IBM (IBM 1.44%) falls after disappointing results from its two largest divisions. Chris Hill, the host of today's show, welcomes Motley Fool senior analyst Ron Gross. Ron analyzes those stories, discusses Facebook's (FB +1.33%) potential name change, and shares where Kit Kats and Reese's Peanut Brittle Peanut Butter Cups fall in the pantheon of Halloween candy.
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This video was recorded on Oct. 21, 2021.
Chris Hill: It's Thursday, October 21st. Welcome to Market Foolery. I'm Chris Hill with me today. The one and only Ron Gross. Thanks for being here.
Ron Gross: Wow, that's quite an intro. I hope I live up to it. Great to be here, always.
Chris Hill: I hope you'll live up, otherwise, I'm going to go get the other Ron Gross.
Ron Gross: Good luck with that.
Chris Hill: There's a lot going on today, earnings season starting to heat up. We're going to hit Tesla on Motley Foolery tomorrow, so tune in for that. But today we've got Big Blue. We're going to start with Big Shoe. Third-quarter profits for Crocs (CROX +2.73%), much higher-than-expected. Revenue beat as well. They raised fiscal year guidance. Shares of Crocs up more than eight percent today. It's Crocs and they are killing it.
Ron Gross: Forget about today. How about over the last five years, up 1,800percent. That's a shoe company for you men. That is some unbelievable performance, and this quarter was strong as well. They beat expectations, demands remain strong, now again, as we always talk with retailers, their anniversarying a tough Q3 from last year. Results are solid, but they look artificially strong because of last year. Take that into account when I go through some of the metrics. Not surprisingly, we're hearing this across the board, business was impacted by Vietnamese factory closures, widespread disruption in the global supply chain. Now the CEO said they are, "managing through the supply chain disruptions to mitigate the impact on our business." They're going to move production to China, Indonesia, Bosnia. They avoided port delays on the U.S. West Coast by switching to East Coast docks, and so they are doing the best to manage through a difficult time. Let me share some of those operating metrics with you. Revenue up 73 percent, direct-to-consumer up 60 percent, digital sales up 69 percent, that accounts for another 37 percent of total sales. Really impressive margins, gross margins of 64 percent, operating margins of 32 percent, for a shoe company those are pretty good numbers, and adjusted earnings-per-share up 160 percent. Even if you look back toward previous years and take out the COVID, onetime situation, results still looked really strong. As you mentioned, they raised guidance through the full-year. They now expect 2020 revenues to grow over 20 percent from 2021. Again, the outlook looks bright there. They are introducing a new bio-based products that's really interesting, using a material sourced from waste and by-products from other industries, I don't like the term waste and by-products [laughs] when it relates to my clothing. But I'm going to give them the benefit of the doubt that they know what they're doing, and the real strong operating results and the strong management really continues there.
Chris Hill: Yeah. Clearly, they need to put the branding people [laughs] on that new product. But you mentioned the comments from Andrew Rees, the CEO in terms of how they're managing their global supply chain issues. Every CEO is going to be asked about that this earnings season, and he is in year five of being in the corner office and to this point you got to give him the benefit of the doubt. They certainly seem like they are backing up the talk with actual results.
Ron Gross: Agreed. Now, we have to say, what they make is relatively easy to move from factory to factory to factory across light technology. That soft shock absorbing foam resin that makes up the clog that they're most known for. You can move that to China relatively easy. You can't do that with really high tech companies so easily. They happen to be benefiting from the fact that they make a product that is relatively easy to make and kudos to them for making the changes that need to be done to preserve those margins. There's expenses with shifting production, there's expenses associated with going to East Coast docks instead of West Coast docks. But, if you can maintain the margins they're maintaining, even with those added expenses, that's pretty impressive.
Chris Hill: Shares of IBM are down eight percent today after a mix third-quarter report, their revenue was light in the global services division, and the cloud and cognitive software division, and the problem is that those are IBM's two biggest divisions.
