In this podcast, Motley Fool senior analyst Jason Moser discusses:
- Coca-Cola‘s strength in the face of currency headwinds.
- PayPal‘s new partnership with Amazon.
- Weber‘s largest shareholder grilling up a buyout offer.
Just in time for Halloween, Fools Alison Southwick and Robert Brokamp break down stock market superstitions.
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.
This video was recorded on Oct. 25, 2022.
Chris Hill: We’ve got a potential buyout, a new partner for PayPal, and a strong report from an iconic brand. Motley Fool Money starts now. I’m Chris Hill joining me today, Motley Fool Senior Analyst Jason Moser. Thanks for being here.
Jason Moser: Hey, thanks for having me.
Chris Hill: Let’s start with big red, shall we? Coca-Cola’s third-quarter profits and revenue came in higher than expected, they raised full-year guidance. I was reminded of Pepsi‘s latest quarter when we saw these results, I thought, yeah, kind of like Pepsi. I don’t want to say they always move in tandem because they don’t. Lately, Pepsi’s had a better run as a business, but Coca-Cola has had a nice run of late and just like Pepsi demonstrated with their latest quarter, Jason, Coca-Cola has got some pricing power and they are executing with it.
Jason Moser: I’m glad you said that because that is one of the primary keys to their success. One thing you know is when you read through this company’s earnings call, this is truly just a global behemoth with a large presence virtually everywhere around the world. Basically, 2/3 of revenue and operating profit comes from outside of North America. It’s always nice to see that kind of a business because they can exploit strength and insure up areas of weakness there. But all things said, it was a really strong quarter for them so much so that they see such a positive outlook for the rest of the year, they raised guidance. If you look at just the growth for the quarter, organic revenue grew 16 percent, unit cases grew four percent.
They did see some pressure on gross margin, which was down 190 basis points from the year ago. A lot of that coming from currency headwinds driven by the greater macroeconomic picture and certainly some inflationary concerns as well. But they do have the ability ultimately to exercise a little pricing power in that business model. Ultimately you saw earnings per share 69 cents grew seven percent from a year ago. Again, getting back to the way they see the rest of the year shaking out. They raised guidance for the full year. They expect organic revenue growth of 14-15 percent and earnings-per-share growth of 15-16 percent. Ultimately, you look at what this business deals with in the face of challenges as far as inflation goes, they continue to see healthy demand.
That’s showing up both in growth, in value, and volume, which I think really just speaks to how strong of a business this really is, even in the difficult times. You mentioned Pepsi and you have to be fair here. Looking back over the last five years, it is really impressive to see how Pepsi has outperformed. The five-year total return, Coca-cola 48.8 percent, but Pepsi 86.3 percent. Again, for a long time we’ve spoken about the strength of Coca-Cola’s business model. That hasn’t really changed. I feel like this is a bit of a testament to how much better Pepsi’s quarter actually was than Coca-Cola’s?
Chris Hill: That’s true. It builds off of a series of quarters that have been stronger than Coke’s. But you touched on something and I’m wondering if this is going to be something for us to watch as earnings season continues to unfold. This idea of, I just think of it as, I think we might see some separation between the grownups and the kids because we know we’re going to hear about currency headwinds. We know we’re going to hear about the strong dollar. It is the stronger, more mature businesses like Coca-Cola in this case that can actually deal with that and put themselves in a little bit better position. They’ve got a little bit more pricing power. They’re able to absorb the hit on the gross margin a little bit better. I just think we’re going to continue to see this.
Jason Moser: I think that’s a very reasonable point of view. This is a challenging time for everyone, but as we say it, so often it’s these stretches where oftentimes you see the leaders really emerge even stronger than before and being so well-diversified across so many different lines, across so many different geographies and having such a strong brand. It really does put Coca-Cola in a tremendous position to keep on succeeding for years to come. You need to understand why you would own this stock in the first place. You’re not buying this stock so that it doubles over the course of the next year or two years. This is a more defensive play. No doubt about it. But I think that that’s really the key to it. You understand why you would own the stock in the first place. If you feel like you need that stability, that income generating presence in your portfolio, it’s not going to light the world on fire, but it’s a tremendous brand with a lot of power around the entire world. It’s always one to keep in mind.
Chris Hill: For anyone who is wondering what we mean when we talk about stocks being a defensive play, it means that in a year like 2022, when the overall market is down 20 percent, Coca-Cola’s flat. That’s what it means. It means year-to-date it’s outperforming the overall market by 20 percentage points.
Jason Moser: I know you could sit there and take the shorter-term view and be like, that’s just what that one little stretch of time. But the fact of the matter is it does help you sleep better at night and it ultimately helps you justify owning those other growthy style investments. It gives you the comfort, the confidence to continue holding those stocks that you need to allow a little bit more time to play out or are dealing with the challenges that so many of those companies are dealing with today.
Chris Hill: Shares of PayPal are up seven percent today after Amazon announced it’s adding Venmo as a payment option at checkout. Venmo is owned by PayPal and we’ve seen this from other businesses like Shopify and Lululemon that have offered Venmo as a payment option. Amazon though, that is a nice win for PayPal.
Jason Moser: I think this is a bigger deal for PayPal than for Amazon, but it’s definitely a win for both. Venmo has grown considerably through the years. It’s closing in on 90 million active accounts now, going to do something in the neighborhood I think, of around $250 billion in total payment volume this year. It moves a lot of money across that network and this is right in line with the digital wallet and checkout focus that management has recentered around recently. We saw PayPal get a little bit too far outside of their circle of competence, so to speak.
They were trying to do too many things and weren’t really doing many of them very well and so you pull back on that, stay in your lane a little bit, focus on the properties that are really succeeding for you. That is PayPal, that is Braintree, that is Venmo. I think this is something that ultimately could play out very well, particularly for the younger generation of shoppers. The shoppers that really have grown up using Venmo so often, you link that thing up to your Amazon account. A lot of people have subscriptions to certain things that they purchase from Amazon. It’s definitely a big opportunity to boost that total payment volume going through the Venmo network, which ultimately would be a very good thing for PayPal.
Chris Hill: The stock of the day is Medpace Holdings shares up 36 percent after the latest earnings report. I mention this only because two weeks ago on this show, Jim Gillies talked about Medpace Holdings as being the stock he was going to be watching this earnings season because management had been buying the stock and basically waving a big flag, signaling that they thought there was great value to be had. Kudos to our friend Jim Gillies. That’s all. We’re not going to talk about this. I just mentioned on Jim’s behalf and hopefully, some of the folks who were listening two weeks ago heard what Jim had to say and took advantage of that. This isn’t quite the stock of the day. But shares of Weber Grill are up 33 percent because BDT Capital Partners, which I was today years old when I learned about their existence, BDT Capital is the largest shareholder of Weber, and they’ve made an acquisition offer for the company. Reminding listeners that this is a company that went public at 14 and the buyout offer is $6.25 a share. It has been a rough, short public life for Weber grill and its shareholders, but maybe this is how it’s supposed to end.
Jason Moser: It felt like it had been this way, we’ve talked about these businesses before, your Weber’s and triggers of the world that make really great products. But don’t necessarily translate into great investments because the products they make, I mean, you’re hanging onto them for a really long time. I mean, you buy good trigger or good Weber grill and you take care of it. I mean, you can own that thing for 15-20 years and so then how else are they making money. Now I give all of them full credit. They’re trying to figure out how to make additional money. Whether it’s selling the charcoal or the wood pellets or spice rubs or even meal kits. But that’s also not really the highest-margin business, sure it generate some repeat sales. But ultimately, I don’t know that always translates necessarily into the best investment.
You can see the writing on the wall for this one from the very beginning too, because they raised $250 million in the IPO and that was less than half of what they were really hoping to raise. I think investors need to take that as a…
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