This Is an Earnings Call That Smart Investors Never Miss

Airbnb (ABNB 1.09%) and Nike (NKE 0.95%) both got upgrades from Wall Street analysts, but one seems a bit "fuzzier" than the other. Analyst Asit Sharma takes a closer look at the upgrades and analyzes the latest results from Fastenal (FAST -1.43%).

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This video was recorded on Oct. 12, 2021.

Chris Hill: It's Tuesday, Oct. 12th. Welcome to MarketFoolery. I'm Chris Hill. With me today, our man in North Carolina, Asit Sharma. Thanks for being here.

Asit Sharma: Thanks for having me as always, Chris.

Hill: We've got some upgrades to discuss in the travel industry and global apparel retail. But we're going to start with the latest from Fastenal. Third-quarter profits from the industrial products maker came in higher than expected, shares of Fastenal up a bit and close to a new all-time high. This is not a household name, but holy cow, are they in the business of household products. You just go to the Fastenal website and it's hardware, lighting, sealers, electrical equipment, batteries, fasteners. This is a good report for them.

Sharma: It's a great report, Chris. It's a company that I bet lurks in the subconsciousness of many people. If you've ever driven down the highway and just been half paying attention and seeing a Fastenal truck plow past you. It's a name that we're sort of familiar with, but like you say, it's not household. But a good company, nonetheless, for people who like industrial stocks and don't want something too flashy, but companies that have these very solid models that just need optimization over time, they sit in a great place in our economy. Fastenal, as the name implies, actually also sells fastening products, fasteners. You can think of it as a glue company in our economy. For that reason, I also like it as a bellwether of what's happening out in the larger world. This quarter, net sales were up 10%, gross profit a bit slight increase versus the prior year. They gained about 1 percentage point of gross margin to 46.3%, which is a lot in this business. That's fairly impressive. A nice bump in net earnings up to about 243 million. That's another 10% year-over-year increase. What I like about Fastenal a lot is that they have more technology being infused into their selling process than most of us realize. If you've ever looked at this company, you probably know that they have onsite solution for manufacturers where they basically have their own sales personnel and inventory there. They help manage the inventory. But the business which I think is the bigger growth driver for them long term is this vending business. They have vending machines they put in manufacturing facilities. They have bins that are increasingly automated that track inventory themselves and have a digital component to them. This is a long-term investment Fastenal's been making. It's paying off over time in faster sales growth, slightly better margins. Chris, I just breeze through the report this morning. Now a full 45% of their business can be considered digital. When you take the direct to their industrial customer sales plus these high-tech bins that know when to request inventory, that track barcodes and SKUs, etc. This is a more techie business than it would seem on the surface.

Hill: It's interesting because Fastenal is not a huge company. It's about a $30 billion company. Yet I remember talking to Bryan Hinmon a few years ago. Bryan is the chief investment officer at Motley Fool Asset Management Funds. He called it a top-five conference call for him. When he's trying to get a sense every quarter of what's going on in the U.S. economy, one of the conference calls that he always listens to is Fastenal, because it gives you insight into the industrial side of the economy.

Sharma: Let's put that into perspective for today. The CEO today was talking about shipping costs in general. I totally agree with Bryan, it's really instructive call, Daniel Florness rarely holds back. He mentioned today that in shipping, it wasn't just difficultly, it was pain. All of these manufacturers, industrial concerns, and retailers, as we know, big retailers are enduring a lot of inflationary pain on shipping costs. They tell it like it is. They're very specific about how the underpinnings of the larger economy are affecting Fastenal's business. Because of that truth telling, I would call it, it is a great call. Sure, is it a top five call for those who want to know what's really happening out there in the U.S. economy? Yes, I would totally agree with that.

Hill: Shares of Airbnb up 4% today after getting an analyst upgrade from Cowen. The thing that interests me is the part of the report that says, Wall Street is underestimating the potential for Airbnb bookings growth in 2022. I'm always interested whenever an analyst stands up and basically says, ''The rest of you are wrong on this one.''

