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The Friday Five

Thu, 9 May 2013

Five stats from the market and the stories behind them. This week: no magic in Dow 15,000, 10% growth for a content king, Windows 8.1, and more.

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Video Transcript

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

Joining me as always with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: My pleasure.

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

Glaser: We're going to talk about the numbers 15,000, 3, 10%, $1.6 billion, and 8.1.

Stipp: 15,000 marks a new high for the Dow Jones Industrial Average. What do valuations look like as we've run up so much now?

Glaser: The Dow hit through that 15,000 ceiling for the first time, and I think it's important for investors to realize that it doesn't actually mean anything. These are just arbitrary signposts along the way. Just because it hits 15,000 doesn't mean necessarily that stocks are hugely overvalued or hugely undervalued. In fact, our team of equity analysts thinks that stocks are just ever so slightly overvalued right now. The median price-to-fair value of the shares that they cover is trading about 3% over its fair value. So it certainly doesn't look like they're outrageously priced or in a bubble.

But I think that when you have a fully valued stock market, and when you have somewhat of an uncertain economic environment like we're in right now globally, stock selection becomes just that more important. I think there very well could be a pullback if we see some weaker-than-expected data, if earnings, say, next quarter don't look as strong or there seems to really be a spring pullback. If the market were to fall, it would be important to really get into the shares that are the higher-quality companies. It would be important to find companies that are trading at a discount to their fair value, so you have that margin of safety. I think when we hit a milestone like this, it's just a reminder that stock selection is a lot more important here than it was at, say, Dow 7,000.

Stipp: Starbucks will now be able to sell three times, or triple, the number of K-Cup coffee pods through that channel. What does that mean for the Starbucks business?


Glaser: It's an interesting story for them. People think of Starbucks as just these stores on the corner. How many more can they open? They had to close some because of their overexpansion just a few years ago. But this move into the consumer packaged goods space has been a fascinating one for the company. They have been working with Green Mountain, which they just reached this deal with, to expand the number of varieties they can have in that K-Cup line. They've been launching some of their own products, instant coffee. They've really been moving fairly aggressively into that space.

Our analyst R.J. Hottovy, who cover Starbucks, thinks that this is a great move for the company. He says it makes it one of the more compelling growth stories, that it could help with margins over time, and helps drive growth outside of just opening new stores, and really helps build the brand and help sustain the brand as that true premium coffee product for a lot of Americans. The stock does not look incredibly cheap right now--it's slightly overvalued--but it's one of those names that, if there were to be a pullback, it would be extremely interesting.

Stipp: 10% marks the recent rise in Disney sales. Does this just prove that content really is king?

Glaser: I think it does. This is a story we talked about just recently with some other media company results, and we're seeing it again with Disney.

Companies that control really high-quality content that consumers want are really doing very well right now. Disney had that 10% sales gain. They were able to increase their operating margins pretty significantly, with good results across their theme park business, across their movie business. Cable was a little bit lagging, but not much. It was up 9% in the quarter. And it just shows that people are willing to pay up for this.

As the number of distribution channels increases, … you can see things on Netflix, Amazon wants to get in there, a lot of different people are vying to get this content to you. The content providers are in the driver seat there. They're able to demand relatively high prices, because these distributors want to offer content that potential consumers want to see. It's a good place for Disney to be, it's a good place for a lot of the other content providers to be, and this is a trend that I think will continue for some time.

Stipp: $1.6 billion refers to the amount that Bank of America will be paying MBIA to settle some mortgage claims. What's the latest on that deal?

Glaser: One of the biggest clouds over Bank of America for a while has been their legacy mortgage business. During the boom and through their Countrywide acquisition, they had quite a few of these mortgages that have since gone sour. There has been a lot of litigation, a lot of claims against this, and it's been a big question mark: What will that final number look like.

Bank of America has very slowly been working through this, and this week, with this $1.6 billion deal with MBIA, they are one step closer to really just putting a period at the end of that sentence and to be able to look into their future earnings.

But when you look into the future, it still is a little bit murky for the big bank. Jim Sinegal, who covers Bank of America for us, thinks that with their slightly higher cost structure than some of the other big banks and with low loan demand and the macroeconomic uncertainty, that they might not get to what their potential earnings power is for quite some time, and that other large institutions like Wells Fargo might be a better idea for investors right now.

Stipp: Microsoft is hoping that a new iteration of Windows 8, Windows 8.1, will get that franchise going again. But what do you think, Jeremy? Is this going be a non-starter?

Glaser: Well, the lack of the Start button really seemed to be a big problem for Windows 8. We have spoken about that big fall in PC sales, and there are a lot of things behind that. But one of the factors was that Windows 8 did not have a great reception when it was introduced, and this week Microsoft came out and admitted in some ways that consumers haven't taken to the product exactly as they'd hoped, that there weren't enough touchscreen products out there that people could get the full experience with Windows 8, and they found it somewhat frustrating to lose that Windows experience with the Start bar that they had become so used to over the years.

That being said, though, Microsoft still had some pretty good results this quarter. They are still selling a lot of Windows licenses, and they are now making steps to really turn that around. They are going to be introducing the 8.1 version relatively soon that will probably make some changes, and they are hoping to roll out by the holiday season even larger changes that they think will make the Windows 8 more compelling.

Is this going to save PC sales completely? Probably not. This was really designed as a post-PC operating system. It's meant to work on tablets. It's meant to work on convertible-type machines. It's very similar to what their Windows phone operating system looks like. So it probably will not reverse that trend of people moving to other devices, but it does bode well for Microsoft that they are able to make those adjustments like they have been able to in the past and continue to sell those licenses.

Stipp: Jeremy, we'll press the Start button on The Friday Five next week, but thanks for joining me today.

Glaser: You're welcome, Jason.

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

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