In this MarketFoolery podcast, host Mac Greer is joined by Million Dollar Portfolio's Matt Argersinger and Jason Moser to dig into the latest chatter around some major companies.
First, they consider the news that American Airlines Group (AAL 3.04%) and Southwest Airlines (LUV -0.87%) will give their employees $1,000 bonuses as a way to pass on some of their corporate tax breaks. But those will only amount to a drop in the tax-break bucket -- where's the real money going? Second, they discuss Amazon.com (AMZN 3.55%): A report this week says it made 44% of all U.S. e-commerce sales last year. Impressive -- but where does it go from here?
A full transcript follows the video.
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This video was recorded on Jan. 3, 2018.
Mac Greer: It's Wednesday, Jan. 3. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Matt Argersinger and Jason Moser from Million Dollar Portfolio. Guys, Happy New Year and all that good stuff!
Matt Argersinger: Happy New Year!
Jason Moser: Happy New Year indeed!
Greer: I'm working through a little bit of a cold, so a little husky, a little raspy.
Moser: I think we all are. This is the congested episode.
Greer: It is. This is the congested episode.
Argersinger: Post-holiday blues.
Greer: Well, as part of this episode, we're going to talk some Amazon later in the show, and a really surprising prediction someone made about who Amazon might buy next. So just let that marinate for a while.
Let's go ahead and start with more news about the new tax law, and companies paying bonuses. Matt, this time, news that's American Airlines and Southwest both announcing plans to give employees a $1,000 bonus due to the new tax law. That came out on Tuesday, that announcement. Now, Matt, there's been a lot of speculation about how companies might use their tax savings. We're starting to get some evidence, based on these bonuses. Southwest also saying they're going to exercise an option to buy 40 jets from Boeing. What do you make of it all?
Argersinger: This comes on the heels of news from Wells Fargo doing something similar. A few other companies -- American Express, I think, was also paying one-time bonuses to employees. These are nice, and no one is going to complain about getting an extra thousand dollars in a paycheck. But something like this reeks of public-relations opportunism. "Hey, we got a big corporate tax break, so let's do something nice in the short term for employees." It certainly helps the image. It helps the CEO. It's a nice story. But this kind of stuff in the long term isn't going to mean a lot for workers or how corporations employ capital.
I think why this could be a little different, and why we might see more hiring and more investment going forward is, there's been a permanent change to the corporate tax rate. It's down to 21% from 35%. So if I'm the CFO of a company, any company, especially a growing company in the U.S., I'm not spending a lot of time now looking for tax savings abroad or fishing for loopholes in the tax code where I can make more on the bottom line, because now essentially, I live in a tax haven in the U.S. So I feel like we're going to see a lot more evidence as the year goes on about more investment.
I know Jason is going to make a point -- not all of it is going to be really effectively hiring or raising wages or things like that that we'd like to see. But I think it's going to have a real positive impact on corporations and employees going forward.
Greer: That's interesting, because a lot of the speculation, Jason, leading up to the tax bill, there were surveys, and a lot of people speculating that these companies are primarily going to take those tax savings and use them for share buybacks and maybe hike dividends. And Matt, you seem to be saying, maybe not so fast.
Argersinger: I think that's going to be good, and I think it's going to be great for shareholders and investors like us. But I do think, because there's been a permanent change in the tax code versus previous times when we've had temporary special one-year tax things you can do, it is going to have an impact. It might not be as great, and I think a lot of those new dollars are going to go to buybacks and dividends. But I think there's going to be some meaningful reinvestment in business going forward as well.
Moser: I don't disagree. I feel like we're going to see a little bit of a lot of it. You have to go back and look at history to give us some ideas of what might be done with this money. Go back to 2004, where there was a tax holiday. It was part of the American Jobs Creation Act. Facts that went back and put some numbers together, and overwhelmingly that tax holiday money was used for share buybacks and dividends, whether they be special dividends or increases into the regular dividend. So that's great. As an investor, generally speaking, you have to feel pretty good about that.
