In this MarketFoolery podcast, host Chris Hill is joined once again by Million Dollar Portfolio's Jason Moser and Stock Advisor Canada's Taylor Muckerman to weigh in on a trio of interesting business news items. They lead off with a particularly bad quarterly report from toymaker Hasbro (HAS 0.59%): Was its sharp first-quarter underperformance a short-term issue prompted by the Toys R Us bankruptcy or a sign of deeper trouble?
Next, they dig into the oil services segment, where McDermott International (MDR) shares jumped after the company rejected a takeover bid. Finally, they consider the latest from much-admired healthcare products and services company Henry Schein (HSIC -0.21%), which is spinning off its animal health segment. And just for fun, they pick a few good stocks for the newborn English prince's long-term investing portfolio.
A full transcript follows the video.
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This video was recorded on April 23, 2018.
Chris Hill: It's Monday, April 23rd. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, senior analysts Taylor Muckerman and Jason Moser. Happy Monday, gents!
Jason Moser: Happy Monday!
Hill: It's finally starting to feel nice out there.
Moser: Little bit.
Taylor Muckerman: Spring is alive and well.
Hill: If it weren't for the pollen, I'd say let's have class outside today. We have a bunch of things to get to. We have toys, we have pets, we have oil. Let's start with the toys.
Hasbro's first quarter revenue came in much lower than expected, and not unfairly, Jason, they blamed -- I don't want to say blamed, yeah, let's say blamed -- they blamed Toys R Us for going out of business. And that shouldn't be a surprise to anyone who's paying attention to the toy business. We saw this in sports apparel when Sports Authority went under. We knew this was going to happen with Hasbro. The stock was actually up a little bit this morning. It sort of opened down, but then bounced back up. So, you tell me. You know this company better than I do. How bad was this quarter? Was this a speed bump or was this like, ooh, they might have some problems here?
Moser: I saw this release first thing this morning. I'll go ahead and read to you what I tweeted out first thing this morning. I said, "Hasbro getting pounded this AM makes sense. It may be the leader in the space, but the space itself is in rough shape. With Toys R Us going under the market is undergoing a shift of epic proportions. That said, it's still a good business. This is not another Mattel (MAT 0.28%) in the making." The stock was down like 9% at that point, and fast forward to now, it's about 2% up. So, go figure, right?
It was not a good quarter, I mean, by pretty much every measure. They obviously missed on the expectations side. But, when you look at franchise brands and partner brands, all of that was down. The Entertainment Licensing division was up 21%, but that's still a very tiny portion of the business. The key to it all, Chris, was in the call, and management really, really saved this one in the maintaining of the guidance in the call, that optimistic midterm outlook, and confirming that they do still see the company bringing in $600-700 million in operating cash flow this year. That's what turned things around. Now, that means they have to do it. It's one thing to say it, it's another thing to do it. And they have their challenges. But, that's what saved it.
Hill: You mentioned Mattel. We talked about this on Motley Fool Money last weekend. I'm still a little surprised at Mattel's CEO, Margo Georgiadis, she's been there just over a year and just decided to bail.
Moser: I would imagine, too, she's not someone who's really stuck for cash at this point. With a Google background, and being hired --
Hill: That's right, she came over to Mattel from Google.
Moser: -- as a CEO, I mean, she's probably financially set, where she can make some of her own decisions. So, I have to imagine that Mattel for her became a more stressful job as the days wore on. It was already a company with a serious culture crisis, and that was one of her mandates, was getting in there and fixing that. But it's also a company that's facing a lot of the same challenges Hasbro is facing in this changing toy market, it's just that Hasbro has far more valuable properties and more of those properties, better leadership, better culture. So, really, Mattel is just bad in every sense of the word. It sounds like she had a great opportunity to go do something else that was a bit more in line with her interests.
Hill: And maybe it was stress, but look, we've seen situations where CEOs are brought in for a particular reason, and that reason is, "This company needs to be sold." And when she got to Mattel, it was clear that her focus was, "I'm going to try to turn this company around." So, it may have been a situation where the board, quietly or not so quietly, said, "Hey, look, the exit strategy for our company is to sell to Hasbro or someone else," and that may have been the impetus for her to leave, for her to say, "That's not why I came here."
Muckerman: She might not have gotten a realistic job preview when she accepted.
Hill: Yeah, let someone else do that.
Moser: The more I think about this, I think Mattel is stuck in a real bind here. They need a deal. I just don't think there's any other way out for this company. The balance sheet is becoming a big problem and they just don't have that top line growth there. Now, with that said, you have to look at the other side of the coin there and think, well, who wants Mattel, and why do they really want it? Because we were seeing the same thing with LeapFrog not all that long ago. "Oh, it'll just get acquired." I'm like, "Wait a minute, that's actually a pretty crappy business. I don't know why someone would want to acquire it." So, it's one thing to say, "A deal is in the making," but it's another one to sit there and try to add it all up and understand why another company may want it. And to me, I look at Mattel and I think, "Man, that'd be a lot of headaches for Hasbro." So, if they do make a deal, and they certainly could, that's going to work out in Hasbro's favor, because Mattel is going to be a very desperate seller, and Hasbro could pretty much just get it for a song.
Muckerman: Depending on the valuation, of course, would that change your idea about Hasbro, your stock thesis? If they did it that way?
Moser: You know, I would actually look at Hasbro with a bit more skepticism, to be quite honest with you, because at least you know they're bringing in a very troubled organization with some less-than-current assets. I'd be a little concerned, honestly, if they did buy Mattel.
Hill: Let's move on to McDermott International, which is an oilfields services company, and the stock is up about 15% this morning after McDermott rejected a takeover bid. I take it, Taylor, you agree this was the right move for them.
Muckerman: It's kind of interesting when you look at what's going on with McDermott International, because last December, they made a bid to acquire Chicago Bridge & Iron (CBI), which is in the energy industry but it's a completely different business lineup than what you see at McDermott. McDermott focuses more on the offshore space -- entirely, in fact. Chicago Bridge & Iron deals with more of the power plant infrastructure in the United States. So, I don't see much overlap there.
It's kind of interesting. The big sell there for investors was that McDermott's CEO came into McDermott, turned that company around. He thinks he can do the same thing for underwater projects at Chicago Bridge & Iron. So, as a shareholder, you're wondering, "Well, do I really want to take on a potential flop in Chicago Bridge & Iron? Or do I want to be acquired at a 16% premium by a company that's in the same business that we are," which is Subsea 7, offshore business? If they did join forces, they would have a much broader geographic portfolio. So, you look at, 90% of McDermott's revenue, coming from the Middle East and Asia. 85% of Subsea's revenue, coming from the North Sea, Africa and the Americas. So, I see a much more simplistic tie up between those two companies than I do with Chicago Bridge & Iron.
It's yet to be seen if Subsea 7 is going to bump up the bid price. But, they only have until May 2nd to do so, because that's when the vote for McDermott's acquisition of Chicago Bridge & Iron takes place. So, for me personally, when you look at this, the Subsea deal needs an industry turnaround, because offshore oil and gas has really been on the back burner as oil has turned around, because it's much more expensive to produce offshore oil. With the Chicago Bridge & Iron deal, you need an industry turnaround and a company turnaround, so, much more complicated there, in my mind.
Hill: So, Chicago Bridge & Iron is not actually in the business of building bridges with iron?
Muckerman: [laughs] No. Maybe they were at one point, but no longer.
Hill: Really quick, because Earningspalooza is really heating up, and tomorrow morning, Caterpillar is reporting earnings. Caterpillar's stock got an upgrade this morning. And by the way, after a rough stretch, this is a stock that has finally turned the corner over the last year. It's up somewhere in the neighborhood of 45% or so. What is one thing people should watch for Caterpillar? Because that's in that small group of so-called bellwether stocks.
Muckerman: For sure. I think the one thing you want to hear out of this company is some thoughts on tariffs or increased trade angst between the U.S. and China. Obviously, steel, a very big input cost for Caterpillar. And China, the No. 1 demand center for their equipment. So, if a tiff continues to grow between the two countries on the trade side of things, that could be a cause for a pause for investors, especially if the stock has doubled over the last two years. Still has a pretty significant load of debt, but this is a cash flow machine, so two different sides of the coin there.
Hill: Interesting move in, broadly, the health and welfare businesses. Henry Schein is spinning off its animal health business, and it's going to merge with Vets First Choice, which is a provider of services to veterinary practices. And the new combination is going to be an independent publicly traded company called Vets First Corp. Jason, I thought of you immediately when I saw this story.
Moser: [laughs] Because my house is overrun with animals?
Hill: I'm not going to say that.
Moser: It is.
Hill: But, we've talked before about this industry, the pet care industry, and I know it's one that you're watching increasingly. And it seems like kind of a win-win here. It seems like this is a good move for Henry Schein, which is basically in the dental --
Moser: It's dental equipment, yeah.
