In today's episode of Market Foolery, host Chris Hill talks with contributors Jason Moser from Million Dollar Portfolio and Taylor Muckerman from Stock Advisor Canada about a few of the market's biggest headlines.
Restaurant Brands International (QSR +2.64%) is up 7% on a not particularly great quarter -- find out why the market seems to see this as a glass-half-full situation. iRobot (IRBT +0.00%) rose 5% this morning, but only after a massive sell-off that followed some guidance that really put investors on edge. And Disney (DIS 0.76%) is making an abundance of headlines with increased park ticket prices, potential Comcast competition for Fox's (FOX +0.00%) (FOXA +0.00%) assets, and a new content licensing deal with a little Chinese company called Alibaba (BABA +1.07%). Click play to find out more.
A full transcript follows the video.
This video was recorded on Feb. 12, 2018.
Chris Hill: It's Monday, Feb. 12. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio -- it's nice to be back in the studio. We had a good time in San Francisco, but it's nice to be back in the studio with Taylor Muckerman from Stock Advisor Canada and Jason Moser from Million Dollar Portfolio. Good to see you, gents!
Jason Moser: Good to see you!
Taylor Muckerman: Good to have you two back!
Moser: That trip went so fast. Every once in a while, people say, going from the East Coast to the West Coast and back, and jet lag and all that, I didn't even have time for jet lag to come into play here, man.
Hill: It was fun on Thursday to tape almost like a commando-style Market Foolery with Michael Douglass. And shout-out once again to our producer, Dan Boyd, who has the equipment and was like, "Yeah, meet me here." But it's a little weird to be sitting in basically an offshoot of a hotel lobby in these really cushy chairs, holding the mics. So, nice to be back in this video. We have some earnings news. We have a bunch of different stories with the Walt Disney Company. We'll get to all those.
Let's start with the restaurant industry. Restaurant Brands International, with one of my favorite tickers, QSR, Restaurant Brands up more than 7% this morning. This is the parent company of Burger King and Popeyes and Tim Hortons. Help me out here, Jason, because their fourth quarter revenue was not particularly great, and their same-store sales were barely positive.
Moser: That is true. I'm not going to argue this.
Hill: Am I focusing on the negative too much?
Moser: Maybe. I mean, listen, I think we're in a market where this is a very rapidly rising tide, and I think if you're in the quick service restaurant part of the industry, as opposed to fast-casual -- I think quick service restaurants, we're seeing why these are good investments in some cases. And QSR, with the acquisition of Popeyes last year, this is a restaurant company being very much built in the vein of Yum! Brands. Now you have a company with three distinct brands with Popeyes and Tim Hortons and Burger King. The Popeyes acquisition has been integrated. There are concerns that maybe their traffic is a little bit weak. Tim Hortons, I don't know that traffic there is any more encouraging. Growth came from new stores. I think generally speaking, that's part of what has the market excited, is knowing that there are stores still to be opened here. Regardless of traffic or weak comp numbers, you can always look at that lever as a source of growth. So I think your concern is merited, but I think the market is just choosing to look at this as a glass half full.
Hill: I will, having focused on the negative so far, give them credit for the Popeyes acquisition, which seemed like a really smart acquisition at the time, and the only question -- and really, this is probably the main question any time any company in any industry acquires another, and that is, how do they bring it together? Because sometimes you have different corporate cultures. What is the strategy there? And it looks like, at least in the short-term, RBI has done a good job of bringing Popeyes under that umbrella.
Moser: I think you're right. I think they saw Popeyes as an opportunity to get into more of a chicken-specific market, and I think that's important because chicken, I think, translates very well internationally. You can find it all over the globe, and it works pretty well. We're seeing a lot of success with companies like KFC, Chick-fil-A. And a lot of people out there would love to see Chick-fil-A go public. When you look at those numbers, they don't even have to include Sunday store sales and they're still lapping a lot of their competition. There's a lot of reason to pursue that. And even McDonald's is catering its menu toward more chicken-oriented items here going into the new year.
