Motley Fool Money - Travel Is Still Flying High

Episode Date: July 13, 2023

Another positive sign for the travel industry as Delta raises guidance. (00:21) Bill Barker and Deidre Woollard discuss: - The surge in international travel and where Delta’s next revenue bump could come from. - What factors could slow the travel boom. - The curious allure of the many flavors of Doritos. (15:11) The latest memo from Howard Marks takes a look at past cycles. Deidre Woollard and Ricky Mulvey explore the memo and the danger of focusing too much on the big macro. Companies discussed:  DAL, PEP Host: Deidre Woollard Guests: Bill Barker, Ricky Mulvey Producer: Ricky Mulvey Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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If you're 45 or older and at average risk, ask your health care provider about the KoloGard test. KoloGard is available by prescription only. Learn more or request a prescription today at KolaGar.com slash screen. We are still traveling and still snacking. Strong earnings from PepsiCo and Delta lead the day. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidrell Willard here with Motley Fool analyst Bill Barker. How are you today, Bill? I'm very good. Thanks. I know you've been traveling a lot recently. You've seen the airports are packed. It's good news for Delta. They had another strong quarter. Revenue up around 19% year-over-year. Is this still just pandemic tailwinds? Are we still just getting our...

Are there pandemic yaya's out? Or is there something else happening here? No, that's largely the story. People want to fly when they can and feel comfortable doing so, and the airlines go through cyclical challenges, where one thing or another pops up and people don't want to fly as much. You look back at a year ago, there were still a bunch of hurdles for flying. So the year-over-year numbers are extremely good for Delta, in part, because of comparisons to last year, it's going to be a good total year. It's going to be a good guidance that they've given for next quarter. Numbers are calming down a little bit, 11 to 14 percent revenue growth for next quarter,

compared to 17 to 20 percent total revenue growth through the year, because that includes the first couple quarters, which we're up against more challenging quarters last year. So things are mostly, not entirely, but mostly returning to pre-pandemic levels of travel. Yeah, part of the big story for them was international, which was up 61% year-over-year. Domestic only about 8%. And they had the biggest transatlantic summer schedule ever. They've just like scheduling flights all over the place. But one of the things I'm thinking about is where else do you get growth after you get all of your international travel back?

And so the one area that seems to be is corporate travel. So it's growing year every year. It's not at pre-pandemic levels, but I was listening to the earnings call, and one of the things they were talking about was the link between return to office and corporate travel. I study return to office. I'm still not sure it's happening. It makes me feel little nervous. What do you think? Well, to start with the international portion, again, this is compared to a year ago, when you still, in the second quarter of last year, this ended.

in the middle of the second quarter last year, where you had to have a negative test to get back into the country. I know that tripped me up when I was traveling internationally last year and tested positive for COVID and had to spend an extra week abroad. But, you know, that was a challenge for people either not wanting to get tested or not wanting to, you know, suffer the potential disruption of traveling, getting it, and not being able to come back. That's all gone. So 61% is a really big jump year over year, and there are obvious reasons why that's the case, including the economy continues to be strong, and

people have pent-up desire to go on the trips that they delayed for years. I think this is going to continue to be the case. There are more flexible travel schedules with hybrid work, which ties into the second part of what you were talking about, which is going to continue. corporate travel. And I think at their Investor Day, a few weeks ago, they predicted that they didn't expect corporate travel to return fully, whatever fully means at this point, until after next year. So we're talking 2025. There are a lot of qualifications in that. And it's true that in a world where not many people are frequently going into the office, isn't a whole lot of need for corporate travel when people have gotten used to doing a lot

of the things they would have done in person by Zoom and other methods. So I think it's offset by the fact that people have the freedom to jump on a plane after work Thursday, if they're going in Tuesday, Wednesday, Thursday, if they're going in at all. Yeah, and I know that that has been good for the hotel industry. And the other thing about the other side of corporate travel, too, is conventions, which seem to be back, at least if the Las Vegas numbers are any indication. I think so. That is a good part of corporate travel, at least.

Well, they would love that. They're filling the seats either way right now with all the summer travel. But come the fall, kids back in schools, families not able to travel in the same way, whether their parents are working hybrid or not, it would be great for them. If there were a lot of conventions, I think there will be more than there were last year, but you know, what the real convention business world looks like going forward remains to be seen. Yeah, I'd say that's true. Well, with airlines, you're often dealing with debt.

