Some Companies Have Growth Stories -- and Some Don't
On this Market Foolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss where Tesla (NASDAQ: TSLA) sees its sales curve going, as well as its alleged talks with AMD (NASDAQ: AMD). They also consider the tough short-term issues facing children's book-centric publisher Scholastic (NASDAQ: SCHL), and the even tougher longer-term issues. Then they examine the way KB Home's (NYSE: KBH) board took its CEO down a peg for his recent public episode of bad behavior, and go off on an interesting tangent about their plans for a special episode of the podcast that will be nothing but digressions.
A full transcript follows the video.
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This video was recorded on Sept. 21, 2017.
Chris Hill: It's Thursday, September 21st. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker. Happy Thursday!
Bill Barker: Thank you.
Hill: Thanks for being here!
Barker: Thanks for having me!
Hill: Before we get into the news of the day, because there is news, we're going to talk automotive, we're going to talk publishing, we're going to talk about board of directors that appear to be highly engaged, unlike the people who are asleep at the switch over at Equifax. We're going to get to all of that, but you were last week at an investor conference in Las Vegas, America's playground. What is one investing takeaway you can share from that conference?
Barker: What happens in Vegas, stays in Vegas, Chris. You know that.
Hill: You know what? I expect better from you than hackneyed lines like that.
Barker: Really?! [laughs] Come on!
Hill: Only slightly better. Come on... you're at a Deutsche Bank conference. There must have been one or two things that you can share. I know some of it was private meetings, and you're doing your work for Motley Fool Asset Management, and I'm not looking for you to divulge, "Oh, here are the takeaways that we're going to put into action with the funds, and here's what we're going to buy!" But there must have been one or two interesting things you can share with the dozens of listeners.
Barker: Sure. And this will tie in. Why not just tie this right into our first story? Tesla, I thought, was the most interesting and most well attended of the breakout sessions. The way these conferences work, for those who haven't been to one, which is hopefully all of you --
Hill: Hopefully because they're boring? Or?
Barker: Yeah. Hopefully you're doing more productive things with your lives...
Hill: Than you.
Barker: ...than I am, than I get to do, exactly. You've distracted me.
Hill: The way the conferences work.
Barker: You can frequently find links to these things on the websites of companies, and you can get an audio frequently, or the PowerPoint that they present. So you can get most of the information yourself. And that is, frankly, courtesy of The Motley Fool, in part, which story we've told at some point about regulation FD. Anyway, Tesla gave a good show. They did not do the usual, "Here's a PowerPoint presentation on what is our business, and here are the growth rates and here's what we would like to do in the future, and here's why we have a competitive advantage over the competition," which is your standard 20-minute show -- and then there's a couple of minutes of questions. Tesla, I think, gets the assumption that everybody knows what they're up to and you can go right into the most interesting things right away. Unlike some companies, they're playing offense. And the companies that I was most interested in hearing the stories from were ones who have an offensive story to tell. This was a tech conference, so that was plenty of companies, which have, in their own eyes, promising futures. And some do not. Some, which we in Asset Management have followed for years and had some investments in, not everything worked out. And I think Tesla referred to having 50% growth as far as the eye can see on an annual basis, which is the kind of numbers which, when you're up at the numbers they're already at, compound 50% over a few years and you get some really big numbers. So whether they'll do it or not is, the representative mentioned, their job is not to find demand for their product, but to actually supply, to actually deliver on what they have promised up to date. And that is not as easy to do as just project out, and that is a challenge for them.
Hill: As you said, that does tie into our first story, which is the fact that Tesla is reportedly working with AMD to develop its own artificial intelligence chip for self-driving cars. AMD, the Washington Generals to Intel's Harlem Globetrotters. They are the little engine that could of the chip world, and they are, my back of the envelope math, AMD is 1/15 the size of Intel. But this is the kind of partnership, we don't know the details of it, but just the association alone sent shares of AMD up about 5% late last Wednesday afternoon when the story broke. It's treading water to being up about 0.5% or so as we walked into the studio right now. Does this move the needle for them from here? Or does it really all come down to what are the terms of the deal? Because this is not Tesla saying, "Back up the truck, we want to buy as many chips. You name the price and we're going to pay it because we love you guys so much more than Intel." This is much more of a "We want to work with you."