I think the biggest concern for me with QSR, and I'm certainly not saying that this is a bad investment by any means, but the concern that I have with it that I have to come to terms with is, I'm not sure that the brands in this company's portfolio translate quite as well globally. You have Burger King, and that's kind of the Pepsi to McDonald's Coke, but certainly McDonald's has a better-known brand globally. Tim Hortons, very well-known north of the border.
Muckerman: Oh, for sure, yeah. That's their Starbucks.
Moser: And probably going to have a little bit more of a difficult time, I think, building any kind of a real presence here. And Popeyes, to a degree, maybe. But I don't know that that carries nearly of the brand power that KFC does, for example. So, it's a well-run business. I think they're doing the right thing in consolidating and finding a number of different ways to win. But I'm still not convinced of that portfolio's long-term staying power.
Hill: The product at Popeyes, though, sure is good.
Muckerman: It is. It's a hybrid Bojangles-KFC.
Moser: It is. It's nothing to sneer at. You're getting spicy chicken, you're getting biscuits, you just can't go wrong.
Muckerman: Louisiana fast.
Hill: Shares of iRobot Corporation are up about 5% this morning. With that rise, that means shares of iRobot are only down 31% in the last three days. This happened when we were out in San Francisco last week, so it sort of fell off my radar. What happened here?
Muckerman: They delivered a pretty strong quarter. Revenue was up as much as you would expect a growth stock like this to be up. They just gave a little lesser guidance than folks were expecting. Revenue still expected to grow pretty strong, but they're ramping up spending on the R&D and marketing side, acknowledging that competition is definitely creeping into their product lineup. And not only did they have a worse quarter than the previous year in China, but some Chinese products are also making their way into the United States to compete directly with iRobot has to offer. So, they recognize that. And while they do acknowledge that revenue should be up next year, they're spending accordingly to try and combat this increased competition, and hopefully derive some new product lineups, make the existing products better, and more affordable, possibly. So, definitely interesting to watch, as a first mover now being encroached upon. But they have a very strong balance sheet, so they're working from a position of strength there. And, founder-led, so you imagine that there's still some alignment there with shareholders, in terms of where the founder is trying to take this business.
Hill: Is this is a stock that is on sale? Over the last three years, it's almost doubled, right? And it has soundly beaten the market. And down 30%, when you look at that performance over the last few years -- at least, that's my default thinking. That's my default question on that. Did it just get a little too high, and now it's cheaper than it should be?
Moser: Maybe they need a robot for those that fly a little too close to the sun, getting in that predicament. Maybe that's the case here. Maybe it was something that was a little bit overvalued, so to speak. I'm a bit torn. I feel like this is a pretty good company, and obviously investors have done very well with it up until this point. My concern, we talk a lot about these device companies and how hardware is, generally speaking, a race to the bottom. Unless you're something like Intuitive Surgical, for example, that's building some hardware that really is going to be difficult to compete with -- and that's obviously partly because of the software that's going into it as well. But, iRobot, to me, doesn't seem like it's producing a product that's terribly protected. I feel like another company could go in there and try to develop something like that. And I know I've seen a commercial on TV, some Roomba competitor like iShark or something.
Muckerman: iShark, yeah. They said that's definitely, it's reached our shores and it's creeping.
Moser: And that seems like a total knockoff of the Roomba. Which, I think the Roomba is clever -- I don't think it's necessary, and it's not sufficient. And I say that having one in our home. It's nice to have, but you have to have something else. So, I feel it, maybe the pool cleaner really works magic, and I would imagine that's where they could start building more technology. I just feel like maybe this is a company that, in the near term, at least, is going to have to invest a lot more in coming up with something compelling. And if that's the case, that's great, but it's going to play out on their margin line, and their margins are already low and compressing. So I think the concerns are at least warranted.
Muckerman: When we were at CES, I was out there with David Kretzmann this year just a few weeks ago, and we were trying to speak with iRobot because we were launching our small-cap service in Canada, wanted to talk to some small-cap companies that the Fool has a history with, and they only had meeting rooms to meet with customers and clients. They weren't on the showroom floor at all. But you would have thought they were just by walking around and seeing so many competitors that look almost identical. Like, you'd almost trip over something that you think is a Roomba, come to find out it's a Chinese or South Korean imitation.
Moser: Zoomba.
Muckerman: [laughs] Exactly.
Hill: SharkNinja, is that it? I know that's one of the competitors which is, frankly, an amazing name.
Moser: And whenever I hear "ninja," I immediately go, Fruit Ninja, which is that game on your phone that's just slicing the fruit and the sound is just ... it's almost addictive. You get hungry for fruit.
Hill: Before we get into the multiple stories with the Walt Disney Company, I want to say thanks again to everyone in San Francisco, either at The Motley Fool ONE event or Wednesday night when we got together at the Golden Gate Tap Room. It was so great. It's always great to meet with members and meet with listeners. And thank you to Jay Nelton, who's both a listener and a member of Motley Fool ONE. Jay lives in Japan, and he gave me some snacks, which I should have opened in front of him. He gave them to me, they were wrapped, and I said, "What are these?" And he said, "These are," and he may have said the name and I just don't remember, but, he said, "They're nuts wrapped in seaweed. They're very tasty." And he said, "Oh, and they also go well with bourbon." Which is always great.
Moser: Well.
Muckerman: A cigar alternative.
Moser: I'm surprised that bag even made it home, to be honest.
Hill: So, I didn't open it until I got back here, and then I opened it, and I don't know why I thought, "This packaged food from Japan will obviously have some English on the packaging when I open it." I don't know why I thought that, because it didn't have any English on the outside wrapping. So, I open it up and it's a bunch of different flavors, based on the fact that these individually wrapped snacks have different colors. I have no idea what the different flavors are. I think I'm going to have to try them all, just because I'm sure one of them is probably really spicy, and we just have to roll the dice and see which one.
Muckerman: As long as you're not allergic to any particular kind of nut.
Hill: I'm not. I don't have the nut allergies, so that's good. Also, before we move on, I want to give a shout out to listener Dale Ting, who's visiting us in the house. [claps]
Muckerman: [claps] In the house.
Moser: [claps] Thanks for coming!
Hill: He's in the house on the other side of the glass with our man, Dan Boyd. He's visiting from L.A. Thanks so much for coming by. Really appreciate it, Dale!
Walt Disney Company making a bunch of headlines this morning. You can choose your own adventure, guys. Here are the headlines. They're raising ticket prices at the theme parks. They've got a content licensing deal with Alibaba. And Comcast has decided, since the recent deal that Disney made for those Fox assets hasn't closed, Comcast has decided, "We might take another run at this, because we came in with a higher bid," which by the way, if I'm a Fox investor, I'm not necessarily thrilled about the fact that, if this is true, they went with the lower bid from Disney. Jason, you get first crack. Of those three, what's the most interesting to you?
Moser: I'm going to see if I can't rip all these things off here in 10 seconds.
Muckerman: The trifecta!
Moser: Ticket prices? You're going to pay them. The licensing deal with Alibaba? Total no-brainer. And Comcast? No. Not going to happen.
Hill: Not going to happen that Comcast takes another run at it? Or, even if they do --
Moser: Even if they do, it just doesn't matter.
Hill: Your advice to Comcast is, "Save your time and money. Just let it go."
Moser: I don't know where this headline came from, but maybe --
Hill: A little place we like to call The Wall Street Journal.
Moser: Well, no, I mean, I don't know where they got it. Maybe this is just Comcast wanting to seem relevant, somewhat not totally asleep at the wheel, like, "Oh, we meant to get in there and make an offer, but we were just a little bit too late, oh well." No, I think in regard to the prices, I feel like, if I were a professor of economics, I'd always be pointing to Disney for something. There's just always a case study there. I think in the case of the parks, this is a great lesson in their pricing power and the operating leverage, because the parks, this is a big part of the business, obviously, and that's not going to change.
