In this episode of MarketFoolery, host Mac Greer talks with senior Motley Fool analyst Jason Moser about the day's market news. Disney (DIS +2.30%) unveiled a new streaming offering, with a price point that looks an awful lot like Netflix's (NFLX 9.71%) most popular services. What does this mean for Netflix? More importantly, what does it mean for big cable? CVS (CVS +0.66%) shares popped after the company reported earnings, but things could be even better than the market is giving CVS credit for. Things are not going nearly so well for Lumber Liquidators (LL +0.00%). As reports like their most recent one keep coming, it looks less and less like this company can shake of the health scare specter of 2015. Could this be a buying opportunity? Tune in to hear more!
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 Aug. 7, 2019.
Mac Greer: It's Wednesday, Aug. 7. Welcome to MarketFoolery! I'm Mac Greer, and I'm joined in studio by Motley Fool analyst Jason Moser. Jason, how are we doing today?
Jason Moser: Howdy! Just fine! How about you?
Greer: I'm doing good!
Moser: Excellent! I'm so glad to be in here! I really like doing the show with you!
Greer: I love doing the show with you! I've also got to give a shout out to Chris Hill for yesterday's podcast.
Moser: That was strong!
Greer: I've worked with Chris for more than 20 years. Since 1998. So I don't know why I'm still surprised by just the majesty and the brilliance that is Chris Hill, but yesterday's MarketFoolery is one of the all-time greats.
Moser: I agree totally!
Greer: If you didn't hear it, actually, just stop right now and go listen to it. And if you did listen to it, then I would encourage you to forward it to someone you love, or maybe someone you don't really love. Just forward it because it is an incredibly compelling, entertaining podcast, and it's a public service.
Moser: It is. I said something to him on Slack about that. I'm never surprised at something like that, always just proud and impressed, but never surprised because he's got it figured out.
Greer: He had me with the moose.
Moser: [laughs] That was the best part. Moose crossing!
Greer: I don't want to give anything away. OK, on that note, today's show, we're going to talk some CVS earnings. We're going to talk some Lumber Liquidators. Woof!
Moser: Of, lack of liquidators. Hey-o!
Greer: Maybe that refers to the stock price. But let's begin with Disney. Now, at the time of our taping, shares of Disney down around 5% on earnings, Jason. Disney citing the 21st Century Fox integration not going swimmingly there, and weak theme park attendance -- you don't hear that every day -- as well as their streaming investments. Those are just a few of the culprits. What do you make of Disney's downturn here?
Moser: This is the same Disney that we've been so effusive over in recent quarters. It is the same business. I think it's really easy to get on the bandwagon with Disney and love this investment because there are a lot of ways to win. But you made some very good points there, and I think these are the questions that they'll need to answer in the coming year or two, particularly in regard to the 21st Century Fox acquisition. I mean, that was a massive, massive deal. That integration is not going to come without challenges and hiccups. It is going to take some time, obviously. We won't know until we know. But they need to really convince us as investors that they can pull this off without wasting too much time and/ or money.
Greer: Yeah. And one of the problems was, speaking with 21st Century Fox, the film business, and this movie Dark Phoenix, a real bomb. Did you see Dark Phoenix?
Moser: I did not.
Greer: Did you know that Dark Phoenix was a film or movie? [laughs]
Moser: I remember reading about it somewhere at some point. It does sound like it was a 21st Century Fox side of the business, not one of the Pixar, Lucasfilm, or Marvel gems that they seem to keep on churning out time after time. The 21st Century Fox acquisition is going to give them a big portfolio of intellectual property. And that's what they do best. They take all of this property, all of these stories and characters, and they just weave gold for decades. So, I suspect we will see them continue to do that. There are going to be some bombs along the way.
To your point about parks, it was interesting to see that while park traffic was down marginally -- it was a couple of percent, maybe down -- per capita spending was up. It sounded like the park attendance was down, and that was a bit of a conscious decision on their part to ratchet back a little bit on the demand side as they're rolling out this new Star Wars dynamic to the parks.
Greer: OK, so you're not sweating the whole parks thing?
Moser: I'm not. This was a Disneyland thing, at least partly. And it was something that was more or less self-inflicted. They're working on really making sure they nail down the experience. And that is something that I appreciate. You remember a lot about Disney World and Disneyland, when you go there, and when you come back, you really remember the quality of the experience. That's one of their advantages. They want to make sure they have that down pat before they just roll this out to the masses.
Greer: Let's move on to streaming. They made a big announcement on their earnings call. Disney announcing that they will offer a bundle of their three streaming services -- Disney+, Hulu, and ESPN+ -- for $12.99 a month starting in November. Now, if that amount sounds familiar, that's because Netflix's most popular plan is also $12.99. Disney CEO Bob Iger says that's a coincidence.
Moser: Oh, I'm sure.
Greer: What do you think of the Disney bundle? That sounds pretty compelling, especially when I looked at Hulu this morning, and I looked at all the Hulu channels I could get. I'm like, "Wow, I can get CNN, I can get MSNBC, Fox News, and all the news channels. I can get ESPN. I can get all of the cable channels I want to watch." I mean, that's pretty compelling.
Moser: Yeah. For as long as we can remember, we've talked about what a great value Netflix is. And it really is. You're paying not a whole heck of a lot for a slew of content. And I think you can make that argument with this bundle as well. This is going to be a tremendous value. Even if it's not everything that you want it to be for the price that you're paying, you're going to have a very broad offering of content that spans from animated Disney content to sports to news to whatever else they have in their streaming catalog on Hulu, which is a lot. We were pretty sure they'd do some type of a bundle thing, because why wouldn't you? It really does just boil down to, how will they be able to raise prices for this over time? I think they did a very, very wise thing in offering this package for such a low price. We don't know exactly what's going to be in it, but I can guarantee you, there's going to be a lot in there. It's going to scratch a lot of different itches, so to speak. And it'll give them room to raise that price over time.
Greer: I'm both a Disney shareholder and a Netflix shareholder. As a Disney shareholder, I'm pretty fired up about this bundle. How should I feel as a Netflix shareholder? As we've talked about time and time again, a lot gets made of this Disney vs. Netflix narrative. And, yes, the price seems fairly convenient, that it's the same price as Netflix's most popular plan. Is this a threat to Netflix? Or do you think that's overblown?
Moser: I think that's overblown. I think that Netflix has done such a good job in helping spearhead this over the top movement, the streaming movement, that I think they've established themselves as a bedrock streaming position. It's a bedrock member of the services to which you'll subscribe. I think they'll be able to maintain that position for the foreseeable future. Again, it's a tremendous catalog and a lot of content there. I think that Disney has put themselves in the conversation as a bedrock holding as well.
Now, I don't think it's a threat to Netflix. The question, I think, for investors when it comes to Netflix, though, is: how much farther can Netflix raise prices now? Netflix, they've got a very big subscriber base. It's reasonable to figure that maybe that growth is going to be a little bit tougher to come by, particularly as more competition enters the fray. So, how much farther can they raise prices before people start saying, "You know what? Maybe I don't find that to be as worth it. Maybe I'll downgrade to the simplest plan they have." That, to me, could be a big problem for investors. I don't think it's a problem for Netflix the company. But, as an investor, that's my first question. The one thing we're critical of with Netflix is that they pay a lot of money every year for content. They have a whopping bill that is going to be due for the foreseeable future. And I don't know that's ever really going to slow down. I know content is a very personal thing. Some people love certain content, some people don't. Now, I personally view Netflix as having a very mediocre universe of content. And it sounds like they're going to be losing a lot of stuff here in the near future. Now, that's just an opinion. I know other people love their content. But I know I'm not the only person that shares the opinion that their content is somewhat mediocre. So then it goes back to, how much can they raise prices before people start trying to make a decision weighing one vs. the other? I don't know that they have a whole heck of a lot of room left to do that. And if they don't, that's going to be a big problem for the financials out of this business.
Greer: OK, back to Disney+, though. If Netflix ultimately is not that threatened by Disney+, if they're fighting their own fight with the cost of content, who do you think is most threatened by Disney+?
Moser: I think it's the traditional cable companies. We even saw a nice passage in the call with Bob Iger, talking about how Disney is having their cake and eating it too. It's really neat, because for the longest time, they've played on this traditional side of the equation, playing in with the cable companies, maybe an affiliate in the advertising revenue that they bring in from being a part of that cable relationship. But as time goes on, we see that cable relationship is eroding as we see more offerings, whether it's Hulu Live or YouTube Live, or whatever. Disney is now having to play both sides of the fence there, making some of their content there for cable companies available, but also building out their own offerings here with their streaming properties, whether it's Disney+ or ESPN+ or Hulu Live or Hulu. Disney really controls a lot of the power here because they can pick and choose. I think cable companies are just on the wrong side of history. They're notorious for really bad service. One of the great things about streaming is, the service is so cut and dry, simple, and easy, and the interface is so slick, the experience is so great, whether it's Netflix, HBO --
Greer: They don't give you a window of time?
Moser: [laughs] No window of time, exactly. If there's a problem, the solution is typically on the website, you just go click a button and it's fixed. I feel like the cable companies are just in this long, slow bleed. I don't know if anything brings that back. A cable company could offer me a full cable package for $50 now. They could give it to me. I don't want it because I don't want to deal with them. I don't want the cable box. I don't want all of those channels that I don't watch. The streaming environment today is just so robust and so great.
Greer: I will say, and I may have mentioned this to you, that a couple of years ago, I was part of an internal development program here at The Motley Fool, and we had the opportunity to go to Philadelphia. And we visited Comcast. And it was a really, really great visit. I will say that, we have Fios, and I used to be a Comcast subscriber. I was not in love with the service.
Moser: I've not heard a lot of good things about Comcast. [laughs]
Greer: The people were absolutely wonderful. But we were running late for this visit. We were meeting with different Comcast executives, and we were running an hour late or a few minutes late, at least, because we had different visits in the city. So, we had this great conversation with their different executives. And afterwards, I was feeling kind of emboldened --
Moser: As you are.
Greer: I should have had an editor, like I should have had many times in life. But instead, I went up to the woman who I think headed up their corporate communications, and I said, "Sorry we were late. I was tempted to tell you that we're going to be here sometime between two and six."
Moser: [laughs] Oh, my God! You said that to her?
Greer: I said that to her.
Moser: How'd that go over?
Greer: I'm luckily used to this response by now -- she kind of just weakly smiled. I don't remember an audible laugh. But here's the thing -- if you're at Comcast and you have an opportunity to make a joke about Comcast to Comcast, I think you've got to take it. Don't you?
Moser: You probably never see that opportunity again! And for most of the vitriol and sarcasm that flows through Twitter in regard to Comcast, I'm sure they see none of it, really. Man, I don't blame you at all. That's a good one!
Greer: I think if it were stand up, this would be called playing the back of the room, where all the comedians are.
Moser: Leave on a high note.
Greer: But this was actually playing to whatever is behind the back of the room.
Moser: That's so good!
Greer: I want to move on, but I do want to ask you one more question. As we know as investors, there are no guarantees. If five years from now, we're looking at Disney+ and saying, "That didn't work out, Disney really coughed up a hairball," what happened?
Moser: I don't think it'll be content, because I think they know that content is what makes it so special. So I'd have to believe it would be on the execution side, like the customer experience, the streaming experience, that they don't make that easy. Discovery needs to be good. The infrastructure needs to be good. That's one of the things Netflix has always done so well. It's just simple. It's simple to use. I think they need to make sure that it's simple to use and organized well. If it's not, then I suspect people will complain about it. Now, the flip side of that is, if it's not and people do complain about it, well, there's your opportunity to make it better. Listen to what the people are telling you to do. It's a solvable problem. But I don't think it'd be on the content side, because I'm pretty sure they know that the content's the big advantage.
