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Saying Uncle?

Fri, 20 Jul 2012

How Nokia, B of A, Yahoo, and others are tacking in a tough environment for their businesses.

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Video Transcript

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

As some business and economic pressures intensify, we're seeing who is saying Uncle in the market. Here with me to offer the rundown is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, glad to be here.

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

Glaser: Well, we're going to talk about Nokia, Walgreen, Bank of America, Yahoo, and finally Coca-Cola.

Stipp: Nokia has certainly lost a lot of ground to their competitors in the handset space. Are they throwing in the towel yet or have they found a new way forward here?

Glaser: They are definitely not throwing in the towel yet. Results this week, as our analyst put it, show that Nokia is not in a death spiral.

Their CEO, Stephen Elop, had said earlier that Nokia was really like a burning platform, and that the company had to jump off into the abyss, jump into sea, in order to really save the company.

And they have done that and they are starting to really make that transition. They are going from producing their own software to using Microsoft Windows phone software on their new line of smartphones. They are putting a lot of marketing dollars behind it, trying to get consumers really excited about it.

And the results this quarter [show] people aren't outrageously excited about these Windows phones yet, but I think as the software gets better, as people continue to play with these phones, they see the phones, it is the solid product, and it probably is one that could capture really a niche part of the market [among] people who aren't interested in Android, who aren't interested in iPhone, who want that other option, and they are there. And the carriers want to have a third option. They want to make sure that they are not too beholden to either Google or Apple or whoever it might be.

So I don't think Nokia will ever be able to return to the enormous prominence that they once had in the industry, but if they can continue to execute this plan, if they can continue to keep their costs under control, certainly you can see a path forward for them.

Stipp: We got some news this week about a tense relationship between Walgreen and pharmacy benefit manager Express Scripts. Did somebody blink here first? What's the story?

<TRANSCRIPT>

Glaser: This is something that we've talked about for a long time. It's been an interesting story, because it really pits the distribution of those drugs to the consumer from Walgreen [against] the emerging power of these pharmacy benefit managers like Express Scripts, which got even larger with their acquisition of Medco.

And as we worry about rising health-care costs and think about how to keep those costs under control, pharmacy benefit managers are becoming more and more important. They negotiate these big deals with pharmaceutical companies with those distribution networks in order to really bring those costs down for the managed-care organizations and ultimately for corporations who might be paying for health insurance or for individuals.

And due to a fee dispute, Walgreen basically got kicked out of [Express Scripts'] network. They decided they weren't going to accept lower reimbursement rates, and they lost a lot of customers. People who had Express Scripts were only going to be able to get their insurance to reimburse their drugs if they went to CVS or if they did a mail order, and [so] they started doing that--a lot of those customers walked out the door. It was a lot of pressure on same-store sales [for Walgreen].

Our analyst who has not been privy to the exact details of the agreement, which haven't been released, does think that it really was Walgreen that blinked here. They saw those customers leaving; they saw that with the Medco acquisition that could be another group of customers that could be forced out of their pharmacies. They didn't want to lose them; they are willing to give up some ground there. But I think that watching companies really try to shrink costs in the health-care industry is a trend we are going to see for years to come and has some pretty profound impacts in the investment world.

Stipp: Bank of America has been hobbled with mortgage woes for quite a while. Do investors have to give up here and just think we're never going to see these mortgage problems in the rearview mirror with Bank of America?

Glaser: It's really been tricky for them. Compared to some of their peers that really have put most of their mortgage troubles behind them, every quarter from Bank of America we seem to see more problems. Yet again, we had increases, an accelerating amount of problems with warranties from the government entities, from private-label entities, and it really is challenging for Bank of America.

Now again, we think that the reserves they set aside for these issues are probably sufficient; they might have to raise them a little bit, but it's not going to be something that's going to crush Bank of America. They have the capital cushion. They have been making some progress in their cost-cutting efforts.

But certainly it's worrisome to keep seeing these numbers get larger and larger. I think investors continue to be a little bit skeptical until they really are truly sure that some of these mortgage issues from the crisis are truly done.

Stipp: Yahoo once was one of the kings of the Internet space. Recently they've fallen behind the curve. We got some new news about leadership there. Is that going to put them back in a pole position in the Internet space?

Glaser: The leadership deficit for Yahoo has been an enormous problem. For years now, I think, to observers both inside and outside the company, it's been clear that they needed a new strategy. It's clear that they needed to make some changes in order to keep what's still a pretty large position in search and a large position in advertising in order to kind of expand shareholder value and continue to do well.

But they haven't been able to find the right person to do that. And our analyst Rick Summer really thinks that the new hire, Marissa Mayer from Google, might be the woman to do that.

Obviously, it's too early to tell exactly what she's going to do, what kind of changes she is going to make, but she is someone who is respected in the industry who should be able to bring good talent with her, and those are really the things that Yahoo needs right now. They need to think about innovation, they need to think about how to expand, what works, what doesn't, and really focus on what does. And I think that she may be the woman to do it. She was very successful at Google, and we'll have to see if she's able to continue that success at Yahoo.

Stipp: We've been wondering with earnings season getting going now, when will the European woes start to effect the results of companies. We got a little bit of news and insight on that this week. When is Corporate America just going to completely have to give in to the European pressures and take some of those hits. What do you have so far?

Glaser: We've been seeing that trend for the past few quarters of managers on conference calls saying that they think Europe is going to be weak, that they look at their future orders, they look at what their salespeople are telling them, and they say that people in Europe are a little bit worried right now. They see everything going on with the sovereign debt crisis, and they are just being very, very conservative.

And on the consumer front, we saw that this quarter with Coca-Cola. They had a good quarter in North America. They are adeptly managing the shift as people kind of go away from the fizzy drinks and into some of the more still drinks; they are creating more products in that category. They are able to raise prices and able to keep their top line going there.

But in Europe they really were having problems. People are cutting back on everything--and one of those things is even Coke. They saw their volumes decline by a couple of percentage points; add in some currency issues, and it really was a tough quarter for Europe for Coca-Cola.

I think, again, that's something we are going to see from a lot of different firms, from a consumer standpoint, from business standpoints. Anyone who is really serving the European economy as they fall into recession--and maybe even into a very deep recession in some of the peripheral countries--there's not going to be a lot of growth there, and they are going to have to hope that what's happening in North America, what's happening in Asia is able to keep the rest of corporate profits alive.

Stipp: Well I know one thing, we'll never give up on The Friday Five. We'll be here again 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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