Sharma: It is. It takes some encourage when you're in a business that is so focused on what's happening next quarter, to be able to do something that we would call Foolish with a capital F and say, well, what about four quarters from now or eight quarters from now? I think the analysis is spot on. There are two big drivers in Airbnb's business that should be paid attention to by investors. One is that their bookings are starting to reflect migration away from big cities. They're still seeing great bookings in major metropolitan areas, but increasingly they see bookings rising in second-tier cities. These are smaller metropolitan statistical areas in the United States, or just smaller cities close to European capitals, is another great example, or travel destinations in Latin America. They're all kinds of examples of this type of city. They are seeing sustained interest in that. That signal says, the world may be changing a little bit after COVID. The other big measure to take a look at is the length of stay. This was something that the company called out in its most recent quarterly report. They're seeing the days associated with each booking continuing to expand. In some cities, this is expanding at rates that exceed pre-COVID levels. There may be a change underway in the way that we are all going to work and travel. I say may here and I hesitate a bit because so much of this is also governed by tax regulations in each country. If you work in the United States, depending on where your employer is based, it may not be that easy to work in your dream destination for a couple of months. You may have a tax implication, and owe, too, states' income taxes, or your employer may not allow you to work in Rome for six months. While different localities start to work out their tax regulations to attract in high-spending remote workers will see some of that change. But it is something that I think this analyst has put his or her finger on that these bookings are pointing to maybe a more sustained piece of market share that Airbnb will enjoy for quite some time to come. I'm not surprised the stock is up today.

Hill: In the longer stay that you mentioned, that jives with something Matt Argersinger said when I was talking with him recently. Because he's got a place that he rents out. I just have to believe that if you've got a property and you are listing on Airbnb, it's just going to be better for a number of reasons to have people with longer stays. It just requires fewer bookings overall, presumably your costs are a little bit lower because if you've got a cleaning crew that's coming in or something like that, that's happening on fewer occasions. It's like you never want to put too much emphasis as an investor into a single analyst report, no matter who it's coming from and what their track record is. But this report about Airbnb, I think does a good job of essentially strengthening the baseline case for the business. We've seen this in other industries where a report will come out and the headline is all about growth strategy, sales, or whatever. This to me is more along the lines of the underpinnings of Airbnb's business are stronger than some people think and more sustainable than some people think.

Sharma: I agree. It's a thesis that's trying to stress test the case for market share that many Airbnb bulls have been making for a long time. Which is to say that this market is so vast, it's in the trillions of dollars, the total addressable market for extended stays when they compete with the hotel industry, they compete with the apartment rental industry. This is a great market here if Airbnb can keep extending its brand within that, then eventually they'll scale into pretty decent profitability. This strengthens that case, and we should say at the same time doing this business case isn't without risk. One of the more recent things against Airbnb is how opaque the total cost of the service is if you are on the platform because often and this has happened to me, Chris, you will be ready to rent that place and then you see the cleaning fee come in, which totally changes the picture because that's a variable expense. We've discussed that before. There are some risks in this, but for those who are interested and have already been thinking along the same line, this is is a focus point for the next quarterly reports to watch these metrics.

Hill: I think they've gotten more transparent with the costs, but it's something they could improve even further. Before we get to our final story, I just want to remind folks our email address is [email protected]. If you've been listening to this podcast for less than a year, then you're probably unfamiliar with something we refer to as Apropos of Nothing. Which is that once a year or so, we have an episode of this podcast that isn't about investing at all. It's just shooting the breeze in, and that's where listeners like you come in because we've gotten some great suggestions on potential topics for these Apropos of Nothing episodes. One that we did last year was what would you put on your Mount Rushmore of soups? That actually ended up being a pretty heated debate. If you can only pick four soups to put on Mount Rushmore. We do have an apropos of nothing episode planned. It's scheduled to come before the end of the month. If you have potential topics, you want to suggest to us, drop us an email [email protected]. Shares of Nike are up a bit today after a Goldman Sachs report that said nice things about the overall health of the athletic apparel industry and the growth plans that Nike has in place. This one seems a little bit fuzzier than the report on Airbnb. I mean, obviously, it's positive on Nike, but I don't know. I'm curious what you thought of it because it didn't grab me in the same way that the Airbnb one did.

