Transcript: Nightly Business Report – October 18, 2016

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

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Inside Intel. The Dow component beat expect, but its revenue guidance disappoints. And shares move initially lower.

Getting more for less? Are investors better off over the long run buying index funds that track the market or picking stocks?

Sales sizzle. Domino Pizza brings in more orders through smartphones than from walk-ins or phone orders, as the company’s big bet on technology pays off.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, October 18th.

Good evening, everyone. I’m Tyler Mathisen. Sue Herera has the evening off.

Well, earnings dominated this day. Four Dow components reported their quarterly results. But we begin with Intel, which released its figures after the closing bell. The world’s biggest chip maker reported a rise in revenue help by improving PC demand but its outlook for sales, its outlook, was below expectations and that pressured the stock in initial after-hours trading.

Intel earned 80 cents a share. That’s 7 cents better than estimates. Revenue exceeded expectations and was up more than 9 percent from last year.

Josh Lipton goes inside Intel.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: $4.5 billion, that was one big number in Intel’s latest earnings report and it refers to the revenue that Intel generated in its DCG business or chips for data centers. That business is a play on the cloud. When cloud providers build out their data centers, they rely on Intel to provide the processors that power those servers.

CJ Muse of Evercore ISIS notes that Intel did see growth of 10 percent, which was the bogey it needed to hit. Muse says the open question, though, is whether Intel could sustain that growth rate into the fourth quarter.

For now, the analysts notes that investors are reacting to a more immediate concern, though, a disappointing Q4 outlook from the chip-maker.

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

(END VIDEOTAPE)

MATHISEN: Intel joins three other Dow components today in reporting earnings. UnitedHealthcare, Goldman Sachs and Johnson & Johnson. All three companies beat Wall Street forecasts, but for very different reasons.

(BEGIN VIDEOTAPE)

MATHISEN: UnitedHealth Group raised its outlook f the rest of the year, part of a somewhat healthier outlook of health care, if sales rose 12 percent from a year ago. That spike driven by growth at Optum, United’s fast-growing primary care business that aims to put clinics in more than 75 major markets.

United also says it paid out less to cover claims, while revenue from both employer base and individual plans grew.

United’s Affordable Care Act plans lost about $200 million in the third quarter, though only about $80 million of that actually impact earnings, because much of it was covered by a reserve. The company has said it will withdraw from most of its health law marketplaces next year. Almost 1 million people are enrolled in United’s ACA plans.

Johnson and Johnson grew global sales by more than 4 percent in the third quarter and posted record profit to boot. Drugs driving J&J’s growth, but its top seller, Remicade, a rheumatoid arthritis treatment, is being challenged now by Pfizer, which plans to sell a cheaper version. J&J is fighting to protect its patent and prevent the launch. Last year, J&J sold had $4.5 worth of Remicade. Some analysts predict the competition could cut sales by as much as $1 billion next year.

DOMINIC CARUSO, JOHNSON & JOHNSON CFO: We think the launch is an at-risk launch, because we intend to defend our intellectual property vigorously. We also have competed in a market place with Remicade, which is very crowded market place, lots of discounting, lots of competitive entries. So, we know how to compete in this marketplace very well. The product has done very well for quite some time and also, we have a very broad portfolio in immunology and across the entire pharmaceutical business.

MATHISEN: Goldman Sachs continued a good run for the big banks, its third earnings jumped 47 percent from a year ago, easily beating predictions with a profit of more than $2 billion. Revenues up to about 19 percent.

Like its competitors, Goldman, saw a big increase in its Wall Street trading business, especially in fixed income. Again, thanks in part to the Brexit fallout. Stock trading revenue up slightly about 2 percent.

(END VIDEOTAPE)

MATHISEN: Shares of UnitedHealthcare soared on its quarterly results. Goldman Sachs also a little bit higher, as you see right there. And shares of J&J fell.

Well, those stronger than expected quarterly results held lift the stock market. Gains from UnitedHealthcare offset a decline in shares of IBM, following its earning report, which we brought to you last night.

The Dow Jones Industrial Average added 75 points to finish the day at 18,161. NASDAQ, which was helped by nearly 20 percent gain in Netflix rose 44, and the S&P 500 added 13.

