On this episode of MarketFoolery, host Chris Hill is joined by analysts Aaron Bush and David Kretzmann to examine many of the market's biggest stories.
First, Tesla (NASDAQ:TSLA) shares soared after Elon Musk tweeted that he was considering taking the company private -- and, oh, by the way, has the funding secured to do so. No big deal.
Find out what investors should watch out for, what this could mean for the company, and why it's not a good idea to make a short-term bet on the buyout potential here.
Also, the trio discusses earnings from Camping World (NYSE:CWH) and Match Group (NASDAQ:MTCH), as well as another chapter in the tragidrama that is Papa John's (NASDAQ:PZZA), a company that's having some real trouble extricating itself from its founder and ex-CEO. Tune in to find out more.
A full transcript follows the video.
This video was recorded on Aug. 8, 2018.
Chris Hill: It's Wednesday, August 8th. Welcome to Market Foolery! I'm Chris Hill. With me in studio, David Kretzmann and Aaron Bush. Happy Wednesday, gents!
Aaron Bush: Happy Wednesday!
Hill: I feel like we could go for a good 45 minutes with the amount of news that's happening today. I think I said this to you two, more companies reporting earnings today than I originally thought.
David Kretzmann: This was a barrage today. I was totally caught off guard.
Hill: Yes. Walt Disney, CVS Health, just two of the companies reporting earnings that we will not be talking about today, because we have other things to get to, including Match Group, Camping World, we have to talk about what's going on at Papa John's.
But, really, what we have to talk about is the story that broke yesterday about two hours after we were done taping Tuesday's episode of Market Foolery, and that's Tesla. For those who may have missed it, Elon Musk went on Twitter on Tuesday afternoon and posted a tweet saying that he was thinking about taking the company private. At a market cap of $420 billion --
Kretzmann: Funding secured.
Hill: Funding secured. That's the direct quote. Funding secured.
Bush: $420 a share, not a market cap of $420 billion.
Hill: Oh. Thank you. Phew. See? This is what happens when I drink water in the studio and not coffee. $420 a share.
Kretzmann: We got you.
Hill: At the time, it was trading around $355 per share, something like that.
Kretzmann: Now it's around $370.
Hill: There are a few things to get to here. First, Aaron, I'll start with you. When you saw this yesterday, what was the first thing that you thought? What was your in the moment reaction when you saw that he posted this?
Bush: I thought it was a joke. [laughs]
Kretzmann: A very illegal joke.
Bush: Yeah. This is not really the type of thing that you see many CEOs tweet about. Normally, this is the type of thing that goes through more formal channels. But, Elon's tweet game has been strong lately, so it's not totally surprising. I think it's still a question of how much of this is shenanigans and how much of it can investors really count on. The price isn't $420 now, even though he stated that he would like to take the company private at $420. We're still $50 away from that. So, the market is definitely pricing in a lot of skepticism, which I think is fair.
Hill: David, what was your thought when you saw it?
Kretzmann: The same thing, I wasn't sure if it was serious or a joke. Some people were thinking, the price, $420, it must be a weed joke. I've been delving into cannabis a lot lately, so I appreciated the subtle nuances of that, if it was a joke.
Hill: For any brand-new listeners, he's referring to cannabis stocks that he's been dabbling in. Not that there's anything wrong with ...
Kretzmann: Right. Yes. Thank you for that, Chris, I appreciate it.
Hill: Just wanted to clear that up.
Kretzmann: That's why you are the host! It was also a matter of, like Aaron mentioned, we really haven't seen any executive make an announcement like this on Twitter. And it wasn't even an announcement, it seemed more like speculation or, "Oh, this is a possibility, I'm thinking about it. By the way, we have funding for it."
It moved the stock dramatically. At one point it was up over 10% before shares were halted for 45 minutes or an hour. Then, we started to get more statements from the company. Elon had written a letter to employees, walking through his rationale.
