In this episode of MarketFoolery, host Mac Greer and Motley Fool analysts Jason Moser and Andy Cross chat about some of today's biggest business news stories. Johnson & Johnson (JNJ 0.44%) was ordered to pay $572 million for its role in Oklahoma's opioid crisis... and the stock popped on the news. Costco (COST +1.82%) had a fantastic opening day in China -- maybe too fantastic, given the lines out the door and three-hour waits for parking. That's still a great sign for Costco's Chinese future, though. Papa John's (PZZA +6.64%) just named a new CEO with experience in the quick-serve business, and the company seems poised for a solid turnaround from here. Tune in to learn 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. 27, 2019.
Mac Greer: It's Tuesday, August 27th. Welcome to MarketFoolery! I'm Mac Greer, and I am joined in studio by Motley Fool analysts Andy Cross and Jason Moser. Gentlemen, welcome! How are we feeling?
Jason Moser: I'm feeling great! But I tell you, I look at you, Mac, and you look rested, you look fresh.
Andy Cross: You look great!
Moser: You look charged! I don't know that I feel as great as you do.
Cross: Time away was good for you, Mac.
Greer: Oh, thank you, thank you! A little time at the beach. The good news is that Chris Hill, getting some much deserved R&R. He will be back in the saddle next week. If you can just hang in there for this week... and it's a free show. Remember that. Chris will be back in action next week.
Guys, lots to talk about. Papa John's getting a new CEO. Costco, opening their first store in China. Spoiler alert: It was well-received. Maybe a little too well-received. We'll get to that.
But let's begin with Johnson & Johnson. An Oklahoma judge has ordered J&J to pay $572 million for its role in the state's opioid crisis. Now, Johnson & Johnson argued that its marketing and sales activities were lawful and that it was not at fault for the crisis. But Jason, the judge and the court, obviously, disagreeing. J&J will appeal the ruling. Now, the interesting thing here, shares of J&J up today around 2%. That may be related to the fact that Oklahoma had sought more than $17 billion in damages. So relatively speaking, could have been worse.
Moser: Yeah, you're right. I think that's really the takeaway here. The market's reaction makes a lot of sense because you do have closure. At least there is some certainty: $572 million is a whole heck of a lot less than $17 billion.
Greer: So I've heard.
Moser: It puts things into perspective for Johnson & Johnson. Johnson & Johnson, as a business, pulled in around $19 billion in free cash flow over the last 12 months on $81 billion in sales. Clearly, these guys are going to be just fine. But Mac, you know, listen, I've got an opinion regarding this. I want to call BS where BS needs to be called. I'm not sitting here saying that the opioid crisis is something that... you don't assign blame to just one entity with this. My problem is, the more and more I research this, where was the FDA [Food and Drug Administration] in all of this? To me, the FDA is the ultimate check, right? That's the organization where the buck really should be stopping. And if you do a little research into this, and everything that's been going on with the opioid crisis and an oxycontin and sort of where things started back in, I think, 1995, clearly, big pharma was complicit in really trying to push the FDA to take some more lenient types of approaches to marketing and whatnot, but the fact is, the FDA folded. The FDA basically buckled and said, "OK, yeah, sure, do whatever." And they did it basically with no backing from science whatsoever.
So you saw this period of time where a lot of these opioids, these big pharma companies were able to market them in such a way that they made it seem as if they were appropriate treatment for more conditions for longer periods of time, when really, that wasn't the case. Science clearly tells us that some of these drugs are extremely addictive and can ruin people's lives. So I go back to, I appreciate the fact that Oklahoma is trying to hold big pharma accountable. I think big pharma should be held accountable. I also very much believe that the FDA should be held accountable here, too, and I don't know that they necessarily are being thrown in the spotlight in the same way.
When I think about it from just a perspective as a parent, let's make this relatable, this is like when you're a parent and your kid is lobbying you to tack on a bear claw to the frozen mint chocolate chip coffee Coolata that you're getting them at Dunkin', right? It doesn't mean you have to do it. You're the check. Right? You're the one that says, "No, maybe that's a little bit too much." Maybe it's an unpopular decision and you have to say no. But I feel like the FDA should have been a little bit more firm here years ago and said, "You know what, no. Let's wait and maybe have some science on our side before we start making some of these decisions."
