Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) second-quarter profits dropped 11%, but it's the cash hoard that interests us. Shares of Tyson Foods (TSN +1.04%) hit an all-time high after strong third-quarter profits. And what will Altria Group (MO +3.02%) look like in 10 years? MFAM Funds portfolio manager Bill Barker analyzes these stories and more. (Tangents include the Liberty Bell, overrated landmarks, the rise of the New York Yankees, and the fall of the Boston Red Sox.)
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This video was recorded on Aug. 5, 2019.
Chris Hill: It's Monday, Aug. 5. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, from MFAM Funds, Bill Barker. Happy Monday!
Bill Barker: Thank you!
Hill: Not in the market so much. There's a lot of stocks going down in the market today.
Barker: Yeah, not unless you're short, in which case, it's a very Happy Monday. Think about the bears. You're always assuming everybody's a bull.
Hill: That's true. That's true. Shout out to the bears!
Barker: Shout out to the bears, taking the victory lap today!
Hill: [laughs] They're having a good day!
Barker: Praising China!
Hill: We're going to dip into the Fool mailbag. We've got one stock hitting an all-time high. We'll get to that in a second. Let's start with Berkshire Hathaway because, as they are wont to do, Berkshire Hathaway put out their quarterly earnings report very quietly after the market closes on Friday. Second quarter profit for Berkshire Hathaway was down 11% compared to a year ago. We'll get to their cash in a second. You were saying this right before we started taping -- they don't really share a whole lot in the quarterly report. And there's no conference call.
Barker: No. They're not giving you a whole lot of additional information beyond the numbers. And if you want to spend the time to look through all the numbers, then you can learn something. But they're not going to do the work for you.
Hill: Did you do any work? Did you actually look through the numbers? I didn't, but that's not my job. [laughs]
Barker: [laughs] No. My job was to just show up here and complain about their not doing the job for me.
Hill: Then let's talk about the cash.
Barker: OK.
Hill: I think I mentioned this last week, that Alphabet recently surpassed Apple in how much cash on the balance sheet the company has. For a while, Apple was the leader in that regard. Well, it turns out, Berkshire Hathaway has them both beat. As of this quarter, Berkshire Hathaway has $122 billion in cash on the balance sheet. Holy cow! How badly do you think Buffett is dying to spend it?
Barker: Well, good question. Not badly enough to spend it. In which case, he's rooting for days like today, a lot of them, because he has positioned Berkshire to be ready for taking advantage of what he cannot currently find, which is cheap companies or cheap stocks. Preferably cheap companies. He would prefer to be out there buying entire companies rather than portions of companies, as he's stated for a long time.
Hill: Last week, when Bryan Hinmon, your colleague at MFAM Funds, was on the show, we talked about Procter & Gamble, which was hitting an all-time high last week. And one of the things we talked about was the pretty fantastic job that Procter & Gamble has done over the past 10 years executing a strategy of shedding a lot of its brands and making the brands that it has more profitable, and exercising pricing power in a way that we don't necessarily think of when we think about household brands, when we think about cleaning products and that sort of thing. We don't necessarily think of pricing power. I'm curious, since we're talking about Berkshire Hathaway, the extent to which you think Buffett regrets the Kraft Heinz acquisition. Not that Kraft Heinz is in the same business as Procter & Gamble. Procter & Gamble 10 years ago had food products, but they shed those and decided to just focus on household cleaning, laundry detergent, that sort of thing. Kraft Heinz, it is a consumer brands business, and it's not going well at all.
Barker: So, the question is, how much does he regret it?
Hill: Yeah.
Barker: Eleven.
Hill: [laughs] On a scale of 1 to 10? Or a scale of 1 to 100?
Barker: On any Spinal Tap scale. No, maybe a 9. He's admitted he overpaid for it. He's on the record having said that. He doesn't want to overpay. Certainly, having publicly, and with a very large chunk of money -- Kraft Heinz took a $15 billion writedown back in February. There were a lot better buys out there than what they ended up getting off of that. I think he would prefer to have been anywhere else, almost.
Hill: They've got $122 billion. [laughs] Can't they afford to overpay just a little for something?
