In honor of Facebook's impending IPO, we're going to talk about several things we like this week, and maybe a few things that we don't. Here with me, as always,with the Friday Five, is Morningstar Market's Editor, Jeremy Glaser.
Jeremy, thanks for joining me.
But on the other hand, there are certainly things that we didn't like about it. I think the valuation is probably going to come out at some crazy level--you hear these $100 billion valuation levels being talked about right now. We just think that's going to be much too high, even based on the growing cash flow that's coming out of the business. Corporate governance looks like it's going to be a concern. Mark Zuckerberg himself will only have 28% of economic interest, but he's going to have 57% of voting interest due to some dual share class structures. So, I think that that's going to make it difficult from a common shareholder perspective to really get on-board from a governance standpoint.
Also that so much of their business is totally dependent on display advertising. I can think of another former fast-growing site like Yahoo that has a great display business, but has been having trouble building on that growth, and I think that Facebook will have to diversify the revenue stream and find new ways to monetize the user base in order to really be worth that $100 billion valuation.
Glaser: There actually was some stuff to like in those retail same-store sales data that came out for January. Now, of course, not every retailer gives this month-to-month data, but the ones that do, it gives you a little bit of a glimpse into how their business is doing, and how consumers are really reacting. I think January is an interesting month, because it's post-holidays, people are spending gift cards, a lot of stores have big sales to try to get rid of that holiday inventory that's left over from December, and I think certainly overall results are pretty good.
We saw pockets of strength really across a bunch of different sectors, but some names that did really well: Target and Saks had better-than-expected results, and I think that consumers really were out there, they really responded to those sales. We heard from a lot of different management teams that inventory was cleared out pretty effectively, that the retailers feel pretty confident and pretty comfortable with what they're holding now as they go into the spring season--they don’t feel like they have way too much excess stuff that they're going to have to do more deep discounting to get some of that out of the door. That's certainly good news.
Not universally, everything was there to like. Macy's didn't do quite as well as they had hoped, Gap did a little bit better, but still had some more declines in their same-store sales; they're still having trouble turning around that business. But I think certainly overall, it was a good sign that consumers are still out there and that retailers are really set up for a solid 2012.
Stipp: So we closed out the first month of 2012 this week, and there's a lot for investors to like on the performance front. How good was it?
Glaser: It was pretty good. This was the best start that we’ve had for 15 years in January, which given some of the macro backdrop, it's just amazing how well stocks have been doing through the end of 2011, and now into January.
The S&P 500 is up 4.4%, really nice return in just a couple of weeks. I think a lot of it was somewhat of a relief rally: Europe wasn’t making news, you didn’t see huge blow-ups, the ECB's move to stabilize European banks certainly seemed to be working. I think that made investors feel a little bit more confident. We got some economic news in the United States that things might be getting a little bit better, and certainly that improvement in sentiment helped boost stocks. I don't think we'll be able to quite keep this pace up for the rest of the year before valuations get totally out of hand, but we think stocks are just slightly undervalued as a whole right now according to our Morningstar equity analysts. So, I think there still could be some room to run in 2012.
Stipp: We also got some earnings news from MasterCard this week, and things look pretty good for them. What's to like there?
Glaser: There's a lot to like about MasterCard in general. It has a great scalable business model, and I think that this last quarter, and really 2011 in total, shows how good this business model can be.
They’ve really been seeing people spending more and more on their cards. As consumer spending picks up, they're putting it on their credit card, and certainly that helps MasterCard.
So, they saw revenue increase 20% in the quarter, which is a nice bump, but expenses didn’t increase anywhere near that fast. They were able to get some nice profitability gains, because the business doesn't cost that much more to run a slightly higher transaction through or to run one more transaction through their system. So, I think that’s really a big net positive for them.
Now, granted, growth in spending did slow in the fourth quarter from the pace that it had been growing earlier in the year, but it’s still, I think, a good sign for the company. Spending on marketing might have to go up in the future, but for now, things look pretty good for MasterCard.
Stipp: Also, we got some economic news, manufacturing data. We took a look at that. We didn’t expect to love it, but there were actually some things to like about it.
Glaser: We didn’t love it--you're absolutely right. But there was some good news on the manufacturing front. I think certainly one of the surprises of this recovery has been the strength of the manufacturing sector, both how it rebounded from the huge losses it had during the recession, and how that strength has continued even on the backdrop of a slowing Europe and the potential slowdowns in emerging markets.
This week we got data from both the United States and Europe that showed that the manufacturing sector continues to be doing pretty well and is doing better than it did just a month ago. I think that’s a great sign that the recovery continues apace, that factory owners are willing to keep producing things because they think there are going to be end users for them in just a couple of months.
I think some of the fear that we saw in the marketplace, maybe in the middle of last year, really has dissipated, and I think that confidence is a great sign for the economy, and it’s good to see those manufacturing data.
Stipp: Well, Jeremy, thanks for poking us with your news updates this week. Some good things to like there.
Glaser: You’re welcome, Jason.
Stipp: For Morningstar, I’m Jason Stipp. Thanks for watching.
