For investors, there's nothing like earnings season -- that period when we get to look under the hood and see how businesses are really doing -- and this week, a number of major companies delivered quarterly reports worth our attention.
First up in this MarketFoolery episode, Under Armour (NYSE:UA) (NYSE:UAA) reported a third-quarter profit beat, thanks in large measure to its rising sales internationally -- but is that success enough without more gains on the domestic side? At General Electric (NYSE:GE), on the other hand, the hoped-for rebound has yet to begin, and it had to cut its dividend to the bone. And then there's BP (NYSE:BP). The oil giant is in one sense riding high, thanks to stronger oil prices that boosted it to its best profits in five years. That, however, begs the question: Why is the share price lagging? Host Chris Hill and senior analyst Taylor Muckerman tackle all these topics, and try to tease out the key information and insights that investors will need as they consider these stocks.
A full transcript follows the video.
This video was recorded on Oct. 30, 2018.
Chris Hill: It's Tuesday, October 30th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Taylor Muckerman in the house. Good to see you!
Taylor Muckerman: We must protect this house! [laughs]
Hill: We will protect this house, from other business news podcasts, I suppose. Earningspalooza is starting to heat up. We're going to get to GE and we're going to get to the big oil stocks.
We have to start with the stock of the day, and that is, I am very happy to say, for the first time in a long time, Under Armour. Third quarter profits for Under Armour came in higher than expected. International sales really look like they crushed it, and the stock up 23% this morning.
Muckerman: This appears to be the quarter that the market's been waiting and waiting and waiting for out of Under Armour. Sales, as you mentioned, in the U.S., lackluster, down 2%. International up 15%. That's carrying the day here. Definitely coming out of kind of a restructuring turnaround. They fired several hundred people lately, and the potential to maybe have another round of that moving forward. They seem to be on track.
One thing that jumped out to me, kind of ironic, they mentioned that sales to Dick's were up 4%. Just in August, Dick's blamed their lackluster performance on decreasing Under Armour sales in their stores. So, kind of two different tales there. Under Armour says it's going well inside of Dick's. Dicks says their partnership with Kohl's is hurting business in the fully priced stores like Hibbett Sports and Dick's with the discount Kohl's partnership.
I like what I see here. I also dig what they're trying with ArmourBox, which they announced last week, after the quarter. It didn't impact the quarter. It's kind of the Stitch Fix model of subscription box for athletic apparel. I don't know if it's going to be a real needle-mover, but it could enhance the brand. At least they're trying something that consumers these days appear to be pretty in tune with.
Hill: A couple of other things. If you look at how they're managing their inventory, they appear to be doing a better job of that. Something that you and I have talked about, and Jason Moser has made this point, Matt Argersinger has made this point. Going back to the beginning of the year, Kevin Plank, very much the leader of Under Armour, but the executive team around him, you and Matt and Jason pointing out, "Look, he has to figure out a way to work with his management and keep them in place because the turnover in the C-Suite has been higher than what you like to see." I don't want to jinx anything, but they're still there.
Muckerman: They are still there. Hopefully we can continue to see that. With successes like this, maybe they found that group that finally is going to be able to turn this company around and challenge the likes of Nike like they always thought they could. But, even with the stock up 23% today, it still has to more than double from here to get back to its all-time highs, which was very early on in the days of this company as a public company. It still has a lot of work to do, if you've been a long-term investor, to get back to even. But you like to see something like this, at the very least.
Hill: Yeah. It's around $22 a share when we came into the studio. You go back two or three years, it doubled that, basically. So, this is great for me and anyone else who is a shareholder of Under Armour, but for the amount of time that I've held it, still very much underwater.
Muckerman: Agreed. I'm in the same boat. We're slowly starting to rise against the tide here, though.
Hill: Right. Again, this is great, let's see this next quarter and the quarter after that. The international sales is great to see, but it's only going to carry it so far. They can't keep treading water in the United States.
Muckerman: No, they can't. Maybe these self-branded stores really help out because you have higher margins there. That was about 33% of sales this quarter. If that can gain a little bit more traction, I think that could help. And, maybe, if they can boost branded store sales internationally. Obviously, international, if they can expand, is much bigger than the United States. But certainly, their home market is the biggest breadwinner for them at the moment.
