In this Market Foolery podcast, host Chris Hill is joined by Motley Fool investor at large Tim Hansen to talk about construction equipment stalwart Caterpillar (NYSE:CAT) -- which turned in a strong earnings report and raised guidance again -- and highly diversified manufacturer 3M (NYSE:MMM), which was firing on all cylinders last quarter.
What does the status of these giants tell us about the global economy? And what's changed for them compared to previous years, when the results were less inspiring? Plus, Chris and Tim take on the controversial topic of Halloween candy and answer a question few have dared to ask before: Where does "fun size" rank among of the great lies of U.S. marketing history?
A full transcript follows the video.
This video was recorded on Oct. 24, 2017.
Chris Hill: It's Tuesday, Oct. 24. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, investor at large, Tim Hanson. Thanks for being here!
Tim Hanson: Yo! How're you doing?
Hill: I'm good. I'm not doing as good as anyone who's a shareholder of Caterpillar or 3M.
Hanson: They're doing well.
Hill: They're doing great! They're doing fantastic today. We're going to dig into that. And of course, we're going to talk about candy, because it's Halloween candy week here on Market Foolery.
Hanson: It is. But you know what I saw at the grocery store this morning? I kid you not! Christmas ale!
Hill: I also was at the grocery store yesterday and saw Christmas paraphernalia.
Hanson: I don't even know where to begin with that.
Hill: Not even waiting for Halloween to be done. We're a week away, people!
Hanson: [laughs] There's so much time between now and then.
Hill: There's taking initiative, and then there's being incredibly overeager. And you don't want to be the latter.
Hanson: No, it just seems desperate. Clingy.
Hill: Let me plug our email address, email@example.com, because we're going to weigh in with our thoughts on Halloween candy. But of course, we want your thoughts, so email us at firstname.lastname@example.org.
We're going to start with Caterpillar. Third-quarter profits came in higher than expected. They reported an increased demand for their construction equipment, and for the third time this year Caterpillar raised guidance. I'm not entirely sure they raised guidance three times in the previous five years combined.
Hanson: They're having a really good year. They're firing on all cylinders. Part and parcel because, probably, the last five years or so were so abysmal for them. But the narrative with Caterpillar was, they came through the real estate downturn fairly well, and then they had cash on the books, and they invested aggressively to grow their businesses through acquisition, particularly in emerging markets and the resources sectors. And then they got hit because emerging-market economies were weak -- Brazil, China -- and then also, obviously, there's been a prolonged resource downturn. The former CEO retired a year early. They lost half a billion dollars buying that fraudulent company in China. I mean, it was a bad period of time for them.
But as they got all that stuff organized, China has recovered a little bit, housing in the U.S. is in a boom right now. I think it's one of those under-reported things. Residential construction is growing at double-digit rates year over year, 10% to 12%. And obviously, Caterpillar benefits directly from that, because they are literally selling the picks and shovels that people are using to build those homes.
Hill: I'm glad you mentioned the China incident, because when we say on this podcast and others that investing in China is hard, we're not messing around. When you consider the fact that an established, steady-performing stock, blue-chip company like Caterpillar, had the other debacle that they had, where they all of a sudden realized that they had sunk so much money into, as you said, a fraudulent company in China.
Hanson: I mean, when you're desperate, you do stupid things. That's a truism of life, right?
Hill: [laughs] That's true in investing, and it's true in life.
Hanson: And that's compounded, if you're desperate for growth in China, you're going to get taken pretty easily by the people over there. So yeah, it was a misstep, but kudos to them for, they wrote it down, and they've recovered from it.
Hill: The stock is up nearly 50% this year. Again, this is a Dow -- when I think about Dow stocks, I think, they're not going away anytime soon, they're not in any imminent danger. One of the top two or three reasons to invest in one of those companies is the dividend. I don't ever expect a Dow stock to have a year like this. Is this overpriced right now? Or is this just, as you said, they've had a rough five years and they're back to where maybe they should be?
Hanson: I'd say it's a combination of factors. Arguably every large-cap stock in America is overpriced right now for a variety of reasons. Interest rates being what they are, people have gone hunting for yield out in the stock market, the amount of passive investing that's happening that's going into market cap or price-weighted indices continues to push up, all those inflows push up the prices of these large-cap companies. And then Caterpillar, unlike some of its peers in the tech sector, so on and so forth, was coming off a somewhat lower valuation. So you put all that stuff together, and yeah, you've had a pretty bonkers year. But let these things ebb and flow.
Hill: But you don't look at it and think, "Wow, this is incredibly overpriced?"
Hanson: I mean, am I actively short in Caterpillar right now? No. Am I wary of the market writ large? Yeah. That's been a tough position to be in over the last year or so, because the market keeps trudging upwards despite the fact that there's been a lot of volatility in global politics, the weather, energy markets, so on and so forth. There's been a lot of uncertainty. But there's been a lot of certainty with the stock market. It goes up. Until it doesn't. [laughs]
Hill: Until it doesn't, yeah, at some point. I will say, the last couple of years, at the start of the year, I've thought, this is probably the year the bull run ends. Maybe it'll be 2018.
Sticking with Dow stocks, 3M shares are also hitting a new all-time high. Third-quarter profits came in higher than expected. This is another one. Year to date it's up 33%.
Hanson: Yeah, similar story. 3M is obviously a little more diversified than Caterpillar. They have technology businesses, they have industrial businesses, they have consumer businesses like the Post-it, they have healthcare businesses, so on and so forth. So it's really a proxy for the global economy, and the global economy continues to perform. And 3M has done a nice job allocating capital in terms of repurchasing shares, paying dividends. They've made some strategic investments to grow the business. I think they grew about 5%-6%. Any time 3M is going to grow above the rate of global GDP, they're going to produce pretty good results, and that's what they're doing.
Hill: Here's an enjoyable five minutes I would recommend to absolutely anyone interested in investing. Go to 3m.com. Go to the 3M website, and look at how many countries this business operates in. To your point, it's so much more than Post-it notes. That's always the default. And all the earnings stories today, "3M, the maker of consumer products, including Post-it notes," I just pulled up their healthcare division -- I don't know who runs this company, but they're doing a bang-up job. We've talked at various points about similarly sized companies that struggle with executing across all of their divisions, in some cases to the point where they say we have to start selling these off. Procter & Gamble, of course, leaps to mind. But 3M, this is another quarter for 3M where every division was doing well.
Hanson: I've actually personally owned 3M stock now for 11 years, and some years are not as good as others.
Hill: Do you ever forget that you own it?
Hanson: Yeah, constantly.
Hill: Because you're not checking.
Hanson: Well, I'm getting on in age, Chris. I forget most of what I own at this point. But 3M quietly chugs along, like I said. It's never going to grow 20%-30%.
Hill: Except this year, when it's up 33%.
Hanson: Well, the stock. But sales, a little bit excess of GDP. Responsible capital allocation. That's what you want from a company like that.
You know what's wild? I was reading a report the other day that predicted that by 2022, more than half of the U.S. workforce will be freelancers.
Hanson: Yeah. It's the fastest growing employment sector by far. You think about all the companies that are enabling that -- Airbnb, Lyft, Uber, the fact that technology enables people to work from home. Why wouldn't you become a freelancer? I was talking to my boss, Mark, and I was like, "Mark, it's like working without having to deal with the hassle of a boss." He appreciated that.
Hill: [laughs] Yeah. Absolutely.
Hanson: But it's a crazy trend in America. It's going to have real implications for the economy.
Hill: If you're an accountant, you're all set. But if you're not an accountant, you might want to check out FreshBooks. The National Retail Federation reported recently that spending on Halloween this year is going to top $9 billion. That is candy, costumes, decorations. That's an 8% increase over last year. I know it's tough out there in the retail industry, but people sure are buying a lot of stuff. In this case, it's a lot of Halloween stuff.
Hanson: Now is the time for Oriental Trading Company.
Hill: This is a better time.
Hanson: This is when they make their...
Hill: Doesn't Berkshire Hathaway own them now?
Hanson: Indeed they do.
Hill: Besides Halloween, what do you think is the killer season for them? I would assume New Year's, because there's a fair amount of New Year's parties, that sort of thing. If you want a big box of cheap stuff...
Hanson: I think back-to-school is big, because all the teachers buy all those prizes and all that junk for the kids. My daughter came home --- she had a week of good behavior, and she was given a lion visor. Which, it's going to break in a couple of days, but it was hilarious.
Hill: Look, if you're looking for rubber ducks of all manner of design, you can do far worse than going to Oriental Trading Company.
Hanson: That's true.
Hill: Before we get to the candy, I think it's important to talk about -- look, innovation comes in different forms. And when it comes to candy, there's really only been one uber-innovation in our lifetimes, and that's the fun size. That is candy companies saying, "Hey, let's make smaller versions of this and we can charge more per unit." There's a communications challenge there. And someone, I don't know who, I don't know who this man or woman is or was, but someone came up with the phrase "fun size."
Hanson: That person's a liar. Is the floor mine now?
Hill: Take it away.
Hanson: What's fun about small candy? What's fun is big candy. That should be the fun size! And then you rebrand the small ones to be -- I'm the guy on the street who was too cheap to pay out for the good candy bars for the kids. There's no fun size.
Hill: Is there a bigger corporate lie in American history in the last 40 years than fun-sized candy?
Hanson: I think it goes Madoff, Enron, fun size.
Hill: [laughs] So, top three?
Hanson: Top three, Madoff, Enron, fun size.
Hill: It's on the Mount Rushmore of corporate lies of the last 40 years.
Hanson: And then, the No. 4 ...
Hill: Maybe the tobacco industry?
Hanson: Yeah, No. 4 is probably tobacco.
Hill: We're going to just lump all of tobacco in there.
Hill: Let's get to your overrated candy. We're going to bring in our man behind the glass, Dan Boyd, on this, because I want his thoughts as well.
Hanson: He's a connoisseur. Of all things.
Hill: Of many different things. Overrated candy in your book?
Dan Boyd: The Pixy Stick. Kids, they're amped to get them, and nobody ever seems to really enjoy it.
Hill: Yeah. And in stock parlance, it's not like Pixy Stix are trading at a particularly high multiple, but it's still higher than it should be.
Boyd: Oh, yeah, because people are like, "Oh! Pixy Stix!" And it breaks in the bag. It's completely unsatisfying.
Hill: Yeah. Dan, do you have an overrated candy?
Boyd: Yeah. I have a take, Chris. All candy.
Hill: All candy is overrated?
Hill: Wow. That's a bold take. [laughs]
Boyd: I would like to make a suggestion regarding giving out candy at Halloween. I think maybe every other house gives out something other than candy, like Goldfish crackers or raisins.
Hanson: How would you know if you're a candy or non-candy house? Would you have to talk to your neighbors? Because that's the barrier for me right there.
Hill: [laughs] Wait, I'm sorry, talking to the neighbors is the barrier?
Boyd: No, you just have to assume that all your neighbors are going to be candy. Isn't it better when you're eating candy and you have something to break up the candy, the sugar, something salty like a Goldfish crackers or saltine or something?
Hanson: I mean, I do enjoy Goldfish as well as pretzels and pretzel nuggets.
Boyd: That's my underrated, salty snacks. And raisins are just great, and everybody should eat more.
Hill: So, to be clear, you're not anti-candy. You're saying, at Halloween, be the contrarian.
Hill: OK. Do you have a favorite candy?
Boyd: Fun-size Snickers.
Hanson: Oh, Dan!
Hill: Underrated, Dan went salty snacks. What are you going underrated?
Hanson: I think Reese's Pieces. They often are in the shadow of the Reese's Peanut Butter Cup. But I would argue they are superior because of the candy coating.
Hill: Yes. A tremendous blunder by the M&M company passing up the opportunity to be in the movie ET, because that launched Reese's Pieces.
Hanson: The Mars people don't make a lot of mistakes, but ...
Hill: But when they do, boy howdy.
Hill: I'll stick with what I said on Motley Fool Money over the weekend, which is, I think Skittles are overrated.
Hanson: I would agree with that.
Hill: Just because of the popularity of that thing.
Boyd: Those things are hard to eat, too. They get stuck in your teeth. At least they get stuck in my teeth.
Hill: No, they get stuck in everyone's teeth. You're not alone there. And Take 5, underrated.
Hanson: What is a Take 5?
Hill: Oh my gosh, what's a Take 5? It's chocolate, peanuts, peanut butter, caramel, and pretzels. It's got the salty and the sweet.
Hanson: I like that. I'm not a big caramel fan myself.
Hill: They don't go heavy on the caramel.
Hanson: OK. Maybe I'll try one.
Hill: And Jason Moser on yesterday's episode, when he was talking down Baby Ruth, just send those over to me. I'll take your Baby Ruth.
Boyd: Yeah, he doesn't know what he's talking about.
Hanson: We could potentially set up some sort of securitized exchange here in the office, where people can trade in for the candy of their choosing.
Hill: [laughs] I like this. Drop us an email, email@example.com. Please share your overrated and underrated. Tim Hanson, thanks for being here!
Hanson: Happy Halloween!
Hill: Happy Halloween! 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. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
Chris Hill has no position in any of the stocks mentioned. Tim Hanson owns shares of 3M. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.