On this MarketFoolery podcast, host Chris Hill and Million Dollar Portfolio's Jason Moser had a lot of big-picture ideas to discuss, but they started with something small: wondering why young Jordan Spieth's win at golf's British Open didn't produce any kind of bump for Under Armour (NYSE:UA) (NYSE:UAA). Perhaps the market isn't thinking long term enough about him?
But the more interesting things are what KKR's purchase of WebMD (NASDAQ:WBMD) says about the public vs. private dichotomy (and network effects); the macro reason why Hasbro (NASDAQ:HAS) got whacked after an earnings beat; the possibilities for an upstart like Blue Apron (NYSE:APRN) in an Amazon-eats-everything world; and the stocks Moser is fixing to buy for the War on Cash.
A full transcript follows the video.
This video was recorded on July 24, 2017.
Chris Hill: It's Monday, July 24th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today from Million Dollar Portfolio, Jason Moser. Happy Monday!
Jason Moser: Hey, hey!
Hill: You know who's having a happy Monday?
Moser: Jordan Spieth.
Hill: Jordan Spieth. You know what, we'll get to the news.
Moser: Let's do.
Hill: We'll get to the Hasbro earnings, we'll get to the war on cash, we'll get to all of it. But I have to say, as happy as I am for Jordan Spieth for winning the open, as an Under Armour shareholder, I'm a little disappointed that we're not seeing a ripple, because we've seen that before. We've seen events where, particularly in golf, big winner, and if they're associated with Nike, you see, irrationally, perhaps, a little bump up in the stock price. I'm not going to lie, I was kind of hoping we were going to see at the open a little irrational bump up of Under Armour shares because Jordan Spieth is an Under Armour guy.
Moser: Or perhaps maybe this is a response to a bunch of fair-weather golf viewers who are really disgruntled at the lack of being able to really understand the rules of golf. The whole thing about yesterday was, other than Jordan Spieth really pouring it all in his last six holes was the number 13 fiasco where he hit a pretty wayward drive, and then it took like 30 minutes to essentially figure out how he was going to hit his next shot. So, to me, as much of a golf fan as I am, and I've played it all my life, this is where I feel like golf is really losing the common fan. The rules of golf are borderline ... you can't understand it, it's completely incomprehensible. And they had this book, they have a rule book, and then they have this other big thicker book called Decisions On The Rule Of Golf. So, it's like real life experiences, for those situations that aren't quite clarified in the actual rule book.
Hill: [laughs] "Guys, the rulebook doesn't cover this, we need to go into the archives."
Moser: It's funny, but the fact of the matter is, this Decisions book is like an encyclopedia. So there's this hurdle that golf faces with the common sports fan in that the rules are just absurd. They're archaic.
Hill: By the way, when you said "encyclopedia," we just lost every listener under the age of 40.
Moser: Well, there you go. Just google it, you probably know. To me, I feel like with golf, it's another one of those sports where, and baseball, I think, too, is facing this from the perspective of, it's a big time-suck. And a lot of people don't have the time to sit down and commit to something like that. Now, for example, yesterday, I was on the way back from the river, it's about a three-hour car drive given the time of day. I was actually able to listen to this thing on Sirius XM. And it was great, it made for good radio, it was good theater. I'm a golf fan, so I can nerd out on that a little bit. But I do think that golf is facing some challenges from that perspective in garnering viewers. It's one thing for me to go out there and play golf and keep the game moving, you play just to enjoy it. But I think, when it comes down to the professional level, I think that's a big hurdle that it's still facing. With that said, you and I were talking about this this morning, Jordan Spieth is 23. He's won three major championships. He is more than likely going to be playing golf when he's 30. And chances are, the way golf works, he's going to be better.
Hill: And he's got a long-term contract with Under Armour.
Moser: And you know that Under Armour is going to do everything they can to keep him locked down for good. And typically, athletes, once they develop those kinds of relationships with their equipment providers, apparel providers like that, they stick with them for the long haul, unless there's some big falling out. So, we talk about long-term investing, we talk about seeing the forest for the trees. I think this is a good example of, when you look at it from today's perspective, you think, Under Armour has been having its challenges as of late. But in seven years, I still want to be an owner of this company, I still want to be an owner of this stock. And I think Jordan Spieth is a good real-life example of how we can look at things further down the road and recognize that, really, seven years from now sounds like a long way away. For him, he's just going to be 30. It's not really that long. But everybody wants to get rich now, and that's just not how investing works.
