In this MarketFoolery podcast, host Chris Hill and analysts Jason Moser and Taylor Muckerman discuss this week's big acquisition speculation: Is Hasbro (NASDAQ:HAS) about to buy rival toymaker Mattel (NASDAQ:MAT)? As new CEO John Flannery shakes up General Electric (NYSE:GE) -- and shares hit a five-year low -- the trio debate whether now is the time to buy. Plus, is Roku's recent earnings surprise simply due to low expectations?

A full transcript follows the video.

This video was recorded on Nov. 13, 2017.

Chris Hill: It's Monday, Nov. 13th. Welcome to MarketFoolery. I'm Chris Hill. Joining me in studio, from Stock Advisor Canada, Taylor Muckerman, and from Million Dollar Portfolio, Jason Moser. Thanks for being here, guys!

Jason Moser: Hey now!

Taylor Muckerman: Happy to!

Hill: Short week last week because we had Foolapalooza, our annual meeting. We'll delve into that in the moment. But new news rolls on.

Moser: It never stops.

Hill: We have tech news, we have industrial news. We're going to start with toy news. Shares of Mattel up 21% this morning. Wall Street Journal reporting that rival toy maker Hasbro has made a takeover offer. As of this taping, Jason, we still don't have the details of the offer. Here's what we know: the takeover offer has happened, Mattel is up 21%, and Hasbro is up 6%. So, there's at least some optimism that Hasbro isn't making some insane overpayment for Mattel. You follow this industry, what did you think of this news?

Moser: I wasn't surprised to see the news. When you look at the two businesses, clearly they're headed in very different directions. Hasbro has been succeeding and doing so well here over the past few years, and that's really come at Mattel's expense. If you're Mattel management right now, you have to be looking at, this is probably the best-case scenario, and I don't know that there is any other scenario for this company that results in wins for shareholders. You have Mattel, it's clearly a company in a position of weakness. And that didn't happen overnight. Honestly, this was set up by former leadership. I think Bryan Stockton was a bigger part of the problem than some people would like to admit, but he was fired for a reason. There was even a question as to whether he was fired, initially. But they actually did come out and say, "No, he was fired." He just wasn't getting it done. There was a culture problem at the company. It certainly seemed like they were failing to innovate at a pace which kept them up with the changes that technology has implemented on the market. And I'm not saying it's easy. It's clearly not. But that's what you get paid the big bucks for, and if you can't do it you need to step aside. Conversely, when you look at Hasbro, they have really been investing a lot in finding new ways to leverage their IP, their toy properties through partners like Disney. I think the loss of that Disney deal for Mattel was sort of the beginning of the end. If this deal happens, that's great. Honestly, though, the thing is, I'm not convinced that Hasbro needs this headache. At the end of the day, it gives them some valuable properties, some valuable brands. But Mattel is a mess of a company. There are cultural problems, there are financial problems. There's a point now where the debt, you can't ignore it. Operating income doesn't even cover their interest expense 3X over at this point, so it could be a lot of headaches if Hasbro decides to take this on.

Muckerman: Yeah. This is one space that we really like in Stock Advisor Canada. We just recommended quasi competitor Spin Master, which owns brands such as Paw Patrol, Air Hogs, they create the TV shows then the movies and then the characters and the games to go along with it. Also owners Etch A Sketch and Uno, for some throwback games. But, you keep growing the imagination of these kids, trying to compete with iPads and things like that. But, certainly a longtail trend that we're big fans of. In the Canadian market, we've chosen to go with Spin Master in that regard.

Hill: This move by Hasbro doesn't surprise me. It would surprise me if it was the reverse, just because Margo Georgiadis, who's the CEO at Mattel, she got there in January. And everything I've read about her just struck me as, this is certainly an upgrade in the corner office at Mattel, and I just figured, give her at least a year, maybe even two years, as we would any CEO. So, if this was a move by her and her board, that would surprise me. I think Hasbro is smart to make this move now in this regard, that they might look at her and think, "Before she gets a chance to really impact the culture and improve things and turn it around, this might be the weakest point they're going to get as long as she's there, so let's go now."

Moser: Yeah. And she comes from Google, so she has, certainly, I think, positive exposure on the culture side, certainly the tech background that could help Mattel at this point. So, yeah, I think you're right in that, they're looking at Mattel right now as a company that is down but not out. And it doesn't mean that they can't turn this around. And they do have some popular brands out there. But they have put themselves in a bit of a bind financially. This is a business that's 100% levered to the consumer in a retail environment that's just really scary right now. And they have not made the investments in technology that they've needed to make, whereas Hasbro has. So, again, I think Hasbro is probably looking at Mattel seeing a company in a position of weakness. Mattel management certainly needs to look at this from all angles and try to consider what's best for the company and shareholders, and this very well may be the best option.

