Synergies Set the Stage for the Week on Wall Street

On this Market Foolery podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman break down the interesting business news of the day, and much of it centered around the strength to be found in unity. 

Tyson Foods (TSN 0.74%) turned in a strong quarter, and beyond the simple matter of rising prices and demand, it also is gaining ground through acquisitions in the packaged food space. Marriott International (MAR -2.92%) signed a new deal with China's Alibaba (BABA -1.14%) that will give it better access to an enormous market. Netflix (NFLX -0.62%) made its first-ever acquisition, and while you may be unfamiliar with the small comic book company it bought, you'll soon see why it could be a huge win. Finally, even Tesla (TSLA -1.06%), one could say, renewed an old partnership -- with the world's debt markets, as Elon Musk went back to the bond well for $1.5 billion in financing to help him transform the automotive industry.

A full transcript follows the podcast.

This podcast was recorded on Aug. 7, 2017.

Chris Hill: It's Monday, Aug. 7. Welcome to Market Foolery! I'm Chris Hill, joining me in studio today: from Million Dollar Portfolio, Jason Moser, and from Stock Advisor Canada, Taylor Muckerman. Happy Monday, gents!

Holy cow, do we have news. We've got entertainment news, automotive news, we have a big deal in the travel industry. But we start with this reminder: Wednesday, just two days from now, Aug. 9, we are going to be taping Market Foolery live at Chatter in D.C. It's at the corner of Wisconsin Avenue and Jennifer. Look it up on the internet, Chatter D.C. We've tweeted this out but we'll tweet it again. The doors open at 11:30 AM, that's when we'll be taping, and we'll be hanging out for a bit afterwards. We will be bringing some Fool swag. So, come on out to Chatter, if you're in the D.C. area on Wednesday.

Let's start with Tyson Foods, which is on the rise this morning. Their third-quarter numbers looking good on the top line and the bottom line. Taylor, when the price of beef and chicken and pork go up, that's good news for Tyson.

Taylor Muckerman: Yeah, when you're the No. 1 U.S. meat processor, totally. They spent a bunch more money than they typically do on the chicken side of things, so that hurt earnings a little bit. But as as you mentioned, volumes were up, prices were up. We love our meat here in America, apparently.

Hill: And around the world, too. There's a fair amount of exporting that went into this quarter.

Muckerman: Yeah, there was. And they made an acquisition in April, they're closing it in June and July of this year, so, they're still working toward that, of AdvancePierre, more of a pre-made sandwiches provider. Kind of falls right in line with the Hillshire purchase they made back in 2014, really trying to ramp up prepared foods. That's been carrying the business, and they're looking at a record year for EPS. Share counts down over the last couple years, and throwing off a ton of cash.

Hill: One of the things I read this morning is that Tom Hayes, who is the CEO at Tyson Foods, he just started in January, one of the things he's doing is some restructuring, but not in the main way that we think of corporate restructuring. This is really in terms of his executive team, and making things more streamlined in terms of the presidents of each division who are reporting to him. If you look at a stock chart just of this year, it's up slightly for the year, but really it's just been in the last few months that they've bounced back.

Muckerman: Yeah they have. And they keep making acquisitions like this, streamlining --

Hill: You have to pay for them.

Muckerman: Exactly. But they've got the cash flow to do it. They're kicking off over $2 billion in operating cash flow and not spending a whole heck of a lot on capital expenditures outside of these acquisitions. So it's flowing right down to the bottom line. As I mentioned, share purchases are making a dent after they issued shares a few years ago to pay for that Hillshire acquisition. So, bringing that back down in line and paying a dividend of a little bit over 1.5%. Seem to be on solid footing, and it certainly doesn't seem like the world is going to stop eating any time soon.

Hill: Let's hope not. Marriott shares up this morning after the hotel chain announced the deal with Alibaba that enables Alibaba users to book Marriott hotel rooms on Alibaba's site.

Jason Moser: Well, maybe Tyson felt a bounce from that, because they figure, more people staying in Marriotts means they're going to be eating steak, chicken, yada yada yada.