So they've paid off a lot. They have a goal of retiring over $4 billion in debt this year. They brought back their dividend. They put $667 million in profit sharing. All of this seems like pretty good use of cash. me, anything else that you'd like to see them do? I guess I personally would like them to just throw out hundreds of additional flights so that there were more seats available for me to not be surrounded every time I get on a

flight. But that's speaking as a non-shareholder. I think shareholders don't want that. They want all the seats filled, Bill. They want the seats filled, and the seats are mostly filled. In every one of the travel experiences I've had recently, there are not many empty seats. And certainly, if there are, they're not anywhere near me. I like the fact that they're doing a little bit of everything, a fair amount of debt reduction

and putting a dividend back in. They've got about $5.5 billion, I think, a year of annual maintenance costs, CAPEX. steady, that's really not predicted to increase. I wouldn't want to see them make any acquisitions from here. I think that the debt reduction from pretty elevated levels is a very good thing to do, because the rainy day will come back. There will be something that interrupts what is the sort of top of the cycle, maybe, right now. The list of horribles that would mean that people are less interested in air travel. I don't need to go into because they're not nice things to contemplate. But sooner or later, whether it's a interruption in the economy

or something worse, the cycle will turn. And if they've reduced debt by as much as they've been doing it, right now they're going to be in better shape. Yeah, I think that's an important thing to understand about airlines is the bad times always come, whether it's something like the pandemic or it's great financial crisis or just consumers spending less, it seems like there's always something that's going to hit the airline. So they really kind of have to make hay while the sun shines, right? Yeah, and I think the business right now is in a little bit, in some ways, a microcosm, of the concept that there are things that are going through recession sectors that have gone through recession

while the economy as a whole has continued to grow. That is true of their business. The corporate travel is still in a recession, and that's offset, especially during the summer, by leisure travel. And whether corporate travel comes back to pre-pandemic levels, it's still significantly far off that. So they are able to offset the recessed part of the business very well right now. But I think that there's going to be something in the cycle someday ahead that makes them feel good about getting the debt down right now.

There is always something. Let's shift gears and talk about snacks, because we have earnings from PepsiCo, seventh consecutive quarter of double-digit revenue growth. But the volume wasn't quite as strong down for business. beverages, down for the Quaker Oats part, up just 1% for Frito Le. Is this just a case of the price increases are driving the results now? Yes. Simple enough?

Simple answer. The shrinkflation is here. They talk about the total pounds being down, not down by much. People haven't changed their consumption habits very much, but they're down rather than up. I think in terms of units, they're up, and certainly in terms of cash that they acquire in all these sales, that's up, as you say, low double-digit percent up, which is better than inflation. So they are selling, most of the price increases went in in the second half of last year, and

so that contributed to inflation numbers the second half of last year. We're cycling those, so they're not going to get quite as much of a tailwind in the raw number for next quarter. They're still targeted to have some pretty good growth nominally. So you have to subtract the inflation over the last year from their headline numbers here. But that stuff all goes in the back. That is one of the ways in which you can protect yourself as an investor from inflation, is to invest in things which do well at passing along costs, like food.

Well, and especially like branded food. PepsiCo has strong brand power with Frito Light and with the Pepsi beverages. Yeah, they do. They're gaining popularity in the Doritos world. Pepsi is pretty steady. They add various different flavors to everything. And the brand power is very very. reel, and they are neck-and-neck with Coke at Market Cap today.

Well, and it's interesting because they're kind of different businesses, because Coke is still all beverage, and Pepsi obviously had Quaker and Friedelais. So you've got sort of the snack angle there, too. One of the things I like about PepsiCo is they've got a focus on ESG. They want to reduce water usage. They talk a lot about reducing sugar and sodium in the product, and things like their baked line. I don't know. I think it's good for the world. I like what they're doing, but this is still a snacks and soda. You've got single-use plastic here. What do you think about

their ESG initiatives? I think that, you know, they put that out there as a reason to support buying things from the company. Cynical to be true. They're in a large group of companies that are playing that game, and hopefully they're believers in what they're saying about it. I think that there are a lot of individual purchases a day for these products. If the packaging puts people off from buying them, then they're going to lose sales. So they need to play this game and make people feel good about what they are doing to offset

the very real issues with more plastics and things like that. So I don't think, you know, there have been companies doing this for decades that are constantly talking about how they are really concerned about aspects of the environment while, you know, not changing the substance of their business. And I think, you know, they've got innumerable things they can do that are going to look good. if they're continuing to produce as much plastic as they are, there's going to be legitimate questions about what it all amounts to. Yeah, there's only so much you can do without addressing that problem.

