Motley Fool Money - What’s the Outlook on Spices?

Episode Date: September 23, 2024

McCormick’s been a laggard over the past few years, does it have some growth levers to get back on track?   (00:11) Jason Moser and Dylan Lewis discuss: - Why interest is picking up for Intel, and what Qualcomm and Apollo Global see in the chipmaker.  - A listener question: What to expect from spicemaker McCormick this quarter.  - How the rate environment might play into results we see from companies this upcoming earnings season.  (15:54) Mary Long and Motley Fool Analyst Anthony Schiavone continue their conversation from last week about housing stocks and the build-to-rent industry. Companies discussed: INTC, QCOM, MKC, INVH, AMH Host: Dylan Lewis Guests: Jason Moser, Mary Long, Anthony Schiavone Engineers: Tim Sparks, Dan Boyd  Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got more Intel on Intel. Tell's future. Motleyful Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves, and in the studio by Motleyful analyst, Jason Moser. Jason, thanks for joining me. Where are we? This is unfamiliar territory. We've got to take any chance we can to tape together.

I agree. I agree. This worked out very well. The timing was impeccable, so I'm glad we're here. Yeah, and it's fun. We have an update on the Intel story just continues to produce more and more ink. We also have a member question on a stock with spicy products, but Jason, Myel returns for investors so far, one that's in your wheelhouse. Why don't we kick off talking

a little about Intel? It's funny to be because this has been a company we have not talked a ton about over the last five years or so. Here we are doing it again. Tim Byers and I did a show together last week, talking about CEO, Pax Ellsinger's plans for the company's path forward, and also some new deals with Amazon, some new funding coming to the company via the Foundry business. We wake up today with even more updates when it comes to Intel. Qualcomm reportedly interested Apollo Global Management, apparently interested. Intel is now the bell of the ball. Yeah, this has been fascinating to watch.

It shows you what's old as new again, and that's no exception here where Intel's concerned. And it's just, there's a lot going on with this company, right? I mean, for what has been sort of this boring, stodgy sort of chip company that was left behind over the last 20-plus years, now all of a sudden there seems to be some interest rate. I think the Qualcomm news that came out is particularly fascinating, just when you consider the scale of the two businesses involved. Qualcomm essentially $185 billion market cap, until somewhere the $95 billion market cap.

So, I mean, the first question that begs immediately is, like, would regulators ever even consider allowing that? I think it would be tough. I think it would be really hard for them to let that go through. I feel like that's the right answer. So I don't know that's the option. And then when you look at the other side of it with Apollo talking about, I think about $5 billion that they want to invest in the business, I think specifically in the foundry side of the business.

And then the dynamics of the foundry side of that business. Right now they're talking about, okay, we'll make that a subsidiary, which will free them up to be a little bit more transparent with their customers as well as suppliers. But then also down the road, does that lead to an actual spinoff of the foundry business so they can operate as two separate entities? oftentimes that can end up unlocking value. And then you see what Gelsinger has done in regard to trying to sort of cut the fat here, right? I think talking about 15,000 jobs. Somewhere in the neighborhood, two-thirds of the real estate portfolio, they're talking about whittling down

as well. So, I mean, there is an intel of the future where the cost structure looks far more in line with the prospects of this business. And then you consider just the cyclicality, the difficult nature of this market. I mean, it's that constant. constant hamster wheel of innovation and evolution. You always have been coming up with something new. Right now, that's AI, but what does that look like in five years? Is that AI 2.0, whatever it may be? So a neat time to be an analyst because we get to watch this whole story play out.

Let's unpack some of the different ideas here with the players here. I mean, Qualcomm reportedly interested, and I guess this shouldn't be all that surprising, because there were conversations about six years ago with Broadcom and Qualcomm deciding to maybe make something happen. That wound up getting sidelined due to national security concerns. This is a space that we have seen consolidation. I think the biggest question I have, your regulatory one is a good one, but also looking at the deal here, how would Qualcomm pay for this? I mean, Intel, as you noted, 90-something billion-dollar company. Last I checked, Qualcomm has about $13 billion in cash on the balance sheet right now.

