Motley Fool Hidden Gems Investing - Activists: Higher All-Time Highs, Please

Episode Date: May 28, 2024

Sometimes, great isn’t good enough. (00:21) Jason Moser and Mary Long discuss T-Mobile’s latest purchase and why Elliott Management has beef with a company that’s trading at all-time highs. Then, at (14:51), Yasser el-Shimy joins for a look at Rocket Lab, the end-to-end space company. Companies discussed: TMUS, VZ, T, TDS, USM, TXN, RKLB Learn more about the Range Rover Sport at www.landroverusa.com. Host: Mary Long Guests: Jason Moser, Yasser el-Shimy Producer: Ricky Mulvey Engineers: Dan Boyd, Chace Pryzlepa Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. A telco company goes shopping. Again, you're listening to Motley Fool Money. I'm Mary Long, joined today by Jason Moser. Jason, thanks for being here and joining after a lovely long weekend yeah happy to be here mary how was your long weekend it was great i am reaping the benefits of springtime in colorado and was able to ski golf and go to a baseball game all in a single day on saturday well i didn't know that you played golf now my interest is peaked

we probably have to save it for after the show but we'll need to catch up on that we can we can save it for after to kick us off on this short week we've got um an acquisition and some activism going on. First story is that T-Mobile announced this morning that they're planning to acquire most of U.S. Cellular for $4.4 billion. First question that might come to mind is what is most? T-Mobile gets U.S. Cellular stores, 4.5 million wireless customers, 30% of its Spectrum assets. U.S. Cellular gets the remaining 70% of those Spectrum assets and gets to keep ownership of its towers. J-Mo, first off, what are Spectrum assets? That feels like an important piece of this equation here? And why is it being chopped up? Yeah, I mean, it is. Spectrum, in just the

simplest terms, mobile spectrum, it's the radio frequency that mobile companies use to communicate over the airwaves. And you'll hear terms like low, mid, or high band spectrum. But ultimately, it's the airwaves that these mobile companies use to transmit their signals, their information. Okay, we've kind of given an overview of the basics of this deal. Can you give us a of what each side would really be walking away with here? Help us peek under the hood a bit. Yeah, it's an interesting deal. When you look at U.S. Cellular, they operate what's called a regional wireless network. They're like Verizon or AT&T, but much more limited in the areas that they cover. The interesting part of the deal for T-Mobile

is, these are areas where T-Mobile's presence is weaker to nonexistent. Ultimately, this helps expand T-Mobile's network of coverage. You mentioned U.S. Cellular keeping some of the spectrum and the towers. I think that's important to note. If you look at what U.S. Cellular owns, mobile towers, you see those things everywhere, and they're ultimately what help us all connect. U.S. Cellular owns and leases cell towers to provide services. If you look at The numbers there, as of December 31st, 2023, they had 7,000 cell sites in service, of which U.S. Cellular owned 4,373. Being able to keep these towers and lease that out is a nice little deal for them.

T-Mobile also agreed under the deal to extend leases on the 600 U.S. Cellular towers that it works with, and then long-term leases on about 2,000 more of them. Ultimately, this solidifies that relationship in reliability. U.S. Cellular knows those towers that they have are going to keep on being used by T-Mobile. Ultimately, T-Mobile being one of the big providers out there, that means some steady and reliable income for the foreseeable future. Then, ultimately, you mentioned that T-Mobile gets 4 million new customers from all this, and they get the spectrum rights to carry more data. This is the business about scale. The bigger you are, the better you are. For T-Mobile, getting more customers,

more spectrum, this expands their network and makes them more competitive with the two real familiar names in this space being AT&T and Verizon. You just laid out a good case for why T-Mobile wants to make this acquisition a part of U.S. Cellular. There have been whispers about this deal for a while. U.S. Cellular's parent company, Telephone and Data Systems, first announced that it was looking for strategic alternatives, looking for a buyer last August. Why do they want to ditch this regional provider? It requires a lot of upkeep and it requires a lot of capital spending. And it's an extremely competitive market when we're talking about mobile connectivity. And when you consider the big players in the space, again, looking at Verizon,

