In this Market Foolery podcast, host Mac Greer is joined by Jason Moser of Million Dollar Portfolio and David Kretzmann of Hidden Gems Canada to discuss the more interesting chatter on Wall Street. First, there's China, which answered President Trump's threat of tariffs with counterthreats of tariffs on U.S. exports. So far, the market is shrugging off the risk.
Our participants discuss Trump's claim that Amazon.com (AMZN 4.50%) is responsible for troubles at the U.S. Postal Service -- though the e-commerce giant is actually supplying it with profits to partially cushion it from the declines to its first-class letter business. Then, they check in on Dave & Busters Entertainment (PLAY 6.00%), which had an entirely unentertaining fourth-quarter release to show investors this week. And finally, they ask what Warren Buffett might have been hinting at when he said Berkshire Hathaway (BRK.A 2.63%) (BRK.B 2.82%) might buy a whole airline.
A full transcript follows the video.
This video was recorded on April 4, 2018.
Mac Greer: OK, guys, let's get this party started. It's Wednesday, April 4th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Jason Moser and David Kretzmann. Guys, welcome!
Jason Moser: Howdy!
David Kretzmann: Happy Wednesday!
Greer: Happy Wednesday to you! Are you feeling it? Are you excited?
Moser: I'm always excited.
Greer: I think I had one a half to two many cups of coffee.
Kretzmann: So you're feeling good.
Greer: I'm feeling good! I think you may have to listen to this one at half speed every time I talk.
Moser: I was going to say, you go by cups. I go by the pot at this point.
Greer: I knew better, I said, "You know what, you're better than that," and yet I kept drinking the coffee.
Kretzmann: No shame in that.
Moser: California cancer warnings be damned. Caution to the wind, aren't you?
Greer: I'm throwing caution to the wind, and we're going to throw caution to the wind on this show -- later in the show, we're going to do some wild speculating about Warren Buffett and what his next buy might be, because there's a lot of speculation that could be an airline.
Kretzmann: Not to spoil too much.
Greer: An airline in the Southwest.
Greer: But I don't want to give it away. We're also going to talk some Dave & Buster's, and we'll talk about Amazon. But, guys, let's begin with a potential trade war. In response to proposed tariffs by the Trump Administration on software patents and other technology, China has proposed new tariffs on U.S. products including cars, whiskey and soybeans, which is the biggest U.S. export to China. Guys, this morning, I was really fired up about this story. In the pre-market, it was looking ugly. The market opened sharply down. But now, the market has turned that frown upside down.
Kretzmann: That didn't take long.
Greer: It didn't take long, and that may be related to a statement made by the president's economic advisor, Larry Kudlow, right before our taping today. Kudlow told reporters that the market shouldn't overreact to trade measures, saying the market correction is mild and overdue. Kudlow went on to say that the president is a free trader at heart. So, what does it all mean for investors?
Kretzmann: Well, there's a lot of back-and-forth going on between the U.S. and China. I think it's important to take a step back and recognize that these tariffs aren't going into effect right away. I think the best way to look at it at this point is, these are really negotiating tactics from the Trump Administration and, on the other side of the table, China. In the case of the U.S. proposed tariffs, companies have until May 22nd to review and probably object to the tariffs being put in place. From there, the U.S. government would have 180 extra days to review whether or not they want to put those tariffs in place and to what extent they would put them in place. So really, the worst-case scenario here is, the tariffs would probably go into place in a couple of months or even later this year if they even go into place at all. But, at this point, I look at it as negotiating tactics. I don't think the U.S. or China really wants these tariffs to be put in place. I don't think either country really benefits.
Greer: Jason, it sounds like a better term might be a proposed trade war.
Moser: Yeah. That's it, right? Nobody really wants a trade war. I think David's right, I think it's really more or less a couple of strong-willed individuals just trying to lob up some strong negotiating tactics and get the conversation started, at least.
I think, the question we get when we see headlines like these is, "How should I change my investing strategy? What should I do as an investor? How should I change or adjust?" And honestly, the best part about our investing style -- which is, as we always talk about, investing in businesses, focusing on longer periods of time, taking things with a grain of salt and focusing on the bigger picture -- the best part about our investing style is, when you run into these kinds of stretches, there's volatility, the markets are down, and you think, "Woah!" But then, go take a look at your portfolio, particularly look at the holdings that you've had in there for a long time. And by "a long time" I mean three, four, five years, even longer. The nice part about our style of investing is, there's a good chance, if you're investing in good businesses and you've held them for three, four, five years, even longer, even in times like these, those positions are still doing really well. They're still typically going to be rewarding your portfolio.