Ron Gross: [laughs] Well, Chris. Yes, it was an uninspiring report. Investors waiting for the managed infrastructure business to be spun off in November. But this report, gosh, revenue up fractionally basically flat, and as you said, cloud and cognitive software up three percent. That's a relatively anemic. There was strength in cloud and data platforms that was offset by their transaction process in business. Revenue from the acquired Red Hat business, which is going to be really important to their cloud business going forward was up 17 percent. You can hang your hat, no pun intended, on that number, that's not too shabby. Their global business services, which is everything else that they do was up about 12 percent with consulting up 17 percent. That's actually surprisingly strong to me. If you normalize the business and strip out the part of the business that is going to be spun off, you get revenue up about 2.5 percent. Again, rather uninspiring. The new business by the way, it's going to be called Kyndryl with a K and a K-Y-N-D-R-Y-L, and I know you're wondering where that name comes from Chris, and I will tell you. It's derived from the words kinship and ten drill to get kin drill, and I know we love to make fun of these names from time-to-time. That's one that just as wonky as in the other I've heard. Their medium-term objectives for their business going forward, medium, single-digit revenue growth. Boy, that's not that exciting guys. I don't think there's a lot to love here. Balance sheets OK, they are still producing fair amount of free cash flow that they can use to reinvest in the business. Let's see what happens when they spin off Kyndryl in November. Shares are awfully cheap, at 12 to 13 times earnings, but they should be there because the business results, and their earnings growth are relatively uninspiring. But let's keep an eye after the spin-off.
Chris Hill: Okay, first of all, Kyndryl is a name that is inviting [laughs] people to make fun of it. It will be rude not to accept.
Ron Gross: Exactly. [laughs]
Chris Hill: Especially when you offer up that type of definitions. I'm sure the people who came up with that name and that definition are very proud of what they've accomplished.
Ron Gross: I'm sure. There was probably many meetings with PowerPoint presentations.
Chris Hill: Yeah. But there is a zero chance that the people of Crocs, who need help with their branding [laughs] are going to call the people of IBM who came up with Kyndryl. That's fair. This is a stock that is basically treaded water for the last five years. You look at the dividend yield of five percent. How high is the dividend of IBM on the list of reasons to buy this stock?
Chris Hill: Because if you're of a certain age, if you're of a certain point in your investing life, I can see making the case for keeping shares of IBM that you already have. But other than that, it's hard to put IBM on the list of blue-chip stocks to buy if you're moving into that part of your investing life.
Ron Gross: Yeah, that's fair. The 4.6 percent, as you said, 5 percent-ish dumb dividend, that's pretty enticing and it's probably relatively safe because the company does continue to generate fair amounts of free cash flow. You always have to think of total return. You don't want to buy a stock and just get the 4.6 percent return but yet the stock actually goes down and you lose money on that. So you'd want them to go hand-in-hand. You want to buy a company that you think has nice growth prospects for the future from a stock perspective and then if you also get a juicy dividend at the same time all the better. So always make a total return decision.
Chris Hill: Before we get to what I know listeners are anxious for, which is Halloween candy overrated and underrated, you were one of the first people I thought of when I read the story yesterday in The Verge about Facebook going with a new name. I'm assuming that this is happening; Facebook hasn't denied it, I can see the case for it, but you were one of the first people when I read that story, I thought, "I wonder what Ron Gross talks about this?" What do you think about this?
Ron Gross: I don't have a problem with them trying to change their name to reflect where they're going, which is this whole concept of the metaverse; this online reality world we're all going to live in, that includes Facebook, it includes Instagram and includes WhatsApp and a lot of other digital avatars and things. If they don't want to be thought of as just Facebook, the app, I think that's OK. If they're trying to do this to rebrand, to get out of some of the controversies that have happened, either from regulators or the whistleblower, I don't think a name change does that. Those problems don't go away just because you changed your name. If that's their primary motivation, I would caution against it. Alphabet's a good example. When Google changed its parent company name to Alphabet, Google kept the ticker symbol G-O-O-G. That's really confusing because people still call the company Google because that's the stock, but it's really Alphabet. I could see that maybe they didn't change GOOG as the ticker because of this continuity and investing and trading perspective. They didn't want to confuse people, but I think it is confusing when your ticker references and old name and your parent company has a different name. I don't know if I would keep FB if they change the name to whatever it happens to be. But I would caution management, make the change for good reasons not to try to sweep some of the controversial things under the rug.
