In this episode of MarketFoolery, Chris Hill and Motley Fool analyst Ron Gross go through the latest headlines from Wall Street. They discuss the earnings reports for Marriott, apparel manufacturer Under Armour (UA 2.34%) (UAA 1.44%), and a medical diagnostics company. There is some encouraging news on the health front, too. Finally, they dig into the mailbag to answer a listener's question about stock diversification.
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This video was recorded on May 11, 2020.
Chris Hill: It's Monday, May 11th. Welcome to MarketFoolery. I'm Chris Hill, joining me today from another state, because that's how we're rolling these days, it's Ron Gross. Good to see you, my friend.
Ron Gross: Good to see you, Chris; how are you?
Hill: I am doing pretty well. We've got some earnings, we've got some -- I don't want to get my hopes up, but we've got some encouraging news on the health front.
Gross: Yes, agreed, encouraging is the right word.
Hill: Yeah. We're going to dip into The Fool mailbag too. But we're going to start with Marriott, because Marriott International net income in the first quarter a year ago was $375 million, and this year it's $31 million.
Gross: It's still profitable. [laughs]
Hill: [laughs] It is still profitable. Marriott is also laying off tens of thousands of people. What do you see when you look at a massive hotel company like Marriott?
Gross: Pain. And you know what, this one hits, kind of, close to home, because they're headquartered out of Bethesda, where I live. So, I actually can put faces to furloughed workers. So, it's tough, man; the stock reflects how bad it is, down 42% this year. Revenue Per Room, they like to call it, RevPAR down 22.5% for the quarter, which was down about 20% North America, down 30% outside North America. Now, that's not even that bad, because when you look at April, RevPAR was down 90%, but that's not reflected in these numbers because the quarter ended at the end of March. But the pain was really, really, really significant in April.
25% of Marriott's 7,400 hotels are closed. A little bit of a bright spot, they think maybe China is recovering somewhat. Occupancy there hit 25% in April. I think that it's fascinating that we consider 25% to be somewhat encouraging.
As you noted, the numbers are just devastating. Adjusted operating income was $192 million for the quarter, down from $655 million in last year's first quarter. So, then we got to look at the balance sheet, how bad is this and how much danger could they be in? Debt of $12 billion, cash of only $1.8 billion. So, they went back to the markets, which I think was wise, raised another $2.5 billion through debt issuances to, kind of, shore up that balance sheet.
Interestingly, they actually bought some stock back, $150 million of stock back during the quarter, before they said, well, maybe not, we should halt this, and canceled the dividend as well. You know, preserve our cash because we don't know when this is going to get better. So, that's wise. As I mentioned earlier, furloughing tens of thousands of hotel staff, two-thirds of their corporate workers -- I believe there are 4,000 of those in total; furloughing about two-thirds of them.
So, they're just in hunker-down mode, going to wait this out. You know, traditionally, a very strong company, and traditionally, a very popular company to work for. Always on the list of great companies to work for. This is just an exogenous hit to their business that they're going to just have to wait out. And, you know, they'll come back, but we just can't predict exactly when this starts to firm up.
Hill: You look at the stock, it's down about 5% today, it's basically cut-in-half since the beginning of the year. But as you said, historically this is a strong company, this is one of, if not the top performers in their industry. I don't know, I could see one scenario where we look back and a year from now and we say, "Oh, yeah, that was the time to buy Marriott, [laughs] when the stock was cut-in-half," because they did talk a little bit about how, as you mentioned, the numbers in China, which are not great numbers, but they're certainly higher than they were. The company talked about demand in most of the rest of the world stabilizing.
So, the challenge for Marriott and all these hotel companies is how do they demonstrate to people that they're completely safe walking into the hotel rooms. And I think if they can do that, then I think then we see demand going up.
Gross: For sure. And when the antigen testing -- we'll talk about that a little bit later -- help, certainly vaccines will help. The vaccines will be the gamechanger for people starting to travel again. And so, whether that's at the end of this year, I don't know, optimistic; next year, more realistic perhaps. But you know, I mentioned on the radio show last week, Jeremy Siegel, I think, correctly said that 90% of a company's value is the cash flows that it generates after the next 12 months.
So, thinking about a company and a stock and a valuation like Marriott, the next 12 months, pain, but the rest of Marriott's life, hopefully, God willing, [laughs] is going to be more normal. Now, the next 12 months are very important, they make up 10% of the valuation because the near-term cash flows are almost in present value state as is and you're discounting future cash flows back rather significantly.
