Transcript: Nightly Business Report – October 17, 2016

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue
Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: House of games. Netflix
(NASDAQ:NFLX) shares soar on a strong quarter, as people around the globe sign up to watch its original                                                                     shows.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Ballot battle. Why the
fight to lower the price of prescription drugs is playing out not only on
the campaign trail, but also in the state of California.

HERERA: Ambitious plan. Pepsi pledges to trim the fat and the salt and
the sugar from many of its popular products.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Monday,
October 17th.

MATHISEN: Good evening, everyone. And welcome.

A trifecta of earnings tonight from a hot digital media company, a cool
blue chip, and a big bank.

And we begin tonight with blockbuster results from Netflix (NASDAQ:NFLX).
The digital media outfit crushed earnings expectations, and added a lot
more international and domestic subscribers that many thought they would.
The company says people are signing up for it service to watch its lineup
of new and original shows.

For the quarter, Netflix (NASDAQ:NFLX) earned 12 cents a share. That was
double forecast. Revenues rose 31 percent to more than $2 billion, and
with that, the stock took off, rising as much as 20 percent in initial
after hours trading. Julia Boorstin has more on what drove Netflix`s
strong quarter.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Netflix
(NASDAQ:NFLX) beating across the board of subscriber numbers far exceeding
expectation, as the company`s price hike proves not to be hindering its
subscriber growth at all. Netflix (NASDAQ:NFLX) adding nearly 3.6 million
new subscribers, 3.2 million of them coming from overseas, bringing its
total subscriber count to nearly 87 million worldwide. And the fourth
quarter is looking equally rosy.

Netflix (NASDAQ:NFLX) forecasting it will as a far better than expected 5.2
million new subscribers, saying that these results are driven by excitement
around its original content. In the past quarter, it`s hit “Stranger
Things” and the second season of “Narcos” in particular, as these results
push the company to continue to invest even more in producing its own
original content.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA: And now to IBM, which saw revenue fall for the 18th consecutive
quarter. And this came despite growth in its cloud and artificial
intelligence units. Big Blue earned $3.29 a share, that was 6 cents above
estimates. Revenue came in at $19 billion, slightly lower than a year ago,
but it was the smallest drop in revenue in more than four years. As for
the stock, it was volatile in after-hours trading.

Josh Lipton has more on IBM`s results.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Eight billion dollars,
that was one big number in IBM`s latest report, and that refers to revenue
in a company so-called strategic imperatives, where those emerging growth
areas, like cloud technology, analytics and security, and that did
represent growth of 15 percent adjusting for currency.

JMP`s Greg McDowell, an IBM bull, says that number is critical for Big
Blue, because when it comes to IT spending, that is where the growth is and
where it competes with other tech giants like Amazon (NASDAQ:AMZN) and
Microsoft (NASDAQ:MSFT), those strategic imperatives now represents some 40
percent of the company`s revenue.

The question for an investor, though, when will those new business lines be
big enough to offset the older ones?

For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.

(END VIDEOTAPE)

MATHISEN: Let`s turn now to David Garrity for more reaction to the tech
earnings out today and what the results may mean for you and your money.
He`s principal at GVA Research.

David, welcome.

Let`s start with IBM. What did you think? What was the strong point and
the weak spot?

DAVID GARRITY, GVA RESEARCH PRINCIPAL: Well, for IBM, you know, it`s been
a long four and a half years for CEO Ginni Rometty to be overseeing a
company that`s been seeing its revenues really do nothing but decline.
Now, granted, the strategic initiatives getting up to a 40 percent of total
revenues and showing grow of 15 percent year over year is impressive. But
in the technology sector, you have to look at companies that are out there
that are growing earning — you know, revenues on the factor of anywhere
from, say, 30 to 50 percent.

So, even though IBM obviously, a very, very large blue chip company is
seeing growth in these areas, it`s still lagging other companies whose
market caps are not necessarily all that different in size in terms of
their revenue growth. Obviously from that standpoint, IBM, a laggard, has
done well in the market, in terms of perception so far this year. But
we`re not surprised to see some profit-taking here after hours.

