Barbie Rocks Her Q3 Report

In this episode of MarketFoolery, host Chris Hill talks with analyst Bill Mann about some recent market shake-ups. Shares of Mattel (MAT 2.40%) popped 17% after the company reported earnings. Bill explains why the toy maker's still not on his watch list. Advanced Micro Devices (AMD -0.35%) put up a good quarter, but the company's five-year performance is much more impressive. And, the guys answer a listener question about a reverse stock buyback scenario, aka secondary offerings: what it is, why companies do it, and what it means. Tune in for more!

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This video was recorded on Oct. 30, 2019.

Chris Hill: It's Wednesday, October 30th. Welcome to MarketFoolery! Thanks for listening! I'm Chris Hill. With me in studio, the one and only Bill Mann. 

Bill Mann: Barely hanging on.

Hill: Barely hanging on because there's not enough coffee in the world. And, as we just learned right before we started recording, one of our colleagues is grilling hot dogs out back.

Mann: Yes.

Hill: So let's do this show!

Mann: Scott Dornbusch --

Hill: The reverend Scott Dornbusch.

Mann: The reverend Scott Dornbusch, who probably doesn't get enough credit out in the public, is doing a thing today for all of us. 

Hill: Absolutely. Shout out to Rev! Alright, we've got a chip stock. We're going to dip into the Fool mailbag. We've got to start with the stock of the day, and that is somewhat surprisingly Mattel. 

Mann: Not dead yet!

Hill: Mattel, not dead yet. Shares up 17%. Third quarter results better than expected. The CFO is leaving, but that seems to be OK. Normally, anytime I see either a CEO or a CFO leaving, I'm interested, like, is this for good reasons? For bad reasons? This appears to be fine. This looks like the better-than-expected sales in the third quarter for Mattel, driving the stock today.

Mann: Barbie up 10%. Hot Wheels up 10%. Some of their other properties were lower. But I really think that the stock is responding to the fact -- there was a whistleblower letter that came out in August that basically accused the company of mishandling its accounting in 2017. Really, in bigger news for a company that requires a lot of capital to operate, they had to halt a bond offering as a result. One of the things that they came out and said today was that they figured out that, yes, there actually was some mistakes. There was a matter of $100 million worth of taxes that was not booked in one quarter and then was booked in the next which, was improper. You have to wonder at the end of the day if it washed out. But, the quarterly earnings matter. It seems to have cost the CFO Joseph Euteneuer -- I say that German-style -- his job.

Hill: This comes at a time where we're heading into the holidays. You look at Mattel's stock, it's up big today, but it's basically flat, down slightly over the past year. This seems like it has cleared the way for them to hopefully have a strong holiday quarter. If they get a new CFO in there, the accounting stuff is out of the way, any financial clouds over the company have cleared, then... I don't want to say they're set up for success, but it's almost like, "Alright, we're going into the holidays, this really should be a quarter where you're doing as good, if not even better, than you just did in Q3."

Mann: Funny question. I don't know what they're set up for. This is a company that's basically been cleared to raise money, but I have to ask, for what? This is not a growth company. You always have to wonder when a company goes to the mat for some more capital, be it debt or equity, what are they going to use it for? This is a company that's got a number of pretty tired properties. Hot Wheels did really well this quarter. American Girl dolls did not. Their infant/ toddler segment is flagging with Fisher Price. They've got moves. This is a company that has pretty incredible intellectual property. But at some point, you need to see something, and it's not just a path to, "Hey, let's raise some more money."

Hill: No, absolutely. I think that, just as we've seen businesses in other industries where every quarter, it seems like one division is carrying the water, once again with Mattel, Barbie. Barbie is doing the heavy lifting. You're right, they do have some tired brands. Barbie does not appear to be one of them. 

Mann: Which, if you were to list out their brands for me, I would point to Barbie as being the most problematic. And, just once again, completely wrong. Completely wrong. 

Hill: I am guessing, however, that like me, you enjoy the fact that, when you look at Mattel, when they break out their sales by product category, one of their product categories is vehicles. 

Mann: Yeah.

Hill: Now, granted, we're talking about Hot Wheels. It just tickles me. "How are vehicle sales?"

