There's Lots of Growth to Go Around
In this MarketFoolery podcast, host Mac Greer, Total Income's Ron Gross, and Million Dollar Portfolio's Jason Moser tackle a few noteworthy and upbeat news items: The DJIA's record-setting 2017, what it means for investors and the Foolish thesis and what it doesn't; Darden Restaurants' (NYSE: DRI) strong quarterly report, powered by a resurgent Olive Garden; and an interesting question on the subject of organic vs. inorganic growth, specifically in the case of the Disney (NYSE: DIS) and Fox (NASDAQ: FOXA) (NASDAQ: FOX) deal. Just for variety, they also toss in a case of intentional shrinkage: Jack In The Box's (NASDAQ: JACK) move to sell off its Qdoba chain.
A full transcript follows the video.
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This video was recorded on Dec. 19, 2017.
Mac Greer: It's Tuesday, December 19th. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Ron Gross from Motley Fool Total Income and Jason Moser from Million Dollar Portfolio. Guys, happy holidays!
Jason Moser: Happy holidays!
Ron Gross: And to you, Mac!
Greer: Lots to talk about here. We have Jack In The Box unloading Qdoba. We'll get to that. And we have Olive Garden just flat out getting it done.
Moser: Yeah. The Steve Broido effect.
Greer: We're going to talk about that. Steve had his tonsils out in September. Starts eating solid foods again, Olive Garden has a great quarter.
Moser: I feel like we need them as an advertising partner. Let's talk after the show.
Greer: But, we begin with a first. For the first time in its 121-year history, the Dow Jones Industrial Average has gone up more than 5,000 points in a year. That the biggest annual points gain ever. Guys, the Dow has also closed at a record high 70X this year. Jason, as an investor, what does that all mean, and what does it not mean?
Moser: What it means is what we've always been saying, you need to be invested, and you need to be doing that over the course of many years. And it's OK if you're not invested to get started now, because it's never too late. It does not mean that 2018, the market is going to have to go down because it just went up so much in 2017. If we look back all the way back to 2007, from 2007 till now, the S&P 500 was down only one year. Granted, it was down 37% that one year.
Gross: [laughs] That was a pretty big year.
Moser: But! Let's be clear here, from 2007 --
Gross: I still have hives from that year.
Moser: From 2007 through 2016, if you had plunked just $100 in the S&P index funds, that $100 at the end of 2016 would have been $195.68, had you just left it alone. So, the returns are real. They do happen. One down year doesn't ruin your life. My point is, it can always keep on going up. I'm not saying it will.
Gross: I heard you just say it will. Send your emails to ...
Moser: I'm not saying that. Don't assume that it must go down because it's had such a good year, because I think it had a good year because of a lot of good fundamentals.
Gross: When you talk about the Dow, I think you have to be careful when you talk about points, because the higher it goes, the less important the points are. When the Dow was new, if you said it went up 5,000 points in one year, it'd be like, oh my god, that's unbelievable! The higher it gets, the less that means. So, it's better to talk in terms of percentages. Now, the Dow has had a great year outperforming the S&P 500. But what is all this Dow stuff? The only time I hear about the Dow is if I turn on the news. I don't invest in the Dow. I'm sure there are ways, there are ETFs and mutual funds, but for the most part professional investors and regular everyday investors invest in the S&P 500, typically, if they want to invest in an index. So, I, on a daily basis, am much more focused on that as a proxy for the market. The Dow doesn't even really cross my radar unless I pop open CNBC or something.
Greer: You're a buzzkill, but I'll go with that right now. Let's talk about the market writ large, then.
Gross: Don't forget, the Dow is 30 stocks.
Greer: Point taken. But when you look at the market writ large and the market hitting new all-time highs, someone who's not fully invested or not invested at all, they hear that old saw "buy low, sell high." So, when the market is hitting new all-time highs, is there still time for someone to get in?
Moser: Well, yeah, because you need to be looking out for the next 10 years. Instead of looking at this and saying this last year was so great, yeah, the last year was so great, but really, when you're investing, when we're investing, we're telling people you want to invest with that five to 10-year outlook. Don't put money in the market that you need over the course of the next five years. If you can do that, then you can remain patient. I think, generally speaking, I have a hard time understanding where money is going to go beside the stock market, because interest rates, even as they start bumping up a little bit, are still going to be extremely low. There's going to be zero return opportunity on fixed income. A savings account just isn't going to cut it. So, you have to be putting your money into the market in some way, shape or form. And I think a lot of people don't even really consider the fact that, if you just participate in your company's 401(K) plan, that's getting your money invested. You're in some type of index or mutual fund there, and that's getting your money in that market. But instead of thinking buy low, sell high, I like to think, just keep on buying. You want to just keep buying, and do that over the course of the next 10 to 20 years. If you do that, things are going to work out OK.
