Fri, 28 Oct 2016
We don't think AT&T's move for Time Warner is prudent, while Apple is hemmed in by lack of iPhone 7 Plus supply. Plus, GM still on a roll.
Jeremy Glaser: AT&T disappoints with Time Warner deal, Apple faces supply issues, and GM overdelivers. This time on the Morningstar Weekly Wrap.
AT&T announced a more than $85 billion deal to acquire Time Warner over the weekend. But our analyst, Mike Hodel, is skeptical of the deal's strategic rationale and price.
Mike Hodel: We think AT&T is buying a great asset in Time Warner. We have a wide-moat rating on Time Warner, and think the business is really well positioned within the media market to continue creating premium content. That said, we don't see a lot of synergies between AT&T's core wireless and fixed-line phone business and the media business they are acquiring with Time Warner. And as a result, we don't think there is a lot of ability create value by bringing these two companies together. So we evaluated the deal primarily on the basis of what we think Time Warner is worth on a stand-alone basis. So with our view that AT&T is paying a little bit too much for Time Warner there isn't a lot of value to be created by putting the two companies together. We lowered our fair value on AT&T from $36 per share to $35, which in our view means the stock is roughly fairly valued today even after the deal's announcement.
Glaser: Brian Colello thinks that disappointing guidance from Apple this quarter reflected tight supply of the iPhone 7 Plus.
Brian Colello: The bigger news is always the first-quarter forecast for the December quarter and the holiday season. And there the big story is that the iPhone 7 Plus is a bit supply-constrained, that demand is outstripping supply, and they are not going to be able to satisfy all orders. And so, the revenue guidance for Q1 was $76 billion to $78 billion. That's a little bit higher than what it was a year ago, so only slight growth.
The bigger disappointment we think for Q1 coming up is the gross margin guidance, which is about 38%. They reached as high as 40% and even if you adjust it back, kind of 39% is the baseline. And again, I think that's the issue that they are going to sell fewer iPhone 7 Pluses which are the higher-priced phones.
The good news or the silver lining, if any, on the 7 Plus is that that might bode well for the March quarter and a little bit of a bounce back.
Ultimately, we are not expecting tremendous growth from Apple. So, even the Q1 forecast, we're not expecting exponential growth anymore for this company. They are hitting all of the major carriers. They have expanded into all of the regions. But we expect sales to be somewhat resilient longer term and we still see that going on with Apple. So, we are still bullish on the company long term. But again, the Q1 forecast, particularly on the gross margin line, just a little weaker than what we were thinking.
Glaser: GM had a strong quarter, and Dave Whiston thinks the market's worries that the firm's earnings are as good as they are going to get are misplaced.
Dave Whiston: GM reported yet another awesome quarter this week, blowing away consensus. Double-digit growth in both revenue and earnings per share. Unfortunately, the market did not reward what I saw as a really good quarter. The market though just seems to be much more focused on this idea that this is as good as it gets for GM, and they can't do any better. In the meantime, shareholders though are getting paid to wait with a really nice dividend yield, yielding nearly 5%. They also finished the first part of their buyback program early, and they are going to move on to the next $4 billion phase for a total of $9 billion in buybacks from 2015-2017.
I did cut my fair value down to $44 (per share) from $48 mostly due to more investment being required and some slightly lower income in China. But I remain very bullish about the new GM. There is a lot more cost-cutting still to get from the management team. They aren't done with their $5.5 billion in cuts, but exactly when that is all going to translate into stock price appreciation is awfully hard to say.
Glaser: And in case you missed it, we just released our new ratings for 529 college-savings plans along with more information on the best way to save for college.