Motley Fool Money - ONON Fire

Episode Date: May 13, 2025

A consumer goods company hit 40% yearly revenue growth. In this environment? (00:21) David Meier and Ricky Mulvey discuss: - Why pharma investors aren’t reacting to President Trump’s executive order on drug prices. - On Holding’s blistering sales growth. - If Alphabet’s stock deserves to be in value town. Then, (19:23) Robert Brokamp joins Ricky to discuss why investors should consider buying individual bonds. Companies discussed: ONON, NKE, UA, GOOG, GOOGL Host: Ricky Mulvey Guests: David Meier, Robert Brokamp Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate C. According to Indeed data, sponsor jobs have four times more applicants than non-sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsor job credit at Indeed.com slash podcast. Terms and conditions apply.

Does Alphabet deserve a grocery store multiple? You're listening to Motley Full Money. I'm Ricky Mulvey, joined today by the smirking. David Meyer, David, thanks for people. What are you smirking about? What's so funny? Oh, it's all good today. All good.

Okay, good. Just making sure I don't look funny or anything. That's why we do an audio-only podcast for today. You know, politics keeps mixing with markets, and we have some earnings from a fast-growing apparel later in this. segment. But, you know, Dylan and JMO hit the trade deal-ish trade agreement question mark between the U.S. and China yesterday. But there's another move from the White House that could have significant implications for markets. President Trump signing an executive order that Americans must get

a quote, most favored nation price for prescription drugs. David, when I saw this, my first reaction was sweet. And you know what? I bet the big drug makers stocks are going to dive on this. They did not flinch. The U.S. is where a lot of their profits come from. What's going on here? Yeah. The reason they didn't flinch is because the market doesn't believe that those profits are going away. I mean, it's as simple as that.

If we look a little bit under the hood at what the executive order actually says, it does lay out some cases where, you know, hey, you know, other countries around the world pay lower prices than we do in the U.S. Well, they negotiate differently. The market for drugs is way more open in the United States than it is in other countries. Governments tend to negotiate on behalf of their people because they're the ones making the purchases. So they have some negotiating power. We here in the United States tend to let markets determine prices. There are other players.

There's, you know, PBMs and things like that. But, you know, this is basically the market saying that the U.S. markets will withstand higher prices. Basically, with the stocks not really moving on the news, they don't, the market says, well, we look ahead and we don't see how you're going to do this. And basically, the other thing that the executive order said was, hey, health and human services secretary, go out and put together a plan in 30 days for what you think the prices will be. So, you know, there's a negotiation. that's going to happen in between. So we'll see what happens. But as of right now, I think that's what the market is saying. Well, the pharma lobbyists are saying something else, David. They're certainly sweating a little bit.

According to Bloomberg, the brand drug lobby, PHRMA, my old employer, had an emergency call on Sunday and said that this could cost the pharma industry $1 trillion over a decade. You look at a drug like Ozempic. This was mentioned in the press conference with President Trump, where a month of it is almost $1,000 in the United States, about $60 in Germany. Okay, you know, that's not great if you need OZemPEC. That's also a huge profit margin for Novo Nordisk. Novo Nordisk CEO trying to defend the practice in Congress a little while ago saying, hey, don't look at me.

Look at the pharmacy benefit managers. Those are the ones that are really screwing up prices here. So, I mean, the lobbyists. certainly concerned here. And, you know, is this a time where if you own stock in a drug maker, especially someone making weight loss drugs, is this a time to revisit your thesis? The short answer is yes. Should you panic? I don't think so. But you should go back, given how this all tends to work. And regulation does play a part in many industries, but in, you know, in pharma specifically. The lobbyists are going to, you know,

have to basically make the case to the HHS secretary to say, hey, this is why we think, you know, these drugs should be priced here. You know, again, this is about, you know, this is about pricing power. This is about bargaining power. And, you know, they're going to, they, the, the lobbyist, pharma is going to have to roll up their sleeves and do some work over the next 30 days and beyond that, because if I read everything correctly, there's some other milestones at 180 days and a year out and a multiple years out. So this is going to take a while to play out. They're going to have to do some work to basically say, look, there's a reason that we, you know, that we, one, should be able to charge these prices. And two, there are benefits to our industry as a result.

