starts declined for the second month in a row, hitting a nine-month low in the process. The number of building permits that were issued also fell. Industry analysts attribute both of these trends to softening demand for housing, largely due to rising mortgage rates.

Wednesday, when July’s retail sales are published the market will look to gain insight into consumer spending habits as inflation remains elevated. The Commerce Department’s revised June figure shows retail sales increased 1% month-over-month. Analysts note that’s not adjusted for inflation so higher gas prices factored into the equation. June’s monthly change in business inventories is also due. There will be housing market data to study as well, with MBA mortgage applications and the average 30-year fixed rate for a mortgage set for release.

Thursday, keep an eye out for jobless claims which have been rising lately. Last week 262,000 Americans filed for unemployment benefits, an increase of 14,000. That’s the largest number of weekly claims in 2022. Economists note the job market tends to come under pressure when rates rise, although labor has been a relative bright spot during this year’s slowdown. July’s existing home sales will also be published to continue the week’s housing-market focus.

Friday, the second quarter’s advance report on services is due. Prepared by the US Census Bureau, the survey tracks total revenue on a monthly and annual basis for a selected group of services, such as hospitals, real estate, and education.

On the earnings front, Ziprecruiter (ZIP) is up on Monday, Walmart (WMT) reports on Tuesday, and Cisco (CSCO) announces on Wednesday. Estée Lauder (EL) and Foot Locker (FL) wrap up the week on Thursday and Friday, respectively. Walmart is always a fun earnings call to tune into given the big-box retailer has such a unique pulse on the US economy. Estée Lauder's call will be interesting as well. The company is reportedly in talks to purchase luxury brand Tom Ford.

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GE Break Up Could Unlock Value

This Isn’t Your Grandfather’s GE

General Electric’s (GE) life as a conglomerate, churning out everything from light bulbs to jet engines, is coming to an end. The company is in the final innings of a spin-off that will create three stand-alone businesses: aviation, healthcare, and energy.

It marks the end of an era for the 130-year-old company, but instead of waxing nostalgic, investors should look to the future starting with GE Healthcare. That arm of the business is slated to be spun off at the beginning of next year. All three stand-alone units have the opportunity to compete better and earn a higher valuation in the market than they could as part of a big corporation marred by missteps and failed executions.

Aviation Unit Poised for a Recovery

Take GE’s aviation business for starters. This division makes engines for the likes of Boeing (BA) and Airbus (EADSY). Prior to the pandemic sales grew about 6% a year, generating roughly $58 billion in EBITDA. COVID did a number on that figure but the business is poised for recovery with travel picking back up. By 2024 the aviation industry is expected to return to pre-pandemic levels.

As a standalone business, GE Aerospace could also more easily flirt with the idea of a merger with another player in the industry. Many analysts think a tie-up with Lockheed Martin (LMT) or Honeywell International (HON) makes sense. Barrons quoted T. Rowe Price portfolio manager Jason Adams saying, “The dream combination was always GE Aviation and Honeywell aerospace ... Together, that would be [the] pre-eminent company in global aerospace.”

GE Vernova Not a Slam Dunk

GE’s healthcare unit is also poised to thrive. The business took a hit during the pandemic but margins and sales are expected to improve. That will be partly driven by bolt-on buys. Some analysts peg GE Healthcare’s future valuation around $50 to $60 billion.

Then there's GE’s energy business, GE Vernova. Prospects for this unit aren’t as optimistic. Part of the division such as renewable energy is losing money. Additionally, its natural gas equipment business could face choppy waters as governments continue to shy away from fossil fuels.

So yes, at one point in time Aristotle allegedly said, "the whole is greater than the sum of its parts," however in GE's case that might not be true. This isn't your grandpa's conglomerate anymore so when the company does finally split, analyze it's parts accordingly.

Is PayPal On the Mend? Some Analysts Think So

PayPal Retrenches to its Core

PayPal (PYPL) is down almost 70% from its all-time highs but that doesn’t mean it's out for the count. Thanks to urgings from activist investor Elliott Management, which owns a 2% stake, and a renewed commitment on the part of management to focus on its core businesses, there may be an opportunity for bargain-hunting investors.

The digital payment company is still projected to grow earnings by roughly 20% and expects to cut $900 million of expenses from the business this year. In 2023 that figure will increase to $1.3 billion. PayPal is also buying back $15 billion in shares and plans to return over 75% of its free cash flow to stockholders.

Super App No More

Even more important to investors is PayPal’s retrenchment from becoming a fintech super app that could do everything for everyone. The company is no longer focused on making huge acquisitions or adding stocks and more cryptocurrencies to its platform beyond the handful it already has. Instead, PayPal is concentrated on its core growth opportunities which include PayPal, Venmo, online checkout, and its digital platform for merchants, Braintree.

The new formula is less sexy but it may be exactly what PayPal investors want. The company vows to improve margins, which fell 10 percentage points since the pandemic waned. To get there, management is reining in expenses and boosting revenue.

The Elliott Management Factor

The relationship with Elliott Management could also prove to be a catalyst for the stock. PayPal is currently rethinking its capital allocation and balance sheet planning at Elliott’s "request". Elliott recently took a stake in Pinterest (PINS), a previous PayPal target, which means a deal could still happen. Meanwhile, some analysts have raised their price targets on the stock, implying upside is in the cards.

The company still has to convince investors it's a growth play, not a mature business that has reached the cost management stage of operations. If PayPal can pull it off, shares could appreciate. If it can’t, well then investors might want to plan for fewer pay-days, pal.

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Lyft Launches Media Unit to Sell More Ads

Lyft Expands Beyond Ride Hailing

Lyft (LYFT) is getting into the advertising business, forming Lyft Media to take on Uber (UBER) and other ride-hailing competitors that are serving up ads on vehicle roofs and inside cars. The move is designed to boost revenue and steal market share from Uber which got into the business in 2019, selling ads through Uber Eats. It has since expanded, offering ads atop cars and within its ride-hailing app.

The launch of the relatively new business also comes two years after Lyft purchased Halo Cars, a startup that makes and operates digital billboards that serve ads on top of ride-sharing cars. Brands can also place ads on in-car tablets. This is currently being tested in Los Angeles.

Lyft All In With Advertising

Lyft isn’t stopping there. The ride-hailing company is selling ads on digital display panels located at docking stations for its bike-sharing services including in New York and San Francisco. It also offers brands in-app sponsorships.

Lyft doesn’t plan to collect personal data from riders, instead relying on the time and location of the rides to serve up ads. Some of the revenue from display and tablet ads will go to Lyft drivers, although Lyft hasn’t disclosed how much. The idea is to create a platform for advertisers and drivers to engage and make more money. The more drivers earn, the more likely they will remain loyal to Lyft.

Competition is Still Fierce

Lyft may have lofty expectations for its new Lyft Media group, but it also has tough competition. Uber said in February it expects to reach $1 billion in ad revenue by 2024. The company is in the process of expanding its ad sales team.

Meanwhile, there are more startups providing in-vehicle advertising. Curb Mobility, which was acquired by Firefly Systems last year, operates over 25,000 screens in taxis, generating about 174 million monthly ad impressions in the US alone. Furthermore, in January T-Mobile US (TMUS) acquired Octopus Interactive, which operates video screens in Uber and Lyft vehicles.

With demand for ride-hailing still strong and competition fierce, Lyft is expanding its revenue opportunities. Time will tell if selling ads is the recipe for success.

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