AT&T, and T-Mobile, I mean, it's just very, very difficult to compete with those large networks when you are a small network. In this case, size really does matter. The largest network or networks typically win. This is going to give them a chance to offload something that is going to require, I think, constant capital spending in order to upkeep and even more capital spending to really expand. Even then, there really is no guarantee that they'll be able to meaningfully compete with the larger players in the space. Yeah, the name of the game in this is consolidation, right? What does continued consolidation in this space mean for investors in these companies, but also for consumers? Well, this is something we'll certainly see

this go through regulatory review. My suspicion is it will likely go through. The structure of the deal is not so simple as we've covered here. But ultimately, these companies are going to need to behave themselves. I think it's safe to say that mobile connectivity today is just a must. In regard to these companies, the consolidation in the space, when you really whittle it down to just three main players in this space, you don't want to see anything like price fixing or other forms of collusion. When you depend on a small number of providers for, I will call them necessary services at this point. The concerns on the consumer's part, those are very understandable. The consumer just doesn't have a lot of pushback.

It's not like we haven't seen price fixing and collusion before. If you look at just some examples of big players trying to use their scale to their advantage, if you go back, I think it was 2012. There was Apple with the e-book publishers. There were several major book publishers that were found to have agreed on price-fixing for e-books, which ultimately led to higher prices. There were fines and requirements to change business practices there. If you look back to 2006, airlines went through something very similar. Consolidation oftentimes can result in stronger companies that can provide better services. And in theory, competition should bring those prices down. But we want to make sure these guys are on the up and up and not

doing something that ultimately hurts consumers. It's worth noting that this isn't T-Mobile's first acquisition. They recently were just cleared to purchase Mint Mobile's parent company. They acquired Sprint in 2020. So growing by buying seems to be a really key part of their strategy here. And it's also seemed to pay off. T-Mobile has handily outperformed both Verizon and AT&T over the past five years and three years and the past year. Are there any risks to this strategy that you're keeping an eye on? Or does this kind of seem to be the best way forward for T-Mobile? I think it's probably the best way forward. I mean, anytime you make acquisitions, you just want to make sure you're buying a productive asset and paying an appropriate

a price for it. I think when you consider T-Mobile and Verizon and AT&T, if that's more your speed, probably the bigger concern with these companies is just their debt loads. They are companies that require a lot of ongoing capital spending in order to maintain those networks. But you look at the debt loads on these companies, they are not insignificant. T-Mobile, long-term debt, $73 billion. Verizon, long-term debt, $127 billion. AT&T, $137 billion. Those are some eye-catching numbers. Now, by the same token, it's worth remembering, that's the model that utilities more or less follow. They're very reliable because they're providing necessary services. They're able to run those debt loads up because they know that those revenue streams are

going to be fairly reliable, but how much they can charge for those utilities, that's something that you want to keep an eye on. Ultimately, you don't want to see those debt loads get so far out of hand that companies either A, can't service them, or B, have to raise additional capital, or C, oftentimes these utilities, and one of the more attractive features of investing in these types of companies is that they oftentimes can yield very robust dividends. sometimes when those debt loads get out of control, those dividends get cut, and sometimes very meaningfully. With those debt loads in mind, are there any red flags that stick out to you with this acquisition in particular? It's a part cash, part debt deal. Do you feel good about T-Mobile's

prospects moving forward with that, or is that something that you're wary of? I think on the whole, you have to feel pretty good about this. T-Mobile has really done a great job over the last several years executing and building out this business. This is not something that's new for them. This is part of that strategy, finding those assets that can ultimately expand this network. Going back to that U.S. cellular network and the regions that they provide, it gives T-Mobile more exposure to areas where they just don't really have any presence. It does seem like they're paying a fair price for it, and it's ultimately going to result in expanding that network, making them larger and more competitive. That's ultimately a good thing,

