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The Price Is Right?

Jason Stipp

Jason Stipp: I am Jason Stipp for Morningstar and welcome to the Friday Five.

With a nod to the classic game show, this week on the Friday Five, we'll be asking if the price is right. Joining me as always for the Friday Five is Morningstar markets editor, Jeremy Glaser.

Jeremy, thanks for comin' on down.

Jeremy Glaser: Jason, always glad to be here.

Stipp: So we're going to be talking about pricing this week, what do you have for the Friday Five?

Glaser: Well, we're going to see if the price is right for Skype, at Macy's, for Google's new laptops, at Disney, and finally for Cisco Investors.

Stipp: Microsoft had some M&A news with its purchase of Skype. It looks like it could be a little pricey, but do you think its right there?

Glaser: I think "a little pricey" might be the understatement of the day. $8.5 billion for Skype is really quite a lofty valuation. This follows a trend we've been following for a while now, which is that Tech Bubble 2.0, whatever you want to call it, really seems to be in full swing--that companies are willing to deploy their cash and pay huge valuations for businesses where they think there is a lot of growth, there is a lot of strategic potential.

Now, the exact strategic potential for Skype inside of Microsoft is not completely clear. Microsoft has a lot of these same video conferencing and audio conferencing and telephone tools that Skype is bringing to the table. Certainly, Skype has a better brand name. It's better known internationally. But still it could be difficult to see exactly how Skype is going to fit in there. It's being kept as its own independent business unit, not being put in with any other part of Microsoft, which also raises some interesting questions.

Certainly, Microsoft paid a hefty price, not really clear they're going to get a big return on it. They have the cash to waste, so it's not going to materially impact our view of Microsoft, but still it kind of leaves you scratching your head a little bit.

Stipp: So, Jeremy it sounds like Microsoft's bid might have been above the suggested acquisition price for Skype?

Glaser: Absolutely.

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Stipp: So in retail, we got some results from Macy's this week. Department stores really struggled through the midst of the downturn. Are they finally getting a handle on their pricing?

Glaser: I think they are. In Macy's results, we saw that their core shopper, the middle-class consumer, is really coming back and is really starting to spend. And I think there are really two factors at work here. The first is that retail sales in general are actually doing pretty well. ... People were worried about the economy slowing down at the beginning of this year. The shoppers were staying home. That doesn't seem to be true across the board, and certainly people are out there spending money.

The other half of it is that Macy's has made great strides in improving their product, improving their merchandizing, making sure that they have better local decision making, so the products make sense for each region, and aren't just national products that have been foisted upon them, and I think that's had a big impact as well.

So I think between those two factors, Macy's was able to turn in some impressive results. Our analysts think that they're going to be able to continue to do so, that there is still some low hanging fruit for them operationally, and it was a good quarter for Macy's.

Stipp: Google this week proposed a new interesting pricing plan for computer users. What's the story on that, and will it work?

Glaser: Google had their big I/O confab this week where they announced a lot of new plans, but particularly in the realm of Android and also with Chrome. They have been developing this Chrome OS for a while that would run on relatively lightweight netbooks and laptops that would let people really access the web, get those web applications without being burdened by very cumbersome large operating system, like Windows or Mac OS 10.

Now, certainly, people didn't know what the pricing model would be on this, and it turns out that not only can you just buy the laptop outright for a little bit less than $400, you are also going to be able to essentially rent the laptop for individuals $20, or for corporations about $28.

Google is going to provide all the services you need. So they are going to tech support. If your hardware breaks, they are going to fix it. They will replace the laptop when it starts to get old, and this is a more innovative cloud pricing model that we haven't seen very recently in the hardware space.

We'll have to see if that price point is too high to get people excited to sign on for this. Are people willing, and certainly are businesses willing, to completely outsource their IT to Google--let them handle all the e-mail, all of the documents, and be completely on the cloud? Are people still going to want to own that piece of hardware, own the software, and own the files that are really on that system? I think it's going to be a big battle. I think that they are gearing up for it, but it's not 100% clear right now if that price point is one that's going to be attractive enough to get people to make that big leap.

Stipp: We also heard results from Disney this week. Disney, a media company, but they also have the theme parks and a travel and leisure aspect. Are we learning anything about their pricing there?

Glaser: Just like with Macy's, where we saw that the middle class consumer is back shopping, we're also finding that the middle class consumer is back at Disney World and back at Disneyland. There was some very aggressive discounting from Walt Disney throughout the downturn to get those hotel rooms filled up, to get people into the parks, and they're really pulling back those discounts, and they're not finding that there has been a huge drop-off in attendance. They are hoping that people are still going to want to make those memorable big trips out to the theme parks, and they are even without the discounts. I think that's a sign of the kind of confidence that families are having and another good sign for the broader economic recovery.

Stipp: Cisco on Thursday was down again after they reported results on Wednesday evening. Is this stock a good idea? Is the price right or not?

Glaser: Well, the price does look great. Cisco has had its share of trials and tribulations over the last few months, and I think that's going to continue for a while. The quarter that they announced the results for, really showed that they are still in the midst of a restructuring. They are still in a lot of low-margin consumer businesses that they don't really have a ton of business being in, and they really need to be focused on that high-margin sophisticated switching and router technology, which is really what they are known for and is really going to be their bread and butter.

It seems like they have a good plan. They are going to cut a lot of management layers. They are going to cut businesses that don't make sense. It's going to cost some money in the medium and short term in terms of restructuring, but we think the long-term prospects for Cisco remain bright, and I think the stock, and our analysts also believe, that the stock looks pretty attractively priced today. The price looks right on that one.

Stipp: Well, Jeremy, an interesting showcase rundown on pricing news this week in the market. Thanks for joining me.

Glaser: You are welcome, Jason. Remember to get your pet spayed or neutered.

Stipp: Okay, thanks for the tip. For Morningstar, I'm Jason Stipp. Thanks for watching.