Best Buy‘s (NYSE: BBY) second-quarter comps were three times higher than Wall Street was expecting. Medtronic (NYSE: MDT) shares hit a new high after strong first-quarter profits and revenue came with raised full-year guidance. In this episode of MarketFoolery, Motley Fool analyst Asit Sharma analyzes those stories and Camping World Holdings‘ (NYSE: CWH) curious decision to double its quarterly dividend.
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This video was recorded on August 24, 2021.
Chris Hill: It's Tuesday, Aug. 24. Welcome to MarketFoolery. I'm Chris Hill. With me today, Asit Sharma. Good to see you.
Asit Sharma: Good to see you, Chris. So glad to be here today.
Hill: We've got some surprising dividend news. We're going to start with earnings because the earning season rolls on and first up is Best Buy. Second quarter revenue was up 20%. Same-store sales came in three times higher than Wall Street was expecting. They raised their guidance for the full fiscal year; shares of Best Buy up. I've been saying right before we started recording, Best Buy's success to me is one of the more unlikely business stories over the past decade because 10 years ago, so many people were looking at Best Buy as a dinosaur. It was Amazon‘s showroom. It's like, yeah, they sell all these electronics, but people can get them for cheaper elsewhere, and the turnaround executed by former CEO Hubert Joly really needs to be studied. I have more thoughts on this, but what did you think of the latest results out of Best Buy?
Sharma: Well, Chris, two things. First, it is just so impressive to see these sales increases. Not just sales increases over an easy comparison to the year-ago quarter in which everything was shut down for COVID. But these comparisons look great compared to the quarter two years ago. Obviously, for anyone who thinks that retail doesn't have a future, Best Buy has proven me, you, and other investors wrong. This is a stock I routinely ignored just because I felt in the back of my head at some point, notably, they're going to succumb to competition from Amazon and other retailers. They play in electronics, they play in appliances, all big-picture targets in this business. But the other thing that struck me as I was reading through the report and some comments from the current CEO, Corie Barry, this morning, is the fact that the future looks so bright for Best Buy because of this shift into technology, into peripherals. This is going to be a big theme. We had so much acceleration of remote work, needing the tools for remote work, needing new laptops, mice, computers, etc.
All the heavy lifting that Best Buy has done over the past several years to convince customers to come in and not just window shop, but to buy, is paying huge dividends for them now and this is only reinforced by COVID. We're going to keep buying so many peripherals and accessories so that we can have these hybrid work environments and small businesses will be buying from Best Buy. My thought is they made it to this point just in time, but they are almost stronger for it. They're going to continue to benefit and this is one of those that just got away from me. Chris, you said you had some more thoughts on this really intriguing story.
Hill: Well, real quick. I am glad you mentioned Corie Barry who's been CEO for just over two years and she's been at the company for more than 20 years. She was the CFO when Joly stepped down from the corner office. You got to give her credit because CEO transitions are tough to pull off and they're even tougher to pull off when you are following a successful act, and Joly left big shoes to fill. The stock has doubled in the time that Barry has been the CEO, so credit to her for navigating the pandemic and chalking up wins for shareholders. I think there are a couple of lessons that can be drawn here and you look at the way that Best Buy redid the stores. Basically saying, you know what? The layout of the store matters. Even if more and more people are shopping online, you can't ignore the in-store experience, and if you make that better, it's going to pay dividends down the line. I think that's part of the story here. I also think that the way that they looked at the service part of the business, that Geek Squad and monetizing that and investing in that. Last but not least, and this is bad news for a lot of retailers out there, but the deck was completely stacked against Best Buy and they not only survive, they have been thriving. One of my takeaways is there's no excuses. Sorry to pick one out of the list, but I look at Macy's and say, you know what? There is a path forward. Macy's is not in any worse shape today than Best Buy was in 2010 or 2011. There is a path forward for these retailers. They just got to figure out what it is.
Sharma: Very true. I think Macy's is a great example because they're a company that's been experimenting a little bit with store formats and their connection to customers to try to make up for these deficiencies in a really overextended store footprint that they've built up over decades. But maybe the key takeaway here is that you've got to experiment all the time and ramp it up. I will say something that really impresses me about Best Buy is they're not done with these experiments. Chris, you mentioned the Geek Squad. They've got a pilot program going now which is a VIP pass for Geek Squad members. It's not for me, but there's so many people out there who rely on this type of service if something goes wrong with their computers. Kudos to them for recognizing that market, going after it, exploiting it, and the experimentation with store format which you mentioned. I was so surprised by this. They have experiments going on in multiple different size formats — 15,000-, 25,000-, 35,000-square-foot stores, as well as those newer, smaller, 5,000-square-foot stores that I've seen in my area, which I look at those and think this is the key to making money going forward, is a smaller retail footprint that's very well curated. But they are also going with gargantuan stores just going back to old-school retail in cities in which it makes sense. This is something about the company I think other retail-based organizations can mimic and try to model.
