In this episode of MarketFoolery, host Chris Hill talks with analyst Bill Mann about some recent business news. Boeing's (NYSE:BA) stock is in trouble after a disastrous crash of one of its non-grounded plane models. U.S. Homebuilder Lennar (NYSE:LEN) popped a bit after reporting significantly better-than-expected year-end earnings. Luckin Coffee (OTC:LKNC.Y) is getting into the vending machine game, and the market is apparently pretty happy about that. Plus, Bill talks about his recent vacation to Australia and his encounters with its bloodthirsty wildlife.
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This video was recorded on Jan. 8, 2020.
Chris Hill: It's Wednesday, January 8th. Welcome to MarketFoolery! I'm Chris Hill, With me in studio, Bill Mann. Good to see you!
Bill Mann: How are you, my friend? Happy New Year!
Hill: As you know from the false start we just had, I'm not caffeinated.
Mann: [laughs] When do you stop saying Happy New Year? I mean, obviously February's too late.
Hill: I think you pretty soon, in the next day or two. One you get to double digits in January, it's like, OK, we can move on.
Mann: I felt like this was OK since this is my first time on for the new year.
Hill: Yes, absolutely.
Mann: Happy New Year, everyone!
Hill: Next week, don't pull this. We've got two very different announcements from the same company. We have a group of economists to consider. But we're going to start today with housing. Lennar, the No. 2 home builder in the U.S., reported fourth quarter results. Profit and revenue both came in higher than expected. Lennar also bumped up their guidance for the number of homes it expects to deliver in 2012. This is a really good way to end the fiscal year.
Mann: It's a boomer of a story. They were expected to report about $6.5 billion in revenue. And they came in at about $7 billion. That's a lot more. I mean, for housing, that's a pretty predictable industry. So, for them to come in that much higher ... Some of it has to do with the fact that interest rates have remained so low, and the housing market has done really well. But Lennar made a great choice a couple years ago. And it's a really interesting study in corporate governance. They kind of leaned into the trend of people renting instead of buying and said, "You know what? We're going to go back into low-priced," what we used to call starter homes, "we're going to make that a core of our business." And not too many other home builders did that. And it's paying off in a huge way.
Hill: So, shares of Lennar are up about 3% this morning. You look at this strong quarter, bumping up the guidance 2020, I felt like the stock should have been up a little bit more. But, it's had a pretty good run over the past 12 months.
Mann: It's had an OK run. I mean, it's trading at a P/E of less than 10X, even after the run up. And one thing that is definitely true about home builders is that sometimes, low P/Es are not necessarily a signpost that the stock is undervalued, because it's such a cyclical industry. I don't know that people still trust that interest rates are going to remain low, or that inflation is going to remain in check. I think people are still a little bit shell-shocked from what happened a decade ago in this industry. But this is a well-run company. And we, in other areas, have looked at this trend of low-cost housing and low-priced housing stocks as well. We recommended a company called Legacy Housing, which has a very similar strategy. So, yeah, it was a great quarter, and the company is running on all cylinders. But, yeah, you're right, the stock didn't seem to react in a way that you might expect.
Hill: Boeing shares down a bit this morning in the wake of the crash of Ukraine International Airlines Flight 752. Minutes after taking off in Iran, the 737 crashed, killing all 176 people on board.
Hill: Terrible tragedy. From a business standpoint --
Mann: Hey, a new crisis.
Hill: I was going to say, this is not a 737 Max, because they're all grounded. This is an older model, the 737 800. But to your point, this is yet another thing for Boeing to have to respond to.
Mann: Yeah. The grounding of the 737 Max, and how Boeing handled that entire situation, has cost them about $9 billion in revenue so far. They were selling about $1.5 billion dollars in the 737 Max per month. And it costs Dennis Muhlenberg, the former, CEO his job. The 737 800 is a different beast. According to Air Safe, which is an organization that tracks airline safety -- so it's a very well-named organization -- the 737 800 is among the world's safest planes. So, we don't know as we're recording this what has happened with the flight. The Iranian government came out immediately and said that it was an engine malfunction. The Ukrainian embassy in Tehran came out very quickly and said that it was not terrorism. And then they pulled that report. The Ukrainians, the governments of France, Germany, and the Netherlands, have restricted their planes from flying in Iranian airspace as a result of the crash. We don't know. Obviously, my first thought goes out to those affected. Anytime you see something like this, it's gut-wrenching. But there are implications for Boeing as well. The new CEO is going to have to address it.
Hill: When you look at Boeing's stock, which is close to a two-year low, I don't know, I feel like there are still so many questions that it's not even something I want to put on my watch list, even though I completely understand that a reasonable outcome for this business -- and therefore for this stock -- is that 2020 is the year all of these issues get resolved, the Max gets back online, orders start bumping up, and in the next five years, this is a stock that's up 50% to 70%.
Mann: Yeah, I hope it doesn't sound too crass to say that passenger deaths are a part of the business of making airliners. Airplanes do something that is bending the laws of physics, and occasionally physics wins. But given what happened with the 737 Max, they have billions of dollars of potential liability in suits from passengers, because it does seem like -- and I'm not making a legal judgment here -- there's a case to be made that there was malfeasance or misfeasance, or something of that nature, on the part of Boeing.
Boeing is still one-half of a duopoly. And in the long term, I think that the stock is probably a pretty good bargain where it is here. But there are going to be plenty of questions in the near term.
