In this podcast, Motley Fool senior analyst Bill Barker and host 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.
The latest memo from legendary investor Howard Marks takes a look at past cycles. Deidre and Motley Fool host Ricky Mulvey explore the memo and the danger of focusing too much on the big macro.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on July 13, 2023.
Deidre Woollard: We are still traveling and still snacking, a strong earnings from PepsiCo and Delta lead the day. Motley Fool Money starts now. Welcome to Motley Fool Money. I’m Deidre Woollard here with Motley Fool Analyst Bill Barker. How are you today, Bill?
Bill Barker: I’m very good. Thanks.
Deidre Woollard: 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 pandemic [inaudible] out, or is there something else happening here?
Bill Barker: No. That’s largely the story. People want to fly when they can and then feel comfortable doing so. 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. 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, 11-14% revenue growth for next quarter compared to 17-20% total revenue growth through the year because that includes the first couple of quarters which were up against more challenging quarters last year. Things are, not entirely, but mostly returning to pre-pandemic levels of travel.
Deidre Woollard: Part of the big story for them was international, which was up 61% year-over-year, domestic only, about 8%. They had the biggest transatlantic summer schedule ever. They’re 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? The one area that seems to be is corporate travel. It’s growing year-over-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 studied return to office, I’m still not sure it’s happening. It makes me feel a little nervous. What do you think?
Bill Barker: To start with the international portion again, this is compared to a year ago, 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 that was a challenge for people either not wanting to get tested or not wanting to suffer the potential disruption of traveling, getting it, and not being able to come back, that’s all gone. Sixty-one percent is a really big jump year-over-year, and there are obvious reasons why that’s the case, including economy continues to be strong, and people have a 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’s more flexible travel schedules with hybrid work, which ties into the second part of what you were talking about, which is corporate travel. 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. We’re talking 2025. There are a lot of qualifications in that. It’s true that, in a world where not many people are frequently going into the office, there 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. 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, or they’re going in at all.
Deidre Woollard: I know that has been good for the hotel industry. 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.
Bill Barker: 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’ll be more than there were last year, but what the real convention business world looks like going forward remains to be seen.
Deidre Woollard: I’d say that’s true, but the airlines are often dealing with debt. They’ve paid off a lot. They have a goal of retiring over four 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 to me. Anything else that you’d like to see them do?
Bill Barker: 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 [laughs] surrounded every time I get on a flight. But that’s speaking as a non-shareholder. I think shareholders don’t want that.
Deidre Woollard: They want all the seats filled, Bill.
Bill Barker: They want all 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 five-and-a-half billion, I think, a year of annual maintenance costs, CapEx. That’s 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 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.
Deidre Woollard: I think that an important thing to understand about airlines is the bad times always come whether it’s something like the pandemic or great financial crisis or just consumers spending less. It seems like there’s always something that’s going to hit the airlines, so they really have to make hay while the sun shines, right?
Bill Barker: Yeah, and I think their 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. 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 that down right now.
Deidre Woollard: There is always something. Let’s shift gears and talk about snacks because we have earnings from PepsiCo, seven consecutive quarter of double-digit revenue growth, but the volume wasn’t quite as strong: down for beverages, down for the Quaker Oats part, up just 1% for Frito-Lay. Is this just a case of the price increases are driving the results now?
Bill Barker: Yes.
Deidre Woollar: Simple enough.
Bill Barker: The 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. But I think in terms of units, they’re up and then certainly in terms of cash that they acquire in all these sales, that’s up, as you say, a low double digit percent up, which is better than inflation. So they are selling. Most of the price increases went in the second half of last year, and so that contributed to inflation numbers. 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 bag. 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.
Deidre Woollard: Especially like branded food. PepsiCo has strong brand power with Frito-Lay and with the Pepsi beverages.
Bill Barker: They do. They’re gaining popularity in the Doritos world. Pepsi is pretty steady. They add various different flavors to everything.
Deidre Woollard: Yeah.
Bill Barker: The brand power is very real. They are neck and neck with Coke at market cap today.
Deidre Woollard: It’s interesting because they’re different businesses because Coke is still all-beverage, and Pepsi obviously had Quaker and Frito-Lay, so you got 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 [inaudible] . I don’t know. I think it’s good for the world. I like what they’re doing, but this is still snacks and soda. You’ve got single-use plastic here. What do you think about their ESG initiatives?
Bill Barker: I think that they put that out there as a reason to support buying things from the company.
Deidre Woollard: [laughs] So true.
Bill Barker: They’re in a large group of companies that are playing that game. 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, and 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 ad the the Locos Tacos. They’ve got this whole line of what they call walking tacos like that. There have been companies doing this for decades that are constantly talking about how they are really concerned about aspects of the environment while not changing the substance of their business. I think they’ve got innumerable things they can do that are going to look good. But 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.
Deidre Woollard: There’s only so much you can do without addressing that problem. You 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 evolution of Doritos is just crazy because you had the the Locos Tacos. They’ve got this whole line of what they call Walking Tacos, which is essentially like a little bag, I guess, that then you can put snacks and cheese on top and go. There’s Doritos After Dark, which is really weird because it was pop-up experiences. Then I think I saw you looking at the website earlier, recipes for things, like Flamin’ Hot Cool Ranch ice cream. Is this necessary to make Doritos continue to be cool? It seems to me now, like spicy sweet is the new way we’re going as well as flaming hot all the things.
