A pair of sector-leading companies grabbed Wall Street's attention this week, but it would have been pretty easy to get caught up in the surface points and fail to notice the aspects of those stories that will matter long term to investors.
J.P. Morgan Chase (NYSE: JPM) missed on its earnings for the first time in almost four years, but the insights Jamie Dimon and the rest of his team had to offer about the big picture are more interesting. In media, Netflix (NASDAQ: NFLX) is boosting its subscription prices again, and that's probably good news for everyone -- including its customers. In this ! podcast, host Chris Hill and MFAM Funds' CIO Bryan Hinmon delve into the underlying stories and offer some insights and takeaways for investors. MarketFoolery
A full transcript follows the video.
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This video was recorded on Jan. 15, 2019.
Chris Hill: It's Tuesday, January 15th. Welcome to MarketFoolery ! I'm Chris Hill. Joining me in studio today, it's the Chief Investment Officer of MFAM Funds, Bryan Hinmon. Good to see you!
Bryan Hinmon: Chris, it's wonderful to be here in Virginia!
Hill: I didn't even know you were going to be in town because you're out in our Denver office. It was a happy surprise to bump into you.
Hinmon: I don't tell many people because my calendar is already slammed. I snuck you in here.
Hill: I appreciate that. The dozens of listeners appreciate that. We're going to get to Netflix in a second. I think we should start with JPMorgan Chase because this appears to be a story that is bigger than just one Wall Street bank's earnings report. The headline is that, for the first time in nearly four years, JPMorgan Chase came in below expectations. I don't know to what extent you follow that bank or any big Wall Street bank closely, but the CEO, Jamie Dimon, his comments to me are the real story.
But first, let's just stick with the bank. How interesting are the big banks, whether it's JPMorgan Chase or others, to you?
Hinmon: They're not overly interesting. However, JPMorgan is, I'd say, one of the four top conference calls that I personally listen to on a regular basis to get my bearings for what's going on in the economy and the markets. I tend to listen to JPMorgan, I tend to listen to Paychex , Fastenal for the industrial side, and then MasterCard or Visa . If you listen to those four, you get a pretty good lay of the land of what's going on domestically, but also globally in a lot of cases.
JPMorgan's worth listening to because they're the largest bank in the U.S., they're the largest credit card issuer, they're the second-largest merchant acquirer, and they're the largest investment bank. This is a behemoth that has their fingers in a lot of what makes the economy and the market go.
Their year was very good. The quarter was a little noisy. What's going to get the headlines in the quarter here was, they had a big miss in their trading department. That's naturally a noisy part of their business, so I'm going to let the traditional news sources take care of that one and just put that to the side because it's not really indicative of, I think, what's important or what's going on truly in driving their business.
The place that I like to look is what they're saying about the U.S. economy and about consumers. As you noted, it's important to read the comments and understand what Jamie Dimon and his company are saying. I'll read you a couple of quote excerpts here real quick. "Healthy and engaged U.S. consumer that is spending, saving, and investing." He also said that credit is pristine. The CFO said, "the outlook for growth in the economy is still strong" and that internationally, slower but still positive global growth. Those are good things to hear.
Hill: They are good things to hear. One thing, you mentioned the miss of the trading department. I get that, in the grand scheme of things, Jamie Dimon doesn't particularly care about one miss in one quarter -- and he said as much on the call. Basically, "I don't really care about that." My hunch, though, is that if you work for Jamie Dimon in the trading department, behind closed doors, that's not how the conversation is going. That's for them to deal with. I'm just saying, I saw that quote and I thought, "Mmm, I don't know about that. I bet if you work for him, you're hearing a different tune."
Hinmon: They definitely run a tight shop at JPMorgan. This is the bluest of blue chip banks that there are. They escaped relatively unscathed through the financial crisis, and they're one of the few rare banks to have that. Jamie Dimon and the way he runs things and his team deserve a lot of credit there. I think he's much more willing to tolerate revenue misses. He's much less willing to tolerate a ramp in risk taking. You see this is how the company presents its data and talks to investors. They always quote their fortressed financial position, their fortressed balance sheet. They very much put risk management first and foremost and are much more tolerant of misses on the top line.
