In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Brian Feroldi about the latest news stories and earning reports from Wall Street. They talk about how UPS (UPS 2.36%) was able to beat analysts' expectations. They've got the latest reports from a couple of digital payments companies and discuss the digital advertising landscape and much more.
Also, get a sneak peek at what's next on Motley Fool Money.
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This video was recorded on July 30, 2020.
Chris Hill: It's Thursday, July 30th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Brian Feroldi. Good to see you.
Brian Feroldi: Chris, great to be back.
Hill: We've got two major players in the War on Cash. We've got a small request of our dozens of listeners; we'll get to that in a moment. We're going to start with the stock of the day. And it's UPS, believe it or not. Shares of UPS are up 17% today, because UPS is in the business of delivering things to people who cannot or do not want to go outside. And you look at this quarter, Brian, their consumer shipments segment, those deliveries going to people's homes, were up 65% in the second quarter.
Feroldi: That's the stat that stood out to me as well. And the amazing thing here was, this is usually a slow-and-steady, relatively predictable business, but wow! Did Wall Street get this earnings report wrong. Analysts were expecting a 3% decline in revenue; we actually saw a 13% jump in revenue. Analysts were expecting a 45% decline in adjusted earnings; we saw a 9% increase in earnings. So, they really blew the numbers off the door. It was fantastic all around.
As you point out, Chris, the business-to-consumer segment, that's packages coming to the likes of me and you, really the star of the show, up 65%. Surprising to me, so in the U.S. domestic shipments volume were up 23%. International was actually a pretty good strength of theirs with the international segment posted 10% package growth. And they specifically called out strong outbound demand from Asia as well as an increase in cross-border e-commerce in Europe, that surprised me a little bit, but I mean, if you look up-and-down, it's hard not to like this report.
Hill: It's really hard not to like this report, I don't know why anyone wouldn't like this report, unless they worked for FedEx. And obviously, playing into this is a component that absolutely is working in UPS' favor right now, and FedEx's for that matter, and that's the low price of fuel. I mean, there's no question that on the cost side of things, UPS and FedEx are helped by lower fuel costs.
Feroldi: Absolutely. They called that out as a benefit to them on the profit line, and while we did note some of the strengths across the board in packaging volumes, we should say that the revenue per piece of that was delivered actually declined 4.4%; a part of that was due to lower fuel and the big report there was their growth of their share post, which is when the United States Postal Service handles the last mile of the delivery. So, it's a partnership that they have. It appears to be going well. But, really, if you look at this report, you can't help but be bullish.
Hill: I didn't see if they did anything with guidance, did you happen to catch -- I mean this is an amazing second quarter, did they give any, sort of, light that they shed on the second half of the fiscal year?
Feroldi: They pulled guidance, they weren't willing to go out there and say what's going to happen, not surprising but --
Hill: Smart. [laughs]
Feroldi: Yeah. I don't know about you, but e-commerce deliveries to my household haven't slowed down. So, it's possible we could see this strength continue throughout the rest of the year.
Hill: I mean, you have to believe anyone in the executive suite who, sort of, raised the idea of, maybe we should -- was immediately shouted down, particularly, when, as you said, Wall Street got this so wrong. And you know, it's tougher to do that type of job when guidance is being pulled. So, smart on UPS' part to keep the guidance pulled.
Let's move on to Mastercard (MA 0.88%), second-quarter profits and revenue were higher than expected. Revenue was still nearly 20% lower than a year ago, payment volume down as well, shares of Mastercard flat to down 1% to 2% today.
Feroldi: Yeah, nothing terribly surprising in this report, Chris. As you pointed out, a 19% drop in the topline to $3.3 billion, that was better than expected, but it's hard to get excited about a 19% drop in revenue. Mastercard has some things that are going for it, some things that are working against it. E-commerce is, obviously, a big tailwind for this business right now, but the benefits that they're seeing from that are more than offset by declines in spending on things like gasoline and restaurants, but the big thing that pulled down revenue this quarter was a huge drop in cross-border volumes. So, that spending across country borders, that was down 54%, and that accounts for a sizable portion of revenue, about 25% of total revenue.