Mann: That's right. "Well, we're not catching up with Tesla just yet, but we're doing OK."

Hill: So, the financial clouds cleared, good sales, but this is not one where you're like, "I'll put this on my watch list."

Mann: Not really. It's a company that, in some of our services, we've had short in the past. Glad we don't at the moment. Mattel, as I said, it's a company with potential shots in its bag. But at some point, you have to say they really haven't come up with anything yet, and I'm not seeing new ideas coming out of the company.

Hill: Let's move on to AMD, Advanced Micro Devices. A stock that we really don't talk about all that often, a business we don't talk about all that often. Maybe we should, looking at the five-year chart. Third quarter results, what stood out to you? In terms of revenue, I think they had their biggest quarter in over a dozen years.

Mann: Yeah, it's the biggest quarter since 2005. This is a company that, back in the day, we almost thought of this as being a third rail company because its shareholders were so rabid about whether or not we're saying nice things about AMD, whether the things were nice enough. There almost was no such thing as too nice for AMD. So, it's really interesting to me -- and you and I talked about this earlier -- this is a $30 billion market cap company. This is not a dying enterprise. So, I'm having a little difficulty squaring these two facts: highest revenue in more than a decade, and a stock that has gone absolutely crazy. 

Hill: Yeah. For the longest time, this was the primary competition -- and I'll just put the word competition in air quotes -- to Intel. Like, yes, Intel is the dominant chip maker; AMD, they also do that too, but they're tiny. There were stretches of time where -- and we weren't the only ones making this joke -- people would joke about how AMD was essentially monopoly insurance for Intel. 

Mann: [laughs] That's right!

Hill: It was like, why doesn't Intel just buy them or put them completely out of business? Because they keep regulators off their back, because Intel can say, "No, no, we have competition. It's them." But the last five years, this stock is up, I believe, more than tenfold, at a time when Intel's stock has done pretty well. And over the long term, obviously, Intel is the bigger winner. You tell me. It seems like Lisa Su, who is the CEO at AMD -- she became the CEO five years ago, and I'm not giving her all the credit, but she probably --

Mann: I want some of what she's having, that's for sure. 

Hill: -- yeah, she probably gets and deserves the lion's share of the credit for what this company has done.

Mann: Yeah. I think that's exactly right. It's really hard to say, as a non-technician -- I don't really follow the technology. They did great in the GPU segment. I can't really tell you 7-nanometer chips vs. anything else, whether they're winning or not. But the fact is, this was a very tired company, five, six years ago. It was a company that, as you say, was probably literally around to keep the regulators at bay for Intel. But now, you have to look at what AMD is doing, and say they're competing just fine on their own.

Hill: You mentioned the... let's just call it passionate fan base. 

Mann: [laughs] Fan base, I think, is right.

Hill: Back in the day. It reminded me a little bit of Rambus. 

Mann: Oh, gosh!

Hill: I think Rambus is in a similar space, in terms of making components.

Mann: Right. It's almost like the little brother syndrome. Rambus was a company, and AMD was a company, both had really huge elements that they were competing with or that they were fighting against. Warren Buffett always says that companies get the shareholder base that they deserve. These two companies, it seems to me, had brawlers for shareholders for a bunch of years. They didn't end up winning, but they fought the good fight for a long time. And, as a market commentator, it was almost terrifying to even bring up these companies' names, because you knew what you were going to get in your inbox, in your voice mails. It was pervasive.

Hill: Our email address is [email protected]. Question from Gary Sinclair in Copenhagen, Denmark. Gary writes, "Thanks for producing a great show. I enjoy listening to your insights about the markets. Recently, you've spoken about companies buying back shares as a way of using cash to help boost market returns for investors. Is there an equivalent event for when a company is low on cash as a way of raising funds, and presumably resulting in a higher number of shares outstanding, and probably a negative effect on the share price? I guess most companies try to avoid this if possible, but maybe it's necessary sometimes? Keep up the great work."

Thank you, Gary, for listening! What do you think?

