On this episode of Motley Fool Money, host Chris Hill and analysts Jason Moser, Seth Jayson, and David Kretzmann hit on the week's biggest market news. The SEC leveraged more than just a wrist slap against Elon Musk for the whole "funding secured" debacle. What comes next for Tesla (NASDAQ:TSLA)? Nike (NYSE:NKE) reported a solid quarter, but its valuation looks a little rich.
Vail Resorts (NYSE:MTN) got hit by decreased snowfall, but it's not all stormy weather ahead. Michael Kors (NYSE:KORS) bought Versace and is slated for a name change...but the company missed at least one critical step there. Hear about these stories, and many more -- plus, a sneak peek at the stocks on the analysts' radars. Also, this episode features an interview with best-selling author Brad Stone. He shares his thoughts on the Lyft and Uber IPOs, Amazon's (NASDAQ:AMZN) innovation trends, the likelihood of Jeff Bezos dumping Amazon for Blue Origin, and more.
A full transcript follows the video.
This video was recorded on Sept. 28, 2018.
Chris Hill: It's The Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week, senior analysts Jason Moser, David Kretzmann, and Seth Jayson. Good to see as always, gentlemen! We've got the latest headlines from Wall Street. Bestselling author Brad Stone is our guest. And, as always, we'll give you an inside look at the stocks on our radar.
But we begin this week with Tesla. On Thursday, the SEC announced it is suing CEO Elon Musk for making false and misleading statements to investors. This came just hours after Musk reportedly backed out of a proposed settlement with the SEC that would have resulted in a fine for both Musk and Tesla, a requirement that Tesla add two new independent directors, and a two-year ban on Musk serving as chairman of the board. Now, by not taking the settlement deal, Musk is looking at the possibility of being banned from being a CEO of Tesla or any other public company for a long time.
Jason Moser: And that's a distinct possibility. It leads me to believe that we will see him change course here. I think he will probably end up accepting some sort of a deal once he realizes the hole he's dug himself into.
I think investors have to ask themselves the question here, what's worse -- Musk staying with the company, or leaving the company? I actually think, at this point, as CEO, he would be very limited in what he's going to be able to do. I think he's becoming a liability, as opposed to the asset that he once was. I think he can still be a part of guiding the company's vision, but clearly, he needs an operator who can get in there and focus on running the company without having to maintain that public presence to keep the stock price propped up.
We talk about it a lot, leadership being a big reason to invest in a company, yet also a big risk. I think Tesla is pretty much playing out to be the textbook example.
Seth Jayson: The idea that the stock price needs to be up, or that there has to be confidence in order for them to get some debt funding, they're probably going to run out of cash soon. The trouble is, they have their doodle in a ringer here.
He's sort of the valuation, the personality. Now, it's fairly clear, if you've been watching this at all, high-level executives have been leaving. If you read the complaint, you see that the CFO was cow-towing and saying, "Well, I know you've probably already thought about all this, but maybe we should have a blog post that explains this?" when it's clear they know he hasn't thought about it at all.
So, I think one of the risks for investors is that there really are no grownups there, and there haven't been grownups for a long time. They've been flying by the seat of their pants. It's worked for a while, but they've never met those production goals until they started building cars in the parking lot in the tents. It's not an easy fix. Absent an easy fix, what do you do without the personality?
Hill: Shares of Tesla down 11% Friday morning. David, you're a shareholder. What goes through your mind as you're watching all of this play out?
David Kretzmann: This reminds me of the Papa John's situation that we've seen earlier this summer. The company, at this point, is between a rock and a hard place. Elon, obviously, said things that he shouldn't have, did things he shouldn't have. But in a lot of ways, Elon Musk is the brand of Tesla. He still owns 20% of the company today.
I do agree, at this point, the board needs to bring in someone new to take over that CEO or operational role. But even if Elon doesn't have that executive title, if he remains as an advisor, or even if he's disconnected entirely from any operational role at the company, how much autonomy would that new executive have?
Jayson: That's what I was going to say.
