In this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker check out the big stories in the business world, which meant leading off with a reflection on the ugly day being had by IBM (NYSE:IBM). The oddities of the price-weighted, overly narrow Dow Jones Industrial Average meant that the company's poor result sent the whole index lower.
But there was more upbeat news elsewhere, with No. 3 airline United Continental (NYSE:UAL) beating on earnings and freight rail titan CSX (NASDAQ:CSX) delivering record first-quarter numbers. Also on the rapid growth train: Intuitive Surgical (NASDAQ:ISRG), whose da Vinci systems are selling at an impressive rate. And speaking of sales of tech products, the guys close out the episode by explaining why it's a win-win that Amazon.com (NASDAQ:AMZN) and Best Buy (NYSE:BBY) are joining forces to sell smart TVs.
A full transcript follows the video.
This video was recorded on April 18, 2018.
Chris Hill: It's Wednesday, April 18th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: Yesterday was the video edition of MarketFoolery in terms of the companies that we talked about. We're going to start today with transportation. Actually, we should probably start with IBM just because, for anyone who looks at the Dow Jones Industrial Average, today is one of those helpful reminders that it's made up of just 30 companies, and if one company is having a particularly bad day, as is the case with IBM, that can really affect the other 29. It's one of those days where if IBM was out and it was just 29 stocks, the Dow average would be up nicely. Instead, IBM is having its worst day since 2014.
Barker: Yeah. It's not only that it's one of 30 stocks, but it's a price-weighted index. Let's not go into all the details of that, but the more expensive the price of the stock is, the greater effect it has on a daily move. So, the combination of the small size, small number of companies in the average, and the price of IBM, which is down $12 today, 7%, is going to make the results of the Dow a little skewed compared to the broader indices like the S&P 500. So, if you're wondering how the market did today, I'd focus on the S&P.
Hill: Let's move on to transportation. We'll start with United Continental. Shares up 5% after first quarter profits came in higher than expected. Yet another quarter where yet another major carrier demonstrates that this is a pretty good business to be in these days, now that they're actually running it well.
Barker: Yeah, for the most part. Of course, when there's a headline, it's usually negative. That's the case with Southwest today, which we might get too. But, United's top line, up almost 7%, so more people are getting on planes is the long and short of it. And they're paying higher prices, they're getting less stringent about looking for the best price.
Hill: United Continental, it seems like this quarter, they were doing a pretty good job of not only managing their costs, but also providing guidance around how they're going to continue to manage their costs. So, maybe not a big surprise that the stock is moving up.
Barker: No. Also, guidance from some other airlines has been very positive. Alaska Airlines guided pretty well the other day. So, transport in general, things are moving, people are moving, the economy is humming. Don't follow too much of the day to day to distract from that. It's already turning out to be a good quarter as earnings come in. The guidance will differ for some companies. IBM had a good quarter compared to expectations but guided poorly. And that's not the case with the United, which has just delivered a good quarter and is guiding higher as well. That's the case basically for the whole transport sector now.
Hill: And obviously, the incident with Southwest Airlines yesterday, the company seems to be managing that about as well as one could. Although, reasonable questions will be asked about the age of the fleet and that sort of thing. There's never a really great way to handle any sort of tragedy. But, one of the things that was being talked about this morning on CNBC was a point that you had made on an episode a few weeks back when we were talking about the death that had resulted with the self-driving car, the autonomous vehicle, and you had provided the context, rightfully so, of, look, thousands upon thousands of people in the United States of America die every year in auto accidents. This is one with an autonomous vehicle. I think the stat I saw today was that in the United States, in terms of commercial airlines, this is the first fatality in nine years. So, it's obviously a tragic situation, but when you provide the broader context, it seems like -- certainly, the pilot did everything that she could to make the situation right.
Barker: Yeah. As you pointed out, questions are going to come up into some flyers' minds about the age of equipment there, because one of the things that Southwest prides itself on, and makes sense is, "Look, we have this efficient airline, there's only one type of plane that we use. If one needs to be taken out for service, we have another one close by, the pilot is already trained on the plane that we use." So, there's a lot of efficiency from that. Today, people are going to say, "If this was fatigue, metal fatigue or some other type, that is the source of the problem here, is that a one-off, or do we need to be concerned about the age of the whole fleet?" Particularly on the heels of this report from 60 Minutes, I don't know if you saw that --
Hill: I didn't.
Barker: -- but it was a fairly standard, and I didn't watch all the details, so I'm not saying this is good or bad, 60 Minutes critical piece about Allegiant Air and the conditions of its planes and the age and how it gets planes that are sold off by other carriers. So, this may have a microscope effect on Southwest today, or on the whole industry. "Hey, we haven't been following the age of all planes out there. Is this something we now need? Do we need Congress to look at this?" That sort of thing. Congress has been distracted by many, many, many other things, but maybe there will be calls for that. I don't want to speculate too much on that. Today is a good day for United. And that's where the focus should be in terms of the actual state of airlines.
