In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and earning reports from Wall Street. They discuss the strategic shift in Disney's (DIS 0.81%) priorities. Plus, a health giant makes headlines, Chris and Jason discuss why a stay-at-home stock is popping, and much more.
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This video was recorded on Oct. 13, 2020.
Chris Hill: It's Tuesday, Oct. 13. Welcome to MarketFoolery. I'm Chris Hill. With me today, the one and only Jason Moser. Good to see you.
Jason Moser: Good to see you.
Hill: We have got a health giant in the headlines. We've got a stay-at-home stock that is on the rise. But we are going to start with the house that Mickey built.
Shares of Disney up nearly 5% this morning, after the company announced reorganization that is going to prioritize streaming video. They're going to have three content groups: One for sports, one for general entertainment, one for movies. And the ongoing challenge, for lack of a better word, I think it's fair to say, and something that will be interesting to watch, is how Disney prioritizes what is the best platform for any given piece of content.
Bob Chapek, the CEO was on CNBC yesterday, after the market closed, talking with Julia Boorstin. And she asked him a great question, which is essentially, Disney has done very well with sort of those big tentpole movies in the theaters. Are you changing that strategy, do you know -- I don't think she used the word "abandoned," but she may as well have said, are you giving up on movie theaters in favor of the Disney+ streaming service? And I loved his answer, he said, we're going to put the customer first, which [laughs] basically means all options are open.
Moser: Yeah, I really am glad you mentioned that, because my biggest takeaway from that was essentially, his statement that the customer is ultimately going to guide their strategy. I mean, that's what it all boils down to, you're building a business, you're basically trying to give your customers what they want. In most cases, you're not going to get out there and just tell your customers what they want and then deliver it to them. You find out what your customers want, then you build around that.
And I think that's the right way to look at it from this perspective as well. I think that Disney, for a long time, has really been close to the ultimate direct-to-consumer business, right? The parks being such a big part of the business, I mean that is as direct-to-consumers as it gets. You're living in that world for as long as you want to go there. And so, I like this move here. I like the focus. Streaming is obviously not some kind of fad; this is really the new model for distribution. And so, to see that they are arranging or reorganizing their business to really focus on that, I think that makes a lot of sense.
You mentioned something that I think really keys on the challenges there; and it's figuring out which platform gets which content. And I think it's a very tough strategy, in their case, to figure out how to marry Disney+ with ESPN+ with Hulu and whatever else they may come up with, because they are three distinct platforms that offer three distinct experiences. And I think probably the one thing that you could argue that they're not as focused on yet that they need to focus on is the content beyond the younger consumer, right, the kids. Disney+ is an awesome platform for the kids; Hulu is getting there. I think the FX acquisition was a step in that direction. I think having FX on our platform is a step in that direction. I think as they continue to build out the platform and bring more content for all age groups, it'll become a little bit more apparent, but knowing that they're really going to be focusing on this delivering the content directly to the consumer, I mean, cable is dying, it may take a little while, but the numbers don't lie.
ESPN is losing subscribers via cable, but that doesn't mean ESPN has to lose subscribers, they just have to, you know, get them a different way. Instead of dealing with cable, they're going to be delivering that content directly to consumers; I think it makes a lot of sense, it's going to give them more data with which they can measure, to determine what consumers want and how they want it delivered, whether that's in kids TV or adult content, whatever it may be, FX or sports, a lot of different ways they can go with it. And I think it makes a lot of sense.
Hill: I want to go back to Chapek for a second, because I was thinking over the last 24 hours about Tim Cook, because Apple's got their event later today. Tim Cook will be there, presumably to unveil the new "iPhone 73" or whatever number they're up to now. And obviously Tim Cook had enormous shoes to fill when he became CEO. So, maybe that's not an apt comparison, maybe a better one is someone like Craig Jelinek at Costco taking over for Jim Sinegal, also a giant in the retail industry. Where I'm going with this is, it took a while, it took a few years in the case of both Jelinek and Tim Cook, for us as investors, for the business media, in general, to stop thinking about the last CEO and start thinking of, OK, this person is now not just new to the corner office, it's their company now.
