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Troubled Times?

Thu, 10 May 2012

A string of disappointments and difficulties led to sour results for some, but not all, newsmakers this week, reports Morningstar markets editor Jeremy Glaser.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.

A string of disappointments and difficulties led to sour results for some, but not all, newsmakers this week. Here with the scorecard is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, never a tough choice to be here on The Friday Five.

Stipp: So, what you have for The Friday Five this week?

Glaser: This week, I want to talk to a little bit about Europe, about Avon, Cisco, Disney, and finally department stores.

Stipp: So, for number one, Jeremy, after some elections this week, the tough times in Europe just continued. Is there a way out of this mess?

Glaser: We'll have to see. Europe is really in an incredibly tough spot right now. Average Europeans are not that excited about these big austerity measures, about big cuts in government spending, about new fiscal pacts to keep the euro together.

So, even though the political leaders and some of the bureaucrats have really been pushing some of these plans over the last few years and have really managed to stave off complete crisis, that's only going to be able to continue to happen if those average Europeans are willing to sign on to it. I think we have seen increasing signs over the last few months that that just isn't going to be the case.

With elections in France, with elections in Greece, with the collapse of the government in Holland, with increasing protests across the Continent, it just shows how difficult it is going to be to make these reforms stick in a way that is going to soothe investors and make them think that over the next decade, they're going to be able to bring these debt levels down, they're going to be able to bring the peripheral countries back to [debt] levels that will be sustainable over time.

So, I think certainly these elections are a sign of that discontent, and I think we're going to have to watch this carefully over the course of not just months, but of years, to see if they can keep this coalition together to keep the euro together. If not, we could be in for some volatility and some turmoil in the future.

Stipp: Avon has had a long string of tough times recently, but despite their difficulties, they have some pretty attractive suitors who want to dance.

Glaser: Avon has had a lot of difficulties, and finally someone is ringing their bell and trying to sell something--that being a takeover offer from Coty. Coty, a fragrance maker, had come up with an initial bid that Avon quickly rebuffed, but this time they came back with Berkshire Hathaway behind them, and usually when you have Warren Buffett's name on something, it garners a lot more attention. They increased the bid slightly, and it's really going to be difficult, I think, for Avon to just go ahead and reject this offer completely out of hand.

Our analyst Erin Lash really thinks that Avon is worth a little bit more than the current bid, and it sounds like there could be some opportunity for that bit to get raised a little bit, but I think certainly the impetus is now on the new CEO of Avon to really show that she has a turnaround plan, that Avon can stand as stand-alone business and create a lot of value as a stand-alone business, or they're going to be forced to succumb to this offer.

Stipp: Cisco's shares took a dive on Thursday after they reported on Wednesday [with a forecast] that disappointed. Is this [stock] a better deal for value investors now or has the story changed?

Glaser: Cisco had a decent quarter, but one of the big issues was that guidance just was incredibly weak. Management really is not expecting much in the rest of the year. A lot of that is because of reduced corporate spending. They said that a lot of corporations, particularly in Europe, are just cutting back on those big infrastructure projects that Cisco is really geared toward and that could really make a ton of money.

So, it's certainly not a catastrophe for Cisco. The shares were down considerably on the news of this lower outlook, but the company still producing really a tremendous amount of cash flow. They remain fairly profitable, even if that profitability isn't growing quite as fast as it had been in the past. It might not be an absolutely screaming, screaming, screaming buy right now, but the shares definitely do look somewhat undervalued.

Stipp: Disney, we talked about a few weeks ago, had a mega flop with John Carter, but they reported results this week, and it was pretty bright.

Glaser: They managed to turn that around pretty quickly. I think it just shows that Disney's more diversified model and wide moat really allow it to not worry about one artistic failure, not worry about one creative failure, because they can make it up elsewhere in the business.

The shares hit an all-time high after these results, as the theme park business really shined through in the quarter, ESPN is still doing incredibly well, and [that] helps offset weakness elsewhere. The Avengers also has been extremely popular for them and will probably continue to drive results.

Stipp: Kohl's had a pretty bad quarter, and meanwhile Macy's had a pretty good quarter, a reverse of a trend that we had seen not too long ago. So what to make of this?

Glaser: This is interesting on a few levels. The first is Kohl's and Macy's are both very mainstream department stores that I think give you a good sense of the pulse of consumers who are out there, and what Middle American consumers are out buying.

What Kohl's did is lowered prices on a lot of items. They tried to raise prices in 2011, and it turns out that those levels just couldn't stick, and they really had to lower them.

So, I think it shows that consumers are willing to go out and spend money, but only if the price is right. I think we saw similar results in Macy's, but they just executed better. They really had to have that merchandising mix just right. They had to have the pricing just right, and that got people to open their wallets, when people aren't just opening [their wallets] for the sake of it, they're not out there just spending for the sake of it. They're being much more careful about their spending. But they are still spending. It's not a total drop-off, which I think is a good sign for the economy.

Stipp: Jeremy, it's always a tough time for me to have to bring The Friday Five to a close, but I know you will be with us next week. Thanks for joining me.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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