On this episode of Market Foolery, Chris Hill is joined by Bill Barker from Motley Fool Funds as they discuss the latest developments at car parts retailer AutoZone (NYSE:AZO) and luxury home builder Toll Brothers (NYSE:TOL). They also hear about some credentials for new Ford Motor (NYSE:F) CEO Jim Hackett from the world of college athletics.
A full transcript follows the video.
This video was recorded on May 23, 2017.
Chris Hill: It's Tuesday, May 23rd. Welcome to Market Foolery! I'm Chris Hill, joining me in studio today, from Motley Fool Funds, Bill Barker. Happy Tuesday!
Bill Barker: Thank you!
Hill: Thanks for being here!
Barker: Thanks for having me!
Hill: We're going to get to the earnings news in a minute. We're going to dip into The Fool mailbag. I have to start with what happened this morning at the New York Stock Exchange where there was a moment of silence in honor of the victims of the bombing last night at the Manchester Arena. To all of our friends in the U.K., please stay as strong as possible in the face of madness like this.
With that, we move on to the earnings. We'll talk auto parts and home building, and one is certainly better than the other today. AutoZone's third quarter was a miss, a pretty big miss. Their same-store sales were down, the stock is down 9% this morning. That seems like a lot. How big was this miss?
Barker: They missed on a lot of different areas, and I think it was the breadth of the troubles that they're looking at. The story going into this quarter was that tax refunds had been delayed, which was true, and they expected to have a pretty good end of the the quarter, because once the tax refunds went out, they had a business which historically has benefited to the day, as soon as people start doing their tax refunds, their customer base is known to use that money at AutoZone.
Hill: So, there's a track record to this?
Barker: Long-term track record.
Hill: When I first heard this morning on CNBC, my gut reaction was, this kind of sounds like blaming the weather.
Barker: Oh, the weather was there, too. We'll get to that. You can overdo it on scoffing at blaming the weather as well, but we'll get to that in a second. What happened is kind, the first five weeks were slow because of that in part. Then, the last seven weeks were a little bit better, but not as much better as they needed to be, and as the company expected to be, those being the 12 weeks of the fiscal quarter. That drove, in large part, the sales miss. This is a company which I listen to the conference call when I was driving to the office today, and they repeatedly brought up that they had had 41 or 44 consecutive quarters of 10% earnings-per-share growth, which is a remarkable record. But it's over, and it's been over for more than one quarter now. So, taking the victory lap for something which has not been the case for a full half year now is problematic. The weather was an issue the last two years. This quarter, AutoZone and the other competitors in the space benefit a lot from bad weather, and the damage that does to cars and roads, which in turn damages the cars. And the unfortunate thing for AutoZone is that roads are not that damaged.
Hill: I have to be honest, I had never thought about that before. If you're AutoZone or O'Reilly, you're absolutely rooting, in some small, quiet way, for bad roads.
Barker: Financially, you are rooting for the small slip. You're not rooting for car accidents, but you know, somebody hits a little patch of ice and bumps into something, a certain amount for that happens --
Barker: Potholes, and the potholes are left at the end after the ice all goes out. That's a secondary benefit to sales. Well, the last couple years have been historically warm weather, and I don't have all the science behind me to tell you whether or not that's going to continue. Weather changes a lot, but the trend of the last couple decades has not been good for cold winter weather in parts of this country. And that is, maybe it's just a one or two-year thing, maybe it's a trend.
Hill: Let's go back to the IRS and the delayed checks, because as you said, that's a real thing. And let's not single at AutoZone, they're not the only retail company out there talking about the delay of tax refunds. But, it does seem, however, like their guidance is slightly off, because in theory, if there's a delay, then if their customers hold the form, then they're still going to go out and buy stuff at AutoZone, it's just not going to be within this fiscal quarter. So, in theory, again, if their guidance is correct, if their own forecasting is correct, then they should feel pretty good about the current quarter.
Barker: It would have occurred by now. All the tax refunds are back. Management points out that that surge in sales just didn't materialize, wherever those tax refunds went they were spent elsewhere rather than the percentage of them that typically AutoZone expects to see showing up in their stores. A few additional things, they have been building out some distribution centers. They've been increasing their supply of parts from once or twice a week to two or three times a week to a lot of the stores, and the traffic has not been there to justify that. So, they've taken on a lot of expense to increase their supply chain and the sales that they expected to generate from having more inventory on hand in stores is not appearing. So, they're left with a lot of expense and not enough revenue to cover it. So, not that they're not making profit, they were still profitable, their total profits for the quarter over last year's were up about 1%. AutoZone being AutoZone, they bought back a lot of shares, so their earnings per share were up 6%. But that's not the 10% to low teens that they've come to give investors expectations for.
Hill: Last question and then we'll move on, with the drop today, shares of AutoZone down around 24% year to date, when you look at that, you think, this is a value play right here. Or, given that they were off on their guidance, given the trend in weather and whether or not it holds for the next couple of decades, where do you see the stock right now?
Barker: Long-term, I think this has been a very well managed company. We've owned it, we do own it in the Great American Fund. However, the combination of macro issues, we haven't even gotten into the increased competition that Amazon is now providing for auto parts suppliers, and we haven't gotten to the long-term situation for auto parts if fully electrical and autonomous vehicles appear, as we've talked about on the show, which decreases the number of parts in a car from the thousands to less than 20.
Hill: Right. Tony Seba was our guest on Motley Fool Money last weekend, and that was one of the things he talked about.
Barker: Should everybody listen to that?
Hill: It's a pretty compelling interview, and I say compelling because I've gotten emails from listeners reacting in both directions. Some people are saying, "That was fantastic, that's really opened my eyes to a whole new possibility in terms of investing," and people are also taking the other side and saying, "Tony Seba is being incredibly assumptive about human behavior and the role of things like the oil industry and that kind of thing, and he's being incredibly aggressive with his timeline."
Barker: Yeah, it is an aggressive timeline. But whether you adopt his time line or not, if ultimately, the number of parts in a car goes from the thousands to the dozens, that's not good for AutoZone.
Hill: Fair enough. We'll move on to Toll Brothers, maybe home building is where people were spending their tax refunds. Toll Brothers second quarter revenue rose 22%. Their profits came in higher than expected, and home sales are looking good. We talked about this earlier down at Fool Funds. We're almost at the halfway point of 2017, and I think it's fair to say that one of the trends in terms of general stocks so far this year is that things associated with the home tend to be doing pretty well. And Toll Brothers and home builders are no exception.
Barker: Yeah. Home Depot, Lowe's, the home improvement stores are a real bright spot in retail.
Barker: Not just AutoZone, there were other retailing disaster stories out there today, and there have been all quarter. Housing stands apart from that. It's been a good year for Toll Brothers stock, which differentiates it from the last three years. Over the long term, this has not been a market-beating stock. But you go back far enough, it's kind of close to the market's return. It provides that with a lot more fluctuation than the average stock. Right now, they're on a little bit of a roll. Housing is good, there's not enough housing available for demand, and they have increased their backlog, up to $5 billion, which is nice, to have all that to work on. It was a good quarter on top of the last of the couple for Toll Brothers. I think particularly in the place where they're operating, the luxury home market, that's a particularly good part of the economy. Rich people are doing well in America, and they're buying bigger houses.
Hill: So, even with the 40% run up this stock has had over the past year, do you still think Toll Brothers has a decent amount in the pipeline that they're probably not slowing down any time soon?
Barker: It's a cyclical stock. When to buy a cyclical stock --
Hill: Is not after it grows 40%? [laughs]
Barker: [laughs] No. That's the short story, it sort of answers itself. If you can get a cyclical stock at a solid company like this after it's declined 40%, you're usually going to do a lot better than if you buy after it's gone up 40%. The last time it had a year like the last 12 months, the calendar year, was 2012, it was up almost 60%. It's just barely back to the stock price it had at the end of 2012.
