Motley Fool Hidden Gems Investing - Three Strikes

Episode Date: September 19, 2023

The United Auto Workers are taking on the entire Big Three at once for the first time ever. (00:21) Ricky Mulvey and Asit Sharma discuss:  - How investors can measure an automaker’s profits.  - A long-term problem for legacy carmakers.  - The impact of the strike on Tesla.  - Digital payments adoption in India. Plus, (15:22) Robert Brokamp and Alison Southwick talk about planning dream vacations before retirement and why you shouldn’t wait.   Companies discussed: F, GM, STLA, TSLA, PYPL   Host: Ricky Mulvey Guests: Asit Sharma, Robert Brokamp, Alison Southwick Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

You gotta try breakfast at A&W. You gotta try breakfast at A&W. And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. Three strikes and you've got a raise, hopefully. Motley Fool money starts now. I'm Ricky Mulvey, joined today by Asit Sharma. Asit, good to see you.

Ricky, good to see you, my friend. So, we're going to talk about the auto strikes in a sec, but first, I know you've got some news. You just got back from a couple of weeks in India. I know sometimes I get investing-related thoughts even when I'm trying to get away from the job. Anything strike you during your trip? One thing that stood out to me is maybe I don't understand some things that I invest in very well. Well, why is that? I hadn't been back to India for a number of years. I was born in the States, family's from India, my wife's from India, so we were actually visiting her family. I noticed that the payment forms I thought we're going to take the last time I was there and

what I've been reading up for a few years, they're still around, but there's a huge amount of innovation going on in the payment space in India. I was interested in a technology It goes by the brand name of M-Pesa, which started in Africa, lets people in villages use their mobile phones, a combination of mobile phones and cash, I should say, to make payments to local vendors. That's still there in India, but now there's this great mix of homegrown solutions. The one that I saw the most of was Paytm, and ones that you'd expect to be there on the ground.

prominent is Google Pay, but the Indian version of Google Pay. India's this great service-based economy. It always has been. You have individual vendors who are selling you so many things. It doesn't matter if you live in a small city or in a high-rise like my wife does. You will still get the bread vendor who will send his or her freshly baked bread up. You'll get the banana vendor doing the same. You can order from your local corner store. They'll send the goods up. Everybody now takes electronic payments from the most humble seller to the most sophisticated. That surprised me a lot. Yeah. In Denver, we have farmer's markets where there are some vendors who take cash only. It's interesting to hear from your experience where that's not the case over in

India. What are some of the solutions that these payment technologies are solving for that might not be solutions or problems in the United States. One of the big problems that solutions like this have solved for is just the lack of landlines. This is a story that's been going on for 10 years. There's so many people in India and Latin America, for example, and Africa, who skipped the whole progression of having a landline to moving to mobile. Here in the U.S., we're blessed. We have landlines.

We got rid of our landlines. We have mobile phones. when you have that necessity that you've got to communicate and you move to this mobile-based system of information and technology, then you've got the ability to make very small innovations that can be used for peer-to-peer payments. That's what you see in India. They have a number of different methods for you and me just to transact, whether it's bank-to-bank, phone-to-phone, bank-to-card. I could go on and on. So, necessity, that mother of invention, is certainly there in India today and in other places that we used to call

the developing world, now emerging markets, let's call them that. We're still a very innovative society here in the U.S., and I like that we are very entrepreneurial. So, we sort of innovate now just out of desire, and it's part of our psyche. But I think that the inability to have things that the rest of the world sees that the West has had traditionally has spurred smaller company startups to provide these solutions, where in the U.S., Ricky, you and I talk about this all the time. In the payment space, we've got PayPal, we've got Stripe, we've got Audion, we've got just toast. A number of vendors, but not 1,000 solutions, maybe 10. And it may also raise some questions about the moats that some of those payment processors,

payment solutions technologies have. Later in the show, Bro and Allison are going to talk about basically why you shouldn't save important experiences for retirements. You should do those when you're able and you're healthy. Any other adventures you want to share from your travel? I had some misadventures. One was going from a very busy part of South Bombay, Calaba, to Cuff Parade, where my wife lives. One of the great things about India is, for all the innovation, they still have this utterly wild system of traffic. I had one cab driver. I'm not sure what he was on. Maybe it was some homegrown pond, which is betel nut. but it was just a deathly trip, a very fast trip. It made me wonder why I didn't get my papers in

