Wall Street Lunch: McDonald’s Starts A Beef

Summary:

• McDonald’s is suing major meatpackers for allegedly colluding to inflate beef prices by limiting supplies since 2015.
• PepsiCo slides after guiding for a low-single-digit increase in organic revenue, Q3 results miss.
• Check out Wells Fargo’s update to its signature picks list.

Listen below or on the go on Apple Podcasts and Spotify

McDonald’s sues Big Four beef producers for price fixing. (0:16) Citi says Nvidia is still a buy. (2:28) Wells Fargo shakes up its Signature Picks list, ditching Amazon. (4:30)

This is an abridged transcript of the podcast.

It’s fast food vs. big beef. McDonald’s (NYSE:MCD) has sued the Big Four meat processing companies—that’s Cargill, JBS (OTCQX:JBSAY), National Beef, and Tyson Foods (TSN)—for allegedly driving beef prices higher by limiting supplies from as early as 2015.

The suit alleges: “Defendants colluded to reduce supplies of beef in tandem, thereby raising and fixing beef prices at levels higher than prices that would have prevailed had the beef market been competitive.”

McDonald’s claims the meatpackers colluded to underpay suppliers for fed cattle and reduce beef output over time, thereby increasing their margins and profits.

“Only colluding meatpackers would expect to benefit by reducing their prices and purchases of slaughtered cattle because they would know that their conspiracy would shield them from the dynamics of a competitive marketplace,” the suit said.

The fast-food chain is seeking “three times the damages” it suffered as a result of the alleged price fixing and legal costs, as well as a court order to end the “conspiracy.”

In today’s trading. Stocks are rebounding from the selloff in the previous session, led by growth stocks.

Lower oil prices are helping risk-on sentiment, with WTI (CL1:COM) and Brent (CO1:COM) down more than 4%. A combination of the potential for a ceasefire between Israel and Lebanon and the lack of further stimulus for the Chinese economy halted the recent rally in oil.

Instead of a significant stimulus effort, China announced a special purpose bond issuance to local governments to spur growth. The ultra-long special sovereign bonds totaling 1 trillion yuan have been fully allocated for regional projects.

Chinese markets were almost closed when the announcement hit, but Hong Kong’s Hang Seng (HSI) plunged 8% and the iShares China Large Cap ETF (FXI) is down nearly 10%.

Among active stocks today. PepsiCo (PEP) is choppy after missing estimates with its Q3 earnings report and guiding for a low-single-digit increase in organic revenue. Organic revenue was up 1.3% for the quarter, short of the consensus expectation of +3% and last year’s mark of +8.8%.

Looking ahead, PepsiCo (PEP) continues to expect to deliver at least 8% core constant currency EPS growth as it plans to focus on tightly managing costs to better align with the subdued growth environment that it said it is currently operating in.

Citi maintained a buy rating on Nvidia (NVDA) and a $150 price target.

Analyst Atif Malik said that while he is bullish on another year of strong +40% year-over-year cloud data center capex growth. But he expects the stock to likely remain range-bound through CES January before Blackwell-driven year-on-year sales and gross margin inflection in the April quarter.

And there were differing opinions on the Street about Microsoft (MSFT).

Wells Fargo maintained its Overweight rating and kept its $515 price target on the stock ahead of earnings later this month.

Analyst Michael Turrin says Microsoft’s first-quarter results are somewhat tough to predict, given the company’s significant intra-quarter model reset. However, stronger-than-usual checks suggest underlying Azure momentum is continuing, and Wells Fargo expects shares to benefit as more model clarity surfaces through fiscal 2025.

But Oppenheimer downgraded Microsoft to Perform from Outperform, saying estimates for revenue and EPS are too high.

Analyst Timothy Horan said: “OpenAI losses are the primary concern and could be in the $2B-$3B range in FY25, which we were not previously modeling.” The downgrade comes after media reports indicated that OpenAI could lose $5 billion this year.

In other news of note. An industry group representing companies that manufactured the copycat versions of Eli Lilly’s (LLY) highly popular weight-loss drug tirzepatide sued the FDA over the agency’s decision to declare an end to the drug’s shortage last week.

The Outsourcing Facilities Association claimed in its lawsuit, filed in federal court in Fort Worth, Texas, that the FDA removed the GLP-1 receptor agonist from its shortage list even though the drug remains in short supply.

The group represents makers of compounded versions of drugs that benefit from shortages of branded FDA-approved medications like tirzepatide and Novo’s (NVO) rival weight loss therapy, semaglutide.

The agency’s decision to call an end to the tirzepatide shortage was arbitrary, capricious, and “contrary to law,” the group alleged.

And in the Wall Street Research Corner. Wells Fargo’s Chris Harvey announced an update to its signature picks list. It removed Amazon (AMZN) and Constellation Brands (STZ) and boosted its positions in Microsoft (MSFT), AvalonBay (AVB), and Vertex Pharma (VRTX).

As you heard on Monday’s Wall Street Lunch, Amazon was downgraded to Equal Weight by Wells Fargo on limited visibility into further positive estimate revisions. Since its reintroduction into the portfolio in July 2023, AMZN shares are +40%, contributing about 20bps of SigPix outperformance, Harvey said.

Constellation Brands was +18% since entering SigPix in Sep 2021, contributing about 90bps of SigPix underperformance.

Harvey boosted Microsoft to 8.9% from 3.9%, flipping at 2.5% stock underweight to a 2.5% overweight.

“We raised our AVB position from 2.1% to 4.1%, adding stability and yield to the portfolio,” and “raised our VRTX position from 3.9% to 4.9%, narrowing our healthcare sector u/w,” he added.

---

---