Bojangles Kisses the Public Markets Goodbye

In this episode of MarketFoolery, host Chris Hill and analyst Matt Argersinger take a look at some of the biggest recent stock stories. Marriott International shares took a hit, and long-term investors might be better off not buying on this dip. Bojangles is out of the stock market game, with Durational Capital Management taking it private for a shockingly small premium.

Sorry, shareholders -- but, don't worry, you'll probably get another shot at the Jangler in a few years. (If you want it, that is.) And, of course you'll get an update on the Amazon HQ2 news. Or maybe we should we call it the HQ3 news? Tune in to find out more.

A full transcript follows the video.

This video was recorded on Nov. 6, 2018.

Chris Hill: It's Tuesday, November 6th. Happy democracy day. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio, Matt Argersinger. We're both sporting our "I Voted" stickers. 

Matt Argersinger: We are. I think your votes count a little more than mine, with me living in DC. That's a terrible joke, but somewhat true.

Hill: It's funny because it's true. We're going to get to the latest restaurant to be taken private. And yes, of course we're going to talk about Amazon's second headquarters!

Let's start with some earnings from Marriott International. Third quarter results, not what the market was looking for. The stock is down about 5%. How worried should shareholders be on this one? I'm not a Marriott shareholder, but I look at this industry, I look at the strength of the U.S. economy, and if you had asked me before they issued the report, I would have said, "They're probably doing well."

Argersinger: I would have thought the same things. The economy is the best it's been in eight years. People are presumably traveling. Business is good, so business travelers are also traveling.

Hill: Employment is up, wages are up.

Argersinger: All of the above. But this is a company that has struggled recently. This might be the third quarter in a row that they've missed their own revenue estimates. What's striking about it is the slowness in North America, which is obviously their biggest market. The revenue per available room in North America, up just 0.6% in the quarter. Their guidance for 2019, looking at North America, up just 1-3%. That's surprising to me. The economy is strong, as we've said. It gets me thinking about things that are thought but not spoken. In Marriott's case, it might be the rise of Airbnb. Which, by the way, I couldn't believe this when I saw this -- Airbnb's private market valuation is about $30 billion right now. That's not much smaller than Marriott. Marriott is about a $40 billion company. Airbnb is really right on their tail. I think about that, I think about the competition there. I also think about the rise in teleconferencing. Communication keeps getting better, so maybe the need for business travel is waning a little bit. Those are two big trends in the economy that are a bit of headwinds. Still, you look at Marriott, it merged with Starwood, now by far the biggest hotel company in the world, something in the order of 1.3 million rooms, almost 3,000 properties. Probably the most important number, 120 million rewards members now that Starwood is combined with Marriott. This is a massive company, a great barometer for the economy. And yet it's showing you that business in North America is not strong. It's interesting.

Hill: You look at the hotel business -- Marriott is not the only one dealing with this -- you look over the last 20 years, the rise of businesses like Expedia, Booking Holdings, that sort of thing. Certainly, the hotels have benefited from being on those platforms. But, as Marriott has gotten to the size that it's at, you mentioned the Starwood acquisition, at any point, does it make sense for Marriott to consider leaving those other platforms and saying, "If you want to book in any one of our fine properties, there's only one place to do it." It's great to be on those other platforms, but you're giving them a scrape of the business.

Argersinger: I like that thought. If there's any hotel chain that could do it, besides Hilton, it's Marriott. They have the size, they have the rewards member base to actually make a dent in a market like that and have some clout. But, again, it's one of those things. We live in a world where businesses are chasing customers, chasing eyeballs. The OTAs, as you mentioned, have all the eyeballs, all the mobile transactions that these hotel chains want to be a part of. Going out on your own is expensive and risky. Do you really want to shut off those distribution channels and go on your own? It'd be a risky shot, but I think Marriott is one company that could probably pull it off. 

Hill: You look at the strength of this brand. The stock dropping. It's not falling through the floor. Down about 5% or so today. In a lot of other cases, this might a situation where investors look at that and say, "I can get shares a little bit cheaper than I could yesterday." I don't know, though. You tell me. Is this a buying opportunity? They were pretty tepid with their guidance. 

Argersinger: I know. Look at the 52-week high, it's almost $150 a share. Now, it's about $113, adding in today's drop. That's pretty far off its highs. But you're right. When I see guidance like that, where it's very tepid, you almost want to see something like that turn around. By the way, Marriott, again, a lot of companies fall into this, they've been buying back a lot of stock, especially over the past year, at much higher prices. Those are the kinds of capital allocation you don't like to see. You'd rather have them investing in the business, especially when they're facing what looks like a pretty competitive market. 

Hill: Let's move to the restaurant space. As I mentioned, yet another restaurant being taken private. This time, it's Jason Moser's beloved Bojangles, which is being bought by Durational Capital Management. They're buying them out at a price of $16.10 a share, which is a nickel or so higher than it was yesterday. You were telling me before we started taping, this is a higher premium than would appear. At least in terms of when Durational started getting involved in this.

