Thu, 1 May 2014
Bank of America makes a boo-boo, Twitter shares are still flying too high, Morningstar heads to Omaha, and more.
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: Glad to be here, Jason.
Stipp: Up first this week, Bank of America had to make an embarrassing correction. What does that say about the financial services giant?
Glaser: A few weeks back we talked about how a lot of big banks, including Bank of America, have almost become too big to earn. Just the complexity of these businesses makes them incredibly difficult to manage.
We saw another sign of that this week when Bank of America had to go back to the Fed, admit that they made a mistake in some of the numbers that they submitted for the stress test, and that their capital levels weren't quite as robust as they had originally said.
Now, the change is not enormous. It doesn't mean that Bank of America is anywhere close to being in trouble, but they have decided not to increase their dividend like they said they were. They aren't going to have the kind of share buybacks [they originally planned]. There is also the embarrassment of having to go back and change these numbers again.
Jim Sinegal, who covers Bank of America and a lot of the other big banks for Morningstar, says this news is really part of a pattern showing just how unbelievably difficult it is to manage them, and how that creates a lot of extra costs and a lot of uncertainty that most investors really aren't looking for.
Stipp: There were merger rumors between AT&T and DirecTV this week. What's the impetus behind this possible deal?
Glaser: We should be clear that this very much is in the rumor stage right now--both AT&T and DirecTV aren't commenting on The Wall Street Journal report. But it seems like AT&T wants to beef up its pay-TV presence and potentially have broader negotiating powers.
But Mike Hodel, who is our telecom analyst, thinks there actually might be a lot more at play here. This could be about AT&T sending a note or sending a sign to the regulators that if they were to allow the Comcast-Time Warner Cable merger to go through and allow them to have over 30 million customers, that AT&T might also need to look into consolidation--this would give them about 20 million TV customers--in order to compete against that. [AT&T may want to encourage regulators] to really think about how much concentration they want in the TV business, and for that to be on their minds when they are deciding to approve this merger are not.
So he thinks that it might be more about the message to the regulators than the actual benefits of the deal. In fact, he thinks the deal would actually be quite a poor one for AT&T. It would cost quite a bit of money to bring in a business that doesn't have the kind of competitive advantages that, say, their core wireless business does, and he would have a pretty dim view of the combination if it were to happen.
Stipp: More merger news over in health care with Pfizer and AstraZeneca possibly having a deal. What's our take on this?
Glaser: This deal likely makes a lot more sense.
Damien Conover, our health-care analyst, sees AstraZeneca as having somewhat of the bloated cost structure. Pfizer would be able to come in and get some pretty significant cost savings. There is also some tax savings that could be quite significant in this deal, and it probably is going to make sense for it to happen.
AstraZeneca has rejected the initial offer, but it's likely that Pfizer will raise it and that there is a price they are going to be able to come to terms on. This will create, if not a bigger wide-moat, you take these wide-moat companies together, you are still going to have a firm with great competitive advantages, and Pfizer's fair value will likely increase somewhat.
Stipp: Twitter shares fell after they reported earnings this week. We've thought the stock looked overvalued for a while. So is it looking any more attractive now?
Glaser: Twitter shares are still looking pretty pricey, even after the big sell-off after earnings. Earnings were disappointing, not so much because of the financial results, which looked fine; they are still continuing to grow revenue and continuing to find new ways to monetize users. But … there are concerns that Twitter just isn't able to attract new people to the platform--maybe it's just too complicated, it's hard to keep people engaged. And that obviously doesn't bode well for future growth.
Rick Summer, who covers Twitter for us, sees the company as continuing to invest in their moat, continuing to do well, and they have a lot of growth in front of them, but he just sees the current stock price as too lofty. The assumptions you'd have to make to get there just aren't reasonable, and it really makes sense for investors to look elsewhere.
Stipp: This weekend is the Annual Berkshire Hathaway Shareholders Meeting, known as the Woodstock for Capitalists. You'll be heading down to Omaha to cover the event for us on the spot. What are you looking to hear from Buffett and Charlie Munger?
Glaser: Unlike previous years, where it seems like there has really been one big pressing issue or one big deal that was clear to be a central topic of conversation, we're really missing that as we head into this meeting. Maybe some of the news that is going on with the Coke board, the compensation package, will come up, but it's missing some of that drama we had, like with the Sokol affair a few years back.
So I suspect we'll hear about Coke, and that we are going to hear about what's happening with succession, what's happening with the asset allocation, the capital allocation: Are they able to find deals right now?
Interestingly this year, Gregg Warren, our Berkshire Hathaway analyst, will actually be on the panel and will have the opportunity to probably ask between six and eight questions to Buffett, so we're definitely looking forward to what he comes up with. We'll have a live blog all day Saturday of all the questions and answers, so definitely stay tuned to Morningstar.com for that.
Stipp: We look forward to all the coverage, Jeremy. Thanks for your recap of the week that was.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.