On this episode of Market Foolery, host Mac Greer, together with Motley Fool contributors Jason Moser and Emily Flippen, hit on today's biggest market news. J.C. Penney (NYSE:JCP) had a little bump after the company named a new CEO, but is there still time to turn the ship around? Tencent Music Entertainment Group is looking to go public in the U.S. soon. Unlike some music streaming companies we might mention, it's actually making money, and still has a substantial addressable market left to tap. Honda (NYSE:HMC) invested some $2.75 billion ... into GM (NYSE:GM), joining forces to get the self-driving show on the road. What does this mean for the technology? When will we actually see self-driving cars in the wild? How can investors buy in now? Tune in to find out more.
A full transcript follows the video.
This video was recorded on Oct. 3, 2018.
Mac Greer: It's Wednesday, October 3rd. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Emily Flippen and Jason Moser. Welcome!
Jason Moser: Hey, man!
Emily Flippen: Hey! Good morning!
Greer: How are we feeling?
Moser: Feeling great!
Greer: OK, good. We're going to talk about a big IPO and a big partnership with some strange bedfellows. I don't want to give it away. It involves Honda and GM.
But let's start with retail. On Tuesday, J.C. Penney naming Jill Soltau as its new CEO. Jason, she was formerly the CEO of Jo-Ann Stores. Investors seem to like the news. Shares of J.C. Penney today up around 5%.
Moser: Yeah. You may be surprised to know, I actually frequent Jo-Ann Stores somewhat, Mac. Having kids, I'm sure you understand the value.
Greer: What are you buying there?
Moser: Specifically, I'm out there looking for watercolor stuff.
My kids love to get fabric and all sorts of other stuff. They're trying their hands at all sorts of crafts. It's a nice place to go waste some time on a rainy day. But I guess I digress, right?
I appreciate the fact that J.C. Penney continues to search for someone with that special skill set to turn things around. I think the problem is, and this is no offense to Ms. Soltau, I just don't think that person really exists. This is well beyond a leadership issue. I think this is a fundamental company issue. Essentially, you're looking at a concept here in J.C. Penney that just simply failed to change with the times in a very fast-changing retail landscape. Consequently, they've been stuck more or less on the defensive here over the past few years. And they're trying everything. Remember, they were going to try selling appliances, and then they were going to really focus on fashion. They've lost their identity completely. And I don't know that there is, ultimately, any way to get it back. I kind of feel like this is another Sears in the making.
Greer: Emily, that sounds pretty dire. It sounds like Jason's saying that Jo-Ann's Soltau is being dealt a pretty bad hand here. Is there any hope for J.C. Penney?
Flippen: There's no doubt she's being dealt a poor hand. I completely agree that a transition at J.C. Penney should have happened a long time ago. They tried, didn't have the capital for it, and they failed. Unfortunately, what we're looking at now is the last remaining vestiges of this once great retailer. I do think that she's an interesting pick, though.
I disagree on where I think J.C. Penney went wrong. They did try a lot of things. But for me, the crux of the problem was always with their merchandising. Where they failed to innovate was the fact that we were changing from looking at fashion in terms of seasons to looking at fashion in terms of weeks, or days, or what's available. They were trying to predict trends seasons ahead of time, and order the right amount, when the fact is, consumers didn't really care. They kept going to stores that don't have merchandising liabilities, as opposed to going and paying up for the experience at J.C. Penney.
This new CEO, she has experience. I think what's possibly her strongest value proposition was the fact that she was the chief merchandising officer at Shopko. She's somebody who understands that process, is probably very familiar with the fact that the idea of a chief merchandising officer has changed a lot over the years. So, I'm hoping that maybe she'll look at how JC Penney manages their inventory and think, "Hey, we need to change something here."
Greer: If she's able to pull this off, what brings me back to J.C. Penney? We were talking before the show, and I'm like, why am I going to J.C. Penney? I could go to Target, I could go to Costco. I could go to any number of retailers. Target, especially now, because they have so many clothes. They're so heavy into apparel. What keeps me, or what gets me back to J.C. Penney?
