Reflecting on 5 Earnings Reports and 1 Remarkable Life

One of the more notable individuals in the tech world died this week: Paul Allen passed away from cancer at age 65. After his Microsoft stake made him a billionaire, he went on to a second act that included purchasing the Seattle Seahawks and the Portland Trailblazers, taking further major forays into business, engaging in serious philanthropy, and more.

Market Foolery podcast host Chris Hill and Motley Fool Asset Management's Bill Barker pause to remember Allen. But first, it's earnings season, and in this episode, there are a few companies that have to be discussed -- among them, investment banks BlackRock (BLK 0.36%), Goldman Sachs (GS 0.22%) and Morgan Stanley (MS 0.44%); retail behemoth Walmart (WMT 0.46%); and pizza-delivery darling Domino's (DPZ -1.68%). The guys also talk interest rates -- not the most exciting subject, but they have major impacts on investments across the economy, so Fools should keep an eye on where they're headed. 

A full transcript follows the video.

This video was recorded on Oct. 16, 2018.

Chris Hill: It's Tuesday, Oct. 16. Welcome to Market Foolery! 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: We've got a bunch of things to get to. We've got some retail. We've got Domino's. Let's start with the banks really quick. For anyone worried about Goldman Sachs and Morgan Stanley, I'm here to say, relax. They're doing fine! 

Barker: They're going to make it.

Hill: [laughs] We were worried that, given last week's drop in the market, gosh, maybe Goldman Sachs and Morgan Stanley and the people running those two large financial institutions have forgotten how to make money. And I'm here to say, based on their latest quarterly results, they haven't.

Barker: No, they have not forgotten how to make money. People have kind of forgotten that these places do make a lot of money. The stocks are all down quite a bit this year, down around 20% for the group, reporting, between BlackRock and Goldman Sachs and Morgan Stanley, 15%-20%. The rest of the market up 5%-8%, depending on exactly where we are at the moment you're listening to this. It's moving around again today. 

It's kind of a time of at least perceived or expected transition for the heavyweight Wall Street banks. There's fee compression. That's a big part of why there is not that high level of enthusiasm for the stocks right now. At least in the case of BlackRock and Morgan Stanley, they're more profitable than ever. Goldman Sachs has been bouncing around a little bit further behind, in adopting the more passive management approaches, and a little bit more, I think, skepticism about their business model at the moment.

Hill: Is that what it is with BlackRock in particular? You say they're more profitable than ever. The stock's down 3%-4% this morning. To your point about the year this group has had, over the past month, we've seen stocks pulled back from all-time highs. That's not the case, certainly, with BlackRock.

Barker: No. They're making about $35 a share over the last 12 months. That's up from $30 a share for the 12 months ending last December. Decent improvement, that's about 11%-12% improvement. The thing that appears to be worrying the market today regarding BlackRock is that their institutional funds were down over the quarter, and they are very good at attracting very, very low-cost funds that are invested in their low-cost ETFs. They're the market leader by far in that. That's a good place to be, but not a wildly profitable place to be. There's some concern, I suppose, that the institutional money maybe looking elsewhere.

Hill: Let's move on to Walmart, which is in the headlines for a couple of reasons. Walmart cut earnings guidance for 2019. That's largely due to the acquisition of Flipkart, which is the e-commerce business in India, which Walmart acquired, and that costs money. Walmart had said they were going to be doing this, so this cut in guidance is not really a surprise. They also announced a new partnership with Advance Auto Parts to sell products online and offer delivery. Walmart shares are actually up slightly, Advance Auto Parts down a little bit. I'm not entirely sure why that is, because on the surface, that would seem like a great partnership for Advance Auto Parts. I haven't seen the numbers on how the deal breaks out. Maybe this is an expensive deal in some way for Advance Auto Parts.

