Why Junk Debt Is a Misnomer

In this episode of Market Foolery, Chris Hill and Bill Barker take a look at some of what's going on in the market. Topics include:

• Encouraging guidance from a much-adored packaged-foods conglomerate.
• A longtime high performer joins a growing list of companies to withdraw guidance.
• Another conglomerate issues junk-rated debt.
• Tobacco stocks and box office news.

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.

This video was recorded on March 31, 2020.

Chris Hill: It's Tuesday, March 31^st. Welcome to MarketFoolery. I'm Chris Hill, joining me today, Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Hill: And "by here," I mean your home, because obviously, we're social distancing and all of that. At some point I'll just stop telling people, because I think we're going to be doing this for a while. So, this seems as good a day as any to just say, "Yeah, we're ... " Because it's the last day of the quarter; we're wrapping up Q1, and it is the worst quarter since 1987, so good riddance Q1.

Barker: Yeah, not a lot of fun out there. And next quarter promises, in many ways, to be even worse, so we've got that going for us.

Hill: [laughs] You're saying that 90 days from now I'm going to be saying, "Uh, it's the last day of Q2 and it's the worst quarter since the last one we just had?"

Barker: Well, not in terms of the movement of stock prices, I don't expect it to outduel this quarter for the price of stocks, but I think there are other categories in which the Q1 is expected to be worse, and that's why the stock market is down so muc, it is a mechanism for looking forward and the near-term looks very challenging. Second quarter numbers projections are, you know, call it, sort of, GDP off 15%. I can find plenty of people to estimate it's going to be worse than that, and some that estimate it will be around there or little better, but you know, pencil that one in for the moment.

Hill: Well, let's get to some of the news today and it's a lot of food news today. Starting first-and-foremost with Conagra Brands (CAG 0.86%), they came out with their third quarter report. Profits and revenue were a little lower than expected but their guidance for the full fiscal year was pretty encouraging and I think that's why shares of Conagra are up about 5% today.

Barker: Yeah. Now, the fiscal year is three quarters finished and one quarter to go, and so they are projecting the next quarter, specifically, to be pretty good. And for their March numbers, I think the retail business -- you want to take a guess at how much consumer retail business was up, and they have a lot of brands that you would know and love: Orville Redenbacher's, Slim Jim, Duncan Hines.

Hill: Yeah, Duncan Hines, Healthy Choice, Hunt's tomato sauce. I mean, this is one of those conglomerates where chances are you've got at least one Conagra Brands product, if not more, in your kitchen or pantry.

Barker: Yes. And you grew up with a lot of them too. So, anyway, the brand's retail sales expected to be up 50% domestically from March. And that sounds amazing, that's going to be offset by the business side, which is going to be off by a similar amount, but they are much more of a consumer retail sales business than supplier to larger businesses.

Hill: Yeah, I mean, this is, I think, kind of encouraging. And I don't own shares of Conagra Brands, but again, [laughs] as I continue to look to the public markets for any sign of encouragement, whether it's macro or just on a company-by-company basis, this was good to see.

Barker: Yeah, I mean, they're getting the benefit of people being stuck at home. We're in our homes doing this for a reason and we have, I'm sure, stocked up, and the house is more full of food than typical. And some things have been hoarded, not that they're in the business of the kinds of things that get hoarded, but they are selling a lot of things that last, and so people are buying more of those things which are non-perishable and on-hand in case they're stuck and simply can't get food delivered for some reason or they want to space-out their trips to the grocery store as much as possible, all that is aggregating to Conagra's benefits today. You know, it's not really going to change the business long term. So, today's catch up, sort of, replaces some of the weakness that the stock has seen, but, you know, it's been more close to flat over the last six months of the year than most other things that you can think of.

Hill: We can add Domino's (DPZ -1.68%) to the list of companies that have withdrawn fiscal guidance; and not unexpected when you consider their business, their business model. And there are just way too many X-factors. And shares of Domino's are down about 6% today. This is one of those great businesses that I don't own shares of and, I'm not going to lie, there's a part of me that would love to see Domino's stock get knocked down another 20% on top of this. In the same way that Starbucks falling from the mid-$80s to, I think, the mid-$50s or maybe the high-$50s, provided an entry point for a lot of people. Domino's down today, selfishly I'd love to see it drop more.