Hill: A week ago, you and I were in the studio talking about the reports of Ford Motor laying off 10% of its employees, and here we are a week later and they have a brand new CEO. I should point out that John Rosevear, one of our writers who pops up on our Industry Focus podcast from time to time, has an article out today on the main page Fool.com. It's an interview with Jim Hackett, the new CEO at Ford Motor, so you can check that out.
We got a couple of emails from listeners, Ben C. Abraham, Chris Jenkins. I wanted to share a little bit of Chris' email, because frankly, going into the studio yesterday, there was very little I knew about Jim Hackett, and it seemed someone out of the blue, particularly in the wake of Mark Fields, who's been at Ford Motor for 28 years and was Alan Mulally's right hand man and was universally praised when he got the CEO job. Chris Jenkins, talking about Hackett, saying, "Hackett was recently named the interim athletic director at the University of Michigan. Many eyebrows were raised at that time, as he had no athletic background other than graduating from and playing football for Michigan many years earlier. I can tell you the Michigan athletic department was a mess following the departure of former Domino's CEO Dave Brandon. Fans and students were restless. Alumni had become fractured, and ticket sales were significantly down. Hackett came in to fix the mess, not wanting to be the permanent AD. He made the decision to fire football coach Brady Hoke and was instrumental in the recruitment and hiring of Jim Harbaugh, pulling him from the NFL. He also oversaw the school's record $174 million deal with Nike. When he left, he had brought the Michigan family together, righted the athletic program both in terms of organization and financially, and he was lauded as a consensus builder. I have no idea how he's going to do at Ford Motor, but my guess is he will adapt how he needs to, and will at least begin the implementation of a new vision. He won't be afraid to make changes, even if he doesn't plan to be there for the next 10 years. I am not a Ford guy, but I wouldn't bet against Hackett." Sounds good to me.
Barker: Sounds good for Ford shareholders, who have not suffered deeply over the last three years, but they've watched the market go up and they've watched their shares go down by about 6% a year.
Hill: And one of the things I said yesterday was, I don't know anything about Jim Hackett, but if he has carte blanche to make the changes that he wants, and he's fearless, then I think it starts to become not only interesting for Ford Motor and their shareholders, but potentially lucrative. But, all of that remains to be seen. But I really appreciate the email.
You can always drop us an email. Our address is firstname.lastname@example.org. Couple of housekeeping notes before we wrap up today. Thank you to Layton and Sarah, who stopped by Fool HQ last Friday. They caught a taping of Industry Focus and I got a chance to meet them, big listeners, it was wonderful to meet them, so, thank you for stopping by. As I think I mentioned yesterday, the new episode of Motley Fool Answers has dropped, and Jason Moser and I make an appearance. It's my debut on Motley Fool Answers, and hopefully I have not ruined that show. We were doing a blind taste test of new Oreo flavors. You can check it out. It starts at about the 20 minute mark, if you want to check out Motley Fool Answers. I mean, frankly, the first 20 minutes is really good, substantive financial information from Robert Brokamp and Alison Southwick. But if you just want to skip right to the Oreo nonsense that Jason and I are doing, you can do that, too.
Barker: Are Motley Fool Answers and other podcasts cool enough to adopt the verb dropped when they appear?
Hill: I don't know that --
Barker: You just used it. I don't know. You're one of the kids that are using that --
Hill: No, I think that's just the general vernacular, when referring to a podcast.
Barker: Is that a podcast term?
Hill: Well, it was an album term.
Barker: Yeah, I think of it as more of a musical term.
Hill: The podcast industry appears to have adopted it. I've heard a lot of other hosts use that verb.
Barker: Do you think they're trying to be cooler than they really are?
Hill: Look, if you're hosting a podcast, you're automatically --
Barker: You're pretty cool.
Hill: No, you're automatically further down the cool scale than a musician who is putting out an album.
Barker: You're at cocktail parties a lot, and people are asking you what you do, and you say, "I'm a host of a podcast or two." And then it's a hushed silence, awe, I assume. I haven't been to any of these cocktail parties with you, so I haven't had the chance to witness.
