On this episode ofMarket Foolery, host Chris Hill is joined byMillion Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman as they dig into the latest earnings news as a horde of companies report their results. But while they are focused on the wins atHalliburton(NYSE: HAL)and Hasbro(NASDAQ: HAS), they have other reasons to check in with Netflix (NASDAQ: NFLX)and Fitbit(NYSE: FIT).
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A full transcript follows the video.
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This video was recorded on April 24, 2017.
Chris Hill: It's Monday, April 24th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Million Dollar Portfolio, Jason Moser, and from Stock Advisor Canada, Taylor Muckerman. Happy Monday, gents!
Taylor Muckerman: Back in the building.
Hill: Holy cow!
Muckerman: What happened?
Hill: Strap in for earnings-palooza.
Moser: I was looking at an infographic onTwitterearlier today,it was basically just a picture of all the company logos of the earnings that matter this week,and it was a big picture.
Hill: 190 companies in theS&P 500 are reporting this week. Andwe're going to talk about some of them.
Moser: I think 75% of MDP's holdings report this week.
Muckerman: Warm those fingers up, baby.
Moser: Let'slight this candle.
Muckerman: Crack those knuckles.
Hill: We'regoing to get into some earnings, we'regoing to get into some unsurprising news thatI'm pretty sure we called aboutNetflix,and some good news forSamsung,but let's start withHalliburton. Firstquarter profits came inslightly higher than expected. I guess they'redoing some more drilling in North America.
Muckerman: Yeah, that's the key here. Italways is for Halliburton. The largest land driller in North America. Starting to gain aninternational presence. But over 50% relies on North America. Revenue there is up 24%quarter over quarter. Typically, you seea little bit less of rig activity in the first quarter due to winter weather, but this was an outlier. U.S. land up 30%, so driving that. International revenues down about 8% quarter over quarter, but Latin America looking strong out of Brazil and Mexico. And they did call a bottom for theEastern Hemispherein terms of rig count. But they'renot looking for significant growth over the 2016 levels. Buthopefully no less of an impact there, as rig countsstabilize or grow a little bit into the second half.
Hill: What shouldinvestors expect in terms of the business ofHalliburton over the next, say, three years, andhow much of it should betied to the price of gas? Because this is a stock that had doneso well for so long, and like everybody else,affected by the price of gas. You among others said on this show, "If anyone is built to withstand a downturn in the price of oil, it's Halliburton."
Muckerman: Yeah,it certainly is, and it has shown that. Theprice has rallied back quite significantly. Evenin the downturn, it was there to support its customers, giving them price cuts, andeven helping finance some of the drilling that these companies were trying to do through Halliburton. They showed good faith to their most loyal customers, andI think they're going to be rewarded for that. Granted, they need to nowincrease their prices a little bit. Not too dramatically, because oil prices are stillpretty subdued. We've seen some supply worries, so prices are now back below $50. But, for this company, near term,definitely some adjustments to be made, you'rebringing a lot of equipment back online, they've talked about hiring a lot more people coming up. Margins did get impacted by that a little bitin the first quarter here. So,I would look for them to maybe not try to get outahead of themselves too much,because as you can see, price of oil isn't set to rise too dramatically in the near term. But North America drillers, still veryravenous appetite to drill. Andthis is the company that's servicing them. So,I have very high hopes for this company over the next three years, butdon't get too far ahead of yourselves inthe near term.
Moser: Yeah. We actually sold Halliburton from MDP not too terribly long ago. It was a good investment for us. We made some money with it. Butpart of it was based on just that --we don't see that catalyst taking oil prices a whole heck of a lot higher over the course ofthe coming couple of years. That's the proxy we use to see how these guys are doing. I've been of the thought that, we wouldcertainly see oil prices bounce back to $50 to $70 over the coming five years, simply because of the supply and demanddynamics at play here. I'm becoming a little bit more skeptical that may be the case, because we're seeing a lot of consideration for otheralternatives out there. Really, I thinkTeslahas made a lot moreprogress here to this point than a lot of people probably thought they would have. They'reobviously not selling the same amount of cars asFordandGMare, but they aremaking a lot of progress. And I think maybe the mindset is such that there are alternatives out there, it does matter, a lot of people are getting on board with alternative energy. I can't help but wonder if these oil plays aren'tnecessarily going to get back to those days of $70 to $80 oil. If they don't,how much upside can we really expect from them? AndHalliburton is certainly a big player in the space,one of the biggest. I think theBaker Hughesdealbeing called off probably ...
