This Week's Updates From Hain Celestial, Restaurant Brands, and Netflix
In this episode of Market Foolery,Chris Hill, Taylor Muckerman, and Jason Moser cover some major news from this week: The S&P 500 hit a round number milestone;Hain Celestialopened up about its accounting issues, Restaurant Brands Internationalreported a strong quarter; and yes, at last, you will soon be able to buy an authenticStranger Thingst-shirt.
A full transcript follows the video.
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This podcast was recorded on Feb. 13, 2017.
Chris Hill: It's Monday, February 13th. Welcome to Market Foolery. I'm Chris Hill. Joining me in the studio today for Million Dollar Portfolio, Jason Moser, and from Stock Advisor Canada, Taylor Muckerman. Happy Monday, gents.
TaylorMuckerman: You as well.
Hill: Braving the winds.
Muckerman: Para glided into work today.
Hill: Yeah. No snow, but ....
Muckerman: No snow.
Hill: It's a little gusty out there.
Jason Moser: Little bit.
Hill: We've got some earning news to get to. The news fairy did show up over the weekend. Before we get to that, let's get this over. You mentioned this this morning, Jason. We had a little bit of fun, I think it's fair to say, with all of the hoopla surrounding Dow 20,000.
We love the big, round numbers. Ultimately, it's nothing that we focus too much on. Yet, an even bigger round number hit today. That is the S&P 500 Index hitting $20 trillion in market cap. Five hundred companies, for a combined $20 trillion.
Moser: I like that big round number. That to me, is a more impressive big, round number. We talk a lot about the difference between Dow and the S&P for a number of reasons. The Dow being a price-weighted index versus the S&P being a market cap-weighted index. That's why that statistic matters more when it comes to the S&P.
Twenty trillion dollars is, obviously, a lot of money. Again, it's not something that tells us anything in particular other than over time it seems to pay to be a long term-focused investor. It pays really, I think, to think in decades versus perhaps days as much of the financial media would have us do today.
This is why we do what we do here. We feel like when you can find a lot of those great businesses out there, you invest in them, you hang on to them through thick and thin. Perhaps during some of the thin times it's even worth adding. I think it pays to own some of an S&P index fund, because you will participate in that upside as well.
Again, nothing terribly surprising. I think it's never really a straight line up. When you do look at the line, over 5, 10, 15, 20 years, it does go up. This is just another shining example.
Muckerman: Do we know where it started at? It didn't start at zero.
Moser: Yeah, that would suck if it started like $21 trillion. Yay, it got to 21. No, it definitely was not $21 trillion.
Hill: Much, much lower, because 10 companies, this blew my mind, again 500 companies in the index. Ten of them comprise 21% of the market cap:Apple, Alphabet, Microsoft, Berkshire Hathaway, Amazon, Facebook, Exxon Mobil, Johnson&Johnson, JP Morgan Chase, and Wells Fargo.
Moser: Does that mean that the average company on the S&P is $40 billion market cap? Is that the math? I'd double check that.
Hill: Please don't make me do math.
Moser: Yeah, it's a little early.
Muckerman: Sounds about right.
Hill: Let's get to what the news fairy brought us over the weekend. Hain Celestial Group is the parent company of a bunch of different organic food brands. Shares are hitting their lowest point since 2013, because the company disclosed that the accounting practices at Hain Celestial are being investigated by a little group we like to call the SEC.
Moser: That's not the football conference. This is the ...
Hill: That is not the football conference.
Moser: ... SEC that monitors everything basically that goes on in these markets. On the surface, yeah, this looks not good. The time of this filing, I hate it when companies do this. They threw this filing out there Friday afternoon after the market closed that their 10Q was going to be late and that the SEC had launched this investigation.
Even if there is absolutely no wrong doing here whatsoever, that may be the case. Let's be very clear. You hate to see, when filings like this happen, is simply the perception is that they're throwing something under the radar there. Perception, in many cases ...
Hill: Optics are powerful.
Moser: Exactly. Perception really matters. This goes back to something that was going on in the latter half of 2016 where there were some questions as far as revenue recognition. I think some potential concessions they were giving to distributors and how that all flowed through the financials. Ultimately, they had done a third party audit, which revealed no wrong doing. Everything seemed to be in order.