order before I left the States, but I'm going to do all the estate planning now. I had my fill of those types of adventures. Speaking of cars, that's a segue to the next story, which is that the strikes are ongoing at the Big 3 automakers. Asit, the last time we spoke, the Big 3 were still making cars. General Motors CEO Mary Barra was confident that they would have a deal before the strike, but now the picket signs are out. The UAW is striking all three makers, but in a targeted way. Only about one-tenth of the union is on strike at this given time. Since these supply chains are connected though, it's causing disruption across the board for the automakers and the car manufacturers are responding. Ford has temporarily laid off

600 workers. General Motors has warned that 2,000 people will be out of a job next week. Asit, this is a newer strategy by Strikers. Attack all three at once, but in a targeted way. What do you think about it? Asit Sharma. On the face of it, it reminds me of medieval types of torture, where you're ratcheting up the pain at every step. It seems brilliant on the face of it, but we also have to keep in mind that this type of gradually raising the pressure, this type of strategy works both ways. Because instead of starting with the big standoff, which we usually see where everyone has had time to mentally prepare for what's coming, here you've got uncertainty on both sides. There's going

to be pressure from the labor force to say, okay, well, this is really hurting. We're in week, I don't know, seven. I'm not sure how much more effective it will be in the end part of this game, but we'll see. We haven't seen this kind of strategy before. I find it quite interesting. Yeah. It raises questions for me about the strike fund. I haven't found an answer to this, which is, okay, so you have workers on strike. They're able to benefit from the strike fund. Now, if it affects a manufacturing plant where the car company has temporarily laid off those workers, how could that affect the math and the calculations of the UAW in both sides? Totally. The strategy makes it much more of a game of calculation than ever before.

All right. Well, let's shift to the investor's lens. There's a lot of talk about record profits. and maybe stepping away from the issue of it, there's a lot of talk about record profits for car makers, but what I don't hear is the specific measure. And there's a few measures that one can use to measure a company's profit. You have operating profit, you have net income. How about earnings before interest and taxes and even free cash flow? When you're looking at maybe a traditional manufacturer, like a car maker, do you have a favorite or preferred measure to analyze? Well, I have a preferred measure for automakers. I should say, I find this business incredibly difficult to analyze. I'm more at home with capital light business models.

Here, I think you have to be careful and try to understand where the cash flow is coming from. I like to look at automotive free cash flow. That's the cash flow the company is generating from the sales of its cars, that cash flow without adding to it the money that it's making from the finance arm, which all of these, to some extent, the automakers engage in. For me, yes, I think that the financing part is part of the entire profit picture, but I want to know at the end of the day, if you didn't have that ability to finance your vehicles, can you generate positive free cash flow? I'll take it one step further, which is to look at a version of this measure and look at the levered free cash flow on the automotive side.

That's basically saying, you had operating cash flow from your sales of automobiles, you took out your capital expenditures, the plants you're building to convert to an EV type of platform, and you got some debt service too. The net debt service, what you had to pay out to your lenders, what was that when you subtract that part that's left? I like to think of that as something I can bank on. Let's face it, these big automakers have got lots of obligations from the debt service to pension liabilities, because many of them have legacy pensions to deal with, all types of cash outflows. That's what I lean towards, but I think for most people, focusing on cash flows may be a little better than just focusing

on the net profits. When I looked at the surface level measures in terms of net income, operating profit, and free cash flow, as you mentioned. One thing that stood out to me was how much Stellantis brings up the mean in terms of the profitability of the big three. In these conversations, they're often lumped together. But over the past 10 years, free cash flow hasn't really improved for Ford. In fact, it's declined for General Motors. Stellantis, on the other hand, has recorded, according to macro trends recorded about $63 million in free cash flow in 2014, and then $12 billion in 2022. When you were looking at the profit measures for these three automakers, what else stood out to

