Motley Fool Hidden Gems Investing - Oops! $132 Million Disappeared

Episode Date: November 25, 2024

Or $154 million could be gone. Macy’s is facing questions from investors after a rogue employee made some accounting errors. (00:14) Jason Moser and Ricky Mulvey discuss: - How more than a hundred million dollars can go missing. - The impact of weight-loss drugs on junk food manufacturers. - Some advice for investors looking for artificial intelligence “picks and shovels” plays. Then, (15:41) Bloomberg’s Lucas Shaw to check in on Netflix, and the company’s strategy on live events. Visit our sponsor: Learn more about the Range Rover Sport at www.landroverusa.com Link to NYTimes article about junk food and GLP-1 drugs: https://www.nytimes.com/2024/11/19/magazine/ozempic-junk-food.html Check out Shaw’s Screentime newsletter: https://www.bloomberg.com/screentime Companies discussed: M, CAG, TPL, NFLX Host: Ricky Mulvey Guests: Jason Moser, Lucas Shaw Producer: Mary Long Learn more about your ad choices. Visit megaphone.fm/adchoices

From morning hockey with a cup of coffee to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian Tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit timhordens.ca slash triangle for details. How do you hide more than $100 million?

You're listening to Motley Fool Money. i'm ricky mulvey joined today by wicked superfan he's got a magic wand in hand and a coffee on the desk it's jason moser jason how we doing hey doing great ricky how about you i'm doing pretty well are you are you more of an elf felba or a galinda kind of guy elfaba elf come on listen i mean i i saw the musical on broadway so i've got like uh you know some really great memories there i you know i don't know that i really play sides there i thought the the juxtaposition was was very well done and the music was tremendous it was a great experience we took our daughters up to new york city several years back saw it on broadway it was pretty

awesome it's wicked week but it's also a week for macy's you know we're you'd think we'd be talking about the macy's thanksgiving day parade this week but macy's has a problem going on at the the corporate office jason macy's reporting preliminary results this morning a little weaker than the analysts were expecting, but here's the real story. Macy's had something to say in a section titled Other Corporate Developments. I'm going to steal that title when I have something I need to tell people. The company identified that a single employee with responsibility for small package delivery made an erroneous accounting accrual of approximately $132 to about $150 million of cumulative delivery expenses from 2021 to 2024.

There was an erroneous accounting accrual of more than $100 million. What's the translation here? It's just numbers, right? I mean, yeah, I think looking at this on the surface, I mean, I think the initial reaction would be, well, this is embezzlement. However, the thing is here, in this case, the individual responsible actually didn't pocket the amounts in question. So it's, I mean, it's a very odd situation. I mean, it's really interesting to think that it kind of went undetected for as long as it did.

It's strange that the auditors didn't catch it as well. But yeah, it feels like it could have been one of those things where it was an it was like somebody forgot to carry the two or something or missed a decimal point like four or five years ago. And then it just snowballed. Right. They tried to fix it. And in trying to fix it, the problem got worse and worse and worse. But yeah, it's it's it's a lot of money for an accounting error. That's the thing that's surprising to me is that it appears that the money was hidden but not stolen. I thought we had like an office space situation on our hands where they were taking like a percentage of a cent off every transaction and pocketing the change. But here's what Macy's is saying is, quote, there's no indication that the erroneous accounting accrual entries had any impact on the company's cash management activities or vendor payments, end quote.

That's where I'm confused. You misplaced $100 million, more than $100 million, but it didn't affect how anyone got paid or how the company is managing its cash. right well and i think it's it's worth remembering number one i mean macy's is obviously a very big company and when you look at their income statement you can start to put that into context so if we think about this money that was hidden right this was something that was was in regard to small package delivery expense and if you look at macy's 10k delivery expense is not a component of merchandise margin. So rather, it's part of what companies list out as SG&A, right? Sales General Administrative Costs. And if you look at that SG&A line, that's an expense line on the

income statement. Their SG&A over the last 12 months was $8.3 billion. So when you put that into context, it isn't really that big of a financial hit. It's noteworthy. I mean, let's not Let's not split hairs. I mean, $150 million is a lot of money. But in the context of Macy's overall business, I at least understand how they miss this because it's not something that's just totally in your face. We normally ask what your shareholder reaction is. We're going to do a different thought exercise. If you had to make $100 million disappear from any company, we're not stealing it. We're just hiding it. We're making it disappear. Which company would you pick and how would you do it? I have an answer as well. Yeah, I feel like I'm going to get myself

in trouble for saying this. Golly, sure. I know that's not a company, but the U.S. government seems just really set for something like this. I mean, there's a lot. I mean, there's a lot you could do with that. In regard to a company, I think I would look for a company that did a lot of transactions, probably dealt with a lot of inventory and probably mentioned shrink a lot in their earnings calls over the last couple of years. Um, so sheesh, I'm a shareholder in Home Depot, so I don't want to go too far with this, but something like that might make sense because they're so big. You probably, you could probably, uh, do this without ever, without it ever being noticed, but, but I'm never going that route regardless. Well, here's the way I'll flip it is

I'm thinking of what is the company that I would be least likely to steal from and get away with it. And I think of a company like Amazon where you're like, they're going to notice it. They're on it. And it gives me a little bit more faith in the management team and in the company itself and how long it's going to stick around. I'll pick, even though they're dealing with a lot of inventory, I'm going to pick a company that's maybe dealing with a lot of cryptocurrency transactions and raising a lot of debt in order to buy a lot of Bitcoin. There's so much going on with the blockchain and so many intermediaries going on there. I think I would go with Micro Strategy. Not that I'm ever stealing from a publicly traded company.

Nope. I like that. That makes sense. That makes sense. Let's move on to another story. There's a good article in the New York Times, I'll link it in the show notes, by Thomas Weber. And it's about how the junk food industry is trying to adapt to wider spread GLP-1 drug use. And I thought there was a story in here that kind of encapsulates what's going on.

They talked to Kathleen Kenney, who's a 54-year-old who runs a sword fighting school. And she told the New York Times that, quote, a ho-ho no longer seems like food. It tastes plasticky, she said, or it feels plasticky in my mouth. And what the article is getting at is how people who are taking weight loss drugs

have changed relationships with processed and ultra-processed foods, and then how the food makers are responding. A more overall question as we start out to set the table, do you think food demand for these food manufacturers and companies like Walmart that sell it, do you think that's gonna fundamentally change over the next few years?

Yeah, well, I'm definitely not gonna sit here batch ho-hos or any of those delightful hostess snacks. I mean, they are a lot of childhood memories there, Ricky, a lot of childhood memories. But I think that, you know, the operative word there is childhood. As we grow up, as we get older, our tastes change a little bit. And yes, I think there's no question to me, at least, that people are starting to care more and more about the food that they eat. And I think even furthermore, that new generations will be raised with a different mindset, for sure. I mean, I certainly already see it with our kids, for example, and they're freshmen and sophomores in college now. So I absolutely think this is going to

be something that changes the way these companies determine what they want to go ahead and bring to market. And it's probably going to impact a lot of those delightful snacks that we remember from our childhood days. Yeah, you think of companies like PepsiCo that are making Cheetos, these types of big snacking companies are trying to respond to it. And there's a separate company, it's a private company that does food innovation. It's called Mattson. And it's trying to develop food for GLP-1 users, thinking like chicken sticks wrapped in mozzarella or like brownie bite cubes with whey protein in them. And when I first read this article, I shook it off. I'm like, here are these companies flailing and trying to fight a losing battle. But then you have the flip

side. Bob Nolan, who's a senior vice president at Canagra Brands, told the writer, quote, you're probably not going to want to be in the kitchen prepping an elaborate meal just to have a few bites, end quote. I mean, I know you like to cook, J-Mo, but do you think the big food manufacturers have a point here? Well, yeah, I think the word processed is becoming a bad word in food, kind of going back to the way people are thinking a little bit differently about how how they eat. And I certainly fall into that category as well. And I'm more of a live to eat guy, Ricky, not an eat to live. But I don't know that they're fighting a losing battle, but I do think it brings to question the growth actually in the industry. I think companies are just going

to need to evolve and rethink how they make their food, or they absolutely will risk becoming marginalized. And then I think finally, it just there's clearly going to be a marketing all of this. Most people probably don't spend all that much time researching so in depth what they're eating. They will kind of take things at face value. So I'll be interested to see how the marketing campaigns for this at large sort of sort of take shape over the next decade and beyond. Living to eat a little bit of a better existence than the alternative, JMO. I think this trend and the reason I want to talk about it is because I really do think this is going to

be one of the biggest economic trends over, if not the next few years, over the next decade or so, which is the impact of these weight loss drugs. And I've got a little bit of Eli Lilly stock just to be invested a little bit. And Morgan Stanley points out that while 7 million Americans are taking these drugs right now, by 2035, that could expand to 24 million people. So going from 7 to 24, more than tripling it. And that number would more than double the number of vegetarians and vegans in America, still room to grow by 2035, if they get there to that 24 million mark. But is this weight loss drug trend? Is this something that you're directly investing in or watching? Oh, well, I would say I'm watching it more than anything. I'm not directly invested

