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By Jason Stipp | 10-20-2011 04:27 PM

Scaling Back?

Should news out of Apple, Amex, Goldman or Groupon cause investors to check their expectations?

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five.

As the market continues to fret over Europe, and the economy hobbles along, we're looking for signs of scale-back in the market.

Here with me to offer some details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: You're welcome, Jason.

Stipp: So what you have for or the Friday Five this week?

Glaser: This week we're going to take a look at Apple, at American Express, Abbott, Goldman Sachs and finally Groupon.

Stipp: Investors were somewhat disappointed with Apple earnings this week, and this is something that's very unusual. You often do not see Apple miss, but they did this week. Is there a scale-back going on there?

Glaser: It's a little bit mind-blowing to believe that a company as big as Apple that's growing earnings at 54% somehow disappointed investors this week. But they did. They didn't come quite into what analyst were expecting. I know analysts have been playing a little game of trying to up and up their expectation as Apple continued to hit it out of the park quarter after quarter after quarter.

But this quarter we saw a little bit of slowdown in the iPhone business, predominantly. That's what was driving the underperformance, and I think a lot of that was mostly related to the fact that people knew the iPhone 4S was going to be coming out soon, so they delayed their purchase of an iPhone, knowing that there would be a new one just around the corner.

I think that as people get more interested in Apple products, and you hear more reports of when the new iPhone is coming out in the mainstream media, I think it's easier for the average consumer to kind of time that purchase a little bit better.

Our analyst Michael Holt took a look at it, and he thinks that Apple is really set up for next quarter to be a blockbuster, just based on some of the sales number we've seen of the new iPhone so far. So, I don't think this is a real scaling back for Apple, even if it was a rare disappointment.

Stipp: We also heard from American Express; we got earnings from them this week. It's interesting to look into those numbers and see what are some of the patterns of spending of consumers using those cards. Did we see a scale-back there?

Glaser: Looking past American Express' earnings, and what people are actually spending on their American Express cards is pretty interesting, because it's one of the ways to directly see what particularly high-end consumers in American Express' case are really out there doing. And spending in ... the United States increased 13%, which is a pretty steady clip.

Now it's a little bit down from where it was in previous quarters, but those higher-end consumers are really out there; they are still spending. It's a continuation of a trend that we've seen across a couple of different luxury-goods makers, about a couple of different industries, and it shows the consumer is not dead and that even with all of the economic doom and gloom we hear, people are out there buying stuff.

Stipp: We also heard from Abbott Labs this week. They are taking a corporate action to actually reduce or scale-back the size of the one big company as it exists today. What's the news there?

Glaser: Well their scientists must have been doing some work on cell division and just decided it would be good to divide Abbott into two.

There is going to be medical devices and some of the nutrition businesses, some of the more stable businesses, in one side, and the other side is going to be pharmaceutical business. And I think that the split probably will make sense. We don't think it's going to add a ton of value or increase our fair value, as I talked to Damien Conover, the analyst on Abbott earlier this week.

But we think it might help the market realize some of that value and have shareholders who have been waiting patiently for that stock to pop for a while, to get some of that return. This doesn't happen until the end of 2012, so a lot could change between now and then, but I think just on its face this week, it seems like a good deal

Stipp: Goldman Sachs also reported their second profit loss ever, so this is something maybe that investors need to get used too? Some scaling back of earnings power at this investment bank?

Glaser: This is not a company that is used to losing money. Even throughout the financial crisis, they were able to eke out a profit.

And I think the fact that they lost money this quarter just shows how difficult the environment is for banks right now. Goldman Sachs and also the other banks just did not have very exciting earnings. I think it just comes down to the fact that there isn't a ton of demand for loans--that affects the commercial banks a lot more--and there isn't a lot of demand for a lot of the investment banking services. M&A activity hasn't really taken off in the way that people thought it would. The IPO market has really shrunken, given the market volatility that's going on. Trading is becoming more difficult. And I think it is just going to be challenging for any of these big firms to really continue to produce profits. They are going to try to scale back on compensation, scale back on the number of people who work there, bring their costs in line with lower revenue. So, I think it could be challenging.

Is Goldman Sachs somehow in trouble? Are they not going to have lots of earnings in the future? Absolutely not, you shouldn't take this one bad quarter as a sign that things are going terribly, but I think it just shows you how difficult the environment is right now.

Stipp: You mentioned the shrunken IPO market there. Groupon made a big splash when it started to talk about an IPO a little bit earlier this year, and now it's making a smaller splash as it's talking about a scaled-back IPO. What's your take on that?

Glaser: Groupon's road to be a publicly traded company has been anything but smooth. They've had a lot of bumps along the way, a lot of slaps on the wrist from various agencies for maybe being a little bit too public with some comments, for some kind of aggressive accounting that they had earlier. And now they decide to scale-back, and instead of selling the whole company, they are only going to sell 10% at a much reduced valuation from where they had expected to be before.

The hope is that if they sell off this 10% stake now at kind of a lower valuation, they can come back to market later with the rest of the company, when hopefully the shares are valued at a much higher level. I think they feel some pressure to come out of the gate with something now before it gets too long. I think they'd like to have that access to capital. I think there are people who'd like to cash out of that investment at some level. But I think it just shows that this is not going to be easy for them and that Groupon, I think, is going to have some trouble unloading the rest of that 90% if they can't prove that they can really be profitable, they can get those marketing expenses under control, and that they are the true winner in the daily deal space.

Stipp: Well Jeremy, I'm glad you're not scaling back your coverage of the markets. Thanks for joining me this week.

Glaser: You're quite welcome, Jason.

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

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