Motley Fool Hidden Gems Investing - Starbucks > Pepsi > Coke

Episode Date: October 9, 2024

For investors who are after steady, mature companies, beverage companies might be a good place to start. But not all of them bring the same returns to the table. (00:21) Jason Hall and Mary Long discuss: Recent earnings from PepsiCo Various forms of “flation” WeightWatchers’ foray into the GLP-1 market Then, (15:04) Adam Comora and Jon Maurer, co-CEOs of OPAL Fuels, join Mary to talk about the push for renewable natural gas within the trucking industry. Vote for Motley Fool Money as Signal’s Best Money and Finance Podcast: https://vote.signalaward.com/PublicVoting#/2024/shows/general/money-finance Learn more about the Range Rover Sport at www.landroverusa.com Companies mentioned: PEP, KO, SBUX, WW, LLY, OPAL Host: Mary Long Guests: Jason Hall, Adam Comora, Jonathan Maurer Producer: Ricky Mulvey Engineers: Rick Engdahl, Desiree Jones 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. we're talking snacks and copycats you're listening to motley fool money i'm mary long joined today by jason hall jason thank you very very much for being here with us this morning hey mary so we are going to kick things off with uh pepsico because they reported earnings yesterday. Big story per management is that Americans are more value conscious. So Pepsi's seeing this play out in their results. A couple big items, revenue of $22.5 billion for

the quarter. That's down a bit from a year ago, and it's shy of analyst expectations, which were closer to $22.6 billion. Net income came in at $2.93 billion. It's also down year over year, also missed analyst estimates. If you break this up into segments, it's really only beverage sales that saw an uptick. In the North American segment for beverage sales, that uptick was minimal. It was about two-tenths of a percent. Europe saw a bit more traction, closer to six and a half percent increase. But pretty much every other segment, which includes a lot of salty, sweet snacks, those were all down. Whether it's any of those items or something entirely different, What are your headlines from this report?

Yeah, I think my headline would be, it's fine. Everything's fine. But we're also going to buy this really interesting clean foods, Mexican snack foods company, because it's not really like fine, fine. It's interesting what's going on, because we look at the long-term trends, Mary, and we'll talk more about it. The carbonated beverage industry has been seeing volume declines, especially in mature markets like North America.

Coke and Pepsi both have seen their largest brands, Pepsi Diet, Pepsi Coke, Diet Coke. Volume trends have been negative, but they have pricing power. They've been able to raise prices and grow revenues, even though volumes have been challenging. And they've done lots of acquisitions all over the world to bolt on other brands. And then they can leverage that big distribution network they have and grow the total business. Pepsi, of course, we'll talk more as it's complicated because they have a snack business. And we're starting to see some challenges there. The big thing to me is what we're seeing from PepsiCo, if we look at every other consumer goods company that's reported recently, where things are challenging are where consumers are having to think about their budgets. Siete Foods, which is the company that Pepsi bought, it's this grain-free tortillas and chips and other organic, they call it clean foods.

It's kind of cringy. I hate even saying the clean foods trend. But like I get the idea of moving away from like the macro farmed kind of foods, but it's also an upmarket product, right? So they clearly see like value conscious, price conscious consumers long term is concerning trends. So they're trying to move upmarket a little bit to consumers that have a little more discretionary income and want to spend on products versus maybe skipping the Fritos and buying the private

label bag of corn chips. It's kind of hard to talk about PepsiCo without talking about Coke. So before we go further, maybe let's just kind of zoom out for the year and compare the two. Pepsi's underperformed the S&P significantly. It's up less than 1% year to date. Coke has also underperformed the S&P, but it's more closely tracked, that index. These are storied rivals, like Pepsi and Coke. What's behind the gap in that stock performance? So I think the near term, it's a little bit of valuation and also where expectations were

a year ago and then at the beginning of the year. And then plus some stumbles PepsiCo's have with its foods business. We'll talk a little bit about the Quaker Oats division. It's kind of a little bit of a mess right now. But here's the thing. If we look over the past quarter century, well, Coke has been the better investment. So a lot of times saying the Pepsi to Coke is kind of a backhanded compliment. Over the long term, its diversity has actually been a benefit and a strength. It's just less clear how things are playing out right now. Let's zoom in on the Quaker food segment for a moment. Because again, they had particularly, I'll say glum performance. Revenue was down about 13%, core operating profit down 28%. Again, that's largely due to product