HERERA: So, how do they change that? They have been acquisitive. Do they
buy that growth in the form of another company, David, or do they have to
keep trying to turn it around organically?

GARRITY: Well, they`ll have to do both. I mean, certainly, what we`ve got
with respect to their artificial intelligence offers with Watson, and the
extent to which that is being licensed in a wide range of partnerships,
it`s certainly very promising for the company. But at the same time, IBM
has been an aggressive acquirer and will continue to be so.

We don`t necessarily think that IBM is going to get great value if they`re
to go out and acquire one large company. So, in that standpoint, it`s
going to be a matter of being patient if you`re an IBM investor and seeing
them piece it together. We think that they will get to that point, because
we think the artificial intelligence is certainly a substantial future
market, and probably IBM is the least expensive way for investors to have a
way to effectively play the growth in artificial intelligence.

HERERA: Quick thought on Netflix (NASDAQ:NFLX). You`ve called yourself a
skeptic on that company. Did today`s numbers change your view? Well, it
certainly made Netflix (NASDAQ:NFLX) a more expensive stock than it was
before, trading at about 50 times its earnings before interest, taxes and
depreciation. Certainly commend the fact that they are out there growing
their subscribers as they are. They do have limitations overseas in terms
of trying to penetrate markets like China.

But we think that, you know, when people look at Netflix (NASDAQ:NFLX) as
an investment, the fact that the company said they want to raise original
content programming from 600 hours this year to 1,000 hours next year,
granted, obviously that`s going to take investment dollars. They have
indicated they`re going to lever up. And obviously, there`s no guarantee
that every show they put out is going to be a hit.

At the same time, there are other companies that are out there such as
Amazon (NASDAQ:AMZN), with its prime offering, which is also moving into
original content. So, Netflix (NASDAQ:NFLX) does not have the field to
itself.

MATHISEN: All right. David, thank you, as always. Great to see you.
David Garrity with GVA Research.

GARRITY: Thank you, Tyler. Thank you, Sue.

HERERA: And now to Bank of America (NYSE:BAC), the second-large bank by
assets reported its first profit increase in three quarters. And it comes
despite a drag from continued low interest rates. Bank of America`s
results were held by an increase in trading revenue just as JPMorgan
(NYSE:JPM) and Citibank were last week.

And on the conference call, CEO Brian Moynihan sounded optimistic.

(BEGIN AUDIO CLIP)

BRIAN MOYNIHAN, BANK OF AMERICAN CHAIRMAN & CEO: We saw better client
activity driving the best third quarter result we`ve had in five years in
investment banking and in sales and trading. And we`re doing that with a
smaller balance sheet, fewer people and lower value at risk or VAR.

(END AUDIO CLIP)

HERERA: Shares of Bank of America (NYSE:BAC) rose slightly in trading
today.

MATHISEN: On Wall Street, stocks close lower as oil prices fell, and
investors evaluated those quarterly results we`ve been talking about.
Economic reports were in the mix too and so were comments from a Fed
official. We`ll have more on that in just a moment. The Dow Jones
Industrial Average fell 51 to 18,086, NASDAQ dropped 14, and the S&P 500
was off six.

HERERA: Output at manufacturers increased for the third time in four
months. Factory production rose 2.4 percent in September, and that rebound
last month was led by the production of construction supplies and petroleum
products. But a separate report on manufacturing in New York state showed
a contraction for the third straight month. New orders and shipments and
employment all fell.

MATHISEN: Federal Reserve vice chair, Stanley Fischer, says the economy is
very close to the Fed`s employment and inflation targets. Speaking to the
Economic Club of New York, the Central Bank`s number two also warned of the
dangers of low interest rates.