unsafe. We've teased out this talk of the big three in the wireless space, T-Mobile, Verizon, AT&T. Keep in mind everything that we've said this morning. Do any of those companies seem like attractive investments to you for their dividend payouts or for other reasons? They're not really my speed. I'm just not that interested in utilities. I love the dividend side of it. The debt loads are always, they scare me a little bit. I don't own any of these three. I don't know that I have any desire to. But by the same token, for income-seeking investors, they are absolutely steady-eddy investments, and we know they're going to be around for a while to come. Another story we've got this morning is that Elliott made a $2.5 billion investment in

Texas Instruments. The activist hedge fund wants the company to improve its free cash flow by loosening up its capital expenditures plan. We'll get to the details of that in a minute. Whenever I hear Texas Instruments, I can't help but go back to high school and think of that TI-89 calculator. But there's more going on to this company than just calculators. How does Texas Instruments fit into the semiconductor landscape? You look in their 10-K, the very first sentence, it says, we design and manufacture semiconductors that we sell to electronics designers and manufacturers all over the world. It's a semiconductor company, first and foremost. And analog is 75% of their business.

And so analog semiconductors are ultimately semiconductors that change real world signals, like sound or temperature or images or whatever, and ultimately amplify and convert them into digital data. Given where we are in sort of this tech evolution, it's a company that absolutely plays a very important role. So what's Elliott's problem with Texas Instruments? because they're a company that's trading at an all-time high right now. So, what's the beef?

Yeah, I think it just boils down to Texas Instruments' capital expenditure plan. They kind of laid it out that they were really looking to adhere to a rigid and firm capital expenditure plan to build out their capability to supply in a world where semiconductors are in constant demand. And Elliott feels like that rigid sort of stance is leaving a little bit of money on the table. And so, they believe that if Texas Instruments could be a little bit more dynamic in how they're utilizing that capital expenditures structure, it would free up some cash flow, which ultimately is a good thing for investors. Yeah, the plan that Elliott's laid out, it lays out a proposal for Texas Instruments to achieve

free cash flow of $9 per share by 2026. That is a huge leap from where the company is today. This year, they're expected to generate less than $2 per share in free cash flow. Do you think that that plan is actually viable? I mean, it is aspirational, no question about that. It is doable. I mean, I think the bigger question is if they do resort to a more dynamic investment model there, does that impact their competitive position? Because as we know, the semiconductor space is an extremely competitive one. So hitting the numbers, I think, is one thing. You can do that. But the bigger question is, is that the correct long-term strategy or is that something that ultimately erodes their competitive position?

Do you have a take on that? Do you think that being more flexible with their capital expenditures plan would change the long-term play for this company? I tend to like being a little bit more flexible with companies in their investment strategy there. I think, for me personally, I would much rather see ... You know that old saying, when the facts change, it's okay to change your mind, right? I think with a business like this, certainly, things change. I think that companies need to be flexible in the change in competitive landscape. For me personally, I like the idea. Ultimately, for a company this size, particularly in this competitive market, being a little bit more flexible strikes me as probably the better

move. Yeah. We like when management does what they say they're going to do, but as you said, when facts change, it's also good to see flexibility in mindset there as well. Yep. Jason, thanks so much for hanging out and chatting with me today. We should end this recording so that we can talk about golf. I love it. Thanks so much, Mary. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI.

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That's R-I-P-P-L-I-N-G dot A-I slash F-O-O-L. Sign up for exclusive access today, rippling.ai slash fool. We tend to hear a lot of the same names when we talk about space. Up next, Fool analyst Yasser El-Shimi joins me for a closer look at Rocket Lab, a space company that does a lot more than launching rockets. Yasser, today we're talking about Rocket Lab, which labels itself as an end-to-end space company. I know what space is, I know what a company is, but that end-to-end part, maybe for the uninitiated, can you walk us through what that means?

