Motley Fool Hidden Gems Investing - Consumer Brands Shake Things Up…With Mergers

Starting point is 00:00:00 Big brands are making moves, but are they the right ones? This is Motley Fool Money. Welcome to Motley Fool Money. I'm Tyler Crowe, and today I'm joined by longtime Fool contributors Lou Whiteman and Rachel Warren. Now, it's November 5th, but I think it's kind of Groundhog Day for me because I think today's show is going to sound a lot like the last time that I spoke with both of you on this Wednesday show.

Starting point is 00:00:37 We're going to talk about whether M&A activity in consumer goods is a sign of strength or desperation. But first, we're going to get into the bubble talk again because that's what seems to be on everybody's mind. Last week at a Federal Reserve policy meeting, Chairman Jerome Powell was asked about the frothiness of the AI market and trying to give him the chance to talk about the comparisons to the dot-com bubble. And he said this, and I'm going to quote it specifically. He says, this is different in the sense that these companies, the companies that are so highly valued, actually have earnings and stuff like that. Now, I'm not going to get into Powell's future as a CNBC talking head after that quote, but it does

Starting point is 00:01:21 sort of echo a lot of statements we've heard from prominent tech folks, Jeff Bezos and Sam Altman, who more or less said, yeah, but it's worth it. We've seen some abrupt market reactions during earnings this past week, like Meta's 17% slide since earnings after mentioning ambitious capital plans. So, I want to pose the question to both of you. And Lou, I'm going to ask you to go first. is, has your opinion on AI market frothiness since basically since the last time we did the show? So, yeah, I mean, with all respect to the chairman, they do have earnings and stuff and stuff is, we love stuff, right? So it's good they have stuff. And yes, I do think that makes this different than 1999 when a lot of the companies, they didn't have stuff. They had

Starting point is 00:02:06 swag that they gave out, but not, not earnings and stuff. But, you know, at the end of the day, all of these earnings, all of this cash is being reinvested into AI. So, at least it's something to watch. It's great to have earnings, but if you're blowing it all on something that doesn't work out, you still end up in a pretty tough place. So, the question is, are they blowing it on something that doesn't work out? I don't think anyone knows. AI is a real thing. I think that there is value there. But is there value that can generate, I don't know, a trillion dollars worth of revenue or whatever they're putting into the investment? Is there the kind of value that can eventually recoup all of this investment? I don't think any of us really know how this all

Starting point is 00:02:49 plays out for them in terms of how this investment will impact their bottom line. So, yes, it's different this time, but that doesn't mean that things can't go wrong. Yeah, this was interesting. I mean, Powell very explicitly pushed back on the direct comparison to the dot-com bubble. And he also really emphasized that AI investments are, as he put it, fueling a genuine engine of U.S. growth. This concept of hundreds of billions of dollars, eventually trillions, being poured into data centers, semiconductors. There's real economic activity there. And I think that's fair. I think there's some other points to underscore as well. A lot of the frothiness that we are seeing in the markets, it is being led by very profitable, established companies. Think the

Starting point is 00:03:32 NVIDIAs, Microsoft, Alphabet, right? They are generating substantial AI-related revenue. And if you go back to the dot-com bubble days, many companies were pre-profit, they had no revenue, they were valued based on these eyeball metrics or website traffic rather than cash flow. And that's very different than a lot of the companies we're talking about today that are driving these movements in the market. So I do think it's very, very different than the landscape that companies were operating in two-plus decades ago. I mean, one thing as an example, AI infrastructure, GPUs, data centers are being deployed and utilized immediately, intensively, because there's genuine, immediate demand there. And so, this isn't the days of

Starting point is 00:04:14 overinvestment in infrastructure, like think back to the dot-com bubble, fiber optic cables that went unused for years. It's just a completely different paradigm. I will say valuations are high. I do think there is a speculative element to what we're seeing, but I think the speculation is more about kind of the magnitude and speed of the anticipated returns on these investments, not so much whether or not the business models exist themselves. I think there's a lot of really intriguing businesses at play in the AI space right now. When you were saying they don't have stuff like the 1990s, all I can think of is like an old Simpsons episode where certificates of stock were being used as toilet paper in an episode. That's all I can seem to

Starting point is 00:04:57 think of when I think of the 90s.com boom. Not to put Lou on full blast here. That was stuff, though, right? It was stuff. It just wasn't what they were hoping. Lou, I'm sorry, I'm going to put you on full blast here, because you might have a little bit more experience of investing around that time than perhaps Rachel and I did. Comparing to that time? Like, do you, what do you say to this being a bubble? So a couple of things to think of for one, even if no matter how you want to write the history of the late nineties, the bottom line was is that not all companies were created equal and that some did fine and some didn't. And the real lesson is whether we're in a bubble, whether or not it can all be justified is that there is almost

Starting point is 00:05:39 no way that this works out storybook ending for everyone involved. And there's almost no way that everyone just loses their shirt. So, I do think it's time to differentiate between companies. You mentioned Meta was down big this week. And I think Meta is a special case right now. I mean, I don't want to be chicken little and say they're in trouble. But for Meta, the argument for all these guys have been they're funding all of this out of free cash flow. That's no longer a talking point for Meta. They are taking on billions of debt. So, they have moved past the, hey, they earn a lot of money, they spend a lot of money. That is, I mean, it's something they can handle. I mean, debt is fine if used correctly, but it is just kind of changing the calculus.

