American Express: Bull vs. Bear

In this podcast, Motley Fool analyst Jason Moser discusses hits and misses from Salesforce.com (CRM 0.42%), Meta Platforms (META 0.43%), Hologic (HOLX 0.36%), Squarespace (SQSP 0.40%) and more, as well as the current state of publicly traded grill companies Weber and Traeger.

And Motley Fool analysts Jim Gillies and Bill Mann take a "bull vs. bear" approach to discussing one of Warren Buffett's biggest investments, American Express (AXP -0.62%).

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 Feb. 14, 2022.

Chris Hill: Today on Motley Fool Money, companies paid millions to get their messages across last night. How did they do? We've done a good old fashion bull versus bear debate, and you get to pick the winner. That and more coming up right now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me.

Chris Hill: Congrats to the LA fans. Condolences to the Cincinnati fans. I think if there's one thing we can all agree on, was a great halftime show.

Jason Moser: That was an exceptional feat right there. I tell you, I'm not the biggest halftime show guy. I just don't like them, generally speaking. I'm tuned into the game really. But with that said, when you see what they put on and everything involved with putting something like that on, that's a tremendous amount of work, a tremendous feat they pulled off. Yeah, the quality of that show was really impressive.

Chris Hill: You and I were talking this morning about the Super Bowl ads. Obviously, a lot of public companies involved spending millions and millions of dollars for the time and in some cases millions of dollars to produce the ads themselves. I wanted to talk about a few of them because, as is typically the case, there were some hits, there were some misses, there were some things that were maybe somewhere in between. I'm always interested in this because, this is something that is completely in control of the company. There are many parts of a business that are dependent on partners, dependent on a variety of factors. In some cases, dependent on weather, which no one can control. Although, I believe someone's working on a machine to take care of that. But when you think about marketing, this is how companies see themselves. 

This is how they want us to see them. Obviously, when we're talking about snacks and beverages, they fall under the umbrella of, "Hey, when you're consuming our products, you are having a good time." Let's put those aside for the moment. The Salesforce ad with Matthew McConaughey, which people in my home, after that ad, turned to me and said, "What was that? What was that ad for?" I'd seen it previously, but it's only at the end that the Salesforce logo goes up there, and if you blink, you miss it. I was tempted to say, I think they missed an opportunity there, but I do think it's a window into how Salesforce and their marketing team sees their business. They see it as we are connecting people. We are connecting businesses with one another. We are a solution. Maybe it was a shot at Jeff Bezos and Elon Musk, but we're not interested in space. We're interested in what's happening here on the ground.

Jason Moser: I think you're right generally speaking. These are opportunities for companies to get out there and communicate with folks, not only how they see themselves, but how they would like us to see them. I am with you, the Salesforce commercial, I'm a McConaughey guy. I think he's terrific. That commercial, it lined up perfectly with Salesforce, honestly. Because Salesforce is the kind of business you look through that 10K. You look through the business description like, "What the hell to these guys do? I'm not sure what they do. That's a lot of people. CRM, customer relationship, what does that mean?" That commercial is right in line with, "What the hell is this commercial about? Oh, Salesforce. It's the commercial. I'm not really sure what it was about talking about the business. I'm not sure what it really does." In that regard, it was right in line. 

I think it made a lot of sense. But, yes, just a little bit here to your point, to me, the Super Bowl commercials are always fascinating because some are really good. It feels like more and more. They are just relying on star power and pushing the other stuff to the wayside. It's like it doesn't really matter about the commercial anymore. It's more about the star power. Let me give you an example, the Lay's commercial with Paul Rudd and Seth Rogen. I'm sorry, those two guys are fine, whatever. But that was the dumbest commercial probably. It was really annoying actually because there was no point. Maybe that is the point. Maybe you're just sitting around doing nothing and those are the best times to just sit there and eat Lay's chips. I don't know. I don't need a reason either, but it is very fascinating to see these commercials rollout. Some of them are hits, some target our heartstrings, and some you're just thinking that was a missed opportunity.

