In this podcast, Motley Fool contributor Jason Hall and host Mary Long discuss:
Recent earnings from PepsiCo.
Various forms of “flation.”
WW International‘s foray into the GLP-1 market.
Then, Adam Comora and Jon Maurer, co-CEOs of OPAL Fuels, join Mary to talk about the push for renewable natural gas within the trucking 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.
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This video was recorded on Oct. 09, 2024.
Mary Long: We’re talking snacks and copycats. You’re listening to Motley Fool Money. I’m Mary Long joined today by Jason Hall. Jason, thank you very much for being here with us this morning.
Jason Hall: Hey, Mary.
Mary Long: We are going to kick things off with PepsiCo, because they reported earnings yesterday. The big story per management is that Americans are more value-conscious. Pepsi seeing this play out in their results, a couple big items, revenue of $22.5 billion for the quarter. That’s down a bit from a year ago, and it’s shy of analyst expectations, which were closer to 22.6 billion bucks. Net income came in at $2.93 billion. That’s also down year over year, also missed analyst estimates. If you break this up into segments, it’s really only beverage sales that saw an uptake in the North American segment for beverage sales, that uptake was minimal. It was about two-tenths of a percent. Europe saw a bit more traction closer to 6.5% increase. But pretty much every other segment, which includes a lot of salty-sweet snacks, those are all down. Whether it’s any of those items or something entirely different, what are your headlines from this report?
Jason Hall: My headline would be everything’s fine. But we’re also going to buy this really interesting clean Mexican snack foods company, because it’s not really fine. It’s interesting what’s going on because we look at the long-term trends Mary. We’ll talk more about it. The carbonated beverage industry especially in mature markets like North America, Coke and Pepsi both have seen their largest brands, Pepsi Diet, Pepsi, Coke, Diet Coke. Volume trends have been negative, but they have pricing power. They’ve been able to raise prices and grow revenues, even though volumes have been challenging, and they’ve done lots of acquisitions all over the world to bolt on other brands, and then they can leverage that big distribution network they have and grow the total business. Pepsi, of course, we’ll talk about is it’s complicated because they have a snack business, and we’re starting to see some challenges there.
The big thing to me is what we’re seeing from PepsiCo, if we look at every other consumer goods company that’s reported recently, where things are challenging or where consumers are having to think about their budgets. Siete Foods, which is the company that Pepsi bought. It’s this grain free tortillas and chips and other organic. They call it clean foods. It’s cringy. I hate even saying like the clean foods trend. But I get the idea of moving away from the macro-farmed foods. But it’s also an up market product. They clearly see value conscious consumers long-term is concerning trends. They’re trying to move up market a little bit to consumers that have a little more discretionary income and want to spend on products versus maybe skipping the Fritos and buying the private label bag of corn chips.
Mary Long: It’s hard to talk about PepsiCo without talking about Coke so before we go further, maybe let’s just zoom out for the year and compare the two. Pepsi’s underperformed the S&P significantly. It’s up less than 1% year to date. Coke has also underperformed the S&P, but it’s more closely tracked that index. These are storied rivals, Pepsi and Coke. What’s behind the gap in that stock performance?
Jason Hall: I think the near term, it’s a little bit of valuation and also where expectations were a year ago, and then at the beginning of the year, and then plus some stumbles PepsiCo’s have with its foods business. We’ll talk a little bit about the Quake Roads division that’s a little bit of a mess right now. But here’s the thing if we look over the past quarter century, well, Coke has been the better investment. A lot of times saying that Pepsi to Coke is a backhanded compliment. Over the long-term, its diversity has, actually, been at a benefit and a strength. It’s just less clear how things are playing out right now.
Mary Long: Let’s zoom in on the quicker food segment for a moment because again, they had particularly, I’ll say glum performance. Revenue was down about 13%, core operating profit down 28%. Again, that’s largely due to product recalls that they’ve had to make in this category. But still, that’s a significant draw down on revenue. Recall strike me as events that are preventable, but also perhaps unpredictable. As investors, how much attention should we be paying to a recall like this? Is it an inevitability in a business like this, or does it indicate a larger problem within a company’s processes?
