In this week's episode of Industry Focus: Energy, host Sarah Priestley talks with Motley Fool contributors Vincent Shen and Dylan Lewis about some of the biggest and most interesting stories in the energy sector. Tesla (NASDAQ:TSLA) met its production goal, but their methods were far from efficient or sustainable, and long-term investors shouldn't breathe easy just yet.
Harley-Davidson (NYSE:HOG) is caught in the crossfire of an escalating U.S.-E.U. trade war. GE (NYSE:GE) is spinning off its Healthcare division to focus on its Aviation, Power, and Renewable Energy units instead, as the conglomerate model just wasn't getting it done. And SpaceX says it won't be sending anyone into lunar orbit this year, but a moon trip could happen as soon as 2019.
A full transcript follows the video.
This video was recorded on July 5, 2018.
Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday, July 5, and we're going to be talking about a few news topics.
I'm your host, Sarah Priestley, and joining me in the studio are two very special guests -- Vince Shen, host of the Tuesday Consumer Goods show, and Dylan Lewis, host of the Friday Tech show. Welcome to the show, guys!
Dylan Lewis: Happy to be here! I don't know that it's going to be a great industrials discussion, but it'll be a fun show. [laughs]
Priestley: You'll have to weigh in with your respective knowledge. This is going to be a fun show for us. I don't know if it'll be a fun show for listeners. This is actually my last show, as I'm moving to Charlotte, North Carolina. My husband got a job down there. I pre-recorded three episodes, doing deep dives on various topics and answering some listeners questions, but this is the last episode I'm recording in the studio that's going to go live today. I thought we would do a fun show and talk about some news things, big companies like Tesla and Harley-Davidson that everybody can relate to and weigh in on. [laughs]
Lewis: We're talking America!
Priestley: Yes, definitely, very American. The first story is that Tesla finally reached its production goal for making 5,000 Model 3s in one week. The story behind this is that, last week, Tesla built 5,031 Model 3 sedans. That's its relatively inexpensive Tesla vehicle. It was meant to be priced around $30,000. I'm not sure exactly how that price comes out in the end.
They've missed that deadline twice before, and it's almost a year after they launched the product. In order to do this, they had to put up a tent at their Fremont site, where they began a third assembly line. Musk slept on the floor. Obviously, I'm sure that was very helpful for motivational for everybody.
Lewis: I'm sure the cult of Tesla loves that part of the story.
Priestley: Yeah, it's just, my eyes just roll so hard when I see that. Like, unless you're there, nut and bolts attaching to things, then I don't know how helpful you are.
Lewis: You're just over people's shoulders at that point. I think this is a storyline where it's worth reading way beyond the headline. If you just see the headline, you're like, "Oh, they're on target." That does not seem to be the case with all of the news coverage that I've read about this. There were a lot of puts and takes with how they got to this number.
Priestley: Yeah, definitely. One of the key things -- Tesla's dream is this automated car line. That's how they're how they're differentiating themselves from Ford (NYSE:F). It's heavily robotics-based, their production line. They built this tent city for the GA4 production line. They built it from parts of a failed conveyor system, and they hired people to move parts around the factory. And I can tell you, having worked in a manufacturing facility, getting parts moved around is the hardest part, probably one of the hardest parts, of keeping everything flowing. So, I understand why they did this. But my question, having a little bit of a background in this, is, I cannot believe this is profitable. This manufacturing process cannot be profitable for them on this vehicle.
Lewis: I also worry that it's not sustainable. They were talking about how they were working a lot of machinery in the factories, and that they were basically on full clip, non-stop, so that they could hit the target. They're pitching this as a good thing. They're like, "We're stress testing these mechanics. We want to see what we can get out of them and what their useful life really looks like."
I look like that, and I'm like, "You guys are making cars that are going to be going out to market, and the expectation is that they're going to have the same performance as these really well-reviewed, expertly crafted cars that you've made in the past. I think they also cut the number of weld points on these vehicles. They're making a lot of manufacturing decisions now that they weren't making when of these cars first hit the road. Is consistency going to be there? I don't know.
Priestley: They could have been over-engineering, to a certain degree, initially. That's something that you come across a lot with high-spec products. When they take it to mass manufacturing, it's like, "Yeah, it would be great for us to have this whole seam bead welded," or whatever, "but actually, all we need is four points for it to be just as strong." So, I understand that, but I completely agree with you on the pushing it. And Musk came out straight afterward and said, "Next goal is 6,000 per week."