Chris Hill: We've talked a lot about Meta Platforms and the aspirations for that business with the Metaverse and the VR goggles. You've tried VR goggles before, right?

Jason Moser: Yeah.

Chris Hill: I have and I think for anyone, whether it's Oculus or some other version of that, if you've put on a VR headset and either played the game or done some simulation, you instantly see the potential for this. I felt like the Meta Platform's ad, which basically took Chuck E. Cheese like animatronic creatures that were disbanded from one another, and then they somehow all got VR headsets and they were reunited. It just seemed like such a missed opportunity for Meta Platforms because isn't a move there put it on people, give people the experience or try to simulate what it's like for someone when they put on whether they're playing a game or they are transported to another part of the world?

Jason Moser: Yeah. I watched that commercial, and the first reaction I had was, like, if that's the metaverse, I don't really want any part of it because it just didn't look like it had anything to do with really anything that is of interest to me. Did you get Toy Story vibes? I got Toy Story vibes from that commercial almost. It felt like the plot of some of private-label brand Toy Story movie. It was like Toy Story but [inaudible] really is good?

Chris Hill: But it wasn't made by Pixar. It was made by some knockoff studio.

Jason Moser: Yeah, knockoff studio being Meta. It feels like that lines up with them. I don't know. I'm not the biggest fan, obviously. I feel like, when you're talking about virtual reality, augmented reality, immersive technology, that didn't really hit the mark because it wasn't terribly relatable. They were trying to have fun with the story, of course, and to that point, I think they succeeded. I could see where they had fun putting that together, but it really didn't feel like it communicated the world-changing implications, the potential of immersive technology, and how it can really impact us in our lives. Because Chris, I can't relate to a big stuffed animal that has been thrown out to pasture. [laughs]

Chris Hill: Two more that I'll throw out there, and then we can move on. You talked about tagging on the heartstrings. I thought the Chevrolet ad, they get an A in nostalgia with the throwback to the Sopranos opening hands. The two people playing Tony Soprano's kids, I thought somewhere Don Draper is smiling because this gets an A for nostalgia. The other one that I thought just really hit the bulls-eye was the Squarespace ad with Zendaya with her seashell shop. I just thought, it's a star in Zendaya, but it also does a perfect job of just explaining this is what Squarespace does. This is a business that creates websites so that you can take whatever is your dream shop and make it better. We're going to help you with your side hustle. I thought it was a perfect ad.

Jason Moser: I agree. I'm glad you mentioned that one because that one really stood out to me. It was clear. It was cut and dry. It made sense. They obviously took advantage of getting some star power in there, and whoever wrote that commercial, God, you have to figure that took a few takes. [laughs] But I always like the commercials that go back to some of the nostalgia. You talk about controlling the weather. "Hey, listen. There was Dr. Evil, the Austin Powers commercial, the GM (GM 0.48%) Austin Powers, I'm all for it. I'm here for that potential 4th Austin Powers movie." You know I am a Diners, Drive-ins, and Dives nuts, so I thought the Budweiser  Flavortown ad with Guy Fieri and Flavortown and the new Bud seltzers was a good one. I thought that was right in line. Then another one I thought that was really good, and there were a couple of reasons why; number one, I'm familiar with the business, but then number two, I feel like it was very relatable and I feel like the commercial could have had the same impact even if it wasn't a star. Even if it was just some normal everyday person. You plunk in that commercial, it could have had the same impact was the Hologic commercial. 

Mary J. Blige going in for her routine, I think it was just a routine breast exam that was something we encourage everybody to do. You get to that certain age and that's something you want to do there. Hologic is a business that really produces, innovates on all of that imaging equipment, and those services. To see that commercial, number one, Hologic is a business I'm familiar with, so I was like, "Hey, wow, neat." That's an idea I've been looking at for a while, but then also, just it was very relatable, and I felt like you didn't even need the star power. It's great they had it, but I don't know, to me, that was one that stood out because oftentimes, I think as the game goes on, I get more and more critical of these companies. They're just relying on star power in their commercials and get lazy. That was a commercial that was neither lazy and while it had star power, it didn't need it. Although that's great that they got it.

