Big Trash Gets Bigger: An Acquisition Story

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On this episode of Market Foolery, host Mac Greer and Motley Fool analysts Ron Gross and Andy Cross hit on a few of the market's biggest stories. Waste Management (NYSE: WM), the King Kong of U.S. waste disposal services, is adding its competitor and fourth largest U.S. disposal player to its business -- making a strong company even stronger. Tiger Woods blew away the Masters tournament, leading to some revived hope for the struggling golf and country club industries -- some hope, but not a lot, so don't get too excited. Best Buy (NYSE: BBY) is getting a new CEO, but investors shouldn't worry too much about the turnaround dynamo Hubert Joly stepping down. Tune in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on April 15, 2019.

Mac Greer: It's Monday, April 15. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Andy Cross and Ron Gross. Gentlemen, welcome!

Ron Gross: Hey!

Andy Cross: Hey, Mac!

Greer: How are we feeling?

Cross: Good!

Gross: Amazing!

Greer: Did we watch Tiger's big win? I know one of you did.

Gross: Watched it twice.

Greer: Good! You were that excited?

Cross: Really?

Gross: They did a replay right after.

Cross: On average, we watched it once each.

Gross: That's true.

Greer: That's good. He won both times.

Cross: Did you bet on the second one? Make any money on that?

Gross: [laughs] I should have done it to my son.

Greer: Excellent. That would have been a good move. We're going to talk about that and what it may or may not mean for investors. But we have some other stories as well. Best Buy announcing a new CEO. We'll talk about that.

But guys, let's begin with some trash talk. On Monday, Waste Management announced that its buying smaller rival Advanced Disposal Services for around $3 billion in cash. Waste Management is the country's largest provider of waste management -- or as some of us say, trash collection. Guys, you may not know this, but it's headquartered in the great city of, where?

Gross: Your hometown, Mac!

Greer: Houston, Texas! Go Astros! Advanced Disposal is the fourth largest solid waste company in the U.S. On news of the deal, guys, shares of Advanced Disposal up around 18% right now. Waste Management up around 2%. What do we think?

Gross: Looks like a good deal to me. It's a smaller company, certainly, than Waste Management. But not small. As you said, $3 billion equity value. They'll take on almost $2 billion of debt from the company. That makes it the total deal $4.9 billion. The company has around three million residential and industrial customers, mostly in the Eastern half of the U.S. It's a nice tuck-in acquisition. Obviously, they paid a decent premium for the company to get it. But it doesn't appear to be an exorbitant price. I think they believe they'll be able to wring out about $100 million of expenses when the two companies are combined. The dreaded word synergies was used twice in one sentence in the press release.

Greer: [laughs] You're not a fan.

Gross: [laughs] We shy away from that word around here. But, $100 million of cost savings sounds good to me. I like this deal, it's a nice tuck-in acquisition.

Cross: These kinds of businesses have a lot of high fixed costs. If you can acquire these companies at reasonable prices, you can get that cost effectiveness. They're very sticky. Once you're part of a waste collection operation like that, that is the business. You are using them. Just some numbers. They paid, as Ron said, $4.9 billion. They have about three million customers. That's about $1,600 per customer. You think about how much you spend for your trash hauling, waste collection business. They're actually hoping and expecting those customers to be around for many, many years, and they will be.

Waste Management is a $43 billion company, paying about $5 billion for this. I guess they have to take on some debt for this because they don't have a lot of cash on the balance sheet. Waste Management does not have much cash. They're going to continue to run a levered balance sheet and get the cash flows from it and be able to pay down the debt. Pretty good deal, I think, overall.

Gross: Very often, you'll see the acquiring company's stock go down on a day like this. Interestingly, Waste Management is up 1%-3%. It keeps moving around. Probably because they think it'll be immediately accretive. That's a fancy accounting word meaning it will add to earnings immediately. Which is not always the case. It often takes a while for an acquisition to integrate in and then eventually add to earnings, hopefully. Here, it looks like it'll happen immediately, so I guess the stock is reacting appropriately.

