McCormick Down 13% on Earnings

Check out all our earnings call transcripts.

In today's episode of MarketFoolery, host Chris Hill and Motley Fool contributor Bill Barker of MFAM Funds talk about the market's biggest stories. A slew of airlines reported earnings today, and all of them popped. What's going on with the airline industry, and can we expect it to continue? McCormick (MKC 0.41%) (MKC.V 0.16%), on the other hand, tanked after issuing a weak report.

A fair amount of that probably comes from the 30% spike in the stock last year -- yes, that's 30% growth on a stolid spice maker. Then, the guys dip into the Fool mailbag. One listener asks why the market is so volatile these days. Others stoke the flames of Chris' rage for the Mondelez (MDLZ -0.86%) Oreo division. Tune in to hear more.

A full transcript follows the video.

This video was recorded on Jan. 24, 2019.

Chris Hill: It's Thursday, January 24th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: We've been in the studio for at least 15 minutes. I was going to say close to 20. Maybe it's close to 20. Had a very lively discussion about the recent Baseball Hall of Fame inductees. And now we're going to move onto the business portion of the show. The baseball discussion is lost forever. 

We're going to get to McCormick. We're going to dip into the Fool mailbag. We have to start with the airlines, though. Southwest (LUV -0.98%), Jet Blue, American, Alaska Air, they're all reporting. They're all up. Do any of the four stand out to you? When I saw all of this taking place this morning, I thought back to a report I saw on CNBC. One of their reporters that I really like a lot, a guy named Phil LeBeau, covers the automotive industry. He'd done a preview of 2019 about the airline industry and was pretty bullish on airlines. Certainly, we're seeing that play out in these four stocks today. 

Barker: Yeah, they're all up about the same amount. As a group, you're seeing that the airlines, to generalize, they've got a healthy business environment. Last year, all of their stocks suffered, some more than others, some down in the low teens and some up to 40% in terms of their stock price. That wasn't because business fell off a cliff. It was more that the operating margin was hit by increased fuel costs. Despite how well the numbers have come in for the year, this is a highly cyclical industry. The profits are highly cyclical, and they don't trade at very high multiples. 

Hill: Certainly, this comes against the backdrop of the government shutdown, which has entered its second month. TSA employees, certainly playing a factor in this. As we were talking about earlier this morning, on some of the conference calls, rightfully so, you had the executives of these companies talking about the effect of the government shutdown. Presumably, the longer it goes, the more of a drag it's going to be on the airline industry. 

Barker: Yeah. Certainly, you've got a lot of people who are right now trying to figure out how to pay the bills. They're not going to be booking fares that are optional. Particularly for Southwest, which is much more dependent on leisure travelers than business travelers and very price-sensitive travelers, I would expect them to maybe take a bigger hit than American or Delta or something like that. Also, Southwest has one of its big hubs at BWI. They're perhaps a little bit more exposed. Everybody is exposed. Certainly, if worst comes to worst in terms of TSA agents not being there to keep the lines manageable, then yeah, you might see that trickle into people's purchase of a spring vacation, which is already heavily impacted this year by the placement of Easter, as you know.

Hill: Because it comes late this year. 

Barker: Yeah, the first full moon after the vernal equinox is late this year. So, so is Easter.

Hill: OK, if you say so. I'm not up on the moon phases like you are.

Barker: Well, let me help you out then. [laughs] 

Hill: I did get a chance to see the super wolf blood moon or whatever -- I forget the order of those words. 

Barker: Do you know why it was the wolf moon?

Hill: Please enlighten me!

Barker: It's just the January full moon in a Native American vernacular. Every month has its own cool name for the moon. February, we've got a snow moon coming, whether it snows or not.

Hill: So, wolf moon. It's a blood moon because it turns red at some point. And it's super, why? Just because it looks so big?

Barker: Just branding. PR.

Hill: [laughs] I don't think it was branding. I'd heard it was an actual scientific term from the moon people.

Barker: More likely the moon just hired the right people to get that one out there.

Hill: Smart, very smart!

Barker: You've heard of the hunter's moon. That's October. The harvest moon in Harvest Moon in September. But nobody ever talks about the beaver moon in November or the sturgeon moon in August. They need to work on their branding. 

Hill: The sturgeon moon needs a complete overhaul. They need a rename.

Barker: Or the strawberry moon in June. But to get back to something that is in some way related to business -- 

Hill: Thank god!