Muckerman: Yeah, you got that breakfast buffet. [laughs] 

Moser: I mean, let's just look at the bigger picture here, right?

Hill: Exactly. This seems almost as big a no-brainer as you can get.

Moser: Sure.

Hill: But, obviously, it took a little bit to work this deal out.

Moser: Yeah. It's a win for both companies. I think when you look at a business like Alibaba, the value there is really in the network. And the greater the network, the more value. And it goes in this loop on repeat, it just keeps growing that network larger and larger and it gives you more and more reason to be in that network and stay in that network. So, for Marriott, it's an additional point of distribution. I think this matters, really, Alibaba is looking to take advantage of that massive and growing online travel space. From domestically here to China to everywhere in between, travel is a major opportunity. With Marriott, Marriott is the biggest hotel company in the world post the Starwood acquisition. A very well-run company. It's one we still have on the watch list at MDP. We've identified the price as just, it's not for us a "buy at any price" kind of company.

Hill: So, you're upset that the stock is up this morning.

Moser: We don't like it when that happens. I mean, I'm happy for current shareholders. I can't deny there's a part of me that would love to see this thing pull back a little bit. But, generally speaking, this makes a lot of sense. I think it's also interesting that, it will also open up the Alipay platform so that not only are you able to find and book rooms via Alibaba, you're able to integrate that payment system into the Marriott properties where you might go stay. So, this all boils back down to the numbers that we're seeing here projected over the coming five years and beyond as the Chinese middle class starts to expand. Taylor and I were talking before taping, once the toothpaste is out of the tube, it's really tough to get back in there. What I mean by that is, the more that the Chinese taste that free-market-capitalism style of economy, the more difficult it becomes to put a cap back on that. And I think you'll see -- as the Chinese middle class continues to grow -- spending continue to grow with it. And travel is just notoriously a great opportunity. So, it makes a lot of sense for Alibaba to try to tie up here with Marriott. For Marriott, it gives them another really valuable distribution point, particularly in the age of your Airbnbs, where they're seeing more competition on the consumer side.

Hill: And if you're Alibaba, you have, presumably, a pretty healthy financial incentive to push those search results up when people are looking to travel, I was going to say without being intrusive, but maybe they do want to be intrusive, to essentially guide people who are on Alibaba's site straight into Marriott properties.

Moser: Yeah, they want to be politely intrusive. It's just like anything else. Google, Facebook, Amazon, these are all properties that are trying to use the data they glean from our usage in becoming more valuable to us. On the one hand, you can view it as maybe being a little bit intrusive, in that you're probably giving them a little bit more information than you would want to. On the other hand, they are able to find out more about the things that you like, the places you want to go, the things that you want, and and can serve you more relative offerings in that regard.

Muckerman: It's one of those things where you hate it in the back of your head, but as it's happening, as you see it understanding you're better, you're like, "Well, this is pretty darn convenient. It's really not that bad of a deal."

Hill: Jason, I'm assuming the answer to this is no, but is there any chance that Marriott would break out this information in their upcoming quarterly results? Maybe not necessarily in a press release or something like that, but on a conference call, is this the sort of thing where, if an analyst asks them, "Six months ago, you announced this joint venture with Alibaba, how's that working out, and can you put any numbers beside it?"

Moser: I suspect what we'll see in the near term would just be the gratuitous "things are working great" talk. 

Hill: "We're very excited."

Moser: "We're very excited about the synergies." Synergy will probably be bandied about there a little bit. But, in the near term, I don't suspect we'll see any real, firm metrics. Now, if it gains traction and becomes a meaningful driver, then I think they'll have more reason to tout it. So, we'll have to just stay tuned. 

Hill: Elon Musk said last week on Tesla's conference call that the company would not be doing another equity offering. Today he backed it up, because Tesla announced the company is going to sell $1.5 billion in a debt offering. We knew they needed money, and I think for anyone who takes Elon Musk at his word, if you listened to that conference call last week, it became clear that it was not a question of if, it was a question of when they were going to announce a debt offering, because they weren't going to issue more shares.

