Motley Fool Money - Motley Fool Money: 02.11.2011

Episode Date: February 11, 2011

Our analysts discuss the latest earnings from Chipotle, Cisco, and Disney.  We delve into Microsoft's new deal with Nokia and talk retail with Costco CEO and co-founder Jim Sinegal.   Learn more about your ad choices. Visit megaphone.fm/adchoices

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From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Full Money. Thanks for being here. I'm your host, Chris Hill, and I'm joined by Motley Fool Senior Analyst, Seth Jason, Ron Gross, and Charlie Travers. Guys, good to see you. Hi, Chris. We've got Costco co-founder and CEO Jim Sinigal is our guest this week.

Yeah. We've got earnings from Disney. and Chipotle and a new partnership for Nokia and Microsoft. Double yeah! Plus, as always, an inside look at the stocks on our radar. But we begin this week in Egypt, where President Mubarak has stepped down ending his 30-year reign. Ron Gross, it's often been said that the stock market hates uncertainty, so Mubarak's

gone, but how much more certainty do we have now that the Egyptian armed forces are taking over the leadership of the country? I was going to say, for now at least, the control husband handed it over to the military. So what could go wrong? What could possibly go wrong? I think we're on the path to free elections. It appears, at least the markets are showing that most of the uncertainty has been removed. I'm sure some additional uncertainty will rear its ugly head down the road. For now, this is a pretty historic event. It's good to see the people cheering in the streets. It's something that doesn't happen very often. It seems like it is. Let's hope it is. I mean,

The skeptic in me says, listen, Mubarak has got these guys on speed dial, and he disappeared to his vacation home earlier in the day. So either he's got a real tin ear for what you need to do when your country is erupting, or he is sort of on his way out. And reports are he's worth $2 to $3 billion, so let's hope he takes that money and goes into the sunset and we move on. On Friday, the Obama administration unveiled its plan to remake the mortgage market and reduced the government's role in housing by one.

winding down Fannie Mae and Freddie Mac. Seth, the plan would be phased in over a long time. It would have to be. Because not doing it that way would be pretty catastrophic. I mean, unfortunately in this country, Fannie and Freddie are the default. I mean, they control the mortgage market, and that, in a sense, had to happen during the financial meltdown.

But we still don't have a lot of details on how this is going to unfold. But it'll be a good thing when it finally happens because these companies were taking too much risk because they had an implicit government backing, and, of course, it turned out to be explicit. Ron, what do you think? Chris, the federal bailout of these two entities has so far cost taxpayers $153 billion, and there's $60 to $200 billion still to come. This is not going to be any quick fix here.

These companies, or their problems, are going to be around for quite some time. There's going to be political debate, political fallout. this is going to take a while for these things to get wound down. So, you know, interesting to see them trying to make some changes, but this isn't happening overnight. One of the early reactions to the plan was that this may make home ownership tougher to come by. Is that necessarily a bad thing? It probably isn't, but it's not what people want to think about right now when home prices are still on the way down. Among the proposals lifting down payment requirements up to 10 percent, I mean, you can squeak by with almost nothing these days.

So on other requirements or other proposals will be bringing down the amount of money you can spend on a house, which right now is quite high. So once that stuff starts happening, if it starts happening, that is going to keep a damper on home price increases. But that's not necessarily a bad thing either. And my wife is a realtor, so this does kind of hit close to home. So let's be careful. For the third time in five months, China has increased interest rates. Seth Jason, any ripple effect for U.S. investors? I don't think we'll see a ripple effect from this. I believe this is mostly a little bit of posturing, public posturing. I was hunkering down with one of our global gains colleagues here, Nate Weisshar, and he was telling me that he believes this is pretty much aimed at reigning in speculation in the property market. The problem is that the interest rate isn't really the issue in China. It's a little bit complex, but it comes down to this. China has a huge trade surplus. They have to buy a lot of dollars, therefore, in order to

keep their currency from appreciating. And what happens to a lot of those dollars is they are, picture the finger quote, sterized by being the Chinese government forces banks to hold on to them. Well, in the last couple of years, a huge wave of this money has been unleashed into the Chinese economy. It was much bigger than the actual official stimulus. First thing it did is it pumped up property values.