Barker: I think that's the interpretation, that Advance Auto is not getting some great deal here. I think, being the third player, quite a bit behind, I would say, O'Reilly and AutoZone, in terms of the success of their model, is getting a bit of a lifeline here. That may be unfair, to characterize them as lagging by that much. But I think it isn't the case that they have stolen a great deal here, at least in the eyes of the market today. But AutoZone is down more, perhaps perceived as having additional competition now and not being the favored stock by Walmart. I think O'Reilly's doing well enough that there's not as much concern. It's not off that much today.

Hill: That's certainly one of the advantages we've seen over the past 15, 20 years for these huge businesses like Walmart, like Costco, where they are largely able to dictate terms to businesses that want to be partnering with them.

Barker: Yeah. One other thing -- Advance Auto Parts is off a little bit today, but it's really right at its high for the year. These things have all bounced back after being way off and given up for dead toward the middle of last year, when Amazon made headlines for wanting to get more aggressively in the auto parts space. Everything sold off tremendously and has been doing very well, I would say, since bottoming out between the summer and the fall last year. Really, Advance Auto Parts has doubled off of its low. The business is not as choppy as the stock price. They are, I think, raising the floor on how things look for them. 

Hill: Shares of Domino's are down about 5% this morning. Domino's seems like it has performed so well for so long as a business that now, when they come out with their quarterly report, they're in that zone of Wall Street analysts saying, "We're looking for perfection. We don't know what numbers you're about to report, but ideally, we'd like to see perfection." Domino's third-quarter report was, on balance, really strong. Revenue up 22%, same-store sales up nearly 5%. And yet, both of those were lower than Wall Street analysts were looking for, and we're seeing a little bit of a sell-off.

Barker: Yeah, I'd give the report, like, an A-. It's an awfully good report, just looking up and down everything. I guess it could be summed up by, earnings per share were up around 68%, something like that, year over year. And yet, that's not good enough. Why? Because same-store sales were up around 6% domestic. They were up 8% last year. Company-owned same-store sales were up 4.9%. I think they were expected to be above 6%. Same-store sales are not compounding at over 8%, but now 6%. International stores weren't growing as fast as that. But they're opening stores. They're buying back shares. I mean, it's a thoroughly good report. The stock can't go up every day, despite appearances.

Hill: [laughs] I suppose that's true. Certainly, there are plenty of, not just pizza companies, but restaurants that would be doing handsprings if they got same-store-sales growth in the neighborhood of 5%.

Barker: Yeah. They're expanding their menu and they're getting a little bit of inflation. So part of the growth is from just pricing. Of course, Papa John's is a mess. Domino's is doing well, I think, in part because Papa John's is not at full strength at the moment, in terms of, I don't know, competent management, or management which is not embroiled in lawsuits with previous management. That's Papa John's we're talking about. Domino's and others are getting a little bit of a tailwind from just having its main competition be as distracted as they are at the moment. 

Hill: I was down at the gym in our building this morning. I was on the treadmill. ESPN was on. At various points, there were commercials for both Domino's and Papa John's. I don't know why, but when the Papa John's commercial came on, the thought that popped into my head was, "Oh, they're sticking with the name." Of course, if they were going to change the name, that would be big news, and I would have heard about it. But in the moment, I just thought, "Wow, OK!" Obviously, they're no longer featuring John himself, because he's no longer with the company, even though he remains the largest shareholder, so I thought, "Oh, they're sticking with that name. They're sticking with the branding for now." 

The Domino's commercial is this one where they're repairing the roads. Have you seen this commercial?

Barker: Yeah.

Hill: Apparently, there's some epidemic in America, and the epidemic is Domino's delivery drivers hitting potholes and the pizza goes flying, and we can't have that. It's a clever ad, where a Domino's-branded truck comes in, and crew, and they fix the pothole. But, really? Is that happening a lot? Here's the thing. I'm not so interested in ordering Domino's pizza itself, but if there's a way that I could place an order to get some potholes filled in Alexandria, Va., I'm interested in that.

Barker: I was in Boston. 

Hill: Speaking of potholes. 

Barker: Speaking of potholes. I was around some neighborhoods where the roads are maintained privately. I guess this is a Massachusetts thing. Some of the local governments have gotten out of the business of actually maintaining the roads, and leave it to the residents to repair their roads at whatever point they can all get together and agree to spend the money to repair it themselves.

Hill: So me and everyone on my block pool our money and say, "Great, let's order the Domino's pothole truck"?

Barker: Or not, as my experience was. People would rather drive over really, really awful roads, or just skip driving on their own road somehow, rather than pay the money to repair them. So there may be a business opportunity for Domino's in certain localities in Massachusetts.

Hill: It sounds like a business opportunity for O'Reilly and AutoZone and Advance Auto Parts. If cars and trucks are going to wear out more quickly there, that sounds like a move for them. 

Sad note from the world of business, and that is the passing of Paul Allen, the co-founder of Microsoft. All you have to do is look at the tributes that are pouring in, not just from the business world, but also from the political world and the world of sports, because Paul Allen owned the Seattle Seahawks; he owned the Portland Trail Blazers. He was also a philanthropist who donated billions of dollars to support the arts, health research, space exploration, protecting endangered species. Gone far too soon at the age of 65. A fascinating life, just as I read various things over the last 24 hours about Paul Allen. It occurred to me that there was very little I knew about him other than he owns the Portland Trail Blazers, he owns the Seahawks, he co-founded Microsoft. His interest in music was fascinating to me. He was a guitarist, a guitar enthusiast. 

Also, as we were chatting about right before we started taping, one of the tidbits I learned this morning was that he left Microsoft before it was public. Microsoft went public in 1986; Paul Allen left the company in 1983. When he left, Bill Gates offered him $5 a share for his stock. And Paul Allen countered, "I'll take $10 a share." And Bill Gates just said, "No, I'm not going to pay you $10 a share for your stock." So Paul Allen left the business. He stayed on the board of directors, but he left the business, and he held on to all of his stock. And that proved to be a very good decision on his part. Bill Gates is doing fine, but it is interesting to wonder. I wonder if, at any point, Bill Gates thought to himself, "Maybe I should have just paid him the $10 a share. Maybe I should have figured out a way to scrounge up the money to pay him $10 a share." Because by the time Paul Allen divested his Microsoft stock, in the year 2000, it was to the tune of more than $8 billion.

Barker: Yeah, I imagine that Bill Gates has had that thought go through his mind, or had that thought go through his mind, long ago, and as long since gotten past it. But, yes, as soon as the stock was $20 a share or something like that, and given all the splits, I don't know the exact amount, split-adjusted, we would be talking about. I'm sure it occurred to him at some point that it would have been a good thing to do, and then a couple of thousands percent later, maybe he got past it.

Hill: I would hope so. Again, things have generally worked out for Bill Gates. Paul Allen, what a fascinating life!

Barker: In the public markets, I guess the thing that he was known for, you can probably remember back when Charter Communications was the thing that people were investing in a lot based on his association with it and being head of it. That never worked out the way people who were investing alongside him there had hoped. I think he got out of it in 2009, maybe, and reorganized. But Paul Allen lost $7 billion on Charter Communications. In terms of all of his investments, he ended up doing just fine. But it was one of those occasions where people were looking at somebody who had had the success he had had helping to start Microsoft. Surely that was a good person to invest alongside of regarding his next big thing. Didn't turn out that well for them on that one. 

Otherwise, he had a lot of success, in charity work and sports ownership. What about the music? I don't know about his music.

Hill: Apparently, he was very much a guitar enthusiast. He funded a museum in Seattle called the EMP, the Experience Music Project. He donated $100 million to fund that. At various points was able to hang out with the Rolling Stones and jam with them. One of the tributes to Paul Allen over the last 24 hours was from one of the members of Nirvana. It was not just, "I'm a rich guy who likes the guitar and I'm going to donate some money so that I can hang out with the Rolling Stones." He was known as legitimately someone who could actually play.

In terms of sports, anyone who's a fan of either the Portland Trail Blazers or the Seattle Seahawks knows what kind of owner he was. Often is the case that we will look around -- just think about whatever sport you're a fan of. You don't have to be a fan of football or basketball. If you're a fan of any sport, and you're aware of the varying levels of competence of team owners, then you know what it looks like when there's a team in the sport that you care about that has a really bad owner. From the top down, that team ends up being terrible. It really starts with the owner. On the flip side, you look at someone like Paul Allen. Seattle Seahawks won a Super Bowl. The Portland Trail Blazers won the Western Conference title a couple of times, got to the NBA Finals, were in the playoffs more often than not when he was owning that team. He was a great owner of those two teams.

Before we wrap up, you just spent some time in Boston. You were at a conference, one of those conferences that, because it's in Boston, takes you less time to get to than -- I think the last time you were in here and going to a conference... where were you going? You were going somewhere outside the United States, and it was a heck of a flight.

Barker: Yeah, around this time last year, I went to one in Dubai. But that was back... I was only there for about 48 hours. I got to spend more time on the ground in Boston than Dubai, which was nice. It was, despite the weather, a good trip. The conference itself was on fixed income. Not the single most riveting conference agenda that anybody has ever been to.

Hill: More riveting now than it was a few years ago. 

Barker: Yes. It is, by fixed-income standards, an exciting time, with interest rates moving the way they have. Certainly, while I was there, there were some days where the fixed-income movements, the interest-rate movements, were dominating what was happening to stocks. We'll see how long that continues to be the case. There were differing opinions on where interest rates are headed, as there should be, because it takes a number of opinions to make the market. But there wasn't a panic that interest rates were going dramatically higher. I would sum it up that way. 

Hill: But general optimism?

Barker: I would say general optimism that there would be more stability than a lot of people fear, that interest rates are still low in real terms, and that there are more demographic reasons to expect that they will continue to be low than to move up. There were some that were thinking that interest rates were more likely to get down below 2% than to get up to 4%.

Hill: Last question, and then I'll let you get back to work, other than the conference -- because obviously, when you're at the conference, you're hard at work there -- when you left the conference, and you were out in the city of Boston, as a New York Yankees fan, was there ever a moment when you were outside where you were not reminded of the Boston Red Sox visually? Was there any point where you thought, "Wow, I've been walking around the city for 10 minutes and I haven't seen a single person wearing a Red Sox hat or shirt, I haven't seen advertisements for the team." At any point?

Barker: Yes.

Hill: Really?

Barker: Yeah. I was able to tune all of that out and focus on the work at hand.

Hill: I don't doubt that while you're at the conference, you're focused on the work at hand. I'm saying, when you're out exploring Boston, when you're going out to dinner, all that sort of thing. You're saying, "Wow, I'm here! The Boston Red Sox are in the American League Championship Series. And weirdly, I'm not seeing any reminder that this team exists."

Barker: Actually, it was raining enough a lot of the time that I was there that people were scurrying around under umbrellas and jackets. I don't know if the Red Sox make a lot of rain gear that people, at least, were wearing when I was seeing them. The thing that stuck out to me during my time walking around the streets was, I went past a rack of tourist-focused brochures, one of which was for Maine. And I thought about you. And the thing that I thought of, and I've never thought to ask before -- your family, are they lobstermen? Or are they lighthouse-keepers?

Hill: [laughs] I think if you're promoting Maine, you're definitely putting forward the idea that the majority of people in the state are working in one of those two professions. I think that's probably true.

Barker: Are they not?

Hill: They're not, weirdly. 

Barker: Really?

Hill: Yeah.

Barker: I mean, you could work at Pepperidge Farm as well, I suppose.

Hill: I think you're thinking of LL Bean.

Barker: Or LL Bean. There are four jobs.

Hill: Well, and forestry. We've got a lot of trees.

Barker: I haven't heard about that. 

Hill: OK. You can read more from Bill Barker and his colleagues by going to foolfunds.com. You can sign up for Declarations. Join the 60,000 fellow investors who have signed up for Declarations, the free monthly newsletter from Motley Fool Funds. Bill Barker, thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendation 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.