☀️☕ Are Tanks and Bombers ESG-compliant?

26 January 2023

 Happy Thursday.

📊 In the Markets

• Tanks are booming

• Are Tanks and Bombers ESG-compliant?

• Tesla EV prices are falling and Cybertruck's finally coming!

📝 Focus

• "The Largest Con In Corporate History"... Shorts attack Asia's richest man

📊 In the Markets

Tanks are booming

On Wednesday, German Chancellor Olaf Scholz announced that it would (finally) be sending its advanced Main Battle Tank, the Leopard 2, to Ukrainian forces to help in the war effort there, and the Biden administration announced the same with its own MBT, the M1 Abrams. Both are among the best and most advanced MBTs on the planet. The US will send 31 M1 Abrams, the equivalent of one Ukrainian tank battalion, while Germany will send 14 Leopard 2s and work with other European countries to create two tank battalions (about 90 tanks.)

On the same day, the maker of the M1 Abrams announced results. General Dynamics is the fifth largest defence contractor in the world and generates 68% of its revenues from defence spending. Increased defence budgets globally since the invasion last February include growing interest in land defence systems such as tanks and armoured fighting vehicles, boosting orders for the company, which reported an 18% jump in profits compared to a year earlier. Slightly better than Wall Street forecasts, though the stock ended nearly 4% down. Since the day before the invasion, the stock is up just 5%.

Are Tanks and Bombers ESG-compliant?

Also reporting yesterday was Boeing. Known for its passenger aircraft, it is also the second largest defence contractor in the world, making 55% of its revenue from the defence business, with a long (some might say terrible) history since the very start of military aviation, which includes the WWII B-29 Superfortress (including the infamous "Enola Gay"), the Vietnam War-era HU-1 "Huey" helicopter, Cruise Missiles and the nuclear-deterrent Minuteman ICBM.

The stock was flat despite a massive earnings miss on supply chain, 737 MAX and 787 Dreamliner planes issues, and since 18-Feb last year is barely up 2% though since end-Sept is up 75%, with demand for aircraft booming in the reopening, post-Covid world. Boeing delivered 480 aircraft in 2022, trailing rival Airbus' 661, though both missed analysts' expectations.

The defence sector is a difficult one for investors, particularly but not only those with Environmental, Social and Governance, or ESG 🎓 mandates. Often supplying both dictators and the oppressed (and with bribery, corruption, and weak transparency issues), they're seen by many as "sin stocks" along with alcohol, tobacco and gambling, or dropped into the "too-hard" category. (Boeing's balance between defence and commercial, environmentally-challenging aircraft makes the calculation even more difficult.)

But Russia’s ‘special military operation’ in Ukraine has raised the question of whether the sector should actually be regarded as ESG compliant given its importance to self-determination -- democracies need arms to defend themselves from aggressors. ESG investors tend to focus so much on the environment that they forget the social. Morningstar estimates that 44% of sustainably-themed funds already have some exposure to the defence sector (compared to 60% of standard funds) while only 23% of sustainably-themed funds actively exclude defence.

Back to four wheels and something environmentally friendlier:

Tesla EV prices are falling and Cybertruck's finally coming!

Tesla aims to start mass production of its Cybertruck later this year, two years after the initial target for the long-awaited pickup, Elon Musk said during the results announcement after the close of trading on Wednesday.

Results were slightly higher than investors expected, and the shares traded higher in the "after-market" (a relatively illiquid period where trades can still be done through the exchange after the end of the official stock market trading session.) Earnings per share for the fourth quarter came in at $1.19 vs $1.13 expected, 40% growth from the $0.85 reported in the same quarter last year (adjusted for the 3-for-1 stock split on August 25th.)

What Tesla has done is boost its profit margins and cash war chest in the last few years with steep price rises so that it can sacrifice margins for volumes going forward as the electric vehicle market develops and becomes a mass-market opportunity. Already, orders are double current production levels following the recent round of steep price cuts.

