Thu, 1 Aug 2013
Five stats from the market and the stories behind them. This week: GDP still trudging along, taper interpretations, and a potash pricing plot.
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: We're going to look at the numbers 1.7%, $85 billion, 25%, 3%, and finally 2.7%.
Stipp: 1.7% doesn't sound like a lot, but it was much better than people were expecting for second-quarter GDP this week. What's your take on that number?
Glaser: The first read on second-quarter GDP was pretty good. As Bob Johnson talked about earlier this week, it was driven by a few things. The government spending number looked a little bit better than expected, business investment was up, and consumer spending remained fairly robust considering everything that's going on in the market right now.
There were a few quirks to this report, some changes in methodology, some revisions. So it was maybe a little bit more difficult to read than some standard numbers. But generally, it shows that the economy is continuing to trudge along. We're not seeing incredible growth. But we're also not really seeing signs of incredible weakness either, and things like manufacturing and housing are doing pretty well and moving the economy forward, even if it is in fits and starts.
Bob still thinks that for 2013, 2% GDP growth still remains a reasonable target, and that really fits that narrative as well.
Stipp: Playing a big role in the economy, of course, is the Fed. We heard from them this week. $85 billion is the amount that they are buying in bonds every month, and for now at least that's the plan to continue.
Glaser: It does look that way. The Fed statement didn't have a ton of surprises in it, but a few interesting changes.
They downgraded their outlook of the economy, saying instead of a "moderate" pace of recovery, it's now a "modest" pace, which is a slight downgrade there. They also reiterated that they were a little bit worried about inflation being too low, that they are not meeting their inflation target expectations.
But really in a lot of ways this statement from the Fed was a little bit of a Rorschach test, depending on how you feel about the taper. If you think that the Fed is going to start tapering its bond purchases soon, you could read parts of the statement and say, there weren't any big changes [and that the taper] is probably going to happen potentially as early as September. If you think that the Fed is going to continue bond buying at its current levels for quite some time in the future, you could point to that reduction in the economic forecast [as evidence] that they're not going to taper.
I think we still don't know. I think the Fed [is serious] when they say they're going to be paying attention to what's happening in the economy, … and they don't necessarily have a predetermined plan yet. I think that this statement really just confirms that the taper will be coming eventually, but the timing of it we just still don't know.
Stipp: 25% is the reported potential fall we may see in potash prices after an event this week. Potash is an important component to the agricultural industry. What is the reason behind this possible drop?
Glaser: This really was a surprise this week. Uralkali, which is a large Russian potash producer--potash being an important input to fertilizer and to agricultural production--pulled out of an agreement with the Belarusian potash company that was really part of almost a global cartel that was helping to set prices for potash and production of potash, along with the North American producers.
This was surprising, given that the potash industry really has done pretty well under this regime. Even though prices have fallen from their peak, they are still relatively high compared to the cost of production. Uralkali said they're going to go out there and produce more than their quota, and that they're going to potentially bring down prices quite considerably, as much as 25% in the marketplace.
This is going to have some very interesting ramifications. This is probably a net boon for [people who use agricultural inputs]; they're going to have cheaper fertilizer. I think that's something that is unquestionably good for them. For the rest of the potash industry, how this shakes out we just really don't know. Will the rest of the cartel hold together, or will it fall apart? There is a lot of interesting game theory going on here. What really does happen with prices, and at those lower prices will those marginal producers still be able to have long-term economic profitability? I think those are the questions that everyone is trying to sort out right now.
The stocks sold off pretty considerably on the news. Our analysts are taking a closer look at it to see exactly [how] each company is going to be impacted by this decision. But I think for investors in this space, this definitely is a time to step back, really evaluate why do I own these stocks, what are my expectations for why they potentially are going to be able to earn economic profits over time? And if that's impaired, investors are going to have to take a close look at these holdings.
Stipp: We got guidance from Procter & Gamble for their fiscal 2014. The lower end of that revenue guidance at 3%. This just shows that they're still in the midst of what's probably going to be a very long turnaround.
Glaser: It does seem like P&G has been trying to turn itself around for quite some time, and now they're giving it another shot.
A.G. Lafley, who was the former CEO, came back, and this is his first quarterly update with P&G. He laid out his vision of how he expects to really bring the consumer-packaged goods giant back around to regain some of the ground that they've lost. He points to a very traditional formula of keeping costs in mind, adding more productivity, creating products that resonate with consumers that they want to go out and purchase.
But this is easier said than done and is not something that's going to happen quickly. They recognize that, as you see with the relatively modest guidance on the revenue side. But as Erin Lash, who is our analyst for P&G, points out, they have been investing somewhat. It's not that they've completely pulled back on marketing or completely pulled back on R&D. It's just that the new products that they've been producing just haven't resonated with consumers. And trying to refocus that spending in a way that's going to really pump up sales is going to be the trick.
P&G still has a wide economic moat. They still have great brands. They should be able to do that. They have the resources, and they have the ability, but it will take some time for that to truly turn around.
Erin thinks that the shares really look about fairly valued right now, and that there isn't really an opportunity to buy now, potentially before things start to get better. On the other hand, Clorox, which is another company that she follows in that space, does look a little bit undervalued right now, trading in 4-star territory, is [that is] maybe the better play at the moment.
Stipp: 2.7% is the rise in Time Warner [Cable]'s revenue that was reported this week. This is a sharp contrast if you turn the channel and take a look at Comcast's results.
Glaser: It really is. Time Warner Cable had what was really a meh quarter. They added about 8,000 net new Internet subscribers, which is not a great number for them. They are having trouble taking share from AT&T and from other telecom providers, and they just have not been producing the kind of great numbers that we're getting out of Comcast.
In this quarter Comcast had, as our analyst Mike Hodel said, one of the best quarters in terms of TV and Internet they've had in five years, which considering how mature many of those markets are, is really incredible that they are still driving so many new customers. They're also really stepping back and investing and making sure that they have that platform for growth in a new set-top box platform that could be successful. They are spending a lot of money on the Universal theme parks, for example, and finding places to put their cash flow to work there. So that's eating into free cash flow a little bit now, but it should be providing a platform for future growth there.
Unfortunately, not a lot of value for investors. Time Warner Cable looks extremely overvalued, while Comcast looks merely overvalued. So possibly not a lot of opportunity right now, but down the line if there were a sell-off, Comcast looks like it's fairly well-positioned right now, particularly compared to others in that cable space.
Stipp: Good food for thought this week, Jeremy. Thanks for joining us again.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.