We've heard about the bubbles there. Now it appears to be coming down with regular inflation as well. And not just pump up property values. you're seeing like ginormous empty malls in entire cities. So it's clearly a massive construction and what appears to be malinvestment, which historically has tended not to end well. You're listening to Motley Full Money. We're talking about some of the big headlines of the week.

Ron Gross, before we move on to some company-centric news, consumer sentiment numbers came out on Friday. Confidence among U.S. consumers at an eight months high. Are you feeling like your confidence is at an eight months high? I don't feel it like it seems like this survey. seems to be indicating, but Ron, you look great. Oh, thank you. Work out, eat right.

You know, as I said months ago, there is another little barometer, another survey as part of this that shows what people are thinking about current economic conditions, and that has actually risen to its highest level since January 2008. So another indication that people are feeling pretty good. We have had some tax cuts recently, and people seem to be a little bit more optimistic than they had been. I'm not sure I necessarily feel it, but it seems that the country at large does. Well, if you look at revenue reports coming out, it's earning season, and everyone's saying,

oh, a lot of these companies have become more profitable because they're cutting costs, but there are also some pretty decent revenue gains. Consumers are spending more on their credit cards. I'm not sure that's necessarily good. But it does appear that consumer behavior is ramping up a little bit. On Friday, Nokia announced a software partnership with Microsoft that will make Microsoft's Windows, the primary software on Nokia phones. Charlie Travers, Nokia's stock was getting hammered after this announcement. It seems like investors hate this deal for Nokia. What was your take?

I should have played the lottery this week because I called this on Wednesday. Yeah, I'm actually surprised that Nokia stock is getting annihilated because this company was in a position where if they didn't do anything, they were going to die a very slow and painful death. And so they took the action of doing something, and that would be partnering with Microsoft. And I think this partnership makes sense in a lot of ways because it gives Nokia a differentiated option versus all the other competitors offering Android phones. Seth, you're a Microsoft guy. What did you make a lot?

And I have a Windows 7 phone, and I've been reading the, I've been watching that investor reaction, and then reading the facile sort of way too easy headlines all over the news about how this is a terrible decision, how Nokia should have gone with Android. I thought they would actually go both ways. The problem with going just with Android is that then you're in a race to the bottom because Google is Joyce just going to support that to the point where it pushes all of the margin out. And I think that Windows Phone 7 is really closer to the iPhone in a certain way, at least in the ecosystem sense, and that it's a much more controlled environment than Android.

And I think that's a better spot for Nokia to operate. And for Microsoft, this is a pretty nice win because Nokia still still. sells hundreds of millions of phones as a big presence overseas, and that will help them get their operating system in more places. Yeah, and my, how things change in a year. I mean, you know, this time last year, Microsoft was written off as dead in smartphones, and a deal with a company with the scale of Nokia really gets them back in the game. Guys, remember all those Toyota's being recalled last year? Didn't we talk about that every five minutes for a while? Yeah, well, the stretch. The government report came out this week. Turns out Toyota's electronics were not to blame.

Turns out that the most common problem was drivers hitting the gas when they thought they were hitting the brake. Seth, we did talk about this a lot last year on the show. I claimed that it was drivers standing on the gas when I thought they were hitting the break. You called this. Well, it's history repeating itself. Same thing happened to Audi a while ago. And if you looked at a lot of the evidence, it really looked like this was the case that this is, well, it's bad news for the poor folks who were injured or killed as a result of these accidents, but, you know, Toyota in the meantime was vilified and it became the politically correct thing to do to just assume that they were covering something up. Whenever something like this happens, I always assume that the

problem is the most likely problem. And, you know, we are just collectively kind of a bunch of dumb monkeys. The problem is usually us. So Toyota drivers like me, just we're kind of idiots. No, everybody is. Everybody is. Gas pedal on the right, break on the line. I've driven a Prius, and if you look at the size of my size 13 clown boots here, how am I not going to hit both pedals at the same time? I know. It's too bad that doesn't come on a stick. You could do all three at once. Coming up, a popular hero is riding off into the sunset, and at least some investors are happy about it. We'll explain. This is Motley Full Money. Welcome back to Motley Full Money.