Barker: Yeah, it's down around $20, which is only about 5%, because it's a $300 stock. It's up beginning today of the coronavirus era, because it had a really, really tremendous earnings report a little over a month ago, in the middle of February. And so, today's numbers were actually kind of pedestrian in terms of the large amounts that you think that a business may be changing at the moment. Preliminary first quarter same-store sales were up 1.6%, and they were expected to be up about 2.9%. People were factoring in the increased delivery, which is there, but offsetting that you got a lot of sporting events not happening, we'll touch on that again this show, and colleges, universities have sent everybody home. So, a lot of the event-driven orders and the student orders -- students probably finding that their parents might not be ordering as much pizza as they're used to at college; I'm sure it's still a big part of the diet but all that is factoring in.

And today Domino's sales are up a little bit for the quarter, business is solid, but they didn't get the, sort of, boost from all this extra delivery that some were factoring in.

Hill: But this is one of those businesses that I don't expect to change. And later in the show we'll talk about at least one industry that is probably facing some pretty significant change. When we think about what the world is going to be like at the end of 2020 or into 2021, when we're past this, when there is a vaccine, all that sort of thing. Domino's is one of those businesses that I just look at, and that's why I said, "I'd love to see it knocked down another 20%," because I think the future of Domino's is going to look a whole lot like the great business that we saw the past decade.

Barker: Yeah, it's been a phenomenal performer for a long time as a business and as a stock, it has not gone unnoticed and I'm sure you've had the opportunity to cover its quarterly returns many times. So, no I don't think it changes, I think it's just a strong business getting stronger, it's returned 22% a year as a stock for the last 15 years versus the market's 7%, so that gives you an understanding of just what this company has been doing and for how long it's been doing it.

Hill: So, all manner of business leaders are looking at their balance sheet, whether they're running a huge public company or just a small local business. They're looking at their balance sheet and they're thinking about, how can we shore this up, how can we get additional funding?

Sticking with the food theme, Yum! Brands (YUM 0.46%) raising a little bit of money, and by a little bit I mean $600 million, but Yum! Brands sold $600 million worth of junk-rated debt and they said they're going to put this to use for general corporate purposes. Why do you think they went this route? I mean, they're paying a higher interest rate. Is this the best move they could've made if they were looking to raise this money?

Barker: Well, it's a regular course of business. They issue debt and retired it to keep issuing new debt and retiring old debt and sort of maintain a level that they're looking to. They have a capital allocation model, how much of the company is going to be funded with equity, how much is going to be funded with debt. And yeah, they, I think, last went out to the market in September [sic] I think, and got $800 million for 10 year debt with a yield of 4.75%. So, it's five-year debt at a higher rate, 7.75% today, still, you know, for a business.

One of the things that brought this story light is this is the first "junk debt" which has come to market since March 4^th. The high yield markets have been open for business and have been operating at least over the last week reasonably smoothly after the Fed did some things that improve their performance. So, there's been a normal, sort of, healthy investment grade debt, as we call it, and recently Yum! had its debt rating downgraded into the "junk" category, but I think that makes it sound worse than it is. I think Yum! is going to be good for paying this debt back. And 7.75% might not be a bad buy at all for debt.

If people are out there buying, I'm not surprised that they're attracted to Yum! being able to pay this off.

Hill: Well, if it's not as bad as you say, then I think someone needs to do a rebranding of the category. I mean, just the fact that the word "junk" is in there is one of those -- I mean that's, come on! [laughs] You can understand why my initial reaction was, "Oh, God! why are they doing that?"

Barker: Well, they would call it high yield instead of junk. Junk is a term that's thrown around and it's not used by the companies themselves, they didn't say, "We went out and issued some junk debt today, some junk bonds," but that's what it gets translated to in the press. And if you are buying some sort of ETF that follows this kind of debt, you're going to find it under the high yield category not junk bonds, so that's where you could go shopping for debt of this kind.

