BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Wheeling and dealing. Two deals, one done, and the other possibly totaling a staggering $100 billion.
Off and running. Alcoa (NYSE:AA) kicks off earnings season — the expectations and the realities of this always crucial time period for companies and for investors.
And health rewards. How one insurance company is trying to revive sales and get people into better shape.
All that and much more tonight for Wednesday, April 8th.
Good evening, everybody. I’m Bill Griffeth in for Tyler Mathisen. Sue Herera is also off tonight. So it’s just you and me tonight.
Let’s get to it, shall we? It was a day of mega deals and a potential one. Two deals. Now, if both go through, they would total nearly $100 billion.
First up, the big one. Last night, we told you about Royal Dutch Shell in talks to buy BG Group. Well, today, Shell pulled the trigger, saying that it would buy BG for $70 billion, making it the biggest deal in that industry in more than a decade back when Chevron (NYSE:CVX) bought Texaco in 2000 for $36 billion. Shares of Shell finished the day lower by 3 1/2 percent.
Jackie DeAngelis has more on what this deal means tonight.
JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: A big deal announced in the energy patch today. Royal Dutch Shell buying BG’s roughly $7 billion. It’s the latest energy deal this year and one of the larger of the last decade rivaling when Exxon bought mobile in 1998.
BG is known for both its oil and gas assets. The addition of those assets will boost shell’s portfolio by about 25 percent.
ANDY LIPOW, LIPOW OIL ASSOCIATES PRESIDENT: For shell, the purchase of BG increases their oil and natural gas reserves, as well as their oil production, while BG brings to the table storage and tunneling assets, as well as tankers to move natural gas around the world.
With the lower oil and natural gas, we’ve seen companies like Whiting Petroleum (NYSE:WLL) put themselves up for sale as well as a number of other companies go into bankruptcy so the time is right for more mergers and acquisitions, as we’ll see more consolidation this year.
DEANGELIS: BG’s stock dropped about 30 percent since the oil slide last summer. That and its wide range of assets make it a prime acquisition candidate.
With Shell paying 50 percent premium to try to keep Exxon from making a counteroffer, some analysts are questioning that valuation. But Shell is betting it’s cheaper to make the deal for proven reserves than it would be to spend money looking for new ones.
LIPOW: With the decline of oil and natural gas prices, we’re seeing that it’s cheaper for big companies to actually buy other smaller companies to increase their reserves of production rather than to go out on their own and drill for oil and gas.
DEANGELIS (on camera): With oil prices falling about 50 percent since the beginning of the fly last summer, analysts say that the industry is ripe for consolidation.
Some of the names on the table for acquisition are BP, Anadarko, Apache (NYSE:APA), EOG and Pioneer, just to name a few.
(voice-over): Some analysts think that oil prices have been trying to find a bottom in recent weeks and the time to strike on deals like this is now. Others still argue there’s more pain to come especially as U.S. inventories continue to rise and so does Saudi Arabia’s output.
For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.
GRIFFETH: The other mega deal news of the day: Mylan (NASDAQ:MYL) Labs offering to buy its fellow drugmaker Perrigo (NASDAQ:PRGO) for almost $30 billion. Now, this merger would create one of the world’s top sellers of the generic medications and would further consolidate midsized drug firms. Perrigo (NASDAQ:PRGO) says it has received that offer and it will meet to discuss the proposal with its board.
Perrigo (NASDAQ:PRGO) higher by 18 percent today. Shares of Mylan (NASDAQ:MYL) also rose interestingly. Up about 15 percent. In fact, that — both these companies were the first and second best performing stocks inside the S&P 500 index respectively today.
Well, tonight marks the unofficial start of earnings season with a late report from aluminum maker Alcoa (NYSE:AA). Per tradition, the company earned an adjusted 28 percent of shares, that beat estimates by 2 cents.
But revenue came in a little shy of expectations but it was still higher than a year ago. Shares fell initially in the after-hours trade.
