On this Market Foolery podcast, host Chris Hill and Motley Fool One's Bill Mann discuss two very different companies with two wildly different places in the market today.
As electric-car innovator Tesla (NASDAQ: TSLA) begins to deliver its long-awaited Model 3, the Fools discuss potential pitfalls -- and whether the company can get by without another stock offering. Teva Pharmaceutical Industries (NYSE: TEVA), meanwhile, faces heavy debt and a challenging market that have cut its market cap in half. So is either a buy at current prices?
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A full transcript follows the video.
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This video was recorded on Aug. 3, 2017.
Chris Hill: It's Thursday, Aug. 3. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, from Motley Fool One, Bill Mann, back from South Africa.
Bill Mann: Hello, my brother! How are you?
Hill: I'm well.
Mann: I've been back for a little bit. I'm no longer jet-lagged. South Africa? Not on the way. [laughs]
Hill: Not from here.
Mann: There's no place that it's on the way to.
Hill: What is the time difference?
Mann: It's six hours, so it's not brutal, it's just the up-and-down part. You're on a plane, you have to file papers to get off the plane -- it's like a relationship that's ending. You have to divide up the stuff equitably. It's a long way away. Beautiful country.
Hill: Worth the trip, though?
Mann: Oh, gosh, yeah. The moment I got back, had I any money at this point, I would try to go back.
Hill: We'll talk a little bit about that. I do want to talk about that.
Mann: Enough about me.
Hill: But we're going to get into pharmaceuticals. We have to start, though, with Tesla --
Mann: We're going to get into talking about pharmaceuticals. [laughs]
Hill: Talking about pharmaceuticals. We are not, as far as you know, going to be ingesting pharmaceuticals. But it's an audio podcast, so you're not going to know for certain. But let's start with Tesla. Second-quarter profits, higher than expected. The stock is up about 7% this morning. Where do you want to start with this? Eventually I want to talk about the conference call and Elon Musk and some of the comments he made. But I think for anyone who's watching Tesla and is thinking, how are they doing on production, they at least seem to be moving in the right direction.
Mann: I think I need to give my standard disclaimer about Tesla. One, I'm an owner of the car and I think it's the greatest thing since sliced bread. So I love with they're doing. Two, as a stock analyst, I doubt that there's a company that I have ever been so consistently wrong about as Tesla. So whatever it is that I'm saying, if you want to play the opposite game, I will not take it personally at all.
Hill: Duly noted.
Mann: At some point, you just have to say, that guy ... it's not even that he doesn't know what he's talking about. He knows what he's talking about, but what he's talking about is the exact wrong thing.
Hill: OK, duly noted.
Mann: I'm a little concerned about a lot of things from the Tesla earnings report. For example, the deposits that they have on the X and the S, which are $5,000 deposits versus the $1,000 for the Model 3, were down more than 60%. Now some of that obviously is the clearing of the backlog. When you deliver a car, that's minus one in terms of deposits. But for a growth company, having those products, which are still very important products for them, to have those numbers be that much lower is kind of concerning to me, particularly since, when you look at the Model 3, which is not in production yet, there was plenty of growth there, but those deposits were $1,000 a piece. So in total, they went from $660 million in customer deposits to a little over $600 million. And that's cash that they use; it's float. So yes, there are lots of things to like about the Tesla earnings report, but it's very clear to me that they're going to need to sell equity sometime soon. So maybe it's absolutely fabulous that the stock is up, because when you sell equity, you would like it to be high.
Hill: You just went to my first question, which is, they have this float, but they clearly need to raise money. And one of the things Elon Musk said on the call was, no, we're not going to do another equity raise, which suggests that maybe they're going to do a bond or something like that. But I think as you said, that's one of the concerns, where it's like, we've done the math; you guys need more money. And they know that.
Mann: They know it. They've increased their credit line substantially. That gives them the cash cushion that they need. But as we're going to learn when we talked about Teva in a few minutes, debt has a real risk to it. So yeah, I think long-term, the thing that you need to realize is that equity is, generally speaking, especially when you feel like you can sell your stock at a pretty high price, cheaper than debt. Equity is the thing if you need cash. And I just don't see how they don't need substantial amounts of cash based on what their assumptions are for how they'll grow, and for the actual cash dynamics of their business right now.
