In this Market Foolery podcast, host Chris Hill is joined by senior analyst Jason Moser to discuss a trio of news items. First, they reflect on the soon-to-end tenure of Pepsico (NASDAQ: PEP) CEO Indra Nooyi, who has done a strong job leading the company through a rough period in the packaged-food space, in general, and for soda, in particular.
Next, they give a quick rundown of Berkshire Hathaway‘s (NYSE: BRK-A) (NYSE: BRK-B) status as of its latest quarterly report, which came out Friday. (No shock, Warren Buffett’s company is firing on all cylinders.) And finally, they consider the somewhat baffling news that Facebook (NASDAQ: FB) is talking to banks about a payments feature that would have your bank data automatically accessed by its Messenger app. (Because we all have total trust that the social-media company is taking excellent care when it comes to data security. Right? … Right?)
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A full transcript follows the video.
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This video was recorded on Aug. 6, 2018.
Chris Hill: It’s Monday, August 6th. Welcome to Market Foolery! I’m Chris Hill. Joining me in studio, Jason Moser in the house. Happy Monday!
Jason Moser: Hey, hey!
Hill: We have some earnings. We have some Berkshire Hathaway. Isn’t it just perfect that Berkshire Hathaway sneaks in there?
Moser: I love it!
Hill: It’s so emblematic of Buffett and the way he runs that company that it’s like, Friday after the market closed, very quietly, they dropped the release. We’ll get to that. And we’ll get to and try to figure out what in the world is happening with Facebook’s latest foray into banking.
We have to start with the news fairy news, and that is, Pepsi announced CEO Indra Nooyi is stepping down in October. This will mark 12 years that Nooyi has been CEO of Pepsi. She’s going to stay on as chairman of the board of directors through early 2019. Ramon Laguarta is going to be promoted up to CEO. When you think about her track record, 12 years, the thing that struck me when I was digging around this morning is how closely shares of Pepsi tracked the S&P 500 while she was CEO.
Moser: I’m not trying to give the incoming management any sort of black marks or challenge here, but man, I would not want to be filling her shoes. She set the bar really high. To me, this is a really big loss for Pepsi. I think it’s hard to overstate that. And a lot of that goes back to that track record you mentioned. For the longest time, PepsiCo more or less tracked the S&P. It’s only the last couple of years where we’ve seen a little bit of a drop-off in the performance.
She’s obviously hitting a point in her life where, maybe, she wants to go do other things, or focus on family, or other worldly issues. I think she probably looked at the tasks that are ahead for this company, and the industry in general, and thought, “I’ve done what I can do here. I don’t want to get stuck in this multi-year headwinds battle that I may not be able to ultimately win anyways,” or at least make some meaningful impact that she hasn’t already done for the company.
The company itself is in very good condition, it’s in good shape. I love the fact, we talk about it all the time, that they have that diversity in the salty snacks division with Frito-Lay. That goes all the way back to 1965 or something, when that all came about. To me, the loss of Nooyi as a leader, beyond just what she’s done with this company, she’s a leader in every sense of the word. Very openly communicative, really praises employees, believes in her company playing a bigger role in the world than just making profits for Wall Street on a quarterly basis. A leader in every sense of the word. We talk a lot about conscious capitalism, and I think she has a lot of the qualities that fit in that mold.
Hill: You mention Frito-Lay. When I think about her tenure as CEO, one of the things I thought when I saw this news that she was stepping down was about, at least a couple of times during her tenure as CEO, activist investors coming forward, trying to push her to make a splashy spin-off, saying, “Look, spin off Frito-Lay and focus on Beverage.” I think there was also someone who came in and said, “Spin off the Beverage, focus on Frito-Lay.” To your point about her leadership, she said, “No. We are a stronger company with these divisions working together.”
To your point how about the recent performance of Pepsi, but also this industry … here’s a short list of companies dealing in food and beverages who have gotten new leadership over the last two years: Coca-Cola, Mondelez, Kellogg’s, Campbell Soup, Hain Celestial, General Mills, and Smucker’s. I don’t think that’s any accident. This is starting to be a much more challenging industry than it used to be. To your point, I think she just said, “You know what? I’ve had a heck of a good run and I’m riding off into the sunset.” Good for her.
Moser: She’s 62 years old, I can’t blame her at all. If she sticks around … she’s more less gearing up for at least another five years of trying to deal with a market where the competitive forces are only growing, consolidation is becoming more and more a factor, prices continue to get pushed down. The profitability for businesses like these just becomes more and more difficult as time goes on. Obviously, we know the challenges that soda faces. Well, Pepsi is really well-known for soda.
Now, thankfully for them, they have a number of different ways to make their money. I think that’s ultimately what should leave investors in PepsiCo today feeling good about the future. I think the company is set up to continue to succeed. But it’s absolutely going to be a very difficult market going forward. If you’re looking for that top five list of stocks where you want to put new money, even if Nooyi is still at PepsiCo, I don’t know that I put PepsiCo on that list ultimately because of the market itself. It’s not a company thing, it’s a market thing.
