Tech Giant Posts Amazing Earnings Growth

In this episode of Market Foolery, Chris Hill and Motley Fool analyst Bill Barker go through a couple of earnings reports. They look at the results of two tech behemoths, a consumer-goods company, and a fashion retailer. They discuss acquisition opportunities, stock buybacks, closed stores, online sales, one-time bumps, and how things might reopen here in the U.S.

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This video was recorded on April 30, 2020.

Chris Hill: It's Thursday, April 30. Welcome to Market Foolery. I'm Chris Hill. With me is Mr. Bill Barker. I'm a little jealous because I see you have coffee and I, rather stupidly, didn't make enough this morning.

Bill Barker: Well, look, hit "pause," go get yourself some. [laughs] Listeners will allow you that.

Hill: Listeners know that the last thing I need is more coffee. But earnings season continues to roll on. We've got some consumer goods we're going to talk about, we've got some fashion retail, but we're going to start with a couple of the tech behemoths, Microsoft (MSFT 1.62%) and Facebook (META 2.71%).

Microsoft's third-quarter profits and revenue came in higher than expected. The Azure Cloud segment was up 59%. And Facebook's first-quarter results were kind of similar to what we heard out of Alphabet, where the ad revenue fell in March, but Facebook executive saying "this stabilized for us in April." And of the two of them, Facebook is having the better day, the stock up about 5% or so.

Barker: Yeah, I mean, we're going to beat people over the head, I guess, with the story again and again, that certain large tech companies which are, you know, in the cloud or otherwise getting most of their revenues from online experiences. You look at their numbers and it just looks all good, it looks like they're in the middle of a pretty good year. Maybe if you break it down, the growth isn't quite as fast as you otherwise would've expected, but it's not much of a departure from what happy tech investors are used to. And Microsoft and Facebook found people are using their services plenty, and in some cases, more than ever.

Hill: Well, Microsoft is offering Teams, which is their answer to Slack, sort of, collaboration software. They're not charging for that, they're just throwing it in for free for businesses that already have the Office suite of products, but part of the results that we saw out of Microsoft was significant growth in their Teams offering, where by the end of the quarter, they were having 75 million people using it on a daily basis. And that's up from 44 million just last month. And that is significant growth.

Barker: That is significant growth. I wonder about the numbers for Teams utilization in a sense, because it's just, sort of, inflicted on everybody that -- you know. And it opens up, if you've got Office, whether you actually use it or not, but. So I think that the numbers are a little bit padded, but still, up 75% over the quarter is pretty dramatic.

And just looking at the money that Microsoft is making, they had GAAP earnings $1.71, up from $1.13 or $1.14; that's amazing growth.

Hill: You look at Microsoft and the cash that they have on the balance sheet. You know, one of the things we heard out of Alphabet on their conference call was a conservative nature, and that's how Ruth Porat, the CFO at Alphabet, operates. She's conservative by nature. But you've really got the sense that Alphabet is not going to be making the type of acquisitions that they've made historically, just because of all the uncertainty in the world. Do you think that probably holds true for Microsoft as well? Because, certainly, they've got the cash to go out and acquire smaller businesses if they want.

Barker: Yeah, I think that I would look at their past acquisition record and take that as a baseline for what you should expect going forward. I think that at the moment, share buybacks are, if not verboten love, frowned upon. And you don't want to just build cash up infinitely. You can increase your dividend, you can go back to share buybacks. On the other hand, all these companies, Microsoft, Facebook, they are trading within about 5% to 10% of all-time highs. So it's not like the shares are nearly as attractive an acquisition as they were a month, month and a half ago, and there are other companies that are not holding up nearly as well. So I think the acquisition opportunities are going to be plentiful.

Hill: Let's move on to Church & Dwight (CHD 0.78%), which is the parent company of ARM & HAMMER and other household goods. Rock-solid first quarter for Church & Dwight. Sales were up, profits were up, gross margins expanding. I mean, why isn't this stock higher today?

Barker: Well, OK. So we said that for the tech companies that you look at the numbers and if you don't know that something's going on, you might say "Everything looks good, this looks like the kind of growth I expect." Church & Dwight has got numbers which take explaining. The numbers do not look like the ones you expect.

And so, you've got sales growth of 11.5% for the quarter year over year and organic sales up 9.2%. That just doesn't happen for consumer products companies that have stable long-standing brands. Those tend to be more in the, sort of, 2%, 3%, 4% range. What you had was a tremendous amount of people stocking up in March, and that created a huge bump in sales and profitability. Earnings per share up over 30% year over year. So it's more of a one-time thing, and it's going to continue into April.