Well, Yahoo released its quarterly results this day and they top forecasts. CEO Marissa Mayer says she is confident in the value of Yahoo’s core business as the company prepares to integrate with Verizon. The deal with Verizon had been questioned following the disclosure of a massive data breach at Yahoo.

The embattled company, Yahoo that is, earned 26 cents a share, 6 cents above estimates. Revenue up 6 percent from a year ago to more than $1.3 billion.

As for the stock, it was higher in initial after-hours trading.

Deirdre Bosa has more now on Yahoo’s quarter.

(BEGIN VIDEOTAPE)

DEIRDRE BOSA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Finally, a bit of a good news from Yahoo. The troubled Internet company beating earnings expectations. The real focus, though, is on its pending deal with Verizon and whether there’s any possible fallout from its massive security breach.

Yahoo cancelled its conference call this quarter, due to the acquisition, and all we got relating to Verizon in the breach was a short statement in the release from CEO Marissa Mayer. She said, “We are busy preparing for integration with Verizon, and we take deep responsibility in protecting our users and the security of their information. We’re working hard to retain their trust.”

But before you get too excited about the beat, note that Yahoo! beat on cost cuts, not growth and its business.

For NIGHTLY BUSINESS REPORT, I’m Deirdre Bosa, San Francisco.

(END VIDEOTAPE)

MATHISEN: Blackrock, the world’s largest asset manager, reported a drop in revenue for the third quarter. The reason, fewer clients are investing in high revenue actively managed funds, which are run by portfolio managers who buy and sell securities. Blackrock CEO Larry Fink says his industry faces a tough environment as investors flock to those lower cost index funds. But Fink says active investing it far from dead.

(BEGIN VIDEO CLIP)

LARRY FINK, BLACKROCK CHAIRMAN & CEO: We’re a believer in active. We had $10 billion of active inflows in fixed income. So, in equities, we did have outflows on the active side. Work continuing to invest in our active portfolios. We’re using maybe different methodologies. We’re using more big data. We’re using factors. So, we’re looking at different techniques to try to earn the return after fees that our clients are demanding.

(END VIDEO CLIP)

MATHISEN: Well, Blackrock’s Fink may be right about active investing, but the “Wall Street Journal” today question whether picking stocks is a, quote, “dying business”. The newspaper points out that investors poured more than $1.3 trillion into passive or index funds over the past three years. Meanwhile, they pulled more than a quarter trillion from actively managed funds.

And judging from the percentage of funds that beat their index benchmarks, actively managed funds have badly underperform the indexers in virtually all time periods over the past 25 years.

Jason Zweig, columnist at “The Wall Street Journal”, co-wrote the article in today’s paper.

Good as always to see you. Do you really believe that the business of picking stock is dying?

JASON ZWEIG, WALL STREET JOURNAL COLUMNIST: Well, I think it’ going to be a slow death, Tyler. I think it’s kind of like a species’ extinction, you know? Ask any dinosaur. It didn’t happen overnight.

You know, we would expect that this is going to be a slow process that has already started and will take a long time to unfold. And I don’t think active management is going to disappear. I think it’s going to continue to dwindle slowly for the foreseeable future.

MATHISEN: It’s certainly not a growth business, or hasn’t been over the past few years. Why are people switching, simply put, and it’s not just people. Individuals, it’s a lot of big institutions switching from active to passive?

ZWEIG: Yes, exactly. You know, one of the big surprises for us in working on this story was the giant institutional investors that we spoke to who are just kind of — as they kept putting it to us, they’re feed up. They’re feed up with underperformance, high fees, and sort of the kind of storytelling and excuse-making that a lot of active managers have been providing their clients in lieu of performance.

And there’s no question that active management can outperform. The real problem, I think, is that people feel they’re not really getting value for the fees they’ paying.

MATHISEN: One of the things that I was interest to read in your article was that trial lawyers are stepping in and pressing lawsuits to force big institutions to move money from active to passive. Explain it.

ZWEIG: Yes, this is — this is something that we have been seeing increasingly popping up in two areas, Tyler. One is in 401(k) and other employ retirement plan and the other actually is at colleges and universities at their endowments and other benefit plans from employees.

So, you know, the plaintiffs’ lawyers are putting these institutional clients on notice that they need to demonstrate that they — the performance they are obtaining through an actively managed fund is superior after fees to what they could get from an index fund.

