In this episode of MarketFoolery, host Mac Greer and analysts Jason Moser and Emily Flippen hit on some of the biggest stories in the market.
Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) got some attention this weekend with its massive stock buyback push. What gives? Is there nothing better it could do with that cash? Lowe's (NYSE: LOW) closed some underperforming stores, but its turnaround strategy isn't too inspiring, and the home improvement retailer still pales in comparison to its rival. SeaWorld Entertainment (NYSE: SEAS) reported better-than-expected earnings. While the parks company is better off than it was last year, its long-term future isn't as splashy as it was before Blackfish. Tune in to find out more.
A full transcript follows the video.
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This video was recorded on Nov. 5, 2018.
Mac Greer: It's Monday, November 5th. Welcome to MarketFoolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Emily Flippen and Jason Moser. How are we doing this Monday?
Jason Moser: Hey, hey!
Emily Flippen: I'm doing wonderful!
Greer: Good! That's all I can ask for. We've got lots to talk about. We're going to kick things off with the world of Warren Buffett and Berkshire Hathaway. Third quarter operating profits doubling. Jason, strong numbers across the board here with their insurers, their railroads, their manufacturing companies. And, Buffett buying back $12.6 billion in stock. What does it all mean?
Moser: I think it means that he really likes his company, so much so that he wants to buy back more and more stock. It makes a lot of sense. Quarter in and quarter out, we about the merits of Berkshire Hathaway's business model. You keyed in on it, they're across the board. You started talking about railroads, energy, insurance. They make their money in a number of different ways.
I think, personally, it was really interesting to see, earlier in the year, they essentially lifted that benchmark that they had set for share repurchases. They were setting this internal benchmark of 1.2X book value as an arbitrary target. That's where they felt like it represented a good return. Now, they're basically just saying, anytime they feel like it's sensible to do so, they're going to do it. And I think we can trust their judgment. They've earned our trust here. It makes a lot of sense to see them continue buying back that stock.
I wonder sometimes if they're ever going to pay a dividend. I do feel like there are a lot of shareholders out there that would like that cash in the pocket. But repurchases do have a material effect, and the stock has done pretty well over the course of time.
Flippen: I've always felt differently about share buybacks. It's always made me wonder, what is a company doing with that capital if the only thing they can think of is buying back their own shares?
But, I will say, in Warren Buffett's case, I think there's something to be said about diluting the value of the brand if you're taking almost $1 billion worth of share buybacks and throwing it at any investment. At some point, people are going to take that name, "backed by Berkshire Hathaway," as less than what it's worth today. So, while it's not my favorite thing to see, I will admit that it does increase shareholder return, and it's not a bad thing. It doesn't really change the needle for me.
Greer: To Emily's point, Jason, a lot of companies, when they buy back shares, they're not getting that right. It's not always a bullish sign.
Moser: We definitely have data that shows that, in fact, most of them get it wrong. The share prices are high when they're buying that stock back, but when the you-know-what hits the fan, and everything starts coming down, they tighten those purse strings very quickly. If you know your business well, that's the absolute time you need to be accelerating those buybacks. So, we do see that data, showing that most companies do get it wrong.
I think Emily makes a great point there. You have to wonder, is that money not better served elsewhere? The old argument with a dividend is a good one, because a lot of people love to get that cash in the pocket. And cash in the pocket is real. Repurchases typically do help the share price over time, but they are somewhat subjective. There's no rule that says the stock market then must bid that stock up accordingly, so it reflects those share repurchases. It's always something to consider. It's company-specific. I don't think you just take it as always a good thing, no matter who's doing it.
Look at his stake in Apple. What is it, $50 billion they have in Apple? For a guy who said he wasn't ever going to invest in tech...
Greer: That seems like an investment in tech.
Moser: It seems like a little bit of a statement. And we look at this sell-off here that's happening with Apple over these last couple of days, that's real. I tell you, they're trying to change the conversation a little bit there, and move away from being just the phone company, and now being more than just the phone company, with Services and whatnot. I think he's looking for businesses like that. He'll continue investing in those, as well.
Greer: Let's wrap this up by talking about another way that Buffett could deploy some of that capital. I want to get each of your thoughts on what Buffett's next big acquisition could be. Now, we know he's buying back shares. But over the years, we've speculated about different companies. Jason, any thoughts on who Buffett might go after?
Moser: I've said this time and time again --
Greer: Say it again, Jason!
Moser: I feel like a broken record here. McCormick! I just don't understand how this hasn't happened yet!
Moser: Yeah. And really, at this point in the game, McCormick is a $20 billion company, and they just digested a pretty big acquisition not too terribly long ago.
