In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Bill Barker about the latest headlines and earning reports from Wall Street. They've got a merger announcement that will create the world's largest cannabis producer. They discuss BlackRock's (BLK -2.14%) green push. They talk about the entertainment business and a bankruptcy. Finally, they answer a listener's question about investing avenues in non-dairy stocks, and much more.
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This video was recorded on December 16, 2020.
Chris Hill: It's Wednesday, December 16th. Welcome to MarketFoolery. I'm Chris Hill, with me today, Bill Barker. Good to see you.
Bill Barker: Good to be here; how's it going?
Hill: It's going alright. BlackRock is going green. AMC Entertainment (AMC -5.64%) is going bankrupt. And one investor is going non-dairy. We're going to get all that, but we're going to start with the deal of the day.
Tilray (TLRY) and Aphria (APHA), the Canadian cannabis companies, are merging. It is an all-stock deal that will result in the world's largest cannabis producer. Shares of both are up, and that's great if you bought shares of both these companies last week. But as you and I were talking about earlier this morning, particularly in the case of Tilray, it has been a long bumpy ride down from the top.
Barker: Yeah, not so many boxes as a smooth descent, a rapid descent, and very little bumping back up along the way. Now, it did skyrocket, I think, it came public at $25, $30 a share, something like that, about two years ago. It made its way to $150 a share almost immediately within the first couple of months. A lot of people thought everybody was going to start smoking marijuana all the time and buy all of it from Tilray, I guess. I don't know how it got to that price, but the stock market does strange things, momentum investing does strange things.
And it's made its way back down to $9 a share today after going up 20%. So, really why is that -- I mean, there's no economics, no positive economics so far to the business of Tilray. They've lost about $500 million in the last 12 months in GAAP earnings. And that's off of $180 million in sales. So, for every $1 of sales, they're losing almost $3. Rewarding employees, management pretty generously. It's not like the product itself is all that expensive. It is after all referred to accurately as weed. So, it's not that the inputs are that expensive. It's just pursued growth and pursued, you know, that to the expense of profits. So, I think that the merger is going to be one in which Tilray will no longer be managing the company and that's good for shareholders.
Hill: I was going to say, is it possible that the resulting company actually has a much better track record, both as a business and as a stock over the next few years than what we've seen out of both these companies in the last three years?
Barker: Well, easy act to follow as to whether it's going to be a better business over the next couple of years than the last couple. Now, the growth has been substantial, because you go back two years ago to the time before it was public, you know, they did raise some money and make some acquisitions, both these companies. And Aphria is actually much more economically run, close to profitable, depending on whether you're talking about GAAP profitability or not, it's not GAAP profitable but it's a lot closer. And so, I think that the combined entity is going to allow them to save costs.
Tilray does have some brand awareness and so it's going to keep operating under that brand. You know, I think there's a future for the product, it just was not a wildly investable product the way people thought when they first got the chance to invest in it.
Hill: With more than $7.5 trillion under management, BlackRock is the biggest investor in the world. In his annual letter to CEOs earlier this year, Chairman and CEO, Larry Fink, made it clear that climate change was going to be a big part of how BlackRock invests. The company now says, starting in 2021, it expects companies that it has a stake in to disclose their plans for transitioning to a lower carbon economy. There were other details they laid out.
To me, the individual details are less interesting than the clarity with which [laughs] Larry Fink and his team at BlackRock are expressing here. The fact that they're just coming out and saying this is how we're going to be investing, this is what we think is important, this is what is important to us. I'm paraphrasing, but it's basically, hey, you can do what you want, this is how we're going to be making our decisions. I mean, this is very transparent.
Barker: Yeah. We'll see how it's implemented, but there are sharp words toward companies, both, on their diversity for boards and for their treatment of the climate. And I think that Fink is expressing, you know, an accurate perception that climate change is a defining factor in a company's long-term prospects and that they need to behave themselves to have everybody onboard in terms of investing. And there are some big players out there that can make a real difference in the way that they vote people on or off boards. And I think that BlackRock, $7 trillion under management, what is that, well, the global GDP is about $80 trillion, so you know, that's a one-year annual production around the world, and you're talking about $7 trillion under management. I'm not sure that that's the right comparison, but it's a way of beginning to scratch at how meaningful $7 trillion is when you decide to throw its weight around.
Hill: Have you, either personally or to the extent that you can disclose holdings, particularly holdings in the past of Motley Fool Asset Management, the funds that you work on, ever owned shares of BlackRock? Because I've personally never owned shares of a big bank, an asset management company. And Larry Fink is [laughs] one of those people, who, every time he pops up on my radar in the media, he just strikes me as a very impressive person.
Barker: Yeah. No, we don't own any, none of the portfolios that I'm aware of in the most up-to-date disclosures, but you know it's been a good stock. It's doubled in the last five years, which is really good in the long-term, but not some dramatic outperformer. You know, that's not its job really, the job is to steward its capital and protect it for its investors. So, the people who are giving it that $7 trillion to invest, rather than the people who are invested in the equity of the company, I'm sure like many other Wall Street firms, you know, that the employees end up doing quite a bit better than the shareholders of the BlackRock stock, but the shareholders have done pretty well, double in five years.
