In this podcast, Motley Fool host Dylan Lewis and analysts Andy Cross and Matt Argersinger discuss:
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The National Association of Realtors agreeing to over $400 million in fines and to eliminate its commission rules.
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Why AI is pushing Oracle up and Adobe down after earnings.
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The numbers behind Williams-Sonoma‘s 18% spike.
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Kevin Plank’s return to Under Armour.
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Ulta‘s wild shrink story.
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Two stocks worth watching: Equity Commonwealth and Landstar System.
Motley Fool host Ricky Mulvey catches up with Bloomberg entertainment reporter Lucas Shaw for a look into the business of streaming, the power of incentives, and corporate infighting at Paramount.
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 March 15, 2024.
Dylan Lewis: We’re entering a new era in real estate. Motley Fool money starts now.
It’s the Motley Fool Money radio show. I’m Dylan Lewis, joining me in the studio. Motley Fool Senior Analysts, Matt Argersinger, and Andy Cross. Gentlemen, great to have you both here.
Matt Argersinger: Hey, Dylan.
Andy Cross: Hey, Dylan.
Dylan Lewis: We’ve got a run-down on retail, the state of things at Paramount and of course, stocks on our radar. But we’re kicking off with real estate news, Matt, after several years and lawsuits related to excessive fees and antitrust activity, we might be looking at a new real estate market.
Matt Argersinger: We might be, Dylan, if you ever sold a home. It’s always been confounding well, at least for me, that in addition to paying a commission to your agent, in that case, the seller’s agent or the listing agent, you’d also have to pay a 2.5, 3% commission to the buyer’s agent. And this was essentially, for decades, a mandate of the National Association of Realtors, NAR, of which the vast majority of agents in the US are members of. It’s why commissions on transacting home haven’t traditionally been set in this 5-6% range, split evenly, usually by the seller’s agent and the buyer’s agent.
So instantaneously on every transaction, in addition to other closing costs, repair expenses, 5-6% of your homes’ equity would instantly, that had been built up maybe for over many years, and worth tens of thousands of dollars would instantly go away for these commissions. It always seemed like one of the final areas of the market that had yet to be disrupted. Because if you think about what’s happened to travel agents, what’s happened to brokerage commissions, certainly transacting and almost everything in the country has gotten cheaper overtime except transacting a house.
If you look at the median price of a home in the US, right around $400,000, that’s 20,000 or more in commissions just to sell a house. But here we are. The NAR has essentially settled, which means they are not contesting any more of these lawsuits, the civil action suits against them, they’re paying a fee and the idea is that they’re going to lose their monopoly position on the marketplace. Now, agents won’t be required to be members of the NAR.
They won’t be forced, for example, to subscribe to MLS listings already get paid and essentially makes real estate agents, free agents that can set their own commissions. And if you’re a home seller, or a homebuyer, gives you far more negotiating power. You can pay a commission to a buyer that you want to pay, and it’s no longer causing a mandate to pay a commission to the other side of the transaction.
Dylan Lewis: Matt, and looking at this news, I was trying to process both the news itself and then the follow-on impact that it would have. And I feel like for buyers and sellers, we’re probably looking at lower fees and a little bit more flexibility. Beyond that in the business landscape of real estate, I feel like it’s really hard to nail down what it means for companies like Zillow, Redfin, and other operators.
Matt Argersinger: I think clearly for the publicly traded agencies, this is not going to be great news. I mean, those fees are coming down, their margins have to come down. The business is going to change. There’s going to be less agents in the marketplace. For companies like Redfin and Zillow, it is a little cloudy for me, because for one, Redfin who has already trying to disrupt the whole transaction fee of this marketplace anyway and with Zillow, Zillow really depends on the vast majority of its revenue still comes from agents who pays a low for leads on their marketplace.
They need agents, and they depend on the traditional model. So for Zillow, it’s also could be disruptive, although a little confusing. I would just say this, good real estate agents do deserve to get paid. I don’t want to make it seem like these commissions were being paid out the door for nothing. I mean, many work really hard. I’ve worked with agents that had been great. They spent a lot of time working with buyers or sellers, and they deal with a lot of paperwork. There’s a lot of value to what they do. So I feel like it’s still, in a way, it makes the marketplace better for them because I think good agents will thrive. Good agents will still get paid. A lot of agents who were just living off these richly undeserved agent commissions will not thrive.
