In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Ron Gross about the latest headlines and earnings reports from Wall Street. They talk about the markets in the context of the election, and get into the details of another important vote related to the gig economy. They've also got a really interesting and stealthy winner stock, the results from a popular restaurant company, and much more.
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This video was recorded on November 4, 2020.
Chris Hill: It's Wednesday, November 4th. Welcome to MarketFoolery. I'm Chris Hill, with me today the one and only, Ron Gross. Thanks for being here.
Ron Gross: Hey-hey! Always a pleasure to be here with you, Chris.
Hill: So, there's an election going on, and I say going on because the votes are still being counted. So, we'll get to that, we do have some earnings to get to, because the sun comes up and the world still spins. But let me start with a couple of things, it is just after 11:00 AM on the East Coast. [laughs] I feel like it's important to timestamp this show today just to provide a little context, particularly for younger listeners. This is the fourth time in the past six Presidential Elections in the United States that a winner was not declared on Election Day, so maybe we should be used to this by now. As I said, votes are still being counted.
But you look at the markets, Ron, the markets appear to be pretty calm. The VIX is down, the volatility index, for anyone who tracks that sort of thing. And as I said to you this morning, it's a really good thing that there are no publicly traded polling companies. I feel like if polling companies were publicly traded, those stocks would be headed to zero.
Gross: Yeah, it's rough. It's always hard to, kind of, figure out why the market is doing what it's doing on any given day. So, the market is so far very strong today. Tech stocks are strong. And so, what is it discounting, is it discounting that there isn't a blue wave, even though Biden still very well may win; it isn't the blue wave that some had projected and the markets don't like a blue wave. It's so hard to know exactly what they're seeing here. Do some actually think, you know, Trump will hang on and will continue the tax policies, the regulatory policies of his administration? Very hard. I like a market that's up, so I'll take it whichever way, [laughs] whatever reason, I'm happy to see a market up.
Hill: Yeah, you mentioned some of the big tech stocks. Interesting to see Facebook, Apple, Amazon, Alphabet, they're all up somewhere in the neighborhood of 3% to 5% today. And when we were talking last week, sort of like, well, what we think is going to happen in the election, one of the things I said was, you know what, I think even though we are very much long-term investors, we are focused on businesses. And by the way, if you're thinking about buying shares of a business and that business is heavily leveraged to whoever is in the White House, you might want to keep moving, you might want to go to another stock on your watchlist.
But I remember saying, I feel like, in terms of those big tech stocks, it wouldn't surprise me if it was looking like Joe Biden was going to win. And those stocks were up, in part because I don't know that the Justice Department under President Biden looks to, as aggressively, potentially break up the big tech stocks.
Gross: Which, it's kind of counterintuitive to me, because you would typically [laughs] in a typical year or four years think of the Democrats as being folks that are more likely to put on regulation and pursue regulations of all stripes. We've certainly seen Trump pull back on that significantly, whether it's in the oil and gas industry or things relating to the climate or even with the financial industry. But he has been very outspoken about going after the likes of the Facebooks of the world and some of those other companies. So, while normally in a vacuum I would say Democrats are more likely to pursue a regulatory environment that is strict, in this particular case that seems to be a bit flipped.
Hill: All right, let's get to some stocks that are moving for various reasons. And this is actually tied to the election, although a state election, because yesterday voters in California approved Proposition 22 which allows Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) and any other companies that are in the "gig economy" to classify workers as independent contractors rather than full-time employees. And shares of Uber and Lyft are both up more than 10% on this.
Gross: Pretty big for them. This was a bill that they had to get passed, and as listeners may know, it's a reflection of the AB 5, [Assembly Bill 5] the gig worker bill, as it's called which was put into effect on January 1st of this year, which made it rough for companies [laughs] in the ride sharing industry to keep independent contractors. And they were going to be pretty much out of business in California if this stood.
You know, votes are not completely in yet, but certainly the indications are that voters are voting in favor of Proposition 22, which will allow Uber and Lyft to once again have independent contractors. Those people would not be given the benefits that many employees typically have, but it would entitle drivers to new benefits, like, minimum earnings, vehicle insurance. So, that's good for the drivers. Independent contractor status is very good for Uber and Lyft.
Hill: I get that this is a win for both of those companies, does it move their business model into -- [laughs] like, I still look at both Uber and Lyft as, those are businesses that I'm glad they exist, I have no interest in investing in them. And while I get that if Prop 22 had gone the other way, it might have been a potential death knell for either or both. But for me, I don't know that this win moves either of them into the, OK, I'm going to put this on my watchlist now.
