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Is It Time to Buy Square and Lowe's Stock After Earnings?

By Chris Hill - Mar 2, 2021 at 3:27PM

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The Fools discuss the war on cash, signs of "The Great Reopening," and more.

Square (SQ 6.39%) wraps up a strong fiscal year, but shares fall on slowing growth. Same-store sales for Lowe's (LOW -0.36%) grew 28% in the fourth-quarter, but pessimism remains about 2021. Despite a rough Q4 report, Six Flags (SIX 0.35%) hits a 52-week high on optimism for "The Great Reopening."

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Clay Bruning to analyze these stories, and Clay shares some boots-on-the-ground research from his days at a Six Flags theme park.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on February 24, 2021.

Chris Hill: It's Wednesday, February 24th, welcome to MarketFoolery. I'm Chris Hill. With me today, Clay Bruning. Good to see you, thanks for being here.

Clay Bruning: Hey, Chris! Of course, happy to be here. How you doing?

Hill: I'm doing all right. We've got earnings for the great reopening. We've got home improvement, we're going to start today with the war on cash. Square's fourth quarter profits and revenue came in solidly higher than expected. Shares of Square though are down 7% this morning because growth is slowing. There's always a lot to get there with Square. When you look at all the numbers, tell me, what's stood out to you?

Bruning: For me, I really focus when I think of Square on really their versioning business, which is the cash happen. It's funny you mentioned the war on cash and they have this conveniently named Cash App. It was really some of the numbers that the Cash App drew in the quarter for that amount of the fiscal year. One of them is a 162% increase year over year in gross profit of the Cash App. A lot of that is being fueled by new users. Specifically, cryptocurrencies like Bitcoin, so I think one number is that throughout the entire 2020 fiscal year, over 3 million people transacted Bitcoin in some regard, which was a 250% increase in volume compared to fiscal year '19. Then they also even gave some information on January of 2021s figure with over one million new buyers of Bitcoin. Really just interesting to have figures throughout the entire report, but Bitcoin being such an important part of that Cash App is what really stood out to me.

Hill: Yeah, and that was certainly part of the headline around Square announcing it had purchased $170 million worth of Bitcoin during the quarter. Cash App is Square's version of Venmo. It's interesting to see the reaction from the stock because on the one hand, this is a stock you, even factoring in the drop today, this stock is up almost 200% in the past year. I understand particularly traders on Wall Street with a shorter-term mentality saying, "All right, it's been a good year. Let's take a little money off the table." That sort of thing. On the other hand, I don't know. The overall market cap of Square is just over $100 billion. It seems like a business with a lot of room to run. I was listening to some of the comments the CFO made around what they are seeing at Square in terms of how sticky the Cash App is, in terms of the other parts of Square's business. How it's this thing that's bringing people in. Once they're in the Square ecosystem, they start trying other parts of the business. I don't know, I get the PE ratio is somewhere north of 500. But when you look at everything that Square has going on, do you look at today as a buying opportunity for people who maybe had Square on their watch list and thought, "Well, OK. It's 7% cheaper than it was yesterday?"

Bruning: Actually, I was looking over the last couple of weeks how it's performed. Through last week year to date, I think it was up something like 27%, then you have, over the last couple of days, 10% or so pullback. These are always the days as a long-term investor that I look for. You have a business that's, in my opinion, burgeoning, having fiscal year revenue grow over 100% granted. Excluding Bitcoin, that's only about 15 or 20%. As a long-term investor, I do think this is an opportunity. I'm not personally a shareholder of Square, but it's a fascinating business to me. We've seen so much traction in, really, their largest growing business in terms of Bitcoin transaction, cryptocurrency, and things like that, which really doesn't seem to be dying. We had the craze three or four years ago, now, and all of a sudden, we have a two-year hiatus, and it's right back in the thick of things, which Square's really benefiting from. I think if you are a long-term investor willing to hold for a couple of years and not too worried about a lot of volatility which Square has realized and probably will continue to experience over the coming months, over the coming quarters, over the coming years, I think this is an opportunity to dip your feet in or maybe increase your position a little bit.

Hill: Lowe's fourth quarter report was similar to Home Depot's yesterday, in that profits and revenue were higher than expected. Same-store sales were up 28%, which was very impressive, but just like yesterday with Home Depot, shares of Lowe's are selling off a little bit. Is this about guidance?

Bruning: Yeah. I never put too much weight on guidance. I was ducting through some of the numbers, their past performance. To me, this is a classic case of a company really getting overheated before their earnings. Lowe's is not your Square. It's not going to go up 10, 15% really any day based off earnings or off of news. Year-to-date through the end of last week, it was up over 10%, almost 11% on the year, which in a month and a half has a low share as someone who might own Lowe's, you'd be ecstatic with that considering the yield and the buybacks that they're doing. To me, this is just a classic case of getting a little overheating into earnings and having that profit-taking and selling off or trimming the position. Nothing in my opinion to be too worried about if you were a shareholder.

Hill: Just to clarify, when you say you weren't too focused on the guidance, is that because you think that the underlying business is strong or do you think that they might be sandbagging a little bit in their guidance, which I've said repeatedly, there's no incentive to puffing up your guidance? [laughs] To me, that's a situation where under-promise, over-deliver is the way to go all the time.

Bruning: Yeah, exactly. If I were management in this scenario, why would you try to have aggressive guidance? You just had realistically a historic year. COVID has produced all of these tailwinds for your business. Then you think about single-family homes in terms of inventory is at the lowest we've seen in over 20 years. I think Lowe's is going to be just fine. Why would you be aggressive in a situation like this when you've had such a stellar year? I wouldn't put too much weight into the guidance. I think they're probably trying to be conservative. I expect it to have a pretty substantial and stellar year again.