This recent news tells us that the SEC opening this investigation perhaps is just the SEC doing its job. Taylor said, right before the taping, Taylor noted that. He was like, "Maybe this is just the SEC doing its job." I tend to agree with that. I think this may just be a situation where it's more process than actual problem.
We may be looking at some restatements here at a minimum. Then, all of a sudden that brings everything into question regarding what the market has been willing to pay for the stock up to this point based on expectations out there that may have been off base.
I think it's important to note here too, though this is an issue that is not a brand problem. This is not like a Chipotle situation where they have to go out there and focus on brand recovery crisis management. In fact, I would be willing to bet that 99.9% of the consumers are not going to have any idea what this means, or that it's even happening.
Hill: You might recognize some of the brands themselves, but ....
Muckerman: He'll recognize Hain Celestial.
Hill: Hain Celestial is not appearing on the packaging.
Moser: Exactly. They have a bunch of brands that you find in your ...
Hill: Prominently.
Moser: ... grocery stores from Whole Foods to Giant and everywhere in between. Let's not forget the success that's led up to this point. This is a very successful business to this point, grown revenue at a nice clip, it's profitable, it's cash flow positive. For a growth company, that's a big deal. A lot of these growth companies it takes forever to get to profitability.
I like the fact that they're selling food. That's a good repeat sales business there. The founder and the CEO there, Irwin David Simon, he's been around for a while. He's been the CEO of this business since 1993. He owns a pretty good slug of shares. He's vested in this.
Yeah, it looks bad today. Probably pretty easy to make fun of. In all honesty, I have a hard time believing that this stock has not recovered from this over the course of the next year to two years. Of course, unless the SEC digs up some serious wrong doing, I'm inclined to believe that probably won't happen based on the independent third party audit that has already happened. I tend to think like what Taylor said. "This may just be a situation where the SEC is doing its job."
Hill: I don't know.
Moser: Chris doesn't seem to be ...
Muckerman: A dubious look on his face.
Hill: Here's the thing. This is not a company I follow very closely. I read an article. Brian Stoffel, one of our writers here at the Motley Fool had written, about a month ago. He had owned Hain Celestial for some period of time, sold it in early 2016 and basically wrote this article in mid-January saying, "Look, I've never shorted a stock before, but I think I would consider it in this case," and raised a couple of red flags. This is before the delay of the 10Q called out the accounting stuff that you had mentioned, Jason.
Also, called out that if you look at overall management and throw in the board of directors, there's not a ton of skin in the game that the leadership has. They've got some stake in the company, but not necessarily as much as you would expect given that Hain Celestial is not a $20 billion company.
The market cap at this point is, I think around $3 billion, or something like that. I don't know. I think it's one of those things where if this were the first time this were happening; if this were the first indication of any kind of ... I'm not trying to pick on Hain Celestial. I think just any company, the first indication of, "You know what? We might have some accounting issues," maybe you give them a pass.
Muckerman: Yeah, that ...
Hill: This ain't the first time.
Moser: I don't like it when my companies are under SEC investigation. I think that there are always ... No company out there is perfect. We can sit there and nitpick any of them. Red flags, aside. I don't look at founder leaders, for example, and say, "The founder's the CEO and he's been in there for ..." That doesn't make it a good investment.
Those are qualities we like to see, but it doesn't necessarily mean it's a good investment. I certainly don't mean to imply that's the case here. This is a pretty simple business, though. They sell food.
It's not like you're amortizing a bunch of software over the course of the ... You're not setting up capital leases. You don't have to capitalize a bunch of stuff on the balance sheet to make this thing work. It is a pretty simple business to understand how the financials work.
Again, it's entirely possible there could be some outright fraud here. I don't lean in that direction simply because it would be very difficult to really cover that up with this type of business. You know what I mean?
Muckerman: There's not as many dark corners on the balance sheet and the income statement, yeah.
Moser: Yeah, this is not like Goldman Sachs.
Hill: I was going to say there's no black box that they're selling.
Muckerman: There's Cayman Island holdings.
