Motley Fool Money - Defensive Stocks FTW

Episode Date: October 12, 2022

No one is putting Pepsi on a list of "sexy stocks" but its performance this year has been crushing the market. (0:21) Asit Sharma discusses: - Pepsi's ability to increase prices that customers are still willing to pay - The role of "shrinkflation" in Pepsi's strategy - Market reaction to the latest Producer Price Index data and what he's watching with Thursday's CPI report (10:05) Did you know Disney tried to make interactive theme parks in the late 1990s? Ricky Mulvey talks with Rick Munarriz about DisneyQuest and its potential parallels to the metaverse today.  Got questions about stocks? Call the Motley Fool Money Hotline at 703-254-1445. Stocks discussed: PEP, DIS, META Host: Chris Hill Guests: Asit Sharma, Rick Munarriz Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. Don't look now, but Pepsi is quietly having a very good year. Motley Fool Money starts now. I'm Chris Hill joining me today. Motley Fool's senior analyst, Asa Sharma. Thanks for being here.

Chris, appreciate you having me. Before we get to Pepsi, I want to start with the producer price index data that we got this morning up 0.4%, which was higher than expected, causing at least before the market opened a little bit of a freak out of, oh, here we go. more inflation, that sort of thing. Tomorrow, Thursday morning, we're going to get the consumer price index. What should we be looking for? Should we be expecting the same sort of thing? Or what are you going to be watching tomorrow morning? This is something that, you know, Chris is very hard to measure one after another. The reason

is the producer price index. That shows you prices that businesses are getting for whatever they're producing services included. Now, this has an effect on consumer inflation, but it's an indicator. It's an indicator of future pricing out in the marketplace. So if input costs for businesses are rising, somewhere down the road, you and I are paying more for the stuff that we're buying. The two don't necessarily have an immediate correlation when the reports land up together. Some of it will probably be visible, but what this does tell us is that inflation hasn't backed off yet. Producer prices increased 0.4% last month. So if you look at this on a trailing basis or a 12-month basis, that's an 8.5% gain, a little bit less than the month

before, but still pretty high. And what it tells us is that this is a big data point for the Fed, does it make them more likely to increase interest rates or less likely? I'm going to bet more likely. Yeah, I saw a headline this morning that was, you know, after the PPI data came out and it was, and this has sparked fears from some investors that the Fed might increase rates again. And I thought, who are these investors who are still on, like, I, it's like newsflash. The Fed is going to increase rates again. So everybody can stop. wondering, stop fearing whether or not they're going to do it. They're going to do it.

That's right. It's like wondering if your parent is going to back off of keeping you grounded when you've been really bad. You're going to be grounded for whatever it is. The week, you're probably not going to get off after a couple of days. And we know with the inflation we've experienced in the economy. Chances are more likely through the end of this year, the Fed is in a raising posture. So I'm with you, man. I'm like, hey, rates are still going to go up. That's the big picture. And then these reports, they have less of an impact on the investor who understands, yeah, inflation will trail off after some time. Maybe it isn't this month. Well, let's get to Pepsi then, because Pepsi's third quarter results came with increased

guidance for the rest of the fiscal year. Third quarter profits and revenue were higher than expected. And, you know, they didn't put it this way, nor should they put it this way. But my reading of the quarter was, you know, because their revenue was up, their volume was down. And I sort of read that as, hey, we're selling less stuff, but it's okay, because we're charging a lot more for the stuff that we are selling. I mean, you read that. Correct, Chris. That's the takeaway from this report. Now, in a moment, we'll talk about whether that lasts. But let's talk about what's here on the ground. Pepsi has done everything right during the period in which inflation was low, interest rates were low. That is their job in those periods where you and I have a lot of spending power.

Their job is to hook us on the right stuff. And if you doubt that this is their goal or one of their business strategies, CEO Ramon Laguartis said today, we've seen, I think, affordable treats and small moments of pleasure continue to be a key need state. What he means by that is this indulgent category that Pepsi plays in between its soft drinks, between its Frito-Lay brands, that intersection that I often talk about in the show in the C store when you walk in and see Mountain Dew and Pepsi marketed together. The intersection of that space, and they're healthy snacks in there as well. They've got many healthy brands is something that we should be slightly addicted to when we've got spending power. Now, as that spending power decreases,

in the periods where inflation rises, interest rates rise, if they've done their job correctly, to an extent, will pay for those products even as they start to raise prices on us. Pepsi has shown, time and again this year, they have pricing power in spades. Now, question I'll pose back to you. Do you think this will last? On the call today, there were hints from management that they might be at peak pricing power. Therefore, if volumes continue to decrease, they may be hitting an equilibrium point. But so far this year, I mean, stock is up today. They've really benefited by this long-term strategy.