Morgan Brennan joins us now with one of the key takeaways from Alcoa’s earnings.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Good evening, Bill.
Yes, so it was mixed results because shares of Alcoa (NYSE:AA) trade lower in after hours as a result of that. That said, this was a solid quarter for this company, because we saw record results in its upstream metals business, basically the smelting and production of aluminum. That was better than expected, and we continue to see this transition for this company into the sort of value-added higher margins, faster growth manufactured products.
So, that came in a little less than expected in terms of revenue, in terms of profits for some of the products. But still, high volumes for autos, high demand for aerospace. And so, this transition happening for Alcoa (NYSE:AA), it’s continuing. It was a really solid quarter despite the mixed results.
GRIFFETH: I know CEO Klaus Kleinfeld has been trying to cut cost so that they’re not as beholden to the price of aluminum, which can be so volatile. Where are they in that process? Are they finished with that now?
BRENNAN: No, they are not finished with that. They’re continuing. They just announced recently that they’re going to be cutting further smelting capacity in parts of the world. So, they’re continuing to cut back on that and move more into these manufactured products to cater to construction, cater to aerospace, cater to automotives. I mean, pickup trucks.
GRIFFETH: Look at all the pickup trucks that are made of aluminum now. That’s a huge and highly profitable, too, for them.
BRENNAN: Exactly. And for that very reason, you have Alcoa (NYSE:AA) coming out. Also saying they expect demand to grow 6.5 percent this year in aluminum.
GRIFFETH: Morgan Brennan, thanks. See you later.
Elsewhere, earnings season is a big deal for Wall Street, of course. Companies and investors, many pros of a downbeat outlook for the profits right now.
So, what are the expectations for this first quarter season?
Dominic Chu takes a look tonight.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): When it comes to the strength of the upcoming earnings season, the bar has been set low — very low. A poll of Wall Street analysts conducted by Thomson Reuters (NYSE:TRI) is predicting a nearly 3 percent decline in quarterly earnings for S&P 500 companies. If that were to happen, it would be the first decline since the third quarter of 2009 as the nation was trying to emerge from the financial crisis.
QUINCY KROSBY, PRUDENTIAL FINANCIAL MARKET STRATEGIST: We say that every quarter that guidance is important, but guidance could not be more important as we go into this earnings season because of the drawdowns and inestimates, and the weak numbers that by the way the economic data releases that we got in the first quarter.
The market needs to be sure and confirmation is needed that we are pulling out of it and things are going to get better in the next couple of quarters.
CHU: The consensus is that the most earnings growth comes from the financial sector as banks continue to work on improving their overall health and capital positions.
Those things will be in focus a lot next week as some of the biggest names like JPMorgan (NYSE:JPM) Chase, Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) report their numbers.
The biggest drag on corporate earnings growth is expected to come from the energy sector. Perhaps no surprise given the sharp drop in oil prices we’ve seen over the course of the last year.
The question for many investors will be whether or not large companies like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and others are worth looking at given their recent stock slide.
Some experts though are looking beyond the energy stocks for the best opportunities.
HUGH JOHNSON, HUGH JOHNSON ADVISORS CHAIRMAN & CIO: The place that you focus is where we’re getting the best relative performance in the stock market. And interestingly, the place we’re getting the best relative performance are also the sectors of the market which are likely to post solid positive earnings: consumer discretionary. That’s certainly at the top of the list — health care, information technology. I not only think you’re going to have pretty good earnings in those three sectors for the first quarter, but I think for all of 2015 and for that matter, 2016.
CHU: The stock market hasn’t seen a larger scale pullback since 2011 and earnings growth has been behind a lot of the optimism in the overall market. Now, it’s about whether America’s biggest companies can keep that positive momentum going.
For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.
GRIFFETH: Meanwhile, the Federal Reserve released the minutes of its most recent meeting held in mid-March and it turns out beneficials were still split on when to raise interest rates. The timing of a potential rate increase of historically low levels has of course been on Wall Street’s mind for quite some time.