It'll be interesting to see what the SEC does. The idea that a CEO can go on Twitter and make a market-moving announcement like this -- and in this case, burning a lot of people who were selling the stock short, betting against the stock -- the SEC might have some issues with that, particularly if there wasn't actually anything to back up what Elon Musk was saying. The idea that a CEO can just go on Twitter, say something, move the stock 10%, burn the shorts, without having anything to back it up, that's a scary thought.
Bush: Yeah. Funding secured, those two words are powerful. Later in the day, after shares were halted, Tesla came out with a press release, and it said there were no details about funding whatsoever. So, I think it's a big question mark.
Hill: Not that big banks on Wall Street are the only place that companies can secure funding, but, CNBC tweeted out later in the day that they had worked their network of contacts at all the big banks. Every one of the big banks said, "No, it's not us." That's not he hasn't gone elsewhere, potentially, to find this funding.
But I want to go back to the legality you raised, David. This is something that we have seen before. I know there were some people on Twitter saying, "What's the big deal? It's a free public forum, anyone can get it." But we have seen this precedent before, back in 2012, when Reed Hastings went on Facebook and posted material information, essentially sharing his thinking about Facebook. The SEC investigated that, ultimately cleared Hastings, but made it very clear that if CEOs of public companies are going to use social media to share material information, they need to make sure that shareholders know ahead of time that it's coming. So, I think the SEC will probably have some questions about this, and they may end up making the exact same point. Ultimately, saying, "It's fine if you want to go ahead and do this, but you have to give everyone a heads up that you're going to do this."
Kretzmann: Yeah, and that's really what didn't happen. The announcement came on Twitter, and it was a couple of hours later that the letter he had written to employees came out. Then he started to expand on his thoughts on Twitter, replying to different people, going through his thinking. This morning, we got an announcement from a few members of the board saying, "Yeah, Elon had brought this up last week, and now we're looking into it."
Chris, you mentioned, you didn't think all members of the board were on that announcement, which is interesting. Maybe there's a split on the board of directors. I don't know what's going on there. There are still so many question marks here. Like Aaron mentioned, the fact that the stock is still trading at a discount to the $420 potential buyout price shows there's still skepticism that this will actually go through.
Bush: I don't have an issue with news breaking on Twitter. I think it's increasingly going to happen, and probably should be embraced. It was more how casually he went about it, and then shares were halted, then a press release came out. That's just not how it should be done.
Hill: Let's bring it back to the stock. The question we are left with is, how serious do we think he is about taking this company private? Keep in mind, on the most recent earnings conference call, he talked about how profitability is just around the corner, and presumably, everything is going to be sunshine and rainbows after that, at least in terms of the actual money-making part of this business. Do we think he's serious about this?
If so, don't we think he could get to $420? Don't you think there's someone out there who would give him the money to help make this work? And if that's the case -- I realize I'm loading in a couple of ifs here, which is always a dangerous thing, when your investing thesis involves more than one if. If that's the case, why shouldn't I pick up a couple of shares, figuring I'm going to make 10-15% here? How serious do we think he is about this?
Kretzmann: I think he's very serious. I would recommend anyone who hasn't already, take a look at the letter he wrote to employees. Towards the bottom of it, he basically said that he's trying to accomplish an outcome where Tesla can operate at its best, be free of the short-term thinking -- which, let's be frank, so much of the conversation about Tesla is dominated by where they'll be in a week from now, a month from now, a quarter from now. That's probably not the way for Tesla to operate at its best. Obviously, Elon Musk is someone who thinks ultra-long-term compared to virtually every other CEO or leader out there. He also highlighted the fact that SpaceX has been private all these years has been to their benefit, and that operationally, SpaceX is in a much better place than Tesla. He thinks being private is at least some sort of contributor there. I think, going forward, for Tesla to maximize its long-term potential, he sees being private, bringing the company there, making that more likely than remaining public.
