In this episode of MarketFoolery, host Chris Hill chats with Motley Fool Asset Management's Bill Barker about some recent business news. FedEx (FDX +1.18%) is down on a report that didn't meet expectations, and the guys discuss the future of FedEx in a post-Amazon (AMZN 1.45%) world. General Mills' (GIS 1.69%) quarter was much more cheerful. Its Blue Buffalo pet division continues to perform, despite some looming potential canine health concerns. Bill shares some of his investing takeaways of 2019 -- namely, what's happened to valuations, why, and what it could mean for investors. And, of course, there are tangents aplenty, and an update on the soon-to-come "Apropos of Nothing" bonus episode. Tune in for more.
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This video was recorded on Dec. 18, 2019.
Chris Hill: It's Wednesday, December 18th. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, for the last time ... in 2019, it's Bill Barker. Thanks for being here!
Bill Barker: You made people happy to hear that.
Hill: [laughs] No question. No question. There are absolutely a few of the dozens who were like --
Barker: "It was a long year of him. At least we can cross something off the list."
Hill: "Let's just get through this one, and then we're safe for the rest of this year."
Barker: Go back to adults and decent guests. Go ahead.
Hill: We've got a look-back on 2019. We've got another strong quarter from General Mills. And yes, I am surprised to be saying that out loud. But we're going to start with FedEx.
Shares of FedEx are down 9% after a second quarter that did not live up to expectations. I've got a couple questions for you about FedEx. Let's just start with the quarter itself. What did you think of the quarter, and what stood out to you?
Barker: I'm going to quote somebody from Wall Street, a Deutsche Bank analyst. The write-up there starts with, "FedEx reporting results that we can only characterize as breathtakingly bad."
Hill: [laughs] That's a little mean.
Barker: That's a headline.
Hill: That's a little hurtful. Do you think they were breathtakingly bad?
Barker: Yes. Well, I mean, I'm just following on somebody else's verbiage now. I have nothing to counteract that with. FedEx itself, not to be outdone, the CFO on the conference call described their quarter as horrific. They're just trying to top each other, really. What he said technically is, quote, "Our adjusted operating profit year over year is horrific, but it's going to improve." So, yes, he tried to clear everything out of the way. This is the bottom. Used that term. We're coming back strong. This is a little bit of a, we're going to make it up in the second half of the year. FedEx has a different fiscal year, so this was the second quarter. They've got the second half of the year to improve things. That's always, I think, a difficult thing to bet on. You hear it a lot. "Oh, the second half's going to be a lot better. Don't look at the first half."
Hill: For a good stretch of time, FedEx was one of those companies that was referred to as a bellwether stock. If you want to know the state of the economy, you can check in to see how X company is doing, and FedEx was one of those companies. It seems, though, for a number of reasons, not the least of which is Amazon's continued investment into shipping, that FedEx is certainly, at a minimum, less of a bellwether stock, and maybe no longer a bellwether, altogether.
Barker: Bellwether about certain things. The main components of the difficulty here were global trade disputes. Less international trade, less things moving around across borders, and that's a big component of FedEx's business. Secondly -- I'm not really ordering these -- Amazon. Yes, Amazon subtracting some of its business from FedEx. FedEx subtracting some of its business from Amazon. The two of them fighting. I would say it is a bellwether in that respect, in that its business is tied to the strength and its ability to work and play nicely together with Amazon. That is also something that, in the retail, mall world the degree to which Amazon is taking things over is a big component of the difficulties they're facing. When you are doing a lot of business with Amazon, as FedEx was, as XPO Logistics was this time last year, went through a similar story. XPO lost the Amazon business, saw its stock cut in half basically because of that and a few other things. A year later, it's come most of the way. That being XPO. FedEx, they have to make this up somewhere. A little bit more difficult for them because this was a big chunk of the business, Amazon.
Hill: You look at a five-year chart of FedEx, it is down slightly. It's basically flat over a five-year period. And by the way, so is UPS. Are these just not great businesses to own if you're someone who's looking to own a business and hold it for five, 10, 20 years?