Greer: I confess, I didn't really follow you after you said "bear claw."
Cross: [laughs] There are a lot of players. This is a crisis that, almost half a million people over the last couple of decades have suffered deaths from the opioid crisis. What Johnson & Johnson is saying specifically to this case is that they only represented 1% of the opioids sold in Oklahoma, so it's unfair for them to get tacked onto this ruling. From the shareholder perspective of Johnson & Johnson, of which I am, as Jason said, analysts were actually hoping for less than $1 billion in the ruling, Mac, which is one reason why the stock, I think, is up today. Even though Oklahoma was looking for more than $17 billion, analysts were probably expecting less than a billion or so. So I think the market's reacting positively to that. They have some closure.
It is still tied up in the courts. This will not be the [last] one from a state. Oklahoma was the first. This will, obviously, now start to set open other potential cases for this. There's a little precedent set here, at least for now. Johnson & Johnson, you have this company with $337 billion in market cap. It yields more than 3%. The 10-year now is at 1.5%, so it's more than double the 10-year bond yield. So investors looking at this, saying, "Hey, I still have a fairly stable dividend payer." It's a large company. It's not going to light the world on fire from a capital appreciation perspective. But now you have this, at least for right now, a little bit behind them, and they can get on to running the business. As Jason said, they generate substantial cash flows that they're going to continue to invest into their business. But this will now be open for more interpretations by more courts and more states. I doubt Oklahoma will be the [last].
Greer: I want to push back on the stock a bit. You mentioned you're a shareholder. You look at J&J over the last five years. Stock up somewhere in the neighborhood of 22%. The market, the S&P, up almost double that, around 42%. When I look at these incredibly diversified conglomerates like J&J, there's a point where I just say, why not just own an index fund instead?
Moser: We've had that conversation before. I think it's a fair question. J&J is one I don't own personally, but have recommended, and have recommended more on the potential for the future. I don't know that a lot of people think about some of the bets that J&J is placing today in regard to the future of medicine. I'm talking about things like robotic surgery. They have a wing of the business called Ethicon. The founder of Intuitive Surgical has played a big role in helping Johnson & Johnson build out that part of the business. I think it's exciting when you look at all the resources a company like that has at its disposal, and leadership that is starting to look forward into how technology can change the healthcare space. It is a bit frustrating, perhaps, the way the stock has performed in the past. That doesn't necessarily mean it's going to be that way in the future. I think Andy made a great point there -- yeah, it's not going to light the world on fire from a capital appreciation perspective, but really, good investing is about making sure you have a nice, diversified portfolio. I think J&J can be a great healthcare stalwart. Again, not going to light the world on fire, but going to be very reliable. They're going to get past situations like this. It's going to make them better. And they'll continue to invest in new parts of the business going forward.
Cross: Jason had a great point about some of their investments and innovations, but really, it's the dividend play. You're going to get a substantial yield that's much higher than at least the 10 year. When you look at bond funds, it's basically yielding about bond funds, and then you have the potential for capital appreciation. So I think that is really the investment case for Johnson & Johnson. As Jason said, probably the best stalwart healthcare company out there in my mind. But yeah, it's not going to be one of these ones that is going to completely change your portfolio. It's going to be a much more stable player.
Moser: They just raised their dividend for the 57th consecutive year. There are a lot of folks out there that are looking for that kind of reliability for their portfolio. As you get older and you get into that "protect your wealth" phase of your life, this is a great one to look at from that income perspective.
Greer: Let's move on to Costco. Costco meet China. China meet Costco. The first Costco in China opened in the suburbs of Shanghai. Let's just say that, well, things went well... maybe too well. Costco had to close early because of the crowds, and signs outside warned incoming shoppers that they may have to wait up to three hours to park. Shanghai, to quote from the movie Casa Blanca, I think this is the beginning of a beautiful friendship.