recalls that they've had to make in this category. But still, that's a significant drawdown on revenue. Recalls strike me as events that are preventable, but also perhaps unpredictable. as investors is how much attention should we be paying to a recall like this? Is it an inevitability in a business like this, or does it indicate a larger problem within a company's processes? I don't think it's or, I think it's and. They are inevitable when you're at this scale. You're dealing with food products. Sometimes the recalls can start with a supplier, right? And it just gets to the point where you have to do a recall. But I do think with a company of this scale, you kind of have to shorten the leash a little bit and watch things a little more closely.

Because you want to find out if it was just an inevitable speed bump or if it's an indicator, a symptom of a bigger issue with a loss of focus on manufacturing, quality control, letting operations slip. Again, these companies make their money by being really good at making a lot of something. and in PepsiCo's case, lots of somethings, and then distributing it really well, leveraging your shelf space, your brand power. The issue though, is that your reputation either supports all of those things or it completely undermines them. So Pepsi's been hiking product prices over the past few years, but it's selling fewer products because of that, as we've kind of discussed throughout this conversation so far. There's a lot of different names for that, that people might point their fingers to. Shrinkflation,

inflation, snackflation, whatever we want to call it. Just boltflation onto it, right? Just boltflation, right? There you go. The point, my takeaway is like, pricing is a bit of a game, right? You mentioned brand power, like how much can you raise prices without customers pulling back on their spending? Declining sales that we're seeing now might suggest that Pepsi has pushed too hard on the whateverflation front. How easy a problem is that to correct? So I think there's kind of two ways to look at it. First of all, we talked about it before with the volume trends with carbonated beverages,

how consumer tastes have changed. And the companies of both Coke and Pepsi both have had extremely powerful pricing power. They've been able to continue to raise prices and grow revenue, even as volume has been challenging in those core brands. It's less clear that that pricing power works as well in snacks. It's obviously there to some limited degree. I think the bigger challenge, Mary, is that what we've seen happen is that private label brands, the quality has improved enormously over the past couple of decades. And some of the stigma around buying store brands has lessened, particularly with the advent of Amazon, right, where you are flooded with these off-brand products all the time that you buy and it turns out they're just fine, right?

So I think it's less clear how powerful brand is, again, for the consumer that's looking at the Lay's potato chips versus whatever the store brand is. The key is owning the IP where you have it, right? And I think that's like where the Siete Foods acquisition comes in, is buying brands and owning brands and leveraging them that do give you more pricing power. It's also very cyclical. We're coming through a period of really high inflation where consumers are thinking more about it.

I think over the long term, that's going to normalize. And the consumers that want that will pay that premium. And you can have the pricing power that lets you at least keep up with inflation, if not a little bit more. It's, again, less clear how well that's going to play out in the snack foods business. We spent a lot of time kind of focusing mostly on the headwinds, I guess, that PepsiCo is facing at the moment. But historically, this is a company that's a pretty aggressive repurchaser of its shares. It pays out a nice dividend trades at a lower PE ratio than Coca-Cola. If I'm looking for a steady, mature company to add to my portfolio, might this be it? Or are there other companies that kind of fit the same bill

that you think do a better job of providing that stalwart in a portfolio? I think it really boils down to what you're looking for. I would say this, if you're thinking Pepsi or Coke, I'm buying Pepsi over Coke. It's cheaper. It has a better long-term track record of delivering returns. Neither one. I know this drives people crazy when I do it, but you go back to 94, which is like the touted, this is when Berkshire built its full position in Coke, hasn't been a very good investment compared to the stock market. Pepsi has been better, but still hasn't outperformed the market. Both have been a heck of a lot better than bonds, right? In terms of total return versus bond yield, which I would argue if you're looking for something better than bonds

and you want something that's safe, I think you're fine. I think Pepsi would be over a five to 10 your hold perfectly fine. But if you're looking for something a little better, you want a business that's facing some challenges, but has a lot to like, has a really good long-term history, still has better growth potential, and gives you a more compelling valuation, I'd say look at Starbucks, Mary. Heck, it's even in the beverage business, right? So you're basically there, and I think you get better returns. So we just focused a lot on PepsiCo's declining snacks business. Another potential reason for lessened interest in snacks, apart from just consumers keeping a tighter hold on their wallet, might be shifting consumer taste. And