(BEGIN VIDEO CLIP)

STANLEY FISCHER, FEDERAL RESERVE VICE CHAIR: Low interest rates make the
economy more vulnerable to adverse shocks that could put it into a
recession. Operating close to the effective lower bound limits the room
for Central Banks to combat recessions, using their conventional policy
tool, that is by cutting the policy interest rates.

(END VIDEO CLIP)

MATHISEN: Mr. Fischer added that low rates can threaten financial
stability, though he does not think that threat exists right now.

HERERA: October, as you probably know, is an historically volatile month.
But so far, this October is turning out to be relatively calm. And that
may be just what investors do not want.

Mike Santoli explains.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Even after some
choppiness in past with, the stock market has been uncommonly calm so far
in the typically unsettled month of October. The S&P 500 index has traded
in a narrow range this month and is less than 3 percent off its record
high. Investors looking for a nice fourth rally should probably be wishing
for some more nervous trading and a deeper pull back in the second half of
the month.

That`s because pronounced October weakness is often the setup for a strong
finish for the year. The average returns since 1970 has been 3.9 percent.
In the past 25 years, an October pullback of at least 3 percent when stocks
weren`t already in a bear market has led to an even better fourth quarter
gain near 7 percent on average. The bear market bit is significant. In
2000, and in 2008, with the U.S. economy in recession, an October dropped
preceded further declines.

Last year offer a bit of a counter example. October was unusually strong,
the stocks rising 8 percent as the markets recovered from the deep late
summer selloff. If the index has peaked in early November and the market
went on to suffer a nasty correction into February.

Of course, the seasonal factors are simply broad tendencies and not laws of
nature. Corporate earnings results now being reported will help dictate
the direction of the market, along with the direction of bond yields and
whether the Fed`s expected December rate increase generates much financial
stress. But history suggests a good October scare that drops the market 3
to 6 percent can give way to a strong sprint into the New Year.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.

(END VIDEOTAPE)

MATHISEN: Look at all those people having fun there.

Still ahead, pricing pressure. California tackles the rising cost of
prescription drugs with its own ballot initiative this November. But what
is the right way to fix the problem?

(MUSIC)

HERERA: Visa`s CEO is stepping down. Charles Scharf says he can no longer
spend the time in San Francisco necessary to do his job effectively and
wants to be closer to his family in New York. Former American Express
(NYSE:EXPR) (NYSE:AXP) president Alfred Kelly will take over the top job at
the world`s biggest payments network starting on December 1st.

MATHISEN: Fellow Dow component Caterpillar (NYSE:CAT) will also see a
change at the top. CEO Doug Oberhelman will retire earlier than expected
and step down at the end of the year. He has been with the company for 41
years. He`ll be replaced by Jim Umpleby, the current head of Caterpillar`
engine business.

HERERA: Pepsi is making some big changes. The company not only wants to
cut sugar, but it`s also making a commitment to the environment.

Sara Eisen talked to CEO Indra Nooyi about her newly outlined long-term
strategy.

(BEGIN VIDEOTAPE)

SARA EISEN, NIGHTLY BUSINESS REPORT CORRESPONDENT: PepsiCo is setting some
ambitious goals for itself. It`s all in response to both consumers eating
healthier and increased regulatory pressure to cut salt and sugar.
Specifically, PepsiCo now says two-thirds of its beverages will have no
more than 100 calories from added sugar per 12 ounces by 2025.

“Beverage Digest” says that`s about 40 percent for Pepsi so there is work
to do and there are risks. Cost, for one, and also that it the company
also wants to cut salt level and saturated fat in Frito Lay Chips, Doritos
and other salty snacks.

INDRA NOOYI, PEPSICO CHAIRMAN & CEO: That`s a challenge, because people
love fried snacks. We had to really invest in tech to reduce the saturated
fat level. It`s still taken us a while, but now, we`ve done two things.
We are trying on snacks in many countries in heart-healthy oils and we have
a technology breakthrough, significant technology breakthrough, which is
now commercially being adopted in China, which is a new frying technique,
which actually reduces saturated fat levels by about 20 percent, and
increases capacity of machine by 25 percent.

