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The Friday Five

Fri, 25 Apr 2014

Still gas in the tank for Apple, Facebook gets mobile mojo, a possible wide-moat combination, and more.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five, five stories from the market this week and Morningstar's take.

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

Jeremy, thanks for being here.

Jeremy Glaser: You are welcome, Jason.

Stipp: First up is Apple. There were a lot of concerns about Apple's growth prospects, but their earnings results show there is still some gas left in the tank.

Glaser: We did get a number of tech earnings this week, and Apple was one that stood out.

There has been some existential handwringing about whether Apple's best days are really behind it. I think in this quarter, they showed that there still is strong demand for the iPhone--particularly their China Mobile deal is really starting to pay dividends--but they also said that there was strong growth in the United States and in other developed markets, that it's not just these new customers who can now access the iPhone who are excited about it. When Apple sells a lot of iPhones, that helps make profitability look better, because it is a high-margin item, even if the average selling price per iPhone shrunk a little bit.

They also announced that they are going to return even more money to shareholders, more buybacks and a dividend increase.

Apple is still not a screaming value right now, but certainly less expensive than some others in the tech space.

Stipp: Facebook also reported pretty remarkable results this week, and it was all about mobile, mobile, mobile.

Glaser: It really was. Facebook has proven that it really understands mobile advertising, and as our analyst Rick Summer puts it, when advertisers want to get in front of mobile users, Facebook is where they are going.

If you remember, before the IPO, we said one of the key risks was whether Facebook would be able to make this transition from desktop to mobile. This quarter just confirms that they absolutely are doing that, with over 70% increase in revenue year-over-year. Things are still going very well there. But again, that doesn't mean that the shares are cheap or attractive right now. It's a great business, but wait for a better time to buy.

Stipp: Netflix also reported this week, and you say there was some good news and some bad news in that report.

Glaser: There was. On the good side, in the earnings call, management started talking about the potential of raising prices. This is something they have been hesitant to do for some time, but something that they'll have to do in order to keep their profitability up over time. Initially it will hit new customers, but it could hit current customers sometime in the future. Pete Wahlstrom, who covers Netflix for us, thinks this is a good sign for the firm.

But on the bad side was an announcement from Amazon that they've inked a deal with HBO in order to show some older HBO shows on their Amazon Prime service. I think this just shows how competitive this marketplace could become, and that even though Netflix has had pretty good success with some of their original programming and with signing new content deals, there are other players out there that could potentially bid up the price for prime content in the future. If content gets more expensive, Netflix may not be able to pass all those costs on. It could hurt profitability. It's a key risk for the firm that we've been talking about for some time, and that HBO deal really highlights that risk.

Stipp: In M&A news this week, Valeant's bid to take over Allergan could create a wide-moat company.

Glaser: It does look like this could create a new wide-moat firm. David Krempa, who covers Allergan for us, thinks that the combined entity could warrant a wide-moat rating, as they'll be able to combine their salesforces, combine some other overhead, and be a much more efficient enterprise and potentially boost those returns on invested capital.

Allergan has products like Botox and other cosmetic products. Valeant has been acquiring some of these brands for a while and is building up their own portfolio. He sees these as really a great fit together, and that Valeant will be able to pay more than almost anyone else for Allergan, and that's why they look like the best partner here.

Another interesting note here is that they are teaming up with Bill Ackman, an activist investor. This is not something we see all that often. It will be interesting to see if this foretells more teaming up of corporate boards with activist investors, who are sometimes at odds, in order to get deals done or to find that kind of financing, and try to convince people that it's going to create shareholder value. That's another interesting twist here.

Stipp: Lastly, Procter & Gamble reported earnings this week. They may not have topped the earnings headlines, but you say there are some interesting things here for investors.

Glaser: You're right that P&G is a lot sleepier than some of the highfliers we've already talked about, but it could a much more interesting case for investors.

It does look somewhat undervalued right now, and they were able to grow sales by 3%. They said a lot of that was driven by their product innovation, new products that investors were getting somewhat excited about. This had been a concern for some time. There had been some stagnation there. It seems like P&G is really starting to turn that around. They had good cost-control measures and were able to keep operating margins looking pretty good, even with some pressures on the gross margin side. That's always a good sign for P&G as well.

For investors who are maybe looking for a less wild ride, this could be an interesting place to look.

Stipp: Jeremy, your earnings insights always beat expectations. Thanks for joining me again this week.

Glaser: You're welcome Jason.

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

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