In this episode of MarketFoolery, host Chris Hill chats with analyst Emily Flippen about the latest quarterly results and news from Wall Street. They talk about why Moderna (MRNA -2.66%) is facing backlash from some quarters around its COVID-related announcements. Another healthcare provider posted robust earnings, beating market expectations. Also, Emily shares a stock to keep on your watch list.
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This video was recorded on July 15, 2020.
Chris Hill: It's Wednesday, July 15th. Welcome to MarketFoolery. I'm Chris Hill; with me today, the one and only, Emily Flippen. Good to see you.
Emily Flippen: Hey, good to see you again, Chris; it's been a while since I've been on MarketFoolery.
Hill: It has been far too long; that is my error. And so, for the people who have been writing in saying, "When is Emily going to get back on?", it's my fault. So, she's back on tonight. We're going to talk about healthcare, because we've got Dow component UnitedHealth out with their latest results. Emily is going to share the stock that she is watching this earnings season. We're going to start with the stock of the day, and that's Moderna, because Moderna's shares up in the neighborhood of 10%, 12% after the company said their COVID-19 vaccine candidate produced a robust response -- that's their word, "robust" -- in all 45 patients that were involved in an early study.
Encouraging news, Emily. I'm sure that's why we're seeing the reaction in the stock. I will point out that at the end of this month, Moderna is going to be doing a much bigger trial. They're going to start a trial with 30,000 people, so hopefully the results of that test are just as encouraging. But what did you make of this news?
Flippen: There is a lot to unpack here. This study with 45 patients, which to your point, saw a robust immune response in producing antibodies that could prevent or at least counter the spread of this new COVID. It started to come out, and it's a phase 1 study, so don't read too much into it, but it is promising not just for investors, but for humankind [laughs] that we may be making some progress on the fronts for creating a coronavirus vaccine.
But what's really important to remember with these earnings reports is that this is the first COVID vaccine to be tested in humans, so we're at a very early stage here, this is just a phase 1 study. The big dog is, as you mentioned, toward the end of July there's going to be likely some phase 3 tests moving forward where they're going to test this vaccine in upwards of 30,000 people. That's going to be a lot more informative for investors, and more importantly, for everybody [laughs] as to whether or not this vaccine really has the veracity to be the preventative measure that we've all been looking for.
Hill: One of the things we talk about, particularly around earnings season, is the way that companies, and in particular, executives at those companies choose to communicate. What do they say on conference calls, what do they say during the quarter, are they overly promotional? One of the things about Moderna is that this is a company that some have criticized for being overly promotional. Even this announcement this morning, there were some people I saw on Twitter; one or two I watched on CNBC who kind of took a shot at Moderna for making a little bit too much in their mind of this announcement.
Do you come down on either side of that when it comes to Moderna?
Flippen: Now, this is just my opinion, I can see people who will make that argument, because there is a lot of hype right now around COVID vaccines, but Moderna defended themselves against these claims. And I tend to agree with management, they said, we have an obligation to our shareholders to release information that could potentially move our stock price, we don't want to sit on this information because it's relevant for everybody that's investing in our company. So, they came out with this very limited study because they thought it was important for investors and consumers to be aware of.
And I respect that, it's important to note that, again, this is just a phase 1 study, so I understand the skepticism. You don't want to get a lot of press saying Moderna has an effective COVID vaccine, because that's simply not the case right now. But they are the first people to be testing this in humans right now, and the first results were promising. That's important information to let consumers and investors know.
Hill: Let's move on to UnitedHealth. Second-quarter profits came in much higher than expected for UnitedHealth. Although, speaking of communication, UnitedHealth seem to be very quick to point out that this is essentially a one-off, in their mind, due to deferred medical care. Which, I got to be honest, I hadn't even thought of something like that, but it makes sense when you think about the fact that so many medical offices have been closed, people, myself included, had medical appointments that were not emergency related, they were just, sort of, like general maintenance type of appointments that just, sort of, got pushed off as a result of that. What did you make of UnitedHealth's quarter?
Flippen: Well, your reasoning is correct. I don't want to understate what a beat this was. They beat by nearly 40% on their bottom line. They had earnings of over $7/share when they were expected to have earnings of just over $5/share, [laughs] so this is a huge beat but for exactly the reasons that you mentioned. Ultimately, they just weren't paying out premiums for people because people weren't going to the hospital, as you alluded to. The last place consumers or people wanted to be over the past few months is in a hospital. And that's understandable, because they're probably one of the likeliest places that you could contract this coronavirus. So, any elective procedures, people were pushing off down the road. And that obviously resulted in a lot more retained earnings for United healthcare this quarter. They were very up front with the fact they expect as people push off their medical care into next quarter, that next quarter they will have higher expenses. We'll see this revert back to the mean.
But I feel like the true story is really getting lost here. Yes, it was a great quarter in terms of their bottom-line beats, lots of healthcare concerns, but the real story, for me, has always been the Optum pharmacy business. And before, pre-pandemic, United healthcare came out and said, we expect Optum pharmacy, in 2020, to account for half of all of our operating earnings. This pharmacy business, that was really not meaningful to them only a few years back, is expected to be half of all their operating earnings this year. And we saw that trend in the growth of their pharmacy business continue this quarter. So, when I think about United healthcare moving forward, I just think it's so important for investors to always keep an eye out on that Optum pharmacy; don't get swayed by these deferred healthcare costs.
