Earnings Watch Party Replay: Cisco, CVS Health, Restaurant Brands, Krispy Kreme, and Kraft Heinz

Thanks everybody for joining today. We're excited to do this. These earnings calls have been a lot of fun. We've got a nice list of stocks to go over today. I'm going to go ahead and share my screen and get us going. As always, please get your questions and emails into the chat. Or to the Q&A. We will take requests if we have time at the end. So if you, if you're interested in that, get those requests in sooner rather than later. But we will jump right in. Let's talk about Cisco. So Cisco, let's see what the news is on Cisco. Pops on an increased full-year revenue forecast. So some good news on Cisco. Good earnings. Raises revenue forecast as profit and sales beat estimates. All right, so that's the news. The performance on the stock, pretty good. That's good. That's a good amount to be up today. You, you know, you might expect a little bit more. It kind of popped earlier in the day, but it's come back down. Cisco is one of our focus list stocks, and we've liked it for a long period of time, and we think it continues to have a good position, but the expectations are getting up there. It's still on our focus list because we think the opportunity is strong. And let's take a look at the model. And, and get a breakdown in terms of why we still think this is a good stock. Because we've talked a lot in these sessions about, hey, good company, bad stock. Here we've got, you know, not great company, not terrible stock. Now this greater than 100 years does raise some concern because this is, this is a pretty strong indicator. And this is all based on our reverse discounted cash flow model. This model is going to take a little bit longer to open because it's got so much history in it and it's been around for a long time. But we see economic earnings, which is why this is kind of a neutral. You know, they're still positive but not headed in the right direction. Return on capital been coming down a bit here as well. NOPAT margins and capital turns both down. It's a competitive environment. Free cash flow for this business has been great. They did do a big acquisition last year, so that's, that's a hit, and that's bleeding into the trailing 12 months here. I think we're only one quarter in, so Probably the first quarter cash flow was— free cash flow was positive, but, uh, we got the trailing 12 months and includes part of 2024 in there. And then economic book value. The price has done well, right? We've seen good performance in Cisco because we can see stock's done well. It's been a great focus list performer for us over time. But this divergence does not look great. So when we look at the model We got a couple scenarios in here. We got a neutral, we got a pessimistic. What does pessimistic look like? That looks worse. We don't need that. I think pessimistic is what I was putting in when we first looked at this thing. It was probably trading below its economic book value. So let's take a look here. Let's look at neutral. Looks like my neutral hasn't been updated in a while for— the default's been updated, but my neutral's not been updated for the consensus number. So we'll put 4.2, 3.7. 3.5, 3.33, 3.5, 3. That's not much of a difference. And then in my neutral, I had margins kind of going back up to where they were in the past. See, going back to pretext margins, look at them over here. 28 was about as high as I got. So 26, 27, you know, that seems pretty fair. So if we put in, let's say, 27 across the future here, and then the cash tax rate, it's come down a little bit. Let's just throw that at 16. We'll leave capital utilization about where it is. It's been pretty heavy. This is probably 70, 90%. That's very heavy. Pretty big numbers. It's a capital-intensive business. All right. So let's put that back down to really where the default is. Save this off, and let's see what that neutral scenario looks like. I would say that's a fairly optimistic scenario because you know it's a competitive business. We call this the plumber, the plumbing business of the internet. What do we call this early on? A network to rely upon. We first put this in here. This week's long idea: super strong free cash flow, market leader, internet usage only going up. see that for sure. I mean, AI, all that stuff is going to drive this. Core earnings looked good, economic earnings super strong, big high backlog. Risk-reward rating even was neutral back then. Interesting. But it was cheaper, 1.0. And this is where we looked at the upside, up to $68, $67 a share. And what are we looking at now? 62. So we're almost there. So with that better forecast we put in, growth, you know, about in line with consensus and margins not as high as they've been, but ever, but a little bit higher than they have been recently. I would say this is looking like a pretty fully valued stock. And we will have a conversation internally about whether or not Cisco should remain on the focus list. We'll have to see. I mean, the good earnings report today was positive. I'm surprised that we're not even going to get a bigger pop. I think that expectations as they are now are probably, you know, we had $66, $67, so it hit it right away. So I think it makes sense for this to come back and, and, you know, get back to there. So interesting. Cisco is one of those stocks that is a great business and has been undervalued when it comes— when compared to a lot of other technology stocks. And so I think this is An interesting story here. Interesting story here. It's done great, up a good chunk today, up way more than the market. So that's good. And it's probably a good long-term holding. You want a safe stock. Is there a ton of upside we see still in the stock? It's not something necessarily we might add, but it's a tough one to sell. For sure, tough one to sell. So that was a good one. That was fun. That was interesting. We haven't had a stock