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What's Revving Up in the Market?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five. With earning season gearing up, Morningstar markets editor Jeremy Glaser is here to tell me which stories out there in the market are revving up. Thanks for joining me Jeremy.

Jeremy Glaser: You're welcome Jason.

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

Glaser: We have got to see if we have revving up in LBOs, the business PC replacement cycle, China growth, financial reform and finally at Yum Brands.

Stipp: So the Playboy story was in the news this week, and there was Hugh Hefner maybe getting a little bit more hands on with the magazine. Can you tell me a little bit about what the implications of that are as far as the business transaction?

Glaser: Hugh Hefner already owns a majority of shares, a majority of voting interest in Playboy, but he decided that he wanted to take it private. I think he is kind of sick of dealing with the public spotlight of a declining stock price. But I think that what's more interesting than this actual transaction is whether it forebodes more LBOs coming down the pipe.

I think certainly there is a lot of managers who probably think that their stocks are very undervalued and, also financing is again a little bit easier to find. So with the combination of those two things, I think it's possible that we could see a revving up in the LBO market.

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Stipp: Also it seems like, relatedly, there has been some more activity in mergers and acquisitions, seems like there is more sense that people want to get some deals done out there right now.

And the second piece, Intel reported some earnings, and it showed that there is business really revving up in some areas for them. What did Intel tell you?

Glaser: They had another incredible quarter. Intel has just been doing great over the last, really, almost a year now. And one of the things that is finally kicking in gear for them is that businesses are actually buying PCs again. During the downturn no one invested, people just used their old XP machines, people weren't interested in Vista, no one was buying new microchips. But nowadays people see Windows 7 has been much better received and they realized that using those four or five year old machines isn't going to get them as far as they thought it would. So, people are out there buying. It could bode well for a lot of different things, could show that businesses are really out there driving economic growth, and it won't just be consumers who are held responsible for it.

Stipp: Globally I think a lot of people had pinned a lot of hopes on China being the one that would really rev up growth as the economy slowed down over the last few years. They reported some data this week; did it show them revving at all?

Glaser: There is not a lot of revving in China. They are certainly doing very well. They grew 10.3% in the second quarter; this is down from 11.9% in the year-ago quarter, and it certainly shows that they face a lot of challenges that when you get so big, adding more to that is hard, especially when Europe is doing so poorly and the United States is still just hanging in there. It makes difficult for them I think with a lot of issues -- with rising prices and with wages going up. It could make it difficult for China to see the explosive growth that they saw; they might have to cope with a slightly lower growth in the future.

Stipp: On the political front, we saw that the Congress passed financial reform in some sweeping measures on Thursday. Can you tell us a little bit about what this revs up, what this means for the financial companies?

Glaser: I feel like we've been talking about this for a year now, but finally the Senate did pass the bill and it's going to become law. And I think what's going to be interesting is how quickly this actually gets revved up. A lot of the bill is somewhat vague, where it gives new powers or it gives powers to authorities, but doesn't say exactly how they are going to use them or how they should use them. So, it would interesting to see how players like the Federal Reserve or the FDIC actually use their newfound power to regulate the industry, or if they continue to do a wait-and-see approach and they don't really flux their new muscle that much.

Stipp: So, lastly Jeremy, another company reported this week, Yum Brands, they actually had some nice revving up in the emerging markets. What did you see out of their report?

Glaser: Yum is doing great in China. They are doing great in other emerging markets, but the United States, the picture is not as rosy. Certainly Pizza Hut was doing pretty well, with promotions like the $10 pizzas, but the KFC has been a particular weak spot.

They tried to introduce a new sandwich, the Double Down, which was two pieces of fired chicken with bacon and cheese and mayonnaise in the middle, and they certainly got a lot of press coverage but didn't actually get a lot of people into the stores.

So, we actually have an idea for Yum Brands, of how they can really rev up their growth even more in the United States, and it's the Triple Threat, and we actually have one right here for them.

Stipp: Oh, Great.

Glaser: So as you can see the Triple Threat combines elements from the three most popular restaurants in the Yum stable here in North America. Starts with a piece of Pizza Hut pizza, then you add KFC chicken wings on top of them, then cover with refried beans from Taco Bell, then put another slice of Pizza Hut pizza on, and then a KFC biscuit really gives it that extra touch and really that richness is going to make it taste great on the pallet.

Stipp: Well I got to tell you Jeremy, I'm only a buyer if it comes with a Maalox Shake.

Glaser: Well, we'll look into that, but I think in the meantime, if they implement this, they are going to see a lot of synergies and they are really going to see their sales go through the roof.

Stipp: Well thanks for joining me this week, Jeremy.

Glaser: You're very welcome.

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