In this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss a trio of earnings reports, but there aren't many earnings to be found among them. 3D printer company 3D Systems (DDD 6.25%) had issued quarterly guidance for a tidy profit, but instead delivered an even larger loss. Envision Healthcare (EVHC +0.00%) turned in a poor earnings report and cut guidance Tuesday, but its issues go deeper, with billing practices that have led to lawsuits. And Papa John's (PZZA 2.70%) turned in a perfectly good third-quarter report, but took a pizza cutter to its guidance.
A full transcript follows the video.
This video was recorded on Nov. 1, 2017.
Chris Hill: It's Wednesday, November 1st. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker. Happy November!
Bill Barker: Thank you!
Hill: How was your Halloween?
Barker: Scary.
Hill: Was it legitimately scary?
Barker: No.
Hill: [laughs] A lot of trick or treaters? That whole thing?
Barker: I think zero. We were gone for part of the time and left some candy out, and when we came back, most or all of it was still there, as opposed to those years were all of it was gone. And it's not a great street for trick-or-treating. Some of the side streets are a lot better. In years past when I've been there the whole time, maybe five or six trick or treaters.
Hill: You'd think at least one kid would be savvy enough to do the math, look around, say, this house isn't getting any traffic, they're not home, all of this candy is mine.
Barker: Yeah. Normally, that's what happens. You?
Hill: A lot of traffic on my block, which is rare.
Barker: What were you handing out this year?
Hill: Handing out some Reese's Peanut Butter Cups.
Barker: Sure. Still ranked No. 1.
Hill: Peanut M&M's and York Peppermint Patties. It's like going to a Rolling Stones concert. I'm only playing the hits, I'm not risking it with anything else. I'm only playing the hits.
Barker: So, you had no tricks.
Hill: No tricks.
Barker: Everyone was just thrilled.
Hill: Yeah, absolutely.
Barker: Put the spray paint back, we're not bringing it out here. We have York Peppermint Patties.
Hill: No, we'll egg the next house. Not this one. Alright, thanks for being here. As always, people in the program -- no. We have news, we have earnings. And by earnings, I mean, well ...
Barker: Reports.
Hill: Reports, that's what we have.
Barker: Reports of results.
Hill: Reports of results. We don't have our earnings, at least not in our first story. Shares of 3D Systems are down 22%. They're hitting a six-year low. And that's because 3D Systems was expected in the third quarter to deliver actual profits, and instead it was a sizable loss. So, they're either really bad at in-quarter guidance, or things took a terrible turn in Q3. But, either way, this is a stock going straight down this morning.
Barker: Yeah, this is a stock, if you look at the long-term chart for the stock, it goes straight up in 2012-2013, and then straight down ever since. Referred to, sometimes, at least by Bill Mann, as the middle finger chart, which it seems to be showing investors again, today, as it visits new multi-year lows. This used to be a $90 stock. Now it's $9. The thing is, 3D printers, it's hard to differentiate your product from the competition. There's not really enough branding power or anything to that. 3D Systems has been more in the consumer side. I don't know what consumers buy a 3D printer to make. Nothing truly useful so far. And it's not been sufficiently exposed to the business side of 3D printing.
Hill: That was going to be my question. Who are they selling to? Who are they trying to sell to? It does seem like there is a market for 3D printing, but it is, at the moment, smaller than presumably it will be at some point in the future. But I would think, any company in this line of work would be doing everything they can to, I don't want to say ignore consumers, but steer their business toward other businesses. This seems like a B2B play, and if it's not, they really need to rethink their strategy.
Barker: They got on the wrong side of that strategy a while ago, and they have been rethinking it, and they have a relatively new CEO. He is talking about new strategic directions for the company, and those have not yet come to fruition. So, some of the guidance was about, we're continuing to pursue, and we have some new exciting products are going to be coming out in the near future. But I think the market is getting tired of waiting for the company to produce some real earnings. I can't say that I blame them, because there isn't anything that exciting about any one of these companies. They have patents that are expiring, the early round patents, and that's going to inspire new entrants to show up and compete and underprice them.
Hill: So, for anyone who may have been looking at 3D Systems or any of these stocks and thinking, one potential reason to buy a stock like this is, some conglomerate, whether it be 3M or GE or some large industrial could swoop in at the last minute and buy them on the cheap, and at least it could be a cigar butt kind of stock. It sounds like, based on what you said, that's not even the case, because if the patents are expiring -- we saw, in the last five years, a bunch of tech companies getting bought up simply for their patents. If these patents are expiring, I'm not sure why any large business would want to come in and buy a 3D Systems and bring them in house.
Barker: Yeah, I think that's one of the problems. There are lots of different patents, and I wouldn't be able to tell you which of the ones that they have that are expiring when, or are important going forward. But, they've had the chance to do some things without competition for a while. That period is ending. They have grown sales, basically tripled sales in the last five or six years. So, that sounds like it's pretty good. But they also haven't really to generate and profits by doing so. So, how much do you care about rapidly growing sales if they don't translate -- in fact, they were more profitable in 2009-2010 when they were only doing $150 million a year in sales. They're up to $600 million now, but they're losing money. That's competition.
