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Retail's far from dead, and Amazon (NASDAQ:AMZN) is far from the only appealing long-term play there. In this week's episode of Industry Focus: Consumer Goods, host Jason Moser and Motley Fool contributor Asit Sharma take a close look at what MercadoLibre (NASDAQ:MELI), Home Depot (NYSE:HD), and Lowe's (NYSE:LOW) have to offer.

Find out what makes MercadoLibre so exciting, along with the risks that investors must watch out for. Learn what sets Home Depot and Lowe's apart, and which is the better buy for the next five years. Plus, the hosts answer a listener question about what a safety net is and how that can and should change along your career path. Tune in to find out more.

A full transcript follows the video.

This video was recorded on Jan. 8, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Tuesday, January 8th. I'm your host, Jason Moser. Joining me today in the studio via Skype, Mr. Asit Sharma. Asit, how's it going? 

Asit Sharma: Great, Jason! How are you doing? Happy New Year to you!

Moser: Thank you very much! Happy New Year to you, too! Doing very well. I think we're off to a fantastic start here in the markets. Hopefully, we continue to see a little bit of recovery from what was such a tough finish to 2018. I think we have some names on today's show that a lot of our listeners are going to enjoy hearing about. 

We're going to talk home improvement, looking at Home Depot and Lowe's. We'll tackle a listener email question. But first, we're going to dig down a bit more into the e-commerce king of Latin America, MercadoLibre. Asit, MercadoLibre is a popular recommendation in a lot of our Foolish services. A lot of our analysts here, myself included, like the business, like what we've seen. I know that you have studied this business for quite some time. Let's kick off with some of these questions to get a little bit more of your input as to where you see this business going and what you think some of the opportunities and the challenges are. 

When we talk about MercadoLibre, it's often immediately compared to Amazon. That's obvious -- it's the e-commerce leader in the Latin American region of the world. But given its focus on e-commerce, you feel like there's another aspect of this business that's really starting to show real production, and it's going to become a bigger part of the business as time goes on, right?

Sharma: Absolutely, Jason. I had the opportunity to cover PayPal (NASDAQ:PYPL), which many of our listeners are familiar with, and invest in once a quarter for our Premium services. I'm seeing stuff that I recognize from PayPal appearing in MercadoLibre's business. PayPal, of course, is an offshoot of eBay, which itself was an early investor in MercadoLibre. I believe they sold their stake couple of years ago. PayPal developed as a payment tech company and it has expanded into this market. In developing the technology to facilitate payments on its marketplace platform in Latin America, MercadoLibre is also coming to realize that it has a great set of technical tools that can be rolled out for off-marketplace transactions. That's something that I'm very interested in.

To read investors some stats from the company's most recent quarter, the third quarter of 2018. Mercado Pago, the payments arm of MercadoLibre, their TPV, total payments volume, increased 24% year over year to $4.6 billion. What is total payments volume? That's not the amount of revenue that this arm of MercadoLibre can claim on its books. That would be nice!

Moser: [laughs] It would be!

Sharma: It's the amount of payments volume that was transacted. Of course, as the platform is facilitating each transaction, Mercado Pago gets a little slice of every payment that occurs.

This is a really interesting business simply because Latin America is increasingly a mobile-based economy. What I mean by that is, if you look at the consumer side of how business is transacted, infrastructure is not quite as great as it is in other developing and developed regions in Latin America. I'm familiar with this because I have relatives in India. My parents are from India. Oftentimes, you jump over that infrastructure using your mobile phone, so a lot of commerce is conducted on mobile phones. This is a great opportunity, because so much of Mercadolibre's business is moving to mobile payments. I'll delve into this a little bit more. What are your thoughts, Jason, on this payments opportunity?