At the other end of the spectrum you have someone like Satya Nadella. The moves he made in the first 12 months of being CEO of Microsoft. In his very quiet, because he's not a guy who beats his chest, but it was very clear, like, this is Nadella's company now, this is no longer Steve Ballmer's company, this is Nadella's company. Disney is now Bob Chapek's. And I say that with nothing but respect for Bob Iger, but with this reorganization, Bob Chapek is basically saying, I'm in charge, [laughs] this is where we are going from here.
Moser: Yeah, I think you're right, this may just be his identity as the Head of Disney for his entire time there. This is really a big deal. You know, we talk about streaming, of course, the conversation always begins, and rightly so, with Netflix. I mean, Netflix really is the company that spearheaded this entire movement. And so, you always look to Netflix and think, OK, what can Disney do to emulate the success that Netflix has witnessed to-date? Disney has 3X the revenue of Netflix. In normal times, it's more profitable, it's got multiple revenue streams, complementary businesses that support one another. So, why does the market value Netflix more highly than Disney? I mean, Netflix is a bigger company by market cap.
And I think it was interesting, I put out a poll this morning on Twitter, you know, not scientific by any means, but it's to get a basic idea of how people view this stuff. And the poll essentially was like, all things being equal, if the subscription prices were exactly the same, and you had a subscription to Netflix or you had a subscription to the Disney+, ESPN+, Hulu bundle, which one would you choose?
And the numbers actually fall out about 50/50 right now, at about a thousand votes, it's about 50/50; a little bit in favor of Netflix, though. And I think that what that speaks to, it's not necessarily always about getting more for your money. I mean, most people would probably guess, oh, well, the Disney bundle would win because you're getting so much more. Yeah, you know, that's not necessarily the case, because what is Netflix's advantage that they've really exploited to this day, it's distribution. And I think that what they did is they produced this seamless distribution that consumers just fell in love with early on, it makes a lot of sense. And you can see challenges on the Disney side, particularly on Hulu. And I say this as a Hulu user, and I like Hulu, they need to improve the interface a little bit more, it needs to become a little bit more user-friendly in some ways.
And I'm sure they could get in there and mimic Netflix to a degree like that, but I think that what they need to do is they need to look at a lot of the things that Netflix has done, and say, OK, there are places where we can imitate, maybe we don't have to copy directly, but there's a blueprint there for how to do this. And I think that as time goes on, I think it'll prove wise that they're basically separating the distribution from the content side. Because when you look at the numbers at the end of the day, and we talk about this diversified revenue stream, but in 2019, parks and whatnot accounted for about $25 billion of the company's close to $70 billion in revenue. And so, what that gets at is, content is a big driver for this business. That's not something new, but it makes a lot of sense that they're really focused on this. And Chapek did note that the pandemic didn't change the strategy, as with many companies, it just accelerated the strategy.
And so I think, you know, you're going to see them really working hard on trying to nail down the distribution side of this thing, because I think the one place where Disney, as a company, has an advantage over Netflix is on the content side, because they have so much IP, right, so much of that intellectual property, they can build content off of so many different storylines and characters, there is the potential there. And so, I think this is going to be something that gets their full attention, this will probably end up being Chapek's legacy as Disney's CEO. And if he continues to use, following what the consumer wants as his North Star, I feel like you have to like his chances, right? I mean, this is not a zero-sum game.
The question I posed on Twitter, it's silly from the perspective of, listen, we probably all in the room have a subscription to Disney and to Netflix, and that'll probably be the case for most people, because those are two of the most powerful platforms out there. But certainly, understand why they are placing their bets on this part of the business, and I suspect they will do very well with it. But it's going to take hard work and it's going to take some time.
Hill: Third quarter profits and revenue came in higher than expected for Johnson & Johnson (JNJ +0.43%). And that good financial news took a backseat to the headline that Johnson & Johnson has paused its late-stage COVID-19 vaccine trial, because one of the participants in the trial experienced "an adverse event." Which, I mean, come on, the Minnesota Vikings experienced an adverse event the other night, and it was Russell Wilson marching down the field. This is a human being getting sick, so it was right for Johnson & Johnson to pause the trial. Obviously, we'll see where that goes. In the meantime, you know, a really solid quarter.