Cross: It's a great start! Costco has not had a physical presence in China, but they've been working on this, the e-commerce site, thinking about this over the last few years. It's a great start. Clearly, China is a massive consumer market -- and a middle class that is rising and continuing to spend more and more money. Very well-received from the news reports that we're hearing. If you live in China or you are visiting China or Shanghai and you want to stop by the China Costco, love to hear some insights. Let us know what you think. But clearly, some well-received shoppers going into a store, into an experience, into a brand they probably are familiar with, but a chance to start as a Gold Star member. Membership business in China, Costco's really bread and butter for their profit picture in the United States. Offering a selection of goods at very reasonable prices. And they're hoping to get up to 100,000 members into the store. Now, I pulled some numbers. There are about 770 Costco stores globally. They have about 41 million Gold Star members around the world. That's about 54,000 members per store. So Costco is hoping to double their average within a few years as they sign more and more members up. Clearly, it's a good day and a good start to Costco in China, Mac.
Moser: A more rabid fan base -- the Chinese Costco consumer or the Popeyes chicken sandwich lover? I don't know.
Greer: That's a good question!
Moser: I'm asking the question.
Greer: I was gone during the whole Popeyes chicken sandwich craze.
Moser: It was kind of nutty.
Greer: How nutty, on the scale of things? We're not talking Chick-fil-A, are we?
Moser: Here's my perspective on things. Now, Popeyes is very good, don't get me wrong. I like the chicken. It's just fine. It's a chicken sandwich. I think this is a little bit more of a demonstration in human behavior than anything else, Mac.
Greer: A cry for help?
Moser: Perhaps a cry for help. Perhaps people just looking for anything good in their life to make the day a little bit better. Lo and behold, there's a chicken sandwich, and maybe it's something that can hold a candle as a No. 2 to Chick-fil-A, which I just have a hard time believing it'll ever be unseated. But yeah... I think Popeyes caught lightning in a bottle. They pulled a social media campaign of Wendy's proportions. Anybody knows -- you follow Wendy's on Twitter, you see what Wendy's does on Twitter, it's next to genius.
Greer: It's the best part of Wendy's. Unfortunately, they have a business to run also.
Moser: [laughs] It is. I feel like this story of the Popeyes chicken sandwich is far better than the chicken sandwich itself. But I will say, I've not tried the chicken sandwich. Again, I've had a million of them. I don't know, it's a chicken sandwich, I'm sure.
Greer: On a somewhat related note, I thought of you -- speaking of quiet desperation -- we passed a lot of Bojangles as we were headed to the Outer Banks.
Moser: [laughs] The Jangler!
Greer: That's the thing. The only thing I've ever done with Bojangles is drive by it. I feel like I owe it to you at some point to go in. I'm not a food snob. I mean, I'll rock Taco Bell. We stopped at a Moe's on the way back. It was everything I thought it would be -- and I'll just leave it at that. But I have not done Bojangles yet.
Moser: I was at the Atlanta airport a few weeks back. Normally, my go-to, there's a Bojangles right there at the gate that I fly in and out of. And man, the line was 500 yards long this time. I couldn't sit there and wait in the line. I was just impressed to see the Jangler is still getting some love.
Cross: Turning back to Costco, thinking about the impact this opening might have for Costco, which is interesting. They offered the membership price for the Gold Star at 299 yuan, which is a little more than $40. That's a discount to what we pay here in the U.S. for that membership level. They may have lowballed the starting price. I think we all say that Costco has some pricing power when it comes to their membership. We just talked anecdotally about how if you're a Costco member, if they raise the price a few bucks here or there every year, I'm still paying it. Maybe they came in with a lowball price to start. Clearly have some potential. Just like Disney's going to do with the Disney+ streaming. Start with a low price, be able to increase that up over time fairly quickly. But that may have contributed to a lot of the very exciting interest this week. Interesting to note, Mac, the word China is not listed in Costco's 10-K.
Moser: Another interesting note, Mac, and I've not been a member of Costco -- fact, we are now members of Costco.
Greer: Nice!
Moser: I know!
Greer: Welcome!
Moser: We've been shopping to get some new appliances for our house. We were looking all over the place. My wife decided to join Costco so that she could see all of the stuff that they had to offer and figured it's worth the one-year membership to be able to see the selection, and then we'll probably be able to use it at some point anyway. Whether we use it or not -- we didn't buy our appliances there, I'm sorry to say. But maybe one weekend, we can plan a Costco excursion together, and you can show me the ropes.