Greer: But $20 billion for Buffett is chump change.
Moser: Well, he's going to have to pay more than that, but still, it would be basically chump change. It's such a Berkshire Hathaway-style business, to my mind. We were talking about this on Motley Fool Money this week, too, how the Kraft Heinznumbers aren't looking all that encouraging. We know that Berkshire Hathaway has a connection there. To me, it was just like, McCormick has been going the other way, big guy. Maybe, maybe now, he'll finally take a closer look. McCormick is doing a lot of things right. They really have brought that RB Foods acquisition into the family. That has panned out nicely. It's a bigger company now than it was a year ago.
Greer: Emily, what do you think?
Flippen: I like a little Berkshire in my tech, whether or not that's realistic to happen. You're going to think that you have two Jasons on the show after I say this -- I would love to see Berkshire go after a company like Teladoc, somebody who's revolutionizing in the healthcare space.
Greer: Did Jason pay you to say that?
Flippen: [laughs] We didn't talk before this! I was actually surprised Jason didn't bring it up himself. It's a very tech-y company, but I think Berkshire is long overdue for some activity in the healthcare space.
Greer: I don't think it's going to happen, but for years, I have wanted, of course, Berkshire to buy Costco. Charlie Munger, the vice chairman, is on the Costco board. Buck Hartzell, one of our colleagues, and I were talking beforehand, and he foo-fooed the idea. He said, Buffett, not huge on retail. Maybe that's just a pipe dream.
Moser: But is that even retail now? Work with me here, that's one of those great membership businesses out there.
Greer: Well, now that you said it...
Moser: We love those membership models.
Greer: It's three minutes into the show. No mentions of Costco or Teladoc for the first three minutes. [laughs] No, I agree, I don't think it's just retail, it's more of an experience.
Moser: To that point, they have relationships with travel agencies and insurance companies and whatnot. You do get a lot out of that membership. It's a big company, a $100 billion company now. That would be a big acquisition. They could do it, but it would be a big one.
Greer: I like the McCormick thing. I would go McCormick. I bet he would go McCormick before Costco.
Moser: Don't get me wrong, I'm happy to let my McCormick shares sit there and keep on appreciating in value over time. I'm just saying, if I was there in the Berkshire boardroom, I probably would have lobbed that across their radar once or twice.
Greer: With maybe a Teladoc mention, as well. Let's move on and talk some Lowe's. Lowe's is closing 51 underperforming stores. That's 20 in the U.S., 31 in Canada. Lowe's still has north of 2,000 stores in North America. Emily, still a big company. What's the story here?
Flippen: Still a big company, still the No. 2 player in the DIY home improvement space. I don't think we're seeing a Sears here. I don't think we're seeing an all-store liquidation. But it is always interesting and concerning to investors when you see store closures. I think what's happening is that they're finding they're oversaturated in this space. They have more stores than their largest competitor and the No. 1 player in this space, Home Depot (NYSE: HD), and they're doing less in sales.
Greer: Lowe's has more stores than Home Depot?
Flippen: It does!
Greer: You shared that with me before the show. That that really caught me by surprise.
Flippen: It caught me by surprise, too. When you think about the person who's going to a Lowe's... Home Depot tend to go more toward semi-professionals, contractors. Lowe's goes toward the you and I, the local people, you just need to go somewhere and pick up something that you're not going to be able to order on Amazon.
Greer: You're saying I'm not semi-professional?
Flippen: [laughs] Not yet. But you could be, if you applied yourself! I think that was the reason why they had a lot of stores though. They had to make it convenient. Pulling back these underperforming stores, making it closer to the number that we're seeing from Home Depot. The macro trends here are too strong for the company to underperform.
I do think it's really interesting, when you look at their new CEO, who just came on earlier this year, Marvin Ellison. He came on from JC Penney, where he served as CEO, and did some very similar things when he was CEO of JC Penney -- closing down stores, cutting some SKUs, making the inventory a little bit less. It's interesting to see him taking the same stances here at Lowe's. I don't necessarily think that, like I said, that's going to go the same way as JC Penney. But it is interesting to see the same strategy that didn't pan out for him at JC Penney being applied here at Lowe's.
Greer: "If you loved what I did at JC Penney... " Jason, what do you think?
Moser: I've always found Lowe's and Home Depot to be like the drugstore space, like the CVS and Walgreens, to the extent that they always seem to be near each other, and you go to whichever one is more convenient. With that said, I do find myself going to Home Depot much more often than I go to Lowe's. A lot of that is because the service is better. They have more stuff. I always know I can get what I'm looking for there. For me, it's no secret why Home Depot has been so successful for so long. I think that Lowe's probably can continue to do just fine. As we've talked about before, they've latched on to this terrific market opportunity that appears to be pretty Amazon-resistant. And as they continue to grow out that internet business, even incremental improvements can ultimately result in gold for shareholders.