MATHISEN: You know, we all want to be in Lake Woebegone and be above average, Jason.

ZWEIG: Yes, exactly.

MATHISEN: I know the feeling. And indexing feels like settling for average. If you wouldn’t mind, what do you do with your money? Are you an indexer exclusively? Or in your 401(k), do you go with the active guys?

ZWEIG: I’m almost exclusively index, Tyler. And I have been for a long time. I think even back when you and I first met each other, I was predominantly indexed.

You know, for most investors, it’s a low maintenance, low cost way to capture the returns of the market without incurring the risk that a manager might wander off the reservation or not earn back the fees.

MATHISEN: Or you were a step ahead of me way back when, Jason, and you still are.

Jason Zweig with “The Wall Street Journal” — good to see you.

ZWEIG: Thanks, Tyler.

MATHISEN: To the economy we go. The price as consumers pay for just about everything rose at their fastest pace in five months. Rising gasoline, rent and medical costs pushed the consumer price index up 0.3 percent in September. Over the past 12 months, prices are higher by 1.5 percent — the fastest rate in nearly two years.

Well, Social Security recipients will be getting an increase next year, but it’s a small one, very small. Your check will grow by — sit do for this — 0.3 percent.

According to the Social Security Administration, that puts the average monthly Social Security benefit next year at $1,360. That’s about $5 more than it is now. The agency will also raise the maximum amount of earnings subject to Social Security tax to $127,200 from $118,500. That starts in January, and is a 7 percent increase.

New leaked e-mails revealed that Hillary Clinton’ team had a long list of potential running mates, including a number from the business world. Starbucks CEO Howard Schultz, Apple CEO Tim Cook, and Bill and Melinda Gates to name a few. But in the end, she chose Senator Tim Kaine, who on an interview on CNBC, said a Clinton administration would seek to strengthen regulations on Wall Street.

(BEGIN VIDEO CLIP)

SEN. TIM KAINE (D), VICE PRESIDENTIAL CANDIDATE: We are very, very committed. With respect to Wall Street, that the kinds of abuses that led the American economy to go into a freefall, you know, at the end of the last administration, we’re not going to tolerate that again. And we’re going to make sure we keep protections and guard rails in place so that the American public is protected.

That doesn’t mean we’re not going to listen. That doesn’t mean we’re not going to try to make the regulations really work in practicality and not just in theory. But the differences between the two tickets on this is very, very sharp. We’re going to maintain Dodd-Frank and try to strengthen it, and the other guys want to get rid of it.

(END VIDEO CLIP)

MATHISEN: Mr. Kaine added that regulations would be fair and enable the economy to grow, in his view, in a sustainable way.

Still ahead, food by smartphone. How Domino’s became a tech company that happens to serve pizza.

(MUSIC)

MATHISEN: Domino’s Pizza delivered a big quarter, the chain restaurant reported a sharp rise in profits and comes as other fast food rivals warn of slowing sales. Same-store sales at Domino’s soared 13 percent from a year ago, marking the 22nd straight quarter of same-store gains. Those strong results are being attributed to Domino’s adoption of technology, making it easier to place orders on mobile devices, using an app. In fact, 55 percent of Domino’s sales were through smartphones, virtual assistance and other digital channels.

And in an interview on CNBC, Domino’s CEO said the strategy is paying off.

(BEGIN VIDEO CLIP)

PATRICK DOYLE, DOMINO’S CEO: We want to make it very easy for our customers to order for Domino’s, and then once we’ve got them in that environment, we got all of the data, all sorts of things we can do from a marketing perspective to get them to come back, drive frequency, our loyalty program, those things are all playing into this momentum.

(END VIDEO CLIP)

MATHISEN: The stock hit an all-time high during trading today, closing up nearly — well, 5 percent.

Domino’s isn’t the only restaurant company riding the mobility wave. Others such as Chipotle and Starbucks on it, too. But some companies that might benefit by integrating technology better have been slower to climb aboard.

Erik Thoresen is a principal at food and retailing consulting firm Technomic. He joins us now to discuss who’s doing it right and who’s playing catch-up.

What has, Erik, Domino’s done really, really well here?

ERIK THORESEN, TECHNOMIC PRINCIPAL: I think that a lot of operators have a good sense of how the technology works and sort the back end of the technology. I think what Domino’s has done is found ways to make it just slightly more engaging for consumers and that’s made all the difference.