Bill Barker: I was not really up-to-date with Doritos After Dark. I like this PG13, R rated branding of the concept.
Deidre Woollard: It’s very bizarre.
Bill Barker: [laughs] Then all the treats and recipes that they put on the doritosafterdark.com website and now in the business of promoting them apparently, and their lascivious natures. But I think bourbon 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. 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. 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. I think that there’s some interesting tastes that they’ve come up with here.
Deidre Woollard: Absolutely [inaudible] . Now I’m hungry, so thanks for the time today, Bill.
Bill Barker: Thank you.
Deidre Woollard: When Howard Marks drops a memo, it’s a must read. Ricky Mulvey and I break down the latest from the legendary investor.
Ricky Mulvey: When 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?
Deidre Woollard: 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.
Ricky Mulvey: 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 dotcom 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 toward stocks, and then March of 2020, “nobody knows”, 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, Deidre, 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’d add to the summary before we dive into the big takeaways?
Deidre Woollard: I think that’s pretty much the summary. The five are really all about the moments when everybody was looking in one direction, and he was looking in the other direction.
Ricky Mulvey: I think one of the keys is that macro calls are very difficult to achieve, and you have to have conviction for a long period of time. He was writing about home prices in 2005. It is very difficult to hold that kind of conviction for three years.
Deidre Woollard: 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.” 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?
Ricky Mulvey: It’s a little bit of a ying-yang. One thing he writes that I think is worth highlighting is that cycles stem from excesses and corrections. 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.
Deidre Woollard: The tricky thing here is understanding that he talks about much of what happens isn’t market mechanics. It’s emotion. 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. 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.
Ricky Mulvey: 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, “We don’t sell things we consider attractive long-term holdings to raise cash and expectation of a market decline”, then goes on to say, “We don’t say it’s cheap today, but it will be cheaper in six months, so we’ll wait”. Deidre, I really like that he seems to be a net buyer. He is an investor throughout markets.
Deidre Woollard: One, he says it’s worse to sell at the bottom than by at the top, which I think is important because a lot of us have a fear about buying at top. There’s a shame in it. No. He makes the point that you might have bought at this top, but the next top is likely going to be higher.
Ricky Mulvey: Actually I may draw a small quibble with that, with some investments that wouldn’t be Marks-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.
Deidre Woollard: They are real, but they are not realized.
Ricky Mulvey: One thing I was also thinking about when reading this memo, Deidre, is I think, if Marks is 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 Oaktree are very thoughtful investors, which they are.
Deidre Woollard: They are. The interesting thing is he does have all of those past memos that he links to in this piece. He’s very much making the case for, we’ve been right before, and look at all these other times we’ve been right.
Ricky Mulvey: Yeah. That is something to say, which is, there are a lot of folks who could not pull this off. But Marks does have the track record as a distressed debt investor to backup what he is saying. I think that brings us to maybe some of the quibbles or discussion around the memo. I want to first say 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 other outside material besides previous memos for his writing.
Deidre Woollard: It feels a lot like Peter Lynch to me in terms of that where he wants to tell you about his own track record. Like you said, this is marketing material. These are funds, they do want more money, so they have to show that they are very good at keeping an investing and growing money.
Ricky Mulvey: Yeah. There’s one line, “I only started making macro calls 30 years into my investing journey.” Not that I worry but I always want to see people and encourage. Hey, even if you’re young, even if you’re just getting started, go out and be an investor. Make some mistakes and learn through a little bit of the pain.
Deidre Woollard: But I think what he’s saying also though is just pattern recognition and that it took him that much time. I think he’s also trying to show you can learn from other people. I do think that he’s trying to do the history lesson thing of I learned to recognize these patterns. Maybe that’s even a little bit of a humble brag. 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.
Ricky Mulvey: Fair point. 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 SeaChange , 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.
Deidre Woollard: It’s interesting. Is it too soon to know if he got this right or wrong? He brings up SeaChange 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. What I don’t think is 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 steer away from riskier investments. Things have already changed so quickly.
Ricky Mulvey: This is something I really appreciate about his writing. He does tell you where he’s coming from. His Oaktree is at a defensive posture. He encourages you to think about your posture as an investor whether it’s offensive or defensive. 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.
Deidre Woollard: A SeaChange indicates it is a massive tectonic shift. That may well be the case. So much of what he’s saying really depends on how long this cycle lasts, and that’s what we can never know.
Ricky Mulvey: You’re seeing it in commercial real estate. You’re going to see it a number of investments. It is going to take a few years.
Deidre Woollard: Also a cycle. A cycle is never just one cycle. It’s a little nesting doll of all these other little cycles moving along at the same time and, often, in different directions.
Ricky Mulvey: 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. Then within the last year, you’ve seen that change as well, is perhaps investors realize that maybe it was an overreaction.
Deidre Woollard: It happens with everything. From the real estate side, home builders, everybody was really down on home builders, and now home builders are up dramatically this year.
Ricky Mulvey: Any final thoughts about the new Marks memo, Taking the Temperature, before we wrap up, Deidre.
Deidre Woollard: 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 doesn’t make the point that you really shouldn’t be a market timer.
Ricky Mulvey: We do it with great hesitancy, Deidre. Appreciate your insight.
Deidre Woollard: Thank you. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don’t buy yourselves stocks based solely on what you hear. I’m Deidre Woollard. Thanks for listening. We’ll see you tomorrow