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5 Earnings Reports to Watch

Chris Hill, The Motley Fool

Next week, around 700 companies are reporting. In today's episode of MarketFoolery, host Chris Hill chats with Motley Fool analyst Jason Moser about what he'll be watching from Chipotle (NYSE: CMG), Facebook (NASDAQ: FB), PayPal (NASDAQ: PYPL), Under Armour (NYSE: UA) (NYSE: UAA), and Boston Beer (NYSE: SAM). Can Boston Beer's beer get out from under its seltzer shadow? Will Sam Adams ever take off in a craft-beer world? What's going on with the whole Facebook Libra thing? What should investors watch to check Chipotle's turnaround progress? How can Under Armour deliver on the challenging North American market? What should PayPal shareholders watch to gauge the company's impressive growth? Tune in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on July 18, 2019.

Chris Hill: It's Thursday, July 18. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Jason Moser in the house. Thanks for being here!

Jason Moser: Hey!

Hill: Next week is my favorite week of earnings season, and that is because nearly 700 companies are going to be reporting next week. 

Moser: That is a lot of companies!

Hill: It's my favorite week, and it happens four times a year. Very excited about this! Today we're going to talk about five companies that are reporting next week and what investors should be looking for, watching, whether it's a number, something out of management, you decide. We'll start with Chipotle, which reports next Tuesday. 

Moser: You look at Chipotle, you think over the past year, what an amazing run this stock has had. It was a little bit more than a year ago, I noted on Twitter that I'd trimmed my Chipotle a position because it really felt like the road ahead was a long one. And when you get down to it, restaurants, generally speaking, don't have any serious, durable competitive advantages. It doesn't mean they can't be good investments, but the risks with Chipotle were there still, particularly with a new CEO in place. But I kept some of that position because I felt like there was an opportunity under in the new CEO with Brian Niccol. And I wanted to at least be a part of that, albeit a smaller part of that. Fast forward to today, shares up around 70%, what's going on? I think that Brian Niccol has just taken this thing by the horns. He's gone on a national advertising campaign. And I think one of the most important things he's done -- and he's done it very well -- he's pulled Chipotle off that pedestal that Steve Ells kept them on with this whole, "We're so much better than everyone else, because our ingredients are sourced responsibly and ethically."

Hill: "Food with integrity."

Moser: Right. We know how that all worked out. So, they're a little bit less self-righteous now, which I think is encouraging. But really, when you get down to it, when you look at their app, what they've done with their digital sales, what they've done with their loyalty program, that's something that they could never even think about getting right under Ells' leadership. Under Niccol's leadership, they've, I think, gotten off to a really great start. The Chipotle rewards program, as of last quarter, has three million enrolled. Looking forward to seeing what that number is this quarter. When you look at digital sales last quarter, they grew 101% from the quarter a year ago to represent 15.7% of total sales. Those are the numbers I think that will ultimately matter. It seems like they've done a good job of innovating the menu and making it a little bit different without throwing us all completely off course. But really, what they've done with the digital sales, the revamping of the restaurants themselves, so that you can go in there and just pick it up from the station that they have, for example -- it's a much better experience than it ever has been before. 

Hill: Well, and at the time, one of the things we talked about was Chipotle's plans to essentially set up, maybe not a second kitchen, but have dedicated staff for that digital sales. We sat in this room and said, "OK, that's great if that works." Right now, you look at what the stock has done, it really seems like they've made it work. 

Moser: Yeah, it does. It's always worth noting -- the stock has done wonderfully, you would look at that and think that everything is hunky dory, but we always have to keep a little bit of separation there. I have seen, for example, on Twitter, where there have been some less-than-stellar experiences with the pickup lines still in some places. I think there's always room to improve. But given that they own all of the restaurants, they control that experience, and what they've been working to do, it's not like you just push a button and all of that stuff is just implemented. But I think they've rolled this stuff out and implemented it fairly well with a workforce that is trying to introduce some new processes to their typical work day. Definitely on the right path. I really do feel like the rewards program is going to be something that keeps customers coming back for more. That really is a very powerful tool once you get it implemented. 

Hill: Facebook is going to report on Wednesday. I feel like it almost doesn't matter what numbers they report. I feel like this is all about the conference call. 

Moser: Yeah, probably. If you go back to the fourth quarter call, which was at the beginning of this year, you look at the four priorities that Mark Zuckerberg laid out, they were to continue making progress on major social issues facing the internet and their company, to build new experiences that meaningfully improve people's lives and set the stage for bigger improvements in the future, to keep building their business by supporting the millions of businesses that rely on their services, and then also to communicate more transparently with what they're doing with their services and how that's affecting their customers around the world. You go just a quarter later, and the conversation is starting to center more around privacy specifically. We've got that missive that he published, where he sees the future where Facebook is focused more on privacy and less about that Town Square type of mentality. Which is fine. I mean, I don't know that we've seen any real signs that that is happening. You go to today, we know that the FTC fine of $5 billion is something that will probably get a little bit of attention on the call, but shouldn't get much because it really is ultimately meaningless to them. And now they're talking about this digital currency, which honestly, I'm still unclear fully as to what problem they're trying to solve. They use very abstract examples regarding the cost of transferring money and serving the unbanked and the underbanked. That's fine, but there are plenty of companies out there trying to crack that nut already and doing a pretty good job of it. It seems to me like they're in way over their head with this digital currency thing. I don't know if you saw recently that thing where they were talking about how there was a Swiss bank that was going to, I guess, help oversee this new currency. And then after they had announced that, a representative of the bank said, "We don't know what these people are talking about." "We haven't heard anything from them regarding this." It just strikes me as... call me skeptical when it comes to Libra and what they're trying to do there. I think they've got bigger issues to try to figure out, particularly regarding privacy. 

