Motley Fool Money - Is Buffett Targeting This Bank?

Episode Date: March 14, 2023

Just because the "Oracle of Omaha" has been quiet lately doesn't mean he isn't sizing up his next big buy. (0:21) Bill Mann discusses: - The latest CPI numbers and the current state of play in the banking industry - One bank that fits the description of something Warren Buffett might be interested in - Meta Platforms announcing another round of layoffs (14:58) Sanmeet Deo and Tim Beyers face off against one another with stocks they believe are a better buy right now. Companies discussed: FRC, SCHW, SIVB, PNC, META, XPOF, MNDY Host: Chris Hill Guests: Bill Mann, Sanmeet Deo, Tim Beyers Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

If you're a small business owner, you already know what it takes to keep everything moving. You're juggling customers, invoices, and about 100 decisions every day. Thankfully, taxes don't have to be one more thing on that list. With Intuit TurboTax, you can get your business taxes done for you with a full service expert. TurboTax matches you with your dedicated tax expert. Who knows your industry understands your business write-offs and gives you the personalized advice your business deserves. upload your documents right in the app, hand everything off, and still feel like you're in the loop the whole way through. You can even get real-time updates on your expert's progress right in the

app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. Meta Platforms is back in the headlines, and our version of March Madness continues. Motley Fool Money starts now. I'm Chris Hill, joining me in studio. Motley Full Senior analyst Bill Mann. Thanks for being here.

Always a delight to see you, Chris. To lay eyes on you. Particularly on a day when the sun is shining, at least here in Alexandria, Virginia. And on Wall Street, everything is awesome. Everything's up. No bank failures. You know, First Republic shares. up big, Charles Schwab bouncing back up. We got the CPI number, which I think was

Goldilocks. Was kind of a Goldilocks number, right? Consumer price index up 0.4% month over month, up 6% year over year. So look, if you want to look at it and say, well, it's still going up, you can do that if you want to say, hey, it's the slowest growth since September 2021. You can do that too. All we needed to do on this Hillbilly Pirateship is just have a couple of banks walk the plank, apparently, and then everything is fine. Where do you think we are right now? I mean, part of me, as someone who does not own shares of any of these companies, any of these banks, I look at all of this. and just as someone who is rooting for the general health of the underlying economy and the market in general,

I got to be honest, this morning, as things were playing out shortly after the market opened, I thought to myself, is this the scene in the horror movie where the idiot says, oh, everything's fine? Like, I don't know. You're more experienced. Let's hide behind these chainsaws. Right. You're more experienced and knowledgeable about this than I am. So, I guess one of my questions is, what are you watching for next?

You know, it's really hard to say because we are in one of those periods of time. By the way, I just had this vision pop into my mind of you being Roblo wearing the NFL hat at the game. Like, let's just hope both teams have fun. Let's just hope everything's great. I want to focus on Silicon Valley Bank as opposed to the two crypto banks, because the two crypto banks are an entirely different situation. But we are coming out of a period now, and the Fed has made a move, and it's essentially helping other banks protect their balance sheets.

Now, you might ask, as I have asked, why banks need to have their balance sheets protected. And it's because they got too clever at the wrong time, and they got caught out. And so they left themselves no real outlet by virtue of, of buying a bunch of assets that had long durations, which meant that it removed some of their ability to be nimble at a time at which interest rates were going up quick, so that required some nimbleness. So we have known that Silicon Valley Bank was functionally insolvent since November, at least. But for banks, functional insolvency and actual insolvency is a liquidity issue, Right? So I'm not saying it doesn't matter. What I'm saying is that there was a lot of risk that was being built in and all you needed was a lit match. So that lit match happened. We experienced one lit match. And this was the result. So we are still in a situation where a lot of banks have balance sheets where there's a mismatch between their deposits and the amount and the kind of assets that they're holding.

And it's not good, but I think it also probably calls into question any further tightening at the moment by the Federal Reserve. Let me go back to something you just said, which is Silicon Valley Bank has been functionally insolvent since sometime last fall. Let's pretend to go back in time on a financial television network. Imagine there is a bull and a bear sitting on the set talking about SVB, and the bear says, hey, they're functionally insolvent. What does the bulls say in response to that? Because I've heard versions of what you just said a couple of times over the last 48 hours. And as someone who has never looked at that stock and seriously considered it from my portfolio,

that's a question. I'm like, well, wait a minute, what's the response to, hey, they're functionally insolvent? It's incredible that you asked that question because this actually happened. And we're not planning this, by the way. That was a follow-up question because it came up in September after the quarter that ended September 30th, and the chief financial officer of Silicon Valley Bank said there are no implications for Silicon Valley Bank because as we said in our Q3 earnings call, we do not intend to sell our held-to-matured securities, which is in fact true because you don't want banks to have to rest.

respond to what you might fancally call quotational risk, right? You don't want them to have to respond to things that are volatile. But the thing that has happened with Silicon Valley Bank, and up until the Fed came in and started big footing around, there were a bunch of other banks that were in the same boat, is that it was a quotational risk that was only getting worse. And I don't understand why local regulators weren't whispering to Silicon Valley Bank and all these other banks. It's great that you're holding these securities till maturity, or you believe that you will. You still need to raise capital. Let me go to the part of this story that has nothing to do with the securities that SVB was holding.

