Happy National Pancake Day! In this episode of the MarketFoolery podcast, host Chris Hill talks with Bill Mann, The Motley Fool's director of small-cap strategy, about the new Fed chair, the changing tides of the restaurant industry, and more.
Jerome Powell made his first public appearance as chair of the Federal Reserve and seemed promisingly calm as he faced the U.S. House Financial Services Committee. Dine Brands Global (NYSE:DIN) has popped some 80% in the last three months, and CEO Stephen Joyce seems refreshingly conscious of the company's situation. The restaurant industry is shifting, leaving some unfortunate older companies to slowly rot away.
A full transcript follows the video.
This video was recorded on Feb. 27, 2018.
Chris Hill: It's Tuesday, February 27th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in the studio today, the director of small-cap strategy here at The Motley Fool, Bill Mann. Thanks for being here!
Bill Mann: How are you, Chris?
Hill: I'm doing well. How are you doing?
Mann: I'm doing good.
Hill: You're rocking the Carolina blue. Kind of.
Mann: It's kind of in between Carolina and Duke blue.
Mann: I know. Which doesn't sit to my loyalties toward one or the other, which is very, very heavily the lighter vs. the darker.
Hill: That's right. Duke lost last night to Virginia Tech.
Mann: Wait, wait, what? I didn't catch that. What did you say?
Hill: Duke lost. [laughs] That's why you have a big smile on your face.
Hill: Also, it's National Pancake Day, and of course we're going to talk about that.
Mann: Speaking of smiles.
Hill: And we're going to talk about the restaurant industry. We should probably start, though, with the new Fed chair. Jerome Powell making his first public appearance since being sworn in as the new leader of the central bank.
Mann: He did a good job.
Hill: Yeah, I was going to say, he did do a good job, although maybe it's a sign -- look, when you're the head of the Federal Reserve, you're one of the most powerful people in the United States of America, you're one of the most powerful people in the world. And yet, it's clear from how he spent his first public appearance that you don't have complete control over your destiny, because he spent it testifying in front of the House Financial Services Committee.
Mann: That's right. You would think that, at some point, he would stop and say, "Hey, think about who you're talking to here." [laughs]
Hill: Yeah. No, he didn't.
Mann: "The gentleman from Kentucky might want to watch his tone." [laughs] He didn't.
Hill: He could have done that, but he didn't. And that's good. I think, if there's one quality we like to see in whoever occupies the role of Chair of the Federal Reserve, and we certainly saw this with Ben Bernanke and we saw it with Janet Yellen, and we appear to be seeing it with Jerome Powell, the calm. Just, the utter calm. Do you have any initial impressions of Jerome Powell based on today? And at some point, I want to talk about, what kind of challenges is he facing in the next 12 months?
Mann: Yeah, I think he was very calm, and I really appreciated his tone. And I think a lot of the members of the committee where he was testifying today were attempting to trap him in one way or another, to make a policy prediction or state what it was that they were going to do. And he was very clear about the fact that, "Look, the Fed is all about monetary policy, and this is where we are focusing." So, every question, it seemed, they were trying to push it back to more of a fiscal question. He got a couple of questions about whether or not the recent tax cuts were going to be good for businesses or good for employees, what the usage of that money was going to be. And he very clearly said, "That's not something that we track. That's not something that the Fed should have policy on."
Hill: In a very polite and distinguished way, "That's not my job."
Mann: [laughs] Right. "I should ask you the same question."
Hill: So, one of the things that has bubbled up, particularly over the last few months, is the question around interest rates and where they're going. It seems not unreasonable that the rate on the 10-year treasury could hit 4%. Some people are saying about the end of this year, some people are saying, "Yeah, this could absolutely happen by the end of 2019." I'm not asking for your prediction on that, but I am curious, as an experienced investor -- as people who are interested in investing in stocks, we've had a very good run of essentially not even having to think about bonds, unless you're so late in life that the responsible thing to do is take some of the money you have in stocks and put it into a safer vehicle.
Mann: Is to simply not lose, yeah.
Hill: But, now, it seems like a reasonable question -- are bonds more attractive now?
