Friday Five: Auto Stocks Have Mileage Left
Plus: Sizing up the ECB's actions, what the BP ruling means for investors, and more.
Plus: Sizing up the ECB's actions, what the BP ruling means for investors, and more.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five: Morningstar's take on five stories from the market this week. Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser. Jeremy, thanks for being here.
Jeremy Glaser: You're welcome Jason.
Stipp: Up first this week, the ECB surprised by cutting key interest rates. But you say that the ECB faces some headwinds that other policymakers don't.
Glaser: They do. The ECB really caught the market off-guard this week with a few announcements: They're lowering their major policy rate. They're taking the overnight deposit rate and making it even more negative, and also launching a relatively limited program of bond-buying of covered bonds and also asset-backed securities in October.
This is designed to continue improving lending in Europe. They launched some programs earlier that haven't taken effect yet, but this is in addition to that. Also they are really trying to kickstart inflation a little bit, which has been dangerously low in the eurozone for some time now.
But when you look at how relatively small the bond purchase program is compared with the much larger programs we saw in the U.S., the U.K., or Japan, you really see some of the constraints that the ECB has that these other central banks don't.
Germany is dead-set against sovereign bond purchases and say that the ECB's charter really doesn't allow them to do it. The ECB has fewer policy options, and we are seeing that play out. Mario Draghi is doing everything he probably can and that is politically possible, but they just can't be as aggressive as some other central banks have been.
Stipp: We got auto sales data this week. This is something that our economist Bob Johnson looks at very closely. How good did it look?
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Glaser: It looked pretty good. The seasonally adjusted annual sales rate was at $17.5 million. That was well above expectations, was up from last year, and is at the highest level since January 2006 before the Great Recession got started. And it isn't just incentives--it's not just lower pricing--that's driving it. The pricing held up pretty well.
Dave Whiston, who is Morningstar's auto analyst, doesn't think that this is priced into the stocks yet either, which is good for people who are looking for ideas in a market that's pretty fully valued. He sees both GM, even with the recall issues, and Ford trading in 4-star territory.
Stipp: In the housing sector, Toll Brothers reported, and their results show that they're still looking for their footing.
Glaser: They are, and this was very much a good news/bad news quarter. On the good news front, the current quarter actually looked pretty good. Revenue was up substantially, margins looked pretty good, and you can build a case that the housing market, particularly the high-end housing market where Toll Brothers operates, is doing a lot better.
But then on the other hand, James Krapfel, Morningstar's Toll Brothers analyst, says that their outlook was pretty poor. In terms of sales that are booked and in terms of selling price, it does not look nearly as good and shows that there could be some weakness throughout the rest of the year.
I think this is very much the case for a lot of the housing market. It has been very uneven. It's yet to really have the kind of sustained recovery and sustained health in employment that we've seen from almost every other part of the economy.
The Federal Reserve's Beige Book, which looks at economic conditions, also this week points out that housing remains the question mark when it comes to addressing the rest of the economy. That was very evident in these earnings.
Stipp: Dollar General raised its bid for Family Dollar again, and they're also taking some steps to put the regulators at ease. So what was the news here?
Glaser: They did. Family Dollar only raised their bid a little bit, to $80 from $78.50. But the big announcement is that they really were trying to ameliorate fears that there was any regulatory risk to this deal going through--that there would be antitrust concerns about joining these two big dollar stores. Now they are saying that they're willing to divest up to 1,500 stores in order to satisfy regulators; before they were saying 700 stores is how many they would want to get rid of.
But even with these divestments, we still think that this deal could make strategic sense for them. Both these companies have very similar strategies. There could be some synergies to cut some costs out of the system. But it's not going to be a dramatic improvement for Dollar General, and given where the shares are trading right now, investors are probably better off watching this one from the sidelines.
Stipp: There was a court ruling against BP this week involving the Deepwater Horizon incident. What does this mean for the stock?
Glaser: This was a bit of a surprise to BP. They expected to be found merely negligent when it came to the Deepwater Horizon oil spill that happened a few years back. Instead they were found to be grossly negligent, and that finding means that their potential fines under the Clean Water Act are much higher than maybe they had initially expected.
But Steve Simko, who is our BP analyst, thinks that investors need to put this in perspective. He's taken a dollar off of his fair value estimate per share because of the potential higher liability. But even if it was the absolute maximum penalty, it wouldn't impact the financial strength of BP. This isn't an extinction level event for them.
Investors really should be more focused on what's happening with the cash flow and how they are going to return that cash flow to shareholders. That's really the important investment idea, not so much what's happening with this litigation, which could drag on for some time. But even at its worst, it won't imperil the company.
Stipp: More great insights on the news of the week, Jeremy. Thanks for joining me.
Glaser: Thanks, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
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