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The Friday Five

Fri, 16 May 2014

Two-speed recovery complications in Europe, Wal-Mart's woes, and questions about a different beat at Apple.

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Video Transcript

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

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

Jeremy, thanks for being here.

Jeremy Glaser: My pleasure, Jason.

Stipp: First up: We got a GDP report for Europe, and it really showed that growth sputtered. This adds some interesting context to the statements we got from the ECB last week.

Glaser: It does. GDP growth did not look great in the eurozone, with 0.2% in the first quarter of 2014, compared with the fourth quarter of 2013. But that number is a little bit misleading, because you had really good results coming out of Germany, nearly a 3% year-over-year increase, while France had almost no growth, and Italy actually saw their economy contract just a little bit. It shows that Europe is still on this two-speed recovery, with Germany doing better and the rest of the economy still struggling a bit.

This does come after the ECB said last week that they were poised to act potentially at their next meeting to create some stimulus and to get inflation up a little bit closer to their target. I think these numbers are going to give them more ammunition to act, but exactly what they do and how much they do, we just don't know yet. The fact that you have Germany doing so well compared with the rest of Europe makes those choices that much harder. It'll be interesting to see what Draghi and the rest of the team in Frankfurt come up with.

Stipp: Wal-Mart reported a disappointing quarter, and they had several reasons for that, but then also they are not necessarily expecting a bounce-back anytime soon.

Glaser: It was not a great quarter for Wal-Mart. They had a 0.1% fall in same-store sales that was really driven both by weather--which has obviously been a major factor for a lot of retailers and a lot of other companies across many different industries--and also they said that cuts to the food stamp program, SNAP cuts, really were a headwind for them in a lot of ways, and that many low-income Americans--although they may be feeling a little bit more confident than they were--still aren't out spending a lot.

But one of the surprises was that their guidance for the current quarter wasn't a whole lot better. They are expecting flattish growth, and you might expect that if it was just weather-related issues, that you might see some bounce-back as people start to go into the stores again.

I think this shows just how tight the competitive market is: When you have firms like Costco and Amazon really making big pushes, that could be challenging for Wal-Mart. I think it also shows the state of the consumer--although it may be better than it was--still isn't great.

Stipp: Another retailer, Macy's, reported a decent quarter, and their outlook is somewhat different than Wal-Mart's.

Glaser: This is another sign that weather truly was a real issue. Macy's said they had a 1.6% decline in same-store sales. Again, weather was an issue, and the timing of the Easter holiday also weighed on those results a little bit.

But they were a lot more bullish on what the rest of the year is going to look like. They have already seen traffic and sales pick up pretty considerably as the weather has gotten a little bit better. Macy's also did a good job with expense control. They didn't overspend on capital projects. They were able to keep their margins and profitability looking pretty good. They are actually going to increase their stock buybacks and increase their dividends as they feel pretty confident about that.

This doesn't mean Macy's is necessarily a great buy right now. It's still very much a no-moat company, and they're going to face a lot of pressures in the years to come, but for now, they are doing a little bit better.

Stipp: Cisco reported a good quarter, but the shares aren't looking quite as attractive as they used to.

Glaser: They are not. Cisco was having some problems, but it really does look like they're turning the corner. Revenue is still declining year-over-year, but at a lower rate than it was just in the previous quarter, and there are signs that a lot of their new products and important business lines are starting to gain traction. Management is being very disciplined when it comes to costs; they were down 6% in the quarter. Gross margins, although they came down a little bit, were still very high.

But the shares had a nice rally on this report. They have been rallying for some time. So it looks like they are getting close to fair value, maybe still a little bit undervalued, but not the kind of bargain that they were before.

Stipp: Apple and Beats, the headphone maker, were in the news. Is there some static in this acquisition, though?

Glaser: There have been a lot of rumors starting at the end of last week and into this week, that Apple is very close to buying Beats headphone and streaming music service, for about $3.2 billion, which would make it the largest acquisition Apple has ever done.

I think there are some interesting question marks around this deal if it does happen. The first being, is this the start of a new strategy for Apple? In the past, the idea of having a sub-brand different than Apple moving into the company just isn't something that they would do; it just wouldn't work with their marketing message. This might be something different that Tim Cook is trying, to bring in the Beats brand, which is very popular, and bring in this streaming service and see if they can integrate it.

Now, overall this isn't a huge amount of money for Apple, given their cash hoard and given the amount of cash that they generate quarter after quarter. But if it does point to a new strategic direction, it could have more importance to investors than just the headline number.

Stipp: Jeremy, The Friday Five always comes through with the highest fidelity. 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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