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Cleaning Up

Jason Stipp
Jeremy Glaser

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

There is not a small amount of cleanup after an eventful week in the market. Here to offer the details is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, glad to be here.

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

Glaser: Well, we're going to talk about Sandy, Disney, Netflix, Ford and GM, and finally Apple.

Stipp: We know that Sandy had a devastating impact on property. There is also loss of life. What is the impact potentially, though, on economics and corporations?

Glaser: There certainly has been a lot of cleanup in the aftermath of Sandy. The markets were closed for two days, something that is, if not unprecedented, extremely rare to have a weather-related closing like that. Things are starting to get a little bit back to normal, but certainly not all the way there, with so many people still without power; people have been displaced for some time now.

In terms of the impact on the business community, it's probably going to be a lot more muted than the impact on the individuals who were affected by the storm. We talked to our insurance analyst, Drew Woodbury, earlier this week. He thinks the insurance companies are fairly well-positioned to pay out the estimated $5 billion to $10 billion in insurable claims. The flood claims are paid out by the federal government--that certainly helps them. The fact that they haven't had any other big events this year certainly helps them. And the better pricing that they've had recently and probably will be able to have in the future makes their capital cushion sufficient in order to pay out those claims. Those numbers could still inch higher--certainly this is not over yet as the recovery efforts continue, but it seems like something they will be able to handle.

On the utility side, Travis Miller, who is our [utilities] analyst, thinks the impact could be a little bit more--just the amount of money that's going to have to be spent to get power back to so many customers, the lost revenue from having those customers disconnected for so long, but he thinks over the long term, they'll be able to make up a lot of that ground.

So definitely, no major economic impacts so far that we think are going to be long-term in nature. Just some short-term issues.

Stipp: News in the media sector this week shows dealmakers hoping to clean up at the box office after a recent transaction. What are the details on that?

Glaser: Bob Iger made another big deal at Disney, spending about $4 billion to buy Lucasfilms from George Lucas, who had 100% owned it before.

And this is really the next in a series of deals that Iger has done to really position Disney in order to capitalize on very popular brands. You look at the Pixar deal, you look at buying Marvel, and now with Lucas and bringing the Star Wars franchise under the tent, it just shows what Disney's strategy is: You take these franchises and then you try to market them and exploit them in every way possible to eke out every dollar of it.

They already said they are planning on making at least three more Star Wars films. I think we can bet on more Star Wars theme park attractions. You can see it potentially moving over into the TV space as well.

Michael Corty, who is our Disney analyst, thinks they paid a fair price for the Star Wars assets. The shares probably look about fairly valued right now, but certainly if anyone is able to pull a deal off like this, it's Disney. They've done it in the past. And all signs [indicate] this is a deal that they are going to be able to execute well on in the coming years.

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Stipp: We found out this week that Carl Icahn has taken an interest in Netflix. Will he be able to help clean up some of the hurdles that have been in front of this company?

Glaser: Well, certainly the market was pretty excited about it when they found out about his 10% stake. Shares rose pretty sharply, and although they gave back a little bit over the last month, they're up over 40%, partially on the rumors and then on the confirmation that he has built up this big stake. And he really sees this as a business that has great growth potential and that could potentially be acquired at a very large multiple.

But we're much more skeptical about that. We've been skeptical of Netflix's ability to keep growing in the face of really intense competition from [firms] like Amazon and potentially from Apple, potentially from the cable companies, who'll be able to offer better content, who'll be able to offer different streaming solutions into the home.

Michael Corty, who is also our Netflix analyst, really thinks they just do not have the same kind of competitive advantage in the streaming space as they do in the [DVD] space. When you have to build out those big distribution centers to get a DVD, that's something that not everyone can do. You [only] need to sign a licensing deal with someone to send a movie over the Internet--that's much easier. When you have so many big media companies that are going to want a slice of that action, [Netflix is] certainly going to get squeezed, and he just thinks that even though Icahn is excited about [Netflix], he is probably wrong on this one, and investors should still steer clear of the shares.

Stipp: Are recent results from Ford and GM doing anything to clear up any lingering misperceptions that the auto industry is still in trouble?

Glaser: Well, I'm not sure if people are still going to think it, but after looking at the results, particularly in North America, they really shouldn't.

Both Ford and GM had excellent North American results, great sales, margins increased. They really are starting to get back to those normalized sales levels as people junk their old cars, look at the new cars, they are excited about the new models. They've really done a lot of good work there.

Certainly, there are still problems with the auto industry. Europe remains a big problem for both Ford and GM. The pension problems … haven't completely gone away, they haven't evaporated. But sales really continue to ramp up as the products that these companies are offering are continuing to be appealing to consumers. They are really showing that these are incredibly strong businesses.

We think that they are both 5-star stocks. This is something [Morningstar auto analyst] Dave Whiston has been talking about for a long time, and we're really starting to see that thesis play out in earnest, and I think it will be interesting to see when the market recognizes that these behemoths have truly turned the corner.

Stipp: Lastly, Apple, a company that's of great interest to a lot of readers, had some cleaning ranks in the senior management this week. What's the story there, and what does it say about Tim Cook's leadership?

Glaser: Last week we got decent earnings from Apple, nothing that was incredible. They were slightly below expectations, but solid earnings. But in a lot of ways, the real news came this week, when we found out that Scott Forstall, who is the head of their software development group, is being forced out of Apple, as well as the head of the retail stores.

Now, what was behind these moves isn't exactly clear, but rumors are that Forstall just clashed with Tim Cook. They were unhappy with the way that he handled the Apple maps debacle, if you will, that he refused to apologize for it, even though the maps fell short of a lot of consumers' expectations. He had a lot of criticism on the design side, and a lot of the designers at Apple were unhappy with the direction he was taking some of the software.

And I think the fact that Tim Cook was able to say, here we made some missteps. They admitted that the maps just didn't work as expected, and they are now taking steps to fix that. I think that is a good sign for Apple. It shows that they're not just living in a fantasy world or living in a bubble, where they think that everything they do is perfect, and therefore is beyond criticism or beyond reproach. I think it's good to see they are trying to make these moves.

Now, the next question is, will those moves actually result in a better products, result in them creating new software, creating new upgrades and updates that make people feel like they are still best-in-class and still able to keep them ahead of the rivals at Google and Microsoft? I think that is really what investors are looking for now.

I think the story at the retail stores is very similar. The new [retail] chief after Ron Johnson left for J.C. Penney had some pretty big missteps in terms of staffing, in terms of keeping up the quality of the Apple stores. I think they saw that wasn't going right and decided to make that change as well. So, certainly, I think Apple realizes they need to make those adjustments, and we'll see if they're successful in doing so.

Stipp: Jeremy, great report as always. I know you'll join me in wishing all the folks affected by Sandy a speedy recovery and cleanup.

Thanks for joining me.

Glaser: You're welcome, Jason.

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