Motley Fool Hidden Gems Investing - Bull vs. Bear: American Express

Episode Date: February 14, 2022

(0:20) Companies spent millions of dollars on Super Bowl ads, so how did they do? Jason Moser discusses the hits and misses from Salesforce, Meta Platforms, Hologic, Squarespace and more, as well as the current state of publicly-traded grill companies Weber and Traeger. (16:00) Jim Gillies and Bill Mann take a "Bull vs. Bear" approach to discussing one of Warren Buffett's biggest investments: American Express. You can vote for who you think made the better argument on our Twitter account: @MotleyFoolMoney What are you doing February 18th? Join us at the "Investing Essentials 2022 & Beyond" event by clicking here: http://2022.fool.com Stocks discussed: SQSP, FB, COIN, CRM, PEP, AXP, GM, BUD, HOLX, WEBR, COOK Host: Chris Hill Guests: Jason Moser, Bill Mann, Jim Gillies Producer: Ricky Mulvey Engineer: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Today on Motley Fool Money, companies paid millions to get their messages across last night, so how did they do? We've got a good old-fashioned bull versus bear debate and you get to pick the winner. That and more coming up right now. I'm Chris Hill joined by Motley Fool Senior Analyst, Jason Moser. Thanks for being here. Jason Moser. Hey, thanks for having me. Congrats to the LA fans, condolences to the Cincinnati fans. I think if there's one thing we can all agree on was great halftime show. That was an exceptional feat right there, I tell you.

I'm not the biggest halftime show guy. I just don't like them, generally speaking. It just kind of takes away. I'm kind of tuned into the game, really. But that said, when you see what they put on and everything involved with putting something like that on, I mean, that's a tremendous amount of work, a tremendous feat they pulled off. And yeah, the quality of that show was really impressive. So, you and I were talking this morning about the Super Bowl ads. And obviously, a lot of public companies involve spending

millions and millions of dollars for the time, and in some cases, millions of dollars to produce the ads themselves. And I wanted to talk about a few of them because, as is typically the case, there were some hits, there were some misses, there were some things that were maybe somewhere in between. I'm always interested in this because this is something that is completely in control of the company. There are so many parts of a business that are dependent on partners, dependent on a variety of factors, in some cases, dependent on weather, which no one can control, although I believe someone's working on a machine to take care of that. When you think about marketing, this is how companies see themselves, this is how they want us to see them. Obviously,

when we're talking about snacks and beverages, they fall under the umbrella of, hey, when you're consuming our product, you're having a good time. Let's put those aside for the moment. And the Salesforce ad with Matthew McConaughey, which people in my home after that ad turned to me and said, what was that? What was that an ad for? And it's only at the end, and I'd seen it previously, but it's only at the end that the Salesforce logo goes up there. And if you blink, you miss it. So I was tempted to say, I think they missed an opportunity there. But I do think it's a window into how Salesforce and their marketing team sees their business. They see it as, we are connecting people, we are connecting businesses with one another, we are a solution.

Maybe it was a shot at Jeff Bezos and Elon Musk, but we're not interested in space, we're interested in what's happening here on the ground. I think you're right. Generally speaking, these are opportunities for companies to get out there and communicate with folks, not only how they see themselves, but how they would like us to see them. I'm with you. The Salesforce commercial, I'm a McConaughey guy, I think he's terrific. That commercial, it lined up perfectly with Salesforce, honestly, because Salesforce is the business. You look through that 10-K, you look through the business description like, what the hell do these guys do? I'm not sure what they do. That's a lot of people. They're like CRM,

customer relationship. What does that mean? That commercial was right in line with it. What the hell is this commercial about? Oh, Salesforce. It's the commercial. I'm not really sure what it was about. Talking about the business, I'm not sure what it really does. In that regard, it was right in line. I think it made a lot of sense. But yes, I adjust a little bit here to your point. To me, the Super Bowl commercials are always fascinating because some are really good. It feels like more and more, they are just relying on star power and pushing the other stuff to the wayside. It doesn't really matter about the commercial anymore, it's more about the star power. I'll give you an example, the Lay's commercial with Paul Rudd

and Seth Rogen. I'm sorry, those two guys are fine, whatever, but that was the dumbest commercial probably the night. It was really annoying actually, because there was no point. Maybe that is the point. Maybe you're just sitting around doing nothing and those are the best times to just sit there and eat Lay's chips. I don't know. I don't need a reason either. But it is very fascinating to see these commercials roll out. Some of them are hits, some tug at our heart strings. In some, you're just thinking, yeah, that was a missed opportunity. We've talked a lot about meta-platforms and the aspirations for that business with the Metaverse and the VR goggles. You've tried VR goggles before, right?

Yeah. I have. I think for anyone, whether it's Oculus or some other version of that, if you've put on a VR headset and either played a game or done some sort of simulation, you instantly see the potential for this. I felt like the Meta Platforms ad, which basically took Chuck E. Cheese-like animatronic creatures that were disbanded from one another, and then they somehow all got VR headsets and they were reunited. It just seemed like such a missed opportunity for Meta Platforms. Isn't the move there, give people the experience or try to simulate what it's like for someone when they put on whether they're playing a game or they are transported to another part of the world?

Yeah, I feel like that commercial, I mean, I watched that commercial and the first reaction I had, I was like, well, if that's the metaverse, I don't really want any part of it, because it just didn't look like it had anything to do with really anything that is of interest to me. I mean, it almost was like they were going, did you get Toy Story vibes? I I got Toy Story vibes from that commercial almost. It felt like the plot of some private label brand Toy Story movie. It was like Toy Story, but it wasn't really as good. But it wasn't made by Pixar, it was made by some knockoff studio. Yeah, knockoff studio being meta. It feels like that lines up with them. I don't know,

I'm not the biggest fan, obviously. I feel like when you're talking about virtual reality, augmented reality, immersive technology, that didn't really hit the mark because it wasn't terribly relatable. They were trying to have fun with the story, of course. To that point, I think they succeeded. I could see where they had fun putting that together, but it really didn't feel like it communicated the world-changing implications, the potential of immersive technology and how it can really impact us in our lives. Because Chris, I can't relate to a big stuffed animal that has been thrown out to pasture. Two more that I'll throw out there and then we can move on. You talked about tugging on the heartstrings. I thought the

Chevrolet ad, they get an A in nostalgia with the throwback to The Sopranos opening and the two people playing Tony Soprano's kids. I thought somewhere Don Draper is smiling because this gets an A for nostalgia. The other one that I thought just really hit the bullseye was the Squarespace ad with Zendaya with her seashell shop. I just thought, okay, it's a star in Zendaya, but it also does a perfect job of just explaining, this is what Squarespace does. This is a business that creates websites so that you can take whatever is your dream shop and make it better. We're going to help you with your side hustle. I thought it was a perfect ad. I agree. I'm glad you mentioned that one, because that one really stood out to me. It was

clear. It was cut and dry. It made sense. They obviously took advantage of getting some star power in there. Yeah, whoever wrote that commercial, you have to figure that took a few takes. I always like the commercials that go back to some of the nostalgia. You talk about controlling weather, hey, listen, there was the Dr. Evil, the Austin Powers commercial, the GM Austin Powers, I'm all for it. I'm here for that potential fourth Austin Powers movie. You know I am a diners, drive-ins, and dives nut, so I thought the Budweiser Flavortown ad with Guy Fieri and Flavortown and the new Bud Seltzer soda was a good one. I thought that was right in line. And then another one I thought that was really good, and there were a couple of reasons why.

Number one, I'm familiar with the business, but then number two, I feel like it was very relatable, and I feel like the commercial could have had the same impact, even if it wasn't a star, right? Even if it was just some normal, everyday person, you plunk in that commercial, it could have had the same impact, was the Hologic commercial, right? Mary J. Blige going in for her routine, I think it was just a routine breast exam. It was something we encourage everybody to do. You get to that certain age and that's something you want to do there. Hologic is a business that really produces, innovates on all of that imaging equipment and those services. To see that commercial, number one, Hologic is a business I'm

familiar with. I was like, hey, wow, neat. That's an idea I've been looking at for a while. But then also just, it was very relatable and I felt like it didn't even need the Star Power. It's great they had it, but I don't know, to me, that was one that stood out because oftentimes, I think I do get a little, as the game goes on, I get more and more critical of these companies. They're just relying on Star Power and the commercials get kind of lazy. That was a commercial that was neither lazy and while it had Star Power, it didn't need it, although that's great that they got it. Chris Hill. Before I let you go, I know it's February, so it's not necessarily grilling season, but I feel like for people like you and me, it's always grilling season.

The grilling businesses as standalone companies are having a rough go of it. I don't know if you've noticed, Weber Grill came out with their latest earnings report, not great results, lowered expectations. You've mentioned Traeger a bunch of times before and I looked at that. Look, Weber and Traeger have been public companies for less than a year. It has been a short, unhappy public life for those two companies with each stock down around 50% or so, which I guess leads me to two questions. One, are these businesses, which are not very big, I think Traeger has a market cap of around $1 billion. I think Weber is maybe $3 billion. Are these businesses going to be standalone public companies in two years,

or is someone going to snap them up? Then two, what should people expect out of these businesses? Because even last year when they were getting ready to go public, I remember you and I were talking. Even though we are fans of the products, these are not subscription businesses, these are not repeat purchase businesses. I think I might have made the joke that Weber should make their grills less durable because I've had a Weber grill for 15 years. Maybe if it broke down, I'd buy another one. Yeah, like mattresses, you're not going to buy a whole lot of them throughout your life. That's a good thing, but that's by design. As I've said before, I just got a Traeger for Christmas and I hope that's the last grill I ever have to actually get in my entire life.

I'm going to take very good care of it, Chris. I do feel like these are businesses that can exist on their own. Yes, I feel like whether they're public or private, that is going to be for leadership to determine. Becoming public obviously opens up a lot of opportunities, potential for additional capital to grow. I was going through Weber's earnings releases, I was going through the call earlier. It's not like it was a bad quarter, but to your point, you're not going out and buying a new grill every year or every five years, really. When you look at the numbers, they generated just under $2 billion in revenue for 2021, and they're calling for about 7% growth from that for this coming year, fiscal 2022. But when you look at the trend,

we've been talking a lot about inflation and supply chain crunches, and the semiconductor industry has, I think, been front and center. But you look at something like a grill manufacturer where they have manufacturing all over the world. Now, Weber does have a domestic manufacturing presence, which is great, but really, they are feeling some real headwinds from this recent supply chain crunch. And also, just exporting. The production in China, for example, they're facing three to four times the container costs that they were just a year ago. And so, while they were able to kind of tread water on that revenue line. When you look at the gross margin for this business, I mean, this was a real eye-catcher. And I'm going to have to repeat

this to make sure you hear me correctly. Gross margin fell 2,100 basis points. 2,100. Yeah, that's 21 percentage points that their gross margin fell from a year ago, right? And that That was all based on supply chain crunches, shipping costs, etc. They passed through three price increases already over the past 12 months. Now, we talked about Chipotle and its pricing power over the last week. Yeah, you're right. These grill makers, they're not based on these repeat purchases. For a business to see that kind of gross margin compression over such a short period of time is very concerning, particularly when the question is still out there, how are these guys going to gin up some repeatable sales model? You see them

doing things like building out the wood pellet grill offering, for example. You got to keep on buying those wood pellets. That's a recurring purchase. They continue to offer more on the side of the actual cuisine offerings, recipes, services, things like that, trying to build some type of subscription business. That's going to take some time. I think that when you see Traeger and Webber in particular, I think they have the opportunity over longer periods of time to build out an identity well beyond just being a grill company. But that is going to take some time, it's going to take some patience, and it's going to take some vision. I don't know if it's a zero-sum game or not, but it really does feel like

it's not one where a rising tide is just going to lift all boats. I really wish there was a sports book where I could go and just put $10 down on, in 2022, an activist investor is going to get involved in one of these companies, because I really feel like that's a ripe opportunity. I think you're onto something. I think you're onto something. Jason Moser, thanks for being here. Thank you. The clash between the Rams and the Bengals was nothing compared to the battle you are

about to hear next. On one side, Motley Fool senior analyst Bill Mann. On the other, Motley Fool Canada's Jim Gillies. In between them, one of the mainstays of Warren Buffett's portfolio, Express. Bill Mann, take it away. Now, Jim, we have been given a company, it has been assigned to us, and our crack director has flipped a coin to give one of us the bull argument and one of us the bear argument. Now, Jim, the company that we're talking about this time is American Express, ticker AXP. Would you think that the bull has won the coin flip? I think you've won the coin flip. I think I've won the coin flip. Okay. And I have lost the coin flip, so I am the bear. So, I'm going to give things over to you,

and you are going to make an argument why American Express will beat the market from today. I will certainly endeavor. It is not a company I traditionally spend a lot of time looking at, but I think it's a company that fits into a very important niche for your portfolio, and that is the bedrock companies of your portfolio. I think everyone needs bedrock companies so you can sleep well at night when you have a more, shall we say, enthusiast part of your portfolio, high growth, but also potentially some losses at certain times. American Express is the original fintech company. It's the original payments company. If I say the words, don't leave home without it, you know what I'm talking about.

Pants! Right? Sorry, sorry. Also, please don't leave home without your pants. But no, that was one of their well-known taglines, right? American Express, don't leave home without it. I mean, traveler's checks, I think, have largely gone by the by. But from a payment service where you're getting tiny little fractional amounts from all kinds of transactions, you're getting card fees and whatever. This company kind of pioneered that whole thing that now we get very excited about when it comes to

payments in fintech. Even if you don't realize it, they partner with companies like Google for Google Pay. They partner with companies like Apple for Apple Pay. You don't realize it. A lot of people will think of Amex as being kind of old, kind of stodgy, but it's actually not the case. Nipsey said, well, they're old and stodgy. They're growing pretty strongly even today. Do the forecast for the next three years. It's about 15% earnings growth just from here. You're paying, I think, 20 times earnings. This is a very reasonable valuation. As well, Amex falls into a category of companies that I call cannibals, as in they like to eat themselves because they produce so much cash and they pay a dividend. It's about 1% yield, I think.

they pay a modest dividend, but they have also been very deliberately buying back their own stock with all the excess cash they generate. And in fact, they've been taking down their share count by about 3.5% a year. The share count today is about 62%, 63% of what it was a decade ago. Or to put it into another context, Warren Buffett from Berkshire Hathaway famously, during what they call the salad oil scandal, famously bought 5% of American Express when it was temporarily beaten down because of that scandal. Today, he owns 20% and has never bought another share. So, that's how much they're eating themselves. All right. Well, thank you for that. You know, it's difficult for me to be on the bear side for American Express because it is a

company that I do admire. There is something about American Express, though, and I think with every company you own, you should be able to express the risks because there is no such thing as a company without risks. It blows my mind, but a few years ago, maybe the most important partner for American Express, a company called Costco, maybe you've heard of it, ended its relationship with American Express. They once had an exclusive relationship. And since that time, American Express stock has outperformed Visa, the company that replaced it. American Express stock is up more than 60% since the beginning of January in 2021. If you were to look at American Express, you would say that it is a claim on the health

of spending of consumers. And I happen to think that although American Express has done very well from a business standpoint, I happen to think that this is a little bit overbaked, that the excitement around American Express is basically the flip side of the days after they were kicked to the curb by Costco. Now, American Express made about $42 billion in earnings in 2021, but it has about $26 billion in expenses, and much of those expenses either come from the form of marketing, which is up about 50% over the year previous, or it comes in $11 billion worth of card member rewards and services. These are huge, huge, huge expenses for them.

They are also ones, when you think about a cannibal market, I think the credit card market is also a cannibal market, where you actually can lose share to these other really, really, really big, aggressive competitors in the form of Visa and MasterCard and Discovery. But also, there are these young guns coming down the pike, companies like Square, companies like Stripe, companies like PayPal that are eating into this market and really, really making a play. Again, as a bear, I really do admire American Express, I do think it's a great company, but we should not be jaded to the fact that it is a call on the health of the American consumer. I'm not quite sure that the American consumer is

quite as healthy as all that at current prices. Okay, we're going to move to the rebuttal round. I'm going to send things back over to my friend, Jim Gillies, who has 90 seconds, Jim. Oh, dear. 90 seconds to tell our listeners why what I said, it was nonsense. Over to you. Well, what you've said is essentially that valuation is the problem, especially with competition. And I happen to love MasterCard and Visa, who you specifically call that as competition. I happen to own both, so I'm not going to argue that Amex will just simply beat them. But looking at the measures of valuation that we use for a company like American Express,

You know, it's trading about 19X trailing earnings, and its average over the past decade is 18X. So, I don't think I see the same, shall we say, wildly overvalued status. And by the way, I believe, I don't have it up on my screen here, but I believe that's a lower valuation than both of those competing companies you've named. Certainly, it's lower than a PayPal and a Square. So, I actually happen to think that it's not all that bad, and I'm going to get a 15% earnings growth between profitability and continuously reducing their share count. The other thing is, I think you're going to see them start hiking their dividend again. They've been sitting on the sidelines for a couple of years during the

pandemic. I think that's over because they've really released a lot of their reserves back into their balance sheet. I think we're looking pretty decent there. Over to you. You went with their tagline, don't leave home without it, which is in fact one of the most successful, famous advertising campaign slogans in history. My question to you is, why not? Why not leave home without an American Express card? There are plenty of alternatives, including as companies like Stripe and Square and PayPal begin to move into direct payments, why do you need to carry an American Express card? Why? Because I don't know if you've noticed, Jim, but in a lot of places, the one card that is not

accepted tends to be American Express. When there is one that's out, it tends to be American Express. If this company, and it is a financial company, so I take your point about the price to earnings ratio, but with financial companies, that's not necessarily the best way to measure it. If this is the company that we should say, don't leave home without it, and it is still not accepted at as many places as its competitors, why not? Is it because of all of the card member awards, well, that's a really tough game to play for the long-term. I take your point. It is a very good company, but it is also a company in a Lord of the Flies market, and it may not be holding the conch. Okay, Fools, that was some bull on bear action, but we do need a neutral third party.

For that, I'm going to bring in our producer, Rick Engdahl, with one important question. Hey, Rick, how you doing? I'm doing just fine, Bill. I listened to your arguments, and, you know, I think that I have a question that's sort of piling on what you just said, Bill, in your rebuttal. I'm an investor, but I'm not an analyst, so I'm coming at this from a consumerist point of view. And, you know, when I was coming of age, American Express kind of had a gravitas to it, like it was somehow exclusive. And nowadays, I can't remember the last time I left home with it, to be honest. So, how much of their future business is tied up in these invisible partnerships, and how

much is really tied up in carrying the card? Jim, that sounds like a question for you. It does, doesn't it? And I don't have specific numbers in front of me, Rick, I'm afraid. But I like that you've mentioned there that you are tied up to these invisible partnerships, because the fact is, you are leaving home without it every time you walk out the door with your smartphone with Apple Pay or Google pay on it. You are walking out the door with an Amex card, with an Amex relationship, they are the partner banks or one of the partner banks to Google and Apple, and the mobile wallet system, the 21st century payment system that we follow. That is one of their pathways

for growth. There still are a significant number of cards out there. I agree with you that the ubiquity and the must-have-edness is definitely fallen by the wayside over time, they found new ways to grow. That has been powerful. It's exhibited in the growth the company has shown for decades. Fools, we now have a special part of the show, the interactive part of the show, in which you can go to the Motley Fool Money Twitter feed, that is, at Motley Fool Money, and you can pick the winner. Who had the better argument. Was it Jim? Obviously not. Or was it me? Obviously so. You will go to the page and there will be two options. It will be Jim and Bill. So, you will only be able to vote appreciably

if you have tuned in to Bull vs. Bear. Thank you very much for joining us. Fool on and have a great day. Who had the better argument? Go to our Twitter feed, at Motley Fool Money, to cast your vote. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thank you.