Greer: Ron, on last week's Motley Fool Money, we interviewed CNBC's Carl Quintanilla. And Chris, as the last question of the interview, asked him, what is he looking at in the year head and what are some questions he has? And one of the questions Carl mentioned is, he wondered if we're finally going to start seeing retail investors start talking about stocks the way they did back in 2000. And this market feels very different to me. We hear a lot about institutional investors vs. individual investors. What do you make of that? Is this a rally? Is this a market that so far hasn't really included enough individual investors? Or is that just a false construct?
Gross: It's so interesting that you ask this question, because on my very long commute this morning, I was actually thinking to myself, gosh, I hope we don't go back to the 1999 days, where I couldn't go to a cocktail party -- not that I was invited to many cocktail parties -- but, I couldn't get together with friends without somebody saying, "Oh my god, I just bought [ridiculous company].com and tripled my money! Did you buy that?" And I would say, "Oh, no, I don't really speculate or things like that." And they would be like, "Oh my god, you have to do it! It's like free money, you have to do it, we're just minting money every day, every day!" I stopped going to parties, I couldn't handle it, it was just ridiculous conversations. And eventually the irrational exuberance popped, and everything came back down to earth. I don't feel like we're in that kind of a situation right now. There are certain hot things like Bitcoin, where you'll hear those kinds of conversations at a party, but it doesn't feel anything like back then. You'll hear more talk about politics, I think, than you hear about the stock market. I think people are just happy to see their account balances continue to rise. Every now and then, if there's a hot stock of the week, maybe you'll hear it being talked about. But you don't get the novice investor all of the sudden thinking they can do no wrong and they're just minting money.
Moser: Yeah, I feel like that discussion is all centering around Bitcoin and cryptocurrencies. Honestly, I feel like that's probably a good thing, because it's letting the market keep flying under the radar, so to speak. Everybody's attention is on the next great cryptocurrency opportunity. And perhaps those will work out. I'm happy to just admit that I don't know enough about it to want to participate. But, yeah, I feel like that conversation is happening around cryptocurrencies, and it's letting the market keep on doing its thing.
Greer: Ron, what do you think of Bitcoin?
Gross: That's a tough one, man. I think about Bitcoin the same way I think about gold. I don't know. It doesn't have any cash flows associated with it, it doesn't do anything to produce cash flows, so I don't know how to value it. And if I don't know how to value it, I don't know how to buy it or sell it, and therefore I have nothing to do but stay away.
Greer: Well, from Bitcoin to Jack In The Box, a place after my own heart. Guys, Jack In The Box selling Qdoba, the fast-casual Mexican chain. They're selling Qdoba to the investment firm Apollo Global for $305 million. Ron, shares of Jack In The Box over the last two and five years have beaten the market and done well. The last year ...
Gross: Not so much.
Greer: Qdoba not doing so well. Do you like this deal?
Gross: I like the deal for Jack, I think it's great to get rid of it. I'm surprised that Apollo-- I guess they would want it, but $305 million is a good deal for Jack, I think. They bought it back in 2003 for $45 million. They've certainly expanded it from 85 locations up to 700. It was working for a while, right up until it kind of stopped working and the concept kind of soured. I think, great for them to focus on their namesake brand, Jack In The Box, which by the way, are primarily franchised, where Qdoba is much less franchised. So, I think it's a better business model to focus on the franchise Jack In The Box restaurants, get rid of Qdoba, take the cash.
Greer: Jason?
Moser: Yeah, I think it just goes to speak to how difficult the restaurant business really is. It seems like a lot of Jack in the Box's success was because of strong performance from Qdoba over the past few years. It's competitive, obviously. There's a little concept out there called Chipotle that seems to occupy some of the space. And that's a much bigger concept. I think you said Qdoba has around 700 stores, Chipotle has somewhere around 2,300. And they're looking for a new CEO that could very well light a fire under that business. So, I think it's probably as good a time as any for them to unload it.
Greer: Shares of Darden Restaurants up big today on strong second quarter results. Guys, Olive Garden, which is Darden's motherload, Olive Garden sales up 3% for the quarter. Olive Garden makes up around half of Darden's profits.
Moser: Yep. This is the crown jewel for Darden, Olive Garden is. Our very own Steve Broido, every time we talk about it, he professes his love. He got one of those pasta passes, I have to assume, right?
Gross: They're hard to get.
Moser: They bumped it up to, like, 22,000 of them this year. It's just amazing to me how much room that business has run in such a short period of time. Because, like you said, it's about half of the overall company. They've really made a lot of investments in the to go concept with Olive Garden, and it has done so well. Every quarter, it's growing double digits. This quarter, to go sales grew 12%, really contributing to that overall same-store sales growth with Darden as a whole. It was Darden's 13th consecutive quarter of same-store sales growth. And the same store sales growth was healthy. It was some growth in traffic, some growth in pricing, a healthy mix of the food and offerings being sold. So, all in all, it's not a business I would put at the top of my watch list just because the restaurant business is generally so tough. But wow, they've really been doing well.
Gross: It started to turn when Starboard Value came in and told them to stop salting the water so much and the pasta would last longer.
Greer: Yes.
Gross: It's all them.
Greer: Remember that report? How long was that report? They wrote this extensive, comprehensive report.