Kretzmann: As we know, Elon is not shy to voice his opinion on Twitter or podcasts or anywhere else. I don't think that would necessarily stop if he is taken out of that role at Tesla, because he still owns a fifth of the company.
It's a difficult situation. I would hope that Elon Musk, of his own volition, would recognize that maybe this is a time to take a step back. You can remain an advisor and still be involved in the company, but you need some help at this point.
Moser: I'm floored that the stock hasn't gotten punished more than it's gotten punished, to be honest with you. It's still a $46 billion company or something like that, and it doesn't look like they have any real clear path to profitability any time soon. This is only going to hurt their situation. Things just don't look all that great in the near-term. I'm frankly surprised that the stock is still getting as much credit as it is.
Hill: Nike's first quarter revenue came in just shy of $10 billion, but shares of Nike were flat this week. Seth, this is a great company, but this increasingly looks like a pricey stock.
Jayson: Yeah, and I have a hard time decoding why. If you just look at a page on the internet, it looks like it's trading for a 65X multiple, which is crazy. They had a big tax bill in the trailing 12 months, which moved things about $1.25. On a more normalized basis, they're trading at about 35X earnings. That may not sound like a lot, but you have to consider, Nike is already a huge company. It's growing the top line in the 8-10% range. Digital is going quickly. They have some interesting innovations that might help them a lot on the cost side in shoes. But it's still tough to swallow.
On the other hand, their returns on capital are great. They are doing a super job of connecting directly with consumers through apps. People can order specialized shoes that way. Their wholesale shipments have been good. They're doing an amazing job in China. There's still a lot of growth left here, and people are willing to pay up for it.
Kretzmann: I agree on the valuation front. Really, no matter which way you slice it, the valuation looks to be on the pricier end of the spectrum. Another way to look at it is the dividend yield, which right now is under 1%. That's toward the lower end of its historical range over the past five to 10 years.
I'm personally a Nike shareholder. I built up a position over the past couple of years. I'm thinking maybe this is a time to lighten that position a bit. If and when the price does drop, or the valuation improves, that's when you look to maybe build up a position again.
Jayson: Yeah. This company should definitely be on everybody's recession wish list. I don't know if I'd buy it right now. But, on the other hand, maybe I would, to remind myself to buy some more later, if and when it drops. They're doing a great job. They've really fended off Under Armour. Adidas is a strong competitor. They're just growing like a weed everywhere except North America, which is only about 6% growth.
Moser: Don't forget about Puma.
Kretzmann: Absolutely. You can certainly argue that the company does deserve a premium valuation. I'd say we're still on the high end of the spectrum here. The company generated $4 billion in free cash flow over the past year. That continues to increase. Really strong across the board.
Hill: Vail Resorts wrapped up its fiscal year with a loss in the fourth quarter. Vail Resorts' management said the company suffered from historically poor winter conditions. David, when you're in the business of ski resorts, that has to hurt.
Kretzmann: It hurts. But the impressive thing about Vail Resorts is, the model they've been shifting to is selling season passes. That's helped smooth out those results. It's a seasonal business, but especially in the Western U.S., I think you had less than 50% the average snowfall over the winter. Over that same period, resort revenue actually increased 2%. They've really found a way to smooth out the edges there with that business.
They're increasingly diversified across the globe. Whistler up in British Columbia had strong results. Their new ski resort over in Australia is doing well. Now they have a partnership in Japan; Europe, as well. Having that diversification across the world, bringing more people into the season passes, trying to increase repeat visits, it's really helped smooth out the business despite that seasonality.
Hill: A mixed third quarter report from McCormick (NYSE:MKC) (NYSE:MKC-V). The spice maker's profits looked pretty good, but overall revenue was a bit light. Still, Jason, this is the rare packaged food company that's doing well.
Moser: Revenue was a bit light. Let's be very clear here, just a smidge. I mean, really, if you round up, they hit everything.
Jayson: A couple of shakes?
Hill: A dash?