Barker: I don't know, it depends on your starting and stopping points. Right now, we're looking at a point which is involving slowing trade and global trade disputes. Check back in a year, maybe it's a different story. Maybe FedEx is saying, "We told you so. This was the bottom. As soon as everybody started trading again, they're using us." There's probably not going to be a better chapter to their story with Amazon. At least, that's the way it looks right now. I wouldn't hold your breath for that to improve. But, global trade? Sure. We're looking at the domestic economy and saying things are good here. But FedEx is a global business. The impact from slower economies is showing up for them.
Hill: Later this afternoon, I'm going to be back in the studio with a few of our colleagues and we're going to be recording the year-in-review episode from Motley Fool Money. I wanted to give you a chance to weigh in on, when you think about 2019 through the lens of business and investing. Is there something that leaps out at you? It can be a business leader. It can be a business, an industry, an event of some sort. What do you think of when you think of the year in business and investing for 2019?
Barker: I think it was a better year for investing than for business. Much better. Stocks being up, call it 25%, 30% in some corners of the market right now. That is not reflective of the actual growth of earnings in businesses. It was a slowdown this year. Earnings per share up about 4.5% in 2019 over 2018. 2018 showed around a 27% gain in earnings per share in the S&P 500. But stocks were down over the course of the year in 2018. Why? Why was that? A lot of it had to do with the direction and the expected direction of interest rates. It was a reminder, I suppose, of the power of people's expectations for interest rates. There was a lot of fear at the end of last year. You may remember where the market was at the end of 2018.
Hill: December 2018, not a great month.
Barker: Not a great month. Interest rates had just been hiked again, and there was an expectation that they would continue to rise. That didn't turn out to be the case this year. The market's taking a huge sigh of relief. But businesses themselves, as I say, have not improved their earnings to anywhere near the degree that the prices have gone up. So, I would say that if you're looking for a hot take -- and you told me you had a lukewarm take --
Hill: [laughs] Most of my takes are lukewarm.
Barker: [laughs] My hot take would be based on the long-term growth of earnings per share and the general multiple the market's put on those over the last 30 years, the market's overpriced by about 15% right now.
Hill: My lukewarm take actually ties in with yours, when you say it's a better year for investing than business. 2019, the year that trading commissions finally went to zero. That was, I think, one more win for everyday investors like us.
Barker: Yes. I think that points to one of the reasons why multiples for stocks are as high -- not at this moment in time. The stock market could lose 10% of its value and it wouldn't really be interesting from the long-term perspective. Markets do that all the time, and then they come back. But, why should people pay, as they have for the last 25 years, a higher multiple for stocks than the 25 years preceding, and really the 125 years preceding? About 10, 15 years ago, Jeremy Siegel, who wrote Stocks for the Long Run and has written many other things, and is a well-known and respected academic. He said that a long-term 20X earnings multiple, somewhere in that range, was justified by the ease with which you can get diversified through the S&P 500 fund or an ETF and lower commissions. That you had to have a higher expectation of the return on your stocks when you had to pay such high commissions and frictional costs back in the old days. The old days being more than 20 years ago. As you point out, they've gone to zero. Maybe people will be paid to trade stocks. Maybe you will make money from that in the future. It's kind of like negative interest rates. There are reasons why, just as there are reasons why a credit card company or a bank will pay you to start an account with them. You may find that there are financial incentives to doing something you used to have to pay for.
Hill: It'll be interesting to see. I'm just glad we finally got to zero. I honestly thought it was going to come sooner.
Barker: Really?
Hill: Yeah. In the same way that 20 years ago, roughly 50% of Americans were invested in the stock market, and that number is not dramatically higher today, I'm genuinely surprised that -- if you had asked me 20 years ago, "50% of Americans are invested in the stock market. Where do you think that percentage number is going to be in the year 2020?" I would have said, "Gosh, it'll probably be closer to 80%." Shows what I know.
Barker: [laughs] You think the zero commissions are going to get more people to own stocks?
Hill: I think it is one more incremental move in that direction. It is one small barrier that has now been removed.
Barker: True.
Hill: General Mills's second quarter profits came in higher than expected. Once again, the pet food division -- historically not really a big part of General Mills's business -- carrying the weight for General Mills. This is a stock that has done surprisingly well over the past year.
Barker: Depends on where you're picking your starting and stopping points.
Hill: With that statement, I was picking it a year ago. A year ago today, it's up 44%.
