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Friday Five: PayPal Unleashed, Buffett Dives Into Dealership

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 this week, eBay reversed course and decided that it was going to spin off PayPal. So what's the rationale behind that, and what's the impact?

Glaser: They did shift gears. Earlier eBay said that PayPal and their core marketplace business really belonged together because there are synergies with … the [eBay] marketplace.

And this week they did say they are in fact going to spin PayPal out sometime next year. They said that PayPal really needs the space, it needs the flexibility, in order to innovate and to come up with new products in a payments marketplace that's changing very rapidly.

I think one sign of this change is Apple Pay, which hasn't even launched yet, but it does seem to be getting a lot of the other payment providers thinking that this might be the tipping point where people really are going to start using mobile to pay, and people are going to move away from plastic cards. I think PayPal wants to position itself well there, and there is a big position to be gained.

Even if Apple Pay is really successful, there is still a limited number of people that have Apple phones. Android is a much bigger platform globally, and there is going to be room for other providers to be in there and potentially make a lot of money, and PayPal wants to be well-positioned for that.

R.J. Hottovy, who is our eBay analyst, thinks that this spin-off is a good idea at this time, and that the agreement they're going to sign for some shared services will help preserve some of the synergies, while providing more flexibility for PayPal, and eBay is trading in 4-star territory right now.

Stipp: Coca-Cola this week made some changes to a compensation plan that had earlier received some criticism. So what's the latest here?

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Glaser: When they first announced this plan, a lot of investors were concerned about the dilution that would happen from giving these equity grants to a pretty broad group of executives. And although there are some disputes about exactly the calculations being used and how much dilution would actually occur, it did raise a lot of concerns.

Warren Buffett, who is a big Coke shareholder, actually abstained from the vote, saying that he thought it was excessive. And even though they won the vote, the Coke board went back and actually made a lot of changes, and that was announced this week. The plan is going to be much smaller; fewer executives are going to have access to it. It's going to be spread out over a number of years to mitigate some of those dilution concerns.

Adam Fleck, our Coke analyst, thinks the fact they are willing to change is another sign of why Coke has exemplary stewardship, and it gets that stewardship rating from us. Instead of having a knee-jerk reaction or shutting down in the face of shareholder criticism, they engaged. They came up with solution, and one that I think all sides are going to be pretty happy with.

Stipp: You mentioned Warren Buffett there. He was in the news on Thursday for buying the Van Tuyl automotive dealership group. What's the rationale behind that, and what are our analysts saying?

Glaser: Warren Buffett is getting into the auto sales business. This is a new area for him, and he says that this will not be the last acquisition he has there.

Dave Whiston, who covers the automakers and the auto retailers for us, sees some reasons why Warren Buffett likes this area, or potentially will like this area. There are a lot of family-owned firms in a very fragmented market, with people looking for potential exit strategies--Buffett can provide that, let's say, if you don't have children or partners who want to take over.

Also there has been a lot capital spending on the dealership side. The image of the automakers' brand is based a lot on what happens in the showrooms. They want it to meet certain standards, and that can cost a lot of money. Maybe people who have been in the business for a while don't want to keep spending that money. Buffett has more capital than he knows what to do with. This could be a good place for him to deploy it. Whiston thinks that aspect could have been appealing to him as well.

That being said, this probably isn't going to radically change the landscape in any way. It will still be very fragmented. The large publicly traded companies will still be able to find new dealerships to acquire if they want to. There is enough of them to go around to make that work, but it will be interesting to see just how big Warren Buffett is able to make this segment of Berkshire Hathaway.

Stipp: Markets were a bit jumpy this week as the pro-democracy protests in Hong Kong intensified. How should investors view what's happening there with respect to the economy and their portfolios?

Glaser: I think that U.S.-based investors need to look at situations like what's happening in Hong Kong right now--and also a lot of the other geopolitical concerns that are at the forefront of people's minds--and put them into a long-term context.

What's happening in Hong Kong certainly is an important political and human story, and it will have economic impacts. Hong Kong is a major financial center. China is becoming an increasingly important part of the global economy. But over the long term, if you think that U.S. corporate earnings are really what's going to be driving your portfolio returns, your equity returns, what's happening now in Hong Kong probably isn't going to have a major impact. I think it's important to keep that context in mind when you're evaluating if you want to make a portfolio change or if you want to make trades around what's happening in these geo-political events. It might be more prudent to look at it through a news angle and be interested in it, but then to have more of a long-term asset allocation plan when it comes to actually investing.

Stipp: The third quarter came to a close this week, and we ended up with stocks maybe a little bit higher than they were when we started the quarter, but it was a bumpy ride.

Glaser: There was quite a bit of volatility, and even though stocks, as you mentioned, gained, there were a lot of worries in the quarter. That was driven by few things. The geopolitical concerns, that I mentioned earlier---things happening in Ukraine and Iraq and Syria. The Scottish independence vote made people a little bit skittish. Global central banks were again in focus, with the Fed preparing to end their quantitative easing program, and thinking about raising rates, while the ECB was becoming more accommodative and trying some different extraordinary measures in announcing an asset purchase program. I think that got people on a seesaw about the direction there.

Also we're coming from a place where stocks have already risen pretty dramatically over the last couple of years, but also throughout 2014 so far, which led to valuations being pretty stretched. When you've got full valuations and some of these questions coming up, it shouldn't be a huge shock that you are going to see some volatility. I think that could very well be the story for the fourth quarter. We're at these high valuations, and markets are priced for things to go really well. If there are signs that things aren't going to happen exactly as planned, that maybe rates are going to rise a little bit faster than we think right now, we certainly could see similar volatility.

Stipp: Great insights on the week and the quarter, Jeremy. Thanks for joining me.

Glaser: You're welcome, Jason.

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