Pizza PR Problems, Private-Equity Postulation, and More
In this MarketFoolery podcast, host Mac Greer is joined by analysts Jason Moser and Taylor Muckerman to put some of Wall Street's more interesting news items into context for investors. First, they consider the efforts now underway at Papa John's (NASDAQ: PZZA) to fully separate the pizza company and its image from founder John Schnatter -- a particularly tough task given the degree to which the man is the brand.
Then, they discuss why recent buyout rumors around aluminum parts manufacturer Arconic (NYSE: ARNC) make sense, examine Bank of America's (NYSE: BAC) latest earnings beat and whether the stock is a good investment, and answer a listener's question about the war on cash. And, given that this is the week of Prime Day, they have to talk a bit about Amazon (NASDAQ: AMZN).
A full transcript follows the video.
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This video was recorded on July 16, 2018.
Mac Greer: It's Monday, July 16th. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Motley Fool analysts Jason Moser and Taylor Muckerman. Gentlemen, happy Monday!
Taylor Muckerman: Hey, now!
Greer: How are you feeling? Good weekends?
Muckerman: Great weekend!
Jason Moser: Good weekend, kept busy.
Greer: Great weekend, can't complain.
Moser: What made it so great? You have to elaborate a little bit here.
Greer: I was going to get this later, but I basically detailed one of our cars. Not professionally, but I really got in there, cleaned out the inside. It was incredible.
Muckerman: It feels good. It feels really good.
Greer: It was so good that I kept making my wife come out and look at it. She was like, "No, I saw it earlier." But I'm the guy that does the good thing and wants to the victory lap.
Moser: Here's the question, this is the test: were Q-tips involved?
Greer: It's interesting, they are not. That is phase two. Is that your recommendation?
Moser: Oh, it's multi-phase.
Greer: Well, now that you've introduced that idea. I just made up phase two.
Moser: You get the Armor All and the Q-tips and you really go to town in the little nooks and crannies where kids get gummy bears stuck and things.
Muckerman: The cup holders in the back seats, yeah.
Greer: Good, it sounds like I have some work to do.
Muckerman: [laughs] Next weekend.
Greer: Guys, on today's show, we're going to talk a little about the war on cash and Amazon's Prime Day officially kicking off. We're going to get into that.
Let's begin with the ongoing soap opera that is Papa John's. This story is a mess. More fallout from reports that founder John Schnatter used a racial slur, the n-word, in a conversation with the company's former media agency. That happened last week, Jason. Schnatter acknowledged using the slur. He said it was in the context of a training exercise. And, he resigned as chairman.
Now, Papa John's has decided to evict Schnatter from the company's headquarters. They're scrubbing all of their marketing, trying to get rid of him from all of their marketing materials, and they're going to review all the ties that the company has with him. But the company is named Papa John's! What do they do?
Muckerman: What isn't tied to him?
Moser: Like you said, this is a really tough situation. I think they are ultimately doing the right thing in trying to take action here quickly, as opposed to deliberating what they may or may not want to do. He's already fanned the flames in regard to other issues, whether it was the NFL situation ... he's had a really not good couple of years.
I think this really shines the light on the risks involved with any business where the individual is so closely associated with the brand. I mean, it's in the name, Papa John's. His likeness is on the pizza boxes. I think they're smart to try to get out in front of this thing and erase his existence. I don't know that people were buying the pizza because of him. I think people buy the pizza because they either like it or it's just really easy to do it from the app on your phone.
Greer: And they are getting his face off the boxes.
Moser: This just gives you the opportunity to set this business up for success for many years to come, if you can navigate this de-affiliation.
Greer: Taylor, what do you do here, if you're Papa John's?
Muckerman: I don't know. That's tough. It's certainly going to involve some costs. They'll probably have to retape every single commercial they've had over the last five or ten years. Probably won't be seeing any Papa John's spots during your commercial breaks over the next few months. It seems like they're going full bore. It'll probably be a little costly. They're going to be busy over there in the Papa John's marketing department.
Moser: He owns a good chunk of shares. That doesn't mean he can do whatever he wants to do. Really, that is the benefit of having a board and having leadership that is somewhat separated from executives or founders. You're not just stuck with one person calling all the shots.