Barker: Yeah, and in the slightly longer term, the last five years, it's basically flat. So, yes, it reversed the decline. The decline was a little bit interesting, because really, the earnings per share here have been ... I don't know, about as steady as any company you can really imagine. So, it's a little bit of more of the same, I think, on the earnings per share over the longer term. But today, it's better than expectations. I think that's all to the good. I would expect that this company, you're investing in it really for the dividend. I wouldn't be investing for some really major increase in the share price, although that's what happened this year. But longer-term, I think it's a dividend play.
Hill: Well, certainly, if you look at the five-year chart, it's not inspiring. But the difference between General Mills today and General Mills five years ago is, it now owns Blue Buffalo pet products. As that has been a boost for the business, and therefore the stock, it wouldn't surprise me if the next five years for General Mills looks significantly better than the last five years.
Barker: Well, it all depends on DCM, doesn't it?
Hill: DCM?
Barker: Dilated cardiomyopathy.
Hill: ... Go on?
Barker: You don't need me to explain that, do you?
Hill: Yeah, I actually do.
Barker: There was some fear, an FDA warning about dilated cardiomyopathy in dogs. There's a trend about the data, and it's showing up in greater numbers, and it's heart disease in dogs. Whether this is or is not related to grain-free dog foods. More and more pet food owners are buying more expensive dog foods like Blue Buffalo, and specifically the grain-free kinds. That was called into question over the summer by this FDA -- it wasn't quite a warning, it was some published data and further study being necessary, and a recommendation that people talk to their vets. And Blue Buffalo was reasonably high up on the list of dog foods for which there had been ties of the incidences of this, in breeds where you don't expect to see it. Are you following me? You don't care. You don't care about dogs.
Hill: I'm listening, go on. [laughs] I'm just waiting for you to get to an actual point. Go on.
Barker: So, I think the expectations were that this could impact sales over the quarter. It didn't. I think Blue Buffalo was still up in the teens year over year, which is, as you point out, a big driver in the good numbers for this quarter and the expectations for the future. If it turns out that these grain-free dog foods are something that the FDA warns against, I think we've got a different equation.
Hill: OK, yeah. I suppose, if you're coming up with a pros and cons list for General Mills's business, you can put that seriously, capital, capital F, that big if, next to it. If this happens ... yeah, absolutely.
Barker: But, it for some headlines. As a non-dog-owner, you have dismissed this as a critical thing for their Blue Buffalo brand. I think it does take a while for any of this information to seep out. Surely, if there really is any tie between the current constructions and grain-free food, Blue Buffalo has options to recalibrate what it's serving.
Hill: Your concerns about the FDA would mean a whole lot more to me if the stock wasn't up 44% this year, if they hadn't just crushed another quarter, again, driven by Blue Buffalo.
Barker: The crushing of the quarter is an expectations piece of things. Other than the Blue Buffalo acquisition, and including that, sales today are still lower for General Mills than they were five years ago. That's not great news.
Hill: It's not, but I think a lot of that is being driven by the cereal haters.
Barker: Well, and the cereal is an indication, yes. The growing appreciation that cereal is not, despite what you may have heard, a necessarily critical part of your completely nutritious breakfast. So, too, if the dog food that currently is being effectively sold as critical to your dog's health comes with warnings, it could go the way of Frosted Flakes -- which is still around, still selling a lot of boxes, obviously.
Hill: Not for General Mills, because they don't own that brand. But, no, I get your point.
Barker: Honey Smacks, then.
Hill: One of the things I like to do anytime we're talking about a company that is a conglomerate, a collection of brands, is I like to go to the website and just see, how does a company decide to feature their business divisions? Whether it's a software company or a consumer products company like General Mills, that sort of thing. Not surprisingly, they break it out you know by the different things like baking products, cereals, ice cream, pets, pizza snacks. It's alphabetical. But, this is the part I love. When you go into the cereal part of their website, they break the cereal division down by further brands, further categories. One of the categories is Monsters. Which I just think, good for them for just saying, "What do we do with Count Chocula?" "We also have Boo Berry. We're not moving a lot of product on Boo Berry or Frankenberry, but they still matter. Alright, we'll group it under monsters. Let's just put it under monsters. Let's move on."
Barker: The leprechaun's not a monster.
Hill: Not a monster. They're delightful.
Barker: Lucky Charms is not part of the monsters.
