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What’s the Outlook on Spices?

McCormick has been a laggard over the past few years, does it have some growth levers to get back on track?

In this podcast, Motley Fool analyst Jason Moser and host Dylan Lewis discuss:

  • Why interest is picking up for Intel, and what Qualcomm and Apollo Global Management see in the chipmaker.
  • What to expect from spicemaker McCormick this quarter.
  • How the rate environment might play into results we see from companies this upcoming earnings season.

Motley Fool host Mary Long and analyst Anthony Schiavone continue their conversation from last week about housing stocks and the build-to-rent industry.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our beginner’s guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 23, 2024.

Dylan Lewis: We’ve got more intel on Intel’s future. Motley Fool Money starts now. I’m Dylan Lewis, and I’m joined over the airwaves, and in the studio by Motley Fool analyst Jason Moser. Jason, thanks for joining me.

Jason Moser: Where are we? This is unfamiliar territory.

Dylan Lewis: We got to take any chance we can to tape together.

Jason Moser: I agree. This worked out very well. The timing was impeccable. I’m glad we’re here.

Dylan Lewis: It’s fun. We have an update on the Intel story just continues to produce more and more Inc. We also have a member question on a stock with spicy products, but Jason, mild 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 me 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 Bayers and I did a show together last week talking about CEO Pat Gelsinger’s plans for the company’s path forward, and also some new deals with Amazon, some new funding coming in 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.

Jason Moser: This has been fascinating to watch. It shows you what’s old is new again, and that’s no exception here where Intel is concerned. It’s just there’s a lot going on with this company. For what has been this boring stodgy 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, Intel somewhere in the $95 billion market cap. The first question that begs immediately is, would regulators ever even consider allowing that?

Dylan Lewis: I think it would be tough. I think it’d be really hard for them to let that go through.

Jason Moser: I feel like that’s the right answer. I don’t know that’s the option. 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. Then the dynamics of the foundry side of business, right now they’re talking about, will 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 spin off of the foundry business so they can operate as two separate entities, because oftentimes that can end up unlocking value. Then you see what Gelsinger has done in regard to trying to cut the fat here, right? I think, talking about 15,000 jobs. Somewhere in the neighborhood of two thirds of the real estate portfolio, they’re talking about whittling down as well. 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. It’s that constant hamster wheel of innovation and evolution. You’re always going to becoming 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. A neat time to be an analyst because we get to watch this whole story play out.

Dylan Lewis: 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. But 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? Intel, as you noted, 90 something billion-dollar company. Last I checked, Qualcomm has about $13 billion in cash on the balance sheet.

Jason Moser: That just boils down to a combination of some sort of issuing shares and borrowing money otherwise to do it. It definitely impacts the company’s capital structure in a big way. 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. We always talk about acquisitions. I mean, acquisitions are tough. Acquisitions of this size, these types of scale acquisitions, these are really hard because we’re 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 just it’s 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. Maybe it gives shareholders an easy 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.

Dylan Lewis: 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. Jason, I 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.

Jason Moser: 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, giving it its own sandbox to play in, so to speak. 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. 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 to 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. 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 CHIPS Act money at play here as well. 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 been obviously not a very good investment. But investing is about the future. Now all of a sudden, you see signs from Qualcomm, from Apollo, Amazon, and others, maybe the future looks a little bit more optimistic in regards to Intel, but maybe it’s just the company itself is taking a little bit of a different form in order to get there.

Dylan Lewis: Market has certainly been paying attention and has been 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 Qualcomm or for 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 investor?

Jason Moser: 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’s “Retail investor”, the individual investor like us. We can look at those and think, 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, 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. 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.

Dylan Lewis: Speaking of the individual investor, we got a member question that seems just perfect for you, Mr. Moser. (LAUGHTER) 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?

Jason Moser: 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. Shout out to Joe Meager. Thanks for lining that up. This is a business I’m owning 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. 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. 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. I’m just making sure management is basically staying true to their word, and they’ve done so.