Moser: Exactly, a dash. Everybody knows I love this company. I think that's for good reason. The RB foods deal that was announced a little bit over a year ago is no longer a question mark. It was a smart deal. It was well executed. The stock is up 40% since that deal was announced. Frank's and French's, which is what they got from that deal, contributed about 10% to the 14% revenue growth for the quarter. They've added distribution for those powerhouse brands to 20 new countries year to date, as well. What that's playing out in is expanded operating margins. They're seeing some leverage flow through the model there with a larger global footprint.
I think another thing to remember here is that they can absolutely, in time, make another meaningful acquisition down the line. Actually, I think they will. You really do have the market leader in the Flavors and Spices segment. It's very resilient, it's not going away. Technology can't really disrupt it. The value proposition is strong. I think that we continue to see good things from McCormick. Shares are around 30X earnings today, adjusted for tax benefit. Not unreasonable for a high-quality business like this. It's a dividend aristocrat.
Jayson: What's their direct digital sales looking like these days?
Moser: [laughs] I don't know, man! Don't you just buy your spices in the grocery store?
Jayson: [laughs] You know, if they start talking about that, that's probably the time to run, huh?
Moser: Yeah. Direct-to-consumer, that's when I start wondering.
Kretzmann: I think they have a subscription box, you don't know what you're going to get.
Moser: The Netflix of spices!
Kretzmann: I could see it!
Jayson: Amazon is taking notes right now. Your Alexa is sending this to them.
Hill: Busy week from Michael Kors. The handbag maker is buying luxury brand Gianni Versace for $2.1 billion. After the deal closes, Michael Kors is changing its name to Capri Holdings. I think we've seen this movie before with Coach and Tapestry.
Jayson: Yeah. It's a thing in Europe, a lot of the larger brands are conglomerated together into a few big names. The last I remember of Michael Kors is back when they were struggling a little. They seem to have recovered a bit from that. Not growing like gangbusters anymore, but at least not squeezing down. The Versace deal looks like it makes decent sense. It pains me to say that, because Versace clothes are just horrific.
Moser: Oh, here come the emails!
Jayson: Versace does about $850 million. But the investor deck, if I'd seen the investor deck first, I would have been horrified. It has magical thinking. Here, you see somebody wearing their Baroque/ rock and roll --
Hill: You know this is a radio show, right?
Jayson: I'm holding it up, it's for you guys here. The current revenues are $850 million. Then there's just a line up to $2 billion, and underneath that, it says, "Future." [laughs] I'm not so sure --
Hill: Is that like South Park and the underpants gnome?
Jayson: It is a little bit.
Hill: Step one, collect underpants. Step two... Step three, profit.
Jayson: They have more of them where they just say, "Here's what we'll do." But the fact is, Kors is doing OK. They could use a little bit more exposure in Europe. This will get them there. I think the businesses are close enough, there probably will be some synergies they can squeeze out of this. It actually looks like it makes pretty good sense.
Hill: Another week, another hot IPO. Survey Monkey (NASDAQ:SVMK) went public on Wednesday. Shares popped more than 40%. David, I get that Survey Monkey is the world leader in digital surveys. But this enthusiasm, is it warranted?
Kretzmann: Nothing sexier than survey software, right, Chris? They're going after a few different markets. They're going after talent management, customer experience management, and market research, essentially trying to help organizations learn more from employees and customers. Those are multibillion dollar markets worldwide. They operate both domestically here in the U.S. Internationally, as well, makes up a good chunk of their revenue.
There are some things that are attractive about the company. They are cash flow positive. They have 600,000 paying users and a lot more registered users. But, the company's not growing all that quickly. Revenue only grew 6% in 2017. So far this year, sales are up 14%. After that pop with the IPO this week, they're trading for about 10X revenue, which seems like a really generous multiple for a company that isn't growing all that quickly. I'm definitely not rushing in to get into this IPO.
Jayson: We do Survey Monkey stuff here, but where they're kind of company where we have Okta, because we all have 15 different logins. I just wonder, how long can that last when you have companies like ServiceNow or Paycom lumping in an awful lot of HR and related systems all in one?
Kretzmann: Even Alphabet or Slack.