you? One thing that stood out over that period is just the volatility of the cash flows. In a perfect world, you have stable markets, you have stable supply. If anything, the world is getting more volatile. We saw COVID, we saw what happened with the supply chains. We're watching supply chains reorient. Parts now, where are they moving? Which content are you manufacturing in? All of these things have made for a lot lumpier production and lumpier cash flows. The world is quite unstable and it's difficult when you're a big automaker churning out millions of vehicles among the big three to keep those cash flows stable. You don't know if you're going to have a geopolitical risk that's upending production in Eastern Europe, or you're going to have a

pandemic that's come. It's not a different story from the rest of the world, but that's what stuck out to me. I think that also when we look at those free cash flow figures, we should cut GM and Ford and Stellantis, all three of them a little slack because part of that end number represents the enormous investments they're making to catch up with Tesla. They could show more free cash flow to their investors, but they're choosing to invest, and that's why that number is smaller. Speaking of Tesla, I've been hearing the take that this is the real winner of these strikes. To be clear, Tesla has been no friend to attempted unionization at their factories. one thing that's also different about Tesla than the other automakers is that there's more stock

options for employees up and down the hierarchy. So I know you follow Tesla. What do you think about that take that the real winner of these strikes is going to be the dominant electric vehicle maker? I mean, it's sort of true when we look at the cost structures, but I don't think it's as big a story as we're seeing some people make out in the financial press. And the reason is the big battle over the next 10 to 15 years is going to be less about that labor component, that the biggest efficiencies are going to come from the manufacturing side, which Tesla's been leading on for a long time. So I think it is going to come down to this idea of who can manufacture electric vehicles with the fewest parts, with the most cost-effective components,

the big three are racing to catch up. And it's really about their investment in plant technology that's the bigger story here. Just on Tesla, I'm reading the Walter Isaacson book, Biography of Elon Musk, right now. And there's the discussion of how Tesla was able to create diecasts of the entire underbody of these cars, which is going to greatly reduce the manufacturing process. It's not just automation with robots. We're just going to pour in the metals needed to create this underbody and completely reduce the steps in terms of making the car, which Tesla has been excellent at. It's so interesting that you bring that up because Tesla's greatest growth has come as additive manufacturing technologies, I should say,

the ability to die-cast ever-larger pieces, body parts for cars, that technology has become available. They've leaped on that, and they've developed a lot of it themselves. When you couple that with so much investment in the supercomputing aspect of the Tesla narrative, how they're using artificial intelligence machine learning to get ever smarter in their production processes, getting data from cars, etc., you've got a real edge. I think the big three may be capable of catching Tesla, but it's not an overnight story. We're going to be watching this for a long time. Yes, we will. As a quick shout-out, the cheapest new electric car comes from General Motors. Asit, appreciate your context and insight

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Allison Southwick and Robert Brokamp discuss how money-conscious folks can give themselves permission to have a little fun. Karen and Steven Kreider Yoder were living the dream. In their mid-60s, they retired and were ready to see the world with stops in Japan, Africa, and Iowa. Well, but as Karen and Steven recount in their column in the Wall Street Journal, while in Tunisia, their first stop in a retirement chock full of exotic travel, Karen tripped and broke her shoulder. All plans were off. And while the doctor told them it was just a hiccup in their life, it felt bigger and delivered a somewhat stark message. Gather them rosebuds while you can still safely bend down. Yeah. And

I'd like to point out that in 2021, this couple pedaled their tandem bikes from California to Virginia in 61 days. So they're no shrinking violets. But in their article, they wrote that they have friends and relatives whose retirements were short-changed or, frankly, never happened due to health issues or just premature death. And over the past few years, I've seen the same thing happen to people I know. And it's really made me come to the conclusion that while delaying gratification and saving for retirement is important, you shouldn't put off everything until your 60s or later. And when workers are asked what they hope to do in retirement, the most common responses are travel, volunteer, pursue hobbies, exercise more,

and reconnect with family and friends. That all sounds like a really good time. The question for those who are still working is, do you have to wait until retirement to pursue some of your goals? Well, we're here with several suggestions. The first one is, crunch the numbers. Yeah. Obviously, retirement is somewhat of a numbers game. The first step is to analyze your current trajectory of your retirement plan and determine how much you can afford to spend now and how long you need to stay in the workforce. This starts with all the stuff you know that you need to do, estimating how much you'll need in retirement, maybe use a retirement calculator, possibly hire a fee-only financial

