In this podcast, Motley Fool senior analysts Emily Flippen and Ron Gross discuss:
- Stronger-than-expected GDP sending stocks higher.
- Tesla ending the year on a high note.
- Chevron's record profits and huge buyback plan.
- Visa and Mastercard delivering strong profits (again).
- The latest from Intel, Microsoft, Southwest Airlines, and Johnson & Johnson.
- Chipotle's plan to hire 15,000 workers for "burrito season."
- Two stocks on their radar: Mercedes Benz Group and Domino's Pizza.
Motley Fool analyst Deidre Woollard talks with Corrado Russo, head of global securities at Hazelview Investments, about real estate, REITs, and a part of the market investors might want to avoid.
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 Jan. 27, 2023.
Chris Hill: Earning season is heating up and one of the biggest names in tech is cooling down, Motley Fool Money starts now.
This is Motley Fool Money. It's the Motley Fool Money radio show. I'm Chris Hill joining me, Motley Fool Senior Analyst, Emily Flippen and Ron Gross. Good to see you both. We get the latest headlines from Wall Street. We've got the latest on real estate and as always, we've got a couple of stocks on our radar. But we begin with the big macro. Despite fears of a recession, US GDP rose nearly three percent in the fourth quarter and was slightly higher than economists were expecting. As much as anything, Ron, that GDP number helped push the overall market higher for the week.
Ron Gross: For sure, Chris, it looks like we've pivoted somewhat and instead of interest rate hikes dominating the headlines we're talking more and more now about the potential for a recession, whether it will happen and if so, how shallow or deep it will be. Reports like the GDP one provide data points to help economist strategists, even traders, makes some educated guesses. As you said, GDP was slightly better-than-expected. Importantly, it was quite positive not negative so that continues to signal a resilient economy. But as there should be in a rising interest rate environment, there were some signs of weakness that we should pay attention to. 2.9 percent was less than the third-quarter's 3.2 percent pace so we see a slowing there.
Consumer spending, which is 68 percent of GDP weakened a bit. Housing has come down sharply, but you do have strengthened government spending that help offset that. The labor market remains strong, which is good for workers, but not necessarily good for bringing down inflation. You boil that down here we are sitting here with the economy. I think a bit worse than these numbers would indicate because interest rates take a while to make their way completely through the economy. Our recession is by no means off the table. Chances of it being mild, I think are increasing, stock market as you say, has been strong this year as a result, but the Fed is not done yet, expect more rate increases, but hopefully, I think likely at a slower pace.
Emily Flippen: Well, I know I just locked down financing for my mortgage on my first house. If that's any indicator, that means rates are straight down from here. All seriousness, the Fed has done a great job of managing investor expectations when it comes to interest rates. It's not surprising to see the uncertainty now focusing on. Well, what's the health of the economy where a GDP numbers at? Because the uncertainty used to be around interest rates that dominated the headlines that drove market movements. That uncertainty is largely gone. Now we're moving onto, what uncertainty can we find and other places for right now is the GDP numbers? It's not surprising at all to see this news really driving the sentiment in the market.
Chris Hill: Let's get to some of the big earnings news of the week. Many people know Elon Musk is the owner of Twitter, but it turns out he's also the CEO of an automotive company called Tesla. Fourth-quarter revenue was a record $24 billion in shares of Tesla up more than 25 percent this week, Emily?
Emily Flippen: Yeah, let's be clear. The expectation were relatively low for Tesla in the quarter. I'm not to say that the business was expected to be weak, but with all the antics that are happening around Twitter and Elon Musk, it's fair to say that investors were expecting things to be a little bit less than stellar, especially with the news over the last quarter so about Tesla employees potentially at doing work on Twitter that caused many investors to be concerned about, what is the resources look like for Tesla today? Should we be worried as Tesla shareholders? But even in the face of increasing competition and higher expenses, this was a record quarter for Tesla. Automotive revenue grew 33 percent to over $21 billion. Earnings even beat expectations by six cents, $1.19 per share.