Chris Hill here in the studio with Seth Jason, James Early, and Ron Gross. If you follow the Motley Fool on Twitter, we've been nominated. for the Shorty Awards. Guys, I think this is... Is that good? I think it's like the Oscars of Twitter. So if you follow the Motley Fool on Twitter and you want to vote for us, you can go to Shorty Awards.com and cast your vote.

All right, guys, let's get back to some of the companies making headlines this week. Chipotle's fourth quarter profits were up 47 percent, and the company saw a 13 percent increase in same store sales. Seth Jason, you were pretty happy about this news. I think that's a gross understatement. Kind of says it all right there. Yeah. I own too much Chipotle because we own it at Hidden Gems, and because of compliance rules,

I was never able to sell it when I probably might have a while ago, what I was getting a little bit nervous. And so, yeah, sheer luck has led to another 100% gain. And that's been good for our members at Hidden Gems and anyone who's own Chipotle. The problem with Chipotle is they just keep doing this thing where they increase their earnings by 40, 50, 90%. They did that a lot this year. and the stock is priced for it, they just keep doing everything right is the quickest way to look at it.

They keep increasing their margins. They make more from every dollar that comes in. They keep expanding. They seem to be doing it intelligently. There's no stopping them. Ron, you're a value investor. When you look at Chipotle's share price, what does the valuation look like to you?

Well, I have sold Chipotle, both personally and in the million-dollar portfolio service quite some time. And we did so because the risk-reward It didn't make sense to us. The stock was priced for store expansion and margin expansion to a level that just didn't seem reasonable to us. So just because the stock has risen to the level it has doesn't mean it will stay there. It doesn't mean it's even necessarily warranted. They're doing a great job. It's a fantastic company. Stock looks expensive to me.

Shares of Activision Blizzard were down sharply this week after the company forecast that 2011 sales would fall short of analyst estimates. Activision is also discontinuing it guitar hero game. No. Charlie Travers, not a great week for Activision shareholders. Yeah, it makes it less likely to three of us here are going to bow out some Tom Sawyer because I know Ron's a big rush fan. Yeah, Activision stock

has not done well for four years. It's been basically flat the whole time, and they're doing the right thing by getting rid of some of their unprofitable kind of titles that have been kind of on the downslide. The music games were kind of always a fad. You know, they made a big stink about getting people people together and you sell all these accessories that kind of are like the equivalent of a juicer sitting in your living room that you don't use after you got it from grandma for Christmas. But long term, Activision is a very, very solid way to play the U.S. spending on entertainment.

Video games sell more than movies these days. And Activision is the top dog in the field. And I like it a lot. Ron? The stock reacted really negatively to guidance, really weak guidance from the company. I don't think it was the stock. I think it was the people selling the stock. That's true.

Blame the stock. I think this is a classic case of the company's sandbagging or giving guidance that is really very conservative. I think both from a revenue perspective, a margin perspective, even a share its outstanding perspective, the company really was conservative here, and I think we're going to see them beat. Seth? I think there's another lesson for investors here. It's a little more subtle, and that is that everybody knew about guitar here, everybody knew about rock band, and those were money-losing units for the,

the umbrella game companies had them, and you would never think of that when you thought about how popular they were, but they really weren't making money. So it's one of those things that what you perceive out in the media might not necessarily be a decent money-making venture, and you have to look for that when you're investing. You're listening to Motley Full Money? Chris Hill here in the studio with Seth, Jason, James Early, and Ron Gross. Shares of Cisco systems fell more than 14% this week after the company reported lower than expected earnings. Seth, this is the third quarter in the third quarter in a row that Cisco has underperformed. They used to be great at the expectations game. What happened?