Because you've got to remember, a lot of that gets plowed back into research and development of all kinds to bring the next generation of drugs and next generation of care. So I don't think anybody would want higher prices just for the sake of higher prices. We should want our health care to be reasonably priced, right? But at the same time, we don't want to disrupt the long-term innovation that happens here as a result. So I think the administration is saying, and I would actually agree on this point. I've been accused of being too liberal and too conservative on this show. So we'll see what complaints I get this time. The administration would basically say we don't want to stifle innovation necessarily,

but it shouldn't be on Americans alone to fund that innovation when you have other developed countries in the European Union, in Australia, for example, paying significantly less for the exact same drug coming out of the exact same factory. And that makes sense. And then the question is, who's going to do the negotiating, right? Is our government going to step in and do the negotiating? That would be a big change to how our markets work today. We'll see how it goes.

I should also mention, I've never worked for a brand name pharmaceutical lobby. I don't want to, I'm afraid of catching heat today, David. I don't know why. Let's move on to earnings. Let's talk about earnings. Let's focus on the fastball here. On holding the maker of comfortable shoes where rocks and mulch often get stuck at the of it. I enjoy wearing them still. They reported this morning, sales up a blistering 40% from one

year ago. That is on a constant currency basis because we're going Swiss francs to US dollars with this earnings report, getting us in some trouble. It's about $860 million in sales for the quarter. That's in US dollars. I'm looking at a retailer that is getting earning basically 40% more sales than one year ago. So, David, what is on getting right in this environment? they have the product that people want i mean i you know i don't i'm not i hope i don't sound glib when i say that but that is true their products are very good and in demand all around the world they had good growth in in in all of their geographical segments and it's because they have taken the time and made the investments to put technology into their shoes that make them both comfortable

I have functional, whether you're running, whether you're working out, whether it's casual, you know, all these things, but playing tennis, can't forget about Roger Federer, they have product that people want. And as we, you know, as we saw here this quarter, more people wanted it, even as we're, you know, starting to get into a little bit of the impact of the tariffs. Yeah, I mean, on clouds were one of my tariff panic purchases. Those included AirPods for a birthday gift. I had to get some basketball shoes. And then I was like, my on clouds have completely worn out at the bottom where the rubber is like gone.

And I need to get these before the prices get jacked up by maybe 50 to 100%. I don't think that's going to happen now that we have the pause, but I do have some new on clouds. I'm a big fan of the product. Is this something you own? Are you a lynchian taking a lynchian look at this company? So I don't own shares, but I am kind of a, or I was a bit of a sneaker guy. So I have tried them and I also like them. You probably aren't the only one making a purchase, right, ahead of what may have transpired. And you did it because you liked the product, right? And it was their direct-to-consumer channel that actually had the best growth. So I don't think you, you are in the minority in terms of maybe pulling a purchase forward. But to management's credit, they actually said, hey, we still see plenty of demand for the rest of the year. It's not a top

line thing for them. What they are actually saying in terms of the tariff impact is, hey, we're a little, you know, maybe margins will get pinched a little bit. You know, we're doing our best to figure out what those might be. We're not really knocking them down heavily, but we just want to let you know that it could be volatile. But on a top line basis, they say, hey, you know, our product is in demand. We're making sure that all of our, all the places where we sell our shoes have plenty of product and good up-to-date products. So, you know, I credit management for at least at the beginning handling this, handling this uncertainty pretty well. Let's take into the numbers a little bit more. Looking at operating margin here, I think there's a story because now on is about

on par with Nike's historic average, about 10-ish, 11%. Nike dipped in a recent quarter, but we'll take that out to be nice to our friends at Nike. This is significant for a younger brand that you would think needs to spend more as a percentage of their sales on marketing or maybe have less negotiating power with shoe stores like Foot Locker. And yet, there they are in an efficiency basis, pretty much on par with Nike, what story does that operating margin number tell investors? So this is actually a fantastic question. Let's use the Nike and on holding comparison.