Hill: Interesting to me, Ramon Laguarta will become the sixth CEO in company history — every CEO has been promoted from within.
Moser: That’s good. We like to see that. It gives you an understanding that they see the value in having someone who’s already very familiar with the company, and someone who’s been able to at least work under Ms. Nooyi’s tutelage. You just can’t say enough good things about her. We’d be so much better off if we had more leaders like her around the world.
Hill: Shares of Berkshire Hathaway up a little more than 3% this morning. As mentioned, they dropped their earnings release, second quarter profits, Friday afternoon after the market closed. Same quarter profits higher than expected. It looks like their insurance business is bouncing back.
Moser: Yeah. It looks like everything is, as Ron might say, firing on all cylinders. I think the old saying goes, there’s strength in numbers. That’s one of Berkshire Hathaway’s big strengths there — it has a lot of numbers that make up what they’re doing. We saw strength across the board in railroads, insurance, investments, even energy, which can be a little bit more volatile at times.
We saw, recently, they adjusted their repurchase strategy. For a while, it was, they would repurchase shares within that 20% premium to book value. They changed that to, basically, their own discretion, Warren and Charlie’s discretion, with the input of those close to them. I think that makes sense. They’re like, “Listen, rules? We don’t need no stinking rules!” So, they’re just going to buy back shares when they feel like it suits.
To that point, I did take a look at the 10-Qs here this quarter compared to last quarter, just to see what the share count looked like. It was notable, when you see A shares, which are the big $500,000 shares, that share count was actually down a little bit more than 13,000 shares from last quarter. B share count went up a little bit, actually. But, when you look at the math, the dollar volume in there, there was about $6.5 billion in that A share repurchase. That actually worked out for them. Again, you look at the strength of the business and its diversity of revenue streams, and let’s not forget, a tremendous investment portfolio, a lot of different public companies that they have, and they’re public companies that we like.
To that end, Chris, I have a little Market Foolery trivia today for our listeners, and anybody else who wants to participate — Dan, you’re in here too, if you want. What company does Berkshire Hathaway not own in its investment portfolio? We have Mac there behind the glass, this is very suiting for one of the companies I chose. I didn’t know he was going to be here. We have: Visa, Sirius XM, PayPal, and Costco. One of those companies is not in Berkshire Hathaway’s investment portfolio.
Hill: Dan, do you want to take the first whack at that?
Dan Boyd: Just one is not in?
Moser: One is not.
Boyd: Can I get them again really quick?
Moser: Visa, Sirius XM, PayPal, and Costco.
Boyd: I’m going with PayPal.
Hill: Mac, do you want to —
Moser: Mac’s going Sirius XM, he’s holding up a sticky note, Sirius XM. Well, I don’t think we reveal the answer now. I think we let our listeners go to town and see what they think. Maybe we take some email or tweets, maybe we put a poll out there on Twitter. We can reveal the answer to you guys after we finish taping. [laughs]
Hill: marketfoolery@fool.com. We’ll put that up on Twitter, as well. I’m going to guess Costco, just to mix it up. One more thing on Berkshire Hathaway, Buffett has said in the past that he likes to have a cash reserve of about $20 billion. I feel the same way in my personal life, by the way. They have $110 billion in cash right now. How badly do you think he’s itching to buy something?
Moser: I think he’s itching. But this really goes to speak to his ability to be patient. I think there are a lot of businesses out there that he would love to own, but only at the right price, and the market has just been on fire here for the last decade, really. I think there are a lot of businesses out there that he’d like to own [coughs] McCormick. We’ll just see how that works out for him. It’s nice to have that kind of reserve.
Hill: The Wall Street Journal is reporting that Facebook is talking to banks about a new feature that would incorporate your bank information to Facebook Messenger. This reportedly would only be in Facebook Messenger, this would not be on the larger Facebook platform. No, thank you.
Moser: Yeah, because I totally trust what these guys are doing.
Hill: [laughs] I said this to you earlier when we were chatting about this, I saw this headline in my Twitter feed when I was multitasking this morning, and my in-the-moment reaction was, “That can’t be real!”
Moser: It sounds so absurd!
Hill: One of the things we’ve talked about, on Market Foolery and on Motley Fool Money, about the privacy challenges that Facebook has undergone over the last six to 12 months. One of the things that you’ve said, Matt Argersinger has said this, and others, is, “Well, among other things, this is going to really pump to the breaks on payments,” because Facebook was interested in getting into payments, and this was really going to pump the brakes on that. It appears that maybe it has, in terms of, this is not a direct payment platform, they’re not launching their own challenger to PayPal, but, my goodness, this seems tone-deaf.