If you've been to the grocery store, there are a lot of things you can't buy at the end of the day, and the restocking is continuing into April, so that's going to be good numbers. But this is a nice cash flow injection for the company. It's already added cash. It drew down its revolver. So it's got plenty of cash to get through tough times, if they come up, but they are not coming up. This is in the right place. It's a consumer products company that makes cleaners, and that's exactly what people are stocking up on to historic levels right now.

Hill: But it sounds like you don't think this is sustainable for Church & Dwight past the next maybe quarter or two?

Barker: Have you bought any cleaners lately?

Hill: [laughs] I have, yes.

Barker: Do you expect to keep buying at the same pace you did in March and maybe April? Do you foresee continuing to acquire this amount of additional cleaning material going forward?

Hill: Not for years at a time. Maybe for the next couple of months, but, no, I'm hoping this is going to drop off at some point.

Barker: Yeah. Well, that's why Church & Dwight is not responding even more favorably to what is a good quarter. It's more of a one-time bump for the company, a nice one; it'll use the cash well, I'm sure. It is always looking for acquisitions, and it is going to be able to find something at a better price that has not held up as well during this time as a cleaner-producing company.

Hill: You know, we've talked about a couple of different ways companies can allocate capital. And one of the things I'm noticing this earnings season is, we're obviously getting a lot of companies that are saying, "We're withdrawing guidance for the rest of the year." And that makes perfect sense. But, if they are in lockstep on the guidance issue, I think one of the things that's interesting that we're starting to see is companies being divergent with what they are planning to do with their capital, over what time period.

This morning I saw an interview Chris Kempczinski, the CEO of McDonald's, was doing on CNBC. And they asked him about share buybacks. And he basically said, not only are we suspending them, don't even ask me about this for another year. [laughs] Come back to me in the middle of 2021, because we're not even considering share buybacks for another year. So it's just interesting to see how different companies approach cash and the different ways they can use it.

Barker: Yeah. I think that, as a political response, if you don't really want to buy back your shares, to say that as loudly as you can. And protect the dividend, that's another way to use cash, and McDonald's is -- you know, Church & Dwight has gone and increased its pile of cash, although it doesn't seem to need to have done so, but it's acted cautiously by doing so. McDonald's, if you suspend buybacks, you're just going to have more cash at the end of the year than you otherwise were planning to. And that's what companies are largely trying to do right now, is to be prepared for an uncertain future.

Hill: Let's move on to Tapestry (TPR -0.91%), which is the parent company of Coach, Kate Spade, and Stuart Weitzman. Tapestry's third-quarter loss was more than double the loss that Wall Street was expecting; and the stock went down somewhere in the neighborhood of 8% to 10% so far today. And, oh, boy! [laughs] this does not seem like a value-play opportunity at the moment.

Barker: No. So just as tech was doing well, and continues to do well, and the future looks bright, you know, retail outlets have been struggling for years. Store-based, mall-based companies are on the wrong side of history, and history just sped up. And Tapestry has got some online sales, but not enough. And all those closed stores are just a drag on -- you know, it's got rent to pay.

And they are beginning to see some stores around the world opening. I would recommend looking at their press release, which does a nice breakdown of geography and where stores are beginning to open and when they closed. So the only bright spot is probably China, where, as they point out in their press release, 90% of mainland stores were closed in early February, so much earlier than the experience here. And you can, sort of, use China as one data point for how things, you know, the timing of how things might reopen here.

As of mid-April, all stores in China were open for Tapestry, but they continue to see traffic muted. So think of that as -- I'm not predicting what will happen in the U.S. in different places, but that's one data point. You open stores, but you still don't see much traffic compared to what you had previously expected. People are not going to rush out to immediately shop in crowded places.

And they go through country by country and region by region where things are and when things closed. And, you know, the net result is not a promising-looking story for the time being.

Hill: Well, and this is not a luxury brand at the same level as Tiffany, but Coach and Kate Spade and Stuart Weitzman, these are nice things to have, they are not necessary things to have. So the drop that we're seeing today, I don't think this is the last time we're going to see this.

Barker: No, and I think it's just something that we've been seeing for a while, which is the weakness of companies that are store and mall based, and things just sped up. And I don't know where the light at the end of the tunnel is. Pretty soon you'll start hearing places talk about, you know, Christmas and not knowing what's going to happen with that, there's not going to be any guidance from any of these companies for a good long period of time. And they have to either be able to sell things better and better online or somehow control their costs for stores.

Hill: Bill Barker, good talking to you.

Barker: Good to talk to you.

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.