Barker: Right. In fact, it's not even necessarily that, because it's a report that they are talking to each other, and AMD's technology is something that Tesla is considering incorporating. So it's not solely dependent on video for the technology. So if you assume, as you very well may, that CNBC has the reporting right on this one, and that they are working together in some way, then it's an interesting opportunity for AMD. And the one thing that investors over the years have done, often to their detriment with AMD is to get too excited. It is a company that, 10 years ago, had $6 billion in sales. It has about $4.5 billion in sales today.
Hill: Oh, that's lower, isn't it?
Barker: It's lower, and it hasn't really visited dramatically different numbers. It's not like it went from $6 billion up to $10 billion down to $2 billion. It's been between $4 billion and $6 billion for the last 10 years, sometimes with a little bit of profit, sometimes with a large amount of losses. The stock has been far more volatile than the underlying business. But over the last 10 years, the underlying business has not rewarded shareholders at all. It's got a less than 0.5% annualized return over the last 10 years. So, done much better in the last three to five years. It had a huge year as a stock last year. It was up 300%, as you may recall. I'm sure you've covered that a few times over the year. But really, the sales were within 10% of the previous year. So the market has decided it's much more interesting times ahead for AMD, but it's been about four or five years since it actually produced a profitable year.
Hill: Let's move on to Scholastic, the bookmaker that's having a tough day. By bookmaker, we mean, they actually make books. They're a publisher of books. They're not a bookmaker like ...
Barker: A bookie.
Hill: A bookie. It's not Guys and Dolls. The first-quarter loss for Scholastic was bigger than Wall Street was expecting, and you've talked before about how the greatest thing in life, one of the greatest things in life, is to have an easy act to follow. In this case, Scholastic had a very tough comp. They had a very tough act to follow, because it was a year ago that they came out with Harry Potter and the Cursed Child, which they sold eleventy billion copies of.
Barker: Apparently, yes. Parts one and two. That is probably what they, as a stock, at least, are best known for, the excitement around Harry Potter publications. It hasn't really amounted -- this is very similar to the story of AMD, in this sense -- it's been a very volatile stock with an underlying business that has been much more stable, oftentimes unprofitably, than the excitement that's around, "Oh this Harry Potter book is going to turn it around! They're going to be able to take the profits from this book and turn it into more recurring revenue." It's not been a happy time for publishing over the last decade. That's no secret. But they've managed to underperform the publishing group over any relevant time period that you wish to choose. I don't have an explanation for how they're going to turn that around. They've already got all of the interesting names that you can think of in the children's publishing space, or just about all of them.
Hill: So the fact that the stock, at one point this morning, was down 10% or 11%, it's hitting a 52-week low, you don't look at that and think, "This might be a value play right here?"
Barker: No, I think it's more likely to be a value trap in that it looks possibly, 2018, another Harry Potter book coming out, supposedly. I read that somewhere. What's that book going to be?
Hill: I don't know.
Barker: You're more of an expert on this Harry Potter stuff than I am.
Hill: Yeah, I think the next one is Harry Potter and the Pot of Never-Ending Money. That's what it seems to be for JK Rowling. We've talked before about, certainly recently, Equifax, and one of the questions we've asked is, where is the board of directors in all of this? And what does it take to get fired at Equifax? The board of directors at home builder KB Home, on the other hand, is not messing around, because, as some may have heard, last Saturday night, the CEO of KB Home, Jeffrey Mezger, was caught on audio yelling a string of profanities at his neighbor, who just happens to be comedian Kathy Griffin. Mezger was yelling at her and her boyfriend. And today, the board of directors at KB Home announced that Mezger's bonus is going to be cut by 25%. And they basically said, "If we find you doing this kind of thing again, you're gone."
Barker: I don't know if that's a product so much of, "You're getting us bad press and that could affect people's choices to buy KB Home." I think it's very unlikely to me that many people are going to fall in love with a house and then decide not to buy it because of the CEO's behavior one day, just using some foul language. And more to do with, they don't want him to do this, they don't want the bad press, but this is a guy who has been, this is a recurring theme of companies that have done basically nothing for shareholders over the last decade. KB Homes is yet another one which has returned virtually nothing to shareholders over the last 10 years, and it has underperformed the homebuilders, homebuilding competition. And he gets a nice salary. And if he had to walk away or be pushed out, I don't think the shareholders would shed a tear.
Hill: So you think this is the board saying, "Oh, here's an excuse we can use to slap this guy around and possibly get rid of him?"
Barker: Well, it was awfully fast, wasn't it?
