Motley Fool Money - 1 New Low, 1 New High

Episode Date: April 25, 2023

First Republic Bank and Pepsi are very different businesses with stocks moving in very different directions. (00:21) Jim Gillies discusses: - First Republic Bank shares plummeting after terrible quarterly results and a surprisingly brief conference call - Medpace Holdings crushing their 1st-quarter report and (once again) winning the guidance game - Pepsi's stock hitting an all-time high after snacks fueled Q1 results (16:03) Bill Mann joins Alison Southwick and Prof. Robert Brokamp to talk about the "new normal" of hybrid work. Companies discussed: FRC, MEDP, PEP Check out the newest episode of our premium podcast, Stock Advisor Roundtable! https://open.spotify.com/episode/6MWIz55NW99Av1l7w9FrXU?si=05100b2801f84f63&nd=1 Host: Chris Hill Guests: Jim Gillies, Alison Southwick, Robert Brokamp, Bill Mann Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got a bank stock hitting an all-time low and a beverage stock hitting a new all-time high. Motley Fool Money starts now. I'm Chris Hill joining me today. Motley-Foe Senior analyst, Jim Killies. Good to see you, sir. Good to be seen, Chris. Thanks. A few things I want to get to, but real quick, we should probably start with First Republic Bank because shares are down nearly 30%.

I believe the big round number I saw was $100 billion. dollars worth of deposits are no longer at First Republic Bank. And it's not often that conference calls make headlines, but I'll just quote one executive at First Republic Bank, who apparently said, on the call, given the events of March, we are withdrawing all previously communicated financial guidance. Please note, there will be no question and answer session

following our prepared remarks. That's pretty breast. And the only thing that would make it more breathtaking, Jim, since I am not a shareholder of First Republic Bank, and I'm going to go ahead and assume that most people listening are also not shareholders of First Republic Bank. The only thing that would take my breath away more is if you tell me what's happening at that bank is going to spread to other banks. This one's not good.

And of course, in financials, confidence is paramount. First Republic already didn't have a lot of market confidence behind it, saying effectively, no questions, no questions, and running away, especially when you see your deposit base down, as you mentioned, Chris, about $100 billion, slightly over $100 billion. That's before the big U.S. banks shoehorned in $30 billion, you know, your J.P. Morgans and your U.S. banks and whoever else was part of that Bank of America, I assume. of this is going to instill any confidence that's presently lacking. Of course, the other thing is usually when a bank says, everything's fine, that's usually

the cue for people to throw up their hands in panic. So, you know, it's a bit of damned if you do, damned if you don't on this one, I'm afraid. But yeah, this doesn't look great. They ramped their lending in the quarter, so loans were up. I'm presuming that's largely before the deposit flight. They've plugged that hole. They've gone from about $6.5 billion, $6.7 billion at the start of quarter and short-term borrowings. That's now $80.4 billion.

The long-term debt has gone from $8.6 billion at the end of 2022 to about $26.3 billion at the end of Q1. That's mainly borrowing from the FHLB, Federal Home Loan Bank. I just can't get away from quoting Stein's Law here. Stein Law, of course, Herbstein, the father of Ben Stein from Ferris Bueller fame, if something cannot continue, it will stop. I know it's very unique, but I've always, I like the simplicity of that. I'd be really concerned if I were a First Republic shareholder.

I think they're going to have to find a willing buyer, and that's not great. As far as spreading to other areas of the banking system, I think it'll be natural that most people will probably be on kind of tenderhooks for probably this quarter, maybe next quarter, especially with these larger regional banks. I could give you a list of some pretty well-run, very small local banks that stick to plain vanilla lending and plain vanilla mortgage lending and what have you, that I think absent any serious deposit flight will and are fine. But the big, the elephant in the room is, what have their members, what have their depositors taken from all of this? And if they decide to, you know, flee their capital from these small and local banks, you could be the best run.