Mann: I probably shouldn't even start this way, but I don't know who said it here in this group, but it's nonsense that share buybacks support share prices. It's a capital decision. It's essentially mainly replacing cash with shares. It's just a way of managing the capital of your business. But there are things -- in fact, the reason why companies are public is so that they can tap the public markets. That's exactly why these companies are listed to start with. The primary way that they do it -- and Gary's exactly right to ask about this -- are something called secondaries. They're follow-on offerings. You have your IPO, which is an initial public offering, which suggests that there are going to be ones that come afterwards. I just looked, there's a company called PagSeguro that's a Brazilian payments company, just this last week announced that they were doing a $650 million secondary offering. What they'll do is exactly what Gary's suggesting. They will sell shares into the market, and in return, they will get cash that they're going to be using for investing. So it's simply a different way of raising money. It's using your equity, instead of what Mattel is going to be doing, issuing debt. It is a tried and true reason and a use for the capital markets.

Hill: Keep the emails coming. [email protected]. You can also join our Facebook group, which is just Motley Fool Podcasts. One of the folks in our Facebook group, Jared Lind, who I'm assuming lives in the Midwest somewhere, made a comment about Halloween candy, because we've been doing that all week. 

Mann: When's Halloween again?

Hill: It's tomorrow.

Mann: Oh, man! [laughs] I've been away.

Hill: You've been away. You've been traveling overseas. But Jared made a comment that an underrated candy is something called the Twin Bing, which is a candy that I'm going to have to disqualify, slightly, Jared--

Mann: My mouth has never experienced this Twin Bing.

Hill: It's a cherry flavored nougat covered with -- it sounds delicious -- chocolate and peanut covering. But it's sold at Casey's General Stores. 

Mann: Not close. [laughs] 

Hill: I feel like Jared's enthusiasm gets tempered a little bit by the fact that we're literally 400 miles away.

Mann: I don't wish to rest upon my coastal bias, but Casey's are not nearby.

Hill: They're not nearby.

Mann: We should road trip. 

Hill: We should road trip. And if Jared wants to put a couple of the Twin Bings in a small box and send it to Fool HQ, we won't stop him. They sound fantastic!

Mann: We'll give them a fair shot.

Hill: He also pointed out that the breakfast pizza at Casey's is as good as advertised. 

What do you have for overrated and underrated candy?

Mann: For me, the most overrated candy -- and it's by far, it's not even close -- are Nestle Crunch. They taste like wax. It's what would happen if you put the Soviets in charge of chocolate production. It's waxy chocolate cut with crispy rice. They're not good. Every year, I get the Nestle Crunch -- it's a Swiss company! How could you screw chocolate up? I just don't think they are good.

Hill: Is that one that, when your kids would go trick or treating, you're like, "Look, you have too much candy. I'm going to take some of it off your hands."

Mann: "I'm going to leave you the Nestle Crunches." 

Hill: "I'm going to leave you this."

Mann: Yeah. "Give me the Twix. Give me the Heath Bars. You're allergic to peanut butter, so I'll take all the Reese's situation, and save you from them."

Hill: Underrated?

Mann: The thing that I love... have you ever had Bit-O-Honey?

Hill: Yes. Not for a very long time.

Mann: They're so good! They're not particularly sweet because they're sweetened with honey instead of sugar. It's kind of a hard taffy with a center. I love them! They are really specifically Halloween candy. I think that they're pretty underrated.

Hill: Do you think that's because they have the consistency of small bricks?

Mann: I think it's possible, because they've obviously pulled someone's tooth out. You can't eat many of them. You're not picking up a Bit-O-Honey king size and working your way through that.

Hill: Yeah. This time of year, it always makes me think of our good friend and former colleague Tim Hanson, who would, almost on an annual basis, do a small rant about "fun size."

Mann: Oh, yeah!

Hill: His point, there's nothing fun about fun size. My counter to that was, I think that's true in most situations. You'd always prefer the regular size candy to the smaller candy. But there are those ones where -- to your point, even you, who enjoys Bit-O-Honey, you don't want a big one.

Mann: No! Some year, though, I'm going to go straight to legend in our neighborhood and I'm going to go out and get those one-pound size Hershey chocolate baking bricks, and I'm going to give those out as Halloween candy. And we're just going to see what happens. That's fun size!

Hill: Let's go get some hot dogs!

Mann: Right on, man!

Hill: Bill Mann, thanks for being here! As always, people on the program may have interest in 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's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!