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Five Firms Leaving the Past Behind

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar and welcome to the Friday Five. New Year is often the time for making a change, making a move, or leaving the past behind. Joining me today with five things that are leaving is Morningstar Market's Editor, Jeremy Glaser.

Jeremy, thanks for joining me.

Jeremy Glaser: Jason, always my pleasure.

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

Glaser: Well, this week we'll see some changes at AT&T, at for-profit education companies, at industrial conglomerate ITT, at the Auto Show, and finally Sears Holdings.

Stipp: So Jeremy, iPhone users got some news this week that they might have a choice for carrier in the near future.

Glaser: Absolutely. Verizon Wireless has got to be carrying the iPhone starting in early February and AT&T probably isn't very happy that it's leaving the exclusive stable of their network, but it's not going to be devastating for them.

Our analyst Mike Hodel pointed out that AT&T has a ton of customers that aren't necessarily using the iPhone right now. People locked into contracts aren't necessarily going to pay a hefty termination fee, and then re-buy their phone just to go to the Verizon network. There's a lot of new devices like those from Android and things like Windows Phone 7 that may entice people to stay on the network. They could still get the iPhone in AT&T; it's not going anywhere.

I think, they're going to focus on increasing their stability. They're rolling out their 4G network a little bit faster than people had initially expected. I think in the end of the day, AT&T and Verizon are still going to be the major wireless companies. It's not going to have a huge impact on their market shares.

Stipp: I'm personally hoping to sit tight with AT&T and hope that all the defectors free up some network space for my iPhone, but we'll see how that plays out. In the for-profit education industry, they are probably hoping to leave a pretty rocky 2010 behind. What does the future look like for them?

Glaser: That's absolutely true. There was a lot of regulatory uncertainty for the for-profit education space in 2010. There were a lot of concerns they wouldn't be able to have access to federal grants for student loans anymore and that those students would have to find some kind of private financing which is extremely difficult for these kind of degrees.

Apollo Group, which runs University of Phoenix, they have reported their results this week, and it show that things are really not going that badly for them. They are able to raise tuition rates, which is something that they have been doing consistently, but they are able to do that again. They think that the outlook is maybe not quite as bad as they initial thought, and their stock popped quite nicely on these better than expected results. I think that could be sign that we're at a new normal, that this uncertainty is going to be out there, it's never going to completely go away more likely than not, but that these companies are getting on with business, students are still willing to go there. And it could show that they are finally turning the page on all the stuff that happened in 2010.

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Stipp: In the industrial sector ITT is leaving its former self as a big conglomerate company behind for a future as three separate companies. What's the story there?

Glaser: ITT is a pretty large industrial conglomerate, and they are finally branching off, so they are taking their military business, the water treatment business, and really separating the other businesses out into business units that make a lot more sense together.

This is the continuation of a trend we have seen this year over the past couple months. Motorola split into two companies, their wireless headsets and their other communication equipments in another place. Fortune Brands finally took their plumbing and liquor businesses and golf businesses and separated those up. It just shows that people like to use the recession and like to use even recovery in the recession as a way to restructure. These are businesses that never really made a lot of sense together. This seems like it's a good time to restructure. There is lot of people who are looking at acquisitions. It's easier to acquire these little bits of the companies than the whole thing. I think, it's a trend that we're going to see continue. I think as long as people are willing to pick up the little pieces, you'll see more of these conglomerates split up. It probably makes sense for shareholders, makes a lot of sense for efficiency.

Stipp: In the auto industry, there's probably a lot of things in their lackluster history they'd like to leave behind, but the road ahead looks pretty good for them.

Glaser: At the North American International Auto Show, which opened this week in Detroit, we really saw the auto companies completely moving out of the shadow of just the unbelievable decimation they saw in really the depth of the recession. Auto sales are starting to bump up, now  they're nowhere near even replacement values right now, but we're starting to get there. People are willing to buy new cars, and the automakers are out there providing them with new models that they might actually want, especially companies like Ford and GM have really put out a lot of energy into putting out new models. Toyota showed off some new Priuses, a lot of environmentally friendly models. Some interesting cars out there, people seem to be willing to buy, and it looks like everyone is going to benefit. As these volumes rise worldwide, I think, a lot of the major players are all going to be able to take advantage of that.

Stipp: So Jeremy, speaking of the consumer and their willingness to spend, they haven't been spreading it all over the place, some retailers have still struggled, that includes Sears. Is the future going to look good them, are they going to be able to leave that struggle past behind?

Glaser: Jason, as I know, I'm a Sears Holding shareholder, so I was anxiously awaiting their results, and they weren't really quite as bad as people maybe initially expected. Kmart saw a little bit of improvement in same store sales, but Sears continued to see a decline in domestic sales.

People just aren't that excited about a lot of their product lines right now, especially on the softer side of Sears as they would like to say, and they've come with some innovative ideas of how to solve this. The most recent being the Kardashian Kollection, which is the Kardashian Sisters' junior apparel brand that will be exclusive to Sears. The Kardashians are kind of latter day Paris Hiltons, so basically famous for the sake of being famous, and Sears hopes that by associating themselves with that fame, they'll be able to get new customers then who want to buy new outfits from them want to buy to just look like Kim Kardashian.

Not sure if it's going to be the most successful strategy in the world, but it shows that Sears really is trying to improve the apparel mix, trying to improve the marketing mix. Hopefully it will bode well for them to be able to get a little bit more growth in the future. Still lot of uncertainty in the stock, a lot of risk in the stock, but there could be some upside there as well.

Stipp: Well, Jeremy, I know you'll be leaving us now, but we'll look forward to checking in with you next Friday. Thanks for being here.

Glaser: You're welcome, Jason.

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