Hill: And just year-to-date, up nearly 40%.
AMC Entertainment had $5 billion in debt on the balance sheet and that was before the pandemic, then everything happened leading to this headline this morning: AMC Could Benefit from Bankruptcy, Analysts Say. Boy! That's... [laughs] those are dire straits that you're in when bankruptcy is looking like a really great option.
Barker: Well, Chapter 11, when you get to a reorganization in bankruptcy, that is almost by definition a decision that you are going to be doing better by choosing to go into Chapter 11 than not doing so. I don't see how they pay people back over the next year, $750 million coming due. How many days between now and then are these theaters even going to be open, and how many of them, which parts of the country, the world? They took out debt in order to improve the theater experience, the seating, screens, things like that, right before this all happened. So, they didn't get any return on their initial investment in the short-term. And the long-term for theaters looks more and more dire as more companies are putting their products directly on to streaming, and maybe exclusively so. I would not wish upon any friend to work in the theater industry right now. And long-term, I think it's going to be extremely challenging and, you know, if anybody ends up figuring out a winning way to run theaters profitably for investors, I'll be very impressed.
Hill: We talk from time-to-time about any given business' ability to administer pricing power, different levers they can pull. In the case of AMC Entertainment and other theater chains, jacking up the price of popcorn, that's worked in the past, it doesn't seem like that's going to work in the future.
Barker: Well, you know, once you got somebody in the theater, they've already committed, you know, maybe that babysitter, maybe the meal beforehand. I think people are not going out to the theaters, a cheap night out anymore. And so maybe charging $12, $15 for popcorn, whatever it is, which is what we were talking about, this the highest margin product in the history of mankind is movie theater popcorn. I'm just asserting that; there may be data to support me, there may not be. But popcorn itself is free, you know, I think people pay you to take popcorn kernels, right? They're everywhere. And then if you can manage to pop them and sell them for $12, you've done an incredible job of multiplying your input into profits. The problem is getting people into the theaters to then buy that popcorn.
Hill: Yeah. I think that's -- I don't want to say a safe bet, but I think staking out like -- the debate is, what's the [laughs] highest margin consumer product out there? I'm coming to the table with movie popcorn. I feel like you're holding good cards, if you come to the table [laughs] with movie popcorn.
Barker: There may be -- weren't there some bars that were, like, selling air, like certain fragranced air that you would go to, oxygen or something like that, that might be on the same page maybe.
Hill: I don't know. I mean, those tanks have to be kind of heavy, there's a labor cost involved there, like if I'm holding, if my cards are movie popcorn and your cards are the flavored air, I like my cards better than yours.
Barker: [laughs] I mean, you're a huge theatergoer, when it's safe to do so, what do you think is the maximum number of movies you'll see in a theater, 2022?
Hill: I think there are ways to make this work. Again, the part of this story that's not getting a ton of attention, and it makes sense in terms of what we do, because we focus on publicly traded entities. But it's everybody whose job depends on box office receipts. So, Tom Cruise is not publicly traded, but I guarantee you he and everyone else who is on screen, even if you're just, you know, someone in a background scene, they all care greatly about box office receipts, the actors, the writers, the directors, it's why Christopher Nolan went nuts when Warner came out and said, all of our movies in 2021 are going to HBO Max. And you can make a pretty good case for the fact that Warner really didn't go about this the right way in terms of the Christopher Nolans... sort of, the actors and directors that they were dealing with.
So, in the same way that I would not be quick to buy shares of AMC Entertainment, I would also not be quick to write-off [laughs] the movie theater business. It'll probably look different, it'll probably be smaller, but I think that scarcity may be the thing that saves the movie theater experience. Again, there are a lot of people who depend on this and I don't think it's to be underestimated.
Barker: Well, it may just be almost entirely, sort of, tentpole things. And Tom Cruise lives in that, sort of, rarefied world, in many ways, but also being somebody who's big enough to open a movie. And the vast majority of actors are getting great work on TV right now and are not necessarily looking toward being a movie star as the ultimate achievement in an acting career. I'm sure most have grown up with that being the dream, but the quality of work that you can find on the various platforms that stream I think is awfully enticing.
And you know, the Marvel movies and the Star Wars movies, there's always going to be a movie theater market for them, although Star Wars is finding out there's an awfully good streaming market for products that otherwise would have been movie theater quality.
Hill: Here's one potential ripple effect in 2021 for the movie business. Because Netflix (NFLX -0.56%) doesn't give out data, they are very protective of their data. And so, there are movie producers who work with Netflix who will tell you, oh, yeah, I have no idea how many people have seen this. And keep in mind, when Netflix talks about, hey, 50 million people have streamed this movie. Technically, what counts as a stream of a movie or a TV show episode is two minutes. So, that's very different from 50 million people buying a ticket to see this movie. It's very different between, 50 million people bought a ticket and went into a theater to see this movie, and 50 million people watched at least two minutes of this movie.