Chris Hill: Part of what Google did when they changed the name of the parent company to Alphabet, was they introduced a new reporting structure. They provided more clarity to Wall Street analysts. I think part of the reason that rebrand went over as well as it did, is because of that very fact that analysts are, "Okay, now we're going to get some greater insight into the business." That's an opportunity for Facebook if they want to go that route.
Ron Gross: Yes, and if that's necessary, if Alphabet has all these little bets they make all over the place, they're trying to think of the next amazing thing, and that's a separate division and they had different reporting structures. If Facebook wants to make changes to the way their organizational structure looks, then they can do that as you say in conjunction with a name change. I don't know if that's a primary motivation or not. I tend to think there's something going on here in terms of their brand and so I'm not sure that's the best reason to change their name.
Chris Hill: Years ago, and I don't remember exactly which it was, but I know it was at least five years ago, we were sitting in the studio at Fool headquarters. We were doing Motley Fool Money. We were talking about Halloween candy and I remember looking at you to my left, you were talking about Milky Way being overrated. To me Milky Way was one of those candies so it's like, "That's fine. That's like the IBM of candies, maybe even better. Maybe it's more like an [...], maybe it's like the Johnson and Johnson of candies." By the time you got done laying out your case, which I will just say you laid out the case for why Milky Way is overrated with the even keel that listeners have come to expect from you when you are talking about stocks. You don't get emotional about stocks, you didn't get emotional about Milky Way; you just categorically laid out the case for why it's overrated and by the time you finish that thought, "Oh my God, I don't think I'm ever going to just another one of those things in my life."
Ron Gross: So funny, thank you for remembering. I don't recall my exact analysis, but I think it was basically a mediocre Snickers without the goodness of a Snickers and I just don't think the world needs that.
Chris Hill: Yeah and when you get done, it was no longer the Johnson and Johnson of candies, it was like the WeWork of candies. Where are you now in 2021 with overrated and underrated Halloween candy?
Ron Gross: I know I'm going to get some mail or some tweets here, but it's Kit Kat, and I'm sorry folks. You don't go to your local CVS, head up to the counter to pay and start searching the candy bars for a Kit Kat, you're just not doing that. You're not doing that because it's not that good. I know it's a big brand name and I know everyone knows what it is, but I just don't think people are searching out the Kit Kat.
Chris Hill: Wow.
Ron Gross: Too strong there?
Chris Hill: No, that's fine. I love the strong take, [email protected]. Go ahead and drop us an email, we'll forward it onto Ron. All the Kit Kat fans out there. What about the underrated?
Ron Gross: Underrated solely because it's new is the Reese's peanut brittle flavored cups. Peanut brittle flavored cream wrapped around crunchy peanut butter, that sounds intriguing to me and it's seasonal, but I wonder if it sticks around even after the holidays.
Chris Hill: How did I completely miss this? This is in stores right now?
Ron Gross: Yeah, I think it is actually in stores right now. Yes. Now, let's not take away from the undisputed king of all chocolate candy bars, which is Take 5. I'll say that forever, that's clearly the best, but it's neither overrated nor underrated.
Chris Hill: It doesn't get enough attention. But we got to wrap up the show because there's a CVS a few blocks away and I'm 100 percent walking over there to find this new thing you're talking about. Ron Gross, thanks for being here.
Ron Gross: Thanks Chris. A lot of fun.
Chris 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. This is going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. See you on Monday.