You sort of teased a minute ago the flavor thing. This is so weird. There's this push into more bizarre flavors, bizarre snacking. Everything has to be flaming hot now. The Doritos, the evolution of Doritos is just crazy, because you had the Locos Tacos. They've got this whole lineup of what they call walking tacos, which is essentially like a little bag, I guess, that then you can put snacks in, like, cheese on top and kind of go.

There's Doritos after dark, which is really weird, because it was pop-up experiences, and then I think I saw you looking at the website earlier, recipes for things like Flaming Hot, Cold Ranch ice cream. Is this kind of necessary to make Doritos continue to be kind of cool? It seems to me, like now, like spicy sweet is the new way we're going as well as flaming hot, all the things. Well, I was not really up to date with Doritos After Dark, but I like this sort of PG-13R-rated branding of the concept.

It's very bizarre. It's, and then all the treats and recipes that they put on the Doritos afterdark.com website, and I'm now in the business of promoting them, apparently, and they're lascivious. natures. But I think, you know, urban caramels with Doritos, spicy, sweet chili, I'm interested. I want somebody not to just tell me how to make this, but to go ahead and make it for me. And so I think that there are a lot of interesting combinations of flavors that they've put out here, which would never have occurred to me. And I think there's, I don't know how much volume there is in any of this, but it's a way to be in the headlines, and it's a way to sell a few more things.

And I think that there's some interesting taste that they've come up with here. Yeah, absolutely. Paul. And now I'm hungry, so thanks for the time today, Bill. Thank you. Howard Marks drops a memo. It's a must-read. Ricky Mulvey and I break down the latest from the legendary investor. Howard Marks drops a new memo. The investment world listens up. His latest, Deidre, is titled Taking the Temperature. Before we dive into the details of it. Why do we listen to this guy? I think track record is a big part of it. This is

a very successful investor with over 50 years of experience, and he's got the memos along the way to prove it. Digging into the details, the memo is a little over 10 pages long, and Marks is revisiting five major macro calls that he's made over the course of his investing career. It was the dot-com bubble in the 2000s, pre-2008 about home prices, the middle of the Great Recession, along with pre-2008, March of 2012, when there was a lot of pessimism towards stocks, and then March of 2020, quote, nobody knows, end quote, but many people were selling, therefore you might find some bargains. He then pulls some lessons from those calls, including his hesitancy to make macro calls after describing those five, Deidra, but also a lot about understanding investor

psychology and how it's crucial to long-term outperformance and how to see where one is in the cycle. Are people overly optimistic or pessimistic? You're not going to be able to call the top or the bottom, but you can recognize the cycle that you're in. Then there's a bit of a discussion about one's risk posture and how that influences investing style. Anything else you add to the summary before we dive into the big takeaways? No, I think that's pretty much the summary. And the five are really all about the moments when everybody was looking in one direction and he was sort of looking in the other direction. Yeah, I think one of the key. is that macro calls are very, very difficult to achieve, and you have to have conviction for a long

period of time. He was writing about home prices in 2005, and it is very difficult to hold that kind of conviction for three years. Yeah, absolutely. He has this line that I love, which was skepticism and pessimism aren't synonymous. Skepticism calls for pessimism when optimism is excessive, but it also calls for optimism when pessimism is excessive. So he's really just taking that critical eye and looking at the cycle, no matter which way it's going and trying to figure out, why are people going this way and are they right? It's a little bit of the ying yang. Yeah.

I also, one thing he writes that I think is worth highlighting is that cycles stem from excesses and corrections. And I think that's notable, especially because we're back into a bull market. Investor sentiment is a little bit more optimistic than it was a few months ago. Well, that's kind of the tricky thing here is understanding that, you know, he talks about much of what happens isn't market mechanics, it's emotion, right? And we are in the midst of emotion right now. And part of the beginning of a bull market is hope. There is so much hope right now. And if you've been an investor for a long time, that hope may make you a little nervous

and a little skeptical, which I think is a correct view. I really appreciate these parts at the end as well, because one may think that cyclical investors are trying to sell at the top and then buy back at the bottom. And he writes, quote, we don't sell things. things we consider attractive long-term holdings to raise cash in expectation of a market declined, end quote, and then goes on to say, quote, we don't say, it's cheap today, but it'll be cheaper in six months, so we'll wait. End quote, Deidre, I really like that he draws, he seems to be a net buyer. He is an investor throughout markets. Well, and he says it's worse to sell at the bottom than buy at the top, which I think is important because a lot of us have a fear about buying at the

