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Firing on All Cylinders Indeed

Motley Fool - Sat Nov 11, 2023

In this podcast, Motley Fool host Dylan Lewis and analysts Ron Gross and Matt Argersinger discuss:

  • Why interest rate and unemployment news helped stocks.
  • Starbucks' triple-shot growth plan, Apple's flat growth, and why Shopify is firing on all cylinders.
  • Huge reactions to earnings reports from DoorDash and Roku.
  • Match's struggle to hold on to singles.
  • Two stocks worth watching: WK Kellogg and Quest Diagnostics.

Economist Marc Robinson breaks down the negotiations between the United Auto Workers and automakers Ford, Stellantis, and General Motors.

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 Nov. 03, 2023.

Dylan Lewis: We've got the latest on three household names and three stocks that are down big, but might be poised for a turnaround. Motley Fool Money starts now. It's the Motley fool Money radio show. I'm Dylan Lewis. Joining me over the airwaves, it's Motley Fool senior analyst, Matt Argersinger, Ron Gross. Gentlemen, great to have you both with.

Ron Gross: How are you doing Dylan?

Dylan Lewis: We've got some big earnings to run through, but first we're going to take a snapshot of the big macro. Ron, we had a Fed meeting this week. We had jobs data this week, what did you see?

Ron Gross: It's been an interesting week, a lot of volatility. On Wednesday, the Fed unanimously easy for me to say, agreed to hold rates steady. As you will recall, that's following a string of 11 rate hikes, four in 2023, and Chair Jerome Powell said, getting inflation down to 2% has a "long way to go". Obviously, the investors, Wall Street are hearing higher longer and they don't typically like higher or longer, but toward the end of the week, we got some interesting data that caused treasury yields to back off and they had been very high, as high as since 2007, which is part of the cause for the weakness we're seeing in the market. We saw a weaker than expected jobs report come in. We saw wage inflation moderating. Two things that say, maybe the economy is cooling off, maybe the Fed is doing a good job in lowering our inflation rate, somewhere down closer to two. The unemployment rate ticked up a bit to 3.9%. Yields came down, stock market shot up later in the week, Thursday and Friday. Let's see what next week brings, but this week ended very strong.

Dylan Lewis: We saw some big time earnings results from some big time companies. We can get the earnings beat started and talk through some of those big reactions we saw Ron. Let's start with Starbucks. Shares up over 10% after the company reported earnings and revenue ahead of expectations. Matt, we joked earlier, I think maybe a couple of weeks ago, about the absurdity of the high priced Starbucks menu items. Are those double shot drinks doing the heavy lifting here?

Matt Argersinger: They are. The good news is yes, they are and Starbucks has been really able to pass along price increases, unlike a lot of other companies we'll probably talk about, but the good news is, it's coming from pol places. It's not just price increases, it's also coming from transactions. It hasn't felt really good to be a Starbucks shareholder lately. Going into the earnings report, you had a stock that's been mostly flat over the past three years. It's really underperformed the market. There's been uncertainty about who was going to be CEO and how long Howard Schultz would stay around, and of course, growth has stagnated, particularly in China, but here we go. Today it feels pretty good to be a shareholder. The Q4 results are really solid. Global, comparable store sales were up 8% and as I mentioned, it wasn't just average ticket, it was also transactions. It's not like Starbucks is seeing any drop off in customer traffic or transactions. We've seen a lot of companies report growth that's been totally based on price and not on volumes. Starbucks is winning on both ends. US comps were up 8%. China has been a little bit of struggle comps, there were up 5% and total revenue was up 11% to 9.4 billion. Probably the best part of the report in the Q4 was the operating margin which was up 300 basis points, earnings per share, up 31% to $1.06. All these figures were way ahead of a consensus. Finally the 90 day after rewards member is something I'd pay attention to. That number was up 14% in the US to 32.6 million members. Quite a strong finish to fiscal 2023 for Starbucks.

Dylan Lewis: Those are incredibly strong results and I know it's not all that Starbucks had for the Street this week. Their CEO Laxman Narasimhan unveiled the company's new long term strategy for the coffee chain. Matt, what's the plan?

Matt Argersinger: Yes, Narasimhan and the team held a special call with Starbucks shareholders. He outlined his new long term strategy and he's calling it, wait for it, the triple shot reinvention with two pumps. [LAUGHTER] This beverage order has five elements to it guys. One, elevating the brand. Two, strengthening and scaling the company's digital presence. Three, becoming truly global. Then here are the two pumps. We got one pump for unlocking efficiencies and a second pump for reinvigorating the partner culture. Don't have a lot of time to go into the details and context behind each of these, but there are a lot of investors who are probably wincing a bit, and I was certainly at the tortured coffee metaphor here, but they probably didn't wince at the company's guidance for fiscal 2024, so comps growth between 5 and 7%. Revenue growth between 10 12%. Earnings growth between 15 and 20%, and Narasimhan thinks those numbers are actually pretty sustainable for the next several years, not just in this new fiscal year. If Starbucks can meet these kinds of growth rates, I think shareholders are going to be feeling pretty good.

Ron Gross: I'd advocate for a third pump where we put the milk back out on the counter so I can put my own milk in my coffee once again, like we used to do pre-COVID.

Dylan Lewis: I would call that an efficiency gain, Ron. That's going to help through putting that milk out there. I'm 100% with you. I want to be able to dictate the color of my own coffee. We had results from Apple as well this week. Another company that needs no introduction, Ron. We just talked Starbucks results. The story there was some strength in China. Not exactly the case with Apple's results.

Ron Gross: No, really the opposite. Dylan, it ain't easy being a $2.7 trillion company. Why don't you try it sometime. A lot of stuff has to go right, and in this case, not everything is going well. Earnings were better than expected, and we'll talk about that in a second. Sales were disappointing, guidance was disappointing. Sales were down slightly, but this was the fourth consecutive quarter of declines. For market leading Apple, that's not what investors are looking to see. The iPhone business was up 2.8% for new iPhone 15 introduced in September, but all other categories basically showed weakness. Mac down 34%. iPad down 10%. Wearables down 3%. Only bright spot in addition to the iPhone was the service segment, which was up about 16%, that's Apple Care, iCloud storage, app store sales deals with Google. That was OK. That's actually the second largest segment now behind iPhone. It's important that that had some strength, but as you said, China, one of the bigger challenges. Apple reported its lowest revenue from the Greater China region since mid 2022. iPhone demand was strong, but Mac and iPad were very weak. Overall, China revenue fell 2.5%. Boiling all this down, you got some help from a lower tax rate, you got some help from the fact that they buy shares back, so shares outstanding were down. Earnings per share actually managed to grow pretty nicely at 13%. Not too bad. Company continues to return cash to shareholders, has $162 billion in the bank. Twenty-seven times forward earnings got to see if some growth folks, otherwise that starts to look pretty expensive.

Matt Argersinger: You hit that, the last point about valuation run and that's where I was going to go. Just if you looked at Apple entering the year, it was trading for around 21, 22 times earnings. A slight premium to the overall market, definitely always justified for something like Apple. But the stock is up 35% year to date. Even through these earnings, I didn't realize it had such a good year. Now, as you mentioned, about 27 times earnings feels like a premium valuation. Even Warren Buffett, who of course owns and loves Apple, is probably a little nervous about where the stock is trading. I notice Berkshire Hathaway was a steady buyer of the stock in last year and coming into the year, but he hasn't bought any shares over the last couple of quarters. I'm wondering if he's seeing the same valuation concerns that we are.

Ron Gross: It could be. A lot of the Talking Heads are focused on the fact that it's down 10, 11% from it's higher earlier in the year, but as you mentioned, still up 35% despite that pullback and selling rather richly at the moment. One of my biggest positions though, so I've got my fingers crossed. [laughs]

Dylan Lewis: Our final name for the big earnings wrap up, Shopify. The company's shares are up 25% this week after a strong earnings report pushed them higher. Matt, what is behind the big pop?

Matt Argersinger: Well yeah, hard to find anything not to like about Shopify results. Gross merchandise volume up 22% to 56.2 billion. That's a big number. The merchant solutions business which is the biggest revenue segment, it's where Shopify help sellers with payments, shipping, and working capital. Revenue there was up 24% and a big reason for that was Shopify payments. The gross payments volume grew to 32.8 billion and accounted for 58% of Shopify's gross merchandise volume. Their payments infrastructure is definitely gain an attraction within their customer base. You turn to subscription solutions, revenue there was up 29%, and part of the growth here was really about pricing. Shopify raised prices on its basic and premium plans and didn't note any meaningful drop-off in subscribers after doing that. Monthly recurring revenue was up 32%. Now, investors have gotten used to these growth rates on the top line, which are obviously still very impressive. But I think what's new with Shopify is just the profitability now. We know the company sold its logistics business to a partner over the summer, so taking all those operating and CapEx costs out of the equation has really boosted the company's cash flow. Operating income in the quarter was 122 million. That compares to an operating loss of 346 million a year ago. Free cash flow was 276 million and free cash flow margin was 16% and management noted that they expect that cash flow margin to remain in the high teens in the current quarter as well. This is a fast-growing company, but also a much more profitable company. I think that is what has investors excited. The only thing I would say is this is still a company that does a lot of stock-based compensation, over 100 million in the third quarter alone, so you have to take that free cash flow with a little grain of salt. Ron Shopify President Harley Finkelstein appeared on CNBC this week and I think he might owe you five bucks, because he said a company was firing on all cylinders, talking about the strong growth, the cost, discipline, and continuing to see some big brands coming over. I want to hear it from the man himself though. Do you agree with the assessment?

Ron Gross: I saw some of that interview and I agree that they certainly at the moment they're firing on all cylinders. He was very happy to be reporting those results to the interviewer for sure.

Dylan Lewis: Well, now you is your royalty, so it's great you go around. The show pays for itself. Coming up after the break, we've got one company riding the trend of convenience and a foul stock up 40% since reporting stay right here. This is Motley Fool Money.

Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis, Joined again over the airwaves by Matt Argersinger and Ron Gross. We're going to pick up right where we left off with earnings this time though, checking on three companies that have had a bit of a rough run over the past few years but might be showing some signs of life. Ron, first one up is DoorDash Company shares up nearly 20% after the leading food delivery company reported recent orders on the platform that we're hitting record levels. Based on the company's guidance, Ron seems like they're expecting some good times to continue.

Ron Gross: Yes, but stock's up 80% this year. Thirty-five billion dollar market gap for DoorDash. Does that sound right? Let's get into some of the numbers and we can discuss that they did post their strongest quarter since going public in 2020. Good for them. I am a customer, probably use it too often, so I'm with them. They projected better than expected growth and adjusted earnings for the current quarter. That's strong guidance as well. Part of the reason that we really saw the stock take off. Total order value on the app and total number of orders both rose 24% strong business, restaurants stayed strong, grocery business doubled. Revenue was up 27% as a result. Expenses were managed well and they managed to trim overall losses to 75 million. I will remind you it's a $35 billion market gap and they're trimming losses. They do have adjusted EBITDA dial. We play with some of the numbers and we see that it came in at 344 million, its strongest ever. It's a four fold increase over last year, 878 million in free cash flow on a trailing 12 month basis. Not profitable yet, but they are producing free cash flow if we do some adjusting, 35 times adjusted EBITDA though here. They've got to grow into this value in a humongous way. Can they do it? That's going to take some time I think, but it'll be fun to watch.

Dylan Lewis: Yeah, we might help them grow into that valuation. Ron is this idea of the macro trend of convenience. CEO Tony Ju has talked about that. It sounds like you're helping them out with some of those orders yourself, but generally the gist is consumers seem pretty happy to sit at home and if they can find some of those categories like grocery and expand beyond conventional food delivery, there might be something there for them.

Ron Gross: I think so. I think this is a business and I think it will be a profitable business if expenses are controlled appropriately. I just don't know if a 35 billion market cap is appropriate. Time will tell.

Dylan Lewis: We have a rough week for match shareholders. The online dating company down over 10% after reporting third-quarter earnings. Matt, it seemed like the key area of concern here was user growth trends especially with tender.

Matt Argersinger: That's the story. If you compare the stock chart of Match group with Zoom over the past five years, you'll see almost what looks like a perfect correlation. Like Zoom, Match was that perfect pandemic stock. People stuck at home. There wasn't a opportunities for social interactions. Match's services really boomed and the stock really behaved like that for a year or so. But now stock is down more than 80% of its high. It's close to a seven year low. I couldn't believe it when I looked at it. I think the results will tell you that unlike a Starbucks or a Shopify, subscribers here tend to be pretty price sensitive. Match group has raised or as management says, optimize pricing over the past year for many of its services, including tender, and I think that's helped revenue in the short term. But subscriber numbers are way down across the board. Paying members fell 800,000-15.7 million, in the third quarter. Tinder was the big loser, paying members there fell 6%, and revenue guidance for the current quarters was below management's prior guidance. All that taken together really hit the stock hard. I think this is somewhat of a network effects type of business. I'm not a user, I can't confirm that. But I think when you start losing subscribers in a business like this, the momentum of the business can really fall off. On the positive side, margins are higher, that's what the price hikes are doing. The business is generating a lot of free cash, but I think unless they can get subscriber growth going again. I don't know, there might be a lower floor for the stock.

Dylan Lewis: We'll wrap with another name in convenience, Roku. Shares of the streaming and ad company up 40%, four 0% following earning. Ron, this report felt like a company that had some good news and desperately needed some good news.

Ron Gross: It really did. Times have been tough here and there, but up 100% this year, the stock. It's getting some love for sure from investors. This was a strong report with signs of an advertising rebound and cost cutting. Helping the bottom line and future guidance, which I think really has got investors excited. Revenue was up 20%, platform revenue, which includes their ad sales and their distribution deals, and the Roku channel was up 18%, Roku added 2.3 million active accounts in the quarter. That's up 16% revenue per active user was down 7% year over year, but it was actually up 1% on a sequential basis. Moving in the right direction, we've got to get that number moving a little bit more quickly, more strongly. Gross margins narrowed a bit. Device margin growth was offset by narrowing platform gross margins, led to an adjusted EBITDA number. Again, adjusted, we have to play with some of the numbers to get this of $43 billion positive. Management said it remains cautious and certain amid an uncertain macro environment and an uneven ad market recovery. But they did guide to adjusted eta of $10 million for the fourth quarter. This is an $11 billion market cap company. Not putting up great numbers but maybe they're on track right now, they remain committed to positive adjusted EBITDA for full year 2024.

Dylan Lewis: Ron, I look at this name and some of the others and I think it's possible that we might be seeing some bottoming with some of these big growth text stock names. Is that what you're seeing here?

Ron Gross: Bottoming, it's interesting though, in the current interest rates environment, you've got to put up some strong numbers, still support some of these market caps. They're still pretty high. Just not as high as they were.

Dylan Lewis: Ron and Matt, we'll see you guys a little bit later in the show. Up next we've got a breakdown of the winds the United Auto workers notched in their deals with Ford, Stellantis, and GM. Stay right here. You're listening to Motley Fool Money

Ron Gross:Well, now Lord, Mr. Ford, I just wish that you could see what your simple horseless carriage has become.

Dylan Lewis: Welcome back to Motley Fool Money. I'm Dylan Lewis. Detroit might be able to breathe a sigh of relief as of weeks end, Ford, GM, and Stellantis all have established tentative deals with the United Auto Workers Union. The details are down and now it's up to union members to accept the contracts. We went to economist Marc Robinson, who worked for GM for over three decades, advising on negotiations, labor, and strategy for a breakdown on how the deals came together and lessons from these negotiations. Marc, we spoke with you in early October, and at the time, the conversation with the UAW and the automakers was these two sides and how they are angling in their negotiations. Very different story now.

Last week, we saw that there was a deal struck with Ford. We have news that there's a deal with Stellantis and GM. What happened over the last couple of weeks since we last checked in with you?

Marc Robinson: Well, they went through their escalation strategy, which they've been telegraphing for a while. They stopped firing shots across the bow and walked out of a negotiation session with Ford a couple of weeks ago, and struck Ford's most profitable plant, its Kentucky Truck Plant. They then waited actually two weeks to strike GM and Stellantis as most profitable plant. The day after they struck the GM's most profitable plant, they announced a tentative agreement with Ford. Some of this was kabuki, it was show, Shawn Fain had to demonstrate to its members that they had, as he put it on Sunday, gotten every last dime that was on the table. Looking at the deal, he got a lot of dimes. He got so many major advances for the members, but despite this extraordinary agreement, he still had to be and is today still concerned about ratification.

Dylan Lewis: Marc, let's talk a little bit about some of the advances that you were talking about there. I think if you're looking at the UAW side, from my perspective, it seems like the major wins that we're seeing based on what we know about these deals are significant pay raises, the return of cost of living adjustments, family relief. Are there some other things that really jump out to you as big wins for the UAW?

Marc Robinson: Yes. It was not just that they got significant wage increases overall. They essentially got rid of the two tier system, and it was actually multi tier system. The Detroit 3 had agreed, essentially, over the years, to bring some jobs back in or keep some plants open basically under concessions that the union made about wages and work rules. They just undid that. If I were the companies, I wouldn't expect that kind of possibility to be out there in the future, and that they may have some remorse about the decisions they made back then. They also covered these, in some cases, plants that didn't even exist yet. These joint venture battery plants that the Detroit 3 had in unprecedented fashion, set up with Korean battery suppliers, Samsung and LG Chem. Even though they weren't under the national agreement, in theory, the companies didn't even have to talk about them with the UAW as part of these national negotiations. They agreed to bring them under the national contract at assembly plant wages. In the case of Ford and Stellantis, who hadn't even opened up their plants yet, they agreed through essentially a sleight of hand to instantly have them be unionized and have them be under again at the national agreement wages. That was a massive win for the UAW, it's a big strategic defeat for the Detroit automakers. They may end up even rethinking their long-term battery strategy as a result of this.

Dylan Lewis: Marc, it seems like this was generally something that led to a lot of advances for the UAW. From the automaker perspective, are there wins? Because so much of the coverage and the press that I see on this is basically the UAW got a lot of what they were looking for.

Marc Robinson: I can't see any major wins that the automakers got. The only thing they were able to not agree to some things that the UAW demanded, like defined benefit pensions for new or higher workers, and big increases in existing pensions, and 32-hour work week, which the union I think never was very serious about. My rough farmers math is that each of the companies has another two billion dollars a year in labor cost by the end of the agreement. That's more than 33% increase in their labor costs, maybe up to 40%. That's a massive hit. The other thing is that, Ford, for example, was very proud of its non-confrontational relationship with the union and they viewed that as a competitive advantage over General Motors. Well, not only did Ford get struck, which is already a defeat for that strategy, but Shawn Fain went out of his way to diss the chairman and the CEO of Ford. He stood up Bill Ford, the chairman of the board, who was coming in for a special conversation with him in advance of the strike. He walked out 10 minutes into an important negotiation session and struck for his most profitable plan. That's not gentlemanly behavior, which I'm sure Shawn Fain would be perfectly comfortable being ungentlemanly. But there are hard feelings in the companies about this strike.

Dylan Lewis: You mentioned Shawn Fain there and the approach from the UAW with this strike was new and different, and Shawn Fain is a very new and different union leader. Do you think that contributed to the success of the negotiations?

Marc Robinson: Yes. I think that his style and aggressiveness contributed. There was a very interesting story in the Wall Street Journal about the 330 something advisors that Shawn Fain hired, not union members, I mean they came in as staffers. The combination of that fresh thinking and more strategic thinking and more nimble communications clearly had an impact on the strike. I think that some of the negotiation tactics were similar to things I've heard about for how Donald Trump negotiates. For example, GM, before it signed the tentative agreement, the UAW escalated and struck yet another plant just before the deal. That couldn't have been because GM was unwilling to sign the pattern. GM would have agreed to the pattern economics. A week earlier hey were said they were very close to a deal. What I think happened is that the union negotiators came into that session trying to get all three deals done at once. Again, there's no tradition around that. They then said, we want more here and we want more there. They had already agreed to not take more, but they grabbed it and that led to more confrontation, and probably more concessions from the Detroit three. But it's not a way they are used to negotiating and it may have some long term consequences for how they approach the union in the future.

Dylan Lewis: Do you think that there are tactics that other labor groups and maybe other industries might borrow from with what the UAW did?

Marc Robinson: Shawn Fain is hoping that in May 1, 2028, there are many union contracts that expire on the same day. He wants to call a general strike. He wants to change the way unions are perceived and bargain in America. Not sure he'll succeed, but definitely he wants to be leading a revitalized labor movement. His advisors, there's apparently a playbook that they published that they more or less followed. My guess is other unions will be downloading copies of that playbook.

Dylan Lewis: You have a C-Suite newsletter that you write. Right after the Ford deal was announced, you wrote that the gains were incredibly impressive. This is a record contract by any measure. However, it is something that still needs to be ratified. This is what we need to put to an end here. Are there reasons to worry about that?

Marc Robinson: Absolutely. Shawn Fain has raised expectations extraordinarily high. That may be some of the downside of his tactics is that the companies basically knew that the workers were going to be had very high expectations, and they wouldn't be able to get out of this with a cheaper contract just by waiting a couple more weeks. Just recently, the union members rejected a proposed agreement, a tentative agreement at Mack Trucks. Now it wasn't nearly as rich as the Detroit 3 agreement, which is in fact part of his problem. In 2015, what's now slants rejected a national agreement. There is history of it, there's a risk of it. One thing that Fain is clearly trying to do is to create the sense that the strike is over with his members by getting, reaching tentative agreements at all three, and ratifying all three and calling the workers back to work before ratification. He's trying to create a fait accompli, he may succeed, but there's a risk that he won't and if he doesn't, if there's a failed ratification at any one of the three, it's chaos.

Dylan Lewis: You're a game theorist and last time we had Jan, you were talking about how these are economic conversations and financial conversations, certainly for the union workers, but also, there is political posturing that goes on here and, right after the Ford deal was announced in principle, the company revealed that they expect it will add about $850 per vehicle to their manufacturing costs. For our audience as an investing audience is a financial disclosure. But I'm curious, is that also political posturing as we start thinking about things like ratification and the relationship between these automakers and their workers going forward?

Marc Robinson: Yes. They're also coming out with statements about how much the strike costs them. I would take those statements with a grain of salt because there have been very few people who have walked away from a dealership not having a car or truck that they wanted even with these strikes. Seems as though they could probably, with a little bit of overtime, make up for a large fraction of whatever they lost in a production during the strike. I think the accounting may allow them to show smaller earnings impact down the road. Then the headline figure on the cost of the strike would suggest.

Dylan Lewis: Marc, we're certainly not rooting for any more labor disputes or for people to be on the sidelines not working. But if that's the case, we'll be coming back to you and talking again soon. I really appreciate your time.

Marc Robinson: Pleasure talking to you.

Dylan Lewis: Listeners, you can catch Marc's latest writings at C-Suite on substack, and if you're interested in stock ideas, the Motley Fool has you covered there too, especially if you're interested in dividends. Our analysts at Motley Fool stock advisor put together a list of five quality dividend payers that are also recommendations in our stock advisor service. This report is free to you with no purchase necessary. You just need to go to fool.com/dividends and we'll email it directly to your inbox. That's fool.com/dividends with an S and we've got more stock. Talk ahead coming up after the break. Matt Argersinger and Ron Gross return with a couple stocks on their radar. Stay right here. You're listening to Motley Fool Money.

Dylan Lewis: As always, people on the program may have interests 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 Bill Lewis, joined again by Matt Argersinger and Ron Gross. Let's get over to stocks on our radar. Our man behind the glass, Rick Engdahl, is going to hit you with a question for our radar stocks round. Ron, you're up first. What are you looking at this week?

