Analyzing 3 'Fine' News Items From Market Leaders

In this Market Foolery podcast, host Mac Greer and Motley Fool senior analyst Matt Argersinger talk about a trio of huge companies making news this week. The E.U. imposed a record-setting $5 billion fine on Alphabet (GOOGL 0.69%) (GOOG 0.56%) for using the Android operating system's dominance to crush potential competition. Does this bode ill for other tech powers in Europe?

No. 1 airline United Continental (UAL 17.45%) brought in a second-quarter profit beat, despite rising fuel prices, and the guys consider what its numbers say about the company and the industry. And finally, they break down Amazon's (AMZN -1.11%) early report on how Prime Day went. (Spoiler: People bought a ridiculous amount of stuff.)

A full transcript follows the video.

This video was recorded on July 18, 2018.

Mac Greer: It's Wednesday, July 18. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analyst Matt Argersinger. Matt, you are flying solo today!

Matt Argersinger: Yes!

Greer: How are you feeling?

Argersinger: Good!

Greer: Good. We have lots to talk about here. We're going to talk some Amazon and some Target (TGT 0.70%) later in the show. We also have big earnings from an airline. That's not something I get to say all the time.

Argersinger: I know, and it gets me all excited.

Greer: I don't want to say you've been bullish on the airlines, but you've been talking about the airlines somewhat enthusiastically for a while now.

Argersinger: I think that's a fair assessment.

Greer: We're going to get to that, because I want to know as an investor, is it time? But, let's start with Google. E.U. antitrust regulators slapping Google with a record $5 billion fine on Wednesday. The issue here is Google using its Android mobile operating system to squeeze out rivals. Google says it will appeal the fine. 

$5 billion for Alphabet, which is the parent company, translates to just over two weeks' worth of revenue, so let's not cry too much. No Kickstarter campaign needed. But going forward, what does this mean?

Argersinger: I think it's a really interesting dilemma. In corporate history, we've never had the situation, until the last 10 or 15 years, where a company makes a product that's not just free but also pretty good. If users are using it and enjoying it, and it satisfies their needs, why mess with that, why hurt the company that's providing that service for free? We can go back several years ago, when the E.U. also fined Microsoft, if you remember, for Internet Explorer. That came as the default search engine for Windows. Therefore, they felt it was squeezing out other potential search engines, it's not fair to the competition, users don't know what they're getting, and they're just using it because it's there. 

I don't know how to solve this problem. I know the E.U. has taken a very strong position on it. We in the U.S. and elsewhere have been laissez-faire with this. We're saying it's a great product. Alphabet is making it free to these phone makers who obviously like having a good, quality operating system on their phones that users can use and enjoy. 

The key is, I'm not only getting the operating system as a user. I'm also getting Gmail, Google search, maybe Google shopping, things like that. It's all these bundled things that Alphabet is providing that maybe I'm getting sucked into because I'm using the operating system, therefore I'm using these other apps, and it's crowding out potential competition.

Greer: When we pull back a bit and think about the E.U. and the regulatory landscape there, you have Google, Alphabet, Apple, Amazon, Facebook. Do you think one of these big companies is more at risk going forward, in terms of regulation?

Argersinger: That's a good question. I think they're all at risk because of their dominance. I'm not surprised at Google initially. If you look at Android, roughly 90% of the smartphone users in the E.U. use Android. That's an incredible amount of dominance. Apple is a bit player, if you think about it. That makes me understand why the E.U. is starting there. 

But it's the natural step to say, "If Facebook is going to do something," -- Facebook, by the way, which owns WhatsApp, which is really popular in Europe -- "look at the network they have, look at the users they have, and the potential control over that ecosystem that they could have." So, I think all of them are going to be, at some point, susceptible to more fines and more regulation. I think part of it is, it's wonky because we're still figuring out how to regulate big tech. There's not a good answer.

Greer: In Google's defense, when I hear you say all that, in the E.U., there's still 10% of the market they don't have, right? [laughs]

Argersinger: Hey, there you go! Still room to grow.

Greer: Well, speaking of room to grow, United Airlines reporting better than expected second-quarter profits. Matt, you look at the numbers here, pretty impressive. Average fares, rising. Traffic, rising. Fuel cost, rising also, we'll talk about that. United went on to increase its profit forecast for 2018. Shares up around 6% at the time of our taping.

