The All-American Earnings Day Was Basically Nothing but Beats

On this Market Foolery podcast, host Chris Hill and Motley Fool Funds' Bill Barker discuss a raft of reports from major companies like Ford, AT&T, U.S. Steel (NYSE: X), Hershey, and Coca-Cola, all of which came through with excellent second quarters. But it was aerospace giant Boeing that kept the Dow singlehandedly in the black for the day with its stellar profits. What the Fools were more conflicted about was what they heard from Chipotle's (NYSE: CMG) CEO. But what they endorsed wholeheartedly? The works of the late author David Halberstam.

A full transcript follows the video.

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This video was recorded on July 26, 2017.

Chris Hill: It's Wednesday, July 26. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Motley Fool Funds, Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: What a day we've got. This whole week, Earnings-Palooza all week, and we have far more companies reporting this morning than we can actually talk about. But we'll hit as many as we can.

Barker: Sure.

Hill: We're going to dig into Coca-Cola, Hershey. We get this question from time to time: How do you pick the stories you're going to talk about on Market Foolery? It usually starts with my sending an email or a message on Slack to whoever is going to be on the show that day with a menu of options, and saying, "Here are all the companies we could talk about. Here are the ones making headlines; here are ones I think we should talk about. Which ones are you interested in talking about?" And when I sent you the list, your reaction was essentially, "Wow, this is the all-Americans earnings list. This is a day of earnings that the late, great writer David Halberstam would have appreciated."

Barker: There were two things. One was, everything had beaten earnings. All the headline reports -- of course, we were working off an aggregation of the early morning news, so it didn't have everything -- but it was the biggest companies, the S&P 500-type companies who had reported. And everybody had beaten earnings, a number of companies by a significant amount, and maybe two had just matched earnings. Nobody had missed earnings, which is fairly unusual, to get that much positive reports in one day. And not just one sector, but everything. A lot of the names, as we'll get to, were core. You could go back to the 1950s, rather than new internet names. These are some of the biggest names of the last 50-60 years of American economic life.

Hill: Although, as we will discuss, just because they're beating earnings expectations doesn't mean the stocks are all going up. We'll start with one that is, and that's Boeing (NYSE: BA). Second-quarter profits blew way past expectations. They also raised guidance. Boeing, which is one of 30 stocks in the Dow Jones Industrial Average, is essentially singlehandedly keeping the Dow in positive territory, because shares of Boeing are up 8%. I don't remember the last time Boeing had that kind of a move.

Barker: No. It's unusual. One of the reason it translates to such a big move in the Dow is because the Dow is, bizarrely, a price-weighted index, so the bigger-priced stocks move the index more. So those who haven't split their shares for a long time, which would be the case with Boeing, which is now trading for upwards of $200 a share and even more than that today, that's a bigger move, just because of a quirk in the accounting of the Dow. But 8% for a company that's nearing $100 billion in market cap is a pretty significant move no matter how you measure it.

Hill: When you look at Boeing, they're in the business of making planes. Yes, they have competition, but it's such a capital-intensive business that I think at least one of the bull cases for investing in a company like Boeing is, the barrier to entry when you're making airplanes for a living is massive.

Barker: Right. It's more or less, Airbus is the competition for what Boeing is doing on the commercial side. And Boeing is getting the better of that competition at the moment. They've got a bigger backlog, they're getting more of the orders for their wide-body planes, and Airbus is not firing on all cylinders at the moment. So this comes and goes. At the moment, advantage Boeing. They have a backlog of almost 6,000 commercial aircraft. That provides greater visibility for future earnings than lots of other companies. Additionally, defense looks like it's going to be picking up for them.

Hill: In terms of the backlog that you mentioned, is that something that, even with the price move today, you can look at how many planes they have on order and say the foreseeable future looks really good for them?

Barker: Despite the fact that they beat on the net income line by a lot, the sales came in right about where they were expected, $22.7 billion for the quarter. The visibility is provided by the backlog and company guidance, and they've now guided higher for the rest of the year on the earnings side. Where they surprised was how much money they made out of these sales. Margins improved, and they improved their tax rate, and that was part of it, in terms of the bottom line. Still, they get to hold on to that money if they're not paying it in taxes.

Hill: Wouldn't that be nice?

Barker: Well, for the quarter. That was the story in some of the other earnings reports today as well -- more of a margin beat and more of a bottom line, in some cases, tax-driven beat based on some of the financial engineering. And I don't say that as a negative thing. There are times when you don't pay taxes. As a function of where a lot of companies are right now, they and individuals are delaying paying taxes now, if possible, because there's a possibility that taxes are going to be lower in the future. So you might choose to make certain taxable events occur later, and that's something that not only Boeing but other companies are doing at the moment.

Hill: Let's get to some of the other companies reporting. As you indicated, names that are straight out of the 1950s here in America. Ford Motor, AT&T, U.S. Steel, Coca-Cola, Hershey all reporting. All, as you said, doing as good if not better than expected. Although in terms of the stock performance, AT&T and U.S. Steel are really the big movers today. I didn't realize, because we rarely ever talk about U.S. Steel. The only time I talk about U.S. Steel is if I'm watching The Godfather Part 2, where Hyman Roth has the classic line, "Michael, we're bigger than U.S. Steel."

Barker: Another good line about U.S. Steel is, there was a book about the Yankees covering the '50s and early '60s. The subtitle was When Rooting for the Yankees Was Like Rooting For U.S. Steel. I know that's painful for you as a Red Sox fan, which is why I bring it up.

Hill: [laughs] That's OK, I wasn't around in the 1950s or early 1960s.

Barker: Wow, would you have suffered if you had been.

Hill: I really would have. Although, as I was going to say, U.S. Steel, really cool ticker symbol. It's just X. I like that. But again, U.S. Steel, AT&T, those are the big movers. When you look at this basket of Americana-type stocks, does anything leap out at you?

Barker: Yeah, it's a victory lap for America. [laughs] Not to get too 1980s U.S. Olympic cheering. When I look at it, I see, again, the bottom line being a bigger outperformer than the top line for a lot of these things. U.S. Steel more than tripled what the profits were expected to be -- $1.07 per share against $0.34 expected. That wasn't a function of tripling what the expected sales were going to be. This is better margins. That's a story for some of the other companies in there as well. I just think there's a breadth to the success of businesses at the moment, which is, what is supporting the stock market as a whole right now? You have the stock market at all-time highs; how much should you be worried about that? Well, this quarter is going to set the record for earnings, both operating earnings, which ignores all the bad stuff, all the one-time charges that go into GAAP-reported earnings. But, GAAP earnings are also going to be setting a record this quarter. And the projections for next quarter are not coming down. So earnings, which ultimately is what you get from owning stock, is looking very good.

The concern, in part, is that this is being driven by superior margins. And how sustainable are margins at or above 10%? Well, they've been pretty sustainable over the last 10 years, in the 9%-9.5% range, except for the Great Recession. So there's reason to think that the longer term of 6%-7% average for operating earnings is something to remember, and to wonder why companies are capturing as much of the income from their sales as they are, one thing is, they're not distributing it to employees at the same rate, and how sustainable is that? We see the effects of that in our politics. But at the moment, it's a good quarter for classic American companies.

Hill: I'm a little surprised by the combination of U.S. Steel's results and Caterpillar's results, which were earlier in the week, in part because you think back to January, when President Trump took office and the new Congress took office, there was a lot of expectation that one of the first big things right out of the gate was going to be some sort of infrastructure bill. And that has not materialized. So the results that they're putting up, the quarters that we're seeing out of Caterpillar and U.S. Steel, would make more sense to me if, in fact, there had been some massive infrastructure spending bill that had been passed back in January or February or something like that.

Barker: I think that's fair, to ask what's going on there. U.S. Steel would love it if there was a significant infrastructure commitment, or something that went beyond words from the administration, some real dollars that were committed. But they're in all parts of the economy. Commercial construction, you don't necessarily need government-supported projects to achieve the results they've just had. Cars. Of course, it would be great for them if every bridge that needed to be replaced started doing that. And part of the hope for the company from the bulls is that various of the proposals that it will be United States-produced steel that's going into any infrastructure bill. We'll see what happens with that. But that's part of the bull case as well.

Hill: Chipotle's second-quarter results came out last night. They were, obviously, not taking into account the recent norovirus outbreak at the location in Virginia. The numbers were fine. As a shareholder of Chipotle, I went into this quarter bracing myself for a slashing of guidance. That did not happen. I was also crossing my fingers hoping that management, and in particular CEO Steve Ells, was going to be saying all the right things. And I can't say I'm thrilled with what he had to say on the conference call. In a nutshell, it seems like there was still a decent amount of denial going on. If not denial, defensiveness on the part of Steve Ells and his management team, because they keep talking about the health protocols that they have in place. They're like, "We've got this. We're the only major restaurant that has this particular type of safety protocol." And I just want to kind of scream, shut up. [laughs] Don't tell me how great your health protocols are when over 100 people are reportedly getting sick and you have to shut down the store!

Barker: All right, what would you have preferred? The question is going to get asked on the call. If they don't address it first, then it looks like they're hiding. So your preference would be what? That they say nothing about it in the presentation, and then the question comes, "People are getting sick again; what's up with that?"

Hill: Here's what I would have preferred. I would have preferred, and we talk about emotion in investing, and books have been written about Warren Buffett and taking the emotion out of investing, and all of that makes perfect sense to me. Every once in a while, when something is going wrong, and in the case of Chipotle, we're talking about something that has gone wrong more than once, what I want to see is anger. Frankly, I would have been perfectly happy if Steve Ells had addressed the health issues with a level of anger in his voice, and drawing lines in the sand and saying, "This isn't acceptable. We blew it again, and heads are going to roll if XYZ."

Barker: His own head?

Hill: You know what? If I'm on the board of directors, I'm seriously considering that. He's the founder-CEO, he's the visionary, and I know he's not necessarily the operational guy. That's fine. Get someone in there who is the operational guy or gal. You see these reports were Chipotle is saying, "We figured out where the problem is, and it has to do with our management at the local level." In the case of Chipotle, they're saying, "It's not a problem with our food supply. This was an isolated incident at one location." OK, fine, what was the problem at that one location? "Well, management wasn't really upholding the safety standards and the health standards that we have put in place."

As a shareholder and someone who has watched this company for a long time, my question for that would be, how is that possible? Since one of the things I hear and have heard for years about Chipotle, in reference to why they don't roll out more locations more quickly -- they have this concept that people like; why aren't they opening more locations more quickly? And the response is always, well, they really take their time picking the location, training the staff, they have to get everybody on board, and it makes it sound like it's the greatest staff in the world, the best-trained staff in the world. We talked the other day about McDonald's. Do you know what McDonald's doesn't have? They don't have these types of problems with their food supply.

Barker: No, but everybody does at some point. I think one of the problems for Chipotle is, when a perfectly commonplace thing happens, it's a national story. Last year I was on the road, I was in Indianapolis, and I had one day outside of Indianapolis. I went to a local restaurant and got sick the next day. And I went on to Yelp or something and found that two other people had gotten sick at this restaurant, same day. But it's not a national story. That's three people that I know of, and presumably it was a one-time thing. That happens in restaurants. Chipotle, unfortunately for itself, is in a position where the thing which happens somewhere in the country, I don't know, the CDC's got records on this, norovirus outbreaks in restaurants. It's a national story every single time it happens.

So you've gpt your conspiracy theorists out there who are measuring how often it's happening in Chipotle compared to how often you would expect to see it in a restaurant chain of this size and all that, and it's 4x -- E. coli is one thing, the norovirus is another. The norovirus is showing up often enough that those who are prone to looking for conspiracies or are mad that they are losing money in this investment and therefore want to blame something other than bad luck or paying too much for an investment, or any other number of things that you could attribute this to, are looking for conspiracies. I think sometimes, bad luck does accumulate at a certain place. Really, Chipotle is running out of the number of times when you can hold that theory in your mind without dismissing it as, "No, it's Chipotle."

Hill: Right. And that's one more thing, I think, on the communications side of things, that Chipotle continues to get wrong. Again, this defensiveness. One of the things they talked about on the call is this executive director of food safety that they've hired, James Marsden, who put in place, I'll just read from this news article. "Marsden introduced Chipotle to the concept of HACCP, hazard analysis and critical control points." Again, Ells, during the conference call, "We're the only major restaurant to have HACCP."

Barker: That's not a great endorsement.

Hill: [laughs] Yeah, I was going to say ...

Barker: I'm not sure everybody else is lining up --

Hill: It doesn't appear to be working.

Barker: -- to buy shares of HACCP. Could we get a better acronym there, too?

Hill: They really do need one. But to go back to the communications piece, someone close to Ells needs to make it very clear to him that, fairly or unfairly, we're going to get tagged with this for the next, I'm going to say minimum three years, in a way that McDonald's, any other fast-food chain, any other fast-casual chain, is not going to get tagged. As you said, the restaurant you ate at in Indiana, that's not a national story. Chipotle is on the clock. And maybe it's not fair, but that's the way it is. So they need to react accordingly. And continuing to talk about how great their safety protocols are doesn't fill me with confidence.

Barker: What about all the people who went there and didn't get sick last quarter? There were hundreds, possibly thousands of people who didn't get sick.

Hill: Possibly.

Barker: We'll never know. [laughs]

Hill: That would be great, if Ells decided to be completely tone-deaf and play that up. "We're estimating how many people, and sure, you can focus on the 135 reported people in Virginia who got sick. But, ball-park, we have 99.98% of our customers not getting sick. We're going to focus on the positive."

Barker: [laughs] So if we're griping about Chipotle, the other thing that we were talking about, where's the breakfast?

Hill: Where is the breakfast?

Barker: Where's the breakfast?

Hill: I don't know. That's another question that has come up before. Again, McDonald's seemed to figure out a way to make not just breakfast, but breakfast all day. And I guess your colleague, Charly Travers, pointed out that what has been the explanation in the past from the company is, "We can't offer breakfast burritos and breakfast tacos and that sort of thing because it would disrupt the food-prep system that we have in place for the lunchtime crowd," and all that kind of thing. And your response was ...

Barker: My response was, I'm happy to eat what they serve for lunch for breakfast anyway. But also, this is a problem that everybody else has figured out.

Hill: Yeah, I don't know why, somehow, Chipotle can't figure this out. Or, on the flip side, I don't know what's so special about their food-prep system that they can't disrupt it so I can get a breakfast taco.

Barker: No. I think opening up at 11:00 rather than 7:00 or 8:00, and serving breakfast, seems to be an opportunity that they could take advantage of, and I imagine someday they will.

Hill: That's the thing. If, for whatever reason, Steve Ells decides in a year from now that, "I'm out, I'm not going to be the CEO anymore" -- if a new CEO comes in, isn't one of the first things that he or she does is taking a good, long, hard look at breakfast?

Barker: Yes. It's an open opportunity. I think they have the ingredients there to combine into a breakfast menu of some sort. They're forced to serve breakfast at Dulles Airport.

Hill: They don't serve what we consider breakfast. They don't serve eggs. They serve their basic food --

Barker: They could serve Rice Krispies. You know? Mexican grilled Rice Krispies.

Hill: Chorizo-infused Rice Krispies?

Barker: Go wild.

Hill: You know what? Someone at Mondelez just got an idea for the next brand of Oreos. [laughs]

Barker: No, they serve, more or less, their standard menu, don't they?

Hill: Yes, it's their standard menu.

Barker: And you can have it for breakfast. But there's a rule at Dulles that if you're operating there as a restaurant, you must serve breakfast, because a lot of people need breakfast. I've had Chipotle for breakfast at Dulles. Have you?

Hill: I have not, no. I don't fly into Dulles that much. I'm not a world traveler like you are.

Barker: You just traveled the world. What are you talking about? You more recently were traveling internationally than me.

Hill: But I'm saying in the aggregate, not as often. Before we wrap up, any final thoughts on David Halberstam?

Barker: My initial thought of David Halberstam -- how many of his books have you read?

Hill: Halberstam, Pulitzer Prize-winning reporter, best-selling author, probably best known for The Best and the Brightest, the book that he wrote about Vietnam. He's written 20 or so books. I think I've read four or five of them. I read The Breaks of the Game, where he followed the Portland Trail Blazers for a season. I've read The Amateurs, which is a great book about rowing -- it was my first introduction to rowing, and it chronicles four men who are trying to make the U.S. Olympic team in rowing. My main takeaway from that book was, boy, if you're someone who decided that your athletic calling in life is to be a single-scull rower, that's a brutal and lonely path that you have chosen. And as you mentioned, The Fifties. I would recommend The Fifties to anyone who's interested in American history. If you want to understand the United States of America, Halberstam's book The Fifties is great, because there are single chapters in that book that you could basically pick up and just read that chapter. There's a chapter just about McDonald's, and about the creation of McDonald's with the McDonald's brothers, and then Ray Kroc comes into their life and --

Barker: Ruins them.

Hill: [laughs] And basically puts them out of business and steals their idea. Also, Kemmons Wilson, who was the creator of Holiday Inn. And one of my other favorite chapters in the book is about how Lucille Ball, Halberstam made the case that Lucille Ball pretty much singlehandedly saves CBS, rescues that television network.

Barker: I remember reading The Fifties about 25 years ago now. I also read October 1964, which is about the Yankees-versus-the Cardinals World Series that year, which actually, the Cardinals won. Halberstam writes about a lot of the culture behind the two teams and describes the delay in the Yankees finding African-American players to the degree that the Cardinals had as being the determining issue for that. But my first memory of Halberstam was coming across him in Doonesbury, which mocked him. They had a series where Rick Redfern was being interviewed by Halberstam. You don't remember this?

Hill: I don't remember this. I vividly remember the comic strip Doonesbury and reading it as a kid. I don't remember this.

Barker: Yes. Halberstam does not come off particularly well. I guess Garry Trudeau had read one of the books, and the word that comes to mind, and it may have been used in the strips or not, is "turgid" to describe Halberstam's writing style. So in this strip, he speaks in the way that Trudeau wants to mock his writing style.

Hill: I'm surprised by that, because Halberstam's a phenomenal writer.

Barker: So before I had read him, I had this picture in my mind of his writing style, which was there to get laughs. That was what Trudeau was up to and succeeded in those strips. I'll forward them to you if I can find them. It's all in there in the archives, the Doonesbury archives online.

Hill: October 1964, is that your favorite Halberstam book?

Barker: No, The Fifties was a better book. In October 1964, the Yankees lose the World Series, so it's really not a good book.

Hill: You knew that going in, though, right?

Barker: I didn't need to be reminded.

Hill: [laughs] You didn't need the blow-by-blow. You can read more from Bill Barker and his colleagues. Go to and sign up for Declarations. It's the free monthly newsletter from the Motley Fool Funds team. Thanks for being here!

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 tomorrow!

Bill Barker has no position in any stocks mentioned. Chris Hill owns shares of Chipotle Mexican Grill and Coca-Cola. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Ford. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.