Muckerman: Yeah,crimped their style just a little bit. Yeah,lost a few billion dollars. But yeah, to your point, oilprices are still suffering, and that's with OPEC at99% compliance of their announced cutslast November, which is unheard of for OPEC. Theiraverage compliance, generally, is in the 75% to 85% range. They're at 99% right now,and it's still not affecting the price of oil to the upside. So, I expect another cut from them,or at least to maintain their cut after the six month review period,which is coming up pretty soon. I expect them to maintain ormaybe even cut a little bit more, becauseoil prices are still not where they need to be for those OPEC countries to sustain theirgovernment spending habits.
Hill: Firstquarter profit and revenue forHasbrocame in higher than expected. Jason, wetalk about the Disneyprincess contract they got a few years back, butyou look at this quarter and it's a nice reminder that Hasbro has apretty strong portfolio beyond that,including the Transformers toys and Nerf.
Moser: Yeah,very strong quarter. And given the retail environment in general, and the egg thatMatteljust laid here duringearning season, it was very fairgoing into this report to wonder,regardless of what Hasbro reported, how the market would necessarily react to it. I think the key here is that Hasbro and management are meeting their owninternal expectations, which are pretty much in line with Wall Street's expectations, and they see more of the same forthe coming year. These toy makers, as they go throughout the year, quarter one is the low point. Andas you'll see as we get to the holiday season, theperformance starts to really pick up.I think what's really worth noting here isHasbro has a lot of strength in their franchise brands versus the partner brands. Thefranchise brands are names like Nerfand Play-Doh andTransformers,like you mentioned, versus partner brands,which are things like Star Wars and Disney princesses and whatnot.
On the heels of apretty strong film season,sort of hitting the reset button on the partner brands side of the business, and gettingready for a busier holiday season here. To see that they can seea little bit of a decline there in the partner brandssegment of the business, and they can really pick up that slack with the franchise brands, shows us that the franchise brands still have some strength. Which is key, becauseMattel haswitnessed some weaknesswith some of their historically stronger franchise brands. But the thing that took me back was 43% growth in gaming. We've talked about these toy makers, and coming into this digital age, and how they were going to embrace it and do it, Hasbro,it seemed like they figured something out. Monopoly is obviously a big name for Hasbro. But 43% growth in gaming, I think, is just impressive to look at. Whenyou add that to the success in the franchise division --
Hill: Is that a smaller base that they're working off of, though?
Moser: Potentially. You'recoming off of apretty easy comparable there. But still,the growth is the growth. And when we're talking about, No. 1, Hasbro isn't really known for video games and digital games,so to be able to pick up that share there is impressive. But again, Hasbro on the whole has a very diverse business with a lot ofsuccessful properties in it, andthis quarter certainly proved that.
Hill: I think last week, we weretalking about Netflix needing to raise some money.
Muckerman: And they do.[laughs]
Hill: Herewe are a week later. Netflix raising $1 billion in Europe. They can use it for whatever they want,but doesn't the smart money say they're going to be spending,if not all of this money, at least the bulk of this money, on original content?
Muckerman: They'd better. Amazoniscatching up to them in terms of spending on original content. $6 billion for Netflix this year, and $4.5 billion for Amazon this year. They'reramping it up. They can sell their Prime video forless than Netflix can,because they can rely on the retail and Amazon Web Services. There's definitely some competition there heating up for the over the top original content programming, andAmazon is not something I want to see in my rearview mirrorif I'm Netflix.
Hill: Whatdo you think, Jason?
Moser: This was certainly expected. Netflix is a business that is going to bebeholden to this very behaviorfor the foreseeable future. They weretransparent about that. Reed Hastings has a strategy, and he's playing it out. On the one hand, weexpect to see this,might as well get this financing while it's cheap. They also have a pretty healthy stock price,I guess is the best way to put it, and they couldcertainly get some cheap capital there as well. I thinkthe question that I have with Netflix -- and,I think this is a wonderful business, and Reed Hastings is very bright, he saw this a long time agoand the strategy has really worked out well for him --at some point,you have to start wondering how saturated the subscriber base becomes, and then you have to start asking the question,what kind of pricing power do these guys have? Becausewe are in such a competitive environment now,and there's so many alternatives out there. We were talking about this earlier this morning on the MDP team, about how 20 or30 years ago, when The Sopranos came out forHBO,that was sort of a revolutionary program,it was sort of a step forward for television. And it was unique. And it lived a very long life, even well after it had gone off the air.
