Coca-Cola and Hasbro Shareholders Are Smiling, but Harley's Still Decelerating

We're in the heart of earnings season, and every day brings a new set of surprises for investors. On Tuesday, some of the most interesting details came from a trio of quintessentially American companies: Hasbro (HAS 12.25%), Coca-Cola (KO 0.25%), and Harley-Davidson (HOG -0.73%). The first two delivered solid beats, and the market applauded: Coke stock hit a new high, and Hasbro popped by as much as 10% on the day. But woe is Harley -- the motorcycle maker's profits were almost 20% lower than a year ago, which unfortunately wasn't much of a surprise at all.

In this MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker dig into the earnings reports, consider the factors controlling the futures of these companies, and weigh their investment theses. 

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 23, 2019.

Chris Hill: It's Tuesday, July 23rd. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from Motley Fool Asset Management Funds, Bill Barker. Good to see you! Thanks for making the trip!

Bill Barker: Thank you! Thanks for having me!

Hill: I just want to say that Bill didn't make the trip from his home, he was driving back from Philadelphia. This is literally like getting off the road to come into the studio. Thank you for that! And what a day for it because we've got the latest results from three quintessential American brands -- Hasbro, Harley-Davidson. We're going to start with Coca-Cola. Second-quarter profits and revenue came in higher than expected. Coca-Cola raised guidance. The stock is up 5% and hitting a new all-time high. This was really good for Coca-Cola.

Barker: Yeah, another good quarter. One thinks of it as quintessential American brand. And certainly you can look at some of its performance that way. But the thing you've really got to be excited for is the coffee. That's less U.S.-based than foreign. As a global brand, having acquired Costa Coffee, a $5 billion acquisition that closed in January, and that looks like that's going to be a potential major growth engine for Coke.

Hill: It's interesting because the organic growth for Coca-Cola in this latest quarter was a little bit better than expected. This is one of those companies that's so big that any time you can move organic growth 1% higher, 2% higher, something like that, it really helps out. For a long time, Coca-Cola, Pepsi, a lot of the headlines around these companies have been the acquisitions that they've made going out to buy growth. Obviously, Costa Coffee was a step in that direction. But the organic growth for Coca-Cola was a nice surprise, I thought.

Barker: Yeah, plus 6% for the quarter. Five percent guidance for the year, up from 4%. That includes a little bit of inflation, so the organic growth, still pretty good. Potentially more acquisitions on the way. We'll see. This was a really good quarter. It is so big that there aren't major surprises, typically.

Hill: There really shouldn't be.

Barker: There shouldn't be because it's got so many different brands, and they don't move dramatically in short periods of time. A surprise of this magnitude is about as much as you can hope for.

Hill: I think if you're a Coca-Cola shareholder, you're also hoping for a couple of more quarters like this. Not necessarily knocking the cover off the ball, but doing a little bit better than expected. Over the last five years, if you're a shareholder of Coca-Cola, you've made money, but you're looking at Pepsi and thinking, "I'd rather have owned that stock for the last five years," because it's basically doubled what Coca-Cola has done. If Costa Coffee can continue to be a growth story for them, then maybe things are turning in their direction.

Barker: Coke Zero, I guess, has now had three years of double-digit volume growth. That's a part of the growth story here as well. But really, how can you compete with coffee when it comes to growth possibilities?

Hill: You can't. It's a mistake to.

Barker: Even if you're Coke. You look and you finally say, "What if we got into coffee?" If only they'd done this seriously 20-some years ago. You can look at the Costa acquisition, it's not well-known to people in the U.S., of course. But it's the second-largest coffee house in the world. 

Hill: In the world? I thought it was just the second-largest in Europe. 

Barker: It is the largest in England, and I believe it's the second-largest in the world. I mean, it's a distant second, but nevertheless, it's bigger than you think, is what it comes down to. And now that it's got the power and the capital of Coke behind it, growth in places that it had not yet gotten to in a major way, like China, becomes more of a possibility.

Hill: Last week, Rich Duprey, who's one of our writers at fool.com, published an article under the headline, "How Bad Will Harley-Davidson's Second Quarter Report Be?" We got the answer to that. It's pretty bad. Profits for Harley-Davidson came in almost 20% lower than a year ago. Is there any silver lining to this quarter?