From an investor standpoint, you just want them to get to some point of stasis, where it's like, "We can deliver this, we'll give you the assurance." Every time he comes out with a target, it's almost laughable at this point.
Vincent Shen: It does seem a little unrealistic to me. The big thing you have to keep in mind here as you see this headline number, they hit their 5,000 target for the one week, but keep in mind that the first 12 weeks of the quarter, they averaged less than 2,000 Model 3s per week. I don't understand how anybody can look at that single week where they were running it day and night, and "cutting some corners," at least relative to their prior production practices. And now, the next target is for, what, August for 6,000? It just doesn't seem very sustainable to me.
Lewis: Yeah, I could tell you that I ate five salads this week, [laughs] and then if next week, if I go back to eating zero salads, what does that do for my long-term health? It's an issue of sustainability for me.
I'm a Tesla shareholder. I see them hitting this and really stretching to hit this. I always worry when I see a company that's being short-termist in how they're reaching goals and setting goals that are setting themselves up to cut corners. Particularly when you're in manufacturing, I think that's something that's troublesome. I don't love that this is the way that they're building their business, as a shareholder, personally.
Priestley: I also enjoy the fact that you said you had five salads this week, when yesterday was the Fourth of July. [laughs]
Lewis: [laughs] That was a hypothetical! I have not. I wish I had five salads. I don't look like I have.
Priestley: It was a lot of liquid lunches, I imagine, yesterday.
Lewis: It was.
Priestley: The next story is Harley-Davidson, America's favorite motorcycle company. Shares of Harley-Davidson are down around 16% for the year, and the company has gotten massively embroiled in this U.S.-E.U. trade tension. Earlier this year, the president announced measures to increase protectionism for various industries. This was particularly around the steel and aluminum imports.
It increased costs for companies. Trump's tariffs have already increased the cost of an average Harley by $2,200. Then, the E.U. announced that it's imposing higher tariffs in response to this on U.S. products -- motorcycles, bourbon, jeans, orange juice, playing cards. [laughs] Vince particularly enjoyed the playing cards. Neither of us had any clue that playing cards were ...
Shen: I had no idea that playing cards were a boon of the U.S. economy.
Lewis: You look at that basket, and you're like, that's a very specific night out and morning after. You have your bourbon and your motorcycle, and the next morning, your orange juice.
Priestley: Well, you can see how the E.U. views Americans from this [laughs] long list of products. Anyways, these retaliatory taxes would cost the company another $45 million. They can avoid incurring some of these costs by locating manufacturing and production outside of America, which is why they've come to blows with the president. They're going to locate an assembly plant in Thailand just for their E.U. production. They won't be supplying any U.S. motorcycles from this plant in Thailand. They're also shutting down a facility in Kansas and consolidating that plant with one in Pennsylvania.
There's been a lot of mixed messages around the fact that they're giving jobs away abroad because they're closing this site, and it's come at a bad time. I think that site move was already in the works. And they have, to be clear, been assembling, they make a lot of the parts in the U.S., and then they assemble them in, I think Brazil is one of the countries they do that in. There's a precedent for this, but it's just come at a really bad time, the era of Twitter.
Lewis: As a matter of macro policy, too, this is what you very often see with tariffs. It's something where, it gets imposed, then you have retaliation, a retaliatory measure. A lot of economists are not really sold on the idea of tariffs, because it winds up working out to basically zero sum. It winds up impacting individual industries very often, but the net result is relatively even for both countries. That's part of the struggle with all of this. Broadly, what's the impact going to be? Is it just that Harley gets raked over the coals for a little while? Is it really all that helpful for the U.S. economy?
Priestley: I can see why they're emphasizing the European market, because Europe, Middle East, and Africa for them, sales rose 7% in Q1. The U.S. has been continually declining in sales. They fell 12% in the first quarter. So, as much as it's synonymous with America, it's such a big American brand, their sales are not being driven right now by their home country. So, you can understand, from running a company perspective, you have to put your money where the income's coming from.
Shen: I also just want to add that it seems like a particularly tough situation for shareholders, where the company, the management team has to deal with this problem that they really didn't have any part in playing in terms of bringing it about. Now, they have to deal with the $2,200 of extra cost. I think a Fool calculated that out to about a $90 million hit annually, a 5% to 6% reduction in earnings per share. That's pretty significant for the investor to keep in mind.