Hill: Let's get onto the big winner of the day, and that is WebMD, and, I suppose, WebMD shareholders. The stock is up 20% as WebMD is being bought by the private equity firm KKR. This continues a trend that we've really seen, certainly we've seen this among consumer brand names in 2017, but we've seen the longer trend over the last 15 years, and it is, fewer public companies as more and more public companies go private for one reason or another. And certainly this year, the high-profile ones are being taken out by someone else.
Moser: Chris, if you had the option to be either a publicly traded company or a private company, wouldn't you opt for the private route? You're going to be held under less scrutiny, right?
Moser: I've got enough to deal with when I go home. I mean, they hold me under enough scrutiny as it is. So, those are the people I need to answer to, that's my board of directors. I think that a lot of companies are just recognizing the luxury in not having to answer to the public on a quarterly basis, and we're seeing more and more that a lot of companies are being judged on quarters versus judged on years and decades, and that's a tough sort of mentality to overcome. Now, with WebMD, this is not a deal that makes you scratch your head and wonder, "What is KKR thinking?" This is something that's certainly in their wheelhouse and adds to available collection of similar sorts of media properties they own already.
For me, we've talked about WebMD before on the podcast here and there. I feel like, to me, this has always been a very fascinating property. When you look at businesses like these internet business, the strength is in the network and what kind of a network you can create. With WebMD, not only have they created this strong brand with what they do, but we live in this information age where it's so readily available. You can find anything you need at the drop of a hat. But, with WebMD, it is this really neat sort of network of not just consumers but physicians. To me, it could be an even more powerful network effect there, because the more physicians that you add to that network, it becomes immensely more valuable, because that's pretty unique knowledge. That's not stuff that you and I -- we can offer reviews on a restaurant, but I can't really tell you about the merits of a colonoscopy. You're just going to have to kind of trust the doctor when they tell you. So, I think there are a lot of dynamics to this network that make it really attractive. The business itself is actually pretty healthy. They make their money from advertising, but they also have a subscription dynamic, which is neat. Net margins are starting to stabilize in the low teen range. It's balance sheet net cash neutral. And if you look at, over the past five years, the stock has been on a tear, it's up somewhere in the neighborhood of 250%.
Hill: It really has. That's one of the interesting things to me about WebMD. We were talking earlier about, "Would you rather be a public company or a private company?" For a good stretch of time with WebMD, they were running into all kinds of brick walls in terms of their business. They really struggled as a business for a long time. At the point that they figured it out, as you said, that's where the tide really started to turn in their favor and in the favor of shareholders. So, you can back this thing out over 10 years or longer, and you're not seeing a great return. But five years ago was really the low point, and I'm sure there were plenty of investors who just gave up on this thing. It turns out that was the time to buy.
Moser: Yeah. You see this a lot, you can see valuable properties out there that have a hard time making it work as a business, but eventually, particularly if you're a public company, you're going to be held to accountability. Leadership has to get in there at some point and create a good business if you have something there where you can build that business on. WebMD clearly has that. When you look at the way this deal is valued, WebMD is a profitable company, it's a cash flow positive company, it's a financially healthy company. This deal values the stock at around 17X free cash flow. Now, sometimes with these internet businesses, we'll back out the stock based compensation side of the equation to get a better idea of cash flow minus that stock based compensation. With WebMD, it's still very cash flow positive.
You look at something like Zillow, which is another example of a network that's really trying to build out a specialized unique information network, with a lot of the same sorts of qualities as WebMD in that regard, Zillow, it's not even close. It's not profitable, it's not cash flow positive. You back out the stock based compensation and it's even worse. I'm not saying Zillow is a bad business, mind you. I just think, at some point Zillow is going to have to flip a switch there and make investors see the light at the end of the tunnel as far as the profitability and the cash that business can generate, whereas WebMD had really already hit that switch. They figured that out, it was around five years ago. At some point, it happens. And if it doesn't, you typically either see shifts in leadership, or you see someone come in there and buy that thing for a song and turn it around in a private manner.
Hill: Hasbro's second-quarter profit and revenue came in higher than expected. For some reason, the stock is down nearly 10% this morning.
Moser: Well, I'm going to depend on you to tell me exactly why. Oh, that's why I'm here.
Hill: [laughs] That's why you're here.
Moser: There are sell-offs where you have to ask yourself, uh-oh, what's wrong with this business, and what's the next shoe to drop? This is not one of those cases. When you look at it on the whole, with a big picture perspective, this was a good quarter. There are a lot of reasons to be encouraged. The business continues to grow revenue at double-digit rates. You look at some of the dynamics, the stock has been on a massive tear all of 2017. It's really been the beneficiary of not only a good business model and good collection of brands and good leadership, but they've also benefited a little bit from Mattel's shortcomings. The stock had a nice run up to this point.
I think probably the biggest concern, going through the call, is this performance on the international front. Particularly, they're calling out the U.K. and Brazil. Those are important markets. When you look at the international segment for Hasbro, it's close to half revenue. Now, it doesn't contribute as much on the profitability side, but it's still important. And Brazil is certainly the most important market in the Latin American region. The U.K. is obviously an important one in the European market, as well. So, there are some concerns there due to macroeconomic challenges that are beyond, really, anybody's control. So, what that led to on the operating profit side, operating profit fell somewhere in the neighborhood of 40% or something for the quarter, 43%, I think, actually. And it sounds like management is guiding for some headwinds there for the remainder of the year on the international side, given the performance in those two countries. But I wouldn't read too much into that, because to me, there are far more catalysts on the horizon than concerns with these guys. I mean, Star Wars: The Last Jedi stuff is going to hit shelves on September 1st, which is Force Friday II or something.
Hill: Do you think they're going to sell anything then?
Moser: That remains to be seen. I think Star Wars is starting to gain a little traction, maybe with the Millennial generation. There's more Frozen stuff coming out toward the holiday season, they're guiding to a lot of reasons to be optimistic for this holiday season. We talk about these businesses, Hasbro in particular, their success really comes from making sure that they hitched their wagon to the valuable IP stars out there like Disney. And Hasbro has done a wonderful job of that. They continue to reward shareholders with a growing dividend. It's at 50% from 2012 from $1.44 per share to $2.16 per share over the trailing 12 months. There are a lot of reasons why I think investors in Hasbro should be happy with the way the business is performing. I think that today probably represents a good look, maybe, if you want to buy shares or add shares. This is a good business with a lot going for it. I think there are far more catalysts on the horizon than concerns, today's sell-off notwithstanding.
Hill: I was pleasantly surprised to see that part of what fueled this quarter for them was some really strong sales in the Nerf category and Transformers. I thought, that's nice, that the toy sales aren't being affected by the terrible Transformers movies.
Moser: Or Shia LaBeouf's most recent complete blow up. I mean, we could have a whole podcast on that alone. But it's nice to see, at least, Hasbro is not levered to Shia LaBeouf as Chipotle is to getting sick.
Hill: We've talked a lot about Blue Apron lately. Isn't that fair to say? And a lot of it's been negative. So we feel a slight application to point out that shares of Blue Apron are up 11% this morning on not one, not two, but three analyst upgrades.
Moser: Yeah, I feel a tremendous obligation to do this, because contrary to popular belief, Chris, I am not a hater, in any general sense of the word. I like to think of myself has a nice guy. Our job is to analyze and make decisions based on that analysis.
Hill: And apparently now there are three analysts who look at the stock being knocked down the way it has and say, "You know what? I actually would buy it at that price."
Moser: Sure. Was it Stockwatch, last week you were asking me, is there some price where you feel like maybe this becomes attractive? And I think my answer at the time was no. It's nice to not have to rag on these guys, all in all. I like actually being able to look at a positive story for Blue Apron, because again, from a service perspective, it sounds like it's a great service. As an investment, listen, I still can't say that I'm on board with these analyst calls. I don't agree with it. But that's not to say that I'm right, either. Maybe these guys have figured it out. In the near run, there's no question, they're going to have to pay a lot of money to acquire new customers. When you're not profitable, the market is only going to give you so much to work with. And when you're dealing with something like Amazon, it's going to make it that much more difficult. By the same token, I think probably we're all a little bit guilty of making this quick leap to just thinking that Amazon is going to own this space thanks for the Whole Foods acquisition and its distribution and fulfillment expertise. But, again, Blue Apron, we're rooting for them. The numbers don't lie, though. They certainly have a lot of challenges on their hands. These analyst calls are part and parcel of the business. But it's nice to see them having a good day, and I hope they can continue to keep things on the up and up.
Hill: Last thing before we wrap up today, and this builds off of the most recent episode of Motley Fool Money, where you and David Kretzmann and Jeff Fischer and I were talking at one point about the latest results from Visa and American Express. I think what Jeff Fischer had to say about not just Visa and American Express but the trend around cash, and I've said this before, I do like the audacity of Visa coming out and literally saying, for the record, "Yes, we are declaring war on cash. We are in competition with cash. Yes, on some level, we're competing with American Express and MasterCard, but we're competing with cash, too." And what Jeff had to say, I think, resonated with each of us over the weekend, because you had tweeted something out and I immediately jumped on. I think you tweeted, "You know, I've been thinking about what Jeff Fischer had to say."
