In this episode of MarketFoolery, host Mac Greer chats with analysts Ron Gross and Andy Cross about some recent business news. Under Armour's (NYSE:UA) (NYSE:UAA) CEO is stepping down and handing the reins to COO Patrik Frisk. What comes next for the company? Biogen (NASDAQ:BIIB) shook up the medical world by announcing its plans to file with the FDA for a new Alzheimer's drug -- one that the company seemed to have abandoned just earlier this year. Hasbro (NASDAQ:HAS) reported earnings, and its performance didn't look nearly as bad as the stock's 14% drop would indicate. Maybe this is a buying opportunity? Tune in to hear more!
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This video was recorded on Oct. 22, 2019.
Mac Greer: It's Tuesday, October 22nd. Welcome to MarketFoolery! I'm Mac Greer and I am joined in studio by Motley Fool analysts Andy Cross and Ron Gross. Gentlemen, how are we doing?
Andy Cross: Doing great!
Ron Gross: We're doing great! Excited for the series, Mac?
Greer: I am excited for the series! I'm a bit of an island here because I'm an Astros fan, being from Houston.
Gross: You stick to your guns, my friend.
Greer: I am. I'm very, very excited! Ask me after games one and two, I'll get back to you.
Gross: Will do!
Greer: Feeling cautiously optimistic. Speaking of cautious optimism, some encouraging news, potentially, on the Alzheimer's front. We're going to talk about that because it is a big, big day for Biogen because of that. And, well, let's just say no fun and no games for Hasbro today, down on earnings. We'll get to that as well.
But we kick things off with big news from Under Armour. Chairman and CEO Kevin Plank, stepping down as CEO on January 1st. He will move into the role of executive chairman. Now, COO Patrik Frisk will become president and CEO. Guys, I want to talk about this. On CNBC this morning, Plank said that this was his decision and said that Under Armour is moving from defense to offense. Shares up a bit on the news.
Cross: Not surprising they were up. First of all, Mac, Kevin Plank, who's the founder of Under Armour, was the only one who's going to remove himself from the CEO role because he controls about 65% of the voting stock. So, for this to happen, it has to be his decision to go. I think the stock is up because they've been talking about this transformation at Under Armour for the last few years. They said they have a five-year plan last year. Patrik Frisk, they brought in, he has loads of experience in retail and apparel, coming from VF Corp and Aldo. He has this experience on how to manage a business. I think they brought him in to help elevate this transformation that they needed to make because they have been struggling. Under Armour has lost a little bit of its mojo the last few years. The stock had done so well since it came public, and the business had done well, was growing north of 20%, 30% at some points when you look back years ago. That's really struggled, especially in North America, which is by far the largest market.
I think Kevin Plank, who we have to say, the past couple of years, he's gotten under fire for some situations about a little bit of a bro culture that's been pervasive over at Under Armour. I think this is a chance for shareholders to benefit from a new leadership at the CEO level that hopefully will continue to bring operational discipline into Under Armour and help to boost those North American sales numbers that they desperately need.
Gross: Yeah, a good move. Could've happened a couple of years ago. But, kudos to Plank! Consummate entrepreneur. Started this thing in his basement. Former college football player. Grew into a multibillion-dollar company. It was time for a change, both from a cultural perspective, as you mentioned, as well as a more seasoned professional from the world of apparel. I think this is a good move.
As you mentioned, I don't love the governance aspect here with the separate class of stock that gives him basically voting control over this company when he only -- I say "only," in quotes -- "only" owns about 15% of the stock, but yet he controls the vote. I never liked that as a former activist hedge fund manager. But, it is what it is. You do see companies start to move away from some of that. We even saw it with WeWork recently when they tried to improve governance. So, maybe one day, things will get better on that front. But this is a good move. I've been a Nike guy most of these years, not an Under Armour guy. But I think this is the best shot they've got at moving forward.
Cross: If you look at what's happening over at Nike, Lululemon, which, stock has been on fire, and Nike continues to perform well. They really had to do something to mix it up here a little bit. I was thinking about what happened with Nike. Phil Knight had run that business since the 70s, when they started it. He was CEO until 2004, when Nike was selling about $12 billion worth of goods. That's twice as large as Under Armour sells today. Then, 10 or 12 years later, he stepped away from the chairman level and retired from the board completely. Mark Parker has been on board as the CEO since 2006. Sometimes you reach a point where the founder is not the person to take that company to the next level. If Under Armour trying to go from a $5 billion organization to a $10 billion organization over the next five, 10 years, it's going to take some real focus on trying to get back to where they were years ago. It's a different organization, and now many different leadership for that.
Greer: Andy, you mentioned the struggles of the past few years. Some people, especially if you don't own this stock, you may be surprised to learn that the stock is down over the last five years. I think of the Under Armour brand, and how pervasive the apparel is, and then you tell me the stock's down over the last five years?