I don't think it should be a surprise that the company -- given the fact that they have production facilities in Australia, I think you mentioned Brazil, India, and then soon with the new Thailand facility -- that they're going to make the right economic business decision to avoid those tariffs from Europe and move the production abroad, regardless of, as you guys have mentioned, the optics and what it means to be this all-American company.
Priestley: It's such a strong brand, too. They have to find a way to leverage that brand. I can understand the reason that they're doing this. Also, an interesting side note, somebody started -- I'm not sure if you followed this -- a Twitter account pretending to be the CEO of Harley-Davidson and tweeted out this inflammatory tweet that then got something ridiculous like 600,000 retweets, I think a lot of news outlets reported on it. It shows you, in the era of fake news ... They have since created a real Twitter account.
Lewis: It's important to read your sources and understand where stuff is coming from. I remember someone had grabbed that tweet and said, "This has gotten all this love and action, but there's nothing tying this to any public statements. This is just something that someone tweeted and ascribed to the CEO. Let's actually work through this and understand if it's real."
Priestley: The next thing I want to talk about is GE selling healthcare. Anybody that's been listening to this show while I've been doing it will know that I've been banging on about GE for a long time. On June 26, CEO John Flannery announced that he's spinning off the healthcare business, and unloading their ownership stake in Baker Hughes, which is the oil services company that they merged with their own in 2017. That was one of Jeff Immelt's last hurrahs.
This is essentially the culmination of a yearlong strategic review by Flannery, the new CEO. In that time, he's ousted a lot of the senior management, he's cut the dividend, he's announced plans to shed numerous businesses, and has started to do that. Shares have lost 50% in that time.
Lewis: [laughs] Something that you are keenly aware of.
Priestley: [laughs] Yes. It's been super painful for GE shareholders. The new GE will focus on the Aviation division and its Power and Renewable Energy businesses. That makes a lot of sense to me personally, just to bias the discussion. I'm just excited to get my GE Healthcare shares.
A lot of people are talking about, "Why wouldn't you separate Aviation from Power," because Aviation is pretty strong right now and Power is in this protracted down period. Actually, they share a lot of manufacturing similarities. You can essentially run those down the same line. It's different quality standards and things like that, but they share a lot of the basics. So, I can see exactly why they're doing this. It's an expected result, but it's positive.
Lewis: Do you think that this is GE signaling that Healthcare is worth being hived off? That's it's something that will grow into its own and become an increasingly important industry?
Priestley: Yeah, absolutely. They make a lot of magnetic imaging machines, MRI machines, things like that. It's about 16% of sales for GE overall, but it's a big contributor of income. It's a highly profitable business. That's actually where Flannery came from. He really understands that business. To me, that's such a good indicator of, if he sees the potential in this space, and with the Internet of Things and what that can really mean for healthcare with AI, and all of those, if you're following those trends, this is something that you definitely want to pay attention to.
Lewis: And you look at a lot of big businesses, there's the conglomerate of Amazon, Berkshire, JPMorgan, deciding to get into healthcare. It's no surprise that with an aging baby boomer population, healthcare spending is going to be going up. This seems to be riding a lot of coattails, trend-wise. It would make sense to me that the company would want to silo that off and let it become its own distinct thing if they think it's going to be growing out more.
Priestley: Yeah, absolutely. The way that they're structuring this is, they're selling 20%, and then they're giving the rest to shareholders. I think it's a shareholder-friendly move. As I said, it was expected, but the stock was up something like 8% on the news. This might be the biggest bump it had in about three years. To me, it signals a real divergence of, we're getting away from these big conglomerates. You saw exactly the same thing with Dow DuPont splintering off. It signals a new era of businesses, where it's this de-conglomerization, to invent a word. It's devolving power more to the business units, which I think is something that we really, really have to start seeing.
Lewis: It's funny to me for this to be happening in the industrials space, as someone that covers tech.
Priestley: It's kind of the opposite, right?
Lewis: Increasingly, all of these tech businesses, you look at Alphabet, and they're saying, "Oh, the conglomerate structure looks awesome. We have all these business units that are working in totally different spaces." For them, they have all of their Google internet properties, they have YouTube, they have Waymo, their driverless cars, they have the moonshots division, they have all of these different things. I wonder if, in 15 years, we're going to be talking about the same thing with them, where they're like, "Oh, we have to start hiving this off, it doesn't make any sense for us to be all under one umbrella."
