MasterCard Revises Guidance on the Back of Coronavirus

In this episode of Market Foolery, Chris Hill and Jason Moser go through the results of three recent earnings announcements.

• MasterCard (MA -0.07%) is getting a new CEO next year; the guys share their views on the present CEO, Ajay Banga, and the future CEO, Michael Miebach.
• Home Depot (HD -1.77%) posts light revenue, but it was overall a good quarter for the company. The DIY retailer also had its highest sales per square foot in company history.
• Shake Shack (SHAK -0.45%) had the slowest sales growth in a quarter since it went public. Jason has a note for you if you're interested in the stock.

Finally, in the Fool mailbag, what stocks should you go for if you're a young investor?

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 Feb. 25, 2020.

Chris Hill: It's Tuesday, February 25. Welcome to Market Foolery. I'm Chris Hill. With me in studio: Jason Moser. Thanks for being here.

Jason Moser: Thank you for having me.

Hill: We've got earnings from Home Depot and Shake Shack. We're going to dip into the Fool mailbag. We're going to start with a leadership change, and that is MasterCard getting a new CEO next year, January 1, 2021. Michael Miebach, who's the chief product pfficer, is going to become the CEO. And Ajay Banga, who's been CEO for the past decade, is going to be the executive chairman.

And the fact that shares of MasterCard are down 4% today, I think, have nothing to do with these announcements, just because Miebach has been there for a decade under Banga's leadership. This has been a phenomenal stock. He's been CEO for 10 years. Stock's returned more than 1,300% since then. This seems like a smooth leadership transition as you could possibly hope for if you're a shareholder.

Moser: Yeah, I totally agree. I am a shareholder, and to me, this is one of those things that we hope for. You like a clear succession plan laid out there. And the reasons are the reasons, you know, I mean, we don't know why Mr. Banga is stepping down from that role. I mean, it sounds like it's something that's in line with what he wants to do with his life, though. And so I think that the big question for me is going to be, it's going to be interesting is if Mr. Banga's views are also Mr. Miebach's views. And what I mean by that is, they've run this business to this point with a certain worldview.

And there is a really good article recently in the Financial Times, I think it was, that was a focus on Mr. Banga, and the title of the article was "MasterCard chief speaks out against nationalism and Facebook." [laughs] But it was a really good article, because it gave a lot of his opinions, his worldviews. Siloed payment systems are stupid. I mean, he's thinking, "Why everybody wants to try to build their own thing, it makes it fragmented and inefficient." He has big questions over Libra, Facebook's intentions, how it's going to make money. You know, MasterCard was part of that initial interest group and pulled out, along with a lot of other companies.

So just for me, it's going to be interesting to see, going forward, if their two views are compatible. Because if not, then you would expect to see some strategy changes over the course of the next, I would assume, at least decade, unless Mr. Miebach just doesn't really do a good job and has to step down. I don't anticipate that being the case; he's obviously very familiar with the business. But that really, for me, is the big question is, are their two views compatible? Because that'll dictate a lot of the strategy over the course of the coming decade.

Hill: So not that we're focused on the short term, but let's talk about why the stock is down today. Revised guidance regarding the potential impact of coronavirus. You're a shareholder. What did you think of it?

Moser: I mean, to me, it seems logical. What we're seeing at this point with coronaviruses is ultimately a global slowdown, and it's going to be hard to fully quantify. And I think a lot of companies are really just trying to get a grip on what quarter one is going to look like and what quarter two could potentially look like. So to me, you know that that only makes sense. If the global economy slows down, then that has a material impact on MasterCard's business, because they facilitate the movement of a lot of that money. But it doesn't impact the business itself; it's just a matter of slowing growth versus accelerating growth. And if we hit a period of slowing growth, because of this temporary albeit scary situation, then so be it, but it doesn't change my view on owning the business.

And this is certainly one where -- you know, Peter Lynch always says, "The best stock to buy is probably one you already own." I think MasterCard falls into that camp. I mean, I think if you saw this company get shellacked on greater market concerns, it's one that I would certainly consider adding to.

Hill: We'll get to slowing growth when we talk about Shake Shack, but let's hit Home Depot first.

Moser: That was a nice little gut shot right there. I like that.

Hill: [laughs] I'm not trying to take shots at Shake Shack; we will get to that. But Home Depot's fourth-quarter profits look good, their revenue was a little light. Given the revenue being light and the market environment this week, and the fact that I don't own Home Depot yet ... I'm not going to lie, I was kind of hoping that this stock was going to get smacked in the mouth today, and it is not, it's up about 1%, 2%. So it's on my list, I'll buy it at some point, but I really was kind of hoping -- once I saw the report coming out, I was like, "Oh, maybe this can be, like -- I mean, gosh, 8% down?"