Chris Hill: Before I let you go, I know it's February, so it's not necessarily grilling season, but I feel like for people like you and me, it's always grilling season. The grilling businesses as stand-alone companies are having a rough go of it. [laughs] I don't know if you've noticed, the Weber Grill came out with their latest earnings report. Not great results, lower the expectations. You've mentioned Traeger a bunch of times before, and I looked at that. Look, Weber and Traeger have been public companies for less than a year. It has been a short, unhappy public life for those two companies with each stock down around 50 percent or so. Which I guess leads me to two questions. One, are these businesses which are not very big, I think Traeger has a market cap of around one billion. I think Weber has maybe three billion. Are these businesses going to be stand alone public companies in two years, or is someone going to snap them up? Then two, what should people expect out of these businesses? Because even last year when they were getting ready to go public, I remember you and I were talking and even though we are fans of the products, these are not subscription businesses, these are not repeat purchase businesses. I think I might have made the joke that Weber should make their grills less durable because [laughs] I've had a Weber pro for 15 years and maybe if it broke down, I'd buy another one.

Jason Moser: Like mattresses. You're not going to buy a whole lot of them throughout your life. That's a good thing. But that's by design. As I've said before, I just get a Traeger for Christmas and I hope that's the last grill I ever have to actually get in my [laughs] entire life. I'm going to take very good care of you Chris. I do feel like these are businesses that can exist on their own. Yes, I feel like whether they are public or private, that is going to be for leadership to determine. Becoming public obviously opens up a lot of opportunities potential for additional capital to grow. I was going through Weber's earnings release. I was going through the call earlier. It sounds like it was a bad quarter, but yeah, to your point, you're not going out and buying a new grill every year or every five years really. When you look at the numbers, they generated just under two billion dollars in revenue for 2021, and they're calling for about seven percent growth from that for this coming year, fiscal 2022. But when you look at the trend, we've been talking a lot about inflation and supply chain crunches. The semiconductor industry is, I think been front and center.

But you look at something like a grill manufacturer, where they have manufacturing all over the world. Now, Weber does have a domestic manufacturing presence, which is great. But really, they are feeling some real headwinds from this recent supply chain crunch and also just exporting. The production in China, for example, they're facing 3-4 times the container costs that they were just a year ago. While they were able to tread water on that revenue line, when you look at the gross margin for this business, this was a [inaudible] cutter. I'm going to have to repeat this to make sure you hear me correctly, gross margin fell 2,100 basis-points, 2,100, yet it's 21 percentage points that their gross margin fell from a year ago. That was all based on really supply chain crunches, shipping costs, etc. They pass through three price increases already over the past 12 months. Now, we talked about Chipotle in its pricing power over the last week. You're right, these grill makers, they're not based on these repeat purchases. 

For a business to see that gross margin compression over such a short period of time is very concerning. Particularly when the question is still out there, how are these guys going to gin up some repeatable sales model? You see them doing things like building out the wood pellet grill offering, for example. You've got to keep on buying those wood pellets, that's a recurring purchase. They continue to offer more on the side of the actual cuisine offerings, recipes, services, things like that, trying to build some type of subscription business. That's going to take some time. I think when you see Traeger and Weber particularly, I think they have the opportunity over longer periods of time to build out an identity well beyond just being a grill company. But that is going to take some time, it's going to take some patience, and it's going to take some vision. It is, I don't know if it's a zero-sum game or not, but it really does feel like it's not one where a rising tide is just going to lift all boats.

Chris Hill: I really wish there's sports book where I could go and just put 10 bucks down on in 2022. An activist investor is going to get involved in one of these companies because I really feel like that's a ripe opportunity.

Jason Moser: I think you're on to something.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: The class between the rams and the bangles was nothing compared to the battle you about this hear next. On one side, Motley Fool Senior Analyst, Bill Mann. On the other Motley Fool Canada's Jim Gillies. In between them, one of the mainstays of Warren Buffett's portfolio, American Express. Bill Mann, take it away.

