In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Ron Gross about the latest headlines and earning reports from Wall Street. They’ve got some updates on the coronavirus vaccines and talk about the cruise lines, the latest reports from some retail and home improvement giants, and much more.
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This video was recorded on November 18, 2020.
Chris Hill: It’s Wednesday, November 18th. Welcome to MarketFoolery. I’m Chris Hill, with me today, the one and only, Ron Gross. Good to see you, Sir.
Ron Gross: You too. How are you?
Hill: I’m doing all right. We’ve got more retail earnings to get to, but we’re going to start with a vaccine update. Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) said the final data analysis on their COVID-19 vaccine found to be 95% effective. So, one more bit [laughs] of good news on that front. They’re planning to submit it to the FDA for final approval within days — the submission will be within days. I think we’re all hoping and expecting that final approval comes maybe sometime later in December.
And [laughs] maybe we’re jaded now as investors after 10 days of this, we’re not seeing the wild swings that we saw a week ago, Monday, when the initial data came out. But we are seeing some movement in the cruise line stocks, although [laughs] it’s just not necessarily what we saw a week ago Monday. In particular, Carnival Cruise Lines appears to be having a busy day. They’re canceling all of their cruises at least through the end of January, and plus, they have a secondary offering coming.
Gross: [laughs] Exactly. A lot to unpack there, but I agree, we’re kind of a little bit jaded; we’re all vaccine experts now, at least when it comes to the stock market. And so, I don’t think the huge price swings will happen, but this is exciting news. I mean, [laughs] we got to get back to some kind of normal, and every time Pfizer or Moderna or J&J says something, it gets exciting. And in this particular case, 95% matching the Moderna news, great. Pfizer says the vaccine is highly effective against the virus 28 days after the first dose; I’ll remind everyone, both Moderna and Pfizer require two doses, three to four weeks apart, depending on which vaccine we’re talking about. Its effectiveness was apparent across all ages, races, ethnicities, older folks more protected, all really exciting stuff.
As you said, they’re going to submit an application for emergency use authorization to the Food & Drug Administration within days. I’ve read some rumors, let’s call it, not official news out of the FDA, but that their committee will probably meet early in December, maybe around December 10-ish, to take up these applications. So, that’s exciting. And Pfizer says they expect to produce up to 50 million doses this year and up to 1.3 billion doses in 2021. So, good news is coming. I’ll remind folks that the Pfizer vaccine has to be held at [laughs] -94 degrees Fahrenheit, whereas the Moderna needs to be cold, but certainly not under those extreme conditions. So, is that giving Moderna a leg-up, because it’s going to be much easier to distribute? And I would think yes, but as I said earlier, we’re vaccine experts, but we’re actually not really. So, we’ll see, and we’ll watch it play out, but it’s exciting news.
And you would expect, as you said, it to be exciting news for the Carnival folks, for the cruise lines, for the airlines; and I think it is. You know, on any given day the stocks will do what they’re going to do, and Carnival is mostly trading today not on vaccine news, but on the fact that in order to keep up with CDC’s requirements, as you said, they’re going to cancel all of their cruises leaving from U.S. ports through January 31st, others, from certain particular ports, through February 28th and even March 26th. So, again, you know, bad news, these are extremely capital-intensive businesses, extremely high expense businesses that have varying degrees of healthy balance sheets or unhealthy balance sheets, I should say. And you know, the longer they have to wait to get back to business, the dicier it gets.
We are seeing, as you mentioned, secondary offerings. In Carnival’s case, they’re kind of doing a recapitalization. They’re selling equity to certain holders of their debt, then they’re paying down that debt and the holders will be left with equity. So, Carnival will actually not be receiving any capital from that offering. So, we won’t do anything to increase the cash on their balance sheet, it will pay down debt and replace it with equity.
But like Norwegian, for example, also today in the news with an offering; that will result in an infusion of capital, of cash, into their balance sheet, which these companies need, as I said, as a bridge to get them to sometime in 2021 when perhaps things get more back to normal.