Hill: A couple of announcements from Luckin Coffee, based in China. First, Luckin announced a secondary offering of stock, more than 7 million shares. Luckin also announced it is expanding into vending machines to increase its market share in China. That appears to be the announcement that's driving the stock today, because shares of Luckin are up about 6%.
Mann: Luckin is a really, really interesting company. Having spent as much time in China and places where Starbucks has a pretty good footprint, I've always thought that there was room for a company to come in and to price its coffee more in line with the incomes of the local market. That's what Luckin has done. It has grown like wildfire. 7,000-plus outlets. And the outlets aren't the same as you would consider a Starbucks store. It's anything from a tiny pop-up to a vending machine. They have done things very, very efficiently and very intelligently.
Hill: What could a move into vending machines do for their revenue? Beyond the broad announcement, I haven't seen numbers regarding how many machines they're looking at. Is this something that could become a nice, small addition to the business, and could, if it works out, bump up revenue by single digits or 10%? Or is this the kind of thing that could actually bump up revenue by somewhere in the neighborhood of 25%, 30%?
Mann: Vending machines are really interesting. It's a very interesting cultural study. I mean, obviously, Japan and China are two different cultures in two different markets. But Japan, especially; Korea is the same; really throughout Asia, you see a much higher density and a much higher credibility of vending machines than you do in the United States. You can buy most anything out of a vending machine throughout Asia. China is a little bit behind that curve, but certainly, there is a lot of hope that they will respond to those types of delivery and commerce markets as well through the form of vending machines. I don't know the answer there. But, a lot of Luckin's pop-ups, it's almost like they're already a vending machine plus a guy. [laughs] They're pretty simple and pretty cheap to stand up. So I think that they're simply taking another step toward automation. It'll be interesting to see.
Hill: Before we get to the economists, you were just in Australia with your family. How was the trip? Other than, certainly, you all made it back alive, which is great, because right before we started recording, you showed me a picture from one of the beaches you were at, where the warning signs included essentially, "Watch out for crocodiles."
Mann: Saltwater crocodiles.
Hill: Yeah, I didn't know that was a thing. For whatever reason, that escaped my knowledge, that crocodiles come in two forms, freshwater and saltwater. And really, if you think about it, that's all the water.
Mann: [laughs] That's right. Yeah, Australia's wildlife reputation for being willing to kill you in a second, a lot of people think of sharks being in the water in Australia, and that being a big issue.
Hill: And they are.
Mann: They are. They're not the super scary things. It's really the saltwater crocodiles, which have been known to explode out of the water and grab people on beaches. To me, that's terrifying. So, the entire time that we were there, I kept a healthy distance from the beach. I understand probabilities, I just am not really that interested in dying in that way.
Hill: Say what you want about sharks, they tend to stay in the water. They don't come out of the water.
Mann: They are mostly in the water. They don't jump up on shore as often as you might think. Australia was fantastic. We were there during the backdrop of enormous fires.
Hill: Horrific fires.
Mann: Horrific. I will say that -- I say this a little bit gently, because I don't want to minimize what's happening there. But Australia is the size of the United States, and the area that's being affected by the fires is a tiny percentage of the country. The entire country isn't on fire now. Because it's such a big country. A small percentage is still a huge amount of land, and it is a tragedy, and it's very sad and I've been looking for ways to contribute, to help. But, we didn't see that much from the fires when we were there.
Hill: You pointed out something yesterday. Ben Castleman, who some listeners may be familiar with, a business writer from the New York Times --
Mann: Fantastic writer.
Hill: -- tweeted something out about how, when you're talking about a group of animals, there's usually a colorful word.
Mann: What they call the collective noun.
Hill: The collective noun. So, school of fish. And so, Ben Castleman tweeted, "Fill in the blank. A pod of whales, a murder of crows, a _____ of economists." And I don't know what response he was expecting, but it was certainly bigger --
Mann: He got 2,000 responses and some of them were unbelievable. And I have to say, I am completely fascinated, have always been, by the collective nouns. For example, I love the fact that a collection of lobsters is called a risk of lobsters.
Hill: Both claws.
Mann: Some of the answers that he got were fantastic. So he got "an academic conference of economists." "A bubble of economists." "A disagreement of economists," which is dark.
Hill: A confusion of economists.
Mann: [laughs] What do you have?
Hill: I think if I were voting, I would have voted for a bubble, just because, I don't know, that just seems to fit. [laughs] But, the overwhelming -- I'm sorry for anyone who's listening who actually is an economist, because unfortunately, the winner by a pretty wide margin in the voting was "a dismal."
Mann: Yeah, a dismal of economists. Since it's called the dismal science, yeah, it makes some sense. That wasn't my favorite. According to James Lipton, the guy who wrote a beautiful book called An Exaltation of Larks, the real answer is a recession of economists.
Hill: Nice. I don't think the hole I went down this morning on collective nouns was as deep as the hole you went down, but I did learn that there are different designations for different fish. A school of fish, I think most of us heard that when we were growing up. I didn't realize that when it comes to rainbow fish, the collective noun is a party. A party of rainbow fish. That feels right to me.
Mann: You know what sharks are?
Mann: A shiver of sharks.
Hill: A congregation of alligators?
Mann: A parliament of owls. We could be here all day, my friends!
Hill: We're not going to be here. We're going to give people back their time. Bill Mann, always good talking to you. Thanks for being here!
Mann: Thanks, 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'll 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 next time.