A House of Mouse in Target

In this episode of MarketFoolery, host Mac Greer and analysts Ron Gross and Emily Flippen talk about some of the market's recent headlines. Many companies in the U.S. and China are seeing impacts from the tariff wars, but Tesla (TSLA -3.76%) is getting hit especially hard with its China sales. Target (TGT 1.30%) and Disney (DIS -9.51%) are partnering up for the next few years, which gives Target a boost and can only help Disney with its uninspiring Disney Store situation. Regulations have been tightening around vapes for a while, and now that vaping is, unfortunately, linked to a fatality, they'll probably get tighter. Tune in to find out more!

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on Aug. 26, 2019.

Mac Greer: It's Monday, August 26th. Welcome to MarketFoolery! I'm Mac Greer and I am joined by Motley Fool analysts Emily Flippen and Ron Gross. Welcome! How are we feeling?

Emily Flippen: Pretty good!

Ron Gross: Hey, Mac! Dog days of summer here.

Greer: Dog days. I've had a nice little break. I'm tan.

Gross: I haven't seen you in months, what do you mean, "little break"?

Greer: I know. It's true. It's been a very generous break. 

Gross: You look good. You look well-rested. 

Greer: Thank you! I feel well-rested. We've got lots to talk about. We've got some new health concerns with vaping. I have a lot of questions about this vaping. I'm just not sure it's a good idea. 

Gross: [laughs] You don't think?

Greer: No, no. I think it's the devil's playground. OK. Also, we're going we're talking about Target getting some Disney magic. Target and Disney teaming up here. We'll get to all that. 

Let's begin with Tesla. According to reports, Tesla will raise prices in China on Friday. That's earlier than planned. Tesla, according to the same reports, also considering raising prices again in December should the Chinese tariffs kick in. Emily, you're one of our resident experts on China. Now we're seeing some of the ripple effects, potentially, of all of this trade war stuff. Tesla, we should add, currently imports all of its cars it sells in China.

Flippen: That's an important note right there, the fact that Tesla, as it stands right now, is selling every car in China that they produced here in the United States. So the 25% tariff on automobiles that China is considering putting into place with the U.S. would hit Tesla very hard. That's in addition to a 5% tariff on auto parts as well. It's kind of a minefield for Tesla right now. They're trying to meet what they see as expanding demand in China while still navigating the tariffs. For the business as a whole, the most important thing is the fact that they've been working on the Shanghai Gigafactory, a factory there in Shanghai, China, that would produce cars that they could then sell in China, for a while now. But they've been going through their own minefield in getting that up and running. The fact is that simply, they're not going to have it up and running this year, and they're probably going to start trying to front-run deliveries to China and advance of the December tariff hikes.

Gross: Yeah, I couldn't tell if this was a Tesla story or a trade war story or a little bit of both. But I think it's an actual real-world example of how trade wars and tariffs can actually impact companies -- in this case, U.S. companies. Everyone should sit up straight and listen and see how this can impact. It's not like Tesla was knocking the cover off the ball. This is another thing that they're going to have to deal with, and it is the consequence of trade wars. President Trump said they're easy to win. Maybe one day, we'll say they are. But as of now, it doesn't appear to be the case.

Greer: When we look at Tesla's business as a whole, Emily, how important is China? If I'm investing in Tesla, or if I'm considering investing in Tesla, how much should this concern me?

Flippen: Last time I looked, China actually accounted for about one-fifth of Tesla's sales. So this is actually pretty concerning. It's a little surprising the stock hasn't moved much today, actually, on this news. That might be in large part because tariffs, as we've found, and trade wars in general, tend to change rapidly. We don't actually know what the situation will be like in December. I think we all see how quickly administrations and politicians tend to go back and forth on things like trade wars. What's important is the fact that companies have to prepare in the environment in which they know right now. Tesla, which has had a problem for a while in getting deliveries out of their factory -- not a demand problem, as they say, but a delivery problem. Whether or not they can actually deliver these cars in advance of a tariff hike that they see coming in December is the big unknown here.

Gross: I think we should add, at least as of walking into the studio, I noticed that Tesla hasn't confirmed that this is actually the case. As of now, it's just a report. A little bit more than a rumor, I think, but just a report. We'll see if Tesla comes out with a comment later.

Greer: It's August, Ron. We need something here. OK, let's move on to vaping. Illinois officials confirming that one person has died after being hospitalized with a severe lung illness after using e-cigarettes. Now, this is the first death reported from a vaping-related lung illness. Emily, there is so much that we don't know about vaping and about the long-term effects, so I want to be careful here. But we do know that it's been marketed as a safer alternative to traditional cigarettes. So, what do you make of the vaping news? And, as our cannabis expert, what do you make of the potential link or the implications for the cannabis industry?

