TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Market driver. Companies are gobbling up tens of billions of dollars of their own shares. Are the buybacks making the market look healthier than it really is?
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: High ceilings. Why the sweet spot in the housing market could be going through the roof.
MATHISEN: And, standard care. The nation’s number two insurer says it will pay cancer doctors an incentive fee if they follow its treatment protocol. Smart business? Smart medicine? Neither or both?
All of this and more on NIGHTLY BUSINESS REPORT for this May 28th, 2014.
GHARIB: Good evening, everyone.
McDonald’s (NYSE:MCD) served up a big Happy Meal for shareholders today. It announced a $20 billion package of stock buybacks and dividends by the year 2016.
Now, this new plan could give investors 20 percent more cash than they received during the last three years. The higher return comes at a time of weak company growth at the fast food company as U.S. sales have continued to be disappointing. But despite the news, shares at McDonald’s (NYSE:MCD) still slipped a percentage.
McDonald’s (NYSE:MCD) and much of corporate America have a big appetite for buybacks and so far this year the stock repurchases are at lofty levels. Some Wall Street pros think buyback have propped up the market.
Is that true and what does it mean for investors?
Dominic Chu reports.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: According to S&P Dow Jones indices analyst, Howard Silverblatt, corporate stock buybacks are on pace to have their second biggest quarter ever, with S&P 500 companies already reporting $157 billion in repurchases during the first quarter of 2013. And the numbers are still trickling in.
Among the companies buying back the most of their own stock, oil and gas giant ExxonMobil (NYSE:XOM), which bought back $4 billion worth in the first quarter. And computer services company IBM bought back $8 billion.
Then, there is Apple (NASDAQ:AAPL). It set a new record for the most stock ever repurchased by a company in a single quarter by spending nearly $18 billion on its own shares.
Many investors look towards buybacks as a bullish signal.
MICHAEL HOLLAND, HOLLAND BALANCED FUND: When companies announce buybacks, a lot of people say that’s an important thing to consider. It’s not a perfect indicator but it’s a good indicator that management believes that their stock values are so attractive that it is better than anything else they can do with that portion of their cash, which includes investing in plant and equipment, and also buying other companies.
CHU (on camera): Some take a more cynical view, they say that buying back stocks simply reduces the amount of a company stock outstanding in the market, and that lets them show growth in earnings per share. But not everybody thinks that the stock buybacks are the only thing driving the market.
SCOTT WREN, WELLS FARGO SENIOR EQUITY STRATEGIST: I think that, overall, a share buybacks had played a role. They have helped. But I think the main thing that’s driving the market is the fundamentals. We’re in a modest growth, modest inflation environment. Our American companies have figured out how to make money in that environment.
CHU (voice-over): Of course, a stock market at record highs is likely propelled by a variety of factors. Shares repurchases of this size are a definite help.
Now, the question is: will it be enough to keep the bull run going?
For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.
GHARIB: Well, not many bulls in Wall Street today. All three major indexes were down, breaking a four-day winning streak. The Dow lost 42 points, the NASDAQ was off two, and the S&P was down 12 points.
Over in the bond market, the yields on the 10-year treasury note dropping to 4.4 percent. This is the biggest one-day decline since February and touching its lowest level in nearly a year.
MATHISEN: David Lefkowitz joins us now to talk more about the markets generally. He’s senior strategist at UBS Wealth Management.
David, welcome. Good to have you with us.
DAVID LEFKOWITZ, UBS WEALTH MANAGEMENT SENIOR STRATEGIST: Thanks for being here.
MATTHEWS: Let’s talk a little bit about the stock buyback issue that Dominic just reported on and whether in fact the fact that corporations themselves have been I believe the largest net buyers of equity so far this year.
Whether that is a sign of strength in the market or a sign that — well, we better buy because nobody else particularly wants to?
LEFKOWITZ: I think stock buybacks can have a short-term impact on a company’s share price. But I think over the weeks and months, what is more important is the earnings per share. And what that means per earnings per share growth over time.