Argersinger: Nice day for United Continental. If you look at the key unit metric, which is revenue per available seat mile, up 3%. Following the industry, that's a really strong number for this particular quarter. They also guided for 4 to 6% growth in that number for the next quarter. I've seen similar announcements from Delta (DAL 2.86%) saying the second half of the year is going to be stronger and stronger. It seems like this higher capacity is actually meeting higher demand, which is great for the airlines. 

You mentioned fuel prices. Fuel prices are up 40% roughly year over year. Delta came out last week and slashed their earnings estimate for the year because of the higher fuel prices. I think a lot of investors thought United would be saying the same thing today, but they're not. Fuel prices are a factor, but they've been able to surpass a lot of that by controlling costs in other parts of business. And, as we were talking about before the show, all the other ways that airlines can pull revenue these days. Some of it feels like nickel-and-diming to us travelers, but I'll tell you what, they've become ingrained. We're so used to paying for luggage, paying more for slight upgrades in seats. We're talking two inches of additional legroom, and we're going to shell out $90 or something like that. 

All these things that the airlines didn't have before have increased their pricing power. It's an industry that I think has certainly changed for the better.

Greer: Let's talk about the stocks. When we look at the five-year chart, first of all, we have the S&P, over the last five years, up around 84%. Looking at some of the big airlines, Southwest up a little more than 300%. That's the leader in the pack. This is over the last five years. JetBlue up 190%. Delta 175%. United 115%. American 110%. So, a double over the last five years. When you look at those stocks, do you have one going forward that you think is best in breed?

Argersinger: I've been talking about it a little bit on our radio show. Delta to me is the one. If you're an investor, I think you can buy a basket and do well. Even though the results over the last five years have been great, I think the next five years could be just as great, if not better. 

But Delta is my pick. Having studied it, I see what I think is the strongest hub and route network. They have the lowest unionized workforce. Only roughly 17% of their labor force is unionized, because they only allow their pilots to union, which is unique in the industry. They have the only investment-grade balance sheet, and that's a product of generating lots of cash, paying down debt, paying down their pension liability. They bought back 15% of their shares over the last five years. They have a new $5 billion buyback plan in place, they pay a 2.5% dividend yield. 

All of that is good for about 10 times earnings. So, I'm not saying you could buy Delta or airlines today and expect it to double or triple in the next five years. But another double in a reasonable amount of time that beats the market? I think you have it.

Greer: I have a follow-up question about airline etiquette. I was on Frontier recently, flying to Colorado. I was sitting on an aisle. The guy sitting on the aisle across from me took off his shoes and did not have socks on. Completely barefooted. He was crossing his legs in such a way that one of his feet was the size of a canned ham, and it was spilling over into the aisle. I'm in the aisle seat right by him, and I'm trying to eat. Can we agree that bare feet on airplanes is a no-no?

Argersinger: I totally agree. It's so funny you mention this story. I spoke with Randy Coon last night, one of our colleagues here at The Fool, and he said he was on a 17-hour flight from the U.S. to Hong Kong recently. A woman sat right next to him, took off her shoes, bare feet again. She was a short, petite woman.

Greer: Smaller feet.

Argersinger: Smaller feet. She took the tray table out, put her feet on top of the tray table.

Greer: Ugh, you can't do that! 

Argersinger: No, you just can't! 

Greer: I think, even at home, that's a questionable move. Now, I will say this. I have taken my shoes off, but I've had socks on. I think sock feet ... do you agree?

Argersinger: Right. I'm a fan of taking the shoes off. On a long flight, there's nothing better than getting your shoes off at some point during the flight. But, yeah, you have to have socks.

Greer: I was tempted to say something to this guy. What I did instead is, I just stewed about it for two hours.

Argersinger: [laughs] I know.

Greer: That's point one. Point two, I have put my seat back before, but I'm now at the point where no one on an airline should put their seat back. We're all in this together. Just stop it. In fact, I would go so far as to say, for new planes, disable that. If one person does it, then another person has to do it --

Argersinger: It dominoes.

Greer: I feel like I'm at the dentist when they put it way back. I'm like, what's going on? So, just kill it. We're all in it together.

Argersinger: Especially when it's so unexpected, you're on your laptop or eating, and all of a sudden, the person jams their seat back.

Geer: We're both fairly tall. I'm not saying it's incredibly comfortable, but we're in it together. If you don't like doing that, take a bus, take a train, take the Wells Fargo wagon, I don't care what you take.

