In this episode of MarketFoolery, host Chris Hill talks with MFAM Funds' Bill Barker about some market news. Rite Aid (NYSE:RAD) introduced some Amazon.com (NASDAQ:AMZN) collaborations, but the company is still adrift in a slow, sad sea of deceleration. McCormick (NYSE:MKC) had a bit of a revenue miss, which wouldn't be terribly interesting except for how the company unironically blamed it on a late date for Easter. Howard Hughes (NYSE:HHC) is up on news that the company is seeking strategic alternatives -- finally, the market is giving this company some love. Also, stay tuned for some quick updates about the next couple of weeks of the show.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on June 27, 2019.
Chris Hill: It's Thursday, June 27th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker. Happy Thursday!
Bill Barker: Thank you!
Hill: Thanks for being here!
Barker: Thanks for having me!
Hill: We've got some earnings. One of the biggest movers in terms of stock appreciation today is a company that I don't believe we have ever talked about in real history of this podcast. We will get to that. But we're going to start with Rite Aid. The first quarter loss for Rite Aid was worse than expected. They still don't have a CEO. If you're looking for a job, that's something maybe to consider. Why in the name of anything are shares of Rite Aid up today? I can't see a valid reason why this stock is up.
Barker: Could be the announcement from Amazon that you can pick stuff up at the Rite Aid counter. That will give you a reason to go to Rite Aid, whereas before you did not have one, or at least that was what the numbers seemed to show. Rite Aid, getting smaller and smaller as time goes by, people not buying more. The same store-sales were basically flat. You could say that they were up 0.3% or up 1%, something like that. There are different ways to break them out. But, essentially flat.
Hill: This is a company that now has a market cap of $400 million. Is someone going to buy them and put them out of their misery? It's hard for me to see how Rite Aid is a stand-alone public company in two years with the likes of Walgreens and CVS out there.
Barker: I haven't studied exactly what's left here. Of course, there were a couple of attempts to sell the company, and they were successful in selling chunks of the company off. There's a little bit left. I don't know exactly where it is geographically. Yeah, there's some value here. There's some customer information, locations. Sooner or later, yeah, somebody will put them out of their misery. I think that's a fair way of looking at it.
But they sell $22 million a year in revenue --
Hill: I'm sorry, $22 million?
Barker: Sorry. Billion. [laughs] It's probably billion. That's down. It peaked around $26 billion several years ago, and as they've gotten rid of locations and all, they've shed revenue, and what revenue they have isn't profitable. The sooner, the better, I think, that somebody else comes in and figures out exactly what there is to do with the remainder of this.
Hill: Isn't that probably what we're going to learn when they finally do hire a CEO? Presumably, the next CEO is either going to come in, and on day one talk about how they've got plans to reinvigorate the brand and turn this business around; or, it's going to be someone that, when we look at their resume, we'll think to ourselves, "Oh, this CEO has been hired to sell this company."
Barker: It depends on what the board wants. They're going to hire somebody whose vision fits with the direction of the board. This is a company that has largely lost money in most years over the past dozen or so. There were a few profitable years. If you go three to seven years ago, they were making some profits. Since then, not. Is there a new vision for this that can compete against CVS, against Walgreens, in a meaningful way? You would tend to think no. That's a tough order. So, who can sell this off in a most meaningful way? What kind of CEO do you want to hire for that job? If that is the job. I suppose those that know the company well, as the board should, might understand this to have some earnings power down the road. It doesn't today. I don't know how they get from here to profitability. But that's their job.
Hill: Let's move on to McCormick. Shares of the spice maker up slightly after a mixed second quarter report. McCormick, the revenue was a little light. This was one of those missed-by-a-penny kinds of revenue misses. But they raised earnings guidance for the full fiscal year, and I'm assuming that's what's getting the weight here in terms of pushing the stock up a little bit.
Barker: Yeah. It's up a little bit. Of course, it's a reasonably strong day for the market, so why not spend a little bit more for this stock than you did yesterday if it's in the stock market.
Hill: Wow, you're not giving them any credit!
Barker: Well, they're sitting on top of a lot of credit, which is a pretty rich valuation for a company growing at the pace that McCormick is growing, in a consumer staples segment. The very name, staple, is going to tell you, people have the McCormick spices already in their cupboards. They'll replace them when they run out, but they're not going to change the way they use spices, for the most part. They can continue to take their profitability and acquire the brands that they don't have, which is what has sparked their recent growth, acquisitions. That's an area where they can continue to perform well. When they don't add something new, they're going to grow 2% or 3%-ish. That's about where they grew over the last quarter, adjusting for currency, 3%.
