In this episode of MarketFoolery, host Chris Hill chats with analyst Bill Mann about the latest financial reports and news from Wall Street. They talk about the recent Twitter (TWTR +0.00%) hack. A medical devices and consumer goods giant announced lower earnings, but bumped up its revenue guidance for the full year. And the largest oil and gas producer in California has filed for bankruptcy. Plus, Bill reveals a stock to watch as the earning season begins.
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This video was recorded on July 16, 2020.
Chris Hill: It's Thursday, July 16th, welcome to MarketFoolery. I'm Chris Hill, with me for the first time in a while, thank God! He's back, it's Bill Mann. Good to see you.
Bill Mann: I'm so glad to be back; I thought maybe you didn't love me anymore.
Hill: You've been anchoring the morning show on Fool Live. So, I'm cognizant of how busy your days are lately, but I'm glad to have you back. We've got the latest on the oil and gas industry, we've got earnings from a health industry giant, but we're going to start with Twitter.
Because even if you're not on Twitter, you probably have heard about Twitter being hacked yesterday. The hackers were able to gain access to a number of high-profile accounts, including Elon Musk, Bill Gates, Jeff Bezos, and [laughs] former President Obama, in what appears to be a scam to promote a cryptocurrency. And, Bill, there are a lot of questions that Twitter needs to answer for what happened yesterday, and I'm sure they're working hard to find those answers, but there's a report out there on Vice that one or more employees from Twitter may have been involved in this hack. Whether or not that is true, another question is, does Twitter have any sort of circuit-breaker that they can hit if this type of thing happens in the future? But this is one of those things where it's alarming, and even more so considering, on the face of it, it doesn't appear like a lot of damage was done.
Mann: No, not a lot of damage was done, but it was an incredibly concerning event that happened, and it really -- I mean, Twitter very quickly came to the conclusion that the only way it could have happened would be if there were some participation, whether willing or unwilling, by people who are on the inside. What happened is, the hackers got control of some internal tools and were able to post in a massive way. Chris, you and I, our accounts were safe, whatever it is that we've done to keep our account safe, it really worked, so if any of the blue checks want to talk to us, I'm sure we can consult.
But, yeah, no, this is symbolically a really big problem for Twitter, not so much because of what happened but the fact that it can happen. And because Twitter has so much become a place where people communicate very, very quickly, and it is so dependent upon for ongoing news and information.
Hill: Well, and you know, no disrespect to the people who were hacked, these are very [laughs] high-profile business people; you know, former President Obama. It's not hard to imagine when you think about what we refer to as FinTwit, sort of, the people who are on Twitter for financial information, that the damage that could have been done, if say, for example, the Treasury secretary's account was hacked, if the president's account was hacked. So, again, as you said, this is alarming.
Twitter really needs to do everything they can to unearth as many answers as possible, because even Facebook -- I shouldn't even put it that way "even Facebook," you know, Facebook is also getting questions about this, because, of course, this is a major social media platform that got hacked, and so everybody's security is now under the microscope.
Mann: That's right. It is amazing to me, Chris, that they hacked into Twitter. They got in, they had the keys to the castle, and then they chose to put out a message that, in some ways, was really diminutive, right, there was so little. They had the capacity, for just a second, to cause so much havoc, and what they did was try to run a bitcoin scam, pff! It's amazing, it could have been a lot worse, it really could have, you're exactly...
Hill: It could have been, although, if you want to be a conspiracy theorist, you could look at this as, well, this was just a dry run, and the next version of this is going to be worse; hopefully, not. But social media platforms as a group, but especially Twitter, really under the microscope. And Jack Dorsey has gotten a lot of praise, particularly over the last six months with the other business that he runs, Square, and that's great, but now he [laughs] really needs to step up and be the CEO of Twitter and get to the bottom of this as quickly as possible.
Let's move on to Johnson & Johnson (JNJ +0.44%), because second-quarter profits for Johnson & Johnson came in 35% lower than a year ago. This is a big company with a lot of divisions, and one of those divisions is medical devices, and with the big drop in elective surgeries, probably not a surprise that that division, in particular, took a big hit.
Mann: Yeah, and as you can notice, before we came on, I looked, and Johnson & Johnson's stock was essentially flat. So, once again tells you about the uniqueness of the environment that we're in, that a $250 billion market cap company can have its earnings dropped so much, and the market will say, "Huh! Yeah, we kind of knew that was coming." So, obviously, anything that has any tie to elective procedures in medicine has gone down substantially. Also, their beauty products division had much lower earnings.
They also came out and said some really neat things about developing some of the things that they're doing to help develop vaccines, therapies for COVID-19, and they were very clear on the fact that they do not believe that profit is the ultimate goal for any of the companies, particularly Johnson & Johnson, in getting something like that out onto the market as quickly as they possibly can.
Hill: You know, yesterday, Bill, Emily Flippen and I talked about UnitedHealth and the fact that they were maintaining guidance for the full fiscal year, which really, sort of, sets them apart from most companies that have just suspended guidance altogether. I was surprised to [laughs] see Johnson & Johnson actually raising guidance for the full year, not to a huge degree, but they bumped up their profit guidance and their revenue guidance.