Hill: There are other companies over the last 25 years that have left very experienced investors scratching their heads in terms of the valuation. Amazon is certainly one of them. In the case, though, of Tesla, I think part of what is head-scratching, for lack of a better term, is that Elon Musk -- unlike, by the way, Jeff Bezos, just to keep that analogy going -- does not appear to be someone who believes in the old motto of under-promise and over-deliver. He's very, very direct about the promises that he's making in terms of the production targets they're going to hit, whether it's "We're going to hit 500,000 vehicles a year," and most recently in this call it's 10,000 vehicles a week by the end of 2018. At some point, doesn't that have to come back to haunt him if he doesn't hit it?
Mann: No, because he's tended not to hit them all along. The Model 3, which, I think, if you want to be excited about something, the reviews that are coming out on the Model 3 in terms of the usability of the car are absolutely fabulous. They're fantastic. To me, the success of the Model 3 -- now, I'm completely ignoring the question you actually asked me -- I'll circle back around to it. They've been able to gin enough excitement up by really delivering on the products themselves. The products, even when they're hyped up, tend to over-deliver. I think people keep giving them the ramp that they need to get there. So even though he says, and I think those very public, very audacious targets, he's setting because he wants to keep pressure on his people. I really think that's what it's about. So I hope there aren't too many investors out there at this point who say, "He said X; therefore, if he doesn't say X, he's failed." Because I think he goes out there and pretends that the audacious is the expectation.
Hill: Let's move on to Teva Pharmaceuticals, which is the generic-drug maker which is having a really bad day.
Mann: Having a really bad year. It's down 55% from its peak.
Hill: Down 20% today.
Mann: Some of that has happened today, yes.
Hill: Second-quarter profits came in low. Overall sales were light. They lowered guidance and they cut their dividend by 75%.
Mann: That sounds bad.
Hill: Other than that, Mrs. Lincoln, how was the play?
Mann: [laughs] That's right. So we were just talking about the danger of debt. The pharmaceutical industry is one of the greatest industries in terms of economics. You produce something that costs very little, and you get to sell it for a lot. But one of the issues in the pharmaceutical industry is that everybody knows this. Everybody understands the economics. So it's somewhat rare when you get, for a mature business, that type of great economic surprise. But the other thing that happens in the pharmaceutical industry is, because those cash flows tend to be so predictable, they can take out a lot of debt if they want to. It's an OK thing to take out debt if you generate a lot of cash and that cash is predictable. But if it's not predictable, you'd better hope that you can cover your debt.
The big issue with Teva -- Teva is now, I can do the math backwards, somewhere about $30 billion in market cap. All told between the revolvers and everything else, they have about $34 billion in debt, which they have to service. So when you read off the litany of things -- lower earnings, lower yields, lower cash flows, and AmerisourceBergen came out this morning and said across the board, generics in the United States are pricing about 7% lower than the same point last year. That hits them directly in the cash line. So Teva is now a company that's pretty severely in stress financially.
Hill: In terms of the dividend cut, if it's not the biggest financial red flag a company can wave, is it certainly in the top three?
Mann: It kind of depends. That's a great question. It depends on how a company treats the dividends. Now, Teva has treated their dividend as being somewhat statutory, by which I mean "The dividend is very important to us, and we would like to pay the same amount or increase it." So when they cut it, that's as much of a flag as you can get that they have a more important need for the cash. A lot of companies don't have statutory dividends. They say, "We'll try to pay out what we can." Then, you know, one year it's going to be this, or one quarter it's going to be that, it's going to move around a little bit. But for companies with statutory issues, the explanation for why they would cut it had better be, "We need that cash because we're about to do something awesome." Otherwise it's a sign of stress.
Hill: When you look at shares of Teva, which are now, as of today, at a 13-year low -- you have to go back to 2004 to find the stock this cheap.
Hill: For anyone who's looking at it and saying, "Oh my gosh, it's down 55% for the year! This is on sale, I should snap it up."
Mann: Maybe. But what you need to understand is that Teva's debt is rated BBB. It's like the old Bugs Bunny, that joke -- watch that next step; it's a loo-loo. The step from BBB down means that they will no longer be investment grade, and that is a big problem for a company with that much debt. I think if you want to take a flier on Teva at this point -- it's crazy to say that for a company that's actually an enterprise value of $65 billion -- you've got to think about it like you're a credit analyst and not a stock analyst. That's a very different set of skills for a lot of people.