Dylan Lewis: This week we’ve also got updates in AI sending tech companies in two different directions. We’re going to kick off looking at Adobe here, Andy. Company reported earlier this week, results were good, but it seems like the guidance and the general outlook on how AI might be affecting the business has the market concerned.
Andy Cross: Yeah. Dylan, it’s like that Damocles hanging over Adobe. AI is just waiting for that string to catch, to end up doing some serious damage to this company. This is a company that’s been in investing in AI for a long time. Their Firefly solution, since its launch, now has more than 6.5 billion images created. They’re investing in this space, and they talk a lot about this. However, even though that quarter was really quite good, revenues up 11%, adjusted earnings per share up 18%. They didn’t have to pay a billion-dollar fee for the Figma transaction getting canceled. Their digital media revenue was up 12%.
Their ending annual recurring revenue, which is very important when you think about this business, up 14%. The Document Cloud business, which is part of their solutions and part of this package, was up 23%. So that’s really impressive. Their digital experience revenue, that’s their new marketing business they’ve been growing. That was up 10% with remaining performance obligations up 16%. So the quarter was all really positive, very good. However, it was all in the conversation about the guide in their future revenues, thinking about the bookings and how artificial intelligence is or is not impacting their business.
Especially it’s things like OpenAI Sora, which is their text to video creating device and how much that’s impacting, not just creating videos and imaging, but also giving clients the ability to edit those. Lots of conversations around what that means for their business. They didn’t come out very enthusiastic about the guide going forward. Lots of conversations around with the analysts about what this means after minutia at the timings at this quarter, next quarter, a lot of concerns that so much of the growth of the year is going to be back-ended into the second half.
Clearly you see the stock reacting, more down 13% as we’re going into tape this. The market clearly having some discussions and some hesitations about Adobe, which is the leader in this space. By the way, the stock has done very well over the last year. So I think the most pullback maybe a little ahead of itself and this is some of the pullback we’re seeing.
Dylan Lewis: A different story with AI over at Oracle. This is a company that is catching the tailwinds of AI. Matt shares up 10% this week following the company’s fiscal Q3 report. Thanks in large part to demand for the company’s Cloud offerings.
Matt Argersinger: Absolutely. I mean, if you look at the headlines, revenue up 7%, adjusted EPS up 16%, both better-than-expected, but the two likely reasons, and you hit one of them, the stock has been up so much. First Oracle’s remaining performance obligation, RPO, Andy mentioned this for Adobe as well. This is basically sales that Oracle is contractually obligated to fulfill, but hasn’t yet quite recognize as revenue or if you’re a simple investor like me, it’s called backlog.
That’s up to 80 billion, up 29% year over year. So that’s just revenue growth is going to continue to be fairly robust going forward for Oracle. But the Cloud revenue for Oracle, 25% year over year, Cloud infrastructure business, 49% increase year over year. That’s the piece that really competes with the bigger at Cloud providers like AWS, Google Cloud, Microsoft‘s Azure.
You can conclude right there that Oracle is gaining market share. The big reason for that is a CEOs Safra Catz, demand for Oracle’s Artificial Intelligence Cloud capabilities far exceeding supply. To address this, Oracle actually signed a new agreement with Nvidia in the quarter, investing heavily in opening and expanding its data center network. The AI plug in here for Oracle is very real and very robust, and it’s got investors really excited about the business, obviously.
Dylan Lewis: Matt, right there, you name checked a lot of the big companies and brands that we associate with cloud discussion, Microsoft, Alphabet, Amazon. We have generally left Oracle out of the conversation for the big Cloud players, do you feel like we need to start bringing them into that group?
Matt Argersinger: I think so. This might eventually become a big four with Oracle. Because if you think on Oracle, all the other three companies that you mentioned all have big leads, big market shares, but they’re also doing very different things in a lot of different markets. Amazon in particular, Alphabet of course, with advertising and YouTube. This is Oracle’s business. I mean, database networking Cloud infrastructure is their business. It’s their focus. I think they’re going to continue to gain market share.
Dylan Lewis: Coming up after the break over at Under Armour, it’s meet the new boss, same as the old boss. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I’m Dylan Lewis joined in studio with Matt Argersinger and Andy Cross. We’ve got a rundown on retail and apparel. We’re going to start things off with Williams-Sonoma, a huge week for them, Andy, shares up 18% following the company’s earnings release. Even though net income declined year over year and revenue was basically flat. Andy, what’s going on here?
