Thu, 24 May 2012
Morningstar markets editor Jeremy Glaser studies possible impacts of the Facebook IPO controversy, struggles and turnarounds at Dell and HP, real economy weakness in the eurozone, and slower sales at Tiffany.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.
From Facebook to France, it was a week of fallouts in the market. Joining me with the details is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Jason, glad to be here.
Stipp: What do you have for The Friday Five this week?
Glaser: We're going to talk about Facebook, HP, Dell, the eurozone, and finally Tiffany.
Stipp: Facebook had a string of bad news after its historic IPO--it became maybe historic for some bad reasons--following that IPO last week. What was the news, what's the latest, and what should potential shareholders think right now?
Glaser: Like one of those horrible viral videos you can't get out of your newsfeed on Facebook, we couldn't stop talking about the Facebook IPO this week.
The shares really traded down a lot on Monday and throughout the week. I think the first day, certainly, the banks were going to step in and support that $38 IPO price, and those supports really just went away as we entered into this week of trading.
I think it certainly shows that Facebook was probably more than fully valued when it came out, and there are a lot of allegations that also emerged this week that Nasdaq had botched the listing in some ways, that the trades did not go off as expected, that some of the analysts at Morgan Stanley and elsewhere had revised downward their expectations for Facebook growth, but instead of widely disseminating that information, only told a few select institutional advisors. And some concerns over why Facebook raised the size of the offering so much at the last minute, and if that has contributed to some of the share price weakness.
And I think that these are a lot of really valid criticisms of the IPO, and ones that we'll probably hear a lot as there are more investigations into them, and that as we find even more information about exactly how this IPO went off.
But I think for investors who are interested in the company, they really need to focus on the long-term fundamental reasons. The IPO only happens once. It's out there. It's in the public marketplace right now, and people really have to think about the valuation.
Our analyst Rick Summer is sticking with that $32 fair value. It's trading right about there right now, but I think we'd like to see a much deeper discount to that fair value before diving into the business, but it seems like those fundamentals are there. But like he said last week, it's going to be a bumpy ride. So, we shouldn't be surprised that the rollercoaster has started a little bit early.
Stipp: Fallout from sluggish business at HP means that thousands of HP workers will be getting pink slips. The Wall Street Journal said this action showed HP's age as an old-line tech company. What does that news say to you?
Glaser: Well, it really is amazing that they are able to shed 27,000 jobs, about 8% of the workforce, and they don't expect it to have a huge impact on their top line or a huge impact on their growth, and in fact the market really viewed this as a favorable outcome and really started to bid the stock up in the right direction.
I think it certainly shows that HP and CEO Meg Whitman are really committed to truly transforming that business and turning it around and turning it back into the powerhouse that it once was, to really step past some of these former management missteps, some of the issues that the board had for so long, and really turn the company into a truly modern giant.
And we think that they are on the right track there, and these layoffs are probably a necessary, but painful, step that certainly will help them get to that higher level of profitability, help them move away from some of that commodity PC business and focus more on services, focus more on printing, focus more on those areas that could be potentially more lucrative for them.
So, I think this is a turnaround story that is not going to turn around overnight. It's not that you lay off these 27,000 people, that process will take years, let alone seeing the benefit in terms of cost savings there. But I think it certainly shows that Whitman is serious about it, is willing to make those really difficult decisions, and we think it bodes well for the future of the company.
Stipp: We also got results from another hardware company, Dell, and those results disappointed. Are we going to see a similar fallout for this particular company?
Glaser: We certainly had a lot of tech news this week, and Dell's news was not as well-received by the market. The stock really just tumbled after they released quarterly results. It just showed that Dell is really having trouble moving their PC business forward, and I think that when you have a very commoditized product like Dell does, they're seeing a lot of competition on the low end, where they're not able to really compete on price in emerging markets and people are just looking for the absolute lowest price. They're having trouble competing against tablets. People really want those devices. Dell isn't really a major player in that space. And a lot of enterprises are still not spending quite as much as they were; they're worried about the economy, ... and this might be a recurring theme we see, that European weaknesses is weighing on the results.
All of this really just adds up to something investors don't really care for very much, and I think they really sold off the stock very hard. And it's going to be hard for Dell really to transform that business quickly. Again, they are hoping that Windows 8, when it comes out for both tablets and for PCs, that will help them boost sales, that will make their products more attractive, help differentiate them some more from some of the low-cost commodity providers, but it's not going to be an easy sell, and I think Dell is going to have an uphill road from here.
Stipp: We had some economic data out of the eurozone. It showed contraction. Is this fallout from the austerity measures and the crisis just the beginning? Are we going to see more contraction over there?
Glaser: When Dell said they are having trouble in Europe, obviously they are not the only ones. We saw a couple of private metrics this week about Europe that really showed some pretty serious contraction. One measure showed that it was the biggest contraction in three years, since really the heart of the financial crisis.
And the thing that's really troubling is, it's not only the peripheral countries that we've talked so much--Greece and Spain and Italy--that are having trouble. It's really starting to affect France and Germany, the real engines of the eurozone, and really showing that they're starting to see some contraction. They are starting to see a loss of confidence, and that really has to be very concerning.
I think that many people thought as long as Germany was able to keep having strong growth and that France was able to have pretty good growth, they would be able to have the firepower to keep the rest of the eurozone together in order to keep things from really turning into a very deep recession. But if these kind of contraction numbers keep coming, and we really see it continue to fall out throughout different sectors and throughout different countries, it's going to be very challenging for Europe.
I think it shows how some of the sovereign debt issues, and some of these seemingly technical issues, can very easily spill over into the so-called real economy, and that's going to have a real impact on investors who have exposure to Europe, on companies that do a lot of business in Europe. It's not an issue that's going to go way anytime soon.
Stipp: Lastly, Tiffany, a high-end retailer, also reported earnings that showed they were slowing down a bit. The high-end consumer has been the engine of growth for consumer spending for a lot of the recovery. Does this bode really unwell for the market and consumer spending?
Glaser: We look at Tiffany a lot, because it really does represent almost a pure play on those higher-end consumers. And we were surprised, I think, early on when their results really started to turn around faster than many people expected.
And this quarter was not great for them. It was not a disaster by any stretch of the imagination, but they definitely had to lower their outlook. They really did not have the kind of quarter that they were expecting. And they really saw weakness across the board, but in the Americas as well, again, weakness in Europe, that recurring theme that we're certainly seeing. And I think it doesn't bode terribly well. It shows that high-end consumers, even if they do have a lot of money, even if they are feeling [continued] wealth effect from the stock market return still being relatively decent even after the recent correction, [may not be as] willing to make some of those big-ticket purchases, buying a big diamond, or buying one of those nice boxes from Tiffany.
Certainly, this doesn't mean it's the death of the high-end consumer, and we're going to see them stop spending. But it shows that we can't count on that segment to just keep spending, spending, spending in order to keep the recover going. It really is going to need to be broad-based, and that's why we are always looking at what consumer spending looks like as a whole, and I think that this is definitely a warning sign.
Stipp: Jeremy, I predict no fallout from this week's Friday Five. Thanks again for your insights.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.