Defense Giants' Merger Gets Green Light

In this episode of Market Foolery, Mac Greer and Motley Fool analyst Tim Beyers bring you the latest headlines from the markets. A promising vaccine for COVID-19 is set to enter human trials late this year. They take a look at the details of the merger between two well-known defense companies. They also bring you a great defensive stock for these uncertain times and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

Editor's note: Mac notes in another podcast that he made an error in this one. "...I want to say mistakes were made, but I don't think you're allowed to say that if it was your mistake. I said that United Technologies owns Sikorsky Helicopters, that is incorrect, that is wrong, that is not right. Now, Lockheed Martin bought Sikorsky from United Technologies back in 2015. So, Lockheed Martin owns Sikorsky. So, apologies for that. Lockheed, I am sorry. Lockheed owns Sikorsky. Sorry, United Technologies, but a deal is a deal."

This video was recorded on March 30, 2020.

Mac Greer: It's Monday, March 30^th. Welcome to MarketFoolery. I am Mac Greer, and joining me from Colorado is Motley Fool analyst Tim Beyers. Tim, welcome. How are you doing now, there? How's the situation out in Colorado?

Tim Beyers: You know, we're social distancing out here in Colorado, Mac. It's a good morning, it's going to be a little sunny today, still a little on the cooler side, but I'm looking forward to Spring and getting out and social distancing, but maybe stretching my legs a little bit.

Greer: Tim, you and me both, social distancing is the word here in Virginia as well. In fact, I got to give a shout-out to my neighbor, because a few minutes ago I had to go outside and ask him if he could stop the weed-eating for a little while, because I was about to record. So, we are in surreal times. I never thought I'd have to ask someone to stop weed-eating.

Beyers: Yeah, the strange times we live in. It's the signs of the apocalypse, let's hope not.

Greer: It is. It is. Well, on today's show, we're going to talk some J&J (JNJ -0.69%), we're going to talk eggs, mergers, Papa John's (PZZA 0.23%) and Shaq. How is that for a Motley show?

But let's begin with the latest on the coronavirus. On Sunday, President Trump announced that he was extending social distancing guidelines until the end of April. Now, Tim, at the time of our taping right now, more than 2,400 deaths in the U.S. with more than 1,000 of those in the state of New York alone. And I know, I think I speak for you, as this crisis continues to unfold, it really feels strange to even be talking about stocks, to be even talking about investing because of the human tragedy and the scope of it all. It just feels so, I don't want to say wrong, but it definitely feels odd.

Beyers: A 100%, yeah, it absolutely feels odd. The human cost here is too much to bear, I think, and the human cost that we're talking about in terms of what the President and his advisors have said is, we're trying to limit the number of deaths in the U.S. to under a 100,000, if we can or under 200,000. Those are staggering numbers that I don't think we considered even a couple of weeks ago. So, we're more concerned, obviously, for our families, for our friends, who do we know that's affected by this. And we're starting to see in the news, Mac, we're seeing obituaries. And it's just, when the news is littered with obituaries, it just, it tells you what a heartbreaking time that we're in.

So, yeah, I mean, it's our job, we are going to keep talking about stocks, but that does not mean it's the first thing that's on our mind, I think it's probably the third or fourth thing on our minds.

Greer: And, Tim, one thing on everyone's mind is a vaccine. So, let's talk about the race to find a coronavirus vaccine. On Monday, Johnson & Johnson announced they will begin human testing of a vaccine by September and make the vaccine ready for emergency use early next year in 2021. Now, J&J CEO, Alex Gorsky, says, "The vaccine ..." -- and this is a quote and I want to get it right -- "... has a high degree of probability of being successful against the COVID-19 virus." Tim, what do you think?

Beyers: I hope he's right; I really, truly hope he's right. Let's keep a couple of things in mind that it usually takes much longer for vaccines to be developed and approved by the FDA, so we are really moving at a pace we haven't seen. Good on J&J for getting to this point. I hope he's right. Let's not talk about the investment case here yet, but let's just focus in on the science, if he's right and we can get this into production, we can get it into use by January and start inoculating people, that would be amazing, because it's typical -- I mean, you wouldn't be at the front-end of Winter, but you'd be in the middle of Winter, and the Winter season is usually when we see a greater impact from some viruses.