Jayson: Yeah, even something free from Google. It's hard to compete with, you would think. But maybe it's not. Maybe I don't know what I'm talking about. Look, they're earning a bunch of revenue already. It just seems like the kind of thing that, I don't understand how it could stay long-term.
Hill: They also have a pretty catchy name in Survey Monkey.
Jayson: Survey Monkey.
Kretzmann: That's the thing, the company was founded in 1999. You have to take a step back and wonder why now for the IPO, when they aren't really growing all that quickly? They are known for having a strong employee culture. Leadership at the company is impressive. Sheryl Sandberg is on the board of directors. She owns 10% of company. Her late husband used to run the company. Serena Williams, the tennis star, is on there. Intuit's CEO. They do have heavy hitters there. Some of the qualitative stuff, you have to like. But the numbers, I just don't think, back up the generous valuation.
Hill: Shares of Bed Bath & Beyond (NASDAQ:BBBY) hit an 18-year low this week after a dreadful second quarter report. Jason, for all of its struggles, Bed Bath & Beyond is still a much bigger retailer than Sears.
Moser: I mean, that's the Beyond, right? We can't really quantify it, and that's probably what's getting it a little bit of credit today. I think, unfortunately, the bottom line, there is no magic bullet for these guys. There's no obvious catalyst that turns this story around. When was the last time you went to a Bed Bath & Beyond, out of curiosity?
Moser: Right? I can't remember, either. I don't even know where one is at this point.
Jayson: It's in a strip mall somewhere.
Moser: Exactly. Can the concept continue to exist? Of course it will. Would I invest in it? Never. Never, never, never. I think we're going to continue to see sales remain challenged. We'll see a stagnating store base. They'll start shutting down stores in order to streamline.
It feels like management is chasing their own falling knife here, too, which is just confounding. Since 2012, they spent around $7.5 billion dollars on share repurchases. Throughout that entire time, it's like that Price is Right game, where the guy climbs up to the mountain and gets up to the very top, and the person overbids and the guy falls off the mountain. That's what their stock price looks like since around then.
The balance sheet, being in a net debt position, there's really not a lot to like about this situation right now. Perhaps one day, we'll have something positive to discuss with these guys. But I don't think this quarter is it.
Kretzmann: The worst part of all is that they actually went into debt to fund those share repurchases. What baffles me is, the company is actually producing a decent amount of free cash flow, but they aren't using any of that to pay back debt. You see so many retailers -- Toys R Us, it wasn't operational issues that caused Toys R Us to go bankrupt. It was the massive amount of debt that the company amassed. I think if you are a retailer generating free cash flow, you have to pay down the debt so you do have more flexibility down the road.
Jayson: Are they just getting killed by online sales? What's their response to this? I haven't looked at these folks for 10 years, probably.
Moser: They actually have tried to develop an Amazon Prime-like subscription. As I understand, it's still in beta form. I just can't imagine, at this point, they can make a whole lot of inroads there, given the popularity with Amazon's Prime, not to mention Wayfair and what it's done in such a short amount of time.
Hill: This week, Weight Watchers (NASDAQ:WTW) announced it is changing its name to WW as part of its focus on overall health and wellness. And Dunkin Donuts (NASDAQ:DNKN) is dropping the Donuts. Starting in January, the company will officially be called Dunkin. I'm not sure how to feel about any of this.
Moser: Are you kidding me?! I love Dunkin, guy!
Jayson: Dunkin sounds good. WW is hard to say. And the URL sounds terrible. www.ww.com?
Hill: See, that actually works. dunkin.com belongs to a small consulting firm in San Jose, California.
Jayson: Not for long, right?
Kretzmann: Probably not a coincidence, Dunkin just opened their first location in San Jose in July.
Moser: What if they just went with W²? Maybe that's a bit more catchy.
Jayson: W2, it would look.
Moser: And then everybody gets all bummed out because no one likes taxes.
Hill: By the way, to go back to Michael Kors, capriholdings.com does not appear to be a working URL, either.
Jayson: Oof, they need to get on that.
Hill: Let's go to our man behind the glass, Steve Broido. Steve, of these three rebrandings, is there one you're particularly excited about?
