In this episode of MarketFoolery, host Chris Hill chats with analyst Jason Moser about the latest headlines and quarterly reports from Wall Street. They talk about the most recent results from one of the largest real estate and homebuilding companies in the U.S. The duo also discuss the details of Lowe's (LOW 0.73%) big announcement, as well as some entertainment news and the streaming landscape.
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This video was recorded on Sept. 15, 2020.
Chris Hill: It's Tuesday, Sept. 15th. Welcome to MarketFoolery. I'm Chris Hill, joining me today, Mr. Jason Moser. Good to see you my friend.
Jason Moser: Howdy! How's everything going?
Hill: It's going all right. We have got some retail news, entertainment news, but we're going to start today with homebuilding. Lennar Corp.'s third-quarter profits came in solidly higher than Wall Street was expecting. I know shares are down a little bit, but I don't know, Jason, I mean, Lennar's gross margins are improving, and the low interest rate environment certainly helps.
Moser: Yeah, it's absolutely helping. And we've certainly seen signs that the housing market is not only stable, but really flourishing, which is just kind of interesting to try to square [laughs] in this time. But I mean, hey, that's housing, right? It's one of those things that everybody needs. These results, I was really impressed, earnings were up 33% on relatively flat revenue. Anytime you have a company that can do that, you got to at least take note and try to figure out what they're doing to see if they can keep on doing it.
If you look at the numbers, they had deliveries of 13,842 homes; that was up just 2%. They had new orders of a little bit better than 15,500 homes. That was up 16%. And that dollar value of $6.3 billion was up 20%. And also, a strong backlog, backlog dollar value of close to $8 billion, up 4%. So, all in all what we're seeing and what management noted is that the fundamentals in the housing market are very strong and that's supported, of course, by [laughs] record low interest rates, as well as, relatively continued undersupply of new and existing homes. You know, anecdotally, I will say like, we're in the middle of refinancing our home here. And you know that what comes with refinancing a home is you get the appraisal to make sure that the value of the home is there so that the bank can crunch the numbers correctly. And certainly, if it seems like valuations in our area are continuing to go up -- and I would imagine they're seeing that in a lot of places. And then it'll be really interesting to see here, as the pandemic continues, as companies start to reassess how they are handling their workforce, I mean if more folks start fleeing big cities for suburbia, that absolutely has the potential to continue pushing up the demand for these homes, which ultimately pushes up the prices, pushes up the performance for companies like Lennar, in being the largest homebuilder out there by revenue. I mean, certainly this was another quarter of excellent performance.
Hill: And the stock, again, I know it's down a little bit today, but you look over the past year, it's up a little more than 40%. And it doesn't strike me as a particularly expensive stock, it's only trading about 11X earnings.
Moser: Yeah, I think you're right, it's interesting to look at the stock chart for a company like Lennar. If you look at the five-year chart, you can see some relative underperformance compared to the market, but then you stretch that out over 10 years and you start to see that outperformance. And I'm wondering with Lennar, it strikes me, at least, that this is a business very focused on using this as a time to get lean and to figure out how to stay lean. And so, one of the things that I was noting here with the company was that they are focused on trying to become land-lighter, in other words, not having so much land in their inventory that's sucking out that [laughs] cost structure, so to speak. And if they can do that, and it sounds like they're able to do that, that will not only help the financials, it will give them more flexibility. I mean, they reduced their years' owned supply of home sites to 3.8 years from 4.4 years at the end of last year's third quarter.
So, you can see this effort to become leaner and to try to stay leaner. And if they can couple that along with their market share dominance, as it stands, I suspect this is probably a good stock to own over the course of the next five to 10 years. Again, housing is always going to be subject to macroeconomic hiccups and concerns here and there, but it's still relatively stable, because again, everybody needs a roof over their head.
Hill: Shares of Lowe's up this morning, as Lowe's announces a partnership with Daymond John from the TV show Shark Tank. Starting today through September 25th, small businesses can apply for a contest called "Making It... With Lowe's." And I like this. This, to me, is one more demonstration by Marvin Ellison, the CEO at Lowe's, and the commitment he and his leadership team made earlier in the pandemic to try and help small businesses, committing somewhere north of $50 million to do so. In this case, they're doing it in kind of a fun way, but I think if you're a Lowe's shareholder, you got to [laughs] feel really good about the way this company has been performing in the, let's call it, a year-and-a-half, maybe we're up to two years now, that Marvin Ellison has been running the company.
Moser: Yeah. I mean, I love this. To me, this is another great example of where our business leaders step in to really support and fill a void where our government perhaps is failing, right? I mean, you've got Congress still trying to figure out exactly how to pass additional financial assistance for folks who really need it. Small and medium-sized businesses are clearly some of the businesses out there that are suffering the most from this. And to see a national retailer with the status that Lowe's has, jump in to do something like this, is just very reassuring. And to me, you know, you said it with Marvin Ellison, I mean, I went back to my notes, because we've been tracking Lowe's for a number of years here on the show. And I went back just a little bit over a year ago when I was looking at how things were shaping up when Mr. Ellison first took over.