planner to perform a professional analysis. Unfortunately, the reality for many workers is that they are behind in their savings, so the right financial move is to reduce their spending and boost their savings and keep working. However, others are on track to have more than enough for retirement, so maybe they could start to live it up now. That's right, because our next suggestion is, if you're one of those people, well, spend some of your retirement savings now. Yeah. While we think of retirement as one big financial goal, it's actually three

intermingled goals. The first is to have enough money to cover essential expenses such as food, healthcare, housing. This is at least partially covered by Social Security and maybe a pension if you have it. The second goal is a big emergency fund to cover large unexpected expenses. Could be home repairs, could be medical care. And this can be partially done with sufficient insurance, some savings, and maybe you tap your home equity. The third goal is the fund money. It's that big pile of cash that you use for the leisure activities, pay for cruises, e-bikes, trips to Europe, stuff like that. And you certainly have to make sure you're saving enough to cover those first two goals. However, you might consider reducing savings for that third

goal in order to have those experiences now while you and your loved ones are healthy enough to enjoy them. All right. Our next suggestion is to put yourself into neutral and just coast on into retirement. Yeah. And this comes from the financial independence retire early movement known as FIRE. And that's been around for decades. But over the past several years, new flavors of FIRE have emerged. One has come to be known as Coastfire. It describes someone who has not saved enough to stop working completely right now, but has built up enough of a nest egg so that it'll be sufficient by the time this person reaches their mid-60s without additional contributions. In other words, they don't have to save anything anymore. Relieved of having to save 15% a year or so for

retirement, this worker can then take on a lower-paying but maybe more fulfilling job, maybe work fewer hours, which of course gives them more free time, or spend more money on leisure activities now that they otherwise would put off until retirement. Our next suggestion is to take advantage of job flexibility. This is one that's near and dear to my heart. Oh, it sure is. Since the pandemic, the opportunities for remote work have increased significantly. Many people, including some of my Foolish colleagues, occasionally work in other parts of the country or even in the world for one to four weeks or longer. Sure, you still got to get

your work done, but then you can spend your evenings and weekends doing touristy things. Another option is phased retirement. This is an increasingly popular benefit being offered by employers who are really struggling to retain talent. This allows someone to ease into retirement by working part-time, but it allows them to increase their free time while still maybe retaining some important benefits like health insurance. Here's something you personally know about, Allison. More employers are allowing employees to take sabbaticals, which give people a chance to knock off some of the items on their bucket lists. All right. Our next suggestion is to supercharge your vacations.

Yeah. Many people have these visions of taking exotic trips in retirement, but until then, they're taking relatively modest vacations in each year. This could be the responsible decision, depending on your financial situation. However, the right choice might be to splurge now while you're capable of traveling. I'll use the example of my mom. My mom always wanted to visit Europe, but she kept putting it off, partially due to cost. This past summer, the perfect opportunity arose. My daughter got married in Rome. However, after talking to her doctor, my mom decided that given her age and her health issues, taking the trip would be too risky. Now she wishes she had spent the money on a European

vacation years ago when she was younger and in better shape. Why buy your retirement goals when you can just rent them, right, bro? That's right. Some workers plan to make big-ticket purchases when they retire. It could be a boat, RV, vacation home. These expenditures require large down payments, likely ongoing expenses, yet they often don't actually provide the expected level of enjoyment. A 2019 survey by LendingTree found that 49% of people who bought a vacation home felt guilty about not using it as often as they intended, and 22% regretted making the purchase at all. The good news is you don't have to own an expensive item to enjoy it. You can rent one instead, which is much cheaper and avoids the hassles

of year-round maintenance and or storage. Plus, renting means that you may be able to enjoy the experience sooner. All right. Our final suggestion is to be more proactive with your free time. Yeah. Many of the pastimes that workers look forward to in retirement don't actually require being retired. By being more planful and maybe a little bit more efficient with getting things done, you might be able to accomplish many of your health, social, altruistic, and travel-related goals in the evenings and on the weekends before you retire. So, there you have it. Our suggestions for having a little bit of that retirement in your life a little earlier than you thought.

