Why You Shouldn't Dismiss PepsiCo's Online Push

In this episode of MarketFoolery, host Chris Hill chats with Motley Fool Asset Management's Bill Barker about the latest news from Wall Street. They go through the second-quarter numbers and discuss the e-commerce presence of PepsiCo (PEP -0.41%). A well-known theater is chain raising capital and a cruise liner does some inventory management. And as we head into earnings season, Bill shares his stock pick to watch.

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This video was recorded on July 13, 2020.

Chris Hill: It's Monday, July 13th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Bill Barker. Thanks for being here.

Bill Barker: Thanks for having me.

Hill: We've got entertainment news. Earnings season is coming up, so Bill is going to share a stock that he's going to be watching this earnings season. We're going to start with the latest results from Pepsi. Pepsi's second-quarter revenue fell 3%; and I'm not a Pepsi shareholder, but I saw that headline number and I thought, "That's not that bad [laughs] in this environment." As we saw with the last quarter, and as we will probably see with the next quarter, it is the snack division, it is Frito-Lay which is helping to boost Pepsi's quarterly results.

Barker: Yeah. For those new to the stock, PepsiCo implies Pepsi, which is certainly a huge part of the company and related beverage brands, but also, Frito-Lay and Quaker. And, yes, the snack and Quaker brands, people stocking up on cereals, Cap'n Crunch and Quaker Oats and other things like that, which kept things closer to neutral for the quarter, because still revenue was off and earnings were off a little bit, but yeah, they had enough diversification in their portfolio of brands that it wasn't all bad news.

Hill: Well, and part of the comments out of the executive team at Pepsi is, the investments that they continue to make, not just in safety for their employees and their customers, but also the investments that they are making online. We talked a couple of months ago on the show about the e-commerce, the direct-to-consumer sites that Pepsi started in May, Snacks.com and PantryShop.com, and I don't know about you, I've absolutely done [laughs] some shopping on Snacks.com.

This is going to be interesting to see how this grows. And it really wouldn't surprise me at all if, as we've seen with other companies that come out with a new division, a new product line, whatever, and it starts off small and, you know, for some in the analyst world, there's a tendency to dismiss new initiatives that don't pay immediate big dividends. And then over time, they grow those sales and pretty soon we're talking year-over-year growth of 25%; that compounds over time, obviously. It's going to be interesting to see how this works out for Pepsi, because I don't know that Pepsi necessarily had the direct-to-consumer businesses in mind before the pandemic.

I give them points for how clean and smooth these sites are, how efficient they are, both for customers and for Pepsi's business. You know, it's not an unlimited portfolio of options that you get when you go to these sites. But they made comments this quarter about the fact that they're very serious about e-commerce, they see it as an opportunity to be moving ahead of others in this space.

Barker: Yeah, the winners are going to be the ones that have a plan for e-commerce. I think that a lot of businesses, the more that they are anchored to the old ways, are going to be the most susceptible to the future. And certainly, in the stock world, the more something is aligned with online opportunities, the better it's doing these days. And that is a relatively small part of their sales right now, but perhaps a better future.

Let me ask -- you know, I hadn't heard about Snacks.com before today -- how did you end up going there to do some shopping?

Hill: I get a couple of business news emails every morning and in reading them, that morning back in May, I saw [laughs] this bullet, like, hey, Pepsi has launched Snacks.com. And my first thought was, wait! Nobody else already owns Snacks.com? Pepsi somehow got that URL, so good for them. And then I went to the site and this is, you know, relatively -- certainly earlier days in the pandemic, and let's face it, [laughs] one of the things that we're doing more, yes, we are buying more Pelotons as a nation, and doing more exercising in our homes, we're also snacking more. I don't have a Peloton, put me down as one of the people who is, like, yeah, I'll buy more Cheetos, absolutely, [laughs] if you're going to make it this easy, and free shipping comes if I only buy $15 worth of snacks. I can do that in 30 seconds, [laughs] no problem. So, yeah. But again, like all kidding aside about my gluttony, these are really well-designed sites. I mean, there are experienced e-commerce businesses out there that [laughs] really could take a page out of whoever designed these sites for Pepsi.

Barker: Yeah, well, good for them, because that is an opportunity which I would go back to, is probably small today, but like anything that you get right on online, and if you're doing it yourself rather than relying on third parties to do the distribution for you, that's an opportunity for better margins. And I think that they're getting you to order, you know, $15 of snacks, which you say you can do easily -- certainly, I could easily -- and once you're there at $15, you know, maybe you get a few more, end up buying more. And once snacks are bought, they generally, unlike many other things in the kitchen, get eaten quickly. The percentage of snacks that gets thrown out because they've gone bad in our house is pretty close to zero.