I think it's likely. The company has already raised a lot of debt from various providers. They have over $11 billion in net debt. Companies haven't been shy to lend Tesla money up to this point. For a deal of this size, I think you're looking at over $80 billion. You're talking about a substantial load of debt if you're doing some sort of buyout. But I think it's likely. Yesterday, Saudi Arabia invested $2 billion or so into Tesla. I think Elon is the type of person who would be able to convince people to raise that amount of money.
Bush: I think that could be true. I do think that's a lot of money. I do think there's maybe more risk there of not being able to raise all of it, which also could pose issues to what price you get taken private at. I do think it's incredibly important for Elon to continue maintaining the narrative. I think being public has made that very difficult. Through maintaining the narrative, that's how you get better terms for debt, the interest rates and that type of thing.
Going private could ease some of that concern and spark more focus, but I do think there are still big question marks. Even if Tesla were to go private, would it be at the terms that were first thrown out? I'm not convinced that's going to be the case.
Kretzmann: One thing that's also interesting here is, Elon mentioned that if they do indeed go this route of being private, he would want to enable it where people could either sell their shares at whatever premium the buyout happens at -- he thinks it's $420, but I agree with Aaron, that's certainly not a done deal -- but he also wants to enable existing Tesla shareholders to remain shareholders in the private company. That's an interesting twist. If you wanted to, you could hold your Tesla shares. They obviously wouldn't be as liquid. You'd probably be able to sell or buy every six or 12 months. Just something to think about if you're a Tesla shareholder and this does actually play out.
Hill: The stock of the day is Match Group, which is the parent company of Tinder and match.com, among others. Second quarter profits for Match Group came in higher than expected, and they raised guidance for the current quarter and the full fiscal year. This is a hell of a report, Aaron.
Bush: Funding secured, Chris. That's all we need to say.
Hill: [laughs] Stock up 20% today. Funding secured.
Bush: As it turns out, when you're the top dog by a mile in an industry that's only growing more relevant, you can make a lot of money. Revenue grew 36%. 27% growth in subscribers. 8% uptick in average revenue per user. These are things that, even a few years ago, most people would have been incredibly skeptical that this could even be a sustainable business. Now, here they are, crushing expectations.
This is also a business that's very scalable. People have been critical of their inevitably low retention rates, which have led to some shorting and skepticism from others out there. But it turns out, when you have a huge audience, that's not as much of an issue. If you can convert those people into subscribers at a decent rate, which they are doing, you can start generating cash more quickly and in higher quantity than other people think.
Even over the past year, operating margins rose from 27% to 36%, which is making pretty great progress. This quarter, free cash flow popped 65% over the past year. I see little reason to believe that trajectory is going to go away, even when others like Facebook are weighing in. It's very clear that Match is No. 1.
Kretzmann: And the stock is up 30% since early May, when Facebook announced it was considering launching its own dating service. That knee-jerk reaction, where Match was down 10-15% just on the speculation that Facebook might enter the category, those fears have reversed a bit now, and rightfully so. Like Aaron mentioned, you're seeing incredible subscriber growth, up 27%. Then, they're also seeing average revenue per user growing both in North America and especially internationally. Across-the board, average revenue per user up 8%. When you have strong growth in subscribers and the average revenue per user or subscriber, that's a great combination and a really solid tailwind.
Like Aaron mentioned, the economics of the business are poised to become more attractive. Today, especially with the younger generation, the stigma of online dating is gone. If anything, it's reversed. It's kind of weird if you're single and not on Tinder or one of these apps. It's become so ubiquitous, and Match by far is the dominant player.
Hill: Aaron, is international where the growth is likely to come for Match Group? It seems like, at least here in the U.S., you look at all the different brands they have under their umbrella, it's very impressive, but it's hard for me to imagine that there are, whether it's organic growth or acquisitions, that there are the types of opportunities here in the U.S. that there will be in other countries.
Bush: I do think international growth is probably going to be the powerhouse for growing the number of users, but I think there's still a huge opportunity to make more money per user. I think that opportunity domestically is still fairly untapped.