Moser: You really piqued my interest when I heard the word PayPal. Anybody who listens to our Monday Industry Focus: Financials show knows that I and Matt Frankel are big fans of PayPal and Square (NYSE:SQ), and also the behemoths in the industry, MasterCard and Visa. We love the payments space because we're seeing that secular move away from cash and more toward mobile payments. As you mentioned, MercadoLibre gets a little slice of every transaction. The total payments volume metric that you pointed out is a really important one. It's one that we look at with PayPal and Square quite often because you can see the billions of dollars that flow through PayPal's network today. It's significantly smaller on Square's side, but also growing a little bit more quickly. I think that really shows you the opportunity that exists. More and more dollars flowing through those networks means more and more of those little slices of those transactions that these businesses get. When you look at something like the Latin American economy, it's continuing to grow, continuing to prosper. Having a company that's really leading the way, facilitating those transactions, is really exciting.

With that said, we're talking about Latin America, there's a bit more uncertainty in that part of the world. When you think about MercadoLibre from a payments perspective, what do you feel like are some of the risks that come along for investors there?

Sharma: One of the biggest risks is competition. It's a lucrative market, and everybody wants to grab the customer if possible. While MercadoLibre has one of the best head starts in the business, it's going to be challenged in the future by big banks like Banco Santander, which has also been an investor in MercadoLibre; PayPal itself is a competitor. We also see the big credit card companies, which are basically themselves facilitators of transactions, like MasterCard and Visa, they have their own payments arms that eventually will compete with the company they're partners with now. That's one risk.

We were trading notes, kicking around ideas for the show. A couple that you sent over to me, I totally agree with, Jason. You mentioned currency risk. That's always huge in these companies. MercadoLibre reports in U.S. dollars, but it operates in local currencies in each of the big Latin American markets it's in. Those include Brazil, which is now where the company is headquartered; Argentina, where it was originally headquartered; Venezuela, which is a great example, a poster boy for the currency problems a country can have. Now, MercadoLibre has deconsolidated Venezuela from its operations as a subsidiary. It's two lengths removed from revenue it gets from that country. Argentina is another example of another country that tends to have really high inflation and goes through massive periods of currency devaluation.

The biggest problem this presents for a growth company like MercadoLibre is, over time, it's hard to get consistent results quarter after quarter because the currencies are swinging so much against the U.S. dollar.

I should mention one other note you sent to me, which is geopolitical risk. Let's go back to Venezuela. Is it going to be a functioning country and government a year from now? We've had an exodus of 3 million people from that country into neighboring countries. This happens periodically in Latin America. It has a history of internal revolution and strife, taken alongside fabulously developing economies with long-term growth potential.

These are some primary risks that are there. But, again, MercadoLibre has this early mover advantage, and has weathered a few storms since it originated in 1999. It's been through a few cycles in various countries, so may be better equipped than a newcomer to address some of these risks.

Moser: Yeah. I remember a while back doing some research on MercadoLibre, and recognizing, No. 1, that so much of its success really is hinged to Brazil. That's the crux of their revenue stream. To your point, they make their money from a few different places, but it always struck me that the emergence of the middle class in Latin America is really a tailwind for a company like MercadoLibre as more and more people are coming online with mobile technology and enjoying being able to participate in e-commerce. Those are all really great opportunities for MercadoLibre. 

I tell you, one of the questions we always kick around on the team here at HQ is, with MercadoLibre, given it's much smaller than Amazon, a lot of question around whether Amazon might consider acquiring MercadoLibre one day. You know the old saying, sometimes it's easier to buy it than try to build it. Amazon does have a track record of making some acquisitions to get into other parts of the world. They recently acquired the Middle Eastern e-commerce player Souq in 2017. That was not a small acquisition. It was somewhere in the neighborhood of $580 million.

Do you think the likelier path for MercadoLibre is that it gets acquired? Or do you think it's going to continue to grow and maybe do some acquiring on its own?

