How Are Airlines Navigating This Crisis?

In this episode of Market Foolery, Motley Fool analysts Chris Hill and Bill Mann take a look at the airline industry and some announcements made by the major players and what the outlook is for them. And what's dragging on the stock of Stitch Fix (SFIX 0.47%)? And finally, they've got some comments on the oil and gas industry and Occidental Petroleum (OXY -0.15%), in particular.

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This video was recorded on March 10, 2020.

This video was recorded on March 10, 2020.

Chris Hill: It's Tuesday, March 10^th. Welcome to MarketFoolery. I'm Chris Hill, with me in studio, the one and only, Bill Mann. Thanks for being here.

Bill Mann: How are you?

Hill: Well, there's green when I look at the market ...

Mann: [laughs] For a moment.

Hill: ... for a moment there. It was looking great at the open, and we'll get to some of the different industries and individual --

Mann: There is nothing to talk about today.

Hill: [laughs] Yeah. Exactly. This is the opposite of what we see normally this time of year.

Mann: What you want to talk about? I don't know.

Hill: Yeah. Because it's not really earning season, and that's usually when we're looking for things to talk about. And there are a bunch of things I want to get to, but I want to start with the airlines because we've seen a bunch of news announcements out of the airlines today, whether it's Delta cutting capacity; Delta is not the only one, the CEO of Southwest Airlines coming out and taking a pay cut.

Mann: United also.

Hill: United also. And what goes through your mind, as an investor, when you see all of this playing out with the airlines? Because up until, I would say, the last 24 hours, I looked at the airlines as being challenged, but not nearly as challenged as the cruise lines. And I'm not saying that they are now in that category, but I'm wondering how challenged do you think they are in the wake of these latest announcements?

Mann: One of the most interesting announcements that I saw, and this should tell you how the airlines are thinking, was that American Airlines came out and said that they were cutting 10% of their peak summer routes. So, they're thinking, actually, months down the road. And so, that's how they are viewing this crisis.

You know, if we were talking about the airlines from 2006 and 2007, this would be the death knell for half of them. I think United would be, I think at this point, it's like, Chapter 44, I don't know how many times they've all been bankrupt. These companies are actually pretty buttoned down now. So, obviously the lack of cash flow hurts. They will get a ton of money back, because their largest expense is fuel. And so, the fuel for the flights that they're cutting is something they're not going to be using. I would imagine that all of the airlines are very, very excited to set their forwards for the price of jet fuel going forward. So, they will get a bump there. And the Trump administration came out and said that they were going to provide support.

So, obviously not halcyon days for the airline industry, but this is not the same group of, you know, the gang that couldn't shoot straight from the last decade.

Hill: Well, and supporting that is the fact that Warren Buffett is someone who has for decades hated the airlines.

Mann: [laughs] Some of his funniest quotes were about airlines.

Hill: [laughs] Yes. Because he took a bath on at least one of them, and the fact that Berkshire Hathaway, I think, still currently owns shares of four of the major airlines. This is, to me, one more thing to look forward to with the Berkshire Hathaway annual meeting in about seven weeks now; six weeks, something like that. What kind of questions he gets about that and how he's thinking, and at that point we'll have nearly two more months' worth of data and reaction from the airlines.

Do you think the fact that they are better at running their individual businesses, means that once we get through this, they will be able to lever back up more quickly?

Mann: I think that's very much the case. These are very lean running companies at this point. You know, obviously, they have enormous fixed costs. So, the longer this goes, the more at-risk they are, but I would suspect that the airlines getting through a very hard 2020 are going to see amazing 2021-2022, based on their ability to lock-in fuel prices now at multi-decade lows.

Hill: Let's move on to Stitch Fix. Second quarter results for Stitch Fix sent the stock down about 35% at one point, it's bounced back a little bit from there, it's still --

Mann: What a rough day to report earnings.

Hill: It really is. They missed on sales. Their guidance was not what investors were looking for. And this is a stock that, I think, as recently as last week, was trading in the low-$20, it's now about $15 a share.

Mann: Which is less. Yeah. You know, one of the things that I looked at with Stitch Fix is they actually had a pretty good uptake in new customers, up about 17%, which for any company that's at the stage that Stitch Fix is, that's the fuel that lights the fire for everything else. They have seen some competition, so they have been doing some price discounting, some things to try and motivate people to spend. They've been seeing somewhat lower tickets on a per customer basis.

It's not a particularly exciting report. I think, probably, the sell-off, either people were too excited at $24 or they're not excited enough at $15, because that seems severe, but I also think that that has something to do with the environment that we're in right now.

Hill: I think it's the environment that we're in, and I think specifically to Stitch Fix, but not solely to Stitch Fix, it is also the fact that it is 2020 and in it is a presidential election year. And you can ask, well, what do presidential politics have to do with Stitch Fix?

Mann: I'm interested.