Argersinger: Correct. I think this is really peculiar. If Jason was here, he'd be calling it the Jangler. This is very strange for the Jangler. If you look at it, the company actually called this out -- it's a 39% premium from when there was speculation about a potential deal back on February 12th. That's interesting because that's the company saying, "We weren't involved in that, but there was speculation back in February. And look, it's up 39% since then!" Well, that doesn't really make sense to me. What does make sense is, they said that the offer is a 15% premium to the closing price on September 27th. That was the day that Bojangles formerly came out and said, "We're exploring strategic alternatives." You can bet that Durational was probably involved at that point, or at least shortly after that date. It's a 15% premium from there.

Still, as a shareholder, you're used to seeing your waking up in the morning, a company you own has been bought out, you're thinking, "Oh my gosh! What's the premium? Is it a 25% gain? 30%? 40%?" And, wait a second, it's almost the same price as yesterday, $16.10. What am I getting here? Well, the process started over a month ago, and you're getting that premium. It's kind of dissatisfying, but it is what it is.

Hill: I'm not even a shareholder, but that was my thought when I saw on Twitter, "Bojangles is getting bought." I was like, "What's the multiple going to be?" I wouldn't be surprised if we see Bojangles in the public markets again. This is a regional chain. Jason's made that point before. It's a southeastern United States chain. They make really good chicken and biscuits. About 40% of the restaurants are company-owned. If you're their new owners, Durational Capital Management, you can start to franchise some of those out and ring the cash register that way. Again, it wouldn't surprise me. Now, that doesn't necessarily mean it's going to be a stock worth buying in a couple of years when it gets spun out. But it wouldn't shock me at all, if we saw this again.

Argersinger: I think you're onto something there. This was a stock that came public in 2015 at around $24 a share. Here, it's being bought about $16. Public shareholders have not done well with this. We know the business has struggled. It's been tough in the restaurant business. Competition, traffic has been declining. But this does offer the opportunity for, private equity comes in, they sell off some of the underperforming stores, refranchise some of them, as you mentioned, right the ship. And in a few years, when the market's feeling better about restaurant companies, and they're getting higher premiums, boom, there you go. You have a Bojangles IPO, the private equity guys are happy, the shareholders get a chance to own this company again in the public markets. We've seen it a lot. I wouldn't be surprised if Sonic, which owns Buffalo Wild Wings, comes public again at some point. They went private earlier this year. Papa John's is on the brink of going private, as well, or being acquired. Hey, take it private for a couple of years, let the problems come back in the rearview mirror, come public again, it's still a successful business at a much higher valuation.

Hill: I'm glad you mentioned the overall environment. I thought to myself, "Maybe this will be the last public restaurant going private this year." And I thought, "Oh, no, we've got eight weeks left in 2018. It's entirely possible, if not probable, that we're going to see another restaurant taken out."

Quick programming note. This week is Foolapalooza. It's The Motley Fool's annual meeting. Yes, we have an annual meeting. We're going to be going away for it. When I say "going away," I mean tomorrow. Tomorrow morning, we're going to be going away. Don't worry, we're still going to have our regular slate of Market Foolery episodes this week, they're just going to be recorded later today. 

Argersinger: The machine known as Chris Hill does not stop.

Hill: Not just because of Foolapalooza. I'm looking forward to our annual meeting.

Argersinger: I am, too.

Hill: I like the fact that we have people coming in from other offices. We have our office in Denver. We've got folks in from Australia, from Singapore, Canada, UK. It's great. I love it. So, because we're not going to be in the studio Wednesday morning, the day after the election, that means we're going to spare everyone the whole, "here's what it means! Here's what the election results mean!" We were talking about this before we started taping -- I shouldn't be surprised by this, but there's always the temptation in business media to try and read the tea leaves of, "Well, if the Democrats take control of the House of Representatives, here's what it means for stocks. If the Republicans ... " And, I don't know. Maybe it's because I work at The Motley Fool, but I always look at that stuff and just shake my head and say, no, not really. I don't want to say that elections don't matter. Of course, they matter, and everyone should vote, if for no other reason than, think of it as renewing your license to complain. Because if you don't vote, you don't get to complain. That's how that goes. But in terms of having huge implications for business, I don't know, I never think of it that way. 

Argersinger: I don't either. It's the ultimate application of that Buffett quote -- in the short-term, it's a voting machine; in the long-term, it's a weighing machine. That's really the way to look at it. You see the same headlines every two years. I saw them this morning. Like you said, "If the Democrats win, there's going to be gridlock! Stocks are going to fall because there will be more regulations! There won't be another tax cut! If the Republicans maintain control, it's great for business, stocks should rally!" I saw the same things before the presidential election, and essentially the opposite happened.