But at the end of the day, it is Facebook. The network effect's in play there. With as many people that use their services, that's really difficult to overcome. Yeah, I suspect that regardless of what the numbers are, the stock is going to be fine because it's such a big company. Advertisers are going to keep flocking there to throw more ads up. 

Hill: Also reporting on Wednesday next week, we've got PayPal coming. Stock's up more than 30% in the past year. I'm a shareholder. [laughs] Obviously I'm not going to complain if it goes a little higher on earnings. But what should I be looking for?

Moser: As a shareholder myself, I think we're looking for any red flags. With a company like this, you want to focus on any one or two things that perhaps give you pause. And you don't typically find it with PayPal. The one noteworthy event here recently is that COO Bill Ready is going to be taking off by the end of the year. I'm more or less indifferent there. I think Dan Schulman, the CEO is the one you want to keep the focus on, and he'll still be there. 

The metrics that matter with PayPal, you're talking about total payment volume. Last quarter that was $161 billion, up 25%. Total transactions, $2.8 billion, up 28% from a year ago. They added 9.3 million new accounts. They now have 277 million total active accounts. We want to see how those numbers continue to grow. Always Venmo gets a lot of attention there. It drove $21 billion in total payment volume last quarter. They announced they had 40 million users. We see how many more users they have with Venmo, talking about that revenue run rate at about $300 million a quarter ago. I'm sure that probably is a little bit more optimistic this quarter perhaps. 

And then a couple of things that they have done recently that will serve as drivers in the future. Remember, they made a big investment in MercadoLibre, about $750 million there. And then we always go back to Xoom when it comes to PayPal. You remember, not the video conferencing company, the little remittance company that we loved for so long that just PayPal took right from us, Chris. 

Hill: [laughs] They didn't take it from me, they took it from you. You were the shareholder who was angry.

Moser: I was a little bit salty, but I'm getting over it because I still at least own those PayPal shares.

Hill: You don't sound like you're over it.

Moser: [laughs] They actually just rolled out Xoom to 32 more countries across Europe now, with the Xoom reaching 130 markets worldwide. This matters because global remittance is essentially a $700 billion market. You go back to that Facebook Libra currency thing, trying to help in the transfer of money, that's what Xoom, the very premise of the company is, is the low-cost transfer with almost instant access. When you talk about companies that were built to solve certain problems, that's what Xoom was built for. I'd be a little bit more optimistic when it comes to that company. 

But yeah, all in all, PayPal continues to really impress. I would just see if there were one or two red flags. But I don't expect any. 

Hill: It was four years ago this month that PayPal was spun out of eBay as a separate public company. I was checking this morning. That's how I have shares of PayPal, because I was a shareholder, and still am a shareholder, in eBay. PayPal, which I was optimistic about when it was being spun out, is now four times the size of eBay. Are you surprised by that? I am. I'm not surprised it's doing well. I'm surprised that it's a $140 billion company in just four years. 

Moser: It has grown fast, it's obviously grown very quickly. I'm not surprised from the perspective that finance in general is an attractive market because money is always changing hands. A time ago, there probably were some questions as to the user interface and how good PayPal really was. I think the real question was, are they going to be able to make this leap to mobile and really make hay out of that? It turns out that they were definitely able to do that. I think it was from a lot of different initiatives that they've taken. So, I'm not surprised as much as I'm really impressed, and at the end of the day, as a shareholder, happy about all that.

Hill: Two quick programming notes. First, as always, check out our other podcasts. Industry Focus. Investing in Asia, which is our new weekly podcast. Insights and observations from our man in Singapore, David Kuo. All of The Motley Fool podcasts. Check them out! They're free! 

Moser: Why not? 

Hill: They're free!

Moser: The return on invested time there is phenomenal. You think about your time listening to those shows -- 

Hill: We hope. That's our goal!

Moser: Hey, listen, man! I don't want to sound too cocky here, but I know. I just know. The return on invested time for listening to our shows, it's up there. 

Hill: Certainly the return on invested money is up there because they're free. 

Also, this weekend on Motley Fool Money, our guest as I mentioned yesterday, is Tim Beyers. This weekend, San Diego Comic Con is going on. Very fun conversation with Tim about what to look forward to, and, of course, the battle for the living room. 

Two companies reporting next Thursday. Under Armour and Boston Beer. Let's start with Under Armour. What are you going to be looking for out of their second quarter report? 