Flippen: That's a good question. I'm not sure if J.C. Penney can do much to attract me as a customer. Like we talked about, I do tend to buy my clothes at Target. I tend to buy my clothes at companies like TJ Maxx, or Ross, where it's kind of an exploratory experience. J.C. Penney, I think, needs to go back to its roots, in terms of making it seem like a value. They made a big mistake thinking they had the capital to transition from being a coupon store to being a Target store. I think moving forward, they need to bring back those customers that are looking for value. The customer that's shopping at J.C. Penney, I don't think it's the same customer that's shopping for clothes at Target.
Moser: I think you asked the right question. I think that's the advantage that Ms. Soltau has at Jo-Ann that she's not going to have at J.C. Penney. Jo-Ann is a very clear proposition. It caters to a specific audience. You're going there for a reason. You're looking for crafting stuff. With J.C. Penney at this point in the game, you don't really know why you're going there. I think most customers are saddled with that, as well. You're thinking about what you may want, whether it's fashion, or anything that you might get from a general retail store, I don't know that J.C. Penney is necessarily top of mind.
Then, add to that the fact that you've got these extremely big successful companies out there like Amazon and Walmart that are really putting their stake in the ground on fashion, as well. Walmart's getting ready to roll up another acquisition on their fashion line. And certainly, Amazon is making a lot of bets there. Express is getting ready to offer up a subscription fashion offering too. It's a really difficult space, no question. I just don't know that J.C. Penney has that same resonance with a consumer that perhaps it did when we were growing up.
Greer: I'm going to count you either cautiously pessimistic or not cautiously, flat-out --
Moser: I would just say pessimistic, unfortunately.
Greer: OK. Emily mentioned value. Now I want to talk about the stock as we wrap this up. Stock trading around $8 a share five years ago. Today, under $2 a share, I think around $1.60. The stock: value play or value trap?
Flippen: There's a reason why it's verging on a penny stock. For me, that's 100% a value trap.
Greer: Don't go there?
Flippen: Don't go there!
Moser: For me, you have to look at the basic metrics. Their trailing 12-month operating income was $230 million. That's on top of a net interest expense of $316 million. When we look at those two numbers together, which we often do, that's the coverage ratio, we want to see that operating income is going to be able to cover that interest expense multiples over. In this case, it's upside down. It's the other way around. They are in a liquidity crisis now. It's beyond just business problems. It's straight up financial problems, as well.
Greer: Let's move to the world of big IPOs. Tencent Music, China's largest music streaming service, has filed to go public in the U.S. Emily and Jason, Tencent Music Entertainment has 800 million monthly users. Yes, that's 800 million. And, oh, it's also profitable. That's not something we hear every day when we're talking about music streaming services. Emily, should investors be excited about this IPO?
Flippen: I know I am very excited about this IPO. You're right, Tencent Music Entertainment, it's probably going to trade under TME, it's the largest Chinese music streaming service. They have the four largest Chinese streaming apps, 4X as many listeners as Spotify, and a completely different revenue model from Spotify, and one that's been proven as profitable.
While we've seen this year a lot of challenged Chinese IPOs, this is a really interesting new company. Like I said, they're coming out with a different business model, strong user base, and profitability right out of the gate. It's exciting. Like I said, they're owning the four largest music streaming apps.
But what's interesting about this is that they haven't really grown into licensing the same way that we see here in the U.S. The majority of their revenues are actually coming from virtual gifts and tips that are given to content creators on the site. It's really interesting, they don't have the same subscriber base, it's all kind of this organic growth that's coming from within these four base apps. It really will be interesting to see how they continue to develop in the near future.
Moser: I think having a family of apps in this business is probably the best way to go. We're seeing the consolidation there with Sirius XM purchasing Pandora. We talk about the success on Apple Music and Amazon. That's because they're part of a bigger whole. It sounds like Tencent, from that perspective, probably has a bit of a leg up. Is this an offering that goes beyond China?