Hill: Also, in the category of finding ways to shore up the balance sheet. We also saw over in the U.K. Imperial Brands, British American Tobacco (BTI 0.80%) both announcing deals for new credit lines to the tune of multi-billion-dollars.

Barker: Yes. And the best time to get credit or to issue debt is when you don't need it. Now, this sort of distinguishes what the tobacco companies have been able to do. Their business is basically unaltered. According to their guidance they're not seeing a big hit to sales. That's not any great surprise, those who are smokers are going to keep smoking, one assumes. And you can get it at all the stores that are going to be open, so there's no interruption of supply or demand there. Nevertheless, a lot of businesses have been going out to either establish new lines of credit or to draw down on existing ones just to have cash on hand, maybe it's to be ready in case the whole economy goes sideways in a way that is beyond what we see right now, maybe it's to be ready and make an acquisition on short notice if something -- a less financially healthy competitor needs to be bailed out in some manner.

So, I think that this is a good move by the companies. It's one that is about as popular right now as withdrawing guidance. It's really kind of the same category, it's, "We don't know what will happen. Therefore, let's get our hands on a lot of cash, if we can get it at a good price, and let's not make any predictions about next quarter."

Hill: So, one of the things, I think, a lot of us at The Motley Fool are expecting in this next wave of earnings that's coming out in April. Well, one, we're expecting it to be bad; and two, we're expecting businesses that have any kind of bad news may pull that forward and release it in this quarter just because the expectations are so low, it's like, you know what, let's just get all the garbage out in one quarterly report if we can. With that as a backdrop, do you expect British American Tobacco to take this window of opportunity to rebrand the company?

Barker: If only. If only. Because, you know, when you rebrand, you take a hit to earnings, and I am on record that the name British American Tobacco is cheating. There is no such thing as British-American. Like, if you go out to people and say, "Yeah, that guy seems kind of a British-American type to me," like, what would that mean? What is ... I mean these are two adjectives which collide and do not supplement each other, they contradict each other, that's what I'm saying. You don't get to sell more tobacco just by trying to pander to both sides of the Atlantic.

Hill: [laughs] I mean, it's worked for them to this point, hasn't it?

Barker: I don't know. Are you smoking any of their brands?

Hill: I'm not smoking any brands.

Barker: Well, apparently, they could be doing a better job is what I'm saying, because they don't have you, they don't have me. And, you know, they've got Kool brands. Kool, that's one of their brands, so.

Anyway, to address your point, as if I were meant to be taking it seriously on what companies are going to be doing generally with taking what is known as a big bath in terms of taking lots of losses all at once, I think, yeah, the second quarter is going to be perhaps a record-setter for that. Any company that is restructuring or has a loss that it wants to take on an investment it made, an acquisition that needs to write that down.

I think that everybody is going to hope that they get a pass on their second quarter numbers and act accordingly so that they have much better second-half numbers and can get all their losses out of the way when it looks like generally the market may be forgiving for that.

Hill: So, as we all spend more time indoors listening to podcasts and watching streaming video, the movie business continues to take a hit because the movie business --

Barker: ... what are you watching, what are you streaming? You got any recommendations before I let you get to a point.

Hill: [laughs] You know, I haven't watched Tiger-King [sic] yet but I watched the trailer for it, and holy cow! does the thing look intriguing.

Barker: [laughs] Okay, there's been a little talk about that one.

Hill: Yeah, so. No, I've mainly just been doing movies here-and-there, rewatching some old classics but then watching some new movies. What about you?

Barker: Yeah, trying to catch the kids up on the classics. And I think next on the list that they're going to sit down and watch, whether they like it or not, The Godfather, which they're going to like, and The Sting, I think, are at top of my list for movies which they are not allowed to leave the house before seeing it.

Hill: I mean, obviously, The Godfather is an all-time classic, but The Sting, I think, last year I showed that to my kids, and loved it. I mean, that's a classic in a different way, but that is a movie that holds up so well.