Moser: I can just see the discussions going on in the Wells Fargo executive suite. They’re like, “Alright, guys, it’s been a tough couple of years. When it comes to losing our customers’ trust, we’re batting a thousand. Something has to change!” Then, some executive in the back corner is like, “I have it! Let’s share our data with Facebook! That’ll work!” Like you, I had to look at my watch here really quick to make sure I had the date, because it seemed like an April Fool’s joke.
I’m not so naive as to believe that data isn’t basically accessible at anytime, anywhere at this point. Any party, nefarious or otherwise, is looking for it and can get it. I understand that. I’m also not so naive as to believe that Facebook wants to use this data to make people’s lives better. I don’t think they’re doing this in the name of making your life better. That’s my ultimate problem here. They’re talking out of both ends. They talk about the fact that they’re not going to use this to target ads for their users or whatever. That’s BS. That’s their entire business model to this point. That’s their entire business model, to take data and serve you ads. That’s what they do.
And I’m not begrudging that, that’s fine. I’m not going to be a part of it. I don’t use Facebook or Messenger or any of that stuff. One of the best things I ever did was completely deleting my existence from their platform, because I don’t trust them as far as I can throw them. Zuckerberg and Sandberg together. I can’t throw them probably two feet, Chris. I don’t trust them at all.
For me, banks would be very well served to say, “Thanks, but no thanks.” To my mind, when it comes to money, for most people, money is one of the most important things, if not the most important thing. There’s health and happiness and all that, but money is a way to get you a lot of those things in some way, shape, or form. So, when it comes to money and finance, privacy matters a lot. We need to make sure that we’re being protected.
I’m not saying everybody is doing a great job of doing that. But this is so outside of Facebook’s wheelhouse, they shouldn’t be fiddling with this at all. I can’t imagine this ends well. Perhaps this is something where they’re putting the feelers out there and they ultimately decide not to mess with it. But if I’m a big bank, I’m saying, “Thanks, but no thanks, you guys go figure this out somewhere else.”
Hill: I understand it from Facebook’s side of things in this regard — they’re dealing with engagement that is dropping. They are looking for greater ways to use Messenger. I understand the genesis of this idea. To your point about trying to make people’s lives better, it’s pretty easy for me to imagine someone at Facebook saying, “Here’s how it makes people’s lives better, it simplifies any sort of payment process.” So, I understand that.
But, to the point you were making about the banks, that’s the part I don’t really understand here. Are banks so hard up for data? That’s ultimately what they would get out of this. Forget Wells Fargo, if I’m any bank, I’m looking to optimize my own bank’s app experience. I’m looking to make my website as secure and streamlined as possible, same for my app. That’s it, to me, unless I’m really struggling.
Moser: I think what you’re saying makes a lot of sense. I don’t think this is something that Facebook can do better than companies that already exist today are doing. I don’t know why this would prompt someone to discontinue using PayPal or Square and go over and start doing all of this stuff on Messenger.
To that end, when it comes to big banks, big banks all have a lot of data. I think big bank’s data is far more meaningful, because that’s actual, in-stone data. You made this purchase at this time from this place. On Facebook, maybe you liked something or scrolled through something, or you qualified as an engagement metric for a specific ad that you scrolled through. It’s less concrete. Banks have more concrete data and ways to use that data.
Perhaps it’s just a matter of a changing the of the guard there, from older executives to younger, more tech-oriented executives. I think that’s why PayPal and Square are companies that are going to really help dictate this next decade and beyond when it comes to finance and purchase behavior and whatnot, because those are businesses that are built on the foundation of data and using that data to actually make consumers’ lives better. That, to me, is just so far outside of what Facebook does.
And I’m not saying that to dog Facebook. Facebook is obviously a very big company. They’ve done a lot of things right to this point. It’s a $500 billion company, something like that. But, I just don’t understand why any consumer out there would give them the benefit of the doubt, to trust them with their finances. I don’t consider it naive on my part, either. I embrace technology, for the most part. This is just so far outside of their wheelhouse, I just don’t understand how they gain any traction here. But, I’ve seen crazier things, too.
Hill: I think it’s a sign that maybe you and I are out of step with people who are trading shares of Facebook today, because the stock is up nearly 4% on this news. [laughs]
Moser: Well, Chris, let’s just always remember that in the short run, the market is a voting machine. But in the long run, it’s a weighing machine, and we’re looking to weigh our companies, so we’ll focus on the longer haul.
Hill: I think we wrap up there. Thanks for being here!
Moser: Thank you!
Hill: As always, people on the program 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 going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening! We’ll see you tomorrow!
Chris Hill owns shares of PayPal Holdings. Jason Moser owns shares of PayPal Holdings, Square, Twitter, and Visa. The Motley Fool owns shares of and recommends Facebook, Hain Celestial, PayPal Holdings, Square, and Twitter. The Motley Fool owns shares of Visa and has the following options: short September 2018 $80 calls on Square and long September 2018 $55 puts on Square. The Motley Fool recommends Berkshire Hathaway (B shares), Costco Wholesale, and McCormick. The Motley Fool has a disclosure policy.