Sharma: I think the company is a great acquisition target for Amazon. But anyone except Amazon is going to hesitate because they don't want to acquire this company only to have to compete with Amazon. That's one of the advantages MercadoLibre has. It's been not reluctant to step into these economies, which, as we've described, are hard to operate in because of the currency issues and inflation. They're hard to consistently make money in. Because of this, almost no one but Amazon would want to acquire the company.

Why hasn't Amazon acquired it yet? I'm not sure. I know Amazon has had forays into Mexico. It has its own game plan to increase its sales in Latin America. But this seems like such a logical choice. One of the factors that may be holding Amazon back is, it just made a huge acquisition in Whole Foods, where it actually went to the market and issued some debt. Now, Amazon, if you look at its balance sheet, it has a lot of leverage it can pile onto that balance sheet. It certainly has the funds to do it. This would be, maybe, an equivalent-size transaction. MercadoLibre has maybe a $17.5 billion market cap, not too far from where Whole Foods was when Amazon acquired it.

I think the ethos at Amazon is, "We can probably build this better." Amazon has a more sophisticated logistics operation. For them, it's just a question of, "Do we go ahead and invest and transfer our logistics expertise into Latin America? Or do we speed that up, acquire this company, then enhance it with our distribution, warehousing, delivery facilities?" That's an open question more intriguing every year as it goes by and MercadoLibre continues to grow and perhaps that possibility becomes more remote.

What are your thoughts?

Moser: I agree with you. It seems like a very logical fit. I think Amazon is probably in a position right now, given the investment they continue to make in India, for one, not to mention the investment they're trying to make in China, become a bigger part of that economy, we may get to a point where MercadoLibre has grown too much, where they're a little bit bigger than Amazon feels comfortable acquiring. It's a bit of a tricky situation. They may have been forced at some point to decide which market was more important, and that's where they decided to start making all of their investments. I suspect that's probably the case, at least to an extent. You can't eliminate a dark horse from coming in there, a company like Walmart, who's clearly making acquisitions to gain share there; even something like Target. You never know. These companies have a lot of resources at their disposal as publicly traded companies. That'll be one we keep an eye on for a while to come. I know our listeners will be enjoy being able to keep up with it.

Let's make a pivot from e-commerce with Amazon and MercadoLibre. Let's talk about a couple of the big, more physical retail behemoths here in the United States. We're talking about the home improvement market, and Home Depot and Lowe's. We talked a lot about Amazon, and how everybody enters into whatever market they're entering, and they try to figure out, "Can Amazon compete with us? Can we deal with the Amazon competition?" Home Depot and Lowe's seem to be almost Amazon-proof at this point. I'm not sure that changes anytime soon, either. What do you think there?

Sharma: I think one of the advantages that both of these companies have had is the ethos of do-it-yourself. They both make it very easy to do small projects around the home. This is anecdotal, but personally, if I am 80% toward a project, but have a couple of questions, I know I can go to the Home Depot, which is very close to where I live and ask somebody there. Most of the people there are tired of seeing me on weekends. If I find one who's not going to avoid me, I'll grab them by that blue vest and ask a couple of questions.

Moser: [laughs] They have nice DIY videos on the site, too.

Sharma: [laughs] They tell me that when they see me. "Go home and watch the videos." But I think this is part of what's made both companies successful in spite of Amazon. They have an integrated approach which involves the classes they give, involves installation services, and a very cyclical massive discount on big ticket items. If you notice, every spring, summer, fall, maybe around Thanksgiving, and at year-end, inevitably, you'll walk into your Home Depot or Lowe's, and they have all the appliances grouped and have pretty massive discounts which equal or beat what you might get ordering the stuff piecemeal from Amazon. I think most consumers still associate Amazon with the little stuff that you buy in a stream through the year, not big-ticket items. That's part of the reason that's helped.

Also, proximity. Both of these companies have a fairly good, evenly distributed footprint of stores. As I said, if you live in even a smaller metropolitan area, I would call Raleigh a mid-sized metropolitan area. It's not huge, it's not tiny, either. There are going to be one or two these stores within distance of most people in that urban area within a few miles. That's also helped them, the physical footprint that was already evolving and pretty set before Amazon came along. 

