In this episode of MarketFoolery, host Chris Hill talks with Jim Mueller about the latest stock news. After getting a favorable ruling from a U.S. district judge, the prospects of a merger between Sprint (S +0.00%) and T-Mobile (TMUS +0.34%) are looking good. We look at how the merger could affect the market, employees, and consumers. Also, after lower-than-expected sales in the fourth quarter, Under Armour (UA 1.98%) (UAA 2.23%) expects sales to drop in 2020. Chris and Jim try to find the possible reasons for this slowdown. Finally, they take some listener questions.
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This video was recorded on Feb. 11, 2020.
Chris Hill: It's Tuesday, Feb. 11. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Mr. Jim Mueller. Thanks for being here.
Jim Mueller: Thanks for having me.
Hill: We've got the bane of my investing existence, with its latest quarterly report [laughs]. We're going to dip into the Fool mailbag. But we're going to start with the business story of the day, and that is the fact that nearly two years after the merger of T-Mobile and Sprint was announced, we're not at the finish line, but we are one big step closer to this deal being finished. A U.S. District judge ruled in favor of Sprint's $26 billion deal to merge with T-Mobile. And in terms of the stocks, shares of T-Mobile up about 10%; shares of Sprint up 72%.
Mueller: Yeah, well, 72% from a really low number. [laughs]
Hill: Yes. Absolutely. But the T-Mobile pop was...
Mueller: Yeah, that's pretty significant. And I like it because it shows the market's expectation that, yeah, this is going to be actually a good thing for both companies to merge into one. One of the things I found kind of unusual is that -- the claim is that this is going to be job-creating from the get-go. Most mergers like this are job-destroying, because you overlap on a whole bunch of back-office things, for instance. But these guys are saying, you know, we're going to create something like 3,500 jobs, I think is the number for the first year, and 11,000 over the next five years. That's pretty cool.
Hill: Yes, absolutely. If they can pull that off. And it's interesting because they [laughs] -- to your point, they're trying to strike a balance; they're trying to say, "Hey, we're going to create jobs," but they're also saying to Wall Street, "We think about $6 billion in synergies will be saved, because, yes, absolutely some of the HR, finance, legal, some of those jobs go away.
I should mention, again, we're not at the final step here. It still needs to be approved by the California Public Utilities Commission. But as you said, I mean, you look at the market reaction; it seems like -- I don't want to jinx it, but it seems like this is going to happen.
Mueller: I think it will. The 13 states that were challenging it, led by California and New York, the New York Attorney General said that she still wants to really think about this, and she still believes the judge was wrong. But in reading the excerpts from the judge's decision, it seems that he was pretty on board saying that, you know, this is going to be actually better for the industry. T-Mobile -- he called them out. T-Mobile has really challenged the incumbents, AT&T and Verizon -- the companies that CEO John Legere routinely called Dumb and Dumber [laughs] in his notes. But the judge says that it should be good for their business. And we're having a fourth company stood up in the form of DISH Network; they're being stood up with the use of T-Mobile and Sprint's network for, I believe, seven years. And a whole bunch of the customers that are going to be transferred over to them to get them up and running as a fourth cell provider competitor.
Hill: You mentioned John Legere -- one of my favorite CEOs; never fails to entertain. But I think Legere, because of his antics, because of the way he would go after, in particular, Verizon and AT&T in very public ways. I should also mention, both those stocks down ever so slightly. If you're AT&T and you're Verizon, you're not thrilled about this. But maybe it helps a little bit that John Legere is not going to be the CEO of the resulting company. Mike Sievert is going to get the corner office on this, so.
Mueller: That was announced last November. It's not a new thing with this.
Hill: Right. And if you like colorful CEOs -- well, there's a little bit of sadness with this, but I got to point out that Legere wasn't just amusing and colorful, he was also a very effective business leader. He did a great job of adding subscribers to the bottom line for T-Mobile. If he wasn't able to do that, then he would have just been a mouthy CEO who wasn't backing it up. No, he backed it up.
