Jim Gillies discusses:
- First Republic Bank shares plummeting after terrible quarterly results and a surprisingly brief conference call. [Editor's note: This was recorded before the Federal Deposit Insurance Corporation took over First Republic.]
- Medpace Holdings crushing its first-quarter report and (once again) winning the guidance game.
- Pepsi's stock hitting an all-time high after snacks fueled Q1 results.
Motley Fool senior analyst Bill Mann, host Alison Southwick, and personal finance expert Robert Brokamp talk about the "new normal" of hybrid work.
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 April 25, 2023.
Chris Hill: We've got a bank stock hitting an all time low and a beverage stock hitting a new all time high. Motley Fool Money starts now. I'm Chris Hill, joining me today, Motley Fool Senior Analyst, Jim Gillies. Good to see you, sir.
Jim Gillies: Good to be seen, Chris. Thanks.
Chris Hill: Few things I want to get too, but real quick, we should probably start with First Republic Bank because shares are down nearly 30%. I believe the big ground number I saw was $100 billion worth of deposits are no longer at First Republic Bank. It's not often that conference calls make headlines, but I'll just quote one executive at First Republic Bank who apparently said on the call, "Given the events of March, we are withdrawing all previously communicated financial guidance. Please note, there will be no question and answer session following our prepared remarks." That's pretty breathtaking. The only thing that would make it more breathtaking, Jim, since I am not a shareholder of First Republic Bank, and I'm going to go ahead and assume that most people listening are also not shareholders of First Republic Bank, the only thing that would take my breath away more is if you tell me what's happening at that bank is going to spread to other banks.
Jim Gillies: This one's not good. Of course in financials, confidence is paramount. First, Republic already didn't have a lot of market confidence behind it. Saying effectively, no questions and running away, especially when you see your deposit base down, as you mentioned Chris, slightly over 100 billion. That's before the big US banks shoehorned in 30 billion. Your JPMorgans and US Banks and whoever else was part of that, Bank of America, I assume. None of this is going to instill any confidence that's presently lacking. Of course, the other thing is usually when a bank says everything's fine, that's usually the queue for people to throw up their heads at panic. So it's a bit of damned. If you do, damned, if you don't on this one, I'm afraid. But this doesn't look great, and they ramped their lending in the quarter, so loans were up. I'm presuming that's largely before the deposit flight. They plugged that hole. They've gone from about 6.5 billion, 6.7 billion to start a quarter in short-term borrowings. That's now 80.4 billion. The long-term debt has gone from 8.6 billion at the end of 2022 to about 26.3 billion at the end of Q1. That's mainly borrowing from the FHLB, Federal Home Loan Bank. I can't get away from quoting Stein's law here. Stein law of course, Ben Stein, the father of Bernstein from Ferris Bueller's fame, if something cannot continue, it will stop. I know it's very unique.
But I've always, I like the simplicity of that. I'd be really concerned if I were a First Republic shareholder. I think they're going to have to find a willing buyer. That's not great as far as spreading to other areas of the banking system. I think it'll be natural that most people will probably be on Tinder hooks for probably this quarter, maybe next quarter, especially with the larger regional banks. I could give you a list of some pretty well-run, very small local banks that stick to plain vanilla lending and plain vanilla mortgage lending and what have you, that I think absent any serious deposit flight will end are fine. But the elephant in the room is what have their members, what have their depositors taken from all of this? If they decide to flee their capital from these small and local banks, you can be the best route and small local bank is not going to matter. I congratulate America on taking one step closer to the Canadian banking system, where we have six very large banks that control everything.
Chris Hill: We're going to move on then. Earlier this month, you were on the show and I asked you before earnings season started, what was the company you are the most curious to see report? You said Med-Pay's Holdings, a medical research company based in Ohio, they reported after the bell yesterday. Holy cow first-quarter profits, much higher than expected. First-quarter revenue was a beat as well. Shares of Med-Pay's Holdings are up 14% today. Don't take all the time in the world for your victory lap. But congratulations on this one.
Jim Gillies: Thank you. I own this one personally too, and not a small amount, so I am not unhappy with these results. The reason we look fantastic quarter, let's see where they are records. They had record revenue, record EBITDA, new bookings, record operating profit, record net income, and record earnings per share. So I suppose that's a decent quarter. That's all for quarterly numbers, not just Q1. They revised their guidance up. I still think they're sandbagging, to be honest. They have a book-to-bill ratio of 1.28. Anything over one portends future growth. So this was a great quarter. One reason why I was interested is I really like the CEO here. He's the founder, he's the only CEO the company has had. He founded the company in 1992. Dr. August Troendle, he's 66 years old now I think. He's shepherd at it from a start-up through various private equity holdings, through the IPO in 2016 or a chucked in billions of dollars of his own money post-IPO. Got to love that. I put about $115 million of his own money into shares last year, while this company bought back close to 14, 15% of their shares last year. Sometimes they don't ring a bell at the bottom, but sometimes they ring a bell at the bottom, Chris. What I was really interested seeing here is, Troendle, is a very straight shooter. My assessment of him at following this company for years now is he's going to sandbag, he's going to underplay what they're probably capable of doing. Then he's going to raise guidance through the year.