Today, I don't think thesepurveyors of original content have that same luxury. These franchises, these names, they don't last as long, theydon't live as long because there's so much competition out there. So,something like House of Cards, for example,probably isn't going to be as relevant -- andmaybe that's an outlier, I hear it's really good -- but,I don't know that it's going to hold the same sort of relevance 10 or 20 years down the line thatsomething like The Sopranos did. I thinkwhen we start looking at this business, we have to think, "These guys areprobably going to have to be raising a lot of moneyperpetually in order to keep churning out theoriginal content and keeping up withall of the other players in the space." This is a fascinating space to watch,and I think Netflix is certainly the leader in it. I thinkthey've done a lot of things right. And I don't suspect Netflix is going togo the way of the dodo bird. But looking at it from an investor's perspective,I wonder if maybe the low-hanging fruit hasn't been picked here.
Hill: But, in terms of just this deal, just the raising of $1 billion, do youprefer this moveas opposed to a secondary offering? Let's justissue some more stock?
Moser: I thinktoday I would rather see them take the debt out,because at some point, rates are going to be a bit higher, and I think they're going to tend to probably keep a pretty healthy share price. Generally speaking,Wall Street is on board with what they're doing, and it's obviously a very good businessthat's very customer-centric. I think, when you have a business with leadership, Reed Hastings,Jeff Bezos, these kinds of people, and they're very customer-centric, they reallywant to give their customers what they want, those are really powerful long-term stories, as long as they stay in line with thatphilosophy. I suspect that Netflix will be very successful for many years to come, just because of that alone.
Hill: Thank you, doctor. No,it's an interesting question, the example that you raised, Jason, about The Sopranos and HBO,because any time I open up theHBO Go app, I am struck byhow prominent The Sopranos is, still,to this day, in terms of HBO promoting it. It is so well regarded,it has held up over time, and it is one of those "HBO classic series" that brand-newaudiences are finding every year. I think we'llonly figure this out as time goes on, butit will be interesting to see 10 years from now, 20 years from now,what are the things that Netflix is promoting, that they own? What is theiroriginal content that they keeppushing out to people, because it holds up over time?
Moser: Yeah,that's the big question. I have never seenone episode of House of Cards,I don't know anything about the showother than it's been very well received. Maybe that's their Sopranos,maybe that's the property that holds up over time. I think those aregoing to be very tough to come byin the coming decade and beyondbecause of the amount of content. There's just so muchgood stuff out there, far more TV than there istime in the day to watch it,at least for most of us.
Hill: Some good news for Samsung today. They are no longer the only consumer techcompany making headlines for having their products explode.
Moser: [laughs]I love how you framed that.
Hill: AWisconsin woman said she sustainedsecond-degree burns after herFitbitFitness tracker exploded on her wrist. Diana Mitchell had only owned herFitbit Flex 2 for two weeks when thealleged incident occurredas she was reading a book. She said there wasno indication there was anything wrong with the device,I'm assuming right up until it explodedon her wrist. She was reading a book! She was justhanging out reading!
Muckerman: Sheshould have been walking. It was a warning shot. "Get up and move!"
Hill: You think that's what it was?![laughs]
Moser: It'slike the boxing glove alarm clock,giving you that nudge.
Hill: That,to me, is the most amazing part of this story. It's not, "She wasout there running and exercising, burning it up ... "
Muckerman: "The heat of the sun ... "
Hill: Yeah. Someextenuating circumstances, no. She was just hanging out reading a book. And if you're Fitbit, let's give them thebenefit of the doubt. Let's say this is the only time this happens,it's not a Samsung 7 situation where there are multiple incidents. Let's say this isthe only time this happens. If you areFitbit, this is absolutely the last thing you need. Even if it's just one time,this is the last thing you need.