EISEN: Pepsi has been moving away from carbonated soft drinks and cola at
a time when Coke is doubling down.

In terms of snacks, Mondelez, a company behind Nabisco and Oreos, says it
is cutting sodium and saturated fats by 10 percent by 2020.

So, companies are setting their own targets, and moving to follow the
consumer. That includes efforts on sustainability as well, something Pepsi
is laying out.

NOOYI: We have been maniacally focused over the past decade, and would be
over the next decade, to reduce the water use in our operations and ensure
the entire community around us is water positive. And that`s our goal. To
make sure that we get welcomed into communities and society not shut down
by communities and society.

And by doing so, we actually save money, because we don`t have to pay for
water to run our operation. Our sustainable initiative has saved us $600
million I would say to you, environmental sustainability is not a nice to
do, it`s a fantastic profit-driving initiative, which also is the right
thing to do for society.

EISEN: As a result, a better bottom line performance, Pepsi`s stock is up
7 percent so far this year, outperforming many of its competitors in food
and beverages. And today, we got a big-picture view at how the company
wants to keep that up in the future.

For NIGHTLY BUSINESS REPORT, I`m Sara Eisen.

(END VIDEOTAPE)

MATHISEN: United Continental` results fly above expectations and that`s
where we begin tonight`s “Market Focus”.

Despite seeing a drop in profit and sales, the airline did manage to beat
analysts` estimates. The company also reported a narrow than expected drop
in passenger unit revenue, but said it expects that to fall between 4
percent and 6 percent this quarter. Shares ended the day down fractionally
at $53.0 3.

Supervalu said it plans to sell its discount grocery chain, Save a Lot, to
an equity firm for more $1 billion. Last year, the supermarket operator
said it was considering spinning off that division. Supervalu shares rose
nearly 6 percent to $5.30.

Tesla and Panasonic (NYSE:PC) have signed a nonbinding letter of intent to
manufacturer and produce solar energy products, but there`s one caveat.
The electric car maker said the agreement only goes into effect if Tesla`s
proposed acquisition of SolarCity receives shareholder approval. Tesla
shares were down 1 percent at $193.96.

Hasbro (NYSE:HAS) topped sales estimates, thanks to strong demand for the
company`s line of Disney (NYSE:DIS) dolls and Furby toys. Hasbro
(NYSE:HAS) also benefit from stores increasing their product inventories
ahead of the holiday shopping season. Profit is also better than expected.
Shares up 7 percent on the day to $81.82.

HERERA: Charles Schwab saw profit and revenue rise as an increase in fees
and brokerage accounts helped results top analyst expectations. Shares
were off nearly 1 percent to $31.69.

Trucking and transportation company J.B. Hunt saw its earnings take a hit,
due in part to weak demand for services and a rise in driver wages. The
company also said higher maintenance costs contributed to the worse than
expected profit. But overall revenue did rise. Shares, though, fell
almost 2 percent to $78.45.

Constellation Brands (NYSE:STZ) will sell its Canadian wine business to a
pension fund for nearly $800. The parent of Corona Beer and Svedka Vodka
says that it plans to buy several brands from a private wine company for
$120 million. Shares finished the day down 1 percent to $167.13.

MATHISEN: The high price of prescription drugs is not only a hot topic
nationally, but also particularly so in California, where this weekend,
Vermont Senator Bernie Sanders campaigned in favor of a controversial
ballot initiative, that h would help lower prices.

But as Meg Tirrell reports, not everyone is in favor of it.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s called the
California Drug Price Relief Act and support may be gaining steam heading
into Election Day. Also known as Prop 61, the act would bar California
state agencies from paying more for prescription drugs than the U.S.
Department of Veterans Affairs.

The V.A. is allowed to negotiate with drug companies, something Medicare,
for example, can`t do. And proponents of the bill say it could save
Californians more than $5 billion over ten years. Proponents to include
Senator Bernie Sanders who rallied in support of Prop 61 in San Francisco
on Saturday.

