When Delta (DAL +7.11%) reported its third-quarter earnings, most of the numbers pointed upward, which investors like to see. But stockholders aren't so happy when rising profits and demand come with higher costs. However, elsewhere on Wall Street, investors were happy with Bed Bath & Beyond's (BBBY +0.00%) pick to take over the CEO job. Mark Tritton, whose current role as chief merchandising officer for Target, brings a resume that makes him look ideally suited to tackle the task of turning around the troubled niche retailer.
In this MarketFoolery podcast, host Chris Hill and MFAM Funds' Bill Barker lay out the current situations at the world's second largest airline and the country's largest housewares retailer, and they consider where the companies are headed. They'll also answer a listener's question on reverse stock splits.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 10, 2019.
Chris Hill: It's Thursday, Oct. 10. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker. Happy Thursday!
Bill Barker: Thank you!
Hill: If you're a Washington Nationals fan, it's a very happy Thursday. Like our man behind the glass, Dan Boyd. He's tired, but boy, is he happy!
Barker: I'm impressed that he made it in. There were threats that he would not posted publicly on Twitter, as I recall.
Hill: Threats by himself, yeah. But he made it in. You know why? Dan Boyd is a game-day player. We've got a new CEO to talk about. We're going to dip into the Fool mailbag. But we're going to start with Delta Airlines. Third quarter results for Delta, everything appears to be up.
Barker: Yes. Not only "appears." Everything is up.
Hill: Well, the stock is down. But profits are up, demand is up. But costs are also up. I'm assuming that's why shares of Delta are down about 3%.
Barker: Yeah, and projected to continue rising. The employee costs being highlighted by Delta as being something that will prevent them from translating the same revenue growth into profits going forward that they just pulled off. It was a very comprehensive quarter in terms of, adjusted earnings per share were up 29% off a 6% top line. Margins got better in the quarter, but going forward, less so.
Hill: We've talked for a while now about how, in general, the business of running an airline has gotten better. The airlines have gotten better at running them. They are more profitable. In some ways, the only evidence you need of that is the fact that Berkshire Hathaway has bought shares of a bunch of different airlines over the last couple of years. How much better can this get? It's been a good run in terms of airline stocks, but I'm wondering if the next three to five years are going to be not nearly as profitable, and therefore not nearly as good for the stocks as the past few years have been.
Barker: Well, it's cyclical, of course. Things are good right now. The U.S. economy is still pretty strong. Looking forward, there's a little bit more uncertainty both about the domestic economy and Europe. That's one of the things that the market may be looking at today, is the cyclicality of things. How much better can they get? When Delta was on the right side of the Boeing 737 Max issue, not having any of those, and Southwest seated a number of flights, they had to cancel flights because of the issues with the aircraft, and others. Delta was not in the same boat regarding that. So they were in the right place, not having any. Going forward, the other airlines will, and have, made adjustments to what they had to do.
Hill: The stock is down a little bit today. But shares of Delta are basically where they were a year ago. It's visited different places in between then and now. I'm curious, when you look at this stock, do you think it looks expensive? Is this a buying opportunity? Or is it not so attractive?
Barker: I would say, in terms of where the stock price visits -- sometimes we talk about stocks visiting a number of interesting places. Delta really hasn't. It's hovered around basically $45 to $55, more or less, hitting $60 a couple of times. You go back five years and you have a $50 stock. You have a $52 stock today. It's paid a decent dividend, 3% yield right now. Buy it when it's below $50 and sell it when it's close to $60, and you would have made some money over the last few years. Otherwise you haven't compounded.
Hill: The stock of the day is Bed Bath & Beyond. Shares are up 23% on the news that Mark Tritton will be the new CEO at Bed Bath & Beyond. The past few years he has been the executive vice president and chief merchandising officer at Target. Before that, he was at Nordstrom, Timberland, Nike. Congrats to the people at Bed Bath & Beyond, not just because the stock is up 23% today, but they appear to have gotten an ideal person to run their retailer. Although I did smile at one report I saw. I'm going to quote directly from that news report. It said, referring to Tritton, "His first order of business at Bed Bath & Beyond will be to improve the in-store and online shopping experiences for customers, as well as widen the company's merchandise assortment," which I think is a lengthy way of saying, "His first order of business is everything."
