On this episode ofMarket Foolery, Chris Hill is joined by Motley Fool analyst David Kretzmann as they look at two major deals that were announced this week
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First, Panera Bread (NASDAQ: PNRA)confirmed it would be joining the large portfolio of privately held JAB Holding -- owner of Krispy Kremeand Keurig Green Mountain, among other brands. Meanwhile, Amazon (NASDAQ: AMZN) picked up the rights to streamThursdayNight Football games in a deal with the NFL that cuts out last season's streaming partner, Twitter (NYSE: TWTR).
To close things out, we'll hear some business takeaways from Kretzmann's three-week trip to Australia and New Zealand.
A full transcript follows the video.
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This video was recorded on April 5, 2017.
Chris Hill: It'sWednesday, April 5th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio: David Kretzmann from Supernova. He'sback from his trip. Welcome back, sir!
David Kretzmann: Imade it back in one piece. It's good to be back.
Hill: I had no doubtyou would make it back in one piece.
Kretzmann: I appreciate that.
Hill: I want to get to your trip in a moment,because you spent some quality time down under, exploring Australia andNew Zealand. But we have to talk about the story of the day.
Kretzmann: The news fairy.
Hill: The news fairy has been good,I'll be honest, coming into this week,I was like, I really hope the news fairy shows up,because there's not a lot of earnings news this week. The deal that we discussed yesterday has now been ... well, ithasn't been set in stone.I guess all the documents will be signed in the nextcouple of months.Panera Breadis being bought, and we now knowit's going to be bought byJABHoldings. It's a $7.5 billion deal. If you're aPanera Bread shareholder, you're having one hell of a good week. A week ago, the stock was trading around $250, and the buyout price is going to be $315 a share. What did you think when you saw this news? JAB Holdings, youlook at their portfolio, the companies that they own, they are very deep into the food space. They haveKrispy Kreme donuts,Green Mountain Coffee,Peet's Coffee, Caribou.
Kretzmann: They love their coffee.
Hill: They do.
Kretzmann: Itdefinitely makes a lot more sense thanDomino'sacquiringPanera. Panera seems like a much better fit. And, based on what Ron Shaich, the founder and CEO of Panera, has been saying, it sounds like JAB will be giving Panera a lot of autonomy. To me, that would bethe only way a deal like this would make sense. You get the impression that Shaich andcompany really love what they do, and the Panera 2.0 concept is really clicking. So, I would expect JAB to be a little bit more hands off with Paneracompared to Krispy Kreme or Keurig, which were brands orcompanies that were struggling a little bit more.Keurig hadKeurig Kold, that was the big deal thattotally fell flat on its face around the time when JAB bought them out. Panera seems like it's a good fit, based on where JAB has been going. Like I said,probably a little bit more hands off. I think it makes sense, and for Ron Shaich and company, they can be fully in control,from the sound of it. So, it sounds like a good deal for both.
Hill: It does. The one thing -- and you and and Aaron Bush and I weretalking about this earlier this morning -- that'sa little puzzling to me is, if you think aboutKrispy Kreme, Keurig Green Mountain, Peet's, Caribou, when they were allpublic companies on their own, by the time JAB got around to buying them, they had struggled,as you said. And it was one of those situations where I remember thinking,particularly in the case of Keurig Green Mountain, "Well, that's good. That's good, that they'regoing the private-equity route, because then they can be out of the spotlight." Panera Bread is crushing it. So,that's the only thing that's a little bit puzzling to me. But, as Aaron Bush said, maybe JAB just wanted something a little easier that they didn't have to go in and fix.
Kretzmann: Yeah,they don't have to fiddle with it quite as much. And it sounds like that's what JAB wants, that's what Panera wants. So, it makes sense there. A few years ago, there was a much different conversation around Panera. Even here at the Fool, we had agood amount of people here who were skeptical about wherePanera was going. It was struggling ona lot of different fronts. And it wasn't immediately clear whether Panera 2.0 would click. Butit turns out Panera was one of the first restaurant chains to embrace digital, mobile, online ordering. And as a result, at a time when a lot of restaurants are struggling, Panera today is putting out astounding numbers, it'swell at the top of the pack,alongside companies like Domino's and others. A few years ago, it wasn't as obvious that Panera would turn into what it has today. The company, even over the past five years, still, after this pop, the stock has still underperformed the S&P 500. I know we have some people at the Fool who follow the company and recommended it a lot longer. If you've held the stock for 8 to 10 years, you've come out well ahead. It's up 300% to 400%. But over the past few years,the company has still struggled. Andit's only really within the last 12 to 18 months thatit became clear that 2.0 was going somewhere. I think,in the grand scheme of things, it still could be somewhat early. But like we were talking about, JAB, at this point, you just let Panera and Shaich do what they're doing,because it's clearly working. And in the restaurant space, not a lot of restaurants can say that.
Hill: Right. I watched an interview that Shaich gave this morning, andone of the things he was talking about was, you go back three years when he made the famous mosh pit comment, andhe was absolutely right about that. Butone of the things he talked about in this interview was how long it takes. It'snot just a matter of "you need an app" and make it easy for people to order. No. You have to make sure that there are people in the kitchen who aregoing to be able to deliver on what is being ordered. The stat thatsurprised me a little bit when he said it, butI suppose it makes perfect sense, when it comes to mobile ordering at Panera Bread, 70% of those orders are customized. So, it's not just someone saying, "I want a bowl of chicken soup," or "I want this sandwich." It's "I want this sandwich, I want it on this type of bread,I don't want themayonnaise, I do want spicy mustard." All that sort of thing. They really put so much ... it's all the more impressive what they have done. It's also, if you are, for example, aStarbucksshareholder, where one of the recent stories about their business is, they'restruggling a little bit with the mobile ordering front, you realize, "Oh, yeah, there's a lot more that goes into it. It's not something that can be turned around in one or two quarters."
Kretzmann: No,certainly not. I think another company thatreally needs to take notes from Panera and Starbucks isChipotle.Chipotle actually took theChief Information Officer, Curt Garner, from Starbucks about a year-and-a-half ago. Even at Chipotle,it's like going through molasses there,it's just so slow to improve the app. I love Chipotle, I'm one of their regular users,but their mobile and online ordering experience,compared to Panera and Starbucks, is just way behind. This stuff does take time. I think it justreiterates or reinforces the importance that as investors, you have to be patient. No company is going to go up in astraight line. Companies like Panera or Starbucks will go through these stumbles, but if you believe in the leadership, the long-term advantage of a company, it pays to stick it out. Even though Panera had a few years where it struggled,by and large patient investors are coming out ahead. So,I think it's critical to be patient, which is easier said than donewhen you are investing in a company that's going through some shorter-term stumbles.
Hill: Bestperforming restaurant stock of the last 20 years,better than Chipotle, Starbucks, any of them. It has returned over 10,000% over a 20 year period. So,definitely a testament to long term buy and hold.
Twitterhas lostThursday night NFL games toAmazon,and it's understandable why, because Amazon ponied up five times the amount of money for the Thursday night games that Twitter did a year ago. Amazon is paying $50 million for 10Thursday night NFL games.
Kretzmann: Which is essentially the same deal that Twitter had last year.
Hill: Right,although they were only paying $10 million for it.
Kretzmann: Yeah, besides that.
Hill: And it's not exclusive, they'llstill be on the broadcast networks. This comes at a time when Amazon shares broke through the $900 barrier and hit another all time high this week. It seems like, whileAmazon is the headline here, in sports, there are games where it's like, did one team win it, or did the other team just lose it?I look at this story and I know the headline is, "Amazon has won the right to stream these games." I look at it as, "No,Twitter is the loser." That, to me, is the headline.