Hill: Let’s assume for the moment that you own shares of both Carnival and Norwegian. They’re both doing these secondary offerings. They’re doing it in different ways. If you own shares of both, are you looking at one more favorably than the other?
Gross: Well, I would be really focused on balance sheets. And so, I don’t know off the top of my head, I know that, for example, Carnival has $26 billion of debt. They’re doing this recap here, to take down $500 million to $1 billion, but still it’s an enormous amount of debt. I actually don’t know off the top of my head what Norwegian’s debt looks like —
Hill: Let’s just assume it’s there. [laughs] Let’s just assume that Norwegian —
Gross: It’s, like, $11 billion; I was able to look it up real quick. So, I would say, in general, Carnival is probably in a more precarious position. They need to get back to business probably quicker, it’s a little bit shortsighted for me to say without really doing the analysis. Norwegian probably can wait it out a little while longer. $2 billion of cash on Norwegian’s balance sheet versus $11 billion in debt. But I actually would not be a shareholder of these.
While they could work out and they could be a wonderful entry point, you know, any time during this year, to kind of buy these companies when they were beaten up and left for dead, for lack of a better word, it’s just very, very risky. And with balance sheets like they have, this could, you know, turn out quite poor, so you have to pick the right company, in the right industry, with the right balance sheet, a lot of factors, a lot of things could go wrong.
Hill: Let’s move on to a company where a lot of things seem to be going right, and that is Target (NYSE:TGT). Shares of Target are up 5%, hitting a new all-time high today. Their third quarter was just a blowout, digital sales up 155%. Overall, same-store sales are up 20%. I mean, pick a number, where do you want to start, [laughs] what leaped out to you from this amazing quarter from Target?
Gross: Yeah, exception. But that digital number, 155%, as you said, was huge. Interestingly, same-day services — so, it’s the order pickup, the drive up, the Shipt, grew 217%. Amazing. One thing I really found interesting was more than 95% of Target’s third quarter sales were fulfilled by its stores, so that’s just a very interesting thing to think about; you know, stores versus distribution centers and the various supply chains and logistics that go into fulfilling orders. Brian Cornell, really doing a great job moving toward that kind of model that allows people either to get delivery or pickup.
Another interesting thing that management noted was that they believe the company has gained more than $6 billion in market share of late. I’m not exactly sure how they measure it, but that is interesting to see. I would imagine that’s impacting Walmart, I would imagine it’s got to impact Amazon to a certain extent; I’m not too worried about Amazon, though, especially with their new online pharmacy business and lots of other things that they’re executing on.
But Target, it’s just really [laughs] turned into a great business, and it’s been able to really capitalize on the fact that the pandemic has caused us all to have to think of other ways to shop. They even had higher margins, markdowns were pretty much nonexistent in this world we live in. There were, of course, higher COVID expenses, as we’re seeing across the board, whether it’s higher wages or safety measures that they have to put in place, you can’t fault them for that, in fact, you can applaud them for that. But when it all shakes down to the bottom-line, adjusted earnings per share was up about 105%; really great, really, really.
Hill: When I saw the results this morning, I was thinking back to two days ago on Monday, when I was like, hey, you want to come on MarketFoolery on Wednesday? And you’re like, yeah, yeah, I can do that. And I said, you know, Target and Lowe’s are reporting that morning, so that, you know, that’s probably going to be something to talk about. And you and I were joking about the fact that we probably could have recorded [laughs] — we’re like, you know what, you know what it’s probably going to be? It’s probably just going to be another blowout quarter for Target. We’re going to be like, man! Brian Cornell and his team are just crushing it again.