Argersinger: Take a boat across the Atlantic if you need to.

Greer: Keep your socks on and don't put your seat back. OK, I feel better. 

Let's move on to our final story. Amazon Prime Day officially a wrap. Amazon said it was the biggest shopping event in the company's history. The event lasted 36 hours. Amazon said that members bought more than 100 billion products. Matt, for investors, what does it all mean?

Argersinger: Well, if you're an Amazon shareholder, it's all good. It's been all good for a while, including this year. They didn't provide a lot of specifics in the release. When I hear "biggest day ever," obviously, that means it exceeded last year's Prime Day, and it probably exceeded Cyber Monday last fall. So, obviously, a big day. 

One of the things they talked about was adding more sign-ups for Prime on July 16, which is the main day, than any previous day in American history. Not surprised by that because they did that last year, as well. Still, the fact that they're adding potentially millions and millions of new Prime users on that particular day is very impressive. 

A couple of other nuggets. This was the first Prime Day when they owned Whole Foods. If you went and shopped at Whole Foods, if you spent $10 at Whole Foods, you got a gift certificate to spend $10 on Amazon, which I think is a pretty good way to get people to shop at Whole Foods. I didn't even know about that. I totally would have done that. 

Customers purchased more than 5 million items in each of the following categories: toys, beauty products, computer accessories, apparel, and kitchen products. I just mentioned those categories because it's such a broad range, if you think about it. There's not one particular area that everyone is going after. It's amazing, the broad inventory that Amazon has, and that people buy. It really touches every aspect of everyone's life.

Then, one more interesting nugget from the release, Amazon called this out, was that members really stocked up on back-to-school and back-to-college things like pens, pencils, things you need for your dorm. I should have known this, but I never really thought of Amazon Prime Day as a back-to-school event for parents or students, but it is. The timing of it, right?

Greer: It seems so early, it seems like the middle of summer here. 

Argersinger: It does, but if you can take advantage of it, school is a month or maybe five weeks away, it's not a bad thing to do.

Greer: It was also interesting, I noticed in reading up on it, that Target had its own sale on Tuesday. I didn't really find a lot about the numbers, but Target said it was the highest single day of traffic and sales of online purchases this year. It reminds me a bit of when you go to a sporting event or a concert, there's someone outside the arena selling bottled water as you walk up. That, to me -- 

Argersinger: That's Target.

Greer: That's kind of Target, right?

Argersinger: It is, in a way. I'm not surprised. In fact, you have to have to applaud Target.

Greer: And I love Target.

Argersinger: If they know that there are millions of shoppers out there going online looking for deals, if you're Target or Walmart or Wayfair or any other popular online destination for e-commerce, why not take advantage of it? I expect to see a lot more of that, for sure. It's kind of like what happened in China. Do you remember this thing called Singles' Day, which happens every year? I feel like, I might not have this totally correct --

Greer: I would have loved that, because I was single until I was 40. It's aimed at people who are single.

Argersinger: Exactly. One of our dozens of listeners can correct me if I'm wrong, but I think Alibaba was the company that started Singles' Day whenever it was, 10 years ago. Now, every major e-commerce company in China, it's this huge event that, they all report, they all talk about it, they all market into it. It's exactly what's happening with Prime Day here in the U.S.

Greer: You said you did not buy anything on Prime Day. In general, you're a prudent shopper? You don't strike me as a guy who's making a lot of unnecessary purchases.

Argersinger: No. I'm not the guy who's always looking for things. If I need to buy something, I'll go and buy it, and maybe I'll look for a deal. But I'm not a guy who says: "That's the day. I know there are going to be deals, I'm going to see what's out there." Same with holiday shopping. If I think of something, I'll go look for it. I don't let the retailer pull me in.

Greer: That's good. I love looking at all the stuff, but it reminds me of how much stuff I don't need. It's unbelievable. You're like, I don't need that, I don't need that. I've gotten a little more measured in my older years.

Argersinger: Smart.

Greer: Matt, thanks for joining me!

Argersinger: Thanks, Mac!

Greer: As always, people on the show 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. We always love to hear from you. If you'd like to ask a question or share a comment, [email protected]. If you'd like to pick up some Motley Fool swag -- shirts, hats, coffee mugs -- shop.fool.com. That's it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We will see you tomorrow!