And it's the part of the story that I think unnerves people to varying degrees. And I think that's reasonable that they would be unnerved. And it is the speed with which they, that this all unfolded last week, which I think caught even experienced market observers by surprise. Part of that was social media. Part of that is someone as influential as Peter Thiel coming out and saying, pull your money out of this bank. And I think that's part of what leads to.

leads to what we saw yesterday with First Republic and Charles Schwab and what could potentially happen with other regional banks, which is to say, hey, regardless of what this bank is invested in, what's to stop this from happening? What is to stop a run on, I don't want to say any bank, but lots of banks. Yeah, exactly. I want to be sure that I make clear that some of the things that I'm saying, I have in deep conflict, right? That what we have created is a moral hazard. And so as I answer this question, I want all of our dozens of listeners to recognize the fact that I'm not, what I'm about to say is not a panacea, right? There are issues always. But, you know, there's that old quip, like, how'd you go bankrupt? Well, slowly and then all at once.

you have to remember that the banking system in this country, really in every country, but banking regulations in the U.S. are meant to hold depositors mainly harmless. That's to say that you don't want to require depositors to get really sophisticated to figure out if the bank they're putting their money in is going to fail, right? And we can agree that there are definite downsides and moral hazards to that, but that is a basic, that is a basic principle. So when you had a big, not huge, but a big, mid-level bank like Silicon Valley go suddenly get a deposit, a run on its deposits, you have to ask yourself as a depositor at any other institution, because your deposits are not risk assets for you, right? That is cash, mainly. You have to ask yourself,

what is the benefit of holding out and seeing if everything is okay, right? And so there is very much a psychological phenomenon around bank runs that can't, it can't really be anticipated, right? Again, like I said earlier, we've known for a long while that plenty of banks were functionally insolvent. And that sounds bad, and it kind of is, but it's not necessarily determinative for what going to happen to the bank. But when you have a bank run, that is determinative. That's going to take the bank down because those assets are what are backing the loans that the bank is making and is capable of making. I said on yesterday's show, the big banks sure have been quiet lately. You know who else has been quiet lately? Warren Buffett. Warren Buffett's been very quiet lately. And I'm not asking you to read his

mind, but I am wondering what you think he thinks. Look, there have been times in the past where everything that has happened in the last, let's just call it, six days has been prelude to Warren Buffett stepping in and saying, hey, I've got an announcement. This looks like a great house fire. Yeah. What a coincidence. I've got this big old hose and a lot of water.

That's exactly right. Well, the big banks have been quiet, at least in the main, because they were the ones that stood to benefit the most. If you have to worry about the – if you have to worry about the security of your deposits, what are you going to do? You're going to put it with J.P. Morgan. I mean, that's just logical. As for Warren Buffett, I think – and let's be frank, there's a cottage industry trying to figure out what Warren Buffett is buying and selling, and they're almost always wrong. And yet I'm going to play a little bit, right? I think that Warren Buffett is going after some of the very stable,

great franchise mid-level banks. And if I had to name one that he would be buying, it would be PNC because it is a big enough bank at a $54 billion market cap that he is able to get some exposure to it. And it was one of the largest of the banks that were kind of thrown into that trough of, well, this one might not be safe. And look, I don't know that PNC in a Wild West environment was safe, but I'm pretty sure that it was at the top of the list of institutions that the Federal Reserve was looking to protect at the point in time in which it made the decisions that it did to backstop the deposits for these banks. We're going to go completely away from banks to meta platforms because, There's a whiplash.

For the second time this calendar year, I think I have that right, or maybe it was late last year. But for the second time in the recent past, Mark Zuckerberg announced layoffs at meta platforms, 10,000 employees, shares of meta are up 6% today. And year-to-date, the stock is up just over 50%. And this seems to be, at least among some on Wall Street, a recognition that Mark Zuckerberg appears to be very serious about the underlying profitability of the business coming on the heels of a year or two when he was looking to spend money on the metaverse. But I'm wondering what you think about that and what you think about the fact that he's taking this approach as opposed to the

approach that some leaders like to take, which is if we're going to have layoffs, we just want to do it once. Yeah, I think that obviously that is a principle. particularly with smaller companies that you would want to embrace, meta is a bellwether company. So I don't know that they have the same downside as a company that smaller companies do. I think Mark Zuckerberg, and by the way, there is always a little bit of attention in between shareholders and employees in this situation. So when you're talking about shareholders saying this is a good idea, let's put a pin in the fact

there are 10,000 people who are losing their jobs, and that is not awesome for them. So I don't want to belittle that experience at all. Not at all. Layoffs are horrible. They're absolutely horrible to the people who participate in them. They're horrible at the companies. So the principle of laying off once matters. But Mark Zuckerberg does deserve credit for being early in recognizing that capital efficiency matters.

