Tough Days for Giants Apple, Bristol-Myers

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The new year is starting off with some fireworks in the stock market, but not all of them of the upbeat variety. Apple (AAPL -2.19%) CEO Tim Cook delivered the bad news that the company's previous revenue forecast for the fiscal first quarter was too optimistic, because of trade war troubles and slowing Chinese iPhone sales. Naturally, the stock took a dive. So did the share price of pharmaceutical powerhouse Bristol-Myers Squibb (BMY 0.48%), after it unveiled a $74 billion deal to acquire biotech major Celgene (CELG).

In this MarketFoolery podcast, host Chris Hill and MFAM Funds' Bill Barker talk about the bac kstories behind both of these plunges, and the outlooks for the companies involved. They also answer the emailed question of a listener looking for advice on how to best invest the savings of his adult daughter.

A full transcript follows the video.

This video was recorded on Jan. 3, 2019.

Chris Hill: It's Thursday, Jan. 3. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, he's been out for a while but he's back now, it's Bill Barker. Thanks for being here!

Bill Barker: Thanks for inviting me back!

Hill: We'll get to why you've been out in a little while. The way you just said that, it sounded like, "Oh, I would have come back sooner, but you didn't invite me." No, you were out for a while. We'll get to that.

Barker: I wasn't invited. Maybe I would have come in. Who knows? [laughs] 

Hill: Yesterday afternoon, around 2:30 p.m., you and I were on Slack going back and forth. You wrote something to the effect of, "What are we going to talk about on Thursday? There's not really any news. Let's figure out what we can talk about." I think the news fairy overheard you, because there's a $74 billion deal in the biopharma industry, and that's not the lead story today. 

Barker: No. Distant second.

Hill: Distant second. That's because Tim Cook, CEO of Apple, sent a letter to shareholders. It went something like this. "Dear Apple shareholders, remember back in November when we forecast that our first quarter revenue was going to be somewhere in the neighborhood of $89 [billion to] $93 billion? How would you feel about $84 billion instead?" Shares of Apple are down 9% today.

Barker: Yeah. The attempt to spice that bad news up with, "By the way, we're going to have an all-time record for earnings per share," didn't seem to work. I don't think there's any surprise here, when you lower the revenue guidance as much as they did, especially for Apple, which is well known for providing very cautious guidance. Largely accused of sandbagging on guidance for the last decade, at least. So, when they say $89 [billion to] $93 billion, the usual response is, "Let's start with $93 billion and add a little more on." This is talking about the Wall Street analyst community. Normally, for many companies, you take the midpoint of the guidance as, "We've really evaluated this, and somehow we've come up with the exact midpoint of the guidance that has been handed to us." [laughs] 

Hill: $91 billion.

Barker: Though, with Apple, you're going to be above that, because history has shown you that that's what's likely to come in closer to the reality. And this time, no such luck.

Hill: Apple is going to report their first-quarter earnings somewhere in the neighborhood of Feb. 7. We've got a little over a month to go. Cook gave an interview with CNBC where he talked about traffic being down in their stores. He talked about China. A lot of it was about China. He said he hadn't seen the December numbers yet, but clearly, the indication was that they were bad enough that they're lowering guidance very early in January. 

In that interview, he seemed to spell out two basic challenges that Apple is dealing with. One is of their own making, one is not of their own making. The not of their own making is the macroeconomic environment, the slowing of the economy in China, the trade war having an effect, that sort of thing. Of their own making is the fact that they're selling a $1,000 phone and trying to get a lot of people to buy it at the same point in time when -- and he made reference to this in the CNBC interview, he talked about the battery replacement program that they did last fall, how they dramatically lowered the price of the batteries, I think it was down to $29. You had a lot of people taking advantage of that. And because of that, they said, "I don't need to upgrade my phone. Why would I go out and upgrade from an iPhone 6 to a 7, or a 7 to an 8, when the battery was the problem and now it's fixed?"