Hill: Shares of Medtronic are up and hitting a new all time high after first quarter profits and revenue came in higher than expected. They raised guidance for the full fiscal year. What did you make of the quarter?
Sharma: I think the obvious storyline here is what investors should pay attention to, and that obvious storyline is that elective procedures ramped up over the last quarter as COVID-19 became a little bit more of a backstage story. Of course, in the present hour, we have the delta variant, so who knows how this will affect next quarter's results. But at least for this quarter, I thought that some of the investments that Medtronic has been making recently had a chance to shine. I just want to work through some of their portfolios here and spot out their growth rates. Their cardiovascular portfolio which includes revenue streams like cardiac rhythm and heart failure, structural heart and aortic, coronary and peripheral vascular. This gives you an idea of how complex and specialized their revenue streams have become. But this whole unit itself grew at a 19% growth rate quarter over quarter.
If we look at their medical surgical portfolio, they have a division called surgical innovations, and that is very advanced with technologies like vessel sealing, advanced stapling. That grew by 44% year over year to $1.6 billion. The one I'm most interested in, Chris, is their neuroscience portfolio, which sounds like it's all centered on the brain, but they've got this growing business in cranial and spinal technologies. Their really interesting product here is a robotic system. It reminds you of Intuitive Surgical, it's called the Mazor. This works with all types of spinal technology and spinal surgery. I think that what we've got here in this grand portfolio, if you look at the whole offering that Medtronic brings, is maybe a lot of R&D that's coming to fruition. Their stock has been an under-performer over the last 10 years, but maybe they're hitting their stride now. As surgeries move toward these more advanced robotic-assisted technologies, I think Medtronic finally has a chance to shine.
Hill: It's interesting you pointed out the stock performance because this is one of those businesses that especially when you consider the fact that Medtronic is a company that's I think the market cap is somewhere in the neighborhood of $175 billion. It flies under the radar a little bit. I think part of that is just the nature of the business that they're in. Even though they're doing all these really interesting things, the overall business is not necessarily one that gets a lot of people excited. I don't own shares of it, but I look at it as one of those businesses that you can buy a few shares in Medtronic and it can be one of those businesses that you really don't have to think about for the next decade because it's going to be higher a decade from that. Maybe it's keeping pace with the market. I get anyone who is a little bit skeptical about this business in the very short-term, just in terms of well, look, if part of your business is depending on elective surgeries, there's a decent case to be made that the number of elective surgeries over the next six months is going to be smaller than if there weren't a pandemic going on. Yet, you look at the dividend, they pay. They've increased their dividend 43 years in a row. I don't know, it just seems like one of those you can just set and forget and not really worry about because they do such a good job within their industry.
Sharma: Absolutely. Maybe one of the setbacks for investors who have been with this company up until now is the fact that they have focused on so many different portfolios. The ones I mentioned are broad, and they are big. Maybe the company would have grown at a faster rate if it had chosen just one specialty and plowed all its research and development into that, for example, cardiovascular. But your points are well taken, Chris, we're not getting any healthier. If you look at trends —
Hill: I'm not.
Sharma: I certainly am not, but trends show, especially on the cardiovascular side that we aren't eating as well, we're exercising a little bit less as a society. Those procedures are probably only going to increase over the years and what you get if you stay invested with this company, Yes, are those cash flows that throw off amazing benefits for investors, but also the outcome of the R&D which could be in the future some spinoffs of revenue streams which become less of a core for this business but have a bright future. I think there is some advantage to reaping parts of this IP intellectual property portfolio over time. Medtronic is probably going to outperform itself versus the last 10 years in the next 10 years. We will continue to keep an eye on this one. But quite an interesting company as you mentioned, it's pretty huge right now, and can still grow in the coming years.
Hill: It's a great point that you just made there that I want to highlight, which is that it's a medical device company. But you can also look at Medtronic and say, this is an intellectual property company in the same way that we talked about Disney as being in some ways an intellectual property company. There's a lot of money to be made in IP. I mentioned the dividend with Medtronic, by the way, seven more years to become a Dividend King so I wouldn't bet against that.
Speaking of dividends, Camping World Holdings announced that it is doubling its quarterly dividend and shares of Camping World up 5-6% this morning. This is a surprising move because this is not a Dividend Aristocrat. This is not a company that has what on the surface appears to be a huge reservoir of cash. What is the thinking behind this move? The only thing that I had was Camping World hasn't made a ton of acquisitions over the past five years or so, so maybe part of the rationale here is, look, we think this is a better move for shareholders than chasing an acquisition that may or may not pay off.
Sharma: A good take on that, Chris. I'm going to go out on a limb here and say nay, sir, rather than a Dividend Aristocrat, Camping World Holdings is a dividend suspect. What is going on here? But I can see some logic here. Long-term investors in this industry know that it's really cyclical. The RV — recreational vehicle — industry tends to have these cycles that aren't always correlated to what's going on in the larger economy. Times are good, and the manufacturers produce like crazy which sends a lot of inventory onto dealer lots. Then you've got this oversupply then the stocks have to retrace while they work off that supply. Camping World is no stranger to this. But there is something here that may be a little related to what we talked about just a few minutes ago in relation to Best Buy and how they see that changes that COVID is right about will give them some tailwinds into these technology sales and peripheral sales for years to come. I think that maybe we have had a renaissance in the desire for camping and outdoor activity due to COVID. The manufacturers that are part and parcel in this industry, like Thor Industries and Winnebago, also see long-term demand out of this.
Younger consumers now see these RVs as aspirational purchases, and they are a perfect blend of buying things plus experiences. As we know, millennials err on the side of buying experiences, but they come together uniquely in the RV, the recreational vehicle. I think for Camping World Holdings, they had this breakout quarter that they reported on earlier in the month in which their average selling price was through the roof, I think it was up 22% on new vehicles, 36% on used vehicles. They're seeing very strong cash flow. I think they want to share this with investors. I think also they feel very confident in their major supplier, which is Thor Industries, and we should explain here that Camping World Holdings itself is not really a manufacturer. They're more of a retailer. There's this huge agglomeration of dealer lots. I think they've got some confidence in their primary manufacturers as Thor itself has broadened out as product lines and really managed its own production process pretty well that their cash flows are going to look stable for the next several years. I wouldn't bet on it, folks, just because of the nature of this industry. But you have to feel good today as if you are a shareholder, which I'm not, that they are sharing that cash with investors.
Hill: But in the same way that I would happily bet $100 that Medtronic increases their dividend every year for the next seven years and they become a Dividend King. I would not bet a dollar on Camping World Holdings keeping this going for the next seven years. Again, I have no rooting, I'm not betting against them, but it just seems like they haven't built up a history. That's one of those things that you want to see. That's why you can have confidence in a business like Medtronic or any Dividend Aristocrat because the company has demonstrated over at least a 25-year period that this is a priority in our capital allocation strategy. Camping World just doesn't have the history yet. So, to see them double their quarterly dividend like this, I was really surprised.
Sharma: I was, too. Now the market apparently really liked it, the stock was up. I think as you mentioned, maybe 5% or 6% this morning. But it's so much easier for a Medtronic to be able to predict with certainty the ongoing demand for those electric procedures than it is for Camping World to place the bet that consumer demand for RVs is going to be in the steady-state on into perpetuity. As I said before, there are peaks and valleys and it's a complicated exercise when they also have to work this really complicated relationship with their suppliers who are also trying to predict how much inventory they need to build out and working with their backlog. You've got something which itself is a bit iffy as a cash flow proposition over any time period. But again, while you've got the money, sure share it, if the stock pops a bit, I think everyone is happy. For now, we've got to admit their financials look fairly good outside of the debt they have which is related to their inventory that they keep on their books. The balance sheet looks pretty stable and solid, and they have been throwing off great increases in net income and their margins as so many of us have shifted to these purchases during and after COVID. I'll grant them that, but I'm betting with you. I'm at the same poker table as you, Chris, and I'm going to also keep my bet to just $1 on this future dividend increase from Camping World.
Hill: When they had the meeting to discuss this, don't you think there was at least one person at Camping World saying, are we sure we want to double this maybe just like a special dividend, like a special one-time thing? How about we do that? Isn't that a safer bet?
Sharma: I think that person is the CFO. The CFO is definitely just trying to inject that note of rationality and caution, but the rest of the executive suite is going to override and make this decision now and shareholders are going to be right there along. As you noticed, the stock didn't go down, shareholders didn't say, hey, we don't like this move. We think you should keep the cash on the books for when you'll need it in about two years. The going is good, why not.
Hill: Asit Sharma, great talking to you. Thanks so much for being here.
Sharma: Always fun, thanks so much, Chris.
Hill: 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 stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Asit Sharma owns shares of Intuitive Surgical and Walt Disney. Chris Hill owns shares of Amazon and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Intuitive Surgical, and Walt Disney. The Motley Fool recommends Camping World Holdings and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $580 calls on Intuitive Surgical, short January 2022 $1,940 calls on Amazon, and short January 2022 $600 calls on Intuitive Surgical. The Motley Fool has a disclosure policy.