and that we have moved from an age of excess, and that's what zero interest rate debt basically is. Just throw stuff at the wall. We are no longer at a throw stuff at the wall stage. And meta, as big of a company as it is, doesn't really get credit for just trying things in this kind of environment. It's too expensive. And so I really do give him credit for saying, leaner is. better, that we are being very data-driven about what it is we're doing and who is doing it and how they are doing it to get to the point where we are a better company for all of the

constituencies, including our remaining employees. Oh, man, thanks for being here. Hey, thanks, Chris. The quarterfinals of our March Madness continues this week. If you missed the yesterday's show, we've got analysts facing off against one of another, pitching a stock that they believe is a better buy than the other analyst stock. In a segment that originally aired on the morning show of our live stream for Motley Fool members, San Mideo has a fast-rising fitness stock going up against Tim Byers rule breaker.

Our second match of the first round of March Madness gets started. We have Tim Byers and San Mateo. One stock each that they're pitching. Tim Byers, six minutes is yours to get started. Six minutes, six signs. Monday.com is a rule breaker. So let's go through the, if you don't know the six signs of a rule breaker, we're going to go through it right now.

The ticker is M-N-D-Y. Monday.com. Monday.com is the top dog. So top-dog or first mover, that's the first sign of a rule breaker. Top dog and first mover, sustainable advantage, past price appreciation, good management, strong consumer appeal, overvalue to, according to the media. So, Top Dog, Monday.com is the top dog in low-code productivity software.

The number two, I would argue here, is either Atlassian, Asana, or arguably Airtable. I would say Airtable is the closest comparable here. Airtable was founded in 2013. Monday.com founded in 2012. So Monday was the innovator here. But there is, are some differences between all of these. And Monday, just to be very brief about this, we can move on to the next sign. This is the one that's not laying people off. This is the one that's getting more operationally efficient. This is the one that has serious insider ownership. Sustainable advantage. That's number two. Second sign of a rule breaker. Sustainable advantage here is what Monday.com calls big brain. And big brain is, if you can imagine this, every employee

at Monday.com has a TV. Like the average TVs in the Monday.com headquarters, this blew my hair back. It's like 1.1 per employee. And the reason for that is all of the data, all of the statistics that matter to driving the business is available to every single employee at their fingertips right up on the screen, right where they work.

They developed big brain internally. It's a B.I. system. I'm not going to go too far in the details because they don't have time. But there's an obsession with numbers, and it shows up in the numbers. So let's keep going. Past price appreciation over the past six months, this company has done very well. So is it beating the market for right now?

Over the past six months, the stock is up 15.6%. When we, I'm going to say, going back to November 2022, I wish you could get the price that we got in, cloud disruptors back in November 2022 when everybody had left this thing for dead. You can't, but it's up 77% this then. It's throttling the market because it's performing. So that's sign number three of a rule breaker. Number four, good management. Roy Mann and Aaron Zinnon are the co-CEOES and co-founders.

And combined, they own roughly 18%. So actually, it's called 17% of the show. shares outstanding. Companies based in Israel, they still operate out of Israel, but they're co-CEOs, and they've been brilliant as co-CEOs, and they have a huge stake in the business. So good management. Another sign that goes with this is smart backing. So just going to crunch base and giving you some backup here. Here are some backers of the company early on. Salesforce ventures, Sapphire Ventures, Hamilton Lane, ion crossover partners, Harbor Vest, Insight, Insight entrepreneurs, Entree Capital. Zoom was a buyer of shares at one point, their venture capital arm.

They do have, they don't have Premier like Sequoia Capital names, but they have some serious backers at this company. Let's keep going so I don't run out of time here. Good, strong consumer appeal. Consumer, I'd say maybe, but there's certainly strong brand appeal here. If you look at the brands that are known in low-code productivity software, there's really two that, people know. They know Airtable, because Airtable's been around for a while, and they know Monday.com because you can, you can admit it, you have seen the annoying commercials. You've seen them many, many, many times. But here's the thing that's interesting. You know what you don't see? You don't see them anymore because they built that, they seated that ground, and they've since pulled back on that,

and I'm going to move to the last one here, which is overvalued according to the media. Could face lower growth, stay away. When was this? November of 2022. What has happened since? The stock is up 77%, roughly 77% since then. And here's the reason why, friends, I'm going to show you this. I don't want to give you just a data dump on numbers, because that would be silly. But I do want to show you, just here is some key metrics, some key data. The thing I only want you to focus on is take a look at this. This is operating income per employee. Look at how that has improved. We've gone from negative 52,000 to negative 6,500. The employee headcount has gone up. The competitors are firing people, 130% in net dollar retention with their core customers, especially the ones that spend

the most. Those are really good signs. A rule of 40, just very quickly, and then I'm going to pause. I don't know how much time I've got left. I'm out. You know what? I'm out. Those are the statistics. We're done. Out of time. You don't get the last statistics. I already did the statistics. I already did the statistics. They're done. All right. You can ask me about rule of 40 later. Possibly. San Mateo. You've got a more health and fitness related stock for your pitch. Six minutes is yours. All right. Well, hey, fools. So I am bringing to you a potential rule breaker, a potential new entry into the Motley Fool universe because it's not in it. And a diversified way to invest in the Omnichannel Fitness industry, exponential fitness is

the name of the company, ticker XPOF. This is a diversified way to invest in the fitness industry. It operates in a very large and US growing US boutique fitness industry, which estimated size of 2023 is 24 billion projected to grow about 5.3% from 2020 to 2025. Basically, there's small retail studios, about 1,500 to 2,000 square. feet in size with small class-based fitness providing community in energetic and engaging format. Some of the highlights of the company, it's 10 brands spanning different fitness modalities from Pilates, Yoga, cycling, rowing, bar, boxing. You may have heard of some of the names,

Club Plotties, Pure Bar, Rumble, Fitton, Rumble, boxing, and so forth. They have about 2,600 plus global studios, and they've grown that 26% over the past five years. They have 5,400% global licenses sold. They're franchisors, so they're selling licenses to potential franchisees that will open. These are contracted licenses to open their studios. They have about 590,000 members as of the end of 2021. As of about January, they've grown that to even above 600,000. They have over a billion in system-wide sales that is sales across the whole franchisor, franchise unit. They're much larger than all the competing brands in the boutique fitness space. They have a very experienced management team that has been together for a very long time. Another thing, when you're looking

in a franchisor, you want to know, is it compelling to the franchisees? This concept has great unit economics. You put in about $350,000 for initial investment, takes about six to 12 months to ramp, and by year two, you can average about $500,000 in sales at 25 to 30 percent operating margins for the franchisee. This gives you about a 40,000. percent cash on cash return. So how is it going to grow? Well, they're going to grow franchise studios across North America. They think they have the potential for 8,000 in the US alone. They're going to grow internationally. They have the potential to kind of three and a half X their current size. They have 16 countries in contract in place. They're growing through

master franchise agreements, meaning they license to one big entity that will open up multiple studios. This provides them high margin flow through to the company. because they're not opening up the studios and taking on the cost. They're going to drive average unit volume, meaning the sales of each store, through customer acquisitions, partnerships. They have a program called X-Paths, which is similar to class paths, but just for their brands, X-plus, which is their digital offering. They're going to have margin expansion opportunities through higher royalties

off of their average unit volume sales growth, increasing the royalty rates. They're currently at 7%. Their popular, more mature brand, Club Pilates is at 8%. So that's something that they could potentially grow to for future studios, future brands. Higher margin international growth will drive margin expansion. Their partnership revenue is very unique because they actually get paid for partnerships that they're doing. For example, with LG, having their X-plus digital offering in TVs, Princess Cruises, having studios and classes for. for cruise members and then signing them up as they leave the cruise.

So lots of cool partnerships that they're doing to drive customer traffic that's unique from just doing Facebook ads and Google ads. And they're going to expand into more fitness, maybe more wellness type modalities. They have a brand called Stretch Lab, which is essentially just helping you stretch. Sounds kind of silly, but it works and it's growing very quickly. So that's a concept and wellness, which is an area of that's a concept. that they can expand into. Really quickly, taking look at the valuation, as I modeled it, with relatively conservative estimates of about over the next five years, 14% revenue growth,

about 21% average EBITDA growth, which is in line with the management's estimates of 20% to 25%. And about 40% adjusted EBITDA margins, which they think they can reasonably achieve through some of the things I told you about. They're currently trading about 11 times enterprise value to EBITDA for the 2025 year. If you look at Planet Fitness, currently, they're about 16 times. Similar fitness franchisors, growing quite large, similar margins, they're about 40%. But their revenue EBITDA growth is not as fast as exponential. So I think this is a very interesting concept.

It's a franchisor, asset light, high potential for margin expansion, strong growth, trading in a pretty reasonable valuation given other fitness concepts. As always, people on the program may have interested. and the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.