Barker: Yeah, it's to fix the mess.
Hill: [laughs] Fix absolutely everything. But by the way, you look at this guy's resume... one of my reactions to this was, if this guy can't fix Bed Bath & Beyond, shut the whole thing down.
Barker: It may be an either/or, in that regard. I think they have found an ideal candidate, at least from the resume. Boy, you talk about an easy act to follow. This is one of the Hall of Famers, I think. Previous CEO was driven out for a number of cases of alleged nepotism. Obviously, the stock hasn't done anything for the better part of a decade or longer.
Hill: Sure it has, it's done something. It's gone down.
Barker: [laughs] It's done nothing positive. Yes. So, is the new CEO up to the job? Well, we'll find out. It's a big, big, big job. I'm sure that he's getting very, very well paid to leave Target for Bed Bath & Beyond. I'm sure that what we will see is some major costs being taken in the first quarter or two, the proverbial big bath. Accounting is forthcoming as things are written down. Bed Bath & Beyond has a lot of other brands going on there besides the namesake. It's got Buy Buy Baby. It has Christmas Tree stores, Cost Plus World Market. Christmas Tree Shops, that is. Harmon. It's got a lot of things that may not be part of Bed Bath & Beyond 2.0.
Hill: Oh, yeah. When you bring in someone like this, you give them all the leeway they want for the next couple of years. If you're Tritton, everything is on the table. To your point, absolutely looking at some of these other brands and just shutting them.
Barker: Yeah, or selling them off, or something. Not being part of the core. We'll see. As part of his interviewing for the job, I'm sure he set forward a plan of what is going to be emphasized, what's going to be kept, what he would like to see changed or gotten rid of. Internally, there may not be great surprises about that. But boy, there are a lot of poor parts, a lot of choices here. I think that getting down smaller in terms of physical stores is going to continue. It has to continue here. The online operation, either that is going to dramatically improve or I think we're looking at the end of the line.
Hill: I'm assuming some of what we're seeing with the stock today is short-sellers covering their short.
Barker: Yes. That was my first thought. A move of this amount, 20% -- of course, the stock had been driven pretty low. I can remember looking at it a couple of weeks ago and thinking, "Well, this looks like a pretty good short candidate." It's been a good short candidate for a long time. But nothing's changed. The same-store sales numbers keep coming out and keep being negative and keep being more negative than you would have thought. Maybe this is a good short candidate. A lot of other people were thinking the same thing. Now they've got to rethink that.
Hill: Our email address is [email protected]. Question from Sarah in Phoenix, Arizona. "How bad a sign is it when a company has a reverse stock split?" Pretty bad. [laughs] That's the short answer.
Barker: Depends if you're long or short.
Hill: That's true. For those unfamiliar, what is a reverse stock split? Because, who doesn't like a good stock split? Two for one. You get twice as many shares.
Barker: Stock splits, back in the day, more common than they are now. A stock got up to as much as $60, you would split it. Then you had two shares at $30 each rather than one share at $60. That was a product of the fact that a lot of people like to buy shares in 100-share lots. Now that everything is online and digitized, it's a very different world. Reverse stock split. Instead of your 10 shares of a $0.50 stock, you now have one share of a $5 stock. If your stock is down at the level where you would consider a reverse stock split, it's probably less than $2, probably less than $1 in a lot of cases. The signal that a stock that low is sending to investors is, this is not much of a company. It doesn't really matter what the per-share price is, but stocks don't come public at -- not real companies -- at $2 or $3 a share. So if it's down to what we call the penny-stock land, whether it's actual pennies or $1.20, something like that, it's showing to investors that something has gone drastically wrong here.
Hill: In the same way that, when a company cuts their dividend, sometimes we will say of that company, "This is the right move from a capital allocation standpoint." From a number of business standpoints, it can make sense to do a reverse stock split. This is a way that companies can avoid being delisted by the Nasdaq or the New York Stock Exchange, that sort of thing. Those exchanges have listing requirements. If your stock is under $1 for a set amount of time, then you're in danger of being delisted. It's not to say that a business doesn't have good reasons for executing a reverse stock split. But as you said, holy cow, does that mean that everything that has come right up until the moment of the reverse stock split has been bad?