Hill: Dental equipment. So, they focus their business, get back to their core competency. But, it also seems like this new combined entity could do well on its own.
Moser: I think it could. The companion animal and equine market is such an attractive opportunity for so many reasons. We talk about it all the time. People will do anything for their pets. I mean, I can speak to that from experience. It's a business that's not fraught with a bunch of red tape and insurance, typically a cash business. And the dynamics, the pet ownership statistics, just tell us that more and more people are getting pets as time goes on.
So, for me, I think you made a good observation. I think probably, from Schein's perspective, it gives them an opportunity to monetize what's been a pretty good business to this point at a good price, but maybe now it's a little bit out of their wheelhouse when you look at other companies out there like Vets First Choice and Idexx Laboratories and others that we've spoken about. To give a little context on the animal health unit, they brought in about $3.5 billion in sales in 2017 for Henry Schein, so it's a meaningful business.
For me, the story behind all of this is almost as attractive as the actual public company that's going to come from this, because Vets First Choice was founded in 2010 by Ben Shaw. Ben Shaw is the son of David Shaw. Now, who's David Shaw, you ask? Well, Chris, I'm going to tell you. David Shaw is the guy who happened to be the founder of Idexx Laboratories. So, there is a neat story here just in the connection of people behind this deal and their history in this market.
It means that they're going to have some pretty wicked competition there in the form of Idexx Laboratories. Mars, obviously, as we know, owns a big presence in the space now. MWI Veterinary Supply, which was acquired a few years back, and I forget the name of the private entity that bought it out, but MWI was a distributor that I liked a lot. They're going to all be competing on the same playing field now. I think this opens up an opportunity, though, in a very attractive market opportunity, if it turns out to be a well-run business, and there are indicators that tell us it could be, given the experience of leadership.
Hill: For a second there, I thought you were going to there was a relationship to Charles Shaw, which is the wine at Trader Joe's. Two Buck Chuck.
Moser: Ah. Well, you're speaking a little bit beyond my scope of jurisdiction here, Chris. I'm a beer guy, remember.
Hill: [laughs] Before we wrap up, a quick note of congratulations to Prince William and The Duchess of Cambridge on the arrival of their baby boy. [claps] 8 lb 7 oz. This is their third kid. This kid's never going to be sitting on the throne.
Hill: This kid's never going to be king.
Moser: Well --
Muckerman: Depends on how twisted he is when he grows up. You know?
Hill: You never know.
Moser: Crazy stuff happens.
Hill: But right now, fifth in line for the throne. Not that he's going to be hurting for money. Not that it's not going to be a pretty sweet gig, because I think, the thing about being prince --
Muckerman: Is that it's for life? [laughs]
Hill: Well, yeah, probably.
Moser: Nice title to have. It's not like you have to go to school to get it, really. Just, he's a prince.
Muckerman: Exactly, it's free.
Hill: Do you remember the HBO show Entourage?
Moser: Oh, yeah.
Hill: I remember watching a few episodes of that. Not a lot, just a few episodes. And there's the character Turtle. And the one thing I remember from that show is Turtle saying to one of the guys, "Yeah, I'm going to be living like a prince." And one of the other guys said, "You mean living like a king?" And Turtle says, "No, no. You don't want to be the king. Everybody's trying to kill the king."
Moser: That's right.
Hill: "You want to be the prince, because the prince just sort of rolls through life. And when he meets a woman, he says to her, 'Hey, baby, someday I'm going to be king.' But no one's trying to kill the prince." Let's give the kid a stock. Again, he's going to be fine, he's going to be set, but if he decides to dabble in investing, what's a stock for a newborn baby?
Moser: I mean, I was actually going to go with Henry Schein, but I don't want people to accuse me of making underhanded jabs because they're a dental company and maybe perhaps I'm saying that he needs dental work or whatever. Obviously he doesn't even have any teeth yet. Henry Schein could be a good one, in all honesty. But, let's also perhaps consider how we learned about this child in the first place. He's young, he has an appetite for risk, so why not pick up a couple of shares of Twitter? It seems like they have things going in the right direction. We'll find out more on Wednesday.
Muckerman: Hopefully he picks up a market-moving amount and drive that share price up a little bit. I like Starbucks for the long-term play here. And, obviously, tea drinkers in England. It's a company that's been in the news lately for something you don't want to see as an investor, but I think that's going to pass over and it'll be back to business as usual for Starbucks for the next decade or so.
Hill: Taylor Muckerman, Jason Moser, thanks for being here, guys!
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. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!