Hill: When I tell people what I do for a living, honestly, and I mention that, the look on their face is not awe, it's more sort of mild confusion, like they're trying to figure it out, like, "Wait, what? What do you do? Really? No, really?" There's a little bit of that. If the thought bubble appeared over their head, that's what it would be. There's a quizzical look on their face in general when I say, "I host a couple of podcasts." It's a furrowed brow.
Barker: "How does that work?"
Hill: "How does that work," a little bit of a struggle to be polite. [laughs] If they have a couple of drinks in them, they're just like, "Wait, what? No, that can't possibly be."
Barker: A lot of request for autographs?
Hill: Not a one. Last thing --
Barker: If a listener asks, "Could I get a signed picture?" Do you send those out, autographed pictures?
Hill: I don't have pictures, so no. No, those requests don't come, and there are no pictures.
Barker: No headshot?
Barker: A voice print, maybe? [laughs]
Hill: I'm not even sure I know what that is. Long time listeners have probably realized that the investing talk for today has ended.
Barker: Maybe. We're going to come back.
Hill: We'll see. But we are going to say one or two things about Roger Moore, who has passed away. Sir Roger Moore passed away at the age of 89. He was James Bond to me. The first James Bond movie I saw in a theater starred Roger Moore.
Barker: What was it?
Hill: It was Moonraker. It was the first one I saw in the theater. And then, I think after that, Live and Let Die was the next one I saw, probably on --
Barker: ABC? Sunday night?
Hill: Yeah, probably a Sunday night movie kind of thing. So, for me, Roger Moore was James Bond. And at some point after I saw Moonraker, I learned there was another guy who played him. So, it was like, who's this Sean Connery guy?
Barker: Yeah. The first Bond movie I saw in the theater was The Spy Who Loved Me, and then a few of the Sunday night ones, and ultimately some of the Connery ones mixed in. Of course, your parents were obligated to insist to you that Sean Connery was the better James Bond.
Barker: That was, actually, I think, a law back in the 1970s and early 1980s.
Hill: I think it's a law in Scotland, that Sean Connery is the best Bond.
Barker: Do you think in England people fight that?
Hill: I don't know. Roger Moore was quoted as saying, "I'm the fourth-best Bond." I'm assuming he put himself behind Sean Connery, Daniel Craig, and ...
Barker: One of the other guys.
Hill: Remington Steele, whatever that guy's name is.
Barker: Pierce Brosnan?
Hill: Pierce Brosnan.
Barker: Instead of Timothy Dalton?
Hill: I don't think anyone is putting Timothy Dalton in the top three, other than Timothy Dalton and his immediate family. And nobody is putting George Lazenby. And God bless George Lazenby.
Barker: He hardly got a crack at it. Yes, that's probably who he was referring to.
Hill: So, as I understand it, George Lazenby was cast to be James Bond mainly because of his looks. He was a model. He wasn't really much of an actor. And I think at least some of the people behind the film thought, "How much acting is really required?" And they put Lazenby on screen, and then they were like, "Oh, actually, yeah, how much money does Sean Connery want to come back? We'll do that." Last thing about Sir Roger Moore -- The Saint, did you ever watch The Saint reruns?
Barker: I did not watch The Saint.
Hill: The Saint was a rock solid television show, and he was Simon Templar. Just a great promise. Basically, a master thief who is recruited to do good in the world, that sort of thing. I think I saw episodes on PBS or something like that, black and white episodes. But, when you see episodes of The Saint from the 1960s, it's really easy to figure out how the producers of the James Bond films watched a young Roger Moore as Simon Templar and said, "We can turn this guy into James Bond."
Barker: Yeah. Look, I grew up with him, I enjoyed the Roger Moore James Bond movies. I didn't see the last two, when they devolved into sillier things than Moonraker was. I mean, pretty silly. But, yeah, he will be missed.
Hill: He will be missed. Thanks for being here!
Barker: Thank you!
Hill: As always, people on the program may have interests in the stocks that 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you tomorrow!
Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. Bill Barker owns shares of Home Depot. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Ford, and Nike. The Motley Fool owns shares of O'Reilly Automotive. The Motley Fool recommends AutoZone, Home Depot, Lowe's, and Sherwin-Williams. The Motley Fool has a disclosure policy.