like that in any of these earnings watches before to talk about like that. CBS. I think there's some pretty big news in CVS recently. They had an earnings beat and solid guidance, had a really good day here recently. Yeah, so it's in an interesting competitive position, CVS, with these pharmacy benefit managers, but it's got a good retail business as well. So we're looking at CVS, I'm seeing a mediocre business with a cheap valuation and negative economic earnings, positive accounting earnings. Low return on capital. You know, it's one of those that might be cheap for a reason. You know, the 0.8 price-to-economic book value means that the stock price is implying its profits will decline permanently by 20%. Here we see less than 1 year, right? Whenever your price is implying a permanent profit decline, you don't need any growth appreciation period. You don't need any profit growth because it's already Pricing in a profit decline. So interesting takeaway here. Yeah, I want to point out for both Cisco and for CVS, suspended rating because we're going to get a new 10-K any day now. And this is the thing I need to emphasize. It's important to take into account the performance of the stock relative to its accounting or Street or pro forma earnings update. But we don't really know the real truth until we get the 10-K. the 10-Q. And for both Cisco and CVS, that's when the real answer is. And so that, that could probably be a good explanation for why with Cisco people immediately said, oh, that's great news. And they said, well, wait, let's wait for the 10-K. And so that's what we do. And so if we get the 10-K in for Cisco and we see that, you know, returns on capital are getting better or margins are getting better, well then that gives us justification to have a better estimate in here. And maybe, you know, we're talking an optimistic scenario here where we can look at 5, 4, 3.5, leave that the same. What happens if we put in 28%? Or let's say 29%, the best ever margin based on what we see in the 10-K. And if we do that, you know, we might have even more confidence. But back to CVS, it's priced to lose a lot of money here. It's priced to see profits decline. And I would say that's probably somewhat of a safe bet. You know, it's not exactly the strongest business. There's our credit rating. If you ever want to get a better sense of the pure fundamental perspective, credit rating is a great way to go. That mirrors what we're seeing in terms of quality of earnings. They are in a dying business, right? The pharmacy benefit managers, the PBM business is under microscope for a good reason. They made a lot of good money for a long time without adding a lot of value. And then it's retail. And you've got CVS, you got Walgreens, you got Duane Reade. Whenever you go into one of these stores in a big city, man, it's rough. They got to have everything behind glass. People conceal stuff. It just seems like a terrible business. Retail is tough. Retail is a tough business. It's a low margin business. I think you're certainly going to have a hard time moving the needle in any of these areas in retail. And so this is why this is a neutral rating. It gets a cheap valuation, but this could be one of those that's cheap for a reason because the PBM business is in decline. Let me take a quick look here at Cisco. What happens when we look at this optimistic scenario? Oh, I put it in as pessimistic. So pessimistic moves the needle a little bit, puts it at 40 years. Right? You see the line is a little faster, a little higher margin, so it's above that neutral line. So, you know, instead of 40 years growth appreciation period, 65 years, that, you know, that doesn't help us a lot. I'm saying this is still looking like this is a pretty good looking stock, but let's see what happens when we get the 10-K or 10-Q next filing. So 10-Q on February 19th. So we're getting that one in the next few days, maybe in the next week. So yeah, but when we get that, we'll see what that looks like. You know, if the earnings beat that they reported here translates into meaningfully better economics, maybe we put even better numbers in our model and Cisco still looks cheap. We got to wait to see— wait till we get the 10-K and really to be sure we know what's going on. All right, who's next on our list? Kraft Heinz. Kraft Heinz has been an interesting company. Been looking at it for a while. I know for a while it looked really good. Again, we're getting a new 10-K on February 17th, so This stuff could change. What do they say about Kraft Heinz and their earnings? It's up a percent. They beat on EPS, missed on sales, soft outlook. Stock's still up about a percent, which is a pretty good move for the stock. It's not a sexy, very popular stock. Kraft is consumer goods companies, one of the better ones. A lot of great brands they've had out for a long time. But a low quintile return on capital. But similar here, not a very good business, cheap stock. The last few earnings watch parties we've had, we've talked a lot about good companies, bad stocks. Here we're seeing mediocre, bad company, and, and now here, but a good stock, high free cash flow yield, stock price implying a permanent profit decline of 30%. That seems pretty drastic. If I were bullish on the Kraft Heinz business, I'd be all over the stock. I'd be all over like, okay, I think they can do way better. Economic earnings are down, but they flattened out here recently, so it doesn't look like we're going to see another 30% decline. Return on invested capital is actually up a bit. Unfortunately, cost of capital has gone up more, so you've seen economic earnings turn negative because the cost of capital has gone up as the Fed has raised rates. But return on capital has been pretty steady at this low number. And we can see a really low cost of capital for these guys, like 360. This is a low cost of capital. Why? Because they've got a lot of low-cost debt and