Some days, the companies and people making business news might be a bit obscure to the Wall Street novice. Not on this day, though. Ubiquitous retailer Walmart (NYSE:WMT) turned in a fairly impressive quarterly report by most measures -- but not all of them. Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) gave the details on its holdings this week, and if one thing was clear, it's that Warren Buffett appreciates banks. Finally, denim giant Levi's looks to be heading for an IPO.
In this Market Foolery podcast, host Mac Greer Hill is joined by senior analysts Andy Cross and Ron Gross to talk about all these items, how they should affect your investments, and also their jeans-wearing histories. (You may want to take their investing advice, but on fashion, probably not.)
A full transcript follows the video.
This video was recorded on Nov. 15, 2018.
Mac Greer: It's Thursday, Nov. 15. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Ron Gross and Andy Cross. Gentlemen, how are we doing?
Ron Gross: How are you doing, Mac?
Andy Cross: I'm doing great.
Greer: I'm doing good. We've got sleet, we've got snow --
Cross: Snow, Mac. Let's say snow.
Greer: There was sleet!
Cross: But let's focus on the snow. It's that time of year!
Greer: 6 a.m., it was sleet. I went out, got the newspaper. Yes, I still old-school read the newspaper, and it was sleeting.
Gross: School's closed in Montgomery County, Maryland. Why, you ask? I don't know.
Cross: It was snowing --
Greer: Well, the sleet was --
Gross: All right, a little bit of sleet.
Cross: It was slippery.
Greer: In the mean streets of North Arlington, schools did not close. They stayed open.
Gross: It's rough and tumble.
Greer: We're gritty. We've got lots to talk about here. We're going to talk some Warren Buffett, and we're going to talk some Levi's. And I am going to ask you guys to share your jeans-wearing history. A little catnip for people to look forward to.
Let's start with Walmart. Stronger-than-expected earnings. Eleven straight quarters of sales growth now. E-commerce sales up 43%. And Walmart raised full-year guidance. That all sounds great. And then I go and I quote the stock, and shares are down.
Cross: Of course, one day, the stock price can move on a lot of reasons. The story here with Walmart, as we talked about last quarter, is really the e-commerce, the change that they're really trying to push ahead. Even the commentary, there's so much conversation about the investments they're making in more sophisticated distribution. Warehouses, online grocery, delivery, grocery pickup is a big push for them. The e-commerce business, Mac, like you said, up 43% this quarter. That's an improvement of 40% last quarter, 33% increase the quarter before that, and 23% four quarters ago. A year-on-year improvement, and a continuing of the trend on e-commerce sales for Walmart. Continues to be impressive.
The stock reaction today, it's still kind of slow-growing. Sales are up 1.4%, 2.4% if you back out some of the currency. Maybe not quite so exciting. But really, for such a large company, they continue to make these investments to try to move the needle and, obviously, compete against Amazon.
Gross: Yeah, a lot of good things to focus on in this report. I think the curmudgeonly traders out there today are probably focusing on margins that got hit a little bit due to higher transportation costs, rising e-commerce fulfillment costs. And actually, that's a good thing, because that means they're growing their e-commerce business. But nevertheless, it does come with higher costs. Profit is actually down 2%. It's hard to get excited about a report where profits are down from the previous period last year. I think that's probably what folks are focusing on. But I do like the raised guidance. I think that makes sense.
The stock has been all over the place this year. From February through August, it was a woof, as you like to say. But it's come back since then. Kind of flat year to date. Nothing really exciting coming from the stock. I like the raised guidance. Only 21 times earnings right here for a company that will probably grow in the low single digits. We'll see how that e-commerce continues to ramp.
Cross: They also closed the Flipkart acquisition, which is the Indian business which they competed a lot for. That's expensive, and it added to the debt pile for what they have. But that's an exciting investment to make. They're definitely not standing still, certainly not the Walmart story of even five years ago, with the investments they're making. And they have to, because it's so much more of a competitive space, with free shipping from the likes of Amazon and others who are not standing still. You have a company that's going to generate $15 billion or so in free cash flow. They're basically going to spend that all in dividends and share buybacks. It's really a return of capital story for investors.
The stock's reacted very nicely off the lows here earlier this year. At $100 now, it sells for about 21 times earnings. A slight premium to the market when you look at forward earnings. Probably not a ton to get excited about in the stock price. But from the business side, they're making the investments that are important.
