Space Mergers and Streaming Stars

On this Market Foolery podcast, host Chris Hill and Stock Advisor Canada's Taylor Muckerman dig into defense giant Northrop Grumman's (NYSE: NOC) bid for rocket and satellite specialist Orbital ATK (NYSE: OA). Then they consider a pair of stories from the world of media: Roku's setting of its IPO price, and what the 2017 Emmys tell us about the state of television, however it's delivered.

A full transcript follows the video.

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This video was recorded on Sept. 18, 2017.

Chris Hill: It's Monday, Sept. 18. Welcome to Market Foolery. I'm Chris Hill, and joining me in studio today, from Stock Advisor Canada, Taylor Muckerman. Thanks for being here.

Taylor Muckerman: Yeah, pleasure, always.

Hill: We had the Emmy Awards last night, so we're going to dig into the battle for the living room in a moment. But first, we're going to get to the deal of the day, and that is in the defense industry: Northrop Grumman buying Orbital ATK. I always think of it as Orbital Sciences. All-cash deal; pretty significant premium compared to where it closed on Friday. This is an industry that you've looked at before. What did you think when you saw this deal?

Muckerman: Yeah, you look at about 20% appreciation to the stock price, as you mentioned last week. And I definitely like the deal. It's complementary to what Northrop Grumman already has. Not a lot of overlap here. You're looking at launch vehicles, some rocket technology, and smaller satellites. So definitely accenting what Northrop Grumman already offers in the defense sector, with their larger satellites and their unmanned aircraft and missiles as well. I definitely like the deal, and maybe you can thank Kim Jong-un a little bit for the announcement of this, after launching Labor Day rockets over Japan not too long ago.

Hill: Do you think that's what sped up this deal from Northrop Grumman? Like, "You know what? We need some more of this tech. Let's give the people at Orbital ATK a call."

Muckerman: Well, I mean, you look at Orbital ATK specializing in a lot of anti-missile defense. So certainly, if you can envision the future of war, it seems like that might be pretty important. It's nothing that you ever want to envision, but certainly if you're a public company and that's your line of business, you'd be doing your shareholders a disservice if you weren't envisioning the next five, 10, 20 years down the road.

Hill: I don't know who's on the board of directors at Northrop Grumman, but to your point, this is a situation where you can imagine someone internally, but also someone on the board, calling up the CEO and saying, "By the way, how are we doing in this one particular area? And if we're not where we need to be," as we've talked about from time to time, "if we can't grow ourselves, let's go out and buy some growth."

Muckerman: Yeah, and when you look at what this is, you look at the kind of wars we've been in most recently, ground wars and dealing with navy and aircraft, where the anti-missile defense systems are fairly old in this country, because we're talking about them being built during the Cold War for the same reason that we're talking about it now with North Korea. So you could potentially look at the Republican Party looking to spend some money here in this one particular area, and that happens to be Orbital ATK's bread and butter.

Hill: I have to mention that David Gardner's weekly podcast, Rule Breaker Investing -- which, if you're not listening to that, you absolutely should be clicking the subscribe button over there -- his most recent episode, which was published last Wednesday, was David talking about five stocks that the average investor has probably not heard of or is probably not that familiar with, and these are stocks that David has recommended at various points in his investing life through different services. Orbital ATK was one of them, which he first recommended 10 years ago, when it was $43 a share. Now you look at the buyout price of $134.50 a share -- that's a tidy little 210% gain at a time when the market is up about 70% over the same time period.

Muckerman: He has his ear to the train tracks, always.

Hill: Yeah, absolutely. Although I do like one of the things David said in the episode. David gets this question a lot. I think a lot of analysts get this question, but David definitely does, which is, sort of, "Where do you get your ideas?" And one of the things he mentioned with reference to Orbital ATK was, he said, "I just like space. I'm just interested in outer space," and increasingly there are businesses that are operating that way.

Muckerman: Yeah, and if you think about it, I've been looking at this space recently from a company in Canada out of Vancouver, MacDonald, Dettwiler and Associates. They're hoping to get their shares listed on the New York Stock Exchange sometime in the very near future, so maybe U.S. investors can get access there. But one of the largest, if not the largest satellite manufacturer in the world, just recently started working more and more with the U.S. government, got their clearance. They're building a facility here out in California. So maybe another way for investors in the U.S. to access the satellite market.

But when you look at what Elon Musk and Jeff Bezos are trying to do with these reusable rockets and allowing launches to happen on a weekly basis for much, much cheaper -- Elon Musk wants to reduce the cost of launching into space by multiples of 10, so making it much more feasible to launch satellites on a consistent basis and talk about repairing satellites in space, which is something that both MacDonald Dettwiler and Orbital ATK are trying to do, basically acting as a tow truck to latch on to these satellites and operate on them without even taking them out of orbit. So certainly the next frontier, and billions and billions of dollars are going to be spent there.

Hill: Before we get to the Emmy Awards from last night, and this is tied into the battle for the living room, Roku, which is the video streaming business, has set the price for their upcoming public offering at $14 a share, and they're looking to raise about $250 million. They could use that, because Roku is not yet profitable. I'm curious if you have any thoughts about this business, because it really does seem like, unfortunately for Roku, they appear to have a product where people who use it like it a great deal, but not the greatest business model in the world to support that product.

Muckerman: Yeah. I wish we had J-Mo [Jason Moser] in here, because he's kind of hinted at his feelings about it in the past. Kind of a one-trick pony, especially when you're comparing it to Amazon Fire Stick, clearly not Amazon's thoroughbred, but it's something that they're selling at a very reasonable price, and very similar offerings to Roku. Then you have the Google Chromecast, Apple TV, Xbox and PlayStation are doing very similar things. So it makes me a little nervous. Needless to say, I will not be investing in a Roku IPO, or any time down the road, at least from what I've seen so far.

Hill: I love the chutzpah. I just love the foresight to say, "Cable cutting is real, more people are going to cut the cord, we're going to start a business that goes in the direction that we think people are going in." That's great. And also, the chutzpah to say, "Yeah, Apple, Amazon, and Google, bring it on!"

Muckerman: Microsoft, Sony, everybody. [laughs]

Hill: Bring it on! And maybe that is part of someone's thesis for buying into this IPO. Hey, Roku does make something people like, and maybe they become a buyout candidate as a result of that. That being said, more often than not, when we ask the question, "Is the prospect of Company X being bought by someone else a reason to buy the stock?" the answer is either no or, it really shouldn't be No. 1 on your list.

Muckerman: Yeah, that's far too much speculation for me.

Hill: By the way, the Industry Focus podcast, the Friday edition where they talk about Technology, Sept. 8, Dylan Lewis did a deep dive on the Roku IPO. A lot of good information there. And they're going to be doing a follow-up episode after it goes public. Check that out if you want to go a little deeper on Roku's IPO. That's the Sept. 8 episode. And his guest, Evan Niu, one of our contributors here at the Fool -- I'll just tell you, Evan has a cold for that episode, so there's some sniffling that goes on. Just hang in there. All the information is worth it, I promise.

Muckerman: Did Roku make him sick? [laughs]

Hill: No, I don't think so.

Muckerman: Was it the IPO's fault?

Hill: [laughs] It definitely was not.

The Emmy Awards were handed out last night. This is the big night for the television industry, certainly for the creators of television. It was interesting to see the results in this sense: The trend that we have seen over the past few years of non-broadcast television dominating the awards, that held up, although I will say that NBC and ABC had pretty good nights. In terms of who took home the most statues: HBO, 29; Netflix (NASDAQ: NFLX), 20; and then followed by NBC, Hulu, and ABC. Again, good night in particular for NBC. I guess the surprise of the night, to the extent that there was one, was Hulu.

Muckerman: No kidding. I didn't even know they had original programming.

Hill: That's the thing. Hulu has dabbled in original programming here in there for a while. But this is a really big splash for them, The Handmaid's Tale taking home Best Drama.

Muckerman: First time ever for a streaming service, I think.

Hill: I think that's right. Amazon, for all of their success, and as you mentioned with the Fire Stick, it's not their lead thoroughbred, and neither is their original programming. But just from a creative standpoint, I think Amazon brought home two last night.

Muckerman: Well, they're putting billions of dollars to work at trying to catch up to Netflix. So it could be one of the main racehorses further down the line. Who knows?

Hill: I think so. Was there anything that surprised you when you looked at the awards? For me, it was absolutely the fact that you had two traditional broadcast networks in NBC and ABC, and obviously with their parent companies being, respectively, Comcast and Walt Disney. I know Hulu is getting all the headlines, but I feel like broadcast TV had a good night.

Muckerman: They needed it, especially when you see Netflix almost doubling its nominations from just a year ago, up from zero maybe about a handful of years ago, up to 91 Emmy nominations, and HBO not too far behind. So they needed a big night, and I think they got it. Whether or not they continue that momentum will remain to be seen for the next year or so.

Hill: I also appreciate that Netflix solved the mystery of the billboards that have been showing up in Southern California that said "Netflix Is a Joke," and they unveiled the commercial with Jerry Seinfeld, Chris Rock, Ellen DeGeneres. You talk about them spending money -- they're spending a lot of money on comedy.

Muckerman: Yeah, that, and, speaking of commercials, I appreciated the Amazon NFL commercial where it was the Bears vs. the Packers -- that was their first game, I guess -- and they had a commercial with bears fishing salmon, and then actual human packers fishing salmon, and basically throwing the salmon back and forth like a football. Pretty creative, I thought.

Hill: I didn't realize that their streaming of Thursday Night Football didn't begin until Week Four.

Muckerman: Yeah, it caught me off guard as well.

Hill: I think it was either last Wednesday or, it must have been last Thursday, but I was thinking, "Oh, I think I'll watch the game tonight -- I think I'd like to just watch this on my laptop," and I pulled it up and typed in "Thursday Night Football," and it was like, "Oh, I have to wait a couple weeks."

Muckerman: [laughs] You still have to pay for the NFL Network for a couple more.

Hill: Exactly. All right, Taylor Muckerman, thanks for being here.

Muckerman: You got it.

Hill: As always, people on the program may have interests 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 going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Hill owns shares of Amazon and Walt Disney. Taylor Muckerman owns shares of Alphabet (C shares), Amazon, and Comcast. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix, and Walt Disney. The Motley Fool recommends Orbital ATK. The Motley Fool has a disclosure policy.