Moser: [laughs] This has become our Visa and MasterCard. We sat there for two, three years talking about Visa, but now we're going to be talking about Home Depot every quarter. I too do not own shares and look at this company and ask myself every quarter, "Why don't I own shares?" And I haven't come up with a good answer yet, Chris.

I mean, to your point, it was a good quarter. And I think it's important to note too that the revenue appeared a little bit light, but that was also based on an extra week last year. And so actually, if you look at it, they did grow modestly from the previous year. And there was strength in the average ticket. The average ticket was up 4.4%, very modest growth in transactions, just under 1%, but that led to a good earnings report, good earnings-per-share figures for the year at $10.25 versus the $10.03 they predicted just a quarter ago.

So this is a company that just keeps on doing what they say they're going to do. They play in a really attractive market. And I'll tell you, one thing they continue to do quarter in and quarter out is these big-ticket comp transactions. These big tickets are over $1,000. They represent 20% of the company's U.S. sales. Growth there was up double-digits, again, for the quarter. Now, double digits could mean just 10%, but regardless, some of those big-ticket items, they seem to be really good at doing it. Sales per retail square foot, $455 for the year, highest in the company's history.

It's really hard to knock what they're doing. And so, for me, it's finding the red flags. And going through the call, I was searching coronavirus in China. And, you know, I was a little bit surprised, there's not a big mention there. I mean, they talked about it very briefly in the context of the supply chain and in regard to the first quarter. They're like, "Hey, listen, most of our stuff, we've already got it here, it's already been shipped or it's en route." But they did notify, they did say, this is a fluid situation, it's changing day by day, and they are looking at Q2 and Q3 and Q4 and seeing what the potential effects may be, but for now, it seems like the business is still firing on all cylinders. Grew the dividend again. I mean, this thing pays $6 a year just to hold the stock. I mean, it's really hard to argue against that at this point.

Hill: It is. And to go back to something you had said about management and their ability to deliver. I think one of the reasons the stock -- or I should say, one more reason -- the stock is not falling today is, despite the fact that management talked about, this is going to be a big year for Home Depot in terms of the money they're investing in the business, with other businesses and other management teams, that would scare some investors off. But I think this management team has proven they're going to invest it wisely. And I think that's, again, one more reason why people have confidence in it.

Moser: Yeah, I think so. I mean, they're still calling for $16 billion in operating profit for the year, which is modest growth from a year ago, but it's growth nonetheless. And when you talk about the money that they're investing, I think it's reasonable to look at the next five years and think that those investments will start paying off. They've been investing a lot in their professional customer. I mean, the big focus on the do-it-yourselfers like you and me, but they also have this tremendous pro business, and they are building out an entirely new and separate experience for those pro customers to be able to come in there and do their work and get the stuff that they need. And I think that's only going to help their cause as time goes on.

Another interesting data point I saw, just going back to the dividend for a second. They raised the dividend this year, 10% increase in the quarterly dividend; that's 11 consecutive years with dividend increase. Which is kind of surprising to me, in that I thought it would have been more. But, you know, we talk about Dividend Aristocrats a lot, Lowe's is on that list, Home Depot is clearly not. And they're not going to be for a while, but I think it's also reasonable to assume that they'll continue raising that dividend for the foreseeable future, because I'd imagine they want to be on that list too at some point.

Hill: At some point, but it's a nice reminder that at one point in time, Bob Nardelli was running this company.

Moser: [laughs] Yeah. Bob Nardelli is --

Hill: [laughs] The Dark Ages.

Shares of Shake Shack are down 14% today. Fourth-quarter profits came in much higher than expected. And if that were the only thing that mattered, the stock would probably be up or at least flat, but same-store sales were down 3.5%. Sales grew 21%, but that's lower than expected. That's actually the slowest sales growth they've had in a quarter since they went public. So I don't know, how concerned should people be about this business?

Moser: Well, first and foremost, thank you for not saying same-shack sales, because that's a tongue twister, I think, that just doesn't really work well for podcasts. I wish they would just abandon it altogether.

Hill: It's a little too cute.

