Watch our Earnings Recap on EOG Resources, Installed Building Products, Monster Beverage, and More

Hello everybody, welcome to Friday's Earnings Watch. We've got a lot of great stocks to cover today. Let me share my screen and we will get started. Alrighty, so these are the 6 we're covering. Let's put— let's take them in, in order of market cap. Let's go with EOG, one of our favorite stocks. This actually happens to be on our focus list. We love the business. It's a toll taker, so they're not really sensitive to the energy cycle. As long as energy demand is there, it's going to happen for this business. And part of the reason we like it is because it's got great returns, great profit, great returns on capital, great profitability, and a price-to-economic book value of 0.7. So the stock price is implying profits are going to permanently decline. I think their earnings were a little bit light. Market didn't like it much. Let's see here. Yeah, down 2.83% today, about 5% here. Looks like they topped estimates, but a little bit lower free cash flow. Let's see how they're measuring free cash flow. What are we showing on free cash flow? Do we have— we're still waiting. We're waiting on a new 10-K. So we're going to get a bunch of information here soon. It's possible some of this information will change. Look, we're getting tons of 10-Ks in every day. I think we're probably going to have analyzed 1,000 this week or more, uh, 1,000 last week, another 1,000 next week. Maybe last week was more like 500. Anyway, we're crunching a lot of data, and these ratings can change a lot with the 10-K. I mean, that's your annual report. That's a big number. Let's see what free cash flow has been historically. Wow. That's some pretty impressive free cash flow. 7% of enterprise value. It's a good number. One of the things that's been great about all of our energy calls is we start with analysis on sort of the macro environment in terms of where the industry is going and what we find across the board with respect to energy companies. Is that, look, demand is— the fossil fuels, the traditional energy companies, the demand is not going away. It may be declining, but not until like 2050. In the meantime, it's still expected to grow, albeit slowly, and then from there maybe decline slowly. So look, it's not going away. So when the price-to-economic-book value is forecasting a permanent 30% decline in profits, And I think there's a strong case to be made for all of the existing legacy energy businesses to be able to transmit and profit from alternative sources of energy as much as they do traditional sources of energy. It's not like the solar panel company is going to take over, right? The energy still has to be transmitted, has to be delivered, has to be produced. And these big firms, all these other legacy firms are just as well positioned to do that as anyway. All right, good. We got some— we got a couple votes in here. For the tickers, we got somebody bragging about big squats this morning. Good for you. Haven't been able to squat for a little while because I had to get my knee scoped, but I'm looking to get back to it soon. I like that. That's a good comment for Friday. But anyway, any other comments on EOG? Good company, good stock. We also like the fact that they link their compensation to return on invested capital. That's a big one. This is my favorite model portfolio by far. Focus list is like the best. Like, that's awesome. But this is my favorite one because anytime the board of directors takes it upon themselves to make sure that they're only paying their executives when those executives create real shareholder value, improve returns on invested capital, or improve economic earnings, I mean, that's a great thing. Why should executives be paid for anything else? Oh, well, they should get paid for stock price. Well, ultimately the stock price should reflect economic earnings. In the near term, we know stock prices can reflect all kinds of false narratives. And we've actually seen where linking compensation directly to stock price can lead managers to lie about performance or focus on false measures of performance like adjusted EBITDA, jack up the stock price, cash in their options, and leave a dead company. Right? So why don't we just pay people for creating value? Why not? I honestly believe it's unethical to run a business without paying executives based on economic earnings or return on invested capital. I would never do it. You'd never do it. Would never do it. I think if you're a publicly run company, you have a fiduciary responsibility to your shareholders to ensure that real value is being created. And if you're not, then you should be fired. And if you're on the compensation committee and you're paying people based on adjusted EBITDA or things that steal effectively from shareholders, You should be fired. And I think that eventually we're going to get to a place like that. Think about New Constructs as being like the DOJ for the stock market, right? We're going through, we're telling you who's actually make— which companies are making money, which ones have an appropriate valuation, just like DOJ is looking at which federal employees are actually working and being productive and which ones deserve what they're getting paid, right? And they promote the good ones, get rid of the bad ones, AKA most attractive workers and most dangerous workers, just like most attractive stocks and most dangerous stocks. And so we're doing it, we're doing it with an honesty and And a technology that has never been before available to the marketplace. That's why it works so well. All right, let's go to the next one. Monster Beverage. I like this one. This has been a really profitable—I mean, sorry—popular company for a long time, and and and it's just kind of interesting to me how it's been so popular, and it's it's like a soft drink company. It's like what is like what why is the soft drink company? valued so highly. You know, we should look at a model like at this and see how highly it's valued. Now, I get the fact that it could be a target for an acquisition. You know, I do love the model where these big distributors like Coca-Cola or Budweiser or AmBev, they can buy craft beer and they can pay the entrepreneurs that created that craft beer or craft beverage a lot of money and still make money on the deal because they can take that craft beer beverages distribution, you know, 10 times, 100 times from where it is. There's— that's a truly like value-accretive opportunity when you can add that. But there's a price. There's a price that is a limit here. And so let's take a look here at Monster. Accounting earnings going up a little faster. That's why we're saying this false positive. Accounting earnings going up a lot faster than economic earnings. We don't like that. Return on capital come down a bit. Margin, invested capital turns. Let's see here. Let's get this model with the S&P stats loaded up before we get here. All right. So for Monster, we got 2 scenarios. If we go with the default scenario, it's going to take them 15 years at— I'm sorry, 4% growth, 53 years. If we go a little bit higher, it's 15 years. Let's go with the 15-year number. Scoop down here. Look at 15-year is $21 billion in revenue. So let's see where that ranks for the S&P 500. $21 billion in revenue puts us in here. So State Street, Bank of Pfizer, Colgate-Palmolive, that's a pretty big consumer goods company. That's a lot of revenue. Kimberly-Clark, same thing. Just looking for comps here. General Mills, they sell a lot, you know, a lot of stuff other than just drinks. And they are still higher. Where's Coca-Cola here? I think Coca-Cola's that much higher. Okay, let's do this the smart way. Coca-Cola is at $46 billion. So they'd be about half as big as Coca-Cola. That's what the current valuation implies. I would say, given Coca-Cola's amazing distribution and wide variety of product, that's a pretty big valuation. Where's Pepsi on here? Keurig Dr Pepper, they're at $15 billion. So they're going to be significantly bigger than Dr Pepper. And then Pepsi is at $90 billion. That's a bigger number because, look, they've got Frito-Lay. And who doesn't love potato chips, folks? Right? Fritos, potato chips, all that good stuff. Cheetos, terrible for you. Honestly, I don't really eat that stuff because I think it kills you from the inside and the outside. It makes you dumber, makes you slower, makes you fatter, all those things. But look, a lot of people love it. Anyway, I think the takeaway here— I know I said I wouldn't get into a reverse DCF model, can't help myself. It's just, I think it's fascinating to really understand what the expectations baked into the stock price are. Let's take a look at the NOPAT. Let's see where that ranks, because I think that's going to be actually an even higher kind of NOPAT. Look at both of them. Seen a pretty good hockey stick here, right? The NOPAT is at $4.7 billion. So let's come back in here, sort by NOPAT. What was it again? $4.7 billion. $4.7 billion. That would put them at 100th, up there with a lot of big companies. Where does that compare to Coca? All right. Coca's about twice that. Pepsi, less than Coca-Cola. Wow. So much bigger revenue, much lower margins. Interesting. And let's go with Pepper, Keurig Dr Pepper. Yeah, they'd be more profitable, quite a bit more profitable than Keurig Dr Pepper. So yeah, I think that says expensive stock. So what happened with these guys today? Monster up a lot. I think they put out good numbers, up about 3.5%. Strong energy drink sales. So yeah, I mean, look, what's the moat around energy drinks? I mean, sweet-tasting caffeine drink. I mean, I see like a new one come out every day, like, so Yeah, there's not a lot of moat here. I think it's all about marketing, and I just don't know that this is a business that I would expect to be able to grow at that kind of a rate. 7% compounded annually for 15 years to get to those huge numbers, you know, at these really high margins, high return on capital. Right. So it's not going to— well, let's see. Interesting. It was even higher before. So interesting. Yeah, it makes sense. You're really just kind of selling, you know, flavored carbonated water with some caffeine. So I could see how returns on capital stay high, but that's not clearly sustainable. So anyway, yeah, they had a good— they had a good report. Stock's up. You know, I think I call this a false narrative. Like any, any, any relation to the back to the fundamentals like breaks the narrative, right? Oh yeah, great. They did well. But the stock price has all of that and much more baked into it. Wall Street doesn't want you to do that. They just want you to look at that one little earnings number, that beat or miss. And every quarter we can have a big party and pay a lot of attention and make investment decisions based on that one little number, about that one little performance point in that one point in time. Even though stock prices reflect the cash flows for all time, we're going to focus on this one little one. Don't you see how the game is going here? Right? Don't look over here. Don't look behind the curtain. Don't understand what's really going on. Just pay attention to what we want you to see. All right, Warner Brothers, strong beat call here. We're seeing, by the way, we're seeing a lot of suspended ratings because a lot of these 10-Ks are due in. We're in the middle of 10-K filing season, so not, not surprised to see lots of Ks coming in here and things suspended. All right, so interesting here, low return on capital. Neutral economic earnings, really strong free cash flow. I think there's been some sales here on the balance sheet. Price to economic book value is 0.4, so I'm curious. Economic earnings headed down, return on capital hurting, NOPAT margin just broke down here negative. It's a very scalable business. I think they had a nice beat, didn't we? We're predicting it, predicting a beat here. Strong beat. And stocks up. They beat— I think they had a positive outlook on, on their subscriber growth, which is what everybody cares about. So interesting. All right, Warner Brothers. It's unattractive. It's kind of a middle-of-the-road here, guy. I mean, we got one green here, but the rest of it is pretty, pretty rough. So I would say Be careful, expensive. I like this business better than some of the other ones we talk about. I think they've got something that's sort of unique, right? I think they've done a good job of original content, but it's a super commoditized business, right? Netflix used capital as a weapon for a long time. Like, and by that I mean they could afford to lose a ton of money and burn a lot of cash for a long time to build up a customer base that they're now able to monetize. And they were very fortunate that they had that kind of capital. But they burned a lot of capital for a long time. They still made shareholders a lot of money. That's a very rare thing when you have investors willing to fund that much cash flow destruction that we saw with Netflix. They only just recently become somewhat positive. I know the margins and return on capital Netflix have gotten better, but they were still horribly free cash flow negative for a long time because they were just capitalizing costs to the balance sheet. So it made the numerator look a lot better. Which even fools return on capital sometimes. If you capitalize expenses, it's going to absolutely overstate your return on capital, which is why we don't capitalize expenses. Those of you who are clients, you can go read my thesis and paper and model on that, that where I show that capitalizing expenses is a fool's errand. All it does is make companies look better in the short term and look worse in the long term. So it just creates noise. Ultimately focus on free cash flow. That's the way to go. All right, Norwegian Cruise Lines. Interesting, right? Interesting company. We haven't talked about a company like this for a while. Waiting for a new 10-K. A lot of neutral here. Price to economic book value is looking big. I'm guessing this is, this is like kind of a dis— difference here, right? You got a, a really high expensive price to economic book value but a low growth appreciation period. I think market implied growth appreciation period. I think if we open this model up, what we're going to see is that margins have come down here a good bit here recently. And so the current value, the current NOPAT is a bit depressed. If you normalize those margins a little bit and you put those into the model, you're going to see a slightly better looking company. Let me see if I'm right about that. NOPAT margins, not really. No, NOPAT margins on the rise. So That's interesting. Got to take a look at that. Maybe, maybe just the, the growth and the consensus is, is really strong, have it bouncing back pretty fast. See what free cash flows looked like. Yeah, this is some bad times. This COVID times were tough for these guys, but it's bouncing back. So this is a business that I would say, you know, I mean, it's, it's kind of one of those cyclical. It's going to, I guess, do as well as the economy. And we know now that the economy is sort of 2 classes. You've got the rich and the not rich, and You know, the rich can go out and spend. And I think there's a lot of speculation as to whether or not the rich can spend enough to, to sort of buoy the entire economy, even though a lot of, a lot of regular folks like me are not going to be able to do anything close to that. So I think, I don't know, it's an interesting situation. I don't know if it's tenable for a long time, and I'm hoping that a lot of the changes we're seeing will address that. So let's see what's going on here with this. Wow. I guess off coming out of COVID Oh, wow. Okay. So, wow, that's a high number. So for whatever reason, that's a really high default NOPBT margin. Let's see what— geez, that's crazy high. Put a ticket in the system and ask what's going on with that. Let's see what it shows when we lower those margin assumptions a little bit. Yeah, very different profile. So as a default scenario, pre-tax profit margin, that's a bit, it's a bit aggressive. Interesting. Surprised to see a default that high. Probably something that should be closer to neutral would be like a 15, 12 as a pessimistic, probably make more sense. Interesting. Okay. So Curtis is weighing in here. Maybe that's what the deal is here. Curtis is weighing in saying that normalized margins in the cruise business are 20-plus percent. COVID crushed them. Yeah, I mean, I'm willing to believe that. I'm okay with like wiping out these years, but I'm not seeing 20% for these guys. I mean, 19, 19, high 19, 20, 18.6, 19. So interesting. Neutral, 16 years. Okay, so if you do believe they're going to get back to those margins, then it is cheap on the, on the market applied growth appreciation period. Thanks for weighing on that, Curtis. I'm not an expert in this industry by any means. But you get the idea here is that with this kind of a tool, you can, you know, you can really hone in on like, what's it going to take, right? What kind of margin? And you could go to management. Imagine if you were like a professional Wall Street investor, you can go to management and say, what's the margin going to be? Tell me what you're going to do. And, and then ask them, okay, how do you justify your stock price if your margin's only going to be X? Or if your margin is that, do you, do you think your stock price is worth this? I mean, what kind of— imagine the kinds of conversations you could have with a management team with a tool like this. Especially for those management teams that were complaining about their stock price being too low. Okay, well, if you think your stock price should trade at $30 a share, show me how you're going to get to 7.1% compounded annual revenue growth with a 3.1% ROIC minus WACC margin and do that for 6 years. Answer my question. Oh, I don't know what you're talking about. Oh, you mean you don't understand the economics of your own business? Right? This idea that financial— that management should not be financially literate about their own business. It's a joke to me. It's okay if the CEO says, oh, you need to talk to my CFO about it, but then CFO should be able to come in and just crank on it right, right there, right then and there. Let's put everybody on the same page— investors, analysts, and the companies, Wall Street banks, everybody. Let's all look through the— look at stocks through this lens. So I'll just be honest about what's going on. How cool would that be? I believe that's going to happen. I believe it's going to happen. I don't know if it's going to be this year or next year or even in my lifetime, but at some point in time, this whole backroom valuation dealing BS stuff, it goes away. Just in the same way that technology has created so much transparency and shined a light in so many dark corners of our world, they're going to shine a light in the dark corner of valuation and profitability. And it's gonna go away because it doesn't do our society any good for there to be such a disconnect between what is presented to the world with respect to profitability and valuation and what is true. And I just believe that as a society, as a civilization, we're moving in the right direction. I'm very bullish about humanity in that way, very bullish about how transparency and honesty and integrity will win the day. Because candidly, Negative behaviors are self-defeating, right? The, the reason that, you know, society is, is, is advancing more, more, more often than not is because when you do really bad things, if we're all out there chopping each other's heads off, we all die, right? If we're all out there lying and cheating all the time, nothing works. Trust is sort of the essential fabric of, of humanity. And I think we all deep down know that without it, things go downhill really fast. So yeah, that's my belief. Sorry to get on a tangent there, but it's Friday. It's tangent time. Okay. One of these days we'll do like, we'll do one of these live and we'll, you know, we'll rent out of some hotel space and on Friday we'll do this as like as a happy hour. How about that? That would be fun. All right. Install Building Products. I was happy to pick this one out of the list because I've heard a lot of sort of like Buffett heads talking about this stock. Right? They probably love it because it's got great economic earnings. But are they looking at the reverse DCF model, seeing great free cash flow? Are they looking at the valuation in the way that we are? Probably not. We talked about Domino's Pizza a couple days ago, one of the original super stocks with the golden metric in place, right? We loved it, but it got too expensive. Now Warren Buffett's getting in there, and like other friends of mine who are Buffett heads, like Claim they like it. Let's break that down. Is that a good idea? Right? I don't think so. I'm not gonna. We don't have enough time for me to get into the reverse