So, somewhere down the line, it is not going to shock me at all if someone comes out and says, I'm no longer going to do a deal with Netflix unless I start getting data. If we collectively, whether it's Tom Cruise or anyone else -- Jason Blum, I heard him talking about this on CNBC recently, and by this I mean the fact that Netflix doesn't [laughs] really share data -- it's not going to shock me if someone comes out and says, if we're going to have to give up box office receipts as a datapoint, then in return, if you want our movie, we're going to need data, we're going to need to know much more precise data of who's watching, because we want to get paid accordingly.
Barker: Well, the proposition that has worked for Netflix so far is, we will share with you the data that we are going to share with you and that is the size of the check that we are writing. And people are accepting that data package. I mean, just given the volume of stuff that is showing up on Netflix, there are plenty of people who are willing to take the, I will take that check in return for no more questions asked.
Hill: You're absolutely right about that, that's also been happening in a world where box office receipts are also an option. If box office receipts go away completely, I guarantee you that is going to change for Netflix, and Amazon Prime, and everybody else.
Our email address is [email protected]. We got an email from Glenn Hagen, who says, "I was wondering if you guys knew of any stocks in the non-dairy space. I'm 22 years old and I'm aware of the obsession of Starbucks and their oat milk and almond milk-based drinks, so I'm curious if there's any investment opportunities there that's not Starbucks? It would be nice to capitalize on this trend that I believe will skyrocket in my lifetime."
I like that Glenn is this engaged as an investor at the age of 22, and that he is thinking about these types of things. I'll just start by saying, [laughs] because there is no obvious pureplay investment in non-dairy alternatives, you could do a whole lot worse than to buy shares of Starbucks, [laughs] while you're waiting for that non-dairy alternative pureplay to appear.
Barker: Yeah. I don't know what the avenue is for a good non-dairy play. The "War on Big Milk" is not going to play out the way the War on Cash has for investors. The substitutes for big milk -- first of all, milk has gotten its act together over the last couple of decades with their fat-free stuff. And where's the moat, I mean, for the alternatives, between almond, and soy, and rice, and I don't know, coconut milk, there's just different, different flavors, and if there are brands that have wildly succeeded in capturing any chunk of that market share, I'd be surprised that they could keep it for very long.
You've got white label stuff, you've got the private brands, you know, the Safeways and the grocery stores will move in and create competitors where there is an opportunity. So, I don't immediately see where the investment opportunity would be, because I just don't see how there's going to be much of a moat for any of it.
Hill: Yeah. I mean, to your point about branding, it seems like the sort of things that I could see if a business like Beyond Meat or Impossible Foods got big enough and successful enough that they wanted -- like, it would be a natural extension of those types of brands. But I just don't see it otherwise. And I also don't know how big that market is. And maybe Starbucks has some insight into that sort of thing, but, yeah, it really doesn't seem like an opportunity yet.
Barker: Well, and also -- I mean, milk's got some advantages, in that, say, as you grow up, one of the first ideas that you're presented with is, oh, yeah, here's some life, this is critical for being alive. Are you talking about almond milk? No, no, not talking about almond milk. Milk, [laughs] it's what keeps you alive, you know? And it transitions until you get to the dairy, cows' milk, that we're talking about being replaced at Starbucks. But milk is working with some huge advantages in not just people's psyches, but in your actual physiology.
Hill: Also, pretty early in life, you know, maybe your toddler years or something like that, you know, your preschool years, at some point you get introduced to ice cream. And you're like, oh, my goodness, this is amazing. How do you make this? Well, you start with some milk, [laughs] then you make it really cold. Like, OK, that's another win for that milk.
Barker: Yeah. Milk's got a long way to fall, I think, before it is in any trouble compared to the competitors.
Hill: You're not betting against Big Milk?
Barker: I'm not betting against Big Milk, but you know, there are alternatives, they are growing, they're not growing at a pace right now that interest me. But I'm not the one putting soy milk into my coffee at Starbucks, there are people who are doing that. And it may be apparent to others that that is a growing trend in a way that it hasn't hit my purchasing yet.
Hill: Bill Barker, good talking to you, you go get some more coffee.
Barker: Were we going to promo --
Hill: Oh, yes! Real quick, yeah. The last warning for listeners.
Barker: [laughs] This is the last ... no, there will be another offramp, you'll give them one more offramp.
Hill: Oh, yeah, of course, when the episode drops. But yeah, on a cold Monday afternoon, [laughs] Barker and I went to Bill Mann's house, recorded an episode, an Apropos of Nothing that will get published sometime this coming weekend. So just, you know, again, for the 17 of you who are excited about this, it's coming this weekend. And for the rest of you, just know an episode is going to show up over the weekend, because usually the last episode of the week shows up on Thursday. And you know, this is the one week where it's like, oh, yeah, this is going to ... it's going to show up, don't be alarmed, you can delete it.
Barker: Do not be alarmed, that is all we need people to know.
Hill: Thanks for being here.
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.