There were some concerns around the gross margins for this business because over the last five quarters we've seen the automotive gross margins ticked down and they reached just under 26 percent in this most recent quarter, which is their lowest level over the last five quarters but it isn't entirely unexpected. Just like other automotive makers, Tesla is trying to go mass market. Lowering the prices of its vehicles to make it more accessible to consumers as they did at the end of last year is probably a smart strategy in Tesla's book. They need to keep up a really high revenue growth rates should justify today's valuation. But it's also just aspect of the car market or the last couple of years, used cars, new cars have been incredibly expensive and part thanks to supply shortages. There's a natural contraction in prices, but I think that says a good quarter for Tesla and a strong indicator that they're willing to pivot and change to keep up with the changing times.
Chris Hill: This is a stock that's been recommended a bunch of times across different Motley Fool services. My hunch is that shareholders, we're happy to see Musk back in the job they want to see him in, which is, please focus on being the CEO of Tesla.
Emily Flippen: It's actually interesting to think about how the dynamic of Tesla shareholders and Musk fans has changed over the past year. I think there are a fair number of people who are shareholders of Tesla, maybe even fans that Elon Musk that's still today think that, hey, the breadth of Tesla is maybe worth more without the involvement from Elon Musk, just because it could potentially dampen sales when people are afraid to buy a Tesla simply because of its association with a relatively controversial figure. It's interesting, it used to be a net benefit for Tesla, but I think that discussion has become a little bit more to the forefront of shareholders minds. If Elon Musk were to disappear tomorrow from Tesla, I can't say that my confidence in Tesla shares or that shareholder confidence would necessarily be shook.
Chris Hill: Shares of Intel fell nearly 10 percent on Friday after the chipmaker ended its fiscal year not with a bang, but a whimper, fourth-quarter profits were much lower-than-expected with revenue down more than 30 percent year-over-year run.
Ron Gross: Not good, Chris, not a strong report, weak report, worse-than-expected results, disappointing guidance. It's hard to point to something good here. A steep decline in demand for PC processors largely to blame, but Intel is just not the competitive and innovative force that it once was. This is not your father's Intel the company is clearly struggling. As you mentioned, revenue down 32 percent, client computing group down 36 percent, data center business down 33 percent, adjusted earnings were 10 cents per share. Well below expectations. CEO Pat Gelsinger has work cut out for him. He's attempting to reinvigorate and reinvent the company. He is accelerating the introduction of new manufacturing technology.
He's building factories in the US and Europe, shifting concentration away from Asia. He's trying to turn Intel into more of a contract manufacturer handling outsourced work for companies that will be in direct competition with Taiwan Semiconductor. Formidable competition so not a gimme there what he is trying to do. There also cutting costs rather dramatically. Intel warn that revenue could fall to the lowest quarterly level since 2010 in their recent guidance and the CEO, perhaps a little Constellation said, I'd like to remind everyone that we're on a multiyear journey. Well, one would hope so because this report is really weak. Intel is not the industry be or whether it used to be. I'm really curious to see what AMD Qualcomm and others say when they report. Finally, I'll mention they did maintain their dividend, which stands at a pretty healthy 4.9 percent.
Chris Hill: Isn't every company on a multiyear journey, aren't all the businesses? What kind of comment is that?
Ron Gross: Not a multiyear turnaround for half a journey, yes.
Chris Hill: Just real quick on the stock Ron, shares of Intel are trading basically where they were seven years ago. I realize they're going through a rough stretch here and Gelsinger and his team are trying to turn this around. Do you look at the stock and think, on a valuation basis, this is starting to get interesting or they're just too many question marks around what they're trying to do?
Ron Gross: I've recommended this stock, it's part of our instant income portfolio. I like the 4.9 percent dividend as long as it's safe for now, I think it is valuation's hard because looking at metrics right now compared to where their earnings are right now, are not necessarily indicative of where this company will be a year or two from now and to project into the future is really difficult. I'm in wait-and-see mode to see how Mr. Gelsinger executes.