Moser: I think Under Armour may be July 30, but I could be mistaken. Double check that. Regardless, earnings are coming up very soon. With Under Armour, we go back to when we owned this stock in MVP a time ago, and we put it on hold when things were really going to hell in a handbasket, so to speak. And we put it on hold with three particular markers we were wanting to see progress on. We wanted COO Frisk and CFO Bergman still on the team, we wanted to see their balance sheet become more a point of strength, and then we wanted to see North American sales stabilize and actually start growing. The first two are working out very well. Frisk and Bergman are still there, playing very integral roles with the company. The balance sheet definitely is getting better. It's really a shame, because they had a balance sheet that was really, really an asset and turned it into a liability with this inventory strategy that didn't work out. But the balance sheet is getting better.

I think that the big question that still hangs out there is the North American sales. Last quarter, sales in North America were down 3%. To put that into context, Nike continues to chalk up 7%, 8% growth in the North American segment now. They've been able to turn that tide a little bit. We need to see Under Armour be able to do that same thing. It seems like it's working, albeit very slowly. We know that international is a big point of success for the company. They've been able to pick up some of the slack from North America. But they need to get that North American number back in check there. 

When you look at the margins for the company, they were feeling a lot of pressure on margins because of the discounting, because of this bloated inventory. They've been able to whittle down that inventory surplus considerably, and focus more on the premium and less on the cost-cutting. So, while that might limit their overall market opportunity in the near term, it certainly makes the business a more profitable one. So, really, be paying attention to that North American number and any language in the call regarding it. 

Hill: You're right, it is going to be on July 30th. My bad, apologies for that. That's when Under Armour is going to be coming out with their second quarter report. If the next 12 months for this stock are like the last 12 months, I'll be pleased. 

Moser: Yeah, as a shareholder, I'm with you, man. It's been a frustrating time with this company. It's clearly a brand that still holds some sway out there. But yeah, they had a strategy. It didn't work out. They're trying to recover from it. It seems like slowly but surely, they're getting back. 

Hill: Boston Beer's second quarter comes -- you look at the last year and a half for Boston Beer, parent company of Samuel Adams, it's been really good because prior to that, Boston Beer had a rough few years. 

Moser: Yeah, you're right. It has covered both ends of the spectrum there with no happy ground. It always felt like shares were a little bit overly punished when those depletion numbers were falling. And now, for all of the good things that the company's done, it really does feel like the stock is way ahead of itself. But you can't complain. They were in a period of time where they could not get those depletions numbers going in the right direction. Ultimately, that refers to how much beer they're selling. Now, they are forecasting somewhere between 8% and 13% depletions for this coming year, which is good. 

The key point to note with this company right now, though, is that most of the success is still coming from the seltzers and Angry Orchards and Twisted Teas of the world. They are still really having a hard time getting that Samuel Adams brand into beer drinkers' hands. Part of that is because there's so many options out there, and part of that is just because I think Boston Beer fell behind on the innovation side. They certainly missed the IPA train early on. That was basically due to Jim Koch saying he didn't like the taste of IPAs, so he didn't want to make them. Well, a lot of people out there love them. [laughs] You had companies that started putting out a lot of flavorful IPAs. That took away from those Boston Beer sales. Now, what they've done recently, and we've talked about this before, this big merger with Dogfish Head. I think that's going to be something we'll get a little bit more clarity on the call as to what they want to do there. I think that's probably a better deal for Dogfish Head than it was for Boston Beer, just because I think Dogfish Head was running into a little bit of a situation regarding some debt that was coming due. And I think Dogfish Head is still a pretty small operation. You had to wonder how far they could take it. Now they're going to be plugged into Boston Beer's production and distribution, which I think will help. Going back to the IPA conversation, Dogfish Head has a very IPA-heavy catalog. There's not a lot of overlap between the two companies. That's good. I think it's probably a merger that works out well. I do still think the stock is a bit frothy, so to speak. But it's a good business, there's no question there. 

Hill: The market cap for Boston Beer is about $4.5 billion. Three years from now, do you think it is meaningfully higher than that? They've been on a great run. But as you said, there's a lot of optimism baked into that stock price right now. 

Moser: Yeah, I think the only way that this stock is meaningfully higher is if they're able to really show some traction in the Samuel Adams brand. I think if a year, two years from now, we continue to have questions about how the Samuel Adams brand is resonating, it's hard for me to understand why the market would keep paying up a premium. I understand why the premium is today. But we need to see that turnaround. Just like with Under Armour, how we need to see North American sales turning around, we need to see some signs of life with that Boston Beer Samuel Adams brand. I'm on the fence with that one. They make good beer, don't get me wrong, there's just so many options out there, and that's not going away anytime soon.

Hill: Jason Moser, thanks for being here!

Moser: Thank you!

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's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you next week!

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Chris Hill owns shares of eBay, PayPal Holdings, Under Armour (A Shares), and Under Armour (C Shares). Jason Moser owns shares of Chipotle Mexican Grill, Nike, PayPal Holdings, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Boston Beer, Chipotle Mexican Grill, Facebook, Nike, PayPal Holdings, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: short October 2019 $37 calls on eBay, long January 2021 $18 calls on eBay, and short October 2019 $97 calls on PayPal Holdings. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.