Yeah, well, I mean, that just boils down to a combination of some sort of issuing shares and borrowing money otherwise to do it. So it definitely impacts the company's capital structure in a big way. And then furthermore, you figure there are likely a lot of redundancies that come with this deal and a lot of right-sizing that has to be done in order to make these businesses work well together. And so, you know, we always talk about acquisitions. I mean, acquisitions are tough, right? Acquisitions of this size, these types of scale. acquisitions, these are really hard because they're just talking about a huge company with a lot of

different dynamics at play here and trying to integrate the business, the culture, trying to right-size the business along the way. It's just very, very difficult to do. And so I certainly wouldn't look at this as like, well, this is the answer to all of Intel's problems. I mean, maybe it gives shareholders an easy sort of option to take a quick exit and move on with life. I would certainly be more concerned in regard to Qualcomm, at least in the near term, just because of the difficulties of integrating an acquisition of this size. Looking at the Apollo side of things, they have, I think, been connected to Intel in the past. As you mentioned, a multi-billion dollar stake interested in the Foundry business there.

Apollo is an alternative asset manager. So, Jason, I kind of want you to unpack a little bit why a company like them might be interested in a very specific part of this business, rather than just saying, hey, we are, as an investor, going to take a large stake in Intel overall. Well, I think you look at Intel's ultimate plan with the foundry side of that business. I mean, there's talk of ultimately making it become a subsidiary of the overall business, sort of giving it its own sandbox to play in, so to speak, right? And that allows for more transparency with its customers. It gives investors a better idea of exactly how that part of the business is functioning and how profitability.

is flowing through the financials with that side of the business. So as far as Apollo is concerned, they're probably looking at Intel and saying, hey, well, this is a fascinating business with a number of different dynamics in play here. This is the dynamic we're interested in. I think the foundry side of the business also is saddling up with Amazon for some AI chip production there as well. So perhaps they see a future where the foundry side of that business is a bit more attractive. I have to believe there's probably some Chipsack money at play here as well. So I think it's really interesting to look at it from that angle, because, again, we look at the past in regard to Intel and have been obviously not a very good investment,

but investing is about the future. And now all of a sudden you see signs from Qualcomm, from Apollo, Amazon, and others, where, hey, maybe the future looks a little bit more optimistic in regard to Intel, but maybe it's just the company itself is taking a little bit of a different form in order to get there. Market has certainly been paying attention and has been kind of giving Intel a shot in the arm when it comes to some of these updates. And there seems to be a little bit of enthusiasm here. One of the things that I would be curious to get your take on is the incentives and the interests

for a Qualcomm or for an Apollo are maybe not exactly the same as a long-term buy-and-hold investor, looking to own a company for five years. How much should we be taking these as signals that Intel, for our own purposes, as foolish investors, is a worthy investment? I think that's a great point. I think that Qualcomm has a very specific point of view here. I think Apollo has a very specific point of view here, and neither of those align with perhaps what, let's quote-unquote, retail investor, right?

The individual investor like us. I mean, we can look at those and think, okay, maybe those are some positive signs for Intel. Maybe there's a catalyst there, and maybe that portends a bit of a brighter future. But maybe that also really pertains to just those individual views, right? Whether it's Qualcomm or whether it's Apollo, they're both looking at this from two different perspectives and have an ultimate different goal in mind here. than perhaps the individual investor. So I wouldn't read too much into that. If you are interested in something like an Intel, be sure you can at least still connect the dots as to why this would

be a successful business if this Qualcomm News and Apollo News just disappeared tomorrow. Speaking of the individual investor, we got a member question that seems just perfect for you, Mr. Moser. We had a member writing and asking, hey, McCormick is reporting soon. What are your thoughts on the business heading in to their quarterly update? Jason, you are Mr. McCormick, when it comes to The Fool. What do you think? Well, yeah, and this is one I love for a number of different reasons, but ultimately the reason why I've always enjoyed McCormick is, obviously, I love to cook. I think I've talked about that ad nauseum.

Had a chance to go visit McCormick headquarters early in my first couple of years here at The Fool, and that was a tremendous experience. So shout out to Joe Mager. Thanks for lining that up. This is a business I've owned it for a long time, and I think it's one that the longer you own it, the more it makes sense. They've managed their way through a very tough stretch here. This inflationary stretch has really impacted the business. It really impacted top-line growth.