Greer: And not curmudgeonly, right? You don't have to be curmudgeonly about it.
Cross: No, I don't think so.
Gross: Years ago, we used to talk about how they have to right-size the U.S. business. The U.S. business is everything we talked about. Now, they've got it humming along. International, though, isn't where they would want to be. Andy, you mentioned the Flipkart acquisition, which I think is a really interesting one. Unfortunately, the CEO of that business unit had to resign following an allegation of sexual assault. Obviously, that throws a little bit monkey wrench into some works. They had to shed control of their Brazil operations. They merged their U.K. operations with a rival to focus on the U.S. business and their e-commerce business. So international is kind of floundering. They need to figure that out next, I think.
Cross: On the U.S. side, the comp growth of 3.4%, that's a 1.2% increase in traffic. More people coming into the stores. But a 2.2% increase on the average ticket price. That's a little bit higher than inflation. They actually are seeing some benefits from some of the pricing mechanisms that they're putting forward. And that's an increase off of the 1.2% from last quarter. They are actually seeing some pricing benefits, which you don't really particularly expect to see from Walmart in this kind of environment.
Greer: Along those lines, let's talk about two areas of the business that really appear to be growing. Toys, benefiting from the Toys R Us bankruptcy, and groceries. By the end of the year, Walmart expects to be able to deliver groceries to 40% of the U.S. population.
Cross: If you look at my household, groceries and toys are pretty good spots to focus on, with two young kids. That's the bread and butter, trying to serve the customer base that Walmart wants to serve in ways that are more convenient. As Ron mentioned, they're investing in that. The new distribution center they've been working on in California will allow them to ship product goods at a 40% faster rate than the traditional distribution centers. A lot of investments, a lot of robotic investments going into the distribution center. Amazon's done this so well. Walmart is now playing catch up. The groceries, we all buy groceries. I eat every day, Mac. And I've seen you eat almost every day.
Greer: It's not pretty.
Cross: And certainly Ron. It may not be pretty.
Gross: I don't like to miss a meal. [laughs]
Cross: [laughs] We all depend on food. It's a good spot for them to focus on, and trying to now meet the customers where they want to be met.
Gross: I love this quote. CEO McMillan said, "Walmart can offer fresh food within ten miles of 90% of the U.S. population." That's pretty powerful.
Greer: And you're still curmudgeonly? Or are you coming off that?
Gross: This company and this stock are not going to knock the cover off the ball. But from a total return perspective, as part of the more conservative portion of your portfolio, I have no problem with it.
Cross: A 2% dividend yield. Don't expect fireworks, but certainly, over the last couple months, it's been a nice performer for people who have held on.
Greer: Speaking of nice performers, there's a guy named Warren Buffett who's got a pretty good track record, is my understanding, as an investor. His company, Berkshire Hathaway, just reported its third-quarter holdings. Boy, does Buffett, or someone over at Berkshire, really like banks. Guys, let me give you the 10 holdings quickly. See if you notice a theme here. Apple is the biggest holding. Then we've got Bank of America, Wells Fargo, [Coca-Cola], Kraft Heinz, American Express, US Bancorp, Moody's, Goldman Sachs, and JP Morgan Chase. Five of the 10 are banks!
Gross: You look at this portfolio and you say, a bunch of banks and a bunch of consumer staple-ish stocks. It doesn't seem to be a very exciting portfolio.
Greer: The curmudgeonly trader, there you go again!
Gross: [laughs] Mr. Buffett doesn't know what he's doing. When I think of Buffett, I think of that folksy guy who likes See's Candy kind of businesses, old economy types of businesses. But we forget, he's a student of financials, whether it be insurance or financial services or the big banks. You'll remember long ago, he was actually interim chairman of Salomon Brothers. Subsequently, in various financial crises, he's helped bail out more than one large bank. He understands these companies where I will say I tend to not, because they seem like a black box to me. He clearly does. And I think that makes him comfortable investing big portions of his portfolio, especially in this type of environment, where interest rates are going to start to rise, less regulation. He sees some good stuff on the horizon. And knowing what he knows about how these banks run, he's comfortable.
Greer: Does this get you more interested in banks, Ron?