Barker: What we're talking about is the movement of Easter. Last year, Easter was on April 1st, so you got a large chunk of the spring vacation travel happening in the first quarter. This year it's the 23rd of April, because it's the first Sunday after the first full moon after the vernal equinox. It's very late this year. That's going to push a lot of business into April that otherwise was in March. So on a year over year basis, look for the airlines to be talking at this time next quarter, three months from now, like, "Hey, remember, we said that Easter was going to affect our bottom line."

Hill: I get that with Southwest, Jet Blue, American, Alaska. All four of those stocks are up today. And as you said, all about the same amount. All up around 4% or 5%. I will just point out, however, that this caps the 46th straight year of profitability for Southwest Airlines. I think if you're, I don't know, literally any other airline, you might want to take a look at what Southwest has been doing for the last four-plus decades, not just in terms of the culture on the planes and the attempt of the crew, and I would say the success of the crew, in having a little bit of fun to make the in-flight experience a little bit more enjoyable, but also just basic things like, typically, when people fly, they need a piece of luggage or two, so we're not going to charge people for those first two bags. We're not going to nickel-and-dime them on fees. That appears to be working out, in terms of, again, 46 straight years of being profitable.

Barker: Southwest stands apart in terms of the consistency of its performance and its having been, at some points, identified as being the only airline that you would have done well to have invested in. The tendency of airlines is to go bankrupt on a frequent basis. That's one of the reasons why, despite very good numbers this year, it's trading at about eight times earnings. That's because, when the cycle goes the wrong way, not only will profits decline -- you can't just build a model where you say, "Look at today's numbers and maybe they'll make 5% to 10% more next year and the year after and the year after that," as you might choose to do with some businesses, and you would be close to accurate with some long-standing businesses that had predictable histories. The downside is, when things go bad, these things tend to be worth zero. Everybody has seen the experience. Basically, everybody's gone bankrupt at some point or another, other than Southwest. 

Hill: Let's move on to McCormick. Fourth-quarter profits for the spice maker were higher than a year ago but lower than expected, and the stock, which has had a good 12 months, sold off this morning. Shares of McCormick down about 13%. How much of that is due to the run-up that the stock has had? 

Barker: I would say more than half, if I had to throw a percentage on it. It was up somewhere in the neighborhood of 30% last year. That wasn't because the business grew 30%. It did have the acquisition in the middle of 2017 of French, and that supported the growth numbers that showed up in that first half of last year.

Hill: Frank's hot sauce.

Barker: Frank's. I think that you're looking at a company which just reported 1% sales growth and it's trading at about 25 times earnings. Well, all right, it's translating that 1% sales growth into greater earnings per share than that, but how are you going to justify a 25 times multiple on something that grows the top line at 1% indefinitely? Well, maybe they'll make more acquisitions like Frank's. But they need to because the market for spices itself is not going to grow very fast.

Hill: They pay a nice dividend, though. If you're listing out reasons to buy McCormick, I would put somewhere on the list, they pay a dividend. Also, if you put a gun to my head, I don't know who is the Pepsi to their Coke.

Barker: No. They're in a dominant position, not only under their own brand name but in their supply of a large chunk of the competition -- that is, a lot of the store brands are really supplied by McCormick and private labeled. There isn't much of a No. 2 player. Nevertheless, 30% stock price return last year is hard to repeat when you're not growing very fast.

Hill: Our email address is [email protected]. You can also hit us up on Twitter if you're on the Twitter. @MarketFoolery is the show's handle. Question from a longtime listener and friend of the show, Chet Felisik out in Seattle. Chet asks, "Are the giant swings that we see in stocks these days historically similar to that of the pre-quant era? Or is this new? I remember giant swings being big news even 10, 15 years ago. But now, it seems daily, we hear about 10% to 30% drops or gains in stocks."

You're the analyst in the room. When I saw this question from Chet, I just thought to myself, "Yeah, that seems directionally correct, with quant trading being what it is, algorithmic trading being what it is."

Barker: I don't have the data to tell you whether the percentage of stocks moving up on a daily basis or down by some number -- 10%, 20% -- has increased. It probably has. One of the reasons for that would be the number of stocks that are biotech or something that reacts to an FDA [Food and Drug Administration] clearance or rejection is greater. There are a greater number of things in the exploratory phase, and they'll go up 50%, 80% on good or bad news. That's a small sliver of the total out there.

There was very little volatility for the market as a whole going into the third quarter of last year. That changed at the end of the year. There could be some recency bias on it feeling like right now, things are moving. The market itself has been a lot more volatile in the last four months than it had been. The quant thing, yeah, that's out there. I can't say that I have the data to support or reject that thesis.