Gross: Yeah, it doesn't change the business model at all really. AB 5, if it continued, would have crushed the business model to a certain extent. So, this just gets us back to even with the debate of does this business model work one day or not, I like Uber better because of Uber Eats and some other things, that they're a little bit more diversified; Lyft being more of a pureplay. I don't own either. As you said, I'm not in a hurry to put them on my watchlist either, because I need to see the business model make more sense and I need to see a stronger path to profitability, as people like to say. And not just profitability, but significant profitability to support the valuations of these companies.
Hill: Scotts Miracle-Gro (NYSE:SMG) wrapped up its fiscal year. Fourth quarter revenue was higher than expected. And in terms of guidance, Scotts Miracle-Gro appears to be feeling pretty good about fiscal year 2021.
Gross: Yeah. 50%, the stock is up this year. Little stealthy winner, but really interesting. Company sales, 79% increase, driven by strong consumer demand, retailers replenishing inventory levels because they think this demand is going to continue. Hawthorne, their hydroponics segment; and I do know what hydroponics is, Chris, because I looked it up, and I do.
Hill: I think I do, but for the sake of our listeners, why don't you just explain it?
Gross: [laughs] It is growing things without soil, typically mineral rich nutrients. So, they have a division that focuses on that. Those sales are up 68% for the quarter. September was the highest sales month ever for that unit. Now, operating expenses were up 47%, that's a big number, due to higher accruals for incentive comp. One-time bonuses, they're giving $3,000 to nearly all of the 3,000 hourly associates as a bonus for all the great work and the great year. So, returning some money to their folks there. High and median marketing expenses, even higher charitable contributions led to operating expenses jumping pretty significantly.
But all that being equal, all that being said, they did have adjusted earnings per share of $0.06. Now, that doesn't sound like a lot, but when you compare that to last year's fourth quarter, there was a loss of $0.91/share. Now, that isn't actually that weird, because the fourth fiscal quarter for this company is typically a loss. It's a seasonal loss, it's not a great time for their business in the fourth quarter. This is the first profitable fourth quarter since 2006. So, really strong for this business, the momentum is carrying into the fiscal first quarter of 2021 they believe, they established guidance, it looked pretty strong, adjusted earnings growth was somewhere 10% to 16%. So, these guys are kind of firing on all cylinders, as I like to say. They're pursuing a joint venture with a company called Bonnie Plants, which they had a business dealing with before, but now they'll own 50% of that company.
So, pretty strong execution, and you see it in the stock price.
Hill: One clarification, when you say first profitable quarter since 2006, you mean the first time since 2006 that the fourth quarter is profitable?
Hill: I'm glad you mentioned the bonuses to the hourly workers, like, [laughs] the $3,000, because they're hourly workers, they're not able to participate in any sort of stock purchase program that full-time employees have. We've seen this with other retailers in the home improvement space, the Home Depot, Lowe's, we've seen it in retail, in general. Costs going up, in part because of bonuses to workers who are kind of crushing it during the pandemic.
You know, Scotts Miracle-Gro, it seems like [laughs] one of those businesses that I'm sure they have competition, I just can't name it, I just have no idea [laughs] who he is trying to compete with Scotts Miracle-Gro.
Gross: Yeah, they are the clear leader, and there are others. You know, there's some controversy always around companies like this, because it's chemical based and there's things like their Roundup product has been attacked from time-to-time for environmental reasons, but they are the main game in town. And you go into any kind of retailer that sells these kinds of products, and they command most of that shelving space. And retailers are happy to keep replenishing that as they said here, because I think that this incredibly strong demand is going to continue. And so, as long as they keep putting up these numbers, you know, the retailers are happy to stock the shelves.
Hill: The highlight of Wendy's (NASDAQ:WEN) third quarter report was the fact that global same-store sales were up nearly 7%; that was higher than expected. I don't know, Ron, it feels like it's always a mixed bag with Wendy's. [laughs] Like, I'm not trying to pick on the business, it's just, I'm struggling to think of the last time they came out with really just a firing on all cylinders [laughs] type of quarterly report.
Gross: Yeah, in fact, in my notes I wrote, fine quarter, but... [laughs] you know, there's always a "but," in this case the "but" is that they fell shy of revenue expectations. I don't know how anybody really takes expectations from the analyst community seriously during 2020, because there's been no guidance and stores have been closed and stores have been reopened, it's very, very difficult. So, playing the expectations game, for me, this is kind of a lost year [laughs] in terms of that.
But Wendy's is doing a lot of the right things that they should do. They're building out their breakfast offerings; really important for these businesses. They're growing their digital business. Again, we're seeing that across the board with lots of these fast food restaurants. They're expanding their international footprint. So, they're making the right moves and it is showing up in the numbers. As you said, U.S. same-store sales up 7%, international was down 2%. So, you know, they offset, obviously, total revenue only up 3% -- still up is better than down, but only 3% -- driven largely by higher sales at company-owned restaurants; they do own some of them, the business is largely franchised, but they do own some of them. There was an increase in franchise royalty fees, and those were driven, all that good stuff was, kind of, driven by their adding of breakfast and the success that breakfast has had so far. And so, you saw some margin expansion.
Obviously, customer counts went down, some COVID-related weakness. Commodity costs, though, as we've seen in a lot of these restaurants are higher. So, you know, expenses just go up. Operating income was up 2.9%, almost 3%. Interestingly, net income, that was down 14%, and that's because of an unusually low tax rate this time last year. So, the comparisons are rough, probably better to look at an operating income line where you see about a 3% increase.
They hiked their dividend. Hey, we talk about the upsets sometimes, even in this environment, we've seen some companies show confidence in their business, reward shareholders by returning capital. They increased it by 40%, it's about a 1.3% yield, which is fine, slower than the yield on the S&P 500, but you know, you get a little income while you wait for Wendy's to execute on their, kind of, let's call it, a turnaround plan or a growth plan.
Hill: And hopefully, they'll be able to execute on it, because they don't have a lot of levers to pull. There was a point in time when the Wendy's Group or the Wendy's Company, they've changed their name a couple of times over the years, had other brands, most recently Arby's, which they sold to Inspire. So, at the time that was seen as, OK, they're going to be able to take that money, invest it into the core business. As you said, they're doing some good things with breakfast.
The commodity cost is going to be really interesting to watch. I mean, they specifically cited, and I'm quoting here, significant commodity headwinds. Food costs are going up. That is not a narrative that is getting a lot of amplification in the restaurant business, but that is a fact and it is going to be interesting to see how, not just Wendy's, but all of these restaurant companies, whether they are fast casual or straight-up fast food, how they manage that.
Gross: Yeah, we saw it with the pizza companies. Cheese is, kind of, at an all-time high, or certainly a recent high, it is just one example. So, it's something that if you can, you pass it along to the consumers at higher prices. Don't forget, labor rates are going up as well. So, a lot of these companies, kind of, get the double-whammy of higher commodity costs plus higher labor, which takes a bite out of earnings.
I feel like Wendy's does need some kind of a menu shakeup; breakfast is a good idea for sure. You know, it is kind of known as a burger company, I think they've got a great chicken sandwich, but you've got the battle of the chicken sandwich going on that they don't even -- you know, barely mentioned, versus whether it's Popeyes or Chick-fil-A really taking the lead there, as well as some others like Shake Shack. So, I don't know, I think Wendy's got to, you know, sharpen their pencil a little on that menu.
Hill: I think you're absolutely right. And the, call it, two or three times a year I go to a Wendy's, it's the spicy chicken sandwich that they have which is, you know, it's not Chick-fil-A, but it's good, it gets the job done ...
Gross: The No. 6?
Hill: What's that?
Gross: The No. 6?
Hill: Yeah, the No. 6.
Gross: [laughs] I know my food.
Hill: What does that say about us, it's like, oh, yeah, the No. 6. When I go to Wendy's, yeah, it's the No. 6 or nothing else. [laughs] But you know, that's one more thing that they need, and that is one more thing that will take money, not just to do the market research to figure out what they can do, what they can come up with, but then what they can promote.
You know, for all the jokes that people make, and we're among them, about McDonald's and the McRib, say what you want about McDonald's, they do a good job with promotional items, with sort of those limited editions. I don't see Wendy's doing that, and that may be one way to start.
Gross: Yeah. And like, you could think of Wendy's almost like a less popular Shake Shack, which I don't think you want to be, [laughs] you don't really want that as your brand, right? People seem to really enjoy Shake Shack, really like the food, really like the experience. And Wendy's is kind of like the afterthought there. I happen to think they make fine food for that kind of food, but they are nowhere near the market leader. And so, I think maybe something on the menu is where they need to go.
Hill: Ron, always great talking to you, I really appreciate it.
Gross: You too, Chris.
Hill: As always, people on the program may have interest 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.