3 Companies, 3 Problems, 0 Easy Answers

Business leaders usually have a number of levers to pull when they are trying to improve their companies' performance. (Obviously, picking the right ones can be a challenge.) But when it comes to fighting macroeconomic headwinds and broad trends, there's often not much they can do.

Wednesday's news in business featured three companies in such situations. General Mills (GIS -0.77%) delivered disappointing quarterly revenue numbers, despite its best efforts to pivot into the healthier-eating trends. FedEx's (FDX 0.12%) quarter was mixed, but President Trump's trade wars will cause the shipping giant even more pain down the road. And Netflix (NFLX -0.63%) may have reshaped the media landscape, but now the old guard is fighting back, and that could cost the streaming pioneer some of its most popular content.

In this Market Foolery podcast, host Mac Greer and senior analyst Ron Gross discuss the strengths and weaknesses of these companies, their latest challenges, their current investment theses, and more points that investors need to know.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 26, 2019.

Mac Greer: It's Wednesday, June 26th. Welcome to Market Foolery! I'm Mac Greer, and joining me is Motley Fool analyst Ron Gross. Ron, it's just you and me. In a word, how would you describe how you're feeling right now?

Ron Gross: So excited I can barely contain myself. Always happy to be here with you, Mac!

Greer: Good! I'm excited, too! Later, we're going to talk some Netflix. They are losing The Office. Have you heard of The Office?

Gross: I've heard of it. Boy, my kids love them some Office.

Greer: As do mine. Effective 2021, The Office will no longer be on Netflix. We'll talk about that. We're also going to talk about some FedEx. But let's begin with a rough day for General Mills. Shares down around 5% at the time of our taping on earnings. Ron, disappointing revenue. Weakness in their U.S. snacks business. Now, a lot of us, when we think General Mills, we think cereal. Cereal sales, in line with last year, hanging in there. But they're not just cereal. They've got a number of brands, everything from Haagen-Dazs to Yoplait to pet food. But they're running into this trend of consumers eating healthier. Tough go.

Gross: You got it! It's interesting, actually, even with today's drop, the stock was up 26% on the year. I would not have guessed that if you'd asked me to predict how the stock has done this year. That was surprising to me. But you nailed it. It's everyone's growing preference for healthier breakfast and snacking options. It's hit all the companies. Kellogg, Mondelez, Kraft Heinz, it doesn't matter who you are. Certainly, General Mills is not immune to that. Organic net sales, that's important, in North America fell 2%.

Greer: That sounds healthy, though. [laughs]

Gross: [laughs] It's organic. But importantly, because of their attempt to diversify, specifically the Blue Buffalo pet food company they bought last year, total sales were actually up 7% and they saw a 30% increase in the Blue Buffalo pet business. Diversifying is working, but obviously, they want to grow some of their brands, continue with some of their healthier brands. A focus on Haagen-Dazs, interestingly. Not so healthy; Old El Paso Mexican; their portfolio of natural and organic foods, and their snack bars, they're trying to focus on growing those businesses.

Greer: I think the question that everyone wants to know is, where does this leave Bugles? I love Bugles!

Gross: My pantry, hopefully.

Greer: You know Bugles?

Gross: I love Bugles! Have you ever had caramel Bugles?

Greer: I don't think so! But when I was a kid, it was one of the most satisfying things to buy the bag of Bugles, and then you pretend that they are, in fact, bugles.

Gross: You had a lonely childhood. You needed a hobby, clearly! That was just salt in a bag, which is why they were so good. Crunchy salt in a bag.

Greer: This is true. Shockingly, not doing as well today with the health-conscious consumer. Let's talk a bit more about the stock. As you mentioned, the stock's had a great last year, beaten the market, but it's lost to the market over the last five years. Shares now trading below where they were five years ago. Fun fact, still outperforming Kellogg.

Gross: Woof.

Greer: Woof, woof, woof. What's the bull case for General Mills?

Gross: The bull case, I think, is that they're going to continue to diversify through acquisitions. But that's dicey. That bull case also has a bear case right around the corner. It's tough to do acquisitions correctly. You want to make sure you pay the right price, you want to make sure you go into the correct areas. Part of the strength of General Mills over the last bunch of months was the result of the diversification strategy, Blue Buffalo being one that investors seemed to be excited about. But it's tough. The stocks are trading around 16 times, not just General Mills, but a lot of these companies, and there's a reason for that. The reason is, there's a lot of uncertainty going forward, and we're going to probably still see weakness for some time until they get their product portfolio straightened out.

