In this episode of MarketFoolery, host Mac Greer and analysts Emily Flippen and Jim Mueller look at some recent business headlines. Altria (MO +1.33%) and Philip Morris (PM +0.91%) spent some time apart, but now the two are looking to merge back up. The analysts break down the history between these two, and what a merger would mean for the future. Meanwhile, KFC is testing out Beyond Chicken in at least one location -- but, interestingly, the fast-food chain is doing it in a way that excludes strict vegetarians and vegans from participating. Finally, luxury fitness bike subscription company Peloton filed to go public. The trio discuss some of the biggest potential opportunities and risks. 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. 28, 2019.
Mac Greer: It's Wednesday, Aug. 28th. Welcome to MarketFoolery! I'm Mac Greer and I am joined by Motley Fool analysts Emily Flippen and Jim Mueller. Welcome! How are we feeling?
Emily Flippen: Feeling pretty good!
Jim Mueller: Feeling hot!
Greer: Feeling hot?
Mueller: Things are burning up with one of our stories today.
Greer: They are burning up. I love a good segue, just right out of the gate. We're going to talk about that. We're going to talk about a fitness start-up, Peloton, going public. They have filed their prospectus. I confessed that I've learned a lot about this company this morning because I do not have a $2,000 exercise bike at my home.
Flippen: Well, you called it a start-up, which shows that you maybe don't know enough yet.
Greer: It's all relative. It's been around for a while, right?
Flippen: It has. It's very popular.
Greer: It's an older start-up. We're also going to talk about KFC getting into the Beyond Meat, or in this case, the Beyond Chicken game, testing Beyond Chicken. We'll talk about that.
Let's begin with Altria and Philip Morris, two tobacco companies in advance talks to merge. If this sounds vaguely familiar, it's because it would reunite them after they split apart in 2008. Jim Mueller, what do you think of it all?
Mueller: I think it's a very interesting story. It has a lot of play in what's happening today with e-cigarettes and vaping and all that. In 2003, Philip Morris, renamed itself Altria, trying to get away from the poor branding that Philip Morris itself had. That didn't work, but, OK. Altria then, in 2008, spun off Philip Morris International and basically separated itself into two companies, U.S. only -- Altria -- and Philip Morris International, which was everywhere else. They sold the same stuff. They sold the same brands, Marlboro being the big one. But the U.S. was separate from the international. That was because of expected increased regulation and litigation in the States. There were still a lot of lawsuits going on. Philip Morris felt it could do better. This was right when the global financial crisis was happening, 2008.
What actually happened is, regulation moderated over the following decade up into the 2015 and 2016 time frame, and the U.S. dollar remained strong, both of which hurt the separation, especially since Philip Morris International was paying dividends in U.S. dollars. Today, smoking is down around the world, especially in the U.S. Shipments are down about 10% over the past decade for Philip Morris, about 35% down for Altria. But Altria is much more profitable than Philip Morris, earning $7 billion of net income on $20 billion in revenue last year vs. $8 billion in net income for Philip Morris on $30 billion. Altria is more profitable. That's because Altria has been able to raise prices steadily and better in the U.S.
Greer: Emily, what do you think?
Flippen: Well, for maybe younger listeners, younger investors out there, personally, I haven't looked at tobacco companies but I know the name Altria because Altria has some really proactive, you could say, investments into cannabis company Cronos Group and JUUL, e-vaping. I recognize the names from their investments. It'll be interesting to see what happens to Altria's investments if this merger does go through. PMI has been pretty open about the fact that they aren't interested in getting into either of those spaces. So it'll be interesting to see what happens with JUUL and Cronos.
Mueller: JUUL has been expanding sales internationally, cannibalizing Philip Morris' thing. The merger would help JUUL in getting international distribution, especially with JUUL being in trouble with regulators --
Flippen: That's an understatement.
Mueller: -- following all these issues with lung diseases that are cropping up, and a recent death in Illinois from a vaping-related lung disease.
Greer: We talked about this a bit on Monday's MarketFoolery. When we think about vaping, is that going to essentially follow the same trajectory as traditional tobacco products and smoking? Where it gets regulated to a point, and then it seems to take hold in the U.S., so the growth is all overseas? Is that where vaping is headed? Is vaping basically where smoking was in the '90s?
Flippen: I'm not sure if I agree with that entirely. Vaping at this point hasn't been proven to cause something like lung cancer. That's not to say it's healthy. Like Jim mentioned, there's already been one vaping-related illness associated in Illinois. The fact is, we don't know the long-term effects of it. I will say that Altria already has investments into other industries as well. You look at nicotine being the addictive substance in things like e-cigarettes and traditional cigarettes. They have investments in companies that are looking to create edible nicotine, nicotine that you can ingest without having to smoke or vape. There's still an opportunity for them to expand. I just think it's going to require a lot of research.
Mueller: And then there's one more thread to this story in that Philip Morris has been spending billions of dollars developing smokeless, heated-up tobacco in something called IQOS, which is like a cigarette. It has a cigarette-like piece injected into this heater that you then draw in the vaporized products from the heated-up tobacco. They're hoping to make that grow sales. The FDA, recently -- last April, I believe -- approved sales of it. Philip Morris wants to market it as a safer alternative. The FDA has not yet said yes on that.
