In this episode of MarketFoolery, host Chris Hill chats with Motley Fool analyst Bill Mann about some business news. Target (NYSE:TGT) knocked the ball out of the park yet again this quarter. Chris and Bill explain why investors with any interest in retail should really consider buying this one -- yes, even at this all-time high. The earnings report from Lowe's (NYSE:LOW) sent shares popping, which probably had a lot to do with low expectations. Also, the guys answer some listener email about the upcoming and insanely massive Saudi Aramco IPO, and the apparently elusive nature of the true boundaries of the American Midwest. Tune in to find out more!
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This video was recorded on Nov. 20, 2019.
Chris Hill: It's Wednesday, Nov. 20. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Bill Mann in the house. Thanks for being here!
Bill Mann: How are you, Chris?
Hill: I'm caffeinated, as are you.
Mann: I'm working on it.
Hill: Let's make this happen because producer Dan is hungry. [laughs] We're going to look to the horizon for a huge IPO and our continuing search for the Midwest. But right here in front of us, we've got some retail earnings. We're going to start with Target.
Target's third quarter was pretty much everything you'd want it to be if you're a Target shareholder.
Mann: Targét, in fact. I love the fact that the CEO, Brian Cornell, got to use the word bifurcation in his call, basically saying, what we're seeing in the retail market is winners and losers, and they are spreading farther and farther apart. The winners are winning faster, and Target is one of them. And the losers are going away.
Hill: Profits and revenue in the third quarter were higher than expected. Same-store sales higher than expected. They raised full-year guidance.
Mann: Good, good, good. Those sound good!
Hill: Yeah. The stock's up 11% this morning, hitting a new high. This is about as hot as you can get going into the holiday quarter.
Mann: I think so. Another important thing is that they seem to have some really good visibility. One of the things that they did -- Target had a few operational issues a couple of years ago, and they've gone to delivery and what they call same-day pickup, which is, you order online and you show up. Their costs for that are like 90% lower than either store or delivery, and they are really seeing some tailwinds behind having pushed that a couple of years ago. So, they're getting a payoff for looking ahead.
Hill: You mentioned Brian Cornell, the CEO. Think back a few years ago, when the big news out of Target was, they were selling their pharmacy business. And it was a perfectly legitimate question at the time to ask of Brian Cornell, "Is this a good move? That's a profitable business that you have within your stores, and you're selling it off."
Mann: [laughs] And people kind of have to come in for drugs.
Hill: Right. It was the sort of thing that, even though he'd had some success early on at Target, I think it was a perfectly fair question. Coming out of that, you just could look at it and say, OK, they're going to get a lot of money. What they do with that money will determine whether or not this was a smart move. And you look at the investments that Cornell and his team have made, and, yeah.
Mann: It's a home run.
Hill: It's an absolute home run.
Mann: It's a home run. I thought that when he was being asked those questions, he was very thoughtful about it. At the time, he said, "Look, we see why one would think that this is a high-risk move. We've done the research and we think that there are places where the money that we will get in return are going to be force multipliers for Target." And, scoreboard. They really are crushing it at the moment.
Hill: I understand anyone's reluctance to buy shares of a company when it's at an all-time high, but this also seems to be... this is not some insert-name-of-software-as-a-service-company, or Beyond Meat, with some crazy valuation. This is a business and a management team at the top of their game. I don't own shares of Target, but the way they're performing, the fact that the stock's at an all-time high is not why I'm not buying shares. There are other reasons why I'm not buying shares. I look at my own portfolio and I feel like I've got retail pretty well covered. But, holy cow, this is a business on fire.
Mann: I think, if you do believe that retail is not dead -- and I happen to think that the death of retail was greatly overstated -- you have to own a company like Target. You don't necessarily have to own Target, but Target is and will be a winner.
Hill: Lowe's third quarter... was a little confusing to me, I'll be honest.
Mann: The market wasn't confused, apparently.
Hill: Apparently not. Shares of Lowe's up about 5% this morning. This is not like what we saw out of Target. Same-store sales came in low. Overall sales came in a little low. They did, however, raise guidance. Their profits were better than expected. I'm assuming it was just the marketing saying, "You know what? The good outweighs the bad in our minds."
Mann: The interesting thing about Lowe's is that Home Depot just reported, and Home Depot's results, if you just take them at face value, were much better than Lowe's. This is why investing is all about expectations in the short term. Lowe's expectations were not great. Home Depot has been firing on all cylinders for years now. This was a rare miss for them.
Lowe's came out and said that they're moving out of out of Canada. They're closing, I think it was 34 stores in Canada. They're doing some cost-cutting. But, yeah, sometimes it is amazing to me what the market picks up on and decides is great or not great. Absent anything else, Home Depot's report was much better than Lowe's.
Hill: You mentioned Canada. On the one hand, you have management saying, "No, we're committed to Canada, but also, we're closing [stores]." I think the number of locations they had in Canada in 2018 was around 60. I don't know if they're closing all -- they're closing 34. At a minimum, that's half of what they've got up in Canada. Maybe it's just a, "Look, let's hit the pause button and figure out how to make this work." That, for all we know, may contribute to a little bit of the bump today. All the credit in the world to retailers who make the tough decision to say, "Some of these locations that aren't performing as well, we're going to shut them down."