Greer: OK, Ron, as we wrap up here, looking back on your cereals -- they don't have to be General Mills, they can be Kellogg or anything -- how about some favorite cereals?

Gross: By far, Cap'n -- wait, not Cap'n Crunch. Cap'n Crunch is one of my favorites.

Greer: With Crunch Berries?

Gross: No. Without Crunch Berries, actually. But Fruity Pebbles are just unbelievable!

Greer: Really?

Gross: Yes. I love Fruity Pebbles!

Greer: I always thought they were overrated. Was it the Flintstones marketing?

Gross: No! It made the milk fruity. Fruity-ish. And if you let them get a little soggy... oh, my God, I might have to have them today!

Greer: OK, let me hit you with some of my favorites, and tell me how you come down. Apple Jacks.

Gross: Boring, but my wife loves them.

Greer: Really?

Gross: Yes.

Greer: Froot Loops.

Gross: It's like a Fruity Pebbles cousin.

Greer: Count Chocula.

Gross: Too chocolatey for me.

Greer: Too chocolatey, are you kidding? OK, here's one of my favorites. This was a sleeper. Frosted Mini-Wheats.

Gross: I have it written down right here on my paper so I wouldn't forget to mention it.

Greer: Is that true?

Gross: If you let them get a little bit soggy, fantastic! And you feel like you're eating wheat, so how bad could it be?

Greer: Oh, my gosh! And, one of my truly favorites -- I had probably a seven-year relationship, a monogamous relationship with this cereal --

Gross: Here goes the thing about you needing a hobby.

Greer: Are you ready?

Gross: Yeah.

Greer: Golden Grahams.

Gross: Golden Grahams are good, for sure!

Greer: They're magical!

Gross: It's a shame that cereal has gone the way of the dodo bird, because it's delicious. Obviously, it's unhealthy, and that's why. But even granola is delicious in milk. Everything is good!

Greer: I'll hit you with three overrated cereals, and you tell me if you agree. Ready?

Gross: Yeah.

Greer: Wheaties.

Gross: God, yes! They're terrible!

Greer: Rice Krispies.

Gross: They do snap, crackle, and pop, but that's the only fun part of it.

Greer: Yeah, after that, it's like, OK. Then, Cheerios.

Gross: Oh, my God, like eating cardboard. Honey-Nut Cheerios are OK.

Greer: One more name I wrote down --

Gross: You don't get this on the other shows.

Greer: -- the phrase I have written by it is "I'm not dead yet." Grape-Nuts. When I was a kid, I always associated Grape-Nuts with being older. Now that I'm older, I still associate Grape-Nuts with being older.

Gross: [laughs] You have to be like 80 to enjoy a bowl of Grape-Nuts.

Greer: Exactly. I've got a few more years, but I'm looking forward to it!

OK, let's move on. After that hard-hitting analysis, let's move on to FedEx. The stock not doing much on earnings. CEO Fred Smith said trade disputes and an economic slowdown have created quote "significant uncertainty" for FedEx Express. Ron, FedEx also facing stiff competition from UPS and Amazon as well. What do you think of FedEx's earnings?

Gross: The earnings are OK. It's the forward guidance about U.S.-China trade tensions. They forecast a mid-single-digit-percentage-point decline in adjusted earnings for fiscal 2020. Investors don't like to see that, that I can tell you. As far as this quarter, adjusted revenue up 2.8%. Operating income down 7%, though. Negatively affected by lower package and freight revenues at FedEx Express, higher costs at FedEx Ground. Costs associated with their U.S.-based voluntary employee buyout. They are voluntarily retiring lots of employees there to cut costs.

There was some strength, though. U.S. volume growth was up. Increased revenue per shipment at FedEx Freight and FedEx Ground. Some favorable incentive compensation expense declines. There were some offsetting positives. But overall, you don't want to see a company like FedEx have an operating income decline.