Small and local bank, it's not going to matter. I congratulate America on taking one step closer to the Canadian banking system where we have six very, very large banks that control everything. We're going to move on then. Earlier this month, you were on the show, and I asked you, before earning season started, what was the company you were the most curious to see report? You said MedPace Holdings, a medical research company based in Ohio. They reported after the bell yesterday, holy cow, first quarter profits much higher than expected. First quarter revenue was a beat as well. Shares of MedPace holding. up 14% today. Don't take all the time in the world for your victory lap, but congratulations

on this one. Thank you. Yeah, I owe this one personally too, and not a small amount. So, I am not unhappy with these results. The reason, and yeah, look, the fantastic quarter, they had a ton of, let's see where they're records. They had record revenue, record Ibadah, record new bookings, record operating profit, record net income, and record earnings per share. So I suppose that's a decent quarter. That's all for quarterly numbers, not just Q1s. They revised their guidance up. I still think they're sandbagging, to be honest.

They have a book to bill ratio of 1.28, anything over 1.10's future growth. So this was a great quarter. And one reason that they were kind of why I was interested is I really like the CEO here. He's the founder. He's the only CEO the company's had. He founded the company in 1992. Dr. August Trundle, he's 66 years old now, I think. He's shepherded it from a startup through various private equity holdings through the IPO in 2016,

where he chucked in millions of dollars of his own money post-IPO. Got to love that. He put about $150 million of his own money into shares last. year, while the company bought back close to 14, 15 percent of their shares last year. I mean, sometimes they don't ring a bell at the bottom, but sometimes they ring a bell at the bottom, Chris. And so what I was really interested in seeing here is, you know, Trendle's a very straight shooter. And my assessment of him following this company for years now is he's going to sandbag.

He's going to underplay what they're probably capable of doing. And then he's going to raise guidance through the year. And the reason I say that is because the last three or four years, what has he done? He's put out kind of our guidance at the start of the year, and then they blow past it, and he raises guidance through the year, and they ultimately end up doing pretty good. And in this case here, at the start of the year, they were kind of saying, well, you know, like a lot of our clients said, we have a lot of cancellations, requests for proposals are down for new studies. A lot of our clients are having difficulty finding funding, something that,

that again, kind of came out of the woodwork when Silicon Valley Bank went down because, I guess, the perception, some people in the market put together that, oh, the people who bank with Silicon Valley Bank are also biotech clients of MedPace, and so it sold the stock off for no good reason. I think I had it in my best buys now, I think in February or March and Hidden Gems, which is the service I run. But it was kind of a dower coming. It's like, well, you know, if our small customers leave us. This quarter, the the prepared remarks from Dr. Trundle were basically, hey, the business environment improved in Q1, requests for proposals are up on a sequential and a year-over-year basis. The dollar

value of pending requests for proposal also improved significantly. Sequential improvement through January to February to March, it's only months of the quarter, and they have continued to improve further to a relatively strong level in the first three weeks of April. Cancelations for prior work cancellations were down over 50 percent on a sequential basis from Q4 to Q1. The trends look favorable, and we are cautiously optimistic, which if you followed MedPace and Dr. Trundle for as long as I have, when he says we're cautiously optimistic, I think that's stand up on your chair and cheer and spin your rally towel over your head for those sports fans out there. Yeah, this is a great report. It's a great quarter. And I don't

think it's that, frankly, that expensive right now. You know, they bought back another, and they're actually very good at buying back their own shares. When the price is perceived too high, they put their checkbook away. And when it's not, they are quite happy to buy, you know, pay for, pay to take down their share account. So they made about 70, just over 70 million last year, last quarter in free cash flow, which is actually a little bit low, but they're always low in Q1.

They spent about 120 million to buy back just over two. percent of the share count. There's some option grants in the quarter, but they shrink the share count by one and a half percent. All in all, just a great quarter. You look over the past five years, shares are up more than 450 percent. This is a six and a half billion dollar company. Why doesn't some healthcare behemoth come in and make them a Godfather offer and add them to their portfolio? Or is your take that Trundell is not interested in that? because he's probably had offers before. Yeah, that is correct.