Hill: Yeah, I was going to say, it rounds to zero in my house. Last thing, just on the beverage side, this will be interesting, I think, to watch, because we've -- and I'm referring to seltzer sales within the Pepsi portfolio of beverages, because they have Bubly and, I think, a couple of other seltzer brands. Because we've seen this with hard seltzer, we've seen Boston Beer Company get a boost out of their hard seltzer lines, we've seen hard seltzer sales rising at a time when a lot of beer sales are flat or declining slightly. So, it's interesting to see Pepsi benefiting, not from hard seltzer, but just from non-alcoholic seltzer.

Barker: Yeah, it seems like the kids are drinking a lot of those things rather than beer. And that's certainly my experience as a parent, not that my own kids would be drinking anything, but they report others do. And that if they go to parties at college this is what seems to be happening more than beer. So, like many other things, the old ways are taking a beating and the new trends, in this case, hard seltzer, looks like it's got a lot of room still to grow. Whether Pepsi indirectly benefits from that? They probably do.

So, it's a trend. They're on the right side of some trends, on the wrong side of a few others. It all adds up to, you know, not an exciting quarter, but I think one where they are continuing to pay their dividend, continuing to buy back shares, and are a very stable, massive entity that can make the necessary adjustments, and because of the strength of their brands, is going to remain relevant under almost any circumstance.

Hill: We have a trio of companies in various parts of the entertainment industry making headlines today. Carnival Cruise Lines is going to cut 13 ships from its fleet; that's nearly 10%. AMC Entertainment, which is the largest movie theater chain in America, is going to get $300 million in new money from investors. And Disney World has opened in Orlando, Florida, at a time when Florida cases of COVID-19 are spiking. And the opening of Disney World in Orlando comes literally hours before the company announced this morning, Hong Kong Disneyland is going to be closing on July 15th due to COVID-19.

Of those three, what's the most interesting to you?

Barker: Well, I suppose the most interesting is Carnival and the situation with cruises, because I think they are in the most desperate situation regarding COVID. That is, we know that there just aren't cruises right now, at least in North America. They plan to, I think, start sometime later in the summer in some locations, but I think they've got -- the entire model is based on squeezing a lot of people into a compact space, and there is no getting around that. So, eliminating 13 ships, presumably the older part of the fleet, and reducing their schedule, gives them some opportunity. I think one of the analysts on Wall Street, Stifel analyst, came out today saying that Carnival may benefit in the long term from this. I think that's a level of optimism that is not shared widely, probably not even at Carnival, but it's a happy spin to put on what is a very challenging situation.

I think AMC, to me, is just, over the longer-term, doomed. I think the stock price reflects that. I think that the competition from entertainment at home, cheaper, bigger flat screens, and more streaming opportunities spells difficulty for AMC that I don't see them surviving over the long term; I think cruises will survive over the long term because there isn't the same level of replaceability for the experience that they present; that experience isn't desired today, but under different circumstances, I think it is.

And, you know, Disney is just always a fascinating company, a lot of different moving parts. And I think that it's more stable -- the floor and the ceiling move somewhat less for them than move for, say, the cruises.

Hill: Yeah. I think Disney also -- you know, you mentioned the Stifel note on Carnival; Goldman Sachs came out with or a buy rating on Disney. And it appeared to be focused on the Disney+ streaming service. As basically saying, when we look at Disney's stock price, we think the profitability of Disney+ is being underestimated. And as a Disney shareholder, I would love that to be true. I'm not convinced [laughs] it is true, just because of all of the other challenges facing the business. I mean, Disney has their own cruise line, obviously, they're far less dependent as a business as Carnival is, because that's all Carnival does. But, you know, we got the parks, it's really going to be interesting to see how things get handled in Orlando. It wouldn't surprise me at all if, at some point in the next few weeks, they had to shut down Orlando. When you look at what is happening throughout the state of Florida; I mean, I hope that's not the case, but it wouldn't surprise me.

So, you know, I agree with you about AMC, though; I mean, I think that as much as I have enjoyed throughout my lifetime going to the movies, when you look at the economics that that business is facing right now, they really need things to turnaround very quickly, just when you look at the debt that they are starting to rack up.

Barker: Yeah, it's not going to be a place to make money. I think that movie theaters will survive in sort of the same form that newspapers will survive, that is, somebody rich who believes that these things need to be around or would like them to be around will just, you know, buy up a movie theater and operate it at a loss or try to breakeven, but it just won't be needle-moving in their life. I think you've seen that with some of the acquisitions of newspapers by some to just preserve something and not have it strictly controlled by the economics of the business that surrounds it.