Sharma: I think fuzzy is a great way to describe this. I mean, the thesis here is that Nike still has a strong brand. They've made strides with their direct-to-consumer business. They've been able to bounce back numerous times in the past from the types of challenges that they're facing this year. They've got supply chain issues, cost inflation, which everybody and his or her brother's facing. But yes, it is a fuzzier thesis. I mean, one way that we can get to terms with this way of looking at a company, which again, this is a very Foolish capital F way to look at a very strong multinational conglomerate is to think about that brand. I'll refer us all back to a survey that came out last week. This is the 42nd edition of Piper Sandler semi-annual survey, where they survey teens this year or latest survey had 10,000 teens participate across 44 states. Nike earned the top spots in the footwear and apparel categories. They had 27% share of the votes when it came to apparel and a bigger footprint at 57% when it came to footwear. Now, in that same survey, Converse came in at 7%, which has been a Nike brand for quite a while. This is a way for us to quantify the idea that one should invest in Nike because of its brand strength and because it has a really efficient operating model which takes a lot of free cash flow and invests it in demand expense. That is, how do we drive up demand? We do it through sponsorships, we do it through technical innovation. Also, say that Nike has done a pretty decent job of not trying to fight the trends in the industry. They've been a very willing participant in the movement toward technology, embedded clothing, and this whole athleisure market. I think in terms of understanding where they should keep investing to grow, Nike does a very good job, but this is not a straightforward thesis. There is no big change here. No sea change that says Nike can continue to push all-time highs. It's more about, hey, these guys execute at a level which is pretty impressive. We see this continuing, despite the near-term challenges that have knocked the stock down a bit over the past few months.

Hill: On Motley Fool Money last week, I posed the question, which group of shareholders is really hoping for good news this earnings season? Ron Gross said it was Nike. Look, this is a long-term market-beating stock. But over the past year, it is absolutely trailing the market. When you talk about the near-term pressures, like yeah, it's not to say it's not a great business and a great brand. But if you're a shareholder, you're right to be hoping that Ron Gross is right, that they need some good news.

Sharma: Yes. I've really think if you take a look at that Nike chart and just widening out a bit. So much of this may seem temporary in retrospect. To me, they're still chasing those all-time highs even though over the last few months they've been battered by the same issues that I mentioned with supply chains, inflation, just getting product into stores. However, I think that those, again, are temporary. Ron is so right to point out that if you're a Nike shareholder, you just want to hear that things are back on track and that you can feel very comfortable with Nike, such a sleepy stock, but a high achiever, the volatility hasn't been very welcome this year. I can totally get behind his argument there.

Hill: Thank you for reminding me that Nike owns Converse because I always forget that. I'm old enough to remember a time when Converse was a very dominant athletic shoe brand. Nice reminder that just because you're on top of the world as a business for a while doesn't mean you're going to stay there.

Sharma: For sure. I'm literally wearing a pair of Chuck Taylors as we speak. With you there, all love to Converse and Nike for that. For that matter, I often have been guilty of second-guessing this company over the years. Sometimes you have to express your appreciation. So might as well do it while we're still here in the next minute or so, Nike has done an admirable job over the decades, just pushing out great earnings value-creation and withstanding a lot of change in the industry. This is something I think going forward. Again, if you're a shareholder, you can sleep well at night knowing that the management team is always a little bit ahead of the trend. They've invested appropriately by the time that trend really starts to take off. They were a pioneer in the sports endorsement game, still do very well at that. Have also mastered the art of taking a single sub-brand like the Jordan brand and just making it an everlasting property. Hats off to Nike in that regard, too, again, like Airbnb, not a risk-free thesis. But this is definitely among blue-chip companies, one that you can sense will keep executing for a while to come.

Hill: Asit Sharma, great talking, thanks for being here.

Sharma: Thank you so much, Chris. A lot of fun.

Hill: As always, people on the program may have interest in the stocks they talked aboutandn The Motley Fool may have formal recommendations for or against. 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's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. See you tomorrow.