Cross: Right. If you look over the last 10 years, of course, it's gone from $3 to $20 --
Greer: That's not what I said --
Cross: But it peaked at $50 back in 2015. In five years, it's gone -- it's just struggled. But it's not surprising. It was a high multiple stock. When your sales start to struggle and your profitability -- by the way, the profits have suffered as well, too, as they've shifted to trying to focus on different product lines. It's been a real struggle for them. They have this performance culture. They continue to promote that. I think that's healthy, but they do have to evolve the business. Hopefully Patrik Frisk is the person to do that for the shareholders.
Greer: Guys, a big, big day for Biogen. Shares of the drug maker up more than 30% right now at the time of our taping on news that Biogen plans to file for FDA approval of its Alzheimer's drug Aducanumab.
Greer: Thank you! Now, what we have here, Ron, clinical trials showing that the drug improved cognition when administered at high doses. It's all the more surprising because this drug was essentially given up for dead last March.
Gross: Yeah, not just a big day for Biogen, but potentially for the world. This is really a breakthrough situation, potentially. I will temper it a little bit because I want to see how this plays out. But, as you said, they had abandoned it for the most part, but as more data kept rolling in, as they collected more data, and they continued to take a look at the data as it came in, they started to see a positive signal from the group that was getting the highest dose of the drug, until they said, "Whoa, whoa, wait a minute, maybe we were a little too hasty here," and things, as they say now, are looking quite positive. They plan to send an application to the FDA early next year for drug approval. These things take a while. I expect it to take even perhaps longer than usual because this will get some extra scrutiny because of how it was abandoned and then brought back to life. However, Alzheimer's is so serious that I could see the fast track maybe offsetting some of that. We'll have to see how that exactly plays out.
But, potentially very exciting. The company does not believe it needs to conduct additional trials of the drug before moving ahead. That's good from a timing perspective as well. We'll wait and see. Very, very encouraging. Biogen also reported earnings, by the way, which were quite strong. The stock is reacting to that as well. But this is, for sure, the headline.
Greer: I'm going to use that word potentially as well -- if approved, this drug would be the first drug to slow cognitive decline in Alzheimer's patients. That seems like a massive, massive opportunity.
Gross: Unbelievable. It's an amazing thing for human beings on this planet. You really couldn't say enough about it. But again, temper some of the optimism. For example, the associate director of the Mount Sinai Alzheimer's Disease Research Center said, "Statistically significant does not guarantee clinically meaningful. And, I want to believe, but I'm not ready to suspend disbelief," says Samuel Gandy. Let's watch this play out, but let's all keep our fingers crossed.
Greer: It also is a reminder of how volatile some of these biotech stocks are. Shares of Biogen down over the past five years, losing badly to the market. Now, after today's pop, basically trade where they did five years ago.
Gross: So volatile. But, this is interesting. Biogen is not one of these early stage, pre-revenue companies. This is an established company with profits. But yet you still see this volatility because they live and die by their drug pipeline and these Phase II, Phase III trials. The stock got creamed back in March, I want to say, when this drug was going nowhere. But here we are back again.
Greer: Ron and Andy, let's end with toys. Let's talk some Hasbro. Shares down around 14% at the time of our taping on weaker than expected earnings. Hasbro pointing to tariffs on toys imported from China, saying that's increasing their shipping and warehousing costs. What do you think?
Cross: My thoughts are that the quarter was actually pretty good. Revenues were up a little bit.
Greer: Pretty good?
Gross: Take out foreign exchange, you're up a little bit.
Greer: So what's the market doing, then? It's down 14%, come on!
Cross: If you look at some of the costs that they've had on the royalty front, clearly the market is somewhat concerned with some of the tariffs talks they've had. But if you strip out, look at some of the royalty costs they have increased, some of their partner brands and franchise brands. A lot of excitement around Frozen 2 and the new Star Wars lineup that's coming down the pipeline. This stock has done well going into this, and I think some of the inflation in the stock price got deflated today on some of the more macro worries.
Greer: So, you're saying there's some one-time stuff? When you say, "if you strip out," if I lose 30 pounds, I have a six pack.
Gross: [laughs] I do want to make it clear, though, that these tariffs haven't even been implemented yet. This is an impact that is occurring in advance of the fact that they are coming, and the administration keeps changing the dates. That's what's caused this disruption, from people ordering product. That's what led to some weaker sales and some larger shipping and warehousing costs. It remains to be seen if these tariffs will actually be implemented, and if so, what the impact is. But Hasbro is taking significant steps to reduce its reliance on China. They source about two-thirds of their product from China now, they're attempting to reduce that to 50% or less. Very important to do. I assume that they'll be successful there. But it does cause some disruption, for sure.
This stock has been on fire. It might have been up 40% to 50% before this, it's up maybe still 25% this year. The company has executed really well, moving to the digital space, partnering with people on things like movies and toys. As Andy said, the partner brands category was strong. Their entertainment category was strong. I don't think it's all that bad here. It actually might be an opportunity.
Cross: Yeah, if you look at the entertainment licensing and digital part of their business, which is less than 10% of their sales overall, but that was up 20%. As they continue to evolve this -- Magic the Gathering continues to be really successful, the Wizards of the Coast brands continue to do well, Dungeons and Dragons, for those D&D fans out there, doing well. I mentioned the Frozen 2 and the excitement around Star Wars coming in the fourth quarter. I saw this as a little bit of a headline, like, oh, my gosh, wow, so many fears around, as Ron said, some of the tariffs. But when you start to dig through, the royalty fees have increased, and that is coming from some of the evolving into the digital space. That's expected to be a little bit higher than some analysts may have seen or have had in their so-called models. That may have sent some of the concerns that investors are seeing today.
Gross: One opportunity, but also a risk at the same time, we should point out that the company is spending money to transform this business. A good example would be their August announcement that they were buying Entertainment One for $4 billion. That's the Peppa Pig, PJ Masks.
Greer: I've heard of it.
Gross: So, this can be great if it helps transition their business to new lines, but they're spending a pretty penny, so you always want to be careful about that.
Cross: My final point is, if you look at the nine months of this year, sales are up 3%, earnings up 20%, and they've seen the expansion in their operating margin toward their target toward 15%. If you look outside this quarter, Hasbro continues to do pretty well.
Greer: You're bringing me around. Initially, when you see a stock sell off 14%, you think, that's not pretty good.
Cross: Are you saying the market's rational, Mac?
Greer: Now you're bringing me around. You're saying the market in this case may have overreacted.
Gross: I'll go out on a limb and tell you by the end of the day, the stock will have come back significantly.
Greer: Wow! Ron Gross, going out on a limb. Now, you mentioned the stock earlier. When I think Under Armour, I always think Nike. When I think Hasbro, I always think of Mattel. Over the last five years, that is a woof. Hasbro up 80% over the last five years. Mattel down more than 60%. Where did it all go wrong for Mattel?
Gross: They didn't move their business into the right areas. They didn't change with the times. They did not focus on the digital world as much as Hasbro. They didn't partner with the proper brands.
Cross: They'd been evolving away from Barbie, but such a reliance there. I think they haven't been as nimble as Hasbro has been. Even Hasbro was caught behind, especially when you had a lot of the Toys R Us bankruptcy issues that work its way through. Now that it has, they've been much more aggressive in shifting their product lines.
Greer: OK, exit question here. We're creating a time capsule. It's going to be opened in 1,000 years.
Cross: 1,000 years?
Greer: 1,000 years. Someone's going to open it and they're going to get a glimpse into our civilization. You can put one of these three Hasbro products in there. Ready? Monopoly, Mr. Potato Head, or Play-Doh?
Cross: I am not choosing Play-Doh. That stuff goes into my house and get stuck under the floor, in the carpets, all that kind of stuff.
Greer: This is a time capsule for posterity, it's not your personal --
Cross: I plan to live 1,000 years.
Greer: So, which one are you going with?
Cross: I'm going Monopoly.
Gross: I think Monopoly, too. It can tell you a little bit about capitalism, about business. It's a fun game, stands the test of time, a little bit about real estate, a little bit about New Jersey, Atlantic City.
Cross: The National Parks version tells you about the parks. I'm sticking with Monopoly.
Greer: I'm going with Mr. Potato Head.
Gross: I figured.
Greer: I think it's interesting. It may be a bit confusing. They may think, is this what people looked like? Can you put a foot in an ear? Mr. Potato Head is pretty timeless.
Cross: Do you have a Mr. Potato Head at home with an Astros jersey on right now?
Greer: I do not.
Gross: Did you ever use a real potato when you were a kid?
Greer: No. I'm just a commentator.
Cross: Stick the ears into it, yeah.
Greer: Desert island question. Over the next five years, you have to go with one of these three stocks, on the desert island: Under Armour, Biogen, or Hasbro.
Gross: Wow! Uncharacteristically, I've been a biotech investor over the last couple of years for various reasons. I want to believe. I want to believe that there are smart people that are coming up with things that are going to help us all. So, for the sake of pure optimism, I'm going with Biogen.
Cross: I like that answer, but I'll stick with Hasbro.
Greer: There you go! 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. Andy and Ron, thanks for joining me! That's it for this edition of MarketFoolery! The show is mixed by Austin Morgan. I'm Mac Greer. Thanks for listening! And we will see you tomorrow!