Paramount Global and Peloton Are Worth Talking About

In this podcast, Motley Fool senior analyst Bill Barker discusses:

• The Federal Reserve meeting expectations.
• Paramount Global slashing its dividend 80%.
• Peloton struggling with its turnaround.
• Shake Shack posting higher revenue in the first quarter.
• Potential names for Darden Restaurants newest franchise.

Motley Fool producer Ricky Mulvey talks with Motley Fool senior analyst (and Star Wars superfan) Jim Gillies about Disney's acquisition of Lucasfilm and ways to improve the franchise.

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

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This video was recorded on May 04, 2023.

Chris Hill: May the fourth be with you, Motley Fool Money starts now. I'm Chris Hill joining me in studio today, Motley Fool Senior Analyst, Bill Barker. Welcome back.

Bill Barker: Thanks for having me.

Chris Hill: Before we get to earnings, let's get to yesterday's announcement from the Federal Reserve. As expected, we got a rate hike of a quarter percent. I don't know about you, I like when this happens and by this, I mean, we were all expecting a quarter percent. We got a quarter percent. That's what I want out of my Federal Reserve historically. I don't want surprises.

Bill Barker: No, there hasn't been a surprise for a long time the actual communications signals from the Fed have led to no surprises on the day of at least regarding the headline is it 25, is it 50, 75, is it zero all that. It's the words afterwards that color people react to and there's a indication will just hold it here not a promise.

Chris Hill: Of pausing rate hikes?

Bill Barker: Pausing rate hikes.

Chris Hill: Right.

Chris Hill: Yeah.

Bill Barker: Yeah. Let's think about that we're going to tell you, we're interested in that,[laughs] but we're not making any promises.

Chris Hill: I probably watched more of this press conference with Jay Powell than any in the past six months or so and not all reporters do this, but some reporters still try and get him to speak in very concrete black-and-white terms and absolutes. When that happens, I just think it's Jay Powell. He's not going to do that. Why are you even trying?

Bill Barker: It's a Fed chair. I mean, he studied at the feet of Greenspan and others who know to hedge their bets. So we think we know, I think the market is pricing in, in 98% chance today of no change in rates at the next meeting in June, we'll get there that that will change a little bit here or there maybe as new numbers come in. But 98% market feels like we're in a pause, and the next move is going to be down markets. Not always right about that, but that's where the market is betting.

Chris Hill: Let's get to some earnings then. The stock of the day is Paramount Global and it's not stock of the day for good reasons, shares of Paramount Global down more than 25%. After first-quarter profits were much lower-than-expected, they cut their dividend by 80%. How bad is this for Paramount Global? Because this looks pretty bad.

Bill Barker: Well, ultimately what you get out of the stock is the money that it gets paid back to you. The dividend is, as you pointed out now, shy by 80% of what it was going into the day. That doesn't mean the stock is going to be down 80%, but it is down 28% as we're talking right now, and I think that the need to hold onto some cash to run the business properly is the signal that is being sent.

Chris Hill: This comes against the backdrop of the writers' strike that started this week and we've got shares of Warner Brothers discovery down a little bit, not nearly as much, but down 4-5% earlier today because they're going to report in the next 24 hours. I think that investors are looking at businesses like Paramount Global, streaming businesses, and in the case of this company, they're saying, you know what? I think we're all in agreement. You don't have the strongest business. You're not the leader by really any measurement, unless they're somehow able to recreate Topcon Maverick year after year.

Bill Barker: Weekly, I think. A week is what they need. The bulk of the business still is the TV networks and basic cable channels that they've got. That's about two-thirds of the total revenue. The direct-to-consumer part near Paramount, plus the grew nicely 39% year-over-year for the quarter. But that's not enough to keep things flat, revenue for the whole company down 1% because there's an 8% hit to TV Media division, which is all the channels, CBS, BET, MTV, many-many other letters and that's a problem because that's the bulk of their business and people are leaving it.

Chris Hill: What do you think the move is for a business like Paramount Global? Is it to try and raise cash by selling off some of these other networks? They've already cut the dividend [laughs] 80%, there's only five more cents to go in the dividend.

Bill Barker: Yeah, well, it's not a great time to sell off these networks. I think BET has been discussed as maybe something that they could sell off Simon and Schuster, the publishing business isn't really core. There are some parts that they can get rid of. I don't think they're going to be strapped for cash anytime soon and the direct-to-consumer will probably continue to grow, you've got Star Trek is a major thing that you'll get people to subscribe chasing the new shows there some of the other stuff, I guess. What are these guys are Yellowstone. Everybody is watching that.

Chris Hill: Yes.

Bill Barker: Am I right about that?

Chris Hill: Yes.

Bill Barker: Are you watching it?

Chris Hill: I'm not watching and I don't have Paramount plus.

Bill Barker: You can watch it and other places.

Chris Hill: I could, but that would require effort.

Bill Barker: Not much. Everybody else is watching it except you and me. That's the brand that's something that they need. They've franchise that into every time zone. I think there's probably Yellowstone in space coming up because they've done like the past and the distant past and they've got everybody doing that now so they're all in on that. But they haven't taken it to the logical extreme, which is what does Yellowstone look like at the year 35, 80.

Chris Hill: That is the logical extreme. Stop me if you've heard this one before, stop. Peloton's third-quarter loss was much bigger than Wall Street was expecting and I think the only solace for Peloton shareholders today is the stock is only down 14%, not as much as Paramount Global, it's down 60% over the past year. Where does the future life for Peloton this is a two-and-a-half billion-dollar company. There is value here. There is affinity for the people who use Peloton. At some price, Peloton becomes an acquisition target is two-and-a-half billion dollars, where other companies start getting interested or they're saying what you would want them to say if you're a shareholder as part of this release, which is yes, the numbers are the numbers and they're not what we want them to be. But the turnaround plan that we've put in place is starting to bear fruit.

Bill Barker: Yeah, 60% down is only scratching the surface of the story on what has happened to the stock it was up around 171, something like that. Peak COVID, Christmas 2020, I think had apparently the market was thinking everybody was going to buy two or three Pelotons. They never made any money, and now it's a seven-dollar stock. The story here is much worse even than down 60% over the last year. Where is the future in their shareholder letter from the company. Today it emphasized that they are not just bikes that they're going into and have been into yoga and meditation and fitness. This leads to the logical question, what are you talking about? How well does meditating work on a bike? The answer is, you're not listening to us. We're not just about the bikes anymore. It's not just the hardware we've got an app. We have an app that gives you fitness classes. That puts them in a category of, I would say, thousands of apps that gives you a yoga lesson or a meditation. That's where they're going. Maybe they can be an all-in-one, I like my bike and I wanted to take all the programming and I'll concentrate all these other apps that I could have and just go with Peloton, maybe that works, I don't know, it hasn't worked yet.

Chris Hill: Let's move to a happier topic, which is Shake Shack. The first-quarter loss was smaller than expected. The revenue was a little bit higher-than-expected. Shares of Shake Shack up 10% this morning. Sorry to make the awkward transition from fitness to burgers, but at least for today anyway, burgers are winning.

Bill Barker: People like burgers. When Peloton went parabolic and other streaming things went parabolic, this compare and contrast with the other two stories in that this is an old-school thing going out to eat. The numbers are improving, they're better than they were this time last year. The restaurants are there. They're expanding into Canada. I still think they have to fill in the restaurants a little bit more than they've got right at the moment. But that's the projection they're going to start making money. This is a company that was growing pre-pandemic at a rate where actual free cash flow wasn't really so much. The picture is, look at the growth of how many establishments we can grow and what is the Shake Shack sales at each one of them? Shake Shack sales were good this quarter. It's not a complicated thing, people are going to be eating next year, the year after, pretty sure. No matter what apps are developed.

Chris Hill: I think if you're Shake Shack, aren't you looking at Chipotle and trying to figure out how can we be more like them as a business in terms of the throughput, in terms of the ability to, I'm not saying they need to make the massive investment of we're going to have two kitchens. One is for people eating in, one is just for people picking up or drive through or that thing. But it really seems like there is something of a blueprint with what Brian Niccol has done over the last couple of years with Chipotle.

Bill Barker: Maybe, Danny Meyer's background is not so much in that realm of the quicker serve and volume. It's more of a higher-end experience for a burger, pretty high-end there. I guess another individual might take it in that direction. I don't see it happening at Shake Shack.

Chris Hill: It might not, but it's worth remembering Brian Niccol wasn't the guy who started Chipotle [laughs] making his bones at Taco Bell, being a phenomenal operator, that's what really helped elevate the business over the past few years. You're right, maybe it's time for a change in management at Shake Shack.

Bill Barker: I'm not arguing that it'll happen.

Chris Hill: No. But I think if Shake Shack is a burger that you enjoy eating and you are an investor and you're looking at it, you're like, I'm not enjoying the business as much as I'm enjoying the burger and the fries and the shakes. That could be a catalyst, bringing in a proven operator. Sticking with food for a second, I wanted to just touch on something from yesterday show when Ricky and Asit talked about Darden Restaurants buying Ruth's Hospitality, the parent company of Ruth's Chris Steak House. I think it's interesting because if you look at the portfolio of restaurants that Darden has, they have eight restaurant brands. Olive Garden is the biggest part of that business. That's more than half their business right there, just in that one restaurant. But this acquisition, I think is interesting because it expands. It doesn't just expand the portfolio. It makes a pretty sizable bet on the fine dining part of the portfolio. Before this acquisition is just two restaurants, The Capital Grille and Eddie V's. But we were talking yesterday, you pointed out that there's another looming question which I think is legitimate.

Bill Barker: Let me just say that Darden also as LongHorn Steakhouse, which is not nearly as high-end.

Chris Hill: That's like if you're just looking at it through the lens of is this casual dining, is this fine dining? Yes, they have a steakhouse in LongHorn, that's not in the fine dining category.

Bill Barker: Yeah, the question that has to come first in mind here is, are we going to rename this Darden's, Ruth's, Chris, or something like that? Can we get a few more apostrophe s's in there to confuse diners?

Chris Hill: Do you think any conversation is taking place at Darden headquarters about rebranding? Because I think it should, I think there should be the conversation about do we rebrand some of these as Capital Grille? Do we make that investment? But then if those conversations are happening, God, I really hope someone is raising that. Wait a minute. Are we sure we don't want to put our stamp on this?

Bill Barker: Capital Grille's, Ruth's Chris Steak House.

Chris Hill: Now you're talking.

Bill Barker: I don't think it's going to have it. Ruth's Chris got a very happy loyal clientele. In most lists of where the top national steakhouse chains go, it's not too far from Capital Grille's quarter step. They're really more on the basis of the breadth of the menu than necessarily having a better steak experience I think. It's been a while since I've been to Ruth's Chris, and it's easier to see, is my experience than Capital Grille, which is dark.

Chris Hill: You mean inside the restaurants?

Bill Barker: Yeah.

Chris Hill: I think you meant the sign outside.

Bill Barker: No.

Chris Hill: Capital Grille for anyone who's eaten there, it's a little dark in there, that's part of the ambience.

Bill Barker: You going to get to a certain age you got to pull out your phone, you got to get the flashlight on the menu, get out your reading glasses. But it's a good steak, they're both good steaks. I think that it's going to work out for Darden, they know how to run these chains and just wish it had a different name for Ruth's Chris.

Chris Hill: Fingers crossed. Bill Barker, always great talking to you. Thanks for being here.

Bill Barker: Thank you.

Chris Hill: Sense it is Star Wars Day. Ricky Mulvey caught up with Motley Fool Senior Analyst and Star Wars superfan, Jim Gillies. To look back on Disney's acquisition of Lucasfilm, and a couple of easy fixes for the franchise.

Ricky Mulvey: May the fourth be with you. Jim Gillies joins us now, before we get started, I think you need to show us your credentials as Star Wars fan.

Jim Gillies: Well, I'm old enough that I was in the audience in the first run of Star Wars in May, 1977. My mother, God bless her, actually she has no interest in Star Wars. She saw Star Wars twice opening weekend, once my father went to make sure it was OK for little six-year-old Jimmy to see, so thanks, mom. You can see a little bit in the background, I live in a house, there's several hundred pieces of Star Wars merch, Star Wars memorabilia in this house. I've got several of the strangest ones I could think of to show you here. I know we're not really recording, so Fools imagined that. First-off, we have a Stormtrooper helmet bottle of hot sauce. Is a clear, it's full rendering. We have my favorite spatula of all time, it's a Boba Fett spatula with further proof that Star Wars, they didn't meet anything wouldn't willing to slap their name on. I have a Star Wars Slow Cooker and I have a down to add at, which is the Walkers from Empire Strikes Back, but down at tape dispenser on my desk. It's an entertainment property that I largely love that was from my formative years. I'm happy to see how it's grown and I'm unhappy to see some of the things that have happened under the present ownership.

Ricky Mulvey: That's Jim Gillies. You've been listening to antique roadshow Disney purchase Lucasfilm for four billion dollars back in 2012. Disney's made four-and-a-half billion dollars just on the Box Office receipts from the newest trilogy. Let's get into the business of Star Wars. That doesn't include the theme park lands, that doesn't include the merchandise, that doesn't include whatever you want from streaming the Disney Plus subscribers. Is that $40 billion, was that spent on one of the best entertainment acquisitions ever or what am I missing?

Jim Gillies: Yeah, I think it was a good acquisition for Disney. I think George Lucas, the creator and basically the man who got to decide who took ownership of his baby. I think he wasn't going to do anything more really with Star Wars. I know he'd always talk about three more movies, but I don't think there was really a lot of appetite at that point was reduced to a couple of animated shows at the time. One that thankfully never saw the light of day because it was just some called Star Wars Detours. Look it up if you've never heard of it, I think it would have been just abysmal. George is smart enough, but he took half the 4.05 billion he was paid. He took half of it in stock, and Disney's done about 7% annual returns since the deal was done. If George kept his stock, he's gotten more than four billion, I don't know what you do. Anything that passed the first billion, I'm not sure what you spend it on. But I think it's grown in popularity. But I'm not sure I would call the sequel trilogy Box Office receipts as the measure I would like. Because, of course, they have to share that with the distribution, and of course there's marketing. I think the sequel trilogy actually did some irrevocable damage to the franchise. I think Disney has doubled down on that damage. I was recently in Florida, we went to the Galaxy's Edge, the Star Wars land, if you prefer.

Ricky Mulvey: With Disney World.

Jim Gillies: At Disney World. We didn't do the hotel experience, which is ridiculously priced. We went and looked at it. We came away disappointed, especially because a month later, my daughter and I were at the Harry Potter World at Universal, which is immersive and fun. The Star Wars land, a number 1 was very focused on sequel trilogy stuff, aka the stuff that Disney has produced, not the stuff that most longtime fans love, which is the original trilogy. Even frankly, the frequent trilogy has a lot of love and the merchandise was disappointing. My significant other and I, we walked out going, is that all there is? We were actually quite disappointed in it and won't go back. We're glad we went once, but won't be back. I think I was to have one statement for Star Wars under Disney, that was fun and that was fine, but I'm not going to be back. Whereas the original trilogy, and there are some exceptions to the rule. The original trilogy however, is still, I think, very beloved in this house. We routinely have arguments about certain facets of the original trilogy and the sequel trilogy and I'm not sure what that says about us.

Ricky Mulvey: Jim, there's also a direct Correlation of what Star Wars series you like and if they came out while you were a kid, and I'll also push back. Disney, not to say that they're working with any crutches here, but they've had Star Wars land open for, I think just under a few years now where's the Harry Potter World you visited has been opened for way more than a decade.

Jim Gillies: They've had time.

Ricky Mulvey: They've had time to work on it. Speaking of having time to work on things, streaming is a largely unprofitable business. But do you think Disney and Start Wars that have gotten there? Sure, the shows are expensive to watch and produce, but they've also been able to build that merchandise business around it. They've built the expansive theme park lands or they not so expansive theme park lands that you've spent probably thousands of dollars to go visit, and then they're able to have the billion-dollar movies with a string of shows to keep you interested in between.

Jim Gillies: Here's the thing. I think the Star Wars shows have been hit-and-miss. Now you could argue the movies have been hit-and-miss too. When Mandalorian came out, I think it was genuinely really good. I think fans loved it. I think they loved the Lone Wolf and Cubs style storytelling of The Mandalorian and of course that Baby Yoda, Grogu, whatever they call them. That was new, that was interesting. I think it tied up neatly in the first season with a pretty good storyline. I think the Season 2 actually it was pretty decent as well. But you started getting into a little bit of what we'll call overt fan service, Boba Fett's back. You can't see all the details in my office here, but there are multiple pieces of Boba Fett-themed art on my walls in my office that were actually a couple more here before Disney bought Star Wars. I was thrilled to see him come back. But they started ceding.

They started rather than focusing on telling a story, it was almost like they started ceding different things that they wanted. We're going to do this next. They've lost focus on what they're going to do them. We're going to do The Book of Boba Fett, which was fine. Wasn't great diverged and it changed the key piece of what happened at the end of Mandalorian Season 2. It changed it. You start Mandalorian Season 3, and you're like how did that happened? You had to watch a different show for that to be there. They ceded the plans for the Ashoka show which will be coming out later this year. They then went in the direction of going toward that Obi-Wan Kenobi show, which I think was dreadful. But I understand why we'd want to see Atkins Skywalker or like a increase of back-of-the-napkin Skywalker, Ewan McGregor back as Obi-Wan Kenobi. But you're telling stories within a pretty established, increasingly crowded universe. But you also have shows like The Clone Wars, which is actually pretty good. Especially Season 7, which was made under Disney's purview. I actually think there's some really good stuff in there. But the problem is the shows were hit-and-miss. People were interested in The Mandalorian has really fallen off. Season 3 was not good. Obi-Wan Kenobi is largely people didn't like it, but bookable if that was confusing. When a truly good Star Wars show comes out.

