Not counterintuitive is this news from McDonald's (MCD 0.06%): Quarter Pounder sales are up 30% since it switched from frozen beef to fresh. But the adjacent plant-based meat alternative business is still in a state of evolution, and vegetarian-burger maker Beyond Meat (BYND 13.74%) has lost almost 30% of its market cap in a week.
In this Market Foolery podcast, host Chris Hill and senior analyst Dan Kline -- a man well versed in both casinos and burgers -- discuss the details investors need to be aware of regarding what's happening with all of these companies. They also weigh in on the peculiar logic of Hollywood that allowed analysts to view the almost $240 million that Toy Story 4 earned in its opening weekend -- the biggest-ever debut for an animated movie -- as a disappointment.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on June 24, 2019.
Chris Hill: It's Monday, June 24th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, up from Florida, it's Dan Kline. Good to see you!
Dan Kline: Nice to see you!
Hill: Look at you, all tan!
Kline: I'm always tanned! It's always summer in Florida.
Hill: That's true! My people, we're pale, we don't do that.
We've got entertainment news, we're going to talk about the current state of the burger industry. We are going to start with the Deal of the Day, because once again, Merger Monday has lived up to its title. This time in the casino industry. Eldorado is acquiring Caesars Entertainment. Maybe this shouldn't be curious. It's a little curious, just from the standpoint of, from a market cap standpoint, this is the smaller company acquiring the larger company; certainly the better-known company in Caesars. I think the people at Eldorado recognize that, because they've immediately come out and said that the resulting casino company will be branded Caesars.
Kline: Eldorado, I knew them as a furniture chain. I'd never even heard of them as a casino company. Their casino properties are in offbeat places for the most part. It marries really well with Caesars. Caesars has been under fire for underperformance, there's been a lot of pressure to do something to change management. This is actually the perfect deal. It gives Caesars a presence in places like Florida. I live down the street, about an hour, from six or seven different off-brand secondary casinos and one Hard Rock. I usually go to the Hard Rock. But now, I'm going to go to the Isle Casino, which is an Eldorado property, because I am a Caesars loyalty member. I think that's the part of this that's being underplayed. It's going to give Caesars a presence in a lot of markets where people are going to say, "Gee, I'm in Louisiana. Which casino am I going to go to? Oh, I'll go to the one where I already have the card, where I'm already getting perks." So I think there's a huge synergy here.
The other piece of it is, this gives them sports gambling potential, bigger imprint, a lot more states, and they have the infrastructure. Even places that are going to let you do it electronically are probably still going to need a casino to provide the infrastructure. This positions Caesars really well.
Hill: I'm going to pump the brakes for a second. I'm curious, just in this regard. When you look at what's happening with these stocks today, shares of Eldorado down about 10%, and it's entirely possible, if not probable, that people think they are paying too much for this. The buyout price for Caesars is $12.75 a share. Right now, it's trading about 10% to 15% below that. Let's put it in gaming terms. If you're at a casino, are you betting that this deal goes through as it is currently constructed?
Kline: I do think the deal is going to go through. I think the problem with the casino market overall is oversaturation. We were talking this morning, Matt Frankel and I, often on our podcast, about the New England area. When I lived in New England three years ago, there was Foxwoods and Mohegan Sun about an hour away. There was Atlantic City about five, six hours away.
Hill: Atlantic City, not in New England.
Kline: That was it. Now there's an MGM in Springfield, which would have been 25 minutes from where I lived; the casino in Everett, Mass., which is a Boston suburb, opened today. Who's going to close? It doesn't seem to me that the casual buses of old people who went to Mohegan Sun to have lunch and play bingo, why wouldn't they go to Springfield or Everett? It does feel like there's going to be some shakeout in the industry. But if you look at where a lot of the Caesars and Eldorado properties are located, they're the only player in town. We were at the Horseshoe last night. It's the only downtown Baltimore casino. It's near the baseball stadium. It's very well-positioned for what it is. Same thing with the one near me in Pompano Beach. It's off from the concentration in the Miami area of all the casinos. They all have a natural constituency. But I wouldn't buy this deal for what's going to happen two years from now, I'd buy this deal for 10 years on the horizon when we've figured out sports gambling and hefty casino companies, you're going to see a ton of consolidation, and you're going to see closures. I think Caesars will be a winner because of that.
