BI Weekend: Disney, Palantir Earnings, Musk Stock Award

21:36And a lot of other companies are doing the same. To my mind, Microsoft is doing the same for their customers. They're trying to embed open AI with their core offerings, with their CRM system, and help them deploy a customer service use case. So the differentiation of Palantir versus Microsoft, to my mind, is not that big as the valuation reflects. And that's where I'm betting they're not going to grow 40, 50 percent for the next 12 to 20 quarters, which is what the valuation is implying. Now, how would you compare what they do as far as a government contractor versus the commercial side, like which is doing better for them?

22:13Yeah. So they have a much higher exposure to government side. I mean, government side is still more than 50 percent of their revenue. and all these large enterprise software companies, they have 10 to 15 % government exposure. So Palantir's government exposure is way too large compared to other software makers. And on top of that, their international sales seem to be declining, at least on the commercial side because of the polarizing views of the management. So if they were more balanced, probably they would win more international business. But right now, this is a U.S.-centric story. And that's where I think it sort of puts a dent to the growth rate down the line once they run out of the deals that they currently have signed.

23:00Our thanks to Mandeep Singh, Bloomberg Intelligence Senior Tech Industry Analyst.

23:04Geetha Ranganathan:We look next at earnings from one of the world's biggest producers of heavy machinery, Caterpillar. This week, the company posted quarterly earnings that missed analyst expectations. Caterpillar also said it now expects full-year adjusted operating profit to fall in the bottom of its annual target range, even with higher annual sales. And the company said it expects to face net incremental tariffs on$1.3 to$1.5 billion this year. For more, Lisa and I were joined by Chris Cialino, Bloomberg Intelligence Senior U.S. Machinery Analyst. We first asked Chris to discuss his takeaways from Caterpillar's earnings.

23:36The print was a little weak. It came in a little below expectations. The big takeaway here is that underlying demand is still pretty darn resilient. You had backlog up sequentially again this quarter, which set another record. You had improving order trends across all three of their main businesses. Dealer inventory still remained quite low. And the company actually raised their sales guidance for the year. So, you know, that seems to suggest to us that underlying demand is still intact despite all these tariff headwinds. And now how do their results kind of match up to some of their peers? I believe there's Terex, Lindsey, who already opened their books.

24:13How does Caterpillar match up? Yeah, I'd characterize the overall earnings season for U.S. machinery is kind of mixed. If you think about really construction peers, which is kind of more Caterpillar's sweet spot, that's a market that's kind of bouncing along the bottom here. We do have infrastructure projects and these large mega projects which are helping to offset some of the weakness that you're seeing on the private, non-residential side, things that are more interest rate sensitive. But, you know, you're starting to see some positive indicators that would, you know, lead us to believe that you're going to start to see a cyclical recovery emerge in 2026.

24:53There's a number of, you know, leading indicators out there that would support that. And I think really Caterpillar's results here, with orders being up in the construction business, with the backlog being up, really kind of reinforce that view.

25:04Geetha Ranganathan:Where does Caterpillar make their big trucks and stuff like that? Everywhere, right? They're a global company. They've got a large footprint that spans, you know, every continent and, you know, most countries. But if you think about it, at the end of the day, it's North America, right? It's more than half of their revenues. Europe is called it, you know, 20 percent-ish. Asia Pacific, a little bit below that. And then, you know, Latin America is kind of closer to 10 percent. They are a net exporter out of the U.S., but as we saw, tariffs are probably going to be a little bit more of a headwind than they had initially anticipated.

25:42They're looking for somewhere between a$1.3 to$1.5 billion hit for this year. So, Chris, you kind of touched upon this. Sales slipped in construction resource industries, but energy and transportation unit, that had some higher sales. What is that driving force behind the growth in engines and transportation? So this continues to be one of really the big highlights for Caterpillar, you know, despite some of the cyclical softness that they're seeing, is the energy and transportation business, particularly in power generation. So think, you know, data centers are becoming an increasingly larger part of the portfolio.

26:20PowerGen continues to drive outsized growth within the energy and transportation business. There's, you know, a multi-year backlog there. So we have, you know, very tremendous visibility. And what Caterpillar is doing now is really expanding capacity to help meet this growing demand for data centers and power generation. So there's a long secular tailwind at play here. And really, we think we have pretty good visibility here over the back half of the decade.

