Earnings-Palooza With Halliburton, Hasbro, and More

On this episode of Market Foolery, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman as they dig into the latest earnings news as a horde of companies report their results. But while they are focused on the wins at Halliburton (HAL 0.34%) and Hasbro (HAS 11.85%), they have other reasons to check in with Netflix (NFLX -3.92%) and Fitbit (FIT).

Chris Hill: It's Monday, April 24th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Million Dollar Portfolio, Jason Moser, and from Stock Advisor Canada, Taylor Muckerman. Happy Monday, gents!

Taylor Muckerman: Back in the building.

Hill: Holy cow!

Muckerman: What happened?

Hill: Strap in for earnings-palooza.

Moser: I was looking at an infographic on Twitter earlier today, it was basically just a picture of all the company logos of the earnings that matter this week, and it was a big picture.

Hill: 190 companies in the S&P 500 are reporting this week. And we're going to talk about some of them.

Moser: I think 75% of MDP's holdings report this week.

Muckerman: Warm those fingers up, baby.

Moser: Let's light this candle.

Muckerman: Crack those knuckles.

Hill: We're going to get into some earnings, we're going to get into some unsurprising news that I'm pretty sure we called about Netflix, and some good news for Samsung, but let's start with Halliburton. First quarter profits came in slightly higher than expected. I guess they're doing some more drilling in North America.

Muckerman: Yeah, that's the key here. It always is for Halliburton. The largest land driller in North America. Starting to gain an international presence. But over 50% relies on North America. Revenue there is up 24% quarter over quarter. Typically, you see a little bit less of rig activity in the first quarter due to winter weather, but this was an outlier. U.S. land up 30%, so driving that. International revenues down about 8% quarter over quarter, but Latin America looking strong out of Brazil and Mexico. And they did call a bottom for the Eastern Hemisphere in terms of rig count. But they're not looking for significant growth over the 2016 levels. But hopefully no less of an impact there, as rig counts stabilize or grow a little bit into the second half.

Hill: What should investors expect in terms of the business of Halliburton over the next, say, three years, and how much of it should be tied to the price of gas? Because this is a stock that had done so well for so long, and like everybody else, affected by the price of gas. You among others said on this show, "If anyone is built to withstand a downturn in the price of oil, it's Halliburton."

Muckerman: Yeah, it certainly is, and it has shown that. The price has rallied back quite significantly. Even in the downturn, it was there to support its customers, giving them price cuts, and even helping finance some of the drilling that these companies were trying to do through Halliburton. They showed good faith to their most loyal customers, and I think they're going to be rewarded for that. Granted, they need to now increase their prices a little bit. Not too dramatically, because oil prices are still pretty subdued. We've seen some supply worries, so prices are now back below $50. But, for this company, near term, definitely some adjustments to be made, you're bringing a lot of equipment back online, they've talked about hiring a lot more people coming up. Margins did get impacted by that a little bit in the first quarter here. So, I would look for them to maybe not try to get out ahead of themselves too much, because as you can see, price of oil isn't set to rise too dramatically in the near term. But North America drillers, still very ravenous appetite to drill. And this is the company that's servicing them. So, I have very high hopes for this company over the next three years, but don't get too far ahead of yourselves in the near term.

Moser: Yeah. We actually sold Halliburton from MDP not too terribly long ago. It was a good investment for us. We made some money with it. But part of it was based on just that -- we don't see that catalyst taking oil prices a whole heck of a lot higher over the course of the coming couple of years. That's the proxy we use to see how these guys are doing. I've been of the thought that, we would certainly see oil prices bounce back to $50 to $70 over the coming five years, simply because of the supply and demand dynamics at play here. I'm becoming a little bit more skeptical that may be the case, because we're seeing a lot of consideration for other alternatives out there. Really, I think Tesla has made a lot more progress here to this point than a lot of people probably thought they would have. They're obviously not selling the same amount of cars as Ford and GM are, but they are making a lot of progress. And I think maybe the mindset is such that there are alternatives out there, it does matter, a lot of people are getting on board with alternative energy. I can't help but wonder if these oil plays aren't necessarily going to get back to those days of $70 to $80 oil. If they don't, how much upside can we really expect from them? And Halliburton is certainly a big player in the space, one of the biggest. I think the Baker Hughes deal being called off probably ...