We really don't have science on how deadly the coronavirus is in Summer versus Winter, but so far, it's really hit us during the Winter season, the tail-end of the Winter season, and it's been more than deadly enough. So, having this at some point during the Winter, I think, could be great.

So, it could be just a real win for humanity if he's right about this. The concern I have, Mac, is what if he's wrong? Because this is unprecedented. And I know he's saying, is a high degree of being successful against the COVID-19 virus, and maybe he's right, but human trials are also meant to understand what's the cost of putting this virus into our body, are we making people more sick by doing this? I mean, maybe it does do an amazing job against COVID-19, but a vaccine, we need it to be safe. So, if we inject it in the human beings, how safe is it and how are we going to know that? Is three months enough time to tell that for sure? It's just there's a lot of unknowns here, so I would caution people.

The stock is up a lot today, the last I checked, it was almost 6%. I think this is good news, but I wouldn't want anybody going out and backing up the truck on the stock just because of this news, because there's a lot of uncertainty here.

Having said that, Mac, J&J is a very good business, even independent of this, generates a ton of cash flow, does have a little too much debt, but a good balance sheet. It's a good business, this would make it an even better business and it would make it a real -- boy! it would be such a benefit for humanity, so I hope he's right.

Greer: So, Tim, you said, you would caution someone against backing up the truck, but what about someone listening to this and someone reading about J&J and this potential vaccine? What would you say to someone who's like, "You know what, I may buy a few shares based on this," or "I may buy shares in another company that's working on a vaccine," because as we know, there are a lot of companies working on vaccines?

Beyers: Yeah, you know what, I'd use the Jason Moser strategy. So, first, to your question. Yeah, buying a couple of shares? Sure. I mean, I just wouldn't bet a significant portion of your portfolio on this, but buying a few shares, yeah, there's nothing wrong with that. This is a good business to begin with. But if you're looking at trying to benefit these vaccines or these drugs that could benefit us as human beings and you want to get in on that and be a part of it, then Jason does a really good job of assembling baskets of stocks that represent a trend, and you could do that with these companies, just buy a small portion, put a very small amount of money into, say, four or five different companies that are working on different vaccines. And that's an interesting way to play the trend without putting too much of your capital at risk.

And don't do this, by the way, if you are either in retirement or really close to retirement. I just don't want somebody to say, like, "This is a homerun and I'm going to put $30,000 of my $100,000 portfolio into this." I think that would be a mistake.

Greer: And it's really amazing, when you look at the timetable here, Tim, reading the article for typical vaccines, I think anywhere between five and seven years of development. So, we're really talking about an accelerated timetable, so that's something that we should keep in mind as well.

Beyers: Yes, that's what accelerates the risk, in my mind. You know, when you start doing things that we've never seen before, then you have to account for the risk you can't see. And so, I think if you're buying J&J on the potential benefits of this vaccine, just recognize that you're making an informed speculation and treat it as such, don't put very much capital at risk. And just hold it, knowing that you've got shares of a good business that is going to continue to be a good business no matter what happens with this vaccine.

Greer: Well, Tim, I don't know the situation out in Colorado, I'm guessing it's similar to what it is here in Virginia, because if you go to the grocery store, eggs are in short supply. It turns out the egg business is booming. I don't think we've ever talked about this company on MarketFoolery or at least I haven't, but better than expected earnings from Cal-Maine (CALM -1.44%). Cal-Maine is the largest producer and distributor of eggs in the U.S.

Now, Tim, when I look at the stock chart of Cal-Maine, over the last five years, it's really lost to the S&P, nothing that great, but year-to-date the stock is basically flat, and obviously that means that it has crushed the S&P year-to-date. So, maybe more of a good defensive stock, right?

