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Judgment Days in the Market

Jason Stipp
Jeremy Glaser

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

In case you've been off the grid, there were several big judgments this week. Here to offer some details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, I'm no Judge Judy, but I'll try to give you my best judgment on these five today.

Stipp: Well, I appreciate it. What do we have for The Friday Five this week?

Glaser: Well, this week we're going to talk about the Supreme Court, Best Buy, Google, News Corp, and finally Coca-Cola.

Stipp: I think we have to start with the big one. The Supreme Court on Thursday upholding most of the new health-care legislation. Our analyst commented on that. What's the take on the investment front?

Glaser: We've certainly been waiting for this ruling for a really long time, and I think that a lot of health-care investors and health-care companies have really been holding their breath waiting to see if the ACA was going to be upheld, if Obamacare was going to be upheld, and if they were going to need to make all these changes, to get prepared for new regulations, new taxes, or if they were going to go back to the way things were before and wait for new legislation in the coming years.

And I think now that the law has been upheld and given the amount of political gridlock in Washington--and without the prospect of that really easing probably even after the November elections--it seems like the companies now know what they're working with.

In talking to our analyst Matt Coffina and others on the health-care team, they really think that how the law is going to impact the investment case is going to depend a lot on the subsector. For managed care they think it could be a net positive, given that there is going to be lots of new customers for them, even though they will probably have to provide higher levels of benefits and some caps on what kind of premiums they can charge.

On the other side, device manufacturers might be pinched a little bit more with higher taxes but possibly not a ton of new customers in that space.

So overall, there isn't a big change in valuations, there isn't a big change in our take on the health-care sector. We had assumed that the law was going to go through, and that these types of modifications were going to happen. So certainly for health-care investors, it eliminates some of the uncertainty, but it could be really decades before we see the full impact of what this law is going to do.

Stipp: In the consumer sector, Best Buy making the judgment that they might do a better as a private company. They've certainly been struggling recently. What do you think the impact is, and what's behind this decision?

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Glaser: Best Buy has been having a lot of problems recently. They have this so-called "showrooming" effect, where people basically go into the Best Buy, take a look at the camera, decide they want to get it, and then go on their smartphone and to Amazon to actually purchase it. And this is not great for their sales, and I think that Best Buy has obviously been under a lot of pressure.

So, they've announced some turnarounds that we've talked about before--shrinking the store size, focusing on mobile, which is a space that I think more people want to touch and feel [the product] a little bit more before they go ahead and pull that trigger. But it's been moving pretty slowly.

The founder of Best Buy, who left the board recently, has decided that he might want to take the whole company private so that they will be able to make some of these big moves and be more aggressive if they don't have to answer to the public market.

Our analyst R. J. Hottovy agrees that it does make sense as a private company--that it's going to be hard to make these really transformative changes in the public eye. Unfortunately, it's not going to be an easy deal to get done. Certainly there's still a lot of financing that would have to be put together. It's not clear that the banks are super happy to lend all of that money for an electronics retailer that isn't doing great right now.

So even if they have the best of intentions to take it private and really think they could do better in that format, it's far from a done deal from a financing and from other perspectives.

Stipp: Over in the tech sector, Google making the judgment to push further into hardware. What's behind that decision?

Glaser: At Google's Developers Conference this week, they released a ton of new hardware and a ton of new software solutions that really is their blueprint for where they see the company going for the next couple months, at least.

I think it's interesting that they did have both software and hardware. We've heard about the new Android operating system, Jelly Bean. We saw some new cloud services, some new browser services, but we also saw a lot of new hardware projects. They have a new $200 tablet that looks like it's meant to compete with the Amazon Kindle Fire tablet. We have a new media streaming device. They really gave some more information about the Google Glasses project, which is a wearable display and a wearable computer that could come out as soon as 2013.

I think that Google is really sinking money into these hardware projects, either working with partners for branded products or developing it on their own, like they are with the media stream. It speaks to the fact that they really feel like they need to have control over the hardware and the software in order to really show how much the Android can really do and really convince consumers that it is a true alternative to Apple.

I think we saw something pretty similar ... with Microsoft going ahead and building the Surface [tablet], but also working with their original equipment manufacturers, the OEMs. Goggle is going to have a similar battle on their hands, where they are going to be producing tablets, they'll probably be producing phones soon with the Motorola acquisition. There's going to be deeper integration there. So, how do you convince your partners--who you really need to get a lot more devices out there in order to keep market share high--that you are not just going to keep undercutting them or you're not going to try to roll out the best features and reserve it just for your hardware and not support them.

I think it's going to be a tricky balancing act for them. And I think that certainly they're making the judgment call that it makes sense for them to do this and that it's worth pushing that envelop. But looking at that kind of interaction between Google and those other partners, it's going to be crucial in figuring out what the long-term success of Android is.

Stipp: News Corp board this week passing judgment on a plan to cut that company, split it into two. What do you make of that decision?

Glaser: It's a little bit like Solomon trying to split the baby; Murdoch has to decide how he is going to split up his babies.

Historically, he's loved the newspaper business. It's where he got started. It's really where he sees the heart of News Corp. But it's really been a distraction recently; the phone-hacking scandals in the U.K. really sent reverberations throughout his media empire, and he is starting to see it impact the very profitable entertainment [segment]--the TV networks and the other things that News Corp does. I think that he sees that those two businesses maybe don't necessarily belong together.

So the split up will hopefully unlock some of that value, where that legacy newspaper business, which still is not going to disappear overnight, can be managed in a different way, while the faster-growing entertainment TV businesses really might make more sense being managed separately. So this idea of these huge media conglomerates that "bigger is better" [is being questioned]. I think we've seen over time that if the businesses don't necessarily move at the same speeds, that can sometimes cause some trouble. So I think for News Corp, this might make sense for them.

Stipp: And lastly Jeremy, Coca-Cola making a judgment call about their opportunities in emerging markets. What's the plan?

Glaser: Particularly in India, Coca-Cola is going to make a really big investment. They announced that they are going to put $3 billion on top of $2 billion of commitments they already had in India between now and the year 2020. And this is really a very big investment in distribution networks, in getting cold storage to locations so that people can enjoy an ice-cold Coke.

I think it really is a big bet on the future of the Indian market at a time that a lot of companies are a little bit worried about India from an economic growth standpoint, worrying that it's slowing. And also from a regulatory standpoint, where there have been some high-profile cases recently where the Indian government has just averted some really big negative shocks to some mobile phone operators like Vodafone, and to others who are trying to shift business in the country. It hasn't been as friendly of an environment as I think people assumed it would be a few years ago. But some of those economic reforms are starting to slow down. So, I think that [Coke] being willing to put this much money behind it is a vote of confidence in India's growth, and I think Coca-Cola will have to see if it pays off in the next eight or nine years.

Stipp: Jeremy, there is no hung jury about the quality of your reporting this week. Thanks for joining me.

Glaser: You're welcome, Jason.

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