Muckerman: Yeah, crimped their style just a little bit. Yeah, lost a few billion dollars. But yeah, to your point, oil prices are still suffering, and that's with OPEC at 99% compliance of their announced cuts last November, which is unheard of for OPEC. Their average compliance, generally, is in the 75% to 85% range. They're at 99% right now, and it's still not affecting the price of oil to the upside. So, I expect another cut from them, or at least to maintain their cut after the six month review period, which is coming up pretty soon. I expect them to maintain or maybe even cut a little bit more, because oil prices are still not where they need to be for those OPEC countries to sustain their government spending habits.

Hill: First quarter profit and revenue for Hasbro came in higher than expected. Jason, we talk about the Disney princess contract they got a few years back, but you look at this quarter and it's a nice reminder that Hasbro has a pretty strong portfolio beyond that, including the Transformers toys and Nerf.

Moser: Yeah, very strong quarter. And given the retail environment in general, and the egg that Mattel just laid here during earning season, it was very fair going into this report to wonder, regardless of what Hasbro reported, how the market would necessarily react to it. I think the key here is that Hasbro and management are meeting their own internal expectations, which are pretty much in line with Wall Street's expectations, and they see more of the same for the coming year. These toy makers, as they go throughout the year, quarter one is the low point. And as you'll see as we get to the holiday season, the performance starts to really pick up. I think what's really worth noting here is Hasbro has a lot of strength in their franchise brands versus the partner brands. The franchise brands are names like Nerf and Play-Doh and Transformers, like you mentioned, versus partner brands, which are things like Star Wars and Disney princesses and whatnot.

On the heels of a pretty strong film season, sort of hitting the reset button on the partner brands side of the business, and getting ready for a busier holiday season here. To see that they can see a little bit of a decline there in the partner brands segment of the business, and they can really pick up that slack with the franchise brands, shows us that the franchise brands still have some strength. Which is key, because Mattel has witnessed some weakness with some of their historically stronger franchise brands. But the thing that took me back was 43% growth in gaming. We've talked about these toy makers, and coming into this digital age, and how they were going to embrace it and do it, Hasbro, it seemed like they figured something out. Monopoly is obviously a big name for Hasbro. But 43% growth in gaming, I think, is just impressive to look at. When you add that to the success in the franchise division --

Hill: Is that a smaller base that they're working off of, though?

Moser: Potentially. You're coming off of a pretty easy comparable there. But still, the growth is the growth. And when we're talking about, No. 1, Hasbro isn't really known for video games and digital games, so to be able to pick up that share there is impressive. But again, Hasbro on the whole has a very diverse business with a lot of successful properties in it, and this quarter certainly proved that.

Hill: I think last week, we were talking about Netflix needing to raise some money.

Muckerman: And they do. [laughs] 

Hill: Here we are a week later. Netflix raising $1 billion in Europe. They can use it for whatever they want, but doesn't the smart money say they're going to be spending, if not all of this money, at least the bulk of this money, on original content?

Muckerman: They'd better. Amazon is catching up to them in terms of spending on original content. $6 billion for Netflix this year, and $4.5 billion for Amazon this year. They're ramping it up. They can sell their Prime video for less than Netflix can, because they can rely on the retail and Amazon Web Services. There's definitely some competition there heating up for the over the top original content programming, and Amazon is not something I want to see in my rearview mirror if I'm Netflix.

Hill: What do you think, Jason?

Moser: This was certainly expected. Netflix is a business that is going to be beholden to this very behavior for the foreseeable future. They were transparent about that. Reed Hastings has a strategy, and he's playing it out. On the one hand, we expect to see this, might as well get this financing while it's cheap. They also have a pretty healthy stock price, I guess is the best way to put it, and they could certainly get some cheap capital there as well. I think the question that I have with Netflix -- and, I think this is a wonderful business, and Reed Hastings is very bright, he saw this a long time ago and the strategy has really worked out well for him -- at some point, you have to start wondering how saturated the subscriber base becomes, and then you have to start asking the question, what kind of pricing power do these guys have? Because we are in such a competitive environment now, and there's so many alternatives out there. We were talking about this earlier this morning on the MDP team, about how 20 or 30 years ago, when The Sopranos came out for HBO, that was sort of a revolutionary program, it was sort of a step forward for television. And it was unique. And it lived a very long life, even well after it had gone off the air.

Today, I don't think these purveyors of original content have that same luxury. These franchises, these names, they don't last as long, they don't live as long because there's so much competition out there. So, something like House of Cards, for example, probably isn't going to be as relevant -- and maybe that's an outlier, I hear it's really good -- but, I don't know that it's going to hold the same sort of relevance 10 or 20 years down the line that something like The Sopranos did. I think when we start looking at this business, we have to think, "These guys are probably going to have to be raising a lot of money perpetually in order to keep churning out the original content and keeping up with all of the other players in the space." This is a fascinating space to watch, and I think Netflix is certainly the leader in it. I think they've done a lot of things right. And I don't suspect Netflix is going to go the way of the dodo bird. But looking at it from an investor's perspective, I wonder if maybe the low-hanging fruit hasn't been picked here.

Hill: But, in terms of just this deal, just the raising of $1 billion, do you prefer this move as opposed to a secondary offering? Let's just issue some more stock?

Moser: I think today I would rather see them take the debt out, because at some point, rates are going to be a bit higher, and I think they're going to tend to probably keep a pretty healthy share price. Generally speaking, Wall Street is on board with what they're doing, and it's obviously a very good business that's very customer-centric. I think, when you have a business with leadership, Reed Hastings, Jeff Bezos, these kinds of people, and they're very customer-centric, they really want to give their customers what they want, those are really powerful long-term stories, as long as they stay in line with that philosophy. I suspect that Netflix will be very successful for many years to come, just because of that alone. 

Muckerman: [...]

Hill: Thank you, doctor. No, it's an interesting question, the example that you raised, Jason, about The Sopranos and HBO, because any time I open up the HBO Go app, I am struck by how prominent The Sopranos is, still, to this day, in terms of HBO promoting it. It is so well regarded, it has held up over time, and it is one of those "HBO classic series" that brand-new audiences are finding every year. I think we'll only figure this out as time goes on, but it will be interesting to see 10 years from now, 20 years from now, what are the things that Netflix is promoting, that they own? What is their original content that they keep pushing out to people, because it holds up over time?

Moser: Yeah, that's the big question. I have never seen one episode of House of Cards, I don't know anything about the show other than it's been very well received. Maybe that's their Sopranos, maybe that's the property that holds up over time. I think those are going to be very tough to come by in the coming decade and beyond because of the amount of content. There's just so much good stuff out there, far more TV than there is time in the day to watch it, at least for most of us.

Hill: Some good news for Samsung today. They are no longer the only consumer tech company making headlines for having their products explode.

Moser: [laughs] I love how you framed that.

Hill: A Wisconsin woman said she sustained second-degree burns after her Fitbit Fitness tracker exploded on her wrist. Diana Mitchell had only owned her Fitbit Flex 2 for two weeks when the alleged incident occurred as she was reading a book. She said there was no indication there was anything wrong with the device, I'm assuming right up until it exploded on her wrist. She was reading a book! She was just hanging out reading!

Muckerman: She should have been walking. It was a warning shot. "Get up and move!"

Hill: You think that's what it was?! [laughs] 

Moser: It's like the boxing glove alarm clock, giving you that nudge.