I mean, I'm obviously not in the room, but I suspect this is Dr. August Trundle's toy until he decides it's no longer his toy. And like I said, he is 66. He has been in charge since 1992. We'll see how long he feels like doing it. But yeah, I've said for a while that I suspect the ultimate outcome is they'll get bought by a bigger player because they're not that large. But boy, it's been a fun ride all the way up.

And I'm hoping for more for the next few years. And Dr. Trundle, I hope your longevity is similar to Buffett and Munkers. Real quick, shares of Pepsi hitting a new all-time high today, strong first quarter results. They also raised guidance, a bunch of parts to the business. But you look at the thing that leapt out to me, the Frito-Lay division in North America, organic revenue growth of 16%. That is real impressive. Rumor has it that this has all been driven by Canada's legalization of marijuana several

years ago, because we certainly do like our salty snacks kicking around. But yeah, no, it was good numbers, a good overall report. I know they did boost their guidance, as you say, like MedPaste did. I think their organic revenue as a company, so not just free to lay itself, but the corporation was over 14 percent. I think earnings per share, their core earnings for share, as they call it, we're a core earnings for share, as they call it. We're up about 18%. And the stock today is hitting another all-time high price. And great for Pepsi investors. Here's where I'm going to throw a small, just

a cautionary tale. It's not, certainly not, oh, this company is doomed or anything. Just something to be aware of. Two things. One, over the last decade, if you go, if you have the tools to pull up and see what the relative valuation is. You pick your poison, price to earnings, EV, Iida, stay away from EV, EVIDA, but, so enterprise value of I'm the first proxy that I look at, even though I recognize Iva does kind of, you know, a squishy number. Valuation ratios have trended up broadly over the last decade. And so, you know, and everyone likes multiple expansion. people like multiple compression. So just some to be aware of, you know, it's some of the returns over the past decade have been driven by investors being willing to pay more for what

PepsiCo is. Okay. I think it's gone. I'm going to make up the numbers. They're roughly right, but precisely wrong. I think they've gone from about 12.5 times Ibadah at the start of the last decade to about 17 and a half times Ibadah today. So just, you know, if it were to revert to, say 12-5 times I'm it over the next decade, that'd be a bit of a bit of a headwin. The other thing is that, you know, Pepsi, again, great business with some fantastic brands. They make a lot of cash flow. I'm a cash flow guy, so that's generally where I care about most. They make a lot of cash flow, beautiful, brilliant, we love it. The problem is they're spending more cash flow than they make. And so, for example, over the past four quarters, and Q1,

they were cash negative, but that's fine. They're always cash The dynamics of their cash flow cycle, they're always negative in Q1. I think the last time they weren't negative in Q1 was 2016, and then they were still, that was operating cash flow positive slightly, and then they were still negative on a free cash flow. But over the past four quarters, they produced about $5.6 billion in free cash flow. They spent $6.3 billion on dividends. So they've already blown it out the door.

They spent another $1.6 billion on buybacks. They spent just shy of a billion dollars in acquisitions. So that's about a $3.2 billion hole. they've had to fill in. And if you're wondering what they're filling it in with, the answer is debt. You know, and 2022 for the full year, they get about a just shy about a $3 billion hole. They were actually slightly positive for 2021. So that's good to the tune of just shy of a billion dollars. 2020, 6.4 billion in cash generated, 5.5 billion spent on dividends, 2.1 on buybacks, 6.4 billion on acquisitions, mainly rock star. So that's about a $1 billion.

seven or $8 billion hole, I think, if my math is good. Year before, the last year, 2019, before the pandemic, $5.6 billion cash generated, $5.3 billion spend on dividends, $3.1 on buybacks, $2.7 on acquisitions, mainly so to stream. So they've been doing this for a while where they're kind of overspending what they can generate. And again, it's fine to do that. You can, and a company, the quality of Pepsi can probably do that for a long time and probably find willing lenders to help them fill it.