Barker: I think that in a lazy world, you would refer to this as a perfect storm. I've always considered that to be among the laziest evaluations of what's going on, is to find three factors and combine them and pretend that somehow, that's a unique circumstance. But you've got China generally slowing down. You've got China-U.S. specifically being an issue. And Apple, in many ways, being a poster boy for the U.S. And then, you've got Apple's specific choices, as you mentioned, being largely around the pricing of their product. They make better and better products, but there appears to be a limit to which large numbers, or at least sufficiently large numbers, of people will go, in terms of buying a new phone when the one that they've already got is already awfully good. And Apple's history of being able to encourage people to upgrade their phones again and again and again has taken at the very least an interruption. 

Tim Cook is talking about the various ways that they can mask the real cost of the phone by getting people to pay in installments. Of course, it was masked for a long time, in terms of what you would pay, because the service carrier was picking up part of the real cost. You were paying for that in your contract with AT&T or whoever. That's largely been interrupted. People are seeing the full cost of the phone and are hesitating.

Hill: This is a stock that, as I mentioned, down about 9% today. Down nearly 40% since last fall. They have all that cash on the balance sheet. When you look at Apple priced as it is today, do you look at it as a buying opportunity? Or do you think this thing has further to fall? Because the CEO himself said yesterday, "I haven't seen the December numbers." It's not out of the realm of possibility that the December numbers are actually worse than he and his executive team are imagining.

Barker: To be wishy-washy, I would say both. I think it's got further to fall in the short term. That said, given the net cash, which I think the letter refers to as $130 million right now, that's about $30 a share --

Hill: $130 million? Or $130 billion?

Barker: $130 billion.

Hill: That's a big difference. Three more zeroes, anyway. 

Barker: Well, some would say. On a day like today, who can tell? So, $130 billion. That's about $30 a share on the share price. They're about $4.7 billion, so I'm rounding up. It's not quite $30 per share. That out of, call it $144 right now that Apple's going for, something like that, you're spending about $114 net of the cash. It's got about $11 a share in earnings. So about 10 times the earnings power of the company. What are they going to do with all that cash? They're going to keep buying back their shares, which they've been doing pretty aggressively over the last six years. Over the last six years, earnings per share have grown 11% per year for Apple. That's off of a peak, six years ago was an interim peak. The actual net income has grown about 6%. They've not quite doubled their earnings-per-share growth by buying back what is closing in on two billion shares. They bought back about 25%-30% of the company over the last six years. They can continue to do that, buy back maybe 5% a year of the company, with just cash on hand and the cash flow that they're getting, and continue to pay the dividend, which is yielding about 2%.

You may see an interruption in their growth. Of course, the letter refers to all the other areas other than the iPhone as doing pretty well. They refer to, I want to say either 19% or 29% growth in the other areas of the company. That's not bad. The diversification outside of the phone is a net underneath things. But iPhone is still certainly the biggest part.

Hill: Absolutely. The services business has been steadily growing. It's now, I would say, more than meaningful revenue. But, as you said, this is all about the iPhone. As long as the iPhone is not flying off the shelves, we're going to see days like this.

Barker: Let me get the number right -- it is in the letter that "revenue outside of our iPhone business grew by almost 19% year over year," which is pretty good. It's a very large company. The non-iPhone part of Apple, which is the HomePods and the Macs and iPads --

Hill: The Watch.

Barker: -- the Watch, the services. Services were $10.8 billion for the quarter. There's a lot of very large business going on outside the iPhone. But the iPhone is the biggest chunk, certainly.

Hill: The deal of the day is Celgene and Bristol-Myers. Bristol-Myers, one of the big pharma companies, buying Celgene, one of the big biotech companies, to the tune of $74 billion. Celgene shareholders -- I believe you are one?

Barker: Yes, I am. Full disclosure. 

Hill: Here's what you're going to get in this deal. You're going to get one share of Bristol-Myers stock. You're also going to get $50 in cash for every share of Celgene. How are you feeling?

Barker: I guess I feel better than I did before the day it started, in terms of Celgene, which has had a rough go of it. Bristol-Myers is selling off quite a bit. I and other shareholders will be getting that share of Bristol Myers, if we want to keep it, as well as the $50 in cash if the deal goes through. I don't have any reason to believe that it won't. But time will tell. Some things do fall apart.

Hill: It's expected to close in the third quarter.

Barker: Yeah, and we're just at the beginning of the first quarter. There's plenty of time for events to supersede.

Hill: As they say in sports, there's plenty of time to blow this lead.