And thankfully, they were able to pass along a little pricing in order to keep margins from getting too out of control. I think management did a very good job through this stretch of creating realistic and appropriate expectations. And I think, for me, at least, that's important just because I pay attention more to. what management, the targets that they're setting versus what maybe analysts are setting, I think those often can be very different. So I'm just making sure management is basically staying true to their war, and they've done so. To me, again, it's one of those businesses. The longer you own it, the more it makes sense, and I think most of that comes from the

dividend philosophy. They pay a dividend for 100 consecutive years now. They are a dividend aristocrat with an annual raise, at least one annual raise every year for the last 38 consecutive years. And this all leads me to believe that eventually in 12 years, we're going to be talking about McCormick, the dividend king. And so I think that that is a big part of the thesis. And as long as they keep doing that, to me, that's one of the most attractive parts of the business,

is that dividend philosophy. And so you've got to understand why you own a business like this. And for me, it makes up just a part of one of many, but it makes up just a part of my retirement portfolio, which is something that I intend to hopefully be talking about with you 15 years from now, right? If not more. And so it is one of those where you take that Uber-long view and given the ability for them to keep on making those little bolt-on acquisitions and keep gaining more share in that grocery aisle beyond just spices. I mean, it's really flavor, sauces. They've got everything from Frank's Red Hot to French's and all that other good stuff. So it's

boring, but Stacey. Yeah, and I think, I mean, I contribute as much as I can to their growth. I have plenty in the pantry. I think folks that are maybe newer shareholders of this business, especially over the last five years or so, are looking and saying, we're kind of waiting for the growth story to rematerialize a little bit. It has been rough. I think the financials for the business look pretty similar now to what they did in about

2021. So is there a lever or is there a segment of this business that you're, you're a financials for? excited about that you feel like might be able to reinvigorate some of that for this company? Well, I think the consumer side of the business is certainly the higher margin side of the business, and that's where hopefully as these inflationary pressures abate and we start to see them squeeze a little bit more profitability out of that model. Hopefully, we will see margins continue to expand a little bit. But, you know, I mean, the flavor solution side of the business, right? That industrial side of the business, I think, is one that can often

be overlooked, but it's a very powerful driver just because of its scale. They don't realize quite the same on the margin line there. But for me, I think with McCormick, it's really one where you want to make sure you're paying a fair price where you want to make sure you're getting a good price where it's one that always has to me. It's always commanded a premium from the market, you know, 30 times plus earnings. And so for me, it's one where I really just focus on, this is one that gets my attention when I see that getting down to like 25, 24, 23 times earnings. Then I start to say, okay, what's going on here? Because I think really that little difference in price with a company like this can make a big difference because

of its slow growth nature. McCormick and our listener reminding us that earnings are going to be rolling on. We've basically gone through the meat of the earnings season. We're going to see McCormick kick us off in early October, banks following close behind. Is there anything from this most recent season that you are going to be paying attention to as we start seeing companies report in this next earnings season or any themes in particular. You're keeping an eye on. Oh, well, I mean, it's all about AI right there. No, I'm kidding.

Actually, I'm not. AI is interesting, fascinating stuff. Obviously, we'll all be paying a lot of attention to that. But I think probably the biggest story over the past few months, and it really just happened, right, was that 50-Bas-point cut there. And so seeing how a lot of these companies are talking about that and how, that starts to affect their guidance over coming quarters in the core and year. Some companies that stand out, just Home Depot, Deer & Co, and Wayfair. Obviously, Home Depot and Wayfair,

very tied to the housing market. Deer and Co. I think at least kind of rhymes with autos, you know, and the financing. You're talking about wheels and financing. And so I think we saw language into all of their calls over the last several quarters where the higher interest rate environment was, it was just delaying. It was delaying sales, right? Customers are still being very picky, particularly when it comes to those bigger ticket items. And so to see these rates starting to come back down, it's going to be, I think, worth paying attention to these companies, others see what they're thinking here over the course of the next couple of quarters as we run into this holiday season and on in the next year. How is that impacting their guidance

and views on growth. We mentioned the banks briefly when I was teeing up earning season, and we have seen them very opportunistically take advantage of the higher rate environment. Catch some of that interest rate spread. They've got to do. Is there anything in particular, as they report, that you're going to be looking at? I think just that. The net interest income alone right there, and again, paying attention to sort of their view on,

because it's interesting to see. I mean, when these interest rate cuts me, there's so many different sort of categories in finance that the, impact, right? It's not all the same, and it doesn't always fall in line with what theoretically should happen. But I think just looking at sort of their take on that net interest income in the coming quarters in year and beyond, and then perhaps looking at the reserves that they're taking as they become a little bit more protective with consumer debt, right? I mean, we know consumer debt is awfully high, and we know it's becoming very difficult for a lot of people to

handle. And so looking at those reserve numbers. Because, you know, if they start really reserving a lot, well, at some point, that's not, that swings the other way. And that juices earnings a little bit there as well. So, yeah, thanks for a fun one to follow for sure. You'll be there to follow it with me. Yes, sir. Later this earnings season. Jason Moser, thanks for joining me. Thank you.