Cross: Warren Buffett has insights, like Ron was saying, into the financial world from his 60 years of investing in all types of businesses. He also has the Todd and Ted partnership, helping him out in the investing landscape, as well. You look through his portfolio, you do see companies like the airline investments they've made over the last year or so, combined with a lot of financials. The financial investment doesn't really surprise me. Ron mentioned the rising interest rates. From a scale perspective, from competitive position, the largest banks continue to widen those moats.
Frankly, Mr. Buffett is not one that's going to pay 10 times revenues, per se, for software-as-a-service companies. And he has a lot of capital to put the work. They have $100 billion in cash on the balance sheet. They generate so much cash from their operating businesses to be able to invest. Making investments like this -- including Oracle, which they bought last quarter as well. These are the kinds of investments you expect to see from Berkshire Hathaway. Given the size of the organization and amount of capital they generate, and the traditional valuation bent and thinking, these don't really surprise me. These investments, he knows them well.
Gross: Yeah. It's good to see the Ted and Todd influence. Buffett was notorious for staying away from tech. He said it's because he couldn't understand it. It's not really about not understanding, it's about not being able to predict the future, which I completely understand. But it's nice to at least see him in consumer electronics like Apple; Oracle, a business where either he or Ted or Todd can understand. We saw recent investments in fintech, financial technology companies. Good to see, because clearly, that's going to be a big place to put capital for the future. I like to see some of that in addition to the old Kraft, Coke, AmEx kind of stocks that he's owned forever.
Cross: And, by the way, let's not forget, he's also buying his own stock. They bought almost a billion dollars' worth of Berkshire Hathaway stock in the last quarter. That's significant. He doesn't really go out there and aggressively buy his own stock. Instead, he changed his methodology for thinking about when to buy that stock from a price to book value target to "when we think the stock is undervalued." And they bought a bunch last quarter.
Greer: I'll be curious to see if he starts buying even more Apple. For perspective here, Apple, his largest position by far, almost $57 billion worth of Apple stock. Bank of America, around $25 billion. Wells Fargo, $23 billion. Apple, far away.
Gross: I would imagine, with the Apple weakness that we've seen lately, he's in the market buying more. That's just a guess. I don't think he gets hung up as much as traditional Wall Street does on the quarter-to-quarter iPhone unit sales numbers. I think he's thinking longer-term about what Apple will do, in terms of generating cash flow and buying back stock over the next five or 10 years. So I would imagine he's increasing his position on this weakness.
Greer: If I'm an investor, and I hear about these 10 holdings, and I'm like, "Buffett's had an incredible track record. One of the most successful public market investors in history. Why not just mimic this portfolio?" Why shouldn't I just go out and buy these 10 stocks?
Cross: I think you'd be better off buying Berkshire Hathaway.
Gross: You could mimic these stocks, but then what? He's constantly changing the portfolio, adding to other companies. But more important, you're getting all the operating businesses of Berkshire Hathaway, which are generating all those billions of dollars of cash flow. Geico generating the float capital, which you then can invest in stocks. Just buying these publicly traded companies, you would not be getting all those operating businesses as well.
Cross: I think if you want to go investing in some of these businesses, they can be fine investments. But considering he was buying his own stock, and he's pretty particular about when they buy that stock... Berkshire Hathaway is one of my largest personal positions.
Gross: Me, too.
Cross: I think the stock is undervalued now, so if you wanted to put your money behind Mr. Buffett and that team, especially with the insurance operations that Ron mentioned and the operating businesses, buy Berkshire Hathaway.
Greer: Guys, our final story, one that is near and dear to my heart. We're going to talk Levi's! We're going to talk denim. We're going to talk jeans. They're getting ready to open this massive flagship store in Times Square. It'll be their largest store in the world. But that's not why we're talking about Levi's. We're talking about Levi's because, according to reports, they are talking about going public again. I say again because Levi's was a public company from 1971 to 1985. Does a Levi's IPO have us excited?
Gross: An iconic American brand, for sure. They're trying to raise $600 [million to] $800 million, a valuation of around $5 billion, it looks like. I don't know if it gets me excited from a stock perspective. I have to see what kind of valuation this looks like relative to cash flow and earnings. I don't know what growth potential looks like, whether this is an international play or retail play. Obviously, they have their own stores, almost 3,000 of them, but they sell into 50,000 retail locations around the world. Levi's Dockers, Denizen brands. I'll keep an eye on it. It's not some hot tech IPO, that's for sure, but I've never been a hot tech IPO investor anyway.
