In this episode of Market Foolery, Chris Hill and Motley Fool analyst Ron Gross look at the most recent business headlines. Abbott Labs (ABT 0.90%) posts strong results across segments. Medtronic (MDT 0.83%) shares ventilator specs. There is dividend news, there is an update on the airlines, a major player joins the videoconferencing space, and much more.
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This video was recorded on April 16, 2020.
Chris Hill: It's Thursday, April 16. Welcome to Market Foolery. I'm Chris Hill, with me today: Mr. Ron Gross. Good to see you, my friend.
Ron Gross: Always good to see you, even if it's just virtually, my friend.
Hill: [laughs] We've got a lot going on. We've got some dividend news. We've got an update on the airlines. We've got a new big player in the videoconferencing space, but we're going to start with some earnings.
Abbott Laboratories' first-quarter profits and revenue came in higher than expected. They withdrew guidance for the full fiscal year, and, yeah, this is one of those companies that I don't own, but I'm rooting for them, because they're one of the companies that has launched some COVID-19 tests.
Gross: I couldn't agree more. And, boy! the stock has held up wonderfully in a really tough environment, which I guess is not surprising due to the space they're in. As you mentioned, stock is actually up 8% year to date. So how's that for bucking a trend? It did kind of crater along with the rest of the market through that March 23 low, but since then, an amazing bounce back. Largely because, I think, as you mentioned, they have three diagnostics out there right now. The third one that was actually launched on April 15, which is the antibody test, which so many folks are waiting for. So many administrations, governments, state and federal are waiting for; to see if it will help us, theoretically, get back to something that resembles being normal.
But overall, a very strong report, sales up 2.5%. Interestingly, the diagnostics division was actually down 1%. So while COVID ramps up in that area, all the other tests they do for everything else were down as kind of COVID takes the spotlight away from everything else.
But pockets of strength in a few of their other divisions, nutritional products, especially. In pediatrics, as people kind of gathered and hoarded some things they thought they would need. That division is up 6%. Pharmaceutical sales up 5%.
So a pretty strong report overall. As you said, they suspended guidance. I'm not surprised. Most, if not all companies are. It's just too hard to see out two, three quarters ahead from here. But for Abbott Labs and Abbott Labs shareholders, and hopefully for the world, they're doing a good job.
Hill: What do you think it is going to look like when companies start to reintroduce guidance? Do you think it's going to be looking out for the full fiscal year, or do you think it's going to be, sort of, gradual on a quarter-by-quarter basis?
Gross: Usually, you'll get one quarter out and then a full year. I think companies are going to be a little apprehensive to go out anything more than one or two quarters. So maybe they'll hold off on full-year guidance or next-year guidance, which some companies do, and will take one quarter at a time. And even then, I will take those numbers with a grain of salt, because while I'm sure management will try their best to provide guidance, I just don't think it's going to be very accurate.
Hill: By the way, we talk about rooting for Abbott Labs. I think Medtronic is another one to root for. And it's a medical device company. I don't own shares of Medtronic, but if you're in the business of making things, your intellectual property is so valuable. And one of the devices that Medtronic makes is ventilators. And they came out recently, [laughs] and basically said, here you go, world, here's everything you need to know about our ventilators, here's how we make it, here are the specs, the design, the software, all the technical files. We're making it publicly available, because the world needs a ton of ventilators. And I just think that's admirable behavior on the part of Medtronic.
Gross: Agreed. Simply amazing. You know, at The Motley Fool, we talk a lot about living by the golden rule and having companies live by the golden rule, and I think this is certainly an example of putting the safety and the health of others ahead of, perhaps, your own bottom line. So really admirable.
Hill: The stock of the day appears to be Bed Bath & Beyond (BBBY 21.82%), because shares of Bed Bath & Beyond are up on a fourth-quarter report that was better than expected, even though same-store sales fell more than 5%.
Gross: Yeah, this is one I bought before the COVID crisis hit, when the stock was really low, and I thought Mark Tritton, coming out of Target to lead Bed Bath, had a fair chance of turning this around. And then, of course, COVID hit and all bets are off and the stock is down 70% year to date and all the stores are closed. They are unfortunately having to furlough a significant amount of their associates, some of their corporate associates. Executive team is taking salary cuts, as is the board. All of those things are certainly appropriate.
But in light of that, some relatively good news, and the stock is reacting. For the period, you saw sales up 6%, digital sales up 16%, excluding certain charges, they were profitable at 38% earnings per share, which is down significantly from this time last year when they were at $1.20 earnings per share. But their liquidity appears OK, $1.4 billion in cash. They drew down $230 million from their revolver. They postponed $150 million in capital expenditures.
All things you want to see management doing when the company is in trouble. You have to go into safety mode, survival mode. That's what they're doing, cutting costs to try to wait this out to once again open stores, and then Mark Tritton can get back to the business of, kind of, executing on the turnaround.
Hill: I'm in the same boat as you. In fact, I think we may have bought this stock on the same day and discovered a few days later that we had each bought shares of this thing when it had been knocked down. But yeah, I'm a big fan of Mark Tritton and hoping, not just because I own the stock, but just hoping he gets a chance to execute his turnaround plan sooner rather than later.
Hill: The latest data point for the airline industry comes courtesy of Oscar Munoz, who is the CEO of United Airlines (UAL 1.73%). United has cut 90% of its flights in May, because, and I'm quoting Munoz here, "We expect to fly fewer people during the entire month of May than we did on a single day in May of 2019." [laughs] That is stark and clear. That is one of those things that everyone can wrap their heads around.