Shen: The GE story, all the divestitures they're doing, the spinoff specifically, the parallel for me from consumer and retail that I always think about in this kind of situation is Procter & Gamble. They had this massive brand portfolio. They went through a very wide and systematic process in reducing that to the top performers in the various verticals that they were focused on.
From that perspective, even though that turnaround story is in the works still, it does allow, I think, a company with this smaller asset base, a little bit nimbler, allow them to go from a very defensive posture, which GE seems to have been in for quite some time now, to a more aggressive stance in the businesses that they remain in.
Then, for the spinoff itself of the Healthcare business, Dylan, you and I have talked about this before -- the spinoffs from bigger companies of these business units that are doing very well are often very, very good performers as individual stocks. We've seen that, for example, with eBay and PayPal, and how much of a winner that's been. That's definitely one I would encourage listeners to follow along. I think the potential there is a little more certain than the broader opportunities for GE once it's done with this entire divestiture process.
Lewis: That's a classic Peter Lynch thing, to look for businesses that are being spun out of larger businesses. The idea there is, there's probably a lot of value that isn't totally being realized because all the results from this business unit are being murked up in the rest of GE and getting lost. So, giving it its room to run allows a lot of that to be realized.
Priestley: I will say, GE has been long criticized for selling low and buying high. If you look back at a lot of their acquisitions, that's a deserved criticism. This is an instance where I think that they're selling high. I think if they tried to spin out Power right now, they would be selling really low. It's just another positive move for the company. As a shareholder, I'm patient, [laughs] and happy.
One of the last few topics I wanted to touch on, just for fun: SpaceX said it won't be launching a pair of tourists to loop around the moon this year. Might surprise everybody.
Lewis: I like that as a company press announcement -- things that we aren't doing. I would love if that was a recurring bit from some PR team.
Priestley: They've had technical and production challenges, and they're delaying this trip until at least mid-2019. It was meant to happen this year. But, just an interesting concept. They need to diversify their business, because they've noticed that a 40% drop in launches are predicted next year. Basically, there was a pent-up demand for launching these satellites. Once you've tapped that, you have another 10- to 15-year cycle. They really do need to crack space tourism to level out those ups and downs.
Lewis: And I'm sure that there are enough people that really want to go into space and have millions and millions of dollars just sitting on the sidelines and are happy to spend it.
Priestley: Yeah, that's a concerning thought. [laughs]
Lewis: [laughs] If I ever reach that level, I don't know if I'll be going into space.
Priestley: No, definitely not. SpaceX, obviously, is a Musk company, synonymous with Mr. Musk. But you can't overlook some of their achievements. Their Falcon 9 has seriously cut prices for launches, and they've made a reusable main stage. They can launch 10 times off the same main stage, which is crazy, and something that I think a lot of other companies are looking to replicate, too.
One for you, Dylan -- Ford is teaming up with Baidu (NASDAQ:BIDU).
Lewis: Heard of it. [laughs]
Priestley: [laughs] I would hope so. They're developing a new technology in services for connected cars. They're talking about infotainment systems and self-driving cars, and all that kind of stuff. That's a cool space to watch.
Lewis: Is this you handing me a show idea? [laughs]
Lewis: It's like, "Oh, I have this cool thing you might be interested in!"
Priestley: [laughs] I like to do that sometimes.
Lewis: This news doesn't surprise me all that much. In the connected car space, really in a lot of the future tech space, we're seeing a lot of collaboration. We're seeing it here in the United States, but we're also seeing it with U.S. players that want to work with China, because that's really the only way to enter that market, is to have some type of joint venture going with a domestic firm. So, Ford teaming up with Baidu, they're in totally different worlds. Baidu is this search giant, they're really big in data analytics. Ford has the technical know-how. That totally makes sense to me.
Priestley: Ford's sales have been declining in China for a long time, so I think this is a pitch to boost their brand recognition in the country and get a few good headlines out there.
Lewis: Hopefully that doesn't portend anything poor for Harley-Davidson. [laughs]
Priestley: [laughs] Poor Harley-Davidson, really had a bad run. One more thing I wanted to mention -- this is a very selfish discussion, because it's something that I would love to happen -- the return of the supersonic airliner. There's a start-up based in Denver called Boom Technology -- don't judge them on their name. I think it's widely agreed that it's terrible. They're going to fly a supersonic airliner test flight at the end of this year. It's going to be called Baby Boom. It's a downsized version of what they will eventually release. Their full-sized tests are meant to be starting in 2020.
