A New Week, a New Bid in the Battle for Fox

In this Motley Fool Money podcast, host Chris Hill and senior Motley Fool analysts Jason Moser, David Kretzmann, and Ron Gross weigh in on the biggest business events of the week, and No. 1 in the ratings this week has to be the news -- predicted on this very podcast a week ago -- that Disney (DIS -1.42%) has re-raised against Comcast (CMCSA -6.06%) in the bidding war for Fox's (FOX) (FOXA) media assets.

Elsewhere on Wall Street, a raft of familiar names delivered their quarterly earnings reports, and the guys look under the hood to tell you what's really going on with CarMax (KMX -2.10%), Winnebago (WGO -3.89%), Kroger (KR -0.65%), and Darden Restaurants (DRI 0.20%). Plus, they weigh in on the news that Starbucks (SBUX -0.88%) is making a few moves in the direction of retrenching, with store closures, the scaling back of new openings, and a cut to its guidance. And of course, they'll give you the stocks on their radar this week. 

A full transcript follows the video.

This video was recorded on June 22, 2018.

Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio -- senior analysts Jason Moser, David Kretzmann, and Ron Gross. Good to see you as always, gentlemen! We've got the latest headlines from Wall Street, Michael Batnick from Ritholtz Wealth Management is our guest this week, and as always, we'll give you an inside look at the stocks on our radar.

But we began with the ongoing clash of the titans. A week ago, it was Comcast raising the stakes in the bid for 21st Century Fox's entertainment assets. This week, Disney returned fire, upping its bid to $71 billion in cash and stock. Jason, that's a big jump over their original offer of $52 billion.

Jason Moser: It is a big jump. And everybody wants us to make a call, Chris. Who's going to end up getting these Fox assets in the end? I'm going to go ahead and make the call. I'm telling you, it's going to be Disney.

Ron Gross: Are you getting a lot of people asking you to make this call?

Moser: [laughs] It does seem like it! We have some requests here and there. And I imagine all of our listeners want us to take a stance, too, so I'm taking one, Ron. 

Gross: All right!

Moser: Listen, I think this is something that is very much in Disney's wheelhouse. They are viewing this as getting the intellectual property, the content, the characters, all of these stories. They have a very rich history of developing worlds like these and then monetizing them in very meaningful ways over long periods of time. So I think Disney really wants this deal.

Comcast, I feel like, wants it, but I feel like maybe they feel like they need it more than anything else. I think there's some desperation there that may not ultimately end up working out in their favor. Disney may overpay, it might seem, in the near run here. But there's a lot of backstory here. When you read a little bit more about the relationships between the executives at Comcast and Fox, it really does feel like Fox would much rather be a part of the Disney family. And if you're an investor that can look out five, ten years and see the benefits there that Disney could gain from this deal, I think it begins to make a little bit more sense. 

David Kretzmann: $71 billion is a lot of money, so I take a step back and I just wonder, is there potentially a better way that Disney could allocate this cash, either developing new franchises --

Gross: A dividend.

Kretzmann: A dividend. That's a good idea for Iger there.

Moser: He wants the Obi-Wan Kenobi spin-off. That's what he's gunning for there.

Kretzmann: See, as a user, and potentially as an investor, I feel like Disney should be throwing a little bit more of that cash at Lucasfilm. Apparently, they're putting Star Wars spin-off movies on hold. The whole Lucasfilm segment is in disarray. They've had directors coming and going, a lot of disagreements, apparently, over the vision for Star Wars. You have to figure out Star Wars. Lucasfilm, they need to get that together.

Hill: Ron, to David's point, right now, we're talking about $71 billion. Comcast is absolutely going to come back with a higher offer, aren't they?

Gross: Conventional wisdom is yes. Will it be high enough to make the difference, I don't know. We're getting into big, big numbers -- not like $52 billion originally wasn't big. But we're getting into the $70-$80 billion numbers, and there comes a time where it stops making sense.

Moser: I'm not convinced they will come back with another counter. When you read a little bit more into the backstory, with the friction, the tension between these two companies and these executives, I can't help but wonder if Comcast doesn't see the writing on the wall here and they just have to let this thing go and get focused on business as usual.

