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The Friday Five: HP Progresses; Target Misses the Mark

Jason Stipp
Jeremy Glaser

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, HP reported results this week, and it shows that management is actually executing pretty well.

Glaser: They really are. They're cutting costs, and they're redeploying a lot of that spending into parts of the business that potentially could have higher returns. We saw that in the quarter, with revenue stabilizing, particularly with the strength of the personal device, PC business starting to look better--part of that is cyclical, you wouldn't expect that to always do better. But that is always nice to see.

They still have more work to do. There is room for profitability to improve. They still have some transition to Software-as-a-Service that could be a headwind for some time. But they really are producing a fair amount of cash and seem to be committed to returning that to shareholders.

Pete Wahlstrom, our HP analyst, doesn't think shares look attractive right now. He thinks you should wait for a bigger margin of safety, but this is certainly one to keep an eye on.

Stipp: On the other hand, Target reported results this week that were decidedly off-target. It shows that they still have a number of issues on a number of fronts.

Glaser: They really do. Target is having a lot of problems regaining their footing, particularly after this data breach in the United States. Comparable-store sales were flat in the U.S. as profitability declined, as they were trying to be more promotional to get people into the stores.

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The Canadian operation continues to really struggle; comps were down there 11.4%, and they're just not finding a lot of resonance with the Target concept in Canada, and that was something they really had a lot of hopes for.

E-commerce still isn't doing as well as they had hoped. They really had to slash their guidance because of some of the numbers they saw in this quarter.

It's going to take some time for Target to be able to turn this around and to get people back into their stores, because there really aren't a ton of switching costs to keep customers who are buying paper towels or some groceries at Target from going to another store. They're going to have to win those customers back.

Stipp: TJX, another retailer, reported good results this week. What's behind their better fortune?

Glaser: TJX, which owns Marshalls and T.J. Maxx and some other off-price retailers, really has been doing pretty well, and that continued in the quarter with 3% comps growth. They had 7% total sales growth, as their new stores really are contributing to the top line. And customers seem to really continue to find the concept very appealing to them.

This is a retailer that actually does have a narrow moat, which is rare in this space, because of their inventory management system. It allows them to take close-outs and take off-price merchandise from companies and from other retailers, and get it to the right consumers. They reconfigure their stores pretty often, if they need to, to move it. They don't hold their inventory for very long. It's a very lean business, and that has led to very good returns on invested capital.

The stock has done very well recently, but our TJX analyst thinks that it still could have some room to go and could be an interesting, maybe slightly under-the-radar, name for people to consider.

Stipp: Bank of America reached a $16 billion-plus settlement with the Department of Justice this week. So, finally, Jeremy, we are closing the book on all their legal woes, right?

Glaser: I'm not quite sure about that. Bank of America agreed to one of the largest single-company fines coming out of financial crisis. This agreement settles some disputes about what happened through the boom, particularly at Countrywide and Merrill--two businesses that Bank of America bought during the crisis, but also some issues at Bank of America itself.

This does settle some of those very specific mortgage-related issues, but it's not going to be the end of regulatory scrutiny for Bank of America and for the other big banks. Clearly, the federal government is very focused on them, very focused on making sure that these kind of actions don't happen again, and they're going to be under the microscope. That's going to make it much harder for them to produce the kind of returns that people were used to in the pre-crisis era, and you need to consider that when thinking about investments in those big banks.

Stipp: Last up this week, the Fed released their minutes, and of course everyone begins to talk again about the rate hike, and when is it going to happen? But did we learn anything new about when the rate hike could occur?

Glaser: It's a big week for the Fed, with Janet Yellen speaking at Jackson Hole today, which is happening after we taped this. But we did get a peek of at least where the rest of the Fed is now with the minutes that were released for the last meeting.

It seems that there was a serious discussion about maybe raising rates sooner than had initially been thought, with the unemployment rate coming down and with the employment market looking better. But also with inflation picking up a little bit, some members of the board thought that was a sign that it was appropriate to tighten monetary policy somewhat. They lost that debate; the rest of the members agreed that things were looking better on the employment front, but that they needed more data and needed to wait a little bit longer to be sure before they thought about a rate hike.

So I think it's important that investors just don't be surprised when that hike comes. It's probably going to be sometime next year. The exact timing, we obviously don't know. It shouldn't have a huge impact for long-term investors if it's early or late in the year. But they are seriously considering this. The days of super, super accommodative policy might be coming to end, and we will have just merely accommodative monetary policy.

Stipp: Great insights as always, Jeremy, on the news of the week. Thanks for joining me.

Glaser: Thanks, Jason.

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