The Friday Five

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five. Five stories from the market this week and Morningstar's take.

Here with The Friday Five is Morningstar markets editor Jeremy Glaser. Jeremy, thanks for being here.

Jeremy Glaser: My pleasure, Jason.

Stipp: First big story this week, Comcast and Time Warner Cable agreeing to merge, but there are a couple of big questions marks on this very big deal.

Glaser: There are. This deal was a bit of a surprise. Obviously Charter had been chasing Time Warner Cable for some time. The board said that deal was just priced too low. So, Comcast used its relatively overvalued shares, according to our analyst Mike Hodel, to make that number look a little bit more attractive for the [Time Warner Cable], let them take it and make this deal happen, at least from that perspective.

But one of the big questions is regulatory, and I think the reasons that this deal are attractive to Comcast are the same reasons that the regulators are going to be a little bit worried. It creates a behemoth. You're taking the number one and number two cable providers, putting them together; they're going to cover 70% of the U.S., and it just gives them a lot of potential bargaining power with content producers, and it's going to give them a big stake in the broadband Internet space, something that regulators are also very concerned about.

Given that, Washington is going to be all over this deal. We're already hearing politicians start to say that they're going to look very closely at it. There are going to be hearings. We're going to hear a lot about this. And I'm sure Comcast understands this. They obviously went into this eyes wide open. There were some similar concerns about the Universal deal that they did a few years back; they were able to make that happen relatively easily. So, we'll see what their strategy is here, but it's going to be challenging to get this past the regulators.

Stipp: Janet Yellen spoke this week, and we were watching the testimony and not a single eyebrow was raised in the whole room. So, can we say no news here, or no new news, is good news?

Glaser: The big theme for Janet Yellen's testimony this week in front of Congress was continuity, which is that she doesn't see herself as making a sharp break from what Ben Bernanke had done from the communication policies, from the monetary policies that he's implemented (even the extraordinary ones), and that she doesn't represent a major break away from that. That was obviously one of the appeals of her candidacy, one of the ways that she got confirmed relatively easily, and that was reiterated through the testimony this week.

This is in sharp contrast to some other changes of leadership we've seen in some other central banks, like at the Bank of England or the European Central Bank relatively recently, where there was some talk that the new head really could be taking the bank in another direction. It's not the case here at the Fed. Over time, I'm sure she's going to put her stamp on the institution, but it's going to take a while for that to happen.

Stipp: Whole Foods reported disappointing comp growth in their earnings report this week. Is it just weather-related issues, which seems reasonable, or is there something else going on here?

Glaser: The comps were disappointing, but certainly not horrible. They had that 5.4% increase in same-store sales--those are stores that have been open for over a year--and this was below expectations. They also lowered the top end of their guidance for the full year.

They blamed two things, the first being poor weather. This is something we've heard from a lot of retailers, and sometimes you can take that with a grain of salt, but they did seem to think that [weather] was impacting the number of customers in their stores.

The second being that they tried to have some more promotional pricing--they are trying to make sure that the brand image stays positive, and that people don't see them as being a very pricey kind of niche market, and that it's a place they can really do all of their shopping.

Our analyst Ken Perkins thinks this is an important part of the strategy. In order for them to maintain their narrow moat, they need to maintain that brand image, and good pricing is part of that. So, it might worth giving up some comps now in order to help build that brand image, and they are still performing much better than many of their other grocery store peers.

Stipp: After a push from activist investors and other calls for change, Pepsi announced during their earnings that they're really not going to make any big changes. So, is that a good thing for the company at this point?

Glaser: Nelson Peltz and others have been pushing PepsiCo for a while to do something to shake things up, be it selling the snack business, spinning off different parts of the bottlers or the beverage business--really try to do something to unlock some of the value that they see there.

Some of them have backed off, but Pepsi hired an army of consultants to look at this, try to figure out what the best structure is, and they basically decided that the way it's structured now, the way the business is working, is fine, and they don't need to make those major changes.

They even said on their call that they're not even looking at any big acquisitions likely. People have talked about maybe they would buy Monster Energy Drink or SodaStream to get into that at-home space. They seemed to rule that out.

I think what Pepsi is going to have to deliver now is organic growth. They say that they have some ideas, ways to keep growth going. It's something that they've struggled with somewhat over recent quarters. They're really going to have to show that. By not making any of these changes, by deciding that they're on the right path, they now have to prove to investors that they truly are, and the proof will be in that pudding.

Stipp: Lastly real estate investment trust Realty Income reported earnings. They had a pretty good quarter. The stock may be not as attractive as it once was, but for income investors, there is maybe a reason to take a look here.

Glaser: It's not as cheap as it was at the peak of worry about rising interest rates, but Realty Income is one of these stories that's almost incredibly boring, and that's the best part about it. They have a portfolio right now that's 98.2% occupied, a relatively small amount of leases expire in any given year. So it takes a long time for these kind of big changes to happen in the portfolio. It's really slow and steady there.

This doesn't mean that they're immune to economic cycles--if there were to be a big downturn, if there were to be major issues in the retail sector, that would have a profound impact on them, but for the time being, it looks like they're doing pretty well. They're able to continue to grow cash flow, able to return that cash flow to shareholders with a pretty attractive yield, and even though the shares have been bid up somewhat, we still think it's trading below its fair value estimate, and for income investors, it could be a solid choice.

Stipp: Jeremy, I know something that pays a great dividend week after week after week, and that of course is The Friday Five. Thanks again for joining me.

Glaser: You're welcome, Jason.

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