In this Market Foolery podcast, host Chris Hill is joined by analysts Jason Moser and Taylor Muckerman to talk about a trio of news items having nothing to do with earnings. (We know you're shocked.)
First up, apparel giant VF Corporation (NYSE:VFC) has decided to split itself in two. The jeans brands and its outlet stores will be spun off into a whole new company, leaving the parent to focus more on its outdoor and activewear brands.
Then, it's on to Tesla (NASDAQ:TSLA): CEO Elon Musk has clarified exactly where he thinks his buyout funding will come from, but the SEC may not be 100% satisfied with his explanation.
Finally, there's a personnel change happening in Netflix's (NASDAQ:NFLX) C-suite, and while it's probably not a sign of trouble, it's still a good moment to see if there's any reason to reassess the streaming media leader. Plus, the guys try to offer some guidance to a listener who is afraid his portfolio may be too China-heavy in this time of Trump tweets, tariffs, and trade wars.
A full transcript follows the video.
This video was recorded on Aug. 13, 2018.
Chris Hill: It's Monday, August 13th. Welcome to Market Foolery! Thanks for hanging out with us! I'm Chris Hill. With me in studio, Taylor Muckerman and Jason Moser, the usual Monday crew.
Taylor Muckerman: Here we are!
Hill: Happy Monday!
Muckerman: You as well!
Jason Moser: Howdy!
Hill: We have my favorite soap opera on Wall Street, which is, of course, Tesla. It's everybody's favorite soap opera.
Muckerman: It's a long-running drama.
Hill: It is. We'll see how much longer this drama runs. We're going to dip into The Fool mailbag. We have some executive news. We have to start, it's not merger Monday, it's ...
Moser: Spin-off Monday.
Hill: Spin-off Monday! VF Corp, which is the company that owns Lee and Wrangler, announced that it is spinning off the jeans brands into a separate company. There's going to be a yet-to-be-named company that will have Lee and Wrangler jeans as well as the VF Corp Outlet division. Then, VF Corp will be the remaining businesses, which includes North Face, Timberland, Vans.
Muckerman: Victoria's Secret, maybe?
Hill: No, that's L Brands.
Moser: That'd be quite the combo there, North Face and Victoria's Secret.
Hill: It would be. I should hasten to point out, Jason, that Steve Rendle, who is the CEO of VF Corp, is sticking with VF Corp.
Moser: [laughs] Wouldn't you?
Hill: He's not going with the jeans company. That seems like all the information I need as an investor about which of these two businesses has a brighter future.
Moser: Yeah, I tend to agree. I think management probably sees this as addition through subtraction. It's weird to talk about the jeans market, you always figure jeans are part of a bigger whole. But they're an actual market unto themselves. When you look at brands like Lee and Wrangler ... I'm not trying to dog those brands, they just remind me of toughskins. They seem very dated. I don't know that they're as big as they once were and carry as much sway in that market as they once did.
To put some numbers around that, you look at Levi's, which is probably the brand that most people look at when they hear jeans. They think Levi's. They brought in about $5 billion in sales last year. That's mostly jeans and jeans-related items. If you look at the VF Jeans segment, which is primarily Wrangler and Lee, they brought in about half of that.
So, you're dumping what's not ever going to be a market leader and favoring the business toward what you have in a number of market leaders, in The North Face and Vans and Timberland. Those are some very powerful brands that carry a lot of sway with a certain audience. To that point, they're moving the headquarters of VF to Denver, Colorado. It'll be, certainly, more in touch with that market, as well.
Again, I think it's just getting rid of... not dead weight, but close to dead weight. It's a company that, I think the jeans segment is responsible for about 30% of operating profit today. It's not inconsequential, but I think it's going to give the newly leaner VF Corp a better opportunity to shape the business around more of a core offering and audience.
Muckerman: So, you're selling shares, if you get them handed to you, as a VF shareholder.
Moser: I would. I mean, I would sell those shares and just go buy a few pairs of Levi's jeans. Those things will last you probably for the rest of your days, right?
Muckerman: Denim dividend.
Hill: The VF Corp executive who's been tapped to be the CEO of the new company is a guy named Scott Baxter. He's been at VF Corp for a while, he was running that division for about five years or so. So, if you're looking for silver linings, they will also have a leaner business, they will be more focused, as well. But to me, we saw this with Hewlett-Packard when Hewlett-Packard split. My only question about that was, Meg Whitman is the CEO, which one is she going with? That's the one I'm going to bet on.
