Why Dell Stock Is Up

In this episode of MarketFoolery, host Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines on Wall Street. They discuss a possible large spinoff, and there are talks of a buyout of a major retailer. Finally, the duo share their thoughts on the tea market and much more.

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This video was recorded on June 24, 2020.

Chris Hill: It's Wednesday, June 24th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Good to see you.

Jason Moser: Good to see you. How's everything going?

Hill: It's going all right. We've got some retail news today; we've got consumer goods. We're going to start with Dell Technologies (DELL -0.27%), which, every time I see news around Dell, I'm reminded, that's right, the hot, literally the best-performing stock of the 1990s, then went away into the private market and it is now back as a public company.

Dell shares are rising, because it is looking into a spinoff of the very large stake that Dell currently has in software company VMware (VMW). I believe the stake that Dell has is somewhere north of 80%. Both stocks are up on this report in The Wall Street Journal. Jason, what should investors be either watching for or rooting for in this case? I can't tell [laughs] if -- you know, because there are a couple of different angles to this. One report says, Dell was looking into essentially acquiring the rest of VMware that it doesn't own. Now, we get this report that it's looking to just spin it off altogether, which would obviously be tens of billions of dollars, potentially, in terms of a windfall for Dell. What should we be watching?

Moser: Well, I think we can agree that, "Dude, you're getting a Dell," works way better than "Dude, you're getting a VMware," so you know, that may be the strongest point that Dell can play at this point, because I mean, it's not that great, honestly, of a business. When I see Dell today, the first thing that comes to mind after that marketing campaign is, unfortunately for them, IBM. And what I mean by that, it's a legacy name in an industry that feels like it's just completely flown right by, I mean it just completely passed right by it. And I may be doing somewhat of a disservice to IBM there just given their investments in cloud and the Red Hat acquisition and whatnot, but I mean, it is what it is, really.

I mean, it does feel like the numbers are really odd here. I mean, it makes you do a little bit of a double-take. Dell's market cap is around $36 billion. VMware's market cap is $62 billion, and so Dell is trying to figure out what to do with its $50 billion stake in VMware. Now, Jason, you may ask, if Dell has a $50 billion stake in VMware, why is its market cap only $36 billion? Well, Chris, there's the rub. And that's the big question that investors probably need to figure out how to answer before they decide to dip a toe in these waters. I would recommend that you probably not, because I guarantee you there are a lot of folks in here who know a lot more than we do and you do. But it really does go to show what the market is thinking when it comes to Dell.

Dell is that legacy hardware business. I mean, they are dabbling in software and whatnot. But really the future of this company is more or less based in its VMware investment. And so, they're trying to figure out exactly how to deal with that, how to unlock value for shareholders. And it could be in the form of buying VMware, because they own so much of it already. It could be in the form of spinning something off, and I think if they wanted to do that, I believe there's maybe a year that they would have to wait in order to get a preferential tax treatment there. But I mean, it really does kind of all boil back down to this legacy operator Dell, trying to figure out what to do with a company that is somewhat more forward-looking in VMware and the numbers really kind of tell us what the market is thinking about both of these companies today.

Hill: It's a nice reminder to that, again, this truly was the [laughs] best-performing stock of the 1990s. And, you know, Jim Sinegal, the great leader of Costco for so many years, used to say, "There are no annuities in business." That's absolutely true. It seems like it's even more true when we're talking about computers and hardware in general.

Moser: Oh, absolutely. And back when Dell was really at the top of its game, it was kind of a revolutionary company in a sense, right? I mean, this was as technology was really making such an impact on our lives early on and Dell was capitalizing on that. You fast-forward to today, this company really hasn't changed all that much. It relies on that sort of -- again, I used the word "legacy" but that's really just another way of saying, it's just kind of old news more or less. And I think the problem for Dell, you know, if you're looking at Dell as an investment, it's not the easiest company to fully follow and understand given its history and the various transactions from going private and then going public again. And I certainly understand investors' concerns here, given that the company went public again I think in 2018, I mean, the stock is essentially flat in the face of a rising market there. So, again, you're looking at a company that's not really able to capitalize on where the puck is going, so to speak.