Starting point is 00:06:21 The other thing that makes them special is that I don't know, we talked about it, this will all be wise or not wise based on their ability to monetize. I see how Microsoft monetizes this. I see how Alphabet monetizes it. I see how Amazon even monetizes it. Meta talks about how making their ads more efficient and things like that. That's not worth a trillion dollars. I think their path to monetization is harder. I think the fact that they seem to be stretching themselves the thinnest, perhaps, with some of the soft balance sheet work, and they are the one that it's hardest for me to see how they monetize. The combination there, I get why the market is being a little harder on them than they are for some of the others. I'll give the last

Starting point is 00:07:07 question to Rachel here. After this, we'll move on. Again, thinking of the idea of separating the hype kind of ideas that we saw during the last dot-com bubble and the ones that, frankly, are starting to pop up now. Everyone today is mentioning something about driven by AI or utilizing AI. It's almost criminal these days to not have artificial intelligence in some SEC disclosure for a company. I mean, you could be hauling trash and you have to use AI. But thinking about it in that way, how do you separate what is just SEC disclosure fluff and real fundamental drivers for businesses with AI? Yeah. I mean, you think about this, real companies are already generating or have a clear line to generating solid revenue streams tied directly

Starting point is 00:08:00 to their AI solutions. It's not just speculation. And I think that's where, and we've talked about this on the show before, kind of in this day and age, and I anticipate this will change particularly over the next five to 10 years, but if you're investing in the public markets, a lot of the really compelling investment opportunities for AI are in these big tech companies. That's really the funnel as a retail investor to sort of gain a slice of the action, if you will, of what's happening in AI. That will change. I think we'll see some of these newer entrants to the market that become publicly traded as the markets relax a bit. And that will also then provide an opportunity to see, okay, are there businesses here that really warrant an investment as a

Starting point is 00:08:38 long-term buy-and-hold investor, or is there hype there? But looking again for those traditional financial metrics, whether it's cash flow, consistent earnings, manageable debt levels, that's really, really key. And one final thing I'll note is genuine AI innovators, they often build a moat, if you will, by gathering very proprietary, high-quality data that constantly improves their systems. Of course, you think of names like Alphabet and Amazon here. You can also think of healthcare companies, right, that are wading into the AI revolution, like Eli Lilly and Johnson & Johnson. You know, they're leveraging these kind of vast amounts of proprietary data and training models to accelerate drug discovery and improve clinical

Starting point is 00:09:15 trials and other key endpoints there. So there's a lot of exciting things happening. I think the investability of it is really just in the very early stages at this point. Well, speaking of companies that probably could use a little AI juice to help them out, we're going to talk about consumer brands coming up after the break. Now, I don't think consumer staples investors will be bouncing their grandkids on their laps talking about the past few years. The three-year performance for the consumer staples SPDR ETF has underperformed the S&P 500 15% to 82%. Nobody's talking about that. It's not a great number. Now, I bring this up because there's been a lot of corporate deals picking up in the consumer staples space. Earlier this week,

Starting point is 00:09:57 we saw Kimberly-Clark acquire Kenview for $40 billion. Again, change. Kraft Heinz is splitting itself in two. PepsiCo has opened up the checkbook quite a bit lately with several smaller acquisitions, but a lot adds up over time. Unilever is IPO-ing its ice cream business. Private Equity is circling Nestle. Mondelez has tried to acquire Hershey. I mean, the stories go on. Now, I say this because the list is expansive. And the question I have, and I'll start with you, Rachel, is whether this underperformance in corporate and these corporate shakeups that we're seeing in the consumer space, is it just the market cycles that we see in every day or these kind of like desperate moves from an industry that's facing a lot of challenges? I think the industry is facing a lot of

Starting point is 00:10:46 challenges. And I think it's also very much a trend of consolidation that we've seen for a while now. And there's kind of a couple of key points here. There was a study that came out from Boston Consulting Group that found that global M&A activity increased by about 10% in the first nine months of 2025 compared to the same period last year. Now, in the second quarter of this year, according to a separate KPMG report, the consumer subsector saw a roughly 175 year-over-year increase in deal value. You know, bear in mind, we are very much not even close to a time where M&A activity is heating up like it was in the 2021 era. We are seeing more activity in certain sectors, the consumer space being one of them. And I think some of these deals could be taken