It's the kind of thing you want to see out of big consumer goods facing multinational. So what are your thoughts about this ability to raise prices and how long it lasts? I'll get to that in a second, but since you mentioned the stock, the stock is up almost 5%. morning. And I know the phrase defensive stocks doesn't really get the average investor excited, particularly younger investors, but it is worth pointing out that with this rise today, shares at Pepsi are basically flat year-to-date, and year-to-date the S&P 500 is down 25%. So, you know, maybe it's not for everyone, but holy cow, Pepsi is demonstrating today why they are one of the best defensive stocks out there.

In terms of whether or not they keep this up, I think that's part of the strength of the business and LaGuarda and his team, their ability to tweak prices and tweak sizes. I mean, this is as good an example of shrinkflation as you can see in the consumer goods market. Their ability to change the size on certain products makes them. make them a little smaller, keep the price the same. I think they've done a very effective job of this. And I think it's smart of them to sort of recognize, like, hey, we're the combination of we're coming out of the summer months when beverages like Gatorade have done really well for us. In North America, we're going into the colder months. That combined with we're basically

at peak pricing. Like, yeah, they're not going to keep, you know, they're not going to continue to hike prices day in and day out. Yeah, I want to add one more thing to that. Pepsi and Coke, for that matter, other of their peers, have always made the argument in low interest rate environments, low inflation environments, that we stay one to two points ahead of inflation. We're going to grow at a rate, one or two points ahead. And we're going to give you returns by being more efficient on our bottom line.

And PepsiCo has also done a great job of this. They've cut costs. They've been more efficient with their spends. They've put a lot of technology investment into figuring out how they should price, how they can optimize their supply chains. So investors start to take notice in a time like this that, wow, following inflation, being able to stay one to two points ahead of that didn't look so pretty when interest rates were at 1 and 2%. But now this proposition looks pretty good. And you're telling me that you've got an efficient bottom line. So I see money falling to the net profit line. I see cash flows growing.

So I'll take that. And I think this is part of that 5% we're seeing today is investors realize what all weather means when the weather's bad. And while we are coming out of summer, we are early in the football season. And you mentioned the Frito-Lay part of the business. And that's, you know, history. There have been times when the beverage part of this business has struggled and the snack side of the business has really lifted the overall results or sort of kept them afloat.

Football season is just, you know, everybody's getting the snacks. You don't even have to be a football fan. You're just going to get those free-to-lay snacks. Just the thought of it makes you want to reach for that bag. Asa Charma, always great talking to you. Thanks so much for being here. Thank you, Chris. This is a lot of fun. Tell me if this scenario sounds familiar. One of the best known companies on the planet making a huge investment in virtual reality, resulting in a lot of consumers being confused about what it all means. I'm not talking about what Meta Platforms is doing right now. I'm talking about what Disney did in 1998 when it launched a chain of interactive theme parks

called Disney Quest. Ricky Mulvey caught up with analyst Rick Munares to talk about Disney Quest and the potential parallels to the Metaverse today. So what was Disney Quest and why did Michael Eisner launch it? Yeah, so Disney Quest initially, there was this whole half of what is now Downtown Disney Springs, which was Downtown Disney before that village marketplace and Pleasure Island. So Pleasure Island was this place that was basically the whole west half of this whole shopping and entertainment district that used to be a bunch of nightclubs and comedy clubs

and kind of these interactive themed adventures and they just shut it down. whatever reason that didn't work, but they left all this real estate here and they didn't know what to do. There was like a House of Blues restaurant and a Cirque de Soleil theater that was going up, but everything between there and the start of the shopping district was pretty much dead. So here they had these big boxes, one of them being where Disney Quest went up, and they needed to fill it up with stores or little restaurants, little things for people to go out there and do stuff. So Disney Quest popped up. It was five stories, five floors, basically, for every kid or every kid at heart to go in there and play in these either high-tech or in some