Gross margins fell more than highly-paid Wall Street analysts were expecting, though, hitting 25.9% from 27.9% in Q3 and 30.6% a year earlier. Gross margin (revenues less cost of goods sold, all divided by revenue) is expected to fall a lot more in 2023 following those price cuts as Musk drives the company to deliver about 1.8 million vehicles in 2023, ahead of its target 50% compound annual growth rate, though he will also keep a lid on costs in “an uncertain macroeconomic environment.”

Musk said “average selling prices” have already been "on a downward trajectory" for years, partly thanks to introducing lower-cost models, adding that improving affordability “is necessary to become a multimillion vehicle producer.”

(Meanwhile Musk's trial about his 2018 "funding secured" takeover comment rumbles on in California. On a split-adjusted basis, that joke-not-a-joke $420 per share bid price would have been $28 today.)

📝 Focus

"The Largest Con In Corporate History"... Shorts attack Asia's richest man

A renowned short seller has launched an all-out assault on the Adani Group, an India-based multinational conglomerate run by Asia's richest person, the world's fourth-richest. The group has already lost more than US$12 billion in market value.

The group's industries are largely focused on key infrastructure projects such as the development of ports, mines, airports, data centres, power generation and power transmission, and involve 7 key publicly listed equities (9 in total) with a collective market value of about INR 17.8 trillion (US$218 billion.)

In an almost 100-page report after a 2-year investigation, Nathan Anderson's Hindenburg Research accused Gautam Adani and the Adani Group of companies of "brazen stock manipulation and accounting fraud schemes" over the course of decades, involving tax havens, undisclosed related party transactions, capital siphoning, money laundering, tax theft and "a vast labyrinth of offshore shell entities" run by Gautam Adani’s elder brother, Vinod allegedly to serve several functions, including laundering money to "maintain the appearance of financial health and solvency."

Adani Group called Hindenburg’s report a “malicious combination of selective misinformation,” in a statement to CNBC, but Hindenberg maintains that it is "one of, if not the most egregious example of corporate fraud in history." Hindenberg has "taken a short position in Adani Group Companies through US-traded bonds and non-Indian-traded derivative instruments." Bloomberg reports that Hindenburg has targeted about 30 companies since 2020, including Twitter, EV truck maker Nikola, Draftkings, Lordstown Motors and Clover Health. On average, their stocks lost about 15% the next day and were down 26% six months later.

Short-selling - a mini-explainer

• If you believe that a stock will go down for whatever reason (perhaps it is expensive relative to its prospects or if you suspect fraud), you can sell the shares you have.

• But if you don't own any of its shares, you can still sell them by first borrowing shares for a fee from an existing shareholder via your broker and then selling them on the market. (This can also be done through derivative instruments.)

• If you're right, then you can buy them back (known as covering your shorts) at a lower price and pocket the difference, less the fee you paid to borrow the shares.

Short-squeezes - a mini-explainer

• If the shares go up a bit, you can just wait for the shares to come down, while calmly re-examining your investment thesis. BUT if the shares start shooting up, you are in a bind and have to decide very quickly if you want to buy back the shares that you sold and take the loss or watch the loss potentially widen dramatically.

• If you have a lot of shares, your buying will push the share price even higher and the losses will be even bigger. But if you don't buy them back, your losses could be even bigger than that... potentially much much bigger, especially if everyone knows that you are short.

• The nightmare scenario is if other traders force the shares higher and higher knowing that at some point you have no choice but to buy them back. If your losses on paper are looking too huge, the broker you borrowed from can force you to buy back those shares.

(In India, share prices are subject to price bands set by SEBI, the Securities and Exchange Board of India, limiting the daily fluctuation of a stock's price to a certain percentage, usually +/- 5% or 10%. This is to curb excessive volatility and prevent panic selling or buying. When a stock reaches the upper limit, trading is halted for the rest of the day, but not when it reaches the lower limit. There are also circuit breaker systems in place which halt short selling when the market falls too much too fast.)