In this episode of Market Foolery, Chris Hill is joined by Motley Fool analyst Bill Barker to take a look at the latest earnings and business news. Nike (NYSE: NKE) has a good third quarter, with its Chinese investment strategy paying off. Our hosts also talk about the opportunities and challenges facing the RV sector. Target (NYSE: TGT) is one of a few businesses still operational amid the coronavirus-related shutdown, so the Fools discuss some reasons the company is withdrawing its guidance, and much more.
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This video was recorded on March 25, 2020.
Chris Hill: It’s Wednesday, March 25. Welcome to Market Foolery. I’m Chris Hill. Joining me: the one and only Bill Barker. Good to talk to you.
Bill Barker: Good to be back. How’s it going?
Hill: You know, just taking it day by day like everyone is. We’ve got some earnings news. We’ve got some guidance news.
Let’s start with Nike. Third-quarter sales for Nike came in higher than expected. Profits were sort of light, but this was one of those quarters where the investments that Nike has been making in online sales really paid off for them.
Barker: Yeah, I think this was a lot of good signs in this, and that’s welcome in the market today. The stock is obviously responding, having been beaten down like just about everything else. But primarily this is good news from the China side, where the online investments have led to, I think, about 100% increase in online sales in China. And for the quarter, I think sales are only off 4% or something like that.
So I think that this is a playbook that Nike is referring to that it can now roll out for its much larger markets, having gone through the worst of things in China and having learned some lessons quickly and having adapted.
Hill: I know that yesterday, pretty much everything in the market was up, and Nike was part of that, but they reported after the bell. Shares are up about 11% today and the stock is up more than 25% in just two days. And I think a lot of investors, myself included, are looking for [laughs] signs of positivity wherever we can find it. I don’t own shares of Nike, and I’m not saying it’s only going to be upside from here, but this was a really good quarter, I mean, you know, for the results that they put up.
And as you said, just from a tactical side of things, and John Donahoe has been CEO just for a couple of months now, but it seems like Nike is in a better position than a lot of other businesses in its industry.
Barker: Yeah, in retail. And I would say that I was reminded of a Churchill quote on thinking about this and seeing these results, and thinking that this is not the end of the problems that are going to come from coronavirus, and it’s not the beginning of the end, but what they’ve sort of gone through is the end of the beginning, which is, China’s quick recovery, having implemented its own playbook for how to address this virus and having so far corralled the worst parts of it.
And right now, Nike, unlike a couple of other companies that we’ll talk about, is still trading — because of the decline in the price over this year — it’s trading at a substantially more attractive valuation compared to the last five years. Now, that is going to be true across the retail sector for the most part, but the bounce today is largely due to this maybe signs of, kind of, normalized results sooner rather than later and a currently attractive price.
Hill: Well, we’ll get to the ripple effects of that, in terms of the guidance, in a minute, but let’s talk about Winnebago (NYSE: WGO) for a second. Because Winnebago, similar to Nike, second-quarter revenue came in higher than expected, shares of Winnebago up around 10% today. Now, this is still, much like with Nike, Winnebago started the year at $50 a share, it got down to $20, now it’s in the high $20s.
But this is an interesting one to me, because Winnebago is at the intersection of two large industries, travel and housing, and I’m wondering what you think the future holds for the RV industry. Because I hadn’t really thought of it until I was looking at Winnebago’s report this morning, but I thought, “Boy, you know what, this might be a good few years for Winnebago and Thor Industries and other players in this space.”
Barker: Well, I’ll give you the bull case. And the market is buying into a certain amount of bullishness today, with the stock up 14% as we talk. It’ll be different by the time people are listening to this, because that’s the nature of market movements these days. I mean, it’s been slammed this year. And so, having gone from over $60 a share down to, I think, below $20. Look, two-thirds of the price was taken off in the last couple of, really, weeks, and so it is rebounding a little bit from that today.
If you want to look on the bullish side, it’s this: People buy RVs when the economy is good, when they have jobs, when they have job security, when gas prices are low, and when interest rates are low. That’s sort of where the perfect storm is for RV sales is: good interest rates, good gas prices and good employment numbers. Well, you’re not going to have those good employment numbers, and you’re not going to have a lot of confidence in the economy for a bit. The other two legs are working out well.
And if you want to look at something which might be hopeful for RV manufacturers, it’s that people may turn to spending on keeping their families in an RV rather than traveling by airplane, rather than traveling by cruise. This is where the discretionary spend for travel and leisure would come in. Those are some of the main competitors, and people might say, “Hey, I want to have an RV next time this comes up, I want to be able to hop in my RV and go wherever I want and live wherever I want.” I don’t know, I mean, that’s a little bit optimistic, I would say, because I think the employment numbers and the consumer confidence is going to make RV sales very challenging for this year.
Hill: So let’s move on to Church & Dwight (NYSE: CDE). After the market closed yesterday, Church & Dwight came out with a statement, you sent it to me, and I read it a couple of times —
Barker: … You were bored, you couldn’t find anything interesting in there.
Hill: It wasn’t so much that. You sent me this, and you said, “Hey, maybe we should talk about this.” And I read it twice, and I was like, “What is the news here?” I’m not really sure what the news is other than they confirmed when their earnings report is coming out in April and they’ll be having the customary conference call and all that. But your response, if I’m recalling correctly, your response was basically, “Church & Dwight is trying to say that business is really good right now.” Is that a fair assessment?
Barker: Yeah. To peel back the curtain on how we set up stories sometimes. I fall back on the compare-and-contrast model a lot. Like, there are two pieces of news, let’s compare and contrast, because I never really got any further than about fourth grade in my writing, I think. So I think that what I want to compare this to is Target, which is more prominently in the news today. And so, Church & Dwight just has a lot of things which people are buying in extra supply right now.
So they’re talking about, the positive side for them is, as they mentioned, all their manufacturing facilities and distribution centers are currently open, which distinguishes them from a lot of other businesses. And not only are they open, but they are going to be, sort of, on overdrive, because a lot of what they make is cleaning supplies under the Arm & Hammer and under the OxiClean names. You could also make an argument that Trojan brand is going to do well in this environment. If you want to make that argument, I’ll try to keep you from going off the rails on it.
So a lot of what they have, they are categorized as sort of essential under the current guidelines, under the essential, critical infrastructure guidance that came out of the Department of Homeland Security. And so, basically what they’re saying is, “We’re open for business, we’re working hard to make as much of this as we can, but there will be some extra costs along with this.” And Target, which is in the news today for having withdrawn its guidance, but pointing out that March sales — early part of March, I think — sales were up maybe to 20% in the first couple of weeks of March. So that sounds remarkably good, and it’s a part of panic buying, and it’s gotten even greater.
But the categories that that panic buying is occurring in for Target are the lowest-margin parts of the business. The things that people are buying there are not the more discretionary higher-margin things like clothing. They’re buying consumer staples, which Target is happy to be selling right now, but it’s not going to drive the same profitability as the other merchandise in the store.
Church & Dwight just makes this stuff that is selling right now, so they’re not seeing any of the downside of where sales are not. They’re just seeing, for the most part, the upside.
Hill: I took a walk yesterday afternoon down King Street in Old Town, Alexandria, walked down to the Potomac River, and noticed that a bunch of the restaurants that are on King Street, which is the main strip in Old Town, were obviously trying to get business, had signs up in the window about they’re doing delivery, they’re doing takeout, all that sort of thing. And I counted at least three restaurants that were using as a promotion to encourage people to get takeout or delivery, that depending on how much food you buy, the restaurant would throw in a free roll of toilet paper. So that’s where we are, I think, when it comes to the hoarding and toilet paper specifically as a commodity.
Barker: Yeah. Are you tying that in to Target?
Hill: I’m tying that in to Target, because you’re right, if you’re a Target shareholder, on the one hand it’s like, you know, that’s great to see those types of numbers. If you’re Brian Cornell running Target, one of the things you’re trying to do is manage your inventory, and they’ve tried with varying levels of success to get people to, sort of, limit the amount of stuff that they’re buying.
Barker: Yeah, Church & Dwight participates in that economy, sort of, but not the part that’s being hoarded. They always, the last couple of years, have talked about the success of their clumping kitty litter, really, sort of the same thing as the toilet paper, and yet, there’s no run on kitty litter.
Hill: That’s interesting.
Barker: Not really, but I was seeing where you would go with that. Since you didn’t take the bait on Trojan, I was going to throw you the kitty litter stuff and see if you could come up with any of your comedy stylings. We better move on, because you’re 0 for 2.
Hill: [laughs] Well, I truly wasn’t listening when you mentioned the Trojan thing, so give me another shot at it.
