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The Friday Five

Fri, 7 Feb 2014

Twitter still flies too high, pressure mounts on Puerto Rico, and Disney gets a content kick.


Video Transcript

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

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

Jeremy, thanks for being here.

Jeremy Glaser: Glad to be here, Jason.

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

Glaser: The numbers we're going to take a look at are 4%, 10%, $70 billion, $2 billion, and finally 27%.

Stipp: 4% is the growth in Twitter's active monthly users. That was a lot less than the high hopes for the company. The stock took a hit. So, what's the story now?

Glaser: Twitter's first quarterly earnings report as a public company was pretty disappointing for most investors. Like you mentioned, they only had that 4% rise in monthly active users, below what a lot of analysts had been expecting, and shares fell over 20% at one point on the news of this disappointment.

I think it raises the question of: is Twitter really going to be able to address a broader market than it is right now? Is it more of a niche social networking site that's going to have some active users but won't be able to get the reach of something like Facebook? Or is there a bigger addressable market?

It's just not clear right now, and this quarter underscores that uncertainty. And given where valuations are, even with the big sell-off, shares still look pricey. Investors are probably best looking elsewhere and letting that uncertainty work itself out instead of taking a big bet there.

Stipp: Coke took a 10% stake in Green Mountain Coffee Roasters. This is the company that makes the Keurig machines and the K-Cup. It's maybe not a big deal for Coke [in dollar terms], but it does send an interesting message about Coke's strategy.

Glaser: It is a good deal for them, although probably nothing game-changing.

Coke is going to distribute exclusively through the new cold-brewing system that GMCR is going to be rolling out. They're taking a 10% stake in the company. It really shows how Coke is embracing this potentially disruptive technology, instead of just trying to ignore it or hoping that it will go away without [Coke's] brand power behind it.

Tom Mullarkey, who covers Coke for us, doesn't think it's going to really move the needle that much--maybe it will amount to about 1% of sales, about 2% of profit, given that it will probably be at more of a premium price point. He just doesn't see a lot of people wanting to buy these machines and have [kitchen] counter space devoted to them.

Overall, it's a sign that Coke doesn't want to be complacent. They want to keep building their moat and continue to be the elite global brand when it comes to soft drinks, and this is just another move of that forward thinking.

Stipp: $70 billion worth of Puerto Rican debt came into sharp focus this week as S&P downgraded the country's general obligation bonds to junk status.

What does this mean for muni investors at this point?

Glaser: Puerto Rico is really in a sticky situation. Their economy has been shrinking for some time. Their population isn't not growing; it's shrinking as well. They've been trying to finance some of their budget deficits by issuing more and more debt, and that's really caught up to them.

This is obviously not the first time we've been hearing about this. They've been in focus for a couple of years now, but this downgrade below investment grade raised a lot of concerns this week. It's going to be difficult for Puerto Rico to really turn things around. They have a government that's very actively trying to close this budget deficit, trying to get on a more sustainable footing, but without growth in the economy, that's just very difficult to do.

I think Puerto Rico is interesting in a few other ways--the first being that they don't have access to the Chapter 9 bankruptcy protection that we've seen used in Detroit and elsewhere over the last couple of years, which means that the idea of how to restructure this debt--if it does need to be restructured--is a bit more open than it might be elsewhere, which raises some questions.

Also, [Puerto Rican debt] is pretty widely held among muni bond funds due to some special tax treatment. So, it's not just [affecting] someone who is [invested in] an isolated high-yield muni fund or some kind of Puerto Rico Fund. People in other state-specific funds may have Puerto Rico exposure that they may or may not know about, which means that it does have a bigger impact on the market.

But overall, I think the muni market remains in pretty good health since the recession. Most municipalities and states have really improved their fiscal position, pretty dramatically in some cases. There are going to be pockets like Detroit, like Puerto Rico, that are going to be problems, but generally if muni managers or muni bond investors are doing their homework, they should be able to find good credit quality still today.

Stipp: $2 billion of CVS revenues will be up in smoke as they stop selling tobacco products. What was the strategy behind this move, and what does it mean for investors?

Glaser: This was a bit of a surprise. CVS said that they're pulling out of all these tobacco products, and they cited health concerns as one of the major issues: They want their customers to be healthier. They don't want them to smoke. They also said they think this will help them deepen relationships with health-care providers and with other people in the health-care industry as they try to move beyond just being a pharmacy and a pharmacy benefit manager into actually providing some primary health-care services and making that a bigger part of their business. They have some of these clinics in their stores now. That's an area that they think could continue to grow, particularly with a lot more insured people these days with the Affordable Care Act. They see that as a potential avenue for growth. It will be interesting for CVS investors and for other drugstore investors to see exactly how that plays out over time. Will that actually be something they're able to do?

For the tobacco companies, the question is, will there be more restrictions on where cigarettes actually can be sold and what impact will that have on smoking rates? Are we going to see a lot of pressure on, say, Walgreens or Wal-Mart to also stop selling tobacco products because they have pharmacies or because they have these relationships with health-care providers? That's also an open question here.

Stipp: Disney reported a 27% rise in their operating income in their earnings report this week. The stock powered ahead. Is this just another sure sign of the wide moat of that company?

Glaser: I think it is. This is a continuation of a story that we've been following for a while, which is the idea that companies that have access to really great media properties and are producing good content are producing really good financial results. Disney saw this across all of its segment--from ESPN and the cable networks to the theme parks to even the studio, which did well with the release of "Frozen," which was an unexpected hit. They were really firing on all cylinders; they had that big increase in operating margin. And they were passing some pretty difficult comps--it wasn't as if the quarter from last year looked particularly weak for some reason--and that's why these results looked good. It certainly is a sign of that wide moat in action for Disney.

Stipp: Always a wide moat for The Friday Five, Jeremy. Thanks for joining me.

Glaser: You're welcome, Jason.

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

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