Fri, 17 Jan 2014
This week: Best Buy tumbles hard, B of A soars (too high), and 4-star GM restarts dividends.
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 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 minus 0.9%, 10%, $37.4 billion, $16 billion, and 3%.
Stipp: We suspected this holiday season would be promotional, and we got Best Buy's results showing a 0.9% drop in holiday same-store sales. It was not a good number for them.
Glaser: It was very disappointing. The stock fell nearly 30% on Thursday when they released this information. They had an almost 1% decline in same-store sales over the holiday. They said their profitability was going to be much below where it was during the holiday season in 2012. This really caused investors to run for the door and that exit probably makes a lot of sense for most of them.
Best Buy has been making a lot of good progress on the cost-cutting side of things. They've been becoming more efficient and really taking out a lot of inefficiencies from their entire network. But if you can't get people actually into the stores to buy things, if you can't get people to buy online [at Bestbuy.com] and you need to have some very aggressive pricing in order to move any merchandise, no amount of cost-cutting is really going to help you. It's just going to get offset by those lower prices.
They said that they were caught off-guard by Amazon extending their holiday shipping through the Monday before Christmas, while for a lot of other retailers, orders had to be in before the weekend. They said those extra couple of days really took that much more out of their sales plans and hopes to get people into the stores for some last-minute items.
There are a lot of challenges there, and it's hard to see how Best Buy is going to, at least any time in the near future, really regain their footing and get back to the profitability levels that they'd like to be at.
Stipp: Certainly some bad news from Best Buy. We also heard from several banks with bank earnings reports in the last week. One of those banks is actually up an eye-popping 10% year-to-date. Which bank is that, and why is it up so much?
Glaser: Bank of America really has been on a run so far in 2014. The year is very early, but the shares are already up over 10%, which is well above the 2% or so improvement that the big global banks generally have seen so far in 2014. It seems that investors are really warming up to the types of changes that Brian Moynihan is making at Bank of America, expecting that those would turn out decent earnings, and they did post decent earnings this quarter, driven a lot by improving loan quality, by a low tax rate, and fixed-income trading that was not quite as bad as some of their peers during the quarter. That really helped them outperform.
That being said, even with what was a pretty good quarter for them, our analyst Jim Sinegal says that the return on tangible equity was only 8.5%, which is reasonably modest and doesn't really present a good case for paying a huge multiple for the earnings that are coming from Bank of America right now. They're still going to have a lot of potential issues in earning a very high return over time. Even if some of these legacy issues really are behind them, he sees the shares as being overvalued right now, and this 10% run certainly hasn't helped that case at all.
Stipp: Charter made an offer this week for Time Warner Cable in the amount of $37.4 billion. Time Warner Cable says that's much, much too low. Do you think this deal with get done, given that gulf between these two sides?
Glaser: Charter has been circling Time Warner Cable for a while now. They came public with a deal this week to try to put some pressure on Time Warner management to seriously consider this offer, something Charter says they haven't been doing. Charter is offering in the low $130s per share, depending on where Charter's share price is, because it's a cash and stock deal.
Time Warner says they won't accept less than $160 per share. They think anything less than that is stealing the company. They're adamantly opposed to the deal in its current form. Charter says it will take it directly to the shareholders, but its prospects there are uncertain as well. The combined company would have quite a bit of debt, something that current shareholders could be somewhat hesitant to take. The share price of Time Warner Cable has traded around $130 before, so current shareholders might not see it as this once-in-a-lifetime opportunity to cash out at a huge valuation. Also, Mike Hodel, who is our cable and telecom analyst, doesn't expect this deal will get done is any way, shape, or form. That doesn't mean there won't be more consolidation in the cable industry, or there won't be other people who might be looking at deals further down the line. But right now it looks this deal has a big uphill battle to get completed.
Stipp: So that deal might not get done, but other deals are moving along, including Suntory's $16 billion bid for Beam, the Jim Beam maker. What's the deal with that? It's a different thing that investors should be concerned about there?
Glaser: Beam has been talking, or has been talked about, for a long time as a potential buyout candidate, something that had been on the block for a while, and Japanese company Suntory came in and did that this week--and at a pretty hefty multiple. Tom Mullarkey, who covers Beam for Morningstar, says that there was about a 20-multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), and that's well above the 16 times EBITDA that's the median where a lot of these deals are done. There's only a handful in recent history in the spirits space that have been at this multiple.
So for Beam shareholders, it's a great payday. But broadly it speaks to the fact that we're in a situation where we could see more of these M&A deals that are done at very high multiples. Part of that is because the debt market is so open; in the corporate debt market, it is easy to trade that debt. And if [the acquirer is] paying with shares at all, elevated share valuation levels can make it a little bit easier to stretch out on the valuation front. Shareholders from the acquiring company need to be very cautious when they see some of these big deals and make sure that management teams aren't hugely overpaying. But for Beam shareholders, it looks like it's a great deal.
Stipp: Lastly, GM announced that they are reinstating their dividend this week; that's going to result in a 3% yield at their current share price. Given the current estimate of the fair value from our analyst, this could be an interesting one to take a look at.
Glaser: All eyes were on Detroit this week in the auto industry, and not just because the bankruptcy, but because of the North American International Auto Show, the Detroit Auto Show, that's going on right now. We did get some fairly big announcements from GM that they are reinstating their dividend again, at around a 3% yield [based on where] the shares are trading today.
Dave Whiston, who covers the automotive makers for us sees this as a very attractive stock. In a market without a lot of attractive opportunities, GM represents an opportunity there, and this dividend is just another sign of the normalization of the company as they come off the bailouts and really put that behind them.
Ford made some news, too, by saying that they're on track to reduce the number of platforms they are going to use for their cars. Doing that helps them make them more efficient, and helps them wring some more profitability out of their global network. Dave Whiston also thinks that Ford shares look undervalued at the moment as well. So those are two automakers that might be worth a closer look.
Stipp: The Friday Five always pays a good dividend, Jeremy. Thanks for joining me again this week.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.