Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.
What's in a name? Well, several companies are finding out as they deal with nomenclature or will deal with nomenclature. Here with me to offer the details is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for joining me.
Jeremy Glaser: You're welcome, Jason.
Stipp: So what do you have for The Friday Five this week?
Glaser: This week we're going to take a look at Disney, at HP, a slowdown in Europe, UPS, and finally at Kraft.
Stipp: Disney had to deal with some pretty negative news, pretty depressing news for their shareholders related to a movie this week. Did it have something to do with the title?
Glaser: Well, they might have wanted to come up with a better name than "John Carter." Disney came out this week to say that they're taking a $200 million loss on "John Carter," which is one of the most expensive movies ever made. I think that they expected that it would have more brand equity, that people would be excited to see this movie, that they would know the character and didn't need a lot of explanation in trailers or in marketing. And instead it turns out that people didn't really know who John Carter was. They were confused by a lot of the campaign, and even though they had a solid director behind it, who has had a lot of success at Pixar, they just weren't able to really make this film work.
Obviously, $200 million is a big loss, but not one that's going to have a huge impact on Disney over the long term, but it shows you how difficult it is to invest in a lot of these media companies that are really hit-based. You might be able to do some great films. They may be able to come up with some great hits over the years, but it can just take one, a real stinker, that could really put a dent in your earnings power, and it just makes it really challenging for a lot of these companies.
Stipp: I personally thought John Carter worked in accounting, but I guess there is more than one.
So, Jeremy also in corporate news, HP has a new business unit. I'm not sure if we know what the name is going to be, but it might have a 2 or a 3 or a 4 after it?
Glaser: I'm sure they are going to come up with some kind of great name for a new combined printer and PC business. CEO Meg Whitman, who took over not too long ago, has decided that instead of selling off the PC business, they decided not to do that, and then beyond that they are going to combine it with the printer business.
Before these have been split off because there was some thought that the imaging business, the printing business, is a little bit different than PCs, and we want to make sure they can have their own strategic direction, but it turns out that that just created a lot of extra overhead and wasn't really creating a lot of extra value.
So they are going to go back to combining them into one big unit, but all this corporate reshuffling doesn't really get at the underlying problem that they're having in the PC business, which is it's becoming increasingly commodity, and even more so than it was even just a few years ago, and that even though their volume looks pretty good, and they are still the largest PC manufacturer, their margins just keep getting squeezed and squeezed and squeezed.
I think adding printers in there is not going to help their core dynamic; maybe it helps shave some cost on the administrative side, but it's certainly not a game changing announcement.
Stipp: In economic news, Jeremy, I have several names that I would like to use to refer to the European crisis, but there is actually a new name that people have been saying recently because of news. What is that and what does that mean?
Glaser: More and more we're hearing about a true recession in Europe. I think for a while, we talked a little bit about a slowdown. We talked about maybe trying to get away without saying the word recession, but I think some data this week is showing a slowdown in manufacturing activity, and getting acceleration in the slowdown. I think it has confirmed a lot of people's fears that Europe is in fact in a mild recession right now. It's nowhere near as deep as the one in 2008. I think that kind of decline in gross domestic product probably isn't on tap assuming that the crisis doesn't completely get out of hand, but growth is really slowing.
I think between the uncertainty with the sovereign debt crisis, between the austerity measures being taken by a lot of governments across Europe, and that pullback in government spending across the continent has really hurt growth, and I think it's a story we're going to hear about for a long time.
China also had some manufacturing data that shows a slowdown in their economy as well, certainly nowhere near a recession level like you have in Europe, but slowing from where they were before, and I think the question for U.S. investors becomes, what does this mean for the U.S. economy that is showing a decent amount of strength now and seems to be accelerating in its strength. Will this mild recession in Europe kind of knock America off that path again? Right now, the answer appears to be no, but certainly if that downturn accelerates even more, it could have some serious ramifications for U.S. growth.
Stipp: European shipping company TNT might be getting a new name after a proposed merger. What does that mean for them?
Glaser: Well, I'm not sure this is going to be an explosive merger, but I think certainly UPS is going to get their money's worth buying TNT, which is, as you said, a European shipping company.
They're spending about $6.8 billion to fold this into UPS' system, and I think the reason that a deal like this makes sense for UPS and the reason that our analysts are pretty bullish on the deal is that it just creates extra volume, creates extra route density that makes it easier for UPS to deliver packages and to get good margins out of it.
If the truck is delivering only one package, or they can deliver three or four or five packages, obviously delivering five packages is going to be much higher margin, and I think by expanding their presence in Europe, UPS will certainly be able to get some good traction out of this deal.
TNT had been having some trouble with their South American operations, some of their Asian operations. I think UPS has a lot of expertise there that should help turn that part of the business around.
So, it still has to get approved by European regulatory agencies. I think the general consensus is that it will go through, but I think certainly it does have a possibility of being a net positive for both UPS shareholders and TNT shareholders, who are getting a decent price for their holdings.
Stipp: Lastly, Jeremy, an iconically named company, Kraft, is also playing the name game in the last week. Is this going to just result in name-calling, though?
Glaser: Well, this is certainly one of the biggest head scratchers we've seen in a long time. We've known for a while that Kraft is going to split up their grocery business and their global snacks business into two separate companies. They have very different growth characteristics, and I think in a lot of ways we think that that split-up probably will create shareholder value. But the name that Kraft chose for this new snack business is really leaving us--and, we've read, some other people--with a lot of questions.
They came up with "Mondelez," which is a made-up word that incorporates some Latin, incorporates some sounds they think kind of sound like delicious, and we'll see if this name actually sticks, but definitely it has an unusually high level of derision amongst the blogosphere, certainly since Netflix came up with Qwikster.
But it really just got me thinking that here at The Friday Five we've had the same brand for a couple of years now. It seems to always be the same name. It's kind of a little bit bulky, a lot of syllables. So, we've kind of brainstormed some different ideas of what we can call The Friday Five now, and I think FriFivia really has a nice ring to it. Equitytainment Today, so that we know we have a little bit of talking about stocks, and we have some entertainment. We know what's happening that day. Replacing it with a Roman numeral, V, I think could be nice. Certainly we could say it's the show formerly known as The Friday Five, and just show the symbol; I think that could be a real good one. And finally, TGIFF, Thank Goodness It's The Friday Five, I think, maybe will help with the youth demographic, make it seem a little bit hipper, but definitely we'll have to see if our rebranding is as successful as Kraft's.
Stipp: Well, Jeremy, I'm always glad to see Jeremy on your name tag on The Friday Five. Thanks for joining me today.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.