The company did see a 12% growth in their growth category, which is just called "other revenue" and that's when they provide insight and analytics and cybersecurity tools to some of their partners. So, it's nice to see that that business is still growing. And they did try and offset some of the weakness by pulling back significantly on their advertising expense, that dropped 60% year over year, so it's going to be interesting to see if that reverberates in other companies that we follow that benefit from advertising spending.
Overall, though, revenue was down 19%, adjusted earnings were down 28%. Hard to get excited about that.
Hill: So, where do you see Visa and Mastercard right now? Because it was, sort of, similar stories with their latest quarterly reports, similar reactions on the immediate trading thereafter. You know, Mastercard is basically where it was trading the first week of January. This is a $300 billion company. Do you look at Mastercard and think, look, given the trend toward digital payments and away from cash over the next 10 years, do you look at this as, maybe not a no-brainer but close to a no-brainer stock to buy and hold for 10 years, or do you look at it and think, you know what, there are enough question marks that I wouldn't automatically go out and buy it today?
Feroldi: Well, if I had to have all of my net worth in one stock, it would probably be Mastercard; if that gives you any sense of my thinking about this company for the long-term. Yeah, to me, 2020 is going to be a year that financially won't be great for Mastercard, but could actually set the company up for long-term growth. As I noted, so e-commerce, there's so much demand for e-commerce right now out of necessity and that is a natural tailwind to a company like Mastercard. And although, financially, they didn't do so well this quarter, there were some things to be encouraged about. So, the number of Mastercard cards that are out there in the wild actually grew 5%. They used their cash hoard to make an acquisition of a company called Finicity, which is a provider of real-time financial data and insights. So, that will beef up their other revenue category.
They also announced a plan with Amazon to make it so that customers there could be -- their payments could be tokenized, and what that means for you and I, Chris, is that, every time we get a new card, we don't have to manually input our updated data into Amazon, so that's going to make it easier for consumers to pay.
And they also -- while they've stopped their buyback program, they restarted in July and bought back $1 billion worth of stock. So, I think what's happening right now is going to make 2020 a forgettable year on the financial side, but it could set the company up for long-term success.
Hill: I really like the fact that you referred to the amount of cash Mastercard has as a cash hoard, I just feel like there's some invisible line where a company builds up their cash balance, and it's like, actually, we now classify this as a hoard. This is a hoard of cash. [laughs]
Feroldi: [laughs] And Mastercard certainly has it, they have billions just sitting there waiting to be deployed. And they're consistently using it on behalf of shareholders to make acquisitions like this, to buy back stock, and pay a dividend. So, that's exactly what you should see given where Mastercard is in this growth cycle.
Hill: Well, and all kidding aside, I mean, I'm glad you highlighted that, because we talk from time-to-time about capital allocation, how important that is for any business in any industry, you want the leaders of the company to be good at capital allocation. And Mastercard, among other things, has demonstrated their ability to be right more often than not when it comes to things like dividends, buybacks and acquisitions.
Feroldi: Yeah. And it's incredibly easy given the financial characteristic of this company, this is an incredibly strong financial company. I mean, even given the operating leverage loss that we saw, their operating margin, AKA how much of every dollar in revenue they convert to operating profit, was still 52%. That's an unbelievably high number, and that's down significantly year over year. So, this company is a true cash printing machine. Given that, and given the long-term potential, I am happy for them to plough every dollar they can into stock buybacks.
Hill: Two quick things before we get to PayPal (PYPL 1.62%), Motley Fool Money this weekend, it's going to be an Earnings-Palooza kind of show. No guests this weekend, so many companies reporting earnings, that's what we're going to be doing the entire show, so check that out when you get a chance.
Secondly, as I indicated at the top, I want to ask you a small favor, the dozens of listeners, we have a very brief survey, and if you could take it, that would be great. One of the things we've talked about on this show, the pandemic has made a lot of companies look at their businesses and how they're serving their customers and look for ways that they can do things differently. And if you've been listening to the show for a while, you may have noticed we haven't been running any ads lately. No Harry's razors, no Rocket Mortgage, nothing like that. And that's because, more than ever, The Motley Fool is trying to be as focused as possible on helping everyone, from our members, to our readers, to our dozens of listeners, we're trying to help people invest better. And so, that's why we're taking a break from those external ads. And to the extent that we promote things on our shows, it's going to be, for ways in which The Motley Fool can help you invest better.