Barker: Well, it's not that much of a lead. Bristol-Myers is down quite a bit. I guess the question for shareholders is, if the deal goes through, do you want to hold on to this share of Bristol-Myers that you're going to get in replacement for your share of Celgene? The market doesn't like what Bristol-Myers has done seemingly, which is understandable from the traditional metric, which is an acquiring company's shares go down and the acquired company's shares go up. That's what's happening. For the last couple of years, you saw that pattern broken a lot, where the acquirer was going up no matter what. Everybody liked everything in the stock market. But we're seeing, first of all, a day in which there's a certain amount of pessimism in the market. I think that Bristol-Myers is pretty interesting at the price that it's going for right now.

Hill: Bristol-Myers, to put some numbers around it, the stock is down about 12% today on this news. Celgene up 25%. I was talking with Shannon Jones, one of the hosts of our Industry Focus podcast. She hosts the Wednesday episode, which is about healthcare. If you're not already listening to that podcast, definitely check it out. Next Wednesday, Shannon's definitely going to be talking about this deal, and probably talking about it in a way with far greater intelligence than you and I are talking about it.

Barker: Oh, easy. That's damning with faint praise.

Hill: [laughs] So, I was chatting with her before. And I said, "Is what we're seeing with Bristol Myers the traditional," as you indicated, "they're the acquiring company, maybe some people think they spent a little too much money and that's why the stock is down?" She said she thought that was part of it, but also, Bristol-Myers had been languishing on its own, and there were some who thought that Pfizer might be making a bid to buy Bristol-Myers. Some of what we're probably seeing with Bristol-Myers selling off today is the "you paid too much," and some of it is, "I was hoping you guys were going to get bought."

Barker: Yeah. "You paid too much," "we hate stocks today," and "now Pfizer isn't going to overpay for you, so we're out of here."

Hill: Some people would say those three factors make up a perfect storm.

Barker: Yeah, idiots are the ones who would say that. Speaking of idiotic notions, do you think this is the opportunity for Bristol-Myers to get rid of the Squibb in its name?

Hill: Yeah.

Barker: The whole Harry Potter thing has undermined the attractiveness of that.

Hill: Yes. In the Harry Potter universe, a squib is a person born of magical parents, but they do not have magical abilities. Do I have that right?

Barker: You do have that right.

Hill: OK. So, yes, I think you're right, in part because some people on Twitter today were already starting to throw out polls in terms of like, "Bristol-Myers Squibb is buying Celgene. What should the new name be? Should it be BristolGene? Should it be CelSquibb?" CelSquibb, I don't think that was getting many votes.

Barker: No. Bristol-Meyers-Celgene... I don't know. I don't care. [laughs] I've got my share of Bristol-Myers to deal with now. 

Hill: We're joking about this, but make no mistake -- there are actual conversations taking place at Bristol-Myers Squibb headquarters in New Jersey today if they haven't been going on already about, "What is the name going to be? What is the branding going to look like?"

Barker: Oh, yeah. Money is being spent. And if they get it wrong, you will be there to kick them in the teeth for a long time.

Hill: I and others. [laughs] If we do anything on this podcast, it's take shots at people who really blow it when it comes to branding.

Barker: Yeah. You've won a few of those battles.

Hill: We had a couple of victories. Certainly with Tronc. The people who came up with Tronc saw the error of their ways and went back to Tribune Media. Good for them. 

Barker: Oath, is that still around?

Hill: Nope. They also saw the error of their ways. Even more quickly than the Tronc people did. They went with Verizon Media.

Barker: What's No. 1 on your hit list now?

Hill: I don't know. We'll see what these people come up with.

Before we dip into the Fool mailbag, you've been out because you've been injured. The dozens of listeners who've been wondering, "Where's Bill Barker?" He's been on the mend.

Barker: I tweaked my leg.

Hill: I think you did more than tweak your leg. You shredded your Achilles tendon.

Barker: It's still there.

Hill: It's still there, but it's repaired. 

Barker: It's under a cast. Yeah.

Hill: How are you feeling?

Barker: I feel fine. I feel good. It's a little annoying to be wandering around on crutches. But other than that, I'm fine.