Both companies do sponsor athletes, right? But Nike, man, think about the suite of athletes that market their products, right? That's actually a huge expense for Nike and they make the most of it by getting, in terms of volume and pricing that they've been able to generate for their products over the years. Even though On does have, again, those sponsored athletes, it's less compared to what Nike spends. They have actually done a good job of, again, creating a product that people want, creating a product where word of mouth marketing is probably more important than necessarily the sponsored marketing. Again, getting the products to consumers in the way that they want to buy them.

On has the advantage of having a consumer that is more apt to buy in a direct consumer channel, an online e-commerce type channel than Nike had when it was starting out. So the other thing I credit is in addition to putting good technology into their products, they've actually done a good job of building their business from a supply chain management standpoint, from managing their marketing, all these things, and figuring out where they can price their product in order to keep moving it at the volumes that they need. And at the same time, they've been able to reinvest back into the company to say, hey, here's our latest technologies that we want to put in shoes. We want to expand into apparel.

You know, hey, we need to open up a distribution center in Atlanta. I give management a lot of credit for not only creating a good product, a good, you know, an emerging brand, but they've created a very good business around this. And this is something that's important for the long run, because if you look at the history of Under Armour, Under Armour had a phenomenal brand, but they weren't the best operator. And eventually that caught up with them as they tried to get bigger and bigger and bigger. So going forward, we'll see how all this plays out for On, but they've done a good job of balancing all the things that they need to balance in terms of creating a good long-term business. You don't think Elmo's getting Steph Curry rates for those commercials?

I mean, you know, I don't know. It depends on how good Elmo's agent is, right? That's a good question. I love the, so they have the commercial with Elmo and Roger Federer. they're using Elmo quite a bit in their commercials. I think On looked at Adidas and saw the trouble they ran into with Kanye West and said, what is the opposite celebrity we can find? And then you get Elmo selling shoes for him.

So you asked about my smirk earlier. There is nothing but good entertainment value as well as educational value in what we're talking about today because that is just awesome. Let's close out with the story on Alphabet. We've gotten a few questions about this company from listeners because of its underperformance relative to the market and storyline going into it. There's a Wall Street research report from an analyst named Gil Lurie that he would like to set the company on fire, basically saying the only way forward for Alphabet is a complete

breakup that would allow investors to own the businesses they actually want, making the point that the entire business is valued on the worst multiple that investors can find. That's the search multiple. It's about 17 times. before I get to your question on valuation, why do analysts need to assign the worst multiple to the whole business? There's a lot of smart people looking at Google, and I assume some of you can do math. So that is essentially the average, right? One way you could go about valuing Google slash alphabet is value the search business, which is by far the biggest business, right? Generates

the most cash flow, has the most uncertainty around it today, like, you know, what is AI search going to bring in the uncertain, in the uncertain macro environment? Is search going to go down? Is it a commodity now? Like, there's all sorts of things facing the search business, but they have many other segments. And so what this analyst is basically saying is, hey, these other segments deserve higher multiples. Well, maybe that's true. As an analyst, you could do that yourself and say, hey, YouTube is worth this. The cloud business is worth that. The chip business is worth something else. And you could, you know, if you think that as a whole, the business should be trading at maybe 24 times a weighted average multiple instead of 16. As an analyst, you can say that.

The challenge, in my opinion, is in breaking this up, is where do these companies get their capital from? All of them need investment capital in order to operate. And a lot of that comes from search. So while I understand that breaking everybody up could unlock a lot of value, if you look at the most recent breakup of a very large company, go to GE. General Electric has split into GE Arrow, GE of Renova, which is the energy business, and GE healthcare, right? That had a conglomerate discount, and it took years to divide that business up. and now the sum of those parts is greater than the previous whole. But it's not necessarily easy for those companies to operate on their own.