Greer: I've got a lot of pro tips. One pro tip: go there Saturday 11:00 a.m. You can skip lunch. That's the high time for samples. And you can hit the samples. And as I've taught my kids, you have to walk away from the sample stand for at least 10 seconds, so you have plausible deniability that you've actually been there. Then you just go right back and have another one.
Cross: I wonder if they have the $1.50 hotdogs in the China store.
Greer: You've got to believe. Remember when Motley Fool co-founder Tom Gardner interviewed Jim Sinegal, the founder of Costco, at one of our member events a few years back, and he asked Sinegal, he said, "What will it mean if Costco stops selling the $1.50 hotdog and drink?" And Jim Sinegal says, "It will mean I'm dead." Which is one of the greatest lines ever. Jim Senegal is alive and well, so I've got to believe that Costco is going to do the $1.50 hotdog and drink.
Moser: Hot dogs are universal, right? They're everywhere.
Greer: They've got to. If you have some boots-on-the-ground research from the Shanghai Costco, please let us know.
Guys, let's move on and finish with a little Papa John's news. On Tuesday, Papa John's announcing that Rob Lynch will be its new CEO. Lynch was previously president of Arby's. Shares of Papa John's up more than 6% on the news. Investors seem to approve.
Moser: I look at this and I think this is likely their Brian Niccol moment. Brian Niccol, CEO of Chipotle --
Greer: From?
Moser: Taco Bell.
Greer: Thank you!
Moser: If you've seen anything, you can see Chipotle -- I think it's the top performer in the S&P this year so far. To me, I think that they're easily through the worst of the John Schnatter fallout. If you look at it from just a big-picture view, the product never really suffered. It was always about the individual. And frankly, I think they did an almost magical job of marketing the recovery far beyond the brand, really bringing the actual franchise owners into the mix. You would see commercials on your TV or on your phone or wherever you were, and now, instead of seeing Papa John, you're seeing the people that are owners of your local Papa John's. Now you get this feeling that perhaps there's a bit more play than just some one individual. There are families and local businesses that need support. And it makes you feel a little bit better when you're supporting this local business. They can tell you a little bit more about their story or whatnot. I think they recovered from that quite nicely. It wasn't all that long ago they brought Shaq on there as a spokesman. Shaq, I think, is going to probably work a little magic there. Top it off with a CEO so they can basically cut ties from the Schnatter era. I think this is just the beginning of some really good things for Papa John's.
Greer: Do they have to change the name? Or it doesn't matter?
Moser: I don't think so.
Greer: It doesn't matter, OK. Speaking of the stock, in December 2016, the stock traded around $89 a share. Today, around half of that, around $46.
Moser: Three years from now, it'll be right back there.
Cross: Starboard Value is the second largest shareholder behind the founder, John Schnatter. They joined first last summer, and clearly they are now starting to work through the leadership team they want in there -- the president of Starboard Value is the chairman of Papa John's. They own 12% of stock. So now, really starting to put their fingerprint on what they want that leadership team to do and to bring their person in, and they clearly think they've found the right person. Investors believe that as well, too, based on the stock price today.
Greer: OK, well, let's wrap up with the desert island question. You are on a desert island and you can own one of these stocks, but only one, for the next five years. We've got Johnson & Johnson, Papa John's, Costco. What are you going with?
Cross: I'm going with Papa John's. Looking at what they're trying to turn around there, like I said, I own a small position in Johnson & Johnson now, and I love what Costco's doing globally. But I just think from the value turnaround play, Papa John's might be the winner of those three. Again, just among those three.
Moser: Yeah, I agree. Pizza is a tremendous market opportunity. Like Jay Leno said, even bad pizza is still pizza. And I'm not saying Papa John's pizza is bad pizza. I think it's quite serviceable pizza. They've done a good job with technology, making it pretty easy to get it from their store to your house in a quick fashion. I just think there's a lot of upside here for this company, especially with new leadership in place.
Greer: I love that. Even bad pizza is still pizza.
Cross: I don't know if I agree with that, man. Bad pizza is bad pizza.
Moser: Yeah, but it's still pizza. You can turn it down.
Greer: Even bad MarketFoolery is still MarketFoolery.
Moser: Hey! [laughs]
Greer: Jason and Andy, thanks for joining me!
Cross: Thanks, Mac!
Moser: Thanks!
Greer: 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. That's it for this edition of MarketFoolery! The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!
