A Pair of Earnings Beats and a Deluge of Stock Buybacks

In this Market Foolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker consider a couple of interesting first-quarter reports and one mammoth trend. Booking Holdings (NASDAQ: BKNG) delivered solid beats on revenue and earnings but took a 5% or so hit to its shares. This was no surprise as its guidance was the likely impetus.

Cable-channel operator AMC Networks (NASDAQ: AMCX) pleased the market, but the bar had been lowered given that ratings for The Walking Dead -- and its many ancillary properties -- were known to be dropping a bit.

And the S&P 500 is setting a record on an unusual score: share buybacks. Is this really the best option for deploying the windfall that U.S. businesses are reaping from the recent GOP tax cut? The Fools weigh in.

A full transcript follows the video.

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This video was recorded on May 10, 2018.

Chris Hill: It's Thursday, May 10th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management, New York Yankee fan extraordinaire, Bill Barker. How are you doing?

Bill Barker: Things have been good lately.

Hill: Things have been really good with your team that's apparently incapable of losing at all. Let's not dwell on that.

Barker: They're coming to town next week. I'm leaving town. I won't go, but you could go. You could go.

Hill: If I go, I'll be rocking the red and I'll be rooting for the hometown Nationals. And, we're going to talk about your trip, because you have kind of an interesting trip coming up. But we're not here to talk about baseball! I mean, we could be, but no one would listen.

Barker: No.

Hill: No one would care. We're going to talk earnings, we're going to talk television, we're going to talk stock buybacks. Let's start with Booking Holdings, AKA Priceline. First quarter profits for Booking Holdings were higher than expected, revenue was higher than expected. The stock down about 5% this morning on guidance for the current quarter. How weak was this guidance? This was about as rock-solid a quarter as Booking Holdings, which is a behemoth, by the way, could put up.

Barker: Yeah, it was a good quarter. Focusing on the one-day stock movement leads to the question, how bad was it, and it was good. The guidance is good, not as good as people were expecting going into this report. So, share price easing off a little bit. Remember that this stock was basically trading at an all-time high going into this report, I think about 1% off. So, this is now about 4-5% off of its all-time high.

Guidance itself is for 7-11% top line room night bookings growth, which is pretty good, slight currency adjustment on that, 5-9%. Total gross bookings up 10-14% is the guidance for the quarter, so it has a good level of growth, but not an exceptional level of growth, that they're guiding to. They have a history of under-promising and over-delivering, so maybe factor that up a little bit.

But, if you're comparing this to some other companies that are of a similar valuation in terms of the price to earnings multiples, things like Alphabet and Facebook, they're really guiding toward faster growth in similar valuations. So, that's one reason for Bookings to maybe sell off a tiny bit today.

Hill: Is Booking Holdings, because of the success that the company has had year after year, are they in that category where not just results but guidance as well needs to be amazing?

Barker: All companies are graded more on their guidance. Well, maybe not all companies, but certainly rapid-growth companies are graded more on the guidance than what they've just delivered. So even though Booking has delivered a quarter better than expectations on both the top and bottom lines, if guidance is any softer than the market was expecting, then, yes, it's going to get hit a little bit. Again, off of an all-time high. Now it's 5-6% within its all-time high.

There's always plenty of competition here, and the competition is continuing to come from places that are staffing up more of the experienced side of the equation than just the hotel room side, where traditionally Priceline and Booking have the greatest strength. The other names under Booking Holdings being KAYAK and Agoda, and they have OpenTable. OpenTable is a little bit more of the experience thing than just the hotel rooms, but they're in the right place. They're continuing to do a very good job. They didn't have the big pop that TripAdvisor had yesterday or the day before because they have been delivering, unlike TripAdvisor, which was bouncing off lows rather than trying to maintain a stock price high.

Hill: Let's move on to AMC Networks. Shares of AMC up nearly 10% this morning. First quarter profits came in higher than expected. I'm assuming at least part of the story here is the tax cut, because coming into this quarter, there was a little bit of concern, in part because the flagship show for AMC right now, Walking Dead, or, I guess, Fear The Walking Dead -- clearly, I'm not an actual viewer of said show -- ratings down just a little bit. So, I think there was a little bit of concern. But, you tell me.

Barker: Yeah, it's Walking Dead and Fear The Walking Dead, and numerous other shoot offs of it. If you go to the AMC website and scroll down, they have The Walking Dead, Fear The Walking Dead, Talking Dead, which, I guess, is talking about the show --

Hill: That's a show that Chris Hardwick, a podcast host that I enjoy a great deal, yes, it airs right after the show. We talk about doubling down. Clearly, AMC Network, tripling down on zombies.

