Verizon, PG&E, Huawei, and Vale: A Tale of 4 Debacles

If you were looking for upbeat stories from the business world, Tuesday might not have been the best day to scan the headlines. To start off with an only mildly rough item, Verizon (VZ -0.53%) admitted that it seriously overpaid in its twin acquisitions of AOL and Yahoo!, and took a $4.9 billion writedown on the combined unit that it briefly called Oath. Meanwhile, California's largest utility, PG&E (PCG 0.24%), is declaring Chapter 11 in hopes that bankruptcy protections will keep it intact as it tries to deal with its massive wildfire-related liabilities.

Next up, the Justice Department has formally charged Huawei with a list of crimes that include stealing trade secrets from T-Mobile (TMUS 0.57%) as well as bank and wire fraud. And while China will have the telecom and smartphone giant's back, there's probably no way this ends well. Finally, after last week's Brumadinho dam disaster, which spilled 3 million gallons of contaminated mining waste, destroyed a town, and killed at least 65 people in Brazil, Vale (VALE 1.31%) shareholders have to be asking themselves if the company is doomed.

In this MarketFoolery podcast, host Chris Hill and Motley Fool director of small-cap research Bill Mann discuss the current situations and futures of these four businesses, each of which in its own way is too big to fail.

A full transcript follows the video.

Check out the latest earnings call transcripts for companies we cover.

This video was recorded on Jan. 29, 2019.

Chris Hill: It's Tuesday, January 29th. Welcome to MarketFoolery! I'm Chris Hill. As the winter weather front bears down on the greater metropolitan Washington, D.C., area, neither snow nor rain nor gloom of night shall keep Bill Mann from his appointed rounds on this podcast. Thanks for being here!

Bill Mann: Oh, man, I wouldn't want to be anyplace else! You know, the heat's out at my house, so I'm super happy to be here!

Hill: Happy to be here! Also, a shout-out to the dozens of listeners in the Midwest. There's cold, and then there's dangerous cold. Be safe, people! Be smart and be safe!

Mann: I saw something the other day where they said it was unseasonably cold in Minneapolis, Minnesota. And it is winter. [laughs] It's Minnesota we're talking about. I mean, we laugh. It's going to be cold here, too. But please be safe! It is dangerous!

Hill: Yeah, dangerous cold out there! We've got earnings to get to. We're going to dip into the Fool mailbag. 

Let's start with Verizon, which closed out the fiscal year with a fourth-quarter report, profits a little bit higher than expected. I think I have this right, their overall revenue was barely above where it was a year ago. 

Mann: Chris, you're not going to believe this, but it turns out that the Oath properties, which is AOL and Yahoo!, are not worth what Verizon paid for them.

Hill: I'm shocked.

Mann: I've been told that they paid more than nothing for them. They have a $4.9 billion writedown. They're not really breaking it out. Oath, at this point, by the way, has been renamed the Verizon Media Group. Maybe the fastest re-rebranding in history. They've overpaid for media properties. The executives at Verizon had said that they're not going to be buying any more media properties or, we assume, media liabilities from here on out. It was an OK quarter. They're in the process of laying off about 10,000 people, which is hard. They need to raise about $10 million in cost-cutting because they've got a big network build-out coming in the 5G network. A pretty tough set of facts for them, for a company that's not growing at all on its revenue base. 

Hill: They're doing a pretty good job, in terms of subscribers. But it really does seem like if you're a Verizon shareholder, obviously you're not happy with the past 12 months. And at this point, you're probably crossing your fingers hoping, "OK, now that we've learned the lesson of drastically overpaying for media properties, can we stick to our knitting? Can we wring whatever value there is?" And I would say that there's some. I don't know what the value is, but there's some value to the content there. But they're saying, "Please, can we stick to our knitting?"

Mann: [laughs] "Can we not do that anymore?" Yeah. In subsequent news, Verizon FiOS has just said that they've come to an agreement with Disney, so Disney won't be blacked out on FiOS. I believe that was nationwide, but it may have been on a property-by-property basis. Either way, that was going to be a fairly bad scene for both of the companies as well as for subscribers. Verizon is what it is. It's a large behemoth company that has huge capital expenses that come up from time to time because networks require not just maintenance, but upgrading. 

Hill: We're going to get to another mobile phone giant in a minute. But first, let's check in on the PG&E saga. The California utility filed for Chapter 11 bankruptcy protection. Shares of PG&E up 17% when we walked in the studio? Am I supposed to put this on my watch list now?! I mean, we've talked before about how, look, it's a utility, it can't just go away.

Mann: Right.