Greer: As we wrap up here, let's talk about a few of the numbers. Home Depot's market cap is around $210 billion; Lowe's, around $80 billion. Home Depot, we mentioned this earlier, their revenue around 50% larger than Lowe's revenue. Home Depot is much more profitable. When you look at the two stocks, they have both beaten the market over the last 10 years. Home Depot especially has crushed the market. How about going forward? What do you think about the two stocks? Do you have a favorite?
Flippen: Home Depot definitely has a premium applied to it right now. They had about $100 billion in sales; Lowe's has about $70 billion in sales. The change in market cap there on a sales basis is pretty extreme. But, I think it's the better company when you look at how it's performed, when you look at the management, and when you look at some of the incentives that they put in place for customers to be return customers. They've done a better job pushing a Pro program, customer loyalty, pushing online sales. For me, that's a hands-down Home Depot. But, it doesn't make me necessarily believe Lowe's will be a bad investment. I would just choose Home Depot between the two.
Moser: We were talking about the basement project that we had done in our house. The company that came in and did it got all of their stuff from Home Depot. I was astounded. And they speak very highly of it. Their Pro program is something they use consistently. I feel like, yeah, Home Depot is the obvious winner in the space.
With that said, I think there's the opportunity for Lowe's to perhaps outperform if the changes they make take. If they're really able to become a bit more like Home Depot, really, is what they ultimately have to do, if they can do that, perhaps there is the opportunity for that stock to outperform. But I feel like Home Depot is the no-brainer.
Greer: It's tough. But, a lower bar for Lowe's.
Moser: Exactly. Why not own both? Maybe that's the way to go.
Greer: Our final story, this is one that I was not expecting to talk about today. SeaWorld reporting better than expected quarterly earnings. Attendance up almost 10%. Revenue up more than 10%. Jason, when I think SeaWorld, I'm going to tell you, I think about the documentary Blackfish. Blackfish was a very critical documentary about SeaWorld and their whales in captivity. It came out in July 2013. SeaWorld's stock back then was trading around $38. A year ago, the stock was trading around $10. Today, shares back up to $25. So, SeaWorld appears to be coming back and overcoming some of that.
Moser: Yeah. You probably want to be cautiously optimistic here. It has been a tremendous turnaround. With that said, I look at SeaWorld and I feel like, when you look at that park space, we talked about Home Depot and Lowe's, going with the obvious one there. You look at SeaWorld and you have to compare it to Disney (NYSE: DIS). Why aren't you just going with Disney in that case? And chances are, probably most people are. My problem with SeaWorld is, while it's unique -- and, I think they managed their way around that Blackfish crisis well enough.
Greer: You think so? That documentary was so jarring. I had only gone to SeaWorld once or twice, and I'll never go to SeaWorld after seeing that.
Moser: I don't blame you for that. I think I've been to SeaWorld once in my life. When we were down there with our girls in Florida, it never even came up on our radar. It just wasn't something they wanted to go to. But clearly, people are going to SeaWorld, and their owned properties. It's not just SeaWorld. They own Busch Gardens and other parks around the country. With that said, I don't think that they possess the ability to raise prices on those tickets like something like Disney. Remember, when we talked about Disney back in the time of the Great Recession, even Disney had to resort to cutting ticket prices a little bit to get traffic in the door. That's really the most important part of it all, getting people in that door. SeaWorld, I just don't think they possess the same ability to raise ticket prices when economic conditions allow for it. Disney has been taking advantage of that every year. SeaWorld doesn't have that same ability. That has to be concerning, particularly when you look at their balance sheet, which has a pretty healthy slug of debt on it and a coverage ratio of just about two. You want that number to be a lot higher. There are a lot of hurdles for them to clear.
Greer: I should add, they have said that they're phasing out the killer whales in captivity. But that brings up another point. That's in part what they were known for. If they don't have pricing power, and the killer whales are going away -- and I think a lot of us think that's a good thing, especially if you see Blackfish. It is brutal. I'll just tell you, there's a scene where a mother gets separated from her calf, and I'm like, wow!
Moser: Yeah, that's going to tug at my heartstrings.
Greer: It's brutal! So, if you if you take the whales out of the equation, and to your point, Jason, they don't have pricing power. What is SeaWorld?
