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BlackBerry and Darden Restaurants Report and eHealth Shakes Things Up

BlackBerry (NYSE: BB) reports results. Darden Restaurants (NYSE: DRI) hits an all-time high after surprisingly strong results in the fine dining segment. Motley Fool analyst Jim Gillies analyzes these stories and shares why the complete overhaul of eHealth's (NASDAQ: EHTH) management team intrigues him as an investor.

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This video was recorded on September 23, 2021.

Chris Hill: It's Thursday, September 23rd. Welcome to MarketFoolery. I'm Chris Hill, with me today, first time in a while, Jim Gillies. Good to see you.

Jim Gillies: Good to be seen, Chris. Thought you didn't love me anymore.

Chris Hill:That will never happen. [...] We have some surprising news out of one part of the restaurant industry. We also have some sweeping management changes to discuss. But we're going to start with the stock of the day. Shares of BlackBerry (NYSE: BB) up 13% after 2nd quarter results were better than expected. No longer in the mobile phone business, BlackBerry is now all about cybersecurity, particularly in enterprise solutions. You tell me, the rise we're seeing today, is this real? Is this short covering? Is it both?

Jim Gillies: Well, full disclosure, I own a position in BlackBerry, but I can get to that in a bit. Look, BlackBerry has been what I like to call a Waiting for Godot stock for years. If you're familiar with the play Waiting for Godot, spoiler, Godot never comes. BlackBerry has been the, I will gladly pay you Wednesday for a hamburger today, style of company, revenue was better than expected. We've seen this movie before. It was below what it was a year ago when we were in the teeth of the pandemic, down by about a third. But wait, last year, that was one time big bulge in the licensing revenue that they have. As you said, this is no longer a handset or mobile phone company, thank goodness, hasn't been for years. But they've been flailing around, in my opinion. Again, I own it, so maybe I should question why. They've been flailing around, frankly, for years now. Right now, the latest thing is, look at us, we're a cybersecurity company and that's great. They bought Cylance a couple of years back, which is the backbone of their cybersecurity offerings. Well, their cybersecurity revenue was basically flat year-over-year, and by the way, margins fell.

That's fine, they can shift and say, "Well, look at us, we're a Internet of Things company." Yes, Internet of Things revenue was up about 30% or nearly 30% for the quarter, but it's still less than a quarter of total revenue, and then that total revenue sharply dropped because of the drop-off in licensing year-over-year. I do like that they produced positive free cash flow in the quarter, but it's less than they produced in the same quarter last year. It's just been the same thing over and over. Like I said, it's Waiting for Godot. I was a pretty big believer when John Chen was airdropped in as CEO. That's been eight years now. In his previous incarnation where he was dropped in to turn around a company, and he did, and it was a multibagger. I'm not sure it was actually eight years, it might have been eight or nine years total that that took around, and we just haven't seen it at BlackBerry since he's been there. He's taken home hundreds of millions of dollars in salary and performance stock issues, I'm not sure what performance means here. The company still feels like it's a company. It's a stock in search of a business, is what I'm going to say. Good for them. I don't think it's sustainable or you're going to need to give me a couple of more quarters, at least, have shown me sustainable growth. We really didn't get that this quarter. As I said, I do own it personally and it's been a play thing of the meme stock crowd a little bit on entering 2021, thank you, meme stock, [laughs] people by the way, because that's allowed me to pull out the entirety of my investment in the form of covered call premiums so I'm playing with house money at this point. I'm probably going to continue to do that, but I think if you're a long-term believer in BlackBerry, I think you've been disappointed to date, and I don't think your disappointment's going to end anytime soon. Sorry to be so dour.

Chris Hill: So for people who are interested in the cybersecurity industry, BlackBerry shouldn't be at the top of their watch list?

Jim Gillies: Well, it's not at the top of mine, so I'm not sure [laughs] that I'm the guy you want to talk about cybersecurity.

Chris Hill: It's not at the top of mine and I own it.