Chris Hill: Well, if it helps, I hear there on a multiyear journey. On Friday morning, Chevron's fourth-quarter results wrapped up a year of record profits. But earlier in the week, Chevron made more headlines by announcing a $75 billion share buyback plan. Emily, where do you want to start?
Emily Flippen: Well as Chevron auto multiyear journey here, because it seems to me that they're only priority is basically spending all of their capital or repurchasing shares at this point because $75 billion, admittedly over five years is certainly driving the narrative for severance shareholders. Sure, their record profits were nice over the course of 2022. They are the second-largest US oil producer. It's understandable that they had an incredible year over the past 12 months. But nothing like high expectations to be a time to repurchase your shares near all-time highs. It's certainly a conundrum for shareholders.
On one hand, share buybacks do pad investors returns. There are wave for almost like dividends and a sense where their wafer Chevron to just show support for their shareholders. You might not get a lot in terms of capital gains, but hey, maybe you get some share repurchases, you get some dividends and that justifies these part of this purchase. But $75 billion represents more than 20 percent of Chevron's current market cap. This is a massive investment by the business. This plan has been called a slap in the face to drivers since the perception is that, Chevron continues to benefit off the pain of consumers that people who are actually consuming and using oil on a day-to-day basis.
But it's a pretty silly move if you asked me just because I think Chevron sees the writing on the wall, the multiyear plan is not well-thought-out with this business because support their stock does depend on oil production and most forecast shows growth in oil production slowly declining over time. That's likely to compress earnings. If you're looking at Chevron's priced earnings ratio of around 10 times right now with their dividends and their share repurchases, I wouldn't jump to the assumption that this is a value stock or a cheap business by any means because these earnings are likely to compress. But buying back their shares at these levels in this amount of quantity is certainly a head-scratcher.
Chris Hill: Coming up after the break. We've got the latest on software, healthcare and the war on cash. Don't touch that dial. This is Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here with Emily Flippen and Ron Gross. Microsoft grew revenue in the second quarter, but it was the software giant's slowest sales growth in more than six years. Shares of Microsoft up a bit this week, Ron, but you tell me how concerning is this?
Ron Gross: The report itself was OK, but the stock got hit on the future guidance and interestingly, shares have since completely rebounded and actually moved higher along with the strong tech sector and the stock market, at least strong for the week, only up two percent revenue, very slow six years, as you mentioned, their Cloud business was up 18 percent, their specific Azure business was up 31 percent, which on an absolute basis seems pretty strong, but there's indications that these businesses are slowing.
Some of the guidance spoke to that their Windows operating system fell alongside personal computers being weak, related Windows and surface tablets business were weak, video gaming was weak, that all fed into the adjusted earnings being down about six percent, which for a company like Microsoft, you don't really want to see, certainly don't want to see negative growth. But they still generated operating cash flow of $11 billion for the quarter, and it was the guidance that sent the stock down, CFO said the Cloud business slowed at the end of the year and would further slow in the coming months and that's what people are mostly focusing on. Microsoft eliminating 10,000 jobs in response to this slowdown shares are 25 times forward earnings, pricey, but I'm actually OK paying that for a company of this caliber. There are some interesting things going on with AI and ChatGPT as well that investors should keep an eye on.
Chris Hill: Anyone who attempted to fly on Southwest Airlines over the holidays, probably was not surprised to hear this week that Southwest posted a loss of $220 million in the fourth-quarter. Emily, they got some work to do over there.
Emily Flippen: Maybe they need to reach out to Microsoft and ChatGPT?
Ron Gross: Yes.