Barker: Nope.

Hill: Well, OK, we can...

Barker: [laughs] The stock is up a tiny bit today. Not a lot was expected, as you can tell from the title of that story. And not a lot was delivered. I haven't read the conference call. Apparently that is being better-received than the numbers. The stock has jumped around from $33-$35 lately. It's at $35 at the moment. Maybe it'll settle at $36, $33 by the end of the day. The longer term is much more relevant. It's a stock which has been flat for the last year, and has been down over the last three, five years.

Hill: Yeah, I haven't seen the call either, but I'm assuming that Harley-Davidson's management is, well, saying things that are giving traders on Wall Street reason for optimism, because the stock opened at $33, and now it's about $36 a share. Is this a value stock at this point? Is this one of those things where if you think, I'll buy a couple of shares because I think they can turn it around -- right now, it's hard for me to imagine that the near-term picture for Harley-Davidson is a pretty one.

Barker: In answering, "Is it a value stock?" I would focus on one of the words that you used following that -- turnaround. Do you believe that there's a turnaround here? Where's the turnaround going to come from? Is it going to come from international, which had been a pretty decent part of the story for Harley over the last couple of years? It's run into a couple of problems. One is tariffs imposed by Europe. It has gotten an end around on that by opening up manufacturing in Thailand in order to supply to Europe. It's gotten approvals for getting out of the bulk of the tariff situation that way there. However, it's harder and harder to define what Harley is exactly as it gets a little bit away from the, "This is a U.S. iconic brand, everything's built in the U.S." Now it's not all built in the U.S. Having moved some of its manufacturing offshore, it has found the wrath of Trump, who has sort of said, "Why not just boycot Harley if they're going to build any of their bikes outside of the country?" They can't win with a business strategy. There's no foreseeable route currently to where they can or should build their bikes to satisfy everybody.

Hill: We're going to do a little boots on the ground research by going to our man behind the glass, producer Dan Boyd. Dan, you bought a motorcycle in the last six months or so, didn't you? 

Dan Boyd: Yes, I did, Chris. I bought one in January. But I didn't buy a Harley-Davidson.

Hill: Do tell. 

Boyd: I bought a Honda, a Honda Rebel 500, because I'm a beginner when it comes to being a motorcycle rider, so I didn't want to buy a huge, super fast, super expensive bike and kill myself. I wanted to buy something that would be smaller, manageable, easy to work on, and something where I could ease myself into being a motorcycle rider. I knew going into it I wasn't going to buy a Harley because Harleys are not exactly the byword for reliability or fuel efficiency. They are way more expensive than imported bikes of the same size. And then there's the Harley Fan Club, which is...hostile. Just, generally hostile. And I'm sorry, I'm probably alienating a few listeners here saying that.

Hill: Certainly the ones who own Harleys.

Barker: Hostile to who?

Boyd: Hostile to everyone. Oh, man! This is something that, as somebody who rides an important bike, people who ride Harleys, if they see somebody who's not riding a Harley, they are upset. But then there's subsets of Harleys that make other Harley riders upset also. Like, smaller Harleys are called Sportsters, and they're fine bikes, and a lot of times you don't need a big, giant, 1,100-pound bike to get around a city or something. But Harley riders who see Sportsters call them...well, they use derogatory terminology that I'm not going to use on the podcast.

Hill: Thank you!

Boyd: There are some very rabid fans of Harley. And Harley, for a long time, was a byword for individualism, for rebellion, for going against the grain. But now it's completely flipped. Harley is this big, corporate monstrosity who represents all these old, traditional values and stuff. 

Motorcycling in general is in trouble. The European Commission just released a report saying that motorcycles are one of the least socially responsible ways to get around in Europe. There's a lot of disputes about that, but we don't have to go into that now. But, motorcycle sales are down across everything. Motorcycle riding, new riders, new bike sales, it's down, it's a worldwide trend. If you're going to be selling bikes like Harley does, that are more expensive than the competition, even though they're domestically made, it's going to turn off a lot of new riders from buying Harleys, because they're harder to get.

Hill: I remember talking to you back then, and I remember you talking to other people at the company who own motorcycles, basically getting their two cents. And I assumed at the time you were open to buying a Harley just because of my ignorance about motorcycles in general and the brand options, that sort of thing. But it sounds like, right out of the gate, you were like, "No, I'm going to talk to people here at the Fool, get their two cents, but I've already checked Harley off my list."