Mann: For me, no, not yet. Not yet. I'm not a bond guy. I focus on stocks and I focus on companies. I think there are probably many more qualified people here, even at The Motley Fool, to talk about what the efficient portfolio and what a portfolio should look like. But, something I thought was really interesting today, and this is a really good reminder, one of the members of the committee asked Powell about the number of rate cuts that would be coming in 2018. And the Congressperson, I can't remember if it was a man or a woman, said, "Well, the Fed said three." And he said, "No, wait a minute. What you're actually hearing when you hear 'three rate cuts' is the average of each of the members of the Federal Committee, this is what each of them thinks, and we just average it." There's no Fed policy that says there's going to be three rate hikes. But, on the other hand, the fact that, on average, they said there were three suggests that the rate environment we live in is rapidly changing.
Hill: In the same way that we have companies, and Berkshire Hathaway is probably the most prominent among them, that don't really engage in quarterly conference calls, they limit their communication, there was a long stretch of time where the chairman of the Federal Reserve, whoever it was, gave limited statements. Yes, of course, testify before Congress, but there weren't really press conferences or anything like that. Ben Bernanke changed that by starting the process of press conferences. If you could wave a magic wand, would you go back to those days where you and I and every other investor hears less from the Federal Reserve? Or do you think this is a situation where more is better?
Mann: I would say, actually, that Greenspan was a little bit more of the origin of that. I think the Greenspan-CNBC cabal, that they were very beneficial to each other in terms of building their brands. I would prefer to hear less from them. Look what the markets did even this morning. He made some very benign statements, and currency markets move very quickly, and the stock market dipped for a little bit and then came right back, because they think he's making a statement about where currencies are going, and what their policy is going to be, how it impacts the dollar. And I don't know that that's helpful to people. Just do it. Just do it. Although, I will say, I think that everyone who has that much power should actually face Congress for questioning from time to time.
Hill: I forgot to ask you the most important question which is, how tall is Jerome Powell? If nothing else, whatever else Jerome Powell does during his tenure as Chair of the Federal Reserve, he has reversed the trend of decreasing height.
Mann: That's right.
Hill: We had Volker in the '80s. Rangy guy.
Mann: May have been part Yeti.
Hill: May have been.
Mann: May still be. He has not passed away, he simply is not on the Fed anymore. But, yeah, part Yeti.
Hill: Someone published a chart, I remember, when Janet Yellen became chair of the Fed, and it was the decreasing height. Like, look, it's a factual chart, from Volker at 6'7, then to Greenspan, then to Bernanke, then to Janet Yellen.
Mann: It is linear, wasn't it?
Hill: It was linear. So, if nothing else, Powell is taller than Janet Yellen.
Mann: I do love the thought of taking a completely spurious correlation and making some prediction based on it. Like, "On a price to height basis, we are decidedly undervalued right now."
Hill: How great would that be, if Powell did that? And I don't know anything about his sense of humor, but if he just dropped that into an answer and just utterly confused the members on the panel?
Mann: [laughs] A ridiculous question comes in and he says, "Well, you know, I'm kind of tall," and then goes on. [laughs]
Hill: Yeah. I mentioned National Pancake Day. This is relevant for investors because of the International House of Pancakes, which is under the umbrella of Dine Brands Global. It used to be a bigger umbrella. Now it's just, Dine Brands Global owns IHOP and they own Applebee's. What's going on with this company? Because, in the last three months, the stock is up about 80%.
Mann: First of all, until Wednesday, this was known as DineEquity. They came out with this very high and mighty statement saying, "We're changing our name to reflect our values. We're now Dine Brands Global." Which still doesn't solve the issue that the first word is a verb. So now, apparently, it's a much more aspirational brand name than it was previously.
These are two nameplates where you can say, without casting too much aspersion, that their best days are probably behind them. But, the new CEO, Stephen Joyce, came in and said, "These companies should be built toward maximizing cash-on-cash return. They are not to be built on having a great claim on being a much larger company in the future. We're just going to be as efficient as we possibly can be. We're going to run our restaurants well, we're going to make sure that people have good experiences in them, get good value for their dollar. But we're not off trying to turn Applebee's into the next big thing, because that's just not where it is." So, yeah, the stock has gone up a great deal, I think because shareholders are somewhat confident that the management sees the company for what it is. And that's actually somewhat rare among companies, because the CEO has a huge amount of pressure and huge amount of incentive to put the blinders down and say, "No, we're a growth company."
