Thu, 21 Nov 2013
This week: Boeing fair value climbs, J.P. Morgan pays out again, Best Buy takes the brunt of retail holiday woes, and more.
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 again for The Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, welcome back.
Jeremy Glaser: Glad to be back, Jason.
Stipp: What do you have for the Friday Five this week?
Glaser: The numbers we're going to look at are 3, 259, $13 billion, 1.7%, and 0%.
Stipp: 3 refers to the third China Plenum, and this is the closed-door meetings where they set the economic course for the next several years. I guess we would say that so far it's been a mystery of interpretation.
Glaser: The communiques we get from China after these meetings are intentionally opaque, and trying to do any analysis right now is incredibly difficult. We've seen over the last few weeks that first it was a disappointment and then when a longer communique came out, there was a little bit more optimism that maybe there were going to be some major structural reforms.
I think that we're going to be keeping a close eye on this story for years to come to see exactly how China is able to continue to open up their economy, to continue to do some pretty serious reforms in order to make this transition from an investment-led story to a consumer-led growth story.
There are a lot of potential avenues for reform, potential avenues where private capital is going to play a bigger role, maybe in the banking system, against other state-run enterprises, really diminishing their power somewhat. But all these reforms are going to be incredibly challenging. Even with the best of inventions of moving the country down this line, it's not a monolith. It's difficult to do. You have entrenched interests that could potentially push back against any reforms that are happening.
What we've seen so far shows that at least the highest levels, there definitely is an appetite to continue to undertake these reform and an understanding that they need to happen. The real story is going to the implementation: what does it look like in the years to come, and does it actually help make that transition a little bit easier? That's the story that we're going to be watching.
Stipp: 259 are the number of orders for Boeing's new 777X, which is a pretty good number, but it hasn't been entirely smooth flying for them.
Glaser: Unlike that Boeing freighter that wasn't quite able to find the right airfield this week, it seems like the customers were really able to find the Boeing sales reps, at least over the last couple of months, as Boeing did launch very successfully this next generation of the 777 to a number of carriers, and particularly the Middle Eastern carriers. Emirates alone ordered 150.
At the list value of close to $100 billion in aircraft, it just shows that Boeing still has a lot of advantages. Even with some of the problems they've had with the Dreamliner launch, with the years of delays, and the fires and the grounding, customers still are interested in the Boeing product.
Part of it is that they think it meets their needs, that it's a good product. But part of it is also they just don't have that many other options. They can look at Airbus, but in order to meet these exact specifications, [Airbus doesn't] really have anything that competes directly with this new 777X. It just shows that those competitive advantages and that moat really does matter for Boeing.
Neal Dihora, who covers Boeing for us, raised the fair value on the strength of these orders. In the future, the Chinese or other people could come up with competing aircraft, but that's years and years out, and Boeing is really taking advantage of the position that they have now.
Stipp: A $13 billion settlement for JPMorgan announced this week with the Department of Justice over mortgages. Does this put a period or a question mark at the end of the saga of JPMorgan's regulatory woes?
Glaser: It really seems like déjà vu with JPMorgan. We're talking about them all the time with different settlement they're reaching on all sorts of issues that they are trying to settle from the financial crisis.
This really takes care of a lot of the outstanding civil suits that were against them. But I wouldn't say it's a period yet on the regulatory woes. I think there still could be future settlements in various other areas. You can't count that out. That potentially is there. I think they're going to see pretty intense regulatory scrutiny going forward. That's something that's not all of a sudden going to disappear with this settlement.
I think what's important to really look at here from the investment standpoint is that, yes, they've had all of these settlements. You might think, if the bulk of them are over, maybe it's time to look at JPMorgan. But this really has revealed a few things about the firm. The first being that, Jamie Dimon talks a lot about having great risk management, talks about taking prudent risk, but it sounds like the rest of the bank isn't necessarily following through in quite the same way.
Our analyst Jim Sinegal recently took JPMorgan from an Exemplary stewardship to Standard in recognition of the fact that some of their risk-taking, and even the [events] that have happened since the financial crisis, show some of that risk.
Also, when you have a bank that has a $2 trillion balance sheet, it's very difficult to know absolutely everything that's going on in all the different parts of the bank, to grow that balance sheet in a meaningful way, to have really powerful earnings growth.
JPMorgan at this point, according to Jim Sinegal, just doesn't deserve a premium multiple. He thinks the shares are probably, at best, fairly valued right now and that investors should look elsewhere for that kind of bank exposure.
Stipp: 1.7% is the increase in Best Buy's same-store sales. They reported that this week, which is a pretty good number. But the shares were under pressure, as they're expecting a lot of discounting this holiday season, which is a theme we've been hearing a lot about from retailers.
Glaser: Given the problems that the consumer is having, the consumer-spending problems we've seen, Best Buy is actually doing pretty well. Like you said, that 1.7% same-store sales growth, they're making really good progress on their cost-cutting initiatives, trying to take out a lot of those recurring costs from the business. This turnaround story really is coming along.
But as our [Best Buy] analyst R.J. Hottovy points out, one of the big problems that Best Buy faces is on the promotional side. They said in the conference call that they expect that the holiday season is going to be very promotional. They're going to have to put pretty big discounts in order to move some of the merchandise. Even though there are a lot of products this holiday season-- new video game consoles, new iPads--that people might be interested in, they're still going to need to give a pretty good price to get people through the door.
This is a comment actually we've heard not just from Best Buy, but from a lot of other retailers. There is an expectation that this holiday season is going to [have] a lot of discounts, a lot of promotions in order to get consumers continuing to open their wallets. It's going to be a big story for retail, not just for Best Buy, but this week Best Buy really took the brunt of it in their share price because of those comments.
Stipp: Zero would be the percentage of GM that's going to be owned by the government by the end of the year. Is this putting a bookend on one of the dark corners of the financial crisis?
Glaser: It's really starting to look that way. The government had expected to be done by the first quarter of 2014, so saying that they're now going to be totally sold out of their GM positions by the end of the year isn't that much of an acceleration in the timetable. But I think it's a very welcome piece of news for General Motors.
Dave Whiston, our GM analyst, thinks that this has been an overhang on the stock for some time, that the "Government Motors" moniker has kept some people out. By having the U.S. completely out of the business--they no longer would have any economic interest in it--could get rid of any perception that the United States might tell GM to do this versus that in any kind of management decisions.
Now, Canada still holds a stake they haven't sold, the part of GM that they got during the bailout. But the expectation is that they'll also exit relatively soon as well. GM will be free of that bailout and the strings from it. I think that could be a net positive for shareholders. We do think the shares are slightly undervalued right now.
Stipp: Nice to have you back watching the markets for us, Jeremy. Thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.