Emily Flippen: To figure out how they can fix this systems because the system errors that happened to Southwest over the last month or so in the course of December were really bad. I don't want to sugarcoat it, investors are already aware, but in December they had a complete systemwide meltdown as a result of severe weather that caused cancellation for more than 16,000 flights. The way that Southwest is distributed alongside these legacy systems that just weren't able to handle the amounts of cancellations that happened led to just complete chaos at Southwest Airlines. They were eventually able to get their feet back under them but the end result was a hit of nearly 800 million in pre-tax earnings that caused a loss of 38 cents per share in the most recent quarter, which is significantly higher than the loss of nine cents per share that Wall Street was expecting.
Now revenue was up 22 percent in the quarter, but let's not forget that they are comparing that to 2021 when the pandemic was still negatively impacting travel. Not a lot of good things to see here, but I will say, here's what you want to see from Southwest in this scenario, accountability. Now if you're an investor in Southwest, you're interested, I encourage you to actually listen to the call yourself and go through read the transcripts to try to figure out how you feel about how accountable Southwest management was in the scenario. I will say there was outright apologies, which I always like to see. They didn't shy away from the conversation, they didn't sweep it under the rug. The entire call was about the meltdown that happened over the last month. I appreciate that level of transparency, but I'm still not sure how I feel about their use of blame.
For me it felt a little bit blaming, they're blaming the weather which everybody suffered. They're actually saying that their processes and technology generally worked as designed, which to me is an even bigger red flag. But then they went even through and describe these opaque descriptions about improvements that they've made. My thought is, this is going to be something that takes a year or longer for Southwest to fix. You do not turn the technology and the ship around overnight. I discount any improvements that they've made over the last couple of weeks, they're, band aids, in my opinion. What I did like to see was the $1.3 billion that are allocated for funds to upgrade and maintain their IT systems. I want to make sure that money is we'll allocated. Unfortunately, investors won't have a good sense about whether or not this turnaround has really happened until probably a year from now.
Chris Hill: For as much as inflation affected consumers last year, you wouldn't necessarily know it from the latest earnings reports from Visa and Mastercard, both credit card companies posted earnings that were higher than Wall Street was expecting. Ron, what stood out to you?
Ron Gross: As is typical, similar reports for both companies, both benefiting from travel, rebounding. But Mastercard actually warning that revenue growth will likely slow as traveled growth plateaus, but for the quarter, they both had revenue up 12 percent. Visa did a little bit better on the bottom line with earnings up 21 percent versus Mastercard up 13 percent, but both had volume growth, one at eight percent, one at seven percent, basically the same. Cross-border volume which tracks spending on cards beyond the country of its issue so it's a gauge for travel demand, was up 31 percent for Mastercard, 22 percent for Visa. This is where Mastercard said that revenue growth is likely to slow. Pent-up demand for travel will diminish going forward, Visa did not make similar comments, but both companies strong, I think it's fine to own one or even both of these companies. They both pay a dividend less than one percent yields, but they're both really great companies to have in your portfolio.
Chris Hill: Shares of Johnson & Johnson treading water this week after fourth-quarter profits fell 25 percent due in part to lower demand for its COVID-19 vaccine. Emily, the profit number got a lot of attention, but the guidance from J&J seemed pretty encouraging.
Emily Flippen: I'll tell you what, when you look at the results, if you take out the impact of COVID and foreign translations, it's actually a really strong quarter for Johnson & Johnson, their operational revenue grew over four-and-a-half percent, which is amazing for a business of this size. Again, adjusted earnings per share look a lot better, growing more than 10 percent in the quarter. Actually really strong quarter for Johnson & Johnson here. I will say a lot of investor focus has been put on their spin-off though, they're in the process of spinning off their consumer health units, it'll be a business named Kenvue.
Actually, interestingly, if you look at the history of them, produce a decent amount of shareholder returns. If you're a shareholder of Johnson & Johnson and you're scared about the spin-off, I wouldn't be overly concerned at least to start because history shows that business has only completed spin-off when they think that an independent company will be worth more alone than it is together. Now, what that actually looks like we don't know yet, but does seem to see an interesting and potentially lucrative move in Johnson & Johnson's positioned to reward shareholders.