Hill: The only thing shareholders of 3D Systems have going for them today is they are not shareholders of Envision Healthcare, which is a stock down 30% this morning after their third quarter profit fell, apparently, off a cliff. This is a company that you know a whole lot better than I do. What is going on here?
Barker: This is a physician-based healthcare company. One of the things they do is staff ERs, or ER-type operations, anesthesia. There was an article that came out in July in the New York Times about the frequency that patients were getting extremely large bills. They would go into a hospital where their insurance was taken, and they would get emergency services, and then they would get a bill from a doctor who wanted to be paid for his service and was out of network, despite working in hospital or getting a reference from the hospital. And this would be upwards of $1,000, sometimes much more. And that came as a shock to the consumers. Frequently, it was this company, EmCare, which is a division of it, which was cited as being a culprit in this. So, the stock hasn't done very well coming out of that. Then, this quarter, the results show that they are getting some slippage in their emergency care. Normally, there are a lot of stocks that get hit, and there's an opportunity to talk about them and take shots at things that companies do, and I don't really like to do that for the most part because there are going to be some people that are owners of those stocks. In this case, it's more of a schadenfreude thing. Like, you're engineering your business around surprising people with large bills, and that gets exposed, and your stock craters, I don't feel too bad for you. That, apparently, as of today, looks like what's happening. There was the article back in July, and today, we're seeing some of this showing up in the numbers.
Hill: There are stocks that we talked about from time to time that get ahead of themselves, there's a little too much enthusiasm, and when they come down in price, that price is seen as being much more reasonable to the underlying business. Schadenfreude aside, when you look at Envision Healthcare and a stock that is 30% cheaper today than it was yesterday, is this more in line with their type of business? Or do you think, no, there's more of this to come?
Barker: Well, take a couple of metrics out there. This is a stock, now, going, after the 30% decline, it has a price to sales ratio of 0.6. So, it has more in sales annually than the value of the company. The forward price to earnings ratio based on the expected earnings for next year before today, and those have come down, but that's about 7X next year's expected earnings. Again, that guidance has come down, so it's probably in the low teens. So, I think there's a real business here which has been, I think, mismanaged. And they probably have real doctors that provide real care. And I'm not going to criticize individual doctors who are part of the program here, because they don't know all the details, I'm sure, of how the bills are getting paid. But, there are assets here, there's a network here. This might be something that would be better off being taken private, because the value here is potentially being under-appreciated by the market, possibly. But I think you have to go through these numbers a little bit to see whether this is in more trouble than that. This is a bad situation. You get bad headlines when you're on the wrong side of patient care, in terms of the bills. And that has shown up in the pharmaceuticals with prices of certain drugs having been jacked up. Valeant had a business model which was based on that, Shkreli, of course. This is the wrong place to be in terms of consumers in sympathy. So, they may need to be taken out, have a new name thrown on them, different management. I'm not sure what.
Hill: Quikster? That's available. Maybe not Quikster Healthcare, I don't know if that would go over well. I'm just spitballing here. Papa John's, third quarter results were fine, but they are largely irrelevant because the pizza chain is cutting guidance on sales and earnings. The stock down almost 10% this morning, hitting a 52-week low. They appear to be placing the blame squarely and entirely at the feet of the NFL.
Barker: Who isn't? [laughs] Who isn't blaming the NFL for their problems these days?
Hill: Domino's Pizza, just to name one. I get that this is the official pizza company of the NFL, and ratings for the NFL are, at various points, depending on the matchup, are a little bit lower than last year, I don't know. This line of reasoning from management is pretty suspect, in my opinion.
Barker: You have to be careful where you're advertising, don't you? It seemed like the NFL was a lock.
Hill: Yes, it did. But to go back to Domino's Pizza, last time I checked, they also do some advertising around the NFL and professional football games and sports in general, and their stock year to date is running around 40% ahead of Papa John's. So, when your profit margins are falling, when your sales growth is slowing, and that's the case with Papa John's, it's not all due to the NFL.
Barker: No. Alright, let's take one step back. Is Papa John's generally doing things right or not? Over the last three, five, 10, 15 years, this has been a market crushing stock. So, let's remember. If this is a one-year thing, let's not take them too much while they're momentarily down. That said, they're down today in part because of this NFL thing, but you can just move your advertising dollars somewhere else if that is the entirety of the issue. They're bringing down their guidance fairly substantially for next year over what people had been expecting going into today. So, that's one of those things where, when you start replacing comps of 5% with comps of 1%, which is what I think they did for the quarter, you start getting very different numbers as you multiply things out over a five to 10-year period. And that's the biggest problem, I think.