Gross: For sure. And they did, and no guidance offered, so you know, I guess not surprising. We are seeing more and more companies come back with guidance, interesting that they felt that the future is still a little too muddy, but they did reinstate their share repurchase program. So, they’re feeling a little bit more comfortable about that, about perhaps putting money to work, buying back some of their stock, which is really only trading at about 22X earnings. Not too bad for a company clearly putting up these numbers, these numbers won’t, you know, this won’t last into, kind of, 2021-2022, but the company has done a great job to just build an infrastructure and a process, whereas even when things get back to more normal, the company should, I think, continue to do well.
Hill: I’m glad you mentioned the guidance, because that was one thing I was looking for this morning to see, what if anything Cornell said about the holidays — and he kind of took the same tack that we saw from Doug McMillon at Walmart, when they reported earlier in the week, which was basically, without giving specifics, it was almost like — he didn’t use these words — but it was almost like they both said, I got a gut feeling it’s going to be good. Like, it really wasn’t based on data. Both Walmart and Target are, and they’re not the only retailers doing this, they’re both investing in holiday promotions, they want to make sure that they are able to have the supply chains flowing so that people can get what they want when they want it. But both, sort of, going with his gut feeling of it’s been a really tough year, and we think to the extent that people can celebrate, because certainly a lot of people have lost jobs in 2020, but to the extent that people can celebrate and have a holiday season filled with gifts, we want to make sure we can help them do that.
Gross: Yep. And certainly, a stimulus program would have helped, it’s not too late, but it appears like [laughs] it’s perhaps getting too late to hit the season. And with what’s going on in politics right now, I doubt that that’s forthcoming anytime soon, but that certainly would have bode pretty well for the holiday season.
You know, on another note, it’s interesting the world — this no guidance world we’ve kind of been living with, it’s going to be interesting to me to see when this is over, do companies just go right back to where they used to be or are they going to say, you know what, the world didn’t stop spinning just because we stopped issuing guidance, so maybe we don’t have to do it, at least as much as we used to. What’s interesting is, in the absence of guidance, I think what you see is Wall Street analysts have been quite conservative. And then when the numbers actually come in, they beat, and we’re seeing, they beat, they beat, they beat, because analysts really have no reason to be aggressive in their number, that would probably be shooting yourself in the foot. So, companies love to beat.
So, this whole back-and-forth between the Wall Street community and companies with guidance is going to be interesting to watch how that shakes out.
Hill: Speaking of Wall Street analysts being conservative, let’s talk about Lowe’s, because like Home Depot, Lowe’s put up a rock-solid third quarter report. Their same-store sales were up 30%. And like we saw with Home Depot, share selling off a little bit, down 3%, 4% today, in part because of — I mean, this is a borderline hand-wringing on the part of some [laughs] Wall Street analysts just saying, hmm… I don’t know how much longer this home improvement thing is going to go on. And I don’t own shares of either one of them, but I just sort of look at that and go, all right, is this warranted or, to your point, are they just being maybe a little bit conservative, because there’s not a big upside in being anything other than that?
Gross: Well, this one’s interesting, because Lowe’s did offer guidance. They reinstated the guidance for the fourth quarter, so just one quarter. I guess they saw some visibility since the fourth quarter, for the full-year as well. And I think investors actually didn’t like the guidance, which is interesting, because they’re looking for 15% to 20% comp sales growth in the fourth quarter, continued COVID-related expenses; again, nobody really should be surprised by that. But flat operating income compared to last year.
So, I think people are a little disappointed with that. On top of the fact that, despite the fact that the toplines of Lowe’s quarterly results were really encouraging. As we said, total sales up 30%, comp sales up 30%, there was 15% growth in all merchandising departments, 20% growth across all geographic regions. You know, I could keep spouting the numbers. And I’ll give you one more, Lowes.com up 106%. So, really strong.
But there was increased expenses, the company is continuing to invest in the business, obviously, COVID-related expenses, omnichannel investments to support Lowe’s, to support the supply chain, led to a bottom-line earnings per share number, which was up about 40%, if you exclude a charge for the extinguishment of debt. 40% was a little bit light, interestingly I think, compared to what Wall Street or investors in general were hoping for. So, you see the stock trading off a bit, but you know, I think it’s a very strong quarter. As was Home Depot’s. Home Depot had this, you know, other thing about their reacquiring HD Supply for $8 billion-ish …
Hill: [laughs] I was going to say, this little thing where they wrote the check for $8 billion.