He was coming up on his first year with the company, I guess it's a little over a year ago, but the stock opened around $95 on the day that he started. And I noted at that point, it was like, you know, I mean, Lowe's was having its fair share of challenges, you could look at this perhaps as a turnaround if you wanted. I mean, I don't think it was ever really a business in peril; and I noted, I think it's going to get better, if for no other reason than the market it serves, but also because I think that Ellison was a good choice as CEO, given his experience in the retail industry. And you fast-forward today, you've got a stock closing in on $170/share. They just recorded a phenomenal, phenomenal quarter here, [laughs] sales for the second quarter $27.3 billion versus $21 billion in the second quarter of 2019, and comps were up 34.2%. So, there are a lot of signs here that what he's doing is working. And then if you look at the actual comparison, looking at Lowe's compared to Home Depot (HD 1.51%), because that's the measuring stick we've always held it to, you know, Lowe's is really holding its own there versus Home Depot as well.
So, it all takes me back to what we've been saying here recently. Remember Pepsi [PepsiCo] and Coke, [Coca-Cola] right, we always spoke about, you know, what is the Pepsi to this company's Coke? Well, that was always because Coke was the better performer, Pepsi has been outperforming Coke lately. And so, I think it's completely reasonable to believe that we may see a world here in the next five years where Lowe's could certainly start outperforming Home Depot. Regardless, I think you have a leader here in Marvin Ellison, who's just doing a lot of really creative, fun, and ultimately helpful stuff. And I suspect their success will continue.
Hill: And for years the -- I was going to call it the secret sauce, maybe it's not so secret, because we talk about it enough on our shows. But, sort of, behind the scenes a little bit with Home Depot's business is that relationship that they have with the contractors, it's not as obvious as the consumer business. Lowe's hadn't really had that in nearly the same way. You know, beyond just being a fun, visible contest that Lowe's is having, this could be a really nice introductory entry point for a lot of [laughs] small businesses and Lowe's to get to know each other, that may pay dividends for Lowe's down the line.
Moser: I would think so. I think that this is going to give them an opportunity to shine a light on what their company really stands for. Hey, listen, get out there and humblebrag a little bit, Marvin, don't worry about -- it's not conceited, it's not narcissistic, get out there and tell the world what you're doing, because it really does matter, people do care. And when they see our best businesses doing things like this, it only makes consumers want to sponsor those businesses more.
And to your point about contractors, another good one, because we've seen where Lowe's is going to start jumping into that tool rental side of the business. And that has been, as silly as that may sound, that's been a wonderful point of success for Home Depot through the years. The obvious question it begs is, why wouldn't you just want to convince people to go there and buy the tool? Well, there are a lot of reasons. You know, listen, I don't need a tile-cutter every day of the week, but there a couple of times here at home where I've needed a tile-cutter. And so, instead of having to go buy a $200 or $300 tile-cutter, I can go rent one from Home Depot for, I don't know, $40, $50 for a stretch of a couple of days, get my work done. And, hey, you know, while I'm in there renting that tool, I'm buying a couple of other things, some supplies, it keeps me in their universe and coming back for more with good customer service. And so, Lowe's has the opportunity, really, to capitalize on that same market. And I think they've seen what Home Depot has done to date with that side of the business. They're champing at the bit, I think, to really get a part of that action as well.
So, I'm very optimistic for a lot of what this business is doing, and I think Lowe's -- you know we like Home Depot a lot, I think there's every reason to like Lowe's just as much at this point.
Hill: One quick thing before we get to our last story. We've heard from a few podcast listeners of this show, of Motley Fool Money, of Industry Focus, that some episodes are missing on Spotify. So, we are looking into that, but I just want to take this opportunity to remind the dozens of listeners out there, whatever platform you listen on, if there's ever a time where you don't see an episode, sometimes the problem is with us, but sometimes it is with the platform. So, this is my periodic reminder, always use Fool.com/Podcast as your backup Fool.com/Podcast; that's the podcast center on The Motley Fool's website. So, again, particularly for the daily shows like Industry Focus on MarketFoolery, if you don't see an episode, double-check at Fool.com/Podcast and see if it's there. If it is, the problem is with your platform.
Moser: Well, and fun fact for you here, Chris, because I got, on my Twitter feed, that podcast, our podcast homepage, that's my website link on my Twitter feed, so. Because it always serves as a wonderful point of reference, it's where all of our great stuff lives under one roof, extremely helpful.
Hill: There you go. ViacomCBS announced today it is rebranding the CBS All Access video-streaming service. The new name, because ViacomCBS owns a lot of brands, the new name of the service, which will officially launch in 2021, Paramount+; obviously, a nod to the paramount film studio and the legacy thereof. And I don't know about you, Jason, but [laughs] I saw this, and I'm going to assume that they have good business reasons for doing this, but my first thought when I saw this [laughs] was, oh, yeah, because it was the name that was the problem, that's why people aren't signing up for it.
