What's Going On With Chevron and ExxonMobil?

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Jason Moser to discuss the latest news regarding the CEOs of Chevron (CVX 0.57%) and ExxonMobil (XOM 0.39%) talking about a potential merger. Also, McCormick (MKC 0.44%) serves up higher sales in the fourth quarter.

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This video was recorded on February 1, 2021.

Chris Hill: It's Monday, February 1st. Welcome to MarketFoolery. I'm Chris Hill, with me today, Jason Moser. Good to see you, my friend.

Jason Moser: Good to see you.

Hill: We've got a preview of Amazon's earnings, we're going to dip into the Fool mailbag. But I'm going to start with something that happened yesterday, a quiet snowy Sunday here in the greater Metropolitan Washington, DC area. It was lovely, it's nice to just look outside and see the snow falling in a place where snow doesn't fall very often, and I was snapped back into reality at some point during the day when I looked at Twitter and saw the news reported by The Wall Street Journal and Reuters that last year, the CEOs of ExxonMobil and Chevron discussed the possibility of their two companies merging, and I wasn't around in 1911 when Standard Oil was broken up, but I've studied enough of my business history to know that, well, to inform, that was my first thought: I was like, "Oh, we're getting the band back? They're going to rename the company Standard Oil?" What did you think when you first saw this news?

Moser: Well, the first thing that came to mind was Rockefeller and Standard Oil. Time certainly has changed since Standard Oil. The world is slowly but surely evolving its energy policy, and it's clearly going toward renewables, things like solar, and wind, and batteries, and further away from fossil fuels. I mean, that's no secret. Now, I think the timeline is such that it's going to take a while to get there. When you think about fueling the entire plant, it's not just cars. We're talking about all sorts of different things that really need to be powered. To me, actually, I could see a world where this does make sense. Part of it is because this industry is one where scale really, really counts. Furthermore, you have two businesses here that really aren't "lighting the world on fire" either. You look at Exxon over the last five years, the shares are down about 40%. Chevron, I think relatively flat over that same time period, and they have just become smaller companies. They are just not the behemoth that they used to be. To me, I feel like this probably would've been a little bit more realistic had they done it or tried to do it a year ago. I'm not sure it would really pass muster in this current political environment. I think that the scrutiny would probably be a little bit too great. Particularly as the Biden administration has really got fossil fuels in the crosshairs. But I could see a world where this actually made sense.

Hill: You just went through the journey that my brain went through from the time I saw this news yesterday till this morning. It's not to say that I've talked myself into it, but for some of the reasons you mentioned, it doesn't seem like a nonstarter. I think it's a little telling that to this point, anyway, neither company is commenting on these reports.

Moser: Yeah.

Hill: There's no indication that these are ongoing talks but the fact that they're both keeping their mouth shut about this makes me think they're open to the possibility of this happening in the future. To your point, the resulting company, if these two companies were to merge today, the resulting company, $350 billion. I'm not suggesting that's a small company. I'm saying however, that's a lot smaller than it would've been a few years ago, and a lot smaller than some of the companies that are very much in the crosshairs of Uncle Sam and the regulators.

Moser: Yeah, absolutely. Part of that has to do with the current environment that we're in of course. Exxon and Chevron, I think both companies are guilty of at least not explicitly investing in the future of energy to the degree that other companies out there are doing. It's interesting when you think about the future of energy and the companies that are out there really trying to push that envelope. Tesla obviously is one that comes to mind, but you look at companies like Apple, and Amazon, and Microsoft (MSFT 1.65%), for example, that are building out their own sorts of energy supply in the renewable space to help fuel their businesses. I think you could argue that Exxon and Chevron really have been focused on fossil fuels. That's where they've been placing their chips for the past several decades and it feels like that's probably the immediate future for them. Now, let's fast-forward to a world where interest rates are considerably higher. Let's fast-forward to a world where energy prices start to go up and investment in that oil and natural gas space starts to make sense again. Regulations can only limit that investment and that production so much. We still need fossil fuels to a degree. Those two companies together in a world of somewhat limited supply and higher prices, again, now you're starting to see a little bit more of an edge there with two real behemoths, a lot of expertise in the space, and a lot of resources at their disposal. That could be very difficult to compete against. Maybe it's something where the focus is less on the competition side of things and more just about that long-term view of, we're trying to steer ourselves away from fossil fuels, but again, I go back to, yes, we're doing that, but that is a slow process, it's going to a lot of time. We are going to rely on fossil fuels here for several years to come and so yeah, you could see in the right environment where these two companies together could really rule the roost, and all of a sudden that $350 billion market cap is probably inching closer toward $500 billion or higher. But yeah, again, it will be interesting to see how this plays out.

Hill: Our email address is [email protected], and an email from Eric Good in Culpeper, Virginia, "Hi guys. Hope all is well. Will you please discuss McCormick's results? They look strong on my end to continue making this a long-term holding." Just to anchor to that last phrasing there, Jason, I can't imagine anyone looking at McCormick as anything other than a long-term holding. I say this as someone who doesn't own shares -- I promised myself I wasn't going to talk about GameStop today and I'm going to break that promise. I feel like increasingly over the past 12 months, it's really come to ahead, the past couple of weeks, the possibility and, in some cases, the probability of newer investors having their expectations completely out of whack. I'm referring to people asking questions like, "Hey, I'm thinking about buying this stock. Do you think it could be a 10-bagger in the next three years?

Moser: Yeah.

Hill: What are you talking about? You asked that question like it's normal. That's not normal. Readjust your expectations. I've gotten a little far afield of Eric's question, but I think that's the right way to think, not just about McCormick, but a lot of businesses, but particularly about McCormick, because this is not a flashy business, but this is an incredibly steady business.

Moser: It is, and to your point, I think there's a lot to be said for the current environment and the expectations that it's creating and those are misguided expectations that will be checked and I think recalibrated here over the course of the coming years. To me, what we're going through right now is a real testament as to why we invest the way we invest here at The Fool. To me, McCormick is just one of those perfect examples of not a business that it's going to double overnight, it's not one of these SaaS digital edge, Cloud plays where you're looking for a 10-bagger here in the next several years. It's one of those businesses where you can put your investment dollars to work; you can feel good about knowing that this is a business that is run well but holds a very strong competitive advantage and over time, over years, it'll be a business that continues to compound. In regard to the quarter, yes, it was a strong quarter, I think, and McCormick has absolutely been capitalizing on this shift toward cooking more at home and I think that's something that played out all throughout 2020 for the most part, it's going to be something that plays out to maybe a lesser extent in 2021, but they seem to believe, management seems to believe there that that trend is going to stick. A lot of people have realized that, "Hey, maybe this is something I can do. There are ways to feed myself without having to necessarily have it delivered or go out to dinner every night."

When you look at the results from the quarter, sales were up 4% overall, earnings-per-share of $0.74 in the fourth quarter versus $0.79 from a year ago. Clearly, they're dealing with some headwinds from COVID and the general economic environment, particularly when it comes to the flavor solutions side of the business, the part of the business that focuses more on the big customers, restaurants and whatnot because restaurant traffic has been so hindered, but growth in the consumer segment has been strong. That was up 5%. I tell you, the one thing that we've been talking about over the past several years since they made that big RB Foods acquisition, and that was a $4+ billion plus deal. If they were able to integrate that acquisition. Keep things going in the right direction, when will the next acquisition happen? We didn't really hear a whole lot for a while.

But then, lo and behold here, the last [laughs] couple of months of 2020, they pulled a couple of fast ones on us. I mean, we know about the Cholula acquisition, they bought Cholula, and hats off to that. I think that's a good acquisition, it gives them another presence in that hot sauce market and Cholula is a very popular brand. But another business that they acquired, this probably slipped under a lot of people's radars, a company called FONA. FONA, essentially is in the business of creating and producing flavors for many of the largest food, beverage, and nutritional companies in the world, and so this was a bit more of a play for their flavor solutions business, but it gives them more capacity, more talent, it gives them more infrastructure to produce at a greater scale and continue to grow that footprint. McCormick is the market leader in this space, regardless. These acquisitions are about $1.5 billion in acquisitions that they made here over the past couple of months. These will be the next -- we're going to watch and digest, no pun intended, these acquisitions over the next year or so. Assuming the integration goes well, I think we'll continue to see that growth chug along. But as far as the expectations go, this is a dividend aristocrat, they raised their dividend again for the 35th consecutive year. Shares have doubled over the past five years. Again, it's just a sleepy pig, but again, as a market leader in the space, and everybody's got to eat, Chris, and we like our food to taste good. This is a great way to play that trend.

Hill: You look at the acquisitions and I think that we've talked for years, regardless of the industry, acquisitions can be tough to pull off well. To me, if you're a dividend aristocrat, I'm not saying it gets you a pass on all acquisitions, but you don't get to be a dividend aristocrat unless you have figured out how to be good at capital allocation. I just feel like McCormick is one of those businesses. Again, not to give them a pass, not to say that they can't screw up an acquisition or overpay for one, but I think that you got to give dividend aristocrats a little bit more of the benefit of the doubt when it comes to the acquisitions that they're making, because they've got that demonstrated history. Real quick before we move on. You mentioned the flavor solutions part of the business. I think that's, we've talked about this before, that's the easy to overlook part of McCormick's business because anyone who's been to a grocery store and walked down the aisle, it's pretty easy to see the consumer-facing business. But I think that gets to why, at a time when so many people are cooking more at home over the past 10 months or so, that's why the stock really hasn't shot to the moon. It's up about 7% over the past year. But it's because that B2B part of their business has been pulled back. Is that something you look at as, that can be the catalyst for shares of McCormick over the next, let's call it, 12-18 months?