Barker: They can afford to, yeah. That's not his game. His game is capital allocation, right? His game is using cash wisely and waiting for market opportunities. For a while, it looked like Kraft Heinz was a pretty good buy, until it wasn't. I think they bought it in 2013. It took a little while for the problems there to be revealed and to develop. It may be overstating it to say that it's that big of a regret, because it wasn't always as obvious that it was such a poor buy.
Hill: Last thing before we move on. Shares of Berkshire Hathaway are basically flat for the past year. I don't own shares. For anyone who doesn't own shares and is thinking about kicking the tires, is Berkshire Hathaway an expensive stock right now?
Barker: Berkshire Hathaway is kind of the stock market now, so yes, it's expensive, if you think the market is expensive. It doesn't vary, at this point, greatly from the broader S&P 500. If I'm looking at how it's done over the last three years as a stock, up 12%, market up 13%. Five years, 10 years, 12% and 13%. It's not varying very much because it is a broadly diversified company, which is, now, at least, more aligned with some of the tech exposure that it didn't have in years past because of its massive purchases of Apple. But for the most part, I would say, look at the S&P 500, and you probably have a pretty good proxy for whether Berkshire is overpriced.
Hill: Shares of Tyson Foods up nearly 10% and hitting an all-time high today. Third quarter profits for Tyson came in higher than expected. For all of the talk --
Barker: Let me answer that one more time, one more way. Berkshire was not acquiring its own shares over the last quarter at the same rate that it had been. The quarter ended June 30th. The stocks went up a lot. Buffett was not buying shares back of the company during that time.
Hill: Well, fortunately for him, the annual meeting with the marathon Q&A session is about, I don't know, 10 months away, nine months away. By then, he probably won't be getting questions about why he wasn't buying his own stock.
Barker: They bought back, I think, $400 million, maybe, of stock in the quarter. $442 million. Given $120 billion available, not much of a commitment.
Hill: Can we move on to Tyson Foods?
Barker: If you insist. I'm just trying to answer your question. Late, granted.
Hill: For all the talk of Beyond Meat, and certainly on this show and on financial TV, there's been a lot of conversation about Beyond Meat and Impossible Foods and the rise of plant-based meat substitutes, Tyson Foods shares hitting an all-time high today are a nice reminder that people are still eating meat. And Tyson is selling it, when you look at all the brands they have under their umbrella with Hillshire Farm and Jimmy Dean and Ball Park Franks and a host of others.
Barker: They are, although some of the enthusiasm may be tied into Tyson having announced its own plant-based line of meat. They're not ignoring what the opportunities there may be. And, yeah, in the meantime, people are going to continue globally eating a lot of meat and other proteins. They have not yet benefited, although they expect to, from the African swine flu virus, which is eliminating huge chunks of China's pork production. At some point, if trade continues with China from companies in this country, then they'll probably get a little bit of a chunk of that.
Hill: Before we started taping, you were saying, yes, technically, this stock is hitting an all-time high, but it's not necessarily as impressive as that might sound. They've had a... I don't want to say a struggling couple of years, but certainly, if you're if you've been a shareholder for a few years, you're happy it's back where it once was.
Barker: Yeah. Over the long term, this has been a pretty good stock over the last five, 10 years. Soundly beating the market. Less over the last three. The stock got a little bit ahead of itself. It's not that fast-growing of a company. It has benefited a lot from the new tax structure. This year, it has rebounded from a couple of hiccups last year. The stock was depressed going into the end of last year. It's up 50% this year, which is pretty nice. If you're just looking at that one slice of time, it looks great. But it's a pretty slow-growing item. They're doing a little better. Expanding into packaged foods rather than -- it's really commodities. Tyson as a brand is known, but it doesn't really have any pricing power over the competition. It's the largest in some categories. In chicken, No. 1; in meat No. 2, maybe. Pork, quite a bit lower on the list. But the scale does not give it any great operating advantages. It's not getting better margins than the competition. The brand does not give it better pricing power. It attracts certain attention for the treatment of animals. Being the largest, it's going to get more of the focus for that. So, it's not all to the good.
Hill: I mentioned some of the better-known brands that Tyson has under its umbrella. One of the brands that I didn't mention was Original Philly Cheesesteak Co. Is that a favorite back in your old stomping ground in Philly? I guess more of just the local places.