Moser: I'm not a shorter either. I don't think I've ever shorted a stock other than just with my mouth. I would look at this and think I would prefer just to not invest in it versus shorting it. I understand this is trepidation. I look at this thing and think, "Yeah, there's some red flags." You hate to see this kind of stuff happening. If it was ongoing, I think, this is basically a continuation of the same thing.
Again, worth keeping an eye on. I don't know that I would necessarily go out there and just say, "Hey, this is a buying opportunity." This is a business that has been successful up to this point. It is a simple business to understand. The founder does own close to 2% of shares. To me, that's pretty significant. He's got a lot of money tied up in this thing. There is a lot of consolidation going on in this industry. We saw WhiteWave not too terribly long ago.
Muckerman: Yeah, yeah.
Moser: It's one to definitely keep an eye on. I wouldn't use this headline today and think, "You just got to get out of this stock and it's not worth your time." I don't think this is that drastic yet.
Hill: Restaurant Brands is the parent company of Burger King and Tim Horton's. Fourth quarter profits came in higher than expected and shares are hitting a new high today. Pretty nice.
Muckerman: Yeah, not to bad. Two different brands merged not too long ago, created the Restaurant Brands International, ticker QSR.
Hill: I like that ticker.
Muckerman: You a big fan of that?
Hill: Quick service restaurant.
Moser: There's a web site called QSR. I wonder if they like ...
Hill: Yeah, it's the whole category.
Moser: Wouldn't they like a little bit of a back and forth there? You can't do that.
Muckerman: I'm surprised they even got that ticker. They used to be THI for Tim Horton's up in Canada. You're seeing this story as international growth story, merger-related cost savings on the general administrative side. BK moving international. Tim Horton's moving down south into the US. They also have some new joint venture franchise agreements in Mexico, the Philippines, and the UK. That's the big story here with this company.
As you mentioned, did beat estimates for the quarter, earnings up about 38%. Same store sales, pretty flat for Tim Horton's, but decently strong for Burger King. If you look at 2016 versus 2015, growth has slowed a little bit across both brands. You definitely want to keep an eye on that. With the stock at all time high, or you might want to take a quick breather before you jump into these shares, but two really well known brands and apparently people are eating a lot of Bacon Kings.
Moser: Bacon?
Muckerman: Bacon Kings. It's the new sandwich that Burger King ...
Moser: Yeah, you had me at bacon.
Muckerman: ... unleashed in the fourth quarter. Then they had the $0.89 pancakes, which apparently did pretty well for them in December.
Moser: Did they have bacon?
Muckerman: No, not on the $0.89 pancakes.
Hill: You got to pay more for that.
Muckerman: You get two Whoppers for 10 bucks now, if you're hungry.
Hill: I'm never that ...
Muckerman: Two Whoppers, come on, 10 bucks.
Hill: Maybe you split it with someone. They are very much in the franchise model. There's not a lot of company-owned stuff going on there.
Muckerman: Yeah, that's where a lot of their revenue comes from that. As I mentioned, they signed, what are they called, master franchise joint ventures in Mexico, UK, and Philippines. That is definitely the direction that they're heading for the future and generally, what they have done in the past as well.
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Netflixis getting into merchandising. To which I say, it's about damn time. The company has posted a job on its web site hiring for a senior manager of licensing, merchandising, and promotion. I said before we started taping, it was a year ago. It was February of last year when we were talking about this very company and this very topic.
Muckerman: It took a them a while to listen.
Hill: Say this is a no brainer. Merchandising, not that it's going to create this vast stream of money, but you can do merchandising in a way where it essentially goes straight to your bottom line. If you're Netflix and you can add incrementally to your bottom line, you should do that.
Moser: It creates a bunch of buzz too. Anybody walking around in a tee shirt that says whatever, Heisenberg, or whatever it was from Breaking Bad. You see those types of shows that are so successful. There are plenty of people out there that would love to have some form of merchandise, whether it is a coffee cup, or ...
Hey, we were just down at Universal Studios a few weeks back. I keep my souvenir. The kids want all the stuff. My souvenir? I got the .... We went to the Simpson's world. I got the Duff beer can. It's a coffee travel mug, but it looks like a Duff beer can.