Moser: Any time we talk about clothing or apparel, it's nice to put your money on a company that has a number of different brands under that umbrella. We talk a lot about Gap, and how the benefit of that model is that they aren't just Gap. It's Banana Republic, it's Old Navy, and we've seen how Old Navy has been able to pick up some of the slack in the weakness of those other brands. The leaner VF is still going to be in that model. It's not to say that the new jeans company can't do well. To be sure, they have a very big audience in the European and Asian markets.
Muckerman: That's true.
Moser: I think that's where this business will have an opportunity to really shine. It's important as investors to recognize that it's not just about this box here domestically in the United States. There's a big world out there. Those brands do carry sway out there. $2.5 billion in annual sales is not insignificant. I just think it's a tougher road ahead if you're just a jeans company, vs. something like a VF, that has a number of different offerings for a really big and growing core audience here domestically.
Hill: Let's move on to Tesla. Elon Musk has clarified the "funding secured" statement, or, I should say, added more context to the "funding secured" statement of last week.
Moser: I feel like if he had just said, "Funding basically secured," we probably wouldn't be having this conversation.
Hill: I think you're absolutely right about that. That's kind of what came out in his blog post. I'll just read directly from it. "Recently, after the Saudi Fund bought almost 5% of Tesla's stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. I left that meeting with no question that a deal with the Saudi sovereign Fund could be closed." It goes on to say, "That's what I was thinking when I posted funding secured." That ... that's not the same thing.
Muckerman: No questions that it could be closed.
Hill: And, by the way! He may be 100% right, that it's just a matter of some paperwork and working out the terms -- I'm assuming that, in the eyes of the nice people at the SEC, that's not the same thing!
Muckerman: It reminds me of Anchorman, talking about the jaguar perfume that works 90% of the time, it works every time.
Hill: 60% of the time!
Muckerman: [laughs] I think I've even read headlines where Saudi Arabia came out and said, "No that's not going to be the case." So, even that's in doubt. Jumped the gun a little bit with that tweet, as he's wont to do.
Hill: Are we in the same position that we were at the end of last week? We had the board meeting coming into this weekend. It seems like nothing has necessarily changed for investors, in terms of where we were at the end of last week.
Muckerman: I think you have to be more worried as an investor, since funding isn't secured. Maybe the board decides to kick him out. And the stock sells off precipitously if that takes place.
Hill: You think the board would kick him out?
Muckerman: I don't know, it depends on if the SEC decides to get involved. That's a pretty damning thing to do, making that tweet without having anything to back it up.
Moser: Yeah, it could go any number of different ways. It depends on how closely the SEC wants to look at this, in regard to his behavior. I think, given his explanation today in regard to the Saudi Fund, it's reasonable to say that if, indeed, they are interested in the company going private, it sounds like funding is basically secured. It really goes back to that. If he had just said, "Funding is basically secured," that implies a much different message than his somewhat arrogant "funding secured."
Muckerman: "The check is in the mail."
Moser: Exactly. That's what we're getting on him about here. I stand by, I would much rather see Tesla a private company. I know there are probably a lot of Tesla investors out there who are cursing me under their breath right now when I say that. But I just think that the world needs a company like this and being in the scrutiny of the public market holds it back. We've seen plenty of examples out there that point to that.
For me, I hope, ultimately, it does go private. It sounds like funding is basically secured, so now, it's going to be a lot of headlines back and forth until something is ultimately resolved. I mean, it's fun to follow, right? You wake up every morning and you're like, "What did Musk tweet today?" " I don't know, let's find out!"
Muckerman: You must not be a shareholder. [laughs]
Moser: I am not a shareholder. Now, with that said, I am a shareholder of Twitter (NYSE:TWTR).
Muckerman: There you go!
Moser: I have to say, I love it when this stuff happens. It's irreplaceable. He's not out there saying it on Facebook, is he? Nope! He's not Snapchatting it, no sir! It's the most valuable news network in the world, in my opinion. Thank you, Elon, for exploiting the value in it on an ongoing basis!
Muckerman: He has some followers.
Hill: Do you think Musk ever picks up the phone and calls CEOs of formerly public companies that are now private? Do you think he recently called up Ron Shaich at Panera, "How is it being private?" "It's amazing! Elon, it's amazing, you should do it immediately!"
Moser: I feel like he's more of a leader than a follower. I don't know that he's soliciting a lot of advice. But I bet if he is, that circle is very, very tight.