Hill: Since this is in the wake of talking about one of the largest pharmaceutical companies in America, I should ask, what was the best part of the painkillers?

Barker: I actually didn't need them for very long. I didn't even need them, I think, the day after. I wasn't up and around very much. If I had been up and around, I would have needed them. But I was just lying down pretty much, and not in any real pain.

Hill: Nice.

Barker: So, I can't speak to the quality of the painkillers that I was on, because they weren't killing that much pain. Which is nice. I guess that's the best part. I had pain the moment that I heard everything pop. That was unpleasant.

Hill: Right. That sounds like the best part of painkillers, not needing them. Years ago, when I threw out my back, I remember after a day and a half, finally seeing a doctor and getting some medication. Once that first painkiller kicked in, after the initial, "Oh, I feel so much better," the next thought in my head was, "Oh, this is why people get addicted to this stuff." And I was like, "I have to get rid of these as soon as possible."

Barker: Yeah. I really didn't have any pain to speak of. Every time I got up, I had some pain, but I didn't get up much.

Hill: Nice! Yeah, you have able-bodied children who can fetch things for you. 

Barker: [laughs] They can fetch things for me and I can work on a laptop and just lie around for a little while. I had to come back in eventually. You need to get out of the house. 

Hill: Absolutely. Our email address is [email protected]. Question from Eddy, who writes, "I have a question about investing for my daughter. She's already out of college and currently working full time, so she's not really a kid. She doesn't know much about investing and has asked me to invest her savings. Do you recommend buying the same holdings you already have for your kids or diversifying and buying companies you don't already have? She has no interest in this topic at all, so I'm trying to decide for her."

Let me start with this: I get that she has no interest in this, Eddy, but I think this is an opportunity to slowly bring her along and get her at least mildly interested. It behooves her to get somewhat interested in where her investment dollars are going.

Barker: Yeah. Not knowing the specific circumstance, but seeing that she is working full time, I would start with, is she using the company 401(k) if there is one? Hopefully there is. If not, and even if so, is she contributing to an IRA? The specific companies is certainly one of the prisms that our company in general looks through. A lot of the people that read or listen to our work think in terms of individual companies. That's one way to get somebody interested in something they know and understand. But another way is to just watch money grow. When you first start contributing to a 401(k), you're starting at zero. You're going to see that amount rapidly grow because you're contributing to it every two weeks, presumably. Also, you're hopefully getting a company match. 

I don't know that that's going to be the case, or if there even is a 401(k) where this young woman is working. I hope there is. If there is, and there's a company match, and you're not using it, that should be an easy sale.

Beyond that, of course, the value of a Roth or regular IRA. And, parents even subsidizing their kids. If they feel like, "I can't afford to take that much money out of my paycheck," a little help from parents is probably more valuable. And, getting that habit started early.

Hill: In terms of specific stocks, and I think that's another natural place for parents to look, is, "I own these stocks. I'm bullish on these stocks. Therefore, I will buy them for my children or put them in my children's account." That's a natural way to think. I would split the difference there, Eddy, or at least consider splitting the difference. There may be some stocks that you own, that you have a particular interest in, and you're particularly bullish on. Maybe those are some that you buy on behalf of your daughter. But I'm a big believer in, the easier a business is for a person to understand, the easier it is for them to follow how that business is doing. So, maybe a conversation with your daughter about what she's interested in, what she has a natural aptitude for, what her circle of competence is, and maybe buying a couple of stocks in that direction, as well.

Barker: Yeah, I think that's good advice. To start somebody off on a company that they can't understand, biotech or anything like that, where you don't really understand how drugs get approved, many areas of tech are difficult for people to process. Apple little bit less so because they see the phones. 

Buying something that's cheaper than it used to be is also one way to get people interested. But, the 401(k) and Roth -- the IRA gives you the opportunity to invest in individual companies. That's the place that I would start. To be invested in an account where you can't really touch the money, or can't do so without a significant penalty, which is going to be the case with a 401(k) or an IRA and knowing that the money that you put in today is going to be compounding for roughly 40 years before it gets spent. 

Hill: As good a place as any to wrap up. Thanks for being here!

Barker: Thank you!

Hill: You can read more from Bill Barker and his colleagues. Go to mfamfunds.com. 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday!