Ford Motor Company (F 3.63%) CEO Jim Farley is attempting to grow the electric vehicle (EV) part of his company while not alienating any stakeholders, especially employees. In this podcast, Motley Fool analyst John Rotonti discusses:
- Farley's plan to create a separate division for Ford's EV business.
- The likelihood of other automotive companies following suit.
- Home Depot's (HD 2.09%) highlights after a stellar fiscal year.
Now that we're well past Valentine's Day, Alison Southwick and Robert Brokamp offer financial planning tips for singles.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Feb. 22, 2022.
Chris Hill: The following is intended for mature audiences only. Listener discretion is advised. No. Just kidding, Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst John Rotonti. Thanks for being here.
John Rotonti: Thanks for having me, Chris.
Chris Hill: It's not often that an iconic company attempts to dramatically change what is it doing with its business, and we get to watch it in real time. But that appears to be what is happening right now with Ford Motor because CEO Jim Farley is looking to separate the EV part of Ford's business. My hunch is, if he could wave a magic wand, he would just spin it off. I could be wrong about that. But at a minimum, John, it looks like he's trying to orchestrate it so that investors can see very clearly within the company what the EV part of the business is doing, how it is growing, how it is spending money. There are a couple of things I want to get to, but first, what do you think of what Jim Farley is attempting here? Why do you think he's trying to do this?
John Rotonti: Chris, I think this is brilliant for several reasons. One is the market is rewarding EV companies, and rightly so, with higher valuation multiples. EV companies are seen as less risky because that's the way the industry is moving, for sure. We know that, for sure. EV companies have a lower cost of capital. Investors want to freely lend capital or invest in EV companies, and so these companies have a higher valuation. The legacy auto business, internal combustion engine business, is more risky. It carries a higher cost of capital. Investors don't want to lend and buy equity in those businesses, and so they have lower valuation multiples. This makes a lot of sense.
Chris Hill: At what point do you think we're going to know? Because as I said, this is happening in real time. I don't own shares of Ford Motor, but I'm very interested to see how this plays out. What do you think are the next couple of dominoes to fall here to enable Farley to pull off what he's attempting?
John Rotonti: The Ford family probably doesn't want to give up ownership and control of the business that easily. I imagine that he does what you said. They first carve off a dedicated EV unit inside of Ford with its own dedicated employees, its own dedicated manufacturing facilities, and they report those numbers out separately, and then as the market, and hopefully the Ford family becomes comfortable with that carved-out unit within Ford, then maybe the next step several years down the road would be to spin off the EV unit. Interestingly, if Ford can pull this off, I imagine other legacy automakers will follow because that's where the industry is trending, that's where the investor demand is, that's where the higher valuation multiples are. Quite honestly, Chris, the most existential threat to legacy automakers is the fact that Tesla can go out and raise $20 billion at the snap of a finger, if it wanted to. The legacy automakers can't, but maybe they could as a separate dedicated EV-first company.
Chris Hill: Part of what is the challenge here, because everything you said makes sense, from a financial standpoint, it absolutely makes sense. But something that we talked about on this show, and at the Motley Fool, in general, that is important to us as investors is the culture at a company. What Farley is attempting to do is grow that EV business, and ultimately, if we play this out into the future, 10, 15, 20 years, eventually, the internal combustion engine business gets wound down. There are a lot of people at Ford Motor who work at that business, and so you've got to be able to balance the internal culture at the company, keep those folks happy, and motivated, and wanting to come to work everyday while winding down their business. While he may want to ultimately spin off the EV part of the business, from a culture standpoint, it may actually be better for Ford Motor that he can't do that, and that he goes the route of creating this separate division so that investors like us and everybody on Wall Street has greater transparency into what they're doing.