cases low-tech because they also had the retro video games to immerse yourself in experiences that were very loosely themed to jungle crews, Pirates of the Caribbean, Space Mountain, even Alien Encounter. So they had these rise of Buzz Light, so Toy Story. There were a lot of things that are lightly themed, but they were sort of ahead of their times in their ways in that these were very, some of them were very high-tech experiences using virtual reality. augmented reality, and even some actual rides, practically rides, that had a gaming aspect to it. So it evolved as they had the space, they wanted to do something about it. And also, again, this is also the time when Michael Eisner was still, you know, we were

still in peak Eisner era. Everyone loved Michael Eisner for a while. And they did, just like every CEO, they always liked them for a little while. And maybe not so much the current regime, but they always had the CEO, they like him, they It's not so many people like Bob Eiger or like Walt Azimself that can leave as well, like does that when they got there. But in this case, it was him and Jeffrey Katzenberg that were being considered for it to takeover CEO. And when Michael Eisner got the promotion, Katzenberg was upset.

He didn't get promoted, so he moved on. And he became, Katzenberg became the K in the DreamWorks SKG. So with Spielberg and Geffen, they formed this media company. Katzenberg was very instrumental in basically launching, rebirthing Disney's animated, theatrical animated movies back in the 1990s. So when the whole Little Mermaid and Beauty and the Beast came up and people saw Disney in a new way that adults can actually go see these theatrical animation films. He sort of just led that when he didn't get it. He moved out. And then he started this whole arcade, which was GameWorks, which was a lot like Disney Quest, maybe not five floors of fun, but definitely a high-tech arcade to show the latest technology.

So, Disney had this place to showcase this technology that was developing for its parks, and also, ideally, to spread it across the country, if not the world, was the initial plan. Yeah, Michael Eisner, he'd taken some cues from competitors, whether it was Bush Gardens for the Animal Kingdom or Universal Studios for Disney, Disney Hollywood, or what's now Disney Hollywood Studios. So there was an element of looking at what the competition was doing. But, all right, so we're going back in time to Florida. You have this five-stores. story box of virtual reality fun. Are people liking it? Is the guest reaction generally positive? Are people confused? I mean, I know you went there. Yeah, I spent a lot of time there because early on,

if you had like the highest Disney annual pass, they included access to Disney Quest. In like the last couple of years when it was open, they just said, all right, no, you got to buy admission. So I didn't go as often, but I still went there. To me, it was a great place to go, especially on a rainy day, where you just didn't want to be out in the parks because it was being miserable. Or late at night, since Disney Quest closed like at 10, 11, sometimes midnight, if the parks were closed, it gave you another place to go when you didn't want to be necessarily at a club or just hanging out at some very expensive restaurant outside property.

So that existed there, but to me it was a great place. There was always so much to do. You basically would go in after you, after you basically, you know, punched your ticket in after they scanned you and saw that you had a ticket to come in, you'd hop this elevator, and while this elevator, all the screen would turn out, and it would be the genie from Aladdin, basically giving you a presentation welcoming you to Disney Quest. And I don't think it was Robin Williams that voiced the genie. Maybe it did, or if not, it was Homer Simpson, Dan Castagnata, or maybe it was even a third person. And then they dropped you off in the third floor. So you're right in the middle of it. And right away,

you're seeing that every floor has new adventures. Do you want to create your own roller coaster? Do you want to ride a bumper car shooting basically medicine balls at other bumper cars. Do you want to have virtual swords and get into a fight with computer-vised villains? So a lot of interesting things happening there. And basically, and also a bunch of video games that were on set free. You didn't have to pay for anything. It was all included with your admission. So it's almost like hitting like a retro arcade too. So it was basically a lot of things to all people. One of the weirdest games, and again, I played maybe three times. I didn't really enjoy it to which was a Disney base to the Mighty Ducks, like the hockey team, the Anaheim hockey team, where you were basically, I think it was like 12 or 15 people would

line up and you were basically a pinball machine and you would be basically just bouncing around whenever a ball came by you to trigger that to happen and you're trying to score points that way. So definitely a very strange place but also a very cool place where if you were bored, there was always something entirely different yet entirely indoor and enclosed and air-conditioned for you to get into. And maybe in the new era of Disney they'd start charging people for those virtual for the for the old school arcade games, but not so when you're paying admission. So Disney Quest did not take off. They briefly had a location in Chicago. There were plans