Hill: Let me go back to something you said, Jason, about Twitter and the importance of Twitter. I agree with you, because for me, for someone who looks at business news every day, Twitter is invaluable. And yet, someone pointed out on Twitter this morning that Twitter is not necessarily representative of the mass audience in America. The example this person used was the fact that David Wells was trending on Twitter. David Wells is the Chief Financial Officer of Netflix. And it's like, no, Twitter skews more toward people who are interested in business and that sort of thing. But, we should talk about that.
David Wells is the Chief Financial Officer of Netflix. He has been the CFO for eight years, he's been with Netflix for 14 years. He announced that he is stepping down, he wants to pursue other things. This seems very straightforward. This does not seem coded in any way. He's staying on. As much as anything, I think this is evidence of how it's very straightforward -- he's staying on until they find a successor. There's no end date. I'm assuming they're not going to have a hard time finding a replacement, given how Netflix has performed. It really seems like they'll have a bunch of applicants for that.
That being said, maybe this is just me, but I always feel a slight negative for Company X when the CFO is leaving.
Muckerman: I'm surprised the stock isn't down more today, it's only down a couple of basis points. When you look at it, coming off a little bit of a rocky quarter, missed their own internal guidance. Doesn't happen very often, but it does happen with a company growing this rapidly. They talk about growing from a position of strength. The successor seemingly has a great balance sheet, cash flow generation, not necessarily earning money but they're contributing cash to the bottom line and the balance sheet there.
I just worry about the arms race going on on the content production side. They're spending $8 billion a year, Amazon is spending billions, Apple is getting into the game, HBO, Disney. I just don't think there are enough writers, producers, actors to go around to make engaging content. That's my biggest worry with this company, that race to the bottom on this original content side.
That's not necessarily the CFO's job, but that's one of the hiccups I see here. The content side is going to have to convince the new CFO that they're worthy of continuing to spend this crazy amount of money on original content.
Hill: To be clear, Jason, I don't think anything nefarious is going on. I don't think anything is wrong with Netflix's books. But my assumption that's built in any time I see news about a company's CFO is, you know who knows the most about a company's financials? The CFO.
Moser: Just to tie a bow on the Twitter trending topic of David Wells, if David Wells wanted to get a picture out there of the lasagna he made last night, perhaps he would put that on Instagram. That's probably a bit more for the masses. So, you choose which direction you go in life. That gets you on whatever platform you're going to spend most of your time on. I'll happily learn a little bit more on Twitter and leave the Instagram to the foodporn and whatnot.
I think, with the CFO leaving a company, any time, typically not a big deal. With Netflix, I don't think it's a big deal, although it's worth a little deliberation, given the way the company's finances were, given the criticism that we have and the amount of debt they continue to take out. I think their strategy is the right one. Cast a big net with a little bit of content for everybody out there. Grow that user base as big as possible. The bigger you get that user, the more difficult it is to make a meaningful ding in it. It's somewhere in the neighborhood of 130 million global users today. That's a very big audience.
My big question for Netflix -- again, we're going to see heavier spending on content here in the back half of the year and going in the next year -- as a user, I rarely use it. I'm finding that it's because it doesn't have a lot of really good content, frankly. I'm able to find what I want to watch wherever I want to watch it. You have Amazon, Netflix, HBO, Hulu all this stuff out there --
Muckerman: Disney coming down the pipe.
Moser: There's great content on all platforms. I don't think Netflix has to worry anything about that. That's the point, really. It's an attractive price, you can subscribe to it and basically forget about it. You're not going to sit there and hem and haw over $12-13 a month. Again, it gets me back to my question of pricing power -- how high can they raise the price of that subscription until people start saying, "Oh, yeah, that's right, I have a subscription to this. Am I really getting out of it what I want?" That's my longer-term question.
That's far down the road. I don't think they're going to have any trouble filling the CFO position. It's a good business with a super bright leader in Reed Hastings. That's just the one question I have, is in regard to pricing power.
Hill: With regards to that, my answer is, at least in the near-term, as long as the price starts with the No. 1.
Moser: [laughs] Yeah, I think you're right.
Hill: I don't even know what it is right now, $12?
Moser: Yeah, something like that.
Hill: They can get that to the teens easily, and they can probably get it to $18. Once it starts creeping up, possibly starting with a two, then it might get a little dicey.