Gross: Those are good guys, I know them very well.
Greer: And about what, overserving breadsticks, they were serving too many breadsticks?
Gross: Yeah, there were a lot of cost-cutting measures.
Greer: That's a wonderful report if you have some spare time over the holidays.
Moser: The other thing to remember is the acquisition of Cheddar's Scratch Kitchen. That's going to be something that I think adds considerably over time, and part of it is just because the unit economics of the stores are so attractive. They're bringing in around $4.5 million average in sales annually. And the average check, around $13.50. So, it's not like some high-dollar offering. It's a pretty convenient, a little bit of a differentiated offering that I think is going to contribute to their bottom line for years to come.
Greer: OK. Guys, as we wrap up, we have a great email from a listener. The listener writes, "The panelists on Motley Fool Money were generally very happy about the news of Disney buying assets from Fox. On the other hand, I've heard several experts on your show talk about how they disapprove of inorganic growth, M&A in particular. I'm having a bit of difficulty in reconciling these two points of views. Can you shed some light? Thanks. Happy holidays, Brajcich." Happy holidays right back at you!
Gross: Yeah, absolutely. That's a great question. Let's define organic or inorganic growth for a second. Organic growth is when a company is able to grow just based on the assets they possess. It has an ongoing business, and it's doing well enough that it grows each year. When you have to go out and buy growth through an acquisition, that's where it gets dicey, because most acquisitions, I think it's fair to say, destroy value, don't add value. So, when it came to Disney, I think on whole, we thought this was a great idea. But he does have a point, because Disney was struggling there a little bit, so they bought their way out of it to a certain extent by getting in certain great assets like the sports and other content. So, I think the question is fair, and we have to keep an eye on this particular deal to make sure it adds value and doesn't destroy it. Which, on the whole, I think it will. But it's certainly not a gimmie, and we have to watch it.
Greer: But you have Pixar, you have Marvel, and you have Lucasfilm. That turned out OK.
Gross: Yeah, those are amazing and [laughs] for sure OK. But, as we said, when businesses are struggling and they try to buy their way out of that struggle, very often, more so than not, it's a mistake that destroys value for shareholders. And you need the right CEO in there, the right capital allocator, to make those tough decisions. I think Iger is probably that guy, which again, I think it's one of the reasons that we like this deal. But keep an eye out, because it's an expensive deal, a lot of money changing hands, a lot of moving parts, integration is key to success when it comes to an acquisition of this size. And, as the email says, trying to buy growth can be fraught with trouble.
Moser: Yeah, I think you hit the nail on the head there. When you look at Disney's growth rates over the last five years annualized, the top line revenue number grew at about 5.5% annually over the last five years. Not terribly impressive, but they were able to really bring a lot of that down to the bottom line. Earnings growth was close to 13% annualized. For me, yeah. You mentioned Pixar and Marvel and Lucasfilm. Part of it is looking at the track record. We have the benefit of hindsight, looking at Bob Iger's track record, and saying, yes, there are risks that come with consolidation and acquisition, but we also know that he's done a pretty good job with it so far. And he has three really good examples that he can shine a light on and say, "Look, we made this work." So, we have to at least give him the benefit of the doubt there. It's also not a company that solely grows via M&A. I'll use another example of a business that, to date, has done really well, and I think it's because the gentleman behind it has been very good at the M&A that this business has participated in, and that's Middleby. Middleby has been the commercial oven business. That's not the biggest market opportunity in the world. Selim Bassoul, I think, recognizes that part of the avenue for growth for them was going to be making a lot of little acquisitions of regional distributors and bringing them into their family. And as it stands, he's done a tremendous job. But that's a business where I think, looking forward, you have to start being a little bit concerned about, maybe, have they done about all they can really do? I don't know. But more acquisitions, the numbers are going to work against you at some point. So, it's something to keep in mind, for sure.
Gross: I'll just add that, when looking at this, is it a good deal or a bad deal, a good decision or not, it's, why was the acquisition done? Are you in a fragmented industry where it makes sense to consolidate some of that and bring things in house, as they did at Middleby, let's say, with the acquisition of Viking, for example? Or is it company struggling and going to try to acquire their way out of the problem by completely pivoting in a different direction, a new business or something they don't have competence in? And they're just trying to throw money at a problem? That's where it gets a little more dicey.
Moser: They have a very good record of figuring out new ways to monetize intellectual property for crazy stretches of time. I think we all, at least, expect them to keep on doing this kind of thing with a lot of the Fox properties that they bring in, and if they don't, shame on them, because that's really the expectation from the deal in the first place.
Greer: We'll keep an eye on it. Guys, thanks for joining me! As always, people on the show may have interests 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 it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!
[James Brown -- Santa Claus Go Straight To The Ghetto]
Jason Moser owns shares of Chipotle Mexican Grill and Walt Disney. Mac Greer owns shares of Chipotle Mexican Grill and Walt Disney. Ron Gross owns shares of Walt Disney. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Middleby, and Walt Disney. The Motley Fool has a disclosure policy.