Hampton Pearson has more tonight.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Janet Yellen and fellow monetary policymakers disagreed widely last month on when to begin lifting interest rates from record lows.
Just released minutes from the mid-March meeting showed some policymakers wanted to raise rates in June, others worried about low inflation, favored a hike later this year. Some even said the economy wouldn’t be strong enough for an increase until 2016. The Fed’s benchmark rate has been near zero since December of 2008.
The minutes show policymakers unanimously agree to remove the word “patient” from policy statement.
Policymakers said further strengthening of the job market, inflation moving closer to the 2 percent annual target and international development would all be factors in deciding what lies ahead for interest rate policy.
For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.
GRIFFETH: Well, stocks were moved by those minutes, moved all over the place as a matter of fact, as investors pored over the language that Hampton just told you about. There seems to be a bit of a delayed reaction as the minutes came out as it happened around the same time that guilty verdict for Boston marathon bombing Dzhokhar Tsarnaev came out.
But in the end, the Dow Jones Industrial Average was up by 27 points to close at 17,902. The NASDAQ had good day up by 40 minutes. Mylan (NASDAQ:MYL) and Perrigo (NASDAQ:PRGO) helped that. The S&P also ended higher with a gain of about 5 points.
Elsewhere, the Federal Communications Commission has fined AT&T (NYSE:T) $25 million over several data breaches at three international call centers. It’s the largest data breach security action ever by the FCC. The breach has compromised almost 300,000 U.S. customer names, full or partial Social Security numbers and account information as well. The incidents happened at call centers in Mexico, Colombia, the Philippines, and it happened in 2013 and 2014.
Walmart is appealing a district court decision in Philadelphia tonight that could give one of the retailers small shareholders a bigger say in how the company’s board operates. It’s a decision being closely watched by investor advocates and by big business.
Mary Thompson tells us why.
MARY THOMPSON, NIGHTLY BUSINESS CORRESPONDENT: Business hysteria if Walmart loses the appeal, it will open the door to future shareholder proposals, imposing restrictions on how a company conducts its day-to-day business. Advocates for the suit’s plaintiff say the proposal is about improving board oversight, not disrupting operations.
Here’s the story: last year, New York City’s Trinity Church filed a proposal to be included in Walmart’s proxy. The proposal at the board committee set guidelines to help management decide if a product on the retailer’s shelves is consistent with Walmart’s family and community minded image. As an example, the proposal questioned why Walmart sells semiautomatic rifles but not handguns or music with violent lyrics.
The FCC granted Walmart’s request to omit this proposal from its proxy citing a commonly used exclusion clause barring proposals that could interfere with the company’s day-to-day operations.
In a rare move, Trinity went to court, the SEC’s decision was overturned and if it’s upheld, the SEC may have less leeway to exclude similar proposals in the future and companies fear this will prompt a flood of proposals, corporations would rather avoid than fight.
For NIGHTLY BUSINESS REPORT, I’m Mary Thompson.
GRIFFETH: By the way, a decision is expected on that sometime next week.
Well, Apple (NASDAQ:AAPL) fanatics can finally order the latest i-gear come Friday. That will be the Apple (NASDAQ:AAPL) Watch. But will the long-awaited wearable gadget be a positive for Apple (NASDAQ:AAPL) stock and the company with the largest market cap in the land for every mutual fund as well?
Walter Piecyk is a technology analyst with BTIG. He joins us tonight to talk about this.
Walter, a lot of reviews came out today. They were generally positive. Have you had a chance to look at the Apple (NASDAQ:AAPL) Watch yet?
WALTER PIECYK, BTIG TECHNOLOGY ANALYST: I did when it was first launched, but I only had about 15 minutes to use it. I think what I saw with some of the reviews today, one of the positives were for people that used it longer than 15 minutes, a full week, is that battery life a lot longer than what people expected.
