In this episode of MarketFoolery, host Chris Hill chats with Motley Fool Asset Management's Bill Barker about some market news. Apple's (NASDAQ:AAPL) earnings report must have been everything the market wanted and more, because the company's stock jumped from all-time highs to new all-time highs. McDonald's (NYSE:MCD) and Starbucks' (NASDAQ:SBUX) reports were a little more muted, given how the coronavirus is hitting them significantly harder -- but probably not too hard in the long term. And, long-beleaguered L Brands (NYSE:LB) popped on news that it's getting a new CEO -- hopefully one that can turn around Victoria's Secret without hurting the money-making Bath & Body Works segment. Tune in to hear more.
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This video was recorded on Jan. 29, 2020.
Chris Hill: It's Wednesday, January 29. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Mr. Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: Earnings season is in full swing. We've got McDonald's, we've got Starbucks. We have a longtime CEO -- emphasis on longtime -- reportedly leaving the company that he founded. We will get to all of those, but we have to start with Apple, because Apple's first quarter, which is the holiday quarter, was everything you would want it to be if you're an Apple shareholder. Profits and revenue came in higher than expected. iPhone sales, $56 billion worth of iPhone sales.
Barker: Yeah, this is the quintessential beat-and-raise quarter, which Apple probably needed in terms of the stock valuation. It was trading at all-time highs, and now is at a new all-time high by a little bit more. So, it fulfilled very high expectations. And the question that probably will be bandied around -- we'll not spend too much time on this -- is, is the valuation justified at this point?
Hill: Yeah. We'll get to the stock in a second. But, the iPhone sales rightfully so getting the headlines. What is the Other Products category -- that's the official name that Apple gives it, the Other Products -- Apple Watch, AirPods, Beats headphones, $10 billion worth of sales?
Barker: Yeah, you can split up the various segments of Apple and get a number of extremely large companies.
Hill: I was going to say, if you just spin off the other products. You'd have maybe not a top 100 company in terms of market cap, but certainly top 200.
Barker: Certainly, if you were a Fortune 500 or S&P 500 company, how many could you get out of Apple there. That work must have been done a few times. The pile of cash is one of them, at over $200 billion right now. One of the more dominant companies in history is Apple's pile of cash.
Hill: [laughs] Trades under the ticker PLCS.
Barker: But in terms of the actual business, yeah, they've got the various moving parts. Wearables, I guess, and home, and that being the fastest growing part today. Expectations for that are the highest of the various things. I think that the iPad and Mac sales were a little below expectations. There would have been a time where that would have been a big problem. But today is not that time. iPhone is still the dominant part of the business, and really got the job done, especially in China.
Hill: So, what about the stock? Actually, before we wrap up on the stock, worth mentioning, and this is something we'll return to a couple of times today, Tim Cook did talk about China. I think it most notably showed up in the guidance that they gave for Q2. The range of guidance was wider than they normally give. That was Tim Cook and his team's nod toward the uncertainty in China, and rightfully so.
Barker: Yeah, a bit of uncertainty both as to what the purchasing patterns will be there, especially over a quarter. Really, if you're looking at Apple over a one-quarter timeframe, you're probably missing a lot of story there. But, possibly benefiting a little bit from the move to do some of the manufacturing outside of China. Yeah, this, like many other companies, has to talk about what the China effect is going to be, and is largely entering with a, "Over the short term, we really don't know. Over the long term, probably not much of a problem."
Hill: Apple's stock has more than doubled over the past year. As you said, it's at an all-time high. As strong as this company is, this really doesn't seem like the day to buy shares if you don't own shares.
Barker: Going into today, it moved up over the last six months from about 17X earnings over the next 12 months to 24X earnings over the next 12 months. The next 12 months earnings are always a little harder to weigh than the actual trailing 12 months. So, they're looking at good earnings in the next 12 months, and things like China might be more of a headwind than we know today. And, giving them a much higher multiple on that positive future than was being done six months ago. So, yeah, the risk here is that the stock trades a little bit more like the stock usually trades, and at some point in the future, it probably will.
Hill: Shares of McDonald's up a little bit this morning after a good fourth quarter report. McDonald's profits were a little higher than expected. Global same-store sales were up nearly 6%. Another company dealing with uncertainty in China in the future. In the present, McDonald's closed a few hundred locations. But that's a tiny fraction of the number of locations McDonald's has around the world.
Barker: Yeah. There's certainly been a time when McDonald's was looked at negatively for not having done as much expansion into China as, say, Yum! Brands, which got bigger there faster, earlier than McDonald's. But today, that doesn't look like as much of a problem. They have to give the same answer today that others are giving. "We don't really know. We're taking care of our employees. We don't know." I think that for McDonald's, it's a more permanent hit to actual cash in the bank in that if you don't eat a McDonald's, you're not going to eat more there later, hopefully. Whereas, if you don't go out and buy your iPhone today, and you want to, you're going to buy in a month or two or something like that. So, I think the phones will eventually be built and manufactured and sold. McDonald's, when they're closed for business, they don't make that up later.