Barker: It’s the problem of not being in the same room. I think our comedy back-and-forth would be better under those circumstances.
Hill: [laughs] That’s a low bar, but I think it would be — Let’s go back to Target though, for a second, because Target, you know, as you said, they withdrew their guidance. Whirlpool did the same thing. We have seen other companies withdraw guidance completely: MasterCard, Twitter. But it is worth noting that the overwhelming majority of companies in the S&P 500 haven’t done that yet. They haven’t just gone whole hog and withdrawn guidance altogether.
We’re going to be entering into earnings season next month. Do you expect that to change, and if so, to what degree?
Barker: Well, I think there will be a lot less guidance. And I think that those that can confidently give guidance are going to get the benefits of that. I think one of the reasons why Target may be in front of some others in that withdrawing guidance, because that is typically a signal for the market to panic a little bit, when a company can’t tell you. Now that everybody has got a little bit more leeway, because of the times we’re in, but Target is marrying this withdrawing of guidance with the information that its same-store sales were up 4% for the preceding four weeks. And that for food and beverage and other essentials, sales have been up 50%.
So they’re sort of saying, well, things are really good in these categories that people are coming in and need us to be open, and then they’re buying in great volume and they’re panic buying, but we don’t really know when this panic buying is going to resolve itself, and in the meantime, we’re missing out on a lot of normal discretionary sales. People aren’t coming in and picking through the clothing right now.
I credit them for saying, “We can’t really give you good guidance, so let’s not give you any guidance, but it’s not all bad and it’s not all good.” So the market is taking this as an opportunity to sell off shares, which are really very much in the valuation range of the last five years. If you look at where they are right now, this is not one of the stocks that has sold off and created some special opportunity. Over the last five years, the average price-to-sales is 0.6, it’s currently at 0.66, so it’s a little higher than the five-year trailing average. The price-to-forward earnings is 14.7 over the last five years, the average has been 14.8. So there’s not a lot to see in today’s Target price that’s different from the average.
Hill: Last question, then I’ll let you go. Warren Buffett, who we have not heard from, is sitting on somewhere in the neighborhood of $120 billion worth of cash. Where do you think he’s looking? Things are much more in the value range than they were at the beginning of the year, when he was pretty open about the fact that he’s got his elephant gun, he’s looking to deploy it, and this is the environment for him to do that.
Barker: This is. I don’t know whether it’s going to be necessarily in the open market. I think there are going to be plenty of opportunities. Right now, the valuation of the market isn’t deeply discounted to what I think he would find as a fair value. But where is he looking? He’s probably looking in the same sorts of categories that he’s been looking for most of his life: large brands that are well known, easy to understand. And I think he’s maybe had his fill of financials. I tend to think he’s not looking at the airlines, which is where he’s made some bigger purchases over the last couple of years. There is a lot of speculation: When are we going to hear from him, when is he going to come out and say, “Buy American?” Which he did in 2008, but, really, I think, the valuations at the point that he came out then were much more attractive than what we’re seeing so far.
Hill: It’s interesting you say that, because that was, I believe, early October of 2009, when Buffett came out with his op-ed piece and it was — I think you’re right, I think the headline was —
Barker: … 2008.
Hill: 2008. Excuse me. October 2008. And the headline was “Buy American. I am.” But that wasn’t the bottom. Like, yesterday, valuations may have been more attractive compared to where they are right now, but they still went down from October 2008.
Barker: Yeah. But they were attractive. I think there are lots of metrics that you can go back and look at the valuation of things in October of 2008 and say — whether you’re working off price-to-book, whether you’re working off price-to-trend earnings, whether you’re working off anything other than what forward earnings would have been expected at that moment in time — that things were attractive.
Looking back, now you needed the stomach to be able to act on that, and he had it, but I don’t think that the valuations that we see today on most of those metrics are yet comparable to what was available in October of 2008. You can find other people that think they are, but I don’t think that things have declined to that extent yet.
Hill: Bill Barker, good talking to you. I promise I’ll be sharper next time.
Barker: [laughs] I blame myself. These were not great setups. They are the best I could come up with.
Hill: As always, people on the program 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 going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
Chris Hill has no position in any of the stocks mentioned. Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. The Motley Fool owns shares of and recommends Mastercard, Nike, and Twitter. The Motley Fool has a disclosure policy.