stop me if you've heard this story before, Jason, the rise of weight loss drugs. Right. Right. Weight Watchers is just another company that's trying to ride that wave of weight loss drugs and the rise of GLP-1 drugs. The company announced the other day that it would be selling a copycat version of Ozempic starting at about $129. And just for a point of comparison, without insurance, Ozempic costs nearly $1,000 per dose. So that's quite the discount. Before we get into anything else on this, I cannot get over this fact. This is not just any product rollout. Adding a drug to a product lineup is really, really different than rolling out a new brand of low calorie potato chips. How is it that Weight Watchers is even able to play

into this space? This is though, this has been the Weight Watchers playbook, Mary, for a very long time. We're talking decades where, because again, fitness and weight loss, these are very trend driven businesses that ebb and flow and what potential buyers are interested in can change, in a year or two. It can change very, very quickly. So Weight Watchers, again, is pivoting based on where the trends are. I will say this, with the GLP-1 drugs, there is massive evidence of good that these drugs are able to do for humankind across all kinds of things from obesity to some evidence about all kinds of different levels of addiction. So it's really going to be interesting to see how they play out over the long term. I do think it's interesting that

they're trying to leverage this in a way that it's not completely clear. I do have some concerns, but they're somewhat minimal around the quality of the medications. The bigger concerns I have thinking about Weight Watchers as an investment, right? It's been an interesting business for a long time has never really been a good long-term value creative business. Stocks had periods where it did good when people like Oprah get really invested and people kind of chase that wave. But the economic results of the business, which is all I care about as an investor, not all, but like that's the core. They've never been good at making money for their shareholders. Jason, I'm going to kind of set you up on this one because before we started recording,

before we started recording, we were talking, you and I were kind of like getting amped up talking about Weight Watchers, WW, and you named out some problems. So I'll just ask you, and again, I'm teeing you up for this one. What is this company's moat? There isn't. And this is really important because when we talk about moats, it is a durable thing that creates economic advantage that then you can leverage to create value. You can grow your cashflow per share, really. If we boil it down to a number, something that can create cashflow per share, protect it, and allow you to grow it over time. and and ww has a great brand way watchers is globally recognized um but again it operates to

to kind of uh crib peter lynch here you know if you own the best business in a mediocre industry you own a mediocre business and i think that's the case it doesn't have things that are real economic moats i think as an investor looking beyond something that looks like a moat but doesn't actually act as a moat is really really important i mean a rake is kind of like a shovel But you know what? You can't really dig very many holes with rakes. So I think that's important to remember. You've called this a mediocre business. Let's just indulge me. You get a call tomorrow unexpectedly saying, Jason Hall, we want you to come take over Weight Watchers, step into this empty CEO role. What's the first thing that you're doing? I'm going to do what I can to get our

operations as lean as possible. I'm going to start talking to everybody I know in private equity, and I'm going to try and position us to sell the business and take it private. Jason, you might just have gotten yourself a new job. Oh, boy. Oh, boy. Best of luck. Thoughts and prayers, please, people. Thoughts and prayers headed your way. Thanks so much, Jason.

Pleasure talking to you. Thanks for joining us today. Thanks, Mary. This was great. In case you didn't know, we got an election coming up in November. But before that, there's another cause that's asking for your vote. Us. Motley Fool Money has been nominated for a Signal Award for Best Money and Finance Podcast. We are super excited about this.

So if you enjoy the show and get value from it, we'd really appreciate you casting a vote for us. I'll drop a link to do so in the show notes. Heads up, you will have to enter in your email to prove that you're a real person, not a bot. Thanks as always for the support, fools. Okay, up next. every day, there are a whole lot of trucks crisscrossing the country to get goods from one place to another. For a long time, those trucks have run primarily on diesel. But there's another fuel that's cleaner and cheaper that's already broken into the market. And it comes

from organic waste. Next on today's show, I talk with Adam Kimura and John Moore, co-CEOs of Opal Fuels, a vertically integrated clean energy company that's changing the way truckers fuel up. For those of our listeners that are unfamiliar with Opal Fuels, you all capture methane emissions from organic waste in landfills and dairy farms, and you convert those emissions into renewable natural gas and electricity. This might be me showing my biases up front, but I think that that is pretty cool. Can you, for like most of our listeners are investors, perhaps rather than scientists,

