SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Apple (NASDAQ:AAPL) tops the targets. But does it have a revolutionary product in the pipeline that will wow investors and consumers?
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Battleground stock. Herbalife (NYSE:HLF) shares have their best day ever as the market concludes investor Bill Ackman failed to deliver what he called a “death blow” to the company.
HERERA: Split decision. Two courts issued different rulings on a central component of the president`s health care law — subsidized premiums.
MATHISEN: All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, July 22nd.
HERERA: And good evening, everyone. I`m Sue Herera, filling in this evening for Susie Gharib.
MATHISEN: And I`m Tyler Mathisen. Welcome, everyone.
Stocks rose today and they got a boost from positive earnings, strong economic data and easing worries about the global economy and how it might be affected by international conflict. Add it up and it was enough for the S&P 500 to reach a fresh intraday high before pulling back ending two points away from an historic record close.
After the closing bell, attention turned to the latest quarterly earnings from the tech bellwether and the most valuable public traded company on the planet, Apple (NASDAQ:AAPL). Apple (NASDAQ:AAPL) made $1.28 a share excluding items and that topped Wall Street estimates by a nickel. But revenue was slightly lower than forecast, despite selling 35 million iPhones, 13 million iPads and nearly 4.5 million Macintosh computers. Shares were volatile in late trading after closing up nearly a percent, 1 percent in regular session.
Julia Boorstin joins us now from Los Angeles with more on Apple (NASDAQ:AAPL)`s earnings.
Julia, take the numbers apart for us. What did you see?
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, Tyler, for Apple (NASDAQ:AAPL), it`s really all about the number of devices it sold. IPhone sales grew 13 percent year over year to 35.2 million, showing that Apple (NASDAQ:AAPL) is keeping ahead of new rivals and thriving particularly in Brazil, Russia, India and China, where CEO Tim Cook says iPhone sales rose in those four countries 55 percent.
But it is a different story for the number of iPad sold. The number of tablets that Apple (NASDAQ:AAPL) sold declined more than expected to 13.2 million, and is down also from 14.6 million in the year ago quarter.
Growth is expected to continue to struggle this quarter with the company projecting revenue that`s lower than Wall Street expectations. The June quarter is traditionally Apple (NASDAQ:AAPL)`s quietest ahead of fall product announcements and now, the focus is really turning to what new products Apple (NASDAQ:AAPL) has in store, with eager anticipation for new iPhones, as well as wearables.
Sue, maybe we`ll see watch. Back over to you.
HERERA: It could be, Julia. And we`re going to come back to you in just a moment. So, sit tight. Stay right there.
In the meantime, with Apple (NASDAQ:AAPL) solid results out, analysts and investors are focused on Apple (NASDAQ:AAPL)`s future and the game-changing products in the pipeline at a time when CEO Tim Cook is firmly putting his stamp on the new Apple (NASDAQ:AAPL).
Josh Lipton has more.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): There is a lot of excitement about Apple (NASDAQ:AAPL)`s next generation of products expected to be in stores this fall. From the iPhone 6 to the Apple (NASDAQ:AAPL) iWatch, the company is poised for a big fourth quarter.
BRIAN WHITE: We expect the iPhone 6, a 4.7 inch and a 5.5 inch. We go to China a lot, I think that`s going to be very important in Asia, as well as elsewhere in the world, but especially Asia and China, and then iWatch we think is a fall watch. So, I think those are two very, very exciting new products.
LIPTON: And as Tim Cook steps outside of the shadow of Steve Jobs, he`s starting to make Apple (NASDAQ:AAPL) his own. Cook has now been at the helm of Apple (NASDAQ:AAPL) for nearly three years and insiders are putting his performance in context. The company`s income statement is one way. Under his watch, the annual`s Apple (NASDAQ:AAPL) revenue has jumped nearly 60 percent and its profits by 40 percent. Apple (NASDAQ:AAPL) stock since August 2011 is up about 75 percent, besting the S&P 500, but lagging the NASDAQ.
But beyond just basic stock performance and financial metrics, Cook is also making changes at Apple (NASDAQ:AAPL) that are having a big impact on the company`s leadership and culture.
WHITE: I think he`s a little more deliberate. He`s a little more data-driven. Steve Jobs is more of a visionary, had a great gut and created a phenomenal company. And now, Tim Cook has to carry that on and what does Tim Cook always say? He says our North Star is creating great product. He has kept that culture at Apple (NASDAQ:AAPL) and I think that`s very, very important. That`s the most important thing he could have done and he`s done it well.
LIPTON: Cook is also comfortable welcoming big personalities into the Apple (NASDAQ:AAPL) family. Dr. Dre and Jimmy Iovine are now Apple (NASDAQ:AAPL) employees after Apple (NASDAQ:AAPL) bought Beats for $3 billion. And Angela Ahrendts, former Burberry CEO, now leads the company`s retail operations.
And Cook is turning old foes into new friends, recently announcing a new partnership with IBM bringing a suite of business apps to iPhones and iPads.
(on camera): At the end of the day, though, Apple (NASDAQ:AAPL) will be judged on whether it continues to make and sell fantastic products.
When I speak to Tim Cook, he`s clearly excited about the company`s product pipeline. We`ll soon find out if investors and consumers are equally enthusiastic.
Josh Lipton, NIGHTLY BUSINESS REPORT, Cupertino, California.
MATHISEN: Well, Apple (NASDAQ:AAPL) was not the only tech giant out with earnings this evening. Revenues rose for Microsoft (NASDAQ:MSFT) in the fourth quarter, even though profits fell. That was mostly due to cost associated with absorbing Nokia (NYSE:NOK)`s handset business which it finally acquired in April.
The world`s largest software company made 58 cents a share, excluding items. That was a 2 cent miss on the forecast number. Revenue, though, up from a year earlier topping $23 billion, and that one comfortably beat Wall Street estimates. Shares were a little change in after hours trading, as you see on that graphic there.
Back with us again, Julia Boorstin in L.A.
What`s the one key takeaway do you see there with Microsoft (NASDAQ:MSFT), Julia?
BOORSTIN: Well, Tyler, the big news was Microsoft (NASDAQ:MSFT) lost related to its Nokia (NYSE:NOK) acquisition, that dragged earnings lower than expected. The company also says its job cuts of up to 18,000 employees that it announced last week, about 14 percent of its workforce will result in pretax charges of up to $1.6 billion over the next four quarters.
But CEO Satya Nadella says this is all part of the plan as the company pivots from a focus on software to selling online services, apps and devices. To that end, Nadella says the company`s changes in the wake of the Nokia (NYSE:NOK) acquisition, its move to the Cloud is paying off. Nadella saying that commercial Cloud revenue is doubling again this year, to a $4.4 billion annual run rate.
Back over to you, Tyler.
MATHISEN: Julia Boorstin, thank you very much.
HERERA: Well, Ty, stocks ended higher today, getting some help from strong earnings, as well as existing home sales, rising better than expected 2.5 percent in June and consumer inflation staying in check last month, up just 3/10 of 1 percent.
Here`s how the major averages look at the close of trading. The Dow was up 61 points, the NASDAQ up 31, and the S&P added nearly 10, closing just two points away from another all-time high.
MATHISEN: Well, not all earnings reports delighted investors today. Some mixed numbers from some top commercial brand names are revealing a lot to investors about the changing tastes and resources of U.S. consumers.
Sara Eisen has more.
SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The big consumer company results say more about the major shift in consumer tastes. According to the CEO of Hain Celestial, the organic food company —
IRWIN SIMON, HAIN CELESTIAL CEO: Healthy eating is spreading across the world today.
EISEN: McDonald`s, for instance, is hurting as consumers stay away from fast food. Same stores sales falling 1 1/2 percent during the quarter in the U.S. and down 3 1/2 percent in June alone. Analysts say it says much more about McDonald`s losing touch with its consumer than about the overall economy.