Greer: Ron, you just mentioned the stock. When you look at the stock chart, shares of Waste Management have beaten the market over one, five, and 10 years. That's a pretty impressive track record. What do you think about this stock going forward? A lot of people mentioned -- and by "a lot of people," I mean the one article I read -- that this could be a good defensive stock in the case of a recession.

Gross: I would agree with that. Nobody's canceling their trash service, [laughs] unless things are getting really bad.

Greer: Sign of the apocalypse.

Gross: [laughs] What would you do then? Now, the industrial customers, that could have some weakness in a recessionary period, probably, especially if companies are going out of business. But for the most part, I would agree, it's a nice stock to own and hold for a really long periods of time. They pay a nice dividend, almost a 2% yield. As you said, outperform consistently vs. the S&P. I think it's a good stock to own for long periods of time.

Cross: The waste management business -- not Waste Management the company, just in general, the business -- as China now is not taking all of our recycled material like they used to, we used to send close to 40% of our recycled material over to China, and they would take care of it. Now, that's not happening. So, waste management companies are trying to figure out how to run recycling at a profit. They haven't had much success. They need scale to be able to grow out both the revenue and the profits. They're going to make acquisitions. Waste Management, as the big gorilla out there, has the ability to make these kinds of acquisitions and make them work.

Greer: A bit of a personal question here. If I go to the Gross household, or if I go to the Cross household, how would we evaluate the trash management? Are we staying on top of it? When you look at the way trash is managed in your household, how are we doing?

Gross: [laughs] That's an interesting question! I think we're doing fine. We're not as good at the recycling. Boxes accumulate in my garage over time, like from Amazon and all that kind of stuff. Those accumulate, eventually we get rid of them. But actual trash, we're good with.

Cross: We have to back a little ours. I'm really religious about the recycling of the boxes from Amazon.

Greer: Are you breaking them down?

Gross: We do not break them down.

Cross: I break them down. I try to, as best I can. But the other trash... kids just accumulate a lot of stuff that you have to get rid of.

Greer: I've heard that...

Cross: That's a challenge for me.

Greer: Let me ask you about the boxes. Where I really get in trouble -- Ron spoke to put in boxes in the garage. If you put boxes out on the curb and it rains, then it's a mess.

Cross: And that's not good for the recyclers.

Greer: But, if you put them in the garage, then you forget that you put them in the garage. What's the answer there?

Gross: [laughs] Every time you know the recycling company is coming, you put the boxes out?

Cross: Do you want me to put a reminder on your calendar when your trash comes?

Gross: Do you put them out days in advance?

Greer: You're like that guy in A Beautiful Mind, you're just doing all this fancy stuff.

Cross: What's your trash day? I'll set a reminder for your calendar. Wednesday?

Greer: Wednesday.

Cross: Wednesday, there we go!

Greer: OK, let's move on! Let's talk some Best Buy. On Monday, Best Buy announcing that CFO Corie Barry will become CEO in June. Barry will be the first woman to serve as CEO of Best Buy. Barry replaces Hubert Joly, who will become executive chairman of the board. Guys, Joly joined Best Buy in 2012 and has led a bit of a turnaround. Eight straight quarters of same-store sales growth.

Cross: A bit of a turnaround? The stock, since the end of 2012, is up 6 times in value. That's an annualized --

Greer: A big bit.

Cross: [laughs] That's a pretty significant turnaround. Not a lot of people, including many of us, expected Best Buy to be able to make this turn and push toward digital sales. Corie Barry, the CFO, she's also a chief strategy officer. She's been there since 1999. She's been pretty integral in this conversion toward using both their storefront as well as online presence to be able to have a resurgence in Best Buy's business. It's certainly has been great for shareholders over the last six years.

