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The Friday Five

Thu, 25 Jul 2013

Five stats from the market and the stories behind them. This week: More trouble for China, Facebook gets mobilized, Boeing still going, 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: You're welcome, Jason.

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

Glaser: The numbers we're going to look at are 11, 75%, 14%, 10, and 9%.

Stipp: It's been 11 months since we've seen China's PMI as low as the data we got this week. So it looks like things really are slowing down there.

Glaser: It appears that way. The HSBC Flash PMI, which gives a snapshot of what's happening in the Chinese manufacturing industry, did hit an 11-month low in July, and this is just one in a series of data points that show a slowing in China. We have worries about the financial sector. We have worries coming from management teams from Apple to Coke that are saying they are seeing some economic weakness in areas that they hadn't before, or maybe even more weakness than they had expected. I think it just shows how difficult it's going to be for [China] to make that transition from being an investment-led economy to one that's more consumer driven and maybe in a more sustainable model.

I think the real question now is, what impact is that going to have on the rest of the global economy? Certainly there are going to be some direct impacts in terms of trade with China, in terms of what's going to happen with commodity prices if they're not gobbling up so much copper and concrete and steel and some of these other commodities [of which] they've helped push the price up over the past couple of years.

I think the really interesting question for lot of investors in the U.S. is, what impact [will this have] on us. It's likely to have some impact. It's probably not going to be enormous, but it's going to be a story that I think a lot of us will be watching closely.

Stipp: On the flip side, on the positive side, Facebook reported 75% quarter-to-quarter growth in mobile ad [revenues]. Have they finally figured out the mobile market?

Glaser: This was a big quarter for Facebook. The stock was up big on this quarterly report that was much better than expectations, as it looks like Facebook has really started to crack this mobile advertising conundrum.

One of the big concerns right after the IPO and leading up to the IPO was that Facebook hadn't really found a way to monetize its mobile user base. An increasing number of people who were on Facebook were doing so through their smartphones, through their tablets, and Facebook didn't have a way to really sell ads to them in a targeted way that could really boost their top line. And they had that big growth this [quarter], and it's really starting to reach not quite parity yet with the desktop advertisements, but starting in that direction. Facebook is showing that it can use its data that it has on its users to give them ads that are going to be useful.

As our analyst Rick Summer, who covers Facebook, pointed out, this comes in a quarter where Google and Yahoo and some of their peers actually had a slightly weaker quarter on the advertising side. So the fact that they were able to drive this kind of revenue growth in a quarter that wasn't great across the industry is a sign that Facebook is moving in the right direction. It still has some ways to go, but generally there was a lot to like in this quarterly report.

Stipp: Speaking of driving revenues upward, Ford reported a 14% rise in revenue, and GM also had a good quarter. Auto is still playing a big role in the recovery we're having.

Glaser: Yes, Bob Johnson, our director of economic analysis, has talked a lot about this rubber band effect when it comes to auto sales. For so long, auto sales were so much below what the natural replacement rate would be or what we think it would be in the United States that it was [just] a matter of time before the auto industry started looking much stronger again.

We're really starting to see that show up in these results. Ford had a great quarter in North America, really had strong sales across a lot of their product lines. Their losses in Europe are slightly less than they expected, and they're still having some trouble there, but at least it's slowly moving in the right direction. They also had decent results in Latin America and in Asia, and really the company is looking fairly strong right now.

GM also had a quarter that maybe wasn't quite as good, but it still was better than expectations and showed that they're also moving in the right direction.

I think this is a good sign both in a more narrow sense for the automakers, and in a broader sense as a return to normalization--a return back from the abyss that a lot of these manufacturing businesses and other businesses faced during the financial crisis.

Stipp: 10 cents is the increase in the offer for the Dell buyout, and there might be also a rule change in how they vote on that buyout. Will they get this deal done?

Glaser: This buyout is moving slower than my 4-year-old Dell laptop. It's really incredible that they have not been to come to terms yet and really get this deal done.

Michael Dell, the founder and one of the largest shareholders, along with Silver Lake Partners, has been trying to execute this buyout and really been running into a lot of problems. Activist investors like Carl Icahn think that a leveraged recapitalization makes more sense to still have some publicly traded shares out there. When it came up to a vote, it looks like they were actually a little bit short, and they had to adjourn the annual meeting, postpone the vote, and what they're trying to do now is they've raised the price just slightly, by $0.10, to $13.75 [per share], and they're trying to change the voting rules, so that abstentions will no longer count as nos. They think that will help them get over the hump and get the deal approved.

It's not clear yet if this is really a done deal, or if they're going to have to truly walk away from this and deal with some of the other shareholder proposals. Given the pressure that PC sales are under right now, Dell is … potentially going to be in a lot of trouble either as a private company or public company, but probably getting past this boardroom drama will help them focus more on strategy and more on how to turn that part of the business around instead of worrying about what the financial structure is going to look like.

Stipp: We also got a 9% increase in Boeing sales in their report this week. While a lot of folks have been focused on the 787 problems, Boeing shares and the company have actually been humming along.

Glaser: The headlines have really been focused on the problems of the 787 program--from the delays to the fires that caused the groundings, to the most recent fire at Heathrow that potentially means that the locator beacon system is now suspect. And amongst all of those headlines about those problem, the rest of Boeing has been doing pretty well. They've been selling a decent number of commercial aircraft, both in the narrow-body space and also in the wide-body with their 777 program still doing very well. Profitability has held up. As our analyst Neal Dihora had expected, the defense sector has also held up pretty well; the sequester cuts haven't had a major impact there, and they've been able to keep revenue growing and profitability high in that space as well. That's led to pretty good returns for investors over the last year. Now that Boeing is raising its guidance for rest of 2013, management obviously sees that as well.

It just goes to show that sometimes you need to do a little bit more research past just looking at the headlines and saying, "oh, this one product or this one program is doing poorly," and [instead] take a broader view of the company, see what else is happening, what else could potentially be a driver of the stock, and not be so focused on some of the headline risk that comes out of the Dreamliner program.

Stipp: Jeremy, thanks for sorting through the news and bringing us The Friday Five again this week.

Glaser: You're welcome, Jason.

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

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