Mueller: No, he did. And one of the things he did was I think he got the company more energized in, both, getting its customers satisfied -- which for this industry is a big hurdle, and getting the employees more engaged. And happy employees lead to happy customers, and that leads to better business. And the revenue numbers at this company have been growing like crazy. So, yeah, they've been doing pretty well under Legere, and I hope they continue under Sievert.
Hill: Let's move on to Under Armour. Fourth-quarter sales came in lower than expected, and even worse, Under Armour said that they expect sales to drop in 2020. And I get that they are also dealing, like a lot of companies, with the ripple effects of the coronavirus in China. They've got hundreds of shops in China, so obviously, that's going to have a material effect in Q1. They expect that's going to hit sales somewhere in the neighborhood of $50 million to $60 million. But if that were the only problem Under Armour had -- if the only problem they had was the coronavirus, then maybe the stock wouldn't be down 18% today. That's just one of many, many problems they have. [laughs]
Mueller: Yeah. They're doing pretty well internationally. That's growing in double digits, and they're expecting that for the next year as well. But when the North American business is 70% of your sales and it's expected to go down next year, yeah, that's not a good sign. And Under Armour really needs to refocus on its core competency. They got a little unfocused with wearables and stuff like that. Yeah, they have to compete against Nike and Lululemon, but they haven't been able to really focus on what they need to focus on.
Hill: Yeah, it really seems like, among their problems, they're discounting too much. They talked about being heavily reliant on Kohl's, and the discounting that went on at Kohl's. It also seems like they just have too many skews. You know, they make good stuff. I've said this before about Under Armour -- they appear to have gotten, in some ways, the most challenging part of athletic apparel correct: They make good stuff. They just appear to have a problem with almost every other part of retail.
Mueller: Right. I don't follow the company extensively, so you and -- who's it, Jason? -- follow it better. But another thing I noticed was that, in 2019, they brought in less cash through the front door as well, even though they grew revenue just a little bit and got gross margin to improve thanks to pulling back some of those discounts you were talking about. They brought in about $120 million less in free cash flow from operations. So that's money coming in the front door -- not as much.
On the good side, though, they are working down on their long-term debt that was down by 19%, something like that, and their cash balance was up significantly. So the balance sheet is stronger. This is CEO Patrick Fisk's first quarter, I believe?
Hill: Yes.
Mueller: And so I think it's OK to give him a little bit of time to get really going on his job. But if they continue as they've been going, yeah, it's going to be not fun for shareholders.
Hill: You own a lot more stocks than I do. And I'm curious how you think about -- look, this is a stock that is down 50% for me. And I have no plans to sell it, [laughs] because it's such a tiny part of my portfolio. And I've basically moved it, both mentally and emotionally, just off to the side. It's a business that, yes, I'm rooting for. Yes, I would love for it, over the next three years, to triple. But I've almost stopped caring about it.
And I'm curious. What is your experience -- how do you deal with stocks that have a similar path where you went in, you had your thesis, it didn't work out? And now you look at your portfolio and it's 1% or less of your investing portfolio. How do you think about a business like that?
Mueller: Well, unless I can see a way for the company to turn around, I'd rather get rid of it, personally. Even though, yeah, it's a little tiny piece and it doesn't feel like it's worth selling. But there is some money tied up, even if it's only a few hundred dollars tied up in that. And you probably have better ideas of where to put that money. And even adding a few hundred dollars to a winner could help boost that down the road.
There's also the psychological thing. Every time you look at your portfolio -- I don't know how often you do that -- but every time you do, you see that. "Oh, dang, there's Under Armour." I bet you do. And even though you say you've put it aside, it still hits you like a little needle every time, so.
Hill: It does, although, like I said, I've kind of stopped caring about it. Or I shouldn't say I have stopped caring about it. I've stopped being upset about it. And to me, it's almost a visual reminder of a mistake I made. And that I hope is going to be helpful to me as an investor in other businesses going forward.