Now, the flip side of that is, we also see the numbers bear out over time that companies usually do a pretty crappy job at share buybacks. They buy back when the stock is at all-time highs, and then, when the bottom falls out, they really tighten the purse strings. And really, you kind of want to see them take advantage of those buybacks when the stock is cratering. And that can be a little bit of a difficult thing to do sometimes, because perhaps these companies don't necessarily have these vast financial resources. I think we're going to see a lot of these vast financial resources open up here with this tax holiday, or this new tax structure, coming in.
To me, I look at these $1,000 bumps that all of these companies are offering, and yeah, on the surface it's great. It does offer some good publicity. It's a wonderful headline for these companies. A little bit of a tip of the cap to the lower tax rate makes everybody feel good, and it certainly gets folks on both sides of the argument arguing a little bit more. It's just a drop in the bucket, though. It's a drop in the bucket, it's a one time thing, and it really doesn't tell us what they're going to do beyond that. We'd love to see them spend more money. The only thing that's going to really tell us that is hindsight, though -- looking back and actually seeing if actions do, in fact, speak louder than words.
But I think Matt made a good point there. This gives a lot of CFOs -- their typical mandate is to figure out how to minimize that tax rate. They don't have to focus as much, at least. I think they're going to continue to try to figure out how to get that tax rate even lower, because generally speaking, people don't want to pay taxes. I get that. But by the same token, this is going to give them a little more transparency, a little bit more of an ability to plan for the future. And I think that could ultimately be a good thing.
Argersinger: Part of the dilemma here is, U.S. corporations in particular didn't need this. If you look at the balance sheets of most U.S. corporations, great shape. Lots of cash; very low-cost debt. Whether or not you have a 35% tax rate or a 21% tax rate, it was fine. They were making plenty of money. So I think one thing you will see, in addition to buybacks and dividends for sure, and maybe a little hiring, a little bit of capital investment, is I think you're going to see more acquisitions now.
Two reasons for that. We're looking for returns now. Corporations are flush, lower tax rate -- where am I going to get the returns? If I can't get it from reinvesting in the business or R&D, new capital investment, or even hiring, I'm going to look where I can make acquisitions to add to the business. And two, I don't want to delve into politics at all here, but from reading conference calls lately, interviews with CEOs, there's at least a sense that the climate is more business-friendly. This administration, for all it's worth, is a little more business-friendly. So the idea of doing big corporate deals, unless there's some kind of angle there that our favorite president doesn't like, probably going to get the green light. And that's in regard to the later stages of a bull market as well. You're going to see some big acquisitions. 2018 might even be a record year for it.
Greer: Let's pivot to the two companies here that we're talking about, Southwest and American Airlines. Matt, I know in the past year, you've had some bullish things to say about airlines. What do you think about the airlines going forward?
Argersinger: I think it's a great time to be interested in buying or investing in airlines. For reasons I've said before, the consolidation we've seen, the time they've taken to improve their balance sheets, the pricing power that they have now, the hub-and-spoke routes that have been made more efficient for airports and things like that, it favors the big four airlines in the U.S. So when I see things like Southwest announcing that they're executing a contract by, I forget what it was, how many more planes from Boeing. Delta made a big deal with Airbus recently to buy new planes. These are big investments they're making, because they see the opportunities, they see the pricing power, they see a future where oil prices aren't going to crush them anymore. I'm a big fan of investing in airlines right now.
Greer: Well, this may be totally unfair, but I have some breaking news that may weigh on your investing thesis. This is courtesy of cnbc.com. "Alaska Airlines is calling in an exterminator after the company says a rat boarded one of its planes at Oakland International Airport in California, and forced it to cancel the flight."
Argersinger: Man. You know, I'm reassessing my thesis right now, Mac.
Greer: Now, what strikes you as odd about that sentence? Because I've been obsessed with this story. Let me read it again. "Alaska Airlines is calling in an exterminator after the company says a rat boarded one of its planes." Can a rat board a plane? Doesn't boarding suggest permission and intent?
Argersinger: Yeah, it does seem strange to me. Did he go through customs? Did he go through the luggage?
Greer: He jumped on the plane from the jetway. But you can't board a plane, can you, unless you intend to? And someone gives you permission?
