Friday Five: Not Much Gas for Retail Sales

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five, Morningstar's take on five stories in 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, we got retail sales data. It was down again in January. A lot of that was due to gas prices, but consumers aren't really spending on a lot of other stuff, either.

Glaser: Sales were off 0.8% in January from the previous month. That follows the decline that we saw in December, and you're right that gas was the biggest driver. As oil prices fall, people spend less at gas stations. That's pretty clear.

But one of the questions has been, will consumers take the savings from the pump and spend it elsewhere? Right now, the answer appears to be no: Excluding gas, sales were flat from the previous month. Although there were some bright spots at restaurants and some other areas where people were spending, generally, sales were flat.

There were hopes that lower gas prices combined with the employment picture were going to lead to a big boost in consumer spending, and that could help boost growth for the entire economy. It looks like those hopes might have been misplaced or at least premature, because as of right now, we really don't see evidence of that happening, and it seems the economy is still stuck in slow-growth mode.

Stipp: Negative currency effects have been one of the themes of earnings, and we saw that again this week with Coke. What's the story on their earnings report?

Glaser: Coke is one of these companies that's going to be really impacted by a stronger dollar, given how much of their earnings happen outside of the U.S. We saw that in the third quarter when they had disappointing results, and again here in the fourth quarter, as they announced this week they had a big decline in earnings because of that strong dollar.

I think for Coke and others, it's important to really look past some of the issues that are related to the dollar and look at the underlying business. Yes, the dollar is strong right now, but it probably won't be strong forever. It's impossible or very difficult to predict exactly where currencies are going, and trying to plan long-term investment decisions based on short-term or relatively short-term moves in currencies is going to be very challenging.

When you look at Coke's underlying business, it doesn't look quite as bad. Actually, they are showing volume growth in a lot of different geographies, they have rational pricing, they are doing a lot of things on the cost-cutting side that make a lot of sense right now.

Our analyst Adam Fleck thinks there is a lot of potential strength or potential growth there. He thinks they are going to be able to get to mid-single-digit earnings growth, excluding those currency issues, in 2015 and that there is still some runway for growth for the business as a whole in the years to come.

Shares are fairly valued right now. They did run up a little bit as this quarter was better than expected, even if it wasn't great, but certainly Coke is not in dire straits by any stretch of the imagination just because there is a strong dollar right now.

Stipp: Retailer Gap raised its fourth-quarter guidance, as it's doing pretty well.

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Glaser: Gap is a narrow-moat retailer that is posting pretty good numbers right now. We saw that from an increase in their fourth-quarter earnings guidance ahead of their full results, which are coming later this month.

Bridget Weishaar, Morningstar's Gap analyst, sees this as a sign that they are able to continue to command some pricing power, have brands that are resonating with consumers, and are able to get them into their stores through the Gap and the Old Navy brands predominantly.

Shares actually do look a little bit undervalued right now, which is why I wanted to feature this one today. They are in 4-Star territory. We don't have that many stocks right now that are undervalued and that have economic moats, and Gap certainly looks like one. Bridget thinks that one of the underappreciated stories here is that there is probably some room for margin expansion, too. She thinks that's not being recognized by the market, so it could be an interesting one for more research.

Stipp: In a bit of travel-industry consolidation, Expedia announced this week it's buying Orbitz for $1.3 billion. What's your take on that deal?

Glaser: Expedia is paying a fair price for Orbitz. It's not a steal by any stretch of the imagination, but they are getting a decent deal considering the synergies they should be able to wring out of a combination with a business that's reasonably similar to the one they have now. You can leverage your salesforce over more hotels, you have a technology platform that's bigger that reaches more consumers, which potentially is a good thing for Expedia in this competitive market that they are trying to consolidate and have more control over.

Expedia shares did rise aggressively on the news of this deal, as the market also sees some of these potential synergies. Expedia had been looking a little bit undervalued. Now, it looks more fairly valued after the rise. Generally speaking, we still think that Priceline is a more attractive play in this space. It still looks much more undervalued compared to Expedia, and for anyone looking to make an investment in this space, Priceline might be the place to look.

Stipp: American Express shares dropped this week after they announced that their exclusive partnership as the credit card for Costco will be coming to an end. How should American Express shareholders view this news?

Glaser: Costco was a pretty big part of American Express' business. A little over 3% of direct spending on American Express cards was at Costco. You add in Costco-branded cards, and you are looking at 8% of spending, even though obviously not all of that was at actual Costco stores. So, it is a meaningful amount of business for American Express, which explains the big sell-off on the news.

But Jim Sinegal, Morningstar's American Express analyst, doesn't see this as a sign that American Express' moat is eroding or that the competitive pressures are going to be too intense for it. Yes, competitive threats are growing, particularly as other companies are offering better rewards to customers--American Express was very much a leader there for quite some time--but he still sees that their closed-loop network offers a lot of value. Particularly in a lot of these new payment spaces, being able to control that entire framework makes it easier to get into some deals and makes it easier to deliver some things, and that could be a positive for American Express over time. So, he doesn't see this as a huge issue for American Express over the long term, but you could definitely see why there was some concern, given how big of a part of their business Costco had become.

Stipp: Great roundup of the news of the week, Jeremy. Thanks for joining me.

Glaser: You're welcome, Jason.

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