Moser: Yeah, it was a solid quarter. And certainly not to belittle the one individual's unknown health event, I mean, this is something that is very part-and-parcel with this part of the business. I mean, developing vaccines requires a lot of time, a lot of trial-and-error, and you run into things like this. So, this is fairly common for this to happen. There's still plenty they don't know in regard to this, because they're still blinded from the perspective of the actual testing, like, there's a lot of stuff that go in there they just don't really know. So, I wouldn't look at that as something that really -- I don't think that's something you really got to hold against Johnson & Johnson. That's something that everybody is going to be dealing with, just like we're all dealing with this pandemic economy, unfortunately.
But the core business itself continues to keep on doing what it's always been doing, and sales up 1.7%, adjusted earnings up 3.5%. They have seen some recovery in medical devices, which makes a lot of sense. I mean, a lot of those procedures were put on hold for a while in order to deal with capacity issues. They continue to see growth in consumer health and strength in pharmaceuticals. And it's the pharmaceuticals business that really is, I think, the biggest growth opportunity for the company. But, yeah, I personally am a big fan also of the investments they've been making in the medical device business, particularly because they continue to focus on technology and specifically things like immersive technology. And I think that's going to be something where we see more investment made in the healthcare space as time goes on.
You know, it was funny, I saw on the call, not the earnings call but an investor presentation, the way they talk about -- one of the strengths of Johnson & Johnson, you got brands like Tylenol and Listerine and whatnot in there that probably just are in virtually every household. You hear more and more just this talk about pantry stuffing. I mean, that brings a lot of success for some of these businesses, I don't know, when I hear "pantry stuffing," to me, it sounds like it could be a pretty killer Thanksgiving dishes, and given that we're just a little over a month away, I'm starting to get some ideas running through my head, but maybe that's a conversation for the next McCormick earnings. [laughs]
I think that with Johnson & Johnson you understand why you own the stock, it's not a stock that's going to double, it's not a stock that's going to be some big high-flyer in this big growth environment. They are a strong, sort of, stalwart-type company, distributed $2.7 billion to shareholders in dividends. That was in line with a 6.3% dividend increase they announced in April. This is a dividend aristocrat, and I think it remains a very sensible holding for folks that are just looking for some stability in their portfolio.
Hill: Absolutely. Johnson & Johnson is on the shortlist of companies that raised their [laughs] dividend this year. You know, as you said, with all the growth we've seen in cloud stocks and that sort of thing, the stock down a little bit today, it's still up around 15% over the past 12 months. And this, to me -- I know there was a stretch in time where IBM was sort of the go-to big blue-chip dividend payer; you know, that's the first place you look if you're looking for that kind of stability in your portfolio. I think it's Johnson & Johnson now. I think this is No. 1 on the list for people who are looking for that.
Moser: I think you're right. And I think the one thing -- I mean, the language that they used, they referred to their dividend as a "top priority." I don't think that's going to change. But the nice thing with Johnson & Johnson versus something like an IBM is, healthcare, it's a bit more of a resilient market, they're not necessarily beholden to the same, sort of, hamster wheel of innovation that tech is always played with in certain cases. So, you know, the healthcare market seems a bit more reliable. And you look at Johnson & Johnson, similar to Disney, in the sense that they have that diversified revenue stream with the number of different ways they make their money.
And, you know, I thought it was interesting with Disney. I mean, we saw a couple of days ago or something, was it Loeb Capital [Dan Loeb, Third Point Capital] (sic) or whatever, they were critical of Disney paying the dividend and wanted Disney to cut the dividend. And listen, everybody has an opinion, I think that's just extremely shortsighted thinking, I wouldn't do it, I wouldn't cave if I was management at Disney. I mean, they paid out $3.1 billion in total dividends over the last 12 months. In the context of $70 billion in revenue, I mean, listen, we'll get past the pandemic at some point, I think you keep the dividend where it is, maybe don't grow it. But with Johnson & Johnson, I think they have a little bit more of a luxury in that, the market they pursue will enable them to keep that dividend a top priority.