John Rotonti: You're right there again, Chris. If they were to succeed and spin out EV completely, then the leaders of the legacy business would just be monitoring a slow decline though into irrelevance over time. Yes, that could create cultural issues and problems at the company that they want to try to avoid. Obviously, you want to take care of all of your employees that have worked so hard for you over the years. Legacy automakers, last thing I'll say here, they're in a difficult spot because they have a lot of debt. They have a lot of pension obligations. Some of them have dividends. They historically pay dividends, but they cut them or suspended them during the pandemic, so they have large dividend requirements. Then they have these facilities that are not optimized for EVs. In a lot of their manufacturing facilities, they are making both ICE engines and EVs and that's not optimized. That's not the most efficient way to do it. Then they also have a legacy business model of going through middlemen, going through dealers, and those dealers take a margin. So if you want to capture Tesla-like margins, you have to have a change of business model. You have to have a change of strategy.
Chris Hill: Do you think by the end of this calendar year, Farley will have made this switch?
John Rotonti: I think this is the way the industry is going. I think by the end of the calendar year, he will have carved out a separate unit inside of Ford that reports separate numbers. Yes, and then I think others in the industry will follow.
Chris Hill: It's never been more fascinating to watch the automotive industry than what we're seeing right now.
John Rotonti: Yes.
Chris Hill: I said this before, and I will continue to say this. No one is getting the benefit of the doubt in the current market environment. Today's example comes in the form of Home Depot because they wrapped up their fiscal year, fourth quarter profits and revenue were higher than expected, and at the moment, shares of Home Depot are down about 8%. They're having their worst drop after an earnings report in 20 years. Twenty years. Let's look at the business first, and then we can get to the stock. This is a business I know you are a fan of. Did you see anything in Home Depot's report or their conference call that stood out to you, either for good or for bad?
John Rotonti: Look, I thought it was one of Home Depot's best years ever, Chris. In the fourth quarter, their same-store sales, also called comps, grew 8.1%, sales increased 10.7%, and earnings per share grew 21%. For the full year, their comps grew 11.4%, sales increased over 14%, and their earnings per share surged 30%. Chris, in the last two years, cumulative, Home Depot has grown its sales by over $40 billion in two years. That's just an incredible amount of sales growth for a company that has only open increased a handful of stores a year. A handful. In 2021, it opened seven new stores. To grow $40 billion in sales over two years is a testament to the relevance of the brand, it's a testament to the crucial nature of the products and services that Home Depot sells, and it's a testament, and maybe most importantly, to the massive investments that Home Depot has made in the past several years into omnichannel retail, into supply chain, and into digital investments because a company cannot grow by $40 billion in sales in two years without investing in that infrastructure ahead of that demand. Otherwise, the company will just break. But Home Depot was able to do it and it did it under the incredible leadership of CEO Craig Menear. I want to mention this because this is Craig Menear's last earnings call as Home Depot CEO. He is stepping aside March 1. He will remain chairman of the board, but he is stepping aside March 1. He's one of the greatest CEOs I've studied.
Chris Hill: I was going to say, Ted Decker, who will be the new CEO, has his work cut out for him. He's been at the company for a while, so presumably, he was picked for a reason. I'm glad you mentioned the store count because, when I was looking through some of the information this morning, I did have that thought. Just sort of, like, I don't remember the last time I heard anything meaningful about Home Depot coming out and saying, "And this year we're planning to open 30 new locations." It was one of those things for us, like, they're not really growing their store count, are they? In fact, they're not really doing that.
John Rotonti: No, they are not. Their store count has reached maturity. They opened seven new stores this year, and then they bought 14 and a tiny acquisition. In most years, honestly, Chris, they open, like, five new stores. So then the question becomes, how do you grow if you're not opening new sources as a retailer? The way is two-ways. They sell more sales at each store, so the increase to sale is per store, and then omnichannel sales are digital sales or online sales. In the last two years, their online sales have grown over 100%. A lot of people don't realize that Home Depot is the fifth largest e-commerce company in the US.
Chris Hill: Say that again?
John Rotonti: Home Depot is the fifth largest e-commerce company in the US. Fact.
Chris Hill: When you say a lot of people you can include me in that because I knew they were doing well. I knew they've been investing in the omnichannel. I wouldn't have put them fifth overall in the country.
John Rotonti: They have a massive digital sales channel. Then their stores actually are the hub for a lot of those deliveries because 50% of their sales are fulfilled by their stores. So their store count is actually a competitive advantage. You did ask me if I noticed anything that would send the stock down whatever it is right now, 7% or something. Their comps, their same-store sales, the trends slowed throughout the quarter, so they were up over 7% in November, 10%-ish in December, and then that dropped about 5.5% in January. The same-store sales trend is down. Maybe that spooked the mark a little bit. Their guidance for 2022 is basically for sales slightly up and flat margins. But you have to realize they're doing a massive comp. They're lapping a massive number from last year. Rather, what I think is going on is I think the market is scrutinizing company valuations and their fundamentals right now. They are scrutinizing these companies closer than I've seen in a really long time, gross.
Chris Hill: Stock is down 8-9% today, more than 20% year-to-date. Is this one of those buying opportunities that's just walking up and slapping investors right in the face because it seems like it for a business that is doing this well. I know it's a completely different business than Nvidia is in. But it reminds me of what we saw last week with Nvidia, both in terms of the strength of the underlying business. Nvidia, by their own admission, greater growth prospects for 2022 than Home Depot is saying, and I think that Home Depot is right to be conservative in their guidance. But we saw the exact same thing with the shares of Nvidia dropping eight% after a glowing report.
John Rotonti: I don't think this is a once in a generational opportunity to buy Home Depot stock, of which I own. But I do think, yes, this is a very attractive entry point for investors that maybe don't own some stock in Home Depot. If it closes downward as today, it'll have over a 2% dividend yield and will probably trade at 19, 20 times earnings, which is a discount for the market, and it's a far above average company. It's a far better company than the market average. So yeah, I think this is an attractive entry point for Home Depot.
Chris Hill: John Rotonti, great talking to you. Thanks so much for being here.
John Rotonti: Thank you, Chris.
Chris Hill: Though we are well past Valentine's Day, the dynamic duo of Allison Southwick and Robert Brokamp are tackling the financial planning challenges for those flying solo because single people still need to save and invest, but just a little differently than their married friends.
Allison Southwick: In the last two weeks, we talked a lot about how to manage money as a couple, not just how to communicate better but also how to then tackle your goals together. Guess what? It's Singles' Night at La Discotheque Motley Fool yes. Today, we're going to talk about the unique financial challenges of being single and how you can take steps to come out ahead. I'll start off by saying that the system was not created to benefit single people. So before we get into the depressing stuff, I want to highlight a recent study from the London School of Economics. They found that single women are actually happier and live longer than hetero-married women. Single men, I don't have any good news for you. You are less happy, and less healthy, and make less money than married men. Whether to get married or fly solo is a personal choice, but it has financial consequences. Let's start looking at three financial challenges of being single. First of which is that singles make less money. How bad is it, bro?
Robert Brokamp: Why, it's pretty bad. According to a recent study from the Pew Research Center, single men make a whopping $21,400 less than men with a partner. The difference is smaller for women at $8,000, but single women still earn less. This is an outlier, 2017 survey from TD Ameritrade found that single workers make $8,800 less than their married counterparts. Get this, a 2004 study published in the American Economic Review looked at identical male twins and found that a married brother made 26% more than his single twin. So what explains these differences? It turns out there could be a few reasons. According to the Pew studies, single men are less likely to have a job which certainly affects your ability to earn an income.
On the other hand, single women are more likely to have a job. But what's true for both women and men is that singles are less likely to have a college degree, and education is certainly highly correlated to wealth. There are also some behavioral speculation. You could ask, does making and having more money make you more attractive to potential mates? Then there's the evidence that getting married is a financial kick in the pants. It serves as a wake-up call to get serious about money. People actually start earning more, advancing more on their jobs, and saving more money after they get married. In fact, here's the final line in that study which found that married twins make more money. Quote, "Our results suggest that marriage causes men's wages to rise."
Allison Southwick: The next challenge to being single is that it's more expensive to be single because you're not sharing the financial burden of things like housing costs, utilities, pets, furniture, appliances. But not only is it a matter of not going Dutch on a lot of things, but in some scenarios, single people are discriminated against. Isn't that right, bro?
Robert Brokamp: Yeah. Some of it is built into the system, and some of it is due to just some people having preferences for one reason or another. For example, some studies have shown that landlords favor married couples over single renters. As for the systemic issues, there are several examples, but one is healthcare. A worker can often add their spouse to their insurance plan. They likely to pay more, but depending on the plan, the costs won't double. Then there's Social Security, which is generally based on work history. However, with couples who've been married for at least a decade, one spouse could never work a day in their life and still receive benefits just for being married to someone who worked. In 2013, an analysis by Elisa Arnold and Christina Campbell published in The Atlantic, estimated that it cost $500,000 to $1 million more over a lifetime to be single in America when you add the additional expenses of being single to the institutional benefits of marriage that single Americans don't get.
Allison Southwick: For the final challenge, here is a big one. As a single person, you are more likely to not have a close family member looking after you when you're ill, which means you have to pay someone to do it for you. Relatives, mostly spouses, but also kids, are the most likely people to fill caregiver roles. That can be everything from taking care of you when you're sick or when you're temporarily out of commission due to a surgical procedure, due to short-term disability, or long-term and end-of-life care. This kind of care doesn't come cheap, even though so many spouses and kids do it for free. How expensive are we talking, bro?
Robert Brokamp: While it can vary widely, depending on what someone needs, but when a single person is sick or incapacitated, they may have to pay for a range of services. They could go from DoorDash, to lawn care, to cleaning services, to a home health aid, which is a health expert coming to your house and taking care of you. That'll cost $15-$25 an hour depending on where you live. If you need it for the whole week, you're talking $700-$1,100 for that week. Then there's long-term care. Frankly, the majority of Americans will need some type of care at some point in their lives. Around 90% of home-based care is provided for free by friends and relatives who are, in most cases, our kids or spouses. If you have to pay for long-term care, it will cost between $50,000 and $150,000 a year, depending on what you need and whether it involves going into a nursing home. Here's another situation where married Americans have an advantage. Under the Family and Medical Leave Act, eligible employees can take up to 12 weeks off to care for parents, children, or spouses with serious health conditions. It's unpaid leave, but your job is protected. However, you can't do it for a partner, friend, or sibling, and they can't do it for you.
Allison Southwick: Enough of the depressing stats. Let's get into problem solving here. You can always go out and just marry someone for their money. No one has ever regretted that decision.
Robert Brokamp: That always works out.
Allison Southwick: It always works out. But aside from that, what can a single person do? Let's start with the boring advice first.
Robert Brokamp: It's basically you get your financial ducks in a row. I know it's boring advice, but it's just the fact. It starts with working to overcome the financial disadvantage of not sharing expenses with a spouse, so that could include anything from getting a roommate to just being extra careful with your spending. You do have to be careful because a single person frankly has to save more. They should have a good-sized emergency fund because, if they're unable to work, they won't be able to rely on a spouse to bring home the bacon and due to the way Social Security is designed, a single person actually has to save more for retirement. This was illustrated in a report from T. Rowe Price which estimated that a single person with an income of $100,000 should have $1.1 million saved by age 65 to retire. But a married couple in which only one spouse worked, also with a household income of $100,000 needs to have just $850,000 saved. That's $350,000 less than what the single person needs. Unfortunately, even though single people should be saving more, most surveys indicate that a single person is actually less likely to be saving for retirement than a married couple.
Allison Southwick: While one financial benefit of being single is that you don't have to compromise with anyone else on spending, where and when you want to retire, or even where to put the thermostat, there is the challenge that you don't have anyone you can lean on to help you manage your finances, or do you, bro?
Robert Brokamp: Most couples do share of the household chores, and that includes the financial chores. The most common arrangement is that one spouse handles the day-to-day stuff like paying the bills, while the other handles bigger-picture stuff like investment and retirement planning. But if you're single, you have to do all the things, so you have to learn more than someone who's sharing the task, and you have to devote more time to doing them. That said, you can get some help, and that could be from a traditional financial planner or from a daily money manager. These are people who can pay your bills, manage your paperwork, set up a budget. Some are specialized at working with people who are running a business, others specialize on working with senior citizens or maybe people with disabilities. You can learn more about what they do, and if there are any in your area, by visiting aadmm.com. That's the website of the American Association of Daily Money managers. While I don't often recommend discussion boards because frankly they can be a hot mess of bad information, there are some good ones, including here at The Motley Fool. We have hundreds of free discussion boards. Another place to go is bogleheads.org. These are people who are big fans of Vanguard and John Bogle, the founder of Vanguard. I would say Reddit can be more of a mixed bag, but there are three subreddits that seemed to be well moderated and very popular: the Personal Finance, Financial Independence, and the Financial Planning Subreddits. Really the benefit of going to discussion boards is that basically it gives you a community of people to whom you can ask questions, bounce ideas off of, get second opinions, those types of things.
Allison Southwick: As we mentioned, paying for healthcare is hard enough when you're a couple, but when you're single, it can be considerably more expensive. So how do you manage healthcare costs?
Robert Brokamp: Two essentials are the emergency fund and health insurance. You just got to have them. Another type of insurance to consider is disability insurance. It's trickier, partially, because it can actually be pretty expensive, but the benefit is that provides an income when you can no longer work. Some married people choose not to get it because their spouse's income would be sufficient, if necessary. The question to ask yourself is, what would happen if you could no longer work? If you'd be in a real financial bind, frankly, whether you're married or not, then consider getting disability insurance and start by seeing if you already get some from your employer. Finally, we come to long-term and end-of-life care. If you do a really good job of saving or working, you actually may be able to pay for this yourself out of your own assets and maybe even home equity. But if you're single, you should, at least, consider long-term care insurance with the ideal age to buy for most people being between the mid 50s and early 60s. If you do it too early, you could be paying premiums for decades before you need the insurance. On the other hand, if you wait too long, you could develop health conditions that would prevent you from getting an affordable policy.
Allison Southwick: Some people are single because they've never gotten married, but others are single because something happened to their marriage. So bro, let's close with some parting words of advice for the couples out there who may one day be single.
Robert Brokamp: I hate to close at such a downer, but the truth is that if you're married, the odds are very high that at least one of you will be single at some point in the future, either due to death or divorce, and both can be financially devastating. An Ohio state study found that wealth dropped 77% after a divorce, and it's generally worse for women. When a spouse passes away, household income can drop 50% or more. The other expenses drop just 20-30%. So here's what you should do now to make sure that you and your spouse are prepared for a possible future of singlehood, and of course, it starts with each person being capable of being financially independent. That includes both knowing how to manage the household finances, both having their own solid credit score and both having an ability to earn income, if necessary.
That can also include life insurance, especially if one spouse is dependent on the other spouse's income. So it doesn't [inaudible 00:24:29] to make smart decisions is when it comes to benefits and entitlements. As an example, a person can receive Social Security based on an ex-spouse's earnings history but only if they were married for at least a decade, and you could lose that benefit if you remarry. Also, as we all know, the sooner you claim Social Security, the smaller the benefit. But it also can result in smaller survivor benefit for a spouse when the other spouse passes away, so which is just really another reason why most people should delay Social Security as long as possible. Finally, it's just important to have an updated estate plan so that all the assets of one spouse pass to the surviving spouse as seamlessly and inexpensively as possible.
Allison Southwick: The deck is stacked against single people when it comes to growing your wealth, but just think of all the things you are saving money on, stuff like going to movies you don't want to see, buying food you don't want to eat, purchasing furniture you hate like, oh, say, gaming chairs, and then of course, traveling to see in-laws that you don't even particularly like. The list goes on. All that money you aren't spending, though, needs to still be put to work in a smart way so as a single person you can live a long, happy and healthy life doing whatever you want, whenever you want.
Chris Hill: That's all for today. But coming up tomorrow, a closer look at Airbnb with Professor Macron Mody. As always, people on the program 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