Gross: Yeah, I was for sure one of those folks who said Best Buy's best days are behind it. Their new strategy wasn't appealing to me. They were going to differentiate themselves based on customer service and in-home service. If you've ever been to a Best Buy, the service is not great, in my opinion. Bit, to their credit, they've really done a nice job. For a while there, they were just known as Amazon showroom, and people said that's not a business model. But yet, they managed to make it work.

Cross: I use Best Buy, there's one down the street from my house in Silver Spring and it's great. The order and pick up, I use all the time. Every time I have to buy electronics, that's pretty much where I'll go shopping first.

Greer: Going forward, Ron, you mentioned that showroom. Yeah, we used to talk all the time about showrooming, and, why are people going to buy at Best Buy when they can buy on Amazon and they can price shop, and all that. So, going forward, do you think there's room for both Amazon and Best Buy? And by that, I mean, is there room for Best Buy to be a market-beating stock for investors five and 10 years out?

Gross: Interesting. I personally don't like buying electronics online. I like to go and see, whether it's a TV or whatever it is, ask some questions, hopefully get the right answers. [laughs] That doesn't always happen. So, I definitely think there's a space for brick and mortar electronic retailers. Is it a market-beater over long periods of time? I tend to think maybe not.

Cross: It's had a nice run, so the valuation's a little bit stretched. I will note that Corie Barry, the new incoming CEO, is also on the board of Domino's Pizza --

Greer: [whistles] Speaking of turnarounds.

Cross: They've been very effective in using technology to basically build out their distribution platform. Obviously, there's a nice partnership there, just in the thinking about how to compete against the likes of Amazon.

Greer: OK, guys, our final story, what is being heralded by some as the greatest comeback in sports history. Yes, Tiger Woods, winning the Masters on Sunday. Woods now 43 years old. He's overcome four back surgery, some personal problems, some probably self-inflicted personal problems, in a lot of cases. The last time Woods won the Masters was 2005. The first time, 1997, when he was 21 years old. Andy, Ron, I know you're both golfers. Andy, I know you're an avid golfer. I was really struck by your response. I don't think of you as a particularly sentimental guy. I mean, I've known you for 20 years, and I was so excited to talk to you about Tiger Woods this morning. I Slacked you, and I have your Slack at 9:06am, and it was really moving. You Slacked me and you said, "I didn't watch, but saw he won."

[all laugh]

Cross: Yeah. I used to be an avid golfer. Quick correction. I used to be an avid golfer. I don't play much nowadays. But my sentimental golfing moment was when Jack Nicklaus won the '86 Masters. My father, was a big Jack Nicklaus. I was around 14 or 15.

Greer: And Nicklaus was how old?

Cross: 46, three years older than Tiger. And my father was just in tears. So, I saved my sentimental moments in golf for that time period. Listen, it was a great victory by Tiger Woods. I mean, you think about what he did to come back. Just the physical challenges he's had in golf, and the powerful way he played golf for so many years, really took a toll on his body. And then, the personal challenges he had. It was a great victory. He certainly competed with the best of them. Francesco didn't put on a great show, his playing partner, I think, in the last round. So that helped a little bit. But hey, he won the tournament. A great victory for him! I think it was a nice victory for Nike, too.

Gross: For sure. I loved it! As I said, I watched it twice, at least pieces of it twice. The reaction at the end with his son, I thought, was amazing!

Greer: Oh, my gosh!

Gross: Brought a tear to my eye. It was awesome!

Greer: [chanting] Tiger, Tiger!

Gross: I think it's great for the sport of golf, which has had struggles over the years. Certainly, the networks love when Tiger's hot, because it's great for the networks, it's great for advertisers. Nike, as you mentioned. Bridgestone, he has a deal with Bridgestone. He's probably the only pro golfer to play with Bridgestone balls.

Cross: No, a lot of players play with Bridgestone.

Gross: Yeah?

Cross: Yeah. I think Matt Kuchar does. Looking forward to the U.S. Open, that will be super exciting. I'm actually going out for the some of the practice rounds.