Moser: Well, I don't know that permission is necessary.
Greer: Can a rat board a plane? [email protected].
Argersinger: Let us know.
Greer: That's the question. I don't know. I think that's the wrong word. It's not Stuart Little here. He's not getting his boarding pass.
Moser: A rat was found. Boarding the plane. That really implies that someone saw him. And then, you're letting a rat on the plane?
Argersinger: Here's the question --
Moser: Snuck on the plane. Hopped on a plane.
Greer: Stormed the plane.
Moser: There you go.
Argersinger: -- if I'm a passenger, is the plane now not moving because there's a rat there? And poor passengers have to wait --
Greer: They canceled the flight. They pulled everyone off.
Argersinger: Oh, no way.
Greer: Yeah, no, I love this. "Alaska Airlines says it will resume using the plane when a professional exterminator certifies that it is rodent-free."
Argersinger: I guarantee you, if you ask 95% of the passengers on that plane, and they said, "Hey, we can either fly with a rat on board or we can cancel."
Greer: No way.
Argersinger: You wouldn't fly with a rat on board?
Greer: No, because he could chew through the cables. No way. I mean, if it's like Stuart Little, if he truly boarded the plane and he has a little carry-on and he's well-behaved, that's fine. But most rats aren't that.
Argersinger: So you're flying home after the holidays, or for the holidays --
Greer: No. You have to think what the rat could do. He could get in the cockpit and chew through the autopilot or something. I don't know.
Argersinger: I guess that's true.
Greer: Not that you could chew through the autopilot. But I'm just thinking, it just takes one cable.
Argersinger: That's true.
Moser: It's better than a scorpion. A few months back, there were reports of a scorpion that was found on the plane, and that, to me, that makes a rat a little more tolerable.
Greer: I'd take a scorpion before the rat.
Argersinger: There would have to be a dozen snakes on the plane before I would be like, "Cancel my flight." I want to go home.
Greer: Let's not lose focus here. The issue here is, I don't think a rat can, quote, "board" a plane. I think "board" suggests permission and intent.
Moser: I agree.
Greer: This is important.
Moser: They probably fired the employee that actually let the rat board. That's what you're telling me.
Greer: Exactly. Then again, if the rat had the wherewithal to buy a ticket and present a boarding pass in a timely fashion...
Moser: That's a smart rat.
Greer: There you go. So, moving on. [laughs] That's so unfair. That doesn't change your thesis on the airlines?
Argersinger: No, I'm still bullish on airlines.
Greer: OK. Let's move on to Amazon. According to a new report, Amazon was responsible for around 44% of all U.S. e-commerce sales last year. That works out to about 4% of the country's total retail sales. Those numbers courtesy of analytics provider One Click Retail. Jason! What do you make of those numbers?
Moser: I have to believe they are spot-on, though I would have probably guessed based on the number of Amazon boxes that ended up on my doorstep this holiday season that the number would have probably been a little bit higher.
Greer: Four percent seems kind of low to me.
Moser: It does seem a little bit low. But I think, we were talking about this before taping it, that 4% probably, we're trying to figure out whether or not this is the case, but I think that includes all retail sales, including things like fuel and restaurants, which are all included in that number.
Argersinger: Exactly. So if you take those things out, because Amazon doesn't really sell those kinds of things, I think it's really closer to 8%. But for now, if you're talking about the total U.S. retail sales -- so everything, fuel sales, restaurant sales, sales of cars, 4%.
Moser: Yeah. And when you look at the fast growers, the parts of the business that are growing more quickly than others, it's impressive to see. These guys are selling a lot of stuff, whether it's groceries or even luxury beauty. We talked before about Ulta on our watch list in MDP. Amazon was certainly cited as a potential threat there. But I think when you look at the grocery opportunity alone, and this obviously goes back to their Whole Foods acquisition, total estimated grocery sales came in at about $1.5 billion in 2017 for Amazon.
Now, let's think about this for a second. Total supermarket sales in 2016 were around $670 billion. And that's a really low-margin business. So they're only scraping the surface there of the opportunity. I think this Whole Foods acquisition is really going to pay dividends for a long time at the company, just because that's such a repeat business. Everybody has to eat. Groceries are just one of those things. So I think they have a real opportunity there, not only to grow the grocery segment of the business, but also that private-label segment of the business, where it's Amazon Basics, you get your charger, cable, or batteries.
And man, I tell you, the one that's grown more quickly than anything else is baby wipes. And think about how many baby wipes you go through with just one kid, not to mention two. Apparently Amazon Elements, their private-label Amazon Elements baby wipes are just knocking it out of the park.
Argersinger: Yeah. Such good points. What really stuck out to me with the report is already what Jason mentioned, things like luxury beauty up 47% from a year ago. Pantry items up 38%. Grocery up 33%. Furniture up 33%. So if you look at look at these categories, I feel like five years ago, these were categories where consumers weren't looking to Amazon for. Household staples, cosmetic products, grocery. And now, they are. And there's a lot of reasons for that, but it just shows that there's been a broad expansion of Amazon's share of the consumer wallet. So if consumers are now looking to Amazon for these kinds of things, then you look at that 4% total figure and you're like, that's got to go higher, because to Jason's point, there's still tiny fractions of what those total categories are worth in terms of total retail sales. Amazon is just scratching the surface.
Greer: Jason, you mentioned the Whole Foods acquisition. I want to ask you about another acquisition. Tech analyst turned VC Gene Munster came out this week predicting Amazon will buy Target (TGT 1.04%) in 2018. He cited two reasons. He said the shared demographic and the manageable but comprehensive store count for Target. What do you think? Does Amazon buying Target make sense to you?
Moser: Personally, to me, no, not really. I'm not going to completely dismiss the potential of it happening. Gene's obviously a smart guy. It sounds like a little bit of a reckless prediction, so to speak. And I mean, we love those --
Greer: We don't do those on this show.
Moser: No, never! [laughs] And I think there's a point to be made there in regard to the demographic. That is a shared demographic. It's the human race, essentially.
Greer: I've heard of that.
Moser: Everybody from A to Z goes to Target, they use Amazon. So the demographic thing is probably a little less compelling to me. But I think, when you talk about a manageable store base, "manageable" doesn't strike me as being a reason to acquire a business like Target. I mean, that's essentially an acquisition that would be more than twice the size of the Whole Foods acquisition alone. And you don't want to hear on the call Amazon management saying, "Well, we know it's a big deal, but we feel like at least it's a manageable store base, and we could probably figure it out." I feel like this would be, on top of the Whole Foods acquisition, such a big and probably unnecessary acquisition. I would bet against it. But by the same token, I'm not laughing him out of the room.
I mean, I think Amazon has a million different ways to run. And honestly, I would rather see Wal-Mart and Target separate, and I want to see them succeed. Because as we've talked about before, their success basically keeps antitrust off of Amazon's backs.
Moser: And so for Amazon investors, you'd rather see those companies stay on the road anyway, I think.
Argersinger: Yeah, I don't think a deal like this makes sense. If you look at why Amazon acquired Whole Foods, it really wasn't because Whole Foods has 300 grocery stores around the country. It really was because they were acquiring, one, a white-label food brand that Whole Foods has, and just to really boost their grocery inventory on Amazon Fresh. And that made sense to me. Buying Target? If you look at Amazon's network of fulfillment centers across the country now, that to me is the only angle, the reason you would buy a Target, is for inventory and distribution purposes. And Amazon has that now, nationwide. Even though it's a, quote, "manageable" store count, I really don't think Amazon is interested in acquiring tens of thousands of employees, all these retail locations that they now have to manage. It just seems like it would add too many headaches and it's just unnecessary.
Moser: We point to a metric all the time with internet businesses -- Amazon, Wayfair (W 10.78%), whatever -- revenue per employee. And they score because they're able to make so much more money per employee because they're relatively more capital light; they don't have to manage as many people and as many facilities. I do agree that Amazon is looking to get a little bit more of a bricks-and-mortar presence. Target seems to be a bit of a bigger one than I think even Bezos would want to take on at this point.
Greer: A few months ago, on Motley Fool Money, Chris interviewed Scott Galloway. He's an NYU business professor; he's written this great book called The Four. He predicted that Amazon would buy Whole Foods. This was a few months back, and at the time, he thought the next logical acquisition for Amazon is Nordstrom (JWN 1.96%). So if you had to bet on either Amazon buying Target or Amazon buying Nordstrom, what are you betting on?
Argersinger: I have to bet on one?
Argersinger: I think Nordstrom, for sure. Because Nordstrom provides something that Amazon's looking to get more into. If you look at their growth in luxury beauty, or their growth in fashion apparel, Nordstrom is a little bit more of a window angle into that world.
Greer: Malls are dying, though.
Argersinger: Malls are dying, but I think Nordstrom has a particular following, a particular quality and class to it that I think Amazon is interested in breaking into. I think when people think about high-end fashion or luxury apparel or really fancy department stores, they probably don't think of Amazon right now, or Amazon's brand. But they would, I think, with a Nordstrom. So I would definitely go for that over Target.
Moser: Yeah. It could easily be a far more manageable acquisition.
Argersinger: Much more manageable.
Moser: Considerably smaller than Target. And Amazon is making inroads into fashion. With that said, I really don't see either one of those companies becoming a part of the Amazon family anytime soon. As a shareholder, I certainly wouldn't want to see that happen anytime soon. I think it would be just a silly use of capital, honestly.
Argersinger: Yeah. The story with Amazon -- and I agree; I just don't think buying another big brick-and-mortar operation is the right thing to do -- the story with Amazon, I think Jason and I talk about it all the time, it's the value that customers are placing on their time now versus price. So if I can find something on Amazon that's even more expensive and I have to pay a little more for shipping, but it'll come to my house and I don't have to get in my car, drive, park, deal with people to buy something, I just feel like people in general, customers in general, particularly younger generations who grew up buying things online, time and convenience is so much more important to them than cost. They're not going to drive 10 miles to save 10%, even if Wal-Mart or Target or anyone else has a cheaper option. That to me is why I look at this 4% total U.S. retail sales number and, for so many reasons, particularly that, it has to go higher.
Moser: Yeah. Honestly, I'll tell you, the one acquisition I would like to see before any of those, it goes back to the performance that they chalked up here in furniture in 2017, somewhere in the neighborhood of $1.5 billion in furniture sold on Amazon. Wayfair is clearly a big winner in this space, and they have done a lot of good things here over the past few years since they went public. They're chalking up more than $4 billion in sales annually, and that's growing at a rapid clip.
I think there are a few reasons for that. But if you look at Wayfair, the stock price is detached from the fundamentals of the business. OK, we're in a big bull market, and that's the case with a lot of businesses. But Wayfair is taking a lot of plays out of the Amazon playbook. They're doing a lot of the same things that Amazon did in building out the fulfillment distribution. And it's a relatively capital-light business, because essentially it's a network just connecting furniture suppliers all over the country.
And the reason why Wayfair does so well is because, truthfully the shopping experience on Wayfair is superior to that of Amazon. If you're looking for furniture, shopping on Wayfair is a better experience than shopping for furniture on Amazon. I know. We've been doing this for the past year, Mac. I just moved, and I told you, we bought a vanity, we bought a toilet, and now I'm getting emails from Wayfair every day about wanting to buy another vanity and toilet, and I'm trying to figure out how many houses these guys think I have. But I think that would be a very manageable acquisition that I think would really fit nicely in with the distribution and fulfillment that Amazon already has, as well as the distribution and fulfillment that Wayfair has built out. Two very similar businesses focusing on very similar markets. I think it would be complementary.
I was truthfully a little surprised that Amazon didn't buy them before they went public. But that would be a deal that I would much rather see, as opposed to Nordstrom or Target.
Argersinger: Yeah. If you're thinking about the Zappos deal or the diapers.com deal, it's one where Amazon sees a niche retailer doing something much more effectively than they can, and going in and buying it. It makes much more sense.
Greer: Well, we will keep an eye on it. Guys, thanks for joining me! 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 it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening. We'll see you tomorrow!