Moser: It is a little -- [laughs] yeah, well said. So we have a little connection with Shake Shack, and we went and we taped a Market Foolery on location one day in New York City. It was a lot of fun, they were super to us, we got some great food. That said, it's always confounded me as to why the stock has done so well for so long. I mean, it's a burger joint, right? Not that there's anything wrong with that, but it's a burger joint. They make pretty good food, but, I mean, I don't know that this is something that necessarily has the growth potential of something like maybe a Chipotle. I mean, honestly, you look at the stock, and before today, it was trading at well over 100 times earnings, which makes Chipotle look like a value play today.

But to your point, the numbers were not really very good. Traffic was down close to 5.5%. Comps down. They've seen a slowdown of delivery. And what's more is the delivery question for them, I mean as they integrate more with Grubhub, in this relationship that they form with Grubhub, it's going to cause a lot of lumpiness, it sounds like, this year as well. It's something that they can't necessarily quantify at this point in the year. So I think you probably see this stock pull back some more as time goes on, because you do have to wonder -- they just opened up the most restaurants in one year that they've ever opened up, and whether it was a direct result or an indirect result, traffic was down.

And so, then this becomes a demand story. You start asking yourself, "How much demand is really there?" I do wonder, if maybe this isn't kind of like a Bojangles' story, in that they are a good restaurant with a loyal cult following, but maybe they can't quite fully grow out of that East Coast footprint that they currently reside in. I mean, that's where they were born. It's a New York story.

And it seems like all of the bulls that I know [...] up in New York anyway, so maybe we're missing something there. But, yeah, I don't know that I have a lot of optimism for this company, at least in the near term. The stock just seems just so outrageously priced based on the fundamentals.

Hill: Well, and to your point about the footprint. You can have a quarter like this where same-store sales are down 3.5%, if you've got a massive, national -- you know, if Starbucks put up that kind of quarter or McDonald's for that matter. I mean, in McDonald's case, that would be pretty bad, but it's a national thing. Part of Shake Shack's job over the next decade, I would argue and I think you would agree, is that they need to prove they can grow nationally. And when they're putting up negative comps on a regional basis, that is the opposite argument. You guys should just stick to where you are and you'll do fine there, but don't go West of the Mississippi.

Moser: And I think that you may be on to something there. I mean, it does feel like burgers are very regional. And you have one part of the country where it's all about Whataburger, and then you've got Smashburger and you've got In-N-Out Burger and you've got Five Guys and you've got Shake Shack. So they're all good in their own right, but they can't all just keep growing to the moon.

And, yeah, they've got -- like what? I don't know -- 250 -- something like that -- stores. They're not going to be able -- maybe it's more than that, maybe it's like 380, I don't know, it's somewhere in that general neighborhood. But the point is, I think that while they have robust growth aspirations, I think if you think this is going to be a Chipotle-like story where they have 2,500 stores, I don't know, man, to me that just sounds really optimistic; I would bet against that.

Another thing to note just for this coming year. If you are interested in the stock, keep this in mind, because you may find a better entry point, because the revenue guidance that they laid out for the year also includes this temporary closure of two New York City Shake Shack's, and that matters, because those are two of their busy stores. And so just keep that in mind that -- I mean, the market is thinking, hey, that's going to be something else that's going to weigh on the business in the near term, but that will go away. There would be a catalyst in the back-half of the year that could play out in investors' favor; that remains to be seen, but it's worth noting regardless, because those two stores are going to be closed for a combined 14 to 18 weeks, and that's going to be a lot of money that they lose in sales from that.

Hill: Our mailing address is 2000 Duke St., Alexandria, VA. We got a very nice letter from Daniel Good in Ireland. And he included a couple of magnets, which was very nice, so thank you for that, Daniel. And a very kind letter with some very nice thoughts. But he had a couple of questions I thought we could hit real quick before we wrap up.

First, he asked, "What are your thoughts on the European market for 2020 and in general? I know you mainly focus on U.S. equities. However, do either of you have holdings or would you recommend it as a place to diversify your portfolio other than emerging markets and U.S. stocks?"

I really like this question, because it's a reminder that we do tend to talk in terms of those two groups, like, there's U.S. stocks and then there's emerging markets. And, you know, there are opportunities in Europe, but to be perfectly honest, I don't really think of them as an investor. I tend to stick close to home when I'm looking at my investment opportunities.

Moser: Yeah, I mean, I do too. I view investing as more of a big picture, you know, why focus on specific markets when you can focus on businesses that cover many markets? I mean, the world is a lot smaller today thanks to technology and these intricate supply chains and so forth. So for me, you know, we don't necessarily have to say, well, I've got U.S. exposure, now I need European exposure and emerging markets exposure. Because, frankly, I've already got a healthy amount of European exposure in my own portfolio, but they aren't necessarily European domiciled companies either.