Greer: Nice!

Cross: I'm out and Pebble Beach. Pebble Beach, where I think Tiger won his first Major, if I'm not mistaken, the first Major of his 15 was won in Pebble Beach, I believe. That will be exciting for both networks and fans. They'll be amped up for him to go out there to Pebble Beach.

Gross: What do you think of the mock turtleneck look? Did you see that?

Cross: Yeah, I didn't like that. But, Nike actually had some stylish -- there's a lot of talk about Nike really making a resurgence when it comes to the younger consumer. Look at Brooks Koepka's hat on the first day. That blue hat, looking very stylish. And the logos. Tiger had his Frank head cover logo on his shirt for one day. I think even Rory McIlroy had a custom logo as well too. Nike, showing a little style at the Masters.

Greer: Let's talk about that. Do you think as an investor that this will move the needle for any of these businesses? When Tiger won in the '90s, when he won his first Masters back in '97, there was an explosion of interest in golf. A lot of golf courses were built. Now, I think golf has a real problem. You've got a younger generation that isn't as interested. Ron, I know you've played some golf, but it's hard committing five or six hours on a weekend, especially if you have a family. I was never a very good golfer, but I don't I just don't play golf much anymore. I don't want to spend that time.

Cross: That's true, you weren't a very good golfer.

Greer: Thank you!

Gross: [laughs] You're right. Golf courses are hurting, country clubs are hurting. I do think this is, as I said, good for the sport. Maybe there'll be a little bit of a resurgence. I can't imagine it will be so unbelievable, to all of a sudden make everyone whole and everything is going to be fine. But there'll be a little bit of a bump.

Cross: Real kudos to Nike! Nike was the most prominent sponsor, who stuck with Tiger throughout all of these challenges. I think Nike's stock is up 700% or so since Tiger's 2005 victory, his last Masters victory. You think about what this means for Nike, they have that moving commercial about Tiger, a tribute to him. From a long-term investing perspective that we love to embrace, it's great for Nike to see that victory, and, besides, a recommendation of ours, too.

Greer: Ron, we actually played golf together at our Motley Fool annual retreat.

Gross: We did, yes!

Greer: I was curious as I was watching Tiger's final round, did anything in his game or final round remind you of playing with me?

Gross: [laughs very hard] Absolutely nothing!

Greer: What happened to my shoes when we played?

Gross: [laughs] They broke in half!

Greer: Both of my shoes came apart!

Gross: They were so old, and you hadn't worn them in so long, that they literally came apart!

Cross: Were they Nikes?

Greer: They were FootJoys from the '90s.

Cross: You're basically the Zion Williamson of golf.

Greer: Oh, a lot like Zion Williamson! We both have opposable thumbs, exactly! Yes, I've people make that mistake all the time!

Gross: [laughs] Good times!

Greer: We will leave it there. Actually, we won't leave it there. I have to ask the desert island question. We've put a few stocks in place. Let me get your thoughts. Let's talk Waste Management, Best Buy, and, let's go Nike. If you're on a desert island for the next five years, you can only buy one of those stocks. What are you going with?

Gross: Huh! This actually harder than usual. [laughs] I think Waste Management is a proven market-beater. Steady-eddy. That's what I'm going with!

Cross: It is tough. I think this may be the toughest one you've posed to us, Mac. I think I am not going Waste Management. I will go with the smallest one in Best Buy. It's the retailer that's shown some life. I like a lot of what the new CEO and strategic officer is bringing to the table. So I'm going to go with Best Buy.

Greer: Well, there you go! Andy Cross, Ron Gross, thanks for joining me! As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery! This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andy Cross has no position in any of the stocks mentioned. Mac Greer owns shares of Amazon. Ron Gross owns shares of Amazon and Nike. The Motley Fool owns shares of and recommends Amazon and Nike. The Motley Fool has a disclosure policy.