Moser: Another plus sign, yeah. The plus is going to change everything, right? How creative? I mean, you got ESPN+ and Disney+, now you got Paramount+. Now, from what I understand, that was a brand that they had used for some internal markets, I guess for testing or whatever. Maybe they just figured that was as good as it was going to get, but maybe they were just being lazy. I don't know; it doesn't really seem to resonate when you say Paramount+; all I can say is, thanks a lot, Reed Hastings, because this is getting out of control, man! I mean, you've completely shifted the entire television landscape, and now everybody is trying to play catch-up.
And what's happened is, now we've just got this landscape of a million and one separate apps with their own little stretch of shows that, you know, some people might want to watch, but as a collective, it's really hard to garner big audiences that want to pay for your service on an ongoing basis. And so, you know, what it does is it forces these legacy providers, whether it's NBC or CBS or what have you. It forces them to keep the advertising dynamic in their mix, and also forces them to keep prices low, because you have to ask yourself, why are people subscribing? Well, they subscribe because they want to watch a show or they want to watch an ongoing stream of shows from this particular provider. So, then the onus is on these legacy providers to keep providing really great content that people can't get elsewhere. And that's fine if you can do that, but it's not easy to do.
And I think a lot of folks, even with Netflix (NFLX 0.91%) felt that, because Netflix is so good with data, in getting the data from subscribers and what subscribers want to watch, then they just take that data and make new shows. I mean, that does work to a degree, but you still have to actually make a show that people really enjoy seeing, right? Data is only part of the equation. I think the struggle with a lot of these legacy providers is they're trying to figure out how to come up with just this ongoing library of content that can convince people to keep on paying for it. And I don't know necessarily that they will, I think that we're probably headed more toward something where we see aggregators like a Hulu, for example, bringing more of these apps into their into their platform so that it's easier to access, and perhaps rolling some costs into the cost of that Hulu subscription down the line. I will say, as a Hulu Live subscriber, I mean we love that service here. I mean, it is cable lite. And so you have the option to pay for no commercial, so that the stuff you watch on-demand is no commercials, and there's going to be commercials, obviously, with live TV, but yeah, it just seems like we've got to this point now we're at such a littered landscape, it's utterly confusing, and it really does all boil down to content, I'm not sure that actually Paramount+ has that yet.
Hill: This is a service that actually launched well before Disney+; CBS All Access launched in the fall of 2014. As best I can tell, I don't know if you found this, I was doing some digging this morning, I couldn't find the number of subscribers just to CBS All Access. The announcements that I found from Viacom, particularly over the past year, combined the subscribers they had for CBS All Access and Showtime, Showtime OTT, and so the latest I saw was a month ago, the combined number for those two services, 16 million. By point of comparison Hulu has 35 million subscribers, Disney+ has more than 60 million. And worldwide, Netflix has 190 million. [laughs] And for those, and I say this as someone who is not a Netflix shareholder, but for those who look at Netflix and think, well, how much more can it grow? You tell me. You know, of those [laughs] streaming services, which one is the table stakes, if you're just starting from scratch, if you move to a new home or whatever? You just decide, like, OK, what am I going to subscribe to, you're telling me Netflix is not on the list, but Paramount+ is?
Moser: I am not telling you that. [laughs] I know you're kidding, and I don't think anybody would tell you that, I think that's a really important point to remember, because I think the table stakes point is a really good one, in that, you know, Netflix I think is the core, I think it is the core to anyone's or any household's entertainment strategy. I think, whether you have cable or you're cutting the cord or you move or whatever you're doing, Netflix is always going to be a given. And one of the reasons is because it's clearly affordable, but it also gives you a tremendous variety, it has a little bit of something for everyone.
I mean, I'll be the first to say, I don't really find Netflix's content to be all that terrific. I mean, there are a couple of shows I watch on it, but I'm not a religious Netflix watcher, because there's content on other apps that I'd like to watch as well. But I've hit that point, we've hit that point where we don't really need anything else, we have HBO Max, we have Hulu, which is the live offering, but you also get the on-demand offering, we have Netflix and we have Amazon Prime and Disney+, and so we're done. Yeah, we have more stuff than we have time to watch. And I think that's going to be the problem that you see with a lot of these businesses, and they're going to play those cards very close to the vest in regard to subscribers, because when the numbers aren't that great. I mean, you don't want to lob that out there, oh, hey, look, we get 10 million subscribers. Really, you're boasting that? Because when you compare it to their competitors, it's not really something to boast about. [laughs]
And again, it really does all boil down to content, but even then, I kind of wonder now if we're so far into this, the landscape has become so littered that people are almost just, they've thrown their hands up, and they said, you know what, I quit. Even if Paramount+ has a show that I want to watch, and maybe an example here is Yellowstone. I would love to watch Yellowstone, and one day I will, when it's somewhere else, because I'm not subscribing [laughs] to Paramount+ just for that one show. And again, that goes back to, you need to build out a library of content that has stuff that you can use on an ongoing basis. And maybe Paramount+ will get there one day, I don't think they will, they could, but I don't think they will.
Hill: Jason Moser, always good talking to you. Thanks for being here.
Moser: Yes, sir. Thank you. Appreciate 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, we'll see you tomorrow.