Coming up next on the show, Mary Long picks up her conversation with multiple analyst Anthony Chauvinn from last week about housing stocks, and they zoom in on the build-to-rent industry. The old adage goes, it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details,

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Most single-family home rentals in the U.S. are managed by mom-and-pop landlords. About 95% of single-family home rentals fall into that category. Aunt, why does invitation focus on this niche when it's served by other types of landlords for the most part? Yeah, single-family rentals are probably the earliest form of real estate, I would say. but large institutional investors never owned single-family rentals because it was hard to achieve any kind of scale. And if we think about it, every home, every single-family home has one tenant, one roof, one H-FAC system, one plumbing system, and the properties are generally spread out. So it's hard to get any kind of scale in this industry. That's true. Unless institutional investors

can buy single-family homes in bulk in geographically close markets, And when the great financial crisis happened, that's exactly what happened. Americans defaulted on their mortgages, and Fannie and Freddie Mac were stuck owning a ton of homes. And rather than reselling those homes, the individual buyers, the government essentially helped sell those homes in bundles to institutional investors like Invitation Homes, who was a part of Blackstone at the time. So that's kind of how Invitation Homes got started in this niche. And today, they've grown their portfolio to around 85,000 single-family. homes. And they now have been able to achieve that scale that was once thought to be impossible prior to the great financial crisis. It's interesting that the government kind of helped carve

this out because in more recent years, there's been talk about worries about increased institutional ownership of single-family rentals. Congress has raised concerns about the growing role of corporations in this market and how that could negatively impact like housing costs. How seriously should investors weigh these concerns moving forward? It's funny that the government is complaining about something that the government helped create in the first place. I don't think the scrutiny about institutional single-family landlords driving up home prices for homebuyers is fair.

Institutions that own more than a thousand single-family homes own around 1% of the single-family housing stock in the U.S., just 1%. And from 2022 to 2024, when a lot of Congress people started calling this out, many large institutions, including invitation homes, were actually selling more homes than they were buying. And invitation owns is actually adding supply to the market through its various homebuilding partnership. So I think it's a stretch to say that institutional landlords

are driving up single family prices nationwide. Maybe in select the markets, they're having a small impact, but they simply don't own enough homes across the country to be impacting overall housing costs. I think the main cause of higher housing costs is we have a shortage of housing. we have strong demand, and many people are moving into their prime home buying years, and then add on top of it higher mortgage rates. So to answer your question, I think it's a risk that Congress could approve some type of legislation that limits how much invitation homes can grow its

portfolio. But I don't think it's likely. And if that legislation were to be approved, I don't think it would be a catastrophic event to invitations business. Right now, it's cheaper in all of Invitations 16 core markets to lease a home than it is to buy one. High mortgage rates likely contribute in part to that. How has that dynamic of higher interest rates, higher mortgage rates, how has that impacted invitation homes in recent years? Yeah, I mean, you mentioned the relative affordability of living in an invitation home. It's actually $1,200 more expensive per month to own a home than to lease a home in invitation's markets. So with that home affordability out of reach, for so many,

potential homebuyers, the average tenant of Invitation Homes leases for more than three years on average. And that's because, one, it's more affordable. And then two, where are they going to move to with the housing shortage? There's simply not enough existing inventory out there. So that's led to invitation's portfolio-wide occupancy rate above 97%. And rent growth is still strong at around 5%. So the fundamentals for this business are still pretty strong. And plus, I think there's kind of this shift to more people renters by choice rather than renters by necessity. As a renter, you get access to the same single family home without the large down payment. You don't have to worry about larger repairs and you have more flexible lifestyle when you're living on a yearly lease. Of course, I don't think that's going to be

running by choice won't be for everybody, but I think it's starting to appeal to more people. So, I mean, big picture, there's a lot of demand for housing. We have a shortage of single family homes. And that's a very, that's very constructive for invitation homes as business. And I think that's a long-term tailwind for the company, especially since they offer a more affordable housing option. Who are the competitors who are going up against invitation homes in this space? Yeah, so they have several competitors. There's one other large publicly traded single-family reits, and that is American homes for rent, ticker symbol AMH. They're the other large one. They're pretty much the same as invitation homes, except they have their own in-house development program.