Hill: I'm glad you mentioned that. That's where I was going next. Assuming this deal goes through, we now have the largest owner and operator of U.S. casinos. This seems like one of those industries where being bigger is better. I was going to ask you, should I be buying this? Should I be buying shares of Eldorado on the drop here? But it seems like, on the flip side, they're going to have to spend a lot of money, not just because Caesars comes with a lot of debt, but also because they may want to do some level of rebranding. Or, I guess I should say, we expect they're going to do some level of rebranding. It's just a question of how much. They're going to be spending money.
Kline: Yeah. And they have to integrate the loyalty programs. They have to think about whether they're going to change some of the names. Does it make sense to have an Eldorado, or should it be a Harrah's? I don't think you can underestimate the value of the Caesars loyalty program, which was just totally revamped. It's one of the more generous ones in the industry. They can use that to market. They know where I live. They can now say, "Hey, there's a casino 45 minutes down the road. Would you like to go to the Japanese restaurant there? You've eaten there before, how about going? By the way, here's 50% off tickets for Comedian X that you like." There's a lot of ability to manipulate people. I know that if it's not like Consumer Electronics Show, I don't pay for a room in Vegas at the lesser Caesar hotels. I'm not some big-ticket gambler. Their ability to say, "Hey, it's a Wednesday night. Do you want to go stay at this property?" that's pretty strong. And adding all these states to it makes their loyalty program a lot more appealing.
Hill: That's another one of those sneaky tech companies. In the same way that for years, Domino's was this sneaky tech company because they were doing such an amazing job with their mobile app.
Kline: The good thing is, Caesars actually has a nice product compared to Domino's. We've talked about this before. Domino's whole business was, convenient pizza is better than good pizza.
Hill: Convenient passable pizza.
Kline: Right. In this case, Caesars actually has a nice casino. If you're in Vegas, Caesars has everything from the lower-rent casinos to the upscale. I know I am perfectly happy staying at Harrah's. But when we're there in October, Matt's wife is coming, so we're going to stay at Harrah's for the point way there, then he's going to go stay at one of the nice Caesars branded properties once his wife comes. That'll cost him as opposed to the completely comped. But they really have the full circle of stuff.
You talked about the tech side. We don't know where we're going with gambling and apps. Can you place a sports bet from your phone two years from now? If that happens, it's going to be very logical to tie it into existing casino companies.
Hill: One more sign that Matt Frankel is a smart man.
Let's move over to the burger industry. A couple of things going on. McDonald's announced that sales of the Quarter Pounder have risen 30% since the company switched from frozen patties to fresh beef. You have to believe that on some level, the people who run Five Guys, Shake Shack, Culver's, all these other burger businesses that have been using fresh beef for a long time, they're rolling their eyes like, "Yeah, no kidding. We already knew that..."
Kline: It's the first time in a decade they've gained burger share. There's no statistic for burger share. They're telling you this, but that's a very soft number. But yeah, who would think, make your product less terrible and more passable? We both have kids. There is a certain point in the age of most kids where McDonald's has to be part of your repertoire, whether that's just in an airport where they're not going to eat anything else that's available, or it's 5:30 p.m., there's homework to do, and you're just stopping at McDonald's. To be able to offer Mom and Dad a slightly passable, less terrible burger -- I know my kid won't go to Five Guys because he won't eat a cheeseburger. He wants Chicken McNuggets or some variation of fried chicken things. There's a lot of places that aren't available to us. If, as a parent, I had to go to a McDonald's, but at least I could get a burger that's not a grey circle.
Hill: Couple this with the fact that in the past week, shares of Beyond Meat have fallen nearly 30%. I look at it and I think, "Yeah, it still seems outrageously priced." But I'm curious where you think all of this is going. Part of this McDonald's story was a conversation with one of their spokespeople about this industry, the non-meat burger, which McDonald's is already doing in Germany. They have said publicly, "We don't have any current plans to roll this out beyond Germany." But I have to believe that they are watching it closely.
Kline: They will, but it's a supply issue. Beyond Meat cannot supply McDonald's right now. Again, I'm not speaking for them. Maybe they can.
Hill: I'm not speaking for them either, and I know they can't. This is McDonald's we're talking about!
