In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Tim Beyers about the latest headlines and earning reports from Wall Street. They look at a global consulting business hitting an all-time high. They look at various factors that go into making an aircraft purchase decision and the investment opportunities therein. They have news about a social media giant and much more.
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This video was recorded on December 17, 2020.
Chris Hill: It's Thursday, December 17th. Welcome to MarketFoolery. I'm Chris Hill, joining me from snowy Colorado, it's Tim Beyers. Good to see you.
Tim Beyers: Good to see you too, Sir.
Hill: We've got some news out of Boeing ( BA -1.92% ). We have some, I'm going to call it, sort of news, out of Twitter ( TWTR -1.36% ); we'll get to that in a minute. But we're going to start with global consulting firm Accenture ( ACN -1.06% ).
First quarter profits and revenue came in higher than expected. And Tim, at a time when a lot of companies are still not offering any guidance at all, Accenture also raised their guidance for the full fiscal year.
Beyers: Yeah, it's looking pretty good here, Chris. I mean, this is a company that as a consulting firm, it's often forgotten, that these guys have an army of developers who are working on cloud projects around the world. I think maybe one of the hidden pieces of Accenture, although maybe it's hiding in plain sight here, they do a lot of Teams integration. They are a big Microsoft consulting partner, and so for large companies that are implementing the Zoom alternative that we call Teams, boy! Accenture gets a lot of work on this. And in the latest quarter, Chris, I mean, I know this doesn't sound like a big number, but if you are a multinational company and your average quarter is over $1 billion, 3.5% year-over-year revenue growth, especially in the middle of a pandemic, that's pretty darn good, and that really crushed the average estimate here. This company generates cash flow, it generates profits; I mean, these guys are killing it.
And so, the pride of Ireland, Accenture, is doing incredibly -- well, people don't know that Accenture is headquartered in Ireland, but they are killing it here, Chris. They really did an amazing quarter.
Hill: And the stock is responding accordingly. And I'm assuming that's not just a quarter, but also the guidance raise for the full fiscal year, it's up about 8% this morning, it's at an all-time high. This is a, just for the sake of context, this is a company with a market cap now north of $175 billion. When you look at the stock, does it look expensive to you?
Beyers: I think it's slightly expensive here, yes, but I also think that if you're looking at the long-term here and if you believe that the cloud is a multiyear or even multi-decade opportunity, then I think the price is justifiable.
I mean, let's be clear, this is a consulting company that is not necessarily compounding earnings at a +20% growth rate and it trades for 34X earnings, but, but! man! The runway in front of these guys I think is long and very vibrant. So, I think the price is justifiable here, if you believe in the cloud for the long-term.
Hill: Boeing is reportedly hiring up to 160 pilots that it will embed at airlines to ensure a smooth comeback for the 737 MAX jet, when it returns to service. And Tim, I couldn't help but think back, you know, this is more than two years now since the crashes of the 737 MAX. I understand this move, like, if I'm David Calhoun running Boeing, I don't think it's hyperbole to say that -- I'm not saying Boeing is in danger of going out of business, what I am saying is, their future hinges on a successful return of the 737 MAX; and embedding pilots with airlines makes sense.
Beyers: Yeah. Absolutely. And part of the issue here, originally, just to not relive an ugly past, but let's just talk a little bit about this. There was an automated system on the original 737 MAX, and there were some reports that came out later -- now, I'm paraphrasing here, so I'm not going to get this exactly right, but there wasn't a lot of training on this automated system. And this automated system would automatically adjust. And in a lot of cases, it would point the nose downward. And it just created instances where the automated system caused problems that pilots could not adjust for. And part of the issue here, Chris, I think is that there just was not a lot of verifiable training here, there weren't people -- I mean, my oldest son is training to be a pilot, I mean, what is the No. 1 thing you do when you're training to be a pilot, you need simulator time, you need training time, you need to be with the airplane.
So, I think this is a really smart move by Boeing to get embedded with the airlines and make the pilots feel very comfortable about flying this plane. Because nobody is going to want to take the orders of the MAX if the pilots don't want to fly it.
Hill: I originally thought, as this dragged on, you know, in the immediate aftermath of this, it seemed like Boeing was doing all the right things, like I said, we're now in the third year of Boeing dealing with the 737 MAX as a challenge to be solved. I was looking at the stock performance for the year and shares of Boeing are down a little more than 30%. I had originally thought, because this is essentially a duopoly between Boeing and Airbus, I thought well, you know what, I'm not someone who does pairs trades, but you could talk me into shorting Boeing and buying [laughs] shares of Airbus. But shares of Airbus, when I checked, are also down about the same amount. And I guess that speaks to what's happening with the airlines themselves as opposed to the two businesses that supply the planes.
Beyers: Right. And you know, I think it's easy to forget that the biggest buyer, at least what appears to be now -- I think this is probably a permanent shift here, Chris -- the biggest buyer of planes is probably going to be the leasing companies. So, we're talking about companies like Air Lease. They are buying up these newer aircraft and then leasing them back to the airlines so that they're not taking on just these capital expenditures. I mean, you know, you look at some of the worst balance sheets that were out there and why airlines got impacted when the original, you know, virus hit and planes were grounded. It's not just because planes weren't flying, it's because these businesses are heavily, heavily leveraged. And one of the reasons they are heavily leveraged is, you know, it's really expensive to buy aircraft. So, I think we're seeing this shift to Boeing and Airbus selling into the leasing companies. And I think the leasing companies have some pretty fat fleets right now. They don't necessarily need to load up anymore right now.
