Motley Fool Money - 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

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh boy. Fantastic. You guys go hard. Daredevil Born Again official podcast Tuesdays. And stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. Kellogg is splitting into three companies, and DocuSign CEO is splitting, period. Motley Fool Money starts now.

I'm Chris Hill, joining me today, Motley Fool's senior analyst, Bill Mann. Thanks for being here. Hey, Chris, how you doing? I am doing pretty well. 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 Wilderruder, 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 it 80 percent from where it's high in 2021. It seems like a lot? Yeah, 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, and 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 there is a, you know, if it is an agreed upon split, there is a, you know, 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.

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 rung out there. This company is still trading it 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, so 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. I mean, so 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, you The rate of growth, I should say, has slowed substantially. So 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 Cahelaine, says 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-division snap, crackle, and pop. I don't think they're doing that. That 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. Because, I mean, I think we are into our second decade now of slowing cereal sales. Yeah. And the plant-based foods, there's potential. So that's going to be the smallest of the three. Just from a brand portfolio standpoint, it's the smallest of the three. And 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, you know, I said to you, I said to you, I said, 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 is in the same boat. So their cereal business is about $2.4 billion in revenues. And we can, certainly, they're Frosties, their

cocoa pops, they're crunchy nuts. Their plant-based business, which is mostly Morningstar Farms, had about a little more than $300 million in revenue, so much, much smaller. And then the Snacks business was over $11 billion in sales. So it really, truly was the biggest part of the business. So it does to me make some sense, it 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, you know, as the cereal company, is going to be a much, much smaller company.

And I agree with you. They have, 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. 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 you know, as you know, as Pringle's fanboys, but it was a great platform for them to do short-term, you know, and special flavors, increase their shelf space through offerings of that nature. So they have done a great job managing this brand, but, you know, 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. Mondalese announced it's buying Cliff Bar for $2.9 billion, which I still can't wrap my head around. And I say this as someone who actually likes Cliff bars.

That's basically the energy bar of choice for me. And when I saw the headline, I thought, wait a minute, that's a $3 billion company? Yeah. And the answer is yes, because that's what Mondalese is paying for them. Yeah, exactly. So I don't know what, I mean, it's a really interesting transaction. Mondalese also owns Oreo, Toblerone, Milka. I'm not sure, given the positioning of Cliffbar, what sort of like combinations they can make when they'll have an Oreo-flavored Cliffbar or something of that nature. But it is, I mean, 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, this is, this is, you know, you know, not insignificant sums of money that we're talking about here. And this is all against

the backdrop of what is now officially a bare 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 bit. 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, you have that factor, and you have, you have, you have, 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 start 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. 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. 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 Lasabers. 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 Brough still drives a Buickle-saber.

That's not true, but I do still have my pet rock. Thank you very much. All right, Morgan, take me back to the 70s. This is going to get really geopolitical heavy, right? Yeah. And 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. And two really important things happened in 1945 that kind of paved the way for what happened in the 70s.

And they're sort of interconnected. And 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 is going to go right back into the Great Depression. And the World War II is what pulled us out of the Great Depression in the 30s. And it was assumed by everybody that as soon as that ended, boom, right back into it. And 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, too.

So this was a really big deal for Truman and for all the policymakers at a time. And 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. So this was a really big deal. Like, 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. So they really did two things. One is the Federal Reserve, which was much more politicized back then than it is now, basically said, No worries. We'll keep interest rates at 0%. Because of federal government, you have all this

debt that you have 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 got to make sure that these people have jobs and that they turn into consumers. And what can we do for them? So there's a lot that went on with the GI Bill and other works programs. But two other things that they did was they made. They really loosen the restrictions on getting a mortgage and consumer credit to kind of of turn people into consumers, so they could really start buying stuff.

And both of those things worked. Both of the 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 kind of got a 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. kind of had a monopoly on the world economy, more or less. So the 50s and 60s were just 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. Well, see, it worked well. That's actually a good point to make because 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 was a problem. It just kind of worked. And 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 kind of get complacent from it. And U.S. consumers, too, I think, really got complacent with the lifestyle that they were living, the U.S. would kind of own the world economy, that interest rates were going to stay low, that there's always going to be a good paying job right down the street. And then so those two senses of complacency kind of cracked in the late 60s and early 70s. A lot of it started with 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 kind of 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. So 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 kind of impacts on investments in the stock market. Yeah, this is like when we were talking about planning for this series, this is the

longest span between episodes in time, right? So we did Great Depression, and then Fast forward 30 years later, that is the sound of nothing fasting forward. But, you know my point. Yeah, so it sounds like it worked for a really long time until it didn't. When are we going to start talking about energy? Because I thought this was about energy. Yeah, I mean, that's one of the big things. Because we bought big cars?

That's it. Well, that's a really great point. So as oil prices started rising in the 1970s, it had a huge impact on the US 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 trucks, semi-trucks that were getting three miles per gallon, which is way, it was just so inefficient. And when oil was cheap in the 50s and 60s, when the U.S. kind of was just owned the world economically, that wasn't that big a deal, because 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. So it just had a much bigger impact on the economy back then. And also, because we had been, you know, at this point, 30 or even 40 years since the

economy was in really bad shape during the 1930s in the Great Depression, you get not only complacency, but just a sense of shock among consumers who've never seen a really bad economy. And I think that it causes a lot of retrenchment, both for companies that say, well, maybe we shouldn't 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. So then you have high inflation coming in from the energy markets,

which was a lot of geopolitical instability in the Middle East. East and in Egypt and Iran. And then you mix that with kind of just a lingering recession in the United States. And it all kind of came to ahead 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. So that's significantly below the 10% you always hear about.

But on top of that, inflation was 7.5% a year. So even though your portfolio was growing on a nominal basis, you were at least, you were losing purchasing power each and every year. And that was not only true for the stock market, but especially true, I think, for treasury bonds, which are back then and today are seen as the safest asset, or even a riskless asset. If you invested 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, the early 1980s, you had lost half your money in real terms, adjusted for inflation. And that's the thing really easy for investors to overlook, because they often don't subtract inflation from their investments at the end of the year to really get a sense of how much money did I actually, how much wealth did I actually gain this year? But I had a huge impact on investing during this period. And then 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, and that's where investors are going to put their money. As interest rates start rising, they become more attractive relative to stocks. And 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 bonds. So stock prices needed to fall and fall a lot just to kind of make up the parity by comparison with bonds.

And so that's what really drag stock prices down in the 1970s, was the fact that bonds got way more attractive because interest rates were rising. And it was a slow drag, right? There wasn't a big major market crash. Or was there a major market crash? Not the one-day crashes that happened in 1929 or 1987, but 1974 is a really bad year for stocks. So you had some bad years, but no overnight crashes like the other periods.

But it was bad year after bad year. Or even in 1970s, there were a couple really good years. It was kind of a period of just a lot of jumping back, just pinballing back and forth, where he 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. So 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 are the people basically sort of 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 when 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. 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 percent? Wow.

Yeah. That's crazy. But the CD that was yielding 12 percent was during a time when inflation was 10 or 11 percent. So it was a pretty crazy time all around. And even though I obviously wasn't an investor or even a person back then, you definitely, 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, whereas I think the U.S., as the world's global, as leading economy, is over.

Very similar to, I think, 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. And just by leaps and bounds, not only in economic growth, but technology and innovation was really kind of running laps around the U.S. at the point, which added to the sense of pessimistic. in the United States.

They were falling behind. Robert Schillers used the term animal spirits. When you look at the 70s, in terms of the zeitgeist at 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. And what I remember were the long gas lines.

And I remember that my first card was a 1977 Lincoln Continental, and it got six miles to Six miles to the gallon. That's great. All right. 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 Volker, who was the Fed chairman in the early 1980s. A maker of rules. Right, right. I've heard of his rules. That's right. That's right. He kind of came back in the last couple years with the Volker Rule. with the vocal rule. But he did something in the early 80s 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 percent, which made this economic recession and pain that much worse. A lot of businesses went out of business that had to refinance their debt, but now interest rates are 20 percent, 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. And Paul Volcker, during the time, it's funny, now that we, in hindsight, I think a lot of people think Volker 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, I think he was the first Fed chairman that had a secret service detail because people at the Fed built an effigy of him and burned it on the steps of the Fed. Employees did that? No, not his own employee, but somebody. Oh, okay. But he was truly one of the least popular people in America at the time because it was viewed, and I think he rightly viewed. Like, his actions were driving the economy into the ground.

And it's true, they were, but they were also, you know, at the same time, killing what needed to be killed. It's almost like with chemotherapy. Like, 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 Volker 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. And 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 then it's Reagan, Morning in America, and bonds too. Inflation's falling. You get a new president, who'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 ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.