Now, nowadays, it's common to view retirement in three stages, as labeled by author Michael Stein as the go-go years, the slow-go years, and the no-go years. That's pretty accurate. Yeah. We began this segment talking about the Crider Yoders who contribute to The Wall Street Journal. And in one of their articles, they quoted an email they received from a 69-year-old retiree who wrote, quote, you first have five to 10 good years doing the things you pictured doing when not working at full current health. That is likely something happens to one or both of you in your 70s, a hip, a heart, a knee, cancer, some decrease in capacity. And if you make it beyond that, you may have five to 10 years of not so good health and limits on your physical and mental

abilities. And frankly, anyone who has older relatives has seen this happen. So the bottom line is, don't defer all the items on your bucket list to your later years. Life and health are uncertain. Enjoy some of your retirement goals now while you still can. All right, before we go, Bro, let's play a quick game of Would You Rather Retirement Edition. I'll go first with what I think is going to be an easy one for you. Okay. Robert Brokamp, would you rather jet set around the world, living in different countries, or live within 20 minutes of all of your grandchildren? Oh, man. So, I definitely look forward to international travel when I retire, and probably I'll do a little bit more before

I retire. But man, I'm going to love my grandkids so much. I'm going to stay close to the grandkids. Yeah, I knew that'd be an easy one for you. Okay, here's one for you. Would you rather work until age 67 and be able to take very nice vacations a few times a year and go out to a nice restaurant once a week, or work just until 60, but then take one modest vacation a year and go out to a nice restaurant just once a month. How much do I like my job? Sorry, is that cheating? You tell me! How much do you like your colleagues? That's what I want to know. I love my colleagues. Wow! Wait, do I get healthcare? I don't have to worry about

healthcare coverage? Yeah. Don't have to worry about the healthcare coverage. But that is a good point. That is a good point. I'm totally ruining this game by turning it into that. Let's get into the nitty-gritty details. I think I would rather retire early. Got it. All right. For you, bro, would you rather eat whatever you want and never worry about getting heart disease or diabetes or never get injured playing sports or exercising? Oh, never get injured. I've had issues where I've had knee problems and back problems, and it made me miserable. I would like my mobility for as long as possible.

Yeah, I hear you on that one. This is actually related. We know from studies that the most important things for a happy retirement are good health and good friends. Would you rather be in great health but not have as many friends, or in poor health but surrounded by friends? By poor health, it's not like your terminal or bed bound, but no pickleball for you. Oh, so my mom used to be a hospice nurse and she actually, one time, I think I've told this story before. She sat down with one of her patients who was in hospice, an older woman in her declining years. And she asked, she said to the lady, isn't this wonderful? You're surrounded by so many friends. And the woman was like,

I'd rather have my health. So I'm going to, I'm going to go, I'm going to, I'm going to trust this woman's judgment who went before. Maybe it's better to have good health than friendship. I don't know. I completely understand. It's tough to enjoy yourself when you're in constant pain. When you're miserable. Yeah. Yes. All right. My last one for you is, would you rather spend your retirement learning new languages, grasping them very easily, or spend your retirement learning new instruments, but they are incredibly impractical and no one will ask you to be in their band. So it's like the Alcorn. And every time you play, it's a whole thing where people are like, oh, bro is breaking out the theremin again. Well, given I get that reaction

anytime I try to play an instrument, I'm going to go with the language because like I said, I really do look forward to more international travel and I love learning languages when I'm on the road. Oh, man. I thought you were going to pick instruments for sure, even though I made it so difficult. Okay. All right. I love music. I'm just lousy at reproducing it. It's just the sad truth. Well, no one will know if you're playing the Alphorn. You're like, this is exactly how it's supposed to sound. I'm very good at this. People who would know. All right. Last one for you. In previous shows, we made fun of retirement communities, particularly the villages. And the Villages and other retirement communities are in the news often because of the scandalous things

the seniors are doing, but also because of the politics. And often, the politics are dominated by one party or another. So, would you rather live in a lively, top-notch retirement community, 24-hour pickleball, but you're in the political minority, or live in a more remote area with not as many fun features and services, but you're in the political majority? oh can i still at least find some friends that are aligned with me and well yes no matter where you go you're gonna find somebody who agrees with you so yes but you'll be in the minority uh i think i think i'd rather be a part of a vibrant community and learn to get along despite our political differences yep i'm with you on that one

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.