Hill: Second quarter profits for Camping World came in lower than expected, so did the revenue. When you look at the stock, David, it's close to a 52-week low. How much of a world of hurt is Camping World in right now?
Kretzmann: That's the thing. When you actually look at the progress that the company is making, they're on a pretty good track. They sold a record number of RVs this quarter, they're on pace for a record year of RVs sold in 2018. They continue to see strong growth with their towable units, which were up 14%. They're seeing a lot of younger buyers who aren't waiting until retirement to hit the road, but rather starting with some of these less expensive units that you can just hook up with a trailer on your existing vehicle.
I think the issue here is, they continue to make some acquisitions to grow their store base. That's causing operating expenses to grow at a faster pace than revenue. So, you're seeing continued pressure on margins.
At this point, it's almost a jockey play. The CEO, Marcus Lemonis, is a TV star on CNBC. He has a show, The Profit, where he works with small businesses. I personally like his approach to retail and working with people, kind of a conscious capitalist type of person. He has a proven track record in the category. But, at this point, the company is relying on debt to make acquisitions, buy stores. In the short-term, that does hurt margins, because you're hiring more people, you're buying more inventory. But, if you're someone who believes in the vision of Marcus Lemonis and his track record, then I would think this might be a compelling opportunity for investors today. It might be another six to 12 months of some subpar quarters when it comes to profitability, but revenue was up 13% this quarter, they actually raised revenue guidance for the rest of the year. If you're a shareholder or prospective shareholder, you're really betting that the strategy that Marcus Lemonis has outlined makes sense. If you don't really believe in Lemonis or his strategy of acquiring mom-and-pop RV retailers or other retailers out there and lumping them into the Camping World brand, then you want to stay away from the stock.
Bush: To me, it seems mostly like short-termism, in the sense that they did miss revenue and EPS estimates this quarter, even though results were strong. They did lower their adjusted EBITDA outlook for the next year or so. But that's as a result of them reinvesting in what should very clearly produce more profits later.
But it's still a bit of a head-scratcher to me. Over the past couple of years, in 2017, the stock was on a tear, there was a lot of optimism. Then, this past year, it's been the opposite of that. If you look at the results, it's been steady performance. I don't know, David, what am I missing? Are there other reasons out there, besides just RV sales, that people are worried about?
Kretzmann: I think the issue is, last year, the company acquired the Gander Outdoors brand, formerly Gander Mountain. They kept about 60 locations of Gander Outdoors open. The market and investors were trying to figure out the rationale there. Obviously, that led to a huge uptick in inventory and pre-opening expenses, as you're renovating the stores and hiring people to fill those stores and support customers there.
Lemonis has basically said, that was a way for the company to accelerate its expansion into states where RV sales are huge. Those are states like Wisconsin, Minnesota, Texas and six others. They represent some of the top RV states, in terms of sales. It's a way for them to accelerate that, bring people into their Good Sam Club membership, which is kind of like AAA for RVs. You get RV support services, maintenance, insurance, things like that. It's a way for them to build a file and eventually sell more RVs.
But, up to this point, like Aaron mentioned, you're still in that investment mode, so margins are being pressured, cash flow isn't all that impressive right now. In the meantime, RV sales are at record heights. Camping World is the only national RV retailer. If you believe in those tailwinds toward RV, boating, and people getting outdoors in general, which has been a trend we've seen for several years, then I think you have to look beyond just one or two quarters with Camping World. The way Lemonis is positioning is to really become the dominant RV and outdoor gear retailer and brand in the U.S. But it'll take some investments along the way.
Hill: Quick last question on Lemonis. If he's the No. 1 reason to buy this stock in your mind, what's the danger of him leaving or being distracted? He has this CNBC gig. Has he been asked about this? Has he come out and said, "I'm committed to this, this is my No. 1 priority?" Because it sounds like, for as well as this business has done over the last few years -- if I'm listening to you correctly -- if he decides to leave next month, then this is less of a bull case for you.