To me, again, it’s one of those businesses, the longer you own it, the more it makes sense. I think most of that comes from the dividend philosophy. They paid a dividend for 100 consecutive years now. They are a Dividend Aristocrat® with at least one annual raise every year for the last 38 consecutive years. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.) This all leads me to believe that eventually in 12 years, we’re going to be talking about McCormick, the dividend king. I think 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 got to understand why you own a business like this. 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 intended, hopefully be talking about with you 15 years from now, if not more. 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. It’s really flavors, sauces. They’ve got everything from Frank’s Red Hot to French’s and all of that other good stuff, so it’s boring, but stacey.

Dylan Lewis: 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 waiting for the growth story to re materialize 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. Is there a lever or is there a segment of this business that you’re excited about that you feel like might be able to reinvigorate some of that for this company.

Jason Moser: 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 the flavor solution side of the business, 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. You want to make sure you’re getting a good price. It’s always commanded a premium from the market, 30 times plus earnings. For me, 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, 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.

Dylan Lewis: McCormick and our listener reminding us that earnings are going to be rolling on. We’ve basically gone through the meat of the earning 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 earning season or any themes in particular, you’re keeping an eye on.

Jason Moser: That means it’s all about AI. (LAUGHTER) No I’m kidding. Actually, 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, was that 50 basis point cut there. Seeing how a lot of these companies are talking about that and how that starts to affect their guidance over the coming quarters in year. Some companies that stand out, just Home Depot, Deere&Co and Wayfair. Obviously, Home Depot and Wayfair are very tied to the housing market. Deere&Co, I think at least rhymes with Autos.

Dylan Lewis: The financing.

Jason Moser: You’re talking about wheels and financing. I think we saw a language in all of their calls over the last several quarters where the higher interest rate environment, it was delaying sales. Customers are still being very picky, particularly when it comes to those bigger ticket items. 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 to the next year, how is that impacting their guidance and views on growth?

Dylan Lewis: 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.

Jason Moser: They’ve got to do.

Dylan Lewis: Is there anything in particular as they report that you’re going to be looking at?

Jason Moser: I think just that, the net interest income alone right there. Again, paying attention to their view on because it’s interesting to see. When these interest rate cuts, there’s so many different categories and finance that they impact. 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 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. I mean, we know consumer debt is awfully high, and we know it’s becoming very difficult for a lot of people to handle. Looking at those reserve numbers. Because if they start really reserving a lot, at some point that swings the other way, and that juices earnings a little bit there as well. Thanks are a fun one to follow for sure.

Dylan Lewis: You’ll be there to follow it with me.

Jason Moser: Yes. Later this earnings season.

Dylan Lewis: Jason Moser, thanks for joining me.

Jason Moser: Thank you.

Dylan Lewis: Coming up next on the show. Mary Long picks up her conversation with Motley Fool analyst Anthony Schiavone from last week about housing stocks, and they zoom in on the build-to-rent industry.

Mary Long: Invitation Homes is REIT that specializes in making single family homes available for a lease. Most single family home rentals in the US are managed by mom and pop landlords, about 95% of single family home rentals fall into that category. Why does invitation focus on this niche when it’s served by other types of landlords, for the most part?

Anthony Schiavone: Single family rentals are probably the earliest form of real estate, I would say, but large institutional investors never own single family rentals because it was hard to achieve any scale. If we think about it, every single family home has one tenant, one roof, one HVAC system, one plumbing system, and the properties are generally spread out. It’s hard to get any scale in this industry. That’s true, unless institutional investors can buy single family homes in bulk in geographically close markets. 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. Rather than reselling those homes to 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. That’s how Invitation Homes got started in this niche. 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.

Mary Long: It’s interesting that the government 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 housing costs. How seriously should investors weigh these concerns moving forward?

Anthony Schiavone: 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 is driving up home prices for home buyers is fair. Institutions that own more than 1,000 single family homes own around 1% of the single family housing stock in the US, just 1%. From 2022-2024, 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. Invitation is actually adding supply to the market through its various home building partnerships. I think it’s a stretch to say that institutional landlords are driving up single family prices nationwide. Maybe in select 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. 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 Invitation’s business.

Mary Long: Right now, it’s cheaper in all of Invitation’s 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?

Anthony Schiavone: You mentioned the relative affordability of living in an Invitation Homes. It’s actually $1,200 more expensive per month to own a home than to lease a home in Invitation’s markets. With that home affordability out of reach for so many potential home buyers, the average tenant of Invitation Homes leases for more than three years on average. 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. That’s led to Invitation’s portfoliowide occupancy rate above 97%, and rent growth is still strong at around 5%. The fundamentals for this business are still pretty strong. Plus, I think there’s this shift to more people becoming 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 large 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. Big picture, there’s a lot of demand for housing. We have a shortage of single-family homes, and that’s very constructive for the Invitation Homes business. I think that’s a long term tail for the company, especially since they offer a more affordable housing option.

Mary Long: Who Are the competitors who are going up against Invitation Homes in this space?

Anthony Schiavone: They have several competitors. There’s one other large publicly traded single-family REITs, and that is American Homes 4 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. Essentially they have a home-building operation inside of their company. Then there’s a couple of private players too, Blackstone, a couple of other private equity firms own single-family homes. Then also the multifamily REITs as well. That’s also not direct competition, but it’s definitely competition for Invitation Homes. So those are a few of the competitors. Pretty much anybody who wants a home, I guess is the competitor.

Mary Long: This is a REIT, and adjusted funds from operations or AFFO is a 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?

Anthony Schiavone: When you’re analyzing a non-REIT or just 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, appreciate in value over time. Adding that back, captures that. Then AFFO, you’re just subtracting the recurring expenditures from FFO, which gives you a good proxy for the cash flow a REIT generates. I hope everybody’s still with me there, but essentially, AFFO is just a proxy for how much cash a REIT is generating.

Mary Long: 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. How has Invitation been able to buck that trend and meaningfully grow its dividend?

Anthony Schiavone: This largely a function of the tailwinds that we discussed earlier. You have limited supply, you have strong demand, and that has 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. Recycling capital means that they can sell lower returning, lower quality assets, and reinvest the sale proceeds into higher quality, higher returning assets. 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. They want to sell a home, they likely have hundreds, if not thousands of prospective buyers that could theoretically buy that home. If you look at Invitation Homes since 2008, it’s 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. That tells me that not only is the company generating a lot of cash, but management is also allocating capital well.

Mary Long: 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 homebuilding segment. Can you expand on that a little bit?

Anthony Schiavone: My thinking at the time was, if Invitation Homes could create its own in house home building arm, similar to American Homes 4 Rent, they can knock out two birds with one stone. 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. Then secondly, right now there’s not a lot of existing home inventory for sale, so it’s hard for Invitation 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 soured on that idea.

Instead of having an in house development homebuilding arm, Invitation has instead partnered with some of the largest homebuilders in the US, including Dream Finders Homes to built for rent communities. 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. I think these homebuilder partnerships feel like a win win for Invitation Homes to the homebuilder, and that’s probably the best risk adjusted opportunity moving forward for them.

Mary Long: 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?

Anthony Schiavone: 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 hard for REIT to do. 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. 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 Invitation Homes. I think that’s really important for them as they continue to grow and move forward.

Mary Long: As always, pleasure having you on the show. Thanks so much for doing a little medium dive on Invitation Homes with me.

Anthony Schiavone: Thank you.

Dylan Lewis: As always, people in the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against, do not buy anything based solely on here. I’m Dylan Lewis. Thanks for listening. We’ll be back tomorrow.

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