Hill: This was their second-quarter results, and I was a little struck by the fact that they maintained full-year guidance, that is not common [laughs] in this environment for -- I mean, usually we're seeing the opposite happening where companies are saying, don't ask us about guidance, we're not doing that. Were you surprised that they maintained the full-year guidance?
Flippen: Yes, because I think it's a risky move on their part, mostly because someone's giving them a free out to remove guidance. And if you're dramatically wrong on that guidance, in a really unpredictable scenario, then that can mean, potentially, really volatile reactions from investors and in your stock price at the market, but what's really interesting about United healthcare and why I kind of understand why they didn't redact those earnings expectations is the fact that United healthcare, if this pandemic continues, just looks better, for exactly the reasons that we saw this quarter, because people are putting off their healthcare expenses. So, they're keeping that full-year guidance, because even if things revert next quarter, and they have a poor quarter next quarter, it will likely even out to what their guidance was initially starting this year. But even with the expectation that things could be better if this pandemic extends, at least on their earnings front, I think it's a risky move.
I really don't know if I agree with the concept of providing really broad-ranging guidance in the first place, but doing it in the volatile times that we're living in today, even if it's to the upside, to me, just feels like unnecessary risk.
Hill: Yeah, that is one of those behind-closed-doors conversations that I would love [laughs] to watch a video of, because I have to believe there are people within UnitedHealth management who, to your point, were saying, "We don't need to do this, we have the out, it's a pandemic," you know -- not to be childish about it -- "but everyone's doing it, why are we going to [laughs] maintain guidance?"
Flippen: Yeah, and maybe I'm talking about risk aversion here, but I tend to think that, why would you put yourself in the position where the only thing you can do is worse than what you say, right? If you do worse than what your guidance is and you don't change that guidance during the pandemic, there's no way that's received well in the market. So, to me, it does feel like an unnecessary risk.
Hill: Earnings season really kicks into high gear later this month, really the last week. So, we're just at the beginning with the big banks reporting. What is a company you're going to be watching this earnings season and what within that company are you going to be watching?
Flippen: You know, I really want to keep the healthcare focus, because, you know, this whole MarketFoolery episode has been about healthcare, but I will divert, I'm actually going to be looking at Baidu (BIDU -2.74%). And that might sound really surprising to people, especially given what we're seeing right now in terms of the global pandemic, but the reasons why I'm looking at Baidu are not for any of the broad-reaching healthcare concerns, especially as they apply to China, but actually just thinking about how this company is going to handle the transition that's sitting in front of them, given the geopolitical concerns we've seen between the U.S. and China?
And why I'm looking at Baidu, in particular, is because Baidu, earlier this year, said they would consider delisting their stock from the Nasdaq. And while they eventually said they're not going to do that, the company is still considering pursuing a secondary listing in Hong Kong. So, I want to see what management says in the next quarter, if anything at all, about their plans to potentially list in a secondary listing in Hong Kong. This could be the beginning of a broader-reaching trend of many foreign companies, especially Chinese companies choosing to list on foreign exchanges, especially those in China.
And the reason why Baidu CEO Robin Li wants to do this is, he believes that the valuations for Chinese companies on the U.S. market are not up to snuff, they think they can get more money if they're listed elsewhere.
Hill: Do you think there is more skepticism today than, say, six months ago about Chinese companies in general? And I'm thinking part of this is macro with the ongoing trade war with China, and part of it is micro examples like the Luckin Coffee accounting scandal, which, you know, when Wirecard had their accounting scandal in Germany, [laughs] I joked on the show, like, yeah, it would be interesting to see if everyone comes out and starts saying, "Well, we shouldn't invest in German companies." Like, you know, that's not going to happen, but people look at what happened at Luckin Coffee and say, "Well, that confirms my suspicions about Chinese companies, which is, you just can't trust the accounting."
Flippen: History has really not been kind to Chinese companies. I think part of the skepticism around the Chinese companies that are listed in the U.S. right now, including what we saw with Luckin Coffee, was that this is not the first time this has happened. You know, for investors who are much older than I, they have lived through periods of times where companies that were listed from China in the U.S. were undoubtedly frauds. I mean, just aware of the fact that they were fraudulently reporting, trying to get investor money with very little real businesses. So, there's a certain level of skepticism that's applied to Chinese companies, just given the volatile history of Chinese companies listed in the U.S., but I definitely think that just over the last six months we've seen the investor mindset really shift with these companies, part of it's the trade war, but I really think it's a political tensions between China and the U.S. right now, concerns over human rights abuses, concerns over technology, even TikTok potentially stealing your data. These are the stories that catch everybody's attention, whether your investors are passive, active, or just a consumer, you're aware of what's going on right now between the U.S. and China.
This does mean that you attach a higher risk premium to investing in Chinese companies than you may in U.S. companies, which would naturally result in those companies being "worth less on the U.S. markets than they may be in other markets." Ultimately, though, I tend to take the mindset of, as an investor, I want to have the option.
And while we do need to increase transparency, I think one of the worst things that we can do for U.S. investors is have potentially good companies, I'm thinking of companies, like, Baidu or Tencent or Alibaba, take their companies away from U.S. investors, re-list them on foreign exchanges, ultimately all that does is limit the options that you have as an investor.
Hill: Emily Flippen, always good talking to you. Thanks for being here.
Flippen: Thanks for having me.
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 MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.