Steve Broido: I don't think so. Dunkin, I guess. Moving away from donuts probably makes sense, because they do sell more than just donuts. I guess that makes the most sense. I don't know. Dunkin sounds very royal.
Moser: To that point with Dunkin, remember, Domino's was very successful with that transition. They went from Domino's Pizza to simply Domino's. That's worked out pretty well for them. Not to mention that Papa John's just continues to step in it on a daily basis.
Hill: Alright, let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. Jason Moser, you're up first. What are you looking at?
Moser: Taking a look at Sirius XM (NASDAQ:SIRI), ticker SIRI. The news out this week that they are going to acquire Pandora. I really wouldn't have looked at either one of these companies individually. But the acquisition here, the two together seems a bit more compelling. It's going to give them the opportunity to develop a few different things here. No. 1, an ad-based Sirius product to take advantage of what they see as a fleet of around 200 million vehicles in the coming decade that'll have that Sirius interface. Given they've already got the satellites in there, this could be the terrestrial radio of the 21st century. I like the idea here. The foray into podcasts. I think they're going to hit them with the Hein.
Hill: Steve Broido, question about Sirius XM?
Broido: I'm a shareholder. Does this replace the app, do you think?
Moser: No, I don't think it replaces the app. I think it really gives them the opportunity to reach out of vehicles, certainly, with Pandora. But I think the most compelling part of it is the ad-based Sirius product that sounds like it's in the works.
Hill: Seth Jayson, what are you looking at this week?
Jayson: The stock on my radar, I'm worried is going to crash, actually. It's been on the way down for a while, Thor Industries (NYSE:THO), RV maker. Airstream, all sorts of different products. We had a huge, long upcycle in RV sales. Millennials were buying them, everyone was buying them. And now, suddenly, the sales are slowing down. It's allegedly just an inventory adjustment at dealers. We've had a couple of quarters of this. I wonder if it's not something worse. I think next quarter is the make or break for not only Thor but peers like Winnebago and retailers like Camping World.
Hill: The ticker symbol?
Broido: Is there a movement, do you think, with people living full-time in their RVs? You see more about that these days.
Jayson: I don't know if there's such a movement of that. But definitely, a lot of the recent growth was selling cheaper units to younger people.
Hill: David Kretzmann, what are you looking at this week?
Kretzmann: I'm looking at stamps.com (NASDAQ:STMP), ticker STMP. They are a provider of multiple software solutions for mailing and shipping. They're benefiting from the rise of e-commerce and the subsequent increase in the number of packages that are being shipped. They're a multi-carrier solution. You can select postage from USPS, FedEx, UPS, DHL, and all sorts of different providers. Growing revenue at a 20% plus clip. They're in the early stages of expanding internationally in Canada and Europe. The valuation looks pretty compelling, as well, for a company growing this fast and this profitably.
Hill: Steve, question about stamps.com?
Broido: We were talking about URLs earlier. Do you think they should win just because they bought stamps.com? It seems like success right there.
Kretzmann: An early winner from the 90s, absolutely. I think they deserve props for that.
Hill: Steve, three very different stocks. You have one you want to add your watch list?
Broido: I love Sirius, I'm a shareholder, so I'm going with Sirius.
Moser: Hey, now!
Hill: Alright! Jason Moser, Seth Jayson, David Kretzmann, guys, thanks for being here! That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!
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 Amazon, UAA, and UA. David Kretzmann owns shares of GOOG, Amazon, CWH, DPZ, McCormick, NFLX, Nike, PZZA, Sirius XM Radio, Stamps.com, Tesla, UAA, UA, and Vail Resorts. Jason Moser owns shares of McCormick, Nike, UAA, and UA. Seth Jayson owns shares of PAYC, NOW, UAA, and UA. The Motley Fool owns shares of and recommends GOOGL, GOOG, Amazon, INTU, NFLX, OKTA, P, PAYC, Stamps.com, TPR, Tesla, UAA, and UA. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool recommends CWH, Dunkin' Brands Group, FDX, McCormick, Nike, and Vail Resorts. The Motley Fool has a disclosure policy.