Gross: [laughs] What’s funny is, they sold it for $10 billion, right, back in the day, and now they’re reacquiring it for $8 billion. They sold it because they wanted to focus on their retail business and move away from the professional market. Now, they’re bringing it back into the fold, [laughs] because they want to get back into the contractor/professional business. That’s the way these things go. So, Home Depot sold off a little bit on that news, also Home Depot, interestingly, said that they were going to make some of the wage increases that they put in place, due to COVID, permanent. And, of course, permanent wage increases theoretically lead to lower earnings, and the stock adjusts accordingly. I’m perfectly fine with that, I think it’s the right thing to do and I love to see that, you know, from a conscious capitalism perspective, companies taking care of their employees and not just worrying about the stock price. So, I was happy to see that.
Hill: This is one of those times, I think, if you are a shareholder of either of these companies — look, when a company comes out with earnings, of course, you want it to be an amazing report, and you want the stock to pop 5% or more. Even with Home Depot and Lowe’s down 3% in the wake of their latest reports, you got a feel so good about the way these companies are being run. All of these investments — I mean, let’s just put aside the HD Supply acquisition; although, we probably don’t have to, because it seems like it was a good acquisition, it was a smart one, and the shares of Home Depot actually were up about 1% the day that news came out. So, you take that. You look at, in the case of Lowe’s, the investments in the omnichannel approach, which you have to applaud that, that’s just smart. Everything both these companies are doing with safety for consumers, safety for their employees, rewarding employees with these wage increases and spot bonuses. I mean, across the board in 2020, you got to applaud everything both of these companies are doing.
Gross: Yep, I completely agree. And from a shareholder perspective we often say, you don’t need to choose one, you can go with both in your portfolio, the slight disparity of valuation continues. We always talk about how — so, Home Depot has a slightly higher dividend, a bit over 2%, Lowe’s has about a 1.5% dividend yield, I believe. Home Depot trades at 22X. Lowe’s trades at 19X. So, Lowe’s is, kind of, perpetually a bit cheaper than Home Depot. Home Depot is typically thought of as a little bit better company, with a little bit of better competitive advantage. But they’re both doing a wonderful job.
And I do see growth for quite some time. Clearly, everyone is working on their houses now, and there’s the COVID angle to this story, and that’s why you’re seeing these huge numbers. So, again, as with Target, these huge numbers won’t continue.
But these were great companies before the pandemic, and I expect that they’ll be great companies after.
Hill: A last thing before we go. I mentioned this the other day with Home Depot, it is the same case with Lowe’s. That Lowe’s has [laughs] a loyalty reward program for professional contractors, but not for everyday consumers like you and me. And I haven’t dug [laughs] into this enough to know if this question has been raised in the past. It strikes me as a little odd in this day and age, particularly when we’ve seen so many retailers across all different kinds of industries have some type of loyalty program for customers, if for no other reason than they can just collect data and occasionally reward customers. I don’t know, do you find that as strange as I do?
Gross: It is odd. Even companies that were resistant, for various reasons, to put forth loyalty programs, have started to. And two, pretty across the board, pretty good success across the board, I’m sure they’ve thought about it, I’m sure they’ve discussed it, I don’t know what’s holding them back. I wouldn’t be surprised at all if we eventually do see one, but it’s certainly the way many retailers, I shouldn’t say “most,” many retailers are moving. And it makes perfect sense, and it would make perfect sense for Lowe’s as well, I think.
Hill: Ron Gross, always good talking to you, thanks for being here.
Gross: You too. Thank you, Chris.
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear.
That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I’m Chris Hill, thanks for listening, we’ll see you tomorrow.