The reason that I'm saying this is a selfish thing is, it would cut flights from New York to London from about 7 to 7.5 hours to 3 hours and 15 minutes. San Francisco to Tokyo, 5.5 hours instead of 11.
Lewis: You know, you say that's a good thing, Sarah, but you know that's just going to have your mom asking why you don't come home more often. [laughs]
Priestley: [laughs] It would! Well, apparently, it's going to start around $5,000 a ticket, so I think that's a good excuse initially. But, yeah, eventually, when I have kids and it's come down, finally, to a reasonable price ... just ship them over. [laughs]
Shen: I have to say, I was really pumped to see this. I remember the Concorde as a kid, thinking that was really cool. Those haven't been in service for I think 15 years. I did find it odd that we had achieved this kind of milestone in aviation, and then the only plane model that really did it commercially stopped being an active part of these airlines' fleets, and nobody was like, let's keep this up. It makes a lot of sense. I know there's limitations, in terms of when they can hit top speeds, because they don't want it happening over populated areas, so it can only happen over water.
When I was reading about the history of the Concorde, the other problem they had was cost of development, cost of operating them. That's why a lot of airlines abandoned them. I found that a round-trip ticket from New York to London on the Concorde in the 1970s, inflation-adjusted, costs $20,000. These trips, $5,000. It's much more affordable. Apparently, that New York-London route was the only profitable route for the Concorde.
It'll be interesting to see if they can bring these costs down, even at a $5,000 ticket price, and they can have multiple profitable routes. Maybe there's more potential for this start-up.
Priestley: They have a back order of 76. Virgin Atlantic ordered the first 10, and they cost about $200 million apiece. People really have skin in the game with this.
As I said, you were exactly right about the Concorde, there were a lot of operational issues with it, and they had quite an infamous crash in the 2000s. That damaged their reputation, too. And, they can only fly supersonic over the sea. Which makes you wonder what they could do if they could fly supersonic over [land].
But, interesting to see, interesting thought. As you said, very cyclical. Lockheed Martin is also working on supersonic, too. I'm interested to see whether competition in that subset of the industry can really drive costs down to an efficient level.
If you look at LIDAR technology for self-driving cars, that's come down. That used to be something ridiculous like $60,000 a set for all the LIDAR equipment. It's now $6,000, and they think they can get it down to under $1,000.
Lewis: I can't help but connect this conversation to us talking about Musk twice earlier. I'm a shareholder in Tesla because I buy into his general vision of things. I worry that he is someone who is a tech futurist and is generally pushing for a certain type of adoption, and for certain technology to be available; not necessarily for his company to be the one that's making it most profitably.
You have a lot of people that are doing that. It's awesome for innovation, it brings costs down, it pushes all these legacy companies to get in on these trends. You have to be mindful that, necessarily, they might not have the business models to make it happen, and for it to be successful for investors.
Priestley: Absolutely. This company, if they do decide to float, they're always going to have that Concorde comparison that they're probably never going to get away from.
But, that's it from us today. It's been so much fun having you both on the show. Thank you very much for the last one, the final hurrah. Thank you to everybody that's listened to me [laughs] over the last year, put up with me. I'm sure that it's going to be an excellent stewardship after I leave. I know that Michael Douglass from the Monday show is going to be standing in for a little while.
Also, huge thanks to Austin Morgan, who mixes the show, and who is incredibly patient and helpful, because he makes me sound a lot smarter than I actually am.
Lewis: Boy, you are buttering him up!
Priestley: Yeah, I know. [laughs] I really don't need to do this for any reason, but, there you go. He's suffering a little from the Fourth of July holiday. Maybe it's just because I'm feeling sorry for you.
If you would like to get in touch with any of the rest of the team, please feel free to email us at firstname.lastname@example.org or tweet us on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thank you to you both for being on the show. Thank you to Austin! I'm Sarah Priestley. Thanks for listening and Fool on!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of Alphabet (A shares), PayPal Holdings, and Tesla. Sarah Priestley owns shares of General Electric. Vincent Shen owns shares of Alphabet (A shares) and PayPal Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, Berkshire Hathaway (B shares), PayPal Holdings, Tesla, and Twitter. The Motley Fool recommends eBay and Ford. The Motley Fool has a disclosure policy.