Hill: It's interesting because I think it was the chief financial officer at Lowe's who was running through some of the numbers. Similar to weather forecasts in the winter where [laughs] it's like, here's the snow forecast and then we've got the boom forecast and the bust, that thing. It's similar [...] this type of forecasting out of Lowe's. Even though in all three of these scenarios, they are expecting the year-over-year numbers to be lower because as you said, 2020 was such a monster year. In each case, they expect their operating margins to improve, which I find it fascinating [laughs] that they could have just from a business standpoint and from a stock perspective. I mean, Lowe's could have a 2021 where the shares are basically flat, but the underlying business could emerge a year from now, so much stronger than it really sets them up for longer-term success.

Bruning: That's a great point you're bringing up, and I'm glad you did bring it up. I'll go back to Home Depot. I think these are very comparable businesses. I view both of the companies as essentially substitutes. If Lowe's doesn't have something just because Lowe's is close in the house, then I'll drive over to Home Depot to check it out. Home Depot does have, I think, 300 or 400 more stores than them, and substantially, more revenues, but on the other side of the spectrum, Lowe's is outgrowing in terms of revenue growth. Home Depot, which of course, presents the possibility of improving operating leverage, and that's impressive all around. Another number that stood out to me for Lowe's was again, as you could probably imagine with COVID raging lockdowns throughout the country and the world for that matter, is they have massive growth in their online business with, I think, over 120% growth year-over-year. As an investor, you might say, "It's just sustainable in a post-COVID world." But in my mind, I think most of 2021 is going to still be, to an extent, a COVID world with some slowdowns in distribution of the vaccine and whatnot. Then I would also say over time, I think Lowe's will grow into evaluation that Home Depot has. I think Lowe's is a little bit behind in terms of all their margins compared to Home Depot in terms of gross margin, EBITDA margin, and then net margin. Over time, it might not be 2021, but might continue to converge to Home Depot in 2021 and beyond. So encouraging results and guidance in that regard.

Hill: The fourth-quarter results from Six Flags were basically the opposite of what we've talked about so far. This theme park operator lost more money than expected in the fourth-quarter, spending per guest was higher than expected. Naturally, shares of Six Flags are up this morning and hitting a 52-week high. This is part of the great reopening thesis that we saw earlier in the week out of Deutsche Bank. These are the stocks that are poised to do well because of pent-up demand and when the world reopens this summer.

Bruning: I mean, it's got to be it. I totally forgot about this company and this stock personally. I used to be a big fan and a big patron of Six Flags, having a couple of season passes. Every now and then on weekends, I would cough up the extra box for the flash pass, to cut the little lines, which really had me a little sentimental about all my trips to the New Jersey and the Maryland Six Flags. There's no other way to look at this other than investors getting excited about the potential of the reopening year-to-date. As you mentioned today, they are at all-time high, 33% increase per share in little less than two months. So there's no other way to paint this other than an excitement over reopening because those fourth quarter numbers and for that matter, the fiscal year '20 numbers were pretty ugly in my mind.

Hill: One of the things that's always great to see when you're an investor is when you own shares of a company that has and is smart about exercising pricing power. Do you think Six Flags is a business that has pricing power? I'm not really a theme park person per se, but I could see a scenario where plenty of people say, "I don't care what the price is. I'm dying to go back. I took a year off from going to Six Flags." As long as they're not outrageous with bumping up the price, again, I could see businesses taking advantage of that in a smart way to say, "We know it's weird, but we're actually going to bump up prices this year because we think people are going to pay them."

Bruning: Honestly, that might be a prudent decision by management granted they have to run some analysis in terms of the trade-off on how many visitors might be deterred by that, and how many might be totally unaffected by a price change. I think there probably is a pretty large cohort of the 33 million people that visited Six Flags in 2019 that are saying, "Okay. I have no problem coughing up another 10% or whatever it might be to visit the park." I think it's similar to restaurants. Restaurants during lockdown provided a service fee or a takeout fee. That's the nature of the COVID world we live in. Everyone understands that businesses, especially like Six Flags, are really struggling to make money. For that matter, in the fourth-quarter of 2019, Six Flags wasn't making money granted they had a profit in the entire fiscal year '19, but I think that price increase is something that patrons will almost expect to this point with such a strenuous year all businesses have had. It will be interesting to see if management does bump up prices and how that impacts some of their visitors on a quarterly basis, especially as they begin to really reemerge and reopen.

Hill: When you think about your time at Six Flags, what's a ride that you remember fondly?

Bruning: There's a ride in the New Jersey. I used to go to Six Flags Great Adventure in New Jersey and I was probably eight or nine. We'd go with my parents or a couple of buddies. We always saw Kingda Ka. One of my first years having an annual pass was when Kingda Ka opened up. I never had the guts to go on it. I'm kicking myself now and maybe if I'm back in New Jersey in the next couple of years, I'll have to give it a test drive, but that's the one thing where I always regret. I never went on it. My mom would always say, "It's too many G-forces or something like that", but I think I'm ready to climb that hill and go into the drop.

Hill: That's why they're going to raise the price, because of people like you who are like, "I got to go." It's like, you can come back on, we're just bumping up the price a little bit. Clay Bruning, really appreciate your time. Thanks for being here!

Bruning: Thanks for having me, Chris! Have a good one!

Hill: As always, people on the program may have interest in the stocks they talk about on the Motley Fool and may have formal recommendations for or against, so don't buy or sell stocks based solely on what your 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.

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Stocks Mentioned

Block, Inc. Stock Quote
Block, Inc.
$84.79 (6.39%) $5.09
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$300.95 (1.68%) $4.96
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$194.03 (-0.36%) $0.70
Six Flags Entertainment Corporation Stock Quote
Six Flags Entertainment Corporation
$28.36 (0.35%) $0.10

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