On the flip side, there were some concerns about some of the latency of the product, but I think those were some applications that were very specific for how those reviewers were using the watch.
GRIFFETH: You know, for consumers, it will be a cachet, there’d be a lot of curiosity and so forth. But what about for investors? Does the Apple (NASDAQ:AAPL) Watch matter when it comes to Apple (NASDAQ:AAPL) stocks, do you think?
PIECYK: I mean, it doesn’t matter to the extent that it’s not going to be a primary driver of earnings, meaning that the iPhone is still generating the vast majority of profits. But it does matter in that it’s the first product under Tim Cook as far as him coming out with a new product, and also, it’s a first extension of the iPhone that could lead to people’s view on how they might be successful in the living room or car or other future products they might want to get into.
So, I think it’s a good sign for its product, but not necessarily one that’s going to specifically drive earnings for the company over the course of the year.
GRIFFETH: But you make the point it’s sort of an extension of the iPhone. One thing that’s been clear under Tim Cook’s term at Apple (NASDAQ:AAPL) is that they’re transitioning from a gadget company, if you will, more to a platform kind of a company and the iPhone itself is a platform and the Apple (NASDAQ:AAPL) Watch is that extension, right?
PIECYK: They definitely seem to want to pull you in to their what’s known as the ecosystem, making sure that if you’re using your computer and communicating with your phone or all the different products that they have, and the watches, just another one of those products that makes it harder for you to go and buy an Android phone or BlackBerry, whatever else is out there. If they have you in that ecosystem, they’re going to get you buy more products and more services, which is going to lead to more profit for the company.
GRIFFETH: Walter Piecyk of BTIG, good to see you tonight. Thank you for joining us.
PIECYK: Thank you.
GRIFFETH: Coming up, how would you feel if your life insurance company knew everything about your health in real time, but got a discount on your policy for giving them that information? And will this lead to other companies doing the same?
GRIFFETH: Seemingly good news for the housing market. Mortgage applications rose for the third straight week and with mortgage applications and mortgage rates still low and rents getting ever higher, why aren’t more renters turning into home buyers? The answers may surprise you.
Diana Olick has our story tonight.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): More apartments are going up, but so too are rents.
UNIDENTIFIED MALE: It’s gone up every time we get a lease renewal.
OLICK: Rent growth at the beginning of this year was the highest in nearly four years, according to Axiometrics, thanks to ever more renters.
So, why don’t more renters buy?
UNIDENTIFIED MALE: It’s just we can’t take on that kind of financial burden right now.
OLICK: If you take the costs involved in buying a home today, from down payment to monthly payment, to taxes, even renovations, and compare that to the cost of renting, Zillow figures it takes just two years for a buyer to be paying the same or less than a renter.
The numbers vary market to market. It takes less time in Dallas and the Midwest, more time in California and New York. Still, nearly half of renters surveyed said either their credit or finances keep them from buying a home.
UNIDENTIFIED FEMALE: I would say credit.
UNIDENTIFIED MALE: I just don’t have enough to qualify.
OLICK: Credit scores required to get a mortgage today are far higher than they were even before the housing boom. Researchers at the Urban Institute claim that kept 4 million borrowers from getting loans in the years following the housing crash, when bad loans cost banks billions.
TAZ GEORGE, URBAN INSTITUTE: Lenders became hesitant to extend loans to really any borrowers that had a chance of defaulting because of that heightened loss that they could take from the repurchase risk.
OLICK: Even those renters with good credit say they are already struggling just to pay the rent, never mind save for a down payment.
ANTHONY SANDERS, GEORGE MASON UNIVERSITY: Income has been lower than it’s been in a long time. Therefore, there’s a lot fewer households can now qualify for a loan, so they’re not been applying.
OLICK (on camera): And all the mortgage math aside, 20 percent of renters surveyed said they simply prefer to rent. Even as home sales edge up slightly, we’re not seeing big growth in first time buyers. That is, renters becoming homeowners.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
GRIFFETH: Well, the merger of American Airlines and U.S. Airways is now one step closer to completion and that’s where we begin tonight’s “Market Focus”.
Regulators granted the airline group a single operating certificate marking a milestone in their integration since carriers merged back in 2013. That news means the Federal Aviation administration now recognizes that airline as a single entity. Shares of American rose more than 2 1/2 percent today to $48.74.
And you can expect to see more Disney (NYSE:DIS) movies in IMAX theaters. Those two companies have renewed their movie exhibition deal through 2017 covering releases from Disney (NYSE:DIS), Pixar, Marvel and Lucas Film, including blockbuster hits like those “Star Wars” movies that are going to be coming out.
Shares of Disney (NYSE:DIS) rose a fraction to $106.36. IMAX was 3 percent higher to $36.33.
Strong prescription sales helped Rite Aid (NYSE:RAD) beat profit estimates. Revenues also topped estimates, but the drugstore chain offered a full year outlook below street estimates. Still, shares rose by 2 percent to $8.87.
And Tesla has announced an upgrade of its flagship Model S. The new electric car features a larger battery pack and all-wheel drive features now. That car starts at $75,000, that’s Tesla’s lowest price model, by the way. Shares were up 2 percent to $207.67.
And shares of Pentair (NYSE:PNR) went the other direction after the company disappointed investors with its guidance. The industrial machinery firm slashed its first quarter earnings estimates, citing strong dollar and lower than expected oil and gas industry demand. That stock fell by 3.5 percent to $62.21, making it, by the way, the worst performer in the S&P 500 index today.
And Triumph Group (NYSE:TGI) announced some management changes. The aerospace engineering and components makers CEO is stepping down to be replaced on interim basis by the company’s founder. The board is searching for permanent CEO candidate. Shares popped by 8.5 percent as a result to $65.06.
John Hancock is hoping that you’re willing to live a healthier lifestyle for a lower life insurance premium. For the first time here in the U.S., the life insurance company is offering as much as a 15 percent discount in exchange for tracking your health and physical activities. Will this open the door for others in the industry to do the same?
Tom Scales is a research director with Celent.
Good to see you, Tom. Thanks for joining us tonight.
TOM SCALES, CELENT RESEARCH DIRECTOR: Happy to be here.
GRIFFETH: I know they do this now in South Africa. It’s been very popular over there. You get a Fitbit on your wrist. It can track your activity. The more activity, the cheaper your life insurance. That’s basically what John Hancock has in mind, isn’t it?
SCALES: It’s broader than that, but that’s the fundamental. It’s an incentive program to get to live healthier for your benefit and lower premiums.
GRIFFETH: Will this increase sales? I know sales and life insurance have been stagnant for a bunch of years. This feels gimmicky to me. What do you think?
SCALES: You know, I really don’t think it is. The industry has been in the telematics on the PNC side. There’s opportunity on the life side as well. People are motivated by both good health and lower premiums. So, it seems like something that will catch on. It certainly has in South Africa, moved to the U.K., and now, it’s in the U.S.
GRIFFETH: And who are they going after? I mean, who is the demographic, they think? Is it the younger crowd that’s less likely to want to buy life insurance otherwise?
SCALES: You know, the younger crowd certainly is going to be very amenable to getting an opportunity to have lower premiums, but I think if you look around any mall, people walking around, you’re going to see Fitbit on people of all ages. So, I think their target is pretty broad.
GRIFFETH: We already see that’s the case.
What about privacy issues? Inevitably, that will come up when they’re gathering this kind of information about your activity at some point. Will there be privacy issues facing the life insurance companies?
SCALES: I really don’t think so. The information they gather is fairly small and very innocuous. Let’s face it. The information about your exercise patterns is not something that the average hacker is going to be going after.
So, the information is pretty bland. So, I don’t really see an issue there at all. I’d certainly personally be willing to give them that information.
GRIFFETH: And it’s starting there with John Hancock, do you think others will follow through? Are they going to be watching this carefully to see if this moves their sales, right?