Hill: They've done a good job, as you said, with the acquisitions. It will be interesting to see what's next on the horizon. I'm looking at McCormick... the analogy I'm going to draw here is to the beer industry, because it does seem like, similar to the beer industry, where you have these large conglomerates, and then a lot of smaller, more local or regional craft beer brands, McCormick might have a nice opportunity to do those same types of acquisitions in terms of, "We're going to pick up this spice brand that's big in the Southeast or Southwest or wherever," then just them into their network.
Barker: Yeah. They've been doing some of that. That is an opportunity. The Frank's acquisition, the French acquisition. Look for more of that if it's a company that acts in the future like it has acted in the past, which is to grow, which is what is also driving the valuation of the company. People are expecting that this thing is going to grow at an impressive rate based on the P/E multiple here. It's a good company, but it's got to have some plan. The organic growth isn't really going to drive very much now.
Now, they missed a little bit of this quarter on the top line. Do you know why?
Hill: Is it a calendar thing?
Barker: It is a calendar thing. The grilling season started late this year.
Hill: It did?
Hill: Doesn't it always start --
Barker: Well, according to the press release.
Hill: Oh, wait a minute! Now I'm intrigued. I always assumed grilling season starts officially on the Memorial Day weekend.
Barker: No, it starts after Easter, which was late this year. You know, years where Easter comes early, you're allowed to grill. You're not allowed to grill until after Easter. It's in the Bible.
Hill: Somewhere in the back.
Barker: [laughs] Maybe not the version you have. But apparently, according to the press release, a slowdown in spices and seasonings category driven by a late Easter, which delayed the beginning of grilling season. So, there you are.
Hill: You know... that's... OK. That's fine!
Barker: I've set this one up for you. Let's see what you can do with it. [laughs]
Hill: I'm just saying, that's fine, if they want to do that. But now, armed with this information, I'm already looking forward to the next year that Easter comes early. I don't know, does McCormick have a history of saying, "Look, we'd love to take credit for the great quarter we put up, but really, it just has to do with the fact that we had an early Easter. Therefore, of course, it was an early grilling season."
Barker: What would be cool is if they didn't even point out, and said, "As you know, the first Sunday after the first full moon after the vernal equinox came early this year. 'Nuff said."
Hill: There we go.
Barker: What do you grill on Easter? Typically, you, as an American, you must grill on Easter, or right after.
Hill: [laughs] Typically, what's on my grill is just the basics. Some combination of beef, chicken, sausage, fish. Occasionally shrimp. You know what I've never grilled, and is on my to do list for the summer? Ribs. I need to do some ribs!
Barker: Are you qualified? That's a high bar.
Hill: As qualified as you are.
Barker: I don't know that I'm qualified. I feel like that is something that you shouldn't do unless you're pretty good, unless you've done enough grilling. That's the more advanced stuff. And you have to be willing to put in the time to do it right, unlike grilling burgers or something, where there's not a big time investment.
Hill: I agree with all of that, which is why I'm going to pick a date sometime later this summer and basically say to my family, "Don't bother me all day because I'm cooking ribs, and this may take eight to 10 hours. It may not take as long as that."
Barker: I would reserve eight to 10.
Hill: I'm going to block of eight to 10. I'll be like, "Look, if you want dinner, that's what's involved."
Barker: This stuff's going to need to marinate all weekend, and I'll have to watch it. Don't bother Dad.
Hill: A quick programming note before we get to the stock of the day. Next week is going to be a short week for us here on MarketFoolery. I'm going to be on Cape Cod. We've got a couple of episodes locked and loaded for Monday and Tuesday. Then, look, it's Independence Day. We've got that coming up.
Barker: Talking about grilling!
Hill: Speaking of grilling, exactly. We want folks to take a little time off, and therefore, we will take a little time off. But we will be back the following week. July 8th and 9th, something special. Mac Greer coming to you live from Colorado with MarketFoolery. MarketFoolery on the road in Colorado, July 8th and 9th. Please make a note of that!
Again, we've been doing this podcast since January of 2011, and I don't believe we have ever once talked about Howard Hughes Corp. And yet we are today, because shares of Howard Hughes Corp are up more than 30% on reports that the company has hired bankers to explore strategic alternatives. This is not a Rite Aid situation where it's $400 million. This is a $5 billion company. We'll get to Howard Hughes, the business icon, in a moment. But the underlying business here is, what, real estate? Hughes made his money in the 20th century on a number of things, but real estate was definitely one of them.
Barker: Yeah. Credit to Jeremy Meyers, who's been banging the table for this in our little world, Motley Fool Asset Management. It's a real estate company with spread around a lot of different areas of the country, and in some different projects. The finances are different than a real estate investment trust, which it is not. It's a company, which is not a REIT. I won't go into the details of that, because I'll just expose my ignorance of exactly what's going on, except to say that it doesn't pay the kind of dividend that typical investors in real estate expect. The finances are a little bit more complicated. It takes many years to realize the value of some of their properties. The market has been somewhere between yawning about that and heading for the exits. That has culminated in their exploration of, what are the other ways? Where can we be owned where somebody appreciates the value of this company?