Hill: Oh, yes. To go back to Equifax, where they have the data breach, I don't even know if that board of directors has met in the same room since that debacle happened, but this was in less than a week, in what amounts of just three days of the market being open, the board of KB Home just snapped into action.
Barker: You used a couple of words that basically everybody uses now and again. I don't know, there were one or two words in there that probably not everybody uses. But it was a very lightning-fast reaction, so either you give all credit to the board for really being on top of this, or you say, well this is a board that was ready to slap a wrist. And I don't know. I don't know which of those. I don't actually have inside information on what the board's intent was here, but I will just say, looking at the performance of the stock, this is not a CEO that you feel you have got to keep around no matter what.
Hill: Speaking of CEOs. The bonus episode of Market Foolery is coming before the end of the month. This all started back in June, when we were talking about buddy-cop movies and using CEOs to cast a buddy-cop movie. We opened it up to the dozens of listeners. I actually have here a collection of email that we got. You can still email us, firstname.lastname@example.org, with your pick for who would you cast. Again, for those who are unfamiliar with buddy-cop tropes, you've got the mismatched cops themselves, usually a seasoned, older cop who is partnered with the upstart, loose-cannon younger cop. You've got the police chief, who is just sick of these two knuckleheads, and at some point calls them in and reads them the riot act, and there's usually at some point, an "Alright, I want your gun and your badge on my desk right now" kind of moment. And I think you also offered up that, looming in the background, usually in one or two scenes, is either the mayor or the police commissioner, because the beleaguered police chief has got the commissioner breathing down his or her neck. I think I pretty much covered that.
Barker: Pretty much covered it.
Hill: And holy cow did we get some great emails.
Barker: The CEOs, it's important to note, can be mismatched in all kinds of different ways. There's the "by the book" and then the "loose gun," but as I pointed out, maybe one of them is a robot and one of them is human. That's a mismatch. Or an alien, or one of them is very young. The key in coming up with this is, in this movie, which ultimately will get made, they're still CEOs of their companies, they're just, for reasons that I can explain but you don't need to know, they're also cops.
Hill: Who solve crimes. That's important. Again, drop us an email with your suggestions. We're going to pick a few winners, and we will have some prizes in the form of, among other things, the brand new Motley Fool Asset Management T-shirt that I'm wearing. Which, of course, nobody can see, but I'll tweet out a photo of it, because it's a fabulous new design.
Barker: If you can picture the words Motley Fool Asset Management and a shirt, you're most of the way there.
Hill: Yeah, I was going to say, you're pretty much there. You're pretty much there. I will say, of the 16 submissions we have so far, I'm not going to spoil them, and we're not going to take the time to read them all, they're all great, and some people went so far as to write not just, "Here's who I would cast," but they wrote some dialogue, some different scenes, that sort of thing. I will simply say this: one CEO has appeared more often than any other in the same role, and it is the loose-cannon cop, and that person is John Legere from T-Mobile. Which, apparently, a number of our listeners look at the landscape of public-company CEOs, and they look at John Legere at T-Mobile and just think, "If that guy were a cop, he would absolutely be the crazy one."
Barker: Now you've got Jeffrey Mezger from KB Homes as a possible new alternative that you can consider for that.
Hill: Again, email us, email@example.com.
Barker: Maybe he's working with Martha Stewart, and she's horrified by his language and tries to educate him on how to behave better, and that's where the friction comes from.
Hill: That could be.
Barker: There are a lot of choices out there.
Hill: There are a lot of choices. Hopefully listeners are going to come up with their own better ones than you just did. Two other things for the bonus episode of Market Foolery, because again, this is going to be in episode, we're trying this for the first time, this has been suggested from time to time from different listeners. It's essentially, what if you just got into a room and talked about random stuff? What if it was a 100% tangent episode? But we want to have some structure to it, so we're looking for any suggestions you have on questions. We got one, and I think this is a good -- one thing we threw out there was, shark versus tiger. Basic question. If a shark fights a tiger, who wins and why? And I'll circle back to that in a minute. But first, a question that we got from a listener, Mark in Arlington, Virginia, he writes: "Guys, for your bonus episode, you had mentioned a story in the Washington Post about Elvis Presley. Dying at the age of 42 meant Elvis missed out on a potential comeback later in his career in the same way that Johnny Cash, Glen Campbell, Brian Wilson, Tony Bennett did. Elvis Presley aside, which performer who died too young would you like to have seen have a career into his or her 80s? I'm thinking musical performers, but if you want to pick an actor or actress, well, it's your show." That to me is a really good example of the type of non-investing question that we could kick around. You, me, and a to-be-named-later Fool who has never appeared on Market Foolery, but you and I immediately agreed, if we're going to have a third person in the room, we know who it's going to be.
