In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Bill Barker about the latest headlines from Wall Street. They discuss what gives Moderna's (NASDAQ:MRNA) vaccine candidate an edge over Pfizer's (NYSE:PFE), and also talk about how the markets reacted to the news. They've got a couple of merger and acquisition deals in real estate to discuss, home improvement and banking developments to share, and much more.
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This video was recorded on November 16, 2020.
Chris Hill: It's Monday, November 16th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Bill Barker. Good to see you.
Bill Barker: Good to be here.
Hill: We have deals in the banking industry, we've got deals in home improvements, but for the second Monday in a row, we have promising news on the vaccine front. Last week it was Pfizer, today it is Moderna.
Phase III study results showing that Moderna's COVID-19 vaccine is effective at a rate of 94.5%. Shares of Moderna, not surprisingly, up 8% and hitting a new high today.
Barker: Yeah, just to queue up the discussion from last Monday about this, and we can sub-in that everything from the Moderna's side is a little bit better even than the Pfizer news, i.e., the 94.5% is in a sense very, very accurate down to the decimal point. And Pfizer only went as far as, you know, somewhere above 90%. So, 94.5% sounds a little bit better.
More importantly is the storage temperature, it appears that the Moderna one can be transported and maintained, which is not at the extremely low, close to zero kelvin temperatures that I think the one Pfizer requires.
Hill: Yeah, that was interesting to see last week in the wake of the initial news. It was like, oh, my goodness! You know, the efficacy rate is so great for Pfizer, then you start [laughs] getting into the nitty-gritty and you're like, wait! How low is the temperature that this needs to be stored at and how is that going to work? And the CEO of FedEx had to come out and talk about the cold storage facilities they have around the country. So, as you said, with Moderna, the storage, much more widely available, [laughs] not requiring, sort of, special deep cold units like FedEx has.
Although, it's interesting, you talk about the efficacy rate being higher for Moderna. And just like last Monday, we are seeing ripple effects across the market, even though the news is arguably better with Moderna, the ripple effects that we're seeing are not as big, we are seeing the cruise line stocks up and the airline stocks up, they're just not up to the degree that they were last week. We're seeing the stay-at-home stocks down, but only down a little bit, which, across the board, just seems much more reasonable.
Barker: Well, the prices had made those adjustments last week up-and-down, depending on the sector, airlines and cruises up. So, to then bump up again, you're working off of a higher starting point. So, today feels like less of a game changer, but more good news. And really the sequence of the news, if this had come out first and Pfizer had come out second, this probably, Pfizer would really not get the same the legs that it got because of those more tricky implementation, storage and distribution, issues that it's going to have. But really, these aren't competitors, these are going to be complements to each other; neither company is going to be able to produce the virus [vaccine] (sic) at the capacity that is needed in the immediate future, even if everything gets the green light, this is still interim data, it's excellent interim data, but it's worth, you know, mentioning that interim data is not the same as final data.
So, it all looks great. This is more good news, and I think it's needed because the implementation of the Pfizer one -- both production and rollout -- is tricky, and neither one can give everybody around the world the vaccination that they need by the end of next year. There are other vaccines, including Johnson & Johnson, which we're still waiting to hear about. So, it's going to be a lot of different companies that contribute to the solution here.
Hill: Were it not for the Moderna news, this would probably be an entirely merger focused show, so let's move on to that portion. We'll start with Simon Property Group, which is the largest mall operator in the U.S. Simon Property buying Taubman Centers, one of its rivals, and shares of both of them are up 7%, 8% on the news. Do you think they're both up 7%, 8% on the news if we didn't also have the Moderna vaccine information that we got? Because it seems like some portion of the rise that we're seeing has to be fueled by the Moderna news, right?
Barker: Well, yes, given the timing, of course, this is a deal that was "agreed to" back in February, the price being $50s and now down to $42. What happened in-between February and now? Well, things changed, things changed for malls. And I'm sure that without having gone through the contract language, Simon Property felt that there was something in the agreement that gave them cover to back out entirely or to reduce the price, Taubman saw it very much the other way, they were going to start litigation about this today. So, this was one of those settlements probably with the encouragement of the court, why don't you guys settle this, OK, [laughs] before coming into court and spending all of your money and time on this, since you wanted this to happen, you go figure it out among yourselves rather than involve the court; and they did.