Andy Cross: Well, on the earnings per share, because they buy back so much stock, it was actually up a little bit just 3%, but far ahead of analysts’ estimates and the sales were down 7%. Again ahead of estimates was much better than how management had guided. Laura Alber has been leading Williams-Sonoma for so many years, so successfully years. I think very conservative when she thinks about running this company, she and her team. Been talking about the challenging market.
We’re having comp sales down. Almost 7%, that was better than two years ago but worse than a year ago. The four-year company, you go back four years, Williams-Sonoma Lakes have focused on that pre-pandemic. They were up almost 30%. I mentioned the earnings per share, gross margins is where they won Dylan in this quarter. Higher merchandise margins, lower supply costs. Williams-Sonoma has been really effective at managing their supply costs.
Being very efficient as how they have taken out more and more costs from their supply chain, how the pricing is starting to impact that. They’ve been talking about that for the past year, which is one reason why their stock has done so well. That allows them to get more efficient when it comes at gross margin up at 46% versus 41% a year ago. The inventories were down 14%. Again, they’re just managing this business, blocking and tackling very well.
Operating cash flow was up 60% for the year. But because they’ve been so efficient on their capital expenditure, free cash flow more than doubled, that allowed them to announce a 26% increase in the dividend certainly helps with the stock price performing so well. Even though comps really for the year where basically down across the board and for the quarter.
Dylan Lewis: Andy, this is probably not accompanying that a lot of people necessarily have on their radar and it is to their detriment. Shares up 140% over the last 12 months. It’s been an incredible performer. The stock is currently at all-time highs for people that maybe haven’t been following this business. Do you feel like the valuation is in a good spot or do you think it’s getting a little rich?
Andy Cross: Here’s just some context behind that. I’m a fan of Williams-Sonoma and a shareholder and we’ve recommended the stock in lots of different spots here at The Motley Fool. The market cap is more than 18 billion. It sells at around an earnings multiple of around 20 times. Historically their earnings multiple is more in the low double-digits or call it the 12, 13, 15 times range. When it got so cheap, it got down to single digits, which is one reason why the stock has done so well. If you want to nibble, fine, don’t go all rushing, but put it on your watchlist. Certainly, if you don’t have it as one to keep an eye on.
Dylan Lewis: We have a less glamorous story going on over at Under Armour. News out this week that founder Kevin Plank will be stepping back into the CEO role and Matt, the market did not seem too excited about it.
Matt Argersinger: Not at all, Dylan. The stock sold off pretty hard. I think there’s a few reasons for this, which we’ll get into. One, it’s interesting, the current or now former CEO, Stephanie Linnartz, she’s only on the job for about a year and she was in the first year of what she thought was going to be a three-year turnaround for the business. Clearly, that turnaround is not happening to the satisfaction of the board and probably to a lot of investors.
But I just found that press release from Under Armour very short, very vague. I felt like this needed a letter from Kevin Plank saying why he’s coming back, why he thinks it’s important for him to step back into the CEO role. We didn’t get that. We just got a pretty short press release. That’s interesting. If you look at Under Armour stock, it’s been stuck in the low single-digits for what seems like forever. Maybe there’s a little bit of desperation here, but you have to remember how Plank left the CEO spot in 2019. Putting aside his various personal scandals, he didn’t leave the company in exactly a great state.
Revenue growth had already flatlined for a few years, he made several poor acquisitions to try to digitize the brand. Inventory hadn’t been managed well. They failed to gain traction at leisure market which I feel they basically invented it. Yet they see that to Lululemon and Nike and others. This isn’t Steve Jobs coming back to the doors. This is not Howard Schultz coming in or Michael Dell coming back. A founder that’s going to come back and lead the company to glory. I think that’s why the market is taking a very cautious look here and saying this is a CEO with a pretty tumultuous tenure at the end. Coming back can a turnaround really happen now?
Dylan Lewis: Matt, I have not sold very many stocks that I’ve owned and when I have almost without exception, it has been the wrong decision. The exception to that is Under Armour. [laughs] I sold my shares, I think when it was in the mid-teens and this business has not managed to get back on track. It’s down about 50% from then. Recently, shares are at their lowest level in almost a decade. What is the return to normal even look like for this business?