Hill: So email us your questions. Marketfoolery@fool.com.
Barker: Did you want to talk about shark vs. tiger?
Hill: I do.
Barker: You always seem to want to talk about shark vs. tiger.
Hill: I mean, who doesn't? Some of the listeners have already weighed in on shark vs. tiger.
Barker: Here's how I think it needs to be framed. There are essentially four elements. There's earth, sea, sky, and fire. And if you have to fight on land, you have to like the tiger. You have it in water, you have to like the shark. Fire, I'm afraid neither one of them are going to win. Fire has a very good record against sharks and tigers.
Barker: Historically. And why would this time be different? But then, there's air. And some have posited, if you took the shark and the tiger and drop them out of a plane, so that they didn't have the atmosphere advantage, who would win? And I think, while that is creative, I think that's the wrong way to look at it. I think it would be better, more logical, really, to posit that they are in zero gravity. You have Elon Musk, call him up, he'll do this, send them up in SpaceX, up to the space station. They have a boxing ring up there, right? A steel cage, they've got one of these things.
Hill: I mean, they can't be all work and no play up there. So yeah, they have to have something.
Barker: And that's where you have the shark vs. tiger, in zero G.
Hill: As I mentioned, a few of the listeners have already weighed in on shark vs. tiger. Don Gleason making the point that, sort of hitting the point that you just made that, just like in investing, environment is everything. So depending on the environment, one will have the advantage over the other. Bud Turner, longtime listener, he didn't suggest space station, but he did say, get with the people at NASA. They have the Vomit Comet. Let's do this in zero gravity. Although, Bud says, "My money is still on the tiger." And then, there was Brendan Smith who added, and I have to read this, "By the way, did you know that the almost blind Greenland shark is the longest living vertebrate animal, and might be able to live to 500 years old? I just thought I would give you a head start on the rambling." That's terrifying, but there's a shark out there, a species of shark, that lives to be hundreds, plural, of years old.
Barker: I suppose, yeah. I don't know, aren't they a little less terrifying when they get older?
Hill: I mean, humans are.
Barker: They slow down, right? Or do they just keep growing?
Hill: I think at some point, much like humans and all creatures, they stop growing at some point. But they just get older.
Barker: I'm not sure that all creatures do stop growing.
Barker: I don't know. It's been a while since I've taken bio.
Hill: I like the idea of the space station.
Barker: Trees. Trees just keep growing.
Hill: Yeah, some of those out west, absolutely. Those things are monstrous. But if we're sure about anything, we're sure that at the space station, they have a boxing ring. If listeners walk away from this episode with no other knowledge, it's that.
Barker: No other knowledge that they've acquired.
Barker: It's that shark vs. tiger could soon be taking place in the boxing ring on the space station. And the thing is, Mayweather and McGregor, the pay-per-view on that, this would triple that, right?
Hill: First of all, I don't think, at any point in my life, I've actually paid money for a boxing pay-per-view. I've had a friend have it, or something like that. But I would absolutely pay.
Barker: Shark vs. tiger, zero G, like, you would take out a loan, no matter how expensive it is. You might have to finance it.
Hill: I don't know about that. I think that's one where you don't --
Barker: You're not helping to sell this at all. You couldn't be a boxing promoter.
Hill: [laughs] I really couldn't. I'm barely succeeding at this, are you kidding me? So email us, firstname.lastname@example.org, if you've got your submission for the buddy-cop CEO movie, or you have your question that you want us to kick around. Again, Mark in Arlington, which performer would you like to have seen have a career into his or her 80s?
Barker: Here's a question that I have for you. I want to wait and hear this on this one. If you were to pick your personal Mount Rushmore of comedy influences, on the how many stylings of Chris Hill, who would you go with? And I don't want you to answer this until the show.
Hill: OK, good, because I'm not answering that now.
Barker: Right. [laughs]
Hill: Bill Barker, Motley Fool Asset Management, thanks for being here!
Barker: Thank you!
Hill: Again, the bonus episode, it will be before the end of the month. I honestly thought we were going to get to it sooner. But it's coming soon, I promise. 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!
Bill Barker has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Intel and T-Mobile US. The Motley Fool has a disclosure policy.