26:47Geetha Ranganathan:Is Caterpillar and companies like Caterpillar, are they benefiting or do you expect them to benefit from maybe on-shoring even more manufacturing in this country to the extent that President Trump wants to do that, and he's been talking about that a lot, is that something where Cat will see it? Yeah. I mean, I would say we haven't really heard of, I would say, concrete or tangible evidence of that happening yet. And it's really difficult to get a lens on that in a quarter to quarter. I think if we look back maybe over a five-year window, maybe we'll have a better picture of that. But yet, no doubt, Caterpillar is a big beneficiary of any kind of construction activity here domestically.

27:31And then not only on top of, you know, not only just moving the dirt and building the facilities, they're also, like I mentioned, having a bigger piece of the data center and power generation needs within our country as well. So it's really kind of twofold, not only with moving the dirt and the facilities, but also longer term, we think the secular tailwinds around power generation are pretty favorable. Hey, Chris, before you go, we have about a minute or so left. People usually say this is like the bellwether for a look at the economy. Is this company going to continue to be that spot and to hold that title?

28:11I don't see anything changing in the near term here. They are the largest global manufacturer of heavy machinery. They have the scale, the dealer network, and really there's not too many competitors that are that close to them. So they are the leading indicator for the heavy machinery markets and construction activity, and I don't foresee that changing anytime soon. Our thanks to Christopher Ciolino, Bloomberg Intelligence Senior U.S. Machinery Analyst. Coming up, we'll look at why the EV giant Tesla approved a$30 billion stock award for its CEO, Elon Musk.

28:47Geetha Ranganathan:You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in-depth research and data on 2 ,000 companies and 130 industries. You can access Bloomberg Intelligence via B.I. Go on the terminal. I'm Lisa Mateo. And I'm Paul Sweeney. This is Bloomberg.

29:04This is the Bloomberg Tech Minute brought to you by ChatGPT. Now with ChatGPT Work, I'm Carol Masser. DoorDash, the largest food delivery company in the U.S., is building its own delivery drones and has gained the necessary FAA approvals to operate them commercially, the latest in its effort to delegate more orders to robots as a way of cutting delivery times. Bloomberg's Natalie Lung reports the company says it has been conducting pilot programs with various restaurants, some of which have seen their order volume grow during the test period. The effort marks an expansion of DoorDash's in-house robotics efforts to reduce reliance on human couriers for some orders, as their wages constitute a key expense to the business.

29:47Drones are also a way for DoorDash to cut delivery times on orders from more remote locations that some dashers may not want. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChachiPT.com today by selecting Work Mode. Available on Plus and Pro Plans. Everyone's talking about how AI is transforming work, especially in sales. While the landscape shifts, one thing remains the same. The thrill of closing a deal. Whether it's a gong or a confetti machine, every team has its celebration rituals. Adio is designed for that moment.

30:26It's the agentic CRM that turns customer signals into actionable insights, helping you close deals faster with revenue agents and automations working around the clock. You'll have everything you need to scale your go-to market efforts. Elevate your wins with Adio. Start your free trial at adio.com slash iHeart. Ugh, hon, the ice cream has turned to soup. I think the fridge is finally dead. Hopping on grandappliance.com. Great idea. They were awesome with the Samsung Ranger microwave we bought last year. Oh, they have matching Samsung in stock and next day delivery. Oh, let me see.

31:00Geetha Ranganathan:Oh, yeah, that looks perfect. I hope we get the same delivery crew. Those guys were awesome. Agree. Total pros. Another crisis averted by the team at Grand Appliance. Appliance experts since 1930.

31:17You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. or watch us live on YouTube. I'm Paul Sweeney. And I'm Lisa Mateo filling in on Bloomberg Intelligence. We move now to second quarter earnings from the fast food giant McDonald's.

31:39Geetha Ranganathan:This week, McDonald's reported their global sales at restaurants open at least 13 months rose 3.8 % last quarter. This suggests that pop culture focused collaborations and budget meals are helping to offset diners' economic anxiety. For more guest host, Isabel Lee and I were joined by Michael Halen, Bloomberg Intelligence Senior Restaurant and Food Service Analyst. We first asked Mike if returning to sales growth feels like a win for McDonald's. It's definitely a win for, you know, overall industry same store sales because it's such a monster. It also could be bad news for some of their competitors with 14 ,000 stores in the United States.

32:14Listen, man, they know how to run good restaurants, right? Right now in the U.S., they're starting to lap some easier comparisons. and that's showing up and that's helping their results. They're also doing a good job with the menu, right? They're bringing back snack wraps. They're bringing back the McCrispy Strip. They just debuted a daily double. They've been pressing on value all year. That was a big thing since the first quarter. And so McDonald's has the scale that they can offer products a little bit cheaper than their peers and still, and the franchisees can still make a little bit of money off of it, right?