The reason I say that is because the last three or four years, what has he done? Is put out our guidance at the start of the year, and then they blow past it, and he raises guidance through the year and they ultimately end up doing pretty good. In this case here, at the start of the year, they were saying, well, a lot of our clients that we don't want to cancellations, requests for proposals are down for new studies. A lot of our clients are having difficulty finding funding. Something that again, came out of the woodwork when Silicon Valley Bank went down because, I guess, the perception some people in the market put together that, oh, the people who bank with Silicon Valley Bank are also biotech clients of Medpace. So it sold the stock off for no good reason. I think I had at my best buys now, I think in February or March and Hidden Gems, which service I run, but it's a dour coming. It's like, well, you know of our small customers leave us? This quarter, the prepared remarks from Dr. Troendle, or basically, the business environment improved in Q1. Requests for proposals are up on a sequential and year-over-year basis. The dollar value of pending requests for proposal also improved significantly. Sequential improvement through January to February to March. There's only a month of the quarter, and they have continued to improve further to a relatively strong level in the first three weeks of April, cancellations for prior work.
Cancellations were down over 50% on a sequential basis from Q4-Q1. The trends look favorable and we are cautiously optimistic, which if you followed Medpace and Dr. Troendle for as long as I have when he says we're cautiously optimistic, I think that stand up on your chair and share and spin your rally towel over your head for those sports fans out there. This is a great report. It was a great quarter. I don't think it's that frankly, that expensive right now. I know they bought back another. They're actually very good at buying back their own shares. When the price is perceived to high, they put their checkbook away. When it's not, they are quite happy to buy paper, pay to take down their share counts. So they made just over 70 million last year or last quarter in free cash flow, which is actually a little bit low, but they're always low in Q1. They spent about 120 million to buy back just over 2% of the share count. There's some option grants that quarter, but they shrink the share comp by one-and-a-half percent. All in all, just a great quarter.
Chris Hill: You look over the past five years, shares are up more than 450%. This is a six-and-a-half billion-dollar company. Why does it some healthcare behemath come in and make them a godfather offer and add them to their portfolio. Or is your take the Toronto is not interested in that because he's probably had offers before.
Jim Gillies: Yeah, that is correct. I'm obviously not in the room, but I suspect this is Dr. August Troendle toy until he decides it's no longer his toy, and like I said, he is 66. He has been in charge since 1992. We'll see how long he feels like doing it. But I've said for a while that I suspect the ultimate outcome is they'll get bought by a bigger player because they're not that large. But boy, it's been a fun ride all the way up and I'm hoping for more for the next few years and Dr. Trundle I hope you're longevity is similar to Buffett and Munger's.
Chris Hill: Real quick, shares of Pepsi. Hitting a new all-time high today, strong first-quarter results. They also raised guidance, a bunch of parts to the business, but you look at the thing that leaped out to me, the Frito Lay division in North America, organic revenue growth of 16%. That is really impressive.
Jim Gillies: Rumor has it that this has all been driven by Canada's legalization of marijuana several years ago. Because we certainly do like our salty snacks kicking around. But yeah, no, it was good numbers, a good overall report. I know they did boost their guidance as you say, like Medpace did, I think their organic revenue as a company. So not just Frito-Lay itself at the corporation was over 14%. I think earnings per share, their core earnings-per-share, as they call it, were up about 18%, and the stock today is hitting another all-time high price and great for Pepsi investors. Here's where I'm going to throw a small just as a cautionary tale. It's not certainly not oldest companies do, just something to be aware of. Two things. One, over the last decade, if you have the tools to pull up and see what the relative valuation is you pick your poison-priced earnings, EV EBITDA
So just something to be aware of. Some of the returns over the past decade has been driven by investors being willing to pay more for what PepsiCo is. I think it's gone, I'll make up the numbers, they're roughly right, but precisely wrong. I think they've gone from about 12.5 times EBITDA at the start of the last decade to about 17.5 times EBITDA today. So if it were to revert to say 12.5 times EBITDA over the next decade, that'd be a bit of headwind. The other thing is that Pepsi, again, great business with some fantastic brands. They make a lot of cash flow, and I'm a cash flow guys, so that's generally where I care about most. They make a lot of cash flow, beautiful, brilliant. We love it. The problem is they're spending more cash flow than they make, and so for example over the past four quarters and Q1, they were cash-negative, but that's fine, that is the dynamics of their cash flow cycle. They're always negative in Q1. The last time they weren't negative in Q1 was in 2016, and then they were still operating cash flow positive slightly and then they were still negative on a free cash flow basis. But over the past four quarters, they produced about 5.6 billion in free cash flow.