Hill: Dimon's comment about the state of the U.S. economy, and in particular, the government shutdown, which is now the longest government shutdown in our country's history. You couple that with the fact that this morning, the White House came out saying that they're now doubling the estimate of the cost that the government shutdown will have, the impact on the economy. You take those two things together, and Dimon saying, "Yeah, this is going to be problematic for a number of reasons, not the least of which is delaying IPOs." We had talked on Motley Fool Money a couple of weeks ago about how, toward the end of 2018, despite the volatility, there were reports coming out that IPOs were actually going to be sped up in the first half of 2019. Clearly, if the government is shut down, that's not going to be the case.
All of this together is a little concerning because, as you said, Dimon runs a great shop. He's incredibly smart. He's highly respected. If Warren Buffett is the economic reassurer-in-chief in our country, Jamie Dimon is probably on the shortlist to come right after him. It's one of those situations where, when Dimon talks about the economy, he does so in very smart and measured ways, and this is a little troubling.
Hinmon: Agreed with all of that, Chris. I think it's worth noting that Buffett recently purchased more JPMorgan shares. He sees that, as well.
The government shutdown and its impact on IPOs, I think, is more concerning to you and I than it should be to most. 2019 is going to be a big year for splashy, important IPOs. Companies out there like Airbnb, Uber and Lyft, Slack, just to name a few, are the big headliners. They're going to go public not because they're desperately in need of money and are going to be in some cash crunch if they're pushed out a quarter. So, I don't see that as being among the big impacts that the government shutdown could have.
Again, I think where it comes full circle is, we have so many workers here in the D.C. area that have been furloughed. Their day-to-day lives are impacted by not getting paid. That can reverberate throughout the economy. That's why my focus is squarely on Dimon's comments around the U.S. consumer and even U.S. businesses and the impacts that it might be having there.
He was fairly reassuring, I think, on this call. Together with his comments about the credit being pristine and their loan books still growing, I'm not worried yet. However, the longer this does go on, the longer it begins to shake consumer confidence even outside of those directly impacted. We'll start to see that playing out in bad ways.
Hill: Not that I'm overly concerned for what your work life is like, I'm a little concerned, but I can't say it's a day-to-day concern, but I am curious if the economic uncertainty in the United States makes it harder for you to do your job. When you're looking at different companies and you have almost this ripple effect of -- we have the government shutdown, we have economic uncertainty, and therefore, CEOs across any number of industries are giving, if not less guidance, they're giving vaguer guidance because it's harder for them to plan.
Hinmon: It actually makes our job easier, in some ways.
Hinmon: It creates uncertainty, it creates volatility, and that creates more opportunities for us. We spend our time trying to understand the guts of businesses and make our own assessments on what their futures are going to be. And if companies issue less guidance or less helpful guidance, we tend to find larger spreads between what we think is reality and what the market is pricing in as reality. So it creates more opportunity for us. It creates more chaos in our day to day, of course, as investors are clamoring and worried and asking for their money back, that sort of thing. But from the pure investing side, it actually makes the job more interesting and easier in some ways.
Hill: Let's move on to Netflix. Netflix shares are up 6% this morning after the company announced it's raising prices. Depending on the plan, prices are going up anywhere between 13% and 18% per plan. This is taking effect immediately for new customers. Existing customers are going to be grandfathered in over the next few months. Not at all surprised that shares of Netflix are up. We love to see companies with pricing power. This has demonstrated in the past that it's a company with pricing power, and they're flexing their muscle right now. Good for them.
Hinmon: I think there are two sides to this story. The first is, they can do this because the gap between what consumers pay for a subscription to Netflix and consumers pay for alternatives is wide, especially given the value proposition. The average Netflix bill is about $100 a year. The average Comcast bill is about $1,000. The average DirecTV bill is about $1,400 a year. Of course, that Netflix subscription cost doesn't include internet, but most people are going to have that anyway. There's a huge gap between what you're paying for Netflix and what you're paying for the next man up, the alternative. And then, frankly, I think that consumers believe that Netflix is raising prices not just so they can pad their bottom line, but so they can invest in the consumer experience, invest in more content, and make that value proposition even stronger.
I think Netflix has earned the right to raise prices because of how they've handled this in the past, which is typically, they make the product a heck of a lot better, let users enjoy that, and then they charge for it. That lag, that delay, has earned them the goodwill to be able to do this.
Hill: It is interesting timing, though. As you said, they've absolutely earned the right to do this. I completely agree with that. They're doing it at a time where, arguably, the competitive landscape is more competitive than ever before. Hulu is beefing up their offerings, Disney , these new streaming services are coming online. I can imagine at least one of Reed Hastings' lieutenants saying, "I'm not sure we want to do this in this environment." On the other hand, it's also easy for me to imagine someone saying, "No, let's do this now before Disney's streaming really gets off the ground and some of those others, as well."
Hinmon: Yeah. I want to go back to the value proposition here for Netflix. Think about the breadth of things that you can consume there. Even in raising their prices here, it's still going to be cheaper than HBO Now. The cost per hour you spend watching is still so much more advantaged in Netflix's case.
The other thing that's worth talking about here is, I think, Netflix is probably going to be the one that has to lead in pricing with all of these competitors. The reality of this business is, they all spend a ton on content and they're not really making any money right now. This buys those other firms a little bit of breathing room to raise their own prices, as well, and keeping them in the same ballpark.
The other side of this coin that I alluded to with my first comment is, does Netflix actually need to do this? They're spending more than $10 billion in content. They have almost $20 billion in content obligations per year. Their debt costs are rising. The last debt that they issued in late 2018, I think it was, was almost at 6% interest rates for $1.9 billion. Their debt costs are rising. They've got 135 million, call it, subscribers. Getting a couple of bucks more across that pays their interest costs for the year. So this allows them to continue what they hope is the flywheel of investing in great content, growing their subscriber base, and having very loyal customers.
Hill: It's obviously been a phenomenal long-term ride for Netflix shareholders. In the short term, for anyone who looked at Netflix shares right before Christmas, when it was over $230 a share and thought, "For Christmas, I'm going to buy myself a couple of shares of that," well, well done! Now, it's north of $350. That's worked out.
It's interesting, I hadn't thought of that before, the point you touched on about competitors and how they may view this. Yeah, now that you mention it, whether it's Disney or Hulu or any other service, I'm sure they're maybe not popping the champagne, but they're probably pleased to see this. "The cost of Netflix is going up? Great! This either gives us an ability to market lower prices more aggressively, or it gives us the cushion to bump up our price a little bit."
Is there anything on Netflix you're watching these days? Or you're just immersed in conference calls?
Hinmon: I'm mostly immersed in conference calls is the right answer. But my favorites are Making a Murderer . I can't wait until they have a another season there. And I like Hip-Hop Evolution , which I believe is coming out with its second season.
Hill: I'm completely unfamiliar with that show.
Hinmon: Get with the program.
Hill: [laughs] Give me the 30-second description of Hip-Hop Evolution .
Hinmon: [laughs] It walks you through the evolution of hip-hop.
Hill: It's a documentary. It's not a fictional series.
Hill: Alright. Did Rob Burnett turn you on to that?
Hinmon: No, that's my own jam.
Hill: Rob knows more about music than just about anyone I know. Anything cutting edge, when it comes to music, I assume Rob is right on top of it. One of our colleagues. Thanks for being here!
Just to pull back the curtain on life here at Fool Global Headquarters, I mentioned yesterday, we had the snow and areas shut down and schools and that sort of thing. Dan Kline and I taped
MarketFoolery . And then, a couple of hours after that, the fire alarms go off. And I thought to myself, "Wait a minute, I don't think we have a scheduled drill." It turns out, this was a legit fire alarm for legitimate reasons. We ended up all huddling outside for about 30 minutes or so. And that's where I saw you! So in hindsight, I'm actually grateful that we had the fire alarm go off, because otherwise, I probably would not have known that you were on the premises.
Hinmon: The stars have aligned, Chris. This was meant to be.
Hill: [laughs] I say this every time Bill Barker is on the show, that folks should go to MFAM Funds and check out the latest writings from you and your team there. This morning, I actually went to mfamfunds.com myself because I realized, "I haven't done this in a while." You guys have a new website, which is absolutely fantastic.
Hinmon: It's slick.
Hill: IT looks great, but also the content -- everything about the site is great. Kudos to you! I know you probably didn't design it, but I'm sure you had a hand in saying, "Let's make sure we include these things."
Hinmon: I can take no credit other than general inspiration for those who worked very hard on it.
Hill: Well, go to mfamfunds.com and check out a phenomenal, brand-new website. Bryan Hinmon, thanks for being here and thanks for making time!
Hinmon: Always a pleasure, 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 . The show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
Bryan Hinmon, CFA owns shares of Fastenal and Mastercard. Chris Hill owns shares of Walt Disney. The Motley Fool owns shares of and recommends Mastercard, Netflix, and Walt Disney. The Motley Fool owns shares of Visa. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy .