Motley Fool Hidden Gems Investing - Snacks vs. Cereal: Kellogg's Plan to Split

Episode Date: June 21, 2022

Kellogg is planning to split into three separate companies, while DocuSign's CEO is just splitting. (0:25) Bill Mann discusses: - Why DocuSign's falling stock price is probably not the reason CEO Dan Springer is leaving immediately - The relative attractiveness of running DocuSign - Kellogg's plan to split into three companies (snacks, breakfast cereal, plant-based foods) and how long its going to take - Mondelez buying Clif Bar for $2.9 billion - His belief that more acquisitions are on the way and the reasons why (13:30) Morgan Housel joins Alison Southwick and Robert Brokamp to discuss how the economic challenges of the 1970s offer lessons for investors today. Stocks discussed: DOCU, K, MDZ Host: Chris Hill Guests: Bill Mann, Alison Southwick, Robert Brokamp, Morgan Housel Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Chris Hill Motley Fool Money http://motleyfoolmoney.com Learn more about your ad choices. Visit megaphone.fm/adchoices

Great news. The federal EV rebate is back. Eligible customers get up to $5,000 with the federal EVAP rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. Kellogg is splitting into three companies and DocuSign's CEO is splitting, period. Motley Fool Money starts now. Chris Hill. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst, Bill Mann. Thanks for being here. Bill Mann. Hey, Chris. How are you doing? I am doing pretty well. Let's start with DocuSign because DocuSign came out this morning and announced that CEO Dan Springer is leaving

the corner office effective immediately. Maggie Wilderotter, who's the board chair, is going to take over as interim CEO as DocuSign searches for a new leader. I say this as a shareholder, I'm a little surprised by this. Some may not be because shares of DocuSign are down, let's just ballpark at 80% from where it's high in 2021. Seems like a lot. I'm feeling that pain. But I felt like the business was humming along okay. What did you think when you saw this news? Because I was surprised by it. I'm surprised by it, too. I'm always cynical whenever I see a CEO or an executive leave effective immediately. That means generally,

and we don't know anything in this case, so let's not drag Dan Springer through the mud just yet, but usually that means that there's something else going on in the background. Usually, if it is an agreed-upon split, there's a period of time in which they work until they find someone, this is immediate, which suggests that there is something going on behind this. Because as you said, the business is doing well. It's about two and a half times what it was when it reported in January of 2020. So, you're talking about a company that obviously benefited wildly during the pandemic, to be expected, has slowed down a little bit after that. But it's not like it went back to where it was before the pandemic started.

So, yeah, this is very surprising to me. I cannot imagine that this is happening simply because the stock is down as much as it is. How attractive do you think this job is? Do you think DocuSign is in a position to maybe not hire whoever they want, but is this an attractive opening for some potential CEO? You know, we talk a lot about the verb portfolio, like companies that have become verbs or have become defaults. And DocuSign absolutely positively has become the default for electronic signature and document management. So, I think it's a pretty attractive job.

The economics of the business, obviously, are pretty great. They have spent a ton of money on their own back office. And so, I think that there may be efficiencies to be wrung out there. This company is still trading at about six times trailing sales. So, it's not a cheap stock by any stretch of the imagination, but it is much cheaper than it was. And so, it becomes a situation where someone who's coming in isn't immediately as likely to be as held responsible for a massive stock drop as you might be for someone who would have come in, for example, when this company was trading at $75 billion. Last thing before we move on. You think whoever the next CEO is, they're going to have some runway to implement whatever plan

they want to do before they get any kind of questioning, either from the board or Wall Street? Yeah, I think they should. If this is simply a matter of business momentum, the momentum has slowed substantially. Their recent earnings, their revenues were up about 16%, which seems pretty good, but it is absolutely slow. The rate of growth, I should say, has slowed substantially. They should have plenty of runway if there is something behind that may be causing this internally. Let's move on to Kellogg's, which is planning to split into three separate public companies. There's going to be a breakfast cereal company, a snacks company, and a plant-based foods company. CEO Steve Cahillane says all

All three have significant potential as standalone companies. I will point out, however, that he's planning to run the snack business, which tells me that's the business with the most potential. I will be so disappointed if they don't name these three divisions Snap, Crackle, and Pop. I don't think they're doing that. Then I'm disappointed. That's all there is to it. I laid out what I felt about this entire deal.

I mean, obviously, Pop-Tart should be with Pop. All kidding aside, this really does seem like a move that is going to unlock growth potential for the snack business. I think we are into our second decade now of slowing cereal sales. The plant-based foods, that's going to be the smallest of the three. Just from a brand portfolio standpoint, it's the smallest of the three. They've already said, even before this split happens, and Kellogg expects this split to take about a year and a half to fully execute, there's a chance the plant-based food business just gets sold off wholesale. Someone comes in and buys it on its own. But it really does seem like the snack business. I said to you this morning, I might have to pick up a few shares of this thing.

I completely agree. It may be the business that is most poorly named outside of Pepsi, which really ought to be called Frito-Lay. Kellogg's is in the same boat. Their cereal business is about $2.4 billion in revenues. Certainly, they're Frosties, they're Cocoa Puffs, they're Crunchy Nuts. Their plant-based business, which is mostly Morningstar Farms, had a little more than $300 billion in revenues, so much, much smaller. Then the snacks business was over $11 billion in sales. It really, truly was the biggest part of the business. It does, to me, makes some sense that they would be moving these apart from each other. They don't have a huge amount of infrastructural overlap between them. This seems like a great move to me. But Kellogg

itself, as the cereal company, is going to be a much, much smaller company. And I agree with you, they do have some potential to unlock each of those three segments. I think it was 10 years ago, I think it was 2012, when Kellogg bought Pringles. And there was a little head-scratching at the time. Now, with the benefit of hindsight, it's clear that, oh, this is where they were headed. Yeah. Yeah, I think that's right. I think it was a good transaction for them. Pringles is a business like a lot of other business in this segment that does not require a huge amount of research and additional investment.

It was a great platform. As you and I know very well as Pringles fanboys, it was a great platform for them to do short-term and special flavors, increase their shelf space through offerings of that nature. So, they have done a great job managing this brand, but piling it into a dedicated snacks company is just going, I think, is going to be a really, really good move for them. And they're not the only company making headlines in the snack world today. Mondelez announced it's buying Clif Bar for $2.9 billion, which I still can't wrap my head around. and I say this as someone who actually likes Clif Bars, that's basically the energy bar of choice

for me. When I saw the headline, I thought, wait a minute, that's a $3 billion company? Yeah. The answer is yes, because that's what Mondelez is paying for them. Yeah, exactly. It's a really interesting transaction. Mondelez also owns Oreo, Toblerone, Milka. I'm not sure, given the positioning of Clif Bar, what sort of combinations they can make. They'll have an Oreo-flavored Clif Bar or something of that nature. But from a brand perspective, it is by far the most important in the energy bar segment. So, I don't know what synergies that they're seeing, but yeah, they have paid $3 billion for it. Interestingly enough, they're not expecting it to be accretive

to the top line until next year, which means that they are seeing elsewhere in their business, or even within Cliff, some potential weakness in sales this year. So, it could be that they are filling a hole and using some cash that's been sitting on their balance sheet. So, we've got this acquisition. We already talked about the potential for the plant-based food business within Kellogg being acquired before the spinoff happens in 2023. do you think, are you expecting more M&A activity? I mean, this is not insignificant sums of money that we're talking about here. And this is all against the backdrop of what is now officially a bear market for the S&P 500. I think absolutely true. You're going to see the

companies that have been conservative, that have hoarded cash, they're now being punished a little but for the first time in about 15 years, you're being punished for holding cash on your balance sheet because the cash is being inflated away. You have that factor, and you have target companies in a lot of different spaces that have seen their valuations come down a great deal, and you've got certain brands that may be much more valuable within a larger framework, within a larger organization that are starved for cash now. So I absolutely, and not just in the snack division, I see this in tech, I see it in software, I see it in a bunch of different segments, the potential for companies that are cash rich to start to use some of that cash and

make opportunistic buys throughout. I think you're going to see it throughout the market. That may be one of the leading themes for the remainder of 2022. Keep watching for it. Bill Mann, thanks so much for being here. Bill Mann Thank you, Chris. So what happens to an economy when oil prices and interest rates go higher at the same time? Well, the 1970s might offer a few clues. Morgan Housel continues his series with Alison Southwick and Robert Brokamp on previous economic challenges and the lessons that investors can pull today. So, last week, we talked about the Great Depression, and now we're taking a big jump to the 70s.

We're all wearing polyester and sweating, or freezing, because there is no in-between in polyester, and we're waiting in line to fill up our Buick LeSabres. Despite disco, the 70s don't sound like a whole lot of fun. I mean, people made pets out of rocks. That's just sad. And bro still drives a Buick LeSabre. That's not true. Interesting fact.

But I do still have my pet rock. Thank you very much! Alright, Morgan, take me back to the 70s. This is going to get really geopolitical heavy, right? Yeah. When talking about the market in the 70s, I think you have to take it back a little bit further and start right at the end of World War II, 1945. Two really important things happened in 1945 that paved the way for what happened in the 70s. They're interconnected. One was that at the end of World War II, it was indisputable among every economist,

every policymaker, that at the end of World War II, once all of the wartime spending contracted, the economy was going to go right back into the Great Depression. World War II was what pulled us out of the Great Depression in the 30s. It was assumed by everybody that as soon as that ended, boom, right back into it. This really freaked out policymakers, especially because you had 13 million U.S. troops that were being demobilized and were going to come home with no job into Great Depression II. This was a really big deal for Truman and for all the policymakers at the time. Then to add on top of that, because of World War II, the federal government had a massive

amount of debt that they built up to pay for World War II, way more than we've had since, way more than we have today. This was a really big deal. How are we going to deal with this? Maybe this is going to be worse than the Great Depression because we have all this debt now. They really did two things. One is, the Federal Reserve, which was much more politicized back than it is now, basically said, no worries, we'll keep interest rates at 0%. Because the federal government, you have all this debt, if interest rates shoot up, you won't be able to pay for it. So, we'll just keep interest rates at 0%. Guys, don't worry about it, we got you. That was one thing.

The other thing that they did at the federal government level was, for all the troops coming home, they really made an effort to say, we have to make sure that these people have jobs and that they turn into consumers. What can we do for them? There's a lot that went on with the GI Bill and other works programs. Two other things that they did was, they really loosened the restrictions on getting a mortgage and consumer credit, to turn people into consumers so they could really start buying stuff. Both of those things worked. Both of those things worked really well. The federal government kept control of its debt in the 1950s and 60s, and the debt that

was accumulated from World War II got pared down over time, wasn't that big a deal. And also, particularly in the 50s and 60s, the U.S. economy was great because consumers were buying homes, they were buying houses, they were buying refrigerators. And because Japan and Germany at the time were literally in rubble, the U.S. had a monopoly on the world economy, more or less. So, the 50s and 60s were this huge boom time where everything went right in the U.S. economy. It sounds like the lesson is, there's no problem that you can't spend your way out of it. It worked well. That's a good point to make. That amount of spending worked really

well in the 50s and 60s for various reasons. One, as I mentioned, because a lot of the developed world, particularly Japan and Europe, was just trying to rebuild themselves, it worked that we could spend all this money because we had a monopoly on global manufacturing. So, even though we're spending all this money, we had the capacity to build it. We also built up manufacturing so much during the war to build tanks and airplanes and whatnot, that we had all this manufacturing capacity to build cars and refrigerators and washing machines. So, it really wasn't that much of a problem. With interest rates low and having that much debt, it just kind of worked. I think that set up a sense of complacency among policymakers

at the Fed and at the President level, at the Treasury level, and among consumers, that A, monetary policy and fiscal policy for the government didn't matter that much. We got this down. We haven't really had any big consequences from it for a long time. So, you just get complacent from it. And U.S. consumers, too, I think, really got complacent with the lifestyle that they were living. That the U.S. would own the world economy, that interest rates were going to stay low, that there was always going to be a good-paying job right down the street. Those two senses of complacency cracked in the late 60s and early 70s.

A lot of it started when spending for Vietnam came along, and then wartime spending had to jump back up again. But interest rates were still low, and because the rest of the world economy was coming back online from World War II, a lot of that spending and debt that was being taken out for Vietnam started to trigger inflation, which the U.S. really hadn't experienced at all since the 1920s. It had been half a century at this point since you've dealt with inflation, which just sets up a lot of complacency. which is just a long way of saying inflation really started picking up in the early 1970s, and that has all kinds of impacts on investments in the stock market.

Yeah. When we were talking about planning for this series, this is the longest span between episodes in time. We did Great Depression, and then fast forward 30 years later, that is the sound of nothing fast forward. It sounds like it worked for a really long time until it didn't. When are we going to start talking about energy? I thought this was about energy. Yeah, that's one of the big things. Because we bought big cars. That's it. That's a really great point. As oil prices started rising in the 1970s, it had a huge impact on the U.S. economy, more so than it would today or did in 2008, the last time that oil prices spiked. Energy efficiency in the 1970s was awful.

You had your average car that was getting seven miles per gallon, and semi-trucks that were getting three miles per gallon. It was just so inefficient. And when oil was cheap in the 50s and 60s, when the U.S. owned the world economically, that wasn't that big a deal. Oil was cheap, it didn't matter. But as you get into the 70s and oil prices start rising, and oil prices double and then triple, it had a way bigger impact on the economy than it would today, just because oil as a share of most people's spending was much higher back then than it is today. Even when oil prices doubled in 2008, the share of most people's income that went to

gas was still a fraction of what it was in the 1970s. It had a much bigger impact on the economy back then. Also, because we had been, at this point, 30 or even 40 years since the economy was in really bad shape during the 1930s and the Great Depression, you get not only complacency, but a sense of shock among consumers who've never seen a really bad economy. It causes a lot of retrenchment, both for companies that say, maybe we shouldn't to hire as many people, because we don't know what's going to happen next. And among consumers who start saying and start forming a mentality that, I don't know if my job is going to be here next month, so we should slash our spending this month. Then you have high inflation coming

in from the energy markets, which was a lot of geopolitical instability in the Middle East, and in Egypt, and Iran. Then you mix that with a lingering recession in the United States. It all came to a head in the mid-1970s with both recessions and a pretty bad market crash. Just to put some numbers on it, when you look at the 70s as a decade, U.S. large-cap stocks averaged 6% a year. That's significantly below the 10% you always hear about. But on top of that, inflation was 7.5% a year. Even though your portfolio was growing on a nominal basis, you were losing purchasing power each and every year. That was not only true for the stock market, but especially true, I think, for

Treasury bonds, which back then and today are seen as the safest asset or even a riskless asset. If you invest in Treasury bonds, there's no risk involved in that. But during this period, from the late 50s to the early 80s, let's say, Treasury bonds lost so much money to inflation that if you invested in Treasury bonds in the late 50s, by the early 1980s, you had lost half your money in real terms, adjusted for inflation. That's really easy for investors to overlook, because they often don't subtract inflation from their investments at the end of the year to get a sense of, how much wealth did I actually gain this year? But it had a huge impact on investing during this period.

The other thing, as this feeds into the stock market, is that stocks compete with other assets for returns. It's just a big competition among stocks and bonds and real estate of what asset class is offering the best returns. That's where investors are going to put their money. As interest rates start rising, they become more attractive relative to stocks. Because of that, when you have a period where now the interest rates are rising in the 70s, so you can buy government bonds that yield 7%, 8%, 10%, now stocks look way less attractive because you can earn a 10% return in bonds. So, stock prices needed to fall, and fall a lot, just to make up the parity by comparison with bonds.

That's what really dragged stock prices down in the 1970s, the fact that bonds got way more attractive because interest rates were rising. And it was a slow drag, right? There wasn't a major market crash. Not the one-day crashes that happened in 1929 or 1987, but 1974 was a really bad year for stocks. You had some bad years, but no overnight crashes like the other periods. But it was bad year after bad year. Even in the 1970s, there were a couple of really good years. It was a period of just a lot of pinballing back and forth, where you had years where the market would be down 40% one year, and then up 30% the next year, and then down 20% the next year.

During the 1970s, it was just a pretty chaotic time all around. I think one of the important historical aspects of this, or the consequences, is that people basically gave up on stocks. They started moving into gold and real estate and saying, basically, stocks were for suckers. Famously, in 1979, Newsweek had an issue, and the cover was The Death of Equities, basically saying no one invests in stocks anymore. Of course, at that point, it would have been the best time to invest in stocks. But people had given up. And really, why would you invest in a risky asset when you can go out to the bank and

get a CD that was yielding 12%, 13%? Wow! That's crazy! But the CD that was yielding 12% was during a time when inflation was 10% or 11%. It was a pretty crazy time all around. Even though I obviously wasn't an investor, or even a person back then, when you read about the period and read what people were writing at the time, it wasn't just pessimism at the moment, but a sense of long-term pessimism, where it was like, I think the U.S., as the world's leading economy, is over. Very similar to what you saw in 2008, 2009, where people really saw it as a paradigm shift

back to something else. Interesting, too, this is around the period where both Japan and Germany had effectively rebuilt themselves in World War II, and their economies started not just growing, but surging. Particularly Japan, starting in the late 70s, early 80s, was really looking like it was going to become the world's dominant economy. By leaps and bounds, not only in economic growth, but technology and innovation, was really running laps around the U.S. at the point, which added to the sense of pessimism in the United States, that they were falling behind. Robert Shiller used the term animal spirits. When you look at the 70s, in terms of the zeitgeist of the time, you had Watergate,

you had the Vietnam War, you had the OPEC and the oil crisis, which made us feel like we're a little powerless against these other countries. I was around for the 1970s. I was born in 69. What I remember were the long gas lines, and I remember that my first car was a 1977 Lincoln Continental, and it got six miles to the gallon. Six miles to the gallon. That's great! Alright, so it was kind of a slow-burning economic mess. How did we come out of it? There are a few times when talking about these events where you can point to one person and say that person pulled it out. But I think in this event, you can point to Paul Volcker,

who was the Fed chairman in the early 1980s. A maker of rules. Right. I've heard of his rules. That's right. He came back in the last couple of years with the Volcker Rule. But he did something in the early 1980s that I think very few people in the history of the Fed would do, which he was fearless about jacking up interest rates as high as they needed to go, and brought interest rates up to close to 20%, which made this economic recession and paying that much worse. A lot of businesses went out of business that had to refinance their debt, but now interest rates are 20%, so there's no way you can refinance it.

It really caused a lot of pain in the economy, but it broke the back of inflation, which is what needed to happen. Paul Volcker, during the time... it's funny, in hindsight, I think a lot of people think Volcker is a hero. I think he's almost universally seen as a hero today. In the 80s, he was probably the least popular person in America, so much so that he was the first Fed chairman that had Secret Service detail because people at the Fed built an effigy of him and burned it on the steps of the Fed. Wait, his own employees did that? No, not his own employees, but somebody. He was truly one of the least popular people in America at the time because it was viewed,

And I think he rightly viewed his actions were driving the economy into the ground. And it's true, they were, but they were also, at the same time, killing what needed to be killed. It's almost like with chemotherapy. It's going to destroy your body. And it's awful. And from the outside, it's like, God, chemotherapy is the worst thing ever. But at the same time, it's killing the worst disease. That was what Volcker was doing in the 80s. So, it took several years of doing it, but finally in the early 80s, about 83 or 84 is when inflation and interest rates started falling again. Then you have the opposite effect of rising interest rates are bad for stocks, and then all of a sudden now, 83-84,

interest rates are plunging, which is great for stocks. And bonds. And then it's Reagan, morning in America, and bonds, too. Inflation's falling, you get a new president, there's a lot of optimism. So then you start the 80s boom and rally. As always, people on the program may have interest 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 Chris Hill, thanks for listening. We'll see you tomorrow.