Hill: Here's the thing. Yes, there are other ways to allocate this money, but if you're looking to acquire large entertainment assets, there's nothing else out there that's like this. There's no consolation prize for whichever company doesn't end up with these assets.

Moser: True, and I agree with that totally. I think that's why Disney ultimately ends up with this. Again, it's right in their wheelhouse. You have to work a little bit more to connect the dots to really see the value with Comcast getting this deal. With Disney, it just seems like it's a much clearer light at the end of the tunnel.

Kretzmann: I agree. I think Disney ultimately wins out here. But please, Obi-Wan Kenobi spin-off. Figure it out, Lucasfilm, now.

Hill: [laughs] From the entertainment industry to the automotive, first quarter profits and revenue for CarMax came in higher than expected. Shares of CarMax up 12% on Friday. How good was this quarter, Ron?

Gross: It actually wasn't that good. [laughs] It's a mixed bag. They beat expectations, but the most important part of the business, not firing on all cylinders, if you will. Used vehicle unit sales, only up 1.6%. Comp store unit sales, down 2.3%. That's by far the most important part of this business. Now, the bottom line was helped by a lower tax rate, which, whose hasn't been? That made the results look pretty good, and it beat expectations. 

There is a bright side. Conversions were up. So when you walk into the store, they were able to convert people at a higher rate than previous. And their auto finance unit is doing really well, up 5.7% in terms of income there. Their extended protection plans -- which are, let's face it, high-margin; those things fall right to the bottom line -- were up 9%. It helped to offset the part of the business that you really do, though, need to see improving quarter after quarter. So don't see the stock jump and get too excited.

Kretzmann: I think part of this was low expectations. The stock, even after today's pop, still trading for just about 18 times forward earnings. I think the long-term growth story for CarMax is compelling. As far as Amazon-proof retailers go, I have to think CarMax has to be on that list. 

There's an interesting story here. The national used car market is very fragmented, so CarMax has the opportunity to create a national brand around buying and selling used cars. From that perspective, I think, looking out over the next five years, there's still a lot of growth opportunity here.

Hill: I'm going to a CarMax this weekend. It sounds like, if the protection plans are high-margin, maybe I should just go ahead and avoid that?

Gross: [laughs] Yeah, maybe avoid that. I've had a very good experience there. I've never actually purchased or sold anything to them, but the experience was good. I'll be interested to see how you do.

Hill: Well, I have a 14-year-old minivan that might interest you. We can talk after the show.

Gross: That would be their wholesale auction sale unit. They'll sell that for you.

Hill: Nice. Shares of Winnebago rising 15% this week after a strong third-quarter report. David, are you buying an RV?

Kretzmann: I'm thinking about it. A lot of millennials are. The strongest segment for Winnebago and most RV companies today by far is the towable unit. This quarter, towable unit sales up 33%. You're not only seeing more and more baby boomers hitting the road and getting into the outdoors -- which, apparently, Ron is definitely not going to be one of those. Not very positive about it.

Gross: Not such an outdoorsy guy.

Kretzmann: Not fond of the outdoors, Ron. I can't believe it. But in this case, you not only have that tailwind of baby boomers buying RVs and hitting the road, but more and more millennials are going for these less expensive towable units and hitting the road. 

Surprisingly enough, even after today's pop, the stock is still down about 20% so far this year. That's despite overall RV sales by far at all-time record highs. Last year, RV sales topped 500,000 units shipped. That number's expected to rise 8% this year. Still some pessimism in the market when it comes to RVs.

Hill: Historically, when we think about the retail industry, and how the holiday quarter for most retailers is the big quarter for them -- is this quarter historically the big quarter for RV manufacturers? It would seem like, hey, we're heading into the summer, that might be a time to get people into an RV.

Kretzmann: Yeah, this is definitely one of the bigger quarters. Part of the issue here is that we had a longer winter. April, which is typically a strong month, you saw a lot of sales go to future months, potentially. That's what these companies are hoping. It seems like these sales have been picking up. Camping World, which is probably the largest RV retailer in the U.S., they're seeing sales picking up outside of April. I think the future still looks bright.