Barker: The Walking Dead Extended Episodes, The Walking Dead Red Machete --

Hill: Please tell me there's a musical. Tell me if there's a Walking Dead! The Musical.

Barker: -- The Walking Dead Conversations, not to be confused with Talking Dead. It just goes on. So, if there's softness in that brand, then they're going to be in trouble. I think they showed that they got the ad rates a little bit higher than last quarter, where they'd had some softness in the ad rates. Bottom line and top line, very flat year over year, which seems to be enough for investors today.

Hill: Here's what could help: if they could actually produce the next season of Better Call Saul. Which, in the past, has come in the spring, and here we are in the spring. Fans of the show like myself are just sort of looking around, saying, "Where's the next season?" They don't even have a firm date on when it's going to start. They're saying, "Fall of 2018." People like me would like a little bit more specificity.

Barker: I guess you would. You're going to have to wait. You're going to have to suffer. Your interest will be increased. They have a lot of different networks over there.

Hill: IFC.

Barker: IFC. WE tv.

Hill: OK. If you tell me there's a television network called WE tv, sure. I'll believe that.

Barker: There is. I don't think it's aimed toward us.

Hill: Which ironic, because it's named WE.

Barker: [laughs] I think the WE, the W probably has something to do with women, because I think that's more of the target audience. MeTV, I think, would be the one for us.

Hill: Yes. [laughs]

Barker: Instead of WE tv. But, that, I think, is their second-biggest network. I'm not sure.

Hill: It's interesting, I saw a couple of comments from the executives, I believe this was from the call. One of the things that AMC, and networks in its category, is trying to do to stem the tide of Netflix (NASDAQ: NFLX) is to talk up not only the quality of their programming, but also their ability to promote those shows. And I think there's a little something to that. I don't know, from an investor's standpoint ... I think that matters more on the content creator side of thing as opposed to investors. If you're an investor and you're looking at Netflix and AMC and just look at the past few years, it's kind of easy to figure out which one has been the better investment.

But, I do think there's something to, when showrunners and producers are looking at their options, in terms of who they're going to go with, one of the things that AMC can legitimately say with regards to Netflix is, "We're going to give you more promotion of your show on our network than Netflix will," simply because Netflix is cranking out a new thing -- whether it's a movie, a television show, a limited-run series, a comedy special -- they're cranking out a new thing pretty much every day this year.

Barker: Yeah. That may be the case, certainly, for the producers. There's a little bit more visibility to some of these things. But, certainly, if Netflix is able to pay more, that speaks, too.

Hill: [laughs] That does.

Barker: Netflix has been spending wildly, and it's working out for them. I think everybody who's partnering with them is pretty happy about the money that they're paying. I think.

Hill: I would think so.

Barker: For all these things. Like anything else, you get more money getting past seasons one and two. So, having a smaller playground to compete in, AMC doesn't have the opportunity to start a new show every day. But, it's all kind of flat there, which is maybe not too bad, in an era of cord-cutting, to maintain your revenues. But, I think today's news was more relief than really demonstrating that things are rapidly improving.

Hill: For anyone who thinks we've been talking about stock buybacks more than we usually do, there's a reason for that. The Wall Street Journal reporting this morning that U.S. companies are buying back their own shares at a record pace. So far, S&P 500 companies that have reported earnings for the first three months of this year have bought back $150 billion worth of their own stock.

I'm curious what your take in general is on stock buybacks, because Buffett at the Berkshire Hathaway meeting over the past weekend, generally not a fan of it, although he seems to like the fact that Apple is going to be buying back stock. I'm sure the fact that Berkshire Hathaway owns a healthy chunk of that stock has everything to do with him applauding Apple for buying back shares.

Barker: Well, they're buying the same thing he's buying, so, yeah, he has to applaud that. Apple just produces too much cash to really put it all to use. And unlike Berkshire Hathaway, where the central skill that the company has is capital allocation. Apple's central skill is not acquiring additional companies. So, buying back its own stock has worked pretty well. Historically, that's a better than average use of capital, and lower than average uses of capital are making acquisitions of companies other than your own.

So, on the whole, I think it's good. It's not surprising, given the tax cut. There's more cash. Apple brought back a lot of cash from abroad, wasn't able to put it to use there. Having brought it back, has to put it to use in some form. It's not surprising that it's stock buybacks. The tax cut in general is fueling a lot of this, as was predicted.

Hill: My own view on this is, it kind of depends on a number of things, including, what are the options that a company has for the cash. We were talking the other day about Starbucks (NASDAQ: SBUX) and this deal with Nestle, this global marketing deal, and how Starbucks said they're going to take some healthy chunk, if not all, of the $7 billion they just got handed from Nestle, and they're going to put that toward share buybacks. As a longtime owner of Starbucks stock, I heard that news and I thought, good, because for all the success of Starbucks, they haven't really demonstrated a great ability to buy other companies, in particular food and beverage companies, and make them work. So, the fact that Starbucks is thinking, "Yeah, you know what? We're going to buy back our own stock," I've seen what happens when Starbucks goes out and acquires food companies, and I would much rather that they spend money buying back their own stock.