Muckerman: You'renot nearly as well diversified as Samsung. They couldrecover a little bit better.
Moser: We werehaving fun, but I certainly don't want to make light of anyonehaving something that explodes on them.
Hill: Yeah,you saw the picture.
Moser: I did, I don't want that happening to me. The thing is,I can't help it go back to this question, I wonderhow much this actually matters for these guys at this point. That old saying,if a tree falls in the woods and nobody's there to hear it, does it make a sound? For Fitbit,does it really matter at this point? Isn't this company kind of done anyway? I think the fitness device market, perhaps, has had its day in the sun.
Hill: Really? You think they're going away?
Moser: No,I don't think they're going,but I think the novelty of the concept has worn off.I think the people who really want them have them. And I don't know what the growth opportunity there is. I thinkFitbit trying to become something more than thisdevice company told us a lot right there. They even know, they had to bea little bit more than a hardware provider in order to be successfulin this line of work,because it's really not about the hardware,it's about what the hardware is telling you. AndI think a lot of these devices have had the hurdle ofmaking sure the device is giving you good information.
Hill: And not exploding.
Moser: Andnot exploding. But, I feel like they'velost their novelty. I feel like the people who want them have them. And yeah,this certainly doesn't help them at all. ButI don't even know that it really matters at this point.
Muckerman: Your phone can do it, there'splenty of watches that can do it. IfUnder Armourhas their druthers, their clothes are going to do it.
Moser: They haveshoes that are doing it. Now,you can wear shoes that will tell youall this stuff, and you don't have to wear this little band. Now, ifUnder Armour shoes start exploding,we have a big problem.
Muckerman: If you'reclose to the finish line, maybe that helps you out a little bit.
Moser: The neatthing about the wearables market is figuring that it doesn't actually have to be a watch or some wristdevice, it could be something a bit morediscreet and not so obvious.I think those are the implications that the wearables market -- that, to me, is the forward-looking nature of it. I think Fitbit hasn't reallypresented us with anything beyonddevices that may or may not explode on your wrist.
Hill: Do you think 2017 is the year that someone buys Fitbit?
Moser: I don't think so.
Moser:I don't know why you would buy it. Why would you buy it? That's the question.
Hill: I think you would buy it because the brand,assuming no more explosions take place and burn people's wrists --
Moser: Yeah,let's hope this is anisolated incident.
Hill: Absolutely. I think there is somevalue there, more than zero, is the way I would put it.
Muckerman: Butare they willing to sell for less than --
Moser: Theexample I go back to isLeapFrog.I think LeapFrog was a very good case study of something where, generally speaking, you likewhat they stand for. It wasbuilding devices for kids tohelp them start learning younger than ever before. But the problem was, theyimmediately became obsolete.
Muckerman: Youput an app on an iPad for that, yeah.
Moser: Exactly. So,it was less about the device and more about the information the device wasgiving you, and there are other ways to get that information out there, and LeapFrog'stechnology was really rendered obsolete in short order. And then, as anacquirer,you have to look at that and say, "Why do I want this? Is thissomething that's going to require more money to fix or turn around than is worth it?" BecauseI'm certain that businesses likeApple, forexample, are going to have better ways to get that information out of consumers, and parseall of that data and actually make something of it. So,I don't know, I guessI'm not clear as to why someone would want to acquire it.
Hill: Remains to be seen. All right. Jason Moser, Taylor Muckerman,thanks for being here, guys! As,always, people on the program may have interestsin the stocks they talk about,and The Motley Fool may have formal recommendationsfor or against, so don't buy or sell stocks basedsolely on what you hear. That's going to do it forthis edition of Market Foolery. The show is mixed by Dan Boyd.I'm Chris Hill. Thanks for listening, we'llsee you tomorrow!
Chris Hill owns shares of Amazon, Under Armour (C Shares), and Walt Disney. Jason Moser owns shares of Apple, Hasbro, Twitter, Under Armour (A Shares), Under Armour (C Shares), and Walt Disney. Taylor Muckerman owns shares of Amazon, Halliburton, Tesla, Twitter, and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Apple, Fitbit, Ford, Hasbro, Netflix, Tesla, Twitter, Under Armour (A Shares), Under Armour (C Shares), and Walt Disney. The Motley Fool has a disclosure policy.