Mann: They have a couple of concepts in Canada that they don't have in the U.S. One is called Rona. The other is called Reno-Depot. Those are primarily what they're cutting in Canada. They're moving away mostly from other concepts that they have, and not from Lowe's. They're closing six Lowe's stores, and you have to imagine that's a consolidation. The reality in Canada is that it is made up of somewhat large cities, so it may just be that they felt like they had too much capacity across these concepts within the Canadian cities.
Hill: You go back a year and a half ago with Lowe's, the board pushing out the CEO, bringing in Marvin Ellison, who made his bones at Home Depot. In the year and a half he's been in the corner office, the stock's up about 35%. Clearly, getting some things done. Although, as you said, this is a business that for five to 10 years has had lower expectations, in part because it just hasn't performed as well.
Mann: Yeah, I think that's exactly right. You're spot-on in that it is admirable when a company looks at something that's not working and says, "Hey, let's stop spending money on that. Let's stop trying to make that work." It doesn't seem like good news ever when a company says, "Hey, we're closing down things," but that's really not the case. So, the fact that they've ripped the band aid off, I think, is probably what the market is really focusing on, and it's why the stock was up about 6% as we record.
Hill: Our email address is email@example.com. Question from Bassam Al Masri, whose name I'm almost certainly mispronouncing.
Mann: I think that was pretty good.
Hill: Sorry about that! He writes, "I would like your opinion on the Saudi Aramco IPO. This is projected to be the largest IPO in history. However, the New York Stock Exchange as well as the London Stock Exchange are slowing it down and not giving approvals. What is the issue? And, do you think this is something The Motley Fool would invest in, given that Aramco is wholly owned by the government, and information usually coming from companies on calls would not really happen due to national security concerns? Would love to hear your opinion on this."
Mann: When I was working with Motley Fool Asset Management, we actually held some shares in some Saudi companies, a dairy company and a bank. Aramco is getting ready to come public. They're selling 1.5% of the company. If it goes out at the $1.6 to $1.7 trillion valuation that the company and the Saudi government want, that means it will be the largest IPO in history, larger than the Alibaba IPO of a few years ago. There is a tried and true belief in investing that you should be buying what the king is selling. When a government privatizes, they're not looking to maximize the amount of money they make because they don't want their citizens, who tend to be the ones who buy, to lose money. They want the citizens to be happy with the privatization. They want them to be happy with the amount of money they're making. So, it is very noteworthy that this is only going public on the Saudi market. The reason it's not going public in the U.S. or in Japan or in the U.K. doesn't have as much to do with the exchanges, because the exchanges would sell their grandmothers if they could get away with it; it's the fact that the big investment banks are not biting at this valuation, so they are not getting enough interest, so they're saying, "OK, we're just going to do it in Saudi Arabia."
I don't see any real chance that The Motley Fool's services would own or recommend Aramco at these valuations. It could come down. I don't think that's good news for Saudi Arabia. But it's not something that I'm particularly interested in, other than as a spectator.
Hill: Just so I didn't mishear you -- did you say this is going to go public at a valuation of $1.6 trillion?
Mann: I did kind of blow past that, yes.
Hill: Making it overwhelmingly the largest -- not just the largest IPO in history, but the largest public company, to the tune of 55% higher than whatever Microsoft or Apple is trading at.
Mann: Yeah, that's right. It instantly comes out as a charter member of the four-comma club. Yeah. It is, by not very close, the largest oil company in the world, and the one that defines pricing. Getting oil out of the ground in Saudi Arabia is so much cheaper than it is almost anywhere else. Their cost of production is about $2 a barrel. You look at some of their comparables, it's $20, $30, $40 a barrel. So, Saudi Arabia has a natural advantage, and Aramco is the government-owned entity. But, as with every other government-owned entity, and this one will still be 98.5% owned by the government, you have to understand that profits are not generally their highest order interest.
Hill: Another email, this time from David Emerson in response to the end of yesterday's episode with Bill Barker. David writes, "Per my time in Indiana for school, the Midwest has a loose definition. People in Indiana, Ohio, Michigan, Wisconsin, and Illinois consider themselves to be the Midwest. People from Nebraska and Kansas will vehemently deny that Indiana or Ohio can be the Midwest since it is neither in the middle nor the West nor the middle of the West."
Mann: [laughs] "That's crazy talk!"
Hill: "The Midwest is a sought-after title."
Mann: Who knew?
Hill: Thank you for that, David!
Mann: Who knew that was a club worth joining? Ohio and Indiana are charter members of the Midwest. I don't quite see how folks from Kansas and Nebraska... I mean, maybe it's a new definition.
Hill: I've learned in the last 24 hours that what you think the Midwest is very much informed by where you grew up.
Mann: I think Pittsburgh's in the Midwest.
Hill: I don't. [laughs] Do you think people in Pittsburgh consider themselves as being in the Midwest?
Mann: We should ask them. Well, they consider themselves to be from PA first and foremost. But Pittsburgh has much more in common with Cleveland than it does with Philly.
Hill: Yes, I suppose.
Mann: The Ohio River, the defining physical characteristic -- OK, maybe the Great Lakes. But, the second-place defining geographic characteristic of the Midwest, goes through and actually starts in Pittsburgh.
Hill: I feel like we're just going to get more email. Not just from people in Pittsburgh, but from people in Nebraska and Kansas. But you know what? We love it!
Mann: That's right!
Hill: Keep it coming! firstname.lastname@example.org. Bill Mann, thanks for being here!
Mann: Glad to be here, Chris!
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!