Muckerman: Peyton Manning is no longer a quarterback. He sold his stores, but maybe he could come out of retirement and be the new CEO of Papa John's. [laughs]
Moser: What's the over-under on Peyton Manning starting some Pizza Hut franchises now that Pizza Hut is the NFL --
Greer: Do you rename it Peyton Manning's Pizza? Or PJ's?
Moser: [laughs] I think a lot of people would probably still feel like Peyton and John are a little too ...
Greer: Too tight.
Muckerman: They're still friends, yeah.
Moser: There's too much association there.
Greer: This quote really struck me. Papa John's is based in Louisville, Kentucky. A former Papa John's marketing director, a guy named Gary Langstaff, had this to say about Schnatter's problems. He said, "When you have an ego the size of Louisville, you say things without considering the ramifications."
Moser: Certainly.
Greer: I this once again -- I have to trademark this, it's the Mac Greer Humility Index. This guy lacks humility. He has a big mouth. When you throw in the racial insensitivity, then you have a bad, bad combination.
Moser: I kind of like that. Say that again, the Mac Greer ...
Greer: It's the Mac Greer Humility Index. The most humble CEOs I know, like Jim Sinegal -- not that I know a lot of CEOs, but just go with it.
Moser: [laughs] OK, I was waiting until this conversation was going toward Costco.
Greer: It's hypothetical. I just think that humility is a business advantage. It's not just a nice attribute, it's a business advantage.
Moser: I 100% agree, and I like that you're coining phrases with your own name in them.
Muckerman: That's true. Very humble.
Moser: It's a very humble act.
Greer: That's so true. I'm pathetic.
Moser: Last week, I was looking at Costco's June comps, remember? I was showing you, that was what we coined the Mac Greer Effect. It was your bump on Costco's sales --
Greer: OK, let's get my name out of it. I don't want my name in it.
Muckerman: MGHI.
Greer: It's a fair point. Gosh.
Moser: I think you have hit on a very important issue, in all seriousness, because clearly, he lacks the humility needed. I think you see other CEOs out there, they're figuring out ways to tap dance around these types of things, too. Let's use Elon Musk as an example, because recently he got in a skirmish on Twitter and blah blah. That's not the first time he's done that. You look at Elon Musk and Tesla. Now, Elon's likeness is not used for Tesla, and Tesla doesn't have his name in it, but that association is so close that he has to be very careful with stuff like that.
Muckerman: Oh, for sure.
Moser: And whether it was this back and forth with someone in regard to the cave rescue, or it was the political contributions --
Muckerman: The Republican Super PACs, yeah.
Moser: You see people on Twitter now going crazy, like, "I'm canceling my Tesla because I don't want to have this," and it's like, whatever. But, you see the problems when you have a company that's so levered to the individual. The individual has to be able to temper themselves. You have to learn when to just shut your mouth. In today's day and age, it's very easy to be heard anywhere, anytime.
It's easy for us to sit here and say it, I think it's a little bit more difficult in practice. People who are that successful, particularly that quickly, I mean, part of it is the hubris that got them there. Having to figure out how to temper that is, maybe, a little bit more difficult.
Greer: I'm going to take your advice. Now it's just the Humility Index, and I'm not trademarking it. Anyone can use it.
Moser: I'm keeping the Mac Greer Effect for my own purposes.
Greer: No! I want that out! I wish I had never said that! I apologize. Shares of Arconic surging on buyout rumors. Taylor, when I heard this story, my first big question was, what is Arconic? Then I did some crackerjack research. They make aeronautical parts out of aluminum. This is never a phrase you want to see -- a Bloomberg characterized Arconic as a "beleaguered manufacturer."
Muckerman: This company was born out of Alcoa, which is traditionally the company that kicks off earnings season every quarter. They split this company in half not too long ago. Alcoa kept the aluminum-producing side, Arconic got the aluminum parts manufacturing side.
As you mentioned, aerospace is big, automotive is very big for this company. Haven't been performing as well as one would expect, given the growth in aeronautical spending and the continued surge in the automotive sector. This all started in January, when the trade talk started emerging, and aluminum and steel prices plummeted.
This company, until this morning, was down about 50% from its 52-week high back in January. Tough time for shareholders, and likely why the private equity groups that have been mentioned, one being Apollo, are rumored to be interested in buying this company out, as the share price has taken such a dive.
Greer: If you're a shareholder right now, what do you do? Do you get out?