Greer: Speaking of hoping to grow sales, KFC is busting out Beyond fried chicken. Yes, they are getting into the Beyond Meat game. Now, they are testing the new recipe in their Atlanta store. It's a plant-based protein instead of chicken. KFC, part of Yum! Brands (YUM +0.72%), which, we should remind everyone, also owns Taco Bell and Pizza Hut, among others. Emily, so far so good. In Atlanta, Beyond fried chicken sold out in less than five hours. What do you think?
Flippen: KFC was smart to test this in Georgia. Southerners love their fried chicken. It sold out in five hours in Georgia. Hopefully this means there's going to be a national rollout. That potential for KFC to expand their Beyond fried chicken to all of their locations is still there. We saw a similar thing happen with Burger King and the Impossible Whopper. As a newly minted vegetarian, I am personally interested, extremely interested in trying this Beyond Chicken. Fried chicken, I think, is one of those foods that it's hard for people who are trying to be conscious about their meat consumption to give up.
But I will say, what I thought was particularly interesting about this story in particular is that they actually cook the Beyond Meat chicken in the same fryers that they cook regular chicken in, which means for strict vegans and vegetarians, they're actually not going to be able to eat this product. And I think it's actually a calculated move on their part. They're going to say that they don't see their target market as vegans and vegetarians. They see their target market as people who are trying to be more flexitarian; if they can avoid choosing a meat product, they will choose to avoid it.
Greer: Flexitarian, did you make that up? Or is that a thing?
Flippen: Oh, no, it's a thing.
Greer: Oh, I love that! I'm a flexitarian, I've decided. I eat what I want, when I want.
Flippen: Well, flexitarians are meat-conscious consumers.
Greer: Oh. No, I'm not a flexitarian. [laughs] Jim, what do you think?
Mueller: I'd like to see it. It's supposed to taste like chicken, right? Just like the Impossible Burger is supposed to taste like beef. But, does it have the same mouthfeel?
Flippen: No, probably not.
Mueller: When you cut it, does it have the same fibers that chicken has?
Flippen: I don't think that matters, if I'm honest with you. I think it needs to taste good. I think it needs to taste close enough to meat that people will feel good about making that choice while still not sacrificing all the taste. But as it stands right now, I don't think there's any meat substitute on the market that will give you the entire experience of eating meat. We're getting there. I just don't think we're there yet.
Greer: So, does this make you more excited about Yum! Brands as an investment?
Flippen: I was already excited about Yum! Brands. You don't need to get me excited about Taco Bell. I'm already there. Yum China has actually been on fire recently. I'm not an active investor myself, but I was already excited about the company to begin with.
Mueller: I was going to make one more point about these meat substitutes. The farms raising the cattle are going to be replaced with farms raising, what is it, soy protein? Soy beans as the base of these now?
Greer: Yep.
Mueller: Plus, all the additives they have to add to make it taste like beef and heme protein to make it taste like beef. Are they adding something to chicken to make it taste like chicken? Everything's supposed to taste like chicken, right? [laughs] It gets away from animals, sure, but it's not necessarily as good for the environment overall.
Flippen: Actually, it's better for the environment.
Mueller: Is it?
Flippen: Significantly. Cattle continues to be one of those things that contributes a lot to environmental degradation, especially in the United States. Environmentally, I think the argument is sound for meat alternatives. I think where you get into an argument is the health argument. There's a lot of people saying these additives are not necessarily better for you to consume vs. meat. But I actually think that the target market, like I said, aren't people looking for a healthy alternative. I think they're people looking to reduce their meat consumption.
Greer: Well, as an aspiring flexitarian, I may give it a shot.
Flippen: [laughs] Great!
Greer: For our final story, we are going to talk Peloton, the home fitness exercise bike lifestyle brand company that you won't find anywhere in my house. They filed for an IPO on Tuesday. Now, as I mentioned earlier, $2,000 indoor bikes. That's one of the things they sell. They're internet-connected, and then you pay a subscription to join a class. Emily, are you buying?
Flippen: You sound way too negative about the premise of the company there, Mac. It's an interesting company. The thing I found most interesting about their filing was how much they're posting in revenue. Nearly $1 billion in revenue over the past 12 months on a half million different subscribers. They're getting this really high, for the bike, up-front fee, $2,500, plus recurring revenue from their subscriptions. As a business, it actually isn't as bad as some may think. Unfortunately, home exercise equipment does get a bad rap. But Jim, as we were talking earlier, mentioned there's not much of a moat here with this business.
Greer: I just think NordicTrack. That's the problem. And you are right. There was some negativity. I apologize for that. But it just feels like this is going to end up being a paperweight.
Mueller: I think their revenue growth is very impressive. One hundred and ten percent revenue growth last year to $915 million. Unfortunately, they're growing their losses at 300%. They went from a loss of $48 million to a loss of $196 million over the same time period. That really scares me as an investor, especially for a company that's been around for so long, and is selling equipment in a subscription business. What are they spending all that money on? I'm not sure, and I'm worried about that. In the S-1, like many of these fast-revenue-growing companies that have been coming public recently, they're saying, "We might not ever be profitable." As an investor, I don't like seeing those words. Yeah, it's a possibility, but I'd prefer a company that is actually making money.