Again, the internal capital allocation process is taking a lot of cash flow that comes from search and putting it in new businesses, making new investments, making new moonshots. I don't know, do we call, is moonshots the thing that's still associated with Google? We can count way, Mo. They've got self-driving stuff going on. There's all sorts of stuff. And while I understand breaking it up could unlock a lot of value, I also am sympathetic to the idea that, hey, most of the capital comes from search. And if you put these businesses on their own, does that mean they have as much capital as they need in

order to grow as fast as they want? I don't know. I don't know the answer to that question. And it's a risk to basically set all those free as individual companies in the market. And the market might say, well, you know, this is great. But, you know, Waymo, you need a lot of capital going forward. So maybe I'm not going to evaluate you at the multiple that somebody else thought you were now that I can see all of your financials. So let's close out with the question that introduced the show. There's some narratives going against Google right now. The search business is declining.

with nothing compared to chat GPT, your business there could become obliterated. And for that, Mr. Market is assigning alphabet a lower than average earnings multiple. About 17 times, David, that is what Kroger trades at. A very mature grocery store business. And here you have Google, which still dominates the search market. It's got a growing cloud business. It owns YouTube, which is the biggest streaming service anywhere. It's free, but we can set that aside for now. I've got this company on my watch list. Should I pick up some shares while Alphabet's in Value Town? Or are we looking at a falling knife here? Me personally, as someone who I've followed this company for a long time, I'm in agreement with you.

I think shares are probably undervalued, but they're probably a little undervalued for a reason. And that's because there's a lot of risk and uncertainty that's ahead of the company in the short term. If you have a case where the lawsuits don't have a big impact, if there's not a call for a breakup by the FTC, if the other businesses that are growing, again, the ones we mentioned, YouTube, GCP, things like that, that if they have all of the earnings power that this analyst thinks they do, eventually the market will be able to see through all of it and figure out what's the right. right multiple. I just personally think this is a phenomenal business, generates significant cash flow. They have multiple ways that they can reinvest that cash flow. And yeah, it's probably a little

longer value today, even as a conglomerate. We'll leave it there. David Meyer, thank you for your time and your insight. Thank you so much, Ricky. This was a lot of fun. The old adage goes, it isn't what you say. It's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic sporting personality with elegance to deliver a truly instinctive drive. Inside, you'll find true modern luxury with the latest innovations in comfort.

Use the cabin air purification system alongside active noise cancellation for all new levels of quality and quiet. Whether you prefer a choice of powerful engines or the plug-in hybrid with an estimated range of 53 miles, there's an option for you. With seven terrain modes to choose from, terrain response to fine-tuned your vehicle for the roads ahead. The Range Rover event is on now. Explore enhance offers at rangerover.com. All right, up next, Robert Brokamp joins me for a look at bonds in what investors should consider before adding them to their portfolios. Investors own bonds for safety and income, but recent history has occasionally told a different story. The total return from the overall bond market has been flat to slightly negative over the past five years. That's if you bought into this safe investment as COVID

kicked off. And over the past few years, investors in bond funds have experienced unexpected and historically steep declines. In 2022, the Vanguard total bond market ETF lost about 13%. Bro, that is nothing for a growth stock investor. But this could spook anyone who's closer to retirement. Yeah, and 2022 was probably the worst year for the stock market in U.S. history. It was quite notable. And the main cause of the declines has been the rise of interest rights, right? If you go back to 2020 in the middle of the pandemic, the 10-year Treasury yielded an astounding 0.5%. But over the last few years, it has risen to almost 5% reaching that in 2023. It's fallen down a bit back, but it's still at around 4.5%. And when rates go up, the value of existing bonds go down.