Hill: General Electric's third quarter profits and revenue came in lower than expected, and let's face it, the expectations were not that high to begin with. You tell me, what's the headline here? Is it that? Or is it the fact that the quarterly dividend has been cut from $0.12 a share to $0.01 per share?
Muckerman: Yeah, that stings a little bit. They say it's going to save them about $3.9 billion. So, as a shareholder, I think that's a good thing. The dividend yield hasn't been enough to keep up with the share price decline. Even though you were getting that few percent over a year, you're still down 50% depending on when you invested in this company. I think to move forward, they're going to need that $4 billion. They have to handle the insurance claims on their GE Capital, which could be up to $15 billion. The Power business, which is their largest, still down 33% in sales in the quarter, and turned into an operating loss. This business is definitely still struggling. They could use that $4 billion. I think that they could hopefully put it to better use.
They're going to have a full investor update early 2019, similar to what Flannery did. The new CEO, Culp, he's going to come out and lay out his plan. So far, it seems like they're still going to continue selling off the Transportation business, spinning off the Healthcare, and paring down their two-thirds ownership of Baker Hughes. Maybe that changes early 2019, when they announce their plans moving forward under the new leadership. But, yeah, I don't think the dividend cut is a negative thing. I think it had to happen.
Hill: It's absolutely the right move. Larry Culp has been CEO for about an hour and a half, I'm sure he and his team are fully aware of the fact that there's a whole swath of investors, institutional and individual, who look to dividend-paying stocks, and when those stocks stop paying dividends or significantly cut their dividends, they're going to jump ship. Larry Culp isn't waiting until 2019 to at least share some of his plans. Part of his plans was taking the Power division and splitting it into two separate units. One is going to be gas products and services. The other is going to be nuclear power conversion, grid solutions. I don't know anything about that business, but I have to imagine that if nothing else, this is going to provide greater insight into those divisions.
Muckerman: Yeah, to see how they're doing, and also hopefully some greater focus within the divisions for the employees themselves and management. I do think it makes sense to split them. Natural gas turbines and steam and nuclear are two vastly different businesses. No real reason why they need to be combined, other than they're power-generating. Natural gas, kind of struggling. Seems to be a lot of supply out there vs. the demand for these natural gas turbines. They did have a little hiccup with Exelon and one of their nuclear turbines that had some faulty equipment, so they had to go out there and shut that plant down. That's a bad look for them in a sector that's quite dangerous, with nuclear power, when you're talking about a malfunctioning unit there. They get that turned around. But, down 33% in your biggest division, that hurts, especially as long as they've been around.
Hill: One other thing that caught my attention, before we move on to the big oil stocks, Larry Culp kind of drew a line in the sand, talking about, "We're not raising money. We have no plans to do any sort of capital raise." I really hope they don't have to, because they don't appear to have a lot of other financial levers they can pull. They've already cut the dividend down to $0.01. It's not like they have a lot of other options.
Muckerman: Yeah, we'll see if that $4 billion can carry them. If they have to go hit the debt markets ... and, issuing equity when your share price is down this far, not a good look, either. Hate to see him have to rebuff on his word this early in the game.
Hill: BP's third quarter profits were the highest in five years, although you wouldn't necessarily know it from what's happening with the stock. The stock is basically where it was a year ago. It's up ever so slightly today. Tell me what's going on with BP.
Muckerman: Yeah, you see oil prices creep back up toward $80 a barrel, you would think that some of these companies with the greatest exposure to oil and natural gas would be keeping pace. But BP, not so much. I have said several times on Industry Focus over the last couple of years that, of the majors, this is the one that I would likely jump aboard if I was going to invest in an oil major. I think internally, it's been justified, but the share price is still languishing. They continue to divest some businesses because they still owe money on the Macondo disaster. I think they're going to end up paying about $3 billion this year. We're talking five, six years later. And they're going to be selling off more U.S. onshore assets to pay for that. But then, they're getting heavier into the shale game. They closed their BHP Billiton purchase for their shale assets. They expect to be able to pay all cash for that, if oil prices remain where they are.
Internally, they judge their projects by $60-65 a barrel. Right now, we're well above that. It seems $60-65 is that that Goldilocks moment, right in the middle of where you might expect it to be. And, a lot of projects coming online. I think they're in a good place right now, it's just still an oil company, which investors haven't really jumped back on with.
Hill: You say that, of the behemoths out there, this is the one you find the most interesting from an investor's standpoint. Why BP and not, say, an ExxonMobil?
Muckerman: BP had been forced to streamline. Whereas Exxon just is what it is. It hasn't been forced to check itself. They've made several big purchases over the years. Some of them have played out, some of them haven't. You have to wait five to 10 years to see if some of these actually do. With BP, they trimmed a lot of the fat to pay off some of these burdens that they've had from the Gulf Oil disaster. Now, I just like where they're at, in terms of upstream assets, more oil-focused. With the projects coming online in the Gulf of Mexico and in Australia recently, they don't have the capital expenditures that, say, some Exxon or Chevron have looking forward.
Hill: Something happened last week when we were out in Denver for our member event. When I saw this headline, I immediately thought, "I have to get Taylor in the studio to talk about this." This is the Attorney General from the state of New York filing a lawsuit against ExxonMobil, alleging that the company defrauded shareholders by downplaying the expected risk of climate change. When that news broke last week, Exxon's stock, which had been trading up during the day, immediately started to head south. Not in some dramatic way, but it was a pretty noticeable change. I'm curious what you think of this lawsuit. In some ways, this is completely expected. The Attorney General's office in the state of New York has been looking into this matter going back three years. So, filing a lawsuit was going to come at some point. If you're an ExxonMobil shareholder, how worried are you?
Muckerman: I think it's going to be a headache.
Hill: I was just going to say, it doesn't go in the plus column.
Muckerman: No, it's definitely not something to brush aside. It's going to be a distraction at the very least for management. It all stems from, in 2015, it came to light that they've been saying things that differed from their internal studies on climate change, saying externally that it's not really that big of a deal; internally, they discovered that, "Hey, this really could be a big thing moving forward, and as an oil and gas company, we need to at least address it internally." So, saying one thing and knowing another is what started the investigation. That's still what's coming out with this new case, but it's slightly different. Here, we're talking about potential securities fraud, misleading investors, not just the general public. I think that's scaring folks a little bit. I'm no legal expert, but I guess folks are saying, the Martin Act exposes ExxonMobil to some bigger penalties or a broader array of penalties.
Basically, they've used different carbon tax pricing in the public sphere vs. what they used internally to justify moving forward with projects. But when you look at it, they used a much higher carbon tax price when they had spoken to the public than they did internally, so they made it seem more damaging than they actually thought it would be. A lot of folks are saying, "If they had just not even undergone this exercise, which could have been more to the detriment of investors, they would be totally fine, because there wouldn't be that discrepancy in what they've said and what they've internally used." So, if they had been less cautious, they'd be fine, and investors could have been punished even more, unknowingly punished.
I think headache at the very least. Potentially a few hundred million dollars in fines. But it's not going to come up right away. There's going to be complicated math here, and definitely taking it to the courts.
Hill: It always makes me smile, whenever we talk about these behemoth companies and say, "Eh, they'll probably pay $100 million dollars in fines."
Muckerman: And then that's it.
Hill: They can.
Muckerman: They kind of tried to do the right thing, they just weren't consistent publicly and internally. That's what's tripping them up again.
Hill: It's always the cover up, people!
Muckerman: Yeah, it is. It's always the cover up!
Hill: It's always the cover up! Whether it's your personal life or politics or investing, it's always the cover up that gets you. Taylor Muckerman, thanks for being here!
Muckerman: Appreciate it!
Hill: As always, people on the program may have interest 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Chris Hill owns shares of XOM, Under Armour (A Shares), and Under Armour (C Shares). Taylor Muckerman owns shares of General Electric and Under Armour (C Shares). The Motley Fool owns shares of and recommends SFIX, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends NKE. The Motley Fool has a disclosure policy.