Mueller: There is that. And I've heard many investors I admire say that. You might want to still trim it down and recover some of that money and put it back to use, rather than consigning it to the depths.
Hill: You know me -- I'll just spend it on coffee. [laughs]
Mueller: Well, you love coffee and it's supposed to be healthy, right? [laughs]
Hill: Absolutely. And another study came out -- now it's good for your bones. I love it.
You can hit us up on Twitter. @MarketFoolery is our Twitter handle. Question from Daniel Shelton in Sacramento, California, who writes on Twitter: "Hold the phone. Is your swag shop gone? I was hankering for a Fool T-shirt, but it's gone. Why? Oh, why?"
It's not gone, Daniel. It really needs one of those signs like you see at the mall or on Main Street that just says "Pardon our dust. We're renovating." The swag shop is going to be unveiled bigger, better, more robust, more products in -- I'm going to say -- April. I don't want to overpromise, but right now it's looking like April. So hang in there, Daniel.
Mueller: Personally, I just love that he says he's hankering for it. I love that.
Hill: Yes. Good word. Our email address is [email protected]. Question from Judah Seidman in New Jersey, who writes, "I know a little about the UN resolution to limit high-sulfur fuel in the world's ports, and I know that renewable energy is a good thing. So do you think Clean Energy, ticker symbol CLNE, is positioned to take advantage of these trends?" What do you think?
Mueller: That's a really good question. I like where he's going with this. So, just a little bit of background. He's referring to IMO, which is the International Maritime Organization 2020 rule. And it's the latest -- and maybe the last, I'm not sure -- reduction of the sulfur levels in the fuels that ocean-going ships are allowed to use. Brings it down to 0.5%, which is a significant drop from the previous. That's been going on for 15, 16 years. As a result, ships are being required to use new fuels, new blends of fuel to lower the sulfur amount, use the same fuel but install scrubbers on the exhaust to capture the sulfur dioxide or just change it altogether, such as liquefied natural gas. And that's where Clean Energy comes in, but not directly.
Clean Energy is focused primarily on fuel as over-the-road transport, specifically in trucks. Those out-and-back delivery trucks. Waste Management is a big customer of Clean Energy, for instance, where they go out and run a route and come back and can be fueled overnight. But Clean Energy is really waiting for the Class 8 trucks, the big semi rigs, to get into natural gas in a big way. That's not been helped by low prices of diesel because of low prices of oil, and so they've been struggling.
But if you want to play this trend, you might think of some other ways of doing it. Cruise lines, for instance, are transferring their ships over to liquefied natural gas, LNG. For instance, Carnival has one -- the AIDAnova, I think is the name of the ship -- in the Mediterranean that's all LNG run. Big oil, such as Shell, is investing in LNG, both as a producer and as running ships that fuel other ships with LNG. They go out to the ship and refuel it; those are called bunker ships. Their storage: Kinder Morgan has a facility in Jackson County in Mississippi and Georgia. Cheniere Energy, Sempra Energy, Dominion Energy, they're all into that kind of storage and export out of the U.S. in LNG. So there's many ways to play it, but there's no direct link between Clean Energy and the IMO 2020.
Hill: So it sounds like you like the trend, but not Clean Energy Fuels as the best way to play the trend.
Mueller: I do like the trend. I am invested in Clean Energy Fuels. I think they'll be able to do it; it's just taking a lot longer than anybody has ever hoped. It is an active recommendation Stock Advisor from David Gardner. Unfortunately, it's down about 90% or something, but he hasn't closed it, probably because there's a couple of us here at The Fool who like it.
There are many ways to play natural gas, both the shipment of it, such as, through pipelines -- that's Kinder Morgan, for instance -- or liquefying it and exporting it, and those are like Cheniere and Sempra and those guys.
Hill: Fortunately, I'm pretty sure David has some winners to make up for that.
Mueller: Yeah. Just a few.
Hill: Jim Mueller, thanks for being here.
Mueller: 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.