So, part of the reason that Airbus, I think, is suffering is because there may be a little bit a glut, in terms of equipment, and people are going to ease back into the 737 MAX. And it's not going to be the airlines, with the notable exception of Southwest, that are going to be the first buyers for the 737 MAX, it'll be the leasing companies. And Southwest is sort of the principal buyer. So, Southwest will be the exception here, but the rest are probably going to go to the leasing companies.
Hill: When looking at the airline industry writ large -- I'm including the airlines, I'm including Boeing and Airbus -- where do you think the signal is going to come in 2021 that, I don't want to say everybody is in the clear, but that, OK, now we're looking at an industry on the uptick? Because it still seems like -- again, you can look at Boeing and Airbus, this is essentially a two-business industry, and you can think, well, I'm bullish on the future of airlines, so I'm going to buy shares of both, I still don't think it's time. So, where do you think that signal is going to come from, is it going to come from the Boeings and Airbus' or is it going to come from the leaders of the airlines themselves?
Beyers: No, I think it's going to come from the airlines. And I think that the actual metric to watch here, Chris, is what's called "load factor." So, let me just explain what this is, load factor sounds like a fancy term, it's really not, it just means how full is the plane when it flies; that's it. And I think once it starts to consistently pass 70%, then you are seeing upswing, then you're going to see airlines saying, OK, we can start doing capacity planning now. Because airlines do capacity planning before they start figuring out how to upgrade their fleets. So, Delta, United, American, Southwest, if they're flying their planes at 70% full, roughly around 70% full, like, a few months in a row, I think that's when you could say, OK, we are getting back to normal.
Hill: Before the U.S. elections last month, Twitter changed its retweet function to prevent the spread of misinformation. Twitter has now withdrawn that change and gone back to its original method of retweeting. And I'm sorry, but the snarky part of me looks at this and thinks, oh, I guess the spread of [laughs] misinformation has been solved.
Beyers: Right. Like, can we please pick a lane here? [laughs] Can we pick a lane? This doesn't make any sense to me at all, Chris. And I think this is part of the reason why Twitter has been a little bit of a nightmare for investors over the past few years, because it can't ever seem to make up its mind, you know? Jack Dorsey is going to go focus on Square; he's going to move to Africa; we're going to focus on content; we're going to battle misinformation; no, we're not going to battle misinformation. I mean, what are we doing? I think, for Twitter, this is one of the reasons I don't own the stock.
And I think this is one of the businesses that's so infuriating, it's almost, Chris, like watching the athlete and you could say, man! That golfer has got ... like, John Daly, right, if you remember John. John Daly could hit the ball a mile, you're like, man! This guy is going to be amazing forever. And then, not so much. And I feel like Twitter is the John Daly of the stock market. [laughs]
Hill: [laughs] It is a reminder, David Gardner talks about the snap test, you know, if you could snap your fingers and this business went away, how would you feel? And David has made this point as well, but this is one of those cases where the snap test doesn't really apply for investors. You know, if Google [Alphabet] goes away in a flash, I guess we'd all start using Bing, but like that would ...
Beyers: ... would we though, would we? [laughs]
Hill: [laughs] That would be very problematic for a lot of people. And you can look at the performance of Alphabet as a public company and see where the snap test applies. I think for a lot of people, myself included, if Twitter went away, I would be bummed about that. Like, that would affect my day-to-day life, because I use it for work.
But to your point, and this is even taking into account the fact that shares of Twitter over the past year are up 75%, I still look at this business and think, for so many reasons I wish this was a private company.
Beyers: Yeah, me too. I mean, if it were a private company, then you could make some really tough decisions without having the overhang of institutional investors saying, why are you doing this or why are you doing that? And I think that, yes, I think that would make a difference. And, hey, look, I know I used the John Daly analogy here, so let's stretch it just a little bit further. That guy still hits 300 yards. [laughs] He may not be winning PGA Tour events, but he still hits 300 yards. And the same thing is true of Twitter, right. Twitter still has one of the most impressive, immense networks in the world, and that has value.
Hill: It does, but they're still not great at monetizing it. You know, the value proposition for users of Twitter is pretty clear, the value proposition of Twitter for investors has been so murky for so long, that's why [laughs] I wish it were a private company, because it would just remove that as an option.
Beyers: Right. And if there was optionality here, like, can you list the number -- I mean, I think we could both spend some time here listing the number of experiments that Twitter has tried and that just hasn't gone anywhere. And the recent one that I thought was really going to be interesting here, Chris, that we have heard nothing about, recently at least, was you recording up to, I think, it was either 1 minute and 40 seconds or maybe a 2 minute message into a tweet and you send a voice tweet. What happened to that? Are people using it, has anything...? Like, we have not seen any meaningful innovation at Twitter that I can point to that says, OK, I can see progress, that this company is thinking about ways it can serve its customers better and grow. I just am not seeing that.
Hill: Is there a price at which you would pay a subscription to Twitter if it ensured you didn't see ads?
Beyers: I might. For me personally, I'm not the best use case here, because I have found that being on Twitter and Facebook is just not good for me mentally, but if I were the person, like many of us who use it for work, I could easily see paying $1 to $2/month and saying, yup! Give me ad-free, fully customizable Twitter and I'm in. I could absolutely see that being an option. And you could have a multitier, right? You could have free Twitter and you could have a subscription Twitter. And I think that would be a fascinating experiment.
Hill: Tim Beyers, always good talking to you; thanks for being here.
Beyers: Thanks, 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 on Monday.