Barker: So, to get to the movie point that you were going to make.

Hill: Oh, I was just going to put a button on that and saying, and boy! young Robert Redford, holy cow! was he good-looking. I mean, old Robert Redford is good-looking, but young Robert Redford.

Barker: Wow! I mean, Paul Newman fans out there are going to be a little outraged that you are dismissing Paul Newman's contributions as a good-looking man just because Redford's in the picture.

Hill: No question Newman's really good-looking, but when I think about his movies, just in terms of like, what are the movies where Paul Newman looks great? The Sting isn't at the top of that list. It's more, like, Cool Hand Luke, Butch Cassidy and the Sundance Kid. I mean, you know, he's Paul Newman, of course he looks good --

Barker: ... He's Paul Newman, that's what I'm saying, I'm sticking up for Paul Newman fans right now, and right now you're "It's all Robert Redford" in your mind.

Hill: [laughs] Let's get back to the actual news. So, we had two more summer blockbuster movies get pushed off. And these are the tent-pole movies that really prop up the movie business and the movie theater business. And in this case, it's Sony announcing that Ghostbusters: Afterlife is going to be delayed not just later this year, they're pushing it to 2021. Marvel doing the same thing with Morbius, pushing that to 2021. And this is on top of the rescheduling, sort of, pushing out of the Wonder Woman sequel, Black Widow, whatever was going to be the next Fast & Furious movie, the sequel to A Quiet Place.

And it's just, yeah, these movie theatres really depend on the summer season and it's looking worse and worse for them.

Barker: Yeah. And it hasn't been a good last decade or two for movie theaters to start. So, yeah, I don't know whether they're one of the industries that is in line to benefit, particularly, from the recent legislation, but you know.

I think, in many ways this episode that we're going through is going to speed up some inevitable things, such as, decline in malls. This is going to put additional pressure and is going to shift more sales online, it has already. And people who are late-adopters to that are going to be changing their habits going forward.

And I think the movie theater is just another industry which is in long-term decline much as you and I, who grew up going to a lot of movies, would like to see it otherwise, but they're in for a tough year unless there's lots and lots of money to bail them out.

And by the way, I think that putting Ghostbusters as a tent-pole movie in the same category with and Marvel and Bond is welcome to the Ghostbusters brand, which is operating under a little bit of pressure, I would say.

Hill: I agree with that, although, I think the early buzz on the movie and the way it was being positioned in the schedule, I think, we're setting it up to do quite well. And certainly, for a movie studio, like, Sony, you know, I understood why they were positioning it the way they did.

Barker: So, you got Ghostbusters, huge movie, the original. Then you got Ghostbusters 2, meh. And then you get the recent Ghostbusters which was, what was that called, was that just called Ghostbusters? The Leslie Jones and Kate McKinnon one. You did see it. I'm looking at you. Listeners can't see you, we've got the Zoom, so I can see you, and you're furrowing your brow because you're embarrassed that you don't know the answer to that question.

Hill: No, I'm not embarrassed, I don't know the answer to the question, I was just thinking, "Wait, do I know the name of that movie?" And I don't. I didn't see it. I know that financially it was a success, but, yeah -- the Ghostbusters franchise, because now we're talking about the fourth movie, that franchise is certainly not as valuable as the Marvel Universe, as the Bond franchise, or even for that matter, The Fast & Furious.

Barker: No. You've got one homerun and a couple of, I don't know what you call the other ones, not homeruns.

Hill: Yeah, I think the first one was a homerun. I think the most recent one was probably, like, a double off the wall. And I think the sequel was a dribbler ground out to first base where the runner doesn't even keep running.

Barker: Yeah, a couple of the Saturday morning cartoons from back in the day as well, competing brands, as I recall. There were two different Saturday morning cartoons because the licensing and legal issues were such that somehow there were competing claims on the brand. Look it up.

Hill: No, I'll take your word for it. I'm just reminded once again, how lawyers make everything better. [laughs] Thanks for being here.

Barker: Thanks for having me.

Hill: As always, people on the program 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 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.