Shares of Volvo popped this morning on the news that the company is selling 24,000 vehicles to Uber starting in early 2019. In today's episode of MarketFoolery, Chris Hill talks with Jason Moser from Million Dollar Portfolio and Taylor Muckerman from Stock Advisor Canada about the deal, the future of the autonomous driving market, and how real adoption of self-driving cars will change the auto industry and the country.
Also, the hosts dip into the mailbag to answer a listener question about whether new GE (GE +2.03%) CEO John Flannery might be a great asset in the making and just what the company needs to turn its losing streak around.
A full transcript follows the video.
This video was recorded on Nov. 20, 2017.
Chris Hill: It's Monday, November 20th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Stock Advisor Canada, Taylor Muckerman, and from Million Dollar Portfolio, Jason Moser. Thanks for being here!
Jason Moser: Hey now!
Hill: Fair to say this episode almost didn't happen. I think that's legitimate.
Taylor Muckerman: Let there be light.
Moser: That is fair to say. Or, perhaps, it would have just been done another way.
Hill: Possibly. Here's what happened at Fool global headquarters this morning: a blockwide power outage. And that was surprising for a few reasons, not the least of which is, it's a gorgeous day outside. There's no storm rolling through town. There's not a cloud in the sky. This is a picturesque November day in Alexandria, and the power went out about 45 minutes before we were supposed to start taping.
Moser: The upside to that was, it was a beautiful day to go walk out of the building and go to our local Starbucks for a refreshment, and take a few minutes to unwind from this stressful work environment.
Muckerman: The long, hard Monday morning. [laughs]
Hill: We're going to dip into the Fool mailbag. We have to start with the news in the automotive industry. Shares of Volvo are up this morning on the news that Volvo has struck a deal to sell 24,000 vehicles to Uber starting as early as 2019. Financial terms not disclosed, Taylor, but suffice to say, they're getting paid something.
Muckerman: I've seen elsewhere that it's potentially up to $1.4 billion for the cars to be delivered between 2019 and 2021. So, this extends the partnership that these two companies have already been working on in cities like Pittsburgh and San Francisco with just a couple of hundred test vehicles for Uber and Volvo. Still having a passenger that can take control of the wheel, but largely, these cars are driving all by themselves, picking up passengers and dropping them off. And I haven't seen any issues to date that they've been working on with this. Looks like the future to me, in terms of automobiles and fleets of autonomous cars being purchased by the likes of Uber, Lyft, UPS, FedEx. It's something that I see continuing and accelerating over the next five to 10 years.
Moser: Yeah. I think this is a great step in the move toward adding this technology to society. One of the things that gets lost in this a lot, because we like to talk about it, it's such a topic that's at the forefront of financial media today, the whole autonomous vehicle movement, this is an additive function. This is something that serves as additive to society. It's not something that's trading one out for the other. We're not talking about, you're going to take my car away from me and now I just have an autonomous car and nobody's going to be driving their cars. This is more about adding a useful technology to places where it's needed the most. I'm likely not going to need an autonomous car for my purposes. I still need to drop the kids off at school and come to work. But, it's about adding more. It reminds me of a poll that Aaron Bush posed on Twitter a little while back, not too terribly long ago, and it was really good because a great conversation evolved from it. But the poll basically was, when you look at this move toward self-driving cars, what group holds the most power in this relationship? Is it the car manufacturers, the ride sharing companies, or is it the chip/tech creators? It started making me think, and we kicked some ideas back and forth. Ultimately, the idea was, chip and tech creators, that gets commoditized at some point, that's sort of the nature of hardware. Cars, same thing, very capital-intensive.
Muckerman: Was it Intel that bought Mobileye?
Moser: I think so.
Muckerman: So, they're trying to tap into that market.
Moser: It was interesting, the poll out of 72 votes, more than half the people voted for chip and tech creators. I felt very good about my vote, which was for the ride-sharing companies. And the reason I felt good about that vote is because that was also Aaron's vote, and I tend to like how he thinks. But, generally speaking, you look at these ride-sharing companies, Uber and Lyft and whoever else comes from this, and they are the ones that are building that network and have the opportunity to provide that long tail of service. So, you get that network built, you get the infrastructure in place, and then you potentially have a very long tail of revenue and profits that you can generate from that network. It does require extremely long-term thinking, which, thankfully, is how we approach things here. So, it's always worth noting, these are the very early days of this movement. But it's very cool nonetheless.
Hill: It's one more reason that I wish Uber were a public company today, so we could see what's happening with their stock. Because, I agree with the long-term thinking, but I think if Uber was a public company and they were stroking a check for some $1 billion, their shares would be down a little bit, because they will have to pull off a switch that will be difficult in general, and it would probably be harder if they were a public company. And it's the, we have drivers right now, and eventually we need to flip to not having drivers.
