Following its recent acquisition of Lorillard, Reynolds American(NYSE:RAI) enjoys a much needed cash windfall as it sells the international rights for its Natural American Spirits cigarette brand to a growth-hungry Japan Tobacco (NASDAQOTH:JAPAF).
To accompany that cigarette, Keurig Green Mountain(UNKNOWN:GMCR.DL) fans can officially purchase the new Kold beverage system online for $369.99 to brew their own Coca-Cola and other carbonated drinks at home. What should investors expect from the launch?
And at Comcast (NASDAQ:CMCSA), the leading U.S. cable company is turning to its theme parks division for opportunities in the burgeoning Asia market as it searches for new investments since its failed buyout of Time Warner Cable.
A full transcript follows the video.
Sean O'Reilly: We're paying $370 to make our own glass of Coca-Cola, on this consumer goods edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly here from Fool headquarters in Alexandria, Virginia. It is Tuesday September 29, 2015, and with me today is the legend -- wait for it -- dary, Vincent Shen. How's it going, Vince?
Vincent Shen: I'm doing well, Sean.
O'Reilly: I was watching How I Met Your Mother reruns last night with my family on Netflix, and I just had to do it.
Shen: That explains it.
O'Reilly: We've got a bunch to touch upon today, including the much-hailed release of the Keurig Kold, Comcast is buying a theme park, but first, Japan Tobacco Group is buying the international business of Natural American Spirit for $5 billion from Reynolds American. Vince, Reynolds couldn't actually be hurting for cash, so why are they doing this?
Shen: Actually, the rationale overall for both these guys is that it's a good deal on both ends, I think. On one hand, Japan Tobacco is looking for growth and, on the other hand, Americans' debt balance is up quite a bit since funding their acquisition.
O'Reilly: So they are hurting for cash in a way.
Shen: Their debt balance is up to about $18 billion as of the most recent quarter.
O'Reilly: That is a chunk of change.
Shen: Reining in their dividend payout ratio, reining in the debt levels, and potentially allowing them to reinstitute their share buyback program, that $5 billion ...
O'Reilly: Are they trying to pretend that they're an Altria? The reason I said what I said was because tobacco is notoriously cash flow positive. It rains money. It just surprised me that they had a debt balance like that. What's the deal?
Shen: It's from the acquisition. Lorillard cost them about $25 billion, and they had to take on a lot of debt to close that deal, and make the acquisition, which ultimately strengthened their portfolio of brands and was a very important deal for them. As you mentioned, Reynolds American will receive about $5 billion from this deal and Japan wants those ...
O'Reilly: This is just the international rights we're talking about.
Shen: Exactly. The international rights for Natural American Spirits, because it's enjoying really good growth. The brand is generally considered a premium brand, it's known as being additive free, sometimes organic for some of their offerings and obviously that's very popular right now. Especially among younger smokers.
They're seeing a lot of success with the brand in places like Japan, Germany, Switzerland, the U.K., Spain, and Japan Tobacco isn't a stranger to these kinds of deals. It's seeing smoking rates in its home market decrease among both men and women significantly.
O'Reilly: In Japan.
Shen: Right. In Japan, its home market. It's going international to fuel growth. Previously, it acquired international operations for brands like Camel, Winston, Benson & Hedges. Again, no stranger to these deals. Some of those were really big, around $18 billion -- $5 billion for Natural American Spirit -- there's a report from Wells Fargo, and they mentioned a really interesting number where Natural American Spirits in Japan has seen volume growth of 36% compounding annual growth rate over three years.
When you think about the purchase price of $5 billion, the fact that international American Spirit business only did about $150 million in revenue for 2014. That's paying 30 times plus sales. The reason for that is that growth.
O'Reilly: What's the benefit for Reynolds other than paying down debt? Is that pretty much it? I'm surprised they wanted to give up their growth, but that's a big price tag.
Shen: The thing is, it's kind of a surprise reduction to shareholders for that debt balance, like I mentioned. They're holding onto the domestic rights for American Spirits, which is by far the biggest market. It's one of the strongest brands that they have in their portfolio. They get to hold onto the high growth of American Spirit within the U.S., which I believe has doubled since 2009 in sales.