McDonald`s has been introducing menu items like egg white McMuffins and snack wraps. But so far, it`s not working.
What is working? Chipotle. Same store sales for Chipotle leaping 17 percent last quarter, and that came even as Chipotle increased its menu prices for the first time in three years.
The takeaway, fresh food is in. Chipotle is known for antibiotic free meats, organic produce — in other words, it`s on trend.
Another example of changing consumer attitudes, Coke missing the mark on sales because North America and many parts of the world, soda is not growing. Diet consumption is declining, even juices are seeing slow in growth. Instead, consumers are reaching for sparkling water, away from artificial sweeteners like diet soda.
It`s caught a lot of the biggest names in the industry off guard.
SIMON: I look at these big food companies, where they didn`t see the trends moving to and it`s not only natural organ organic. It`s taking sugar out of your product. Salt out of the product, no additives, no stabilizers, no emulsifiers.
EISEN: Campbells Soup, which is struggling with canned soup sales, is playing catch-up, launching hundreds of new products this week, like V8 protein shakes and protein bars, organic soups, smoothies, fruit and veggie snacks, even Greek style yogurt, hitting all of the trends.
(on camera): So, while the economic environment is still tough, the shift in taste and perception of what`s healthy matters even more and it`s separating the winners from the losers this earning season.
For NIGHTLY BUSINESS REPORT, I`m Sara Eisen.
HERERA: Still ahead, why investor Bill Ackman`s much hyped attack against Herbalife (NYSE:HLF) backfired big time today.
But, first, a look at some of the other big names reporting their earnings today.
HERERA: Shares of Herbalife (NYSE:HLF), the nutritional supplement company, had their best day ever today. Shares shot up more than 25 percent, and that`s despite a billionaire investor promising to deliver a, quote, “death blow” today in his long-time battle against the company. Trouble is, that didn`t happen.
Kate Kelly has the story.
KATE KELLY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hedge fund manager Bill Ackman took another big swing at Herbalife (NYSE:HLF) today and seems to have missed. Investors in the nutrition supplement company which sells healthy shakes and encourages better diet and fitness partly through member organized clubs sent shares of the stock way up even as Bill Ackman, who runs the multibillion dollar hedge fund Pershing Square Capital Management described it as a criminal fraud that targets the poor.
In a 3.5 hour presentation, Ackman revealed having spent $50 million to probe Herbalife (NYSE:HLF) among other things by hiring a team of researchers to go undercover at Herbalife (NYSE:HLF) clubs from Queens, New York, to Chile.
Their key findings, that a training program used by Herbalife (NYSE:HLF) has targeted low income people, many of them in the Latino community, and that it costs participants an average of $3,000 before they become bona fide product sellers, something they achieved through required attendance at club meetings, and forced purchases of products they may or may not want to consume.
BILL ACKMAN, HEDGE FUND MANAGER: When you run out of countries, you have to go deeper and deeper when and when you run out of middle class people, you have to go after people who make $2 a day, because there`s $13 trillion of revenue there.
KELLY: But the presentation even seemed to have the opposite of its intended effect, driving the stock to a six-year high. The reason? The investors were expecting an even bigger and perhaps less nuanced revolution.
The day was certainly a win for Herbalife (NYSE:HLF), whose chief financial officer said in an earlier interview that Ackman misunderstood their nutrition clubs.
JON DESIMONE, HERBALIFE CFO: I`m not worried about the substance of what he has. I — you know, there is no doubt that he`s missing the real analysis, the real research. This is anecdotal, is very propaganda-based. I`m not even sure he completely understands clubs, but we`ll listen. What he`s missing is that fundamentally, we`ve got millions of customers that enjoy the product, that use the product, that`s indisputable.
KELLY: Either way, the nutrition supplement company remains a closely watched market battleground.
For NIGHTLY BUSINESS REPORT, I`m Kate Kelly, in New York.