That said, it was another good quarter. I think they have highlighted that U.S. sales and traffic is what they're most focused on. I think that is going well. Getting U.S. guest count to positive is our number one priority, new CEO said in the call. They're getting people in.
Hill: They are, although I get why it's a priority. Even though we see the positive comps, and they're able to boost that ticket for 2019, they did see a slight decline in traffic. You mentioned the new CEO. I think that's also worth highlighting for McDonald's.
Barker: We're referring to him as the new CEO because his name is harder to pronounce than Smith. I'm going to let you take a crack at it. You'll probably get it right, but I'm not 100% sure that I'll pronounce it perfectly, because it is not Smith, which is, I think, the only name I can confidently get right all the time.
Hill: Chris Kempinski is the new CEO.
Barker: I think you're right.
Hill: Yeah, I wrote it down phonetically. But, worth pointing out that, they put up these numbers, this is a huge company, and they put up these numbers when, in the middle of the quarter, Steve Easterbrook, who had been, from a business standpoint, a successful CEO, and certainly from a stock standpoint, and he left suddenly and immediately. And credit to Kempinski and his lieutenants for having no time to ramp up as CEO and pulling off this type of quarter. We'll see if he can handle it just as smoothly for the next couple of quarters.
Barker: And there is a tendency to give, probably, in my estimation, too much credit to a CEO, both positively and negatively at times. We'll see whether McDonald's as an operation owes as much to Easterbrook as would have been thought the case at this time last year. He certainly did a great job and then they're in a good position. Right now, what they're looking at is more competition from places on breakfast, which McDonald's got to early, while giving more competition to the chicken sandwich phenomenon that Popeyes got to earlier than McDonald's. So, they're rolling out a couple of new chicken sandwiches, and they are, I think, expecting more competition from Wendy's in the breakfast category. So, a little bit of getting into some competitions, on both sides, good and bad.
Hill: From a headline standpoint, Starbucks' first quarter report kind of similar to McDonald's, in the sense that profits came in higher than expected, they put up global same-store sales growth of 5%. That was, I think, about 0.5% higher than was expected. And yet shares of Starbucks down a couple percentage points. Maybe they're being more aggressive with their guidance with respect to China, but if they are, it's probably because they need to be.
Barker: Yeah, we're three for three now on China being a big part of today's stories. It is their fastest-growing and second-largest market, and it's a major, major, major contributor to the top and bottom line. Again, when they're shutting down stores, which they're doing, closing, they are losing that money, that cash flow, and they're not going to make it back, despite our recommendation that if you have missed some coffee, go ahead and drink more the next day to make sure that you're getting all the health benefits that you can. I mean, not to make light of the situation. But, one thing, listening to the conference call, I felt like, a little bit -- I thought the CEO did a very good job of going on again and again about the partners -- what other places call employees, Starbucks calls partners -- and that Starbucks' success was all attributable to the partners and special relationships and all that. And I'm going through, as you have, and will again, the college experience. And my feeling going to every single college and hearing their spiel is, what makes that place special is the people.
And got a little bit of that vibe, listening to the conference call, which you don't typically get. There are many CEOs that talk about their great employees, but Starbucks is definitely a leader in that category.
Hill: I agree with that. But, I referenced this the other day, that I think that how companies doing business in China provide guidance in their earnings report this quarter is something that bears watching more closely than usual. And as a Starbucks shareholder, I was happy with the guidance that they gave, the clarity. You mentioned Kevin Johnson, the CEO. Also Patrick Grismer, the CFO. Just, being very clear with analysts about China, about closings, basically saying -- to the point that Kempinski made with McDonald's, "Look, we're going to update our guidance for the current quarter and the fiscal year as soon as we possibly can." And they're also dealing in an environment where the state government of China may not necessarily be giving them all the information they want. That is a very real possibility. I think that's to be respected.
Barker: Yeah. That would be consistent with every bit of information that probably comes from the Chinese government. But I think on the whole, they had a great quarter, and in terms of their guidance, they didn't change their previous guidance. On the conference call, pointed out, "We would have been raising the guidance if not for China." There was a question, "How much?" He was like, "I'm not going to answer that, but I'll just say that we're able to maintain our guidance because of the good start to the first quarter and how well things are going outside of China. And we still think we'll hit that guidance. And it would have been possible to raise it, but it's not possible to raise it today." I think that is putting a cap on what the ceiling for this year is likely to be, but it's a pretty strong floor.
Hill: It is. And I think if Starbucks is a stock you don't own and it's on your watch list, you're probably hoping that this coronavirus thing goes on for another few weeks.
Barker: You're a bad person then, aren't you? What kind of awful people are you describing here?
Hill: I'm not saying I want the death count to rise. I'm not saying that people --
Barker: It sounded like that to me. You're saying other people think that way?