I think in this economy, both of these companies probably retain this Amazon-proof-ness, unless we see Amazon wake up one morning and decide to start building out some very nice, beautiful do-it-yourself warehouses where you don't have to do anything to check out, you just walk out like their Amazon Go stores that they're testing out now.

Moser: I feel like they'll probably take a pass on that, given the strength that both Home Depot and Lowe's have displayed through the years. They really do seem to own that market. I have a hard time believing that Amazon could ever really get in there and fully give them a run for their money. I think a part of that is, speaking from the perspective of a homeowner, those stores become invaluable resources. There's always something that needs to be done at your house. And even if you're renting, there's always something you can do when you're renting, as well. 

The other neat thing about these businesses is, they do well regardless of the weather. We hear a lot of these companies in the winter quarters and going into spring, they'll cite weather as being a problem, slowing down traffic. But typically, with Home Depot and Lowe's, people are going there to get de-icer if it's cold, wintry, icy outside. But if spring hits, they're going to get fertilizer and flowers. They don't have that same lumpiness that the weather can offer some others in the retail space. 

One thing that's interesting to me with these two concepts -- I wouldn't call myself a loyalist to either one, I just go with whichever is closest. But, it does seem like Home Depot has something figured out compared to Lowe's. When you look at Home Depot, its market cap is more than twice the size of Lowe's. They're bringing in around $30 billion more in revenue per year. But Lowe's is actually the concept with a bigger store footprint. They have more stores than Home Depot does.

Sharma: Yeah, absolutely. I think Marvin Ellison, the new CEO of Lowe's, has put his finger on it. There are certain cues, if you walk in as a consumer, that you get from a store: how it's laid out; what the end caps look like, that's the end of the aisles; how attractive the end caps are; is there old merchandise sitting around. I'm not saying that Lowe's is a sloppy place by any means. But if you're used to observing this stuff, they're subtle cues, Home Depot's just crisper in its retail presentation. It moves its inventory in a little crisper fashion. 

CEO Marvin Ellison was appointed this summer. He's trying to fix operational deficiencies. He himself spent 12 years at Home Depot and was formerly the CEO of J.C. Penney. This is a guy with a lot of retail experience. He's looking at their supply chain, he's looking at poor utilization of labor, a lack of standardized truck loading processes. When the trucks come up to a Lowe's, who goes out and unloads that truck? Is it an all-hands-on-deck? Is it someone who's been scheduled? These things, which, if you think about them, may not seem big by themselves, as you add each operational deficiency up, it makes for a lot of lost sales, lost time. One of the things that Ellison has pointed out is, if our labor is so involved with trying to move our inventory in inefficient manner, that's less time they have to spend with customers. Jason, I know you're a big Starbucks follower and analyze that stock. That's something that even Starbucks said in their last quarter, that they want their baristas to have more customer-facing time. 

So, I think he's got his finger on the pulse of what's really a difference between these two companies. Over time, even though Lowe's has that bigger footprint, I think that each year helped Home Depot get this edge year after year. 

The other place that manifests itself is in the income statement. Home Depot's operating margin -- this is, you take revenue, take your cost of goods sold, and most of your overhead expenses, and what's left is operating income when you divide that by sales. Home Depot's operating margin is about twice that of Lowe's at 15%. These are problems that are solvable and fixable. Lowe's is a turnaround story right now, whereas Home Depot is a story of optimizing what's already working.

Moser: I'm really glad you brought up that operating margin metric. That's such an important one to pay attention to, particularly in the retail space. It gives you such a clear picture as to how efficient an operation leadership is running. That's always worth paying attention to it. 