HERERA: Now, a lot of investors may not know it, but there is a good chance that many of them have money invested in Herbalife (NYSE:HLF) stock. Here`s a list of the big mutual funds with significant investments in the vitamin supplement company. Virginia College American Fundamental is a state-run 529 college savings mutual fund, and American Funds NVIT is an insurance fund only available through a variable annuity.
MATHISEN: But it was also a positive day for shares of Verizon (NYSE:VZ), which ended the session higher. The largest U.S. wireless telecom company reported nearly 6 percent rise in quarterly revenue and earnings per share of 91 cents — well, they topped Wall Street estimates by a penny. But the sector this year has been lagging behind the broader market.
Morgan Brennan explains why and whether these stocks are now a good deal for investors.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Despite perceived safety and high-paying dividends, the telecom sector has been underperforming the broader market. So far this year, the sector gained just 4.5 percent while the S&P 500 is up about seven.
Analysts say telecom is trading at its biggest evaluation discount to the S&P in more than a decade.
AMIR ROZWADOWSKI: There are a lot of concerns going on with a broader industry with respect to competition, with respect to some of the M&A transactions that are taking place in the marketplace. And so, that`s adding an additional layer in terms of overall concern that`s keeping valuations where they are today relative to the market.
BRENNAN: But key trends could make some telecom companies more attractive to investors, and they were apparent in Verizon (NYSE:VZ)`s earnings.
First, the growing popularity of tablets. In Verizon (NYSE:VZ)`s second quarter, the number of people who signed up for a tablet data plan quadrupled, offsetting declines in smart phone subscriptions, which is that`s become market harder to grow, with 80 percent of American adults already owning a smartphone.
Second, the return of wire line revenue. Although small, Verizon (NYSE:VZ) posted the first increase in the land line business in seven years. Analysts say companies like AT&T (NYSE:T) which reports tomorrow and frontier communications could start to see similar results as plain old telephone service is replaced by broadband.
ROZWADOWSKI: Our overweight names right now are Verizon (NYSE:VZ), as well as T-Mobile.
BRENNAN (on camera): Another area to watch, cell towers. As more carriers promise faster speeds, companies providing the infrastructure could benefit, names like SPA Communications and American Power, a stock that hit an all-time high just earlier today.
For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.
HERERA: Well, if you have a smartphone, you`ve likely seen a ton of adds on it and now, you should expect to see a whole lot more of them. A new report from E-marketer predicts that revenues from ads running on smartphones and tablets will outstrip those from newspapers, magazines and radio this year for the first time ever.
MATHISEN: And we begin tonight`s “Market Focus” with earnings from three big Dow components, DuPont kicks it off, saw shares fall after it gave a weaker than expected forecast as lower sales in its agricultural business weighed on its earnings and revenue. The chemical and agricultural company did increase its quarterly dividend but that did not impress investors. Shares down a fraction, they finished at $64.95.
Travelers earnings were well below estimates, but its revenue beat forecasts. The insurance company`s results were impacted by catastrophe loses that were higher than the prior year because of wind and hail storms. And that sent shares down almost 4 percent to $91.63.
HERERA: Shares of Dow component United Technologies (NYSE:UTX) fell because of weak order growth and disappointing margins. Its engines business, in particular, saw sluggish performance in the quarter, that despite a rise in earnings and news that the company raised the lower end of its 2014 earnings forecast. Still, the shares fell nearly 2 percent to $110.86.
Comcast (NASDAQ:CMCSA) (NYSE:CCS)`s second quarter earnings topped estimates as it added more Internet customers and it reduced the rate of people disconnecting its video services. The media giant said it saw strong momentum across its cable and content business. That sent shares up 1 1/2 percent to $54.63. Comcast (NASDAQ:CMCSA) (NYSE:CCS) is the parent company of CNBC, which produces this program.