Mann: It is really interesting that they bumped it up as opposed to simply saying that people are deferring and they expect for the remainder of the year for there to be a catchup, which makes perfect sense. They went a step beyond and said, no, no, we are seeing beyond that, reason to believe that our overall results are going to be better than they would have been without COVID-19, and that to me is an amazing statement. There are very few companies, particularly that aren't in the direct COVID trade, that you could say that about.
Hill: California Resources Corp, the largest oil and gas producer in the state of California, has filed for bankruptcy. And if you think you're hearing more about this topic lately, you are, Bill, here are a couple of numbers. In the first quarter of this year there were five bankruptcy declarations in the oil and gas industry; in the second quarter, 18. And we are just 16 days into the third quarter and this trend is continuing.
Mann: Yeah, so, California Resources, which was a spin-off from Occidental Petroleum, which is itself in some real trouble, has declared bankruptcy. Drilling at $40 oil is just not economic for most of the United States of America, and you are seeing companies that have tended to run a little bit on a knife's edge in terms of their financing, in terms of their economic structure, really, really seeing pain. And they're not seeing any light at the end of the tunnel.
The other topic that's interesting here is simply the amount of bankruptcies that are happening not just in that sector but in the market in general. There is a professor named Edward Altman, who does something called the Altman Z-score, and he came out yesterday and said, there have been 30 bankruptcies so far this year where there were debts greater than $1 billion. And he sees at least 60 more in American companies by the end of this year. So, not only have we seen pain within the oil and gas sector, we are seeing huge bankruptcies, which makes it all the more remarkable that when we look at the market, it's up on the year. I don't really have an explanation for it other than that people are focusing on the companies that have been making money in a bigger and bigger way.
Hill: Let me go back to oil and gas for a second. Is this now, when you look at, as you said, $40/barrel, is this an industry that investors should basically just stop considering for the time being, is this one where you're just like, if someone's like, "I'm thinking about this oil and gas company," that you just don't even let them finish the sentence, you just say, "No, no, move on"?
Mann: Yeah, you know, I think that if you're going to do it -- so, more than 200 oil exploration companies have filed for bankruptcy since 2015; 200. I didn't know that there were 200; like, I think about this stuff all the time, and I had no idea that there were 200 of them. If you are going to invest in an oil and gas company, and I would say, maybe don't, but if you're going to, I think you've got to stick with the majors. This is one segment where being enterprising and really thinking about the small guys is not going to pay off very well. The oil majors, ultimately, have the financial backing, the financial resources that they can withstand much longer. And if you really want to make a bull case, may have the opportunity to buy up a bunch of properties and a bunch of assets on the cheap because the market is so incredibly at risk at the moment. It's the only way I would do it, Chris.
Hill: One programming note, CNBC reporter, Kate Rooney, is our guest on Motley Fool Money this weekend, talking about Robinhood, FinTech VCs, what the big companies are thinking about all of that office space [laughs] in Silicon Valley, so check that out this weekend.
Earnings season, obviously, kicked off this week with the big banks, it really starts to gain steam over the next few weeks. What is a company that you are curious to see, and what within that company are you looking for?
Mann: Chris, my answer, it's going to make me seem very shallow.
Hill: If it makes you feel any better, I already think you're shallow.
Mann: [laughs] So, that's good. So, we're OK. I'm going to say Chipotle, actually. I think Chipotle had fantastic earnings in their last quarter, but it is the company in the restaurant industry that seems like it is most well geared to managing within an environment where so much has shifted to takeout, has shifted to meal replacement at home. This environment ought to be really great for Chipotle, but I think if Chipotle comes out with an earnings report, a revenue report that is a little bit lower, that ought to be seen as a real risk for a bunch of other restaurant companies. So, Chipotle, to me, is in effect, the canary in the coal mine for how the industry is doing writ large. So, it is something I'm really interested to see how many burrito bowls people are buying, yeah, so that's the one I think is going to be interesting.
Hill: You know, there have been times in the past, when you think about the run-up of Chipotle stock, I'm thinking about 2013-2014, you know, pre-health concerns Chipotle, there were quarters where going into the quarter, you would look at that business and say, boy! They are in the range of anything less than perfect and this stock is going to take a little bit of a hit. And it sounds like you're saying they're at that spot again, not necessarily because everything is perfect, because it's not, because pandemic. But because, as you said, within the restaurant industry, they're the ones who are getting it done.
Mann: Yeah, that's right. And so, I think, thinking about Chipotle, what does what they are doing suggest about the remainder of the industry, the companies that have had to shift as hard as they have had to shift? You know, you see amazing things like Texas Roadhouse has done, and amazing things that a lot of the sit-down places, the Darden Restaurants have done to shift. Chipotle really didn't have to. So, I think if Chipotle has a really good earnings report, that does bode a little bit better for the rest of the companies in the industry.
Hill: Bill Mann, always good talking to you; thanks for being here.
Mann: Thanks for having me, Chris; I've enjoyed it.
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, and we'll see you on Monday.