Boyd: For the most part, yeah, that's correct. If I had found a crazy good deal on Craigslist for a used Harley or something, maybe I would have done that. But I didn't. I wasn't about to buy a new Harley when I could buy the same -- the Harley Sportster 500 or 550 or something, I forget what it's called, is something like $1,000 or $1,200 more than the Rebel 500 that I got. And I actually got my Rebel on sale, too. I ended up saving like $2,000 instead of buying a Harley there. And if I'm going to buy a beginner motorcycle, which is what these smaller bikes are meant to do, I'm not going to spend $7,000 on it. I'll go with a $5,000 -- we're talking new, of course. Used bikes are way cheaper, but I wanted a new one. I don't know, it seems to me like it makes a lot of sense that their guidance is down, that their profits are down, their quarter was not that great.

Hill: I already was not optimistic about Harley's near-term future when you finished your analysis, Bill. But now, after hearing Dan, I think they might be in even more trouble. I know it's a data set of one, but that's some user experience that...I don't know, that just doesn't look good for Harley.

Barker: In Harley's defense, in terms of being a huge corporation, they've been getting smaller for a long time now. Maybe they sell as much product today as they sold 15 years ago, and they've got half the number of shares. So, in a sense, they are getting to where Dan wants to see them, which is more of a niche brand.

Boyd: I just want to say to any listeners out there, just because I didn't buy a Harley, just because I'm not a big fan of Harley-Davidson, it's not a personal attack. If you have a Harley, I am not saying that you're a bad person. I'm not saying that you're a hostile person. I'm just saying that there is somewhat of a stigma. 

Barker: Dan is not looking to fight you, is what you're saying.

Boyd: I would agree with that, yes.

Hill: I will say that our email address is [email protected], for anyone who wants to weigh in on any issue. 

Shares of Hasbro up 9% this morning after second-quarter profits came in much higher than expected. Avengers: Endgame is the biggest hit at the box office, and Hasbro has the licensing deal for the Marvel characters. I think you can pretty much draw a straight line between those two facts to see why their stock is doing as well as it is.

Barker: You can draw that line. There are a number of different elements, all of which seem to be going right. One is that Hasbro is beginning to source more from outside China, which is something the market wants to hear because the trade war with China continues. Any additional options other than building everything in China becomes more valuable. As they have taken a little time to get that ramped up, nevertheless, their margins are still improving. They're going about this in a way that is friendly to the bottom line. 

As much as the Avengers highlight was brought up, the partnership revenue was up about 3%. Of course, that's comparing to last year. There are blockbuster movies coming out from Disney all the time. Hasbro is fortunate to be the recipient of, more or less, the merchandise for all of them. Frozen coming up, Star Wars later in the year, all the Marvel stuff. They're always lapping something pretty good. So that wasn't as much of the driver as lapping a couple of problems. One, Toys R Us being a big problem last year, and having gotten more or less past that. And, the China situation, on top of increased demand for a lot of their product.

Hill: You say they're the recipient. Let's be clear. They're the recipient of these licensing deals because they pay The Walt Disney Company hundreds of millions of dollars for the right to license.

Barker: Yes. And those deals are working out very well for them, not only right now, but in the recent past and in the slightly more distant past. Disney has cornered the market on blockbusters at the moment. The rest of the year is shaping up to look just as good. Revenue worldwide up 11% adjusted for foreign currency. 9% when you don't make that adjustment. Eleven percent growth for this company is pretty good.

Hill: Absolutely. I was a little surprised, maybe I shouldn't be, when I went to Hasbro's website, I was not surprised to see right there at the top there, they're promoting Marvel characters. Spider Man tied into the latest movie, Far From Home. But then, you scroll down, and they're highlighting their other brands, including board games. I was not aware that Hasbro owned Trivial Pursuit. Classic board games, Trivial Pursuit, Cranium, Risk. Like, there you go. I don't know who they're marketing to there. I feel like the board game -- I'm probably going to get in trouble with David Gardner with this -- industry is a niche industry. Maybe it's just, there are good margins on the board games. They have a long shelf life. Once you make them, they probably don't cost much. I don't know. I'm really showing my ignorance about board games here.