Realistically, this works for them and what they need to manage their balance sheet, and at the same time, they could hold onto that growth with the American Spirit brand, and Japan Tobacco benefits with what they need to grow internationally as well.
O'Reilly: Cool. Before we move on, I wanted to point our listeners to our brand-new focus.fool.com redesigned site. There you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners.
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Moving on to Keurig Green Mountain's Kold finally hitting the market. Oh, boy! For our listeners that may or may not be aware, this is a story we've talked about before. Vince, real quick, run it down for them. What's the Kold? Why is it so expensive?
Shen: OK. We talked about this not too long ago.
O'Reilly: Yeah. It was probably a month at most.
Shen: I think we looked at it overall in terms of Keurig's business. Keurig officially released the Kold today. You can go on their website ...
O'Reilly: Online, I assume.
Shen: You can go on their website and buy it. The price direct from Keurig is a surprising $369.99.
O'Reilly: Even in investor presentations they were talking about $299. That's what it is with promotions.
Shen: Direct from Keurig, it's $369.99. You can get it through other retailers with some promotions that will bring that price down.
O'Reilly: "In limited quantities!"
Shen: To $299.99. They're also going to be releasing it in some of their certain key markets over the next few weeks. That includes Atlanta, Boston, Chicago, Dallas, L.A., and New York. We've talked about some of the perks that they're going to enjoy.
O'Reilly: Yeah. Again, for listeners that may not be aware; everyone's heard of the Keurig machines. Somebody we know owns them and you can make a hot beverage with the little pods whether it's a knock-off pod or not, but you can make a cup of coffee, hot chocolate, or whatever. With the Kold, it's a cold beverage. Arguably, it's cool because Coca-Cola owns 16% of this company.
Shen: 17%, yeah.
O'Reilly: Yeah. 16.8%. You can make your own glass of Coca-Cola, Sprite, or whatever in your house. What are the prices of these pods?
Shen: I think that's the big sell here. The pricing system is obviously very high compared to some competitors where it might come in at $80 for that base system, but you get to make a Coca-Cola, or a Sprite, or Dr. Pepper at home. The thing is, 8 oz. serving pods will come out to about $1 to $1.25. Pricewise, that's not competitive when you can buy a pack of cans for $0.30 per can for a 12 oz. serving.
O'Reilly: Right. Are you paying for novelty here? What's the deal?
Shen: I think it's a combination of the coolness factor of this kind of technology where the fact is, between putting your pod in and having the glass of Coca-Cola served it only takes 30 seconds and it will till chill room temperature water to very cold. I think it was around 33 degrees for the carbonation to work properly within that time.
It's very fast and they're touting the technology behind that.
O'Reilly: So this is a very advanced machine?
Shen: It is definitely interesting. That price though. I think it's going to appeal to people who like to have that cutting edge technology a bit, to show off, to do a lot of entertaining and they're not going to be as price conscious.
O'Reilly: Two other things and then we'll move on to our last story of the day here. We didn't discuss this beforehand, but what do you think the over/under is on them getting these Kold machines in at least 5 million homes? We've seen their business model and what they want is to get the machine in as many homes as possible and then the money just comes in from selling the pods. That was 84% of their revenues in the past year.
Shen: Right now, their original Keurig system for the coffee is in around 20 million homes. Management hasn't given a specific forecast for the Kold, but they've mentioned they expect to sell hundreds of thousands of systems within the first year in the market.
O'Reilly: OK. We'll see.
Shen: It's really important that they do hit a sizable number like that because of the fact that the New York Times mentioned that Keurig will spend approximately $200 million developing the Kold system this year and next year.
O'Reilly: That's crazy because I was looking at their capex numbers yesterday, and I was on S&P Capital IQ, and I think their capex last year -- and their fiscal year ended last year in September of 2014 and it was $450 million. So they're spending the money here.
Shen: Of course.
O'Reilly: The other thing I wanted to mentioned because I feel the need to be a coward and hedge my bets here a little bit; all pricing aside on the Kold, the one angle I think they might have something there is that you will be able to make cocktails with this thing. A little bit of margarita. I could see that working for parties, or something. Who wants to bust out a blender at a party?