So, you know, the positive thing is movies are getting made, or other than the situation with COVID not letting people work on those, there are always going to be movies, they're just going to be seen more at home than in the theater, because the experience is getting closer and closer to just as good or better, and it's far more affordable. And the movie theaters, which I know you love, I grew up loving theaters, I don't get to them very often these days because I think that the cost and the cost versus the experience at home is controlling what I do with that time and money.

You are a big theater supporter, if everybody out there were going to as many movies a year as you and your family, I would be more optimistic about the theater's future.

Hill: We got earnings season coming up -- what is a stock that you are curious to see, it could be about their results, it could be about what management says, but above-and-beyond, sort of, the headline numbers of, you know, a profit, a loss, revenue, that kind of thing, what's a company you're curious to see report in the next couple of months?

Barker: Well, one, because we own it in a few of the funds, Axon Enterprise, the company formerly known as Taser, but also makes body cam and software that works with the body cameras. And I think that they've had a quarter. So, you know, mostly, quarterly calls are going to be about coronavirus and an inability to quantify the rest of the year, to give guidance, in a lot of cases. And that's a critical story, but we're going to hear that in a number of forms every single day. And Axon, as a stock, you know, the stock did very well as a result, or during the time, of the protests and the protests against current policing. So, I think that they have a very interesting story that they have to dance around, which is, they are not a business that can come out and say, as so many have, a fairly simple, clear: we support minorities, we want to let you know what we're doing regarding, you know, how we operate in our business and what we're going to do going forward; that part of the story. Axon, I'm sure, is saying that as well, but they also have to recognize, and they do recognize, the police forces are the ones that are buying their equipment, and so, they've got a more complex story.

And they're sitting on top of this benefit to their stock, which reflects future sales that the market expects, and so the guidance that they can give, you know, I don't know that there are going to be a lot of orders that have come in this quarter for their equipment, they are in a growth story regarding their sales, but I just find that their story is going to be much more nuanced and interesting and difficult, I think, than a lot of other companies.

Hill: Yeah. Shares of Axon Enterprise up 50% in the past 12 months. So, yeah, it is going to be interesting to see what they report and how they talk about it.

Real quick before we go. Last time you were on the show, we talked about an anniversary, which is that next month is going to mark the 20th anniversary of the passage of Regulation Fair Disclosure. Today there's another anniversary, it's not financial in nature, it is the 35th anniversary of Live Aid, the two concerts held in Wembley Stadium in London, and I believe, the old Veterans Stadium in Philadelphia. You were there.

Barker: You believe incorrectly, but ...

Hill: Oh, OK, what was the stadium in Philly?

Barker: It was JFK.

Hill: Oh, OK.

Barker: Not Vet Stadium. It would be ridiculous to try to throw that at Vet Stadium, what you're thinking about? Did you ever go to Vet Stadium?

Hill: No.

Barker: What an awful place to go to, [laughs] any ball game or concert. No, it was the old JFK, which also doesn't exist any longer.

So, yeah, I was there because it was in Philly and it was easy enough to get tickets. I mean, you had to get up the morning tickets went on sale and shell out all of $35 for the concert, which, at the time, I had $35. So, you know, that was convenient. I was a college student at the time, but it was July, so we were on summer break. And, yeah, I remember it pretty well, considering.

Hill: So, certainly for a lot of people who are younger and, you know, you and I remember the concert; I remember watching it on television, you were there in Philly. I think it is fair to say that, in general, as a group, the performances at Wembley Stadium in London are more highly regarded than the ones, as a group, in Philly. And, of course, the appearance by Queen, which was featured in the movie, you know, that's, sort of, you know, maybe the iconic performance of either venue. That being said, what do you remember as being the best performance of the concert in Philly?

Barker: So, the one that surprised me the most actually was Madonna, because at the time I was, sort of, a snooty kid, rock and roll fan and considered Madonna beneath me, as pop and something that girls listened to and all that. And, boy! She came out [laughs] and, you know, she puts on a good show. She didn't get to where she got in life without working extremely hard and being very talented and extremely good at entertaining. So, I thought she did a great job.

In terms of the acts in Philadelphia, it's true there are fewer really, really memorable moments. I think it didn't end on an especially high note, in that, the final group was, I think, like, Bob Dylan and Mick Jagger and Keith Richards or something, you know, some group of great musicians who were not necessarily great taste, that went great together. In particular, because I think Ron Wood's guitar string broke on him and so he was just doing air guitar for a little bit, and looked kind of like he was at the end of a long day that he had enjoyed off stage perhaps; I don't know. And so, those are some of the things that I remember.

Hill: Bill Barker, 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.