In this episode of Market Foolery, Chris Hill chats with Motley Fool contributor Dan Kline about the latest news from Wall Street. They've got the latest headlines from the airlines and the travel industry, an iconic brand is up for grabs for anyone with deep pockets, and much more.
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This video was recorded on June 22, 2020.
Chris Hill: It's Monday, June 22. Welcome to Market Foolery. I'm Chris Hill. With me today: our man in Florida, it's Dan Kline. Good to see you.
Dan Kline: Nice to see you, Chris.
Hill: Belated Happy Father's Day!
Kline: Thank you. Did you do anything exciting yesterday?
Hill: I grilled some meat, because it's Father's Day, you know, anyone with a grill should be able to grill whatever they want on their day.
Kline: I went to Texas de Brazil, so similar theme, except I didn't have to cook.
Hill: [laughs] We've got a wonderful buying opportunity for anyone out there who wants to own an iconic brand, but we're going to start today with the airlines.
Both United and American Airlines are in the news because both of them are looking to raise a lot of money. American Airlines is reportedly going to be raising up to $3.5 billion, and United is going to be raising up to $5 billion. How bad is it out there for the airlines? Because when I look at this -- and look, I know these are huge businesses, but this is probably not what you want to see if you're looking to own shares of these companies.
Kline: Yeah, this is bad news. So the estimates are, they're losing $45 million a day. And you know, everyone's acting like we're back to business as usual. The reality is, we're back to some flights at limited capacity, and you probably didn't pay that much to be on [laughs] those flights. So airlines are in real trouble until there is a cure or some method of keeping you safe on planes. If they make every seat some sort of individual plexiglass pod, I guess [laughs] maybe that could work, but I'm not even sure how that would work with loading and offloading -- at best you're looking at two-thirds capacity and most routes are going to have lower pricing.
I know I've booked some flights; I don't know if I'll take them, but I've booked some flights and the pricing was very, very low. So this is a lot of pain. And starting at the end of September, they can lay some people off. They're trying with buyouts and other offers to reduce their workforce, but these are companies that are not going to be back to normal for maybe years. And I point out, I'm a travel optimist.
Hill: [laughs] Yeah, I was going to say, you're one of the more optimistic people I've heard talking about the travel industry in general, whether we're talking about people getting back to casinos or the airlines or the cruise lines. I saw a clip this morning, an interview, that's going to be running tonight on HBO. Ed Bastian, who's the CEO of Delta Airlines, talking about masks on their planes, and basically saying, "Look, we're not going to remove people from the plane if they take their mask off." And it's a tough spot that they're in, because -- particularly, when you think about longer flights, it's not hard to imagine for, sort of, the shorter trips where the flying time is maybe an hour, and so part of the safety procedures involved, we're not going to be doing drinks and snacks. Everyone needs to stay seated, keep their masks on.
When you start thinking, Dan, about cross-country flights, then you get into an area where it's, like, "Well, wait a minute. If I'm going to be on a plane for five or six [laughs] hours, I'm probably going to want to use the facilities at some point, I'm probably going to want to eat something or drink something." So they're in a really tough spot.
Kline: They're not stopping people from bringing their own drinks on board, but there are some things they could do. Instead of doing drink service all in order, they could do every other row. So you finish your drink before I got mine, and my mask goes back on. The problem with this is, is that, at least here in Florida, people have not shown a willingness to wear masks. The restaurant I ate at last night, the restaurant did everything really well, and you were supposed to be wearing a mask until they served you food or beverage. And I would say it was 50/50 whether people did that. And honestly, it was a tiny bit uncomfortable. I'm not sure I want to be on a plane and a person behind me is blatantly not wearing a mask, and I don't mean they're taking their mask off carefully to have a cup of coffee and then they're putting it back on.
I get it that masks aren't super comfortable. I've ordered about 10 different masks to try to find the most comfortable one. I know my son has been wearing the neck gaiter, and that's really comfortable, because he's got a small neck. It doesn't work as well for me. Look, you can find a mask that's comfortable, you could wear a face shield if you want, there's all sorts of options out there. And I think right now, the airline should be enforcing this, they should be -- even the perception of it is important. They've changed their filters. They're doing lots of things to keep you safe.
I don't believe flying on a plane, if people are wearing masks and there's reasonable precautions, is that dangerous. On the other hand, if people are completely ignoring the rules and they're walking to the bathroom while drinking a soda and sneezing without wearing a mask, that does seem to increase my danger. And, look, I get the politics of it, why the airlines don't want to make hard-and-fast rules, but I think as a society, maybe we should make some hard-and-fast rules about being nice to each other.
Hill: Last thing on the airlines. There are a chunk of investors out there who look at the airlines, particularly, with their stocks knocked down to the extent that they have been, and they think to themselves, well, look, they're going to survive, they're going to get through this, this is a necessity in our society, so why not take a shot with one of these stocks, why not buy a few shares because it's a value play right now? Do you look at the airline stocks as value plays?
Kline: No, it's a value trap. It's a danger. There should be red lights and crocodiles jumping up, and whatever could scare you away, because airlines could go bankrupt. That doesn't mean they're going to go out of business, Chris. We've talked about this with cruise lines. The banks don't particularly want to own cruise ships and they don't want to own airplanes. These routes need to be flown, so what could happen -- and they're taking steps for that not to happen -- but if this goes on for an extra long period of time, they'll file Chapter 11, they'll get out of some of their debt, the same people will be in-charge, some executives will get bonuses and shareholders will get wiped out. That is how it goes. So if you invest in an airline, you're making the bet, this will recover over the long term without there being a bankruptcy in the interim. I might make that bet on Southwest; I am not making that bet on any other airline.
Hill: Second quarter earnings for TripAdvisor (TRIP 0.80%) are scheduled for early August, but we got indications today that it is not going to be pretty. TripAdvisor said it expects revenue for June to be one-fifth of what it was a year ago. And, Dan, TripAdvisor is also quick to point out, "We've got the money to cover our debt obligations for the rest of this year and all through 2021," but that seems like the financial equivalent of damning with faint praise.
Kline: Yeah, that's not great. That's like you go into a meeting with your boss and he looks really upset and he says, well, we're not going to fire you. It's like, "OK, I'm not getting fired, but something is not good here." And travel has rocketed back to 20% of previous volumes; that's not great. And nobody is taking discretionary vacations to -- I mean, there are places you can go, because camping is up, there are some things people will do -- but the amount of people flying to Orlando to go to Disney World, which hasn't even released its official method of reserving days at the park yet, that doesn't happen till June 22, for people that have a resort reservation. Nobody is doing that. Someone like me might fly to Vegas for a few days and carefully gamble. Your average group of buddies that was going to go to Vegas is not going to do that when the city is half shut down. That's true of most destinations.
Chris, let's say, you and I, we're going to have a meeting with, you know, a potential sponsor. We might have flown to do that in person, there's no way we're doing that in person right now, especially if it's someone in New York or Los Angeles or a big city. So there's just going to be less demand for a long time. Do I believe that demand will never come back? I do not. I believe that we will forget about this. This will become the blizzard of '78, a fond memory, as weird as that sounds, that we all tell war stories about 10 years from now. But for the next however long, no, things are going to be really ugly for the travel business.
Hill: They are. And you think about a business like TripAdvisor, which has really stumbled over the last five years. I mean, it's been a pretty steady decline for the stock and for the business. A year ago, this stock was in the mid-$40; today it's at $17/share, so it's a little more than a $2 billion company. I'm wondering if you look at TripAdvisor and think that there is enough there in terms of data, in terms of users, that someone might consider an acquisition. Last week on the show we were talking about Groupon, and for all of the struggles that Groupon has, it still has about 42 million active customers. So there is a price at which someone would be willing to pay for that customer information, and I'm wondering if you see the same thing with TripAdvisor.
Kline: So TripAdvisor would make sense at Booking, it would just fit nicely into their portfolio, or maybe they just close it [laughs] and rotate people into the services they have. It would work at Expedia, it would also work well at a Microsoft or a Google [Alphabet]. It would not be a terrible venue for almost anyone to own if the price keeps coming down. Doesn't make a ton of sense as a stand-alone company, it's the smallest fish in a very big pond. But, yeah, absolutely, I think they are an acquisition target, which usually means they're not, by the way. My history on this has been very, very bad with forecasting acquisitions.
Hill: No, but you have to figure, particularly for some of the companies that you mentioned, and you know, Booking, given the challenges that they're facing, they're probably not looking at acquisitions as actively as people at Microsoft and Alphabet. There have to be people [laughs] in Microsoft and Alphabet who, given the strength of those businesses, are maybe even more focused on tuck-in acquisitions than they were at the beginning of the year.
Kline: Yeah, Microsoft tends to buy things that don't automatically fit its portfolio. LinkedIn and Skype would be two big examples of that. This would be a value-add. That said, Microsoft does not have a great history of buying things and extracting added value. In fact, [laughs] they generally do the opposite.
But I would think any of the cash-rich tech companies; would it be shocking if Amazon is kicking the tires here? I don't think it would be. Offering travel services ties into so many other things you can do, and think of all the data Amazon has related to travel and travel products. So this would work really well at pretty much any tech company.
Hill: Apollo Global Management is the private equity firm that owns Chuck E. Cheese, and if you've got cash burning a hole in your pocket, they want to hear from you. The Wall Street Journal is reporting that Apollo is currently fielding offers from potential buyers. This story reads like Apollo is being pretty straightforward. Obviously, anytime you're fielding offers, you want to get more offers. But it seems like there's enough smoke here that there may actually be some fire. Although, Dan, I can't get away from the question: Who wants to buy Chuck E. Cheese and why? Like, is it to keep the Chuck E. Cheese brand or is it just a real estate and restaurant play?
Kline: In my opinion, someone like roughly our age that fondly remembers Chuck E. Cheese for, like, a post-, you know, hockey team breakup party or a birthday party or something, that doesn't recognize that Chuck E. Cheese in 1985 is pretty much Chuck E. Cheese now, except there is a lot better competition out there. I could make an argument for Dave & Buster's (PLAY 0.23%) working. You could argue that if they made their food better, that they could do enough business on the weekends and during sporting events, that if they could be seen as a restaurant at the mall the rest of the time, they might be profitable.
Chuck E. Cheese has to revamp everything. Its food is terrible. Its games are old. Nobody wants their kids climbing around the hamster thing now. Right now, in this pandemic, there is no way to sanitize a ball pit that -- there wasn't before, folks, [laughs] I'll tell you, those weren't the cleanest places on earth. This feels to me like a nostalgia play.
And maybe owning the Chuck E. Cheese brand would have some value, and maybe you could incorporate it into something else, but as stand-alone restaurants, who as a parent, my kid would want to go to Chuck E. Cheese. And if they had awesome food, maybe he could have talked me into it. If they had some stuff I wanted to do. Chuck E. Cheese was like a last-day, rainy-day, absolutely there's-nothing-else-to-do option. There's going to need to be a lot of money invested here to make this anything at all.
Hill: It really is going to be interesting to see how this plays out for a couple of reasons. One, there are different versions of this, because it's private equity, in terms of what they could do with the debt. Obviously, one possibility is someone just swoops in and buys it all themselves. There could be partnerships involved here.
But you mentioned Dave & Buster's. Shares of Dave & Buster's are down 10% today. I have to believe a little bit of that drop is the prospect of what's playing out with Chuck E. Cheese, a private company. The ripple effect of it moving over into Dave & Buster's. Because Dave & Buster's, think about the way -- you know, let's go back to January of this year, prepandemic. Dave & Buster's is a stock that really hadn't moved. I mean, it would move up and down, but it was basically in the same spot in January of this year that it was four, five years ago. And that's at a time when the economy in America is doing very well, when wages are going up. You know, this is a discretionary-income business. Dave & Buster's doesn't need to exist in the same way that airlines need to exist.
So like you, I just sort of ... I get a little, you know, twitchy when someone mentions [laughs] Chuck E. Cheese, just for the few times I've been there. But I'm really curious to see how this plays out.
Kline: Dave & Buster's benefits from Chuck E. Cheese going out of business. There's a certain amount of birthday parties that trickles to Dave & Buster's, which would be a better fit at Chuck E. Cheese but also works at Dave & Buster's. But you could argue that Dave & Buster's, in a nonpandemic world, is a very affordable indulgence. It's a, "Hey, we're not going on vacation, but on school vacation, we'll take the kids to Dave & Buster's." It's not a big leap to say they could revamp their menu to make their food a draw on its own right. And it also seems like they're coming into a time where malls are going to be really, really willing to negotiate for any business that eats up space and draws in traffic, which Dave & Buster's theoretically does.
Chuck E. Cheese, that's a tough argument. You're lugging your five-year-old to Chuck E. Cheese, you're probably not walking around the mall after buying a bunch of stuff. You're going out with your friends to watch a football game at Dave & Buster's, you know, the one near us in -- was it Arundel Mills? Not too far from the office, but 40 minutes from the office. After that Dave & Buster's, maybe wandering over to the casino, maybe I'm wandering around the mall. There's more of an argument for Dave & Buster's than there is for a very dated brand in Chuck E. Cheese.
Hill: Dan Kline, always good talking to you. Thanks for being here.
Kline: Thanks for having me.
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.