Jim Gillies: I'm a big believer in investments in people and investments in transition. I like we're going to diverge to one of these in a bit. I'm a big fan of companies with hair on them, where something has gone wrong, something has been problematic, because people they tend to shoot, ready, aim kind of thing. They throw it over the side first and then they start wondering about it. Blackberry, formerly known as research in motion, formerly known as the largest company in Canada, don't worry, it's nowhere near that today. It got justifiably slaughtered just over a decade ago, and it stayed there. Like I said, John Chen, I believe was brought in in 2013 to turn this ship around and recast the business as a software and security business from a handset. That was the Genesis of my involvement with the company and my investment with the company. I will just say that as an owned portfolio position has been, as I said, disappointing, Waiting for Godot. As a covered call candidate, it's been good, verging on great when the meme stock crowd show up and juice the option premiums. But you can't rely on that frankly, and it has nothing to do with the business. As a business, this thing has been stuck in the mud for the better part of the decade.

Chris Hill: EHealth is a billion-dollar online health insurance marketplace. I really hope they have moving boxes at their offices, because under pressure from activist investors, eHealth announced a new chairman of the board, a new CEO, and basically a whole new management team. I've never heard of this company before today, Jim, and now that I've learned about it, I can't look away.

Jim Gillies: EHealth, I had mentioned I like businesses with hair on them, this thing's a sasquatch. [laughs] EHealth, it's a health insurance marketplace, a platform that connects people, mainly seniors, with the supposedly highest quality, most affordable Medicare plans for their circumstances. You can think of it as a broker, they're matching health insurance plans and customers, they got over 10,000 plans for over 180 different insurance companies, companies like Humana, Aetna, UnitedHealth Group, etc., and in return for brokerage services, it gets paid commissions by the insurer per year every year the customer's on the plan. The problem has been that this thing has also been a cash furnace. We raised money to burn it, then we burned some more, but eventually, we'll make it up on volume. That has been the premise that the commissions, I believe I'm going from memory here, but I believe the commissions turn a customer cash flow positive, I believe midway through the third year that the commissions received from the big health insurance companies overtake the cost of customer acquisition in about midway through year 3. But eHealth has just had its foot stamped on the gas gathering more customers. They've been cash flow negative, and this has gained a lot of short attention. Muddy Waters, who is a short seller that I pay a lot of attention to, when they speak, I listen. They did an epic takedown of this company at $150, I believe close to two years ago. The stock this morning is about $37, so you can see how well that worked out for Muddy Waters. But this also got the attention of a couple of activists, as you mentioned, they got Starboard Value and Hudson Executive Capital. They both basically came in hot last proxy season and then both agreed to stand down for a year, return for board representation, couple of nominations. Basically, to start getting their people on the board, so they stood down for a year. Since they did that, the stock has fallen by half. How enthusiastic do you think the Starboard Value and the Hudson Executive Capital people are probably doing today? I imagine they've basically lined up the executives and said metaphorically, "Who would like to be shot first?"

The former CFO bailed in the spring of 2021. It's not just today's announcement, but in July of this year, there was a new director appointed associated with Starboard, specifically associated with a SPAC run by Starboard in search of a business. I'm not suggesting anything, but I find that interesting. In August 2021, they also brought in another new director, this person is someone associated with Echelon. They had the private equity group that basically lent them some very expensive preferred stock money earlier this year that was sharply criticized by the market, frankly, and it's a terrible deal. But the now former CEO thought it was good to keep that growth thing down. They just, last week I believe, appointed a new CFO coming over from Lincoln Financial. As of today, as you mentioned, Chris, the CEO is out as both CEO and Chairman of the Board. New guy coming in is a veteran, he's in mid 60s, a veteran of CVS Health, a veteran of Aetna dealing with government services, long time industry player. They've also appointed a new Chair of the Board who is someone who's only down on the board since 2019, again, as things are rotating. This is an activist stream that is going in slow motion.