Another thing that struck me a quarter or two ago, I was reading through a Home Depot call. The headlines are always talking about macroeconomic challenges or a tightening housing market or interest rates going up, yada, yada, yada. That's all fine and dandy, but let's look at the business, and let's look at the trend that this business is involved with. Home Depot and Lowe's are both benefiting from this. Management made a note on the call that there is data that says that by 2020, 54% of U.S. homes will be greater than 40 years old. That's vs. 51% of those homes in 2016. That's all to say that we have an aging house base here in the United States. Our houses are getting older. What happens when houses get older? They require a little bit of fixing up. That's what Home Depot and Lowe's do so well. They sell us that stuff to fix those houses up. I do like that long term-trend there. It seems like they have a big market opportunity ahead of them. 

To my mind, investors should have their eyes on both of these companies. But I'm going to put you on the spot here, Asit -- if you had to pick one of these names for the next five years from today, what do you think is the better investment? Is it Lowe's or Home Depot?

Sharma: Today I'm going to be a contrarian against myself. I usually love the underdog. I love a turnaround story. I love the opportunity to improve margins. So normally, I would say, no question, buy Lowe's. You have five years, a relatively young, very experienced CEO who's going to turn this around, they're going to bring their margins up to where Home Depot's are. Both companies trade at the same multiple against earnings, I believe. I don't have it right on me. I might correct this later, folks. It's around 18X forward earnings. They're valued the same by the market. Typically, I would say that Lowe's has the better chance to improve earnings. By that criteria, in five years, it ought to grow more in terms of market capitalization and price. 

But. [laughs] And this is a big but. I have to like Home Depot's path. One of the things that I was looking at and reviewing for the show is the company's supply chain, which they've engineered to be what they call the fastest delivery network in home improvement. They can reach approximately 95% of the U.S. population within two days or less with their parcel shipping. You have a company which is already best-in-class. It has an opportunity in this market, as Jason pointed out, to pull market share as more and more homeowners improve rather than switch housing. We saw this in the last recession -- people couldn't trade up when the Great Recession hit. So, counter-intuitively, both Lowe's and Home Depot started to prosper because folks, with the money they did have, went to their local stores and did home renovation projects. Home Depot in any environment can take advantage of this. 

I do think Lowe's will catch up at some point in time. But in a five-year timeframe, all things considered, risk-adjusted, I guess I'm going to go with Home Depot.

Moser: You have to go with the strong one. Like you, I felt like Lowe's might be the better opportunity, given that it has the opportunity to make more improvements and turn things around. But, it's really hard to bet against Home Depot. It's just such a strong operation, and they've demonstrated such a long track record of success. I agree, I can't go against it. For a while there, I was thinking Lowes might be able to offer the better investment. Perhaps it will. But I feel like Home Depot's probably a bit more of a certainty. Listeners, we'll keep tabs on these companies over the coming years. We'll follow these stories along and keep everyone updated.

Before we take off today, Asit, we were both talking about an email that we received over the break at Industry Focus. I thought it'd be an opportunity for us to offer a couple of quick opinions. I suspect we have a little bit of experience in this field. 

The email reads, "Hi, Jason. I'm just curious, what would you recommend or consider as an emergency fund? I have a set amount aside. But should this range as you grow through your career? For example, should your emergency fund be 10% of your net worth at any given time? Thanks in advance for your help, Arvind." Arvind, thank you for the email! We're sorry for getting to this so late. As I said, we got that email over the break, but we really thought it would make a good topic for the show, so we wanted to give it its due attention. 

I'll start with you, Asit. Where do you fall on the emergency fund discussion?

Sharma: Let's start with basics and work our way up to a final answer. Basics to build an emergency fund, that presupposes that you have some spare dollars you can set aside. I know all of our listeners are different paths in their financial careers. You may be at a really great point, or you may be struggling. The point is to try to find some way to put something aside each and every week. If you read a lot of personal finance articles on the web, you'll see a number. I see this number a lot, and Jason, I'm sure you do, too. It's $400 to $600 as an emergency fund. This comes from studies. You'll see headlines, "The Average American Doesn't Have $400 for an Emergency." 