Greer: Let's talk about the competition. When you look at FedEx, when you look at the stock, shares have lost to the market over the last year, and they've lost in the market over the last five years. But they're still beating UPS. If you want to feel better, if you're FedEx, hang out with UPS. But it seems like, increasingly, you've got traditional competitors like UPS, but you also have the Amazons, the Ubers. You have anyone with a car who may essentially contract their time and their services out to a bigger company to deliver. How does FedEx compete with that?

Gross: Well, you're seeing that it's tough, and you're seeing that in the stock price. They're doing things like making it more convenient for folks to drop off and pick up packages. A perfect example would be, they just said they're going to create drop-off and pick up sites at Dollar General, 8,000 stores. What that does, it puts 90% of the U.S. population close to a FedEx footprint of some kind. They're trying to make it as convenient as possible. They severed ties with Amazon for their Express delivery service. They're making strategic moves, and sometimes difficult moves, because, as you say, it's a very competitive landscape out there.

Greer: Ron, our final story, Netflix. Let's talk some Netflix. At the time of our taping, shares are actually up slightly. That was a bit of a surprise because of news coming out that NBC is pulling its hit show The Office from Netflix when that deal ends at the start of 2021. Now, interesting to see how this played out. The Office is produced by Universal Television. They held an auction. NBC bid $100 million per year for five years, edging out Netflix. Now, maybe they had a bit of an inside track. We were talking about that. Regardless, The Office, leaving Netflix in 2021. What do you think?

Gross: I think it's a big deal in and of itself, but the bigger deal is, is this going to continue to happen? Is Friends next, for example? I think the answer is probably yes. Lots of folks watch Netflix for the repeats of their favorite shows, not necessarily original content. You and I were discussing earlier before the show. If they're going to lose just a few key hit shows, I would imagine that's going to be a serious hit to their value proposition.

Greer: Yeah, you mentioned that. It's a little tough to get at this because Netflix guards their data, but I've always had this Stranger Things theory of the case, that we would subscribe to Netflix if Stranger Things was the only show they had. Now, the question is, do most people fit into that? Or are most people using Netflix to watch archived shows like The Office? I guess we're going to find out.

Gross: I guess. It may be based on demographics. I think younger folks like to watch the repeats of their favorite shows. Maybe old fogies like us enjoy the original content. I'm just making that up. But perhaps that's how it divides, based on demographics. But clearly, if you're going to charge a fee and continue to want to raise that monthly fee, like Netflix likes to do here and there, you have to have the content, you have to put the right content forth. It's going to be a combination of their own, as well as other people's favorite shows.

Greer: Ron, as we wrap up here, I want to present you with my desert island question, where I ask you, if you're on a desert island, and you have one of these stocks, and you have to buy one of these stocks for the next five years, what are you going with: General Mills, FedEx, or Netflix? Let me first back up and say that last week on the show that you were on, I mentioned that there's been an internal debate here. One of our colleagues said, "When you say desert island, I don't think you mean that. I think you may mean deserted island." I got a lot of great emails. I don't want to relitigate this. I want to say I'm sticking with desert island. I feel good about the way I've been using it. Marjorie wrote, "Don't let other people's lack of finesse and painful pedantic literalness limit your perfectly appropriate use of desert island. Besides, if the Gilligan's Island theme writers got it wrong, my faith would be destroyed."

Gross: Wow! Strong words there, Marjorie!

Greer: Thank you! And Tim from New Jersey wrote, "Desert island is an island which has never been inhabited, which is and has always been uninhabited. Deserted island is an island which once was inhabited, but whose inhabitants left for one reason or another, whose inhabitants deserted it."

Gross: I just want to say, how great of our listeners, to take time out of their day --

Greer: So great!

Gross: It's extremely Foolish! Obviously, we're kidding around here, but it's so kind and fun of them to take their time. It's great!

Greer: I love it, just to indulge me! So, the desert island question. General Mills, FedEx, or Netflix over the next five years. What are you going with?

Gross: This is a toughie, I don't like any of them. But if I have to choose, I'm going to choose FedEx.

Greer: FedEx.

Gross: Yes. Let's see how I do.

Greer: How do you feel about Alpha-Bits?

Gross: I like to make words with them, but the taste was nothing special.

Greer: I agree. It's more the marketing, wasn't it?

Gross: Right.

Greer: Well, as always, people on the show 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. Ron Gross, thanks for joining me!

Gross: Thanks, Mac!

Greer: That's it for this edition of Market Foolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!