So, I think it's always nice to take a step back, take a look at your portfolio, look at those companies you've been holding on to for a long time and ask yourself, do I really need to change what I'm doing? Because in the long run, it seems to be working, these short-term sorts of moves notwithstanding. And perhaps it's an opportunity to add a little bit to those positions that are doing so well.
Greer: David, pushing back on Jason's point a little bit --
Moser: Don't push back on me.
Greer: OK, Jason, I'm going to push back on your point directly. If I'm a shareholder in a company like Boeing (BA 5.92%) -- Boeing last year agreed to sell 300 planes to China. That's around $37 billion worth of planes. Boeing estimates that China could buy more than a trillion dollars of aircraft over the next 20 years. That's not nothing.
Moser: I'm going to pull my Tim Cook card, I would never be an investor in Boeing in the first place, Mac. How about that?
Greer: Oh, what a dodge!
Kretzmann: He doesn't accept the premise of your question, Mac.
Moser: That's right.
Greer: You reject the premise. But, if you're a Boeing shareholder, do you look at this story, and do you look in a potential trade war, and say, "You know what? Maybe I should get out."
Kretzmann: I think it's premature to do that. Obviously, Boeing has a diversified business, it isn't just selling to the U.S. or to China. And hopefully you're not investing so much into Boeing that you're losing sleep at night over this proposed trade war. With our style of investing, as JaMo was outlining there, if you have a diversified portfolio of quality businesses, they're not going to be all companies largely dependent on China for the bulk of their revenue, I think you can afford, in this case, to continue holding Boeing or a company like that, that's a little bit more dependent on China for the long-term. Like I mentioned earlier, I just don't see these tariffs being put into place, at least to the extent that I think both countries are jockeying for at this point.
Moser: Yeah. And to your point, I think that's a good one.
Greer: Thank you. I appreciate that.
Moser: All companies are not created equally; all markets and industries are not created equal. There are certain companies or industries that are going to be a bit more exposed to this than others. And I think one we've seen a lot discussed here recently is appliances and electronics, a lot of that stuff that's imported over here, chances are we have a house full of them. And on the one hand, in theory the price of things like home appliances and electronics could go up.
I also was thinking about this from the other side of that, though. It doesn't necessarily mean that a retailer has to pass on those costs, especially if that retailer is run by someone who takes a longer outlook and is focused more on being the Earth's most customer-centric company, for example, [coughs] Jeff Bezos and Amazon. But, I mean, there are examples of retailers out there that will forgo that short-term profitability in order to build up that loyal customer base, and they would view things like this as a bit more temporary in nature. So, that's another way to look at it.
Kretzmann: I would say, at the end of the day, I would be nervous about letting macro events drive your investing decisions one way or another. Our former Fool colleague Morgan Housel, he had an article looking back at previous Administrations. The Bush Jr. Administration was supposed to be good for airlines and energy. Those industries turned out to perform terribly under his tenure as president. Obama was supposed to be great for clean energy, and that industry by and large really performed poorly, from an investing perspective.
For me, it comes down to, don't let those macro decisions drive your investing decisions. At The Fool, we tend to be bottom-up investors. Focus on finding great, quality businesses that you think have good odds to perform well over the next five years or beyond, regardless of which administration or political party has power at that given time.
Greer: And it sounds like you're both saying, this could end up being more of a trade kerfuffle, right? Not a trade war.
Kretzmann: I would lean more toward that.
Kretzmann: Kerfuffle, I like it.
Greer: Can we all say that together, kerfuffle?
Greer: Thank you. Let's move on. Jason, you mentioned Amazon. President Trump continuing his war on Amazon. On Tuesday, Trump tweeted that Amazon is costing the United States Post Office massive amounts of money for being their "delivery boy." I want to set the table with some not-so-fun facts here. Ready? The U.S. Postal Service has lost money for 11 straight years. They have significant pension and healthcare costs. Around two-thirds of Amazon packages pass through the U.S. Postal Service at some point. That's a lot.
Amazon's network of warehouses is so extensive now that it pays sales tax in every state that has a sales tax. But, Amazon also facilitates third-party sales, and those third-party companies do not need to pay sales taxes in states where they don't have a physical presence. Finally, the Postal Service has a monopoly on regular mail delivery, as we all know. And you may have noticed that's a declining business.
Kretzmann: Even with the monopoly status.
Greer: There you go. So, what do you think about President Trump's war on Amazon? Are we all Amazon shareholders here?
Moser: Yes, I am.
Greer: What does that mean for you?
Kretzmann: I'll kick it off here. I think in this case, the USPS needs Amazon more than Amazon needs the USPS. The President's claims that Amazon is hurting the USPS, I don't know if there's actually a whole lot of facts behind that to back it up. In a way, it's that parcel and package delivery business that's actually been a growth driver for USPS. And that's driven, of course, by Amazon and the plethora of e-commerce activity we're seeing. So, that's something I would need to look into more.
But, at this point, like you mentioned, Mac, what used to be the USPS' bread and butter, first class mail delivery, that's been a declining business for a long time now. That package and parcel business with Amazon and others is where the growth has been. So, I think if USPS had to renegotiate its rates with Amazon, Amazon can go to FedEx (FDX 5.06%) or DHL or UPS (UPS 3.56%). Amazon is already testing out its own delivery service in LA. I suspect that's something that the company will roll out nationwide as they start to get that under their belt more. So, for me, it comes down to, USPS needs Amazon more than the other way around.
Moser: I absolutely agree with that. It's not like the USPS' business just went to crap overnight. It's been bad for a long time.
Greer: Take heart, you've been crappy for a while.
Moser: My entire life is like a Seinfeld episode, I relate to things via Seinfeld. I can always go back to that episode where Kramer tries to have the Post Office stop sending him mail, and Newman takes over and his bosses go crazy. So, there's an interesting situation here with the USPS, because it does seem like, when I get my mail every day, it goes from the mailbox to the trash can. I could do without it.
I also find it very interesting that he was not targeting FedEx and/ or UPS in this process. Perhaps that's because they don't necessarily have the ties to the government that USPS does. But Amazon has a lot of stuff that flows through the UPS services and FedEx services, as well. It's not like Amazon isn't paying for stuff to be shipped. If you look at it as a percentage of net sales, fulfillment was 12.5% of net sales in 2015, 13% in 2016, and 14.2% in 2017. Also keep in mind that throughout this entire stretch, Amazon Web Services has become a bigger part of Amazon's business as well. This is all just to say that Amazon is paying -- and this is a technical term -- a buttload in shipping and fulfillment costs every year. It's not like the USPS is getting the short-ended here.
Greer: So they're not getting a free ride.
Moser: No, they're not getting a free ride! And I can't help but feel like this is maybe a bit of a personal vendetta. I think there's probably some questions.
Greer: Jeff Bezos owns The Washington Post.
Moser: Yeah. So, I just think there's a little bit more here than meets the eye. I consider it a non-issue. I think it's kind of a soap opera, more or less, a little sideshow that's probably going to fade into the background pretty quickly. I mean, it would be one thing if Amazon's services and what they're doing wasn't benefiting customers. But people love Amazon. Customers are winning from using Amazon. It makes things better for us, it's bringing down costs, it's giving us more time. It'd be different if Amazon was a blight on society, but it's not.
Greer: OK, guys, let's talk some Dave & Buster's. Dave & Buster's down big on earnings. Guys, same-store sales down almost 7%.
Greer: That seems bad. [laughs] Investors aren't too happy about the company's outlook for the full year.
Kretzmann: Yeah, this was a really rough quarter. It's especially rough because, the fourth quarter of 2017 was actually the best quarter for restaurants in the U.S. in over two years. Dave & Buster's, their fourth quarter results in this case actually got progressively worse through the quarter. Their same-store sales were OK in November, got worse in December and got even worse in January, at the same time where restaurants as a whole over that same period were actually improving their results. So, a little bit baffling here.
Just reading through the conference call, management seems so scatterbrained right now. They're like, "We need to improve our food, we need to improve our speed and delivery of the food, we need to improve our amusements, and at the same time, we're going to continue opening new stores." They were clearly caught off guard here. They missed their expectations. They're now expecting the same-store sales to decline for this upcoming fiscal year. So, a rough situation.
Last year, I had seen Dave & Buster's, their numbers as far as same-store sales and revenue and earnings growth had actually been a lot better compared to a lot of other restaurants which were struggling, as we all know. But this is really puzzling to me, that people just aren't going to the stores as much as they were a year ago, and I don't think management knows why. And their strategy to turn that around isn't all that compelling to me.
One thing that they mentioned as far as the amusements go, which makes up about 55% of their business, those games and amusements, they're rolling out a couple virtual reality games this year. I'm thinking, who would go to a Dave & Busters to put on a VR headset, which totally takes the social aspect out of the experience? So, if you're banking your turnaround hopes on two VR games this year, that's a head scratcher to me.