in that hole with some debt, but I'm going to again return to Stein's law, Herb Stein's law, that which cannot continue will stop. So just putting it out there for long-term thinkers on Pepsi. You know what? I've got a few shares in an IRA. You're not going to rain on my parade. Oh, yeah. Pepsi's hitting it all time high. Yeah, you're good. You're good. Just be aware. Just be aware. Well, thank you, thank you to you and your fellow Canadians for just boosting the salty snack consumption in the North American vision. No problem. We'll take that victory left, too. Tim Kelly's always great talking to. Thanks for being here. Thank you. By the way, the brand new episode of our premium podcast, Stock Advisor Roundtable, is now

available on Spotify. Tom Gardner leads a conversation about chat GPT, what it means for business, investing, and three stocks in particular. I put a link in the show notes for this episode, So when you're done listening to this, just click that link and check it out. Earlier this week, Bill Mann joined Allison Southwick and Robert Brokamp in the studio to talk about the new normals in a few areas of the investing world, starting with hybrid work. You're like me, chances are good that just about every day of your life, you're seeing an ad for Shen Yun, feeling an achy pain in a part of your body you didn't even know you had, and reading an article headline invoking the new normal.

Extreme weather is the new normal. High inflation is the new normal. New normals are the new normal. So we decided to bring Billman, analysts with the Motley Fool, to come on and talk about three new normals to see if he's buying the hype and what it could mean for investors. Up first in our three-part series is Remote Work. This one's tricky because you'll see articles everywhere, Forbes, New York Times, whatever, saying flexibility and remote work are the new normal. But, counter to that, are companies like Amazon, Capital One, Disney, Citigroup, Goldman Sachs, Google, Salesforce, Twitter. I could go on, all making employees come back to an office at least a few times a week. So, working from wherever, whenever, is that the new normal bill? Nope. It isn't. It isn't. I'm sorry. And by the way, you said something really important there.

I also think that the new normal, even for these companies, is not you are in the office from 9 to 5 Monday. to Friday, or in the case of Goldman, you're in the office from 6 to 11. Yeah, it's a don't worry about it. So, don't worry about it. So I think that that, the concept of the pre-pandemic in the office, I think that's gone. But I think culture really matters to businesses and efficiency matters to businesses and performance matters to business. And the performance is not how you, Robert ProCamp, are doing.

It's how the business is doing. And I think that remote work has been found by these companies to lower overall productivity. And ultimately, the story is going to be this. People are saying, well, I'm just not going to come back into the office. I'll just leave. That's great. But it's very easy. And that was a murderous row of companies you named.

That was hundreds of thousands of employees. All they have to do is to make coming into the office a condition for the next person they hire. So, there is so much that I think that is good about remote work. Obviously, having that flexibility is great, but I don't think that employees ultimately will retain the power to determine for themselves if it is something that is actually harming the company. And I think in many cases, it is. Did you all see the video from James Clark, the CEO of Clearlink? So this is a company out... That sounds exciting.

It's a company out in Utah that, as recently as October said, you don't have to come in the office. And then they changed it. It said, no, people who live within 50 miles have to come into the office. The video of his speech to the company went viral, and there are some reasons for why you would want to criticize him on this. But another thing he found out, apparently, was that 30 employees. hadn't opened their laptops in the last month. And that's just it, isn't it?

I think that, well, first of all, that's a little scary. Wait a minute. Let me stop and put a pin in that part for a second. But remote work, I think whatever we think about the positives, it lowers the trust function in a business, and it creates silos. Like, if you think about in an office, like if, Allison, as she is want to do, is doing something that you don't like, all you need to do is raise an eyebrow, right? And that's a conversation that has happened. It's incredibly efficient. Whereas if everyone is remote, you have to sit there and write out a memo or you have to have a meeting. And so those are taxes on the productivity of the business. And I think ultimately efficiency for the business and that trust function. So that Allison knows that she's Oh, you're always on the right track.

I've never, never met. See, I called you out because I knew that was so absurd. We went straight to absurdist, Stan. But it's true that conversations that happen that take two seconds when you're in person, take a really long time when you are not. And that is something that matters. And I don't know who this guy is and whether he's tracking everyone's laptop, but I don't think you need to.

All right. So that was nice of you to pay me a compliment, as always being right. And so I'm going to repay you, unfortunately, by saying, as elder statesmen of this company, do you feel that perhaps there is a generational difference here for being productive remotely versus not remotely? Or is it objectively? Objectively, silos are broken down.

There is better collaboration. You work more effective. with people when you are in the same room. I know I have my own opinion, but of course, I'm here to hear your opinion. Is it because you're too old? I'm sorry. I told you it was the get off my lawn segment. I knew we were going to get there.

I don't think so because I think that probably the, I'm going to use the word prejudice about it being a function of being too old. has to do with the belief that we can't handle technology. Like, we are now the, we are now the Blinky 12 o'clock VCR generation, that the generation just younger than us has a better grasp of technology than we do. And maybe they do. But if you think about what a business is, there's your job, but then there's also what else it is that you bring to the company.

And that may be as simple as mentoring somebody who's younger, or just having those conversations and sharing that knowledge. And so, yes, maybe they can work several types of technology better than we can, but that doesn't necessarily mean that that's the totality of their job. So, yes, I think that there actually is a little bit of a break in terms of what people want. I have noticed. So my eldest child graduated from college this last year, which means that she went to college, during COVID. And she and her generation, I guess her cohort, they desperately want to be in the

office. They have seen what that is like in an experience that everyone knows is better when you're in person. So as an investor, do you think that the difference between working remotely versus working in an office together, will have such a material impact on the productivity and success of a company that you are actually going to consider that as part of an investing thesis, or are we not there yet? I don't know that we're there yet. I think that the big test out there will be Airbnb, because they're maybe the largest company that has very loudly said nobody's ever coming back to an office.

And maybe that's the case. That's the one to track. I think it was interesting that a year ago, oh, gosh, and I hate bringing up Elon Musk in this context, but it's happening. Okay, let's, you know, I think this is a specific example, but there were a number of Twitter employees before he took over that made a bunch of demands, and they are now Twitter X employees. And so, I think that there really is, as an investor, a test that is going on. I think you're seeing from the scoreboard, from the number of really large employers. And again, they're not necessarily saying you have to be back in the office, chain to your desk from 9 o'clock on.

They're saying you need to come in from time to time because it is more effective. And I think that that is happening because they have seen the research and they have seen the impact on their business over the last three years. All right. So the new normal for remote work, not so remote, according to Bill Mann. What's your closing thoughts here on remote work, the future of work? Again, it's not an on-off switch. We're not talking about, most companies aren't talking about having people back into the office all the time. And so I think that companies like Zoom have really proven to us that we do have much more capability to do things remote than we did before. And so, I mean, what a blessing that Zoom was as far along as it was when the pandemic happened, because it truly, in some ways, I guarantee you it saved a bunch of companies.

So the other side of that is what happened to Skype. Talk about an example of a company that was positioned to take advantage of something, and it just didn't work. It just didn't work. Because with Zoom, remember, it just works. That was afraid. It's true. It just works.

Yeah, that's exactly right. And we could have a technological conversation. That technology exists, and it is a force multiplier for companies. But I do not believe that many of the functions in companies. And I do think it's a function-by-function basis. Like sales staff, I don't know that they need to be in offices. They weren't before. They probably aren't going to need to come back. But there are certain collaborative components of almost every business where I think that the impediments to doing that

remotely are going to prove to be too high. I'll just add that I think it's going to continue for a while for a couple of reasons. First of all, there were some companies that were doing it already before the pandemic, like stock research companies that I knew of, because they wanted to be able to hire the best people in the world, not just the best people in their city. So they were willing to do that. And then the other aspect is employees still want it. And while the unemployment rate is low, it's going to continue. There was a study from McKinsey that said that people said, chose remote work as the number three reason behind looking for a new job behind higher pay and better career opportunities. And while unemployment is low and employers are desperate for workers,

they're going to have to offer this to something. As always, people on the program may have interests on the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.