Hill: I'm assuming that they're going to have buyers. I don't see the stock popping like this unless there is an expectation that there are enough assets at Howard Hughes Corp that someone's going to want to step in and buy them, whether that's a single buyer or it gets divided in some way.
Barker: Possible. The notice that you are exploring strategic alternatives does not always translate into the sale of a company. It could be, "Hey, which of these properties can we spin off in a way that makes the remaining part look more like what people want to see?" It's up 37% right now. On the other hand, a little bit more than halfway in between the low of the year, which was basically going into today, and the high. Anytime a stock is pretty close to the middle of its 52-week low and high, I tend to think, "This is kind of boring. Whatever. It could be worth a little more, it could be worth a little less." Not everything is hitting new highs all the time. Now it's back to the middle range where it's traded at different points. Maybe just the notification that, "Hey, we're looking at ways to unlock value," make the market sit up and take notice. It's a well-respected stock by analysts that cover it, many of whom have higher price targets or fair value estimates than where the stock -- it's a 37% today, but it's still not up to a lot of analysts' price targets.
Hill: If the stock itself or the underlying business itself is boring, Howard Hughes the man, definitely not boring.
Hill: For those unfamiliar, Howard Hughes, business icon of the 20th century. A billionaire investor, big in real estate, film production, aviation. Not just the producer of films, but also the subject of films as well. Probably the best-known of those is the relatively recent film where Leo DiCaprio played him, The Aviator, and Cate Blanchett, I believe, won an Academy Award for playing Kate Hepburn.
Barker: Yes, one of the many starlets that his path crossed. Yeah, he was successful in the movie business, at least successful in making movies. Not many of them were classics, or designed to be classics. They were more designed to introduce him to young actresses. I think he would not have done well in the #MeToo era, is my guess.
Hill: That's probably a safe bet. I think so.
Barker: But yeah, he's appeared as the subject not only of The Aviator, but Melvin and Howard, a classic, which got a couple of Academy Award nominations many years ago. The Amazing Howard Hughes. Tommy Lee Jones starring as Howard Hughes.
Hill: Really? Tommy Lee Jones played Howard Hughes?
Barker: You can see that, can't you?
Hill: I guess I can. I don't know. To me, the two that always pop to mind are Leo DiCaprio as the younger, more dashing version. And then, in Melvin and Howard, you have Jason Robards playing Howard Hughes at the end of his life. Hughes was an eccentric, I believe he had severe OCD. The subject of Melvin and Howard ultimately proved to be a hoax, that a man named Melvin Dummar, is that the name?
Barker: That sounds right.
Hill: He came forward and said that he had an encounter with Howard Hughes, and Howard Hughes rewrote his will and left everything to him. That ultimately proved to be a hoax. But Jason Robards, really good in that movie.
Barker: Hughes has quite a legacy. He established a charity, which is the second largest charity in terms of assets in the country, and fifth in the world, at least in terms of disclosed assets. The Howard Hughes Medical Institute, which is located in Chevy Chase, Maryland.
Barker: Yeah, right nearby.
Hill: I had no idea!
Barker: Of course, he's the inspiration for Tony Stark. Iron Man.
Hill: Yes. I suppose we're burying the lede here. But yeah.
Barker: You were working toward that.
Hill: No, I was not. You had mentioned that earlier today, and I was like, "Is he really?"
Barker: It's pretty far down on his list. What we were doing was his actual accomplishments. Now we're going to fictional stuff.
Hill: Right. For a certain type of person, that's what you lead with. "Howard Hughes? Never heard of him." "He was the inspiration for Tony Stark." "Really? Tell me more!"
Barker: [laughs] Yeah. He's the visual and lifestyle, other than, I think Tony Stark is supposed to be Howard Hughes minus the crazy. Although he is an alcoholic, Tony Stark.
Hill: Did that show up in the movies?
Barker: Not yet. There's still time. It probably won't. The kids don't need to see that. But, in the comic books.
Hill: It showed up in the first couple of movies. There were a couple of scenes where Tony had a little too much.
Barker: Terrible problem to have, but not as unique as Howard Hughes' issues. It'd be tougher to be a superhero, I think, given what Howard Hughes was going through.
Hill: I think that's probably safe. I also think we're at the end of this episode. Bill Barker, you can read more from him and Jeremy Meyers, and the rest of the crew at MFAM Funds. You can go to mfamfunds.com.
Barker: I guarantee you, there's one or two people out there that were thinking, "Here we go." And they were looking forward to another 15 minutes on Howard Hughes, off the rail stuff. One or two. I'm not saying more than that.
Hill: For those one or two, sorry to disappoint!
Hill: For absolutely everyone else --
Barker: You're welcome!
Hill: -- you're welcome! 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 Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you on Monday!