But if you believe in Marriott, you believe its balance sheet is going to withstand this. You're right, it's probably a time when we'll look back and be, "Boy! I could've owned Marriott at $87 a share," you know, even if it goes to $75 or $70, you know, we can't call the bottom. Five years from now, 10 years from now, I don't see how owning Marriott at $87 is not a good buy.
Hill: Under Armour shares are down 10% today. First quarter revenue for Under Armour down nearly 25%. And coming into this year, CEO Patrik Frisk, who's new on the job, was all about the turnaround and executing his plan for the turnaround. And that bar is so much higher for Frisk and the team at Under Armour.
Gross: Ugh! That's brutal. He came on, I think, January, right? [laughs] I mean, he just literally just came into a storm. And as you say, it's not like Under Armour was firing on all cylinders in the first place. They had a rather significant restructuring program in place to, kind of, better align costs to where they see the business at the moment. And then this hit and then just all bets are off.
North America, which is 65% of sales or 28% reduction in revenue, and international was down 12%. Direct-to-consumer down 14%. Wholesale down 28%. You know, any way you slice these numbers, they're just bad. They have previously announced layoffs, extended their store closings, they withdrew their forecast for the year as most companies have. They lost $590 million for the quarter, if memory serves me correct. So, you know, this is not going well amid an already tough restructuring.
So, again, we always have to turn to the balance sheet and see how bad this is. The balance sheet is relatively OK. $1 billion in cost, about $1.2 billion in debt. So, kind of, net neutral there, but business is weak. And you can contrast that with a company like Nike, who also is not gangbusters in this environment, but still, there's digital growth at Nike of 36%, revenue is actually up for the quarter for Nike.
So, Under Armour stock is down almost 60% year-to-date; Nike is down only 12%. And that's a reflection that the businesses are just very different and Nike's is much stronger. So, UA, I didn't like it before the pandemic, I thought it was problematic and I'm certainly even more wary now.
Hill: You know the old saying, there's enough blame to go around. There are enough mistakes that Under Armour has made over the past, call it, five, six years, but when you talk about the e-commerce sales for Under Armour, I can't help but think about the decision that Kevin Plank made years ago to invest, I think, it was $700 million buying a connected fitness company. And you think about a decision like that, and if instead the decision was, we're going to invest $700 million in a robust e-commerce platform, because those are decisions that Nike and Adidas have made and that's part of why both those companies are in better shape financially than Under Armour.
Gross: Yeah. I mean, we're playing armchair quarterback, but I think that's absolutely right. Like, years ago, Nike sitting around the conference room table, "Hey, should we double-down on our relationship with Foot Locker or should we go multichannel and really do direct-to-the consumer?" And luckily for them they made the right choice there, bad for Foot Locker, [laughs] obviously. But it's all about capital allocation and, kind of, looking into the future and kind of skating to where the puck will be. And Under Armour has not done a good job in that sense.
Hill: Well, and similar to Marriott talking about the rest of the world and demand stabilizing. With Under Armour, one of the things they talked about was their locations in China, that basically all of them have reopened. And now we get to see, over the next couple of months, what does that traffic look like, does it provide a blueprint to stores in the U.S.? You know, if you're looking for glimmers of hope, that might be it with Under Armour.
Gross: Right. But then you'll just be back to their normal restructuring, right? [laughs] And then back to where Patrik Frisk thought he was back in January, which was not an easy thing to be tackling. We'll keep an eye on it for sure, it's an important company and we've talked about it a lot in Fooldom for years and years. So, we'll keep an eye, but they've got some work to do.
Hill: Shares of Quidel (NASDAQ: QDEL), which is a company I'd never heard of until this morning. That's right, Quidel. Shares up 25% this morning after the company got emergency approval from the FDA to distribute a new type of COVID-19 antigen test.
And this test is designed for very rapid detection of the virus. This seems, obviously, great for shareholders, but this also seems promising for everyone in our country.
Gross: Yeah, looking at that stock chart or as they say in Boston, that "stack chart" it's unbelievable. [laughs] I mean, it's very exciting. And we won't pretend to be experts here, because I was not familiar with this company either. But the fact that it's a quick test, the fact that it appears to be 85% at least accurate, the fact that it utilizes machines that already have an installed base in doctors' offices, about 40,000 of the Sofia machines, that's the brand name, Sofia machines are already in doctors' offices. I think that bodes pretty well in terms of getting these tests directly to folks. And the fact that the FDA authorized the emergency authorization means, they agree as well.
And this is pretty exciting stuff. The test actually, it's a little bit different, because from my understanding, this looks for actual chunks of the virus itself when checking out antigens, but again, if we talk too much about the science, I'll be making it up and I certainly don't want to do that.