SCALES: You know, I think they will. It may take time. Our industry doesn’t move at a fast pace, but look at frequent flyer programs, it’s not dissimilar. It’s an incentive program to reduce your cost with a minor giveback.
So, I think others will follow. Vitality is certainly a first. I wrote a paper last fall talking about the potential for this and actually use them as an example.
So, I think there’s a lot of opportunity in the industry, shake it up a little, and do something new and interesting.
And let’s face it, Hancock is a great start. They’re a company of a high reputation. So, that lends a lot of credence to it.
GRIFFETH: They are no slouch.
Why have life insurance policy sales lagged over the years? What’s going on there?
SCALES: You know, there’s a lot of industry issues. But really, the issue I see more than anything else is the economy.
Let’s face it. For the last five years, people’s disposable income has dropped. And so, if you’re focusing on whether you’re going to buy food, you’re going to pay your electric bill, you’re going to pay your rent, or you’re going to pay your life insurance, one of the first things you’re going to drop is your life insurance.
So, I certainly hope and believe that the economy turnaround is going to turn around the life insurance industry as well.
GRIFFETH: And you think this will move the needle for them on sales?
SCALES: You know, it’s different. It’s exciting but it’s also optional. So, you can buy products from Hancock and the others using vitality with the program or without the program. So, it’s really a choice of the consumer.
GRIFFETH: Tom Scales with Celent, which by the way is an insurance consultancy firm. Thanks for joining us tonight, Tom.
SCALES: Happy to be here. Thank you.
GRIFFETH: Coming up, the $300 million slice of the meat industry that some people just cannot get enough of — the booming business of bison.
GRIFFETH: By the way, here’s a look at what to watch tomorrow, he said. We will look at the health of a labor market with initial jobless claims. Greece’s next major debt repayment to the International Monetary Fund is due. That will be interesting to see how that works out — all coming Thursday, something to watch for.
Finally tonight this Wednesday, it’s the meat that’s in a bull market. The one that people are willing to pay more for, double digits per pound and I’m talking about bison. But even though things seemed fine, ranchers are running into some obstacles.
Jane Wells has more out there where the buffalo roam.
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It’s America’s original protein and now it’s hottest. Bison puts the paleo in the paleo diet.
KEN CHILDS, STAR B. BUFFALOR RANCH: I love to have some more animals here.
WELLS: Ken Childs has been raising bison for decades at the Star B. Buffalo Ranch east of San Diego, and he’s watched the market grow steadily despite bison meat’s high costs. Grass fed ground buffalo meat could cost $12 a pound, stakes could be three times that.
The industry, though, predicts over $300 million in sales this year, up 7 percent. As high end or health conscious consumer choose bison for its leanness. Even the federal government buying some for the school lunch program.
(on camera): But despite growing demand for bison meat, ranchers here in California are running up against a different situation — an epic drought.
CHILDS: We depend on the rainfall for our grass to grow. And if we don’t get that grass, that means we simply got to cut back on how many animals that we can keep on the property.
WELLS (voice-over): The buffalo roam over this land with less grass to eat. So, Ken Childs is shipping some in?
CHILDS: It seems like for in this part of the country, most people rely on alfalfa for supplemental feed, and the Japanese market tends to drive that to where so much of it is exported from this region of the country. We pay a horribly high prices for alfalfa when we need to purchase it.
WELLS: He’s willing to pay because bison is bull market, but don’t expect it to replace beef completely as what’s for dinner. The USDA still classifies these animals as wild game. Many slaughterhouses will not handle them, and there’s not enough to work altering the facilities for these large animals. Last year, an estimated 67,000 bison were processed which sounds like a lot, but twice as many beef cattle are processed every day.
For NIGHTLY BUSINESS REPORT, Jane Wells, Ramona, California.
GRIFFETH: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Bill Griffeth. Thanks so much for watching, everybody. Have a great evening.
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