SEN. BERNIE SANDERS (D), VERMONT: Stand up to the greed of the
pharmaceutical industry, which is charging us, by far, the highest prices
in the world for prescription drugs, while they`re making tens of billions
of dollars in profit every single year. That`s wrong.

TIRRELL: It`s shaping up to potentially be the most expensive ballot
initiative ever seen in California, with more than $100 million donations.
The vast majority of which oppose the measure. Some of the biggest
opposition funders, big pharma, Merck (NYSE:MRK), Johnson & Johnson
(NYSE:JNJ), and Pfizer (NYSE:PFE) lead the way. But those opposing the
bill also include veterans who fear the result wouldn`t be lower prices for
everyone, but higher prices for them. That drug companies would respond by
eliminating some of the discounts that now go to the V.A. and major
California newspapers have both weighed in against Prop 61, citing
potential unintended consequences.

TERRY HAINES, EVERCORE ISI: You have a real divide on policy. Republicans
both nationally and in many states, seeing the issue as one where they
don`t want to limit research and development as opposed to supporters of
ballot initiatives like this who just want to flatten the prices,
regardless of whatever the other impacts might be.

TIRRELL: But many Californians support the bill. Two polls done in July
and September put support at almost 70 percent among state voters.
Opponents say that`s a dangerous position.

KATHY FAIRBANKS, NO ON PROP. 61 COALITION: Polls were taken a number of
weeks ago, and we think that when they take a look at the details in
Proposition 61, they`ll recognize that this is a flawed initiative that
won`t work.

TIRRELL: The financial impact to pharmaceutical companies though may be
limited if Prop 61 is passed, according to RBC Capitals. Its research
shows a decrease in revenue of about 2 percent in 2017 and 2018, a
reduction stipulated in Prop 61 were stretched to all 50 states, something
RBC sees as unlikely.

But the political focus on high drug prices looks like it`s not going
anywhere any time soon.

For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.

(END VIDEOTAPE)

HERERA: So, with California getting in on the battle to stem soaring drug
prices, is this the best solution, letting states fix the problem or should
it come from the federal government instead?

Michel Mellow is a professor of law and professor of health, research and
policy at Stanford University, and she joins us now to talk about that.

Professor, welcome. It`s nice to have you with us tonight.

MICHELLE MELLO, STANFORD UNIVERSITY: Thanks.

HERERA: I guess the question we`re posing is, we know we have a problem
with soaring drug prices — is it better to be federally-mandated or state-
mandated?

MELLO: Well, as in many areas of health policy, the types of initiatives
that we`re seeing out of states are not the first best solution, but
they`re the solution that appears to be politically feasible at this
particular moment in time.

MATHISEN: I assume that`s because there is no consensus in Congress or
between the administration and Congress on how to handle this.

I`d like to go to the question in front of the voters, is Proposition 61.
And one of the concerns is those unintended consequences. In other words,
if you reduce prices for the state workers in California for retirees,
current employees, people who receive Medicaid assistance and so forth,
that somewhere, somehow the prices are going to go up, maybe even for
veterans in California, as a result of this.

Do you share that view, or worry?

MELLO: Well, I think any economist would share that worry. The fact of
the matter is, there`s not one drug price in the United States. There are
hundreds of drug prices. And without regulation that prevents companies
from raising prices in one part of the market when they` forced to
constrict them elsewhere, there`s always the prospect that companies will
game the system, when one payer pays less, another payer pays more.

HERERA: Do you k the industry, if indeed this proposition does pass in
California, they have been under an enormous amount of scrutiny and
criticism, because of soaring drug prices. Do you think it might act as a
deterrent to them if this proposition passes so that they don`t continue to
raise prices, or not?