Barker: Yeah. There are some costs involved in the paperwork of making a reverse stock split. When you cut your dividend, that is a real capital allocation decision. We don't have the capital to keep paying the dividend at the level we were, basically. We need to do this to support the business, is what's being conveyed there. But it can be a good sign in that, wow, people already had processed a dividend would have to be cut; now finally, management is making the right move, so the stock might move up on a dividend cut. It doesn't usually, because it's usually a surprise, and it's usually a signal that things are bad. Reverse stock splits, the stock price is there, hanging around, telling you that things have been very, very bad, and you're just trying to make a cosmetic change, really.
Hill: Speaking of stock splits, I'm pretty sure that general topic is going to come up later today on YouTube Live, which I mentioned the other day. We're doing live Q&As on YouTube, on The Motley Fool's YouTube channel. You can check those out. We're doing those weekly now. We'll have a set topic and then we'll take questions from the audience and provide stock ideas. If you're looking for even more stock ideas, you can check out our flagship service Stock Advisor by going to stockideas.fool.com. That's a special URL just for our dozens of listeners. You get 50% off Stock Advisor. Go to stockideas.fool.com.
Quick shout out, as mentioned, our man on the other side of the glass, Dan Boyd, so happy today. Tired but so happy with the Washington Nationals' victory. Also on the other side of the glass, shout out to Denise and Bill Sloane, who are visiting from Portland, Oregon.
Barker: Absolutely!
Hill: Have you been to Portland? Portland, I think, is No. 1 or No. 2 on the list of cities that I've still never been to and that, when I mention that, everyone who's ever been there is like, "You have to go to Portland."
Barker: The only flaw in your analysis is considering it might be No. 2. First of all, Portland. Great city. I went there a couple of years ago. Went with no particular expectations except meeting up with a friend of mine who was living there. Loved every part of it. For you, of course, Portland takes a back seat to no one in its worship of coffee.
Hill: Oh, really?
Barker: Oh, yeah!
Hill: I don't know, there are a lot of cities out there that love their coffee and do well by coffee.
Barker: Those are fighting words to actual people in Portland.
Hill: Let me throw out another city I've been to a couple of times and I really liked -- Flagstaff, Arizona. That's a really nice city. Smaller than Portland, Oregon. But Flagstaff would probably say, "We do a pretty good job with coffee." And they do.
Barker: Baristas per capita can't compare.
Hill: I didn't know you had an actual metric you were using.
Barker: I'm making one up.
Hill: [laughs] OK. How great would it be if Starbucks slipped that into the next earnings call? "When you weigh that against baristas per capita... "
Barker: They won't do that. They'll tell you Seattle is the home of coffee.
Hill: I wasn't suggesting that they were going to play up Portland, Oregon. Of course, Seattle being where their headquarters are located. I'm just saying, the metric, your faux metric of baristas per capita.
Barker: I'm sure once Portland gets a baseball team -- great baseball town, by the way.
Hill: Don't they have a Triple A?
Barker: Yeah. I think they should be the Baristas when they finally get a Major League team.
Hill: Wouldn't that be the best part of owning a minor league team, though? Being able to name it whatever you want? I feel like, if you had all the money in the world, you would do that. You would give it some name, I don't know if it was a Pennsylvania-based minor league team, whether they wanted a sponsorship or not, there's a decent chance you'd name it the Wilkes-Barre Wawas or something like that. But, all things being equal, I could see you naming a baseball team the Baristas, in your eccentric billionaire way.
Barker: I get where you're going with Wawa, but it needs to be pointed out that there are people out there -- people do this where I went to college -- who would refer to it as Wawas. It is not Wawas. It is Wawa. Now, the plural of Wawa would be Wawas. But they somehow thought the store name was called Wawas.
Hill: This is people you went to school with?
Barker: Yes. Otherwise seemingly educated people.
Hill: Well, that's what you get for expecting --
Barker: Try saying that in Philly. Try it.
Hill: That's what you get for expecting things from people who go to Yale, I guess.
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'll 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 next week!
