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Time to Retool?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five.

Here at the Friday Five, we don't feel the need to mess with success, but Morningstar markets editor Jeremy Glaser sees some areas where retooling really does need to be implemented and one area where retooling has met with great success.

He's here to share those stories with me today. Jeremy, thanks for being here.

Jeremy Glaser: You're welcome Jason.

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

Glaser: We'll start with the success story at FedEx, and then we'll look at potential retoolings at ConAgra with commodity costs, for Boeing at the Paris Air Show, at the Federal Reserve, and finally, in the housing market.

Stipp: So, FedEx reported this week and they had some pretty good numbers. It didn't just happen by chance. What helped them out there?

Glaser: FedEx has been trying for a while to really reinvigorate their freight business, and to some extent, their ground business. They're really known for their Express, Overnight, Envelope Delivery on the airplanes. That's really their bread and butter. But an area that hasn't been so profitable over time has been the less-than-truckload freight. You see those FedEx trucks going down the highway.

This quarter they really were able to finally turn it around and bring that to profitability. It wasn't hugely profitable compared to their other divisions, but they're really progressing in the right direction. They're really making sure the acquisitions they made in that area really are working with the rest of the business in the way that they wanted to. I think it's a great way that the management team focused on the problem, made the changes they needed to do, and it just shows that FedEx is a well-run company and is really doing a good job there.

Stipp: Elsewhere in corporate news, at the beginning of the year, we were worried about how commodity costs would affect companies. We've actually seen that it is affecting some companies, and they might need to take some action because of some of the higher prices we've seen.

Glaser: It's really having a big impact. This week we heard from ConAgra, which is the maker of all sorts of consumer packaged goods, foods products, basically saying that anything that they got in terms of price they had to give back just from the huge amount of food inflation and input cost inflation that they were seeing in making their products. And this in some ways was a little bit unique to ConAgra in that it hurt them so badly.

Some of the other companies like General Mills have maybe a little bit more pricing power, have a better economic moat, have been able to pass on more of that cost, been able to push on their suppliers to get lower cost--ConAgra doesn't have that kind of brand equity, doesn't have that kind of ability to push those suppliers to push prices higher, and they've really seen a lot more trouble, and I think in order for them to really compete again and try to compete with the larger players in the industry, they're going to have to find a way to bring those costs down, find a way to get their brands a little bit more power, and if not, they're going to be in big trouble for a long time.

Stipp: In the aerospace industry, Jeremy, Airbus has gotten some good news recently. Will Boeing have to think about retooling some things?

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Glaser: Boeing is really going to have to consider its options very carefully. At the Paris Air Show this week, Airbus announced a lot of orders for their A320 NEO aircraft. This is a version of their popular narrow-body airframe that's going to have new engines, be a little bit more fuel efficient, but it's not a huge departure from the existing aircraft that they are producing today.

Now, this is the largest part of the aerospace market. It's a big part of both Boeing and Airbus' business, and Boeing is still trying to decide if they're going to retrofit the existing 737 aircraft with new engines or if they're going to go ahead and build a whole new aircraft that could be even more fuel efficient, that's going to be even more modern than just popping new engines onto the existing frame.

Now, the real question is if Boeing is going to do this or not. Customers aren't going to wait around for ever for them to make their decision. They're really running out of time. They said they're going to say something by the end of the year, but it's not clear when or what their decision is going to be exactly, especially with new competition coming from some of the regional jet manufacturers, coming from Chinese manufacturers to try to enter into this marketplace. I think it's crucial that Boeing retools as quickly as they can, makes the decision as quickly as they can, and locks up a lot of these contracts before people start looking at other options.

Stipp: In economic news, Jeremy, we've talked a lot about how the Fed's accommodative policy has been basically on repeat over and over again. Is it time, though, that Bernanke is going to have to think about retooling their policies at the Fed?

Glaser: He is really going to have to. Right now we have QE2 ending at the end of this month, and then after that, the Fed is taking a wait-and-see approach. They came out this week and said they are not moving rates and that they think that growth is actually going to be slowing. Now, this is something we've heard from a lot of people for a long time, so no one was totally shocked that the Fed was going to lower their outlook, but they really don't have any plans to have any intervention and to try to keep the economy going, and the Fed is really the last player that has the ability to really do anything stimulative.

Congress clearly does not have an appetite to spend any more money. I think we are going to see budget cuts most likely coming out of things like the debt ceiling conversation that they are having right now. You don't see a lot of new spending happening there. So, really the Fed is the one that's going to have to act, but right now they seem a little bit gun-shy to do so, due to political pressure, due to potential for inflation, and I think that Bernanke is going to have to think very hard about exactly what he wants the Fed to do. How it's going to enter this phase of the recovery that seems to be slowing, that seems to be weakening. They might have to make some changes, and I think it will be interesting to see over the next six months exactly what those are.

Stipp: Lastly, Jeremy in the housing markets, it seems like bad news upon bad news with prices and demand. I don't think anyone would argue that some retooling needs to happen here, but what kind of retooling? What can we do in housing?

Glaser: There hasn't been a lot of good news recently. This week we saw new home sales fell a little bit less than expected, but still fell, and really we haven't gotten a good piece of housing news in a really long time, and the truth of the matter is, is that for the recovery to really take hold and to be robust, people are going to need to get their tools out and start building new homes and start renovating existing homes, and for the housing market to come to at least some healthy state where it's really growing instead of people worried about a double-dip in housing prices.

But the problem is that we don't really have a lot of solutions of how to solve these problems. If we think about having better access to loans or giving homebuyer credits, all that seems to do is kind of boost the prices temporarily, and once they expire, the prices just fell right back down to where they were before.

I think it's really a matter of working on employment, making sure that there is enough jobs and that people who have new jobs, who create new households are going to demand housing, and making sure that those policies are in place, that we have robust employment growth that should lead to people who demand houses and that should eventually lead to housing prices coming up.

We are going to need to see a lot of retooling in that area; we need to see a lot of retooling in the housing sector before we see the recovery there. Unfortunately, I think it's not going to be as an easy fix, and one that could take years to really play out.

Stipp: Well, Jeremy, thanks for reaching into your toolbox for your insights this week and for joining me.

Glaser: You are quite welcome, Jason.

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