But for all of us, for the economy, for the health crisis, it's going to be things like this, and then the eventual vaccine, that gets us back to some kind of new normal.
Hill: I watched a clip with Scott Gottlieb, the former Director of the FDA, and the analogy, when he talked about how this test worked, it reminded me a little bit of a strep test; if you've ever had a strep test. And they can do, sort of, a quick version of it, where they get the results, you know, in five, 10 minutes. And eight times out of 10, nine times out of 10, that's the one, you know, that's all you need. And then 10% to 15% of the time, it's like, no, actually we need the more robust testing where we send it away and then we get the results, that sort of thing. But it --
Gross: And even that's, probably, only 24 hours, which is not too bad.
Hill: Right. Exactly. So, yeah, this is great for Quidel, great for the shareholders. And if this is a test that can, you know, because as we've talked about before, yes, we want a vaccine, but before that it's all about the testing. And we [laughs] got to be able to test as many people as possible as quickly as possible. We're going to see that with businesses as offices attempt to reopen, and you know, this could be part of the solution.
Gross: Yeah, for sure. Right now, just taking people's temperatures, I don't think that gets us where we need to be in terms of getting back to business. We need to see who has antigens, who doesn't, contact tracing, you know, all the same things we hear all the time. Testing, contract tracing are really important until we get over that hump and get to the vaccine, as you said.
Hill: Our email address is [email protected]. Question from George Demakos, who writes, "I am new to your Stock Advisor service. Tom and David Gardner always talk about buying 15 stocks. I have $6,000 to play with. Do you advise splitting the $6,000 up into 15 different stocks? Also, when you guys recommend stocks like Netflix and Amazon, does it make sense to buy Amazon at such a high price? I'd only be able to buy two-and-a-half shares, does that really make any sense?"
Yeah, I mean, it's a good point, because, yeah, I think of where Amazon stock price is -- yeah, $6,000 probably gets you two-and-a-half shares.
Gross: [laughs] Right. So, first of all, George, welcome to Stock Advisor and great that you're starting to invest. With respect to the 15-stock guidance that you often hear us talk about. I won't speak for Tom and Dave, but I'll give you my thoughts on that, it doesn't have to be immediate, it's something aspirational, it's something we'd like to see you build to, so you are diversified across a number of different stocks, hopefully, a number of different sectors, hopefully, a number of different types of sizes of companies, market capitalizations. So, you can get there over time, you don't need to feel that you need to do that immediately.
And also, don't be afraid for some of those positions, one chunk of that 15 to be an index fund, which will get you even more instant diversification. So, maybe start with five or 10 right now. Take your $6,000 -- he said, he's going to play with it, this is not about playing, this is serious business, but definitely have some fun with it and invest for the long-term for sure.
Start with five or 10 and divide the $6,000 across that. It doesn't matter how much of any one company you buy. So, the higher priced stocks, like, Amazon, obviously, can be rather daunting. If you have a broker that will allow you to buy fractional shares, that's even better, because you can take $500 and buy $500 worth of Amazon and get a fractional share there. It's not about the number of shares you own, it's about the amount of cash that you put toward a stock. So, never focus on the number of shares, just focus on the amount of capital you're investing in a company.
Start now. Now is a great time to start, I think, in terms of pricing and where it will be, hopefully, five or 10 years down the road. Start with five or 10, build toward 15 and you're on your way.
Hill: You know, speaking of index funds, as you mentioned, one thing I was thinking about this morning, because I've got an S&P 500 index fund -- and looking at how the market is going so far this year and how it's probably going to go for the next year-and-a-half, I might look into just putting a little bit of money into a Nasdaq index of some sort.
Gross: Nasdaq is positive for the year, which is fascinating. The market is being led, as it has been quite a bit over the years lately, by some of the large technology leaders. Nasdaq usually, typically thought of as a home for technology companies. And so many of them are actually up this year. So, when we think of companies being down 10%, 20%, you can point to a number of companies that trade on the Nasdaq that are actually up. Certainly nothing wrong, like, QQQ [PowerShares QQQ Trust, Series 1] is the typical kind of Nasdaq ETF exchange-traded fund, always great to have exposure. I personally have exposure to the S&P 500, the Russell 2000, which are small cap stocks. The Nasdaq, which are typically technology stocks. Nothing wrong with owning ETFs to, kind of, invest in the market that way.
Hill: Ron Gross, good talking to you.
Gross: You too, Chris; thank you.
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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening, we'll see you tomorrow.