Why? Well, if you had bought a 10-year treasury back in 2020 that yielded 0.5%, it's now less attractive, right? Because after all, who would want 0.5% yield if 4.5% is now available? So the price of the 0.5% treasury has to adjust downward. However, there's good news. The price of that bond will return to its par value as it gets closer to maturity as long as the issuer, in this case Uncle Sam, is still in business. So the price decline won't last forever. Unfortunately, that same dynamic may not play out in a bond fund, which could hold hundreds or even thousands of bonds with different maturities and credit ratings that are constantly being bought and sold. But you can get varies with your 12-month trailing yield, your 30-day

SEC yield, or your weighted average coupon rate. So one solution, is to buy individual bonds instead of bond funds. However, it's not as simple as it sounds. So, Bro's got a few tips starting with invest enough to be diversified. Yeah, there's one rule of thumb that says you should attempt to construct your own bond portfolio unless you have at least $50,000 to invest. And that's because the issuers, whether it's corporations, municipalities, foreign governments, they can all go bankrupt and default on the debt.

And that doesn't mean you'll lose everything, actually. Investors typically recover 40 to 60 percent of the original value of the bonds after a company restructures, gets liquidated. But it usually takes a while for investors to get some money back. So you want to spread your bond bucks around. When it comes to investing in stocks, we hear at the Fool generally say you should own at least 25 companies. And that's probably a good starting point for bonds as well. Though if you invest in really, really safe bonds, you can get away with a smaller number. For example, you can feel more secure with a smaller bond portfolio or smaller number of issuers if you invest primarily in U.S. Treasuries, which are still considered

among the safest investments of the world. Fledgling casino developers may not like this tip, but number two, stick to investment-grade bonds. To minimize the risk of buying bonds from a company that may go belly up, you want to stick with investment-grade issuers, and those are rated B-B-B-B-B-B- or higher by Standard-I-Moodies. So according to Fidelity, here, the 10-year default rates on bonds of different ratings from 1970 to 2022 as rated by Moody's. So, AAA bonds have a default rate of only 0.34%. So pretty darn safe. Investment grade, 2.23%. Speculative grade, high yield junk, whatever you want to call it, 29.81%. That's a high default rate, which is why they pay such high yields. But even if you stick with investment grade, there's still

the risk of default. In fact, if you own individual bonds long enough, you probably will, see a couple of defaults. So it's still important to diversify your bond portfolio, but you can mitigate that whole default risk by choosing highly rated bonds. Next up, find out whether the bond can be called. Now, every bond has a set maturity rate, but many can be called before then. And what happens is that a company decides to pay off its bondholders before maturity. You know, you bought, let's say a 10-year bond, but then it got called five years in. Why did they do that? It's usually because interest rates have dropped where the bond's credit rating has improved. It allows the issuer to redeem the old bonds, issue new ones at lower rates.

And unfortunately, that leaves investors left with having to reinvest the money at lower rates. So you want to make sure you know beforehand whether the bond you're going to buy is callable. And if so, what the yield will be. So you'll often see at the quotes, you'll see either the yield to call, YTC, or the yield to worst, YTW. And that's what you'd receive if it does get called. By the way, another benefit of treasuries is that they're not callable. This next one gets a little tricky if you like owning investments in standard brokerage accounts, bro, but pursue the primary market. Yeah, when bonds are first sold to investors on what is known as the primary market, they're usually sold in $1,000 increments and will be worth $1,000 when they mature.

This is known as their par value. But once a bond is issued, it trains on an exchange. This is known as the secondary market. And at that point, a bond rarely trades for $1,000. The price is going to either be higher or lower, depending on changes in interest rates and what's going on with the company, maybe what's going on with the economy. And if you buy a bond that is below or above its par value, this is going to add a layer of tax complexity because when the bond matures for $1,000, you're either going to receive