Flippen: I like to think about these types of things split into two. There's experiences and there's activities. Disney is undoubtedly an experience. You have people who say, "One of the things I want to do before I die is go to Disney World." Kids want to go to Disney World. It's an experience. SeaWorld used to be an experience. It used to be an experience because of the Orca shows. That was, in itself, an experience that was quintessential when you were growing up as a kid, getting splashed by the Orca tail. I think with Blackfish and phasing out the Orca program, you're looking at something that is now an activity. That doesn't necessarily mean it's bad. But, I agree, it doesn't have the pricing power that an experience has. Theme parks are activities, fairs are activities. SeaWorld now is an activity. I don't think we'll ever go back to the glory days of SeaWorld being that quintessential, once in a lifetime experience that you get when you look at a park like Disney. For me, it lost a lot of its power because of that. Of course, ethically, that's a good thing for people. After seeing Blackfish, I'm sure people are like, "I'm never going back to SeaWorld because of that." I don't think they should go back to Orca shows, but without the Orca shows, they're really lacking something.
Greer: What about the stock going forward?
Moser: The stock has made a tremendous come back from the lows where it was. But investing, as we know, is all about the future. When you look at a business like this, I question its pricing power. It's going to cost a lot of money to maintain these assets. It means the balance sheet becomes more and more of a liability as time goes on. In the face of questionable revenue growth, it's just not the kind of business I'd personally want to invest in.
What if I told you, to Emily's point, in trying to reinject that experience element, what if I told you -- work with me for a minute -- SeaWorld, you add that show where the monkey rides the dog? Have you ever seen that, where the monkey rides the dog and the monkey wears a cowboy hat and bandana? Do they have the brand permission to do that? And I want to make sure the monkeys are treated ethically and not separated from their mothers and all that.
Moser: In this age of technology, perhaps the answer really is something more along the virtual or augmented reality side. Instead of actual orcas, perhaps they just have a hologram of an orca that splashes on you, but doesn't really. You sit in those theaters at Universal.
Greer: Virtual killer whales.
Moser: Maybe that's the answer. But then you leave wanting more.
Greer: How about if we pair virtual killer whales with very real monkeys riding dogs?
Moser: The monkeys thing is where you're losing me. I just don't trust monkeys.
Greer: That's true. And you'd have to retrofit the parks, and if they got out, there's liability. I haven't really thought through this. I apologize. I take it back.
Moser: Didn't a monkey steal something from Joe Magyer on his honeymoon? Joe, reach out to us, tell us that story again, if you can.
Greer: They're crafty. I was in Gibraltar traveling. They warn you, "If you have ice cream, if you have any food items, the monkeys will come and take it."
Moser: Be careful!
Greer: They're cagey. As we wrap things up here, I want to give you my desert island poll again. If you've never heard this, you should never invest this way. It's completely arbitrary. It's just kind of a fun conversation topic. You're on a desert island for the next five years. You can buy one of these stocks: Berkshire, Lowe's, Home Depot -- we'll throw that in -- or SeaWorld. What do you think?
Flippen: SeaWorld for me is immediately out of the question, being a socially conscious investor, for better or worse. So, for me, that question comes down to Home Depot vs. Berkshire. And they're so similar, but so different. I think I'll have to go with Berkshire on that. But I definitely think Home Depot is a close second.
Moser: I used to actually own Berkshire Hathaway. I don't anymore. I think I'd go with Home Depot, actually. I'm a big fan of that market, as someone who likes to do that work at our house, I think they'll be getting a lot of my dollars for hopefully the next 30 or 40 years. Let's go Home Depot.
Greer: And, if Berkshire buys McCormick, you'll own Berkshire.
Moser: There you go! Now you've got the best of both worlds!
Greer: Jason, Emily, thanks for joining me! firstname.lastname@example.org is our email. If you have questions, if you have comments, if you have any ideas on how SeaWorld can improve their experience or their activities, let us know. email@example.com. Thanks for joining us! As always, people on the show 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 it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We will see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Emily Flippen has no position in any of the stocks mentioned. Jason Moser owns shares of AAPL, MKC, TDOC, and Walt Disney. Mac Greer owns shares of AMZN, AAPL, COST, and Walt Disney. The Motley Fool owns shares of and recommends AMZN, AAPL, and Walt Disney. The Motley Fool is short shares of SeaWorld Entertainment and has the following options: long January 2020 $150 calls on AAPL, short January 2020 $155 calls on AAPL, short February 2019 $185 calls on Home Depot, and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Berkshire Hathaway (B shares), COST, CVS, Home Depot, Lowe's, MKC, and TDOC. The Motley Fool has a disclosure policy.