MATHISEN: The Federal Aviation Administration is telling all U.S. airlines not to fly to Tel Aviv for at least the next 24 hours. This after a rocket launched out of Gaza landed near Ben Gurion Airport early today. Germany`s Lufthansa and Air France have also suspended flights for Israel for the time being.
Before that FAA directive was announced, Delta diverted a plane headed to Tel Aviv with 290 persons aboard. They sent it all the way to Paris to avoid the conflict zone.
HERERA: So, how will the escalating violence in places like Tel Aviv and Ukraine impact the aviation insurance industry? With a loss of Malaysia Airlines Flight 17, many are asking, who pays when these acts of aggression happen?
Robert Hartwig, president of the Insurance Information Institute joins us now with some answers.
Robert, welcome. It`s a pleasure to have you here.
ROBERT HARTWIG, INSURANCE INFORMATION INSTITUTE: Glad to be here.
HERERA: Let`s start with are the airlines required to carry insurance against these different types of acts of terrorism or aggression or to simply just safeguard the fleet?
HARTWIG: Absolutely, all commercial aircraft are required to carry insurance. And, typically, they`re going to carry insurance that covers the aircraft itself. They`re also going to be required to carry coverage that protects them against liability losses in the event that people are injured or killed in accidents. Those could be accidents that involve a crash on the ground or the sorts of accidents we`ve seen recently, whether MH370 disappearing off the coast of Australia or most recently, the shooting down of MH17 over the Ukraine.
MATHISEN: Would Malaysia Airlines already have been paid for the loss of those two aircraft in the amounts of probably $90 million to $100-some million?
HARTWIG: Right. A Boeing (NYSE:BA) 777 is typically insured for hull coverage for about $100 million. They have certainly been paid in the event of the MH370 that disappeared in March. The most recent event in Ukraine occurred just a few days ago. However, payment has been authorized on the hull of that aircraft. I don`t know if the payment has actually been transferred at this point, but it has been authorized.
HERERA: Now, what about the passengers? Does, say, Malaysian Airlines then pay out per passenger, and does that preclude lawsuits or not?
HARTWIG: There are international agreements that govern how much carriers have to pay in the event an individual is killed in an airline accident, to the survivors, to the members of the family, and in this case, it`s known as a Montreal Agreement, and that is approximately $175,000 per passenger.
So, Malaysia will begin these payouts, basically very close to immediately to the family members of those who were lost on this flight.
Ultimately, the costs for the most part are born by the insurers of the airline, however, and there are a multitude of insurers who would take part in these losses.
MATHISEN: Who writes this kind of insurance? And is it likely in light of these two tragedies that premiums for this kind of coverage will go up?
HARTWIG: Right, aviation insurance is written in a different way than you and I might insure our cars or our homes, where we take out a policy with an individual insurer. An aircraft, commercial aircraft are written through consortiums. These are groups of insurers that bond together to provide coverage in the event we have losses just like these, which can be very expensive, hundreds of millions of dollars, even billions of dollars per event.
So, they do bond together, and they bond together for different types of losses, and that`s basically how the entire global marketplace works.
Now, what will the impact be? We have had an accumulation of events recently. You can go back to the Asiana flight that crashed in San Francisco last year. You can look at the disappearance of Malaysia Flight 370 in March, and, of course, Malaysia 17 just a few days ago. You combine that with the loss or damage of a number of aircraft in attacks by insurgents in the Tripoli airport in Libya, an attack in Pakistan, and a few other events here and there, and what you have is some pressure on the marketplace.
And yes, at the end of the day losses of this magnitude could impact the cost of aviation insurance on a global scale.
HERERA: Robert, thank you very much for joining us. We appreciate it. Robert Hartwig.
HARTWIG: My pleasure.
MATHISEN: And coming up, two conflicting legal rulings on a key provision of the new health care law and what that could mean for millions of Americans.
But first, more earnings results from some big corporate names. Take a look.