Barker: Yeah, and I won't be much less ignorant, but hopefully somewhat less ignorant. It's s an easy act to follow, is my point. Monopoly, classic board game, one of Hasbro's brands. Magic the Gathering, Play Doh, were all highlighted as some of their franchise brands. These things have staying power for many, many decades, and can translate into things that are not strictly the board game that you are thinking of, but also into esports in some ways. Magic the Gathering, a better translation of that than Monopoly. Again, probably we should hand this show over to Dan, who can do more justice to this topic than we can. What is the Magic the Gathering status for e-games with you? Esports, esports. Let's elevate this to where the terminology is being used now.

Boyd: Well, esports, as we know, is getting bigger and bigger as time goes on. Hundreds of millions of people tuned in to watch the largest esports tournaments or shows or whatever you want to call them. That's only growing. As far as physical board games and stuff, are you asking me to speculate on the future? One, I'm not qualified for that. Two, I can't imagine that selling more and more copies of Monopoly or Trivial Pursuit is going to bring Hasbro to the heights of Apple or Google or something.

Hill: Yeah, no, if you're a Hasbro shareholder, don't be looking to the board game section of the business to be the growth driver.

Barker: No, but the board game section of the business has brands that extend into different realms, whether its Monopoly and being able to use that brand to sell more things at McDonald's or whatever --

Boyd: Who's buying board games now?

Barker: But the value created by the board game, which can then be extended into other places. Aren't they making a Monopoly movie? I mean, you can see the plot, immediately.

Boyd: Wasn't Wall Street from the '80s, that movie with Charlie Sheen, basically a Monopoly movie?

Hill: Actually, no. That's not a Monopoly movie.

Boyd: But, you know, the spirit of it.

Barker: Starring Kevin Hart.

Hill: Really?

Barker: Yeah. You thought I was making stuff up?

Hill: Well, it wouldn't be the first time on the show you've done that.

Barker: [laughs] Sorry, he's rumored. I'm looking at IMDd. But it seems a natural for the plot of the movie that you're imagining here.

Hill: Kevin Hart is one of those people where, if he's in a movie, I'm automatically more interested to see the movie. It doesn't mean I necessarily go, but it moves the needle in the right direction. 

I will just say that my favorite memory of board games was about 20 years ago, one of my brothers, who is very good at board games, he's very analytical, he's very good at board games, he rented a beach house one summer and invited people to stop in. So, there was this afternoon where he and our other brother were the only people in the house. And we thought, "Let's see if there are any board games in this beach house." And the only board game was Candyland, a game which requires no skill whatsoever. What was great was, my brother, who's really good at board games, didn't win a single time. We played like five times. I won a couple, my other brother won a few times. It was a fun moment. Dan?

Boyd: I just wanted to say one last thing --

Hill: One more apology to Harley?

Boyd: No, I've already apologized to them. I do play a lot of board games with friends and stuff, but the board games that we play aren't from Hasbro or any of the big companies that make them. They're generally indie board games. And most of those these days are built on like Kickstarter and Indiegogo. Somebody will create a game and then record a video about it, put it on Kickstarter, and sell it for like $60, or more for more special editions and stuff. And you get a bunch of people together, and then these games come out. I don't know, because I haven't done any research about this, but it seems to me that the board game space is getting more and more competitive as crowdfunding, as the internet and the connectivity that everybody's working with -- I just feel like board games is a space that, for a large company like that, sure, they probably have some game masters employed there that can make a good new game that people want to play, but it has to be so, so competitive now. 

Hill: Before we wrap up, Dan, in terms of Twitter outrage and email outrage, do you think we'll get more comments about the Harley conversation or the board game conversation?

Boyd: I don't know. Excited to find out, though!

Hill: Yeah. We'll find out in the next couple of days.

Barker: You're turning to me. 

Hill: You looked like you were working on something. 

Barker: Movies based on board games. I was trying to determine, and this is from a search, claiming that Jumanji was a board game, but it was a book. This is just a flaw in the internet algorithm.

Hill: You're saying the internet has bad information on it? That's crazy! You can read more from Bill Barker and his colleagues, go to mfamfunds.com. Check out what they've got! Thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interest 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!