Beyers: Well, that's what it seems like. Here's the thing, I think there's a couple of things. So, eggs, you can keep for a while. If you stock up on eggs, say, two or three dozen, you've got some emergency food for a little while. So, that makes it very interesting. And Cal-Maine, like you said, is the biggest supplier of eggs here in the United States. But here's the other thing that may be impacting this, eggs are required, and in fact they're used -- and this is true, I swear I'm not making this up, the United States does have a national stockpile of egg-laying chickens. This is real. This is real because you need eggs for making vaccines. I know that sounds ridiculous that we have chicken stocked away in a secured location. We have chicken stocked away in a secured location. And it's because we need eggs in order to make vaccines.

And so, I do think maybe there's a run on eggs here because it's a healthy source of protein, but also because we need these things in order to make vaccines. So, yeah, maybe an interesting defensive stock. It might be more of a short-term stock, Mac, I mean, I don't know what happens to this company after we're on the other side of this crisis, but very interesting timing for this company.

Greer: Well, I am pro-egg, beginning maybe, like, five years ago. Every morning I eat two eggs, Tim, so I am pro-egg. Yeah. And so far, I think my cholesterol is good, and the protein thing, it just totally works for me. It's been a game-changer.

Beyers: Nice. I love it. You know, you are the spokesperson for the national Egg Board.

Greer: [laughs] I may be the reason that Cal-Maine's earnings are up so big. Okay, let's talk about a big deal that just got approved. The Justice Department has approved the merger between United Technologies and Raytheon. Now, Raytheon, a huge defense company. United Technologies, people may not know that name, but I'm sure they know a lot of their businesses. United Technologies owns Carrier heating and air conditioning, Otis Elevators, Pratt & Whitney aircraft engines and Sikorsky Helicopters.

Now, the new company will be called Raytheon Technologies. Tim, this is an all-stock deal, and the approval is conditional on Raytheon shedding some of its businesses.

Beyers: Yeah, they have to shed Otis elevator and Carrier air conditioning. And I, frankly, am more interested in those two spinoffs than I am in the main company, but let's just talk about the main company for a second. It does make a lot of sense, because Sikorsky is a big provider of transport helicopters. It's been around for a really long time. So, that makes sense folding that piece, that defense piece, into the Raytheon business. Pratt & Whitney, the same thing. I mean, Pratt & Whitney is one of the largest makers of aircraft engines in the world, and not just commercial aircraft, but also military aircraft. So, it does make a lot of sense to fold those two pieces of the business together.

But I'm fascinated to see what happens once we get a look at the financials for Otis elevator and for Carrier. And frankly, Carrier, you know it's a little on the nose and close to home for me, because I have a graduate degree from Syracuse University. And Syracuse, New York is the home of Carrier air conditioning and I spent a whole lot of time in the Carrier Dome while I was just at Syracuse.

So, it's a very interesting couple of companies. Of the two, though, as much as I like Carrier, and it just sort of speaks to my past, you know, the one that really interests me most is Otis, because Otis is that kind of company that is everywhere and you probably encounter it every day and you don't even know it. Because you're probably using an Otis elevator if you work in an office building. I mean, maybe we're not using them now as much, but in an apartment building, in an office building, these things are everywhere. And Otis actually has a fairly rich business in terms of servicing those elevators, because elevators do need to be certified and serviced, I think, every year. So, that to me is probably a better business than we actually think it is. So, I'm going to be curious to see what it looks like once it's spun-off.

Greer: Tim, I'm pretty sure I've made this joke before, and I really want to be better than this, so I am --

Beyers: [laughs] But you're not better than this, Mac. Let's just say it right up front.

Greer: That is true. So, I am not, I am not going to ask you, if Otis Elevators has its ups-and-downs?

Beyers: [laughs] I'm glad that you didn't.

Greer: That's good, I restrained.

Beyers: I'm glad that you didn't. I will say, hopefully more ups than downs.

Greer: Yes, hopefully more ups than downs. Well, speaking of more ups than downs, and actually maybe more downs than ups now, Papa John's and Shaquille O'Neal, well, may be headed for a divorce. Now, Shaquille O'Neal joined the board a little over a year ago or so, and now the advisory firm, Institutional Shareholder Services, says that O'Neal has missed too many board meetings at Papa John's and should not be reelected to a second term. O'Neal attended less than 75% of the board and committee meetings over the last year. Tim, what do you think?