And what the buybacks do is they do reduce the share count that companies have outstanding and that tends to boost earnings per share growth a little bit. At a market level, it has an impact of about 1 to 2 percent of a boost to earnings per share of growth.
So, that’s how I would think about it. It can have a little bit of a short-term impact but over a longer term. It’s beneficial in a small way for the stock market.
GHARIB: All right. So, David, what is going to drive stocks to go higher? Today is a down day. We have some milestones recently on the S&P 500. But what’s going to drive the markets and, you know, what’s your overall take on the markets for 2014 so far?
LEFKOWITZ: So, I think what is going to drive markets is it always comes down to earnings. And earnings this year we believe will be up about 8.5 percent, and that’s probably going to be about the type of gains we see for the market over the course of 2014. And so far, we’re really pretty much on pace for that.
We’re up — including dividends, we’re up about 4 percent so far this year. Annualized you’re getting close to that high single digit number that I mentioned for earnings growth.
In the first quarter, earnings came in even better than I think many people thought growing 6 percent and that’s with the weather being a significant negative impact. And I think as you go forward through the rest of the year, you’re going to see a pick-up as the weather becomes less of a factor.
In conjunction with valuation which looks relatively normal, I think we can look to earnings to be the primary driver of market gains over the balance of the year.
MATHISEN: Forgive me, Dave, if I’m being a little dense here, but let’s talk about earnings growth in the context of large share buybacks. If McDonald’s (NYSE:MCD) goes out and pulls $20 billion worth of shares out of its share count, and then, a year from now, I see that its earnings per share are up x percent, are they really up x percent or is it merely that — and are their profits growing? Or am I really growing profits by reducing as a number of shares over which those profits are displayed?
LEFKOWITZ: It’s a fair question, Tyler. I think the first thing I would point out is that about half of the share of the $20 billion will go to dividends. So, about half of the $20 billions will go to share repurchases.
But, at the end of the day, if I’m a shareholder in, say, the S&P 500, what I want to know is what will be my earnings for each share that I own in the index. And if the number of shares outstanding are going down because of corporate actions, that does tend to boost my earnings growth rate and that’s ultimately what I care about as a shareholder.
GHARIB: David, I want to follow up on something that you put out on a report today talking about select over-solds opportunity. You mention a bunch of stocks, everything from Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO)!, to Blackstone Group, saying that many of these stocks have been over-sold recently and these are opportunities for investments — for investors.
Tell us a little bit more of what your message is here.
LEFKOWITZ: So, we put out this report because we were responding to — if you recall back a few months ago — the big momentum sell-off and people were scratching their heads about what was causing that. And I don’t think we even know essentially why stocks really fell during the months of March and April in those kind of high momentum areas of the market.
So, what we thought it was an interesting place to look given that the market is at an all-time high roughly. And where should people be looking to invest right now? We thought it made sense to look at some of those stocks that may have gotten hit in the momentum sell-off. But the fundamentals are still quite good.
So, we found 18 stocks where fundamentals are good in the sense that earnings estimates for these companies have actually increased over the last three months. They were sold off in the momentum sell-off. And our analysts like them.
So, that’s how we came up with this list of 18 stocks.
MATHISEN: Are you at all worried about what is going on in the bond market with bonds now at 2.46 on the 10-year. What does that tell you, what should we infer from that about the direction of stock prices?
LEFKOWITZ: Tyler, this is the question that everybody has been talking about. I think there have been a number of factors that have been leading to the decline in bond yields. I think the factor that probably makes them — has the greatest weight in my mind is that investors are beginning to price in the fact that the Fed is not going to raise rates to the extent that it usually does, in a tightening cycle.
So, I don’t think it means that the growth outlook is necessarily any worse. What it probably does mean, though, is interest rates are not going to — the Fed is not going to raise interest rates as much as we originally thought they were going to.