DCF on this one, but I think the answer is obvious here. Great company, bad stock. It's crowded trade, folks. Move on. Find something else. Take your money and go. Right? These days, this market, you assume Momo's just going to carry the day. Things just going to keep going up. Roaring Kitty meme stock style. I don't know. I don't— I'm just not a big fan. Dentply Sirona. Fun to put this one on the list because this was a— I think we did a big piece on this a long time ago. We did a Danger Zone talk about this mostly because we were talking about misaligned compensation. The top 7 executives listed. Compensation is based on revenue growth, non-GAAP EPS targets, and meeting strategic goals. Company executives pocketed tens of millions in compensation in the past decade while ROIC has been in steady decline. I think we look at this stock— when did we write that article? 2017. So you got to go back a ways. We wrote it right around here when it was crazy high. Okay, good call. Goodness gracious, when exactly did we write that? October 2017. Wow. I mean, okay, talk about calling the top and had a little Wall Street action there, COVID action, and now where is it? So yeah, I was a— that was a— that was an awesome piece. Good for us. We've written a lot of stuff in the past, my friends, so I don't remember them all, but I remember bits and pieces. And so yeah, you know, as a good friend of mine on Wall Street used to say, Mike Mayo, he's like, listen, nobody pats other analysts on the back. When you have a victory, you got to take a victory lap because no one's going to give it to you. So Apologies for me breaking my arm, slapping myself on the back there. But yeah, it's still not a great business. What'd it say? Did they beat here? You know, I couldn't find anything about this. Couldn't find any simple headlines on whether or not they beat or not. But my guess is that they may have, but the market didn't care because it's already expensive. So just, you know, not a great business here. It's a commoditized kind of business. Not a lot of, you know, opportunity to build a real moat. And I think in dental supplies— oh, I think they did a big— oh, this was about the original acquisition and the merger and all the synergies. So I can't tell you how many times I have heard Wall Street analysts and executives talk about synergies from an acquisition. That's another thing that could be— that can be quantified. Specifically, if you say, hey, listen, we're going to buy these guys for $10 billion more than their market cap, then you need to be able to quantify those synergies. If you were to come to me and say, hey, I got $100 million in cost savings, then the net present value of $100 million of cost savings, assuming a 10% cost of capital, that's $1 billion, right? There's, there's $1 billion of, of, of overpayment that you can justify. It's not hard to do. You could give me potentially incremental revenue and incremental NOPAT based on combining. We can find the present value of that, of that NOPAT. We can find the present value of cash flow from selling off assets from overlapping branches or stores, right? All this stuff can be quantified, but shrouding it in the term synergy, that's just a, that's just like a trick to get you to believe they know what they're doing and that somehow something good is going to happen. Don't buy it. If they're not willing to give you the details, then what makes you believe they have the details on their own? Why would they hide it? Right? Hide it because they can. Because Wall Street analysts don't ask them the hard questions. Why? Because Wall Street bankers are making a ton of money on that deal. Everyone's got a mandate to cheer the deal on or get fired because Wall Street analysts are not getting paid. I'm sorry, they're getting paid a lot of money. They're not making the firm any money. So if you're not helping the firm make money, by doing deals that are good for the firm. Honesty doesn't pay. Honesty doesn't pay. I've talked about that a lot. You guys can read a lot of my, my, my, I got multiple e-letters on this, folks. If you want to get a sense about how Wall Street is sort of a propaganda machine, just come in here and check out any of my e-letters. Why Truth Matters is a great one. Humility Matters Too. Fake News Is Cheap for a Reason. See, Where's that one? Oh, here we go. I gotta go back some more. Yeah. Oh yeah. Yeah. This speech was BS. I mean, I like his, his meaning, right? You know, his goals, like, oh, you gotta work hard, but it's more than working hard. If it were just about working hard, then every, every schmo could get out there. There's, there's a lot of luck and there's a lot of talent out there. And, and, and I think it takes a lot of humility. This was sort of— this is what I love to talk about is when asked what he said to David Taylor, this was a huge match, these 2 amazing wrestlers, amazing people, this was after a match and basically this guy Aaron Brooks defeated the reigning Olympic champion and ended his Olympic dreams, like David Taylor was done and by the way, these are the most hardcore people, some of the most hardcore people in the world, they will fight. Wrestlers know how to fight in a way that's like, Different, otherworldly. So when