Bill Mann: Now Jim, we have been given a company. It has been assigned to us.

Jim Gillies: It has.

Bill Mann: Our crack director has flipped a coin to give one of us the bowl argument and one of us the bear argument. Now Jim, the company that we're talking about this time is American Express, ticker, AXP. Would you think that the bowl has won the coin flip? I think you've won the coin.

Jim Gillies: I think I've won the coin flip.

Bill Mann: I have lost the coin flip, so I'm the bear. I'm going to give things over to you and you are going to make an argument why American Express will beat the market from today.

Jim Gillies: I will certainly endeavor it if not a company I've traditionally spent a lot of time looking at, but I think it's a company that fits into a very important niche for your portfolio and that is the bedrock companies of your portfolio. I think everyone needs bedrock companies so you can sleep well at night when you have more, shall we say, enthusiasts, part of your portfolio, high-growth, but also potentially some losses at certain times. American Express is the original fintech company. It's the original payments company. If I just say the words, "Don't leave home without it," you know what I'm talking about.

Bill Mann: Pants.

Jim Gillies: Right. [laughs]

Bill Mann: Sorry. [laughs]

Jim Gillies: Please don't have to leave home without your pants, but no, that was one of their well-known tag lines; American Express, "don't leave home without it." I mean, travelers checks, I think largely gone by the by, but from a payment service where you're getting tiny little fractional amounts from all transactions, you're getting card fees and whatever. This company pioneered that whole thing. That now we get very excited about when it comes to payments in FinTech. Even if you don't realize it, they partner with companies like Google Fire for Google Pay. They partner with companies like Apple for Apple Pay, you don't realize it. A lot of people will think of Amex as being old, stodgy. But it's actually not the case. Well, they're old and stodgy, they're growing pretty strongly even today through the forecast for the next three years is about 15 percent earnings growth just from here. You're paying, I think 20 times earnings. This is a very reasonable valuation. 

As well, Amex falls into a category of companies that I call cannibals, as in they like to eat themselves. Because they produce so much cash and they pay a dividend that's about one percent yield, I think. They pay a modest dividend, but they have also been very deliberately buying back their own stock with all the excess cash they generate. In fact, they've been taking down their share count by about 3.5 percent a year. The share count today is about 62, 63 percent of what it was a decade ago. Or to put it into another context, Warren Buffett from Berkshire Hathaway, famously during what they call the salad oil scandal, famously bought five percent of American Express when it was temporarily beaten down because of that scandal. Today, he owns 20 percent, and has ever bought another share. That's how much they're reading themselves.

Bill Mann: Well, thank you for that. It's difficult for me to be on the better side for American Express because it is a company that I do admire. There is something about American Express though, and I think with every company you own, you should be able to express the risks because there is no such thing as a company without risks. It blows my mind. But a few years ago, maybe the most important partner for American Express, company called Costco, maybe you've heard of it, ended its relationship with American Express. They once had an exclusive relationship, and since that time, American Express stock has outperformed Visa, the company that replaced it. American Express stock is up more than 60 percent since the beginning of January in 2021. If you were to look at American Express, you would say that it is a claim on the health of spending of consumers. I happen to think that although American Express has done very well from a business standpoint, I happen to think that this is a little bit over baked, that the excitement around American Express is basically the flip side of the days after they were kicked to the curb by Costco. 

Now, American Express made about $42 billion in earnings in 2021. It has about $26 billion in expenses, and much of those expenses either come from the form of marketing, which is up about 50 percent over the year previous, or it comes in $11 billion worth of card member rewards and services. These are huge expenses for them, and they are also ones, when you think about cannibal market, I think the credit card market is also a cannibal market where you actually can lose share to these other really big, aggressive competitors in the form of Visa, and Mastercard, and Discover. But also there are these young guns coming down to pike companies like Square, companies like Stripe, companies like PayPal that are eating into this market and really making a place. Again, as a bear, I really do admire American Express and I do think it's a great company. But we should not be jaded to the fact that it is a call on the health of the American Consumer, and I'm not quite sure that the American Consumer is quite as healthy as all that at current prices. We're going to move to the rebuttal round. I'm going to send things back over to my friend Jim Gillies, who has 90 seconds to tell our listeners why what I said was nonsense. Over to you.

Jim Gillies: What you've said is essentially the valuation is the problem, especially with competition. I happen to love Mastercard and Visa, who you specifically call that as competition. I happen to own both, so I'm not going to argue that Amex will just simply beat them. But looking at the measures of valuation that we used for a company like American Express, it's trading about 19 times trailing earnings, and it's average over the past decade is 18 times. I don't think I see the same, shall we say, wildly overvalued status. By the way, I believe I don't have it up my screen here, but I believe that's a lower valuation than both of those computing companies you've named. Certainly, lower than a PayPal and Square as well. I actually happened to think that it's not all that bad given that I'm going to get to 15 percent earnings growth between profitability and continuously reducing their share count. The other thing is, I think you're going to see them start hiking their dividend again. They've been sitting on the sidelines for a couple of years during the pandemic. I think that's over because they've really released a lot of their reserves back into their balance sheet. I think we're looking pretty decent there.

Bill Mann: Over to me.

Jim Gillies: Over to you.

Bill Mann: You went with their tag line, "Don't leave home without it," which is in fact one of the most successful famous advertising campaigns slogans in history. My question to you is, why not? Why not leave home without an American Express card? There are plenty of alternatives, including as companies like Stripe, and Square, and PayPal begin to move into direct payments. Why do you need to carry an American Express card? Why? Because I don't know if you've noticed Jim, but in a lot of places, the one card that is not accepted tends to be American Express. When there is one that's out, it tends to be American Express. If this company, and it is a financial company, I take your point about the price to earnings ratio, but with financial companies, that's not necessarily the best way to measure it. If this is the company that we should say, "Don't leave home without it," and it is still not accepted at as many places as its competitors, why not? Is it because of all the card member awards? Well, that's a really tough game to play for the long term. I take your point, it is a very good company, but it is also a company in a lord of the flies market, and it may not be holding the COG. Fools, that was bull on bear action, but we do need a neutral third-party, and for that, I'm going to bring in our producer, Rick Engdahl with one important question. Hey Rick, how are you doing?

Rick Engdahl: I'm doing just fine, Bill. I have listened to your arguments and I think that I have a question that piling on what you just said Bill in your rebuttal. I am an investor but I am not an analyst, so I'm coming at this from a consumer's point of view. When I was coming of age, American Express had a gravitas to it, like it was somehow exclusive. Nowadays, I can't remember the last time I left home with it, to be honest. [laughs] How much of their future business is tied up in these partnerships, these invisible partnerships, and how much is really tied up in carrying the card?

Bill Mann: Jim, that sounds like a question for you.

Jim Gillies: It does, doesn't it? I don't have specific numbers in front of me, Rick, I'm afraid. But it is, I liked that you've mentioned there that you are tied up to these invisible partnerships. Because the fact is you are leaving home without it every time you walk out the door, with your smartphone, with Apple Pay or Google Pay on it. You are walking out the door with an Amex card. With an Amex relationship, they are one of the partner banks to Google and Apple, and the mobile wallet system, the 21st century payment system that we follow. That is one of their pathways for growth and there's still are a significant number of cards out there. I agree with you that the ubiquity and the must-have-it-ness is definitely fallen by the wayside overtime, but they found new ways to grow, and that has been powerful, and it's exhibited in the growth the company has shown for decades.

Bill Mann: So Fools, we now have a special part of the show, the interactive part of the show, in which you can go to Motley Fool Money Twitter feed, that is @MotleyFoolMoney, and you can pick the winner who had the better argument. Was it Jim? Obviously not, or was it me obviously so. You will go to the page and there will be two options. It will be Jim and Bill. You will only be able to vote appreciably if you have tuned in to Bull Versus Bear. Thank you very much for joining us. Fool on and have a great day.

Chris Hill: Who had the better argument? Go to our Twitter feed, @MotleyFoolMoney to cast your vote. 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, don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.