Hill: I'm saying you want the uncertainty out there a little bit longer. You want a cure sooner rather than later. But, just the uncertainty, because as the old adage goes, the market hates uncertainty. If you like Starbucks at this price, you'll like it even more if it's $4 cheaper a share. And Kevin Johnson, the CEO, he was on CNBC this morning. And one of the things he said, and I hope he's right about this was, he pointed out, "Look, 12 months from now, this is the comp we get to work against. This is the same-store sales report that we're going to be competing against a year from now." And he's right about that.
Barker: Yeah. Long-term, obviously, it doesn't change much. And it's in a glorious business of serving something that is legal and addictive and beyond that -- we joke about this, but there is a lot of science. It has been studied. As something which is consumed as much as it is, I believe the second most consumed beverage behind water in the world, it is important that it be assessed as to whether it's healthy or not. And there are a lot of studies which we talk about, because we like to see that, given our respective amounts of coffee consumption. And the large weight is to their benefit. And that is a nice thing to have.
Hill: L Brands is the parent company of Victoria's Secret and Bath & Body Works, and shares are up 13% this morning and reports that Leslie Wexner, the founder and CEO, is in talks to step down. Mr. Wexner has been the CEO of L Brands for the past 57 years. He is 82 years old. And I think this speaks to the belief, certainly among some investors out there, and maybe private equity is part of this, that they look at Victoria's Secret and Bath & Body Works as brands that have some staying power, and if someone other than Mr. Wexner is running the company, then that's the value to be unlocked.
Barker: I have discussed that if I were to be accorded one superpower, it would be the ability to leave at the right time. I think you could do a lot with that. And that is not a superpower which he has, because this is a stock which was trading at $100 in 2015. It's going for $23 after going up 12% today. His superpower is longevity. Not strictly. Other people have lived longer than he has, although he's off to a good start. 57 years as CEO, that's rare company.
Hill: Incredibly rare company. Also, he's a billionaire, so let's not bemoaned any losses he must have taken --
Barker: He probably thought about it, [laughs], probably, a little bit. But, no, he's lived and worked a whole life. Let's not look at the last couple chapters from a stock perspective, which I was setting up.
Hill: You know what? He's in the Tres Commas club, he's fine.
Barker: Yeah. So, up 12% on the news. This is something that isn't entirely unexpected. I say that because I was reading a Deutsche Bank report today from about three weeks ago, which was speculating that now -- this was three weeks ago -- was the time to buy following as disastrous a quarter as L Brands had just reported, because this was highly likely to lead to increased movement in terms of his departure or some sort of breakup. Right now, Victoria's Secret is expected to lose money this year, which is remarkable. It's Bath & Body Works which is producing what little profits there are now. Victoria's Secret has just not gotten the trends right at all for a while now. That has led to 80% of the stock price being taken away.
Hill: Again, there's brand equity there. They're still a leader in their category. I was talking a bit with Abi Malin this morning, she follows the retail industry pretty closely. When I asked her, what do you think of this pop? She said, "Yeah, this makes perfect sense." Someone in there more dynamic, with more creative ideas, particularly with respect to Victoria's Secret. Yeah, that's absolutely why this is happening.
Barker: Yes. They are behind on a number of issues. If we get into talking about the specifics, I'm sure we'll trip over the wrong thing. But I was interested that, for instance, in the last quarter, there were declines in casual sleepwear, but there was growth in sexy sleep. And I didn't really know that was an industry category.
Hill: Look, Apple has their Other Products category. Victoria's Secret, makes sense that they would break out into different categories as well.
Barker: You've got your Sexy Sleep and your Casual Sleep. So, it's definitely not doing very well there. Bath & Body Works, they had a good Christmas season, perhaps in part because of the Unicorn Sprinkles candles.
Hill: You sent this to me right before we started recording. The profit margins, as we've discussed in the past, the profit margins on those $25 three-wick candles have got to be pretty amazing. And at this point, I think anything's fair game. As you said, Bath & Body Works is getting it done for the parent company. So, if you're in the candle division, yeah, you can pretty much throw whatever you want out there. Sweater Weather? Sure, absolutely.
Barker: We've mocked the candle names in the past, and I think we're about to again, but I went to the page, and the first page of candles -- and they've got hundreds of different scents -- all made sense. Like, I could say, "Oh, that's a smell I recognize," rather than Sweater Weather and Expensive Romantic Dinner or whatever. But, Unicorn Sprinkles, I don't know where to begin on what that might smell like.
Hill: I'm assuming like Sex Panther cologne; it has bits of real unicorn in it.
Barker: The fragrance -- I've looked it up -- "fluffy cotton candy," as opposed to your more hard cotton candy, I guess. "Rainbow candy drops and sugared lemon with essential oils." So, it smells like sugar. Which is what unicorns smell like.
Barker: So, they nailed it.
Hill: [laughs] Well done, Bath & Body Works. Well done! Bill Barker, thanks for being here!
Barker: Thanks for having me!
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.