Moser: I think it can be, yes. I think they are going to see that flavor solutions side of the business continue to pick back up as 2021 progresses. I think they feel like that is going to be a relatively tempered recovery, because the feeling is that the consumer side of the business will continue to perform based on the trends over the past year. And I mean, that's really one of the beautiful parts of this business, is it can win a couple of different ways here. It's not just restaurants that are really part of that flavor solutions business. When you go up and down the grocery store aisles, you see those meal kits or you have meal kits sent to you or whatever. That's part of that flavor solutions side of the business. They really do have a position in so many different aspects in regard to the food service businesses. It's just really impressive. To top it off, and we've talked about this move toward digital in this digital economy that's developing here. Worth noting, e-commerce sales from a quarter to the quarter rose 136%. I bet you most people wouldn't have even thought they had an e-commerce business. But the fact of the matter is they have an app that's pretty slick and they do have an e-commerce business and you know what? It seems like it's working.

Hill: We've got more big companies reporting earnings this week including Alphabet, PayPal, Qualcomm, and after the closing bell on Tuesday, Amazon will be out with its fourth-quarter report. Amazon is guiding for revenue in the range of $112-$121 billion. I'm pretty sure that no matter what they report, the stock is going to be down Wednesday morning, just because [laughs] that's how it went last year [laughs] with their fourth-quarter report. This is a stock that has appreciated to a nice degree over the past 12 months. What are you going to be looking at in their report?

Moser: It is a stock that has done very well, obviously, very happy shareholder here. I always think it's interesting beyond the sales guidance that they set. When you look at the actual operating and income guidance, the range there always makes me chuckle, because they're calling for a range between $1 billion and $4.5 billion. There are a lot of different ways that could go from the profitability side, but that's never really been the point with Amazon anyway and I don't think that's really going to be the point this time around. For me, my eyes immediately, just every release, my eyes scroll past all the headlines, all of the language in the release. I go down to where the numbers are, in the tables, and I look for how AWS, the Amazon Web Services side of the business is performing. Because to me, that's the story here. We know how strong Amazon's North American retail business is, we know how strong their international retail business is becoming. But when you look at how important Amazon Web Services is to the business itself, the overall business, it's pretty impressive.

You think about the fourth quarter last year, Amazon Web Services sales revenue of $10 billion and they recorded operating profit of $2.6 billion or so, about 26% operating margin. The North American retail side of the business, $53.7 billion. Yet, operating profit of just $1.9 billion, that is a 3.5% operating margin. 26% versus 3.5%; the numbers tell you the story there. For a company that chalked up $4 billion in operating profit for the quarter, you can then see that Amazon Web Services was responsible for a considerable portion of that. I'm not sure whether the stock goes up or down based on the retail news, but I do think every quarter, when we see Microsoft report, we see Alphabet report, we see Amazon report, and we see the progress all three businesses are making in their cloud services, for a long time, it really was Amazon's game. But now, we're seeing companies like Alphabet, Microsoft continue to pick up share. I wonder if a little pressure on that number for Amazon wouldn't cause them some problems, at least in the near-term. It's not to say it would impair the business at all, but I think when you look at Amazon as a whole company, it has a $1.6 trillion market cap on about $350 billion in sales. Walmart has a $400 billion market cap on $550 billion in sales. Walmart, I think we've established, we've talked about it a lot over the past couple of years. Walmart is doing a wonderful job, strong business, great track record. It just goes to show you how important really, I think that Amazon Web Services side of the business is for Amazon.

Hill: Both Apple and Microsoft have jumped into the dividend-paying pool. Who do you think is going to be the last one standing to not pay a dividend? Do you think Alphabet pays a dividend before Amazon?

Moser: That's a tough one. I think Alphabet would pay a dividend before Amazon. The only reason is that I feel like Jeff Bezos would probably be able to hold out just a little bit longer and say, "You know what? Man, I've built this business on reinvesting every penny I've got and then some." It is obviously a very well-diversified business in regard to Alphabet. Alphabet, it's an advertising play, and they offer a bunch of different services, but they make their money via advertising. I don't think Alphabet merits the same reinvestment that Amazon does today at least. I don't think I see either one of them paying a dividend anytime soon, but I feel like Amazon's probably the last man standing.

Hill: I'm not holding my breath, but [laughs] I think Bezos -- in the same way that James Sinegal at Costco was like, "They're going to raise the price of the hotdog and soda over my dead body." I feel like Bezos [laughs] is like, "No, no, no. No. There are other ways to invest this money."

Moser: Yeah, it's an [---]. I just don't think he does it.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

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, this show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening, we'll see you tomorrow.