Greer: So, I'll count you as skeptical.
Kretzmann: I'm skeptical. And another thing is, over the past year, they've actually increased their debt load by over $100 million. This is a company now sitting on over $330 million in debt. People aren't going to the stores like they were, management doesn't really know why. And at the same time, they're opening new stores.
Greer: Tell me more!
Moser: Is the debt to open those stores? What are they doing with that debt?
Kretzmann: Yeah, mainly to open new stores. When they went public a couple years ago, they already had a hefty debt load. If I was management now, I would slow down the new store openings, really focus on improving performance of your existing stores, pay down that debt load. If you're putting up -6% comps when the economy is doing pretty well, restaurants as a whole are doing pretty well, next time a recession comes along, that's going to get way uglier.
Moser: Yeah. I've never been to Dave & Buster's, I don't really know much about it, it sounds like a Chuck-E-Cheese for adults, kind of.
Kretzmann: Pretty much, yeah.
Greer: That's fair. But you can drop a lot of cash in a hurry. I almost think of it as more of a casino.
Moser: To your point there, and that's just it, with Dave & Buster's, about half of their revenue is tied to the actual games and entertainment in the stores. We always talk about with restaurants; the key is traffic. You have a lot of fixed costs in keeping the restaurant open and staffed. So, the more traffic you bring in, the more profitability. Traffic is the key. And it seems to me that with Dave & Buster's, that would be doubly so, because you have a concept that's not just dependent on the food, but it's dependent on the games as well. And I don't know that Dave & Buster's is necessarily known for slinging a bunch of really good food, either. So, to me, the debt load seems to be the icing on the cake there as to, why would you invest in a company like this that doesn't seem like it's being managed very well?
Kretzmann: Yeah. I think the actual concept is appealing in a lot of ways, because you're not overly exposed to food and beverage trends, and you also have that high-margin revenue coming from the games and amusements. But in this case, I really struggle to see where management is going with this. It would be one thing if they acknowledged, "Yeah, we had a bad quarter, here are some ideas why." But at this point, it really seems like a shotgun approach. You can't just say, "We're going to improve everything and hope that leads to more people coming back." It can't be everything that you need to improve.
Kretzmann: Focus on something. It seems like at this point, they're doing a lot of things in a mediocre way, and they're just going to double down on that strategy, at the same time that they're opening new stores. And when you have that level of debt if you're a restaurant or retailer, that really takes away your flexibility when times actually do get tough on a macro level. That's why I'm a little more cautious today. The stock is trading at a pretty reasonable multiple, so it does have that going for it. But, 15X earnings, I think if you're interested in restaurants, there are better-operated restaurants than Dave & Buster's right now.
Greer: Guys, for our final story here, I what to do some speculating. It's a bit reckless, it's a bit wild, but it is grounded in a story about Warren Buffett.
Greer: Grounded is appropriate, because it's about an airline. Southwest Airlines CEO Gary Kelly has come out and said that he has not talked with Warren Buffett about a possible sale. This comes after Buffett sparked speculation with a comment that he wouldn't rule out owning an entire airline. And I should probably mention that Berkshire owns around 8% of Southwest Airlines, and Berkshire has around $116 billion in cash. So, is Buffett going to buy Southwest? And if not, where's he going with that?
Kretzmann: If he was going to buy an airline, I would hope it would be Southwest. Since Berkshire tends to have a hands-off approach, they could continue to let Southwest to be awesome. It takes away the likelihood of someone else, an activist investor, coming in and saying, "If you just take away some of those perks, you'll raise your margins." As far as airlines right now that I want their business model and practices to be preserved, I would love Southwest to continue to have that kind of flexibility. And maybe operating under Berkshire is a nice way to do that while still having independence over the culture, which has been a huge contributor to their success.
Moser: I'll go in a little bit of a different direction here. I think this is going to be potentially an easier one for Berkshire to swallow. For all of my life, I've sworn no loyalty to any airline whatsoever because I never really cared. Just give me a reasonably priced ticket and get me there safely.
Greer: No Delta, given your Atlanta roots?
Moser: Whatever. I go to Priceline, I buy a ticket, just get me there. You know what I mean?
Greer: Pretty sentimental there.
Moser: Well, I'm a sentimental guy. Old and grumpy. But, we were in the Bahamas last week --
Greer: Quit bragging.
Moser: Well, let me give you my mango banana analogy. We were on the way back, and we just worked out our airfare, we flew different airlines here and there. But, JetBlue was the airline that we flew back. I think it may have been the first time I'd ever flown JetBlue. But, I was thoroughly impressed not only with the customer service that we received from them in the airports, but also with the planes. The seats are big.