these 2, like, immovable forces, you know, meet, it's an amazing thing. And it's amazing to see, like, this humility from the winner. And when asked, you know, what he said to him, he goes, I told him I love you. He said that David had pushed him to be better by setting such a high standard, illustrating the transformative power of competition. You know, and so I just think that that's that's that's that's awesome. That's that's a great e-letter. Really getting philosophical on you guys today. Hope that doesn't. Hope that's not too annoying. There you go. All right, let's get back to business here. We got a couple plug power. One of our analysts for a long time was always like he was like, "Hey, can I can I trade?" I'm like, "Okay, yeah." You know, plug power, go for it. He hated this business. I think he was like he wanted to be a zombie stock. Maybe it should be a zombie stock. See what's happened over the last few days. Year to date, it's locked 24% of its market cap. Yeah, I mean, look, this is a pretty bad looking business, my friends. I don't know, you know, you guys look at the numbers, nothing good here. Uh, weak internal controls. We just suspended it. We probably just got— oh, that was a year ago. Sorry. Weak internal controls. Bad news. I would note that we a lot of times see this weak internal control stuff go on for a while. Like, you know, years. Not a good sign. So we'll be interesting to see if they reverse that. But you got economic earnings maybe getting a little bit better. Return on capital, you know, bad for COVID, but trending down. Margins trending down. Free cash flow trending down. Free cash flow negative, negative, negative, negative. I mean, there's been a false narrative story. You know, out there, this has got to be one of them. You know, the energy sector is our favorite sector. It's a very attractive rating. I think it's our favorite sector. I shouldn't say that. If you guys were on here earlier this week, you know that just a couple days ago this list looked different. Ratings are changing, sector ratings are changing. We're getting in a lot of new data, but the energy sector still up there. But you know, what does this tell you? Not all stocks are good just because they're in a particular sector. You'll hear that from us all the time. We don't paint groups of stocks with the same brush. We don't have to. We've done the work. We've done the work. So when we're screening for stocks in our system, we're screening based on, you know, the best information in the business. So we can come in here and say, look, I want to know all the stocks that have a very unattractive rating and a return on invested capital. Looking for shorts, return on invested capital less than zero. Free cash flow yield less than zero, and I'm looking for stocks to short in the tech sector because I think it's overheated. I want my growth appreciation period to be greater than equal to 100. Go! There it is. Oof, that's a scary large list, isn't it? Uh, maybe you want a market cap, big market cap. Wow, okay, there's some target shorts for you. But here's the beauty of our screening system. This screening on, like, incredibly good ratings. All screening in the past before new constructs, it was just meant to try to limit the amount of work you had to do by narrowing the number of companies you're going to do a deep dive on to a manageable number. We did the deep dive to begin with. So when we screen, when we create model portfolios, it's based on extremely good information. So that's That is an update. All right, ITRN. Don't worry, Stephen, I'll get to you. You were the first vote. We just added to the list here. Iteron. Ah, I spoke about this company at a conference, pointed out as one of our top picks. It's in the Most Attractive Stocks Model portfolio, safest dividends, 3.6% yield, and a price-to-economic book value of 1.0. If you'd listen to me on this one, you've done extremely well. I did this conference Last November, I think. So yeah, I think you've— gosh, you've made like 50% since I talked about this one. It still looks cheap. Economics, cheap stock. I love you too. ATKR. This is our last one, folks. So no more questions, no more, no more questions, no more tickers. We are going to end it here. Wow. Okay. I don't know anything about this company, but it's, it's not on any of our model portfolios. Credit rating is neutral, but otherwise it looks pretty darn good here. Must have a lot of debt. $900 billion in debt on $2.1 billion. So that's credit rating looks a little bit shady, but man, free cash flow yield greater than 12%, greater than 10%. Price to economic book value, assuming a permanent 50% decline in profits. Meanwhile, economic earnings are going down, but that decline looks to be decelerating. Same with return on capital. Probably whatever's going to happen here is not going to be a 50% decline. So again, I don't really even know anything about this business. All right, folks, thanks for being with me today. I hope you enjoyed. Appreciate it. We will, we'll probably be doing this next week. I haven't looked at the calendar yet, but if there are a lot of good companies reporting next week, we will continue this earnings watch party gig. Thanks for being with me. Have a great weekend.