Ricky Mulvey: You're talking about Andor?

Jim Gillies: I'm talking about a show called Andor. Andor it's actually great. Because it feels more real and more lived in its by Tony Gilroy who believed that the Bourne Identity, at least a few of those movies. The problem with star wars, I think, it's a little bit cartoonish in that the good guys always win, even during a time of tremendous oppression on government oppression, the good guys always win. That's not what happened in Andor. You know the ending of what's going to happen with the character. It feels more present so I like that.

Ricky Mulvey: When you think of companies that aren't Disney that have really benefited from Star Wars, are there any? You could have Funko, Hasbro or for a lot of these companies is Lego.

Jim Gillies: Is absolutely Lego. Lego has made mint on Lego Star Wars. It's been a really good partnership for both Disney and Lego because you've got all ages, from relatively old people like me to younger folks like you to my kids. My kids are teenagers, so not that young, but kids. You've got parents like me pushing star wars on their kids. The kids is like this is cool. Every year my kids get the advent calendars and my daughter gets the Lego friends one, which is a Lego-owned brand, and my son generally gets the Star Wars one. There is a very definite dollar figure difference between those two calendars and you can infer exactly what Disney is raking from each one of those things that it sold because Disney wanted 10 or $15 more, and that's the Disney rate. But hey, people like me will pay for them. People with younger kids will pay for it. I like that. I think Funko's done well. I've always been very confused by Funko because unabashedly fat and you could see one in the background behind me. But I'm always worried it's going to go away. Then if you ever go to a Comic-Con or those types of shows, every other booth is selling Funkos and they're piled as high as you can see. There's no shortage of them out there, and I'm always wondering. I'm waiting for the third end. But I think Lego has done really well. Star Wars, arguably, George Lucas famously retained the merchandise rights. Which is why it turned into the merchandise and the toy juggernaut that it was, and it was very savvy piece of business on George Lucas's part. But it didn't mean we got cannibalistic teddy bears fighting the final paddle and return to the Jedi rather than Wookies, which is what we were supposed to originally get.

Ricky Mulvey: As we wrap up, I'm going to give one easy fix for the Star Wars franchise. It's character named Dr. Afra. She needs to get her own film franchise. That is easy. You can do an adult Indiana Jones storytelling with her right off the bat and it's new character that doesn't have the baggage that a lot of film characters have. Now I'm going to give you the floor for Kathy Kennedy, Bob Iger, the rest of Disney's executives for your pitch for one easy fix for the Star Wars franchise.

Jim Gillies: It's a two-parter, get out of the present era. We've exhausted the storyline for the Skywalker Aaron, get out, go thousand years further down the line, go 1,000 years back in the old republic, do a storyline that's gotten nothing to do with the Skywalker saga. The next thing is think through what your movie arc is going to be. Sit down and if you want to do a trilogy, do the story treatments for all three and how they work together. I don't care who you get to direct. Have one guy, have three different individuals direct it that's fine. Because it's not just what they did with the sequel trilogy, but how many Star Wars movies had they announced and they just evaporated. You had Rogue Squadron. Well, that's gone. You had a trilogy being done by the guys who ran Game of Thrones, those are gone. Ryan Johnson who did The Last Jedi, was going to have a trilogy, that's gone. Tyco YTD, is he still doing one? Kevin Frady, if he's still doing one, there's not been a precedent. They frankly, they panicked because they thought they would just be throwing these Star Wars stories out when they did Rogue One, which is excellent, and they did Solo, which is less excellent. It's fine. I actually quite like Solo, but I understand why people got a little annoyed by it and that they panicked. They pulled the Boba Fett movie, I think that's became the TV show. They pulled the Obi-Wan Kenobi movie. I think that took for them a little bit of a TV show. They don't have a coherent strategy. Sit down and plan out what you want to do, and then execute it. Stop with the slip-shot stuff.

Chris Hill: Jim Gillies, appreciate your time. Thanks for joining us for May the 4th Star Wars Day.

Ricky Mulvey: Thanks for inviting me.

Chris Hill: As always, people on 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 Chris Hill, thanks for listening. We'll see you tomorrow.

Chris Hill has positions in Chipotle Mexican Grill and Walt Disney. Jim Gillies has positions in Chipotle Mexican Grill. Ricky Mulvey has positions in Walt Disney. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Funko, Peloton Interactive, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends Hasbro and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.