Muckerman: It's tough to say. I don't know if you're going to see much more price appreciation in the near-term if these trade talks continue this way. I'd say, keep holding and wait to see if there's a competitive bid. They mentioned multiple companies out there are rumored to be interested. Maybe you get a private equity bidding war, drive the share price up a little bit more. But in terms of the global markets and the stock price, I don't see too much more appreciation until the trade talks are tempered.
They did just sign an extended big contract with Boeing this morning. That could also have an impact on the stock price today. But that's not necessarily enough to get me over the weight that's being held down on aluminum prices right now.
Greer: Jason, a good day for Bank of America. Shares up on better than expected earnings. What's the story here with BoA?
Moser: Not a bad quarter at all. Love them or hate them, I think these guys have come a long way since the financial crisis. We remember, it wasn't all that long ago where we were at a point where we were talking about nationalizing our banks here. I think we saw Bank of America touch around $3.50 per share at that point, because there were questions as to whether it would even be able to continue on in its current form.
I think Bank of America has done a good job of capitalizing a little bit on Wells Fargo's mistakes. Bank of America, for a long time, was the easy name to drag through the mud, and Wells Fargo was the better bank.
Greer: The wagon, it was Old Reliable, that wagon. [laughs]
Moser: Yeah. [laughs] We've seen that conversation change considerably. Consequently, Bank of America continues to grow total average deposits consistently, quarter in and quarter out. That's good.
The problem that big banks are going to have here is, as we get into this environment where interest rates start to rise, that gives banks the ability to make a little bit more money on their net interest income line, because they can earn a little bit more money than they're actually paying out.
If we look at our personal savings rate today in this country, it's around 3%. It's at an all-time low, basically. People aren't saving money. Part of that is, maybe, people don't feel like they have as much money to save. I think part of it is, when you look at something like a traditional savings account today vs. what we grew up with, a savings account is not a way to generate wealth anymore. You're not going to see any competitive interest rates in a savings account, not like we used to see, at least. So, it doesn't surprise me that there aren't as many people socking away as many dollars in savings accounts and whatnot.
I think, going forward, we look at things like index funds, ETFs. Those are, perhaps, better vehicles for wealth generation. An S&P Index Fund, on a risk-adjusted basis, when you consider inflation and everything, I think it's a lower-risk form of saving than an actual savings account, to be honest with you.
Muckerman: It's wild to consider.
Moser: It is wild to consider, but when you look at it over longer stretches of time, if you dollar-cost average into an S&P Index Fund, you're going to do better. You just will. I think, probably, some people are looking at that as an option. Thankfully, Bank of America does have an investment wing in the business. I think they'll continue to be OK. It's a huge bank. But again, we look at these big banks, they're so unknowable, I don't know that I view them as the most attractive investment opportunities.
Greer: Guys, let's keep it on the subject of cash, cash money, and bust open the Fool mailbag. We have a great email from Eric Wallace. Eric writes, "Hey there, can the gang of Fools explain a little more about this so-called war on money? MasterCard, Visa, PayPal (NASDAQ: PYPL) owns Venmo. Everyone loves some Venmo. My wife uses Venmo. Everyone but me, for now, uses Venmo. How does all this fit in?" Eric goes on to ask, "How is PayPal/Venmo not going to crush the rest? Do we need all these cards aside from the mileage and benefits cards?"
Moser: It's a good question. I think the initial way to approach something like this is to view it as not being a zero-sum game. It's not a market where there is going to be just one winner. That was the purpose behind the basket. When you look at this market opportunity --
Greer: The Jason Moser War on Cash Basket. [laughs]
Moser: Sure. You said, it not me. I'm going to maintain some humility here. I think it was more about, a number of these companies, identifying their position in the value chain, and then recognizing their competitive strengths.
Greer: And what's in the basket?
Moser: People are probably sick of it at this point. You're going to get sick of it next week, too, because next week, the basket's actually a year old, Mac. It's MasterCard, Visa, PayPal and Square. The basic idea is, buy all four companies in equal amounts and just let the basket go. That way, you're not trying to pick just one winner. You can pick a lot of winners.
To the point on PayPal -- I like PayPal a lot, don't get me wrong. Actually, in the basket thus far, since inception, while Square is outperforming them all, MasterCard is outperforming PayPal. It's worth noting, too, that all four companies are outperforming the market individually, so it's done well.
I think the basic idea behind the basket was, instead of trying to pick one winner, try to pick a few of the companies that we know are really leading the way. If you can put your money down on four winners, maybe that's a risk-friendly way to get exposure to the space and participate in what I think is one of the bigger long-term trends out there, and that's this move away from cash toward more electronic payments.
Muckerman: War on cash, not war on money.
Moser: Very good point.
Greer: Guys, let's close with Amazon's Prime Day, which is officially here. We have 36 hours of deals exclusively for Prime members. Jason, we're going to talk about what we want to buy in a minute. First, as an investor, as an Amazon shareholder, how meaningful is Prime Day? How much attention should I be paying?
Moser: I think it's important to recognize the strength of Amazon as a business, that they can do this. They're essentially just like, when you go in the bathroom in the morning and you turn on the water on your sink, Amazon can just turn the water on at any given point in time, and sales come out. This is just sales. I think, as an investor, it's important to note how easy it is for them to execute this. They're making it a little bit longer this year, 36 hours.
Muckerman: Yeah, a day and a half.
Moser: It doesn't cost them anything to do that. It's just a little additional marketing and awareness. It really does create a more powerful brand in Prime, I think.
Muckerman: I'll be interested to see how the third party sellers get involved and continue to grow that marketplace that's not necessarily tied to Amazon and their own inventory. It's more or less people using it as a platform to sell and then pay Amazon a fee in response.
Tons of buzz around this, and now you have Whole Foods involved. I certainly don't think it's a make-or-break for the company, but you definitely don't want to see a year over year decline in the use of Prime Day, because that might signal something. But, I'm just looking forward to seeing all the Amazon boxes in my condo stack up in the next couple of days.
Greer: [laughs] Nice. So, what are we buying?
Muckerman: I don't know. I don't have anything in particular in mind. But it's nice to poke around, see if you can find some gift ideas for folks over the summer; some birthdays, anniversaries, stuff.
Moser: I have a specific thing in mind. I spent the weekend doing some repair work to our deck at our house. The next task for me is going to be, I'm going to basically replace all of the boards on our front porch. Our front porch is 40 feet long.
Greer: That's impressive.
Moser: It's long, it's a lot of wood. I have to go in there, take all the stuff out, put all this new in. I'm getting a nail gun, because there's no way. That's 40 feet of a lot of nails, so I need a nail gun to do it. I got my $10 credit from the purchase I made at Whole Foods last week. I'm getting me a nail gun.
Greer: That's great. Do you have those skills? Or is this -- because, I do not. You do not want me putting your porch in.
Muckerman: You could trade car washes for porch repair.
Moser: [laughs] You know, I grew up, I was a BMX guy. Not Motocross, but bicycles. So, when I was a kid, I built a lot of ramps. That was a lot of wood and nails. When you're talking about decks, you just throw a few joist hangers in there. It's just kind of putting pieces of a puzzle together.
Greer: I'm going to stick to the detailing. Baby steps. Q-tips. That's what I need to find. Maybe you have suggestions -- I want to find some new, great cleaning product for the interior of cars. Armor All is great, and I got this other thing from Amazon that I like. But I know there's something else. If anyone out there has a suggestion that gets the muck out --
Muckerman: Hey, now!
Greer: Anything you can recommend, marketfoolery@fool.com. Or, actually, if you have questions or comments about other stocks, marketfoolery@fool.com.
Moser: I have what you need. Getting the muck out, the gunk, sticky stuff, you have to get that Goo Gone. It's orange-scented. It's called Goo Gone, it's an orange-scented cleaner that removes gum, gummy bears, whatever it is. It does it pretty well.
Greer: I like that. OK, Jason, Taylor, thanks for joining me!
Moser: Thank you!
Muckerman: Salud!
Greer: Thanks, as always, for listening! People on the show may have interests 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 it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer, but I don't like to talk about myself. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Moser owns shares of MA, PayPal Holdings, SQ, TWTR, and V. Mac Greer owns shares of Amazon and SQ. Taylor Muckerman owns shares of Amazon, PayPal Holdings, SQ, TSLA, and TWTR. The Motley Fool owns shares of and recommends Amazon, MA, PayPal Holdings, SQ, TSLA, and TWTR. The Motley Fool owns shares of V. The Motley Fool has a disclosure policy.