MATHISEN: All right, David, we have to leave it there. Thank you so much for being with us.
David Lefkowitz at UBS Wealth Management.
Valeant Pharmaceuticals has raised its bid for Allergan (NYSE:AGN), the company that makes Botox and other wrinkle smoothers. The Canadian drugmaker is now offering $58.30, plus stock, for each Allergan (NYSE:AGN) share. That could be worth more than — get this — $49 billion. That smooths a lot of wrinkles.
Shares of both companies were down in today’s session, Valeant by 2 percent, Allergan (NYSE:AGN) by more than 5 percent.
Meg Tirrell is on the story for us.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Valeant today raising its bid for Allergan (NYSE:AGN) by about $10 a share, to a total of about $166 based on Valeant’s closing share price yesterday.
Now, that offer also includes what is known as a contingent value rights or a CVR, tied to the performance of a pipeline action (ph) of Allergan (NYSE:AGN), the drug for macular degeneration.
CEO Mike Pearson spoke with us after the presentation to investors today here in New York City, saying that investors may have been looking for a higher bid and that’s why the stock went down today after the presentation.
J. MICHAEL PEARSON, VALEANT CEO: We were expecting a much higher offer. And if we had a higher offer then maybe this deal would have been completed more quickly. But, we’re going to remain financially disciplined and believe this is a great deal for both sets of shareholders, that’s what we heard from both sets of shareholders. But my primary responsibility is to Valeant shareholders and we’re not going to overbid for this asset.
TIRRELL: Valeant also fighting back today to some claims that Allergan (NYSE:AGN) has been making, saying that its business model is unsustainable, that its growth is not organic, but rather derived from price increases on its product, and it doesn’t know how to manage global brands like Allergan’s.
Now, Valeant also drew a lot of comparison with Busch and Lomb, one of its bigger acquisitions recently, saying that’s a good model for how to integrate Allergan (NYSE:AGN). Now, the question becomes that Valeant have to raise the bid again, or does it take the offer directly to Allergan (NYSE:AGN) shareholders, it could take a while. And Mike Pearson telling us today they’re willing to wait.
In New York, for NIGHTLY BUSINESS REPORT, I’m Meg Tirrell.
GHARIB: Well, there could be another deal in the works, this one in the lucrative medical device industry. Shares of Britain’s Smith & Nephew soared on speculation that its American rival Stryker (NYSE:SYK) would make a take-over bid. Then, Stryker (NYSE:SYK) said it’s not making an offer and ruled out bidding for six months. The stocks slumped, but it wasn’t over yet. Shares of Smith & Nephew, a perennial takeover target, rose again when Wells Fargo (NYSE:WFC) indicated that it might be interested.
Smith & Nephew ended the trading day up more than 3 percent. Stryker (NYSE:SYK) also rose by nearly 3 percent.
MATHISEN: Housing isn’t as hot as it was a year or so ago, but the high-end home builder Toll Brothers (NYSE:TOL) is doing just fine, thank you. Toll’s revenues rose nearly 16 — 67 percent, excuse me, during the start of the critical spring selling season.
Diana Olick has more now on why homes for the affluent are selling and what it says about housing in general.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For luxury home builder Toll Brothers (NYSE:TOL), it was a banner quarter. With its average selling price of 22 percent, the Pennsylvania-based company said it more than doubled its quarterly profit.
DOUGLAS YEARLEY, TOLL BROTHERS CEO: We love our niche. We love the luxury end.
The buyers don’t have mortgage problems. Twenty percent are all cash. Those that get a mortgage put 30 percent down. Their decision to buy is more of a discretionary decision.
OLICK: The average selling price of a Toll Brothers (NYSE:TOL) home came in at just over $700,000, which is fast becoming the sweet spot for sales. In April, sales of homes priced under 100,000 fell, while those priced higher rose, according to the realtors. The biggest jump was in million dollar plus homes, up over 5 percent from a year ago.
MICHAEL ALDEFER, REDFIN AGENT: It’s easy to say that being rich makes life easier. But it does give you a flexibility financially and time-wise that other people just don’t have.
OLICK: Real estate brokerage Redfin looked at the very top of the market, the priciest 1 percent and found sales up 21 percent this year. While in the rest of the market, the 99 percent, sales were down nearly 8 percent.
YEARLEY: We’re not dependent upon the kid coming out of the apartment who can’t afford his first house.
OLICK: The wealthiest buyers either pay cash or can qualify easily for a mortgage, while others struggle to make down payments and meet debt requirements.
Witness mortgage requirements to purchase a home last week down 14 percent from a year ago. On the bright side, mortgage rates hit their lowest levels in a year.
BILL PULTE, PULTE CAPITAL PARTNERS: There is no doubt it’s a psychological effect, especially if your young people, right, if they think about their longer term obligations being able to meet it — obviously having interest rates below 4 percent, below historically, obviously, if let’s say 5 percent or 6 percent.
OLICK (on camera): If those rates continue into the summer, we could see sales heat up again. One thing is certain, though, this recovering housing market is far more sensitive to even the slightest rate move than ever before.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
GHARIB: Coming up on NIGHTLY BUSINESS REPORT: insurers want to bring in the cost of drugs. And one of the nation’s biggest is taking its plan right to the doctors. Will it work and what does it mean for you?
GHARIB: Shares of Michael Kors waivered between Red and Green all day, despite a strong earnings report. And that’s where we begin tonight’s “Market Focus”.
The luxury retailer said quarterly profits jumped nearly 60 percent, thanks to a big increase in sales across all regions. It gave an upbeat full-year outlook but warned of margin pressures as it expands aggressively in Europe.
But despite the volatility, Michael Kors shares rose more than 1 percent, closing at $97 a share.
It was a completely different story for shoe retailer DSW (NYSE:DSW). Shares of that stock plunged after the company posted earnings that missed estimates and it cut its full year earnings forecast. It blamed bad weather and aggressively promotional environment for the miss. The stock tumbled 27 percent to $23.62.
And today, investors got a chance to react to a new rating on Tesla stock. Standard & Poor’s labeled Tesla a, quote, “vulnerable investment” and gave it an unsolicited, quote, “non-investment grade,” corporate debt rating of a B-minus. S&P cited the automaker’s narrow product focus and concentrated production profit. Shares of Tesla were up a fraction to close at $210.24.
MATHISEN: Shareholders of Chevron (NYSE:CVX) rejected a proposal to split the roles of chairman and chief executive. Both positions are currently held by John Watson. Shareholders voted against a non-binding, say, on executive compensation and a proposal that would have required Chevron (NYSE:CVX) to disclose more fracking information. Shares of the company fell slightly to $122.52.
Koch Industries will take PetroLogistics private, in a deal worth more than $2 billion. This will give the Koch control of a plant that can convert cheap U.S. shale into propylene, which is a key ingredient in plastics. Shares of PetroLogistics surged, up more than 10 1/2 percent to $14.30.
And shares of Vivus (NASDAQ:VVUS) popped on news the company’s biggest shareholder, Aspen Investment Fund, is planning to buy the company for $640 million. Aspen reported a 10 percent stake in the drugmaker today and said it plans to submit a non-binding buyout offer in June. Vivus (NASDAQ:VVUS) was up 6 percent to $4.95.
GHARIB: WellPoint, the nation’s second largest insurer, has a new plan to rein in costs. According to today’s “Wall Street Journal”, WellPoint will start paying oncologists $350 per month for each patient who is on the insurer’s recommended treatment. The plan is being viewed by some as transformational. By others, as controversial.
Joining us now to discuss this, Dr. Sam Nussbaum. He’s the chief medical officer at WellPoint.
And also joining us, Craig Garthwaite, assistant professor at Northwestern University Kellogg’s School of Management, where he specializes in health care.
Gentlemen, thank you so much for joining us on this very important issue.
Dr. Nussbaum, let me begin with you, because this is a program that you’ve overseen.
Everybody wants to cut costs, understand that insurers want to do this, hospitals want to do this. But when you think about someone’s cancer treatments, it just doesn’t seem like a one size fits plan will necessarily work. Each person is different.
Why do you think this is going to work? And do you expect any pushback on this from doctors and patients?
DR. SAM NUSSBAUM, WELLPOINT CHIEF MEDICAL OFFICER: Susie, I’m pleased to speak with you about something as important as cancer care. We know that cancer can be a devastating illness and yet it can be one that is treated.
We took on cancer care because number one, we know that about a third of individuals with cancer don’t receive state-of-the-art care. We also know there are just breathtaking new gnomically targeted therapies that we want patients to have. Yet, we believe that the current payment model doesn’t allow physicians to always prescribe the most cost-effective, the most clinically effective and the most patient-centered therapies.
This program will begin to make a difference, a program where we’re paying an enhanced fee for doctors to use, evidence care. And there are 60 different clinical pathways. This is not a one size fits all approach at all. These are specific treatments, developed by the nation’s — some of the nation’s leading oncologists that will guide the very best care.
MATHISEN: Craig Garthwaite, do you buy what Dr. Nussbaum just said? In other words, that this plan to incentivize doctors to follow a certain protocol will actually improve care?
CRAIG GARTHWAITE, KELLOGG SCHOOL OF MGMT. ASSISTANT PROFESSOR: So, I think overall it is good that we’re trying to get a handle on what we spend on cancer drugs. We spent about $100 billion a year on these medications. It’s one of the fastest rising categories. And this is the step towards that, because right now, we see a sweeping variation in how doctors prescribe care, not all of which is attached to clinical outcomes.
That being said, I think we do have a little bit of note of caution here, and that this is only going to be effective to the degree that we have insurers competing with each other to make sure we’re providing cost-effective care, not just low-cost care.
And so, we want to have a robust and competitive insurance market that allows patients if they’re unsatisfied with the decision their insurer makes to vote with their feet and move to another insurance company.
GHARIB: You know, Craig, a few weeks ago, we were you were on our program and we were talking about this new move towards referenced pricing, where hospitals — where insurers are going to put a cap on what hospitals can charge for various procedures like hip replacement, knee replacement, things like that.
And it just — and now, this thing with cancer care and from the point of view of the consumer/patient, there is this feeling of kind of like price controls that are coming into the U.S. health care system.
What are your thoughts on that? Are we moving towards that?
GARTHWAITE: So, it’s very clear we’re not moving towards price controls, which I think sort of the government coming in, and by fiat saying this is what we’re going to pay. Instead, what we’re really having here is a robust market place. And so, it’s good that insurers are going to push back against pharmaceutical companies and the prices they want to charge.
And as long as we have a robust set of insurers competing on this, this could be the good outcomes. But there are markets in the United States where the insurers have a lot of power. We need to be careful in those markets that insurers are making the best choices for the customers and customers being patients.
MATHISEN: Dr. Nussbaum, in today’s “Wall Street Journal”, you’re quoted as saying that the payments for physicians are insured — aimed at insuring that the best drugs and the best protocols are being compensated and that we’re creating, quote, “revenue neutrality so better care can be given.”
Forgive me, Doctor, but I think that when a lot of people hear that they think it is a big for-profit insurer, selling them a big of goods. Specifically that that insurer is potentially more concerned about its earning stream and maybe about the $17 million pay package for the company’s CEO, than it is about my individualized care. Why are they wrong to think that way?
NUSSBAUM: Well, Tyler, first of all, this is a voluntary program. Every oncologist can continue their current treatment patterns using the drugs that they find most effective for their patients. But today, remember that oncologists make about 70 percent of their revenue for their practice based on a percent of the drugs they prescribe.
All we’re saying is let’s create a democratization over pricing. Let’s give the doctors the path ways developed by their experts the opportunity to make as much money and give the right care for their patient.
GHARIB: All right. I’m so sorry, Dr. Nussbaum, to cut in, but we have to leave it there. Very interesting conversation. Thank you so much.
Sam Nussbaum with WellPoint and Craig Garthwaite with Northwestern University Kellogg’s School of Management.
GARTHWAITE: Thank you.
NUSSBAUM: Thank you.
MATHISEN: Up next, a future is in focus as the biggest names in technology show off their wares in southern California. We’ll show you what you need to know.
MATHISEN: It’s been talked about for weeks and now, it’s official, Apple (NASDAQ:AAPL) is buying Dr. Dre’s Beats. Apple (NASDAQ:AAPL) will pay $3 billion for the headphone and streaming company, most of that in cash. Apple (NASDAQ:AAPL) is trying to reinvigorate its iTunes music app as people stopped buying albums and single recordings and pay for streaming services instead.
Apple (NASDAQ:AAPL) was just one hot topic in southern California today where some of the big names in technology are gathering at the code conference. It’s hosted by news Web site Recode.net.
And as Julia Boorstin tells us, the big names have some big plans for our future.
JIMMY, ROBOT: Hello, everyone. I’m being excited to be here today for the Inaugural Code Conference.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Taking the stage to give a peek into Intel’s future, Jimmy, the chip company’s 3D printed robot set to go on sale by the end of the year with a consumer version available for around $1,600. The high SN version going for $16,000.
Also speaking at the Code Conference, Google (NASDAQ:GOOG) co-founder Sergey Brin, making big news, unveiling a prototype for a fully self-driving car. It’s electric, with no steering wheel, accelerator or brakes. Brin says it aims to make it easier and more affordable to get around, and solve problems like the hunt for parking spots.
SERGEY BRIN, GOOGLE CO-FOUNDER: We’ve worked with partners, like in the Detroit area, in Germany, and California, we used automotive suppliers. So this is using car parts that are kind of standard, but sometimes we’ve modified them to our needs first —
UNIDENTIFIED MALE: But how about the whole body?
BRIN: Yes, we’ve worked with partners, auto manufacturing firms that have helped us with the body.
BOORSTIN (on camera): Here in Code, there is a lot of excitement about the product Microsoft (NASDAQ:MSFT) says will hit the market by the end of this year. Skype’s real-time translator.
New Microsoft (NASDAQ:MSFT) CEO Satya Nadella said he is focused on building platforms and building software for productivity, showcasing new technology to enable people to conduct business across languages around the globe.
SATYA NADELLA, MICROSOFT CEO: What happens is you want to teach English. It learned English. Then you teach it mandarin, it learned Mandarin. But then it becomes better at English, and then you teach it Spanish, it gets good at Spanish, but it gets great at both Mandarin and English, and quite frankly, none of us know exactly why. It’s brain like in the sense of its capabilities —
BOORSTIN: Among the media moguls and tech titans here, Twitter CEO Dick Costolo. And while his company’s (AUDIO GAP) around 30 percent year to date, (AUDIO GAP) on the company is bullish.
DICK COSTOLO, TWITTER CEO: I can’t focus or spend my time paying specific attention to the short-term fluctuations in the stock market. I try to focus on the long-term view of building a really durable business, a lasting business. And that includes making sure we’re investing into growth.
BOORSTIN: For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin at the Code Conference in Palos Verdes, California.
GHARIB: And one programming note, CNBC parent NBC Universal (NYSE:UVV) is an investor in Recode’s parent, Revered Digital, and the companies have a content-sharing arrangement. And of course, CNBC produces NIGHTLY BUSINESS REPORT.
MATHISEN: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Tyler Mathisen. Thanks for watching.
GHARIB: And I’m Susie Gharib, have a great evening, everyone. We’ll see you tomorrow.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.