Hasbro (HAS +0.51%) shares hit a 52-week high after strong second-quarter results. America's population growth is slowing down, so what does it mean for different industries? In this episode of MarketFoolery, Jason Moser analyzes those stories and shares what he's going to be watching when Teladoc Health (TDOC +1.12%) and Qualcomm (QCOM +1.35%) report earnings.
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This video was recorded on July 26, 2021.
Chris Hill: It's Monday, July 26th. Welcome to MarketFoolery. I'm Chris Hill. With me today: Jason Moser in the house. Good to see you.
Jason Moser: Hello there, how are you?
Hill: I'm doing well because earnings season is heating up and we've got previews on a couple of businesses we're going to get to. We're also going to dig into the ripple effects of slowing population growth here in the United States.
But we're going to start with a strong second quarter from Hasbro. Shares of the toymaker are up 10% this morning after really great revenue in Q2. Demand for board games up greatly during the pandemic, not a big surprise there. I'm always reminded when I look at reports from Hasbro that they have a TV production business, and it is getting back to work.
Moser: It is. It's good to see it. It feels like all of this business is getting back to work. It feels like the Wizards of the Coast in the digital gaming segment was the real story for the quarter.
But I think as you noted, it was really a strong performance all the way around. Revenue for the quarter was up 54% to $1.32 billion. It's a small tailwind from some currency effects, but they saw strong performance really across all their major lines of business. The consumer products segment, revenue was up 33%. As I mentioned, Wizards of the Coast in the digital gaming segment, that revenue more than doubled.
In the entertainment segment, revenue was up 47%, so they are getting back to work there, which is nice to see. All really boiled down to adjusted net earnings of $1.05 per share. They had unloaded a little music side of the business they had acquired recently, so that played into the financials a little bit, but all things considered, it was a good quarter, and it seems like the business is recovering nicely from a very tough 2020.
Hill: You and I have talked about the toy industry for years now, and there was a good stretch of time where Mattel was the clear leader and Hasbro was playing catch-up. That has reversed over the past five years, although I'm curious to see what Mattel reports. I'm pretty sure they are reporting later this week, because they are like Home Depot and Lowe's. They go one day after the other. But shares of Mattel have nearly doubled over the past year. I get that's off of years of underperformance and a low base, but it does make me wonder if Mattel is close to turning the corner.
Moser: It feels like they are. It certainly was a long, tough slog for Mattel. There was some rotation there in the executive suite. They lost, obviously, a very big relationship with Disney a while back. Who knows really how they let that happen to begin with.
But when I look at these two businesses, I do favor Hasbro over Mattel, simply because of just No. 1, the breadth of the offerings. They just have such a strong catalog. When you just look at the franchise brands alone, the Wizards of the Coast, they've got that Magic: The Gathering, which is part of that, Nerf, Transformers, Play-Doh, My Little Pony, those are just resilient brands that seem to stay a bit more relevant than what Mattel has been able to manage here over the last several years.
I think the interesting thing in regard to Hasbro, particularly when you look at the way the stock is performing today, the market clearly loves this report, and I can understand it from the perspective of the results they reported. But I think that the market is also looking at some news they dropped in the call, which is playing out.
You've been talking a lot about inflation lately and how that's playing into the way these businesses are modeling the rest of the year, and 2022, is inflation transitory or is it something that's going to be a bit more permanent? Management on the call offered some pretty interesting context.
So margins were performing very well. When they talked about operating expenses, they referred to ocean freight costs specifically. Freight input costs were significantly higher this year than last, and they are actually projecting, on average, that those costs are going to be more than 4 times higher this year versus last year. As such, they are passing through price increases here. They're going to pass through price increases during the third quarter. That should ultimately be fully realized by the fourth quarter.
And follow me here, Chris, you know the third and the fourth quarter, we're leading into that all-important holiday season. There's a lot of potential for this to be a really terrific holiday season for a lot of businesses. There's going to be some pent-up demand, there's some consumers with some fairly healthy bank accounts thanks to all the stimulus. If Hasbro is able to pass through some cost increases to really help combat this inflation, that really does speak to the power of this business and the breadth of its offering.
That's encouraging. I think that's part of the reason why the market is so excited about the back half of the year, because it seems like they've got a little bit of a one-two pop here on the tailwind side in being able to respond to inflation, as well as the prospect of a very healthy holiday season.
Hill: If you are Target or Walmart, something like that definitely goes. I shouldn't say definitely, it almost certainly goes in the plus column if Hasbro is able to pull this off.