Can you give us a peek behind the curtain into how that process of converting organic waste into energy actually works? Yeah, no, happy to do it. And this is Adam Kamourin. Thanks for having us. Really excited to talk to you and your listeners. And you captured what we do pretty succinctly, where we capture decaying organic waste that turns into methane, one of the single most damaging greenhouse gas emissions. And, you know, really thought of as the front line for what we can do to help stem or reduce climate change. And, you know, the process that you were asking about is really pretty simple, where we have waste in place issues, whether they be landfill waste or coming from wastewater treatment facilities or coming from livestock waste.

And what we do is, you know, at a landfill, we have simple PVC pipes that we drop into the ground. They have perforations on them. We rather than that methane venting up to the atmosphere, we apply a little bit of suction and vacuum pressure. So all of that biogas that is has a methane content to it either gets put into a renewable electricity generation facility and we generate electricity right on site, which is really a great way to decarbonize electricity grids. It's baseload power. It doesn't rely on either sunshine or wind or battery storage. So it has a lot of positive elements from grid stability.

Or in larger facilities, it's really exciting. And if we have proximity to a pipeline, we build a renewable natural gas facility. So we can purify that gas all the way up to basically pipeline quality fossil natural gas. and then use it for hard to decarbonize sectors and use it as a drop in fuel over existing pipeline infrastructure. We have a particular focus on transportation fuel for a variety of different reasons. Class 8 heavy duty fleets have presented a really difficult challenge to decarbonize and move off of diesel. And renewable natural gas has proven itself to be a really wonderful application for RNG as fleets both recognize cost savings, reduce their emissions, and Opal Fuels is also

a little bit unique where we also build out all that fueling infrastructure for those downstream fleet customers. UPS happens to be our largest customer. We've already built 50 stations for them. They have over 6,000 of their heavy-duty trucks operating on RNG, and we've got a service network across the country that takes care of those stations. So Opal Fuels is vertically integrated. We're in the capture and conversion of that biogas or that decaying organic methane emissions, and then treating it and converting it either into renewable power or, and then also on the downstream side, building out that fueling infrastructure and supporting fleets as they move off of diesel and into RNG. Sundari, let me just interject. What you said is right.

It's really cool. It's methane that's being generated from landfills. And it, as Adam said, would seep into the air and methane is really bad for our environment. The best thing we can do, quickest way to reduce carbon in our atmosphere is collecting that methane gas. And so, yeah, we collect the methane gas. What's even cooler is that we use it for productive purposes to create electricity or this renewable natural gas. And what's even cooler than that is that we use it for fuel to displace fossil fuel in trucks. So we love what we do. We're very excited by it. We've built 10 projects so far. We've got six more under construction, and we can't wait to put more into the market. So before we dive more into the fueling and the electricity aspect of this, I want to stick on supply for a minute. How are you building out your supply of this waste that you're then converting into fuel? Are there other companies? I know it's not the sexiest topic in the world, but are there other companies that are clamoring to get their hands on the organic waste that's sitting at these landfills and on these dairy farms? So, the largest landfill companies in the U.S. are the likes of Republic Services, Waste Management, GFL, and Waste Connections, and they operate the largest landfills across the country. And so, they are very actively engaged in finding partners to help them utilize this methane gas. So, they're required by federal regulation, once they reach a certain size, to collect that gas. But the real interesting part becomes how do you then utilize it when you collect it. And so if you just burn it in a flare, sometimes you've seen what's called a candlestick flare. You drive by a landfill and you see it burning. It's like, no, no good.

Better than that is to create electricity where you can decarbonize your electric grid, baseload electricity, as Adam said. Or even better than that is to create this renewable natural gas and put it into vehicles or really any other place that fossil methane is used. It just so happens that these trucks are hard to decarbonize. Battery technology isn't really ready for prime time on heavy duty trucks, nor is hydrogen. Yeah. And to answer your question as well on other people clamoring for the resource or other people that see this opportunity as being interesting in an area of growth, the answer is yes. We have seen some major E&P companies move into the space. BP bought one of our competitors, Archaea. Now it's about 16 months ago. We're seeing other major energy companies get more interested in this space. You know, one thing unique to Opal Fuels is we've been doing this for a long period of time.

We have a 20, 25 year operating history capturing biogas from decaying organic waste and landfills and creating renewable power. And our vertical integration, having that transportation fuel offtake is also a very key differentiator as it is the highest value offtake market for our product. And in terms of one thing that with our operating history and our proven track record, we've gotten ourselves to a spot where we're a very attractive partner for these landfills and these municipalities and other fleets as they're seeking to either maximize the value of their resource, work with a partner where they're confident that the projects will be built on time, on budget, operate the way they're supposed to, and also find that best offtake market for the fuel. So today, in addition to these renewable natural gas projects, you operate over 350 fueling stations around the country. After this capture and conversion process, who is it that's fueling up at these stations? Yeah, so that would be a variety. Refuse companies were one of the first early adopters, and that had to do with the truck engine technology that came out. The first engine that could run on renewable natural gas or conventional natural gas was a nine liter engine. And so the first early adopters were buses and refuse companies. So we have a lot of refuse companies where they're operating their collection vehicles on renewable natural gas as their fuel. I think waste management is now up to about 70% of their fleet that they've converted over and GFL and some others continue to deploy more natural gas vehicles. In 2013, a 12-liter engine came out so we could start moving up the class of weight that people would use. And UPS really started deploying the 12-liter engine.

So they're a very large customer of ours and are fueling up at a lot of those sites. And we've got a number of other logistics, beverage haulers, food haulers, agricultural goods. You know, that's really, you know, who our prime customers are that have transitioned from diesel over to R&G. And now everybody's excited, including us, on Cummins introducing a new 15-liter engine, which we think will expand the market further into more over-the-road trucking and logistics firms. It's important to understand that these trucks are the heavy-duty trucks. You're talking about, you know, big, you know, 18 wheelers or other big cement mixers or big heavy duty garbage trucks. So these are not, you know, smaller, lightweight trucks that might go around the city or other things. And we're currently at about 2 percent market penetration. Right.

So the amount of RNG that's being used on the road today is about one billion gallons of a 40, 45 billion gallon diesel market. So, you know, we think there's there's plenty of opportunity for for additional companies and fleets to convert and save money and recognize or realize zero scope one emissions, zero scope two emissions. It's really quite fascinating that we have a green discount product, you know, for these for these fleet customers. You all are relatively new to public markets. You went public in 2022. We're long term investors here at The Fool. So most of the folks listening have adhered to that long term investment mindset and have time horizons that are at minimum five to 10 years out into the future. So with that in mind, what is the long term, let's call it five to 10 year vision for Opal Fuels?

Where do you want to be? That's a great question. So we're really excited about our growth right now. We started and went public two years ago with just a few projects in operation and a lot more in construction. We're now up to 10 projects in operation, six more in construction. Our plan is to put another four, six, eight into construction in the coming months and two million into construction of MMBTUs per year into construction each year and find opportunities to scale up, combine with other entities. We really think that it's a fragmented industry. Adam said we only have 2% of the downstream fueling market. That can grow six to 10 times. We only have a small penetration into landfills. We can do more in landfills. We can do wastewater. We can do manure. We can get into food waste. There's all sorts of opportunities for growth, but it takes access to capital, it takes an experienced team, and we have all of that.

All of our senior leadership has over 25 years of experience in the industry. I started 35 years ago in this. As a company, we've been doing landfill gas to energy for 25 years. We think that the opportunity is growth and scale. Yeah. And I would just add there, one of the things that really excites us about our business model is the free cash flow generation. After we build these facilities, if you remember talking about the process to get the resource to our facilities is really just a little bit of vacuum pressure. So after you build these facilities, all of your adjusted EBITDA or 90, 95% translates

into free cash flow generation. And we see a lot of, you know, exciting growth opportunities here in the U.S. And, you know, we think we've got a management team that's going to be able to capitalize on that growth and ultimately, you know, maximize shareholder value, which is really what we're focused on as a management team. 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 Mary Long. Thanks for listening. We'll see you tomorrow.