Hill: But I just assumed it was going to reappear in some form that maybe was completely removed from the public markets. Am I now supposed to think, "Oh, maybe there's a future, not just for this utility, but a future for investing in this utility?"

Mann: Oh, yeah, absolutely. Utilities are so weird. If you produce a product and it, for example, catches on fire, and you get sued for it, and you don't have money to cover it, you go out of business and that fire-producing product doesn't get produced anymore. You can't do that with utilities. You can't say, "Well, electricity or the production of electricity caused these fires in Northern California. The company's going out of business. Let's just produce no more electricity in Northern California. There's your solution." 

What's going to happen? There were fires in 2017, and the California Public Utilities Commission passed a ruling that allows the utilities to pass on the costs of the liabilities for such events onto rate holders. Good thing that they did, too, otherwise we'd have an enormous financial issue with PG&E. So yes, it's going bankrupt. It has sufficient assets to cover its cash liabilities. It's going to come out of bankruptcy; restructured, the equity will in all likelihood have some value. The bonds were trading at $0.85 on the dollar earlier. I think they'll rally. What you have now in this place is a plan.

Hill: Are you interested?

Mann: No. No! Here's the thing. It's going to become much more expensive to produce electricity in this country for a couple of reasons. One, because the slate is changing. We can argue over global warming a little bit, but utilities are having to respond. They're having to change their slate. The cheapest forms of energy -- coal, nat gas, oil -- are being ramped down, and other forms are being ramped up. But also, these types of liabilities are popping up a lot more, as well. You could say that it's because of climate change, you could also say it's because of a change in how people live. The town called Paradise, which is where the fires were, and where the most damage was, where the houses were destroyed, was probably not something that really would have existed in the same form even 40 years ago. It was largely a retirement community. People, as a change of lifestyle, went up and lived in the woods. 

So, no, I don't find utilities to be a very exciting investment because they'll be boring until they're exciting in the exact wrong way.

Hill: Huawei, which is the phone giant in China, is back in the headlines. The U.S. Justice Department has charged Huawei with a number of crimes, including trying to steal trade secrets from T-Mobile. The company and its CFO have also been charged with a little thing we like to call bank and wire fraud.

Mann: Which is a little bit of a catch-all for "We know you've done something bad with your finances and we're going to sort out what it is." I expected some form of charges to come.

Hill: We've seen charges from other countries. 

Mann: That's right. As we talked about before we came on the air, the Justice Department is not messing around with the charges against Huawei. Of course, the company disputes all the charges. It disputes the overarching charge against Huawei, which is that its telecom equipment is also used for spying for the benefit of the government of China. I think it's crazy to be on that side of that argument. But, yeah, this is a company that's now in the crosshairs of a lot of Western countries, and I don't see how they get out of it.

Hill: Where is T-Mobile in all of this? To go back to Verizon, you look at the past year or so, Verizon, T-Mobile, these are stocks that haven't really done all that well. They've done better over the past 12 months than AT&T. But if you're T-Mobile...[laughs] John Legere, one of our favorite CEOs because he's one of the most colorful CEOs and certainly for enjoyable conference calls, this isn't the kind of headline he's looking to be a part of.

Mann: No! Yeah, he doesn't want to be part of a headline where, "By the way, some data, maybe it was ours and maybe it was yours, has been taken from us by the Chinese government." Allegedly. Nonetheless, it's not good for the U.S. carriers. T-Mobile, of course, is German, so let me back that up a little bit. It's not good for the carriers involved.

In some ways it's really interesting. I hadn't really thought about it until you asked that question. It's a little Big Brother-y of the government to come in where -- T-Mobile hasn't sued, and the government is coming down on Huawei on their behalf.

Hill: Our email address is [email protected]. Before I get to the email, this requires some setup. Some listeners may have seen the news out of Brazil from last weekend. A terrible story of a mining dam bursting, which triggered a deadly mudslide. Somewhere in the neighborhood of at least 60 people confirmed dead.

Mann: Three hundred missing.

Hill: Hundreds more missing, probably presumed dead at this point. It's a tragic story. 

One of our listeners, looking at it through the lens of investing -- and we've seen this play out before -- an email from David, who asked, "I was wondering how the dam burst in Brazil affects Vale in the long term." Vale, the company attached to this. "BP's stock still hasn't recovered from its pre-2010 disaster levels. Does this dam spell doom for the world's largest iron ore company?"

Vale, probably not well known to a lot of listeners just because we don't really focus on commodity stocks all that much.