They spent 6.3 billion on dividends, so they've already blown out the door. They spend another 1.6 billion on buybacks. They spent just shy of a billion dollars in acquisitions, so that's about a $3.2 billion hole, they've had to fill in. If you're wondering what they're filling in with the answer is debt and 2022 for the full year, they get about, just shy about three billion dollar hole, they were actually slightly positive for 2021. So that's good. Just shy of a billion dollars, 2020 6.4 billion in cash generated, five-and-a-half billion spent on dividends, 2.1 on buybacks, 6.4 billion on acquisitions, mainly Rockstar. So that's about a seven or eight-billion-dollar hole, I think if my math is good. Year before the last year, 2019, before the pandemic, 5.6 billion cash generated, 5.3 billion spend on dividends, 3.1 on buybacks, 2.7 on acquisitions, mainly SodaStream. They've been doing this for a while where they're overspending what they can generate, and again, it's fine to do that. A company the quality of Pepsi, can probably do that for a long time and probably find willing lenders to help them fill in that hole with some debt. But I'm going to again return to Stein's Law, Herb Stein's Law, that which cannot continue will stop so just putting it out there for a long-term thinkers on Pepsi.
Chris Hill: You know what? I've got a few shares in an IRA, you're not going to rain on my parade. Pepsi hit its all-time high.
Jim Gillies: You're good. Just be aware.
Chris Hill: Well, thank you to you and your fellow Canadian's for just boosting the salty snack consumption in the north American region. [laughs]
Jim Gillies: No problem, we'll take that victory lap too.
Chris Hill: Jim Gillies, always great talking to you. Thanks for being here.
Jim Gillies: Thank you.
Chris Hill: By the way, the brand new episode of our premium podcast, Stock Advisor Roundtable, is now available on Spotify. Tom Gardner leads a conversation about ChatGPT, what it means for business investing and three stocks in particular. I put a link in the show notes for this episode, so when you're done listening to this, just click that link, check it out. Earlier this week, Bill Mann joined Allison Southwick and Robert Brokamp in the studio to talk about the new normals in a few areas of the investing world. Starting with hybrid work.
Alison Southwick: If you like me, chances are good that just about every day of your life, you're seeing an adverse genuine, feeling an achy pain in a part of your body you didn't even know you had, and reading an article headline invoking the new normal. Extreme weather is the new normal. High inflation is the new normal, new normal are the new normal. So we decided to bring Bill Mann, analyst at The Motley Fool to come on and talk about three new normal to see if he's buying the hype and what it could mean for investors. Up first in our three-part series is remote work. This one, it's tricky because you'll see articles everywhere, Forbes, New York Times, whatever, saying flexibility and remote work are the new normal. But counter to that are companies like Amazon, Capital One, Disney, Citigroup, Goldman Sachs, Google, Salesforce, Twitter, I could go on all making employees come back to an office at least a few times a week, so working from wherever whenever is that the new normal Bill?
Bill Mann: Nope, it isn't. It isn't. I'm sorry, and by the way, you said something really important there. I also think that the new normal even for these companies, is not. You are in the office from 9:00-5:00, Monday to Friday, or in the case of Goldman, you're in the office from 6:00 to 11:00.
Alison Southwick: Don't worry about it.
Bill Mann: So don't worry about it. I think that the concept of the pre-pandemic in the office, I think that's gone. But I think culture really matters to businesses and efficiency matters to businesses and performance matters to businesses, and the performance is not how you, Robert Brokamp are doing. It's how the business is doing, and I think that remote work has been found by these companies to lower overall productivity, and ultimately, the story is going to be this. People are saying, well, I'm just not going to come back into the office. I'll just leave that's great, but it's very easy, and that was a murderer's row of companies you named. That was hundreds of thousands of employees. All they have to do is to make coming into the office a condition for the next person they hire. So there is so much that I think that is good about remote work. Obviously, having that flexibility is great. But I don't think that employees ultimately will retain the power to determine for themselves if it is something that is actually harming the company, and I think in many cases it is.
Robert Brokamp: Did you all see the video from James Clark, the CEO of Clearlink?
Bill Mann: It sounds exciting.
Robert Brokamp: Company out in Utah that as it recently is October said you don't have to come in the office and then they changed and said no people who live within 50 miles have to come into the office. The video of his speech to the company went viral, and there are some reasons for why you would want to criticize him on this, but now he found out apparently was that 30 employees hadn't opened their laptops in the last month.