in it today, at least as at least in regard to drug makers. I mean, there is it's a little bit questionable, at least there's always a pill for that. Right. But but in this case, there is a lot that we still don't know in regard to the longer term implications of these GLP drugs. So that will be information that comes out of the course of the next five, 10 years and beyond. And hopefully that is good news. I mean, I can't say whether it will be or not, but I think owning healthcare companies is always something worth considering, I think, for investors. I mean, I guess if you, I still own shares in Teladoc Health, for example. I mean, I've owned those for ever since they IPO'd. So given the Livongo acquisition and everything that they're doing to try to address sort of, you know, chronic conditions and whatnot, I mean, I guess I am invested in a way in a company that will at least be trying to address this to some extent.

But they're clearly approaching it from a different angle, right? They're approaching it more from an angle of a healthy lifestyle and keeping track of what you're doing as opposed to just always having a pill to take care of that for you. To round us out, there's a story in Bloomberg about West Texas Energy and this company called the Texas Pacific Land Corporation. There's an AI angle we're getting to here, Jason. But I mean, have you heard of this? I heard one person mention it to me about a month ago. But have you heard about this company before this morning? I absolutely had heard of it. I didn't know anything about it. Just not not a company in a space that I really follow closely. But I had heard of it before. So there's a lot of investor hype around it because this company owns eight

hundred and seventy three thousand acres in West Texas. For the context of that, that's about the size of Rhode Island that this company just owns the oil rights to in West Texas. The stock is up more than 200% this year as investors are hoping that big tech companies will build data centers in this kind of area where natural gas is cheap. And what's changed is not just the money that they've made from these data centers being built, but valuation and investor expectations, where this company went from about 40 times free cash flow or earlier this year to more than a hundred times. But when you think about these investors getting really excited for these literal picks and shovels plays, do you think the hope in hype here is warranted? I mean, I certainly understand

the hype. I mean, there are a lot of conversations out there in regards to data centers and the opportunity there. We know that data centers are going up at a very rapid pace. If you look at McKinsey Research, for example, they're looking at current trends, global demand for data center capacity should rise annually around 20% from 2023 to 2030. That is a pretty long stretch of sustained growth there. And you go through an NVIDIA earnings call, obviously they talk a lot about data centers. That's the bread and butter of their business, really. So I definitely get the enthusiasm, but I think you make a very good point. That enthusiasm, however warranted it may be, valuation does always matter. And there's a lot of enthusiasm in some of these AI names today.

And this is a business that is also fundamentally sound. There's a real business there that has an extraordinary advantage in that I was watching Scoreboard earlier on the Motley Fool Live premium feed. And I think it was Tyler Crowe pointing out that these 870,000 acres have a carrying value of just $100 million or $95 million. So there's a tremendous amount of value here. And a lot of people are going to want to get to that oil. And this company is able to collect the royalties of it. But there is a lot of excitement. And what would your advice to investors who are looking for these picks and shovels plays in AI be? Well, I think just make sure you can connect the dots, right? Understand how this individual company is ultimately benefiting

from the trend. Don't just go by what the headlines tell you. Like I mentioned, valuation always matters. And a lot of enthusiasm in the headlines tends to push interest in buying and therefore valuations up. You mentioned it, fundamentals, I think. Making sure these companies have fundamentals in place, good financials, a business model that makes sense, strong leadership that knows what they're doing. Those are some key things to focus on if you want to do a perceived strength. And Jason, if you end up going to Wicked this afternoon, that's three hours if we're including previews where you gotta get your butt in that seat for three hours so i want to be very mindful of your time as we let you go here well i appreciate that

thanks thanks for joining us on wonderful money thank you all right up next bloomberg's lucas shaw joins me to chat about netflix and the company's pivot to live events. Lucas also writes the informative and entertaining Screen Time newsletter. I recommend you check it out. From morning hockey with a cup of coffee to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian Tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every tim's run terms and conditions apply visit tim hordens.ca triangle for details netflix spends