Flippen: I've clearly been looking at the wrong companies recently because that didn't bother me at all. I know about Peloton from, it has a really large social media following. Where I imagine a lot of those investments are going is building the brand, building the awareness. They've been extremely successful in that. SoulCycle is something that a few years ago got extremely popular. Peloton is playing off that same popularity, except giving it to you in your own home. SoulCycle itself expressed interest in potentially creating a home exercise bike similar to Peloton's. It'll be interesting to see if they see this market as lucrative enough to innovate and go after it themselves.
Greer: You mentioned SoulCycle. For Peloton, is their primary competition essentially a gym membership or a membership to a place like SoulCycle? Or is their primary competition some other home fitness option?
Flippen: My gut told me when I first started looking at this company that it was the high-end gym memberships, the SoulCycles, the classes of the world. If you can get access to these experts in the comfort of your own home, why wouldn't you do that? But if you actually read their S-1, they're going after a lower demographic, they said $50,000 was their minimum income. Then they're saying that they had the largest growth in people under 35 who made less than $75,000 a year. That makes me think that maybe they're actually competing with the lower-end gym memberships out there.
Mueller: That worries me because then it becomes more like a commodity. Do they want to go down the commodity route of lower and lower prices? Yeah, $2,500 does seem to impose a fairly high switching cost once you've bought that bike. But if you can get the bike for $1,500 or $1,000 in a few years, or you can get a SoulCycle bike or a NordicTrack bike for the same thing, how much of that are they going to do? Or, is Peloton going to go high-end and try to stay at that exclusive lifestyle choice, "Look at me, I'm a Peloton user and I've got the apparel to prove it," and all this other stuff? That might be a better route for the company to go down.
Greer: Okay, a non-Peloton question, but on the subject of fitness. I can't touch my toes. I've never been able to come anywhere close to being able to touch my toes. Here's the question. I put it to colleagues recently. If I start stretching and I do all the right things, can I over time learn to touch my toes? Or is that largely genetic? Is the cake baked?
Flippen: Do people actually think that they're genetically unable to touch their toes?
Greer: Have you seen me try to touch my toes?
Flippen: I think you can teach yourself if you try. Stretch every day. Do yoga. I don't do yoga myself. But I've anecdotally heard yoga is great for helping people relax their muscles to the extent where they can touch their toes.
Greer: That would be amazing! That's going to be on my bucket list.
Mueller: Mac, you invited the wrong people into the studio. You need Sam Whiteside in here. She's our fitness Fool here. She'd be able to answer your question.
Greer: She put together a stretching routine for me. I even put it on my Outlook. It was so sad. This is what would happen if I did the whole Peloton thing. Every day, I would just look at this appointment for stretching to remind me to stretch and I would just delete or ignore. And I finally just took it off my Outlook because it was so sad. It was so sad.
Flippen: That makes me sad, too, Mac.
Greer: But it wasn't $2,000 plus a subscription.
Mueller: We need to get you a Peloton. Then you're invested in it.
Greer: That's the thing. To bring it back around, maybe once you've made that up-front investment, you are much more inclined to use it. Although, gym memberships, that doesn't always work.
Mueller: Yeah. $39, is that the monthly price?
Flippen: Yeah, $39 for Peloton.
Mueller: That's certainly an expense, but it's easy to ignore that. But once you've spent that $2,500, you'd probably feel really bad --
Flippen: I'd be on that bike every day.
Mueller: At least for the first week.
Flippen: Yeah, then I'd forget about it.
Greer: [laughs] Let's wrap up with the desert island question. It's a little tricky because we have Altria and Philip Morris, who may end up merging. Right now, we'll treat them as the same company. And we've got KFC, which is part of Yum! Brands. And we've got the soon-to-IPO Peloton. If you had to own one of those for the next five years, which one would you go with?
Flippen: I'm second-guessing our choice of stories today based off the stock selection. I think I have to go with Yum! Brands. Like I said, I'm a big fan of Taco Bell. They opened up a hotel, a resort. They've proven that Taco Bell is not a fast-food chain, it is a lifestyle brand. Maybe KFC can do the same.
Mueller: I'm going to go with Yum China, actually.
Greer: Nice!
Mueller: That one's growing nicely. Yum! Brands, if I had to. Yum China if I had my druthers. I want to stay away from cigarettes and I don't think Peloton is going to do well.
Flippen: I agree.
Greer: Okay, well, Jim and Emily, thanks for joining me!
Flippen: Thanks for having us!
Mueller: Thanks, Mac!
Greer: That's it for this edition of MarketFoolery! The show is mixed by Austin Morgan. I'm Mac Greer. We are taking Thursday off, and the stock market is closed Monday for Labor Day, so we will be back in action on Tuesday, Sept. 3rd. Have a great Labor Day holiday weekend! Thanks for listening! And we will see you next week!