And that announcement preceded the Moderna announcement, so I don't think that there would have been, you know, quite this move, but it still is better for both companies to be on the same page, to be working together than working against each other.
Hill: And as you said, even if Taubman Centers is taking, let's just ballpark it, a 20% cut to what they had agreed upon in February, as you said, it's probably better than hacking away at each other in court.
Barker: Yeah, Taubman the family is going to maintain ownership of the Taubman subsidiary, so it's in their ongoing interest that there is a successful operation of their namesake. And I think that the challenges for malls are not going to go away the day that everybody is vaccinated, but I think that Simon is an extremely strong operator, it's got a number of, sort of, world-class properties, including the one that I most frequently am on Christmas Eve during my last-minute shopping in King of Prussia, Pennsylvania, [laughs] at the world famous King of Prussia Mall. So, good luck keeping that around, because hopefully in 2021 I'm going to need you again.
Hill: [laughs] You're not going to be road-tripping on Christmas Eve this year?
Barker: I sense that's going to be a bad idea, you know; what about you? [laughs] You probably do your Christmas shopping a little bit earlier than December 24th.
Hill: I do. And when I do last-minute Christmas Eve shopping, it's usually in Old Town, Alexandria. I'm not [laughs] hitting the road for King of Prussia.
Barker: That's where my family is, so that's why; I'm already home. And yeah, I'm not going all the way to King of Prussia and back from here. [laughs]
Hill: It would be a nice road trip though.
Barker: Have you done a road trip on I-95 between here and Philly? That's not a nice road trip. [laughs] There aren't many great sections of 95 for -- there aren't a lot of songs written about I-95 being a great road trip experience.
Hill: That's true, that's true. Definitely songs about the Jersey turnpike, not so much about I-95. Home Depot reports Tuesday morning, but they're making news today with the acquisition of HD Supply, this is an $8 billion deal. Shares of HD Supply up more than 20%, Home Depot up a little bit too, that to me is always a signal that it's a win-win, and that Home Depot isn't breaking the bank to make this deal.
Barker: No. I can't... it's hard for me to piece together exactly how today's price compares to the price at which -- because HD Supply was part of Home Depot; it started out as a different company, rebranded HD Supply, then was spun off in, I think, 2007-ish when Home Depot wanted to reacquire some of its shares, and so it sold off HD Supply to get the money to make that happen. And so, they're remarrying it, but it's quite a higher price. But HD Supply has bought some things and let some things go and invested some money and paid down some debt. So, look, if you look over what Home Depot has done in the last decade, you're probably pretty happy that it was buying back its shares in 2007.
Hill: Right. And as you and I were talking about this morning, this initial deal, back in 2007, this is in the wake of what we like to call, the Bob Nardelli era, because if you were an investor who's relatively new to the market, if you've only been paying attention to the stock market for, let's just call it, five years, if you've only been a shareholder of Home Depot for five years you may not be aware of the fact that there was a stretch of time earlier in this century when this was a horribly run company, and much cleanup had to happen [laughs] in the wake of former CEO, Bob Nardelli. And you know, this was one of the ripple effects of that. As you said, it made sense at the time in terms of repurchasing the shares. And you know, even if they are paying a little bit higher than they want to for this, it seems to make sense.
Barker: So, yeah, they maybe had their hand forced by Lowe's coming out, Lowe's being the company which had, sort of, in the Nardelli era, not superseded Home Depot in terms of size of the company, but in terms of shareholder rewards it was doing much better during that era than Home Depot go 10, 12 years ahead. Home Depot has now been the superior performing company for quite a while. But Lowe's last week was in the news rumored to be interested in buying HD Supply. And much like one of my dogs, I think, I have one dog that just will not let the other dog receive any attention, as soon as Winnie is getting any attention, Owen moves right in and makes sure that he is getting all the scratches that otherwise would go to Winnie. And I think that Home Depot sort of saw this move by Lowe's to pet HD Supply a little bit and said, no, no, no, no, [laughs] we're the ones who are -- this is HD Supply, why do you think it's called HD Supply? Home Depot Supply. They used to be part of us; nobody else can have this one.
