Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five: five stories from the market this week and Morningstar's take.
Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: It was an earnings week in the market. Up first is Google. The market was upset about Google, but our analyst Rick Summer, not so much.
Glaser: The market was a little bit concerned that expenses at Google were growing faster than revenue, and free cash flow actually declined a little bit. What's happening here is that Google is investing a lot in things like data centers and other projects, everything from self-driving cars to Google Glass.
Our analyst Rick Summer doesn't think this is necessarily a bad thing. Even though the returns on some these projects are going to be lower than you've seen in their traditional search business, they're still well above Google's cost of capital, and they are still worth doing. They are making prudent capital allocations; they're not just throwing money away. He still likes the long-term competitive positioning of the company.
Shares are about fairly valued right now. I don't think anyone would mistake them as cheap. But compared to some of their Internet company peers, Google stock does look a lot more attractive and would be an interesting core holding, particularly if it sold off a bit more.
Stipp: A lot of banks reported earnings that were generally disappointing. Do investors need to get used to disappointing earnings here?
Glaser: It looks like these banks maybe are becoming too big to earn. This was a theme that our bank analyst Jim Sinegal touched on this week when we discussed this. These banks have been under so much regulatory scrutiny, are so difficult to manage, you just have so many different units across so many different geographies, it's difficult to know exactly what's going on everywhere in the business, and you run into all of these problems. And we see these so-called one-time legal fees just keep coming back and keep recurring and are keeping earnings down.
He sees Wells Fargo as still by far the best positioned. JPMorgan as well also doing a little bit better but still potentially facing some problems. Jim thinks particularly with the dividends you get from Wells, that it's the place you should be looking if you are interested in one of the big banks.
Stipp: GE also reported earnings. They had a decent quarter, and the stock might also be worth taking a closer look at.
Glaser: They did have a good quarter. Excluding some one-time gains from last year, they had 9% year-over-year earnings growth, which is impressive for a company the size of GE.
I think what's happening here is that their focus on their core industrial businesses is truly starting to pay dividends. The oil and gas sector did very well, and the water segment did well, and even though there were some less strong results in places like health care and transportation, overall the picture looked pretty good.
I think for investors who are looking at a very fully valued market, as we have right now, with GE trading at 4 stars and having a decent dividend yield, it could be quite attractive.
Stipp: Coke also reported earnings, and some of the volumes on the sodas maybe didn't look that great, but there are some interesting reasons to take a closer look here.
Glaser: You're absolutely right. Coke saw a 1% decline in soda volumes, which is not something that anybody wants to see for a company that obviously derives the ton of their sales from sodas. But there were a lot of bright spots in the quarter.
We saw emerging-market volume growth looking pretty good. There were signs that pricing was holding up fairly well. On the revenue side, even though there was a decline, a lot of that was driven by currency headwinds that Coke management had been talking about in the past, and is nothing that was terribly new or terribly surprising.
Given that their shares aren't particularly pricey compared to the broader market, Coke could be interesting right now. Josh Peters, who recently bought Coke for his DividendInvestor newsletter portfolio, said earlier that one of the drivers is not thinking of Coke as necessarily a soda business, but as a distribution and marketing network. And even if there are some long-term secular trends away from soda, maybe even away from diet soda, there are still opportunities there for the company. They still are able to serve a lot of markets that almost no other company really can as effectively. That could serve them well and should be able to drive future dividend increases, drive future value, and Coke remains a solid wide-moat name.
Stipp: Lastly, Chipotle reported another great quarter, but the valuation is looking probably bigger than your head.
Glaser: I think it is. Chipotle did have a great quarter. Over 13% growth in same-store sales--that's pretty impressive for a chain that's been around for some time now. And profitability also looked OK; higher food costs hurt it a little bit, but generally speaking for a restaurant, their profitability and operating margins look fairly good.
The issue is on the valuation side. Right now, R.J. Hottovy, who covers Chipotle for us, basically says that it's priced for perfection. That absolutely everything has to go right. They have to be able to expand in all the markets they need to expand in; Food costs have to stay where they are; and they have to be able to raise prices and get operating margins even higher than they are in order to really justify today's valuations. So even if it's a great company, you're probably better off not picking up that order of stock on the side when you get your burrito bowl.
Stipp: Jeremy, great earnings insights again, with a side of investment ideas. Thanks for joining me.
Glaser: You're welcome Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.