Greer: Let's move on to CVS. Shares of CVS up around 5% on earnings. Jason, same-store sales rising 4.2%. CVS also raising its full-year guidance.
Moser: It's amazing to see where this company is today vs. the CVS that you and I grew up with, or maybe didn't grow up with, but knew from 10, 20 years ago. They have diversified themselves into a multi-faceted healthcare company. For the longest time, CVS was just this grody store that you would walk into to buy deodorant and Nicorette or whatever it was. Now, you can go in there and get whatever you want. But beyond just the store, they've got all of these initiatives with health hubs and Aetna, and PBM wins and Medicare Advantage lines that are to be coming online and in 2020, and the MinuteClinic strategy. They're taking this big, physical footprint of stores that they have and recognizing that they need to do more with it. We saw a long time ago the move where they stopped selling cigarettes and tobacco. That was a sign of what mattered to them and what they were trying to become. And I think they're executing there. And the Aetna acquisition, which closed at the end of last year, is working out well. Pharmacy claims processed were up 4%, prescriptions filled were up 6%. Again, they're reaching out to consumers by becoming a more comprehensive offering.
Greer: OK, that all sounds good. But then I look at the stock chart. Over the last year, shares down around 20%. The market, S&P, is roughly around where it was last August. It's been, obviously, a volatile year. So, it's lost to the market, shares down around 20% over the last year. What is going on with the stock?
Moser: I think a lot of it certainly centers around not only the bit of a nebulous healthcare environment, but the Aetna acquisition, that was a big, big acquisition. You know what it reminds me of? It reminds me of -- it all comes back to McCormick, really, I guess. [laughs] It reminds me of McCormick, the RB Foods deal. Remember when that happened? At the time, as good of a business as McCormick was, or is, the questions were fair -- are they going to be able to pull this acquisition off? Because it was a big one. And I think with CVS, that is a question that still is up for debate. And that's valid. It's not been a very long time since they made this acquisition. They really stretched themselves financially to do it. They've put share repurchases on hold. They're not going to be raising the dividend at all. So, those two things right there alone, investors are probably looking at it and thinking, "Well, it's not really going to be some big income play, and we know they're not going to be repurchasing shares. Maybe there are other, better opportunities out there." But I do think, in three years, when we look back at this, given all of these things that they're trying to do, the catalysts on the horizon between health hubs and the MinuteClinics in their foray into telemedicine with you know what company I'm getting ready to talk about, Mac --
Greer: I know.
Moser: Teladoc. And I think the Medicare Advantage lives that are coming online in 2020, that's going to be about 20 million new potential customers that they're going to be able to try to woo. So, I think in the course of the next three to five years, we're going to look back at this point in time as being a very good time to buy shares of this company.
Greer: That all sounds compelling. I have one request. They have to make their receipts shorter.
Moser: I don't understand why they have done that.
Greer: It's insane! It's ridiculous!
Moser: It is.
Greer: When I come out of there, it's like a 100-yard long receipt. I mean, how many trees is that?
Moser: It's not like management's unaware. People make fun of it all the time. It's like that's their identity, almost. "CVS! Great place, really long receipts though!" It seems like a pretty thing to change.
Greer: Charge me a nickel more not to have a long receipt. "Would you like to pay two cents more not to have a long receipt?" "Yes, yes I would. Of course!"
Moser: [laughs] "Tack it on there, I'm happy to do it."
Greer: I don't know what to do with it.
Moser: I mean, it goes straight in the garbage.
Greer: OK, let's move on. A rough day for Lumber Liquidators. Shares down around 14% on earnings, hitting a 10-year low. Yikes! They missed on profit, they missed on sales, outlook not so great. This may not even be the floor, right, for this company?