Shen: The premium pricing for both the system and the pods indicates that they're not trying to market this thing to budget minded consumers. It's for someone who does a lot of entertaining, someone who wants this cool, new technology. Will it appeal? Will it work?
O'Reilly: I wouldn't be surprised if the cocktail ends up...
Shen: We'll have to see. I'm still bearish overall. I just think it's a little too expensive, but I say we need at least a year to see what the sales of the system amount to, and see if it develops a strong foundation of users, and then they could develop their pod sales like they did with the coffee machines.
Right now management has a lot staked on this with the fact that Keurig 2.0 didn't do that well. They've had layoffs, some management shakeups, stock is down 60% over the last 12 months.
O'Reilly: Rough. Moving on to our last story of the day, Comcast isn't satisfied owning NBC, I suppose. They're buying a 51% stake in Universal Studios Japan from Goldman Sachs. What's going on?
Shen: Comcast made one of its bigger international investments for a majority stake in Universal Studios Japan. Comcast does already operate some theme parks through its NBCUniversal name. All those are domestic in Florida and California. It does receive fees for intellectual property and other services from Universal Studios Japan and Singapore as well.
It's purchasing this stake from Goldman Sachs, a bunch of P/E firms, MPK and PHG, and Owl Creek Asset Management. I think this is an interesting look into what Comcast is pursuing now.
O'Reilly: They want to own Harry Potter.
Shen: Since the Time Warner Cable deal fell through, because that was basically their focus for so long and that got blocked by the regulatory authorities and now we're getting a glimpse into what their next steps are.
O'Reilly: We can get the rationale for this deal in a minute, but it almost seems like they're trying to pivot to things that are harder to replicate because content -- you had the new kids on the block like Netflix and Amazon Prime come along spending $5 million an episode and winning five Emmys -- it's a tough world out there in the content world. If you own intellectual property rights to stuff like Harry Potter and you own the best theme parks in the world, you're going to get customers that don't just want to sit at home and watch stuff on TV.
Shen: I think it's important that you mentioned Harry Potter a few times, because Universal Studios Japan opened their Wizarding World of Harry Potter attractions in the past year and that's contributed to a lot of their growth. The park saw record numbers of visitors. They're up 20% to 12.7 visitors for the most recent year.
O'Reilly: That's crazy growth.
Shen: A lot of that's driven by new attractions, but also overall a very robust theme park environment in Japan right now.
O'Reilly: Disney is minting money in their theme parks. People don't realize that of all the Walt Disney Corporation, the biggest chunk of their capex is on new rides. The other thing is, it's a smarter investment, because if you build a really cool ride you get 50 years' worth of value out of it. You don't get that with a movie. How many years have they had the haunted mansion at Disney World? It's been around since 1960 or something.
What is Comcast thinking with this?
Shen: Japan is seeing really robust theme park attendance overall. This kind of extends to Asia overall. NBCUniversal is making plans to open another theme park in Beijing as well. China is becoming the new battleground for Six Flags and Disney.
O'Reilly: Could it possibly be because of the 1.2 billion people with the burgeoning middle class?
Shen: Exactly. There are huge numbers of visitors through that whole region. For Comcast, its theme park segment has been contributing some of its most robust growth recently. For the most recent quarter the theme parks saw revenue grow 25.7% year-over-year, and along with its film entertainment division, those are by far the two best growing segments.
For Comcast to delve out and expand internationally, this is one of their biggest investments so far in that realm.
O'Reilly: I almost wonder if this is the first of many. I wonder if they see the future of theme parks in Asia and have to get in on it.
Shen: It's doing very well for them. Disney has that other park opening in Shanghai soon, which they're expecting to be their biggest park, even bigger than their main attraction in Orlando for Disney World. There's definitely a lot of growth opportunities in China, Japan, and the Asian region overall. There's lots of growth in tourism.
O'Reilly: We're going to have to do a theme park themed show before long.
Shen: I would like to recommend that we go test it out firsthand.
O'Reilly: I'm more than happy to do that. All right. Thanks for your thoughts, Vince.
Shen: Thank you.
O'Reilly: Have a good one. If you are a loyal listener and have questions or comments, we would love to hear from you. Just email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening, and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Netflix, Walt Disney, and Wells Fargo. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Coca-Cola and Keurig Green Mountain. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.