In this podcast, Motley Fool analyst David Meier and host Mary Long discuss:
- What merger rumors signal about Nissan‘s business. (Note: This podcast was recorded before Nissan and Honda announced their plans.)
- How retailers are leaning into the holiday spirit.
- Advice for a seasonal decoration company.
Then Stephanie Guild, Robinhood‘s head of investment strategy, joins Motley Fool host Ricky Mulvey to discuss her outlook for 2025 and what’s excited Robinhood investors in the past year.
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.
Mary Long: It’s not a car crash, it’s consolidation. You’re listening to Motley Fool Money. I’m Mary Long, joined today by David Meier, somewhat of a car guy, David Meier, I should say, which is how you described yourself just in the pre-recording. David, how are you this morning?
David Meier: I’m doing well. Thank you. How are you?
Mary Long: I’m doing great. Good to be here. We’ll kick today off talking about two carmakers. Hence, the somewhat of a car guy comment. Honda and Nissan are in talks to join forces. We’re unsure at the moment what exactly this would look like, whether it’s a merger, an acquisition, maybe some holding group situation. But the market likes this news for Nissan. Stock is up 17% this morning. David, you got any immediate takes on this? What did you think when you first saw this headline this morning?
David Meier: I literally did a double take when I saw the headline flash across Bloomberg TV this morning, and I was like, wait. What? This is a bit of a surprise. It’s not every day that you see two large Japanese companies, and I’ll stress Japanese for now, want to merge. In fact, in my 20 years of investing, I don’t think I’ve ever seen two Japanese companies talking about merging. I talked about this on the Morning show as well on Wednesday the 18th. I asked a fellow Fool and a more experienced international investor, and our friend Bill Mann. I was like, dude, does this com in? He was like, No, it’s not. In fact, he mentioned that in Japanese business cultures, mergers like this are more of an admission that something has gone very wrong.
Mary Long: Even just if you go back a few years, it seems like there’s been quite a bit going wrong at Nissan. Listeners might remember the name Carlos Gone. He was Nissan’s then chairman. He was arrested in November 2018 for financial crimes. He denied those charges. He escaped on a jet about a year later, right before his trial began. It’s not just man on the loose type issues that Nissan’s face. They’ve also had financial problems, too. Operating income for the first half of the fiscal year was down 90% from the year ago, period. It’s US sales fell 2% in the most recent quarter, 2% compared to 90% sounds minimal, but neither is good. Two part question here, focusing on what’s gone wrong. First of all, why is Nissan so in the slumps? Then I’ll just give you the second question right off the bat. Why does Honda want that baggage?
David Meier: The first one is a really good question, and I think the first place to look is competition. Competition in the global auto sales business is fierce. Let’s say you come out with new models for the year, and they don’t resonate with car buyers. Guess what? You’ve made a lot of investments. You’ve tied up a lot of inventory, and it’s sitting on the lot, which is costing the dealership money as well. In a situation like that, your sales growth is extremely challenging. What do you do in order to boost sales? Well, you can discount the price, which that blows up the model because that’s not what you were expecting when you made all the investments, or you can offer financing deals.
Either way, both of those hurt margins, and that’s one of the things that we’re seeing at Nissan over the last few years. Margins have been contracting, and that is never a good thing for an automaker because they operate on thin margins. If we look at what’s the cash flow statement at Nissan, what story is that telling? Well, we see the operating cash flow generated by the company has been coming down while CAPEX, capital expenditures, the investment the company needs to make every year in order to keep its factories going, is staying high. Again, operating cash flow or cash coming in the door, falling is not a good thing. You never want to be in that position, especially when you know you have to make these huge investments. Getting to the second question, which is, why does Honda want Nissan’s baggage? I can tell you right now they don’t want the baggage. That’s not what they’re after in a merger like this.
But Honda is actually an incredible operator. If you look at their financial statements over the last 10 years, it is amazing how consistent their margins are. They’re thin. They’re not making all that much profit, but they’re consistently positive. Perhaps the thinking in this is, hey, if Honda and Nissan merge, the single entity could be a stronger competitor in the global marketplace, i.e, they would have more share. Then in the process, Honda could take its operations know-how and transfer it over to Nissan’s operations and hopefully help clean up their margin story.
Mary Long: You talk about this declining operating cash flow and this flatter CAPEX. What can Nissan or if it’s Honda that’s taking this on? What can they do to write those patterns?
David Meier: The first thing that you need to do is, again, making sure that the inputs, where the cash flow is coming into your business from, you have to make sure though all those are working. One of the interesting things I saw on Nissan’s cash flow statement is their sales receivables have declined significantly. What is a sales receivable? When somebody buys a car, they typically finance it. The finance becomes the receivable on Nissan’s balance sheet. What Nissan then does is it sells that to a third party, typically some financial institution and says, hey, I want the cash now, so I’ll give you a little bit of a discount on this loan. But you take care of the loan. You can have the cash flows that come in. Cash today, for selling off a loan.
If that’s not working, and that was a big part of Nissan’s business model in the past, that’s very bad. It could be because you’re discounting those loans aggressively in order to get them off the books, or it could be that there’s just no buyers out there, and you might even have to keep them on the books, which is not what a car dealer a car maker wants to do. That’s the first from what’s the first thing you got to do? You got to make sure that you have the product that people want. You’re selling it for a good price, and that you’re giving loans that are attractive to outside buyers if you want to get them off your balance sheet. Not the easiest thing in the world to do.
Mary Long: With Nissan having trouble offloading those loans to other buyers, do you think that that’s a Nissan problem, or is that an industry problem right now?
David Meier: Well, it’s probably more of a Nissan problem, because if we look at others, I don’t see the same margin profile. I have seen cash flows, operating cash flows coming down at other car makers. Maybe it’s an industry problem as well. But right now, at least from what I’m seeing in Nissan’s statement, it’s affecting Nissan more than it seems to be affecting others.
Mary Long: Going to pivot stories for a moment. The holidays are just around the corner, and CNBC was out this morning with a story about how retailers are hoping consumers spend big on holiday decorations despite being budget conscious in other areas. Before we dive into this a little bit, David, is the Meier house decked out with holiday decor?
David Meier: Minimally. Our daughter is grown and out of the house. We take much more of a minmalist approach. We do have some nice lighting, pretty much all white lights that look nice on the house. But no, we definitely don’t go all out like we used to when she was younger.
