In this podcast, Motley Fool senior analysts Andy Cross and Jason Moser discuss:
- AMD warning about lower revenue.
- Constellation Brands posting a loss in the second quarter.
- Apple looking to boost production in India.
- Macy's gaining inventory insights from its own credit card data.
- The latest from McCormick, Peloton, and more.
Malcolm Ethridge, host of The Tech Money Podcast, weighs in on prospects for more interest rate hikes, expectations for earnings season, why he's watching seasonal hiring, and the S&P 600.
Jason and Andy discuss the possibility of DraftKings signing an exclusive partnership with ESPN and share two stocks on their radar: Alphabet and Dream Finders Homes.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on October 07, 2022.
Chris Hill: We've got the latest jobs report, retail, semiconductors, consumer goods, and breaking news in the world of sports business, Motley Fool money starts now.
... I'm Chris Hill, joining me in studio Motley Fool Senior Analysts, Jason Moser and Andy Cross. Good to see you both gentlemen.
Jason Moser: Hey, Chris.
Andy Cross: Hey, Chris.
Chris Hill: We've got the latest headlines from Wall Street. Malcolm Ethridge from the Tech Money Podcast is our guest, and as always, we've got a couple of stocks on our radar.
But we begin with the big macro. The U.S. economy added 263,000 jobs in September. It was the lowest monthly number of jobs added this year but still good enough to send the unemployment rate down to 3.5%. Markets were down on Friday, but, Andy, still positive for the week.
Andy Cross: Well, it's still a very tight labor market, obviously, Chris, with demand outstripping supply. That's showing up a little bit in wage growth. Wages were up 5%, a little bit lower than what they were last month. But still, I think that continues to give ammunition to the Federal Reserve.
This is the last job report they will have before they make their next announcement in early November. We still have an important inflation number to come out still. But more ammunition for them to continue to increase rates, and some of the stock movements we saw earlier this week after a very difficult September and third quarter was because of some of the excitement around the Fed not being quite as aggressive, or else they might not be so aggressive soon, and they might be able to either pause or, in fact, maybe even think about lowering rates. Now, the Federal Reserve has said no, we're not doing right here, we are sticking with our plan.
But this job report continued to show the strength in the job market, 263,000 jobs created on nonfarm payrolls, Chris, as you mentioned, versus 255 first of the estimate. That's down from 420,000 average per month for the entire year and down for August and July. We are seeing this slowing in that job growth, but still, it's pretty robust. Unemployment, as you mentioned, fell, at 3.5% versus 3.67%. We still have almost 6 million unemployed people and 10.1 million job openings in the month of August from that jobs report. Again down from July but again, it still shows this healthy labor market, healthy wage market.
We saw growth across lots of different industries, leisure and hospitality up more than 80,000. Healthcare up more than 60,000, now back to February 2020 levels. So the employment market continues to look good. That's showing the increase in wages, and that continues to show me that the Federal Reserve will stick with their plan of raising interest rates, the federal funds rates more than 75 basis points in November.
Chris Hill: Let's go to some company news shares of AMD fell more than 10% on Friday after the semiconductor company warned third-quarter revenue will be more than a billion dollars lower than originally expected. AMD says the PC market is weaker than they expected, and the announcements surprise some on Wall Street. Jason, were you surprised?
Jason Moser: No, I wasn't. I think anybody who has been paying attention would probably expect something like this. It was maybe a month ago or so where Nvidia did the same thing. We saw them preannounce, guide down, talk about challenges in the industry as supply chains are cramped, a lot of demand that's been pulled forward over the last couple of years has cooled off. If you remember, Nvidia, they guided down from an outlook of $8.1 billion to $6.7 billion. The magnitude is very similar. Now, Nvidia was tied to gaming, and AMD, as you mentioned, tied to PC. But nevertheless, it is an industry that right now is feeling some headwinds.