Well, they stink and they're stinking it up. And John Chambers, the CEO, I think, could use a boot in a certain part of his anatomy and be shown the door. He's been blaming, putting the blame on the economy, on state spending, picking scapegoats that have mysteriously somehow not been a factor for other companies selling similar gear. I mean, the last fiscal quarter, their gross margin was down more than 3% the operating margin was down more than 7% this is horrible

they're losing share or they're losing margin at the high end with their most profitable business which makes the overall business less profitable their consumer division

is a complete mess you remember when they bought Scientific Atlanta how many people here remember that the set top box business yeah they bought a couple of these businesses for set top boxes

on top of TVs when's the last time I mean that business is going away They bought Flip Camera And the guy who ran Flip Camera They actually just booted him out He was the head of their consumer His big innovation was just to put a USB port on a camera

They have no strategy there And that is just going to kill them If they cannot differentiate and get people to pay big money For their nerdyer hardware And they can't make it in the consumer And there's no evidence that they can I would stay away from the stock All right finally Disney posted

better than expected earnings this week. Ron, shares of Disney are closing in on an all-time high. They are. And as a Disney shareholder, I'm pleased about that. How are they getting it done? Well, this stock is near and dear to my heart. It's the first stock I've ever purchased for both my children and they're proud shareholders. And the company is doing great in line with the economic recovery. Even their theme parks had increased attendance this quarter, which has been a drag on earnings beforehand. ESPN is really the driver here. There are TV divisions in general, cable networks in ESPN, higher advertising revenue, and it's just really shown in the revenue all the way down to the bottom line. And it's kind of continuing a theme that we're seeing with a lot of

the U.S. media companies this quarter showing really strong results. But again, to go back to the parks, because it seems like in quarters past, the basic story of Disney's earnings was doing great on the TV, but the parks were really a laggard. Are they doing something different at the parks, or are they just sort of like getting lucky? They're not doing anything significantly different, except in some cases they're doing some pricing promotion. But in this case, it really is an economic story. As the economy proves, and people, as we said earlier, feel more comfortable consumer sentiment goes up, they start coming back to the theme parks and spending money. Before we go to break, when you think

of the classic Disney characters, there are so many. I want to just go around the table. Give me one and think like Survivor, the reality show Survivor. If there's one, you could boot off the island, you could just get rid of one character. Who would it be? And on the flip side, if you could take a road trip with one classic Disney character, who would it be? Charlie, I'll start with you. I'm very partial towards venison and deer sausage, so I'd have no problem putting a slug right into Bambi and cooking that up. Killing Bambi's mom wasn't enough. at fool.a. Bambi's like an old cigarette smoker now, not that young cutie.

And a road trip, Charlie? I think if you're going to road trip, you really got to go all out and do something crazy. So my partner would be the Mad Hatter. Nice, nice. Ron, what do you think? Well, I'm kicking out Daisy Duke, Chris. I'm sorry. She's just plain mean to Donald.

She's got a temper like I've never... Daisy Duke? Daisy Duke? Yeah, Daisy Duck. She's got a temper like I've never seen on the duck. Because Daisy Duke is from the Dukes of Hazards, and she's, well, in a word, awesome. She's completely mean to Donald. She's trying to change him at every step.

I mean, this guy's a star. He doesn't need this. Okay. All right? And once we kick her to the curb, me and Donald are going out in the town. We're hopping in that red jalopy with the 313 license plate and him and I are going on a road trip. Really? That voice wouldn't bug you after a couple days in the car?

Oh, Seth? Well, if I throw out one Disney princess, they all go, right? Because they're all just the same one with a bunch of different wigs. Is that true? That's kind of. All right. That's my pick. And then you have to go with the road trip.

You've got to go with the Robin Williams genie. Anything can happen. Oh, from Aladdin? Yeah. I think so. Robin Williams wouldn't just bug you after a while? Not if he's got that kind of magical power. Steve, what about you?

I'd boot the crab from Little Mermaid. Was it Sebastian? Is that his name? Yeah. The Jamaican. It seems sort of irritating. And the road trip, I'd go with Thumper. Thumper seems like good people.

Aw. That's nice. He's such a good guy. And you know what? That would cheer up Thumper because Thumper's friend Bambi has just been killed by Charlotte. So that's nice. Could you just pick me up? All right. Coming up, a conversation with Costco co-founder and CEO Jim Senegal. Stay right here. This is Motley Fool Money.