Beyers: I really like this move by ISS. I'm not sure. You know, I don't have a strong opinion about whether or not he should be voted off the board. I do think, if you've committed to be a director, you need to show up. So, I completely get the argument that ISS is making. What I really love about this, though, is that ISS is making the argument in the first place, because I think, in overall, we've seen corporate governance and boards of directors be a little bit asleep at the switch for the past several years.

I mean, let's just put this in perspective. Papa John's is not WeWork, but WeWork wouldn't have become WeWork, if it had a board that was acting as a real advocate for the shareholders of that company, because they just went along with anything Adam Neumann wanted to do, it has become an economic disaster, and it's had some fallout.

And we've seen, weirdly enough, like, during this crisis, this is how bad this company has been, that there are still some WeWorks open, it passes understanding why this is still happening, but apparently that's still the case.

But I think when you have shareholder activism, I mean, real shareholder activism and you know shareholders getting involved and holding a board of directors accountable, that's good, that's good for all of us. So, I hope this is the first of many moves we see in terms of more activist shareholders, more arguments in favor of real oversight of companies.

So, yeah, maybe Shaq should, you know, frankly get the boot here. I'm with ISS in spirit, even though I don't know the details.

Greer: [laughs] Okay, I have two thoughts there. First of all, at least for the near future, can't Shaq just Zoom in, I mean how hard is that to connect via Zoom, right?

Beyers: Right.

Greer: And then going forward here's my proposal. Are you a big basketball fan, Tim?

Beyers: Oh, yeah. Sure.

Greer: Okay, well, as you know -- and if people aren't basketball fans, they may not know that when he played, Shaq was an incredible player but one of his Achilles' heel was his free throw shooting, just awful, he shot around 53% for his career from the line, that's terrible. If you're not a basketball fan, just know that teams would intentionally foul Shaq so they can make him shoot free throws. They called it the Hack-a-Shaq OK.

So, if I'm Shaquille O'Neal, I'm like, give me another chance, Papa John's, and the deal is that my board attendance is going to be higher than my free throw percentage. So, I'm going to --

Beyers: And apparently already there, Mac. Apparently, it's already there. If it's 75%, he's already beating the Mendoza Line he had on his free throws.

Greer: Well, we don't know exactly, they say he attended less than 75%.

Beyers: I see. Got you.

Greer: So, we don't know. So, if I'm Shaquille O'Neal, I'm going to say, "You know what, I'm going to attend at least 53%. And I'm going to Zoom in a lot."

Beyers: Right. Low bar. But if he leaps over the low bar, he stays, alright.

Greer: Yeah. On a serious note, I was excited when he came on the board a little over a year ago; I'm not a shareholder. But, as you know, Papa John's has had some real struggles, some real image problems, and it feels like he could be a real ambassador, but so far it sounds like, maybe not working out too well, huh?

Beyers: Yeah, not as good as the icy hot deal, apparently.

Greer: [laughs] Okay. Well, let's move to the desert island question, as we wrap-up. You're on a desert island over the next five years and you have to own one of these stocks. What are you going with? We've got Johnson & Johnson, we've got Cal-Maine, we've got the soon-to-be Raytheon Technologies or Papa John's?

Beyers: Here's why I'm going to go with Raytheon Technologies, even though I'm super interested in J&J, because it's such a good business and I don't think it needs the vaccine to continue to be a great business. The reason I'm going with Raytheon is because, after this deal is done, I'm going to get shares of Otis and I'm going to get shares of Carrier. And I'm very interested in those two as independent businesses; Otis more than Carrier.

Greer: Okay. Well, there you go. [email protected] is our email, for your questions, for your comments. Tim Beyers from Motley Fool, Colorado, thanks for joining us.

Beyers: Thanks, Mac.

Greer: As always, people on the show may have interests 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 Dan Boyd, I'm Mac Greer, thanks for listening and we will see you tomorrow.