Hill: That really would have been embarrassing, you know? I know embarrassing doesn't necessarily show up on the balance sheet, but that really [laughs] would have been embarrassing if Lowe's bought HD Supply.
Barker: It would be an improvement on balance sheets, though. Like, embarrassment, it could be a line item, and it could encapsulate, sort of, write downs and things like that. I like your idea; I think you need to run with it.
Hill: Well, and the other thing about, now that I'm just thinking out loud about embarrassment as a line item, it could apply both to acquisitions, as well as executive behavior.
Barker: Sure, sure, that can cost you quite a bit. Often the executive behavior that gets an executive shown the door costs quite a bit, because you got to nevertheless, somehow, [laughs] for some reasons known only to those deeply embedded in American capitalism, and still costs you tens of millions of dollars to fire somebody for cause. But that's a topic for the next time that happens, which I'm sure it will sometime soon.
Hill: Probably. We'll wrap up with a company I don't think we have ever talked about in the nearly 10-year history of this podcast, and that is BBVA [Banco Bilbao Vizcaya Argentaria], the Spanish financial group. BBVA has agreed to sell its U.S. business to PNC Financial Services for $11.5 billion. You know shares of BBVA are up to a nice healthy margin, PNC up a little bit as well. This really [laughs] bumps up PNC Financial's profile, both in terms of the now hundreds of new branches in the U.S. across most major markets, it also gives them $100 billion under management on top of what they already have. So, this seems like a win-win type of deal that BBVA gets a nice healthy check, and they get to refocus on their core market, and PNC buys some growth.
Barker: Yeah, PNC more or less funded this with its sale back in May, I think, of its share of BlackRock. And so, that was something that it had had for a couple of decades. And so, that money was sitting around waiting to get used at the right time. They are at a relative position of strength to the acquisition. BBVA I think was down in the European markets approximately 60% from its highs earlier in the year. PNC is down only about 20%. So, it's able to, you know, buy something that is a little bit more in need of cash and shoring up for the rest of its operations, and probably both feel like they got a pretty good price compared to their alternative.
So, credit to PNC, which has a history of good capital allocation, significantly outperforming the banking stocks, really, over any meaningful period that you want to measure.
Hill: You would hope they'd be good at capital allocation, wouldn't you? I mean, they're in the banking business. Look, I know we talked about particularly that the CEO needs to be a good capital allocator, regardless of industry, you would really hope they're better than the average bear when they're in the banking industry.
Barker: You would hope, but I don't know if you can remember back to 2008-2009, there was a lot of bad capital allocation [laughs] going on by banks. It's not a given that banks will allocate capital intelligently or manage risk well. And, you know, PNC, I don't remember them showing up in the large string of catastrophes, and near catastrophes, and banks that needed to be bought by somebody else at, you know, three in the morning on a Sunday, that kind of thing. So, they emerged stronger from all that hullabaloo than a lot of the competition. because they were a more rationally run operation and they continue to be today.
Hill: You just reminded me of the very, very good HBO movie adaptation of Aaron Ross Sorkin's [Andrew Ross Sorkin's] (sic) book Too Big to Fail. For anyone who has HBO streaming, that is two hours well-spent, that is a really well-done movie about what happened during the financial crisis. And as you indicated, yeah, the middle of the night phone calls, the early morning meetings trying to figure out how the banks are going to collectively help one another by [laughs] taking on enormous amounts of debt.
Barker: Yes, fortunately, the latest catastrophe hasn't involved any, sort of, collapsing banks, in part to the conservative nature that was imposed coming out of 2008-2009 through a number of regulations, some of which have been revisited. But you know, the banks, although their stock prices have obviously not been good performers this year, are largely interest rate related, but you know, they've been sound, they're not the things that need bailing out.
Hill: Bill Barker, always good talking to you. Thanks for being here.
Barker: Thanks for having me.
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.