I believe from the ones that I've skimmed through over the years that that number is being generated from your car breaking down. If you had a car emergency, that must be the average price, because it takes $400 to $500 to get your car out of the mechanic's shop and get back on the road. So, that's the first step when we think about emergency funds. 

But there's a progression, also. If you increase that number from, let's say $500 to $1,500, that might cover your ability to pay your rent or mortgage in a month, or have a brief small medical illness. To me, that's another bucket that's very important. As you see, you move up in these trenches. 

The next, I borrow from the corporate world. What I used to advise people is to try to get six to 12 months of your operating expenses in your household somewhere in a savings account. 

Finally, Arvind, I think you hit it right on the head. That 10% number is a great number. If you look at people who are masters of finance and you study portfolio allocations, a lot of the really wise people who I've read in my career say, "Even if you're very invested in stocks and bonds, you should have some money in real estate and maybe 10% to 15% of your money in liquid assets." It could be cash. It could be currencies, foreign currencies, or maybe a commodity like gold, which you can quickly convert to cash. 

Over time, that, in my opinion, is a great goal to have. As you grow wealthier, maybe an emergency for you might be needing to tap into 10%. I hope I get there someday. [laughs] I'm a far away from that. 

Let me flip it back to you, Jason. That's a broad four or five buckets that I see. What are your thoughts?

Moser: I like how you hit that in stages. There's an easy answer to just say, "Have three to six months," and that's the standard rule. To your point, clearly, the data out there shows that people are having a tough time saving. That's a challenge in and of itself. I was recently on a field trip with my older daughter. Her school went to the Junior Achievement Finance Park here. It was basically a day where they learned what it's like to be an adult. They get their paycheck, they have to calculate their net income, and then budget everything for monthly expenses. Those kids found out really quickly, No. 1, money doesn't go as far as they'd like it to; No. 2, it seems like you need insurance for everything. But the old saw, and we kept on telling them, make sure you pay yourself first, save a little bit of that money. The younger you start doing this, the easier it gets. The idea isn't to have that three or six months immediately. That's the goal to get to. If you can reach that point, that's terrific. 

The other way to think about that is, once you get to that goal, you don't necessarily have to keep socking that money away for that particular fund. You could be saving money for something else or investing that money. Everybody's financial situation is unique. If you can have a three to six-month cushion where you can afford your rent or mortgage and your necessary bills in case of an emergency, hopefully, there's health insurance that will help if there's a medical emergency. That three to six months is a good goal to have. 

To your point, the older you get, hopefully you're making a little bit more money. Maybe you need to save a little bit more to cover your expenses then. That's a nice problem to have, I suppose. That's where you want to get to eventually. 

Either way you look at it, to me, what stands out with this question is, no matter what, the younger you start this, the better off you're going to be. It's a good feeling to know you have some liquid cash available to take care of yourself in the case of an emergency. Chances are, you're going to run into one or two of them throughout the course of your life.

Sharma: Sure. I'll just add one last thing. Even if you're not young anymore, there is a certain reward in starting that discipline savings week in and week out. However small it is. It's rejuvenating. It's very similar to something I know a lot of Fools recommend, which is invest regularly. Don't just get a lump sum together and knock it all in the market. Try to invest with every paycheck. Jason, what you said really resonates with me, the concept of paying yourself first is an old saw, but it's such a powerful concept. Pay yourself first, invest some, set some aside. There's a rhythm to it. No matter where you are in your financial progression, you can always put some aside each month, each week, each time you get paid, and it has this wonderful compounding effect, which is lovely after time. 

Moser: Indeed. We'll leave it at that. Asit, it was great talking with you this week. Thanks for the time!

Sharma: Absolutely. Thank you, Jason! This was fun!

Moser: 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. This show is produced by Austin Morgan. For Asit Sharma, I'm Jason Moser. Thanks for listening and we'll see you next week!