Welcome back to Motley Fool Money. I'm Chris Hill. In 1983, Jim Sinigal and his partner, Jeff Brotman, borrowed $7.5 million to open up three stores. Today, Costco has 582 locations in the United States, Canada, the UK, Mexico, Australia, and Japan, and employs 150,000 people worldwide. Costco co-founder and CEO Jim Sinigal, welcome to Motley Full Money. Jim, I was in your Pentagon City store this week, and right there at the front of the store, there were a couple of tables filled with swimsuits. Now, we're having record cold across America.

Why are you selling swimsuits in the dead of winter? Well, you know, our strategy has always... As I said, we're having this record winter here in America. To what extent does the weather affect your business, and to what extent is it a convenient excuse for retailers? Because it always seems like there are times when a company is reporting earnings and they cite the winter weather as an excuse for poor earnings, and it smacks a little bit of the dog ate my homework.

I'll tell you to fine people not to talk. You're listening to Motley Full Money. We're talking with Costco co-founder and CEO Jim Sinigal. Jim, you have come under some criticism by some on Wall Street for overpaying your employees. How do you respond to a criticism like that? That's what we do out of our employees. In 2008, you said in an interview, you compared raising prices. to heroin. You said it's like heroin. You do a little, and you want a little bit more, and

raising prices is the easy way. So, I mean, how much does it kill you to raise prices in your stores? We always try to... Are there times when you sell below costs? No. The market down. We may get ourselves. You're listening to Motley Full Money. We're talking with Costco CEO, Jim Sinigal. Jim, you are known for, among other things, answering your own phone. And from time to time, handling customer complaints. So I'm curious, what's a recent customer complaint that you've handled and how did you handle it? Now, Saul Price, the legendary retailer, is someone who's had a tremendous influence on you for the benefit of our listeners who may not know that much

about Saul Price. What was so different about his approach to retail? It was different because thinking of new ways. Your father was a coal miner and a steel worker. what did he teach you about the working world? I give you anything. You graduated from Helix High School in LaMesa, California back in 1953. If I could go back in time and talk to some of your teachers or maybe the principal at Helix High, what would they say about Jim Sinigal, the high school student?

You know, they listen. I was just like... You're listening to Motley Full Money. We're talking with Costco CEO, Jim Sinigal. Jim, before I let you get away, we have to wrap up with a round of buy-seller-hold. So let's start with buy-seller-hold, the estate tax. Why? It costs $1.50 and comes with a 20-ounce soda, buy-seller-hold, Costco hot dogs.

When was the last time you raised the price on the hot dogs? We haven't. Ever? And finally, this is something that most everyone uses at some point. Buy-seller-hold Costco caskets. I saw somewhere online that there was one location that was offering two-for-one. Can you confirm that somewhere there was a Costco offering two-for-one on caskets? I, the minute we get off the top.

Jim Sinigal is the co-founder and CEO of Costco. Jim, thanks so much for being here. My pleasure, Chris. Coming up, we'll give you an inside look at the stocks on our radar. This is Motley Fool Money. As always, people on the program may have interest in the stocks they talk about. Don't buy ourselves stocks based solely on what you hear. I'm Chris Hill and back in the studio with me, our trio of senior analysts, Seth Jason, Ron Gross, and Charlie Travers.

Ron, I know you're a big Costco fan. What did you think listening to your friend, Mr. Senegal, there? Well, I think Costco is probably one of the finest run companies in the United States, and Mr. Sinigal is an absolute terrific merchant and CEO. I thought it was interesting what he said about raising prices. I'll be nice and then I'll be cynical. On the one hand, I think he really does care about keeping prices long. and making things affordable for the consumer. The cynical side of me says his business model is reliant on people renewing that membership.

So 75% of Costco's operating profit comes from those membership fees. So he needs to keep people happy so they're coming back to the stores and renewing that membership, and lower prices does that. All right, time to talk about the stocks that are on our radar, and we'll bring our man, Steve Brodo, in to grill you with a question. Charlie Travers, your stock this week? Yes, Chris. I've actually been eyeing up kind of large-cap, more safe dividend-paying kind of companies, and one that has caught my eye recently is Abbott Laboratories. It's a very well-known company.