Hill: John Flannery has been the CEO of General Electric for about an hour and a half, and at the company's investor day conference on Monday, boy, did he make headlines! You take your pick, Taylor. He called 2018 a reset year, said there was going to be broad corporate restructuring, and, oh, by the way, cut the dividend by 50%. And that, as much as anything, is why shares of GE are down 5%. For a company of that size, that's a really big move.

Muckerman: Yeah, not a lot of whittling, just a lot of axe-wielding at that meeting. Like you mentioned, the dividend cut, 50%, down from $0.24 per share to $0.12, so now yielding below 3% at the current price. And announced that it's basically going to become a business geared around Power, Aviation and Healthcare. So, you're looking at some of the biggest businesses that they own, especially that new Baker Hughes joint venture, which they own 62.5% of. That might be one of the last businesses that they try to sell off. You're looking at Transportation, that's going to be gone. Lighting, gone. Industrial Solutions already being sold to ABB, we talked about that on the show a few weeks back when that was announced. So, a huge seat change for this company led by the Power business, which is around 28% of their revenues. But, like you mentioned, 2018, reset year. Because they still see weakness in that Power division, and to help change that around, he's already axed most of the leadership in that division, along with deciding to whittle down the board from 18 to 12 members, bringing on some folks from Trian, the activist investor that's been involved with GE for some time now. So, yeah, big changes. Leaving Healthcare, which I had read, some people thought that might be one of the divisions that they announced were going to be parted out, but that's the one that Flannery is most intimately connected with, because that's where he spent his time prior to being CEO. So, I have confidence in the business, once they announce how they're going to restructure this, but it definitely needed to get smaller, in my mind.

Hill: I don't know if it's going to work, Jason, but you have to give the guy credit for not sitting on his hands.

Moser: Well, that's it. I love the long-term tailwinds in Aviation, Power and Healthcare. Those are big market opportunities that are going to continue being big market opportunities for some time. I've said it before, I think John Flannery is GE's Alan Mulally. He is coming in here and getting stuff done. And that was his mandate. I really do believe, in five years, we'll look back, and this will be more apparent, but I think John Flannery has created more value in three months for this company than Jeff Immelt did in 17 years. And that, really, I think, is a testament to how asleep at the wheel Jeff Immelt was. He took this big company, this recognized brand with a lot of financial resources and just tried to do too many things. And he didn't really do anything well. So, I think Flannery is trying to get back to basics here, whittle this company down, focus on doing what they can do really well. It's easy to sit there and rag on the fact that he cut the dividend in half, and kill him on the fact that he cut that earnings estimate basically in half. But it's got to happen. The first step is admitting the problem, and the second step is taking actions to rectify it, and that's what he's doing, and I applaud him for it.

Muckerman: Yeah. He could prolong his solution for 17 more years if he really wanted to, because they certainly have the business power to stay around for that long, and sell off something if they needed to. But, yeah, I agree, I've been waiting for something like this to happen for a couple of years as a shareholder, and all it took was a new CEO to come in and totally change the trajectory of this company.

Hill: So, from the standpoint of General Electric's stock, it is now at a five-year low. And one of the things I was thinking about was the classic Warren Buffett line, be fearful when others are greedy, be greedy when others are fearful. It seems like, with GE's stock, there's a lot of fear, and I'm wondering, with the stock at a five-year low, if now is the time for investors, and I'll include myself in this camp, who have not only never owned GE, have never really considered owning GE, and I look at it now and think, "How cheap is this stock?" Because, if five years from now, Flannery's plan has worked, then this is the time to buy.

Moser: It sure is. If they're going to do $1 a share in earnings this year, you're essentially looking at something that's trading at 18-20X earnings, and you would probably think, for a company that just slashed its earnings guidance and its dividends by half, that's probably expensive. And maybe it is. But again, this is a big jockey play, I think, in that Flannery obviously has to get in there and actually prove himself. I think there's a lot in place for him to succeed, given GE's history, its financial resources, its presence. So, from that perspective, listen, I think five years from now, you're looking at a stock that's considerably higher than where it is right now. And if it's not, it's because Flannery didn't do his job well. And we're only going to know that in hindsight, unfortunately.

Muckerman: I'll be holding my shares.

Hill: As I mentioned, last Thursday and Friday was The Motley Fool's annual meeting. We had two days of looking at our own business, had some great external speakers, including Dan Heath, who's a best-selling author with his brother Chip. They have a new book out. We're actually going to be running part of that interview with Dan Heath on Motley Fool Money this coming weekend. Jenny Abramson, who I did not know at all, she is the founder of a VC firm in Washington D.C. called Rethink Impact. Such an incredibly smart woman, it was so great to hear from her. But, the news doesn't stop just because we have our annual meeting. And one of the news stories that caught our attention that we wanted to address because it's still making news is Roku (NASDAQ:ROKU). Last Thursday, Roku came out with their first quarterly report as a public company, and they did a lot better than anyone was expecting. Sales were better than expected. They still reported a loss, but it was narrower than Wall Street was expecting. And while the stock popped about 50% on Thursday, Jason, it's continued to rise. It's up another 14% today. It's almost doubled since the close of the market last Wednesday.

Moser: Well, it's all about setting the appropriate expectations.

Hill: So, is this a situation where you think a lot of analysts lump Roku and with other young public companies that IPO-ed in 2017, like Snap and Blue Apron, and just thought, "Wow, they're not a complete dumpster fire!" Is that it? Because it seems like there might be legitimate reasons for optimism.

Moser: I don't want to take anything away from their quarter or the business. I think generally speaking, it was a good quarter. They certainly bested expectations, and I can see why investors were thrilled with that, because we've been dealing with IPOs like Snap and Blue Apron that have been nothing but basically trips straight downhill since they IPO-ed. I want to be careful with Roku. It's not like this is just as clear as can be, "We missed it, we should invest in this business." Don't make that leap yet. It was a good quarter, it was a good report. You have to take it all in context there, and expectations matter. I think a lot of this has to do, honestly, with the fact that this is a stock that has such a small float out there on the market, only about 17.5 million shares floating on the open market right now. So, it's very low float. And as of October 31st, it had a very high short interest, somewhere in the neighborhood of about a third of the shares outstanding.

Muckerman: That helps. [laughs] 

Moser: Right. So, the fact that there are so few shares out there trading, and the fact that so many were shorted, it sets these pops up.

Hill: So, you have a bunch of people shorting who said, "You know what? I'm out of this one."

Moser: Exactly. So, when you have that, along with a number of people who see this report and think, "There's one IPO that's actually doing it right, let's jump on in," it can really compound that effect on the high side. And that's fine. When you look at Roku and you look at the way the business is set up, their mission is to be the TV streaming platform that connects the entire TV ecosystem. Now, that is a lofty goal. And I'm not saying they can't do it. But primarily, the way the business has gotten to where it is today is by selling those Roku TV devices. And they've done pretty well. But, when you look at it compared to Amazon (NASDAQ:AMZN), Google and Apple (NASDAQ:AAPL) collectively, Amazon, Google and Apple collectively have somewhere in the neighborhood of 50% share of those actual streaming devices, vs. Roku, which is something like 5%. Now, the flip side is, Roku is also powering a lot of these TVs themselves, so it goes beyond the device and it's actually in the TV. But, that said, they're getting into a very difficult business here. It's fine to want to be the TV streaming platform that connects the entire ecosystem, but you have Apple, Google and Amazon out there that are doing the same thing with business models that are far more diverse and far more mature, as well. And if Roku get stuck in the cycle of having to invest in original content, and we know how expensive that is because we've seen Hulu and Netflix doing the same things -- successfully, I would add --

Muckerman: And Amazon as well.

Moser: Yeah, Amazon, exactly. They're doing it successfully, but it costs a lot of money to do. So, I'm just not sure how much leeway the market gives Roku on that end. ARPU, average revenue per user, is the metric they're going to use to basically dictate their success, so we're going to want to pay attention to that. Very much, active user accounts matters. So, when you look at this business and try to analyze how well it's doing, we're going to see that ARPU metric, we're going to see how many active accounts they have, that's going to give us a good idea. But I think you have to watch this one. One quarter does not make this a good investment.

Muckerman: Yeah. When you talked about them becoming embedded in the TVs, they have partnerships with Philips and Hitachi and Sharp and more, but just because they're embedded in the TV doesn't mean anyone's actually going to be using it. They still have to use that service. There are a lot of things that come embedded in your TVs nowadays that, either you just don't realize are there, or you have a better option. It's still, in my mind, hard to beat the Amazon Fire stick, especially with everything that comes along with it if you're a Prime member -- free music, free TV, free movies, all for the price of a stick and $79 or $99 a year. So, a lot of competition out there from one of the biggest, most well-known companies in the world.

Moser: And the TV has certainly been redefined here in the last decade. A TV is a much different thing. You have a TV in your pocket. I'd be willing to bet that the average house has fewer traditional TV sets today than it did maybe even five years ago. Remember back in the day when 3D television sets were going to be the next rage.

Hill: How'd that work out?

Moser: It fell on its face in prompt order. You look at that and think, how many people were actually looking for that? And also, the fact that, TVs now are more than just TV sets, they're tablets, they're phones. It's just a very difficult market. And for a young business like Roku, they had a lot of work to do against some very, very formidable competition.

Hill: Jason Moser, Taylor Muckerman, thanks for being here, guys!

Muckerman: Thanks, Chris!

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 MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon and DIS. Jason Moser owns shares of Apple, Hasbro, and DIS. Taylor Muckerman owns shares of GOOG, Amazon, and General Electric. The Motley Fool owns shares of and recommends GOOGL, GOOG, Amazon, Apple, Hasbro, NFLX, and DIS. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.