Hill: Nice.
Moser: It is nice. That's a good example right there. It's a no brainer.
Hill: I don't know what you paid for that, but I'm guessing it wasn't inexpensive.
Moser: It was not. It was $20.
Hill: You were like, "I'm paying for this."
Moser: It was $20 and it never ... I never even had a question. I said, "Boom." It could have been $50 and I'd probably said, "Hey, give it to me." There's going to be plenty of demand out there for these kinds of things for the foreseeable future.
I think probably they were waiting just to see, just to make sure that they were doing the right thing as far as the original content. They were making good decisions on that front with shows that are gaining traction. I think it's safe to say they've figured something out here. I think they have some pretty good beginnings there as far as original content goes. This is going to be something I think that just gains steam as they do.
Muckerman: Yeah, 100%. If you look at Disney, at $1.5 billion in consumer sales in the last quarter. Netflix $8.3 billion sales in the entire 2016 year. There's some room for improvement. Not to say that they're going to catch up to Disney on the consumer side, because they don't have that brand power. Certainly, people are listening, or watching their shows on Netflix. As they continue to move around the globe, it's just going to become more and more widespread.
I think they have tested it with Hot Topic and Stranger Things. Never seen the show, so I can't talk about the characters, or anything. Shirts, mugs like we just talked about, they're selling that. Interesting to see, though how you can see new spike for a company just based on a job posting.
Moser: I think the interesting thing with the way this stuff works now though is because content is put out there in just one big season. You're going to get your episodes of one full season out there at once.
Muckerman: Yeah, that's true.
Moser: It seems like content .... It seems like these shows are living maybe shorter lives than they used to on linear television depending on how Netflix, or Amazon puts them out. You have something like House of Cards, or Orange Is the New Black that's still alive today. Those are the outliers. I don't think many shows tend to make it that far.
A couple seasons, a few seasons. If you've done that, you've done really well. Then you wonder how long does that merchandise really ... How relevant is it? How long does it stay relevant? After three years, is there even any demand for something like that out there? Perhaps there would be, because with Netflix, that content lives there forever. Seemingly, new subscribers would be checking it out.
The flip side to that is they already have so many subscribers, I don't know how many subscribers are going to be actually new ones.
Hill: One of the things we've heard about Netflix, for years, is just how much data they have on their subscribers right down to we know when you paused this show, at what point, when you started watching it again, all that sort of thing.
You're right. There may be, just as there may be a shorter shelf life for the programming itself, there may be a shorter shelf life for the merchandise. I think that when you consider how they, in theory, how they can target merchandise to individual people, to individual subscribers, saying, "Hey, we know what shows you want, you have already watched, so here's the stuff we're going to serve up to you. It's different that the stuff we're going to serve up to Taylor, because he might want to buy other stuff."
When you throw that in, plus the fact that, again, they can do merchandising. They can do as much, or as little as they want. As much as they want, is we're going to hire all the people. We're going to make all the stuff and we're going to reap all of the profits.
The much lighter way to do it is to say, "We're going to outsource just about everything and we're just going to take our cut and that's going to go right to the bottom line after we pay whoever this person is we're going to hire."
Moser: I think the important part of this is that ... It's not going to make, or break the business in either way. I think there is plenty of upside and very limited downside to this decision.
Hill: Thanks for being here, guys.
Moser: Thank you.
Muckerman: Thank you.
Hill: As always, people on the program may have interests in the stocks they talk about. 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fools board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fools Board of Directors. LinkedIn is owned by Microsoft. Chris Hill owns shares of Amazon, Chipotle Mexican Grill, Johnson and Johnson, Walt Disney, and Whole Foods Market. Jason Moser owns shares of Apple, Berkshire Hathaway (B shares), Chipotle Mexican Grill, Walt Disney, and Whole Foods Market. Taylor Muckerman owns shares of Alphabet (C shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Chipotle Mexican Grill, Facebook, Hain Celestial, Netflix, Walt Disney, and Whole Foods Market. The Motley Fool owns shares of ExxonMobil and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy.