Casey’s General Stores (NASDAQ:CASY) wraps up the fiscal year with a rock-solid fourth quarter, and Chipotle (NYSE:CMG) raises wages and menu prices. In this episode of MarketFoolery, Motley Fool analyst Clay Bruning, with host Chris Hill, analyzes those stories and discusses where companies like Sumo Logic (NASDAQ:SUMO) and Datadog (NASDAQ:DDOG) fall in the spectrum of attractiveness for investors interested in data analytics businesses.
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This video was recorded on June 9, 2021.
Chris Hill: It’s Wednesday, June 9th. Welcome to MarketFoolery. I’m Chris Hill, with me today, Clay Burning in the house. Good to see you.
Clay Bruning: Hey, Chris, how is it going?
Hill: It’s going well. We’ve got data analytics to discuss, we’ve got some restaurant news. We’re going to begin in the Midwest, with Casey’s General Stores. Casey’s wrapped up the fiscal year with a solid fourth quarter, profits and revenue came in higher than expected, same-store sales were up nearly 13%. I mean, I get the stock is down a little bit today, but this seemed like a good quarter.
Bruning: Yeah, it did, and it was a pretty good year overall and to me, this is just a rock solid business, they’re consistently growing, not at a staggering pace, I think at a 5%-10% clip on an annual basis, consistently generating profit and using that to fund investments. Most notably, they’re acquiring more stores. I think this past quarter they announced they are going to acquire about 50 Circle Case stores, which I’m familiar with from my time in North Carolina so just a rock solid business. They pay the dividends and I think they actually could be a beneficiary to an extent of inflation in terms of being able to pass on some of those costs to customers. Like I said, just a rock solid business that should be just fine.
Hill: It seems like one of those businesses, certainly if you look at this quarter, I mean, part of the story for Casey’s was a nice increase in foot traffic in the stores, as more people get vaccinated, as more states open up, and by the way, people are traveling, they need to put gas in the tank, get some snacks, get some pizza, that sort of thing. It seems like Casey’s, I don’t want to put any pressure on them, but it seems like they’re set up for a pretty nice second half to 2021.
Bruning: Yeah, absolutely. Like you said, foot traffic is up and something that caught my eye was they are taking advantage of that digitization, if you will. They noted that 3.6 million rewards members, which is something I always look for because I’m one of those consumers who is constantly eager to get rewards if I’m a loyal customer, and that breeds loyalty, especially for consumers like me. They had 96% growth of digital sales, which I didn’t even realize that convenience stores or gas stations have digital sales, so a couple of interesting tidbits that I saw in the press release for the quarter, so encouraging signs both on a post-COVID and COVID impacts there.
Hill: You mentioned inflation, that ties into our next story, which is that last month, Chipotle announced it would raise hourly wages for restaurant workers up to $15 an hour by the end of June. To make up for that, Chipotle has increased prices on the menu by 4% to cover the costs. I get that we are past earnings season, and so it’s not the busiest week for news. I mean, I looked at this and I just thought, this seems normal. This seems like the appropriate move.
Bruning: Yeah, and this is close to home to me, I’m a huge Chipotle fan. I have sadly been sitting on the sidelines since I read up a senior thesis on the company and the rebound story with the new CEO coming in from Taco Bell. But I have a quick anecdote here. My local Chipotle, and I live in Montana here, they were constantly having issues in terms of staffing, to the point where they closed the store for in-person ordering, they we’re only taking online ordering, and one of the times I caved in and did the online order, which I’m not a huge fan of personally, I like doing the in-person order. I asked one of the line chefs, “You all like this. Is it making you all more efficient?” He said, “We don’t really have a choice. We can’t hire, we don’t have enough staff to fill the stores.” This is probably a month and a half ago. Hearing they were going to raise the wages was music to my ears and they’ve since been able to hire a couple and I can order again in person, which I’m thankful for. But it makes total sense, and I think a lot of consumers, myself included, are more than willing to pay an additional 4% which is probably going to equate to something like $0.20, $0.30 for your chicken burrito. I think this is going to be totally fine. Again, this is another story of a company being able to pass on the cost of inflation onto their customers.