32:55So, you know, they seem to really be hitting their stride and they're lapping easy comps in the second half of the year. So, you know, we're looking at a pretty good second half for McDonald's. And international markets led the company's growth. What regions of the world did they really push aggressively towards? Yeah, they mentioned some really good strength in Germany. They talked about some improvement in some markets that had been struggling, like France and Australia. And so, you know, what they're doing overseas is similar to the U.S. playbook, right? But they're probably ahead of the game, ahead of the U.S.

33:33in terms of providing everyday value. Their value messaging has been on point and it's really helped them grow internationally. And that's why we've seen international grow faster than U.S. for the last year or so. They also cited the fact that there's less competition overseas. So they're really, you know, a pricing leader overseas. You know, they can same type of thing in the U.S. where they can offer price points that competitors just can't match. And then they're also improving the operations, improving the quality of the product, which has been an ongoing theme here. They're improving the quality of the beef, better burgers, the way they cook the burgers.

34:11They're debuting the Big Arch, which is a big, bigger sized burger in their lineup. They're also expanding chicken overseas. So this company is humming along right now.

34:23Geetha Ranganathan:What does the company say? Like when I think about McDonald's, I think a lot of folks probably feel like the low-end, low-income consumers, probably it's bread and butter there. And maybe that consumer is more at risk in this economic environment. What's the company saying about low-income patrons? Yeah, you know what I like about this call, Paul, is that, you know, they're talking about what they can control. You know, they cited the fact that low-income consumer traffic is down double digits. right versus a small gain for middle income consumers and steady, consistent gains with high income consumers.

34:55So they are seeing, you know, weakness with low income consumers like everyone else. That's why they push so hard on value. That's why they have these, you know, $5 meals and buy one, get one for a dollar and why they put marketing dollars behind that. That's part of the, you know, the beauty of the snack wraps. They're coming back at a$2.99 price point. We think that's going to bring some low income consumers back into the fold. Right. So they understand that that people are very price sensitive right now. And, you know, they're addressing it with with the price points. But they're also trying to give people better quality and better service at the same time.

35:32They also plan to taste new beverages. This includes cold coffees and crafted sodas at more than 500 U.S. locations. How much of a pull are beverages when it comes to McDonald's offerings or is food really still king? Food is still king, but listen, beverages are hot. Beverages are hot everywhere, right? Dirty sodas, energy and very high margin, right? And so we think this is a very good opportunity for McDonald's. I think this is kind of a problem for Sonic, which has long done a really good job with their drink offering. But, yeah, we think this is something that can help drive sales at McDonald's.

36:15Taco Bell, this is something Taco Bell is expanding as well. But we think this is going to be more of a 2026 story for McDonald's.

36:23Geetha Ranganathan:For McDonald's, Mike, what percentage of the revenue comes from owned and operated stores versus franchise stores? Oh, they're 98 % franchise. So, yeah, they're heavily franchised. And, you know, it's a beautiful model, man. There's not a lot of operating leverage in the model. They generate a ton of cash that they return to shareholders. It really is a beautiful thing. So what's the royalty rate on? Does a franchisee pay McDonald's based upon revenue, based upon net income, based upon how many Big Macs they sell? How does that work? Yeah, McDonald's is a little bit unique. They have a 5-ish percent royalty rate, plus they own a lot of the real estate.

37:02So a lot of franchisees in the United States are paying a rent, which is typically, you know, a 10 percent of sales will say. And then they'll pay another three and a half to four percent into the ad fund.

37:14Geetha Ranganathan:I didn't know that until I saw the movie. And then that famous scene. Yeah. You're not in the hamburger business. You're in the real estate business. And that was such a great scene. I learned a lot there. All right. I can't let you go without crackerballing. I need my daily update. Country Boy Breakfast. How's that company doing? Listen, we're big fans of new CEO, Julie Messino. that stock's been a bit of a roller coaster not a surprise since it's a small cap it rose more than 100 % off its April lows now it's in the midst of a pretty aggressive downturn but you know we like it we like Julie's plans to improve the the operations to spend more and be more efficient with their marketing spend we think this is a chain that hadn't been taken care of it hadn't been run really well for the last decade.

38:01And so we see a lot of low-hanging fruit for the current management team to turn things around and really drive strong seam source sales through year-end 2025 and well into 2026. Our thanks to Michael Halen, Bloomberg Intelligence Senior Restaurant and Food Service Analyst. We move next to news at the EV giant Tesla.

38:19Geetha Ranganathan:This week, we heard that Tesla approved an interim stock award worth about$30 billion for Chief Executive Officer Elon Musk to keep his attention on the automaker. The award includes 96 million shares of the automaker that will vest if Musk continues to serve in the top post for another two years. For more, guest hosts Norma, Linda and I are joined by Steve Mann, Bloomberg Intelligence Global Autos and Industrials Research Annals. We'll first ask Steve what he makes of this stock award. I think it's very positive news for Tesla because, you know, they are going through a pivot right now. Not only an automaker, but they're very focused on AI.

38:54But if you look at Elon Musk, you know, he's Tesla is not his only business. Right. He's got XAI, his AI company, which owns the former Twitter. And he also has, you know, SpaceX, Neuralink. I think they're all related in some ways to AI. And I think, you know, without Elon Musk and Tesla, I think, you know, there's going to be a lot of risk to to that vision for Tesla without him there. See, if you mentioned that there are a lot of different things that are vying for Musk's attention, of course, we do know that he was really politically involved. And then we thought kind of pulled back and then he mentioned his intention for creating the America Party.

39:38So clearly he still remains in these conversations here. But what are investors looking for right now from him? And does it seem as though his attention is devoted as much as it should be to Tesla? Yeah, I think fortunately for now, his attention is very much devoted to Tesla. He said that at the second quarter earnings call. I think, you know, his presence is important because, you know, right now the company is going through a changeover in terms of the direction, the strategy. Right. You know, cars. has been very important, continues to be important to drive that AI theme. But without must there, I think the company will have to, you know, won't able to find the next person really to drive the company to the next step in expanding RoboTaxi, expanding their Optimist robot offering in the future.

40:31Geetha Ranganathan:Do we care about how many cars they make and whether they make any money in the old car business, Steve? We do. And a lot of people think that it's a full pivot towards AI. But I think making cars and developing that AI software goes hand in hand. It's almost like Apple and its ecosystem. I mean, there are opportunities for Tesla to actually license the FSD, the full self driving software out. But I think in the meantime, it's not something he's looking to do. I think he wants to build out Robotaxi internally and actually drive revenue and profits. He does see huge profits from the Robotaxi and from the FSD software.

41:22If you look at other software companies, margins are high double digits on the software for any software but and you know with with his fsd software the the car is an integrated component to it it's it's it's it's very important that he continues to to make cars not only for the for cash but uh for for really uh marketing that software that he has steve a lot pressuring tesla over the last few months i mean we're looking at a stock it's the worst performing stock within all the mag 7 stocks that there are right now. Explain to me right now what the latest overhangs are right now for the company.

41:58Well, I think one big overhang that's going to remove this is his pay package. There is a lot of fear in terms of him potentially being kicked out of Tesla. But I think the biggest overhang right now or where the investors are more focused on is the expansion of RoboTaxi, right? He launched it back in June in Austin. He's launching it in the San Francisco Bay Area. And he's also thinking about launching in Nevada. And it's from the looks of it, it's going quite well. I mean, there are some hiccups here and there with this complex engineering system that he's putting in place for cars. It's normal.

42:42It's normal. So but, you know, safety is still his priority. And, And, you know, he's going to go at it at a measured pace. But it seems like he's expanding it relatively fast. You know, the area of coverage is much bigger than it initially was back in Austin, back in June. And we're seeing something similar in San Francisco. So investors are really focused on when Robotaxi will start contributing to the bottom line. And we think that's probably more likely in 2027. Our thanks to Steve Mann, Bloomberg Intelligence Global Autos and Industrials Research Analyst. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts.

43:29Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

43:47Healthcare doesn't always work great. If you've ever waited on a refill or couldn't schedule an appointment, you get it. That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy, and everything else. So healthcare is connected, not complicated. What's that look like? Cheaper prescriptions that are easier to get and care that looks at the whole person how you need it. Optum is helping make healthcare work as one for everyone. Learn more at business.optum.com.

44:44wins with Adio. Start your free trial at adio.com slash iHeart. Ugh, hon, the ice cream has turned to soup. I think the fridge is finally dead. Hopping on grandappliance.com. Great idea. They were awesome with the Samsung Ranger microwave we bought last year. Oh, they have matching Samsung in stock and next day delivery.

45:04Geetha Ranganathan:Let me see. Oh, yeah, that looks perfect. I hope we get the same delivery crew. Those guys were awesome. Agree. Total pros. Another crisis averted by the team at Grand Appliance. Appliance experts since 1930.