Hill: They -- and you touched on this -- their advertising costs are higher. One of the things they talked about was the cost of digital ads going up, and that is something -- and you don't have to own shares of Stitch Fix to be affected by this. You do, I think, maybe use this as a moment to look at the businesses in your portfolio and say, "How much are they depending on digital advertising to drive acquisition?" Because if they're not talking about their costs going higher, why is that? Because everybody's costs --

Mann: Are you suggesting that Bloomberg leaving the race will be bullish for Stitch Fix, because I'm interested in this theory?

Hill: I think it probably is [laughs]. I mean you've seen the numbers of what Michael Bloomberg spent just on advertising alone. Holy cow! But yeah, it is one of those things that makes it tougher for anyone who is trying to acquire customers mainly through digital ads.

Mann: Yeah. The thing that worries me the most about Stitch Fix is that, I don't really see the next steps that they're doing to delight their customers? Like, if they're having to advertise, if they're having to discount that raises some alarm bells with me. Now, I happen to think that Katrina Lake, who's the Founder and CEO, is a very, very talented executive. And I do think that she has shown, in the past, a tendency to be conservative in her guidance. But it was not a particularly inspiring quarter, so we will see, but obviously the market has judged very harshly.

Hill: Anywhere on your list of reasons to buy shares of Stitch Fix, putting aside the fact that you can now get it for 30% less than you would have paid yesterday, is Stitch Fix being an acquisition target anywhere on that list? I know it's never a reason to buy a stock or I guess I should say, if the No. 1 reason to buy a stock on your list is, I think someone's going to buy them, then maybe you should move on.

Mann: You know, I think that's a really interesting question, because Stitch Fix actually is the leader in a pretty interesting segment. They're the thought leader. They have the largest market share. It could be a pretty good tuck-in acquisition for -- I mean, Amazon would be the obvious, but also someone like Target would be a very interesting thing. It wouldn't be that expensive for them compared to the size of their war chest or from a market cap basis. So, yeah, I think that it is possibly the case that they do happen to be the big fish in what is now a pretty small but promising pond.

Hill: Occidental Petroleum making headlines. And this is interesting for a couple of reasons. This is not a stock we've, I think, ever talked about in any detail on this show. $12 billion company. Occidental Petroleum came out today and announced they're cutting their dividend to the tune of about 75% or more.

Mann: Yeah, from more than $3 to well less than $1.

Hill: Yeah. So, that caught my attention just because it's such a big cut, but as we were talking right before we started recording, I thought about it for a little bit and I thought, "Oh, right, they're probably not going to be the only one doing this."

Mann: No. I think if you took a look at the biggest losers in the stock market yesterday, it was a long list of exploration and production companies in the oil patch. Occidental among them. I think it closed down nearly 40%, which is remarkable for a company that produces something that generates a lot of cash flow. This isn't some biotech that got some bad news. This is a massive company with operations all over the world; and it was a bunch of them.

So, yeah, they need to conserve cash. One of the interesting things about the oil industry is that prices are really determined on whether supply is 101% of demand or 99%. Those marginal dollars are massive.

Hill: Just to put some numbers around this, in terms of the stock. A month ago, Occidental was trading in the low-$40s, it's now $13 and change. Should we all be looking at our portfolios now, looking at the dividend payers and asking ourselves how likely are they to cut the dividend or how much of the dividend is the reason I own this stock? Because, I mean, put aside oil and gas, we're going to see other companies doing this.

Mann: Yeah. It's all happening and a former Fool friend of ours Todd Wenning made this point on Twitter this morning and I thought that was a brilliant one. He said, "You should not, under any circumstances, trust a high dividend, because a high dividend is, generally speaking, suggesting some really bad news or some real stress within the company itself."

Yeah, I don't own any oil or gas companies, I don't find commodities or cyclicals to be the most exciting place to put my money. I think, one of the really interesting things about the oil and gas industry is that over the last year, if you have heard much about it at all, you have heard about it because socially responsible investors have been pushing to get out of oil and gas.

Now, we saw this with the gun industry as well. When you are disfavored by a large segment of the market, you usually respond by being as shareholder-friendly as you can, like, for example, paying a huge dividend. So, it's going to be interesting to see how shareholders react over the next few months.

Hill: Quick programming note, which is that, later today Bill and Andy Cross and I are doing a live Q&A on YouTube at 3 o'clock Eastern Time, I realize that from the time you hear this, it's quite likely that our live Q&A will be over.

Mann: I thought you did a terrible job. I'm going to be honest. [laughs] at 3 o'clock.

Hill: [laughs] Could you believe the profanity that Andy used in the 28^th minute? I mean, that was surprising, wasn't it?

Mann: [laughs] It was disappointing.

Hill: It was disappointing, and yet, we left it in, because it was live. But live Q&A, check out The Motley Fool's YouTube channel, it's free to subscribe. And a little more heads-up on this one, on Thursday I'm going to be doing a live Q&A with David Gardner.

So, anyway, Bill Mann, thanks for being here.

Mann: Thank you, Chris.

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see you tomorrow.