Kline: I would assume that McDonald's is talking with the various players in that space and they're figuring out when they can roll this out. You cannot cede this to Burger King. I've talked about this on the various shows. I actually think the fake burger, it's kind of like, every restaurant had a gluten-free menu for a while and dropped it. Or you go and you're like, "Can I get the gluten-free bread?" And they're like, "Do we have that in the back?" I don't think the person who wants a meatless burger is seeking out McDonald's or Burger King. I think it's a convenience for when they have to be there. That doesn't speak to me of something that's going to be on the menu six months from now. This feels like something that's going to fall off. Not that there's not a huge demand for it, but that demand is going to be at nicer places.
Hill: The counter to that is the example that you used with your son. We can't go to McDonald's because they don't have the meatless version that so-and-so wants when you're on a road trip. And all of a sudden it's like, oh, they have it now.
Kline: Maybe I'm wrong, but I think the market demand for a fresh meat burger from someone who was begrudgingly going to McDonald's is a lot higher than the demand for a meatless burger. I go back to, every time McDonald's has tried to make healthy salads a focus, it doesn't work. Two years later, they come out and say, "Hey, turns out people don't want to come here for healthy." I don't think a product's going to work if it isn't luring a certain amount of people off the street. I think those people are always going to choose Chipotle or places that are more naturally meatless options. And, maybe a little snobby, better? There's probably a correlation between vegan and snobby some of the time, not to be too much of a jerk. I think there might be a little disdain for McDonald's in that crowd?
Hill: I think food snobs come in all stripes and sizes. There are pizza snobs. I'm a little bit of a bagel snob. There was a great piece in The Washington Post over the weekend about great casual restaurants in the D.C. area. One of them is this relatively new place in Washington, D.C., It's a bagel place, and it's called Call Your Mother. And the write-up of The Washington Post said, in New York City, bagels are religion. In Washington, D.C., bagels are a prayer, as in, "I wish to God I could find a good bagel somewhere in this city."
Kline: Well, don't come to Florida. Florida is the land of your mother from New England or New York overnights you bagels.
Hill: Just to wrap up on this, I don't want to overlook the point you made about the supply chain. It's worth remembering that McDonald's is such a large business that it has in the past, and will probably continue in the future, to single-handedly sway the beef market, just in terms of beef as a commodity and beef prices. McDonald's has that power. So, yes, once they decide, "We're going to flip this switch," even if it's just on a McRib-level test, just testing it for one month, that is still going to be a massive order for someone to fulfill. Whether it's Beyond Meat or someone else or some combination thereof, and it just gets branded as a McDonald's meatless burger, whoever steps up to do that, they'd better nail it.
Kline: It's a tough call. If you remember, a couple of years ago, they did the Mighty Wing.
Hill: I don't remember that at all.
Kline: They tested chicken wings. It was a national rollout. And that actually forced Buffalo Wild Wings to offer deal prices on boneless wings, because the price of wings went up. They were running all their promotions around boneless wings, because McDonald's single-handedly caused the market -- and then, when they got out of it, they actually had a huge surplus, so they kept them on the menu without promotion just to get rid of, I guess they had a lot of frozen wings somewhere. So, yeah, absolutely. They can completely change how everything goes in this entire industry. It still won't make Beyond Meat worth its current valuation.
Hill: Toy Story 4 had a "disappointing" weekend. Disappointing is in air quotes. I put it in air quotes. It's an actual quotes because every story I saw this morning about the opening weekend for Toy Story 4 talked about how taking in nearly $240 million worldwide was a disappointment.
Kline: It's the highest opening for an animated movie ever, globally. [laughs] Here's the thing. Toy Story 4 is the four-quel to a movie that came out long enough ago that the original audience is taking their kids. This is a stupendous opening. The reason it's being perceived as disappointing is because it isn't front-loaded in the U.S. because the timing of the release wasn't Fourth of July weekend. If you look at the $138 million it made in the U.S. this week, it will probably make $90 million or something like that next week. And when you're sitting at the end of week two, which for most people, this will be a four-day weekend. You've got a Thursday Fourth of July. Even people who go to work on Friday, they're not working that hard. There is a lot of opportunity to see this movie. Again, when did Toy Story 3 come out? A decade ago?
Hill: Less than that. I want to say 2012, 2013, something like that. But yeah, the span of time, to your point, is more than 20 years.
Kline: This is a movie that people remember nostalgically. They're taking their kids. Adults are going to see it just out of fondness. There isn't Avengers-level pressure to go see this on opening night because you're not getting any answers. You wanted to see Avengers because you needed to know, does Hawkeye die?
Hill: How does it all end?
Kline: Right. What happens to Iron Man? Can Spider-Man fly now? What's going on? In this, there's no big cliffhangers. I am pretty sure the space guy played by Tim Allen, nothing major happens to him. I've never seen these movies.
Kline: Toy Story 3 was the second most bored I've ever been in a movie. The most bored is Up, a movie where nothing happens.
Hill: Oh, my goodness! I thought you had a soul, Dan!
Kline: No, I don't. I am not in the target audience for these films. Again, I have a kid, I've seen most of them. I liked Cars, the original one. That one basically had the Rocky plot. That makes me cry whether it's Air Bud or Rocky or Cars. It always works every time. But to say this movie is a disappointment, what would have made you happy? Bigger than Avengers? It's on track to do $900 million to $1 billion at the box office. There is no such thing as a $900 million disappointment.
Hill: I'm still flummoxed by the fact that you cried at Air Bud, but you think Toy Story 3 --
Kline: [laughs] I probably cried at Air Bud 6: Let's Go Bud or whatever it was called.
Hill: Wow! Yeah, it is pretty amazing to think about how well the Pixar division of Disney has performed for so long, that this kind of box office is viewed as a disappointment. I went and saw Toy Story 3 opening weekend when my kids were younger. They're obviously older now. I thought about going this weekend, wasn't able to make it work. But I also know that this is a movie that I will see in the theater this summer because at least one day this summer, it's going to rain. When I go on vacation next week, whenever it is. This is one of those things where it's like, yeah, this has the longer tail.
Kline: Here's the thing -- I don't want to see it. My kid is 15, and he doesn't want to see it. And I'd say there's a 75% chance we see it for exactly the same reason. There's going to be a Wednesday afternoon where it's pouring, we've already intentionally seen all the movies we want to see, where it's like, "Fine, let's just go see Toy Story 4. How bad can it be?"
Hill: By the way, last week, because I love movie previews, there's a preview for, remember Trolls, the animated movie?
Hill: They've made a sequel to that.
Kline: I've seen the trailer.
Hill: I just thought, "Oh, God, this should be shown to anyone who thinks Toy Story 4 is a disappointment." Sequels are hard. Animated sequels are hard. If you don't think they're hard, just check out two and a half minutes of the Trolls sequel. That looks like a dumpster fire. A colorful, animated dumpster fire.
Kline: When I saw the Trolls trailer, I actually had to look up whether it was a sequel or not. The Trolls movie was so forgettable. [laughs] The one I've got hopes for is, Sony has the Peeps movie coming out later this year.
Hill: Really? There's a Peeps movie?
Kline: They could have moved it back, but that's what it was originally slated for. Yes. When you think of characters with personalities, you think the Peeps.
Hill: We're talking about the marshmallow?
Kline: The marshmallow candy. [laughs]
Hill: You know what? I won't bet against that. As long as there are college students and a growing market for marijuana and marijuana-based products, I feel like there's hope for the Peeps movie.
Kline: I don't know. It just feels like we're trying to make anything an animated movie. Can't The Flintstones get a movie? Why does Scooby-Doo always have to be direct to video? It feels like there's some great animated properties out there, and we're trying to force-feed a Cap'n Crunch movie.
Hill: But it's interesting to see how, you have some studios that are saying, "We bought the rights to Peeps. We own that brand now. We're going to option a movie out of that and just build it out of nothing," whereas Disney is basically taking past hit animated movies and saying, "Let's roll the dice with live action." They've got Lion King coming out later this year. I think in 2020, a live-action version of Mulan is coming out. It's interesting to see how different businesses react.
Kline: It makes a lot more sense to me than Angry Birds 3.
Hill: As long as a movie makes money, there will be pressure for a sequel. Dan Kline, always good talking to you! Thanks for making the trip!
Kline: Thanks for having me!
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 Market Foolery! The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!