Hill: It is refreshing. I think those are two restaurant concepts, and there are plenty of others out there, but those are two restaurant concepts where --
Mann: Plenty of others. [laughs]
Hill: -- as an investor, you look at them and think, "What's your throughput like?" That would be my No. 1 question. How high is the throughput right now? And what are your plans to make it higher? How are you turning over the tables? What is your plan for increasing comps? And I could be wrong, but it seems like IHOP is the path forward there of the two. I was saying before we started taping, I've been to Applebee's a handful of times, it's never been an amazing experience, but it's also never been a bad experience.
Hill: Whereas, IHOP ...
Mann: [laughs] It's all over the map!
Hill: I was going to say, IHOP delivers. Come on!
Mann: Oh, IHOP delivers?
Hill: IHOP totally delivers.
Mann: That's right. You're getting your $4.50 -- [laughs]
Hill: Say what you want about pancakes, they're not expensive to produce.
Mann: They're not expensive to produce. They're filling. [laughs]
Hill: Let me go back to something. Everything you said about the new CEO I find interesting and refreshing. Which makes me question the name change. To go from DineEquity to Dine Brands Global, that has me thinking --
Mann: That seems like a deck chair, doesn't it? Yeah.
Hill: Well, unless they actually do plan acquisitions in the future. If they rolled that out and said, "Here's our new name, and by the way, we have a five-year plan to increase the throughput, to raise our comps. And in the next five years, we don't have the amount of cash on hand that Uncle Warren has in Omaha -- "
Mann: Because, who does?
Hill: Nobody does. We were talking yesterday about how it really seems like he's really itching to buy something. But, if they had a five-year plan that said, "No, we're absolutely looking to grow our global footprint," well, that would make me understand the name change more.
Mann: Yeah. I'm going to ignore that question just for a second to talk about --
Hill: We all should.
Mann: -- what may be the coolest thing about their recent bump up which is, they came out and said that one of the things that's helped Applebee's a lot is their $1 Long Island Iced Teas. That that's been something that's been very helpful. And they call it a disruptive value offer. Now, they aren't clear on what they're disrupting. I think they're probably disrupting their clients' next couple of days. [laughs]
Hill: I'm pretty sure we talked about that on Motley Fool Money at the end of 2017, because I'm pretty sure, wasn't that a promotion in December?
Hill: That's my memory, they said, all month long, and I don't know if they expressly said, "We're going to help you get through the holidays by getting you plastered on $1 Long Island Iced Teas," but that seemed to be the underlying promise.
Mann: You could see the corporate discussions. "OK, should we do blockchain? No, I have a better idea: cheap booze. It's either/ or." [laughs]
Hill: You know what? I have a lot more respect for them for going the cheap booze route. If they came out -- and we've seen this with other companies -- if they came out and said, "We're changing our name from DineEquity to Dine Brands Blockchain. We're Applebee's, IHOP, and we're standing up a blockchain division." Come on!
Mann: Yeah, no. Dumber things have been suggested, and not that long ago. The global thing, I think, is probably the most important word, because it has traditionally been the case that IHOP was somewhat poorly named because the I in IHOP basically meant the United States and Canada. But, they have suggested, they are opening new restaurants through the franchisees, and it's a pretty good mix of the U.S. and overseas. I think, of the two brands, IHOP is the more differentiated of them and the one that has the most equity in it. And it probably has the most breadth internationally.
Hill: Where do you think we are with the restaurant industry right now? Because about a year ago, you could start to look out and see the cracks for a number of different publicly traded restaurants. And 2017, as a group, it was not a great year for restaurants.
Hill: When you look at the restaurant industry right now, what do you see?