MATHISEN: Others that I can think of that are having some success, I believe we mentioned in the little lead-in there include Starbucks, which has made it easy. You order from your cell phone, you go in and the beverage is there. But I can imagine that there are certain kinds of quick-serve restaurants where this just probably hasn’t worked as well, or companies that haven’t figured it out yet. Can you think of any?

THORESEN: Sure. You know, any restaurant that has a very complex menu, or has a high degree of customization has a little bit harder time implementing this kind of — these kind of technologies.

MATHISEN: So, I mean, at Chipotle, you can have it made your way. But I guess that’s pretty easy.

How about a company like McDonald’s? What have they done in this, and obviously, they’re — they have a different business model. Domino’s is a delivery service, basically. McDonald’s, you’d have to go pick it up and you want the fries crispy. You don’t want them soggy.

THORESEN: That’s right. That’s a good point. Not all food travels well. And so, if you think about McDonald’s business model, you know, they get a lot of their business through their drive-through. For certain locations, certain operators like a Starbucks, it makes sense. It’s a little bit easier to implement. There are a lot more foot traffic going through.

And so, it really depends on the operation, the type of food and also the number of locations and proximities of those locations to consumers.

MATHISEN: You know, you can use your Amazon app really very nicely on your cell phone. Are other retailers — have they been quick or slow and can you name some that just maybe missed the boat here so far?

THORESEN: Well, sure. I think that the — you know, there’s companies out there that have affiliated themselves with something like Google Express, which target Walgreens, just to name a few. Sort of use that platform and that platform is designed to be very efficient and very user-friendly.

Any kind retailer who has a real wide assortment of goods. You know, you can buy pencils or a swing set from a retailer like a Walmart, right? They have different kinds of challenges in terms of how those products are actually shipped out to consumers. And so because of that, they have similar challenges in terms of building online apps.

MATHISEN: Yes, you think of a company like Walmart or a Home Depot, where it might not translate as well.

Erik, thank you very much.

THORESEN: Thank you, Tyler.

MATHISEN: Erik Thoresen with Technomic.

Well, Eli Lily plans to expand health care access around the world and that is where we begin tonight’s “Market Focus”. The drugmaker said it will spend $90 million over the next five years to grow an existing program to provide treatment for diabetes and tuberculosis in areas without access to proper care. But the company’s CEO says this is just the first step.

(BEGIN VIDEO CLIP)

JOHN LECHLEITER, ELI LILLY CHAIRMAN & CEO: If you say the world has 7 billion people, we think Lilly footprint today enables us to reach and effectively provide medicines to about 2 billion. So, this is the focus on the other 5 billion in many parts of the world where we otherwise don’t have much for presence, but can bring a lot of expertise to bear in areas like diabetes and cancer and TB.

(END VIDEO CLIP)

MATHISEN: Shares of Lilly up 24 cents to $78.77.

The India-based online book site, MakeMyTrip, will acquire the rival Ibibo Group in an all-stock deal, making it the largest travel company in the subcontinent. The value of the transaction is not disclosed, but the combined company is estimated to be in the $2 billion range. Shares of MakeMyTrip rocketed higher by 44 percent. Yes, 44 percent to $29.45.

Sprint posted preliminary results today, and they showed an uptick in sales and a narrower loss. The wireless carrier also said it saw postpaid subscriber growth more than double, helped by the company’s big promotions. Sprint slated to report financial results next week. Shares fell 6 cents to $6.86.

Wolverine Worldwide, which owns Sperry shoes and Keds said its sales fell in its latest quarter, but the company did manage to eke out an increase in net profit. Wolverine also says it now expects sales for the year to come in at the lower end of its previously issued guidance. This is because of a tepid consumer environment. Shares off 3.5 percent on the day at $21.26.

Well, China is wooing Hollywood, and now, China’s richest man, the head of that country’s Dalian Wanda Group, is making a big play for a piece of the heart of the American film industry.

Julia Boorstin has our story.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chinese conglomerate Dalian Wanda Group made a big splash and big pitch to lure studios to shoot in the Qingdao movie metropolis, a $5 billion studio that it’s building in eastern China. Wanda Studios committing $750 million over five years to have production rebate of up to 40 percent of film’s budget. Wanda’s chairman saying Hollywood will benefit from catering to this exploding movie-going market.