Hill: Certainly don't discount the effect of social media and media, in general. The speed with which information travels, we're just more aware now. Also, operating in a universe where there are fewer publicly traded companies in the United States than there were 15 years ago.

Barker: Yeah. Another item could be, in terms of things going down on a daily basis that don't end up changing the story of the stock, but ends up being a lot of volatility, is short-seller reports, which have been out there -- but I think that they're more sophisticated in getting that story out. That can create some one-directional pressure on a stock, in terms of one day, which is then oftentimes reversed over the following days. There's more of that. There are more rewards to getting a story, even if it just takes hold for a very short period of time. There are more people involved in trying to profit off of a one-day movement of stock.

Hill: Also, Wes Yee and a couple of other listeners flagging a recent story near and dear to my heart. That is our good friends at Mondelez, particularly in the Oreo division, up to it again. Their latest limited-edition Oreo is something called The Most Stuff. It's like a double-stuffed, but it has, I don't know, triple to quadruple the amount of cream filling. And it does not look good, unlike the Oreo thins, which I was actually in favor of because you get more of the cookie there on a ratio basis. 

At some point, it's not going to surprise me at all if they just start selling small tubs of the cream filling, the Oreo cream filling. It's just like, "Look, we know you want this. We'll give you a plastic spoon to go with it. Here you go. Enjoy, America!"

Barker: Yeah, I think you're right. That's where this is going. Much more likely than -- although, maybe they do this -- them selling just the cookie part.

Hill: Yeah, true. I think that's right. 

Barker: You're more into the cookie than the filling?

Hill: I want a little bit of the filling. I don't need quadruple the amount of filling.

Barker: It's not about need.

Hill: [laughs] This is like when razor blades -- you and I are old enough to remember this. I mean, you're a good 40, 50 years older than I am. But old enough to remember that, when it came to shaving, razor blades, there was a single blade. That went on for a very long time. And then, someone came out with a double-blade razor. And then triple. Then four-blade. Then five-blade. And I would argue, those are improvements. I would argue that four times the amount of cream filling in an Oreo, not an improvement. 

Barker: You don't know yet, though, do you? You haven't tried it.

Hill: I'm not going to try this. No. 

Barker: This is where you take your stand. You've taken a stand against basically everything except the straight Oreo, the thins.

Hill: Sure.

Barker: How many other Oreos have you tried?

Hill: Let me be clear: this is about business spending at Mondelez run amok. This all comes down to the business. They've got the No. 1-selling cookie in America. They've got the No. 2-selling cookie in America. And whoever's running the Oreo division is just out there saying, "Hey, look! I'm crushing it! I've got the top two selling cookies! Give me a bigger budget, I want to create more. I want to explore my inner artist and come up with different flavors and that sort of thing." And the spending is run amok. Mondelez shareholders are doing worse because of this type of attitude in the Oreo division. 

Barker: Explain to me how this spending changes when you repackage the same materials in a more stuffing-to-cookie ratio.

Hill: [laughs] We have to advertise. We need more money for advertising.

Barker: No, you're supplying the advertisement. Do you think you're going to go to the Super Bowl and see commercials for this?

Hill: Possibly. 

Barker: I mean, alright, I'm willing to bet on that.

Hill: Producer Dan Boyd wants to jump in. Dan, do you have a thought? 

Dan Boyd: Yeah. I hate to do it, but I'm going to agree with Barker here. This is absolutely ridiculous. This is the same thing as saying Taco Bell shouldn't innovate with their stable of Mexican-themed ingredients to make whatever ridiculous food that they can to delight the people of the United States of America. This is saying the iPhone shouldn't get better, it's already good enough! This is saying cars shouldn't get safer, they're already safe enough! What are you doing over here?! 

Hill: Wait a minute, wait a minute -- 

Barker: He's just trying to get the darn kids off his lawn. 

Hill: I was with you on the Taco Bell point. By the way, I did see an ad on television this morning, the limited edition nacho fries are back for Taco Bell. Yum! shareholders should be happy about that. I was with you, Dan, on that. But the moment you equated what Oreo people are doing to car safety? [laughs] No! 

Boyd: This is the kind of thinking that kills innovation. And innovation drives business, Chris. Everybody knows this.

Hill: I can't think of a better place to wrap up than there. 

Barker: Five minutes ago, probably.

Hill: Yeah. Hopefully, people dropped off five minutes ago. You can read more from Bill Barker and his colleagues. Go to mfamfunds.com. If you want more of producer Dan Boyd, get on the Twitter and follow him. Thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday!