Motley Fool Hidden Gems Investing - Earnings for Breakfast, Cereal for Dinner

Episode Date: February 27, 2024

Zoom has a new growth story. Are investors buying it? (00:21) Ricky Mulvey and Bill Barker discuss: - Zoom’s quarter, and if the company has a moat. - AutoZone’s international growth. - Wendy’s plan to test surge pricing. - If cereal is a part of a complete and nutritious dinner. Plus, (18:15) Alison Southwick and Robert Brokamp answer listener questions about 403(b)s, UTMAs, and the safety of brokerage platforms. Got a question for the show? Email us at [e-mail]. Companies discussed: ZM, AZO, WEN, KLG, SCHW Host: Ricky Mulvey Guests: Bill Barker, Alison Southwick, Robert Brokamp Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

I'm Ricky Mulvey, joined today by Bill Barker. Bill, thanks for being here. Thanks for having me. Let's start with Zoom earnings because the investors seem to be pleased by the latest quarter operating income and Billings beat analyst forecasts. There's a little bit of a dip in growth that they're saying they're going to make up for later in the year. Before we dive in, are there any headline takeaways for you from this beaten up former growth stock? No. The thing that is most striking to me, I guess, is just the growth curve here, which it did about eight times the business within two years of the beginning of the pandemic that it had done, and it was growing pretty

rapidly going into the pandemic. But in the last two years, it's not quite flat-lined, but not even really kept up with the level of inflation. So, they're talking about sort of a slow first half, but we'll start making up the growth in the second half. And I always throw a couple grains of salt onto the second half looks so much better than the first half guidance. Well, that's not until the AI kicks in. So the bull story for Zoom that CEO Eric Yuan is selling is about AI. And in case you've missed the first mention of AI, there were five more mentions, additional mentions in the first five sentences. The story is that Zoom's more than video conferencing. You have generative AI that can help summarize meetings, make businesses more

productive, and also become not just video, but a full workplace solution where you can reserve desks, see how your direct reports are doing. We'll even have a messaging app that competes with Slack. Maybe that's enough to restart the growth engine. Sure, maybe. I think that no one's expecting it, particularly. I think Zoom has done a phenomenal job of embedding itself into a lot of people's work lives and even beyond work, social lives at times to meet with friends or family over Zoom. But it's embedded a lot of that already. and the things that it points to to charge the future growth are more and more tangential to its central purpose and use to date. If AI adds some growth to it, it'll be in a large

category of stocks that can make that claim. It's making that claim before the growth is here with the hopes that it'll come true. The part on Zoom being embedded is something I want to focus on. There's a mention from the CEO I want to discuss. He said, quote, we became more disciplined and focused while continuing to prioritize growth opportunities. As a result, we are much better positioned than we were one year ago. Our platform moat is deeper. Our contact center offering is more robust and our go-to-market teams are primed with defined goals and sharpened expertise to drive growth and empower customers. End quote. The part I'm focused on there is our platform moat is deeper. As people use Zoom, maybe the longer they use it,

the less likely they are to leave. But one of the big bear cases is that Microsoft Teams has options. So does Google. So I will ask you, does Zoom have a moat? Yes, Zoom has a moat. And it is not a particularly deep or wide moat for the reasons that you've just brought up. But It is in use. There are some switching costs for enterprises. There are some switching costs for individuals, even if they're using it for free. The familiarity with it and perhaps the growing familiarity with these new applications, such as the AI tools and the the conference summaries and things like that. There are reasons why it becomes a little harder or even quite annoying to switch over an entire company's work onto Teams or Google

when they've already gotten used to Zoom, if it's competitively priced. That switching cost is, in terms of the hours and the learning curve is enough to keep some business around. But we were originally going to record this on Zoom, and we, for one reason or another, it was my reason, it was on my side, we just switched to something else to do the same work. We did. Although, Bill, I am curious if this is a Zoom problem or a Bill problem. It's not a Bill problem. It's a Bill's laptop problem. which is slightly different. As identified as we all are with our laptops these days, we are separable. And in this particular case, it is not my fault. It's a rare case where any