Kretzmann: Especially withJack Dorsey coming on as CEO over the past year and a half. Thecompany is focusing on being the live events platform, and this NFL deal seemed to be a pretty big piece of it. And it's not like Twitter is struggling for cash. I've been critical of the company, I'm a disappointed shareholder, like a lot of people, but they have over $2 billion in net cash. And this seems like the type of thing where you don't want to focus so much on immediate ROI here. So, I'd be curious to see, what was the max price that Twitter went up to and they said, "At this point it's not worth it." It reminds me of theCostcoandAmerican Expressdeal, where Charlie Munger atBerkshire Hathaway... I guess he's vice chairman under Buffett, he basically said comments along the line of, "If you're American Express, you pay a little bit more and you keep that deal. Clearly, that's valuable to your brand and your competitive position." I think, if you're Twitter, you needed the NFL deal far more than Amazon needs it. But, I think it makes sense for Amazon. It beefs up their video platform. I'll be curious to see, because, they will have some time for ads during the game, so I'll be curious to see what that mix of ads looks like. Will they just be promoting Amazon NFL gear? Will they be promoting other Amazon products and services? Or will they open it up to outside advertisers? If I'm Amazon, I think this is a great opportunity to test promoting your own products and services. I would be surprised if that isn't a pretty big focus of theirs.
Hill: Yeah, that was one of my thoughts when I saw the price tag. I thought, "Can they sell $50 millionworth of stuff on 10 consecutiveThursday night this fall?"
I think they probably can.
Kretzmann: We'llfind out. And, they'll bring in more Prime memberships. It makes that Prime offering,especially the video aspect. I think more people are waking up to the fact thatAmazon has some quality original shows. I just found this out today, they have apartnership with the NFL already with one of their showswhere they follow an NFL team through the season. Apparently, that's one of their most popular shows. I think they feelpretty good that this will be a hit. They have that data. I think this is agolden opportunity for them to venture into that live TV market andfigure out how they can integrate the Amazon experience with live TV.
Hill: Let'stalk about your trip. We'll start with any business takeaways. You were gone for three weeks. One or twobusiness opportunities that you saw,whether it's investing opportunities or a U.S. brand that'sdoing well in Australia. Did you meet up with the Fool Australia people?
Kretzmann: I was able to meet up with most of them. They actually had a memberevent on the Friday before I left, soI was able to meet up with a lot of them. I stayed with Claude Walker, who's one of our advisors over there for Hidden Gems in Australia. Big thanks to Claudeand the team for meeting up. I was able to see Joe, Uncle Joe.
Hill: Nice. How is Uncle Joe?
Kretzmann: Seems likehe's doing well. He's heading up a fund now. What's interesting about Australia compared to the U.S. is,The Motley Fool in Australia is a big fish in a small pond. In the U.S., when it comes to retailinvestors, we have more clout thanprobably any organization in the U.S., but we're still in a big pond. Our analystsaren't jumping on conference calls talking to management. But in Australia, it's not uncommon to go on a conference call and hear aMotley Fool advisor asking questions to management. It's adifferent ballgame there, to some extent. But, yeah, the team over there has done some great work.
Hill: Fantastic. In terms of what you saw,in terms of business and investing, share one or two things.
Kretzmann: One thing to me --this is an area that I definitely want to pay more attention to now --is the whole payments space. I didn't actually convert any cash while I was over there. There were onlytwo instances where I needed cash. It was either, whenI needed to ride the bus, in New Zealand, andthey only accept cash, theywouldn't accept a credit card. Similarly, inAustralia, I needed to pay cash for a shuttle to the airport. Other than those two instances, I was able to just bring mycredit card. If you have a travel card, there's noforeign transaction fees. To me, it reinforced the position especially ofVisa (NYSE: V)andMasterCard (NYSE: MA). They are really bringing us toward a cash-less society. I think they have an incredible position. Also, thinkingmore broadly about the payment space, inNew Zealand in particular, I noticed a few different retail spots that hadAlipay andWeChat Pay. That'sAlibabaandTencent, two of theheavyweights in China that arerolling out their mobile pay services. So,it makes me wonder what company in that whole space has the best position? Because Alipay, WeChat Pay, that's venturing closer intoPayPal'sterritory. Then, you have online paymentprocessors likeStripe.
It's a whole category that, as a whole, seems to be pretty crowded, but I keep coming back to Visa and MasterCard. I think those are the toughest companiesto disrupt or overtake. They have very powerfulnetwork effects at playand it shows in the financial statements. PayPal is a profitable company. They have a net profit margin of about 13% to 14%. Visa has about a 40% profit margin. Visa and MasterCardessentially have no cost of sales, so their gross margin is 96%. In thecase of MasterCard, their gross profit margin is100%. They have no cost of sales. It's just incredibly powerful and profitable companies. Theircompetitive position is reflected in the financial statements. That means they do have a pretty big target on their back,because if you are a companynipping at their heels,that's a pretty attractive position to be in. But I see those companies as least likely to be immediately disrupted. I want to take a closer look at those companies, for sure. A month or two agoI was watching an interview with Visa'srelatively new CEO onJim Cramer, and he was talking about the opportunity. And Cramer said, "You're a $200 billion company,but it sounds like you're just at the beginning of your opportunity." The majority of payments around the world are still in cash, so there's a hugeopportunity to transition from cash to credit cards. Obviously, I would sayNew Zealand and Australia are probably toward the forefrontas far as credit card adoption,compared to some other countries you might visit. But,that was definitely something that stuck out to me.
Hill: Nice. AndI'm assuming you had a little bit of fun?
Kretzmann: Yeah,I had a lot of fun. Pretty much the whole trip, I was in theNorth Island in New Zealand, so I had some time toexplore around there. I went to Hobbiton. You and Bill were talking aboutThe Lord of the Ringsyesterday. I'm not a huge The Lord of the Rings fan, I watched the three original movies andI watched maybe one and a half of the Hobbit movies. Butpeople had told me, even if you're not a hugeThe Lord of the Rings fan, Hobbiton is a cool thing to check out. And I think it'sprobably the closest thing thatNew Zealand has to a Disneyland type of experience.
Hill: Is it a theme park? Is it a town? What is it?
Kretzmann: What it is, it's theoriginal farm that they filmed the whole Hobbit set, this is the whole Hobbit village, so, whereBilbo and Frodo are from. Initially,when they filmed the The Lord of the Rings last decade, theyessentially tore down the set. But when they returned to do The Hobbit movie, the farmer who owned that land very smartlysuggested to Peter Jackson, the director, "Let'sleave the set up and invite people to come here." So, it is not a cheap experience, by any means. You're paying $70 to $80 a person to get in. And they're just filling busloads by every 10 to 15 minutes. That farmermade a very smart business decision. But, it's a fun experience. You're there for a couple hours, you walk through the whole Hobbit set. It'ssimilar to Disneyland,you're just transported to another world. And if you're a diehardThe Lord of the Rings fan, it's definitely a place to go.
Hill: Thanks for being here, man!
Kretzmann: Great to be here!
Hill: I really appreciate you coming by. As always, people on the program may have interests in the stocks they talk about, and The Motley Foolmay have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.
Chris Hill owns shares of Amazon, Chipotle Mexican Grill, and Starbucks. David Kretzmann owns shares of Amazon, Berkshire Hathaway (B shares), Chipotle Mexican Grill, Costco Wholesale, Domino's Pizza, Panera Bread, Starbucks, and Twitter. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), Chipotle Mexican Grill, Costco Wholesale, Mastercard, Starbucks, Twitter, and Visa. The Motley Fool owns shares of Panera Bread. The Motley Fool is short Domino's Pizza and has the following options: short June 2017 $140 puts on Domino's Pizza. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.