Kretzmann: Yeah, if he left, I would be more concerned, especially because the company is relying on debt to make these acquisitions, especially the Gander Outdoors acquisition. Right now, they're sitting on $1.8 billion in net debt. It is substantial. That does amp the risk. Lemonis does own over half the company now through a holding company. He has by far the vast majority of his net worth in Camping World. So, I think the likelihood of him leaving is minimal. But, certainly, if he did take a step back or leave altogether, I would definitely see that as a risk.
Hill: In terms of the debt, would you say that the funding is secured?
Kretzmann: I sure hope so. RV sales are going up.
Kretzmann: Yep! [laughs]
Hill: Papa John's second quarter results were kind of a mess. They missed on the top line and the bottom line. Adding to the drama and the spectacle of Papa John's is the fact that the founder and namesake, John Schnatter himself, who is no longer the CEO, is on the sidelines ripping the current CEO, who he worked with for years and was essentially his protege. This stock is down more than 50% in the last 12 months. For the life of me, I can't think of a time when an established, mature restaurant stock fell that much in a year and it didn't involve some sort of health crisis.
Kretzmann: Yeah, this is pretty ugly, and it'll probably get uglier going forward. North American same-store sales were down 6%. In July alone, after Schnatter's comments, same-store sales were down 10.5%. This is just brutal. This is almost Chipotle E coli levels from a few years ago.
There are so many issues here. On the conference call, Steve Ritchie, the new CEO for the company, became CEO officially in January, he outlined some different initiatives they're doing with digital and their loyalty program, and even stuff to keep franchisees on board, potentially giving them some kickbacks or relaxing royalty agreements. Apparently, that's something that really only happens in recessions. The fact that they're doing that demonstrates that they're potentially getting a little desperate here.
Then, from a financial perspective, free cash flow was actually up this quarter. But the company last year made the brilliant move to go into more debt to buy back stock. An interesting thing here, in the most recent quarter, the company bought back $5.4 million in shares, which is the least amount of stock they've bought back since the first quarter of 2011 ... even though the stock is basically the lowest it's been in the past three to five years. [laughs] Only $5.4 million in stock bought back in the most recent quarter when the share price is the lowest it's been in quite a while. In the past few quarters, they bought back well over $200 million in shares.
So, from a capital allocation perspective, now the company is swimming in debt, will potentially have to renegotiate that. Management was saying, "We might have some pre-emptive discussions with our lenders." The company has backed themselves into a corner here. You have a ton of debt, you have such a bizarre scenario where you have your founder and former CEO, John Schnatter, on the sidelines, ripping the company.
Hill: And still the biggest shareholder!
Kretzmann: Yeah, he owns 30%. I don't know where you go from here. I think their best option would be to try to find some sort of private buyer, but in this case, I don't think funding is secured for Papa John's. This is such an ugly scenario, for a company that, a couple of years ago, was actually doing pretty well.
Bush: Yeah, it's terrible. [laughs] It blows my mind a little bit. I think the risk, apart from just consumers not wanting to associate their pizza-buying habits with Papa John's is that franchisees also don't want to associate their business with Papa John's. The franchisees are really the lifeblood of what keeps this business going. If I were a franchisee looking for a new restaurant to franchise with, how would I ever be thinking about Papa John's as a good idea right now? If they can't get the franchising element improved, that's crippling for them.
Apart from that, they really need someone to step in and right-size the culture and the ship of things. I don't know much about the current CEO, but if Papa John's owns 30% of this business, I see that as sort of impossible.
Hill: That's the thing. We can think about ways to right-size this business, but ultimately, Schnatter is the one who has to buy into this. He has 30%. You would think, at some point, since the value of his company has dropped so much in such a short amount of time, maybe he would think, "OK, whatever that takes. If that includes selling the company, rebranding it completely," because, I don't think a culture fix alone is going to do it. I really do think it's going to take a total makeover.