Hill: That, to me, is the most amazing part of this story. It's not, "She was out there running and exercising, burning it up ... "

Muckerman: "The heat of the sun ... "

Hill: Yeah. Some extenuating circumstances, no. She was just hanging out reading a book. And if you're Fitbit, let's give them the benefit of the doubt. Let's say this is the only time this happens, it's not a Samsung 7 situation where there are multiple incidents. Let's say this is the only time this happens. If you are Fitbit, this is absolutely the last thing you need. Even if it's just one time, this is the last thing you need.

Muckerman: You're not nearly as well diversified as Samsung. They could recover a little bit better.

Moser: We were having fun, but I certainly don't want to make light of anyone having something that explodes on them.

Hill: Yeah, you saw the picture.

Moser: I did, I don't want that happening to me. The thing is, I can't help it go back to this question, I wonder how much this actually matters for these guys at this point. That old saying, if a tree falls in the woods and nobody's there to hear it, does it make a sound? For Fitbit, does it really matter at this point? Isn't this company kind of done anyway? I think the fitness device market, perhaps, has had its day in the sun.

Hill: Really? You think they're going away?

Moser: No, I don't think they're going, but I think the novelty of the concept has worn off. I think the people who really want them have them. And I don't know what the growth opportunity there is. I think Fitbit trying to become something more than this device company told us a lot right there. They even know, they had to be a little bit more than a hardware provider in order to be successful in this line of work, because it's really not about the hardware, it's about what the hardware is telling you. And I think a lot of these devices have had the hurdle of making sure the device is giving you good information.

Hill: And not exploding.

Moser: And not exploding. But, I feel like they've lost their novelty. I feel like the people who want them have them. And yeah, this certainly doesn't help them at all. But I don't even know that it really matters at this point.

Muckerman: Your phone can do it, there's plenty of watches that can do it. If Under Armour has their druthers, their clothes are going to do it.

Moser: They have shoes that are doing it. Now, you can wear shoes that will tell you all this stuff, and you don't have to wear this little band. Now, if Under Armour shoes start exploding, we have a big problem.

Muckerman: If you're close to the finish line, maybe that helps you out a little bit.

Moser: The neat thing about the wearables market is figuring that it doesn't actually have to be a watch or some wrist device, it could be something a bit more discreet and not so obvious. I think those are the implications that the wearables market -- that, to me, is the forward-looking nature of it. I think Fitbit hasn't really presented us with anything beyond devices that may or may not explode on your wrist.

Hill: Do you think 2017 is the year that someone buys Fitbit?

Moser: I don't think so. 

Hill: Really?

Moser: I don't know why you would buy it. Why would you buy it? That's the question.

Hill: I think you would buy it because the brand, assuming no more explosions take place and burn people's wrists --

Moser: Yeah, let's hope this is an isolated incident.

Hill: Absolutely. I think there is some value there, more than zero, is the way I would put it.

Moser: Probably.

Muckerman: But are they willing to sell for less than --

Moser: The example I go back to is LeapFrog. I think LeapFrog was a very good case study of something where, generally speaking, you like what they stand for. It was building devices for kids to help them start learning younger than ever before. But the problem was, they immediately became obsolete.

Muckerman: You put an app on an iPad for that, yeah.

Moser: Exactly. So, it was less about the device and more about the information the device was giving you, and there are other ways to get that information out there, and LeapFrog's technology was really rendered obsolete in short order. And then, as an acquirer, you have to look at that and say, "Why do I want this? Is this something that's going to require more money to fix or turn around than is worth it?" Because I'm certain that businesses like Apple, for example, are going to have better ways to get that information out of consumers, and parse all of that data and actually make something of it. So, I don't know, I guess I'm not clear as to why someone would want to acquire it.

Muckerman: Same.

Hill: Remains to be seen. All right. Jason Moser, Taylor Muckerman, thanks for being here, guys! 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!