Muckerman: Well, that's probably their highest cost outside of insurance or something along those lines.
Hill: Right, but the cars they're buying aren't free.
Muckerman: They're not cheap, no. But, the payback period, you imagine, you talk about these autonomous trucks, we're talking about the payback period being less than a year or two. And these fleet vehicles are likely going to last longer than a year. So, I certainly see them making money off of it. I came across an interesting think piece from Bob Lutz, former chairman of General Motors and former head of their product development. He says within 15 to 20 years, human cars will be legislated off the roadways in the United States. He gives a less than 20 years.
Moser: See, the only reason why I would be skeptical of that claim is, I don't think we actually have the infrastructure in place at a national scale to accommodate self-driving vehicles. You need to have a road system that's very well delineated and marked. To me, it's going to take a little bit longer to build that out. I'm not saying we couldn't get in that direction. I tend to think we ultimately will be a hybrid of both. It's a big country, it depends on where you live. Folks in, Moultrie, Georgia, I don't think have a care in the world about self-driving cars. But they also have two stoplights down there. And hey, listen, that's OK. Up here in Northern Virginia, a bit of a different tale, certainly if you get into somewhere like D.C. or you're looking at New York City, where this could solve a lot of problems. But, I think when we talk about recouping your costs in this, if they do this well, then all of the sudden you're looking at a network that also has a lot of pricing power, too. So, whether you're Uber or Lyft, you're going to be able to demonstrate that value pretty quickly. And if you can demonstrate that compelling value, you can eke prices up a little bit here and there. Obviously, they talk about times when demand is higher than others, like New Year's Eve or whatever it may be. A lot of opportunities to demonstrate value through these networks over time. In the end, that should wiggle down that recoup timeline, all things considered.
Hill: You and Aaron Bush may be correct in terms of which group is going to hold the most power, but would you at least agree that, whoever is the leading chip maker, that company stands to benefit enormously?
Moser: There's no question. There's absolutely no question there. History is very clear that, in the beginning of any new sort of disruptive market, the company that is responsible for the technology has a tremendous advantage there until that technology proliferates and is mimicked or copied. There is a period of time there where the technology providers have a great opportunity to profit immensely from this. At the end, tough, we also see, even Apple (AAPL +0.39%), with its brand power and really good hardware, even their margins are coming down as they're having to start offering more price points for their products. So, hardware, generally speaking, trails down toward the end stages of a disruptive market.
Muckerman: You mentioned Apple. One company we like in Stock Advisor Canada that could potentially be a big player is Magna International.
Hill: Magna?
Muckerman: Yeah. They make a lot of car parts for the big manufacturers in the world, but they also have complete vehicle production capabilities. They were actually rumored a couple of years ago to be approached by Apple potentially to manufacture an Apple driverless car. That has since petered out. But, certainly, if you see these fleet companies approaching a company like Magna to say, "Hey, we don't want to go through a BMW or a Volvo or somebody, we want our own vehicle to these specs. Here it is. Can you build it?" It's a company that's been building out its autonomous capabilities quite dramatically working with Intel and BMW. We just haven't recommended it as of late because we're a little nervous about the automotive cycle. But, a company like that could be one to look at long-term.
Hill: Our email address is marketfoolery@fool. I should mention before we get to the email, this is a short week for us because it's Thanksgiving this week. So, we're here through Wednesday. No show on Thursday.
Moser: I bought a 23-pound turkey over the weekend.
Muckerman: What?!
Moser: Yep. Took my younger daughter to horseback riding, and there's a Wegmans out that way, so I'm leveraging my time and decided to get some grocery store shopping done and out of the way, just knock out some stuff.
Hill: How many people are you having over for dinner?
Moser: We're having our family of four and then another family of four, plus one. So, nine people total. Now, granted, four of those nine are kids, and they're probably not going to eat a whole heck of a lot of turkey.
Hill: More for you.
Moser: Listen, man, Thanksgiving is basically about two things for me at this point. It's about letting the fire in that fireplace as early as I can on Thursday morning and keeping it going all day long, and roasting the biggest turkey I possibly can. So, I think I've got things laid out in a pretty good position here.
Hill: Are you looking forward to Thanksgiving dinner? Or are you more looking forward to the next day leftovers?
Moser: I'd say equally. But when I got to work today, and I saw on Twitter, Emeril Lagasse tweeted out this recipe for turkey bone gumbo. Essentially, it's a gumbo recipe with your leftover turkeys, with the bones in the broth and all that. So, I'm very excited to make that gumbo recipe this year with the leftovers, to go with, of course, the sandwiches in the turkey Bolognese and whatever else may enter our kitchen.
Hill: Nice. [email protected] is our email address. From Logan Grant, who writes: "I recently finished reading the book The Outsiders: 8 Unconventional CEOs and Their Radically Rational Blueprint for Success. As General Electric's new CEO John Flannery shares the details of his capital allocation changes, I noticed many similarities to specifics discussed in this book. These past CEOs with phenomenal track records made drastic changes such as selling off core performing businesses, cutting their dividend to make better use of free cash flow, and cutting unnecessary operating expenses. While these changes scared away many investors in the short term, they added remarkable per-share value in the long-term. Could this be a similar story for John Flannery at GE? I hope to hear your thoughts on this. Thanks for all you guys do." Great question, and thanks for listening, Logan. I should mention real quick this morning, before the power went out -- and thankfully, I wasn't here in the studio when the power went out, because I think this is the single worst room in the office to be in because there are no windows -- I taped an interview with Nell Minow that's going to run on Motley Fool Money this week, and one of the things we talked about was Flannery and GE and the pretty dramatic shake-up with the board of directors. But, Jason, to Logan's question, you read The Outsiders, you're a fan of that book.
Moser: Yeah, I thought it was a good book. The only criticism I have is, it gets a little bit redundant.
Muckerman: Yes.
Moser: Because it talks about eight CEOs, very similar stories. They got to where they ended up with a lot of the same strategies. And we covered that in the question.
Hill: The author could have knocked it out in four or five CEOs?
Moser: [laughs] Probably, but I think good investing is always sort of about reinforcing those good lessons. So, for a lot of reasons, it was a good book. It was an enjoyable, easy, quick read. I was looking through, the CEOs that he chose, it wasn't just arbitrarily that he chose them. He took a couple of measures. He said the CEOs had to be two classes. There was an absolute returns test, which said they had to have better returns relative to the S&P than Jack Welch did during his 20 years at GE. Then, they also had to materially outperform their peer group. Jack Welch, if you look at what he did with GE during his time there, I think it was '81 to 2000 or something like that, the shareholders really won under his tenure. Now, obviously, Jeffrey Immelt is sort of the opposite case there. He didn't really return much of anything. In fact, as a matter of fact, I think shareholders lost considerably.
Muckerman: Yeah, you lost if you bought in.
Moser: The pessimism of GE is so rampant today. And I get it. It should be. But, I think the pessimism today is just reflective of some hard decisions that needed to be made that should have been made 10 years ago, or maybe seven years ago. But, any which way you cut it, there were decisions that were basically put off that should have been made. So, I feel like Flannery is getting in here and making some calls early on to say, "Look, before anything happens, before we can be successful pursuing Healthcare and Airlines --"
Muckerman: The Power segment.
Moser: "-- the Power segment of the business, we're going to need to get our books in order. We need to have our numbers in such a way that we can attack this, as opposed to constantly having to play defense." So, he's looking to not only make those difficult decisions, but also surround himself with different thinkers. And I respect that. It reminds me a lot of the Doris Kearns Goodwin book, A Team of Rivals.
Hill: About Lincoln.
Moser: About Lincoln, yeah. Now, I'm not comparing Lincoln to Flannery, mind you. [laughs] I get it. But, it was a very good book in that it shows you one of Lincoln's greatest strengths, if not his greatest strength, was the ability to surround himself with diverse opinions, people who thought differently than he did. It helped him make better decisions, and it helped him recognize, he's not always right. We could always maybe rethink things. I just think Flannery is doing a lot of things right now that must be done. Whether the company is successful or not, time will tell. But I would not like their chances if he didn't make these decisions. Now that he has made these decisions and set the table for us, I like what he's doing. I think history will look back on this as being the time when things started turning around.
Muckerman: If he does sell out of all the businesses that they've talked about, there's going to be a lot of cash to work with. I think that's what we're going to see, out or under-performance, is what he does with this cash. They've announced which businesses they're going to trim, now it's time to see what they do with these billions of dollars that they're going to suddenly come upon. It's either going to be share buybacks or growth in the industry that they're keeping, maybe more acquisitions. But, I doubt it's going to be a higher dividend, because that was the first thing they cut and if you looked at some of the CEOs in the book The Outsiders, the dividend was one of the last things on their mind, unless it was the last absolute possibility to return money to shareholders. And, more strategic buybacks, rather than just, "We have $4 billion, we're going to buy back stock over the next two years." It was very strategic buybacks, not just blanketed, month-over-month buybacks.
Hill: Thanks for being here, guys.
Moser: Absolutely.
Muckerman: Yeah.
Hill: Have a great Thanksgiving!
Moser: You, too.
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!