Moser: I think that you and I probably kick this around every earnings season, we talk about American Express earnings, Visa, MasterCard, PayPal, all of these payments businesses, and we're like, "Oh, weren't we saying last quarter that we wanted to buy some of these?" And then another quarter goes by and we didn't. I had a little bit of driving time this weekend, and I really started thinking about this, and it struck me that I have some capital to deploy, and for me, this is such an attractive space for so many reasons. Maybe it was the words "war on cash" that just crystallized everything for me right then and there. To me, this is one of the biggest long-term trends out there. Having looked overseas in a number of different places and understanding how many infrastructures out there are still lacking on the electronic payments side tells me all I need to know. There's a great opportunity out there for all of these businesses to really take market share in some meaningful way, and I don't see any reason to place your bets on one winner. So I'm not.
Hill: And there won't be one winner.
Moser: Right, there will be many. I think you have to prioritize the list of names that you would like to have exposure to. I keep on getting questions about American Express and I'm torn there, because as a customer of American Express, I really love it. The card is great, the service they provide is wonderful. The investment side of it, they're faced with more challenges. Visa and MasterCard are offering similar products, they have bigger networks. You can go to places where they just don't want to accept American Express because it costs them more to do so. With that said, I think American Express is a very powerful brand and a very valuable network. They can come up with new offerings and products. To me, I think I whittled it down to a basket that I'm going to purchase in equal amounts. Are you ready? Because I'm going to tell you what I'm going to do here. So, as soon as our trading restrictions allow, I'm going to actually go do this. I'm going to break it out into 25% in each of four holdings. I'm going to buy Visa, I'm going to buy MasterCard, I'm going to buy PayPal, and I'm going to buy Square (NYSE:SQ). Square? Yes, Square.
Hill: You're buying Square? [laughs]
Moser: Yes I am.
Hill: When you look at the 25% that you're allocating toward Square, do you look at that the same way I look at cash in my hand when I walk into a casino? Like, "Oh, I'm not leaving with this cash, this cash will stay here."
Moser: The cash into the casino example, there's a 100% chance that you're not walking out with it. With Square, I think there's a chance. It strikes me, a lot of these places I go, whether it's the frozen yogurt store or the music store down the road where we rent my daughter's viola, all of these places are starting to take Square. Square is proving itself to be very resilient, and I think a very valuable offering for a lot of small and medium-sized businesses. So, I think there's something there. I think the business is showing signs of gaining traction with a lot of folks.
One of the things, I think, with a lot of businesses, it's very easy in the short run to be bearish or critical of companies that get out there and do whatever it takes to win over their customers, at any cost. They're going to sacrifice, in the short run, to build up that loyal customer base. It's easy to criticize them in the near-term. But in the long run, the businesses that really tend to do well are the ones that find out what their customers want and then just keep giving it to them. And over time, you develop that loyalty. If you have a powerful network, and I think payments is a good sort of example of a network effect type of business, you can do very well. When you consider all of the opportunities there in that basket, to me, you have two very lower risk investment ideas in Visa and MasterCard. PayPal, a little bit on the median side. And then, Square represents the very high-risk, high-reward style. I think when you put those all together, it's an easy way to manage risk, get some exposure to a lot of neat ideas in the space. So for me, I made the decision, that's what I'm going to do. I'm not telling anyone else out there to do that, I'm just telling you what I'm going to do. But, I just thought that was a neat little byproduct of our discussion this weekend.
Hill: Do you still own shares of Twitter?
Moser: I do.
Hill: See, this is going to be great, because you're going to own two companies that Jack Dorsey is the CEO of, and then I'll get to ask you which one you want him to leave.
Moser: I'm all in on Dorsey, I guess. And, we can make fun of him, but I tell you, there's a lot to him. I think he's a good leader. And more so, I think he's a good person. I think, generally speaking, when you have good people who are hell-bent on giving people what they want, building a business around giving people what they want, I think Dorsey is one of those guys, in the long run, they tend to do pretty well. And I'm a patient man, as Lex Luthor once said.
Hill: Jason Moser, thanks for being here!
Moser: Thank you!
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!
Chris Hill owns shares of Amazon, Chipotle Mexican Grill, Under Armour (C Shares), and Walt Disney. Jason Moser owns shares of Chipotle Mexican Grill, Hasbro, Nike, Twitter, Under Armour (A Shares), Under Armour (C Shares), and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, Hasbro, Mastercard, Nike, PayPal Holdings, Twitter, Under Armour (A Shares), Under Armour (C Shares), Visa, Walt Disney, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.