March 16, 2023

The big news of the week is, of course, rising risks in the financial system following the failures of several smaller regional banks in the U.S. as well as instability in some larger institutions abroad, mainly Credit Suisse (CS).

We also received February inflation data in the form of CPI (Tuesday) and PPI (Wednesday), which continue to show that inflation is moderating but isn’t collapsing. The February PPI report showed a 0.1% decline versus estimates for a 0.3% increase.

The mess in the financial system has leapfrogged the inflation story to become the biggest near-term risk. Beyond bank failures (as if that’s not enough of a problem), another ongoing risk is that smaller lenders will lend less. That will be especially true for those that have seen deposits flee to the relative safety of the megabanks.

This could drive a credit crunch and force a more significant economic slowdown. Maybe the result is what the Fed wanted (slower economy). But maybe not the path they wanted to curb inflation or the desired magnitude of the slowdown they envisioned. We will just have to see.

On another downbeat note, any credit crunch would likely be felt more among small and mid-cap borrowers than among larger companies. This may be part of why we’ve seen more weakness in “old economy” names (the Russell 2000 Index is skewed this way) including our newest position Terex (TEX). More details on that in my TEX update below (hint, it’s not bad).

On deck next Wednesday is the wrap-up of the FOMC’s two-day meeting, the interest rate decision and Jerome Powell’s press conference. Whereas, at the beginning of last week, a 50bps hike was looking likely, the current market odds (as of this morning, subject to change by the minute) are that a 25bps hike is coming (72% probability).

Suffice it to say, the market never fails to keep life interesting.

Recent Changes
None

Updates

Enovix (ENVX) is finally acting better after management affirmed that the Board approved the design of the Gen2 Autoline (10-times manufacturing throughput versus Gen1) and that its first high-volume production facility (Fab-2) will be built in Penang, Malaysia. The company also announced several leadership additions as the company looks to scale up to commercial-scale production. HOLD

Expensify (EXFY) was moved to hold last week as shares haven’t held up very well since we jumped in. There’s no new news and we’re sticking with the hold rating now while watching the stock closely. We may be forced to cut EXFY if it doesn’t turn around, or at least stabilize, soon. HOLD

Flywire (FLYW) Q4 revenue was up 42% to $73 million (beat by $7.55 million) while GAAP EPS of -$0.01 beat by $0.11. The company sees 2023 revenue of $353 - $364 million (+34% at the midpoint) versus consensus of $349 million. Management spoke this week at the Loop Capital conference (Monday) and the Wolfe Research Forum (Tuesday). After selling off late last week FLYW looks better now. BUY

Huron Consulting (HURN) had a great Q4 earnings report that sent shares to new highs. It’s been somewhat weak since then. As I mentioned last week, I’m looking for a little more follow-through here, some performance that represents better-than-expected 2023 revenue guidance of $1.22 - $1.28 billion (+10% at the midpoint). EPS guidance of $3.75 to $4.25 straddles consensus of $3.98. BUY

Inspire Medical Systems (INSP) announced the company received countrywide reimbursement approval in Belgium, effective immediately. No other news. HOLD TWO THIRDS

Intapp (INTA) has come in with the market, but nothing has changed with the story. The company put out a couple of press releases, including a note that law firm Practus selected Intapp to manage cloud-based risk and compliance and that the company’s DealCloud solution won awards for helping the European private equity industry. HOLD

Rani Therapeutics (RANI) continues to be quiet and hasn’t yet given a Q4 update. We’ll await that report, which should come relatively soon. HOLD

Repligen (RGEN) has pulled back since we elected to sell a quarter of our position a week ago. There’s no change. Management will speak at the Keybank Life Science and MedTech Investor Forum next Tuesday, March 21. SOLD A QUARTER, HOLD REST

Sprout Social (SPT) continues to trade in its established trading range on no new news. HOLD HALF

Terex (TEX) has pulled back 17% from our entry point through yesterday’s close. The move both validates adding a half-sized position and illustrates just how volatile this market has been. Despite the short-term move in the stock, I’m still a believer in the name. The most recent update comes from the JPMorgan Industrials Conference where management said that, despite the macro outlook, delayed orders and cancellations remain at normal levels. Part of the reason is that equipment fleets, which typically go for about 50 months, are running in the 56-to-62-month range. This is driving a replacement cycle that should have legs as supply chain bottlenecks continue to abate. Regarding the big-picture trends (electrification, waste/recycling, infrastructure, digitalization) management said they continue to be tailwinds for both the Materials Processing (MP) and Aerial Work Platforms (AWP) segments. The big event coming up is the move of major AWP production lines to Monterrey, Mexico (begins Q2 2023). This should add 2% to margins once fully operational, estimated to be late 2024. In terms of M&A, management continues to shop around, especially for assets in the MP and Utilities areas. It is also considering expanding into some new geographies, such as Franna into India. Overall, the business appears on solid ground even though the stock has hit an air pocket.

In terms of Terex’s capital structure, recall from my report that the company had net debt of $471 million ($776 million gross debt minus $304 million in cash) at the end of 2022. That implies leverage is about 1.0x (relatively low) and that the company is on track to be debt free by mid-2024. Management has had the financial flexibility with growth in free cash flow ($152 million in 2022 and guidance for $225-$275 million in 2023) that there is room for more cash to go to shareholders in the form of dividend increase (recent 15% increase) and/or share buybacks ($97 million in 2022). In short, Terex seems to be on sound financial footing for now. BUY HALF

TransMedics Group (TMDX) continues to hold up relatively well. The stock is off its highs but there’s nothing different about the story. HOLD THREE QUARTERS

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.