I'll use a few examples here, Autodesk is one, and that's in the business of AutoCAD software, that almost half of their revenue comes from their Europe, Middle East and Africa segment. Ansys is another one that's in simulation software. Very strong presence in Germany and France; generate a lot of sales from Europe. And another company, PTC, with 35% or so of their revenue coming from Europe, with a big focus on Germany as well.

And those are all software companies that are focused on that autoCAD and simulation-style software offerings. PTC and Ansys have actually partnered up. And Autodesk, I think a lot of people out there are familiar with that name.

So those are just three examples of software companies that -- yeah, they're U.S. investments, but they're really also European investments. You get a nice exposure to the European economy there. You look at big tech, things like Facebook, Google, Amazon. We love those companies here. I think it's fair to assume that they're going to be under even more of a microscope in Europe here in the coming years. And maybe that's a good thing, maybe that's a bad thing. But I mean, those are businesses that, of course, give you a lot of exposure to the European economy as well. So looking for pure plays there, nothing wrong with that. I don't necessarily view investing that way anymore, because we don't have to.

China, very much the same thing. I mean, I don't really look for pure-play China investment ideas, I just look for good businesses with a healthy exposure to the Chinese economy, and it seems to be working out.

Hill: Daniel's a university student, and he also writes, "Since I'm 21 years old, I don't know whether it's better to invest in dividend stocks like Pfizer or growth stocks like Virgin Galactic?

Moser: Well, Daniel. [laughs]

Hill: [laughs] But this reminds me of the most recent YouTube Live Q&A that we did. You, me, and Bill Mann. We were talking about blue chip companies, not this specific in terms of Pfizer and Virgin Galactic, but we got a similar question in terms of, sort of, to what extent should you allocate your portfolio toward growth, particularly if you're a younger investor, or dividend? And I look at this question and think, ideally, you want to have at least somewhere between 10 and 20 stocks in your portfolio, and there's room for both.

Moser: I want it all, right? It is a very interesting dilemma, because we talk about when you're younger and you have all of this time in front of you. And you can take on more risk. And a lot of times, that risk is in the form of growth-type stocks, maybe businesses that are less proven, less profitable. They're not going to be dividend payers. By the same token, the whole idea behind dividend payers is you want to hold on to those things as long as you can. So 10, 20, 30, 40 years, if you can. I mean, Home Depot, I think, is a great example. If you're owning Home Depot and they're giving you $6 a year just to hang on to that share. Well, you can do the math and see over the course of a decade, two decades, how meaningful that can be.

And so, I mean, the answer, as you said, is you want them both. I think it's just looking to find a healthy mix and not really committing to one or the other. But recognizing the fact that, while, Daniel, you're younger and you're in that "grow your wealth" stage of life, eventually you'll get to that "protect your wealth" stage of life. And it's really neat, when you get to protecting your wealth, to already have that more or less unassailable just bedrock dividend core in your portfolio that has already been so hard at work for you. Because, I mean, eventually, you hang on to one of those things long enough, I mean, in theory, your cost basis becomes zero, and that's pretty sweet. But, yeah, I don't think it's an either/or, I think it is both, and I think it's just really finding that healthy mix and taking advantage of those opportunities when you can.

Hill: Well, and as you and Bill Mann and I talked about on YouTube, fortunately for all investors, those dividend stocks are a lot more attractive now. You certainly have a lot more options, and the businesses appear to be more dynamic than when you and I were Daniel's age. And it's, like, yeah, they're blue chip, they're dividend payers, it's IBM, it's not going anywhere, it's safe, it's steady, but you know. Guess what? Apple is a dividend stock, and look how that's done over the last couple of years.

Moser: It does feel like you don't have to sacrifice capital gains for dividends anymore. I mean, that used to be, I think, the perception was that, if you're going to hold a dividend stock, well, the stock price is not going to really do much, but you get that dividend check every quarter. It does feel like dividend payers are more dynamic, and you don't have to necessarily sacrifice capital gains anymore. Microsoft, I think another great example.

And a lot of these companies, Microsoft included -- again, we go back to that Dividend Aristocrat list -- a lot of these companies want to be on that list, and the only way to get there is to keep growing that dividend year in and year out for at least 25 consecutive years. So you find a lot of those companies that are close to that, and there are a lot of good ones from which to choose, for sure.

Hill: Jason Moser, thanks for being here.

Moser: 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.