So, to do that, we'd like your help, we just need to know a little bit more about who you are and how we can help you. If you go to Mot.ly/survey, we have a very easy two-question survey, it'll take less than a minute. Again, that's Mot.ly/survey. You know what, I'm just going to put the URL in the description [laughs] of the podcast. If you could check that out, if you could take 30 seconds and help us out, that would be great.
Let's move on to PayPal, which is hitting a new all-time high after a second-quarter report that featured record revenue and total payment volume was up nearly 30%, Brian.
Feroldi: Yeah, this is really the tale of two War on Cash stocks, right? Both Mastercard and PayPal play into that trend very nicely. But PayPal is much more focused on e-commerce transactions and that shines through in the company's results. We saw revenue growth at PayPal of 22%, that came in at $5.26 billion. They were guiding, initially, for 13% growth, and Wall Street was only expecting $4.93 billion; this was a huge beat on the topline. And they registered 21 million net new active accounts, that was up 137% year over year, and that was the best quarterly performance in PayPal's history.
You look at some of the other numbers, so their total number of active accounts on their platform, 346 million; total payment volume was up 30%, $222 billion. Venmo is growing strong, margin has expanded. We saw a non-GAAP profit per share of $1.07. Again, Wall Street was expecting $0.84 here, that was up 49%, and the company had previously guided for about 18%. This was an incredibly strong report.
Hill: Am I right that fiscal year guidance is back for PayPal?
Feroldi: Yes, they reintroduced it. They have a clear path to what's going to happen this year. Next quarter, they're expecting revenue to grow 23%, Wall Street was only expecting 15%, so nice uptick there. And then for 2020, they're now calling for total revenue growth of 20%, they were previously guiding for 18% prior to pulling guidance; and Wall Street, again, only expecting 14% topline growth. So, this is the very definition of a beat and raise quarter, Chris.
Hill: Yeah. And as a person who owns a few shares of PayPal, very happy to see it. So, we talked about Mastercard, we talked about PayPal. I know you've seen Visa's latest report. After the closing bell today, we're going to get some of the biggest companies in the public market with their latest quarterly reports; Apple, Facebook, Alphabet and Amazon. Does anything you've seen, particularly, out of Mastercard and PayPal, give you any indication of maybe raising expectations for Amazon going into this quarter or do you just think, you know what, don't try to read the tea leaves on what we're seeing in terms of payment volumes from Mastercard and PayPal?
Feroldi: Well, based on what we've already seen from companies like Shopify and UPS, I think it's OK to assume that Amazon is probably going to have an OK quarter. The bigger question to me is, what's going to happen at the advertising companies, like, Facebook, like, Google? We've heard from numerous large advertisers that they're pulling back on spending. As a reminder, we just said, Mastercard cut its advertising spending in half, that's got to have some kind of impact on the big advertising players. So, I'm much more keenly focused on what's happening there than I am on what's happening with Amazon.
Hill: Well, and along those lines, it is going to be interesting to see from Facebook and Alphabet if there's any conversation whatsoever on the conference call about live sports. Because, like, we already heard very early in the pandemic from the travel companies and the travel related companies, you know, Expedia coming out very quickly, I think it was late-March or early April, basically [laughs] saying, we normally spend $5 billion/year on advertising, this year we're going to cut that by at least 80%. As we start to move toward the NFL season, if it happens; college football season, if it happens, you know, those are big drivers of advertising revenue and it will be interesting to see how much prognosticating happens from either of those companies.
Feroldi: Yeah, sports, obviously, play a big impact for companies like Disney, for companies like Facebook, for companies like Google. How that reverberates through, only time is going to tell. I have my fingers crossed that the NFL season is going to happen. I'm an avid Patriots fan and watcher, as I know you are, Chris, but who knows what's going to happen.
Hill: You just have to wait and see. Brian Feroldi, always good talking to you. Thanks for being here.
Feroldi: 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 next week.