Moser: Oh, that was a good one!
Greer: Thank you!
Moser: I see what you did there. Man, this is a good show today, guys! I hope you're loving it! Man, this has really been a fascinating story to watch. This company should have recovered from the fallout from a time ago with the health concerns over the flooring.
Greer: So, 2015, 60 Minutes reports. They found that Lumber Liquidators appeared to be selling laminate flooring from China with high levels of formaldehyde. The stock took a nosedive. Lumber Liquidators ended up paying a $33 million penalty for lying to investors regarding the sale of this laminate flooring from China.
Moser: Yeah. And the good news is, really, that litigation is essentially in the rearview mirror for this company now. Like I said, they really should have been able to say, "OK, it's in the rearview. Now we're moving forward. This is the plan to recover." Unfortunately, what we've seen is, they have not been able to recover. That's for a number of reasons. It's a difficult business. They're essentially just selling a commodity good, and they're not the only ones that sell it. I mean, you're looking at Home Depot and Lowe's as massive competitors in the space that sell basically the same stuff. We had our basement finished at our house a couple of years ago, and we're going through, looking at all the flooring options, and we never even considered Lumber Liquidators. And it wasn't because of the litigation or the health scare. We just found better stuff elsewhere for the same price.
Greer: Teladoc. McCormick?
Moser: That's called diworsification. If they get into that, I'm selling those companies immediately. [laughs] I mean, it is just a very difficult business. It's not one where they really have any pricing power. Their brand is in the toilet, unfortunately. And they've not been able to get it back. So, then you hear on a call -- and I hate hearing this phrase -- "Our transformation plan remains on track." Like, really? Show me how! And they really can't point to anything because traffic is still down. Now, part of that is because of this big, secular shift away from bamboo flooring and more toward other options, less expensive, more durable options. They've been tagged by that bamboo problem a little bit. They are certainly faced with a China tariffs problem. They are working on trying to bring their sourcing in China down from around a 50% number to like a 40% to 45% number. But I don't know that's going to have a really material impact on the business at all. The problem is, that meager top line growth was really thanks to the opening of new stores. They opened three stores, they closed one, so they net two new stores. They're talking about wanting to open 10 to 15 this year. I think that's probably too much, actually.
I don't know that the solution is simple for this company. I don't know that there necessarily is one. It's not to say that the stock can't go up from here. It's probably kind of a dirty value play. But I look it out and there's just way better businesses and better ideas out there. I would look at this one and just immediately take a pass.
Greer: OK, now it's time for the desert island question. You're on a desert island. Over the next five years --
Moser: Teladoc.
Greer: I think you --
Moser: McCormick, too. You have to exclude those two.
Greer: Exactly. I think I know where you're going with this. You're on a desert island, and over the next five years, you can buy either Disney, CVS, or Lumber Liquidators. A bit of a contrarian play, I guess, if you went with that last one. Where are you going?
Moser: Hmm...
Greer: I'm surprised you're hesitating. I'm already surprised!
Moser: You know, I really love healthcare, and given where CVS' stock is in relation to... I'm going to go CVS.
Greer: Interesting!
Moser: Let's keep track of that. You know I love Disney. This is not a knock against Disney.
Greer: I thought you were excited about the bundle.
Moser: I am very excited about the bundle. Listen, I am going to have that bundle. Don't get me wrong, Mac. I love that idea! But I feel like the pessimism out there on CVS right now is a little bit unwarranted. And I think over the course of the next three to five years, CVS is going to outperform Disney.
Greer: And if they cut down on the length of their receipts, that's a windfall.
Moser: That's immediately a full 100 basis margin -- easily, on margin.
Greer: That's their Disney+. You heard it here first, that's their bundle.
Moser: There you go!
Greer: As always, people on the show 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. Jason Moser, thanks for joining me!
Moser: Thank you!
Greer: And all of you, thanks for listening! That's it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!