Gross: Yeah, it's really amazing. Impossible to have predicted that certainly a month or two ago. The part of that letter that I took away also was where he said demand won't bounce back quickly. He expects demand to remain suppressed for the remainder of 2020 and into next year. So it won't be like flipping a switch where everyone all of a sudden starts traveling again. Social distancing will certainly be a big part of that. International travel will not bounce back anytime soon.
So you know, the airline is really counting on that stimulus package, which was -- actually some of the details were worked out earlier this week for $25 billion in payroll grants. And the airlines have to abide by certain things, such as no furloughing employees through Sept. 30 and limits on dividends and share repurchases and executive comp limitations, all very important things, things that I think the airline should be certainly willing to do for the, you know, $4 billion to $10 billion that each of the majors will receive.
Interestingly, that bailout package also gives the government warrants to acquire stock. So it looks like we will have some government ownership in some of our airlines, so that will be interesting to watch.
Hill: Yeah, but to your point about not like flipping a switch, it really does seem like with every passing day, we get more and more information about the airlines, it really does seem like it's not going to be a 6- to 12-months thing. It's going to be more, like two to five years in terms of getting close to the capacity they were at before.
Gross: Correct. And I mean, at these prices, it might be worth your waiting that out. I mean, if you can make 50%, 100%, 200%, but it takes several years, those are still great rates of return, you just got to make sure that this doesn't continue to go south and the balance sheets are OK, and the government stimulus is enough, and the government ownership of these companies make it a little bit more confusing. Something we have to keep a really close eye on.
Hill: We can add Costco (COST 0.94%) to the short list of companies that are actually increasing their dividend. Costco's quarterly dividend goes to $0.70 a share. This is an increase of nearly 8%. This is, kind of, in line with the increases that we saw with Johnson & Johnson and Procter & Gamble too.
Gross: Yes. It's a very strong signal coming out of Costco, whose stock is actually up 6%, 7% year to date, which is impressive. So along with Amazon and Walmart and perhaps Target, really going to be the winners here as part of the retail shakeout, and the retail shakeout is real. That for sure is coming, it's right upon us right now. But a very strong signal coming out of Costco.
In March, they announced a 9.6% increase in comp sales. Obviously, that's a huge number in a very difficult environment, and that's because they offer a value proposition and the merchandise that people want in good times and need in bad times. So it's one of those stocks that's really held up well. Wonderful business model, wonderful leadership and culture. I've owned it for years, and I assume I will own it for years to come.
Hill: Yeah, I mean, I know we've hit the Dividend Aristocrats, you know, those companies that have increased their dividend for 25 years or more. I think it's entirely possible that by the end of this year, someone is going to put together [laughs] a list of, I don't know, the COVID-19 dividend stocks. The companies that actually came out, increased their dividend at a time when everybody else was cutting theirs back or just, you know, keeping it right where it is.
Gross: And assuming that management isn't reckless, and they certainly aren't in this case, it is a true sign of balance sheet strength and cash flow-generating strength. And those two things combined, especially in an environment like we're in now, are very powerful.
Hill: Verizon (VZ 0.83%) is at the center of the deal of the day. Verizon is buying BlueJeans Network, which is a videoconferencing company. They're not Zoom, [laughs] creative name, but they're much more on the enterprise side. They're focused on businesses. I actually first learned about BlueJeans when I was reading, I think it was The New York Times story about Bob Iger getting more involved in sort of the day-to-day duties at Disney, and there was a reference to the fact that Disney uses BlueJeans Network as their videoconferencing.
But this is -- we don't have all the details, Ron. I saw one report that Verizon is paying less than $500 million for BlueJeans. When you consider that Verizon is a $230 billion company, it almost seems like pocket change for them.
Gross: Yeah, it's one of those little tuck-in acquisitions that we've been wondering if we're going to start to see here in this environment. And as you say, very short on details here, less than $500 million. BlueJeans, we really don't have much user data on them. We do think that they have some pretty significant customers, like Facebook, LinkedIn, Viacom, supposedly large banks, such as Goldman Sachs, Morgan Stanley, JPMorgan, use the technology as well.
So Verizon, obviously, sees a way to get into the space here. They see a way to incorporate it into their 5G strategy. I don't know what that means, necessarily, yet. We'll keep an eye on it. But as you say, not a huge acquisition for behemoth Verizon, a company that I own and that is a nice dividend payer as well. But it will be interesting to see how they get into the space and how big they want to be in the space and how long that takes.
Hill: You know, I was thinking that we've gotten a lot of questions about Zoom Video over the past six weeks or so, and understandably so, when you consider how Zoom has scaled up the security problems that they ran into, the performance of the stock. And I was thinking you could actually do pretty well with a videoconference basket of stocks, if you think of Zoom, Microsoft, what they're doing with Skype and Teams, Cisco, with WebEx and now you throw Verizon in there because they've got BlueJeans. I don't know, that seems like a pretty nice little basket of stocks.
Gross: Yeah, I agree. And I love the basket approach. You may not do as well as if you just picked the winner, which, let's face it, is hard to do. So if you attack it from a diversified approach to gain exposure to a particular sector that you feel relatively confident will be growing into the future for years to come, it's a great way to play a theme, as we do with things like War on Cash and I've done with the genetic engineering and gene therapies. It's a great way to invest.
Hill: Ron Gross, always good talking to you.
Gross: You too, Chris. Be safe.
Hill: As always, people on the program may have interests 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 next week.