Flippen: I'll take cannabis expert as my title now. Actually, it's important to note the difference between smoking and vaping. A lot of people may not be familiar. Smoking, obviously burning, whether that be tobacco for the nicotine effects. That's been, for a long time now, proven to cause lung cancer. Vaping came up as a healthier alternative to smoking. It uses water vapor to get you your addictive chemicals, whether that be cannabis or nicotine. So, it was perceived to be a healthier alternative because that water vapor itself was not linked to the tar in cigarettes that caused cancer. So, these new reports coming out that maybe vaping isn't as healthy as it initially seemed is not good for the industry. In large part, it's just that we don't have a lot of history to work on here with vaping. We don't have people that have been vaping for 20 or 30 years to prove those side effects. It's almost like we have a generation of mini guinea pigs who have been the first generation to consume vapes in any large quantity. I expect that we'll see more reports like this. It is worth noting that the report is not nearly as bad as "immediately causes lung cancer," but is to say that there are likely health effects to vaping and using vapes as opposed to smoking cigarettes.

Gross: At the risk of stating the obvious, I just think we have to make sure we keep this out of the hands of kids. Kids kind of did learn the lesson about cigarettes, I feel. And now, boom, just when we all thought we were out of the water with that generation smoking cigarettes, they're vaping more than ever. If it's the fruit flavors or the bubblegum flavors, or it's the marketing to children, I'd be firmly in favor of stricter regulations when it comes to children. I mean, even Nicorette, I believe, for example, a prescription is necessary. Why can't vaping nicotine also be prescription, perhaps? I don't know if the industry will ever go that far, but let's just try our best to keep it out of the hands of kids.

Flippen: It's so interesting you say that, because the FDA has actually been targeting regulations focused at keeping it out of the hands of kids. The largest vape producer in the United States, Juul, has flavored pods that the FDA has recently said are too attractive to children, so they've limited a lot of places that Juul can sell their flavored pod products.

Gross: I believe San Francisco's outlawed the sale of vaping products completely. You can actually use them, I believe, in San Francisco, but you can't purchase them. Maybe we'll see more of that.

Greer:  In our final story, we're going to lighten it up a bit here, go to the Magic Kingdom. A little Disney and a little Target. Disney and Target joining forces. Twenty-five Disney stores will open at certain Target locations across the U.S. on October 4th, with 40 more Disney stores expected to open within Targets by October of 2020. And, Target is set to open a store near the Walt Disney World Resort in 2021. 

Gross: [laughs] That part of the story doesn't make any sense. 

Greer: I love this, Ron! 

Gross: The beginning is good. 

Greer: Is this a great partnership or a really, really great partnership? This to me seems like a no-brainer.

Gross: I really like it for Target. Target's toy department -- I'm going back a few years because my kids are older now -- was never impressive. It was not an enjoyable experience. I think this makes really good sense. Obviously, they'll be selling products that everyone is really looking forward to. They'll coordinate the launch with Frozen 2 and the Star Wars release that's coming up. I really like this.

Interestingly, the last several quarters, if not several years, has really been about competing in the online space against folks like Amazon, becoming this multichannel company. For example, last week, Target had a really blockbuster quarter, where digital sales were up 34%. Online is more than half of its total same-store sales at this point. Things are looking really good under the leadership of Brian Cornell. But the stores are doing pretty well, too. Store traffic was up 2.4% in the last quarter. So, I think something like this, a move like this, will even help further bring people into the actual stores. It won't just be an online story. Perhaps it will be an actual brick-and-mortar story as well. 

Greer: Ron, you were talking about the performance. We were talking before the show about the five-year charts, because that's what we like to do. We talk about five-year stock charts because we're fun guys, right? 

Gross: [laughs] That's fun, all right.

Greer: Target, over the last five years, up 72%. Disney up around 46%. Target has been crushing it. Disney, not too shabby. But Target, really getting it done.

Flippen: One thing that I thought was really interesting from this story, it's a stat, and I apologize, I'm going to butcher this name, Bob Chapek -- sorry, Bob -- 

Gross: [laughs] Bob's listening.

Greer: [laughs] Apologize to the whole Chapek family.

Flippen: [laughs] Mr. Chapek. He said that there's a 90% overlap between Target and Disney customers. Now, I have no idea where Mr. Chapek got those numbers, or what that means. But if it's true that there's a 90% overlap between those two customers, then hey, maybe that means really great things for not just Target, but Disney as well.

Greer: I think that's low. I think there's a 100% overlap.

