Deals for 2021

In this episode of MarketFoolery, Chris Hill is joined by Motley Fool analyst Jason Moser, as Teledyne (TDY 3.99%) announces plans to buy FLIR Systems (FLIR) in a cash and stock deal worth $8 billion. Roku (ROKU 1.58%) is in advanced talks to buy Quibi's entire catalog of content. Jason analyzes those stories, as well as Chipotle's (CMG 6.33%) new "rice" offering and the impending launch of McDonald's (MCD -0.42%) much-anticipated crispy chicken sandwich.

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This video was recorded on January 4, 2021.

Chris Hill: It's Monday, January 4th, welcome to MarketFoolery. I'm Chris Hill with me today, Mr. Jason Moser, good to see you see you, sir.

Jason Moser: Good to see you. Happy to kick off 2021.

Hill: Yes, indeed, we're going to talk restaurants, we have got some entertainment business news to get to. We're going to start with the deal of the day. Teledyne Technologies is buying FLIR Systems in a cash and stock deal that's in the neighborhood of $8 billion, which is a pretty nice neighborhood. FLIR systems is in the business of thermal imaging cameras and sensors. Shares up about 20% this morning, shares of Teledyne down more than 7%. Anytime I see that disparity, Jason, the first place my brain goes is people on Wall Street think that Teledyne, whatever they think of FLIR Systems, they think Teledyne overpaid.

Moser: Well, that's certainly possible. It's very much in line with that typical move that we see with the acquirer's stock getting hit because the burden of proof ultimately is on them to prove that this is a sensible acquisition. I do see the interest though here, and as a little context, FLIR Systems as a company I have been following for a while now and it's actually a recommendation in our Augmented Reality Beyond service and added in there for a while and understanding that business, I definitely understand the interest coming from Teledyne here. First and foremost, let's look at what FLIR does. You mentioned thermal imaging and that ultimately is what they are into, thermal infrared imaging. They consider themselves the world's sixth sense, if that gives you any idea. But they make their money by selling cameras and sensors and the related technology with that main focus on thermal and infrared imaging. These are cameras that can do all sorts of things from detecting elevated bi-temperatures to chemical, biological, radiological, nuclear explosive, threats detectors. They have an industrial side of the business which generates about 60% of the company's total revenue and then a defense side of the business as well, which generates about 40%. A similar business is to Teledyne, but there's not a lot of overlap. But I think Teledyne is really interested in that thermal focus from FLIR. Given the neat things that thermal is doing, I can understand the forward-looking nature of this acquisition, getting that thermal technology.

Hill: This is, as I said, the deal's worth about eight billion dollars. Teledyne is on it's own, a $13 billion company.

Moser: Yeah.

Hill: That frankly was odd. It always strikes me as odd when we see a deal, and the acquiring company is not dramatically bigger than the company they are buying.

Moser: Yeah, I mean, it is a bit of not quite a merger of equals, but close to that. Again, I think the main idea here is being able to bring all of this IP in-house and leveraging that to the fullest extent. I think one of the interesting things about FLIR is that it's a vertically integrated supply chain. That means they keep their supply and their manufacturing basically in-house, so they control a lot of that. FLIR and Teledyne together they're both companies that really value and protect their IP, their intellectual property in the sensor market. But because there is no overlap there, it's not something where they're going to be talking about, whittling away turning to fad and whittling away unnecessary expenses in letting part of FLIR's business go, just because there isn't really that much overlap. I mean, sure, there will be some consolidating costs that come with all this and what not. But when you look, you go back to the thermal imaging nature of the stuff that FLIR's doing, one of the things I really like about the business, I have liked for a while, is they do a good job of partnering up with other tech companies out there in doing really neat new things. Another company I've talked about on this show before in a stock I own also is Ansys. It is a company that actually partners with FLIR. FLIR and Ansys are partnering together in order to deliver detection solutions for assisted driver and autonomous vehicles. FLIR ultimately, you see this debate as to whether Lidar or thermal imaging is the more appropriate platform or sensor for autonomous vehicles, and Lidar, which is just a laser detected distance sensor, has some shortcomings, particularly when it comes to adverse weather conditions. And so, FLIR, because thermal imaging is seen as a better option as opposed to Lidar for autonomous vehicles, FLIR and Ansys are doing a lot of work in that autonomous vehicle market. While that's very nascent and I think we're still ways away, I just think it goes to show the type of technology that you are dealing with here. They are also part of those Microsoft HoloLenses in all of the different applications that you can undertake with those things. It's a lot of neat technology. They are very focused on protecting that IP. I understand why Teledyne would like to bring that in-house, and it sounds like they are going to pay a fair price. When I recommended the stock, it was trading around 32X earnings, and this implies about 36X trading earnings. They're not paying through the knows that FLIR could probably hold up and get a little bit more out of it, but it's a fair price for a good business.

Hill: The Wall Street Journal is reporting that Roku is in advanced talks to buy Kubi's entire catalog of content. For those unfamiliar, Quibi is the short-form video streaming service that went from start-up to bankrupt in less than two years. [laughs] Breathtaking speed. Suffice to say Quibi's lineup of original programming is lightly used. But all kidding aside, Jason, hopefully we're going to find out what price Roku pays if this deal goes through. Depending on the price they pay, this could be a really interesting and potentially fruitful move by Roku.

Moser: It absolutely could be and for all of the fun that we have poked and we will continue to poke at Quibi, you're right. Depending on the price that they pay, this could be OK. I mean, it really is about exclusive. I think this qualifies as exclusive content. I think it probably qualifies, like I said on Twitter earlier today, it probably qualifies as never before seen footage [laughs] in most cases. Because I just don't know that many people actually saw that Quibi content. If Roku is paying a good price for it, and I would imagine that Quibi is probably a little bit more of a desperate seller than Roku a desperate buyer, then listen, it all boils down to just generating more money from the ads than you pay for the content, and I bet you that they will be able to pull that off. I mean, when you look at Roku today, they already count basically two-thirds of the top 200 national advertisers as clients. That just continues to grow. I mean, if you look at the actual reach this platform has now, when they reported Q3 of 2020 earnings, somewhere in the neighborhood of 46 million active accounts. That was up from just over 32 million a year ago, and to put that in context, Amazon Fire, I think which is the other really big competitor in this space, Amazon Fire and Roku are really going to jockeying for market position here. Amazon Fire reported recently somewhere in the neighborhood of 50 million monthly active accounts. So, I think you've got Roku that is looking to branch out and provide a little bit more exclusive content. This is probably a very easy bet to make for them, because they're not going to have to pay a lot to do it. But it is going to be something that can help them build that Roku channel app, which is really a point of focus for management here in the coming years, that Roku channel app.

Hill: When the news broke, I think it was last month, that Jeffrey Katzenberg was looking to sell Quibi's content and he was approaching Netflix and Disney at the time, you and I were like, no, please. As Disney shareholders, please, unless you get it for a nickel, there's no need to buy this content. I think in the case of Roku, because of the amount of content and the different categories Quibi's content falls into, if they end up buying this one of the benefits could be seeing what sticks. Because if they've got 100 shows across action, comedy, drama, all these different categories, they can just let their customers decide what's the stuff that we want to see more of before Roku, they have just been blindly throwing a dart against the wall trying to figure out, if we go into original programming, what category should we go in? If they get this, this enables them to make a much smarter investment down the line.

Moser: Yeah. I mean, no question about it. I think you look at a deal like this and I would imagine management of Roku is looking at this as an investment that could pay out in one of or two of two ways. You ultimately are able to bring in that content, sell some good ad inventory from it. That is just Roku's revenue. It's a very ad driven business model. Again, if the money that you bring in from selling that ad inventory outweighs the money that you're paying to actually get that content, ultimately the economics make sense. It's hard for me to imagine they couldn't pull that off because I just think they're going to buy this stuff for a song, and then you add to that the earnings that they take away from it. Just like you said, I mean, they're going to get a very good idea here, particularly when it comes to short-form content, because that's what this really is about. That's what Quibi was all abou, bringing in a lot of "star power" to bring more short-form content to the forefront, particularly in mobile. I think that's where this could really play out well for Roku as well in regard to the Roku channel. That's that app that you can download to your phone, and there's your mobile presence right there. If they really push this on the Roku channel, that's becoming a bigger driver of revenue for the business, and that's why it's a big point of focus for 2021. We probably won't ultimately find out what the price is here, a lot of times companies keep those cards close to their vest, but I just cannot believe that Roku would be just clamoring to pay up for this stuff when really Quibi is the more desperate of the two by far.

Hill: For anyone looking to start the new year by cutting greens from their diet, Chipotle has some good news. This morning, Chipotle announced the nationwide launch of cilantro, lime, cauliflower rice. For an additional $2, you can get that burrito bowl with not actual rice, but cauliflower rice. This is a limited time offering. I have to believe though, Jason, if this works, in part because of the additional $2 price tag, then this becomes a permanent addition to the menu.

Moser: I would think so. I guess I just don't know how many folks are looking for cauliflower rice today. I mean, Chris, first it was pasta, and everybody's got a problem with pasta, now they've got a problem with rice. Where does it end? This is getting to be insanity for me, because I don't understand what's the problem with rice.

Hill: I don't have a problem with rice, [laughs] but some people do. In all seriousness, look, when it comes to restaurants, for investors, the name of the game is, what did you do in terms of same-store sales and what did you do in terms of the average ticket price? If you're growing both of those, then I'm happy as a shareholder. $2 is not nothing. If all of a sudden the average ticket price goes up, I'm not going to be doing this, but if enough people do, then that's good for Chipotle shareholders.

Moser: Hopefully, my sarcasm was obvious in my [laughs] previous statement, because I have heard of cauliflower rice before, I totally get it, I understand that's what some people like to eat. Don't email us, I was just joking around. It is I think very much in line with what Chipotle has done so well over these past several years. If you just, wow, look at this, it's not even close to the same menu from back in the day, is it? This is not the same Chipotle that we knew even five years ago. They were obviously going through a big crisis there with the health scare, and they were able to come through that. Obviously, it took some new management to do that. But what they've done is, it's something we always harp on with Chipotle, was this fairly simple menu, and being able to take a fairly limited pallet of ingredients, and just doing a lot of good stuff with it. Now, if you look at what they've done with their menu, they've really kept relatively the same pallet of ingredients. They add a little bit of stuff here and there, but now, you look at all of these new dishes, these lifestyle bowls. There's so many different ways you can go about it now eating at Chipotle.

To me, this is right in line with what they've been doing and it's right in line with really what they stand for. It's like when they introduced sofritas to the menu, for folks who were looking for a meatless option. That was a limited time only, they tried it, people liked it, it went away, it came back. I think they do a very good job of trying new things, bringing them out, seeing how customers like them. If customers like them, they always have the option of trying to introduce it like a more constant offering on the menu or they can always just offer it as something that is a limited time, and that limited time perhaps creates a little bit more interest. I think at this time of year, probably some folks are making some resolutions to eat better and maybe this is a move that homes in on that a little bit. But I never ever dismissed any menu innovations that this company tries, because going back to what we were talking about with Roku, I feel like, even when they mess it up, they figure things out, they learn from it, and then they introduce something that can be better. Whether it succeeds or not, they're going to glean data from this rollout that is going to make their menu even better, I think, going forward. As a longtime shareholder, I continue to applaud all of these innovations that they can keep rolling out.

Hill: By the way, shortly before we started recording, McDonald's came out and announced the date, February 24th, the rollout of the much anticipated crispy chicken sandwich. We're just over a year into Chris Kempczinski's tenure as CEO of McDonald's. You and I have talked about this before, this is item No. 1 for that group of independent franchisees when they sent that letter to McDonald's saying, this is what we want. It's maybe taking more time than they had hoped for, but it's coming in late February.

Moser: Hey, listen. There's a lot of power in a well-executed chicken sandwich. We have seen, obviously, Chick-fil-A's built a wonderful business around it, Popeyes. That has just continued to be a phenomenal driver for them, and it really is all a matter of execution. It seems like it'd be easy, just a lot of chicken sandwiches up there, but hey, remember, Goldman Sachs dropping some big coins there on Zacks. It's trying to grow that Zacks, we probably talked about that a couple of weeks back on the show. This is not a slam dunk. You get out a lot of companies out there that do chicken really well, so McDonald's is going to have to bring in an A-game.

Hill: I think in the case of both Chipotle and McDonald's, the subsequent conference call when the results of the cauliflower rice and the crispy chicken sandwich, when those get baked into the earnings results, that's absolutely going to be the first question out of the gate for both of those companies, isn't it?

Moser: It's the questions I would be asking, Chris. [laughs] I don't pretend to represent all of the analysts out there, but I think you and I are on the same wavelength there.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in the stocks they talked 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.