Starting point is 00:11:30 on their own merits. Kimberly-Clark, for example, that pending acquisition of Kenvu, that's going to create a combined entity that they think is going to bring in about $32 billion in annual revenue. Kimberly-Clark, they've lagged behind. Ravel's like Procter & Gamble. And they're hoping this will help them become a leading consumer company, particularly in the higher margin consumer healthcare space. And bear in mind, Johnson & Johnson spun off its consumer business into Kenvu just a few years ago. And this was one of the oldest and slowest growing segments. So I think that's a perfect example of a company that really makes sense as part of a larger consumer goods, multinational conglomerate, rather than as a standalone. But there's a lot

Starting point is 00:12:13 of consolidation happening in the space right now. You think back to Mars, they're nearly a $40 billion acquisition of Kelanova, which was the stacking spinoff from Kellogg. Ferrero's $3.1 billion acquisition of W.K. Kellogg. So a lot of this is consolidation. A couple more examples, you know, Foot Locker, right? They got acquired by Dick's Sporting Goods. Skechers was acquired by 3G Capital. I think we're going to continue to see these movements in the space. I don't think this is a one-off. And I would expect that a lot of consolidation could still lie ahead. There's a lot going on and a lot of activity. Like I said, this is really navigating a lot of different angles. After the break, we're going to put the real rubber to the road on a lot of

Starting point is 00:12:53 these deals and figure out which ones are actually going to work. We covered a lot of different deals in the previous segment, Lou. I really want to get to your thoughts on this, on how it all comes together and whether some of these deals are going to work. Like you said, some of these assets are being hot-potatoed from company to company. And M&A isn't always the best way to grow. So, looking across that spectrum that we just talked about, what do you see working out of any of this? It's funny. I love that you started with Kraft Heinz, because Kraft Heinz is what I keep thinking of when I see this Kenview deal. Kraft Heinz, I think we can say it now, almost universally agreed as a failed merger attempt. That's why they're breaking up. It just hasn't

Starting point is 00:13:40 worked out. And again, I look at the Kimberly-Clark deal and I worry about the outcome. And here is sort of, for me, the big overall theory of what's going on. The middle in retail has just been totally hollowed out. Consumers are still willing to pay for red-hot brands, celebrity endorsements, something with Bieber on it, whatever it is. We love to pay up for that. We will still pay a premium for some things. One, holding shoes, too. There are some things that we will pay just through the roof for. But we also really like the store brands. And that middle ground, which makes up a lot of Kraft Heinz's portfolio and a lot of Kimberly Clark's portfolio and a lot of Kenview's portfolio, that is what has suffered. So, look, do we really care about Kleenex and

Starting point is 00:14:32 Band-Aid anymore. That doesn't resonate to consumers when the Kroger brand or the Walmart brand is a few dollars cheaper. Glass half full here, the only answer is scale. The only way to do this is to do it just with great efficiencies. Kimberly-Clark, buying Kenview, all of these deals consolidate, grab scale, it gives yourself a chance. But if you look at this Kimberly-Clark deal, glass half empty, they're just adding a whole new portfolio of question marks to a pretty big existing portfolio of question marks. And I'm not sure how a whole bunch of question marks really turns into a winning investment, unfortunately. All right. So I'm going to put this both to you at the end here, and you can be very, very quick about it, but of the kind of M&A

Starting point is 00:15:18 activity or the deals that we've been talking about in this space, and a lot of the ones that Rachel covered earlier, which of those ones do you think is actually going to work? I tend to think Kimberly-Clark's acquisition of Kenvu makes sense. I understand why Johnson & Johnson spun that one off. It was dragging on their business. They really wanted to focus on the pharmaceutical side. I think it makes a lot more sense as part of a bigger organization like Kimberly-Clark. Certainly one to watch, though. But I think it makes sense as part of the overall organization. So, once you mentioned that I think it's different from all of these, I do like Dix's deal for Foot Locker. I think that makes sense for different reasons from what we're talking about.

Starting point is 00:15:55 So that's the one I would pick. And as the host, I get to punt and not give an answer because I don't know if I'm terribly excited for any of them. And with that, that's going to be the end of our show. Tune in tomorrow where I'll be hosting along with Matt Frankel and John Quast. We'll be going over software earnings, stocks on radar, and a bunch of other stuff. 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 appear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational

Starting point is 00:16:32 purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman and Rachel Warren, our production leader, Dan Boyd, and the entire Motley Fool team, I'm Tyler Crowe. Thanks for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - Consumer Brands Shake Things Up…With Mergers

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