17 billion on content a year and that's actually up from last year i think it was 13 billion is they're looking at these big live events do you think there's a trade-off from other programming or is the pie just getting bigger for netflix here it's definitely a trade-off because actually the 17 billion figure has been pretty steady for for probably two or three years now and the the money for live comes out of the the larger unscripted budget because it all folds up under this executive brandon reig and so if he spends a half a billion dollars or a billion dollars on live programming that's money he can't spend elsewhere on unscripted now for now the amount of money they're spending on live is small enough that i think the total unscripted budget

has probably grown because of how how much they're doing there but he can also reduce in some places I noticed that I believe their CFO made some comments in the last call suggesting that they would increase their programming budget in the future. And so I think if they do more live, the total programming budget will grow. But for now, yeah, it comes from other parts. So I would imagine that if you're for Netflix executives, not that they're making these direct trade-offs, they may be thinking maybe it was better to pay Mike Tyson and Jake Paul a collective 60 million for 15 minutes of work versus getting the Russo brothers to make another original action movie. But for the unscripted stuff, is this reality shows? Is this documentaries?

What's the pie being taken from there? Yeah. I mean, Netflix's unscripted division includes documentary series. It includes dating programs like Love is Blind. It includes music competition programs. Netflix at this point releases dozens of unscripted programs every year. It's been one of their more successful kind of new quote unquote programming areas. I want to talk a little bit about the movie side where there's another strategic shift you've reported on this. And originally there was this sort of spray and pray strategy where they were releasing as many movies as they possibly could and you rightly point out that netflix doesn't make a lot of good movies there's there's been a few exceptions to the rule i liked the irishman

and roma got a best picture nod but you know from an outsider perspective i would expect like hey if you just give filmmakers a blank blank checks and make a bunch of stuff there's going to be a lot of good stuff that rises to the top why didn't that work out for netflix as much you're asking why i don't think they have made more good movies yeah like if you're just giving a director five million dollars and you let them go do whatever they want i would expect that to create some sort of cult classic or a24-esque type successes where you get a legion like a lot of people or a or a like cult followings for more movies versus just tv in the background part of it is they're just doing too much it's very hard to have any kind of quality control when you're making

more than one movie a week or releasing more than one movie a week, I should say. Also, people underestimate or don't appreciate that feedback from other people makes your work better. So getting notes from a studio or getting some guidance from a producer and all these things that a lot of filmmakers weren't getting at Netflix can help the product. And Netflix films suffered because they were trying to do too much and as a result, couldn't give that kind of feedback or didn't want to or whatever it may have been you know netflix also just puts out movies so many movies so quickly that they feel pretty disposable so they might not even have that chance to become a cult classic it's possible that five seven years from now maybe people will

rediscover some of these movies and decide that they really like them but in the moment i just think it was it was too much uh and in the case where they worked with a lot of talented filmmakers like they were giving those people sort of too much money to make a not fully developed idea so it wasn't like you had some filmmaker who'd spent years trying to get this thing made and just like couldn't get the money and did oftentimes it's like oh alfonso crone you want to make this personal story here's like more money than you need to go do it and now romo was it's an example of a good movie that they made but it was a lot of that on netflix's film strategy along with thomas Buckley, you reported that now they're talking to IMAX to get Greta Gerwig's Narnia on very large

screens. Do you really think this is a one-off like Netflix leadership would tell you, or are we seeing a change in strategy here? For now, I believe it is, if not a one-off, I don't believe it is a sign of a strategy change. If you go back to the earliest days of Netflix's film strategy, they actually tried this with one or two of their early movies. I forget if it was crouching tiger something like that that they put on imax screens because the major theater chains wouldn't play their movie and so i think they're doing what they have to do to satisfy greta gerwig greta is she's attached to the project she wants to make it it doesn't seem like she's trying to get out of it but she does want it to be on theaters and because it's going

to be this big movie it makes a lot of sense that for people to see it on those types of screens i think netflix is probably able to say you know greta's a unique filmmaker and we're doing what we need to do to make her happy but you know we're not going to do this with everyone also keep in mind that that movie hasn't even entered production so it's not coming out for two years at a minimum so i don't think you're going to see between now and then like suddenly a bunch of filmmakers get to put their movies in theaters whoever they want so no i haven't gotten any sense from the folks that that's like their strategy is changing in any material way i think they have a track record of tweaking what they're doing to appease filmmakers and this is another example of it

that's not to say the strategy won't change there are all sorts of things netflix have said that they don't want to do and then they end up doing for one reason or another but i don't think we're there with the film business yet because the same at the same time that this was going they lost out on another project involving margot robbie at large part because they didn't want to put it in theaters so was this it was this the um it's just a weathering heights project weathering heights Okay. The other thing that Netflix has changed on was ads. And for a while, the ad business was just getting started. And I've heard on the town with Matt Bellany, I believe it was you who said that at 40 million, basically ad members, it's not super scalable.

Right. What about 60 million? When does this get scalable? Because now Netflix is at 60 million. At what point do the ads, it's 70, excuse me. At what point is the ad business really impactful for Netflix, you think? we're getting a little closer you know the tricky part with it is so that 70 million figure it's viewers so they're they're counting people who maybe use an account like multiple people per account it also means that if people watch something like the nfl game will have advertising right they'll be able to count those people as maus because they watched it one day of the month

but come January, they won't count because they're not on the ad tier. So I'll be curious how that number changes, but they're getting there. They're slowly but surely getting the scale. It's spread across 12 countries. I don't think they're big enough in any market for them to really matter in terms of advertising. They say now, I think that sort of next year, year after it is when people will start to see it be a meaningful contributor. You know, as they add more live programming, as more people sign up for the ad tier, as they direct more people to it, they'll get to a point

where their ad business will be meaningful. I don't think it'll be meaningful compared to like YouTube. I don't know how long, you know, YouTube subscription business is much larger than Netflix's advertising business. But I think in the next two, three years, we'll start to see them be big enough

that they'll make enough money that Wall Street will be paying attention. And Netflix can't do probably what was Amazon Prime, where suddenly everybody gets ads for what they're watching. Another strategic shift that's come out of Netflix lately is with gaming. They closed a gaming studio, and this is something I've always been a bit confused about. What was Netflix hoping for with its gaming efforts?

Or what is it hoping for? Well, I think Netflix, like all of these Hollywood companies, sees gaming as this very large entertainment business that is related to film and television, right? It's also storytelling. Some of the biggest properties are based on film and TV properties. some of the biggest movies and tv shows are now based on gaming there's sort of a logical interchange and a lot of entertainment companies have have tried and largely failed at gaming much as a lot of gaming studios have tried and largely failed at making film and television and so i think netflix was looking at this as if they wanted to plan for 20 years in the future they

needed to do something in gaming and that they wanted to have it be more than just licensing their titles to other people they wanted to make their own games and use their platform which has hundreds of millions of people using it every month as a way to get people to play those games you know if it weren't for certain app store rules i'm sure they'd love it to enable people to play the games within netflix instead of need to go to a separate app and so they slowly built up this team to develop a bunch of in-house games some of it for based on netflix properties and some of which weren't. And I think they quickly realized that making games is a lot harder than most people realize, or most people think it will be, I should say. And so they've changed

strategies a couple of times. They moved their head of, they moved the head of gaming over to another part of the company. You know, they seem to go back and forth about like, are we making mobile games? Are we making games for consoles? Are we making games for PC? Are we making small games, big games? The studio that they closed made bigger games. So it seems like maybe they're less interested in that. They could have a slightly less ambitious strategy. They've also been pretty clear that the games based on their titles generally do better than the ones that are not, which makes a lot of sense. I think Netflix's gaming efforts remain sort of one of the big questions at that company and more broadly across media. And then last question as we wrap up,

this is something I don't understand in the industry really at all. Over the pandemic, these release windows for movies completely collapsed. Netflix, as we mentioned famously, does not like putting movies in theaters that much. But for these other entertainment companies, they tried putting movies directly onto streaming and then realized they kind of needed theaters. But the thing that's remained surprising to me is just how quickly movies go from theaters to video on demand to streaming. Why have those release windows stayed so tight? Why haven't they expanded? Well, they have expanded. It's funny if you look back on it. Before the pandemic, these studios and theaters spent years arguing over it and they didn't really change and then

the pandemic scrambled it all and in some cases the windows collapsed to zero right they've since expanded back out where for most movies there's at least a few weeks and usually a few months before it's available for for rental or transaction at home and then another couple months before it's available to stream every company's a little different setting aside netflix universal has the most aggressive strategy where you can buy those movies at home oftentimes like 17 days after they're in theaters while they're still in theaters yeah and then they'll go to peacock usually after like three months but i just had a conversation with the head of paramount pictures who said we've slowly walked it back where now usually their movies aren't

available at home for two months three months four months because they feel like that's better And so we're still finding that happy medium where you can sort of take advantage of the marketing that you do when a movie comes out on streaming, not need to do a whole secondary campaign. And some people believe that making a title available at home, depending on how it's available, it doesn't necessarily cannibalize the theatrical performance. You know, Universal would point to The Wild Robot, this kid's movie that has held up really well in theaters, even though it's available at home. Lucas Shaw, appreciate your time and your insight. Thanks for joining us on Motley Fool Money. Thanks for having me. As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against,

so don't buy or sell anything based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. Thank you.