Chris Hill: I appreciate you're reading my mind, Emily, because I am a Johnson & Johnson shareholder and I am worried about this spin-off.
Emily Flippen: I would only be worried about the time frame. It's going to take 18-24 months for the spin-off to happen, which is a bit long, but I will say they're also going through an unusual process of doing a pre-spin-off IPO which will raise money for Johnson &Johnson and Kenvue. It's actually a good news for our shareholders in this place, at least in my initial opinions. But ultimately it will shake down to how Johnson & Johnson manages that 80 percent voting control that they'll retain over Kenvue that could potentially be dominating for how this company is run.
Chris Hill: Emily, Ron, I will see you later in the show. Is the bad news for real estate already priced in? That answer's after the break so stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Time to get a check on real estate. Corrado Russo is a Managing Partner and Head of Global Securities at Hazelview Investments. Deidre Woollard caught up with Russo to talk about his firm's new report on global public real estate, why many REITs may be underpriced, and one part of the market that investors might want to avoid.
Deidre Woollard: I really like this report because it talks about REITs, which just happens to be one of my favorite subjects. It talked a little bit about the impact of dampened expectations when it comes to REIT investing, because last year wasn't a great year. Why could REITs still be an economic bright spot in 2023?
Corrado Russo: If you look at what happened in 2022, obviously, with high inflation and interest rates starting to go up, there was an expectation of a potential economic weakness and a potential recession coming on board. All equities suffered from dampened expectation, turned to earnings starting to come down, and REITs weren't immune to that. But if you look at 2023, we actually think that REITs could outperform relative to those expectations. If you really think about it, and while we've seen market rents significantly go up over the last three years since the beginning of COVID, the underlying companies haven't really captured all of that growth yet.
Even though, market rents might tailor off and might flatten and even come down a bit, there's still a very large embedded growth relative to where market is. Two things are really happening. One, you have contractual leases. At the end of the day, people are obligated to cut you a check for rent every single month. Even if the economy rolls over, those amounts are relatively fixed in terms of how much they have to pay on a monthly basis. You tend to have a very resilient earning stream when you get into economic weakness or recession. I think that's the first thing that can outperform relative to what people's expectations are.
Then the second thing is, even though rents might be up, let's say in certain sectors like industrial or multifamily, as much as 50, 60, 70 percent, the underlying companies have only captured about half of that. That's because of these long-term leases that you signed several years ago, that takes time to expire and to roll over to the new market REIT. Even though rents might be flat, you have leases that have expired from five years ago, seven years ago, 10 years ago that are much lower rent today, and so they can roll those over at new leases at today's rents that are significantly higher. Not only do I think you'd get resilient earnings growth relative to expectations, but I think he can see continued growth in the real estate space or in the REIT space relative to some of the other equity asset classes.
Deidre Woollard: Interesting. You mentioned leases expiring. Can that also be a negative, though? Because especially in sectors like office, as leases expire, will new leases get renewed?
Corrado Russo: Yeah. I think it's a great point. Obviously, when we talk about real estate or REITs, we're lumping everything into one. But when you look under the surface, there's so many different types of real estate. Like you mentioned, you have office, you have industrial, you have hotels, apartment buildings, retail shopping centers or strip centers. All have very different experience in terms of how they might behave relative to the economy. Office generally has very long leases, so the impact from the downturn is actually relatively slow.
Having said that, obviously, the work-from-home stemming from the COVID quarantines is reducing the demand for overall space in that environment. I think you could see some weakness are softening. As leases expire, you might see a softening of rents there. But again, keep in mind, if these leases were signed 5 years ago, 7, 10 years ago, even if rents have only gone up modestly, there's still higher than where they were five or seven years ago. I think it's more a function of can you fill the space? Is there enough demand to fill the space than where potential rents might go? I'm happy to dive a bit more into that. But office could be a very interesting sector in terms of how it plays out over the next 2-3 years.
Deidre Woollard: Yeah, absolutely. When you're looking at REITs as an investor, you're looking, I know, at funds from operations, you're looking probably at occupancy depending on which sector it's in. What else are you looking for as metrics to watch with REITs?