Bill Mann: That's just it. Well, first of all, that's a little scary [laughs] Wait a minute. Let me stop and put a pin in that part for a second. But remote work, I think whatever we think about the positives, it lowers overall the trust function in a business and it creates silos. Like if you think about in and office, if Allison, as she is want to do is doing something that you don't like. All you need to do is raise an eyebrow, and that's a conversation that has happened. It's incredibly efficient. Whereas if everyone is remote, you'd have to sit there and write out a memo or you have to have a meeting and so those are taxes on the productivity of the business, and I think ultimately efficiency for the business and that trust function so that Allison knows that you're always on the right track.
Alison Southwick: I'm never.
Bill Mann: You'll never. See I called you out because I knew that was so absurd. We went straight to absurd a stun, but it's true that the conversations that take two seconds when you're in person, take a really long time when you are not, and that is something that matters, and I don't know who this guy is and whether he's tracking everyone's laptop, but I don't think you need to.
Alison Southwick: That was nice of you to pay me a complement as always being right. I'm going to repay you, unfortunately by saying, as elder statesman's of this company, do you feel that perhaps there is a generational difference here for being productive remotely versus not remotely, or is it objectively silos are broken down, there's better collaboration. You work more efficiently with people when you are in the same room. I know I have my own opinion, but of course I'm here to hear your opinion. Is it because you're too old? I'm sorry.
Bill Mann: I told you is the get off my lawn segment [laughs] I knew we were going to get there. I don't think so because I think that probably I'm going to use the word prejudice about it being a function of being too old has to do with the belief that we can't handle technology like we are now the blinking twelve o'clock VCR generation, that the generation just younger than us, has a better grasp of technology than we do, and maybe they do. But if you think about what a business is, there's your job. But then there's also what else it is that you bring to the company and that may be as simple as mentoring somebody who's younger or just having those conversations and sharing that knowledge. And so, yes, maybe they can work several types of technology better than we can. But that doesn't necessarily mean that that's the totality of their jobs. So yes, I think that there actually is a little bit of a break in terms of what people want. I have noticed, so my eldest child graduated from college this last year, which means that she went to college during COVID. And she, and her generation, I guess her cohort they desperately want to be in the office. They have seen what that is like in experience that everyone knows is better when you're in person.
Alison Southwick: As an investor, do you think that the difference between working remotely versus working in an office together, will have such a material impact on the productivity and success of a company that you are actually going to consider that as part of an investing thesis or are we not there yet?
Bill Mann: I don't know that we're there yet. I think that the big test out there will be Airbnb because they are maybe the largest company that has very loudly said, nobody's ever coming back to an office, and maybe that's the case, that's the one to track. I think it was interesting that a year ago, oh gosh, and I hate bringing up Elon Musk in this context, but it's happening. I think this is a specific example, but there were a number of Twitter employees before he took over that made a bunch of demands, and they are now Twitter ex-employees, and so I think that there really is, as an investor, a test that is going on. I think you're seeing from the scoreboard, the number of really large employers. Again, they're not necessarily saying you have to be back in the office, change your desk from nine o'clock on, they're saying you need to come in from time to time because it is more effective, and I think that that is happening because they have seen the research and they have seen the impact on their business over the last three years.
Alison Southwick: The new normal for remote work, not so remote according to Bill Mann, what's your closing thoughts here on remote work, the future of work.
Bill Mann: Again, it's not an on-off switch, most companies aren't talking about having people back into the office all the time and so I think that companies like Zoom have really proven to us that we do have much more capability to do things remote than we did before, and so what a blessing that Zoom was as far along as it was when the pandemic happened because it truly, in some ways, I guarantee you it saved a bunch of companies.
Robert Brokamp: The other side of that is what happened to Skype. I talk about an example of a company that was positioned to take advantage of something and it just didn't work.
Bill Mann: It just didn't work.
Alison Southwick: Because with Zoom remember, it just works. That was their phrase, yeah it's true.
Bill Mann: It just works. That's exactly right. We can have a technological conversation. That technology exists and it is a force multiplier for companies. But I do not believe that many of the functions in companies and I do think it's a function-by-function basis, like sales staff, I don't know that they need to be in offices. They weren't before. They probably aren't going to need to come back. But there are certain collaborative components of almost every business where I think that the impediments to doing that remotely are going to prove to be too high.
Robert Brokamp: I'll just add that I think it's going to continue for a while for a couple of reasons. First of all, there are some companies that were doing it already before the pandemic, like Stock Research companies that I knew of. Because they wanted to be able to hire the best people in the world, not just the best people in their city, so they were willing to do that. Then the other aspect is employees still want it and while the unemployment rate is low, it's going to continue. There was a steady from McKinsey that said that people said chose remote work is the number 3 reason behind looking for a new job by higher-paying, better career opportunities. While unemployment is low, and employers are desperate for workers, they're going to have to offer this.
Chris Hill: As always, people on the program may have an 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.