Hill: Was it Lucky Charms or Trix that General Mills experimented with the natural coloring? I think it was Trix. They experimented with natural coloring, and tried to use that as a selling point. "Hey, no more red dye number five in our cereal!" And the colors ended up ... it looked like cereal that had been left out of the sun for a week. It was all faded. People were like, "This is terrible. It's Trix, for crying out loud, just put the regular colors back." It was their version of New Coke.
Barker: Yeah. They've got some of the classic.
Hill: By the way, for anyone wondering, we've moved on to the tangents section of this episode. We're probably done with the investing.
Barker: Yes and no. We're wandering back and forth. Really. This is part of the actual business case for General Mills, is how do they pivot over time toward things which are less offensive to those who do care about nutrition. It's a delicate balance. As with the Trix, trying to make a step in that direction, and then being told by the market, "No, don't do that with Trix. Nobody who's buying Trix cares about the nutrition. Nobody is buying it for the 18% of niacin that it provides to your daily schedule."
Hill: It's a fair point. I'm sure that's part of why they expanded into things like, "Fiber One, we've got that brand. You want healthy cereal? Go check out our offerings from the Fiber One division."
Barker: "And we've got monsters."
Hill: "And we have monsters, and we have Trix. And something called Cascadian Farm," which, OK, there's another healthy cereal because it's got farm in the headline.
Barker: Yeah, one suspects that that is meant to be truly nutritious in some way.
Hill: Anything else before we wrap up?
Barker: I don't know. You were starting to tell me about the burdens that you are going through of editing the Apropos of Nothing episode. You were going to give me a little theory on what makes a good edit.
Hill: So, yes, for those who have been asking -- and a few people have actually been asking.
Barker: You keep talking about it!
Hill: "You keep talking about it, but I don't see the episode." I started the editing process today. And, yeah, it's some work.
Barker: How do you keep all the good stuff in? Is that why it's a lot of work?
Hill: No, it's, "Wait, what did we talk about? How long did we talk about this topic? Oh, this whole thing has to come out because it didn't really work." That's why it's Apropos of Nothing. There are tangents.
Barker: What's the theory? You were going to tell me a Kevin Smith story.
Hill: Oh, yeah. Kevin Smith, writer, film director. Years ago, he would go around and speak at colleges and talk about making films and that sort of thing. And turned some of those into -- and there are YouTube clips where you can just type in Kevin Smith speaking. One of my favorites is, he tells the story about 25 years ago, when he gets involved in a potential reboot of Superman. So, he goes through the process of getting a script --
Barker: Between Christopher Reeves and --
Hill: Brandon Routh. One of the notes he gets when he turns in his first crack at a script is, "You don't have enough action beats in this. This is an action movie, it's a superhero movie, there needs to be an action beat every eight to 10 minutes," an action scene every eight to 10 minutes. And it goes on from there.
So, in listening to the nearly two hours' worth of Apropos of Nothing that we recorded a few weeks ago, I took a similar approach. It's like, what I'm listening to at this moment, this either needs to be interesting or humorous, or it needs to be driving toward something interesting or humorous. And if it's not doing any of those, it's being left on the cutting room floor. That's the general approach.
Having said that now, anyone who actually listens to it when it gets published, I'm sure will come back and say, "Wow, I heard how you think about this and how you think about editing, and I noticed you left in a lot of unbelievably boring stuff." But that's why it's Apropos of Nothing.
Barker: During that time, the Superman issue, and they were considering Nicolas Cage as Superman, do you think that could have worked?
Hill: No.
Barker: Christopher Walken as Brainiac?
Hill: Christopher Walken as a villain of some sort, that can work in almost any setting whatsoever. But I think there's a reason Nicolas Cage didn't end up as Superman. It's Hollywood. If they felt like there was money to be made, they would have made that move.
Barker: He owned, at the time, the most expensive comic book. He bought Superman number one at -- what at the time seemed like -- an absurd price, nearly a million dollars or something. He ended up selling it years later for like 4X what he bought it for. But everybody thought it was one of the indications of his insanity, was having paid this much for a comic book. But it turned out to be a great investment.
Hill: Given what I've read periodically about Nicolas Cage and his financial situation, it's probably good that he sold at a profit.
Bill Barker, 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's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.