Hill: I think you're right. That's the biggest problem. Which is why I find it curious that the company spent part of their conference call talking about the NFL, and saying, we're really disappointed in leadership of the NFL because they should have resolved this issue with the national anthem protests, and all that sort of thing. So, it's like, your entire business hinges on several Sundays in the fall? OK. [laughs]
Barker: For this quarter, the guidance they're giving for the quarter we're now in, if that was a huge part of their ad spend, that they bet on the wrong horse, and probably have felt pretty good traditionally about betting on the NFL and paying up for that. You haven't been watching any of this exciting round of baseball playoffs, I take it?
Hill: Not really, no.
Barker: You're still sulking.
Hill: I'm not sulking. As exciting as the World Series is, I haven't been watching.
Barker: Since when?
Hill: Since when?
Barker: Since the Red Sox lost? That's when you stopped caring about baseball this year. And I say, that's because you're sulking.
Hill: [laughs] Uh.
Barker: Nice comeback.
Hill: No, I'm just tired. [laughs] Like our listeners, I'm just tired of you. But, by all means, go on.
Barker: So, baseball, these playoffs have been brought to you in large part by Camping World, which is just on fire, seems to have timed their ad buy very well, because the RV market is on fire. If you go to Elkhart, Indiana --
Hill: Home. Ground zero.
Barker: Home of the Hall of Fame, and go to the meetings they had out there recently, you'll find out that the RV manufacturers are telling investors that they can't build them fast enough right now. So, Camping World is the main sponsor, was the main sponsor for the League Championship Series and the AL Championship Series, and also prominently featured in the World Series. And I would expect them to have pretty good numbers, again, as they have had since their IPO, and all the RV manufacturers, actually. But, the opposite is the case for NFL manufacturers. That's a cyclical thing. Papa John's can just throw its ad buys at the NHL or NBA or wherever else the eyeballs happen to be.
Hill: We have the Winter Olympics coming up. Plenty of opportunity there. I'm sure the people at Comcast, NBC would love to sell Papa John's some ad space.
Barker: Pizza goes very well with the Olympics.
Hill: Pizza goes well with pretty much everything.
Barker: Exactly.
Hill: I actually like Papa John's pizza, more so than Domino's. But, the management whining about the NFL ...
Barker: You're just not having it.
Hill: I'm not having it. What's your go-to pizza, by the way? With this caveat that it's just you. Like, you're alone in the house like, I'm ordering a pizza, or, I'm picking up a pizza.
Barker: Well, you know what's shown up recently in the area is New Haven style pizza.
Hill: What in God's name is -- New Haven, Connecticut?
Barker: Yeah.
Hill: What is New Haven style pizza?
Barker: First of all, you are aware that that's where pizza was invented, yes?
Hill: No. And New Haven has done a phenomenal job of keeping that a secret.
Barker: Really? Go to New Haven sometime.
Hill: [laughs] I've been a couple of times. Nowhere while entering nor leaving the city was there a huge billboard saying, "Welcome to the place where pizza was invented." And I'm happy to say our man Dan Boyd is healthy enough to be back behind the glass, do you want to weigh in? First off, Dan, did you know that New Haven was the birthplace of pizza?
Dan Boyd: I actually did. As much as I hate to do it, I have to back up Barker here. I've been to New Haven, and the pizza places in New Haven are really something else.
Hill: I'm familiar with Chicago style pizza, deep dish pizza. I know there are some people from New York who hate the phrase "New York style pizza" because they feel like, hey, this is just pizza, and no such thing as New York style pizza. But, regardless, what constitutes New Haven style pizza?
Barker: Funny you ask. I've opened up the Wikipedia page, which I think explains it pretty well. New Haven style pizza is distinct in its thin crust characteristic charring. They put bread crumbs underneath the pizza so that they burn.
Hill: I like the charring.
Barker: It's the bread crumbs rather than the dough that gets charred. And, limited use of melting cheeses and chewy texture. It's closely related to New York style pizza. But crispier than New York style pizza.
Hill: OK, so, back to my original question, apparently, as you allege, in the D.C. area now, there are New Haven style pizza places?
Barker: Yes.
Hill: Is it a chain? Or is it just one near your house?
Barker: No, there are few. Anybody that does it right is my preferred kind of pizza.
Hill: Do you want to plug one? Do you want to plug some local business? Lord knows I've plugged Sugar Shack before.
Barker: If I were going to plug a local business, I'd be very local, and I would plug Bugsy's, which is not New Haven style pizza but does deliver pizza to our pizza day here at the office, and that's good pizza.
Hill: Shout out to Bugsy's. What are going with for toppings?
Barker: Sausage.
Hill: Again, it's just you, the kids are nowhere to be seen.
Barker: Yeah, keep it simple.
Hill: Dan, what about you?
Boyd: This is going to anger a lot of listeners. My ideal pizza has both pineapple and jalapenos on it.
Hill: Anything else? Or just those two?
Boyd: Maybe some pepperoni.
Hill: I think I want a slice of that. [laughs] I think we need to wrap up the episode and get ourselves some lunch. Bill Barker from Motley Fool Asset Management, thanks for being here.
Barker: Thank you!
Hill: As always, people on the program may have interests 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 next by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