Hill: And sticking with transport, we'll move to CSX Railroad, which put up a record first quarter profit just shy of $700 million. I was thinking about CSX the other day, just because over the weekend, I was at my son's soccer game, and the field happened to be relatively close to the railroad tracks here in Alexandria and it was just rolling by. And I thought what I usually think when I see CSX trains rolling by, which is, "Should I be owning that stock?" [laughs] It really does seem like, railroads aren't necessarily the sexiest business in the world, but the barriers to entry are so massive, and if you have people who are a doing a halfway decent job of running the business, then it's going to be delivering relatively steady profits over a good length of time.
Barker: Halfway decent is a good thing to focus on. CSX, short story, blew out the earnings expectations, came in at $0.78, I think $0.64 was expected per share, falling on $0.51 a year ago, so that's over 50% bottom line growth over the year. Now, the actual capacity of the railroads and the revenue isn't growing like that, but they've improved their service. And when we say they've improved their service, let's focus on one data point for a moment here. In the first quarter, this is an improvement, 57% of their deliveries came in within two hours of on time. So. OK. That doesn't sound great.
Barker: If that was your experience with airlines, you would be moving to another airline. Their goal is to get to 95% by 2020, so they have, as we sometimes talk about, an easy act to follow, which is their own act. And they are improving it, and there is room for improvement. So, it might be a good time to look at railroads. It's just, trucking right now, there's a lot of capacity constraint in the trucking industry, as there aren't enough truck drivers at the moment. If you're looking for a job and you have skill driving a truck, you've probably got offers that you're fielding.
That, combined with some increased regulatory requirements on the number of hours that drivers can actually drive, which started at the beginning of the year but was given a soft launch in the first quarter and is now supposedly being actually implemented a little bit more effectively. After giving companies three months to get used to it, now they're going to start enforcing it. All this means that there's going to be a spillover for rails. And with oil prices, gas prices going higher, that's another good mark for rails. And they have an easy act to follow. If they can increase their on-time delivery to 95% which is the goal, from 57%, I have no doubt that they're going to be a great stock over that period of time.
Hill: What's the biggest vehicle you've ever driven?
Barker: A van. And you?
Hill: One summer, when I was in college, I worked on the grounds crew at the college, doing a variety of things. And I don't even remember what the task was, I just remember it involved me essentially driving a 10-wheel truck, essentially something the size of a dump truck, one of those things where you have to climb up into the cab. And all I could think was, "Don't crash into anything," and, "Thank God I don't have to parallel park." Because, of course, if you're driving an 18-wheeler, that's part of getting your license, is parallel parking into a tight spot.
Barker: Yeah. The van, I was only driving a van once, and managed to get pulled over.
Hill: [laughs] So, maybe this isn't the career for you.
Barker: I don't even remember what I was pulled over for, but I was driving my team in college -- this will date me, this was back when a college would allow a student to drive the team a couple of hundred miles. We were driving from Connecticut to Philadelphia. And for whatever reason, I was driving one of the two vehicles. I was pulled over, I can't remember why --
Hill: In all seriousness, did the reason have anything to do with the fact that you're from the Greater Philadelphia area? You went to college in the 1950s, so this is well before smartphones and that sort of thing. So, it was like, "You probably know where you're going."
Barker: I think everybody else probably said "not it" first.
Hill: Well played.
Barker: But, I was being followed for some time and didn't realize it. [laughs] I feel like I had the rearview mirror adjusted correctly, but I was given the heads up by somebody behind me, like, "Hey, the hot and colds are on, you're being chased." So, I don't know. I was given no ticket, I know that.
Hill: Nice. You talked your way out of it.
Hill: Well done!
Barker: I cried, probably. [laughs] From what I hear, that's the best way to get out.
Hill: [laughs] Just turn on the waterworks. We're going to stick with earnings. Intuitive Surgical's first quarter ... just, lather, rinse, repeat, just another strong quarter from Intuitive Surgical. Increased sales of the da Vinci robotic Surgical System, and the stock on the rise once again.
Barker: Yes. And it's having a very good day. It's also worth remembering that this is not something that has gone straight up as much as you might think. That is, it took a pause for about four years, from 2012 to 2016, kind of traded sideways for a lot of that time as it digested some of the growth that it had made, but also ran into some problems. It's gone beyond those at the moment. And now, with quarters like this, 25% top line growth, I think 15-18%, depending on how you're looking at it, procedure growth, it's reacting today as if that's the kind of growth that you can look forward to compounding over some period of time over the future. Trading at about 75-80X earnings.
So, the market is obviously delighted with the story it sees today, and it's just worth remembering that numbers like that, even for a company which is in a space like robotic surgery that's as exciting as it continues to be, that kind of growth is not guaranteed. The market is looking at it as if it's guaranteed. I would say, consider the alternative, which was experienced by this company no more than two, three years ago.
Hill: Good context. Amazon is teaming up with Best Buy to sell smart TVs, specifically the Amazon Fire TV. There was a nice photo on Twitter today of Jeff Bezos and Hubert Joly, the CEO of Best Buy, together. This seems like a smart move for both of these companies, because I think, and there's no reason in the world for Jeff Bezos ever to say this out loud, but my hunch is, at least part of this partnership is a recognition on Amazon's part that when people are making a big ticket item purchase like a smart TV, it helps if you can actually stand in front of that TV and look at it and compare them side-by-side.
Barker: Yeah. Well, the first thing that came to mind when I heard this is, keep your friends close and your enemies closer.
Hill: [laughs] There's that as well.
Barker: And I don't know that anybody on either side of this equation would say that they are enemies, but the potential exists. Certainly, if you go back five or six years, I think Best Buy was kind of given up for dead --
Hill: Absolutely, and people were saying, "Amazon's going to put them out of business."
Barker: Right. And that didn't happen. So, Best Buy sells some Amazon products, the Fire, Kindle; and Amazon is now going to have Best Buy sell some of these things through the Best Buy channel on Amazon, so there is a working relationship on a number of levels. Today, the victim of that stock-wise seems to be Roku (NASDAQ:ROKU), which was making the operating system for the smart TVs for Best Buy's Insignia brand. Now, it's going to be Amazon.
Hill: Matty Argersinger and I talked about this yesterday. Roku shares were up double-digits yesterday, and it was on the announcement that they were partnering with Disney on the ESPN+ streaming app. It was one of those things that seems like a little bit of a no-brainer, seems like a small win for Roku, it didn't seem like a double-digit stock move win. So, I'm sure at least a little bit of the gains that Roku is giving up today is some recognition of people saying, "Yeah, wait, what were we thinking yesterday?"
Barker: Do you watch John Oliver at all?
Hill: Not really, no. It's late on a Sunday night. Sometimes I'll watch it on YouTube or that sort of thing.
Barker: A couple of weeks ago he went after the NRATV. I think one of the quotes in it was that NRATV was on big tech platforms, including Roku, and John Oliver went off on Roku, how delighted they must be to be included in a list of big tech companies. [laughs]
Hill: [laughs] Along with Amazon and Google--
Barker: Along with Amazon and Apple and their platforms for TV. Yeah, it's a reminder that Roku is out there. It's not one of the biggest in a lot of ways, but, well, a deal like today, and as you say, maybe it's just feeding off having moved up a little bit too much yesterday, but, that seems to be having some effect on Roku. But, I like the idea of this new Amazon Fire TV.
Hill: Before we stick with that, I just want to mention, one of our longtime listeners hit me up on Twitter in the wake of yesterday's episode and talked about his experience as a Roku consumer. And it did remind me of the fact that the interface of Roku is a good one. This isn't a perfect analogy by any stretch, but you and I are old enough to remember America Online, when it was the dominant platform back in the 1990's, and it was criticized toward the end of that decade for being so simple and so basic. But, for people who were just figuring out what the internet was, that was all they needed, just the basic interface of AOL and basic email and all that. They didn't need all the bells and whistles. Roku reminds me a little bit of that. For people who are just figuring out smart TVs and how to use this type of device, the interface is very smooth. But it's probably got a window that's closing.
Barker: So, the interface, and the comments from Bezos today on this new partnership and what this TV is going to look like is that it can sync it up to Alexa. So, that's one of the great attractions, you can just tell your TV, "Show Disney channel," or whatever. And if it's effective in routinely doing that, that will be a useful thing, given the number of times that, in my experience, I have to look for the remote, given that the children seem to move it around, or the dog seems to eat it, things like that. It takes up a certain amount of time, and now, just to now change channels physically on the TV set without the remote involves a PhD.
Hill: [laughs] That's true. Yeah. You don't have a dedicated space in your TV room where it's like, "This is where the remote goes."
Barker: The dog hangs out there.
Hill: Oh, well, that's ...
Barker: [laughs] The rules have been explained to everybody but Winnie. Well, they've been explained to Winnie, she's just incorrigible.
Hill: Well, I can't think of a better way for this episode to peter out than --
Barker: [laughs] Shout-out to Winnie.
Hill: -- a shout-out to your dog who's eating your remote control.
Barker: She's so good.
Hill: Except when she's eating the remote control.
Barker: Yeah, and other things.
Hill: Thanks for being here!
Barker: Thank you!
Hill: You can read more from Bill Barker and his colleagues. Go to foolfunds.com and sign up for Declarations, it's the free monthly newsletter from Motley Fool Asset Management and it's always a good, insightful read. 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 mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bill Barker owns shares of Alphabet (C shares), Apple, and Walt Disney. Chris Hill owns shares of Amazon and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Intuitive Surgical, Twitter, and Walt Disney. The Motley Fool is short shares of IBM and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.