for more locations across the country, possibly across the world. So it ultimately did not work out. So what mistakes do you think Disney made with Disney Quest? Yeah, I mean specifically to the rollout, within Disney Quest itself, the original location, the Chicago location lasted two years and they announced that Philadelphia was, they broke ground on Philadelphia. They had that ready to go a year after that. It obviously did not happen. That did not open. So between the time that they launched the first Disney Quest in 1998 and the time that the Philadelphia place should have opened two years later, obviously they thought different about at least expanding the concept. Obviously,

they closed the Chicago location within two years. About 20, 2001, two years after that opened, it closed down. I think a couple of limitations were, first of all, Disney is great, great when they're on their home team. So if you're at a Disney theme park, you're not going to flinch at paying $8 for a tour or $4.50 for a small cup of Diet Coke. You're fine doing that just as you are in a movie theater. When you're away, things get a little tricky. Just as we saw Disney basically closed down most of their Disney stores over the past couple years outside a couple outlets. Sometimes they find that their retail, their brand as strong as it is. When it's standalone, it doesn't hold up so well. And especially with this high-tech virtual

arcade where you have to maintain and be on top of all these augmented reality, virtual reality headsets to take care of and to clean rides to maintain. And more importantly, when they launched, it was people really excited about virtual reality and augment reality. And even though we're feeling that Renaissance now at the time, we eventually just tired of it, just because there were limitations to what would happen if you put on a headset. Was it blurry? Were some people being dizzy, getting dizzy when they were taking them off? There were a lot of limitations to the process to roll it out on the kind of scale that they wanted to. Though, to be fair, the original Disney Quest, the one in Orlando, lasted for 19 years. So it did stick around for a long time,

but yeah, expanding it, it was not, yeah, it failed. And also, to be fair, I keep saying to be fair as if I have to be fair, but let's be blunt. This was a rectangle in the middle of a place where people are used to being visually stimulated. And all they saw is almost like a carnival Barker saying, hey, come inside this tent, you'll love it. But there was no, way to truly get people to experience what it was like to build your own roller coaster and then step into a two-seater simulation and spin up, go upside down as often as you wanted as far as the track you created. So there was really a lot of things that it was hard to sell what was inside without showing more of it off. And they never really did that. Not that it was going to make a difference.

But I think towards the end, they put monitors right by the outside, like small TVs showing you things that were in there. But it was the kind of thing that you really had to experience for us. And I think they just didn't really get that point, especially when it was 20, 30, $40 to get in by the end. It was really hard for people to justify that at the time. Tough to see what's going on inside when there's no windows. Let's think about the Disney Quest experiment. And now you see meta going whole hog into the metaverse today. Do you think there are any parallels with what Zucks doing and with what Eisner did?

Are there too many differences for the comparison to work? Again, I mean, if you go back, I mean, anyone that was there at the original Disney Quest, there was an Aladdin game where you basically went through the whole area, and you were basically looking for the genie, collecting jewels, and you had to put on a headset, which was a lot bulkier, but not too different than what the Oculus is for meta. And the same thing for Ride the Comics, which was a game where you actually had, you were actually standing on a platform, and everyone saw you,

It's an elevated platform with like, you know, there were barriers, but people from the floor below could see everyone playing this game, holding like a sword, a virtual sword that you'd be swinging around to, you know, try to basically, you know, fend off and attack the virtual creatures that were made. So clearly it's the kind of thing where that kind of technology maybe was 20 years ahead of its time and maybe not as well developed. So that's sort of similar to what's happening now. But again, hopefully what happened then, which is basically people just weren't ready for augment. reality, they weren't ready for virtual reality, will be different now for meta. Clearly, it's putting a lot of money into it. And again, I mean, the new Oculus headsets coming out, and I have the last day, Oculus too.

And I don't play with it as often as I thought I did when I first got it. I think a lot of people like me, like you get it because it's, oh, it's the toy that every man-child owns, and you put it on and it's like, well, okay, what else can I do with this? So I do think it's a technology that will take time. And obviously, the high cost to barrier to just buy the Oculus headset and to begin with, much less all the apps that you have to buy if you want to keep playing the premium experiences. We'll take some time.

But yeah, it's definitely similar. It's a company that is trying to be ahead, trying to be a step ahead of tomorrow. But as Disney proved, sometimes that's not enough. Brick Minerras, thank you for your time. Thank you. 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 again. So, don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.