Matt Argersinger: I don’t know, Dylan. Unfortunately, I’m still a shareholder, and Under Armour withheld throughout. You see the stocks at a 10-year low. I looked at it. It’s about a 17-year low in the stock price. But this is a situation where I step back and say, wait a second, how much worse can this actually get? Because if you look at Under Armour’s stock, it’s trading for about 0.6 times revenue. For comparison, Nike trades at three times revenue.
The stock’s at a 17-year low. This is the kind that still generates healthy cash from operations. We were talking about before the show, that the brand has to have some equity value. That’s probably greater or somewhere in the vicinity of three billion, which is its market cap. Maybe it can’t get worse and just maybe Kevin Plank finds a little bit of that entrepreneurial magic he had early on in Under Armour. Three years from now, four years from now we’re looking at Under Armour and it’s $25 stock.
Andy Cross: Six dangerous words in an estimate. How much lower can this go? Just be mindful of that.
Dylan Lewis: You’re pumping the brakes there a little bit there Andy.
Andy Cross: Be cautious there.
Dylan Lewis: We’re going to wrap the company updates with a look at Ulta Andy, shares the cosmetic company down 5% after earnings. What’s the story here?
Andy Cross: It’s interesting, the quarter was actually pretty good. It wasn’t anything to really crow about. Revenues were up almost 10%. Earnings at $8.08 ahead of estimates so that was actually quite strong. Their comp sales were at 2.5% but that was versus 16% a year ago so a pretty good deceleration and a little bit lower than the estimates, which I think is what has the stock lower.
Transactions up 4.5% but pricing or average cost of the goods that someone buys down almost 2%. The gross margin was up a little bit. Lower shipping, better supply chain costs. Same thing was we sold Williams-Sonoma. I don’t think quite as effective at Ulta, but a little bit better, but lower on the merchandise margin, which was different than what we saw at Williams-Sonoma. Sales gross and operating margin the cost down at 23.1% versus 23.6%.
They’re doing a pretty good job of managing the cost that boosted the operating margin to 14.5% versus 13.9%. A lot of numbers there, but ultimately, they’ve done a pretty good job managing the cost in a relatively slower-growth business. Skincare up very much. One interesting little tidbit there. They talked about the sales for the makeup category decreased in low-single-digit range. They saw softness in prestige cosmetics was partially offset by growth in mass makeup. They pointed at Elf Beauty as one of the ones that are doing pretty well at Ulta.
Dylan Lewis: It’s interesting. I haven’t taken a look at the quarter, but I’m wondering if they said anything about shrink or anything like that, Andy. I don’t know if you guys caught it, I only caught a little bit of it, but CNBC did this pretty large report this past week about retail theft. I can’t remember the exact story, but I guess there was a ring of resellers who had stolen millions of dollars and Ulta is one of the big victims here of just ceiling this high-margin makeup, reselling it, pocketing the difference and I know they made some arrest. But it was a remarkable story.
Matt Argersinger: It was a huge enterprise, actually a criminal enterprise. Now I think this quarter didn’t get nearly the tension as we’ve seen in the past. I think you’ll see that they’re starting to peak a little bit in there talking about shrink I think but it still continues to be an issue. The guidance, by the way, just very quickly is that comp sales at 4-5% versus 5.7%. That’s for the full year guided ahead. Comp sales for this year ahead, not quite as good as last year.
Dylan Lewis: I’m glad you brought up the shrink story there, Matt because I remember looking at Target‘s results earlier this earnings season and I think it was two quarters ago, shrink was the narrative. They made that statement, I think it was a $500 million adjustment. Some of the numbers that they were looking out for the year saying that shrink was the culprit.
We didn’t see a lot of headlines on that. We didn’t see a lot of discussion of that with the most recent earnings release but we’ve actually dig into management’s calls. It came up 12 times. It is still a story for some of these retailers and we’re still hearing management talk about it but it seems like one of those things that has crested as a wave already when it comes to financials.
Matt Argersinger: When CNBC does a special report or in a special documentary and something that usually as Andy alluded to, it’s looked at the peak but it might be one of those situations where hopefully companies are figuring it out and moving on.
Dylan Lewis: Matt Argersinger, Andy Cross, fellows, we’re going to see you guys a little bit later in the show. Up next, we dig into the turmoil at Paramount and the possible path forward for the entertainment giant. Stay right here. You’re listening to Motley Fool Money. Welcome back to Motley Fool Money. I’m Dylan Lewis. Award season is over, but there’s still plenty of drama unfolding in Hollywood. Motley Fool Money is Ricky Mulvey caught up with Bloomberg entertainment reporter Lucas Shaw for a look at the business of streaming, the power of incentives and corporate infighting at Paramount.
Ricky Mulvey: It’s a tough time to be a movie company, but do you think there’s starting to be a greater willingness to go for those singles and doubles now that there’s some adult dramas that are doing poorly. Ferrari did not make money. But Anyone but You, which was a romantic comedy made more than 200 million at the box office. Like A24 eked out a profit with Iron Claw. So is that door continuing to open a little bit for those adult dramas that used to just go to streaming.
Lucas Shaw: I get very mixed signals on this and I think it’s hard to answer that holistically. I don’t think that these companies are giving up the Tentpole strategy, which is, let’s have a handful of really expensive, really big movies. Because when those hit, they make so much money that it pays for everything else. They can’t really move away from that for that reason. But you do see certain studios. I think Universal, Sony, and Warner Brothers, foremost among them making a wide range of movies, believing that there is value in having to use your metaphor, a single or a double, in addition to the home run.
If you look at the types of programming that Netflix is going to do, I think they are going to take fewer really big swings and make more movies. That cost in the 20-$100 million range, which is, I don’t know that it’s going to be a bunch of dramas. I think it’s going to be comedy, and thriller, and action, and things like that. But I do think you’ll see a good number of movies made that are in that middle that the big studios had really forsaken over the last several years.
Ricky Mulvey: Yeah, and I want to own a move to Paramount, which you covered in a story called How Paramount Became A Cautionary Tale Of The Streaming Wars. The only thing on their upcoming slate seems to be those big Tentpole films after the Bob Marley movie, and they did Mean Girls. But then upcoming it seems that it’s a Transformers movie, they’re going to do a PAW patrol movie and it’s not these small movies. They might have trouble attracting creators right now to get those smaller to midsize movies for their studio.
Lucas Shaw: The problems at Paramount have made it very hard for that studio to do deals. I’ve spoken with executives there who’ve been very pleasantly surprised, I should say, at some of the talent who’ve reupped their relationships with the studio, including John Krasinski though, filmmaker of A Quiet Place. But you talked to a lot of producers and they’re pretty clear that Paramount would be their last choice, both because it’s a company that just hasn’t made that many movies.
Other than basically Top Gun, hasn’t delivered a lot of huge hits. But I think more than anything because of the uncertainty at the corporate level where you have a controlling shareholder in Shari Redstone who pretty clearly would like to sell the business, is looking for buyers, is struggling to find buyers. She’s looking to exit, not because this is a great time to sell and you can get a great deal, but because the business has been declining and she wants to get out while she still can.
Ricky Mulvey: Can you take us into the informal auction going on for for Paramount right now. Where’s that sit?
Lucas Shaw: Actually, you know what? Let’s let’s take it back a step. I think Shari decided that she wanted to sell at some point last year. Some people say over the summer, some people say in the fall. Either way, she had been approached over the years by a few parties. She really started late last year talking to David Ellison, who runs a company called Skydance, whose father is Larry Ellison, one of the richest men in the world. David Ellison’s company is a co-financier and producer of Top Gun, of the Mission Impossible movies, of Star Trek movies, all Paramount biggest franchises.
David Ellison would like to buy Shari Redstone out of National Amusements, which is the family holding company, a movie theater chain that has the stake in Paramount and then merge his company with Paramount. The challenge with this is that while that deal is great for Shari Redstone, it’s not necessarily great for Paramount. I think there’s some people who are skeptical about why you would want to merge with Skydance other than because David Ellison wants them to and there would certainly be a dispute over valuation.
So you’ve got Shari Redstone and her camp looking to see if there are other bidders. Because anytime you’re trying to sell, you want to have multiple bidders so you can drive up the price. So she’s talked to David Zaslav, the CEO of Warner Brothers discovery. She’s talked to Apollo, the private equity firm, and she’s talked to some other potential buyers. At the same time, you’ve got the company of Paramount with advisors looking to see if there are other offers because they don’t necessarily love this David Ellison idea.
That’s the state of play. We know that David Ellison is interested and has at least made a preliminary offer. We know there have been conversations with a couple of other parties, but it’s not clear that there is another tangible offer or real buyer on the table right now for the company. So it’s an open question as to whether they’re going to get a deal done.
Ricky Mulvey: In the past, Netflix was a part of the conversation. Warner Brothers discovery looked at it briefly.
Lucas Shaw: It should be noted. I should just on that point, that yes, Netflix has been part of the conversation, but Netflix was part of the conversation in so much as it wanted to buy just the studio, Paramount Pictures. I think there are a lot of entities that would be happy to buy just the studio because it’s got a good library that they could exploit and film and television, it’s got, honestly great real estate that lot in Hollywood alone is worth billions of dollars.
The problem is that if you’re Shari Redstone and you don’t want to sell just the studio because it’s your most valuable asset. So then you’re left with a bunch of stuff nobody wants. If you’re a buyer, it’s the stuff nobody wants. Like you don’t necessarily want to take these declining cable networks. So it’s going to be interesting to see Shari Redstone’s probably going to have to sell at a discount to unload the stuff that nobody wants in order to unload the whole company.
Ricky Mulvey: It seems that there has been a little bit of pride when they’ve had offers on the table. BET was one of them where the deal is off by a billion dollars, so everybody walks away. Now Paramount may get to a point where there’s no option other than the buyer that’s willing to take on the company.
Lucas Shaw: Yeah. I mean, it’s crazy that they almost sold. They could have sold BET, they could’ve sold Showtime. That would have raised enough money between the two of them. If they did the deals, they probably could’ve gotten 4.5-5 billion dollars, that would solved a lot of problems. They could have paid off a lot of debt. They could have funded a bunch of stuff for the streaming service and yeah, they just didn’t want to do it.
Ricky Mulvey: Is the cardinal misstep that Paramount made with streaming, which is their main loser of money. Just that they were late to the party or were there other mistakes along the way?
Lucas Shaw: They were definitely late. But that was not the cardinal sin because every company was late and every company that went in is facing the same conundrum right now, whether it’s Paramount, or Warner Brothers Discovery, or Disney, or in a lesser way, Comcast because there are more diversified enterprise. But entities that have a bunch of cable networks are just watching as they fall into the sea and their streaming service is not rising fast enough.
So should they have moved faster? Yes, Disney moved a little bit faster. Having a lot of the same problems. I think the issue is that this was always going to be painful and you have this incredibly lucrative business that was going away and entities that made a lot of money from that business were not going to rush to kill it. It’s the the classic innovator’s dilemma that people talk about. Netflix was able to come in as a new player and disrupt this business and none of the competition moved fast or move quickly enough to respond.
I do think that Paramount has made some specific missteps. I mean, you look at it and I should also say Paramount was hamstrung by the corporate infighting. There were two separate entities, CBS and Viacom, that the Redstones controlled. Shari Redstone had to spend many years fighting to cement family control over them in disputes with management of both companies, when she did actually put it together. That then took a while to make it happen. So there were a lot of hurdles to making it work. Then they spent a lot of money really quickly.
They didn’t think about it. All these companies made the same mistake. They had to try to compress 15 years of Netflix’s building into a short time frame and we can debate, is there any way in which that would have gone well? Or was it just a function of going late and I’m not sure the answer. I’m sure that there were sounder strategies with these companies. I also think that had they acted five-years earlier, there’s no guarantee it would have worked.
Ricky Mulvey: On Paramount, Shari Redstone wants a buyer. What happens if Paramount doesn’t find a buyer?
Lucas Shaw: It’s a good question. It’s the one facing all of these enterprises. Then Shari faces a couple of options. She can stay the course and believe that we’ve suffered maximum pain right now and the streaming service is going to keep growing, or we’re going to manage costs and we’ll figure it out. I don’t think Wall Street would be very happy to hear that because it isn’t working right now. There’s a strategy where they resort to selling individual pieces again or where they halt costs a bit more. Then there’s a more dramatic one which some have proposed which I still don’t see them doing.
But this notion of them becoming a pure arms dealer, which means that they shut down the streaming service and just be a studio and sell the others. But considering that that company makes basically all of its money from cable networks and to some extent from streaming. That’s where most of the employees are. That would require, I should say, gutting the business. You’d fire 50-80% of the staff, which is why I see that is unlikely but she’ll have to have to make some big changes if she cuts it because if they come out and say, they haven’t officially said that they’re for sale but if there was a bunch of coverage basically saying that the deal talks were over, their stocks is going to tank.
Ricky Mulvey: I think there’s also an interesting angle on this with the power of incentives. I want to talk about David Zaslav in a sec, but in this case, there’s an early misstep from the CEO, Philipe Dauman, this guy was making so much money in stock awards. He incentivized to boost the stock price and then in order to do so, he’s buying back stock, which means they’re not investing into content and growing the business for the long term.
Lucas Shaw: Philipe Dauman, really one of the worst media CEOs of the last 20-plus years, I would say. Maybe, ever. He took what was one of the most vibrant and great businesses, in Viacom, drove it into the ground. He didn’t understand Netflix, he didn’t understand YouTube and rather than invest a bunch of money in streaming, which he should’ve done because they had the networks that were most exposed. MTV, Comedy Central, Nickelodeon, they speak to young people so you could see the trends early. I
nstead of investing in streaming, he just bought back a bunch of stock. He did whatever he could to prop up the share price and it was really destructive to the enterprise long term. All the mistakes that Shari Redstone and Bob Bakish may or may not have made Philipe made more. Sumner Redstone, who was in charge of the company at the time and was the was the owner, they deserve the largest share of the blame, no question.
Ricky Mulvey: I wonder if there’s an incentive problem right now. If Warner Brothers discovery and you’ve talked about it on the town, where David Zaslav has compensation award tied to the free cash flow of the business. I was talking to one of our investment analysts, Tim Buyers earlier. Basically, that’s an uncommon way to incentivize a CEO. Feel free to break down this theory but now you have HBO or the company that’s essentially shelved movies, one of which recently was the Wiley Coyote vs Acme movie. You get a tax loss on that, which is going to boost. You get the immediate boost of free cash flow but then, you might be killing ideas, drawing away creators.
Lucas Shaw: It’s a question of whether he’s incentivized to just cut cost to make cash flow look good and get himself paid more rather than act in the best interest of the company. It’s a tough press. I don’t think that David Zaslav made free cash and the Board made free cash flow the most important metric for his pay just because they knew that they were going to cut costs. I think they wanted to set the target. We have all this debt and we need to save money to pay it off. How are we going to incentivize people to do that? We’re going to incentivize them to generate free cash flow and that’s what they did.
That being said, it’s just a terrible look for this guy who’s about to get paid a ton of money, even though their stock is in the toilet, nobody thinks the company is performing very well. By the way, that free cash flow being the metric for performance and how people are paid, that doesn’t apply to most of the employees of that company. It mostly applies to David Zaslav and maybe the inner circle. They’re really perverse incentives there.
Ricky Mulvey: Listeners, you can catch Lucas Shaw on X. He is @Lucas_Shaw. Coming up after the break, Andy Cross and Matt Argersinger return with a couple of stocks on their radar. Stay right here. You’re listening to Motley Fool Money.
Dylan Lewis: 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 or sell anything based solely on what you hear. I’m Dylan Lewis joined again by Matt Argersinger and Andy Cross. If you went all in on the Stanley tumbler craze, you’re going to have to make room in your cupboard for another weird household item that has caught fire. Andy, grocer Trader Joe’s began selling mini tote bags for $3 in March. They are now selling for hundreds of dollars online. What are you make of this new consumer craze?
Andy Cross: How many is many on the per square inch of tote bags? This has got to be a record if they’re really small. We just bought a Stanley for $35 at REI and those things are some serious piece of hardware. We’re now part of the Stanley craze, I think we have two of them now at the house so I can understand that. If it’s me, when I go to Trader Joe’s, I buy a lot of stuff. I’m bringing tote bags, hanging them on my shoulder, pulling them out of my jackets. Minis are not helping me very much.
Dylan Lewis: I think you timed the market well on that. I think you got in on the tumblers slightly after the peak and maybe have a good cost basis there. Matt, what do you make of these consumer phrases?
Matt Argersinger: I can’t speak to this. I’m a guy who takes brown bags run reused bags to the grocery store and reuses them so I have I can’t believe people are paying $100 for tote bags. I cannot believe it.
Dylan Lewis: I’m just happy people are using reusable bags. That makes me happy.
Andy Cross: There you go.
Dylan Lewis: I’ll take that. Let’s get over to stocks on our radar. Our man behind the glass, Dan Boyd is going to hit you with a question. Matt, you’re up first this week, what are you looking at?
Matt Argersinger: Weird special situation here, Equity Commonwealth, the ticker is EQC. Equity Commonwealth, it’s a two billion dollar real estate investment trust with 2.2 billion in net cash. Do the math there. Yes, it’s trading below the cash on its balance sheet. Now it does own four office buildings that are cash-flowing but materially they’re a very small part of the story here. Management is essentially sitting on 2.2 billion in cash collecting 5% with treasuries, which is good but waiting to make a transformative investment for the business.
The problem is they’ve been sitting on their hands for quite a while now. Investors are starting to get a little impatient and now there’s a hedge fund called Land and Buildings Investment Management, LLC. That’s a mouthful them but they own 3% of EQC shares, and they’ve submitted a letter demanding that EQC actually liquidate the business because under their model, liquidating the business would actually result in a net asset value of about 20% above where EQC is trading in the public markets. We’ll have to see if this gets any traction. But I think it’s a fastening situation to watch over the next few months.
Dylan Lewis: Dan, a special situation with Equity Commonwealth. What’s your question?
Dan Boyd: A special situation is called for, it doesn’t make any dang sense. I’m sorry, are you trying to sell us on cash or office buildings, Mattie?
Matt Argersinger: I think cash but it sounds like I’m actually trying to sell Dan a tote bag from Trader Joe’s Andy, you’re going to be able to beat that? What’s on your radar?
Andy Cross: I got Landstar guys, LSTR, an asset-light logistics company that generates more than five billion in sales, market cap value almost seven billion more cash than debt. It’s an asset-light business, so it doesn’t really own a lot of the assets. It uses technology to help clients, which is more than 25,000 customers across 1,100 independent agents. Basically get our goods from point A to point Z. Mostly inter-modal trucking, van shipments but also some Aaron Freight.
They help make sense of all the logistics challenges to be able to get all our stuff from when we buy it to when we want to consume it. Now it’s been a tough two years post-pandemic because we’re not buying as much stuff. Inventories are going lower. Companies are trying to run down all those inventories. You’re just not seeing the volumes come across their net worth. That’s been a big hit to their sales and to their profits. But this is a very talented management team. They focus very heavily on returns on capital and free cash flow. Ultimately in a pretty good spot, I think for Landstar.
Dylan Lewis: Dan, a question about Landstar.
Dan Boyd: First off, absolutely gorgeous stock chart here for the maximum time since they came out in 1993, whatever, just up until the right you love to see it But this is one of those companies where you read about it and you got to read four paragraphs to figure out the day. Make technology or make programming to help people do trucking. Not crazy about this company.
Andy Cross: But that’s the magic behind Dan. Two tough businesses this week, Dan, which one’s going on your watchlist?
Dan Boyd: Well, I’m not going with whatever Mattie said Come on. I don’t even know what he was talking about.
Dylan Lewis: Landstar wins. Matt, Andy, I appreciate you being here. That’s going to do it for us. We’ll see you next time
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Andy Cross has positions in Adobe, Alphabet, Amazon, Comcast, Microsoft, Netflix, Nvidia, Redfin, Target, Under Armour, Walt Disney, Warner Bros. Discovery, and Williams-Sonoma. Dan Boyd has positions in Amazon, Walt Disney, and Zillow Group. Dylan Lewis has no position in any of the stocks mentioned. Matthew Argersinger has positions in Alphabet, Amazon, Netflix, Nike, Redfin, Stanley Black & Decker, Under Armour, Walt Disney, and Zillow Group. Ricky Mulvey has positions in Lululemon Athletica, Netflix, Redfin, and Walt Disney. The Motley Fool has positions in and recommends Adobe, Alphabet, Amazon, Equity Commonwealth, Landstar System, Lululemon Athletica, Microsoft, Netflix, Nike, Nvidia, Oracle, Redfin, Target, Ulta Beauty, Under Armour, Walt Disney, Warner Bros. Discovery, Williams-Sonoma, Zillow Group, and e.l.f. Beauty. The Motley Fool recommends Comcast and recommends the following options: long January 2025 $47.50 calls on Nike, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $8 calls on Redfin. The Motley Fool has a disclosure policy.
Real Estate News and a Retail Rundown was originally published by The Motley Fool