Hill: Shares of Ethan Allen (ETH 0.31%) up 12% this morning, after the furniture retailer raised guidance for the first quarter. They're expecting a profit, they report on October 29th. I'm not trying to knock them, Jason, but [laughs] I look at this and I understand why the stock is moving the way it is today. And look, they're in a business where, in this environment, Ethan Allen should be thriving. That said, this is still a really small company, I mean, it's just over $400 million in market cap. I think there's some brand equity there, but part of me looks at this and thinks, is Ethan Allen going to be acquired by someone? Because I could see this brand thriving under a much larger umbrella in a way that, frankly, it just hasn't as a stand-alone public company.
Moser: It's possible it could be acquired, I don't know. They refer to themselves in their 10-K as a vertically integrated luxury furniture company; that's a mouthful, I know. But essentially, maybe -- I don't know, it's really difficult to say. Let's take a look at, sort of, the direction things are headed. Going into today, if you look at the five-year charts for Wayfair and for Ethan Allen, Wayfair is up somewhere close to700%, 680%, like that; Ethan Allen is down like 40%. I don't think that's an accident, I mean, this company has been treading water since 2012, the stock hasn't really been all that much of a gem because the topline has just been treading water, and hasn't gone anywhere. And so, maybe this release today, things are less bad than we probably would have assumed they would be, but when you look at their most recently reported quarter, at the time they had to furlough 70% of the workforce, and they've been able to bring some of those folks back. But this is a company that still very much relies on the physical shopping experience. And there are some players in that space that are doing well. I mean, Restoration Hardware -- RH, I guess they call themselves now -- seems to have been able to make it through OK, which is still somewhat confounding to me, but you know, hey, it is what it is, I suppose.
To me, Ethan Allen just feels like a legacy furniture company. And I just can't get past the fact that every time I hear the name Ethan Allen, my mind goes directly back to when I was seven years old and I got plunked in front of the TV to watch The Price is Right for an hour, while my mom was getting stuff done around the house. I mean, Ethan Allen, it feels like that kind of a legacy furniture maker. I'm not sure it's as relevant today, because of partly the business model, and maybe partly because of the brand, I just don't know that people necessarily place the same value in that brand, when it comes to furniture, as they did, you know, a lifetime ago. But again, I mean, you got to give them some credit for really dealing with what is a very difficult situation.
Hill: Well, I'm glad you mentioned Restoration Hardware, because that, to me, is an even better comparison than Wayfair, because it's much more the traditional bricks-and-mortar furniture retailer, luxury furniture retailer. And that's a stock that has nearly quadrupled over the [laughs] last five years, so there is a way to make this business work. Again, good for Ethan Allen for having the day that they're having, but there's nothing about that business, once I start to dig into it, that makes me think, OK, I think I want to put this on my watchlist now ...
Moser: No, it strikes me honestly that Ethan Allen could be -- that they may be better off trying to figure out a way to join that Wayfair network. Ultimately, Wayfair it's like a network, right, they just connect all of these suppliers around the country with consumers. I think it makes sense for Ethan Allen to try to figure out ways to expand their business and maybe get beyond that vertical integration. Vertical integration I think is far more crucial for a tech company that's focused on protecting its IP versus a furniture maker that -- listen, I don't know that IP is really ruling the rooster when it comes to furniture.
Hill: Real quick before we wrap up, because on Mondays you host the Financials episode of Industry Focus. We got the big banks reporting this week. I haven't listened to it yet, but I know you and Matt Frankel discussed this on Monday's episode. Give me the 30-second preview of what investors like me should be looking for this week out of the big banks?
Moser: Yeah, I think it's really -- you know, you see this low interest rate environment, which is obviously challenging for a lot of banks. The bigger banks that are very consumer-facing, that don't necessarily have those investment operations that you might find in something like a JPMorgan or a Golden Slacks as they call it, [laughs] Goldman Sachs, I think watching sort of that dichotomy between the consumer side and the investment side, is something to keep an eye on for sure. And again, just how are these banks dealing with reserves? I mean, it's just a very difficult time for a lot of participants in the economy and these big banks have to be very aware of the fact they need to be conserving. So, you know, it's going to be a fascinating earnings season for sure.
Hill: All right. If you're not already listening to Industry Focus, check it out. You can subscribe with one click of a button and it's free. Jason Moser, always good talking to you. Thanks for being here.
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.
That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