So they essentially have a home building operation inside of their company. And then there's a couple of private players, too, Blackstone, a couple of other private equity firms owned single-family homes. And then also the multifamily reeds as well. That's also not direct competition, but it's definitely competition for reputation homes. So those are a few of the competitors. Pretty much, you know, anybody who wants a home, I guess is a competitor. This is a read.

And adjusted funds from operations or AFFO is a means. meaningful metric when you're looking at REITs. For those who are newer to this type of investing, what is AFFO and why is it matter? Yeah, when you're analyzing a non-RET or just like your normal company, you typically want to know how much a company is earning or what its net income is. For REITs, funds from operation or FFO, it adds back depreciation to net income because over time, single-family homes, most notably the land, appreciates. and value over time. So adding that back captures that. And then AFFO, right, you're just subtracting the recurring expenditures from FFO, which gives you a good proxy for the cash flow of REIT generates.

So I hope everybody's still with me there. But it's essentially just a proxy for how much cash a READ is generating. I can't talk to you, one of our dividend investor superstars and not talk dividend growth. Since Invitation Homes went public in 2017, it's raised its dividend about eight times. Because REITs need to pay out 90% of their taxable income in dividends, they're not always the best sources of dividend growth. So how has invitation been able to buck that trend and meaningfully grow its dividend? I think it's largely a function of the tailwinds that we discussed earlier. You have limited supply. You have strong demand. And that is allowed invitation to generate strong rent growth, and that's been flowing through to a higher dividend payout for investors. But Invitation

Homes is also really good at recycling capital. And recycling capital means that they can sell lower returning, lower quality assets, and reinvest the sale proceeds into higher quality, higher returning assets. And the reason why they're so good at doing that is because they own single-family homes, which is the most liquid form of real estate. So if they want to sell a home, they likely have hundreds, if not thousands of prospective buyers that could theoretically buy that home. And if you look at Invitation Home since 2008, its long-term debt has actually gone down. It's shares outstanding have barely gone up, and its dividend has grown at a very high rate. So that tells me that not only is the company generating a lot of cash, but management is also allocating capital well.

I've heard you say on Motley Fool Live when you've talked about this company before that you'd like to see Invitation start its own home building segment. Can you expand on that a little bit? Yeah. So my thinking at the time was if invitation homes could create its own in-house home building arm similar to American homes for rent, they can knock out two birds with one stone. So they could turn to Congress and say, look, we're adding new supply to the market and we're being a solution to the housing shortage by building new homes. And then secondly, right now there's not a lot of existing home inventory for sale.

So it's hard for invitations to acquire properties and grow externally. But by building properties, they have more control over their future growth. Since I said that on scoreboard, I've kind of soured on that idea. Instead of having an in-house development arm, homebuilding arm, invitations has instead partnered with some of the largest home builders in the U.S., including Dreamfinders homes, to construct built-for-rent communities. And I think that's smart because it's less risky for invitation homes. They don't have to worry about volatile land pricing.

They don't have to worry about procuring labor and materials. And they get to benefit from the homebuilder's existing scale. So I think these home builder partnerships feel like a win-win for invitation homes and the home builder. And that's probably the best risk-adjusted opportunity moving forward for them. With this potential home-building arm now out of the picture and a better option having appeared, is there anything else that you'd like to see Invitation Homes try on in the future or anything that you're keeping an eye on with this company moving forward? Yeah, so two things.

One, I'd like to see them continue to grow their third party management platform. This is where Invitation Homes manages single-family rentals on behalf of third-party owners. They currently manage about 22,000 homes in the platform, and the business looks like a nice way to achieve capital-light earnings growth, something that's kind of hard for REAP to do. And so once this business gets scale, I want to see that continue to grow and see their earnings continue to grow as a percentage of the overall earnings. And then secondly, I want them to continue to improve their tenant experience. I think that's super important. Like you want tenants saying, hey, I want to live in an invitation home. I think that's really important for them as they continue to grow and move forward.

And as always, pleasure having you on the show. Thanks so much for doing a little medium dive on invitation homes with me. Thank you. As always, people on the program may own stocks mentioned. and The Motley Fool may have four more recommendations for or against, so no buyer selling anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.