technology that I'm unable to get to use is not my fault, but the hardware's fault. But this is such a case. All right. Well, let's talk about the repurchase plan, because that's grabbing some headlines for Zoom. Zoom's board authorized $1.5 billion in buybacks. Woo! That's a lot of money. However, Zoom also spent $1.3 billion on stock-based comp over the past year, according to YCharts. They're starting this buyback. Is it meaningful? Does it signal anything? I think that you have accurately summed up how meaningful it is. If it's a pretty fair fight between the buyback and the stock-based compensation, then it is not meaningful in the sense of reducing share count. It's meaningful in the sense of preventing share count from

continuing to be diluted, which it has been over the last four or five years. I think there's about 20%, 25% dilution on the increased use of shares to compensate employees and management. Maybe this slows or stops, but it's a very different kind of buyback than one that shareholders should truly get excited about. Zoom's got a lot of money. It's got $7 billion in cash, so this is easy to finance, no debt. If they're not going to show a lot of growth. This is one way to possibly grow earnings per share by reducing share count, but we'll see over the next year whether it's executed and whether it actually reduces share count or just keeps it steady as measured against all the shares that are still being

used to compensate employees. Let's talk about another type of buybacks, and that's with AutoZone. But first, we'll start with the new CEO. There's a new guy in town, even though he's been there for 30 years. It's Philip Danielle. Bill Rhodes was at the helm of AutoZone for 18 years. This is the first quarter for Danielle. Any impressions of the new guy who's been there for 30 years? I think it's too early to make much of a call. As you say, he's been there for 30 years, so we don't expect, and he's been in high position, so we don't expect there to be a big departure from the winning formula that AutoZone has employed for the last couple of decades. Previous CEO is moving to chair.

So, I think that it's more of a steady as she goes until we have reason to think otherwise. Some highlights from the quarter, to the extent there are highlights. AutoZone continued to decrease inventory, also pointed out higher merchandise margins for getting essentially flat-ish sales to a higher operating profit. Domestic sales, same-store sales, essentially flat, but international same-store sales up 11% on a constant currency basis. Also, 26 net new stores, but they have a total store count of more than 7,000. Anything really stand out to you? The thing to keep an eye on in terms of looking at the growth, because the domestic growth is not likely to be that exciting, is the international expansion. That is a possible thing to keep an

on with the new CEO? Are they going to be more aggressive in expanding internationally and can continue to be more aggressive expanding internationally as they have been in the last few years compared to the domestic operation, which is not quite saturated. They're in a fairly dominant position with O'Reilly continuing to take market share from Advance Auto and the continuing fragmentation of the industry for auto supplies. But I think that there's not a lot that looks any different from this report than from most. They continue to reacquire their shares, and that's probably the most exciting thing that this company does. So, let's talk about those repurchases, because they have $2 billion to go on a share repurchase

authorization, bought back more than $220 million in the quarter. This is a similar tactic from two very different companies. So, for a newer investor, we talked about how Zoom is using share buybacks. How does AutoZone use buybacks differently to increase shareholder return? Sure. Well, in 2002, AutoZone had about 100 million shares out. That was down to about $80 million by 2005, about $60 million by 2009, about $40 million by 2012. They're down below $20 million today. If you just bought and held, 22 years ago, there were 19 million shares out. You own about 6X what you owned almost in terms of your percentage ownership of the company. They're relentless share repurchasers. They've done that by increasing debt during most of that

20 years where debt was extremely cheap and is not as cheap as it was. The continuing use of debt to do this is not going to have the same returns that it has had, but it's a phenomenal stock story. It could have used all that money to pay dividends, but it bought back stock. As I said, fewer than 20 million shares where once upon a time there were 100 million. It's just been a very, very big win for shareholders. I want to wrap up with a story about Wendy's, where Wendy's bill appears to be taking a note from Uber. CEO Kirk Tanner said to analysts that quote beginning as early as 2025 we will begin in test we will begin testing more enhanced features like dynamic pricing and day part offerings along with ai enabled menu changes

in suggestive selling end quote love it this means that a burger price essentially could go up at lunch rush down during an afternoon lull back up at dinner we're gonna surge price burgers is this a good idea. It works for Uber. I think it's an interesting idea and therefore good enough to test. It makes some sense. There's a lot of downtime in the slower hours. Why not give people better prices during those hours to fill some seats and keep the employees busy during what otherwise are lull times. I think that for the most part, people have set times for breakfast, lunch, dinner, a little bit variable. You can maybe make some more money during those slower times. Of course, the downside is this is interpreted as raising prices, which in fact

might be the case when you start talking about surge prices. That's what it feels like and we'll see that this is a marketing challenge to, I guess, hit the cheaper prices at the slower times rather than let the story become, we're charging more for the same thing at different times. I think it's very funny that we're going to use these AI tools and digital menu boards to just get back to happy hour, where we're going to spend millions, tens of millions of dollars for all of this software to figure out what many bars and restaurants have already figured out, which is that between 3 and 5 PM, you can get some traffic by, by, uh, lowering prices on select menu items. To me, it'll be a big mistake. If, if someone shows up at the same time, multiple

days and the prices are different, even slightly, like I, I know as a customer, I would be completely annoyed by that. And this is, you know, maybe they're listening to the data analytics folks a little bit more than the people buying burgers? Well, if you show up a little bit early and you get a better price than you were expecting, then you might be incentivized to repeat that. But yes, it is a challenge to bring this into reality in a way where people interpret their experiences better because of the different pricing. At what point, so just a single Wendy's cheeseburger, at what point are you turning, you've gotten to the drive-thru and you've seen the menu price, what's your break-even point? What's the point at which you're just going to go home and listen to Kellogg's CEO, Gary Pilnick's advice and just make some cereal for dinner?

Where are you turning around on that burger? For a Wendy's burger? Yeah, single. when i add you know it's probably at a price that is already higher than what i'm what i'm willing to pay uh although i don't have anything against the wendy's burger it's been a while since i've had one and uh i think i would be shocked at what the price is uh even at the best hour of the day so uh boy if they were charging for a single yeah you could still i mean there's still you can get a single for for a few bucks it's not too bad for 485 maybe 45

okay 85 i started like there's maybe just some fries i mean it's been a tough look though with the dynamic pricing and then you had kellogg ceo as i mentioned gary pilnick touting he goes on cnbc it basically says that we have a new marketing campaign which is cereal for dinner because food's so expensive people can just start eating cereal for dinner and a piece of fruit it's less than a buck per serving. So why don't you all do that? We're here for the consumer. It's a tough thing to say in front of palm trees. I guess the ability of people to draw a fence, why isn't he creating a solution that is comprehensively addressing all food prices rather than cereal for dinner? It's easy. It is cheap. I think I've been known to do that just

because of, uh, not, not the price, but just, uh, I haven't given a dinner any thought and there is nothing here to eat except some cereal. You're not, no one's eating cereal for dinner proudly. And I think on it, here's why people took offense. It's because he didn't do cereal for lunch. No one would have cared if he said cereal for lunch, but because dinner, it's like the big family meal. That's why people got upset. I think, I think that's a key reason no one's talking about. All right. Well, I didn't see the actual interview. And as you say, it did get some attention, but it doesn't take much to get attention for a story to blow up nationally anymore. Just have the wrong background behind you while you're making the case for something

that is reasonable. I think that people have had cereal for dinner before this, and we'll have cereal for dinner again, whether Kellogg's can use it in a way, and this is the bigger problem for them to get people to maintain their consumption of cereal. It's a declining item in the diet of Americans and has been for a while. Despite its being a part and really only a part of a completely nutritious breakfast or completely nutritious dinner now, it's becoming a smaller and smaller part. Anyway, Bill Barker, as always, thank you for your time and your insight.

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complex actions across your entire organization. That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today, rippling.ai slash fool. Got a question for the show? Maybe some feedback or a guest idea. Send us an email at podcasts at fool.com. That is podcasts with an S at fool.com. Up next, Alison Southwick and Robert Brokamp are tackling some of the questions that you emailed in about 403Bs, pensions, and saving for kids. Our first question comes from Jum. I have been contributing to my 403B plan every year with an employer match. For the first 10 years, I contributed to a traditional 403B, and in the

past six years, I have switched my contributions to a Roth 403B. I am nowhere near retirement, but I just want to learn and understand how will the money be characterized when I take it out? Will it be confusing at the time of distribution since it is mixed in this one account? Also, do I have the choice of rolling it over, maybe converting it all into a Roth at my retirement? Thank you for always bringing great content daily. I really appreciate the work that everyone at The Fool is doing to make the world smarter, happier, and richer. Oh, thank you. That's very kind of you, Jim. So, you have a mix of pre-tax traditional and Roth money in your account. And this would also be the case if you had been contributing to a Roth the whole time,

because the employer match always goes into a traditional account. The Secure 2.0 Act passed at the end of 2022 was supposed to allow employer contributions to go into Roth accounts, but that has had trouble getting off the ground because the IRS needs to clarify a few things. So, That option will eventually be available, but for now, match money goes into traditional accounts. So, what happens when you take a withdrawal from an account that has both traditional and Roth money? Well, each withdrawal is partially taxable and partially tax-free, proportionate to how much each type of the money is in your account. So, for example, if 75% of your account is in traditional pre-tax money, then 75% of each withdrawal will be taxable. The other 25% will be tax-free from the Roth, assuming, by the way, of course, you're following

the rules, which is you have to be 59 and a half, and the account has to have been open for five years. Now, what you can do, though, when you leave your employer, maybe because you've retired, you can roll the money over to two separate IRAs, a traditional IRA for the traditional money and a Roth IRA for the Roth money. And then you can choose which account to take withdrawals from in any given year of your retirement, depending on which makes the most sense for your tax situation at the time. Quick note about the five-year rules with the Roth, by the way. If you roll your 403B over to a new Roth IRA, and that is your very first Roth IRA, that starts the whole five-year clock over. So, you want to open up a Roth IRA at least five years before you retire so you can

roll money over to that account. And now, finally, you asked if you could convert all your money into a Roth when you roll it over? The answer is yes. You could convert your traditional money to the Roth, but the amount that you convert will be added to your taxable income in that year, which could lead to a pretty hefty tax bill. It's not a free lunch. Our next question comes from TMF Frugal. If a large bank, say Charles Schwab, fails and they house your brokerage and IRA accounts, are your investments safe? Is there a dollar limit on how much would be protected, like the FDIC protects up to $250,000? I have over $800,000 in investments in Charles Schwab brokerage and IRA accounts. I'm curious if I

need to start splitting things up. Well, yeah, just as the FDIC insurance bank accounts, the Securities Investor Protection Corporation, also sometimes called the SIPC, sometimes called SIPC, it insures brokerage accounts up to $500,000 per account, including up to $250,000 in cash. Keep in mind that this is just insuring against the brokerage failing and in some cases a fraud, but it doesn't insure against your stocks dropping in value. Also, the coverage doesn't extend to all investments. It doesn't cover things like commodity futures contracts, limited partnerships, and currencies, including cryptocurrencies, but it does cover most standard stocks, bonds, mutual funds, stuff like that. The coverage is per account type. For example, if you have

both a traditional IRA and a Roth IRA with a single broker, you get $500,000 for each of them. However, if you have two Roth IRAs with a brokerage, then the compound coverage is just that $500,000. You should visit the SIPC website to see the different account types that qualify for separate coverage. By the way, this is the same with FDIC. You could have more than $250,000 coverage with a single bank, depending on how those accounts are titled. Also, you should know that in most situations, brokerage firms are required to segregate accounts and prevent the commingling of client assets and company assets. Most brokerages actually have a third-party custodian that

holds the accounts and holds the assets. That's an extra layer of protection. Most have additional insurance on top of the SIPC insurance, though frankly, it's likely not sufficient to cover if one of these big brokerages fail. What happens when the brokerage fails? Well, in most cases, investors will receive any stocks or bonds that they own in kind, rather than having to just accept their cash value. What usually happens, frankly, is that the accounts are transferred to another brokerage that buys the failing brokerage, and then you have the option of just staying with that brokerage or transferring the account to someone else. If you're still unsure about whether your brokerage account or your particular investments

are covered, check out the SIPC website. It feels like, though, in practicality, if someone like Schwab were to go under, then there'd have to be a whole lot going wrong in our financial system for that to happen, right? Right. I mean, the last time this happened was with Bear Stearns and Lehman Brothers, and that definitely presaged the Great Recession. So, it would be a bad sign. Our next question comes from Jet. New fool here. I'm 24 years old and really getting into personal finance and long-term investment strategies. That's awesome news, Jet. Currently an MBA student who is finishing up this spring. Three months ago, I transferred an UTMA into my name.

The money is currently in an actively managed mutual fund that has a 0.25% expense ratio and underperformed the market. The money has been in that mutual fund untouched for almost a decade. I want to sell and transfer the money into an S&P 500 index fund. If I do this, will the capital gains be considered short-term because it has been less than a year since it was officially transferred over to me? Or since it has been held untouched for over a year under the UTMA, are the capital gains considered long-term?

Yeah. Well, congrats on getting into personal finance and investing at such a young age. It's great news and definitely an outstanding way to launch into adulthood. Future Jet is going to be very, very thankful. Yes, absolutely. So, just so we're all on the same page, UTMA is a custodial account that allows some well-meaning adult to create an investment portfolio for a minor. And as soon as the money is contributed, the money irrevocably becomes the property of that minor. And the adult acts as custodian for the account, making investment decisions, and maybe making decisions about withdrawals, until the minor reaches the age of majority. And that varies from state to state.

But at that point, the kid takes over the account, and it sounds like this is what has happened with Jet and her or his account. The key here is that the mutual fund in this account always belonged to Jet. So, the cost basis and the holding period didn't change when Jet took over the account. So, the sale would be taxed as a long-term capital gain, except for any gains made on dividends or distributions that were reinvested over the past 12 months. Our next question comes from sad dad in Illinois. My 32 year old son passed away in 2023. Oh, sad dad. We are, we are very sad to hear about that. That's probably one of the most tragic things I can imagine is losing a child. Absolutely. Absolutely. All right. He has no will, no wife and no children. I am his father

and the court appointed administrator of his estate. Here's my question. His three siblings ages 30, 31, and 34 will receive a fair amount in 401k, IRA, and Roth money. According to the 10-year rule in the Secure 2.0 Act, my three surviving adult children will have to do the required RMDs starting at the end of 2024. Pending IRS changes could alter that. I believe that the two younger siblings would be considered, quote, eligible designated beneficiaries and could use their life expectancy to calculate their RMD. My question is about the 34-year-old. Most articles I have read say 10 years younger. Some say within 10 years of the account owner's age. The IRS website is difficult to interpret this difference. Oh, you don't say. I want to give

them accurate advice. What do you think? Thank you and love your podcast for many years. Makes my drives much more enjoyable. Glad to hear it. All right, bro. Yeah. So I'll just repeat. I'm so sorry to hear about your loss. Sad dad. My oldest daughter is 32, and I can only imagine what you and your family have gone through losing someone so young. So really, you have my sincere condolences. And after that loss, you now have to settle your son's estate, which I know isn't easy. As you're finding, the rules that govern the inheritance of retirement accounts are surprisingly and maddeningly complicated, partially because they're not even yet set in stone due to some changes in the laws over the last few years. The main questions surround how soon a beneficiary

has to drain the account. It could be five years or 10 years or the rest of the beneficiary's lifetime, depending on several factors. The people who have the most flexibility are these eligible designated beneficiaries. Let's start with the designated part. It means that the decedent had filled out the forms that name specific people to inherit their retirement accounts. Everyone should fill out these forms. In most situations, it takes only a few minutes and you can do it online, you will be doing your heirs a huge favor by filling these out. Besides giving your heirs more flexibility with the withdrawals, the account will also bypass probate, which is the time-consuming and sometimes expensive process of settling

an estate. So, do everything you can to have as much of your property as possible bypass probate, which starts with filling out these beneficiary forms. Oh, it's also when we usually remind people, also make sure that it's up to date, because you don't want your ex-husband to get all your money. Yes, exactly. Absolutely. And something else may have happened. You might have had other kids and things like that. So, yeah, very important to update it. All right. So, that's the important part of

the designated. Now, let's get into the eligible part. This is a group of people that include spouses and people who are no more than 10 years younger than the person who passed away. They can spread withdrawals out over much longer periods, in most cases, over the course of their lives, which means that most of the money could stay in the account growing on a tax-advantaged basis. So the dad here is wondering whether the 34-year-old is considered an eligible designated beneficiary by not being more than 10 years older than the son who passed away. And I look through the IRS code for clarification, and unfortunately, it seems to me that the 34-year-old is not eligible. The code clearly states that the person has to be within 10 years younger than the person

who passed away. But this is truly a complicated and changing topic. So you or your 34-year-old should really check with an expert, a CPA, someone like that, once he or she has taken possession of the account. All right, our last question today comes from Tony. My wife is a teacher and her retirement is through a state-run pension. As such, she does not contribute to social security. It is our understanding that for this reason, she would not be able to collect my social security if and when something happens to me. This brings about a lot of questions. Are there any loopholes that would allow her to collect my social security in the event of my passing? For example, what if she worked another job for, say, five years and contributed to Social Security throughout that job?

If she can't collect it, can I make my two sons the beneficiaries? I would like to think my benefits would continue to my family as permissible by the rules upon my passing. What are my options, and are there any actions I can or should take now? I'm 54 and she is 50. I appreciate any information you can provide. Bro, provide some information. Okay. Well, Tony, this is known as the government pension offset, or GPO. And the thought behind it is that Congress intended for Social Security spousal and survivor benefits to support

non-working spouses who are raising a family and are financially dependent on a working spouse, at least according to the Social Security Administration website. And if you or your spouse have your own career earning a pension, then you don't need spousal and widow's benefits quite as much. Again, this isn't in my opinion. This is just the rationale behind the rule. And by the way, the same thing sort of happens with Social Security to some degree. A worker won't receive a spousal benefit if her or his own benefit is higher than what her spousal benefit would be. As for the GPO, it reduces spouse, widow, and widower benefits by at least two-thirds of the person's own monthly government pension based on that work that was not covered by Social

Security. And if two-thirds of that pension is more than your Social Security benefit, you'll get zero. It's possible that Tony's wife could still receive some spousal or widow benefit, and there's a GPO calculator on the Social Security website he can use to figure it out. But because it's reduced by the amount that his wife will receive from her pension, that's really what will determine the amount of the reduction. If she were to work for another job that was covered by Social Security, that really wouldn't directly change the offset. Finally, some good news, this just affects the spouse's benefit. Tony's kids would still be eligible for their survival benefits. 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 anything based solely on what you hear. I'm Ricky Mulvey, Thanks for listening. We'll be back tomorrow.