I mean, there's the investment in VMware, and that's certainly a bright spot, but VMware isn't Dell, right? They're two very separate, different companies. And so, I think that if you look at the two, VMware is the more attractive of the two. But it's going to boil down to how they unlock this value for investors, that's not clear yet.

So, for me, when I see these types of things, again, I adopt the mindset that there are a lot of people out there involved with this that know a lot more than I do. To me, investing is as easy or as difficult as you want to make it. And if you decide to play in this sandbox, I think you have to acknowledge that you're trying to make it somewhat difficult. The degree of difficulty is a little bit higher. And so, for me, I just sit and I watch and I learn and I am entertained, but I don't know that I would recommend investors try to get in there and play some type of arbitrage or value realization here.

Hill: Simon Property Group (SPG -1.06%), which is the biggest mall operator in America, is looking into buying J.C. Penney. To do this, Simon Property would team up with Brookfield Property Partners. And this is a partnership that Simon has undertaken in the past, Jason -- they did it earlier this year when the two teamed up to buy Forever 21; you go back a few years, they teamed up to buy Aeropostale. I will hasten to point out that both Simon Property and Brookfield Property Partners [laughs] both of those stocks down in the neighborhood of 5% to 8% on these reports. Is the third time a charm, do they actually go and buy J.C. Penney?

Moser: Well, I mean, maybe. So, I'll say that -- you know, Matt Frankel, my partner in crime on the Monday Industry Focus shows, he and I talked about this on Monday as well. And, you know it's easy on the surface to look at this and say, what in the world are you thinking? I mean, we're all sitting here just ripping on J.C. Penney for the last several years and just basically acknowledging the fact that the world doesn't really need J.C. Penney. And I don't think that's changed, and I don't think that's where Simon Property Group is actually viewing this from. There's a real estate angle here ultimately, that I think has Simon's interest. And certainly, Matt felt that way as well.

If you look at Simon Property Group, that's the largest mall operator out there, they operate a lot of malls. And we knew what went on during the shutdown; I mean, that really, you know, dinged their business, for lack of a better word, because of the exposure there. But in good times, that's a pretty strong presence to have.

And the interesting thing about J.C. Penney is there is a real estate angle here. I mean, it kind of takes you back to those days of Sears and the real estate thesis that folks would try to use in justifying an investment in Sears. And so, for the individual investor, I don't know that it makes a whole heck of a lot of sense, but for Simon Property Group actually, it does make some sense, in that, they should be able to get the real estate here at relatively good prices.

And the thing is, with J.C. Penney owning so much of that real estate, and a lot of that also is in Simon properties, so that ultimately means that Simon -- and they're not collecting rent from J.C. Penney on those stores, because J.C. Penney more or less owns them. What this does, it gives Simon probably some pretty cheap real estate that they can then control as far as what the -- have a development take shape from there. I mean, it's one thing if you own a mall and then you see something like J.C. Penney go bankrupt, and now all of a sudden all of your malls have this big anchor store that's been shut down, and looks like a ghost town, it doesn't bode well for your mall, it's not an attractive thing for your mall.

And so, Simon could certainly take more control over how J.C. Penney is managed from that point forward. You'd assume they would probably let J.C. Penney shut down in most cases, and they could take those stores and develop them into something else, whether it's entertainment complexes, restaurants, movie theaters, what have you. So, it gives Simon Property more real estate, it gives them control over the development of that real estate in a market that they're already really good at managing. And so, I see the idea there, but yeah, you have to kind of dig down a little bit.