Absolutely. Most people actually, when they think of Rocket Lab, they only think of it as a rocket launching company, but it's a lot more than that. Rocket Lab certainly started out in the business of building and launching rockets carrying small satellites into space. We've seen that, you know, develop over about a three-year period starting in 2014 to 2017. But since then, they have expanded into the rapidly growing field of space services. And what that means in a, you know, kind of a nutshell is that they make the software, the hardware of the satellites that go into space, they do troubleshooting, they do maintenance of those satellites that are deployed in orbit. And perhaps a surprising fact to many listeners is that this

space systems segment of Rocket Lab actually takes the lion's share of the total revenues of the company. So about three-fourths of the total revenue of Rocket Lab actually comes from space systems as opposed to just the launching part. You kind of teased out what that segment does and focuses on. Can you give us an example of some of the different platforms and the technology that's being offered in that segment? So they have been building custom satellites for their customers through their Futon satellite platform.

And what Futon basically is, it's a customizable platform that can be tailored in order to meet any mission's requirement. so that mission can be for earth observation scientific research for communication as i as i explained earlier and what they can do here is that they can effectively build the satellites themselves on behalf of their customers so the customer would come to them and tell them hey i would like to send a mission uh to the you know to hover or to orbit around the north pole uh to try and measure perhaps infrared radiation in that area, which is actually an example of a real mission. I'm not just making that up. And so Rocket Lab will be able to effectively build

the satellite that perfectly meets the requirements of such a mission effectively from A to Z. Maybe they're going to kind of import some scientific measuring equipment that they don't manufacturer in-house, but otherwise, everything that's related to the rocket, to sort of deploying it in the exact spot, to the satellite itself, to kind of how that satellite operates, both from a hardware and software perspective, all the way even into the powering of it through perhaps solar panels, all of that can be made in-house by Rocket Lab. And, you know, you mentioned earlier kind of that being that end-to-end space company that's exactly what the aspiration has been for rocket lab is that it's a one-stop shop people can go to it can ask them to do multiple things

at the same time that obviously is a kind of a strong proposition of value to any potential customer who you know effectively does not want to be handling a lot of different vendors here and there uh you know getting different components from different companies and kind of stitching them together and then renting a rocket, uh, at the, at the very tail end. And I think there's a lot more, let's say potential profitability that can be made into, into, in that space systems, uh, part of the business, uh, that should hopefully start kicking in, uh, in future years. Yeah. Anytime that I just begin to look into a space company, I'm kind of amazed and overwhelmed by, by all the different projects that they seemingly have going on. And Rocket Lab is

no exception. They've got a lot of different irons in the fire here. If you spend any time beginning to look into this company, I think there's going to be three names of different projects that kind of stick out. So I want to go over those to give people a better idea of what they are. One name that you're going to see is Electron. So that's a launch vehicle that gives small satellites rides into orbit. Basically, it gets rented out to commercial and government customers. It's reusable. It's now flown, I think, 47 times. Kind of similar to that is Neutron. This is still in development, but it's basically Electron on a larger scale. So it'll be able to carry larger satellites, go further distances, and it's semi-reusable. Then there's also Photon.

That's another name that might stick out if you start exploring the Rocket Lab universe. As you mentioned, that's a spacecraft platform. So it can be used for scientific research, imagery remote data collection lunar and deep space expeditions i believe it's been selected to support nasa missions to the moon and to mars and i've also caught wind that it will be used for a private mission to venus in search of life there lots of different things going on as we mentioned which of those endeavors is most interesting to you oh that's a tough one i think for me like They've got the Electron rocket and the Futon satellite platform down. Now, what's really interesting to me is what are they going to do with the Neutron rocket,

which we should mention is in development. It has not been tested. They're still working on it. I think they're kind of still working on that engine that they're going, the Archimedes, I believe it's called. Now, but let's establish kind of like why do they need a Neutron rocket to begin with? isn't the electron good enough well the electron does its job very well and and that job was to carry small payload into lower earth orbit meaning you have a couple of satellites maybe one satellite you want to launch into space quickly on a budget the electron is probably

