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 markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: Up first this week, we got Fed minutes. There wasn't anything terribly surprising, but is there any more insight on when that rate hike might begin?
Glaser: You're right--nothing groundbreaking in the minutes, and I don't think we learned too much about when we're going to see that rate hike.
As was broadly expected, several members do think that June is the meeting that rates should start to increase. But remember that these minutes happened before we got a spat of weak data, particularly that weak jobs report, which might push back that date. There was also some concern about the rising dollar and the impact that's going to have on the economy; that's obviously on the Fed's mind as well.
I think June is still a possibility, but it's looking more and more remote; it looks like it's going to be later in the year. There was even a slight suggestion that a member thinks that 2016 is more appropriate; I think that's also an outlier. Late 2015 seems like the most likely timing right now.
Again, we'd like to emphasize that the exact timing of the Fed's rate increase shouldn't be a huge concern to individual investors. If you're an institutional investor, if you are worried about day-to-day market fluctuations--sure, that date is really important. Long-term investors don't need to be terribly concerned about when it happens. They just need to have it in the back of their mind that, yes, we're going to be moving into a higher short-term rate environment sometime in the coming months.
Stipp: There was a lot of deal news this week, including a deal in the energy sector. Energy is maybe not a bad place to go shopping, but we actually think that particular deal could be overpriced.
Glaser: The M&A wave so far in 2015 really continued this week in a big way. Obviously, the big news was the $70 billion deal of Royal Dutch Shell buying BG Group. Just last week we were saying that with all this M&A activity, it seems like companies were paying generally fair prices; we weren't seeing any huge premiums.
That really went out the window with this deal. Shell is paying a 50% premium to where BG Group was trading before the deal and also paying an 11% premium to our fair value estimate--what we thought BG Group was worth. So, yes, the shares are undervalued, but given how much Shell is paying, they're actually paying a pretty hefty premium there.
Shell is trying to get access to BG Group's crown jewel assets, particularly in Brazil, which Shell thinks will help them grow their output and bulk up in the volatile energy price environment we're in right now. But this really is predicated on Shell paying the right price--and we think they are overpaying here--and also having the operational expertise to exploit these assets over time and to go through with some of the divestitures they want to do in order to pay for this deal and streamline the company. Given Shell's checkered history when it comes to some of these operational issues, that remains very much an open question as well.
Stephen Simko, our energy analyst, lowered the Royal Dutch Shell fair value estimate by 3% on this deal--not a big drop, but definitely factoring in the fact that there are some potential operational difficulties here and some valuation issues as well.
We think the regulators will allow this to go through. There is a small chance they will say it's just too big of a company and they won't be able to consummate the merger, but we think it's likely to happen.
Stipp: Another deal that we are more bullish on this week was FedEx and TNT. What's the story with that deal, and why does that look like it could be a good combination?
Glaser: This is comparatively smaller deal at only $4.8 billion. FedEx is going to buy TNT Express, which will give them access to the intra-Europe delivery that they don't really have a lot of exposure to right now. According to Keith Schoonmaker, our FedEx analyst, this is a complementary fit for the two companies. It gives FedEx access to a market it doesn't have now, and he thinks over time it is going to help expand FedEx's moat and that it makes quite a bit of sense.
Interestingly, FedEx in the past had said they weren't interested in TNT. They were worried about the price. But it seems like the stronger dollar has really helped make valuations of European companies look much more attractive, and FedEx was able to get this deal done at what we think is a fair price. Also from a regulatory standpoint, because these companies are so dissimilar in a lot of ways, Keith thinks that this deal will get done compared to previous deals, like UPS-TNT Express, that weren't able to pass that regulatory burden.
Stipp: Over in real estate, Ventas made a couple of moves this week, including an acquisition. What's your take on those moves?
Glaser: We think this was a pretty good deal on both fronts for Ventas. On the first front was the $1.75 billion acquisition of Ardent Health, which is a hospital operator predominantly, and that really adds to Ventas' core business of having triple-net leases on health-care facilities. Health care is an industry that really needs that physical space, and that's been a big boon for Ventas over time.
The other thing is that they are going to spin off their skilled nursing facilities business. It's a little bit different than what they're doing in hospitals and elsewhere, and they think that having the transparency of that in a separate company might help with valuation and help investors understand that business a little bit better.
Todd Lukasik thinks that both of these make sense. He doesn't see a big valuation upside on the spin-off, but thinks that the Ardent earnings will be accretive, will allow Ventas to grow their dividend in a safe way, and that they'll be able to increase the payout without really stretching those rent dollars, that net operating income, that's coming in. That would be a good sign for current Ventas shareholders.
REITs are a sector that is pretty overvalued right now, but Ventas is one of the few REITs that is trading for less than our fair value estimate. It's not at a huge discount, but it is one of the few names that does look relatively cheap.
Stipp: Lastly in earning news, Constellation reported this week. They had a pretty good quarter with some pretty good growth.
Glaser: There were a few other deals, but I thought we'd take a look at one earnings report before we get into the bulk of earnings season in the coming weeks. Constellation Brands had a good quarter and a good fiscal 2015. They saw good growth in their beer business, particularly with Corona and Modelo. That looked like a much stronger part of the business for them. Our analyst Adam Fleck thinks that they'll be able to even see some margin expansion there over time as they make some investments in breweries and their glassworks. The spirits and wine business isn't doing quite as well, but pricing is looking decent, so that has helped profitability in that part of the business.
Unfortunately, Constellation looks like it's pretty overvalued. Even though things are going pretty well, this is an area where investors have been looking for more defensive names, so there isn't much of a bargain right now.
Stipp: Another one in the books, Jeremy. Thanks for joining me and for your insights.
Glaser: You're welcome, Jason.
Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.