a very— and a low beta. So it's a pretty safe stock. Margins took a hit, came back. Capital returns coming up. Let's see, what does free cash flow for these guys look like? Strong free cash flow. Look, $600 million, $6.9 billion, $8.6 billion, $11 billion, $4.4 billion, $3.6 billion. It's a moneymaker. I believe this at one point was one of Buffett's favorites. Price to economic book value here, economic book value still a good bit above, price has kind of dropped off. You know, this could be an exciting opportunity. We'll know when we get the 10-Q or the 10-K. We'll know more. And if you see movement in the return on capital on this model, that would be very interesting. And we actually opened the full model on one of these. We actually got quarter-by-quarter return on capital. So We'll be able to model that when we get the new 10-K. And if you see good movement here in the quality of earnings, well, then this is going to look really good. I think that's why you're seeing the stock up today despite a soft outlook and a top-line beat. You've got an earnings beat, and, and so the stock's up, up a little bit less than it was a minute ago. Maybe people are watching this, this call and saying that the quality of earnings historically have not been that good. I don't know, probably not. But yeah, I think you're seeing a pretty strong movement despite what was not the, the best earnings report. And I think that's a function of the fact that you've got a really cheap, a cheap stock here. So yeah, going in, we can go in and see like return on invested capital. We can look at it quarterly. And this quarterly return on capital is going to be a little misleading because it's— you're looking at the true quarterly. It's not a TTM, which would be quarter by quarter. You can see how it's moving. Quarterly is true quarterly, like the NOPAT for one quarter. So it's not, it's not 4x-ing the numerator. It's looking at a one-quarter numerator and a full-year denominator because you don't really get a quarterly denominator ever. So like that's a, that NOPAT is a quarterly NOPAT. You can see it's pretty steady. If we go to the TTM, you can see it's much higher. NOPAT's pretty steady. Return on capital has been really steady. Dropped a little bit here in the last quarter, and we're looking at a TTM value of 4.1. But we'll see that pops up. That could be interesting. We got a lot of history for Kraft. Their return on capital has always been around this level. So maybe it's a pipe dream to believe that it's getting much better. Who knows? It'd be interesting to take a potentially deeper look and see what Kraft could do to move the needle. All right, let's move on to the next stock. QSR attractive rating. Ding ding ding ding. Hey, we haven't had one of these in a while on one of these calls. It's in our dividend growth model. Restaurant brands: Burger King, Tom Hortons, Popeyes, Firehouse. Fifth largest behind Subway, McDonald's. Some pretty good brands there, and there's a lot of opportunity in that space to to be dynamic, to be trendy, and grow. I mean, look, we see the valuation of some of the stocks in this space like Sweetgreen and Chipotle, Cava. absolutely crazy nuts. And if you're going to be in this business, this is a way better one to be in than I would say Sweetgreen by 1,000%. Uh, question on KHC. I think they had a big acquisition in 2018-19. Roger, we could take that. The 10-K for Cisco should be out soon. I think we showed that on the page. We predicting that that 10-K would be out February 19th. Just going through some questions here. Sorry, Let's keep moving here. QSR hasn't come out yet. So what are we thinking here? Well, earnings distortion score says miss, so we wouldn't be surprised if they came in a little bit low. This is a decent company, you know, and good stock. You know, you got good economic earnings. Return on capital is not great. It's kind of hard to have a really high return on capital in this business, but it's pretty cheap. Got a decent amount of growth in it, looks like, based on our, our, our consensus sort of estimates. you're going to, you know, the price-to-economic book value is a little bit higher than what we'd like, but the growth— market implied growth appreciation period is less than 1 year. So that's looking pretty cheap. And I'm guessing it's because we're seeing return on capital rise. This TTM number right here is what's causing the price-to-economic book value to be a little depressed. But our forecast and the DCF model is going to be looking over the last 3 years. So it's going to have a profit margin forecast that's around here, and that's enough make the stock look really cheap. Capital return is doing great, so it's a capital-efficient business, as it should be. Free cash flow, decent, stays positive. You got to like that, got to like that. And then the price to economic book value, just recently the stock went over, you saw a good bit of a drop there. Been competitive, competitive business, but price is down, economic book value looks flat. So this could be a good one. This could be a good one to look at. We like this stock. Attractive rating. All right, Krispy Kreme, very unattractive. This is also on our most dangerous stocks model portfolio list. This has been a bad company from the beginning. I believe we said not to buy the IPO, uh, but from the IPO it's way down. I think our warning was right. We recently reiterated to avoid this stock, but what we, we showed back in the day Like we've shown on a lot of these companies, all these danger zone stocks that, you know, first of all, profits took, took a nosedive when they went private. It's a very unprofitable business, low market share. I don't eat donuts, so I'm not like, I'm not going to eat this. And I don't drink coffee anymore. I don't really eat fast food, but I don't need to be a connoisseur to just see that this business is one of the weaker ones in the space. And it's a very competitive business. We've been watching McDonald's for years. It used to be a focus list stock. It got too expensive. Maybe we got out too early because it— that business just crushes it. And we've seen these other businesses, Wendy's, Burger King, et cetera, just kind of dash their swords against the McDonald's steel curtain around their moat and run promotions and lose money to try and take share. And it doesn't stick. And I just don't see Krispy Kreme as one of the businesses that's going to do that. You can see we were predicting that it could be easily as low as $10 a share. Even that implied a fair amount of profits. It hasn't even done that. The other thing to keep in mind is that you know you don't get a vote when you vote when you when you look at when you own Krispy Kreme. That's never a good thing. They focus on adjusted or EBITDA. It's a bad thing. They didn't have an independent auditor on the internal controls when they did the IPO. That's not a good thing. Why why why not? Why why not be more honest and forthcoming? We recommend you avoid this stock for sure. Bad business, very unattractive rating, expensive valuation, negative economic book value. I'm guessing— see here, return on invested capital trending down, NOPAT margins still down even compared to when they started, free cash flow mostly negative, though positive here so far, and The first 3 quarters. And then, yeah, you got an economic book value. It's a no growth value. The stock is negative $4.58. Like, so this is just not a strong business. So yeah, we definitely highly recommend you avoid the stock. All right, we're done a little bit early. I'm going to take some, some requests. Let's go with BBY. So we, we like Best Buy back in the day. We had a bullish thesis on these guys, but it just hasn't really panned out. So you're seeing a decent company and with a good valuation here. If I was Best Buy and I was running the business, I'm like, yeah, you know what? The market's probably doing pretty right by us. I think it's still difficult for this business to compete. You know, it's not that dissimilar to Staples or OfficeMax, mainly because these electronics are so easily available in other channels, especially online or even Costco. So I just think they're in a tough competitive position. We really liked when we first recommended them a while ago. Several years ago, and I think it did well for a while. We closed it last year. You know, I think what you're dealing with here is just a business kind of run its course. It was good for a while. We really liked the high-touch advisory and explanation that the Best Buy people would have that were non-commissioned experts that would help you figure out how to buy a TV. I remember using that once and it was super helpful. I liked it. I just don't know how much you need that anymore. I mean, the TVs are plug and play. And, and so are most electronics. I think that Apple has really led the marketplace in delivering products that are like, you just take it out of the box and you, you put the watch on, you turn it on, you use it. It's not hard. And that's, I think that's the model these days. And that makes it tough for Best Buy to distinguish itself. So there's that. All right. One more question. CDNS. Let's see. Cadence Design Systems. Good company, somewhat good company, bad stock, super expensive. What you're seeing here, again, we're getting a new 10-K, probably expected tomorrow, but a 9.0 price-to-economic-book value. This is like some really extraordinarily high level of expectations. Economic earnings going the opposite way of accounting earnings. You can see accounting earnings pretty flat, economic earnings falling more, which is why we're seeing this false positive. Return on capital headed down. No-pet margin capital turns both headed down. Free cash flow yield headed down. Free cash flow just went from positive to negative. Yeah, economic book value versus the price just getting wider. Economic— the no-growth value of this business is $33 basically, and now it's trading at $294. So that's a pretty big multiple. So if you divide 33 by 294 and you can see the percentage of the stock price that's dependent on future growth, 33 divided by 294 minus 1. So 89% of the stock price is dependent upon future growth. So you've got a lot of growth baked into this. So we'd say, hey, it's been a good company, been a good stock probably so far. For a long time, been up and down here in the last three months. I'm guessing at some point it went on a pretty good run. Otherwise, I don't know how it could get so expensive. Maybe it's never been a good business. But yeah, we would say this one is fully valued. We'd avoid it. All right, we got one more earnings watch party this week. Tomorrow, it's at 10:30 a.m. Eastern. Not the normal time. I got to go a little bit early tomorrow. We'll be talking about some of the top stocks in the market tomorrow. We'll be giving you the truth behind the earnings. Also want to make sure that I drop a link here for our next offer. We're going to be talking about the Golden Metric. This is a special metric that we've used to identify some super outperformers in the past. We don't even have a model portfolio yet for this, and but we've just found the stocks do great. And it's a ratio that no one else can measure because no one else is looking at the footnotes and no one actually has the truth about earnings the way we do. And so when we see this ratio shift, uh, to where one number's higher than another, that's a super good sign. And so we're really excited to be rolling out that stock bundle again. Those picks, again, the last time we did this offer did really, really well. So we're excited to talk about that. It's a great— it's a great flex of our system, a great offer for folks. So thanks very much for joining me today. Appreciate the Q&A and the suggestions and the requests, and we will see you guys tomorrow.