Gross: [laughs] Every single person. You know, the Disney stores have never been a pretty picture. Those stores have not really executed very well. Most people don't realize, Children's Place actually owned them and operated them from 2004 to 2008, until Disney took them back because the subsidiary of Children's Place that was operating them filed for Chapter 11. The stores have never been a gangbuster part of the story here for Disney. So this is actually probably a nice little move to kick that into gear.

Greer: As we wrap up here, do you have a favorite and least favorite Disney character? Let's look at it through the prism of an investor. How about the most undervalued Disney character and the most overvalued. I can start. I think Mickey Mouse, overvalued.

Gross: Wow!

Greer: Yeah, I'm going strong to the hoop there.

Gross: He's an icon, you know.

Greer: Yeah. Minnie does not have as big of a role. That's why I'm going Mickey. I think the valuation is way too heady. So I'm selling Mickey.

Gross: Wow! Goofy?

Greer: I get Goofy and Pluto mixed up. Which one --

Gross: Come on! 

Greer: Goofy owns Pluto? Or Pluto owns Goofy?

Gross: I didn't think it was an ownership structure.

Greer: One is a pet for the other.

Gross: Goofy, I would say, is the owner of those two.

Greer: OK, then Goofy is my underrated.

Gross: Those characters we're actually talking about are so old school, though. 

Flippen: Yeah, I was thinking...

Gross: People think of Disney, princesses were big for a while. 

Greer: Who do you got? Overvalued?

Flippen: Those two sisters with the ice. 

Gross: Frozen.

Flippen: Frozen. Undervalued, though. Aren't they making a second movie?

Greer: Yes.

Flippen: There you go.

Greer: I think that's good. Undervalued. Do you have overvalued?

Flippen: You couldn't have me name any more Disney characters than that.

Greer: Donald Duck. 

Flippen: OK, there you go. Donald Duck.

Greer: Or, Scrooge McDuck. Never understood.

Gross: [laughs] Scrooge McDuck.

Flippen: I think I've aged out of that.

Gross: You put a monocle on the guy, and all of a sudden, it's a new character.

Greer: [laughs] OK, Ron, you've got to come to the hoop here.

Gross: Listen, my kids, especially my daughter, adored the princesses, especially Jasmine. So, Jasmine was huge in my house, and she will always have a warm spot in my heart. So I think she's actually undervalued for all the great time she's provided my family. Overvalued, overvalued...anything having to do with...

Greer: Chip 'n Dale?

Gross: [laughs] I forgot those are Disney. Are they?

Greer: They're squirrels or rats or something. I'm not sure what they were.

Gross: Yeah, I don't know. I think some of the some of the old-school ones that we just mentioned are...they've had their day.

Greer: Steamboat Willie.

Gross: [laughs] Again, that's Mickey, isn't it? Just have him whistle and he becomes a different character.

Greer: It's August, people. It's a free show. OK, for our desert island question here, we've got Tesla, we've got Target, we've got Disney. We're going to lay off the vaping because I don't even want to start --

Flippen: No good vaping investments you can think of, Mac? Huh?

Greer: Do you want to throw in a cannabis basket there?

Flippen: Oh, well, there's a lot of companies, I think, that could be really hurt by this. One thing I thought was interesting was the fact that tobacco producer Altria actually owns 35% of Juul. You think they'd be hurt by this, but they actually have some investments into smaller companies that are looking for things like edible nicotine, ways to ingest without smoking or vaping. Maybe that's something to keep an eye on. But, I don't think I'd want to add that to our basket.

Greer: OK, let's just stick with Tesla, Target, Disney. For the next five years, you can only own one. What are you going with?

Gross: My kids have owned Disney for 17 years, and I'm sticking with it. The House of Mouse is my go-to.

Greer: Sorry, Mickey! I feel bad.

Flippen: I have to agree. Out of those three, I think Disney, especially when you look at Disney+ and how exciting that could be coming up here in November. There's just a lot of opportunity. 

Gross: Twenty-First Century Fox is being integrated. Lots of good stuff on the horizon.

Greer: I'm a Disney shareholder, too. And I want to clarify, I like Mickey, I just think he's overvalued. It's a valuation thing. It's not a popularity thing. I mean, can Mickey get any more popular? No.

Gross: No. He's everywhere.

Greer: Except Target. But, soon. OK. As always, people on the show 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. Ron Gross, Emily Flippen, it is our summer spectacular, dog days of August --

Gross: Oh, it was spectacular, alright!

Greer: Thank you so much for joining me!

Flippen: Thanks, Mac!

Gross: Thanks!

Greer: That's it for this edition of MarketFoolery! The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening! And we'll see you tomorrow!