What Will Buffett Buy Next?

On today's Market Foolery, host Mac Greer together with Motley Fool analysts Emily Flippen and Andy Cross review the market's biggest news. Tesla (NASDAQ: TSLA) hit headlines on two fronts this week. Shares of the EV maker tanked when delivery numbers were significantly lower than analysts were expecting. On the other hand, we have the upcoming legal battle regarding Elon Musk's whole contempt-of-court-tweeting thing. Pop your popcorn and tuck in for an interesting trial. Meanwhile, adult-beverages giant Constellation Brands (NYSE: STZ) (NYSE: STZ-B) is up today on earnings, even though earlier in the week it culled some 30 brands from its hefty portfolio. And the analysts speculate on what Warren Buffett might be looking at from atop his mountain of free cash at Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). Tune in to find out more.

A full transcript follows the video.

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This video was recorded on April 4, 2019.

Mac Greer: It's Thursday, April 4th. Welcome to Market Foolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Emily Flippen and Andy Cross. Welcome! How are we doing this Thursday?

Emily Flippen: Doing well!

Andy Cross: Good! Hi, Mac!

Greer: Good to see you! We have a show! We're going to talk some beer, wine, cannabis, and Warren Buffett. And those are two different stories.

Cross: You had me sold right there.

Greer: Buffett is not related to the beer, wine, and cannabis. I want to make that clear.

Flippen: Yet.

Greer: Yet. We will get to that. But we begin with Tesla. The ongoing drama, soap-opera story that is Tesla. Shares down big on Thursday after Tesla reported that first-quarter deliveries fell short of expectations. This is just one of the story lines playing out, y'all. The other story line is, today, a judge will hear oral arguments as to whether Elon Musk should be held in contempt of court over a tweet that misstated the number of vehicles that Tesla expected to produce this year. All of that, you throw it together, Tesla shares down around 7% right now, Andy. What do you make of it?

Cross: Let's break up the two pieces of news. When it comes to the orders, the quarter was much less than what analysts expected. It was down 30% on the delivery side from the fourth quarter, which was a record. They delivered more than 90,000. Now they're around 63,000. Down significantly. They pointed to this massive buildup of demand that they are seeing in Europe and China and not being able to deliver that. Elon Musk in the release did say that they still expect delivery of 360,000 to 400,000 total cars this year. There is a debate, Mac, and we'll talk a little bit about that debate, about what number they're really looking for. Elon Musk has been a little bit all over the place.

But the quarter was not that great. Investors are reacting to that and wondering, "Wow, if this is more of the future for what we will see from the challenges they have with the Model 3, is that going to impact long-term profitability for that car?" And that really is going to be a big driver over the next five years of what Tesla's value will be to shareholders. They have to get that right. Clearly, right now, there's a lot of demand, but they're struggling to operationalize that into productive deliveries.

Flippen: Yeah, and that's a hard problem to have. It doesn't matter if the demand's there if you're not able to fill that demand. In the past, we've seen people wait a very, very long time to have that demand filled by Tesla because there's so much value in owning a Tesla. It's surprised, I think, a lot of analysts to see that demand stay up regardless of their inability to quickly deliver vehicles. It'll be interesting to see in the future if it continues.

I'm definitely carefully watching their Shanghai plans. We saw Tesla have a lot of problems getting a plant up and running here in the U.S. and getting that up to scale, so it was producing on a regular basis. Last year was full of issues in that process. So it'll be interesting to see if they're also capable of replicating that model in China, which is arguably a little bit of a harder place to get those cars produced. But if they're able to do that, they'll be able to more quickly meet that demand.

Cross: They do have an advantage there. They have gotten friendly reception for building that plant, where they can go in and they can own the entire process there, as opposed to doing a joint venture. The market in China, as Emily referred to, it's gigantic. Last year, they did more than a million electronic vehicle sales compared to 360,000 here in the U.S. So, three times the size. It's the largest EV market in the world. It's already Tesla's second-largest market.

We saw this quarter that they are trying to ship the cars over there. They don't have the Shanghai plant built yet. That's a struggle. Elon has talked about this, the challenge they've had with getting parts in the right spot and bringing parts from China to the U.S., shipping the cars back to China, and how inefficient that is. The China plant is one thing that I'm really watching with the investment there, Emily, like you mentioned.