Muckerman: Yeah, they have less cash than they did this time this year, we know they need it, we know they're going to continue to need it. Over half a million pre-orders for the Model 3, that's the kind of production level they're trying to get to it in the next couple years, about 500,000 cars a year, when they're only a little over 100,000 this year. So, definitely some work to do, and the cash burn is a real deal over there.

Moser: Yeah. I think, as we've said, it's a matter of when and not if. With Tesla, it really boils down to, which would you rather have, share dilution or additional debt? Because it's going to be one or the other. And I think at one point or another, I believe that this debt offering is going to involve some junk debt --

Muckerman: Yeah, for the first time.

Moser: -- ratings and junk bond ratings, which is significant in that at some point or another, it's going to become more attractive an option to go ahead and issue equity. So, if you look at it historically, since 2012, Tesla's share count is up about 45%. It's no shock that they're going to have to continue to access the capital markets in one form or another. I think, really, it boils down to, do you believe in this story? If so, how far do you think it will go? Because I can tell you this that what they're doing -- and again, I admire what Elon Musk is doing, and I'm 100% for it but, as an investor, you've got to look at this and recognize the fact that it's going to require a lot of money for a long period of time. Everything these guys do is extremely capital intensive. Whether it's building cars, batteries, Gigafactories, whatever, it involves a lot of money. So, when I look at Tesla as an investment, I'd say the 10-year picture is probably more attractive to me than the three-year picture, because this isn't the last time they're going to have to access capital. 

But the flip side to this is that, with Tesla, you have a pretty good window into demand. With the Model 3, for example, they have a pretty good idea of how many they need to build initially. Granted, some cancellations come through. But they have a pretty good idea there of how many cars they need to build, how many people want them. So, that's a plus. Their next step is going to be semi-trucks, according to the letter, and it's not going to stop there. This is a car company, a battery company, a power company. They're trying to do things to fundamentally impact our world for the better. So, there's a psychology in play here that really gives you a stock that's completely detached from the fundamentals of the business, and that's the leap of faith you have to make as an investor. I think with this one in particular, you have to be able to say, I'm OK with holding these shares for the next 10 years, because I know it's going to be a bumpy ride.

Hill: For anyone interested in more on the automotive industry, check out the most recent episode of Motley Fool Money. Our guest was Paul Lienert, who has covered the automotive industry for 30 years. It's always great to talk to Paul. I've interviewed him a few times, and one of the reasons I love talking to him is, he just tells it like it is. One of my questions to him was about Elon Musk and his prediction, which you referenced, Taylor, the whole 500,000 cars in 2018. And I posed my question, and he essentially said, I don't mean to be rude, but your question is moot. [laughs] Essentially, it doesn't matter what he predicts, it really doesn't matter.

Moser: When you look at things like the Model 3, there was this big hubbub made about the first Model 3 being delivered, the Model 3 deliveries coming out. You have to look at that as basically the Dow 21,000. It's a headline, it's a milestone. It doesn't mean, really, anything else. It's a good thing, it's a positive thing, but it doesn't mean game over, it means it's just getting started. I think the market really loves to focus on that because it's a great story, but let's look at the hard work now that's coming up in building a lot of these Model 3s, and further, building semi-trucks, and further than that, completely reshaping our nation's and potentially the world's power grid. It's amazing to think about the things that Musk has in his mind. I would recommend, too, if you get out there on the internet and google up Elon Musk's plan get to Mars, read that thing. It is amazing on so many different levels, but it's really a great window into how he thinks. If you're going to be a shareholder of Tesla, I think you need to have a good idea of how his brain works, and the way he's looking at things.

Hill: Netflix is getting further into original content, and for that they need original content. And today they went out and bought some. Netflix is acquiring Millarworld, which is the publisher behind franchises like Kingsman: The Secret Service, Kick-Ass, and Wanted, which all started in print form and ended up being a pretty successful set of movies. I don't want to say this is akin to Disney buying Marvel, but it is in the same vein. The Marvel Universe is so vast and so deep. This is sort of like a miniaturized version of that, though, I think, in terms of the characters and stories they have in the acquisition of Millarworld, and the ways that they can use it.

