Thu, 26 Jul 2012
Who will get the medal in synchronized bailouts, the long fall, and golden archery?
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.
In honor of the Olympic Games getting going this week, Morningstar markets editor Jeremy Glaser has identified five lesser-known Olympic events in the markets. He is here to offer the rundown.
Thanks for joining me, Jeremy.
Jeremy Glaser: You're welcome, Jason.
Stipp: So, Jeremy what captivating lesser-known Olympic events have been going on in the markets this week.
Glaser: This week we tuned into the iPhone-arod, Synchronized Bailouts, the Very High Jump, the Long Fall, and finally Golden Archery.
Stipp: The iPhone-arod sounds like a very interesting event; we got certainly a snapshot of that event this week with the Apple earnings [report]. What's your take on that?
Glaser: Well, that event involves a bunch of Apple analysts essentially just guessing time and time again, in a big race, how many iPhones are going to be sold. And those numbers kept getting ratcheted up, ratcheted up, ratcheted up as Apple kept exceeding expectations. No matter how many iPhones people expected to be sold and no matter where they were in the product cycle, new market and new carriers really helped Apple continue to beat no matter what any number [analysts] put out there.
But that really came to a stop this quarter. For the first time in a while we had disappointing iPhone sales. Granted, they still moved a ton of units. It wasn't like iPhone sales dropped off a cliff, but they certainly were stagnating, certainly were down in that year-over-year measure. And I think that represents the product cycle, represents that they don't have those new carriers, they don't have that exciting new product. And certainly it’s not the death knell for Apple. It's not that the iPhone is going to go away, but it's definitely a stumble in that race. And I think the iPhone 5 is really going to have to deliver to get Apple back on that growth track that they need to justify the valuation, to justify the excitement about that product, and we'll be watching carefully for that.
Stipp: Something tells me that the ECB is a major contestant in the synchronized bailout event. Are they going to be able to keep their heads above water?
Glaser: The synchronized bailout has been pretty popular. It really came into vogue during the 2008 Beijing Olympics as we were worried about bailing out a number of banks here in the U.S., and now it's really moved to more of the sovereign category in 2012 when it comes to those bailouts.
And we got some interesting news from the ECB this week, where the head Mario Draghi basically said, "We're going to protect the euro, no matter what. We have tools to do it. We are not going to let it fail." And it really was a pretty unequivocal statement from the ECB given that we've gotten some more wishy-washy statements previously. But now we have to see if they are actually able to execute it.
You can plan your synchronization, and you can plan all these great things all day long, but you actually need to do it and you actually need to prove to the markets that you can do it for it to make a really substantive difference. Will they be able to keep Spain's borrowing cost below that kind of magic 7% level both in the short term and the long term? Can they keep Italy from getting caught up in the sovereign debt worries? Can they keep the rest of Europe safe?
So, I think it's good that they are thinking about it, it's good that they talking about making these plans, but really it's important to see that execution, and I think that's what going to be really crucial for winning the gold in that one.
Stipp: An aerospace giant not surprisingly competing in the very high jump. What's the news on their results?
Glaser: It really is much easier to get over that high jump in an airplane, rather than trying just to make it. Even with a pole vault, I think the airplane is still going to beat you there.
And Boeing had a pretty good quarter. No matter what's going on with the global economy--we hear about worries in Europe that we just talked about, worries about slowdowns in emerging markets, and certainly in the United States the economy is not exactly growing gangbusters. But people are still out buying aircraft. Both the narrow-bodies and the wide-bodies are doing pretty well. Their deliveries are starting to ramp up as their much-delayed 787 program and their new 747 really start rolling out the lines, and that's showing up in the bottom line of Boeing--showing up in durable goods orders, too, in data that we got this week.
So I think that Boeing is doing pretty well with that jump. They are handling the competition with Airbus; they are going head-to-head and getting more of these new orders. They are really holding on their own there, and I think it's a good sign on the commercial aircraft side.
Stipp: The long fall doesn't sound like an event that I would want to medal in, but a couple of companies are certainly competing in that long fall. What are the results and how long before they hit bottom?
Glaser: We've had a lot of companies that have been really vying for pole position in the long fall before that starts, but we had two this week that really, I think, took the cake.
The first was Zynga, the social gaming company, which had extremely disappointing results and saw their shares fall by over 40%, really to the lowest level since their IPO. Basically, the fear is that people don't really care about playing Farmville anymore, don't care about Words with Friends or Draw Something or their new games that they are starting to launch.
I think there are some fears that maybe the idea that people are locked into this platform and that they were going to keep playing these games forever and keep spending money just isn't the case, in that those eyeballs can easily click to another game that is just, again, a click away, and that they are not going to have that sustainable advantage.
So, I think I'd see if they can actually build that platform, if they can really get people coming back to them. That's going to determine the future value, and after this quarter it's not terribly clear that they can.
Stipp: So it sounds like Zynga is going for the gold in the long fall, but they have some stiff competition with another company that also reported results this week. What's the story there?
Glaser: Netflix is trying to give them a run for their money. Certainly Netflix is a much stronger company and has a much more developed brand following, has a much more developed business model in a lot of ways, but they ran into some problems as well. As our analyst Michael Corty has pointed out a number of times, that transition from the disk model, which has a lot of competitive advantages, to one that has fewer competitive advantages, online streaming, is going to be challenging for them. And particularly as Netflix continues to try to push into international markets, continues to try to expand their footprint, it just is more and more challenging for them to really regain those profitability numbers that they had before and not just get squeezed by the content providers, who could just keep increasing and increasing fees in order to have decent content that comes on to that streaming platform.
So, Netflix fell pretty sharply on this news. I think a lot of investors are just kind of seeing that this not going to be an easy story, it's not going to be an easy transition. And I think it could take awhile for Netflix to settle into its new trajectory.
Stipp: Jeremy, I can't possibly guess who is competing in Golden Archery, but whoever it is, are they hitting the target?
Glaser: There is actually a lot of good contenders for this one this year. We've got the Hamburglar, we've got Mayor McCheese, we have Ronald McDonald himself and Grimace, of course, who are really all trying to get to the top of that podium. But I think they are probably also trying to get more people to come into McDonald's.
This quarter we saw a slowdown in growth from the fast-food giant, which is really a very sharp change from what we've seeing for McDonald's in the recent past. I think that with their menu changes, with their store remodelings, they've really been able to take market share, they've really been able to continue to grow even in the backdrop of relatively bad economic growth, but that's only taking them so far. And now, as they are seeing that growth so down, until the economy really picks up and people have jobs and need to go out and eat lunch or need to go out and get breakfast, it's going to be hard for them to kind of post those big gains that they had before. I think a lot of taking that share, that kind of growth is probably behind them, but certainly they are going to be doing everything in their power in order to get people on target and into those restaurants.
Stipp: Well, Jeremy, I don't want to jinx it, but I think you medal in your news reporting this week. Thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.