I think when you look back to mid-September, AMD had an investor presentation, management was even talking about back then that the PC market continued to track lower than they expected, they even use the word "messy." Typically they expect the second half of the year really to be more robust. We could see signs that this might have been coming down the pike here.
But regardless, it is something that is playing out here for short-term investors as opposed to long-term investors. I think it's difficult to invest in this sector because it's so cyclical, it can be so volatile. You have to endure these stretches.
I think my big question, really, and we're going to learn more about this when they announce earnings November 1st. They guided for full-year non-GAAP gross margins for around 54% a quarter ago. You got to believe that's going to change. Getting a better idea of what they see as far as the gross-margin picture for the full year. Some perspective on inventories. But the nice part, again, this is a very well-diversified business. They benefit from other markets including enterprise, gaming, the embedded market, which is something that the focus is on enterprises, both data centers. It's a nicely diversified business, but no doubt PC headwinds are going to play into this one over the next several quarters.
Chris Hill: Last month, McCormick released preliminary results for the third quarter, and this week, the spice maker issued the actual results. Andy, after we got the early release in September, not really a lot of surprises, but McCormick did indicate they expect pricing to improve in 2023.
Andy Cross: Pricing was actually mentioned 51 times on the conference call, Chris, which I think is a lot. But not unexpected. Mike Smith, the CFO, said, "We expect pricing to continue outpacing inflation into next year as we plan to fully offset inflation over time." You saw that a little bit start the pricing accelerated in the third quarter from earlier this year. Revenues were up 3.2%, the strong dollar hurt them as well. X the strong dollar revenues were up 6%, but they are up 10% on pricing, Chris, and down 2% in volume.
When you think about their consumer business, their flavor business, the pricing really matters, and they're starting to see that impact show up on, finally, into their products, into their revenues, and into their growth.
They did continue to emphasize that the next year will be a little bit tough on the sales and the earnings front. They reaffirmed that guidance of their sales to be up about 3% and operating income about 2%. EPS will be somewhere between $2.64 and $2.69. That's down from 2021 as they continue to put through some of their costs initiatives. They're going to plan to eliminate $100 million of cost going into 2023.
McCormick, you got stock at $72 down from $100, about $20 billion in market cap yield of 2%. Price to earnings and then mid-20 range, dividend growth rate of gosh, more than 9% over the last five years. I look at that and say, it's a pretty attractive price for a really good, stable business through the cycles.
Chris Hill: Constellation Brands posted a loss in the second quarter. The parent company of Corona beer and other wine and spirits brands did find with the alcohol part of the business, but constellations investment in Canopy Growth cannabis business dragged down the results and the stock, Jason.
Jason Moser: Yeah, a cannabis business you got to take the ultra-long view with that one. Constellations is interesting. It's not been the greatest investment over the last five years, total return close to 20%, but it's been a good one to own this year, a pretty defensive holding its outperformed the market even though it's down slightly.
I think, though, when you look at the merits of this business, really it boils down to the diversification in its portfolio. It's attacking this market from a number of different angles, not just beer, not just wine, but all three and they've made this move to focus more on premium in the wine and spirits division and that's paying off. The business performed really well, I think. Grew revenue 12% earnings, excluding the Canopy loss, came in at $3.33.
The beer business posted depletion growth of nearly 9%, and they continue to gain share. Remember that's brands like Modelo, Corona, Pacifico. That translated into 15% sales growth in the beer business, 25% growth in operating income. Wine and spirits treaded water for the quarter as they continue that shift to higher end, but still continuing to perform well. They witnessed a little challenge on the cost side of that business because it requires a little bit more, and it's a little bit more stretched out around the globe. As you mentioned, the Canopy side of the business, it just requires taking a much longer outlook, I guess.
They wrote down another $1.1 billion impairment there. But again, they estimate this to be a $25 billion market at the end of 2021, and it's expected to nearly double in size by 2026 as more states continue to legalize cannabis. I think if you look at the trend, it's hard to argue that that is not materializing. It's just a matter of watching the legal landscape shake out for this, and that's going to take time. When it does become a little bit more clear, it feels like Constellation is going to be in a good position to benefit. It's just a matter of hanging in there and letting it play out.
Chris Hill: Do you think there's any chance they just completely cut the Canopy Growth part of the business? Because Bill Newlands, the CEO, he was not running Constellation brands when they made that deal.
Jason Moser: It's distinctly possible. That was an acquisition they made really... I think they probably felt like it was going to materialize a little bit more quickly than it has. There has been a lot of enthusiasm and that industry that has abated since. But again, it does feel like the puck is headed in that direction. We're seeing that legal landscape change, albeit very slowly.
At this point, maybe they're feeling like, hey, you know what, we've got a strong brand in this space, we can hang on to and grow slowly ,and as it becomes more apparent the opportunities, then they'll be able to take advantage. But I guess we'll just have to wait and see.
Chris Hill: Apple may be looking for a new home for production, and one surprising retailer may have a key advantage heading into the holidays. More after the break, so stay right here. You're listening to Motley Fool Money.
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Chris Hill: Welcome back to Motley Fool Money. Chris Hill here in the studio with Andy Cross and Jason Moser.
The hits keep on coming for Peloton. The company is cutting another 12% of its workforce. CEO Barry McCarthy was hired earlier this year to turn the company around and told The Wall Street Journal in an interview this week, "There comes a point in time when we've either been successful or we have not." McCarthy indicated that point in time would be in about six months.
Andy, I got to be honest: the drama surrounding this company. I can't look away.
Andy Cross: Yeah, even this interviewing, Barry backed off a little bit of that. I liked CEO Barry McCarthy when he was at Netflix as a CFO. I think he did an admirable job there. But he certainly has some challenges ahead with Peloton. As you mentioned, Chris, this is the fourth round of cuts. That's going to leave them with about 3,800 employees, about where they were pre-COVID when the stock was at $30 and now it's at $8.
"With this announcement, the bulk of our restructuring work is complete," McCarthy said to employees. "The final building block is rightsizing our retail footprint." That will be next. Get the employee costs settled mostly and then right side the retail footprint, they'll close a bunch of stores next year.
The market cap is now $3 billion, and that's about $800,000 per employee in market cap versus employee, versus like great companies, Apple and the rest that are north of $10 million per employee. When you look at the last 12 months, they're at an operating loss of almost $1.5 billion, a massive loss in the last quarter. The number of fitness subscribers is stalled at 3.8 million. They have $1.2 million in cash on the balance sheet versus $1.5 million in long-term debt.
Really, rightsizing the storefront, rightsizing the employee base for a slowing business is what McCarthy was hired to do. He's doing it, and we'll have to see how it goes. The next thing could be a sale of that Precor business that they bought for $420 million in 2021. We will see how that plays out.
Chris Hill: One small silver lining, I think, for Peloton is the calendar shapes up nicely for them. If you just think about what is going to happen in the next six months. We're going to have the holidays, we're going to hit January when so many people naturally think in terms of their health and fitness. They have maybe the best opportunity in terms of the calendar, but I think come end of January, early February, all eyes are going to be on whether or not Peloton starts to explore strategic alternatives.
Andy Cross: I think past the holiday, they did structure a deal with Hilton to put the bikes in Hilton Hotels, and they have a new selling arrangement with Dick's Sporting Goods and Amazon. It's not like they're standing still. It's just that they're really facing the headwind that they did not have during the COVID pandemic.
Chris Hill: Multiple reports this week that Apple is moving some of its production from China to India. The company is not commenting yet, but if Apple has, in fact, started asking suppliers to make AirPods and Beats headphones in India as early as next year, Jason, that would lower the risk of the supply chain disruption that they've seen from China.
Jason Moser: Yeah, there's no question. It absolutely makes sense to diversify the supply chain. We've been talking about this risk in regard to myriad companies even before the last couple of years. Remember pre-COVID even, we were talking about supply chain risks in regard to China just because of trade issues. The companies from Home Depot to Wayfair and everywhere in between were talking about trying to figure out ways to diversify their supply chain away from China. This seems to be a very logical step. It makes a lot of sense.
At the current rate, when you look at the way things are right now, these are baby steps. Right now, you're looking at around $1.3 billion in iPhones that were exported from India. They were manufactured in India and exported last year. That's set to double this year to around $2.5 billion. To put that in terms of units, you're talking around $3 million in India versus around 230 million iPhones from China.
I'm sorry, did I say dollars in India?
Chris Hill: Yeah.
Jason Moser: Three million iPhones in India and 230 million iPhones in China. This is just one step, I think in a long, long process that will take many, many years to play out. But it does make a lot of sense. It's not about margin improvement. It's about a more reliable supply chain. I think that makes a lot of sense. You look at Apple, they've grown gross margin 5 percentage points over the last five years alone just on pricing. It's the strength of the brand and the offerings that they have, but they will be making more than just iPhones.
Like you said, Beats AirPods, this is going to be more and more products from Apple being made from India. India providing incentives for this to happen. What we will see, I'm sure, is more investment in India in the coming years and decades to build out their capacity and ability to actually manufacture that. Because I think they're going to be seen as an attractive partner for many companies beyond just Apple.
Chris Hill: Apple historically has not made a ton of acquisitions. It's worth remembering when they made the Beats acquisition, there were plenty of people scratching their heads, saying, "What are they doing? Why are they spending that money?" When you look at how the music part of their business has played out, another shrewd move.
Jason Moser: They seem to have a knack for it.
Chris Hill: We've talked recently on this show about the inventory problems facing businesses like Target and Nike, but one retailer who may be ahead of the competition is Macy's. The Wall Street Journal reported this week that Macy's credit card data from early in the year gave the company insights on shopping trends, enabling them to adjust their merchandise orders.
Andy, I got to be honest, I would not have bet on Macy's being the one to have this type of insight and adjust accordingly, but it seems like they are shaping up for a pretty good holiday season.
Andy Cross: Yeah, Chris. It's interesting, the CEO, Jeff Jeanette, said on the latest call, the improved use of data analytics enabled his leadership team really to respond quickly and adjust our inventory flow accordingly. They've implemented this Polaris strategy that allows them to really focus on inventory. Their inventory was up 7% last quarter versus the likes of 48% for Kohl's and 44% for Nike. Levi up 40%, Gap off 37%. The Macy's inventory to sales, like how much they have inventory to convert to sales is at some of their highest levels of the past decade.
This clearly is having an impact, and senior leadership started collaborating and working together, noticing the inventory management and their inventory position with all the data analytics they're starting to get from their own Macy's card, the co-branded card that their consumers use. So finance, supply chain, merchandising, planning, they all got together in January on a monthly basis and started really thinking about their inventory.
Now, they haven't been immune to it. They certainly had some stumbles, and they missed this and that, but they started to pivot back toward the back-to-work clothing spirit as opposed to the stay-at-home in the home goods. Using the data... I'm sure other companies are tied very closely to their data, but clearly, Macy's has something that's working out pretty well for them.
Chris Hill: Well, and we were talking before the show about how inventory is so difficult in retail, even under normal conditions, never mind a pandemic and global supply chain problems and all the rest.
Andy Cross: Yeah, and you're starting to see now all that work through and companies just focus, because it's pretty shocking I think and frankly maybe caught some investors a little bit by surprise on how much both the strength of the dollar as well as inflation as well as the inventory system has really caught companies behind and investors behind.
Of course, the more inventory build up, you got to pay for that inventory. Macy's, you have a stock at $17, it's less than a $5 billion market cap, has a strong yield, generates a lot of cash. The price-to-earnings ratio is in the single digits, but it seems to me to be a little bit of one of the deep value speculative plays, knowing that we're probably entering into a very tough buying environment.