Moser: I would agree. They did note too that inventory levels had started to normalize. They were lower than they were at this point a year ago, which means that these retail partners are going to be back to really stocking those shelves to get those inventory levels nice and healthy for the holiday season. Yet another check in the plus column.
Hill: The Wall Street Journal is reporting that America's population growth is the slowest it's been in a century. For the 12-month period ending July 1st, 2020, population growth in America was just 0.35%. In half of all states last year, more people died than were born. For context, the year prior to that, that was the case in only five states. Yes, go ahead and insert every disclaimer about the pandemic. But you look at the trend, Jason, over the past 15 years, it has been steadily downward.
One of the things that this article in the Journal went into was the ripple effect for industries. I'm curious how you think about something like this, assuming, in general, we see the trend continue. Basically, yes, the population continues to grow; it just grows at a slower rate.
Moser: Yeah, it makes sense. A growing population begets a growing economy, and that's what really helps these businesses continue to grow. There're going to be two, I guess, really primary sources of population growth. That's just through birth and through immigration. It's understandable that we're not seeing necessarily the same demographic expansion here in the near-term because of certain headwinds.
But when you look at the numbers, historically, the data in this article is really fascinating and we feel this entire piece could be a show on its own. Like you could just sit here and have a conversation for an hour about the stuff that it talks about.
Essentially, historically, nearly half of our economic growth has been driven by the expansion of the working-age population. Right now, we're faced with a working-age population that is essentially stalling. That means that's going to play out on that economic growth as well. You start looking at ways that we might overcome this. Birth rates, I suspect we'll see that pick back up.
But the greater conversation regarding immigration... I think immigration is always going to be a hot button issue for a lot of folks. But I think that if you're looking toward an economy that is growing, that is developing, that is evolving, I think you have to argue for a strong immigration policy, strong immigration growth backed by strong and sensible immigration policies, then it just makes sense.
I think it is very important for our politicians in DC to really focus on that, because that's going to be something that matters the bigger we get. Again, you start trying to figure what problems need to be solved. It does look like one of the problems is that rural America just continues to face challenges in bringing population growth in, which then helps rural America continue to grow and develop.
You start trying to figure out ways to solve, perhaps, that problem. Getting more people into these rural areas, you incentivize reasons for people to go to those places. You need to develop, you need real estate, you need homebuilders, you need suppliers. You need things that are always going to be in demand in good times and bad: healthcare, infrastructure.
There are opportunities that come from this. It's understanding how the immigration and birth rates play together. The importance that they both play in the overall economy. There's absolutely opportunities that can come from both. Even if we're faced with the near-term issue of birth rates declining, immigration is always going to be part of our country's growth, and it's going to be an important part of it.
Possibly one way to look at it is more development in a lot of rural America. In order to do that, it just requires investment in those key areas: real estate, homebuilders, suppliers, healthcare infrastructure, things like that. A lot of opportunities with companies in those spaces for sure.
Hill: One other thing I'll just throw out there, and this was mentioned in the article, because we talk from time to time about the corner office, like who's the CEO of any given company, and how long is that person going to be there and if they're going to retire, what's the plan to replace them, that thing. This article went a step further to talk about senior management in general, particularly when it came to the healthcare industry, information technology, and engineering. That was one of those things where I read that I was like, "Oh, OK."
Again, everything you mentioned in terms of why this could be a good holiday season for Hasbro. We've seen similar stats about older Americans who are nearing retirement age. If they've been investing in the stock market, maybe they're closer to retirement from a financial standpoint.
I forget, it was at the Harvard Business Review, one of them referred to it as the great resignation wave, that over the next 18 to 24 months, white-collar workers who maybe were 5 to 10 years away from retirement just look around at their situation and go, "I think six more months and I'm going." There are really well-run IT businesses, healthcare, engineering. You can put software in there as well. It'll be interesting to watch how many times the word "hiring" shows up on conference calls over the next year.
Moser: Yeah. I have to believe that we're putting ourselves in a position for a nice little hiring binge over the next several years based on that. It's interesting that they also refer to that as a great wealth transfer rate. You've got a lot of folks getting ready to go ahead and pull back on the working hours and start enjoying the rest of their lives. They've been preparing for this, and they are getting ready to spend a lot of that money. It's a lot of money that, in theory, should be pumped back into the economy.
It's also worth remembering, maybe going back to that rural-America question, now in this day and age where we're seeing more opportunities for that, for lack of a better word, peripatetic lifestyle. People can just pick up and move wherever they want to go, whenever they want to do it. All of a sudden, you can find places where the cost of living is far more reasonable, more attractive. You've got a place where maybe it's not like the hustle and bustle of a big city. There's a big opportunity.
I think there are a number of different ways to spread the love, so to speak. Chris, and just get people in the areas of the country that maybe haven't seen that development historically because of necessary reasons. Those reasons don't really exist as much anymore. That could be very encouraging.
Hill: We're not going to have a guest on Motley Fool Money this week. It's going to be an earnings-palooza show.
Moser: Oh, wow.
Hill: For the very basic reason that nearly 1,000 companies are scheduled to report this week. Let me hit you with two companies reporting later this week, and tell me one or two things you're going to be watching.
I'll start with Teladoc, which, for all of the great run that Teladoc has had over the last, let's call it, four or five years, in 2021, I believe it is down somewhere in the neighborhood of 50% from its high.
Moser: Sure. Well, let me set my coffee maker on stun, because that name we are going to be busy, it sounds like, on Friday.
Yes, Teladoc is obviously one that we followed for a long time here. It's one that we watched go crazy all last year for obvious reasons. We've seen businesses, their stock prices, react irrationally in some cases, I have argued all the way up and then all the way back to where the company's prices are today. Maybe it was a bit irrational based on the fundamentals of the business.
I think the Livongo merger is still a big question. The market wants to see how that merger is progressing and make sure that it's something that ultimately makes sense. Last quarter, just to put some context around that last quarter, they had noted the total chronic care enrollment — that's really what that Livongo acquisition was about — chronic care enrollment was 658,000 members, which was a 66% increase over the prior year.
Ultimately, it really is just about seeing more, we want to see more enrollment there. We want to see chronic care enrollment continue to go up because that was the purpose of the acquisition. Chronic care requires chronic attention. That's something that Teladoc and Livongo together can really exploit. They can serve those chronic-care patients, because we know that's a large demographic and we want to see growth there.
I think there should be more language on the primary-care offering, because they really are building out this full service, Total Care Healthcare System. It's not just about seeing the doctor on your phone. It's not just about a video chat. They are building out a modern-day healthcare company, for lack of a better word.
To that end, we saw a headline here recently, a very big partnership they announced with Microsoft and their Teams platform. That comes from the InTouch acquisition from a little while back. Remember, Teladoc Health acquired a company called InTouch, which is a provider of enterprise telehealth solutions for hospitals and health systems.
You don't look at that partnership with Microsoft as a magic bullet or anything. But it's worth noting because when you become immersed in a network like that, we know Microsoft Teams' network is massive. There's a ton of potential.
When I say massive, I mean, last year Teams reported over 145 million daily active users. That was almost double from a year ago. The number of organizations with more than 1,000 users integrating their third-party and business applications with Teams. That's increased nearly threefold from a year ago. Teams as a big platform serving a lot of purposes, and to get into that network, I think, could be very lucrative for the business over time.
Hill: Teladoc reports after the close on Wednesday. Qualcomm comes out with their latest quarter. What's something you're going to be watching there?
Moser: Well, I think really, first and foremost, is the language regarding the supply shortage. Qualcomm is one of the biggest players in this space as an important business and it's a good business. They have the chip side of the business, and they also have the licensing side of the business, which is very profitable.
But if you look at that chip side of the business, they continue to witness strong growth in all major aspects of the business from handsets that recorded 53% growth. Radiofrequency front-end, they recorded 39% growth. The automotive space, they saw 40% growth; in Internet of Things, 71% growth. I think those last two in automotive and IoT, those should continue to, I think, grow given the rollout of 5G and just connectivity in general.
But when you look at the language from a quarter ago, they certainly acknowledge the shortage. They are utilizing their scale and trying to manage their global supply chain in order to be able to not only navigate the shortage but really capture opportunities that might be slipping through other providers' fingers. They did note they expect material improvements by the end of the calendar year. I'll just be interested to see if that language is consistent, if that they still feel that way.
Hill: Yeah. I think for all involved, not just Qualcomm shareholders, the sooner the better. On the components, everything.
Moser: I got a daughter that's getting ready to get her driver's license, like her full-fledged license here in the next couple of months, Chris, which means now we're in the market for another car. And holy cow, let me tell you. The difference a year makes, wow! The prices on cars.
Back to that inflation thing, I don't think we're looking at transitory inflation, man, I think this stuff is here to stay in a lot of ways which ultimately investors just, it's important to focus on looking at those businesses with demonstrable pricing power. They can be a really nice way to protect yourself against inflationary times.
Hill: Jason Moser, great talking to you. Thanks for being here.
Moser: You got it. Thank you.
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 today's edition. This show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