But this quarter, with a drop in the tax credit, and that's going to be phased out here in the U.S. This is more of a normal case with Tesla when it comes to the quarterly sales and deliveries than what they were expecting.

Greer: Along those lines, Andy, I was asking the investing team what their biggest question was about Tesla. Ben's question was, what's the average selling price of Model 3s over the last quarter, and what are the gross margins of the lowest-price model? Two big questions there that we don't know the answers to.

Cross: Yeah, we haven't gotten the results. They did say in the release today that the quarter's unexpected drop in Model 3 sales and total deliveries will impact net income for the quarter. I think Ben's question is really good because the Model 3, which is what Elon is trying to sell to the masses -- this is really their general mass-market car. Dropping the price from $60,000 to $44,000, maybe all the way down to $35,000. Obviously, as the price goes down, the gross margin potentially goes down. They really have to get the scale right to make that really profitable for Tesla shareholders. That's still an outstanding question.

Greer: What about the second piece of this story, the court hearing over Elon Musk's tweet that misstated the number of vehicles that Tesla expected to produce this year? This whole debate about what is material, what is nonmaterial? Is this legal overhang? Is this an issue that Tesla investors should be worried about?

Flippen: We saw yesterday some analysts pointing out that it was an interesting day to release the production information, the decline in deliveries. The reaction that we've seen today to the stock proves that that information is material. Investors obviously care about Tesla's ability to produce and sell their vehicles. So, incorrect tweets, this would seem to go for evidence that hey, yeah, that's material information.

But honestly, with the legal system, things are never really quite known. It all comes down to some of the most minuscule wording of the tweets and the legalese. I'm excited to see what happens. I'm not sure that's a normal thing to say, but it'll be fun to watch.

Cross: It seems like, with all of the social media tweets that Elon has had over the years, he's always had some threaded explanation of what he really meant. Whether it's a total number for the year of deliveries of 500,000 or more of a, "Oh, no, that is the weekly rate that I meant." He has explanations. I think this will be turned into a lot of "He said this, what is the interpretation of that?" And ultimately, I think while investors do care about the forecasts -- as Emily said, because they were expecting 75,000 this quarter, and Tesla did not deliver that -- I think ultimately, the proof is going to be in the pudding. What they actually deliver is going to drive the share price.

Greer: Let's move on to Constellation Brands, the beer, wine, spirits, and cannabis company. Constellation is the mother ship for Corona and Modelo beers, those beers doing very well. The stock up today on earnings. On Wednesday, y'all, Constellation announcing that they had agreed to sell about 30 brands from their wine and spirits portfolio. The business, changing a bit. And this is a business, Emily, that last year bought a 38% stake in Canopy Growth, a Canadian marijuana company. We've got beer, wine, and spirits. We've got cannabis. How are things looking at Constellation?

Flippen: Well, unfortunately, it feels like I'm not going to be getting my cannabis-infused wine anytime soon as a result of this.

Cross: Aw, Emily! I'm sorry to hear that!

Flippen: Investors are holding out for Constellation Brands to really deliver on its partnership with Canopy Growth to make that cannabis-infused beer or alcoholic beverages, which are expected to be loosened in Canada later this year with regulatory loosening in the fall. They're putting a pin in that investment until they're able to actually get off the ground with selling those products in Canada. If that's successful, then it opens up a lot of opportunity for other companies. We've seen Anheuser-Busch possibly getting into the same space. So, if they're successful, that really sets a playing field for what could revolutionize the alcohol industry.

Cross: Why the investment that Constellation has made in Canopy, and I think it was $4 billion or something, it was significant, is when you look at the U.S. alcohol volume market, last year it was down 0.8%. The year before that, down 0.7%. Beer was even worse, it was down 1.5%, even though Constellation's having some successes in the beer market. Beer was down 1.5% last year. Volumes were down 1.1% in 2017. So, the trend for the alcohol market is really not in the favor. There are some bright signs out there in these things called soda-infused alcohol, alcopop, as they call it. That seems to be a market that the biggies are investing in. I know Diageo has invested in those. They've had some successes there. So, clearly, a lot of these big alcohol-branded companies are looking for other ventures and different ways to grow, because we're just not consuming as much beer and spirits and wine as we used to.

Flippen: Constellation's a great example of that. They're getting into these ancillary spaces, but it's worth noting that Corona and Modelo are still really strong brands. While growth in those industries hasn't been particularly outstanding, Corona is going to surpass Coors as the second-largest beer brand family in the U.S. Corona is the No. 1 most-loved beer among Hispanic consumers. So there's obviously demand there. Modelo has seen double-digit growth over the last 26 of 27 quarters. That's huge! It has 40% of the total category growth in high-end beer. All of this is really going to say that beer as an industry isn't down and out.

Cross: It's not. Actually, Boston Beer, the maker of Sam Adams, has actually seen some volume growth come back after a couple of years of some struggles. Really, the companies that are starting to suffer on this are the very large megabreweries. These companies start to struggle as, gosh, we're just not consuming as much beer as we used to in the U.S. or maybe globally. And the likes of a Boston Beer or Constellation Brands, Corona, to be able to finally start to take some market share back.

Greer: We should add that Constellation is not getting out of the wine business. Instead, they're really focusing more on higher-end wines. Andy Cross, how would you define a higher-end wine?

Cross: Maybe on a dollar amount? What is that... maybe higher than $20 a bottle? $25 a bottle, maybe?

Greer: Emily?

Flippen: I didn't realize that people bought wine that wasn't in boxes. Maybe I'm the wrong person to ask.

Greer: So, your definition of a higher-end wine is "not in a box."

Flippen: Two-buck chuck, right? That's in a bottle.

Cross: [Boxed wine] actually comes in a bag, in a box.

Flippen: A bag in a box, yeah.

Greer: Is a bag below a box? What do we think?

Cross: I don't think you can put it -- well, maybe you can, with the new boxes they sell.

Flippen: Boxed water has really done well. Maybe boxed wine is ready for a comeback.

Greer: I like that! Bringing back the boxed wine!

Cross: Love it!

Greer: Our final story here. There's no real hook for this story, we just thought it'd be a fun story to talk about. In his annual letter to shareholders back in February, Warren Buffett said that he was looking to make a quote "elephant-sized acquisition." This is a great time to basically speculate on what that acquisition may look like. We've got the Berkshire annual meeting coming up in May. So we've got to speculate. Again, I brought it to the investing team. As y'all think about what the next Buffett acquisition could look like, here are three answers I've got. Ready? Jason Moser says McCormick. That's his prediction.

Flippen: [laughs] I'm shocked!

Cross: That's his go-to for everything. Spice it up a little bit, Jason! Spice it up!

Greer: I like that. Jim Gillies says Southwest Airlines. Tim Beyers says Salesforce.

Cross: Wow! The Salesforce one would be amazing, if he decided to do that.

Flippen: Bigger than an elephant, probably.

Cross: Yeah, that's a $120 billion company.

Greer: OK, so, Andy Cross. Buffett's next elephant-sized acquisition.

Cross: Just for some context here, Mac. Berkshire, their last big acquisition was purchasing Precision Castparts for $35 billion back in 2015. So when he talks about going after these large acquisitions that are meaningful, I'm thinking like $35 billion to $50 billion in market cap.

The one that I was thinking that would be a good fit with him is Sherwin-Williams. Sherwin-Williams is the paint company, a global company. They generate more than $17 billion in sales per year. They have very high returns on equity. Pretty consistent profit margins. The stock's done phenomenally well. It's a recommendation of ours in Stock Advisor. It's the kind of business that Buffett can clearly understand. They have a retail component. They have a wholesale component. I'm guessing maybe one of his houses probably has some Sherwin-Williams paint there. So, I'm saying Sherwin-Williams.

Greer: OK. Emily, what do you think?

Flippen: Well, I have two. I have one that I just want them to do. I don't think it's realistic. I don't think it's Buffett's style, but I so desperately want Buffett to revolutionize healthcare. Our country needs it. I would love it if Buffett were to acquire a company like Teladoc, and really just raise awareness of telemedicine.

Hill: Did Jason pay you to say that?

Flippen: You know, he's been rubbing off on me. He does sit next to me, so it's hard to avoid the Teladoc talk every day. I'm sold.

Cross: At least he's in the space, though, with the Berkshire Hathaway, JP Morgan, Amazon initiative to try to change healthcare. So, at least he's thinking about it.

Flippen: And that's what gives me some hope. It's clearly on the top of his mind. He's made comments in the past about investing for the purpose of changing industries, of doing good. That's a bit of a deviation from the way that he's invested in the past. So, fingers crossed.

More realistically, I could see Buffett investing in a company like Ross or Burlington. It goes back to really understanding the business. These are businesses that serve the average American consumer. They've performed really, really well. Actually, a lot of these businesses, even though they're retail, they've done an amazing job of managing their inventory, of meeting consumer demand. I would be hard pressed to think that hasn't crossed Buffett's mind.

Greer: Interesting ideas. My dream, probably not realistic, but my dream, of course, is Costco. He could pick it up for the low, low price of a little over $100 billion or so, market cap.

Cross: Yeah.

Greer: Is there any chance that could happen? Or it just doesn't fit, you think? Do I need to give up my Costco dream?

Cross: No. Berkshire has more than $100 billion of cash on the balance sheet. They have $350 billion in shareholder equity. It's not cash, but it's shareholder equity. There are only 10 companies in the world that have a market cap of $350 billion. So there's a lot of capital for Warren Buffett to use with the insurance business and their cash. A $100 billion acquisition would be a pretty big one.

Greer: But, $1.50 hot dog and drink. You've got to remember that.

Cross: He has to love that!

Greer: I guess you don't have to buy the entire company to get that, though.

Flippen: He also looks like the kind of person who would shop at Costco, right?

Greer: Absolutely! That's a compliment, right?

Flippen: It's a compliment! Of course it's a compliment!

Greer: OK, phew! You scared me there for a minute!

Flippen: They don't let the riffraff like me in.

Cross: He has said, "I buy expensive suits. They just look cheap on me."

Greer: I don't even buy expensive suits. I think the last time I bought a suit...it was probably that my parents bought it for me.

Cross: Probably at Costco.

Greer: Yeah, in the 70s. OK, so, the desert island question as we wrap up. Again, don't invest this way at home. It's just a fun question. If you're on a desert island, you basically have nothing to do because you're on a desert island. You're there for five years, and you've got to buy one of these stocks. What are you going with? You've got to own it for the next five years. Let's go Tesla, Constellation Brands, or Berkshire Hathaway. Andy Cross?

Cross: Oh, gosh, I would say, for the next five years, I'm going with Tesla.

Greer: Wow! Surprising!

Cross: Full disclosure, Berkshire Hathaway is one of my largest personal holdings. But, I think five years, I'm going to --

Greer: Roll the dice!

Cross: -- sit back with Elon and roll the dice.

Flippen: I'm going to take a little bit of a riskier choice here, stick with the opportunity for growth. I see the most growth opportunity with Constellation Brands. If the investment in Canopy Growth does well, and they revolutionize the space, that could mean amazing things for their business. If it doesn't, and it really just falls flat, at least you still own shares of a really solid company. Pays a steady dividend. Can't be upset about that.

Greer: You've got the beer, you've got the high-end wines.

Cross: On your desert island, you're going to have a lot of fun!

Flippen: Oh, yeah! [laughs]

Greer: I like it! Well, you can always email us at marketfoolery@fool.com with your questions, comments, and desert island picks. Andy, Emily, 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 Market Foolery! The 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 owns shares of Berkshire Hathaway (B shares), Boston Beer, and Diageo. Emily Flippen owns shares of Constellation Brands. Mac Greer owns shares of Amazon and Costco Wholesale. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), Boston Beer, Costco Wholesale, Salesforce.com, Southwest Airlines, Teladoc Health, and Tesla. The Motley Fool recommends Anheuser-Busch InBev NV, Constellation Brands, Diageo, McCormick, and Sherwin-Williams. The Motley Fool has a disclosure policy.