Barker: Yeah. For the most part, it's a better use of capital than acquiring other companies, as measured. Those who have taken the time to measure this have concluded that the stock buybacks historically have been a better use of cash. Now, historically, stocks have also been cheaper over the long spread of time than they're trading right now, perhaps. Most stock buybacks have come in the last couple of decades because of some changes in the tax laws, or changes in securities laws, which allowed companies more opportunity to buy back their own stock. So, it's more a function of the last two, three decades than the history of the market, where returning cash to shareholders, for the most part, came in the form of much higher dividends. You go back in time and you find that the larger history shows 4-5% annual return of dividends. That's no longer the case. It's less than 2%, it's been less than 2% for a while. But, buybacks are a bigger and bigger part.

Hill: Couple of quick shout-outs. First, shout-out to the newest youngest listener out there, Elizabeth (unclear 15:55), born yesterday. Her father, Peter, is one of our listeners, and he sent a photo. Congrats to Peter on a brand-new baby girl. Fantastic!

Shout-out to Peter Roegner of Fool Germany who's visiting this week. For anyone who has not checked out The Motley Fool's website in Germany, you absolutely should. Peter runs one of our services over there, essentially our small-cap service. Also, Peter's a longtime listener, because he brought tribute in the form of not just a bottle of whiskey, which looks amazing, but also Pringles. I'm going to Tweet out the photo of the Pringles, because they're Emmentaler, I think I'm pronouncing that correctly, basically Swiss cheese. Swiss cheese Pringles. I can't wait to break them open. They're going to be fabulous.

Last but not least, if you're going to be in the D.C. area at the end of this month, we're having a podcast listener meetup in Washington D.C. We've got more details coming, but it's going to be on May 30th, so save the date for that. If you want to email us, marketfoolery@fool.com, we'll send you all the information. That's marketfoolery@fool.com for our podcast listener meetup in Washington D.C. on May 30th.

Let's talk about your trip. You have two conferences you're going to, is that right?

Barker: Yes. I'm going to the CFA Annual Conference in Hong Kong.

Hill: Not in Boise?

Barker: Not in Boise this year, unfortunately. It's going to be in Hong Kong instead. So, heading out tomorrow, arriving a day later. Looking forward to it.

Hill: This is you and a bunch of other folks like you in a room and companies are presenting to you? Companies are saying, "This is why you should buy our stock. We're going to do this PowerPoint about our business and take some of your questions. We have a great business here." Is that typically how that goes?

Barker: That's the typical conference I go to, but that's not the CFA conference. It's a society and people get together and talk about how wonderful their profession is, and where it's going, and a lot of talks about what's new in the business and what's new in the profession and what's old and not going to work any longer. It's not an individual company presentation kind of thing. I'm doing that afterwards in Singapore.

Hill: And Singapore is where you have a little bit of free time to maybe explore, go out, check out a restaurant, maybe a tourist attraction or two?

Barker: Yes.

Hill: Have you been to Singapore before?

Barker: Yeah, but not in 25 years.

Hill: I'm sure it's exactly the same as it was 25 years ago. I can't imagine Singapore's any different.

Barker: I hope not, because it was great then. If it's changed in any way, I'll be disappointed.

Hill: I'm sure it's a completely different place now. Can we crowdsource for you?

Barker: Sure.

Hill: Obviously, if people are interested in the podcast listener meetup on May 30th here in Washington D.C., they can email marketfoolery@fool.com. They can also email suggestions for restaurants, for things to do, because Bill Barker hasn't been to Singapore in 25 years, and it might as well be a completely different planet.

Barker: Is there anything new there? I assume not.

Hill: No. You're wrong. I've never been to Singapore, I'm sure it's completely different.

Barker: Hong Kong, the same --

Hill: What are you looking for? Ideally, we get an email that just says, "Here's where you have to go." Are you looking for restaurants? Are you looking for tourism stuff? Museums?

Barker: Anything.

Hill: A coffee museum?

Barker: Any must-do things, because I will have a little bit of free time. I'll have the better part of one free day in Singapore, and really no free time in Hong Kong. But there'll be some speakers. Daniel Kahneman's speaking. Have you ever interviewed him?

Hill: No.

Barker: No?

Hill: No. Michael Lewis has interviewed him, and I've interviewed Michael Lewis about his interview of Kahneman. So, there you go.

Barker: So, you've indirectly interviewed him. You feel like you've interviewed him?

Hill: It's two degrees of Danny Kahneman, which is a much more obscure game than the six degrees of Kevin Bacon.

Barker: He's been here though, hasn't he?

Hill: Who? Kahneman? I don't know.

Barker: Maybe. Anyway, I'm looking forward to hearing him speak, and everybody else. What are you going to be doing?

Hill: I'm just going to be here in the studio.

Barker: Going to the Yankees game? They're in D.C. [laughs]

Hill: No, I'm not going to be doing that. I'm going to be watching on TV. Our producer, Dan Boyd, might be going.

Barker: You're going to be rooting for the Celtics next week, aren't you?

Hill: You know what? That is the other sport news today. My Boston Celtics emerged victorious over your Philadelphia 76ers. I'm glad we were able to work that in. [laughs] Yes, the Celtics will be in the Eastern Conference Final.

Barker: And you've got them going past the Cavs?

Hill: Oh, my goodness, LeBron James is just ... [laughs] is just looking superhuman, more so than usual, which is incredible. By the way, I was actually thinking -- I'm going to use an investing analogy here. For those who are not fans of the NBA, not basketball fans, one of the star players for the Philadelphia 76ers is a young man named Ben Simmons. He's almost certainly going to win the Rookie of the Year award this year. Ben Simmons has had a phenomenal season, and Ben Simmons had, in the playoff series against the Celtics, not a great series. Didn't shoot particularly well, had some turnover, in general didn't play great, particularly for someone who's probably going to win the Rookie of the Year award.

And, much like in investing, when a promising young company goes public, and maybe they have a stumble in terms of quarterly results or something like that, you see people descend and immediately start to focus on all of the flaws as opposed to the promise. And that has really happened over the last few days. My observation with respect to Ben Simmons, that as he has struggled a little bit in this series, there's any number of commentators coming out and saying, "I don't know. He's really struggling. Maybe he's not that good." A couple of people even suggesting, "You know, they shouldn't take off the table the idea of trading him." And I just look at that, and kind of like investing, where there's a young company and you just think, "Yeah, they have a little bit of growing pains, but I'm pretty sure this is a business I want to be a part owner of for the next 10-15 years and beyond." If Ben Simmons were a public company, shares would be selling off over the past week and I would absolutely be buying them.

Barker: Well, I think there's a very low bar for spouting off some nonsense on sports talk radio.

Hill: Really? Have you watched financial television recently? [laughs] Because I think there's a similarly low bar.

Barker: There's a low bar. But, in terms of the decision-makers on Ben Simmons, I doubt they're giving one-millionth the amount of thought to trading him that those that call in on sports talk might promote.

Hill: I think that's probably true, but it's still entertaining.

Barker: Another speaker at this, Steve Eisman.

Hill: Steve Eisman?!

Barker: Steve Eisman.

Hill: Now I'm --

Barker: Now you're thinking about going.

Hill: No, I'm not thinking about going. But actually, now I'm legitimately jealous that you're going to be at this thing. Steve Eisman, for those unfamiliar, one of the star characters -- real life characters, obviously -- of Michael Lewis' book The Big Short. In the movie version, the Steve Eisman character is played by Steve Carell. I remember reading The Big Short and being blown away by Steve Eisman, who's just an openly rude person. Not necessarily in a malicious way, he just, as his wife says, he just lacks manners. But, it makes him a phenomenal investor, because he's able to sit in meetings where companies are pitching him ideas, and because he has no manners, he does not care about how he comes across. And because of that, he doesn't care about looking rude when he's asking very pointed, blunt questions.

Barker: There's a meet and greet with him. Should I try to get him for your show, Motley Fool Money?

Hill: No.

Barker: Would you have him on?

Hill: I would love to. There's no reason Steve Eisman would need to come on, because he doesn't strike me as someone who's necessarily seeking publicity or looking to promote a book or anything like that. But, you should absolutely go talk to him, because he strikes me as a fascinating person.

Barker: Well, we'll see who's willing to talk to me out there. If there's anybody listening who's going to be there, let me know. I may know very, very few people. At the beginning. I'll know everybody by the end, hopefully.

Hill: marketfoolery@fool.com.

Barker: I'll be the white male in a dark business suit, so I should be easy to spot.

Hill: Yeah, that's perfect!

Barker: At conferences like this?

Hill: [laughs] marketfoolery@fool.com if you have any suggestions for Bill in Singapore. Thanks for being here! Have a great trip!

Barker: 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bill Barker owns shares of Alphabet (C shares) and Apple. Chris Hill owns shares of Starbucks. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Berkshire Hathaway (B shares), Booking Holdings, Facebook, Netflix, Starbucks, and TripAdvisor. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends AMC Networks. The Motley Fool has a disclosure policy.