Hill: This weekend on Motley Fool Money, quick housekeeping note, we're going to have Paul Lienert, longtime auto industry reporter from Reuters, going to be talking about, I'm sure I'll be talking to him about Tesla, but also U.S. auto sales and more.
Mann: I would listen to him about Tesla. He's great. He's really good.
Hill: Yeah. I was telling our man behind the glass, Dan Boyd, about this. The thing about Paul Lienert -- phenomenal voice. Maybe the greatest voice of anybody -- people are like, who's your favorite person you've interviewed? I really don't have one favorite person I've ever interviewed for Motley Fool Money, but in terms of superlatives, I know who has the best voice.
Mann: Can you do his voice?
Hill: I can't. But it sounds like ...
Mann: Give it a shot.
Hill: Here's how I'll describe Paul Lienert's voice. It's like bourbon and molasses had a baby, and that baby's voice is Paul Lienert's.
Mann: My voice was once described as saltwater taffy and sandpaper.
Hill: [laughs] Wow. That's harsh.
Mann: I don't know if it's harsh.
Hill: Yeah, it depends on, I think, among other things, how you feel about saltwater taffy. Let's talk about South Africa really quick. The last time you were on Market Foolery, we were talking about your trip, and I said that when you come back, I want a business takeaway. But I know, even though this was a trip you took with your family, you spent part of the trip visiting hospitals.
Mann: Yeah. Not in South Africa, but we were in Ethiopia, and we were involved with the group called the Fistula Foundation. I'm on the board here in the U.S. There's a Fistula hospital, very renowned in Addis Ababa in Ethiopia, and the first time I had the opportunity to take my family to one. It was an incredible experience for them. My daughter, who's 17 now, came out from that and said, "The thing that I noticed more than anything else was, when the patients show up at this hospital, they're given these beautiful blankets." If you Google "Hamlin Fistula Hospital blankets" -- it'll show up; you'll see them in a second. The blankets are donated and the blankets are given to these women when they show up, and these women have, for 20 years, some of them have been treated as worse than nothing. And to be given this blanket, it's comfort and it's yours. Nobody will touch it if you don't want them to. It's yours to take with you afterwards. It's a beautiful thing. So my daughter immediately said, "You know what I want to do? I want to start -- one, I need to learn how to knit. But I'd like to start knitting to do these blankets." So I thought, if there are listeners out there who know people who like to knit, get in touch with me, because she's really passionate about doing this. It was a really neat thing.
Hill: Send me the link to the hospital. I'll tweet it out on the Market Foolery Twitter.
Mann: That'd be great. It's nice when a 17-year-old is excited about anything. [laughs]
Hill: Yes. [laughs] Anything out in the world, anything out of their immediate purview.
Mann: Yeah. So for her to have said, this is something that I really think is cool, I also think that's cool.
Hill: That's great.
Mann: Yeah. So that was a very special experience for us.
Hill: Nice. In terms of, one of the things we talked about last time you were on, South Africa, you mentioned the burgeoning middle class there.
Mann: Yeah. South Africa, you think of as being a wealthy country. And it is. It is by far the wealthiest country in Africa. But it's also, perhaps, one of the most unequal, in terms of wealth. You have a huge underclass there, and you can understand why, thinking about the history. But a lot of them are tremendously underbanked. There are companies, one that's actually not in South Africa, which I think is one of the most interesting ones in the world, is Safaricom, which is the Kenyan national telecom company. They have a product called M-PESA. You see it all over the country; you see it in multiple countries in Africa, including in some of Southern Africa, where it gives people who have no access to bank accounts microcredit, credit to do spending. They don't have to worry about carrying cash with them. And it just speaks to me that, in the developing countries, things will not happen the same way they happened here in the U.S. What you're not going to have in these countries is these little community banks forming, because there's no need. Technology is getting them to the next step. We think of technology as being transformational here, and it has been. But in areas where there has been so little economic growth, just the tiniest bit, it doesn't even have to be sophisticated technology, not bleeding-edge stuff -- it changes people's lives. For them to be able to not have to worry about cash, it's an unbelievable thing. Every time I go, I notice things like that. But in Africa, with what Safaricom is doing with M-PESA, it's really remarkable.
Hill: Interesting. Thanks for being here!
Mann: I'm glad to be here!
Hill: As always, people on the program may have interests 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 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 on Monday!
Bill Mann has no position in any stocks mentioned. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Tesla, and Twitter. The Motley Fool recommends Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.