Fri, 23 May 2014
Fed stays intent on tapering, Tiffany shares look rich, a big deal in pay TV, and Target feels a chill from Canada.
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: Up first this week, we got minutes from the Fed. There was nothing shocking there, but it's clear that they're set on continuing their tapering.
Glaser: Nothing too surprising at all, and the market barely even noticed when they were released. What we saw was that the Fed is very intent on continuing with their tapering program, and they're starting to talk more about what the exit policy is from all of these extraordinary measures. What do they do with all the assets that are on their balance sheet? How do they go about actually raising rates when they want to?
I think it shows that something really extraordinary would have to happen, the economy would have to see a big shock, to really move the Fed off of their current tapering schedule.
Stipp: Target reported results this week. They've had a lot of problems in the headlines, including the data breach and other issues, but that's not the only ailment facing the retailer right now.
Glaser: It's not, and whoever comes in and takes that new CEO position on a full-time basis is going to have a lot to do. One of the big things is going to be with their Canadian division. Target expanded into Canada, is trying to open stores and bring the concept north of the border, but they're having a lot of problems, and it keeps disappointing.
We saw another big disappointment this quarter. Target saw margins shrink pretty dramatically as they're trying to compete on price, trying to get their brand name out there, and are having more and more promotional efforts.
They cut their sales estimates from $2.6 billion for the year to $2 billion. The problems in their Canadian division just keep racking up. It turns out it wasn't as easy as just trying to export what they were doing in the U.S. to Canada and hope to replicate that success.
Stipp: Tiffany had a great quarter, but the shares are starting to look as pricey as the merchandise.
Glaser: Tiffany did; you're right. Target may have struggled a little bit, but not all retailers are having a problem.
On the high end, Tiffany really did very, very well. They had 11% growth in same-store sales, and that was pretty evenly distributed across the globe: North America looked good. Asia Pacific looked very good, particularly in Japan. It had some very strong sales, and that helped profitability for Tiffany, but unfortunately this is not a story that other investors don't know, and there are a lot of expectations of continued growth baked into the shares right now. So, it's probably better off to look elsewhere.
Stipp: AT&T and DirecTV announced a merger this week, but does this big deal make sense?
Glaser: Our AT&T analyst Mike Hodel thinks that it doesn't make a ton of financial or strategic sense.
On the financial side, they are paying a hefty premium--not so much that it imperils AT&T's financial position or anything like that, but certainly they are paying a high price for this.
On the strategic side, the deal is a little bit shaky, too. Yes, it maybe gets them the ability to deliver TV to some customers that can't [get it] right now through their U-verse system, but they already have a marketing agreement with DirecTV that lets them bundle that product, so that's not completely new. Plus, they are rolling out high-speed Internet and higher speed Internet to most of their service area, which will let them deliver this TV eventually anywhere, so that might be just kind of a short-term issue.
The deal gives them maybe a little bit more bargaining power with the content providers, but again with that high acquisition price, who knows how much that's really saving them.
I guess the real question is probably regulatory at this point in a lot of ways--if this will get done or not. This is really going to focus regulators, with Time Warner-Comcast in front of them and now with this deal in front of them, to think about what they want the future of pay-TV to look like, and it should be a fascinating battle to watch.
Stipp: In big tobacco, there were rumors of a merger between Lorillard and Reynolds in a deal that might have a strange twist.
Glaser: It really might. This would create essentially a duopoly in the American tobacco market, with Lorillard and Reynolds American on one side, and with Altria on the other really just having the lion share of the market.
You might first think that that means the regulators just weren't going to let this happen, that it would give too much pricing power and would allow too much profit to flow to the manufacturers.
But the strange twist here, as you mentioned, is that the regulators may not really mind that tobacco prices go up. There are some pretty good studies that our analyst Phil Gorham has looked at that indicate when prices go up, consumption also tends to go down with tobacco. With regulators maybe wanting to reduce tobacco consumption, they may see higher prices as actually a feature, and not a bug of this deal, and they may allow the merger to go through.
Stipp: Jeremy, great insights, as always on the week. Thanks for joining me.
Glaser: You're welcome Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.