Corrado Russo: Well, you want to look at net asset value changes period-over-period. If you look at historical price performance of REITs, the highest correlation as to what their net asset value has done over time. To remind everyone, net asset value obviously is, how is the overall value of your properties changing relative to your debt that you have and other liabilities that you have in your books. What is the net amount of value that isn't ascribable to the equity holders? What we've seen is over time, those that grow NAV have also outperformed. I think especially in this environment where there's a potential for cap rate changes, there's a potential for releasing and where market rents might go, paying intention to how net asset value will change over the coming quarters is going to be a significant thing to watch as we try to determine who's going to outperform and not.
Deidre Woollard: I wanted to go into a couple of the REITs that you specifically mentioned in the Hazelview report. One of them is Rexford Industrial. You talked earlier about being location-specific. This one is really location-specific as an industrial REIT, right? Because it's mostly Southern California, that big Inland Empire area where all of the traffic's order from the big Long Beach terminal goes through that area before it goes to the rest of the country, right?
Corrado Russo: Yeah. I think that's right, and that is a big reason why we like Rexford. It's the only industrial market in the US where supply is shrinking in Southern California. That's because land is becoming so scarce in that market. You've seen a lot of the industrial land it's being converted to a higher and more profitable use like residential. As residential shortages in that market continue to be an issue, they're buying up as much land as you can, and so that means that there's very little land leftover for new industrial stock. Yet, we're seeing a significant demand for that infill industrial space, which has gone off the charts. That's really been driven by the port of LA and Long Beach, as well as broader e-commerce growth.
That's leading to market rents that, not only have been going up significantly, but we believe that they will continue to go up at a double-digit place for the foreseeable future. Rexford has an incredible balance sheet. They're the best in the industry. They have a 20 percent loan to value debt on their balance sheets, so they're relatively immune to potential rises in interest rates. Then, acquisitions is really their secret sauce. The company is buying over one billion of new assets per year, and that's being driven by a pretty robust in-house originations team. We think when you look at the valuations, stocks still trades at a 20 percent discount to our forward-looking intrinsic value for the underlying portfolio. You're getting it at a discount, has significant growth, and it's got great staying power given its balance sheet.
Deidre Woollard: As we wrap up here, we've talked about a bunch of different sectors. Is there any sector that worries you if we are headed into a global slowdown and potentially a mild recession here in the US?
Corrado Russo: Yeah. Again, if you're going into recession, you don't want to be in cyclical sectors. I think the one that's highlights its cyclicality is hotels. Would we be a bit worried about hotels going into economic downturn? For a few reasons, one, traditionally and historically hotels have not fared as well in a recession as you know. One of the first things that we cut out, is our travel, both on the corporate side and on the personal side. I think you could see a potential weakness in occupancy. At the same time, hotels have had a very, very strong fundamental backdrop over the last two years, believe it or not.
That's in stark contrast to 2020 when nobody thought we'd ever get on a plane and step foot into a hotel ever again. In the second, we were able to reopen. It was one of the sectors that came roaring back. They've enjoyed extremely high occupancy for quite some time now. They've enjoyed some of the largest margins that they've ever had. The stocks have done relatively well. My fear is that most of that benefit that they've enjoyed over the last couple of years has been driven by leisure travel. As we've been locked up for a year in 2020, and we saved a lot of capital. This first thing we did is went and enjoyed a very nice vacation. We didn't cheap out in terms of our accommodations.
I think once we get out of our system, it's hard to see us continuing to do that year-over-year. Now, the saving grace was supposed to be that the reopening of business travel was going to pick up the pieces. As leisure travel slowed, business travel would come roaring back. That might still happen depending on how mild a recession is, but I wouldn't be worried if you go on the global recession to your point on the technology companies cramping down on their budget spending. I think you could see a lot of corporations. Typically, business travel is one of the first things that get caught back in that environment. I'd be a little worried about that sector going into 2023.