Greer: Ron, we were talking about this before -- apparently, Levi's T-shirts are all the rage these days. Who knew?
Gross: Who knew? I'm telling you, iconic. It's an iconic American brand.
Greer: Do you ever wear Dockers?
Gross: Do only old men wear Dockers, is my question. Because then I'll answer your question.
Cross: With pleats!
Greer: I wore pleats for like 10 years too long. And finally, I had a group of friends, it was like an intervention. They basically said, "You have to quit wearing pleated pants." No one had told me! And apparently, the braided belt, that went out.
Gross: That went out, too. Did you wear the stretch waistband Dockers? Or just the straight-up Dockers?
Greer: No, the straight-up Dockers, but they were pleated. It was a bad look. Someone should have just pulled me aside. Sometimes tough love is the best love.
Gross: Don't throw out that braided belt. That'll come back.
Greer: Oh, my gosh, I'm banking on it. Andy, what do you think of Levi's?
Cross: As Ron was saying, even though it's headquartered in San Francisco, not some high-tech investment, it's not. It'll probably be priced around 1 times sales. It looks profitable. It looks like it's growing nicely. There has been a resurgence here, along with the iconic brand, the Americana. There's enough to get me kind of excited. But the business in general has proven to be quite tough over the years. Gap struggled. We know what the retail channels are looking like with them. More and more of their business might be tied to their own distribution, rather than dependent on the likes of the other storefronts, particularly those that are tied more to malls. Traffic is down there.
It will be interesting to see how they use their brand, and how that translates to a new buying experience compared to where it was the last time it went to the public markets. It's a much different marketplace now.
Gross: I'd be curious why they need $600 [million to] $800 million of capital. Is somebody trying to cash out of this business? Do they need that capital because of some growth strategy? I'd need to see their projected use of funds.
Cross: Yeah, and how much the family still owns may be tied to it. It is interesting. Why now? Why right now? Are they trying to push the growth story that they can't find internally with their own capital? Why offer shares versus taking on more debt? That'd be pretty cheap right now. It might be a liquidity event from a core group of shareholders.
Greer: The business is 165 years old.
Gross: That's amazing.
Greer: It's pretty cool. It's very cool. Here's another fun fact, if you're out and about and there's a lull in the conversation. Worldwide denim market, $95.5 billion. How much of that does Levi's have, according to 2017 figures?
Cross: I'll say a little bit less than that, 10%.
Greer: There's a lot of upside if you think denim is going to be around for a while.
Gross: Kids do not wear jeans anymore. Male children. The girls still wear them. But there is no jean market right now for kids.
Greer: That's true.
Gross: So that might be an opportunity, or it might be a red flag.
Greer: That's such a good point. My boys will not wear jeans. They wear athleisure wear. I know lululemon hates that term, but that's what it is. It's athleisure. It's something I'm going to be wearing in 20 years when I drive a golf cart.
Gross: [laughs] That sounds awesome. Sign me up.
Greer: [laughs] As we wrap up, I have to ask. We talked Dockers earlier. Let's briefly belly up to the bar here and talk about our jean-wearing history. Andy Cross, give me the overview.
Cross: I've gone through Wranglers; I've gone through Lees. I've never been a super fashion person. But I did have a little bit of one embarrassing jean moment. We were at the Motley Fool board of directors, and Tom Gardner was trying to get us all to bond and was talking about an embarrassing story. I had mentioned one thing that I just like to do when I try on jeans, back when I used to go to the store. I'd try them on and turn around and check out how my backside looks in the mirror.
Gross: [laughs] At the board meeting?
Cross: So I mentioned this to the board of directors. And it got a really good laugh. But I wish I hadn't told that story to the board of directors.
Greer: Wow. True confessions.
Cross: It was a true confession. But, yeah, I have a pair of Levi's on right now. It's a standard go-to. They're affordable. They've opened up lots of different types of styles that match what I want.
Gross: The jeans I'm currently wearing as we speak are nine years old and from Gap. I'm sure they're not in style anymore.
Cross: Were they ever?
Gross: I don't know. I wouldn't even know how to tell.
Greer: And what would you say was your most stylish jeans? If we go back, get in the way-back machine.
Gross: Oh, this is sad. I don't know how much of our audience remembers Jordache or Jordache and Sasson jeans. In sixth grade, I had a brand-spanking-new pair of Jordache that I refused to wear because they were designer and tight and ridiculous. But yet I found myself having to throw them on to attend a band concert that the parents all attended in our sixth-grade auditorium. I remember it to this day. I'm sure I dream about it consistently. It was just so embarrassing and traumatic.
Greer: And how did that work out for you?
Gross: It was just so embarrassing and traumatic.
Cross: You guys ever go the Mavi route? I did Mavis for a while.
Greer: No, what is that?
Cross: It's a brand. They're still around. You can still buy them on Zappos and Amazon.
Gross: Lucky makes a nice pair of jeans.
Cross: Lucky, yeah.
Greer: I'm surprised neither of you mentioned Toughskins. I would rock the Toughskins in elementary school.
Cross: [laughs] Toughskins?
Gross: Are they for husky children?
Cross: There you go! If the jean fits...
Greer: I was not husky. Then I went through a dark period in college where I wore Wranglers with Stan Smith tennis shoes, which is a terrible look. If you're going to wear Wranglers, you have to wear boots. And I think technically, you probably have to dip or chew. I didn't do any of that.
Gross: Are you wearing Kirkland jeans right now? Costco?
Greer: I've gotten religion. I was wearing Kirkland for a while. I love Costco. You know I love Costco.
Gross: Yeah, we know.
Greer: But Kirkland is just... I feel like you've just given up. So, I finally said, "I'm going back to Levi's." Now, I'm wearing Levi's 501s.
Gross: They look amazing.
Greer: I'm happy as a clam, but I'm not turning around. I don't do that. I just put them on and there you go.
Gross: You know that strip that goes along the leg that says what size they are? The adhesive strip? I once went to a party forgetting to remove that adhesive strip. And I got there, and luckily, it was friends who pointed out. But before they told me, they took a picture of it. I as wearing a blazer, jeans, and the adhesive strip. I forget what size they were.
Greer: I think that that means you're just incredibly secure.
Gross: Because I didn't check myself out in the mirror before?
Greer: You're so confident that you're like, "This is how I roll."
Gross: It was there on purpose.
Greer: Then again, I didn't get married until I was 40. Consider the source.
Gross: [laughs] Yeah, you're no source.
Cross: Acid wash? Did you guys go the acid-wash route?
Gross: I loved acid wash.
Greer: More stone wash, but yeah. You like acid wash?
Gross: It worked for me for a good two years in New York and Jersey.
Greer: Full-on Bon Jovi.
Gross: Good times.
Greer: The desert-island poll, it's a little tricky this time. I think I know where you're going with this. If you had to invest in one of these companies that we've talked about, you're on a desert island for the next five years -- I should preface this by saying, don't invest this way. It's just a fun game. Walmart, Berkshire Hathaway, or the maybe soon-to-be Levi's IPO. Berkshire?
Cross: Yeah, I have to go Berkshire on that.
Gross: No-brainer. I think it's my biggest holding, actually, and I'm a proud shareholder.
Greer: There you go. Andy Cross, Ron Gross, thanks for joining me!
Cross: Thanks, Mac!
Greer: email@example.com is our email. If you have any questions or comments, or if you just want to talk about your jeans history, we would love, love, love to hear it. As always, people on the show 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 it for this edition of Market Foolery. I'm Mac Greer. For the Jordache-wearing Ron Gross, and for the very fashionable Andy Cross, the show is mixed by Austin Morgan. Thanks for listening! We'll see you tomorrow.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Berkshire Hathaway (B shares), Gap, and The Kraft Heinz Company. Mac Greer owns shares of Amazon, Apple, and Costco Wholesale. Ron Gross owns shares of Amazon, Apple, Berkshire Hathaway (B shares), and Costco Wholesale. The Motley Fool owns shares of and recommends Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool owns shares of Moody's and Oracle and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short December 2018 $52 calls on Oracle, and long January 2020 $30 calls on Oracle. The Motley Fool recommends Costco Wholesale and Lululemon Athletica. The Motley Fool has a disclosure policy.