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The Friday Five

Thu, 31 Jan 2013

Five stats from the market and the stories behind them. This week: a critical 10 for BlackBerry, a promising 3.2% margin for Amazon, and more.


Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five: five stats from the market this week and the stories behind them.

Joining me with the details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Glad to be here, Jason.

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

Glaser: Well, we're going to look at the numbers 10, $26, 3.2%, $12.1 million, and finally 32%.

Stipp: 10 refers to the 10th generation of an operating system and the last hope of an ailing handset maker. What's the story?

Glaser: The recently renamed BlackBerry released the 10th iteration of their long-awaited BlackBerry software and some new handsets that are meant to be competitive with some of the modern smartphones out there and help to turn around RIM's business.

And the product they released was good. The question is, is it good enough? The software seems to be pretty competent; early reviews of the units are fairly positive. But at the same time, you have to remember that there's lot more to the phone than just the software. You have to think about the app ecosystem, you have to think about the cloud services that support it, and their BlackBerry is still lagging some of their competitors. Windows Mobile gets a lot of really good reviews, but it still hasn't really taken off to compete with Android and iOS. Palm came out with WebOS and the Palm Pre, which also was reviewed fairly favorably, but it wasn't able to find that traction.

So, I think that for BlackBerry, this really is a good start. Is it a necessary but not sufficient condition for them to really get back to strength. It should stop the bleeding. It should give BlackBerry loyalists a real option in both a touchscreen and in a keyboard in order to stay in the ecosystem, and maybe give some CTOs at major corporations an excuse to stay with BlackBerry, but it's not going to be enough to completely turn around the company.

Stipp: $26 refers to the per share buyout price for a slot machine maker. What's the deal with this deal and what does it perhaps say about the M&A environment?


Glaser: The deal itself is pretty small. Scientific Games is spending $1.5 billion to buy slot manufacturer WMS. Our analysts feel that this probably slightly undervalues WMS, but given some of the regulatory problems in buying slot manufacturers--there are a lot of people who are worried about those designs getting into the wrong hands--[the deal] probably will get done at that lower valuation.

But it does raise a question of what's 2013 going to look like on the M&A landscape. Our analyst team actually just put out a report on what they expect, and they see that 2013 is probably going to be better than 2012, but they're not expecting a lot of huge blockbuster deals. The economic uncertainty is still keeping companies from wanting to lever up or really going for these transformational blockbuster deals, and instead focus on smaller tuck-in acquisitions that fit into the strategy, that are manageable with cash on hand or maybe some limited financing. And those are the kind of deals, smaller ones like this WMS deal, that they expect to really dominate the M&A landscape this year.

Stipp: 3.2% doesn't sound like a very high operating margin, but how good is it for an online retailing giant?

Glaser: The market was pretty happy for Amazon to come up with that number, and I think it's less [about it being] a spectacular number in and of itself and [instead] points to the fact that Amazon may be getting out of some of their heavy investment phase and moving into the monetization of that and moving into a higher operating margin stance.

R.J. Hottovy, who covers Amazon for us, thinks that in the medium term a 5% operating margin is something that's attainable for them, and that would really help drive a lot of value to shareholders. Amazon has been spending a lot of money on distribution centers, on content, on building out other international businesses, but now they are going to be able to take advantage of that, offering that same-day delivery, being able to be a one-stop shop for people, funneling more of those third-party and "fulfilled by Amazon" purchases, which can be pretty high-margin for them, is a good sign for the giant. And it's a sign that these investments probably weren't just money being thrown away; they really were solid investments in the future of the company.

Stipp: $12.1 million is the rather embarrassing price tag on a set of antique maps. This was embarrassing for a particular CEO. That story came up again this week. What are the details?

Glaser: Chesapeake Energy CEO Aubrey McClendon always seemed to be at the forefront of lot of articles and lot of discussions about corporate governance. That $12.1 million refers to the antique map collection that he sold back to Chesapeake Energy because it was displayed in their corporate headquarters. There are some questions about the exact value of those maps. And even a couple of years later, there are a lot of [other] questions about his involvement in his personal investments in some of the wells that Chesapeake Energy was investing in, as well as his very aggressive strategy of spending way beyond the company's cash flow and spending top dollar to buy new plots of land, to buy new potential places for drilling, and creating a bit of a funding gap in order to really make all of those deals work--particularly as natural gas prices really fell.

So, due to some shareholder pressure, he was pushed out as the chairman of the company last year, and this week we found out that he'll be leaving altogether. He'll be leaving that CEO seat. And Mark Hanson, who covers Chesapeake Energy for Morningstar, thinks this is a real net positive for shareholders; that the new board is a lot more financially conservative, that they're going to have asset sales to be able to cover this funding gap, to be able to execute, and to really get a lot of value out of these pretty good assets that they have without worrying about the financial uncertainty that he brought to the table. You just didn't know if he was going to be able to ratchet it down enough in order to really get that cash flow. This removes a lot of that uncertainty, which is a good thing for investors.

Stipp: 32% refers to the commercial segment sales [growth] of Boeing. What should I think about this number given all the bad headlines for the airline maker?

Glaser: Boeing has been in the news a lot recently, and in a good way for at least their earnings this week.

They saw revenue in their commercial aircraft business rise 32%, which is pretty sizable if you think that it's not exactly a small business to begin with. Margins came down a little bit as the mix moved to some of their newer planes, which are less profitable. But the commercial airframe market continues to be pretty robust, and Boeing is taking advantage of it.

The fact that there is so much strength there, and that they do have such a big backlog, shows that they have some chance to really ride out the problems they're having with the 787 Dreamliner right now.

They didn't give a lot of guidance into what they thought was the cause of the problem, when they thought the problem would be fixed, when those aircraft would be in the air again. But given that they had a pretty optimistic outlook for 2013, it seems that they don't expect it to be a major problem, and is something that will be fixed in the relatively near future.

But given that those customers don't really have a lot of other options of where to go if they want that kind of plane--the Airbus model hasn't even had its first test flight yet and a lot of those early [Airbus] delivery slots are already spoken for, so you'd have to get in the back of the line if you wanted to get the A350--a lot of [Boeing's] customers may not just completely disappear.

Now, if the 787 problems do turn out to be more severe--say, the aircraft has to go through a complete redesign; maybe there are some much larger problems--it's going to have a significant impact for them, but it's not one that they won't be able to withstand. It could raise some questions about their ability to develop new aircraft in the future where customers may be less eager to sign up if they think those problems are going to re-emerge. Those are open questions at the moment.

But these results show that Boeing really still has seen a lot of strength despite some of the headline problems with the 787 program.

Stipp: Five very interesting numbers. Thanks again, Jeremy, for the stories behind the stats.

Glaser: You're welcome, Jason.

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

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