Friday Five: Intel Restructures, GM Drives Forward

Christine Benz: Hi, I'm Christine Benz for Morningstar.com and welcome to the Friday Five. It's been a busy earnings week. Joining me to discuss five earnings reports that caught our eye this week is Morningstar's markets editor, Jeremy Glaser.

Jeremy, thank you so much for being here.

Jeremy Glaser: You're welcome, Christine.

Benz: Jeremy, let's start with Intel. Its earnings news maybe wasn't the main story; some news about job losses at Intel. Let's talk about what's going on there.

Glaser: Yeah, their weaker-than-expected results really were overshadowed by the announcement that they are going to cut 12,000 jobs, a significant portion of their workforce, as they really focus more on cloud computing, on the Internet of Things--the idea that we're going to have all these connected devices everywhere on these higher-growth opportunities and away from their traditional PC business. They've been kind of going down this path, but the announcement of this restructuring really is very much a statement that this is the direction the company is going.

And we generally view this restructuring pretty positively from a return on capital standpoint. We think these are higher-growth opportunities. We think they are going to get higher returns over time. However, we think a lot of that is already priced into the shares. They are trading in 3-star territory right now, not a lot of value. But with these restructurings they tend to be kind of lumpy. There could be some bad quarters. We could see a sell-off. This could be one to kind of keep on your radar screen. If it does really fall in price, it might be an interesting long-term holding.

Benz: Another story, GM actually had a pretty good quarter. Let's talk about what's been going on there.

Glaser: Yeah, they had a strong quarter and Dave Whiston, who is our GM analyst, has been kind of talking about the story for quite some time now, that as GM really has improved their product lineup, that they are getting close to building the scale that they needed to really see their returns increase markedly. You definitely see in a business like that that scale is very important and we saw that this quarter. The North America business looked good as they began to really scale back on fleet and rental car sales--those tend to be pretty low-margin--had improved their product lineup, got people excited [and] into the showrooms. That showed up in the results.

Notably, GM Europe started to look better. This has just been losing money for quite some time and management saw that the loss was pared significantly and they do think it has a path to break-even this year. That's really significant and we think that has been an overhang on this stock for some time. Shares are trading in 4-star territory. They do look cheap, but it is important to note that there is high uncertainty around what's happening to GM. We're seeing a lot of positive signs for the company but the range of outcomes is wide. So this is really an idea for investors with a much higher risk tolerance.

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Benz: And any automaker, that's a really cyclical business, right?

Glaser: Yeah, we do think that there's a high level of uncertainty around all of the large automakers.

Benz: Netflix reported earnings this week. The market did not like what it saw; it didn't like some of Netflix's guidance. Let's talk about that one.

Glaser: Precisely. Earnings were actually pretty strong, above expectations, but the guidance they gave, particularly for international subscriber additions next quarter, was way below and well below views. So, what's happening here, our Netflix analyst thinks, is that their global launch was so skinny, it's such a small launch, that it really was a very small addressable audience. They kind of have gotten a lot of people who have been waiting for Netflix for a time in a lot of markets and now comes kind of the harder slog of getting new people to sign up.

So, when we say it's skinny, we mean that a lot of the programming is English-[language]-only, so that limits the potential audience. It's Netflix originals and there is some great programming there, but there are relatively few programs versus their entire library that you might get here in the United States. So, it's going to take some time to really build out those local content libraries and that's going to cost money to build those out. It's going to be kind of a long expensive process. So, they were excited to launch, get their foothold in all of these markets, but that doesn't mean that they really, fully have a competitive product there yet. It's going to take some time. We think the market is still overly optimistic on Netflix. Shares are in 2-star territory and we think investors are better served looking elsewhere.

Benz: Coke, its results were a little bit short of expectations. Let's talk about that.

Glaser: Yeah, Coke came in short of views. They had their organic growth that excludes currency issues, it excludes acquisitions and divestitures; that was up 3% on the top line, which is still decent but below where even we thought it would be for the full year. But Adam Fleck, who is Coke analyst, doesn't think this is any cause for concern. He thinks Coke is still very much on track. He thinks a lot of this dealt with kind of some geographic mix issues and less anything to do with actual weakness in kind of the strategy of their business. He still expects about 4% growth for the full year, particularly as some of these global marketing initiatives start to kick off and he thinks those are going to pay some dividends.

And you also see a pretty good environment in the U.S. We have a very rational pricing environment. Coke and Pepsi in particular have not been trying to have a race to the bottom on pricing. That held up in the quarter. He thinks that will continue to hold up. That will help support growth, too. The stock did sell off on this news, but really just being about fairly valued. It hasn't really created any value on Coke despite the decline in price.

Benz: Last story I want to cover with you, Jeremy, is American Express. The shares have been under some pressure. The company has been under some pressure. But you think there are some maybe reasons to be a little bit positive about the company behind the scenes?

Glaser: Yeah, they were really under tremendous pressure, particularly from losing the Costco business. This was a big part of the spending on American Express cards and losing that deal was a blow to them. But I think we see in this quarter kind of the signs of what their way out and how they make up some of this loss here. We saw that because consumers are still willing to spend on the cards, the growth excluding the Costco portfolio looked pretty good. Also, they're also continuing to borrow on the cards--not only are they spending the money but there is higher lending, and we're still in a pretty benign credit environment. So, that's something that is a positive for American Express right now. So, that was another good sign that they are kind of moving past some of these issues.

But that being said, it's important to see that in order to kind of get that spending, to keep that going they are spending a lot more on marketing, they are spending a lot more on kind of customer service and things to keep their current customers happy. Those elevated costs, that elevated cost structure, could be with us for some time as they really try to make up some of these issues. But Jim Sinegal, who covers American Express and some of the other names in that space for us, thinks that it still does have a wide economic moat that competitive advantage of having to access to that well-heeled clientele is still going to be really important, they are still going to be an important partners to retailers and that they have a bright future ahead of them. He sees the shares as undervalued right now.

Benz: Jeremy, busy earnings week. Another busy earnings week to come. Thank you so much for being here to recap some of these stories.

Glaser: You're welcome, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.