Fri, 12 Sep 2014
Apple's event this week burnished more than its own reputation. Plus, Lululemon sprints ahead, but what about the long run?
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five: Morningstar's take on five stories in the market this week.
Joining me with The Friday Five is Morningstar's markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: Up first, of course, is Apple's new launch. You have two items on this launch you'd like to talk about. Let's talk about the new phone and watch. Our analyst thinks that the launch did prove something for Apple.
Glaser: It did. There had been a lot of worry that Apple's innovative days were behind it, that since Steve Jobs passed away, they just weren't able to come up with new product categories and exciting products.
Apple structured this entire announcement on Tuesday to try to dispel those rumors. They held the event at the same place where the Macintosh was launched. They put out quite a bit of hype leading up to it. And our analyst, Brian Colello, thinks that it mostly lived up to those expectations. They released new, bigger phones and also the Apple Watch, which is a new product category for them.
He says the big problem, though, is that the expectations for these products might be a little bit too lofty right now. He did raise his fair value estimate on it, but he thinks some of the talk of incredible numbers of iPhones being sold, or the Apple Watch being a runaway success at first, are just way too optimistic, and investors need to temper their expectations a little bit. Things are going to be good, but they are not going to be great, and he thinks that you should probably wait for a better entry point before purchasing Apple shares.
Stipp: Apple also announced on Tuesday a new payment platform called Apple Pay. This isn't really groundbreaking per se, but there are some interesting ways that they are rolling it out.
Glaser: You're right that this is not a truly groundbreaking product. Google Wallet has been out there for a long time. The mobile carriers have supported mobile pay. PayPal has obviously been out there in this space. This is not something radically new.
But what's interesting here is that Apple is really working with the existing networks--Visa, MasterCard, the banks, American Express--in order to make this system work, instead of trying to disintermediate them and go on their own in trying to connect directly to those services.
I think this is a sign of how powerful those networks are. For a long time we've talked about how wide those economic moats are of a company like Visa. It really is difficult to replicate that, and the fact that Apple is kind of forced to work with them, or is choosing to work with them, in order to get a system like this going is just another sign of that strength and a sign that these businesses are going to be able to survive the move from plastic cards into mobile and into other types of payments. They are still going to be relevant in that world.
Stipp: In other news this week, GE sold its consumer appliance business to Electrolux. You say they got a good price for it, but it's also interesting to note that this continues a drive of focus at GE.
Glaser: This was very much more a strategic move than anything to do with valuation. The $3.3 billion they are getting for the division is quite healthy; they didn't give it away. But this is just one in a series of moves by GE to move away from consumer-focused businesses and really focus on industrial businesses.
They get rid of their consumer appliance business. Recently they had a spin-off of their North American consumer finance business. Even going a little bit further back, you have the sale of NBC Universal to Comcast. You see them getting out of these businesses that are non-core, which don't makes sense with their industrial businesses, in order to focus on what they do best.
You have a little bit of financing to support the industrial businesses, but you're not a bank, you're not trying to market to consumers. This will allow them to gain better focus. I think this is a good strategy for the firm. The shares aren't looking incredibly cheap at the moment, but it certainly is nice to see management continue to execute this path very well.
Stipp: Lululemon shares were up big this week after they announced better-than-expected results. Does this mean that some of the issues the retailer had are now in the rearview mirror?
Glaser: I think some of the short-term issues are fading. They had the problems with the see-through yoga pants, and with a tone-deaf response to those problems, which hurt sales for quite some time. But there were some signs in this report that that really has passed them. They had better-than-expected results. They raised their guidance for the rest of the year, and the stock popped on this news.
But this doesn't mean that Lululemon's long-term problems are totally gone. There's going to be a lot of competition in this space, a lot of well-capitalized players out there who want to be in this premium athletic-wear category, and they are going to spend big to try to push Lululemon. That's going to potentially hurt their pricing power or their margins, and even if the company does very well--and our analyst expects it to do well and to continue to grow revenue in the mid-teens and still have very healthy margins--they are not going to get the kind of growth they had before they were having these problems and before they saw this competition.
The shares just don't look priced right for investors right now. I think we're going to see the fact that they don't have an economic moat really come into play over the next couple of years as this competition ramps up.
Stipp: Lastly, jitters in the U.K. ahead of the vote that Scotland will have next week about whether to become independent from England. What's the latest here, and should U.S. investors be concerned?
Glaser: This issue really came into focus this week after a poll last weekend showed that for the first time, a majority of Scots favored independence, and this sent the pound tumbling and also the U.K. stock market down.
The worry is about what's going to happen if Scotland leaves. There is a lot of uncertainty around that. I think for U.S. investors, they shouldn't be too worried about any big systemic risks that are going to come out of a potentially independent Scotland. It looks like a lot of the big banks, RBS and Lloyds, will actually move from Scotland to London and still be under the Bank of England. If this were to happen, you're probably not going to see any big financial dislocations because of it, at least on the global stage. So, you probably don't need to be too worried.
Unfortunately, the sell-off has not created a ton of opportunities in British stocks. The valuations were already pretty high to begin with. So, there aren't any great values there. But if we do see over the next couple of weeks some more dislocations there, this might be a good time to keep a few U.K. stocks that you've been interested in on your radar screen.
Stipp: Great insights on the big news of the week, as usual. Jeremy, thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.