They do pharmaceuticals, med devices. They have a nutritional segment. So they have their fingers kind of in every little cookie jar across the healthcare industry. And what's interesting about Abbott right now is that the stock is trading for only 10 times their earnings guidance for the year and you get a nice 4% dividend yield on top of that. And I think that's a lot of to like with a very safe kind of company. And what's the ticker simple? A.B.T. Steve Abbott Laboratories. What do you think?

How do pharmaceutical companies tend to perform? It seems like in terms of biotechs and pharmaceutical companies, they usually seem to do very badly. Am I mistaken? It is a very feast or famine kind of business. These are high-margin products that are awesome until the patent runs out and then they disappear and go away. But Abbott is in a good position right now with their portfolio. Ron, your stock this week? Over a million dollar portfolio, we like Hillenbrand, ticker symbol, H.I. So Hillenbrand is the leading maker of caskets for the funeral services industry.

You cynical, cold-hearted so-and-so. Hey, they make a product that's in demand. Now, they've done something recently that I normally would hate, is that they took $370 million, and they made an acquisition of a company that has nothing to do with the funeral services business. That's usually a recipe for disaster. in this case. It's an industrial company. It's going to give them the growth they need to kind of get that cash flow moving again. I'm going to give them the benefit of the doubt. I've spoken with management. I think they know what they're doing. Stock looks good, cheap to me here. Dividend yield

to three and a half percent. I like the company. Steve Brito? Leading casket maker. What makes a good casket, Ron? You know, I mean, it seems like a... Craftsmanship, Steve. Don't people, I mean, isn't cremation getting more and more popular? That is actually one of the, I would say, the main risks to the business model is cremation is growing, and they are actually getting into the earn market in a bigger way as a result. But as we all know from the closing of the Big Lobowski, it's pretty easy to disintermediate the own business as well, the coffee can. So just to be clear, they really are diversifying into earns. Sure. Yeah. What, wouldn't you?

I guess. I'm also wondering if there's a cremation company out there that's publicly traded that, you know, maybe. I don't know. Could be an acquisition candidate. Seth, Jason, please get us off this gruesome topic. Your stock this week? It's probably been several days since I flogged Fossil. But Fossil is going to have earnings next week. And I'm looking at what a lot of the companies in its space are doing,

sort of higher level, affordable luxuries, coach and others. And I just think that as expensive as Fossil looks, I think they're going to knock it out of the park again. and the stock is going to continue to do well. It's a spicy play, if you're thinking of doing it before the 15th, of course, because anything can happen on about earnings day. And the ticker symbol? FOSL.

Steve Brunel. Fossil. What is the primary thing that Fossil makes? If you had to say, Fossil is really... Watches. Yeah, and it seems like that as well. It seems like they've gotten into leather goods and all sorts of stuff. Yeah, and that's doing really well for them, actually. Their accessories have done very, very well.

I never would have guessed it. I never would have guessed that watches could be a decent business. When I first looked at this stock, I thought they can't possibly be a good business, but the truth is in the numbers, and they've done a great job. I'd actually like to turn to tables here and ask Steve a question. Steve, do you own shares of fossil? I do not. They'll be fine.

Nice. Thank you. Steve Brito, our contrarian indicator. You know, to be fair to Steve. He bought XM satellite serious and made a bunch of money, right? Yeah, to be fair to Steve, he has got some great. winners in his portfolio. Is that right, Steve? Yeah, it's definitely Feaster Fam in Charlie.

But yeah, there are the occasional... Stinkers, if you will. Allied Irish banks and... Now Cisco, add that to the list. All right, Seth Jason, Ron Gross, Charlie Travers. Guys, thanks for being here. Thanks, Chris. Thank you.

Thanks for our special guest this week. Costco, co-founder and CEO Jim Sinigal. If you haven't already, please check out Market Foolery. It's our new daily podcast. You can get it on iTunes. You can get it on the Motley Fool's website. Just go to Market Foolery.com every Monday through Thursday at 4.30 Eastern. Our engineers are Steve Broido and Gail Anya Nuevo. Our producer is Mack Greer.

I'm Chris Hill. Thanks for listening. We'll see you next week.