less or more than you paid for it. This is a really complicated topic. But in most situations these days, investors are buying bonds at a discount, meaning they're paying, let's say, $950 for a bond that will eventually mature in $1,000. And that $50 difference is going to be taxed as ordinary income in most situations, not as a capital gain. You can avoid all this tax complexity if you buy bonds right when they're issued in the primary market and then hold to maturity. That said, buying bonds in the primary market isn't easy. You're going to increase your chances by having an account with a brokerage that underwrites a lot of bond offerings. Some of the

bigger discount brokers also have access to some primary offerings, but you might want to check with beforehand to see how big that inventory is going to be. And if you want to play this game, you've got to know what you're buying. Understand how bond prices and yields are quoted. If you've never seen the quote for a bond, it's going to look a little interesting to you. Because despite being typically worth $1,000 at issue and at maturity, bond prices are quoted in a different sort of way. You basically move the decimal point to the left.

So, a quote for 99.616 for a bond indicates that the bond is being offered for $996.16. And you'll likely see both the coupon and the yield quoted. The coupon was the interest rate on the day the bond was issued. But once the bond gets trading and moving above or below its par value, the yield is a more accurate representation of what you'll actually receive as a percentage of what you paid for the bond. And then finally, most bonds pay interest twice a year. When you buy a bond in the secondary market, you'll owe a crude interest to the previous owner for the time she or he owned the bond in between payments.

But then you'll get the full six months' worth of interest during the next payment, even though you only own the bond for maybe less than six months. You know, bro, our engineer Rick Engdahl was asking for more excitement before we started recording in our segments. I really, I think he's getting it with understanding how bond prices and yields are quoted. Let's keep going with the tip of buying directly from Uncle Sam. Yeah, so you can buy savings bonds, treasuries, eye bonds, treasury inflation protected securities, otherwise known as tips, directly from the government. Commission free at treasury direct.gov. So it's a really convenient way to buy treasuries.

Unfortunately, it can only be done in taxable accounts, right? Because the government isn't set up to serve as a custodian for IRAs. But the consolation here might be that interest from treasuries is actually free of state and local income taxes. So that makes them somewhat more compelling. Also, in the case of treasuries and tips, you don't actually buy the security immediately, knowing the exact yield you'll receive. Rather, you're basically signing up to participate in an upcoming auction.

Once the auction is complete, you'll be informed of the rate you'll receive. And finally, you can get the best of both worlds with defined maturity ETFs. Yep. If you've been listening so far, you can see that buying individual bonds requires more education and effort than just buying a bond fund. Fortunately, there's a type of bond ETF that offers most of the benefits of buying individual bonds. These are known as defined maturity or target maturity bond ETSs. And these are funds that only own bonds that mature in the same year, and that year will be identified in the name

of the ETF. Toward the end of that year, after all the bonds have matured, they just have a bunch of cash. The cash will be distributed to the shareholders and the ETF ceases to beat. The two main issuers of these type of ETS are in VESCO, and they call them bullet shares, or iShares, and they call them iBonds, but that's not to be confused with the inflation-adjusted bonds issued by Uncle Sam. You can use these ETFs to invest in all kinds of bonds. Corporates, munis, Tips, high-yield bonds, and both the Investco and I-Share's websites have tools

that can help you build a bond ladder with these ETS, so you have a certain amount coming due each year, probably particularly attractive to retirees. Like all bond funds, these ETS are going to go up and down in value, depending on what's going on with interest rates in the economy, but they should return close to their initial share price, that is the price of the ETF on its very first day, once the fund matures. But there are no guarantees, and this is more likely if the ETF invests in safer bonds, less likely if you're choosing an ETF that invests in like high yield or junk bonds. But the bottom line

is that with these ETFs, you can get the ease and diversification of a bond fund, yet a measure of the predictability about what the ETF will be in the future, similar to what you'd get from an individual bond. In other words, most of the best of both worlds. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for it against. Don't buy yourself stocks based on what you hear. All personal finance content follows Motleyful editorial standards and are not approved by advertisers, advertisements are sponsored content and provided for informational purposes only to see our full advertising disclosure. Please check out our show notes.

The Motleyful only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.