Hill: Yeah. I think Morgan Housel wrote an article years ago about pronouncements, particularly before presidential elections, or even in the wake of them. When George W. Bush was elected in 2000, there were all these statements. "Here are the industries that are going to do great." And, in fact, over those eight years, they didn't do so good. Same thing with Obama when he got elected. I'm going to quote Neal Brennan, a comedian I enjoy a great deal. Great Netflix special. If you're a fan of stand-up specials on Netflix, Neal Brennan has a great special called 3 Mics. It's a very creative format that he did for his stand up special. But he wrote on Twitter, and I'll clean this up for our audience, "For people who say you don't vote because none of this affects your actual life, California has a proposal that ends daylight savings time. You can vote and literally change the time, like Marty McFly."

Argersinger: [laughs] That's so great. 

Hill: Anyways, Amazon, second headquarters, it's not official yet, but certainly, we've seen significant news organizations come out with stories about how this appears to be winding up. First, it was the Wall Street Journal. Now we have The New York Times. Initially, it was, "The second headquarters is going to be in Crystal City, Northern Virginia," which is a couple miles from where you and I are sitting. You had called this out a week or two ago based on a number of things, including, as you pointed out to me, the betting odds.

Argersinger: Yes, which was extraordinary to see. Northern Virginia, which includes Crystal City, the odds suddenly came better than even money. All the others, whether it was Boston, Atlanta, were still 6:1, 10:1. And Virginia was better than even money to get Amazon.

Hill: And now, it appears as though the second headquarters is going to be split. I would then posit, it's not a second headquarters, then. It's a couple of very large regional offices. You tell me, are we down to two cities? It's going to be two locations, and the three finalists for those two locations are Crystal City, Dallas, and New York City. Is it now down to just Crystal City and New York? Is Dallas still in the mix? It seems like it's going to be Crystal City plus one.

Argersinger: That would be my bet, and I would say the plus one has to be Dallas. Austin, maybe, but probably Dallas. 

Hill: You don't think it's going to be New York?

Argersinger: I don't think it's going to be New York. I'm ready to be wrong on this. I say this because when I look at Amazon, I look at the next several years for the company, what is the biggest risk facing Amazon? It's regulation. It's the idea that they're too big, they're too involved, too big a market share in certain markets, they need to be broken up or regulated in some fashion.

Hill: By the way, that's probably the biggest risk for companies like Alphabet and Facebook, as well. 

Argersinger: Absolutely. So, what do I do if I'm Jeff Bezos, if I'm Amazon? I think about, what's the best way to spread my political clout and build up my political defenses? And that is having two coastal hubs. And, by the way, Northern Virginia is relatively progressive, it votes along with DC, which tends to be a fairly liberal part of the country. Or, Boston. Or, New York. You're hinging your prospects to two progressive parts of the country. If, instead, you went to Dallas or Austin, and you said, "We're going to also have a big hub down there," it builds your defenses better for the long-term. You can say like, "No, wait a second. We have our second or third-largest employee base in a big red state," like Texas. I know we're getting in the political weeds here, but with Amazon, it is that sort of fundamental risk over the next several years. I would say, having two coastal hubs, probably less optimal if you're thinking about that risk. 

Hill: Also, from a facilities standpoint, you look at the airport facilities in Dallas. 

Argersinger: The infrastructure is fantastic. 

Hill: What do you make of the wailing and gnashing of teeth among some of the business media, that "Amazon was just stringing everybody along..." I don't know. I don't think it's because I'm a shareholder. Maybe it's because I'm a shareholder. And I used our colleague, Shannon McLendon, as an example because, Shannon heads up our office ops team here. I just thought, the idea that some are putting forward, that Amazon was always going to be going to more than one city, and they were just stringing these cities along, dangling this carrot of 50,000 jobs, but really, the plan all along was to split it among two -- and I just thought, if I were the Shannon McLendon of Amazon, I would not be thinking that. All along, I'd be thinking, "No. I want one big office. That's enough of a Herculean task. Now we have to open two?"

Argersinger: Yes. As we discussed before the show, you put it exactly right, this was a process. I don't think this was a preordained strategy. I think they said, "We're going to explore this. Our aim is to have a second headquarters. Seattle's become too big. We have too much of our population and assets there. Let's find one big strategic place to have a second headquarters." How long has it been? Over a year, is it 18 months that they've been in this process?

Hill: The beginning of this year was when the list of 20 finalists came out.

Argersinger: Right. And coming down from over 100 at the time. So, this has been a process. At some point in this process, they probably said, "Hey, actually, it makes sense. We've taken a look at the landscape. We've observed the infrastructure, we've observed the marketplace. Now we see, this one is compelling for these reasons; this other one over here is compelling for those reasons. Why not be flexible in our thinking and say, now it makes sense to have two large regional hubs as opposed to two big headquarters? So, now, we maintain our headquarters in Seattle, we have two of these large, regional hubs in different parts of the country. That's taking advantage of different fundamental factors at each of those places." It makes sense. So, I wouldn't be surprised if this was a decision made a month ago. And that's fine. That's how Amazon moves. That's the kind of flexible thinking and capital allocation they bring to the market.

Hill: Matt Argersinger, thanks for being here!

Hill: Thanks, Chris!

Hill: 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 Market Foolery. The show is mixed by Steve Broido. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.