HERERA: A huge auto recall to tell you about. Chrysler recalling nearly 800,000 older-model Jeep Commanders and Jeep Grand Cherokees over an ignition switch problems where contact between the driver`s knee and ignition key can turn the engine off. The automaker said it`s only aware of 100 complaints, one accident, and no injuries related to that problem.
MATHISEN: A pair of conflicting federal appeals court rulings today both over the legality of subsidies given to low and middle class earners living in states on the healthcare.gov insurance marketplace.
White House Press Secretary Josh Earnest says no one will lose their subsidy as a result of today`s court rulings.
(BEGIN VIDEO CLIP)
JOSH EARNEST, WHITE HOUSE PRESS SECRETARY: Right now, there are millions of Americans all across the country who are receiving tax credits from the federal government as a result of the Affordable Care Act that`s making health care more affordable for them. And while this ruling is interesting to legal theorists, it has no practical impact on their tax credits right now.
(END VIDEO CLIP)
MATHISEN: And Bertha Coombs joins us now with more on what this means for the Affordable Care Act.
Let`s start with what the courts did today.
BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: OK. The issue here is whether we`re talking about the letter of the law or the spirit of the law. So the appeals court in the D.C. district, in the D.C. circuit, said the letter of the law and the Affordable Care Act says that these federal subsidies can only be awarded to people who buy their ACA plans on state built exchanges.
Now, if you look at a map, that`s only about 14 states, the District of Columbia, D.C., the rest of the map are states like Texas, like Florida, like Ohio, which are on the federal exchange. That`s what we`re talking about here.
Now, you go over next door in Virginia and the fourth circuit court of appeal says, nope, the spirit of the law is what is intended. They in fact sort of said, it`s akin to sort of saying to somebody, hey, get me a pizza for lunch, you really don`t care whether it`s coming from Domino`s or Pizza Hutt, if you`re getting a pepperoni pizza, that`s the important thing.
HERERA: So, how does this get resolve? Does the Supreme Court become the final arbiter of this? Or do the courts figure it out between the two of them?
COOMBS: It could be — go to the Supreme Court. The next phase, the Obama administration is going to appeal to the full D.C. circuit, because it was a 2-1 decision by the panel. So, now, they`ll go before nine judges.
If those nine judges agree with the majority on the panel, then it will likely go to the Supreme Court because you have two different circuits disagreeing and the Supreme Court will need to resolve it. It`s not going to happen quickly. A lot of analysts say this is going to take a long time.
MATHISEN: And very quickly, if you expect to get or are entitled to a subsidy now, you will get it no matter what. If the Supreme Court ultimately will side with the District of Columbia Appeals Court, would it gut the law?
COOMBS: It would gut the law in that you — a person could say, look, I can`t afford this coverage —
MATHISEN: Without a subsidy.
COOMBS: Without a subsidy.
Ultimately, Congress could change the wording of the law itself but a lot of analysts say, notwithstanding all the political issues, both sides would find that a dangerous issue because it opens everything up.
HERERA: Yes, there is no political appetite for that, whatsoever.
COOMBS: Very interesting day. Bertha, thanks very much. Bertha Coombs reporting.
Let`s look at the shares of some of the biggest health insurers and how they closed today. All of them were higher, Aetna (NYSE:AET) and UnitedHealthcare each up more than 1 percent.
HERERA: And finally tonight, they say that there are 8 million stories in the Naked City, and in the New York, it turns out one in every 25 of them involves a millionaire. A new study by consulting firm Wealth Insight says that about 4 percent of the Big Apple (NASDAQ:AAPL)`s residents are worth at least a million bucks, and the firm defines a millionaire as someone with net assets of more than a million dollars, not including their primary residence.
That counts us out, buddy.
MATHISEN: That`s right. The Big Apple (NASDAQ:AAPL), pretty rich place.
HERERA: We maybe in the Big Apple (NASDAQ:AAPL), but we`re not in that club. That`s right, exactly.
All right. That does it for NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us.
MATHISEN: And I`m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody. We hope to see you back here tomorrow night.
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.