Our email address is email@example.com. Question from Garret in Syracuse, New York. Garret writes, "My portfolio is a little China-heavy at the moment. One of the largest positions I currently own is Alibaba. I also own smaller positions in Momo, JD.com, and TAL Education Group. In preparing for a potentially tumultuous end to 2018, or even a possible large-scale economic downturn in the market in 2019, would you recommend I hang tight, or maybe slowly scale back my investments with Chinese ADRs? Alibaba, for example, seems very optimistic and full of strong potential, but the stock has been quite volatile over the last year and seems to be affected by Trump's tariff tweeting and a potential trade war. Any thoughts?"
Great question. We can't give specific guidance for a whole bunch of reasons, one of which is, it's not clear what percentage of his portfolio is in these different companies. I'll just say, with regard to the President's tweeting, what I said shortly after he was elected president, which is, all investors need to be prepared as long as he is president. Any given day you wake up, he could be tweeting about your stock, he could be tweeting about the country that you own shares in, a tariff war. That's just how this is going to be.
Muckerman: Prescient statement, back then. It's happened quite a few times since.
Hill: It has. Off the top of my head, I don't think I have any great exposure to China. I don't know if you do, Taylor.
Muckerman: I have a small stake in Baidu and JD.com and iQiyi.
Muckerman: I sold put options on that. I think it's an interesting market to be a part of. It's been one of the worst performers this year as a whole, not necessarily those companies that he mentioned.
When you look at this country, such a big user base potential with the size of the population there. I jotted down some numbers from a study I saw that came out earlier this year saying that only 55% internet penetration inside the country, 51% have smartphones. When you compare both of those numbers to the U.S., 89% internet penetration here, 69% mobile smartphone penetration here. Huge upside, if they can even catch up to the penetration percentages here that you see in the U.S. That's not to mention the fact that the sheer numbers are already far greater for internet penetration, in terms of aggregate.
I think you have a long way to run here. It all depends, obviously, different government style. That's a big if there, but I think there's plenty of room to grow, especially with some of the big names that were mentioned in that email question -- mostly online, tech-based stocks. If you can see China moving in a similar direction as the U.S. has in the last decade, I see some big numbers there.
Hill: Of course, Jason, any time we get a question about selling a stock, regardless of what that stock is, one question all investors should ask when they're thinking, "Should I trim back this position?" is, what are you going to do with the money?
Moser: That's one of the bigger questions there. You sell for a number of different reasons, either outright fraud or you feel like there's a place for your money.
Hill: Yeah, if there's a better place.
Moser: That's always a good reason. It's worth noting, if you feel like there's a better place, that's great, but you'd better be right. Personally, I would never want to be China-heavy in my portfolio. I think, a lot of that stems from, me, personally, the learnings I took from earlier in the decade. Chinese small-cap companies were all the rage for a while, and there were some neat stories, and we talked about all of these market opportunities, big numbers were thrown around. We saw a lot of problems stem from a lot of those companies.
And part of that came from the level of transparency. That's probably my biggest hang-up with having overexposure to any sector like that. I think it makes sense to have some exposure to it, sure, if you want. Make sure you're investing in leaders in the space -- companies like Baidu, Alibaba, iQiyi is a good one with a lot of potential there. When it comes to geopolitical events, presidential tweeting, all of that stuff is very unpredictable. The only thing that you can predict is that it's going to happen at some point or another. It's pretty hard to predict when it's going to happen, and then, further, how the market is going to react to it in the short run.
So, I fall back to my general investing philosophy -- investing is as easy or as difficult as you want to make it. I can't stand it when I hear people say how hard it is. It's not hard at all. You can make make it as hard as you want, but I have some easy strategies for you, too. China is fine. I would keep that position in check, though.
One last piece of advice I've learned through the years, one thing I like to do from time to time is take a look at my portfolio and imagine, the next day, each position gets cut in half, for whatever reason. Would I still feel good about owning those businesses? There are going to be some clear yeses, there are going to be some clear nos. Put those clear nos under the microscope and make sure that you need to be owning those in the first place and understand why you own them.
Muckerman: Good little thought experiment!
Hill: Taylor Muckerman, Jason Moser, thanks for being here, guys!
Muckerman: Appreciate it!
Moser: 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!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN and DIS. Jason Moser owns shares of Twitter and DIS. Taylor Muckerman owns shares of GOOG, AMZN, BIDU, JD, Tesla, and Twitter and has the following options: short September 2018 $30 puts on IQ. The Motley Fool owns shares of and recommends GOOGL, GOOG, AMZN, BIDU, FB, JD, Netflix, Tesla, Twitter, and DIS. The Motley Fool recommends IQ and MOMO. The Motley Fool has a disclosure policy.