Hill: Kroger's first-quarter profits came in higher than expected. The grocery chain also racked up some nice online sales growth, and shares of Kroger up 13% this week, Jason.

Moser: Yes! I feel somewhat validated with the comments I made about a year ago on Market Foolery, when Amazon announced the deal to buy Whole Foods. If you remember that day, I think every single grocery store --

Hill: They got whacked.

Moser: Yeah, they got whacked, to say the least. Certainly, Kroger was no exception. I was saying back then, though, that was a good example of a knee-jerk reaction when Amazon does anything. Fast-forward to today, guess what? Kroger's doing quite well. If you bought shares of Kroger on that dip, then you're feeling pretty good about yourself right now. 

I think there are a number of reasons for that. You mentioned digital sales. Digital sales were up 66% for the quarter. Really, this all goes back to what the company's North Star is. It's this initiative called Restock Kroger. It's focused on redefining the grocery customer experience -- that sounds good, doesn't it --

Gross: I want to know what PR firm put that out.

Moser: -- [laughs] expanding partnerships to create customer value. We all love creating value, right? Also, to develop talent and live our purpose. Now, I mean, some of that sounds pretty squishy, but I think really, they are doing a good job in growing those digital sales. They have really produced a lot of results with their private brands, they call them Our Brands. And we've seen the success that Whole Foods has had with their private brands. Kroger is seeing that same type of success.

Now, all of this said, I still don't think groceries are the most attractive investment opportunity for investors. I think it's more of a value-style investment. You identify when it's undervalued; you sell it when it's fairly overvalued. Kroger's probably at that point now where it's pretty fairly valued.

Hill: Welcome! Of the 30 companies that make up the Dow Jones Industrial Average, General Electric had the longest tenure. It was November of 1907 that GE was added to the Dow. That streak came to an end this week, when GE got kicked out and got replaced by -- wait for it, Ron -- Walgreens Boots Alliance.

Gross: Similar company. [laughs] 

Hill: In a million years, I never would have -- the fact that GE got booted out, with all the struggles they've had, that's not the shock.

Gross: No, that's clearly not the shock.

Hill: Walgreens?

Gross: GE was actually in the very original one in 1896, and then was out, and came back in 1907 -- 111 years. The end of an era, for sure.

Hill: That's a hell of a streak.

Gross: Walgreens is interesting. Clearly, they wanted to up both the retail exposure and the healthcare exposure in the Dow. It's kind of an innocuous, invisible committee that chooses companies for the Dow. I used to work at Standard & Poor's and knew those folks that did the S&P 500 on that committee. And then S&P and Dow actually combined the index businesses in 2012, so actually, I know the guys and girls, it's the same people, but it's a different process, and it's one that they don't really tell you much about. 

They're typically supposed to be large companies, well-respected companies. They'll look at the industry and they'll make sure that they don't over-represent industrials or they don't over-represent financials, which are the biggest parts of the Dow right now. So, I wouldn't have picked it. I wouldn't have guessed it. But you could see how some more healthcare/consumer discretionary there at the front of the store makes sense.

Hill: I just want to know who else was on the shortlist. Who came in second to Walgreens?

Kretzmann: Well, let's see if we can think of any less relevant companies that could possibly be added here.

Gross: Because the Dow is price-weighted -- which by the way, makes it a relatively non-relevant index, and professional investors tend to ignore it -- you're not going to see companies with very high-priced stocks go in there. You're never going to see Amazon in the Dow --

Hill: Priceline.

Gross: -- you're not going to see Berkshire, and companies like that.

Kretzmann: Yeah. Really, the only thing the Dow has going for it is that it's been around so long. I think this just proves yet again that they're on a slow and steady race to becoming less relevant.

Moser: [laughs] I feel like we have an ongoing segment here. "Next week on Dissing the Dow!" We're pretty much just killing it.

Hill: [laughs] Starbucks' management left shareholders with a bitter taste this week. Starbucks lowered sales guidance, announced it would be slowing the number of store openings, and that they'll be closing 150 company-owned stores next week. Jason, that is three times the number of stores that they typically close in a year. This is a bad week.