top, there's some sort of, there's like a shame in it. And it's like, no, he makes the point that you might have bought at this top, but the next top is likely going to be higher. Well, and actually, I may draw a small quibble with that. With some investments that wouldn't be Marx-style investments, many folks may have bought at the top, and then that will be the height of it forever. But it is an important distinction that there is a difference between permanent losses and paper losses that you see on your brokerage account, even though they feel very real in that moment. It's only real if you were to sell in that moment. They are real, but they are not realized. One thing I was also thinking about when reading this memo, Diedra,

is I think of Marx as a masterful investor, someone that I have learned from and has encouraged me to think differently about how I invest in market cycles. This is also masterful marketing material. You get something out of it and you think, wow, the folks at Oak Tree are very thoughtful investors, which they are. They are. And the interesting thing is, he does have all of those past memos that he links to in this piece. So he's very much making the case for, we've been right before. And look at all these other times we've been right. Yeah. And he does, and that is something to say, which is there are a lot of folks who could not pull this off, but Marx does have the track record as a distressed debt investor to back up what he is saying. And I think that brings us to

maybe some of the quibbles or discussion around the memo. I am generally, and I want to first say, like, I'm generally a very big fan of these, and I do open them up as soon as I get them in my inbox. There were a couple of critiques that I would have, one of which is that self-referential style. I would like to see maybe a little bit more drawing on what other outside material besides previous memos for his writing. It feels a lot like Peter Lynch to me in terms of that, where it's, you know, he wants

to tell you about his own track record. And like you said, this is marketing material. These are, you know, these are funds. They do want more money. So they have to show that they are very good at keeping and investing and growing money. Yeah, there is one line. Quote, I only started making macro calls 30 years into my investing journey, end quote. Not that I worry, but I always want to see people encourage, hey, even if you're young, even if you're just getting started, like go out and be an investor, make some mistakes and, you know, learn through a little bit of the pain. I think what he's saying also, though, is just pattern recognition and that it took him that much time. So I think he's also trying to show, like, you can learn from other people.

So I do think that he's trying to do the history lesson thing of like, I learned to recognize these patterns. Maybe that's even a little bit of a humble brag of it. It took me 30 years to understand this stuff. Learn from me. And maybe you can get that pattern recognition in your brain a little faster. Fair point. And I think one of the things that I noticed, and I know you noticed, is of the five calls, he made. One of the ones that was not mentioned was the call he made most recently in December of

2022, the memo from C-Change, which is that economic conditions are drastically different now. It benefits savers, more than speculators, and that's going to create a fundamental shift in the economy. It's interesting. Is it too soon to know if he got this right or wrong? He brings up C-Change in the memo. He defends it. He believes that his observations were still correct. And I think he was right to some extent He's very right about the Fed can't really go the other way for a while and that he didn't see further big cuts. And he's right there about the Fed not being able to switch over to being stimulative. Where I don't think he's as right is the idea of everyone is going to switch to being

savers, everyone's going to look at credit instruments, and people are going to sort of steer away from riskier investments. Things have already changed so quickly. And this is something I really appreciate about his writing. He does tell you where he's coming from. Oak Tree is at a defensive posture. And he encourages you to think about your posture as an investor, whether it's offensive or defensive. And then the other thing I would encourage Marks to say is, hey, it's only been seven months since I've made this call. Sometimes these changes take a little bit to go into effect. Well, if it's a sea change, especially, a sea change indicates it is a massive kind of tectonic shift, and that may well be the case. I mean, so much of what he's saying really depends on how long this cycle lasts, and that's what we can never know. The cycle to the new normal might take, maybe even as we're seeing, you're seeing it in commercial real estate, you're going to see it in a number of investments. It is going to take a few years.

And also a cycle, a cycle is never just one cycle. It's like a little nesting doll of all these other little cycles moving along at the same time and often in different directions. And I think that's why, at least for me and I know a lot of the folks at the Motley Fool, we don't try to be macro investors because it's so difficult. You have to figure out where all of the nesting cycles are. But one of the things that I've been thinking about is how you're seeing cyclicality play out in individual businesses. Recently, you saw meta and Netflix get very much beaten up when sentiment turned against them. And then within the last year, you've seen that change as well is perhaps investors realize that maybe it was an overreaction.

Happens with everything. From the real estate side, homebuilders, everybody was really down on home builders, and now home builders are up dramatically this year. Any final thoughts about the new Marks memo? Taking the temperature before we wrap up, Didera. I think it's a good read. I think he's right about not being a market. timer and the importance of that, even though what he's showing you is all of the times he timed

the market, he still does make the point that you really kind of shouldn't be a market timer. We do it with great hesitancy, Deidre. Appreciate your time and your insight. Thank you. 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 stocks based solely on what you hear. I'm Deidra Willard. Thanks for listening. We'll see you tomorrow.