Hill: And it also seems like, if you can see the idea, presumably you also see, this is going to take a while, that this is [laughs] not a thesis that you buy into thinking, in the next three years Simon Property and Brookfield are going to start seeing results, and therefore your shares are going to start seeing results. This seems like the sort of thing where, if this has a happy ending, we're talking at least five and probably closer to 10 years down the line.

Moser: Yeah, I think that's a reasonable expectation, I mean when you talk about how many stores there are when it comes to J.C. Penney, I mean, there's a strategy that would have to be laid out here. You mentioned, it's Brookfield and Simon Property, so it's not just like one real estate investment trust calling the shots.

But I mean, you know the flip side is, I would argue that's OK, because you're typically investing in a real estate investment trust for that. I mean, you're investing in a real estate investment trust with that long-term timeline in mind, because they pay that nice yield given that REITs pay out most of their net income in the form of dividends for that tax treatment. You know, holding on to those REITs for long periods of time is actually a pretty nice thing to do. And with Simon, I mean, you can criticize this deal if you want, but they have a great track record of the space they're really good at what they do. And so, you know, I think you got to at least give them a little slack here and see if they can come up with something, but yeah, it'll take a while.

Hill: Unilever (UL 0.18%) (UN) is talking with a host of private equity firms about its tea business. Like Procter & Gamble, Unilever is one of those consumer goods giants. It's a $150 billion company with hundreds of brands: home cleaning, health and beauty, food, beverages, and they do have a few tea brands -- most notably, Lipton. Jason, they're talking to Bain Capital, Blackstone Group, KKR, I mean this is kind of a Who's Who of private equity.

One of the things I'm struck by here [laughs] is that, all of these private equity firms are really interested in this tea business that for at least the last, call it, six months or so, Unilever has made it pretty clear, they're interested in shedding at the right price.

Moser: It does seem like they want to. And for the folks who are tuning in here on Motley Fool Live, you may see my cup here, my iced tea, and this is your Lipton iced tea right here. So, I'm giving Unilever a little bit of a shout here, because I do consume a ton of that Lipton tea [laughs] on a daily basis, and I think a lot of people do. When you look at the numbers, I mean, tea is the most widely consumed beverage in the world next to water.

I've got some interesting data here on tea, Chris. In 2019, Americans consumed over 84 billion servings of tea or more than 3.8 billion gallons. And about 84% of all tea consumed was black tea. So, that's basically what that Lipton tea is. Approximately 75% to 80% of tea consumed in America is, in fact, iced, so we like our iced tea. So, black tea, iced tea, that all bodes well for Lipton.

Now, as far as Unilever goes, maybe they feel like there are better places to invest these dollars. I mean, sales of black tea, I think it generates around $3.3 billion in sales for Unilever annually. So, that's a big number, but it has been falling. They are seeing consumer taste shift toward more herbal teas and things like that. Like, we saw Starbucks early on making that investment in Tazo Tea. And I think actually Unilever owns that now. But what you're starting to see is this shift in tea mentality, away from, like, your standard iced tea, black tea kind of thing over toward more of those herbals.

And that's kind of where Unilever is thinking, "You know what, maybe this isn't really where we want our portfolio of brands to be positioned for the future," and I get that. I mean, it does seem like the company is trying to shed some of those old-school brands and get more of the newer brands. It feels like we're in a little bit of a brand turnover here domestically where you're seeing like -- it makes me think of Buffett and Berkshire Hathaway and his fondness for things like Heinz and Kraft and Philly cream cheese. They're starting to be disrupted a little bit with these new brands that are coming in for younger folks. And maybe Unilever sees that same thing happening with Lipton and they don't want to focus necessarily on that side of the business. But I mean, tea and coffee, that's good business. I mean, it's repeat sales, people drink a lot of it. I can remember the time when we were overseas and we were in Egypt, for example, I mean, you couldn't walk anywhere without somebody pulling you into their shop and offering you a glass of tea, in many places it's a cultural thing. But, yeah, it feels like maybe they feel like they could allocate those dollars more wisely somewhere else. They do seem to have a pretty good track record of allocating capital and maybe that's where this is coming from.

Hill: Well, and in terms of actual dollars, some of the numbers being thrown around are, Unilever could fetch north of $6 billion for this portfolio of tea brands. And to your point about reinvesting that money, if you're a shareholder, you have to hope that they're going to be smart about that, because they have hundreds of brands. And I was reminded, sort of, looking over some information about Unilever this morning, of the way that Procter & Gamble, over the past decade, has methodically shed brands and has rewarded shareholders as a result of that. I mean, when we started doing this podcast in 2011, that's about the time that Procter & Gamble came out and said, "Look, we got too many brands, we're going to start to look to get rid of some of these," and it's paid off. I mean, it is not a "shot to the moon" stock, but you know, it's basically doubled over the past nine years or so. And for a dividend-paying consumer goods giant, like Procter & Gamble, you know, that's not a bad performance.

You know, if you're someone looking at your portfolio and thinking, I want a section of it for sort of those large blue chips that are going to pay a dividend, I don't have to really worry about them, they've done a nice job of rewarding shareholders. If Unilever goes through with this, I hope they're able to do, sort of, the same thing. It hasn't done quite as well as a stock as Procter & Gamble has over the past decade, it's done pretty well. But I mean, if they want to follow that strategy that [laughs] might be a smart move, because I think they have somewhere in the neighborhood of 400 brands. And they're more global, they're less tied to the United States than maybe Procter & Gamble is, but yeah, hopefully if they get that money, they're going to invest it well.

And on the flip side, more coffee [laughs] and tea brands going private. I was reminded of JAB Holdings which has got, you know, Peet's Coffee under its umbrella. JAB also bought Panera Bread, so it's going to be interesting to see if, you know, in the same year we see a major tea brand in Lipton go private and JAB Holdings go through with spinning out, whether it's Peet's or one of their other coffee brands.

Moser: Yeah. And you make a really good point there, there's a point where these big, sort of, conglomerates, these big brand collectors, I mean they can get bloated, right? And they could sort of lose a little bit of the vision. It does feel like Unilever is trying to position themselves for a bit more of a, I don't want to say a premium pricing offering, but at least maybe something where they can realize some pricing down the road, whereas you know maybe Lipton isn't something that you really be able to push prices up a whole heck of a lot over time.

But yeah, I think either way, I certainly understand the attraction for these companies, like JAB, to go ahead and try to collect as many of these similar style offerings. I mean, whether it's coffee or tea, I mean, very similar style, very large market opportunities. And generally speaking, they have a pretty good idea of how to do it. I mean, there's distribution in play there as well. And they've got really very attractive distribution networks all over the world which really plays into, particularly, the tea and coffee market given their popularity.

So, you could see both sides certainly winning here, just really a matter of if Unilever is making the right decision, exactly how they're trying to position that portfolio for the future. And if they could shed the right brands to really focus on the right ones as well.

Hill: So, when it comes to tea consumption, you're just straight up iced tea, you're not a hot tea guy?

Moser: So, I don't drink a lot of hot tea, no. So, the progression for me basically goes: morning, we're drinking the coffee, and once the coffee is dry, then we go into the iced tea. And that iced tea, you got to have a couple of good lemon wedges in there. You know, it's almost like an Arnold Palmer, but not quite. And it is sweet tea, understand, it is sweet. I don't go heavy on the sugar, but it is sweetened. And then by the time the evening rolls around, you know, then you're probably looking at maybe imbibing on that nice beer toward the end of the evening to sort of wrap up what hopefully has been a very successful day. And I feel like this one, hey, man, we're on the right track, Chris.

Hill: Absolutely. And if nothing else, you're certainly doing a great job of hydrating, so that's important for all of us.

Moser: No doubt.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

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, and we'll see you tomorrow.