Chris Hill: Coming up after the break, Emily Flippen and Ron Gross return. They get a couple of stocks on their radar, so stay right here. You're listening to Motley Fool Money. 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 or sell stocks based solely on what you hear. Welcome back to Motley Fool Money, Chris Hill here once again with Emily Flippen and Ron Gross. Despite the positive start to the year for the overall market, there are still a lot of great companies whose stocks are trading down at levels that they haven't been at in a long time. Our investing team has put together a report of five companies that have all fallen below $49 a share and the report is free.
Just go to fool.com/report and you'll get immediate access to the report, which I have to say, I love the title, it's creatively entitled Five Stocks Under $49. Ron, you know me, I love it when things are straightforward. Again, just go to fool.com/report, you can access it for free immediately. While one of the big narratives recently has been major companies announcing lay-offs, at least one business is bucking that trend run. This week, Chipotle announced a plan to hire 15,000 new workers in preparation for what the restaurant chain referred to as burrito season. We'll get to burrito season in a second, but I got to say, I was a little surprised by this because we've talked a lot about big tech, but it's not just big tech, earlier this week, Hasbro announced with their struggles, they're laying off 15 percent of their employees. The fact that Chipotle is stepping up and hiring this many people over the next, let's just call it four or five months, that's surprising and encouraging.
Ron Gross: Chipotle is executing, they're doing well. You might want to see the stock's up 15 percent so far this year trading at 39 times by the way so not cheap, they need to continue to execute and still put up growth and still continue to increase their store count as well as their same-store sales count, but we're used to seeing seasonal hiring at Walmart, Target companies like that. We're not used to necessarily seeing it in the quick-serve restaurant industry. Certainly, as you say, not around something that I've never heard of called burrito season. I will just end my thoughts here by saying, I demand equal time for pizza. In fact, pizza should have the whole season and burritos can just have a long weekend.
Chris Hill: Emily, I was saying earlier in our production meeting, I feel like burrito season is 12 months out of the year and to Ron's points, so is pizza season. I'm genuinely interested to hear more from Chipotle on this because they appear to have just thrown this phrase out there. Maybe they have grander plans and promotions around this in the same way that Amazon years ago came out with Prime Day, but what was your reaction?
Emily Flippen: I will say my theory for burrito season, which they define as March to May, is maybe that's the point where the New Year's resolutioners have given up on their beach-bodies and they're saying to themselves, "Ah, just grabbed myself a burrito." But no, this is awfully convenient timing, isn't it Chipotle? Because we do have news of all these layoffs and it's a good PR move to say, hey, look, we're not laying people off, in fact, we're hiring people and you know the reason why we're hiring people? A completely made-up holiday that we've never talked about before.
This whole thing stinks to me and the reason why it stinks me a little bit and I'm a big fan of Chipotle, don't get me wrong both as a consumer and an investor, is the fact that in 2021 they had some of their highest turnover ever for their employees. They had a turnover rate of over 194 percent and their corporate staff turnover doubled over the course of 2020-2021. They constantly talk in their earnings clause about the cost associated with employee separation. They're similar to Starbucks or one of those businesses that invest heavily in their employees so it's pretty expensive for them when they have high levels of turnover. Last quarter alone, their expense nearly four million dollars for employee separation cost. Part of me is like, yeah, they probably need to be hiring to back-fill the positions that they've been suffering over the last year or so due to turnover and they saw a convenient opportunity to make good PR move out of it.
Ron Gross: Can we all agree it's Chipotle, not Chipotle. It's dry.
Emily Flippen: What did I say?
Ron Gross: No you did it perfectly.
Emily Flippen: Oh. Good.
Ron Gross: When people say Chipolte, it drives me a little nuts.