And I think another thing that they do, as they grow and the park segment becomes a bigger part of it and they have more offerings, as they raise ticket prices -- and it's not like they're raising ticket prices across the board -- I think in some cases, some stay the same -- it becomes very difficult as a consumer to go in there and nitpick and be a little bit more critical, particularly as they hold such power in the possession of those parks. So, I think as long as they're keeping them fresh and continuing to add to the experience, they're going to continue to bring in traffic. And they're not increasing prices willy-nilly. They're doing this based on the data that they have. And the supply and demand, as long as the demand is there, they're going to be able to command some pricing there, particularly in times where the consumers are feeling pretty good about things. And then, the operating leverage, all they have to do is just bring the people in the parks. You just keep spending more and more, and they become more and more profitable. So, I mean, they're going to do it.
Muckerman: Are you really going to tell your kid they're not worth $4 extra a day when you're already spending $115 on them? I don't think so. [laughs]
Moser: "Well, Timmy ... "
Hill: You mentioned the pricing power. I've only been to Walt Disney World a couple of times, and the last time was in 2010. And I remember talking with a cab driver about Disney's response to the Great Recession. Because it's not just that park in of itself. Obviously, there are all of the ancillary businesses that depend on that park bringing in a lot of people. For example, a cab driver, who was saying that they did a great job in '08 and '09, and it was really only in 2010 that they were starting to cut back on the deals. But he said they did a great job of, not necessarily slashing prices willy-nilly, but putting together really attractive packages so that they could keep more people coming in. And, to your point, Jason, now they're looking at the opposite side of that and saying, "We're not going to raise prices across the board, but in areas where we feel like we can pull this lever," they're going to do it.
Moser: And we discussed this. I agree, I think they did a great job through that difficult period in figuring out ways to keep customers coming in. Now, traffic wasn't as high, it just clearly wasn't. We saw that play out on the operating income line. It's also worth remembering, too, that we're going to run into another tough stretch where they're not going to be able to command pricing, and they're going to have to go back to figuring out ways to get consumers in there. So, it's a bit cyclical. But that all goes back to the beauty of this business, and they make their money in a number of different ways, including license deals like they just forged with Alibaba, right?
Muckerman: Yeah. The parks are becoming more efficient. They're becoming more technologically advanced. So, you'd imagine they'd become cheaper to run, so then the prices, if they do hit a recession, that might not hurt as badly.
Moser: That's a good point there. If you think about the way technology is going, you're going to have more automation as time goes on. Amazon is not the only one that's going to have robots running stuff. They're getting their warehouses outfitted pretty nicely. But, that technology is going to cross market segments. And whether it's hospitality or restaurants or whatever, it'll be more automation that's coming into play, which is good and bad. There are trade-offs there. In regard to the content deal with Alibaba, that's just a no-brainer. You have that content, you have a large country that wants that content --
Muckerman: More eyeballs than anywhere else.
Moser: -- and a phenomenal distribution platform in Alibaba, you have to take advantage of that. And I think with Youku, the streaming platform with Alibaba that actually will get that out to their consumers. But, yeah.
Muckerman: Interesting to see that, right, after Disney pulled their deal with Netflix in 2020, to now, not a same deal, but still trading content with them for a fee.
Moser: And Disney had their own platform at some point there that they were trying to manage. There was some question as to why they really shut that platform down. I think perhaps part of that was due to regulations within the country. But, there are going to be some markets where it's a bit more difficult to have full control, so where you can't have that full control, you forge agreements with partners. And in this case, Alibaba makes for a good one.
Muckerman: Best of the bunch over there, yeah.
Hill: Taylor Muckerman, Jason Moser. Thanks for being here, guys!
Muckerman: Cheers!
Moser: Sure.
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!