Barker: Not sure I'd ever heard of it. [laughs] But I'm concerned. I'm concerned that it is listed as one of their brands, and the link takes you to the Original Philly Cheesesteak Co. page, which states, "Original Philly you know is the real deal. We're the category pioneer and leader. Still family owned and operated, now in the second generation." And my question is, what?
Hill: [laughs] You're saying back in Philadelphia, people aren't familiar with --
Barker: I'm saying it can't be family owned and operated unless you're talking about the Tyson family owning it and operating it. Maybe it's family operated, but it seems to be owned by Tyson. I'm sure they make a fine frozen cheesesteak. Not that anybody wants to eat frozen cheesesteaks when you have the opportunity, as one does in Philadelphia, to get them virtually on every street corner, fresh.
Hill: It is pretty great. One of many reasons to go to Philadelphia.
Barker: Many.
Hill: High on the list, though, is the cheesesteak.
Barker: When was your last trip to Philly?
Hill: I think a couple of years ago, actually. Time to get back there. Even if it's just for a day trip to get cheesesteak.
Barker: Cheesesteak, catch a couple of games.
Hill: I don't know about catching a game. A couple of games. I'll catch a couple of cheesesteaks.
Barker: Hear the history of the Declaration of Independence.
Hill: Really, I'm just there for the food.
Barker: Have you done that, the historical tour?
Hill: Oh, yeah!
Barker: You didn't waste time with the Liberty Bell, did you? That's the most overrated thing to see in America.
Hill: Yeah, but it doesn't take very long.
Barker: Depends on the line.
Hill: Wait a minute, the most overrated thing to see in America? No. No, I wouldn't think so.
Barker: Have you seen it? You've seen the Liberty Bell, right?
Hill: I've seen the Liberty Bell. It's fine. It's not super overrated. This is a good time to mention that our email address is [email protected]. We love questions about stocks. We're about to dig into a question about stocks. But also, if you have opinions on, what is the most overrated... landmark? Is that what we're going with? The most overrated landmark? I thought you were going to say in Philadelphia. It's the most overrated thing in Philadelphia. I'd be like, "OK."
Barker: Historic, iconic American tourist trap. But of the high-quality variety. Not a giant ball of string on the side of the road, which, to me can never be overrated.
Hill: It's truly giant.
Barker: If you go to Philadelphia to see the Liberty Bell, you're wasting your time. It's just not that great of a story. You see it and get inspired to do what?
Hill: There are a lot of other things to see. Maybe put it on your list, but put it way down on your list.
Barker: If the line's going to be half an hour to look at the bell, just google it and look at a picture of it, I say.
Hill: Get a cheesesteak. Our email address is [email protected]. Question from Brendan O'Brien in Maryland. Brendan rights, "I've done my homework on Altria Group, ticker symbol MO, formerly known as Philip Morris. They have a reasonably healthy balance sheet. They are slowly but surely diversifying into smokeless products, and lean on the cash from the core cigarette business until they establish something more sustainable. My question is, what do you think Altria Group will be in five to 10 years after moving away from smokable products?" Interesting question. Philip Morris back in the day, it's been Altria Group for I guess about 20 years or so. This is one of those stocks that is a little bit of a lightning rod, in that there are absolutely funds out there, there are absolutely people out there, who say, "I don't want to invest in smoking, so I'm not going to own this stock." That's anybody's choice. People are that way on any number of businesses. I will just point out that over time, this has been a market-beating stock and a stock that has, I don't think it's just a dividend aristocrat, it's whatever is the one above aristocrat.
Barker: King? Emperor? Something like that.
Hill: What do you think of Brandan's question? What do you think, in 10 years, Altria Group looks like from a business standpoint?