Chris Hill: Jason Moser, Andy Cross, guys, we will see you later in the show.
Up next: Financial planner, Malcolm Ethridge shares why he's expecting more big rate hikes from the Fed and what it means for investors. Stay right here. This is Motley Fool Money.
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Welcome back to Motley Fool Money. I'm Chris Hill. Malcolm Ethridge is a certified financial planner, an executive with CIC Wealth, and host of the Tech Money Podcast. He joins me now. Malcolm, thanks for being here.
Malcolm Ethridge: Thanks for having me. I'm glad to be back.
Chris Hill: We are in the home stretch of 2022. As you and I are talking, the S&P 500 is down 21% year to date, the Nasdaq is down nearly 30%. I think when the history of 2022 is written for the stock market, one of the dominant storylines is going to be the Federal Reserve raising interest rates repeatedly, as they have throughout the year. They have another meeting in November and another one after that in December. You're expecting more rate hikes. Why?
Malcolm Ethridge: I'm expecting more rate hikes, for one reason, because it's literally the only card they have left to play. If you think about the handful of tools that are at the disposal of the Fed and their ability to affect our spending, basically the money supply, they don't have a ton that they can do. They've already stopped buying bonds and zapping liquidity out of the system. They've already raised interest rates to a point, which has done a good job, in my opinion, of reducing the froth that was out there. They made it more expensive to do frivolous things like do another cash-out refi for the third time in two years on my mortgage to take another $25,000 out to buy a Tesla. Or they've made it more expensive for me to go buy a car I don't necessarily need, but I want the newer model version of the car that I own.
They made it more expensive for me to borrow short term on my credit card for things that I don't necessarily need because the rate has gotten to, I don't know, 25% or something is the legal limit that they've pushed into. All of those things that really slow down and halt frivolousness -- I hate to say it that way, and it might be insulting to some people.
But for lack of a better term, and not staples; we're spending on discretionary items at that point. Those interest rate hikes have done that job to some degree. We won't know exactly how much yet, because interest for Fed policy usually takes a few months to actually work its way through the system and prove in the numbers. But I just don't think that there's anything that those rate hikes can do from this point on.
That said, I do think, because they've been so widely criticized and vilified almost by folks like Professor Siegel at Wharton, who are on TV on an every-other-day basis just lambasting, and just attacking, for lack of a better word, them in their policies and everything that they've done leading up to this. We had three rate cuts in 2019 that were unexplainable.
Mathematically, I know why they did it. It's because Powell gave into pressure from the president using his Twitter as the bully pulpit, and just decided to capitulate. But mathematically, there was no reason for those hikes, and I think this is them trying to make up for lost time and trying to make up for using words like "transient" for a year where we saw the writing on the wall. Now, they're going to overcorrect in trying to make sure that they don't miss the mark and under do it.
Chris Hill: Before we get into earnings season, which starts next week, you and I were talking during the break. The sentiment lately really has been as pessimistic as I've seen it, maybe since the Great Recession. I really think it's been more pessimistic for a longer period of time on Wall Street since late 2008, early 2009.
Malcolm Ethridge: Well, you know what my great uncle of absolutely zero relation, Warren Buffett, likes to say. It's that we should be greedy when others are fearful and fearful when others are greedy. I would say to your point, not quite. We might, in our conversation, say that we are just as pessimistic as we were in 2008, as we were in 2000, as we were in the crashes before that. But if you just take a look at the VIX, which is dubbed the Fear Index, and we look at 2008. I think the VIX got up into the '70s, if I'm not mistaken. If we look at 2020, the VIX got up into the mid-'60s. I think, '66 is where it topped out, if my memory serves correctly. Right now, the VIX is sitting just below 30.