Mann: No, but touch something metal to your left or your right, and most likely Vale produced some of the metal that's in it. It's a foundationally important company to the global economy. It's very, very important to the Brazilian economy. And therein lies a little bit of the rub. 

Vale has been sued by the Brazilian government for a 2015 disaster that happened about 80 miles up the road from this dam, in which 10 people were killed. The government sued for $5.3 billion U.S. dollars. That was a much smaller accident. After that accident, Vale and all of the Brazilian miners went through a process of verifying the safety of all of their dams. According to the Brazilian National Water Agency, there are 600 -- this is called a tailings dam, it's part of the mining process. There are 600 of them in Brazil, and 144 of them are big enough to cause catastrophic environmental damage. 

The fact is, they've gone through the process to verify these dams. In fact, this dam was 28 stories high. To me, that's an interesting balance between, there's no such thing as a precise amount of measurement, but there was 28 of them. It's a huge dam. The dam itself basically is made out of mud. What happened, they believe, is that the mud literally liquefied in place. So it looks like it is in good shape until suddenly, it fails. There are 144 dams that are just like this. Vale owns a large number of them. 

I'm not saying that this is a no-touch company, but I am saying that they don't really have the ability to either replace the dams or to say for sure that these dams are safe. I'm relatively sure they had $5.3 billion worth of interest last time in making sure this didn't happen again, and it happened again.

Hill: It seems like, if you're an owner of this stock, you might want to start looking at what's on your watch list. 

Mann: Yeah. It's interesting, because in the same way that the state of New York is so careful with its Wall Street firms -- Wall Street is worth 25% of the tax base of New York State, there's only so much they're going to do to punish them. We look back at the financial crisis, the answer was basically nothing. Brazil is in the same boat. Brazil gets a huge amount of its tax base from its largest mining companies, in particular Vale. So, I don't think that Brazil will do anything that is existentially threatening to Vale. They just can't.

Hill: You think back to the recent scandal involving Volkswagen and getting around the emissions test, all that sort of thing. Somewhat analogous in that, at that moment in time, you can look at that and say, "Boy, they're really going to get punished." And then, you start to look at how crucial Volkswagen and the automotive industry is to the German economy, and then you go, "Oh, OK. They can't. That's a really bad idea, to punish Volkswagen to the point where it goes out of business."

Mann: Right. They can't leave a crater where Volkswagen was. The other thing for Vale that's interesting is, there's a brand-new government in Brazil, and he's a populist. I think you could see a scenario where he comes down really, really hard on them in ways that are visible, like, "I'm here to protect the people of Brazil," but in invisible ways, Vale will ultimately be allowed to continue to exist. 

Now, the question that's being asked is, "What do I do with the equity?" And I think you've got to see what the lawsuits look like before you touch. Just because they lost 25% doesn't mean that it's not going to get much, much worse for them.

Hill: Before we wrap up, you were traveling about a month ago, as you do from time to time. You very nicely brought me a present.

Mann: I did! [laughs] I did. I walked into a store in Prague, and they had three types of Pringles/Pringle-esque snacks. I decided not to bring back the marijuana ones. 

Hill: [laughs] Really?! That was an option?

Mann: Oh, yeah! Not Pringles. Frito-Lay is not putting out marijuana Pringles. Although... [laughs] 

Hill: Someone local?

Mann: Someone local put out a Pringle facsimile made from pot. 

Hill: OK.

Mann: I think they'd probably sell a few of those. 

Hill: Probably.

Mann: I instead went with a different type of unhealthy and brought you back, from Prague, New York-cheese-fries-flavored Pringles. 

Hill: New York cheese fries, made in Prague. Fabulous! I should mention, because people are listening to this and thinking, "Well, I can't see this," you actually can! Thanks to the work of Dylan Lewis and Taylor Harris and our multimedia team, we have the newly revamped Motley Fool YouTube channel, with videos from all of the podcasts. You can check that out. It's a fabulous, bright Pringles box with the -- wow! [laughs] -- with New York City food trucks, apples -- you know what? I'm giving them points for effort there.

Mann: I agree. The other one I should mention was beef fajita flavored. I think I did best. The pot ones, let's just put out there, probably going to be a little bit of a risk of arrest, things of that nature. 

Hill: Look, when you travel internationally, anytime you're bringing food back into America, you get questions about it. You're getting questions about the cheese-fries-flavored Pringles. So you're going to minimize the questions if you're not buying the marijuana-flavored ones.

Mann: You're minimizing the second question. [laughs] 

Hill: Yeah, exactly. Bill Mann, thanks for being here!

Mann: Thanks, Chris!

Hill: As always, people on the program may have interest 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!