Barker: So I guess I would hone in on one of the words, which is something more sustainable. I would say, well, this has been unbelievably sustainable, the addiction that people have to cigarettes. Despite all of the information about the many reasons to never get started, it persists. I think I would start with, if you asked me 10 years ago, "How well is it going to survive over the next 10?" I would have underestimated the staying power of cigarettes. Despite all of the local taxes put on them, they're being priced to a point where you would think it wouldn't be sustainable. I think you have to question, is the death of cigarettes overrated? And if it continues to die a very slow death, then in 10 years, it looks a lot like it does now. Having increased its dividends every year the way it's been, it'll be a big dividend payer, and it'll have this highly successful, cash profitable business, which is not growing, but they make a lot of money off of it. And maybe they diversify further into smokeless. Maybe that becomes a lightning rod to a similar degree. It's got the potential. You featured some of that on one of your podcasts recently. Juul.
Hill: Oh, yeah! CNBC did an eye-opening primetime documentary about vaping. The CEO of Juul was one of the people who was interviewed. Carl Quintanilla did the documentary, and it was pretty incredible, to see how quickly people become addicted to vaping. Also, there are people who have used vaping to get off of smoking. They've quit cigarette smoking and they're vaping instead. But there are also all of these particularly younger people who have started vaping. And one of the stunning things to me was this kid who, the first time he vaped, it was 14 years old. And Carl asked him, "What was it like the first time you did it?" And he said, "It was great! It tasted great!" And I was watching that, thinking to myself, "Oh, my God, the first time I smoked a cigarette, my lungs were on fire. I thought, who in the world would ever do this?" The fact that vaping is like, "This tastes great! I'm feeling a buzz immediately." It's like, no wonder people are getting addicted immediately to this. And one of the things in the documentary is how we don't have the decades of health evidence for vaping that we do for cigarette smoking. 10 years from now, to Brendan's question, I feel pretty good about the idea that in 10 years, we'll have at least some concrete evidence of what vaping does to people's... not just their lungs, but their bodies in general.
Barker: I think you mentioned that Altria was a controversial company. I would imagine that if you asked people, "Quick, name the most evil company in America," Philip Morris would be the leader. More people would come up with that name.
Hill: Isn't that why they changed their name to Altria Group?
Barker: Right. [laughs] But the controversy remains. If anybody can think of companies they think would be more popular in terms of getting the answer of most evil company in America -- maybe it's gun manufacturers. You'd find some people offering that. You're shaking your head.
Hill: No, no, I was just going to say, I put Altria Group as a stock in the same category as gun manufacturer stocks, casino stocks. There are plenty of people who say, "I think gambling has no redeeming value whatsoever. I don't care what the returns of -- "
Barker: These people have never won on the hard eight. That's pretty redemptive, when you have the hard eight come in.
Hill: I'll take your word for it. I've never been in that position. But, you know what I mean? People are like, "No, I don't care that casino stocks might be a good investment."
Barker: Have you ever seen split aces and get two tens?
Hill: No, never. [laughs]
Barker: [laughs] OK. Yeah, some people throw in casinos. But I have to believe Altria would still be the winner for that. They've got, in their research, the playbook on how to keep research regarding any problems with vaping in a confused state in the public mind. I'll just go ahead and accuse them all -- I imagine they're willing to look at that playbook and see what works in terms of making that harder to regulate in the way that it might ultimately be.
Hill: Well, certainly the stories we've seen recently, the emails that have come out of the investigation into opioid manufacturers --
Barker: Right, sure. Sure.
Hill: -- the degree to which executives knew, "This is something that people are becoming addicted to do in terrifying ways." And in some cases, just shrugging their shoulders, saying, "Oh, well, as long as we're moving our product."
Barker: Yeah. So, I think, where you would get the most votes in terms of evil, it would be hard for casinos to keep up with that because their ability to hide the harm that happens to you is not very good. That is, you walk out of the casino, if you've lost your money, completely aware of the harm that has happened to you, unlike opioids and tobacco. When you take opioids, in the short term, you're getting relief from pain.
Hill: I think we're going to wrap up here. I don't see where we go from here.
Barker: Really?
Hill: Unless you want to talk about how the Yankees are on a hot streak and the Red Sox are on the out --
Barker: All of America is already talking about that. It's hard to go anywhere where people are not talking about just what happened to the Red Sox. It's just incredibly depressing for people that like the Red Sox.
Hill: And what turns that frown upside down is Tom Brady signing -- You can read more from Bill Barker and his colleagues, go to mfamfunds.com. 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 tomorrow!