Moser: Yeah, it's a page right out of that playbook. It's like we say every quarter, content is king, and I think this really does back that up. It's no secret that Netflix is moving more and more into original content, and this gives them an interesting avenue into that IP which certainly can carry a longer life due to the animated nature, at least in its original form, it can go a million different directions and we've seen that with things like Marvel and Lucasfilm and even Pixar, to a lesser degree, with Disney. It's interesting that it's their first acquisition. I was actually a little surprised by that, just because I hadn't really thought about it, but I guess that does make sense. I don't know that they've done any real acquiring.

Muckerman: It's pretty astounding organic growth, then, for the past decade or so.

Moser: It is. It does really speak to the success that the business has had to date, and how well they've really done building out a platform that everybody uses as a sort of a must-have now. This gives them another way to really separate themselves from the competitors in the space. That's really what's differentiating any of these. I think we're at the point now where TV is basically a streamable product, and that's how people are getting their offerings, and it's a matter of what content you like and signing up for the services that provide that content. I'm not really very well-versed on Millarworld or the content that comes from it, but it seems like it has enough interest to where Netflix sees a future.

Muckerman: Yeah, I'm not too familiar with it, either, but I do know the last couple movies they've made have brought in $300 [million] to $400 million. So, it's nothing to bat an eye at. I wonder if they're going to produce a movie and then sell it externally, or if it's all going to be Netflix-only content, where you have to be a subscriber to get access to it.

Hill: I think it's worth revisiting the point that you made earlier, Taylor, which is, all the more impressive that Netflix has made it this far on original content that they have not owned. And what that means is going out and talking to showrunners and creators and that sort of thing. Now, I think, with this acquisition, Netflix is in a fantastic position, because there are absolutely going to be people they've already worked with that are going to be interested in this source material. So, it's not a situation where they're basically taking meetings with people saying, "OK, tell us what your ideas are." With this purchase, they have the ideas. They have the intellectual property. And now, it's an even better position to be in, where you're essentially fielding offers from showrunners, saying, "You've got the Kingsman property? Here's my idea for a four-season-length show that can be rolled out over the next five to six years."

Muckerman: Yeah, they don't have to stick with movies, that's the great thing about it.

Moser: Yeah, just like with Disney, you can use those properties, take a Kingsman movie and develop backstories for characters and take them in all different directions a la Disney. It really is, I don't want to say limitless, but it certainly has to feel that way, at least at this point, in that they can go a number of different directions with it. I think what Netflix does so well, what they've always done so well, and this is because they were really such an innovator in the space, is they use data to figure out what viewers want. They wouldn't go making this acquisition willy-nilly, I don't think. This wasn't something to say, "We're going to stake our claim on some IP and then say we have IP." They went into this knowing that there were people that wanted to watch this stuff. You don't make a deal with Adam Sandler to make six Adam Sandler movies without knowing that people want to watch them. I'm still fascinated that there's such a demand for him out there, but nevertheless, that's the case. I'm certainly they did the same thing here.

Hill: Oh, yeah. Two Kick-Ass movies, the Wanted movie, which came out in 2008, and the second Kingsman movie is coming out in theaters later this year, I'm assuming the first one has already been on Netflix, so yeah, to your point, they've already got all of the data on those four films, and how many people are watching them, rewatching them, and how big the universe of people who have watched one, or more than one, all that sort of thing.

Moser: So, really, I think we probably need to shift this, now data is king, and content is just the result. Right? Data is really what it all comes down to. You get the data, and then you make the content.

Hill: Is that it?

Moser: But can you make the content without the IP?

Hill: You have to start with the content.

Moser: We could go all day with this.

Hill: Oh, let's not. 

Muckerman: Check, please.

Hill: That's why we have Bill Barker.

Moser: Point well taken.

Hill: Jason Moser, Taylor Muckerman, thanks for being here, guys

Muckerman: See you Chris, thanks.

Moser: Thanks.

Hill: 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 stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!