Chris Hill: Can we also agree that the period from March through May already has a title and that title is Spring. Again, we're all fans of burritos, I think to your point, Emily, as an investor and a shareholder, fan of Chipotle, but on a more serious level, Ron, maybe this is under the guise of promotion and maybe it ends up being a little too cute by half, and I'm thinking as Costco as one example, the best businesses part of their recipe for access is finding a way to hire and retain employees. If if this is Chipotle's way of saying, yeah, we haven't done as great a job as we could have on this front and this is a way to move in a better direction then hopefully it works out.
Ron Gross: If they want to combine real capital allocation decisions in the sense hiring 15,000 people with something cute, like burrito season, that's fine. But the first thing has to come first is that a smarter use of capital, do they need those resources? It can't just be because of this made-up season, it has to be that they're hunting for resources. If they feel comfortable as a management team, that's the right way to go. We will give them the benefit of the doubt and we'll keep an eye on it.
Chris Hill: Let's get to the stocks on our radar. Our man behind the glass, Rick Engdahl is going to hit you with a question. Emily, you're up first. What are you looking at this week?
Emily Flippen: Stock that popped up on my radar this week is actually Mercedes-Benz. They're traded over-the-counter in the US with the ticker MBGYY. The reason it's on my radar is because yesterday they announced that they are the first company to certify Level 3 self-driving in the United States. This is a big deal because most car companies, including Tesla themselves are still at what we'd call Level 2.
Certifying for Level 3 means that a state regulator in this case, Nevada, reviewed their technology and gave them permission to have complete liability for self-driving under certain circumstances in their states. Basically, Mercedes-Benz is putting financial liability on themselves if anything goes wrong when their self-driving is in use under certain circumstances. Now there's a lot of caveats here, but this is a big note because Level 2 basically says, hey, the liability, even when it's in use, is still on the driver. Now, to be clear, this is only for their S-Class vehicles, the most expensive vehicle that they sell. It's not going to be everywhere overnight the way it would be if Tesla were to implement something like Level 3 self-driving, but it is still a huge milestone for self-driving in general. Definitely, a business that popped up on my radar.
Chris Hill: Rick, question about Mercedes-Benz?
Rick Engdahl: I'm curious about the Mercedes brand. It used to be like a really top anything, it feels like an old brand now. Is Mercedes still the Cadillac of cars?
Emily Flippen: I would say that brand has been threatened and part because they were caught cheating on their emissions test. A lot of people were concerned about the results of this the corporate governance there. They also are delayed in their electric vehicle adoption so they have a handful of electric vehicles, but definitely losing ground in terms of attracting new consumers versus the way that the Ford or Tesla maybe, so the brand is still there, but I wouldn't say it's slowly degrading in my opinion.
Chris Hill: Ron, we got a minute, what's on your radar?
Ron Gross: Speaking of pizza season, a company I have a long history with that I'm revisiting is Domino's DPZ. I think we all know what they do, they make mediocre pizza, Chris, but they do it quite well, 19,500 stores in 90 countries, 20 percent of that market return or invested capital of 51 percent, long growth runway ahead of them, it's a franchise business. They think they can open many, many more franchise stores, they pay a dividend of 1.3 percent, stock has come way down from its COVID high, which was probably a little bit too high at that point in time, but I like the company right here and I think they do a really nice job.
Chris Hill: Rick, a question about Domino's Pizza??
Rick Engdahl: You seem to be such a pizza fan. I just have to ask your opinion on pineapple?
Ron Gross: Absolutely. I'm from New York, we don't need pineapple pizza, but I see that Emily's a big fan.
Emily Flippen: Future
Ron Gross: You do yeah.
Chris Hill: What do you want to add to your watch list, Rick?
Rick Engdahl: Well, I haven't lunch yet, I'm hungry. With pizza even if it is mediocre.
Chris Hill: Ron Gross, Emily Flippen, thanks so much for being here.
Ron Gross: Thank Chris.
Emily Flippen: Thanks, Chris.
Chris Hill: That's going to do it for this week's Motley Fool Money radio show. This show is mixed by Rick Engdahl. I'm Chris Hill. Thanks for listening. We'll see you next time.