Jason Hall: I don’t think it’s or I think it’s and. They are inevitable when you’re at this scale, you’re dealing with food products. Sometimes the recalls can start with a supplier, and it just gets to the point where you have to have to do a recall. But I do think with a company of this scale, you have to shorten the leash a little bit and watch things a little more closely because you want to find out if it was just an inevitable speed bump, or if it’s a symptom of a bigger issue, with a lot of focus on manufacturing quality control, letting operations slip. Again, these companies make their money by being really good at making a lot of something, and in PepsiCo’s case, lots of some things, and then distributing it really well, leveraging your self space, your brand power. The issue, though, is that your reputation either supports all of those things or it completely undermines them.
Mary Long: Pepsi has been hiking product prices over the past few years, but it’s selling fewer products because of that, as we’ve discussed throughout this conversation so far. There’s a lot of different names for that that people might point their fingers to. Shrinkflation, inflation, snack flatiron, whatever we want to call it.
Jason Hall: Put inflation onto it.
Mary Long: Inflation, right?
Jason Hall: There you go.
Mary Long: My takeaway is, pricing is a bit of a game. You mentioned the brand power, how much can you raise prices without customers pulling back on their spending? Declining sales that we’re seeing now might suggest that Pepsi has pushed too hard on the whatever flation front. How easy a problem is that to correct?
Jason Hall: I think there’s two ways to look at it. First of all, we talked about it before with the volume trends with carbonated beverages, how consumer tastes have changed, and Coke and Pepsi both have had extremely powerful pricing power. They’ve been able to continue to raise prices and grow revenue. Even as volume has been challenging in those core brands, it’s less clear that that pricing power works as well in snacks. It’s, obviously, there to some limited degree. I think the bigger challenge, Mary, is that what we’ve seen happen is that private label brands, the quality has improved enormously.
Over the past couple of decades, and some of the stigma around buying store brands has lessened, particularly the advent of Amazon, right where you are flooded with these off brand products all the time, that you buy and that turns out they’re just fine. I think it’s less clear how powerful brand is. Again, for the consumer that’s looking at the Lays potato chips versus whatever the store brand is, the key is owning the IP where you have it. I think that’s where the Siete Foods acquisition comes in is buying brands and owning brands and leveraging that do give you more pricing power. It’s, also, very cyclical. We’re coming through a period of really high inflation where consumers are thinking more about it. I think over the long-term, that’s going to normalize, and the consumers that want that will pay that premium, and you can have the pricing power that let you at least keep up with inflation, if not a little bit more. It’s again, less clear how well that’s going to play out in the snack foods business.
Mary Long: We spent a lot of time focusing mostly on the headwinds, I guess that PepsiCo is facing at the moment. But historically, this is a company that’s pretty aggressive for purchaser of its shares. It pays out a nice dividend, trades at a lower PE ratio than Coca-Cola. If I’m looking for a steady, mature company to add to my portfolio, might this be it or are there other companies that fit the same bill that you think do a better job of providing that star war in a portfolio?
Jason Hall: I think it really boils down to what you’re looking for. I would say this if you’re thinking of Pepsi or Coke, I’m buying Pepsi over Coke. It’s cheaper. It has a better long-term track record of delivering returns. Neither one, another drives people crazy when I do it. But you go back to ’94, which is like the touted. When Berkshire built its full position in Coke, hasn’t been a very good investment compared to the stock market. Pepsi has been better, but still hasn’t outperformed the market. Both have been a heck of a lot better than bonds. In terms of total return versus bond yield, which I would argue if you’re looking for something better than bonds and you want something that’s safe. I think you’re fine. I think Pepsi would be over a 5-10 year hold perfectly fine. But if you’re looking for something a little better, you want a business that’s facing some challenges, but has a really good long-term history, still has better growth potential and gives you a more compelling valuation. I’d say, look at Starbucks, Mary. Heck, it’s even in the beverage business. You’re basically there, and I think you get better returns.
Mary Long: We just focused a lot on PepsiCo’s declining snacks business. Another potential reason for lessened interest in snacks, apart from just consumers keeping a tighter hold on their wallet, might be shifting consumer taste, and stop me if you’ve heard this story before, Jason, the rise of weight loss drugs.
Jason Hall: Right.
Mary Long: WeightWatchers is just another company that’s trying to ride that wave of weight loss drugs and the rise of GLP-1 drugs. The company announced the other day that it would be selling a copycat version of Ozempic starting at about $129, and just for a point of comparison, without insurance, Ozempic costs nearly $1,000 per dose so that’s quite the discount. Before we get into anything else on this, I cannot get over this fact. This is not just any product rollout. Adding a drug to a product lineup is really different than rolling out a new brand of low-calorie potato chips. How is it that WeightWatchers is even able to play into this space?
Jason Hall: This has been the WeightWatchers playbook, Mary, for a very long time. We’re talking decades because, again, fitness and weight loss. These are very trend driven businesses that ebb and flow and what potential buyers are interested in can change in a year or two. It can change very quickly. WeightWatchers, again, is pivoting based on where the trends are. I will say this with the GLP-1 drugs, there is massive evidence of good, that these drugs are able to do for humankind across all kinds of things from obesity to some evidence about all kinds of different levels of addiction. It’s really going to be interesting to see how they play out over the long-term. I do think it’s interesting that they’re trying to leverage this in a way that it’s not completely clear. I do have some concerns, but they’re somewhat minimal around the quality of the medications.
The bigger concerns I have thinking about WeightWatchers as an investment. It’s been an interesting business for a long time, has never really been a good long-term value creative business. The stock had periods where it did good when people like Oprah get really invested, and people chase that wave. But the economic results of the business, which is all I care about as an investor, not all, but that’s the core. They’ve never been good at making money for their shareholders.
Mary Long: Jason, I’m going to set you up on this one because before we started recording, you and I were getting amped up, talking about WeightWatchers, WW, and you named out some problems, so I’ll just ask you, and again, I’m Tina for this one. What is this company’s moat?
Jason Hall: There isn’t. This is really important because when we talk about moats, it is a durable thing that creates economic advantage that then you can leverage to create value. You can grow your cash flow per share, really. If we boil it down to a number, something that can create cash flow of per share, protect it, and allow you to grow it over time, and WW has a great brand. WeightWatchers is globally recognized. But again, it operates to crip Peter Lynch here. If you own the best business in a mediocre industry, you own a mediocre business, and I think that’s the case. It doesn’t have things that are real economic moats. I think as an investor, looking beyond something that looks like a moat, but doesn’t actually act as a moat is really important. A rake is like a shovel. But you know what? You can’t really dig very many holes with rakes, so I think that’s important to remember.
Mary Long: You’ve called this a mediocre business. Just indulge me. You get a call tomorrow, unexpectedly, saying, Jason Hall, we want you to come take over WeightWatchers. Step into this MD CEO role. What’s the first thing that you’re doing?
Jason Hall: I’m going to do what I can to get our operations as lean as possible. I’m going to start talking to everybody I know in private equity, and I’m going to try and position to sell the business and take it private.
Mary Long: Jason, you might just have gotten yourself a new job.
Jason Hall: Oh, boy.
Mary Long: Best of luck.
Jason Hall: Thoughts and prayers, please, people.
Mary Long: Thoughts and prayers headed your way. Thanks so much, Jason. Pleasure talking to you. Thanks for joining us today.
Jason Hall: Thanks, Mary. This was great.
Mary Long: In case you didn’t know. We got an election coming up in November. But before that, there’s another cause that’s asking for your vote. Us. Motley Fool Money has been nominated for a Signal Award for Best Money and Finance Podcast. We are super excited about this so if you enjoy the show and get value from it, we’d really appreciate you casting a vote for us. I’ll drop a link to do so in the show notes. Heads up. You will have to enter in your email to prove that you’re a real person, not a bot. Thanks as always for the support Fools. Up next. Every day, there are a whole lot of trucks crisscrossing the country to get goods from one place to another. For a long time, those trucks have run primarily on diesel, but there’s another fuel that’s cleaner and cheaper that’s already broken into the market, and it comes from organic waste. Next on today’s show, I talk with Adam Comora and Jon Maurer, co-CEOs of OPAL Fuels, a vertically integrated clean energy company that’s changing the way truckers gear up.
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Mary Long: For those of our listeners that are unfamiliar with OPAL Fuels, you all capture methane emissions from organic waste in landfills and dairy farms, and you convert those emissions into renewable natural gas and electricity. This might be me showing my biases up front, but I think that that is pretty cool. Most of our listeners are investors, perhaps rather than scientists. Can you give us a peek behind the curtain into how that process of converting organic waste into energy actually works?
Adam Comora: Happy to do it. This is Adam Comora. Thanks for having us, really excited to talk to you and your listeners. You captured what we do pretty succinctly, where we capture decaying organic waste that turns into methane, one of the single most damaging greenhouse gas emissions and really thought of as the front line for what we can do to help stem or reduce climate change. The process that you were asking about is really pretty simple. We have waste in place issues, whether they be landfill waste coming from wastewater treatment facilities or coming from livestock waste, and what we do is at a landfill, we have simple PVC pipes that we drop into the ground. They have perforations on them. Rather than that methane venting up to the atmosphere, we apply a little bit of suction and vacuum pressure so all of that biogas, has a methane content to it, either gets put into a renewable electricity generation facility, and we generate electricity right on site, which is really a great way to decarbonize electricity grids.
It’s base load power, doesn’t rely on either sunshine or wind or battery storage, so it has a lot of positive elements from grid stability. Or in larger facilities, it’s really exciting, and if we have proximity to a pipeline, we build a renewable natural gas facility, so we can purify that gas all the way up to, basically, pop pipeline quality fossil natural gas and then use it for hard to decarbonize sectors and use it as a drop in fuel over existing pipeline infrastructure. We have a particular focus on transportation fuel for a variety of different reasons. Class 8 heavy-duty fleets have presented a really difficult challenge to decarbonize and move off of diesel, and renewable natural gas has proven itself to be a really wonderful application for RNG as fleets both recognize cost savings, reduce their emissions, and OPAL Fuels is also a little bit unique where we also build out all that fueling infrastructure for those downstream fleet customers.
UPS happens to be our largest customer. We’ve already built 50 stations for them. They have over 6,000 of their heavy duty trucks operating on RNG, and we’ve got a service network across the country that takes care of those stations. OPAL Fuels is vertically integrated. We’re in the capture and conversion of that biogas or that decaying organic methane emissions, and then treating it and converting it either into renewable power, and then also on the downstream side, building out that fueling infrastructure and supporting fleets as they move off of diesel and into RNG.
Jon Maurer: Let me just interject. What you said is right. It’s really cool. It’s methane that’s being generated from landfills, and as Adam said, would seep into the air, and methane’s really bad for our environment. Quickest way to reduce carbon in our atmosphere is collecting that methane gas, and so, yeah, we collect the methane gas. What’s even cooler is that we use it for productive purposes to create electricity or this renewable natural gas, and what’s even cooler than that is that we use it for fuel to displace fossil fuel in trucks. We love what we do. We’re very excited by it. We’ve built 10 projects so far. We’ve got six more under construction, and we can’t wait to put more into the market.
Mary Long: Before we dive more into the fueling and the electricity aspect of this, I want to stick on supply for a minute. How are you building out your supply of this waste that you’re then converting into fuel? I know it’s not the sexiest topic in the world, but are there other companies that are clamoring to get their hands on the organic waste that’s sitting at these landfills and on these dairy farms?
Jon Maurer: The largest landfill companies in the US are the likes of Republic Services, Waste Management, GFL and Waste Connections, and they operate the largest landfills across the country, and so they are very actively engaged in finding partners to help them utilize this methane gas. They’re required by federal regulation once they reach a certain size to collect that gas. But the real interesting part becomes, how do you then utilize it when you collect it? If you just burn it in a flare, sometimes you’ve seen what’s called a candlestick flare, you drive by a landfill and you see it burning. It’s like, no good. Better than that is to create electricity where you can decarbonize your electric grid, baseload electricity is atom set, or even better than that is to create this renewable natural gas and put it into vehicles, or really any other place where fossil methane is used. It just so happens that these trucks are hard to decarbonize. Battery technology isn’t really ready for prime time on heavy-duty trucks, nor is hydrogen?
Adam Comora: Yeah, and to answer your question as well on other people clamoring for the resource or other people that see this opportunity as being interesting in an area of growth. The answer is yes, we have seen some major E&P companies move into the space. BP bought one of our competitors, Arkea. Now, it’s about 16 months ago. We’re seeing other major energy companies get more interested in this space. One thing unique to OPAL Fuels is we’ve been doing this for a long period of time. We have a 25-year operating history capturing biogas from decaying organic waste and landfills and creating renewable power, and our vertical integration, having that transportation fuel off-take is, also, a very key differentiator as it is the highest value off take market for our product. With our operating history and our proven track record, we’ve gotten ourselves to a spot where we’re very attractive partner for these landfills and these municipalities and other fleets as they’re seeking to either maximize the value of their resource, work with a partner where they’re confident that the projects will be built on time, on budget, operate the way they’re supposed to and also find that best off-take market for the fuel.
Mary Long: Today, in addition to these renewable natural gas projects, you operate over 350 fueling stations around the country. After this capture and conversion process, who is it that’s fueling up at these stations?
Adam Comora: That would be a variety refuse companies were one of the first early adopters, and that had to do with the truck engine technology that came out. The first engine that could run on renewable natural gas or conventional natural gas was a nine liter engine. The first early adopters were buses and refuse companies. We have a lot of refuse companies where they’re operating their collection vehicles on renewable natural gas as their fuel. I think waste management is now up to about 70% of their fleet that they’ve converted over and GFL and some others continued to deploy more natural gas vehicles.
In 2013, a 12 liter engine came out so we could start moving up the class of weight that people would use, and UPS really started deploying the 12 liter engine so they are a very large customer of ours and are fueling up at a lot of those sites. We’ve got a number of other logistics beverage haulers, food haulers, agricultural goods. That’s really, who our prime customers are that have transitioned from Diesel over to RNG, and now everybody’s excited, including us on Cummon’s, introducing a new 15 liter engine, which we think will expand the market further into more over the road trucking and logistics firms.
Jon Maurer: It’s important to understand that these trucks are the heavy-duty trucks. You’re talking about, 18 [inaudible] or other big cement mixers or big heavy-duty garbage trucks. These are not, smaller lightweight trucks that might go around the city or other things.
Adam Comora: We’re currently at about 2% market penetration. The amount of RNG that’s being used on the road, today, is about one billion gallons of a 40, 45 billion gallon diesel market, so we think there’s plenty of opportunity for additional companies and fleets to convert and save money and recognize or realize zero Scope 1 emissions, zero Scope 2 emissions. It’s really quite fascinating that we have a green discount product for these fleet customers.
Mary Long: You all are relatively new to public markets. You went public in 2022. We’re long-term investors here at the Fool so most of the folks listening have adhered to that long-term investment mindset and have time horizons that are at minimum 5-10 years out into the future. With that in mind, what is the long-term, let’s call it 5-10 year vision for OPAL Fuels? Where do you want to be?
Jon Maurer: That’s a great question. We’re really excited about our growth right now. We started and went public two years ago with just a few projects in operation and a lot more in construction. We’re now up to 10 projects in operation, six more in construction. Our plan is to put another 4, 6, 8 into construction in the coming months and two million into construction of MMBtu’s per year, into construction each year, and find opportunities to scale up combine with other entities. We really think that it’s a fragmented industry. Adam said, we only have 2% of of of the downstream fueling market, that can grow 6-10 times. We only have a small penetration into landfills. We can do more in landfills. We can do wastewater. We can do manure. We can get into food waste.
There’s all sorts of opportunities for growth, but it takes access to capital. It takes an experienced team, and we have all of that. All of our senior leadership has over 25 years of experience in the industry. I started 35 years ago in this. As a company, we’ve been doing landfill, gas, energy for 25 years. We think that the opportunity is growth in scale.
Adam Comora: I would just add there, one of the things that really excites us about our business model is the free cash flow generation. After we build these facilities, if you remember talking about the process to get the resource to our facilities, is really just a little bit of vacuum pressure. After you build these facilities, all of your adjusted EBITDA, 90, 95% that translates into free cash flow generation, and we see a lot of exciting growth opportunities here in the US, and we think we’ve got a management team that’s going to be able to capitalize on that growth, and ultimately, maximize shareholder value, which is really what we’re focused on as a management team.
Mary Long: As always, people in the program 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. I’m Mary Long. Thanks for listening. We’ll see you tomorrow.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jason Hall has positions in Berkshire Hathaway and United Parcel Service. Mary Long has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, BP, Berkshire Hathaway, and Starbucks. The Motley Fool recommends United Parcel Service and Waste Management. The Motley Fool has a disclosure policy.
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