I was thinking about it this morning, coming into work, one of the things that's good to have in life, and I would argue important to have, whether it's business or just your life in general, we all need that person in our life who can pull us aside at a given moment and say, "Look, I know you don't want to hear this, but ... " We all need that person in our life, whether it's a friend or a spouse or a family member. Schnatter needs that friend right now. I don't know if he has that friend, but someone needs to go to him and say, "I know you don't want to hear this, but the only way your net worth is going to start heading north instead of south is for you to walk away from this and back whatever plan it takes to make this company over."
Kretzmann: Yeah. The press release he put out after the company reported earnings yesterday, he made it very clear, "I'm not going anywhere. I'm going to keep doing what I feel like is best for the future of the company and employees and shareholders."
What's interesting is, he was blasting Steve Ritchie, the new CEO, for the company's performance since mid-2016, which is when it started to turn south. They've been underperforming compared to Domino's for a while, but frankly, every restaurant is, so that's not the best comparison. But, Schnatter, if I'm not mistaken, had the CEO title all the way through until January 2018 when Steve Richie took over. So, he can't totally offload all the blame onto Richie and the management team. He was still chairman, he was still CEO -- if nothing else, by title -- over the past couple of years. He still needs to take some of the blame. Going forward, I think you need to find someone who's willing to buy this, but I don't know who would be at this point. It's such a tarnished brand.
Hill: To go back to what you were saying about the franchisees, Aaron, if you're someone who's looking to get into the restaurant business, why would you go to this -- by the same token, if you're an investor looking at this stock, it's dropped this much. The market cap is $1.2 billion. This company is so tiny now. I can imagine a few investors out there going, "Gosh, this thing's cheap!" The fix is, theoretically, easy, because it's a pizza company. This is not a complicated business, this is not nanotechnology we're talking about here. But, I don't know, this stock still screams, "Stay away!"
Bush: I think he needs to pull a Martha Stewart and just --
Hill: Go to prison?
Bush: Yeah, go to prison. And once he's gone, there will be something there. Maybe that's too much. [laughs]
Kretzmann: That's might be what you need there.
Hill: What's your go-to on pizza? Not necessarily brand, but when you're thinking toppings, what do you go for?
Bush: As much as I can. Load it up.
Hill: [laughs] Multiple.
Kretzmann: I'm a green pepper, black olives type of guy.
Hill: And you're a gluten-free person.
Kretzmann: I am.
Hill: Is there a place around here that does gluten-free -- more places are offering that, so I have to assume it's getting better.
Kretzmann: In Old Town, we have Facial Luna, which is great. Their gluten-free pizza is one of the best I've ever had, actually. That's always my go-to.
Hill: Nice. I'm not as young as you, Aaron, so I can't -- I would like to be as much as possible, but, meat, in general. Some kind of meat on the pizza would be good. Let's bring producer Dan Boyd in real quick on this one. Hey, Dan, I know you're a fan of pizza. Not necessarily Papa John's. What's your go-to, when it comes to ordering pizza?
Dan Boyd: You mean toppings?
Hill: Toppings. Let me give you two here: left to your own devices, but, now that you're engaged, maybe there's a different answer when it's you and your fiancé --
Boyd: Left to my own devices is very dangerous. I'll usually go with pineapple, jalapeno, and roasted garlic, if they have it.
Hill: That sounds really good!
Boyd: When I have to compromise, I never get to do anything as fun as that.
Hill: [laughs] That's what compromise is. Aaron Bush, David Kretzmann, guys, thanks so much for being here!
Kretzmann: Thank you!
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!
Aaron Bush owns shares of CMG, FB, Match Group, Tesla, TWTR, and DIS. Chris Hill owns shares of DIS. David Kretzmann owns shares of Camping World Holdings, CMG, DPZ, FB, Papa John's International, Tesla, TWTR, and DIS. The Motley Fool owns shares of and recommends CMG, FB, Tesla, TWTR, and DIS. The Motley Fool recommends Camping World Holdings, CVS, and Match Group. The Motley Fool has a disclosure policy.