But I've seen a few of these before and these generally play out. They play out well for investors, but you don't realize it until it happens. The one I'd like to point to is a company called Bob Evans Farms. You might seen them, their restaurants. That was a play thing of activists for a couple of years since they cleaned out the executive board, made the company do some capital allocation improvements that resulted in some positive steps, but no one was really noticing. Then they sold the restaurants to private equity, leaving only the food service business, and then this food service business got taken over by larger food service business. The two years that we had it in the service that I used to run GoldPro Canada, we basically doubled our money in two years, 85-90%, so close to it. For the vast majority of the holding, we look like idiots, because why would you want to own this? Look at all this horrible stuff going on, blah blah blah. I think that's playing out here with eHealth right now. But as you say, you can't look away, it's a train wreck. But if you are a fan of special situations of turnaround investing, of activist-led house cleaning and business shifts and strategy shifts, boy, this looks interesting.

Chris Hill: Yeah, that's why I can't look away because two years from now, it could be turned around. They could be acquired or we'll look back on this time and say, "Oh, actually, it was a dumpster fire and no one could put it out."

Jim Gillies: It is unequivocally a dumpster fire, yes. The game you're playing if you're going to invest here is, can someone, as you say, put out the dumpster fire? There are a lot of smart people who have done a lot of dumpster fire fighting in their time lining up on this one. Comparables in this states that have been taken private or acquired in the last couple of years have been acquired up multiples that we'd see this stock more than doubled. If the new people in charge can slate that cash burn, and I'm just betting, this is pure speculation on my part, I think the new guy is going to really emphasize working with governments and government plans. That's just my hunch. If so, you can probably address some of that cash burn because of just the sheer volume of customers and steady customers that you can get from government. That's a competitive industry, I get that, but that to me, it looks like he's going to shift the target market. I'm into this thing will be acquired in the next couple of years camp. I think it's real interesting like I said.

Chris Hill: We'll wrap up with restaurants. Shares of Darden, up to 6% and hitting a new all-time high today. Not surprising, maybe, when you consider 1st quarter profits came in higher than expected, they increased guidance for the full fiscal year, they declared a quarterly dividend, and a share buyback program. Normally, I'm happy to talk about Olive Garden, but the surprising nugget in these results is that Darden owns The Capital Grille and an average weekly sales in their fine dining segment is now higher than it was pre-pandemic.

Jim Gillies: It is, and the fine dining segment, same-store sales for the quarter is by far the highest same-store sales number I've ever seen of any restaurant company ever, 85% year-over-year, which tells you, we would know when it was fine dining in the same quarter last year, which is fine. But overall, consolidated, they did at 47.5%. Look, people want to eat out again, people have got their money saved up for the last year and as much fun as microwave burritos have been for 18 months, people want to get out and have real food and treat themselves. At the end of the day, a fine dining meal that costs you $300 or $400, it's one meal, that's a treat. If you haven't been able to go on vacation for a year and a half, if you haven't been able to travel or you've been otherwise restricted, I'm not terribly surprised that people are choosing to do that. I would love to do that in the near future as restaurants in this area are starting to reopen up with all the protocols. Darden is a company whose, as you say, they beat expectations and they've raised their guidance and that's good. The cash flow dynamics of this business, probably because of our friend Steve Broido and his affinity for Olive Garden, the accounts with Amex, with the business look generally excellent. They are very steadily free cash flow positive. Superficially at least, they've been doing the right thing with it, dividends and share buybacks. The company's got more cash than debt so this is not exactly a leveraged bomb or anything like that. I don't count operating leases as debt equivalents, I think that's a silly argument. But regular debt, they have the same amount of cash. Where I have a problem with Darden, is that the share count, they talked about buybacks, they talk about the new buyback program, over the past five-years, they spent $1.4 billion buying back their stock, another 1.4 billion on dividends to folks. The dividend yield today, 2.8%, nice middle of the road dividend. The share count today, in spite of all those buybacks, is higher by about 6% than it was five years ago. That is because management in, I guess, a panic or a pandemic panic last year, sold 9 million shares into the market, $0.5 billion in equity for $56 a stock, and they were buying it back at $143 in the quarter. What's the old adage? It's buy high, sell low right? [OVERLAPPING] Wait, no. That's backwards.

Chris Hill: They didn't time it right, that's for sure.

Jim Gillies: They didn't time it right. You are far more charitable than I am. They undid any good they did for the previous near decade by that rushed equity. Again, more cash than debt. Cash flow dynamics are pretty good, I'm not sure why they rushed it. I'm sure there's all rationality told themselves. But unless you thought the pandemic was never ending and that we would never eat in restaurants again, there are lots of companies that didn't raise cash, that accelerated their cash purchases in the worst of the pandemic. I've got a couple in mind that we actually saw them up their buybacks during that period of time. That's what you should have been doing, that's good capital allocation. Darden just panicked. Okay, so fine, they panicked, whatever. But here we are today, they've got about this share of 900 million in trailing free cash flow. The stock today is priced at about 22, 23 times that free cash flow. That's not cheap, it's not expensive. It's middle of the road. The dividend yield 2.8%, that's middle of the road. I mean, these tremendous same-store sales numbers, those are going to go away, but we expect it to go away. Then we'll get back to more routine. I think this is probably a market performer and that's fine as far as it goes, but if I want market performer, I'll just buy an index fund because I know I get market performance and much more diversified market performance. I really don't like the capital allocation panic that I think I see here. That's great that you've announced another buyback program, but I'm not sure it's going to terribly benefit me as a shareholder and so I probably go, "Whatever." But if I was an old Darden fan, maybe I'd [...] a little bit because, like I say, I own my favorite restaurant, but other than that, I don't see a lot here.

Chris Hill: Well, you raise a good point because the thing that is unknowable about new management teams is how good are these people of capital allocation. It's one of those things that reveals itself with time. To your point, panic played some role in their decision a year ago to release those shares to sell them low and buy them back at a higher price. It's now a data point for shareholders and prospective shareholders because absent to that, it's hard to argue with the performance of the stock that's hitting an all-time high.

Jim Gillies: No. I got no problem with the score boarding of it. If you were a buyer of Darden in the wake of the worst of the pandemic, good for you, you've got a near four-bagger, depending where you bought it. Things looked really bleak. They looked bleaker than they were, I think is the point I'm trying to make. Because as I'm looking here, I've got their numbers up here on my other screen. As I look at what they did, I think they had exactly one quarter. It's the quarter you think it is, the quarter that it contained March 2020 when everything fell off a cliff, which was their fiscal 4th quarter, the quarter ending in May 31st, 2020. That exactly one quarter of negative free cash flow. One. It's a company that has more cash than debt like I said. I promise you, I don't know who their bankers are. I promise you, their bankers would have possible lifeline. Promise. The reason I say that is because companies that have far less financial strength than this one, far less. Like the movie theater chains, forget AMC. We'll put AMC over there as the meme stock nonsense. But movie chains where their business was shut down, shut their doors closed, no tickets being sold, no movies being released. For the better part of a year, those companies were able to raise short-term debt financing to weather them through the contagion. I remain mystified as to why they panicked the way they did. The problem is that's going to impact shareholders going forward. Again, record share price today, that's great. If I had a time machine, I'd go back and buy Darden in the worst of it, now along with a few other restaurants. [...] That was the time to do it, but much like the eHealth thing as we're talking about, the time to buy companies that looked like they are about to die is when they were about to die. Darden was nowhere close to dying, but everyone was panicking in the world. That's the time to buy, when everything looks terrible and the hair on it. It's very apparent. Today, with everything going great guns and everybody is, " It's all its all-time high. Look at our tremendous results, we beat expectations, record same-store sales." If I owned this, I'd probably be making a quick exit myself. I'd probably be happily selling my shares too to Darden as they were buying back the stock higher than they [...] pulled it out.

Chris Hill: Jim Gillies, great talking to you. Thanks for being here.

Jim Gillies: Thank you.

Chris Hill: As always, people on the program may have interest in the stocks they talked about, The Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.

American Express is an advertising partner of The Ascent, a Motley Fool company. Chris Hill owns shares of UnitedHealth Group. Jim Gillies has no position in any of the stocks mentioned. The Motley Fool recommends BlackBerry, CVS Health, UnitedHealth Group, and eHealth. The Motley Fool has a disclosure policy.


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