Flippen: I think this will be a straight Chinese exposure stock. The laws vary so drastically by country that I think it's smart of them to get a hold on the Chinese market before potentially moving internationally. I think they'll have a harder time if they do try to compete internationally. I think what they're doing is trying to be the player in the Chinese market. They already have some strategic alliance with Spotify. They each are invested in each other. There's some opportunity there for them to get some international revenue from that partnership. But I definitely think right now, we're looking at a pure China play.
Greer: OK, y'all, as we wrap up, there's an old expression: politics makes for strange bedfellows. Turns out, self-driving cars also making for strange bedfellows, because we have news of a big deal between Honda and General Motors. Honda, investing $2.75 billion in GM's self-driving car unit. Jason, this investment is going to happen over a 12-year period. But still, that's nothing to sneeze at.
Moser: For the record, I'm far more bullish on self-driving cars than I am politics. Now that we've gotten that out of the way...
Greer: You are not alone.
Moser: [laughs] I think this really speaks volumes to the advantage of already having a major presence in the auto space. You look at companies like Honda and GM, and Ford as well, they can really hit the ground running because of their production capability and the availability of capital for these businesses.
The auto business is hard. I think we've seen that year in and year out. It's a tough business. Partnerships like these, I think, need to be seen as advantageous as opposed to, perhaps, deals that are being made out of necessity. I mean, we're seeing a big shift here with the technology that's available today, to changing our transportation infrastructure. These are the companies that are going to be a part of making that happen.
I will say, personally, I think it's going to be a little bit further down the road, than perhaps a lot of people think. I do think the technology will find its way where it's needed most. I think it's going to take a little bit longer, probably, than some people think.
Greer: Emily, what do you think?
Flippen: I actually think it's coming a little faster than some people think. We had talked about this a little bit before the show. We have an aging population, a population that has a very strong vested interest in having the independence that comes with driving. So, I think there's going to be a very strong demand for autonomous vehicles, at least one that can go short distances to get people to the grocery store, get them to the doctor's office, get them to their families' houses. Here's a really, really big area for future demands. I think the first ones to get there and to make it so the average consumer can have an autonomous driving vehicle is going to be a very big player. So, I'm very bullish in this space in general. I think because of that strong vested interest, it's probably coming faster than a lot of people think.
Greer: I want to put numbers on this. A kid born today, let's say they get their driver's license around age 16. 16 years from now, is that kid going to have a driver's license, or are autonomous vehicles going to be mainstream?
Moser: Boy, that's a tough one! I think you'll have a choice, frankly. I think you will have a choice. My biggest hang up in regard to the timeline here has less to do with the actual technology and the automobiles. It's more to do with our actual road system. I just don't think we have a road system that was built to accommodate this kind of technology. There's a lot of parties involved beyond just people in the cars and the people who are making the cars. Insurance companies are going to have to figure this out, states, municipalities are going to have to figure this out, how they all play with one another in regard to this.
I think it's going to be more than just the technology for the cars. I think it will be available. But I do think there will be plenty of 16-year olds and 17-year olds in 2035 that'll probably be wanting to get the driver's licenses.
Flippen: I think the question is, is that kid well-off? Is that kid born to a well-off family? If they are, I do think there's going to be a choice. I agree that the government, municipalities, these things operate much slower than technology and corporations do. But I think the technology is so rapidly evolving that it's really going to force them to do something. Ultimately, we're going to have autonomous vehicles on the road in the near future. They're going to have to get with the times if they want to start regulating that, which they're going to want to.
Greer: In terms of investors, if I'm looking at this whole area, self-driving cars, autonomous vehicles, and I'm like, "This is going to be bigger than anyone thinks, and maybe it's going to happen faster than anyone thinks." What's the best way to invest? There are a lot of different ways you can go. You can invest directly in the car makers. You can invest in big tech, like Alphabet, Google, that owns Waymo. Or, you can invest in the companies making the technology like an NVIDIA. What do you think, in terms of investors, what's the best way to invest in this area?
Flippen: I think it depends on how much exposure to the area you want to have. If you're like me, and you think this is coming around the corner faster than a lot of people expect it to be coming, then hell, invest directly into these automakers. Speaking of Chinese IPOs, a recent Chinese IPO Nio, many say the Tesla of China. That's an interesting angle, as well. You're looking at electric vehicles, because these new developed cars are likely going to be the ones that have the autonomous vehicle driving sensors. You can invest directly into those types of companies. Or you can do the chip makers if you want a little bit more of a hedged exposure. Chip makers are also probably going to be a big player in this field in the future.
Moser: Yeah, I think that makes a lot of sense. The one thing I worry about with chip makers, the makers of the technology, is, if it becomes the norm, it essentially becomes fairly commoditized. If you're looking further down the line, I'd be very fascinated to look at the companies that are utilizing this technology for some kind of service or offering to consumers, and perhaps how they monetize that. Thinking about something like an Uber or a Lyft, how companies like that might go ahead and leverage this technology for their own business model. I love to think about this from the senior citizen angle. Mac, we're getting there faster than you or I would like.
Greer: Why are you looking at me when you say that? That's so hurtful.
Moser: I mean, I'm in the same boat with you, man! I mean, I was looking in the mirror ...
Greer: Take it back!
Moser: [laughs] But, wouldn't it be interesting to see states adopt legislation that says, "At age 75, you're not allowed to have a driver's license, because the technology is out there and you don't need it." That would be pretty compelling, too. There is a point where either you as an individual, or perhaps you have parents that are older, you have to take away that privilege. I don't think it's the easiest thing to necessarily do.
Greer: A tough conversation to have. I can tell you, because I absolutely love driving. But I had a first this summer at the beach. I drove a low-speed vehicle, which is essentially a souped-up golf cart that can go on a main highway. It goes up to 35. It was incredible. I just felt like, "I am living the dream." I have seen my future. My future, when I get rid of my car, is, I'm going straight to the low-speed vehicle. I guess you're somewhat limited, but I mean, 35 --
Flippen: It'll get you most places.
Greer: Yeah! It was great!
Moser: That'll get you where you need to go, man. It's all just a matter of time.
Greer: And this is in the golf cart. Let's be clear, this is a low-speed vehicle. It's roadworthy. OK, let me hit you with my desert island poll as we wrap up. Totally unfair, totally arbitrary. You should never invest this way. But for some reason, you're on a desert island, and you have to buy one of these stocks for the next five years. What are you going with? You have JC Penney, Honda, GM, or Tencent Music Entertainment?
Flippen: For me, that's hands-down Tencent Music Entertainment. Tencent's been a big, strategic player. They're the only player in the music space in China. It's going to be interesting to see if they need to move toward a subscription revenue in the future to continue to be profitable. But for how they're doing right now, I think it's a great value proposition, and definitely superior, in my opinion, to automobile makers and J.C. Penney.
Greer: Not tempted by those cheap J.C. Penney shares?
Flippen: I am not tempted!
Moser: I've made it a policy to not invest in failing retail concepts.
Flippen: Good policy!
Greer: How's that working out for you?
Moser: So, I'm not a big fan of the automakers. I'm going to saddle up with Emily here. I trust her judgment. I think I'm going with the Tencent music streaming.
Greer: I need to throw something else in there. That was not a good question.
Flippen: Not fair!
Greer: It was too easy! I needed to throw in Amazon or something. Well, Emily, Jason, thanks for joining me!
Greer: If you have any thoughts on our desert island poll, you have any predictions on when self-driving cars will be mainstream, or if you just want to share your experience of driving a low-speed vehicle -- awesome -- our email is email@example.com. Thanks as always for listening! As always, people on the show may have interest in the stocks they talk about, and the Motley Fool may have recommendations for or against, so don't buy or sell stocks based solely on what you head. That's it for this edition of Market Foolery. The show is mixed by Anne Henry. I'm Mac Greer. Thanks for listening! And we will 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. Emily Flippen has no position in any of the stocks mentioned. Jason Moser owns shares of Apple. Mac Greer owns shares of Alphabet (C shares), Amazon, Apple, Costco Wholesale, and Nvidia. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Nvidia, Pandora Media, and Tesla. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.