Hill: I get that every business is different. Every restaurant, whether it’s an individual mom-and-pop local place, or a national chain like Chipotle, they’re all going to make their own decisions and they are all dealing with the same thing though, which is, how do we get people to work here? We’re just going to have to decide what we want to do and fortunately, in the Chipotle case, when you think about the way they market themselves, there is not a value proposition to Chipotle. I get if Wendy’s, McDonald’s, Burger King, which are three successful chains that do offer value meals, I get if they are reticent to boost up wages, because that’s part of their proposition, “For this amount of money, we’re going to feed you,” and I think you’re right. I mean, this is a thing Warren Buffet says he loves to see in businesses, pricing power, and Chipotle can’t raise prices to the moon, but 4% seems really doable for them.
Hill: Our email address is [email protected] From Jason Long in Colorado, he writes, “Hi, guys. Jason Moser talked about Elastic on Motley Fool Money recently. I’d be curious to get your take on a company called Sumo Logic. They compete in the same market and announced their most recent earnings last week. What do you think? P.S. I appreciate everything you do in your Stock Advisor service. I’ve done very well since I signed up 16 months ago. Please let the Stock Advisor team know that they have a happy customer here.” Consider it done, Jason. In the same way that when Jason Moser mentioned Elastic and I’ve never heard of that business before, I never heard of Sumo Logic until this email came in. Am I right that they are in the data analytics industry? Yes?
Bruning: Yeah. They are SaaS company or Software-as-a-Service company that helps address the digital transformation by using automation and data to help build actionable insights for companies. On the service, I love the concept more so because I think their data is the present and it is the future. When you think about just about every single industry is using big data in some way, whether it’s machine learning or quantitative analysis and the financial services and you name it. There is going to be data that’s being included and it’s going to be increasingly used moving forward. I wasn’t familiar with this company either. I took a quick look at some of the financials and whatnot, and that’s where I had some pause. Their growth is slowing a little bit. They didn’t grow quarter-over-quarter at all, 15% year-over-year in the first quarter, versus 45% growth on the revenue side of things, in the first quarter of 2020. In my opinion, I just think there are better opportunities in the data analytics space. A couple of names I’m semi familiar with are Splunk and Datadog, and Datadog would be the one that I’d be most interested in personally so. I think this is starting to be a crowded space and you have to pick the players with some thought and for me personally, after just a quick surface look, Sumo wouldn’t be my first deck.
Hill: For all of the opportunities in this industry, do you think we’re likely to see some consolidation over the next few years? The reason I asked that is because Sumo Logic went public last fall, the stock is not trading dramatically below where at IPO’d, but it’s about 20% below where IPO’d. The listener referenced Jason Moser’s mention of Elastic. Elastic’s a $11-$12 billion company. Sumo Logic is about a $2 billion company and it seems like if there is going to be consolidation, they could be a candidate to be acquired.
Bruning: Yeah, absolutely and that’s what I was about to say if you didn’t mention it, it’s a $2 billion company. You compare it, like you said, to Elastic, I think you said $14 billion or $15 billion ($11-$12 billion), and then you have the biggest player up incoming player is Datadog. I think they are approaching a $30 billion market cap. I think if the management teams at other companies are interested in acquiring for growth and maybe go for Sumo. There’s definitely going to be some consolidation in the space, when you have legacy players like Splunk that are struggling a little bit. They’re probably going to try to require growth as well. I think this is definitely an industry to look for some consolidation, and like you said, Sumo’s probably fitting that through to it’s seat.
Hill: Last thing before I let you go. Does this company might get acquired ever show up on your list when you’re thinking about buying a stock, and if so, where does it fall on the list?
Bruning: Yeah, I don’t try to think about that when I’m looking at a company, because you can never know the future for sure. I would never use that as a reason to actually put money in a company saying, hey, I think Datadog can acquire this company, it will probably be at a 30%-40% premium. That’s just a guess or forecast on something that you have no way of knowing unless you have the insider information, which is a whole nother story. That’s not something that I really ever consider.
Hill: You don’t want to get the lawyers involved?
Bruning: Yeah, exactly.
Hill: Clay Burning, great talking to you. Thanks for being here.
Bruning: Yeah, thanks for having me on, 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 Dan Boyd, I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.