Moser: Yeah, but Howard Schultz just got out in front of us and said, "Hey, listen, the stock is undervalued. It's a buying opportunity." Now, he knows one or two things about the business.

Hill: It's certainly 10% cheaper than it was at the beginning of the week.

Moser: [laughs] It is. It was interesting, I asked a bit of a rhetorical question on Twitter the other day in regard to their loyalty program. I'm just befuddled by the fact that they only have 15 million active U.S. rewards card members. To me, that seems very low. Panera, over a year ago, before they went private, had around 25 million. I mean, listen, I'm one of those donks that opens my app, goes in to buy the coffee, and I realize every once in a while that I get a free one. I don't give it a lot of thought.

Gross: A befuddled donk. [laughs] 

Moser: But it was interesting to see the responses I got on Twitter. There are a lot of people out there that had a lot of feedback in regard to the rewards program. My point was, if I'm Kevin Johnson, I'm looking at that as very low-hanging fruit, and I'm figuring out a way to double that number, from 15 million to 30 million, over the coming year. 

Based on all of the feedback I got from the good folks on Twitter, there are a lot of opportunities, I think, they have to make that program better. That is an instant traffic driver. China's always going to be there. Let's not use slowing comps for a quarter as a real reason to sound the alarms. I really do feel like the rewards program could use some fixing, and that would be an easy one.

Hill: I'm not saying that they shouldn't be slowing the store growth, and I'm not saying they shouldn't be closing underperforming stores. But, taken altogether, David, this is a bad week.

Kretzmann: Yeah, not ideal. Still, 150 stores compared to, what, how many stores? Close to 25,000-30,000 now?

Gross: One billion stores, they have.

Kretzmann: Just about. They'll have a store for every person in the world at this rate. In the grand scheme of things, it's actually not a huge deal. But obviously, for this week, it's painful. But, I agree with Jason. I think the mobile app and that whole digital payment experience, that's low-hanging fruit. When I look at Starbucks today, there are so many different levers the company can pull. You have iced beverages, food, the premium Roastery and Reserve brands. Taken all in all, you have a stock now trading for a forward P/E of about 20. You also have a dividend yield close to 2.5%. I look at this as a buying opportunity. I agree with Howard Schultz.

Gross: I just want to go on record and say, about 10 years ago, I told my wife that there were too many Starbucks, and they would need to close some. I just wanted to go on record as saying I was right.

Moser: You really went out on a limb there, didn't you, Ron?

Gross: [laughs] Yeah.

Hill: Shares of Darden Restaurants up 15% on Thursday, the parent company of LongHorn Steakhouse, The Capital Grille, Olive Garden and other restaurant brands. Darden's fourth quarter report impressed Wall Street. Ron, their guidance for the new fiscal year was pretty strong, too.

Gross: Pretty good, especially in a time where restaurants are struggling, these results that are mediocre look pretty stellar. You have adjusted EPS up 17% on an increase of sales of 10%, and blended comps across all of their restaurants up 2.2%, with folks like Olive Garden and Capital Grille leading the way. Eddie V's, actually, which a lot of people don't know, was up 3.6%, which is really strong. 

The one weak place to point to here is their most recent acquisition -- which, we love the name -- Cheddar's Scratch, that they acquired about a year ago for $780 million. Comp sales there were down almost 5%. So, they have some work to do there. If they firm that up, then you'll really see the overall results pick up.

Moser: I didn't look into this, but did you check out how the Olive Garden To Go segment had done this quarter? I just know that quarter in, quarter out, they've been recording this double-digit growth with Olive Garden To Go.

Gross: I didn't see any specific metrics in terms of numbers, but comments were really favorable.

Kretzmann: What about metrics on Italian nachos?

Moser: [laughs] That's right!

Hill: We'll go to our in-house expert in just a second. Ron, just in looking at the Darden website and the brands that they have, did you get any sense from this recent quarter of how they're managing -- because there was a point in time, I'm thinking primarily of when they came out and said they were going to sell off Red Lobster -- that they were struggling with managing multiple brands.

Gross: They were struggling. Activist investors at Starboard came in and told them to stop salting the water so much, which seems to be the big catalyst there. But clearly, they needed to get their act together. They did sell off Red Lobster. But then they went ahead and acquired Cheddar. So, it appears that they're not afraid to have a diversified portfolio. So far, at least on a blended basis, it's working out.

Hill: Let's go to our man behind the glass, Steve Broido. Steve, any comment on the To Go question that Jason raised?

Steve Broido: You know, I've never used it. It sounds like an exciting opportunity, potentially this weekend.

Hill: [laughs] Here's another opportunity: Looking at the Olive Garden website, they're promoting something called "create your own lasagna." Have you taken advantage of that, and do you have any recommendations on what we should do when creating our own lasagna?

Broido: I have not, and I wouldn't even know where to start. That sounds so complicated to me. What would you create?

Hill: I don't know, maybe it's kind of like create your own pizza.

Moser: It's just layers, Steve! Pasta, layer, pasta, layer. Just figure out what you want in the middle.

Kretzmann: Get some cheese in there.

Hill: Chipotle (CMG 5.65%) is testing out some new menu items. On Thursday, Chipotle announced it is adding five new menu items to its test kitchen in New York City. Among the items are quesadillas, chocolate milkshake, and avocado tostadas -- which I have to believe, guys, is aimed at David Kretzmann's generation. That's avocado toast. You millennials are all about that, right?

Kretzmann: That's gold for Instagram, Chris. That's what we're all about. They're also looking at nachos. Like you mentioned, this is just a small test in their New York City test kitchen, potentially rolling out regionally, and then nationally, they'll keep tweaking the recipes. The big challenge here, which CEO Brian Niccol addressed, is that they need to find the right process to fit this in to their existing assembly line without slowing throughput and building up the line as people wait for their food.

Hill: That's the thing. I look at this list, Ron, I think, with Chipotle, with any fast-casual restaurant, they're focused on that throughput, how many people can we get through the line as quickly as possible. These are items that take a little bit more time, and in some cases, they require new equipment.

Gross: For sure. There'll definitely be some capital expenditures associated if they roll it out wide. They have to balance the menu getting boring with the throughput taking a hit. There is a balance there. My concern is, if you recall, the queso does not have stabilizers. So to create nachos without stabilizers, I mean, it's chaos.

Hill: I think Ron's right about that.

Kretzmann: Chipotle has been rolling out a kitchen in the back of the restaurants. I would suspect, some of these more complicated items, they might stick back there, really encourage people to order ahead on the website or through the app. That way, you're not disrupting that line of people in the stores themselves. Something else that Brian Niccol mentioned is that they'll be rolling out one or two promotional items during the year, more one-time items that they launch for a few weeks -- similar to Taco Bell, where he came from.

​Hill: You can follow Motley Fool Money on Twitter. Our handle is @MotleyFoolMoney. You can also submit questions, as Daniel Alvarez did when he asked on Twitter, "Guys, your first $500 to invest. What stock or stocks are you buying today?" Jason, sounds like we have a new investor on our hands. Let's just go ahead and assume -- we don't know, but that's why we'll assume -- that Daniel, maybe, has a 401(k), he already has the box checked in terms of the low-cost S&P 500 Index Fund. In terms of individual stocks for someone starting out?

​Moser: I have to point to the war on cash here, Chris. I want to look for something that's going to still be very relevant ten years from now. I think, to me, the payment space, that money still has to travel from point A to point B. I'm looking at companies like Square or PayPal as the companies that are going to help shape this space for the coming decade.

Gross: I'll give some more generalized advice. I would buy one stock with $500, not a bunch of stocks. I would make it a company you truly love. Perhaps you're already a customer. But one you really would be proud to own, proud to watch. Maybe you're going to end up owning this for 10 or 20 years. One stock that is really one of your favorite companies.

Kretzmann: I would say start with companies that you understand and are easy to follow. A few stocks that I like that I think fit the bill: Starbucks, we mentioned earlier, I think a compelling price today; Facebook, everyone knows Facebook; then I'm going to throw out a little bit of a wild card, National Beverage, the company behind La Croix sparkling water. I think three solid companies to look at.

Hill: And a solid ticker symbol.

Kretzmann: FIZZ, yes, sir.

Hill: Yeah, I would just echo that last point by David. In my experience as an investor, the more I understand the business, the easier I sleep at night. 

Let's get to the stocks on our radar this week. Our man behind the glass, Steve Broido, is going to hit you with a question. Ron Gross, you're up first. What are you looking at this week?

Gross: I have another great ticker symbol for you. That's LUV, Southwest Airlines (LUV -6.64%). Largest U.S. airline, flying 120 million customers a year. Strong balance sheet, unmatched record of profitability, high returns on invested capital, great free cash flow, recently increased their dividend by 28%. Stock is not necessarily cheap relative to its peers, but it is trading at a discount to its historical average. It always does trade higher than the competition. Quite frankly, that's because it deserves to. It's a much better run airline, and really the only major that's never declared bankruptcy.

Hill: Steve, question about Southwest Airlines?

Broido: I like flying Southwest Airlines. Why is it so difficult for Southwest Airlines' tickets to be sold on places like Expedia? I don't think you can buy Southwest tickets on Expedia. Why is that so hard?

Gross: I don't have a direct answer. I think it's because they want to drive people directly to their website, rather than third-party websites, and they can control the process a little bit better.

Hill: Isn't JetBlue the same way?

Kretzmann: They used to be. I don't think they are anymore.

Hill: Jason Moser, you're up. What do you have?

Moser: Sure, a new one here. iRhythm Technologies (IRTC -2.78%). Ticker is IRTC. A little tip of the cap to a Twitter follower of ours, Phyllis Schuster, who actually shot this out there on my radar earlier in the week. It's a healthcare company focused on cardiac arrhythmias. Their main offering is a system called Zio, which is a biometric patch, a data-collecting system for patients at risk of atrial fibrillation, which is just fancy-talk for irregular heartbeat. AF affects as many as 6 million patients in the U.S., 35 million or so patients worldwide. This is an FDA-approved platform. I'm really digging in this to find out if it's a business worthy of investment dollars. Thus far, I'm compelled to keep looking.

Hill: Steve, question about iRhythm Technologies?

Broido: Do you know if insurance companies are bought in to this technology at this point?

Moser: That's a very good question. Because it's FDA approved, they are. It's worth noting that most of their money is levered to collections from insurance companies, government agencies such as Medicare, Medicaid, etc.

Hill: David Kretzmann, what are you looking at?

Kretzmann: This was a big week up in Canada. Canada officially announced that Oct. 17 will be the date that legalized adult-use recreational cannabis will be available in the country. Canada is going full legal. This will be the first major G7 Nation to embrace legal recreational marijuana use. There's no question in my mind that a legit industry is forming here. We're still in the very early stages. But once we cross Oct. 17, I think we'll begin to see which companies are walking the walk and actually forming a sustainable business model here. 

I think a company worth watching here is the top dog in the space. That's Canopy Growth (CGC -0.67%). Ticker CGC. That's not a buy recommendation at all, but I think it's a company worth watching just as we start to pay closer attention to this space. 

And, by the way, up north, Motley Fool Canada is launching our first-ever cannabis investing recommendation service. If you're interested in that, go to fool.ca/marijuanamoment.

Hill: Steve, question about Canopy Growth?

Broido: Do you see legalized marijuana hitting the lower 48 any time soon? I know in certain states, but, across the country.

Kretzmann: Yeah. Even Trump has said that he would support a bill that would decriminalize marijuana on a federal level, so I think it's a matter of when, not if.

Hill: Steve, do you have a stock you want to add to your watchlist?

Broido: I'm going LUV.

Gross: Baby.

Hill: All right. Ron Gross, Jason Moser, David Kretzmann, guys, thanks for being here!

Kretzmann: Thank you!

Hill: Keep the questions coming. You can always email us, [email protected] is our email address. That's [email protected]. That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido, our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!