your best bet uh it's going to get you there it's going to get you in the exact location that you're looking for and it's going to you know get you there a lot uh perhaps less costly than if you were to uh to buy us you know a falcon 9 rocket from spacex which would set you back 50 million dollars or so the electron is you know like maybe about eight million dollars so huge difference there now the problem though is that electron could only fly up to you know maybe the moon You know, they've done that successfully, but it can't venture beyond that very much. It also can only carry a payload up to 300 kilograms, which is not that much. And it's not capable of supporting, you know, a human pilot.

So you just basically launch the rocket into lower Earth orbit or at most to the moon with a small payload, and that's all you do. Now, the neutron, they're trying to kind of meet a growing need for ever-larger satellites and, in fact, the deployment of what they call constellation of satellites all at once. So now you have some customers who are interested in deploying not just one or two satellites. They want to deploy a whole constellation of satellites to achieve for various scientific or national security or other purposes or communication purposes. They want to have that constellation deployed all at once. So they're working in the neutron, which would be a much bigger, you know, version of what the electron has been. It can carry up to, I believe, 13,000 kilograms of payload into lower Earth orbit or, you know, as little as 1,500 kilograms to Mars and Venus. It's also able to support, you know, an astronaut on board, which would be, again, great from kind of a space exploration kind of perspective.

So it definitely increases their end market substantially if they're able to kind of make that neutron rocket work. And I believe there's definitely going to be demand for it. And they will be perhaps in more head-to-head competition with the likes of SpaceX and Blue Origin once they do it. So this company's launching rockets, it's moving quickly. It went public via SPAC in 2021. And since then, the stock is down over 78% from its high. It's marking off all these accomplishments. Why is the stock not responding accordingly? Well, I think this is one of those classical stories of diversions between the stock and the fundamentals of the business. And that's not to say that the market has fundamentally wronged Rocket Lab stock.

I think the problem is, you know, we all remember that COVID mania when it came to stocks, especially SPACs back in those crazy wild 2020, 2021 days, when Rocket Lab first came to public markets via SPAC, it had a valuation of nearly 170 times sale at one point. Again, 170 times sale. That's very, very, very, very, very expensive. So I can be bullish on a company, but that was just nuts, if I may say so myself. So here's the part that I have to issue the disclaimer. This is an unprofitable company.

it's a cash-burning company. And therefore, if you're interested in this business, you have to look at it or approach it from a speculative investment type of perspective. And that's fine. I believe personally that every portfolio should have some room for some of those kind of wild bets or speculative investments that can have perhaps binary outcomes. This is, however, not a pre-revenue company. So, we have seen also a lot of SPACs that came to market that did not have any sales whatsoever. They were merely just business plans with fancy PowerPoints. And we have unfortunately seen the failure of actually several rocket launching companies that came to the public markets via SPACs, including Astralabs and Firefly. There is actually a

real business with Rocket Lab. They are making money, as in they are selling stuff. They're not making money on the bottom line yet. But look, if you look at this, again, as I said, as a speculative hyper-growth investment, we're looking at a company that's trading at maybe less than 10 times 2027 EV to EBITDA, that is enterprise value to earnings before interest tax depreciation amortization. If you pause for a moment and reflect on the fact that the latest capital raise round for SpaceX valued that company at $180 billion compared to Rocket Labs' enterprise value of $2 billion, you can see that there's maybe some room for growth here. Of course, SpaceX has a huge lead in the field and its revenue far eclipses that of Rocket Labs.

But if we believe in the Rocket Lab management and what they're saying and the kind of projects they're working on, the successful track record in terms of their Electron launches so far and building out that space systems side of the business. And if they are hopefully successful with the launch of the Neutron down the road, you know, maybe there is something here. 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. I'm Mary Long. Thanks for listening. We'll see you tomorrow.