MELLO: You know, it would be great if the industry saw initiatives like
this as a strong signal from the public that they need to take voluntary
action to rein in cost growth. I`m not convinced that will happen. I
think where we seen action by the industry, it has been in response to a
very discreet and acute outcry, for example, like the EpiPen pricing by
Mylan (NASDAQ:MYL). And it`s also been very limited in nature.

Companies have adopted solutions to attempt to respond to public concerns
like offering discount coupons. But at the population level, those
solutions don`t tend to save us money. In fact, they may cost us money.
So, while I would love to see an industry-lead solution here, I`m not
optimistic based on what we ha seen so far.

MATHISEN: You began the discussion with a very interesting answer. You
said that this is a solution, but probably not the best solution.

What would be the best solution in your view?

MELLO: Well, drugs are a national market and it calls for a national
solution. But Congress in its wisdom, when it passed the Medicare Part D
Act back in 2003 chose to explicitly state in the law that Medicare was not
going to be permitted to negotiate the price of drugs, as it does for other
services.

This is really an extraordinary step to take. I know you said there`s no
consensus in Congress about how to do it, but there was a consensus and the
consensus is, let`s devolve that responsibility to hundred and thousands of
individual pharmacy benefit managers.

So, that creates a very fragmented market, where each manager and each
payer is pitted against one another, and we`re not able to effectively
negotiate prices. So, there are a number of strategies that our Congress
could consider that other countries have pursued that would still maintain
a lot of our market approach, but impose some discipline on a very
undisciplined market.

HERERA: Professor, thank you very much for joining us tonight.

MELLO: Thank you.

HERERA: Professor Michelle Mello with Stanford University.

Coming up, extreme makeover. A classic and iconic home is taken into the
21st century.

(MUSIC)

MATHISEN: They are the iconic homes of San Francisco, the Painted Ladies
as they`re known. And now one of the Victorians is getting a very modern
makeover.

Aditi Roy has our story.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT: At first glance, this
iconic Victorian house in San Francisco has stayed remarkably the same
since it was built in 1892. The newest owners have preserved the gas lamps
and ornate chandeliers reminiscent of the era.

But on the roof of the house, you`ll find something unmistakably modern —
solar panels use to capture the sun`s energy and power the home.

COME LAGUE, HOMEOWNER: We`re big believers in sustainable energy and
renewable sources of energy so we thought, wouldn`t it be great to get
solar on this house.

ROY: Come Lague says he and his wife chose to go solar, because it also
makes financial sense.

Sunrun, the solar company that the Lagues hired to make the switch, says
they offer the installation to their customers for free, as long as clients
agree to let Sunrun manage their electricity for 20 years.

The company says by going solar, the average customer reduces their month
electric bills by 20 percent.

LYNN JURICH, SUNRUN CEO: The benefits for going solar first are cheaper
electricity. You don`t have to compromise to switch over to solar. And
that`s news to a lot of people.

ROY: The Lagues are part of a growing trend. The solar energy industry`s
association reports 1 million Americans currently have residential solar
power. And the group projects the solar industry will grow 85 percent year
over year.

Part of the reason for the explosion of growth is a government`s tax
credit, which went into effect the end of 2015 and has been extended
through 2019. The Lagues hope by switching over to solar power, they`ll
show other potential customers that sometimes, even the most traditional
home need something new.

LAGUE: Having a solar system on the roof really doesn`t impact us day-to-
day. Just feel good about the power that we consume.

ROY: They`ve also included other modern technology in this historic home,
outfitting it in smart tech, like a dual zone furnace and even an automatic
wine dispenser.

For NIGHTLY BUSINESS REPORT, I`m Aditi Roy, San Francisco.

(END VIDEOTAPE)

HERERA: What a beautiful home.

MATHISEN: Yes, lovely place.

HERERA: Really pretty.

That does it for us tonight on NIGHTY BUSINESS REPORT. I`m Sue Herera.

MATHISEN: And I`m Tyler Mathisen. Thanks very for joining us. Have a
great evening, everybody. We`ll see you back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post
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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
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