Mann: I see, still, a pretty substantial generational shift. I see an enormous amount of restaurant installed base that's based on the quick-serve sit down model, where anyone who is 34 and below, by and large, are favoring much higher input quality and much lower interaction, like glorified takeout or the Chipotle model. There's a restaurant chain here in town called CAVA which is going gangbusters, and I would love for them to be public instead of private. And it's very much the same thing. You pay $8 for an entree, and you know full well that the majority of the money that you're paying for it goes into those ingredients. These are the kinds of things that are favored now. The restaurants that are caught out in the middle, those chains, and you could list 20 of them -- the Chili's, the --
Mann: Applebee's is definitely one. They have to shift. And a lot of them are trying, but I think we're going to find over the next couple of years that some of them will succeed at it, and some of them are in the midst of the long, drawn-out goodbye.
Hill: By the way, we talked last week on this show about Texas Roadhouse and CEO Kent Taylor. It was a year ago at our FoolFest conference that you conducted a fabulous interview, fabulous interview, with Kent Taylor on stage in front of a huge audience. Which leads to this question. They said in the most recent quarterly report that they were going to open as many as seven new Bubba's 33 sports bar concepts. Can you give him a call and see if we can get one in the D.C. area? Because right now, the closest one is Fayetteville, North Carolina.
Mann: We could get there. We would probably have a harder time getting home. I think we could take an Uber home. I don't know the designated driver protocols. I'll reach out to Kent. The other interesting thing about Texas Roadhouse is, they are rolling out lunch.
Hill: Oh, that's right.
Mann: Yeah. They have always been a dinner-only place, and they are actually looking at and testing offering lunch.
Hill: Not dessert, though.
Mann: No. [laughs] That was the greatest. "I want you to eat your dinner and get the hell out." [laughs]
Hill: Programming note, the rest of the week on MarketFoolery is going to be Australia Week, because tomorrow, we're going to have Scott Phillips, who's here in Fool HQ. And on Thursday, I don't even remember the last time this guy was in the studio, Uncle Joe Magyer is also on the premises.
Speaking of Australia -- this seems as good as any to wrap up -- Dateline Brisbane, and thank you to Bill for sharing this. This is the headline from The Daily Mail, which is a U.K. publication, big circulation. Here's the headline. Dateline Brisbane, Australia. "Former Freemason, 51, found drunk and naked inside a huge pipe organ with a toy gun and remote-controlled police car says he got lost while trying to hand out cheeseburgers to the homeless."
Hill: There's a lot to unpack there.
Mann: You could take one fifth of that headline and put it out there, any one fifth, and it would still be awesome.
Hill: Handing out cheeseburgers to the homeless?
Mann: I want to know about the toy gun. I want to know about -- because Freemasons, I understand to be, you're I member for life, and he's a former Freemason. Which suggests to me that this guy has bad choices in his blood.
Hill: I think so, if at some point, the Freemasons said, "This is a have to go situation for you."
Mann: How do you start by bringing cheeseburgers -- OK. Is there an Applebee's in Brisbane? Maybe he had a few too many $1 Long Island Iced Teas?
Hill: Let's start with the positive: that's nice.
Mann: That is nice.
Hill: Handing out cheeseburgers to the homeless, that's a good-hearted gesture.
Mann: Yeah. Nobody is saying this is a bad guy.
Hill: Well, no, no one's saying that part isn't good. But, somewhere on the path to handing out cheeseburgers to the homeless, he managed to get himself very drunk, very naked, and inside of a huge pipe organ.
Mann: Which he apparently destroyed. [laughs]
Hill: Which tells us that he's, on some level, physically fit, because pipe organs, that's a large instrument.
Mann: Yeah. I think we should be less mad than impressed.
Hill: [laughs] You know what? Maybe I'll bring this up to Scott Phillips tomorrow and just see what he thinks.
Mann: You know what he's going to say? "Queensland." [laughs]
Hill: I was going to say, because Scott is from Sydney, right?
Hill: So, that may be a rivalry thing there. Bill Mann, thanks so much for being here!
Mann: Thanks for having me, Chris!
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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Bill Mann has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Chipotle Mexican Grill, and Texas Roadhouse. The Motley Fool has a disclosure policy.