Moser: Yeah! I was really amazed. And from what I could gather, we were on two different sized planes, it doesn't appear that they have first class, either. So, from what I can gather, it seems like it's just one class, make the plane a little bit bigger for everybody. I was impressed. I left that thinking -- and I bet David Gardner would like this, because I think JetBlue is in his universe in Stock Advisor. This is the one airline where I thought, I would actually make an effort to fly them again because it was just such an enjoyable, comfortable trip on the way home. And comparing it to the trip going there, there was a noticeable difference. JetBlue, considerably smaller than Southwest. It's only about a $6.5 billion market cap company today. Why not just buy both?
Moser: Southwest and JetBlue. Then you really corner the market on good airlines, they're comfy, no frills, getting people back and forth. You could probably build up some pretty good loyalty there, I bet.
Greer: I need to know if I need to give up my dream of Warren Buffett buying Costco. Costco has a market cap of around $81 billion. And let me mention, as you may know, Charlie Munger is on Costco's board. So, it's not completely crazy talk, but that's a pretty hefty price tag.
Kretzmann: Yeah, that would be a large pill to swallow. The biggest acquisition Berkshire has made I think was around $40 billion.
Moser: Was it Burlington Northern?
Kretzmann: No, it was the Castparts one.
Moser: Precision Castparts.
Kretzmann: Yeah. I think that was around $40 billion. So, $80 billion or higher, I wouldn't bet on it, no.
Greer: OK. Campbell Soup, $13 billion.
Moser: I stand by McCormick (MKC 2.79%). I just stand by McCormick. I've said this ever since I started working here. This is the kind of nerd I am. I'm going to go back to the Bahamas again, Mac. My wife was even looking at the pictures I took when we were there, and she was like, "Jason, why do you have a picture of the spice rack from the grocery store?"
Greer: That sounds like a cry for help.
Moser: [laughs] Well, I was in the grocery store, just a local grocery store, looking at the spice rack, and I'm thinking, there's a bunch of McCormick stuff, and then there's some other generic brands and local brands, and I'm taking a picture so I don't forget the names of them because when I get home I want to look them up and start researching to see what names McCormick is responsible for on that spice rack. So, I think McCormick could still be a cool acquisition for them to make, particularly after the RB Foods deal that brings French's mustard and Frank's RedHot Sauce under their umbrella. Man, McCormick is just a Berkshire company through and through.
Greer: I will confess, I don't know if I heard any of that last part, because I can't stop thinking about you taking a picture of a spice rack, and someone in the front of the store feeling the need to call authorities.
Moser: Yeah, I'm sure.
Greer: It's a little ...
Moser: It's a little weird.
Greer: ... I don't want to say "creepy," but it's not usual.
Moser: I can't turn my mind off.
Kretzmann: It's unique.
Greer: It's unique. It's not ordinary behavior.
Moser: I'm just hardwired a certain way, man. I can't get past it.
Greer: It's not against the law.
Moser: I can't get past it. I mean, I'm the cook of the house. Maybe that has something to do with it. I mean, I think I can at least play that angle.
Greer: I think that's good, I would lead with that next time. "I'm the cook of the house and I took a picture of the spice rack." Otherwise it feels like a cry for help.
Kretzmann: Well, here's a contrarian thought for Berkshire: I think they need some more restaurants in their portfolio to compliment Dairy Queen. Why not? A lot of restaurants are cheap right now.
Kretzmann: I don't know if you go after Domino's, which is basically printing money.
Kretzmann: Chick-fil-A, there you go. So, I don't know, why not branch out that restaurant portfolio? A lot of cheap concepts out there right now.
Greer: But not Dave & Buster's.
Kretzmann: Not Dave & Buster's, not at all. Anything but Dave & Buster's, you'll have a better bet.
Greer: OK, I suspect I know where you're going with this one, but, my desert island question. You're on a desert island, you can only own one of these stocks for the next five years. We have Dave & Buster's, we have Amazon, or we have Berkshire. Where are you going?
Kretzmann: From here, I'll go with Berkshire. Why not?
Moser: I'm just Amazon through and through. To me, there's such a big market opportunity in so many different ways. I'm a big fan of the business and intend on owning those shares for a very long time to come.
Greer: OK. Guys, well, thanks for joining me!
Kretzmann: Thanks, Mac!
Moser: Thank you!
Greer: As always, people on the show they 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!