Ron Gross: This is an interesting one that caught my eye from our friends over at our microcap service firecrackers and it's WK, Kellogg, KLG. It's the number two seller of ready to eat cereal in America, Number 1 in Canada and the Caribbean and owns nine of the top 20 brands. That's Frosted Flakes, Rice Krispies, Raisin Bran, Fruit Loops, Frosted Mini-Wheats, and Special K. I happen to love cereal. Don't eat enough, but I should. It's delicious. It's still the top breakfast choice for kids. But there's a lot of competition out there from healthier food, so there has been some weakness here. It was recently spun off from the parent company, which is now known as Kellanova ticker, symbol K. They hold onto some of the international brands and they kept a rice crispy treat business that was smart because they are delicious. But we're left with this small microcap company, Kellogg. They've definitely had some problems. The shares are off significantly since it went public. That could create an opportunity. It's only a $900 million market cap company. So if they can put up add numbers of what they're hoping, which could be up to 400 million annually for a $900 million market cap company, this could be very interesting. It's a little dicey though, because it is in a category that is showing declines and we really don't see any significant catalyst from a business perspective in the foreseeable future.

Dylan Lewis: Rick, sounds like we've got a pure play cereal company here. What's your question?

Rick Engdahl: Yeah, I can't imagine a world without fruit loops that's clear. [laughs] Ron.

Ron Gross: Yes.

Rick Engdahl: I know the answer, but cereal first or milk first?

Ron Gross: Definitely cereal first, right?

Rick Engdahl: I've heard arguments the other way and I just don't believe it's. I just wanted to see if there was.

Dylan Lewis: You want the milk to water fall down over the cereal so that you don't want to dry stuff on top. I mean, we're all sensible people here. We know how this works.

Ron Gross: Not anarchy. [laughs]

Dylan Lewis: Matt, what is on your radar this week?

Matt Argersinger: I'm looking at Quest Diagnostics, tickers, DGX. It's a leading diagnostics and blood testing company. Think of Theranos, except legal and ethical. It pretty much operates at duopoly with Lab Corp, so most hospitals and clinics will use one or the other or both to outsource blood tests. Obviously quest revenue really soared in 2020, 2021 because of COVID 19 testing. No surprise that's fallen off big time. In fact, their COVID 19 testing revenue fell 92% year over year in the third quarter. But what's been great about the company and the results is just how well their base or non COVID testing business has held up volumes there were up almost 6% in the quarter that was well ahead of what management was expecting. Because of that resilience, management keeps raising full year guidance. Earnings per share are not expected to be between $8.65 and $8.75 for the full year. They're also expecting to generate at least 900 million in free cash flow. This is a really cash flow heavy business. Management tends to use that free cash flow to either make acquisitions pay a steady dividend, which they do, and buy back shares, and I think at less than 16 times earnings, it trades for a below market multiple. Yet it's a very strong cash flowing business with a really good competitive position, so I like where quest diagnostics is right now.

Dylan Lewis: Rick, a question about quest.

Rick Engdahl: Yes, but, [laughs] so in my extensive research for this segment here, I went to the website and the first thing that popped up was a photograph of a very healthy woman working on a laptop while doing a plank and smiling and I'm wondering, is this company just over promising? [laughs]

Dylan Lewis: It could be, but it's, it's aspirational and it's just showing you, what we're all hoping to achieve in life.

Rick Engdahl: Yeah.

Dylan Lewis: It's a lifestyle brand, Rick.

Rick Engdahl: Exactly.

Dylan Lewis: Which one's going on your watch list?

Rick Engdahl: I think I got to go with the fruit loops.

Dylan Lewis: Got to. How can you turn that down?

Rick Engdahl: I might do a plank while I'm meeting them.

Dylan Lewis: That's good balance. Rick, thanks for weighing in on our radar stocks. Matt and Ron thank you for bringing them to us. That's gonna do it for this week's Smart Fool Money radio show. Thanks for listening. We'll catch you next time.

Dylan Lewis has positions in Match Group and Shopify. Matthew Argersinger has positions in Match Group, Quest Diagnostics, Roku, Shopify, Starbucks, and Zoom Video Communications and has the following options: short November 2023 $130 puts on Quest Diagnostics. Rick Engdahl has positions in Apple, Berkshire Hathaway, Match Group, Roku, Shopify, Starbucks, and Zoom Video Communications. Ron Gross has positions in Apple, Berkshire Hathaway, and Starbucks. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, DoorDash, Match Group, Roku, Shopify, Starbucks, and Zoom Video Communications. The Motley Fool recommends General Motors, Quest Diagnostics, Stellantis, and WK Kellogg and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

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