We may be telling ourselves in conversation that we feel just as pessimistic as we did during those times because we just hate seeing it. But the reality is, we aren't halfway as pessimistic as we were on the markets at that moment in time. That may mean absolutely nothing going forward, but just from a mathematical perspective, I don't think we're there, and I don't think we're going to get there. Because if you think about what was happening, existential crisis in both of those periods, we're not there right now. We're just having an unhappy time because we're considering how good we felt the last couple of years, as far as the market was concerned. That's what we're using to anchor our comparison point.
Chris Hill: What, if anything, are you expecting out of the earning season that's going to start next week? And really kick into high gear in late October or early November.
Malcolm Ethridge: I expect it to be bad, plain and simple.
Chris Hill: Don't sugarcoat it, Malcolm. Tell me what you really think.
Malcolm Ethridge: I take the point that a lot of times folks who do what we do for a living will say about things being baked in. I generally refuse to believe that anything has ever baked into the stock market. I think that people will make knee-jerk reactions based on the news itself. There are people who will look at the rumor, buy the rumor, and sell the news. But most people will buy the rumor and buy the news or sell the rumor and sell the news. I don't see anything as being fully baked into this market.
I think what we're going to get is Q3 earnings that are bad. We expect them to be bad because like you said, pessimism is the feeling across all of Wall Street. But once we can assign math to just how bad, then folks will suddenly start to become more pessimistic and start selling again.
I think a lot of the reason for that is going to be blamed on, even if it's not true, it's going to be blamed on the currency exchange rate with our dollar index being at a 20-year-high, and being up 15 or so percent for the year. A lot of companies in the S&P 500, if not all of them, have some level of international exposure, and so them repatriating those dollars from sales they've made in those other countries against that strong dollar is going to have a serious weight on earnings.
I think that earnings season that we're two weeks out from is going to be the thing to really just crush the market and sentiment one more time. I'll be happy to be wrong, but I think that's what we're going to be looking at.
Chris Hill: To that extent, do you think that businesses that are primarily focused on the United States, should we expect more out of them? Businesses that, even if they have an international footprint, most of their money is made here in America. Is there the possibility that they surprise to the upside?
Malcolm Ethridge: Yeah. I think small caps are going to actually have their time to shine, at least over this next quarter. As folks rotate, they're trying to find a place to rotate away from large-cap multinational exposure and find a place that's less exposed to that strong dollar. Small caps, because just by nature don't have a ton of free cash to expand into multinational status, their profits are mostly going to come from here in the States. That's a way to play that without having to get out of the market completely or without having to go to cash.
Plus, if you just look at how oversold small caps are in comparison to the broader markets, the S&P 600, which I use simply because it's got a better quality mix, in my opinion, than the Russell 2000. If we just look at the S&P 600 being oversold, I think 7% or 8% more to this point, I haven't looked at this today so forgive me for being off by a few basis points. But we're more than 30 down there, and you just gave me, I think, 21 as where we are on the S&P. The difference there, I think, just tells us that we're overdue for a resurgence in the small-cap sector anyway, and I think this is how we get there.
Chris Hill: We're starting to get more color from large companies around seasonal hiring. Amazon came out earlier this week saying they're going to hire 150,000 seasonal workers. We've gotten 100,000 out of UPS and Target. Walmart, a much smaller number. But we're starting to fill in the pieces of the puzzle when it comes to holiday retail.
Is that anything you have expectations around, or are you waiting, maybe to see how Amazon's Prime event goes next week to give you a sense of what to expect? Because we're getting these competing forces, Malcolm. We're getting the surveys around consumer sentiment, which, if you take them at face value, people are concerned about inflation. They are ratcheting back their spending. And yet it also bumps up against large retailers, some of which have inventory they're looking to clear out. It's not unreasonable to expect that there're going to be some pretty big sales going into the end of this year.
Malcolm Ethridge: Well, let me say as a consumer, I am looking for those sales. I haven't quite found them yet. I heard Nike talking about an inventory glut in their last call, and it's not reflected online just yet. But as an investor, I will say I do expect the hiring numbers to be the canary in the coal mine, or the hiring expectations, I should say. Because I have started to hear that those numbers are coming in light in comparison to the last couple of years.
I think also, where I started this by saying that our access to easy money as consumers has dried up or is drying up is also what's making a difference in those retail numbers. Because if I can't pull another $25,000 out of my house, my refinancing at 3%, then Christmas isn't going to be as spectacular as it was the last couple of years.
Or if I can't use my Amex one more time to borrow, to purchase those gifts and things, again, Christmas just won't look the same. I think it definitely is going to make a difference. The fact that folks' access to that easy money is not there so much.
I do also think that retailers are already planning for this. I think not only are they hiring fewer people as far as their short-term holiday staff, they're also bringing in fewer goods, knowing that they're not going to have the same demand that they've enjoyed the last couple of years. Because I have to imagine, after two quarters of getting crushed and being surprised by inventory -- I'm doing air quotes here, but people can't quite hear me. You can't quite hear my air quotes -- but by being surprised as Doug McMillon and the CEO of Target, slips my brain for some reason.
Chris Hill: Brian Cornell.
Malcolm Ethridge: Brian Cornell. I think the third time fool me once, fool me twice. As George Bush said, "Fool me, can't get fooled again." I think, this third time, we're going to hear about them proactively controlling inventory and making sure that they're not overbuying. Even if they run out, because Black Friday is its usual Black Friday self, that's better than being stuck with inventory you can't move. I think that's already being built into their forecasting, and will be reflected in just lighter numbers from a profit perspective or from a revenue perspective, but that doesn't necessarily hurt them the same as over-inventory and having to liquidate.
Chris Hill: If you want to hear more, you can check out the Tech Money Podcast. You can find it wherever you get your podcasts. Add it to your list, give it a follow-up. Malcolm Ethridge, thank you so much for being here.
Malcolm Ethridge: Yeah. Man, always happy to sit back and talk markets with you.
Chris Hill: Coming up after the break, Jason Moser and Andy Cross are coming back. They've got a couple of stocks on their radar, so stay right here. You're listening to Motley Fool Money.
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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. Don't buy or sell stocks based solely on what you hear.
Welcome back to Motley Fool Money. Chris Hill here, once again in studio with Jason Moser and Andy Cross.
Before we get to the radar stocks, we have a late-breaking story. Shares of DraftKings moving higher on Friday on reports that the company is close to signing an exclusive partnership with ESPN. Terms of the deal are unknown at this point, but the partnership could be worth billions and include ESPN broadcasts being integrated with betting odds.
Jason, what do you think?
Jason Moser: I think it makes perfect sense that ESPN does not want to become a sportsbook. It's not what they do and they don't have the expertise in doing it, at least compared to the other companies in this market. I would say DraftKings needs this far more than the other way around. DraftKings' trailing 12-month revenue, $1.5 billion. Disney could pull that from under their couch cushions.
Now, ESPN's long-term strategy is direct to consumer, nonlinear. It's gonna be a slow haul to get there but it puts sports betting front and center, I think from that perspective, particularly when you consider mobile, so that makes a lot of sense.
ESPN could be seen, I think as a tremendous data and content engine as well. If you look at just some of the numbers involved here, DraftKings' average monthly unique payers, Chris, that's RP MUP. I'm not kidding. That's what it is. RT MUP is up to 1.5 million from 1.1 million a year ago. ESPN Plus just ended the quarter with 22.8 million paid subs. Then if you look at ESPN digital properties, they're bringing in around 120 million unique visitors on a monthly basis.
There's just a lot of potential, I think, here for a relationship. Again like I said, it makes sense that ESPN wouldn't want to actually be the book, because that puts a lot more risk on their table than they probably need to take.
Chris Hill: Neither company is commenting but Bob Chapek, CEO of Disney, has talked recently about the possibility of adding sports gambling to ESPN. If not DraftKings, I guess we shouldn't be surprised if someone strikes a deal with them.
Jason Moser: It's going to be something he seems like he wants to do it, just he wants to do it this way.
Chris Hill: Let's get to the stocks on our radar. Our man behind the glass, Rick Engdahl, is going to hit you with a question. Andy Cross, you're up first. What are you looking at this week?
Andy Cross: Guys, I'm looking at Dream Finders Homes, it's a $1 billion market cap, small-cap homebuilder focused in the Southeast, Colorado, Texas. It focuses on building entry-level first- and second-time buyer houses. It utilizes this asset-light model of buying lots rather than buying land, very much like another company, successful homebuilder, NVR, does. There's a significant need for new homes to accommodate the long-term demand trends. We have some estimates. We have a shortage of 4 million homes.
That's stock's at 11 down 42% market cap, like I mentioned, about a billion. They're going to probably close around 7,000 homes this year versus 4,800 homes last year. The growth is very rapid. They continue to improve their profitability now and they have a very large backlog.
Now, of course, guys, the risk with homebuilders is the recessions, rising interest rates, and then access to land to be able to build homes and in an environment of increasing regulation. That's why the stock sells at 2 times book value and a price-earnings ratio of 6 times, with earnings likely in the future going down. We're going to be challenged. That's why it's a watch list for me. I'm interested in the homebuilders because they've been so beaten up, but it's still just a watch list for me right now.
Chris Hill: And the ticker?
Andy Cross: DFH.
Chris Hill: Rick, question about Dream Finders Homes?
Rick Engdahl: Sure. As a small company building dream homes, do they have any official affiliation with Mattel?
Andy Cross: I don't think they do. Barbie is not a spokesperson, as far as I know. Patrick Zalupski, the founder and CEO, owns 65% of the company but I don't know if he's a fan of Barbie or not.
Chris Hill: I mean, it seems like an obvious celebrity endorsement opportunity right there.
Jason Moser, what are you looking at this week?
Jason Moser: Yeah. Going with Alphabet, a couple of tickers here, GOOG, that's the Class C with no vote, or you could go GOOGL, that's the Class A, that gives you a vote. Prices are pretty close together. I don't tend to pay for those votes. It doesn't matter anyway. I own the GOOG, personally.
Another strong performer. I think a business that everyone is already familiar with. The search tool alone with Google is just immensely valuable. Organizing the world's information, but it extends so far beyond that with things like Maps, Waze, entertainment, YouTube, and whatnot. This is just such a strong business from so many different directions.
I think something that is being overlooked today: Look for when its cloud services business starts hunting and operating profit. It's still losing money today. But that's by design. They are investing a ton of money in this because they see where the world is headed. Wants that happens, once that business starts turning in operating profit. That to me feels like a big tailwind that's just not fully accounted in the stock price today.
It's trading at around 20 times full-year estimates, that's around what the market is trading at today as well. This is a premium business. It deserves to trade at a premium multiple to the market. I think you take advantage of near-term pessimism in advertising today. This too shall pass. This is a stock you want to own for years.
Chris Hill: Rick, a question about Alphabet?
Rick Engdahl: If they're not inventing the metaverse or colonizing Mars, what does the world of tomorrow look like from the perspective of Alphabet?
Jason Moser: I don't know. But man, I'm going to tell you what: The metaverse is a maybe, right, social is fleeting, but like I say, Rick, search is forever.
Chris Hill: Two very different businesses. Rick, you got one you want to add to your watch list.
Rick Engdahl: Now, I guess got to add them both.
Chris Hill: Andy Cross, Jason Moser, guys. Thanks so much for being here.
Andy Cross: Thanks, Chris.
Chris Hill: That's it for this week's Motley Fool Money radio show. The show is mixed by Rick Engdahl. I'm Chris Hill. Thanks for listening. We'll see you next time.