WANG JIANLIN, WANDA GROUP CHAIRMAN (through translator): Since the Chinese cinema market will continue its robust growth, it is surely destined to become the largest film market. And if you want to profit from this market, you will have to understand the Chinese audience. You have to figure out a way to please them and win their hearts.

BOORSTIN: Wanda Chairman Wang predicting the Chinese box office will soon surpass that of North America, to become the largest movie market in the world, forecasting 15 percent growth annually over the next decade. The studio promising more than just access to production facilities, but also relationships to help navigate the political challenges of distributing films in China, which set limits to the number of foreign releases.

DR. JACK GAO, WANDA SENIOR VP: Wanda, actually, in summary, offers something that none of the global competitors does, special access to the fastest-growing film market in the world.

BOORSTIN: Wanda showcasing some of its partners on stage for a signing ceremony, including Legendary Pictures, which it bought in January, as well as Lionsgate.

MICHAEL BURNS, LIONSGATE VICE CHAIRMAN: A partnership helps. And, obviously, again, we’re free agent there. We’re doing a lot with a bunch of different players in the China world, and I think you’ll continue to see us do that. But, again, we’ got to pick the right partner and Wanda certainly could be the right partner in many ways.

BOORSTIN: Wanda is continuing buying spree. It owns AMC Theatres and bought Legendary Pictures in January, now in talks to buy Dick Clark Productions. And it’s drawing scrutiny. Sixteen members of Congress urging the Government Accountability Office to examine its review of foreign investments in the U.S. such as Wanda’s. We’ll see if Wanda can convince more studios and the government that the perks it’s offering U.S.-based media companies can be a win-win.

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

(END VIDEOTAPE)

MATHISEN: To read more about the Wanda Group’s big push in Hollywood, head to our website, NBR.com.

Coming up, working out while staying in. How the fitness industry is bringing exercise classes to your living room, live.

(MUSIC)

MATHISEN: Here’ a look at what to watch tomorrow. The Dow component, American Express, which is still feeling the effects of losing its partnership with Costco, will report its earnings. The Federal Reserve releases its aptly titled Beige Book, an anecdotal look at the economy across the country, and we will find out how fast the world’s second-large economy is growing when China releases its GDP figures. And that is what to watch for Wednesday.

Well, no more excuses for not getting to the gym. What if you could do a live fitness class right in your own living room, even talk to the instructor while you’re doing it? It’s on demand on steroids, and a business model with a long runway ahead.

Diana Olick has the latest installment of “Sweat Equity”.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: We are here!

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: At the studios of the Daily Burn in Brooklyn, New York, only about a dozen people in a room, but thousands of others are in the class, doing the same squats and pushups at the same time.

ANDY SMITH, CEO DAILY BURN: Live is important, because it create the community feel. So, that’s why we’re live at 9:00 a.m., we’re video on demand for the next 23 hours, and then it starts all over again and there is a community and a movement around doing today’s workout.

OLICK: The Daily Burn started with on-demand workouts to stream at home, but went live la

UNIDENTIFIED MALE: For the first time, we actually have a real community forming.

UNIDENTIFIED MALE: We’ve got a great shoutout from Julia Henderson.

OLICK: Because the live daily, it combined with a social media platform where subscribers can connect with coaches, dieticians and each other.

PRINCE BRAITHWAITE, DAILY BURN TRAINER: You know it’s real. You know that I’m really doing it with you.

OLICK: Do you feel more accountable?

BRAITHWAITE: Yes, you definitely feel accountable.

OLICK: It’s the next step in a fast-growing landscape of on-demand fitness, where being able to pull up a yoga video just isn’t enough.

KEITH KOCHNER, CEO LIVE STREAMING FITNESS: It also deals with your mentality. If you’re watching a recorded DVD or still archive, it’s not as fresh or important to you.

OLICK: The social generation has found all kinds of new ways to get together and work out, even compete against each other. But it’s not always easy to get to a studio, and in today’s elite boutique fitness atmosphere, it’s not always cost-efficient, either.

KOCHNER: I think of it this way. Even the most modest budget in the family can afford the power of $9.90, which is what our monthly membership is. That membership covers the entire family, less than a Netflix membership.

OLICK: The daily burn is just $14.99 a month, while one class at a boutique studio can cost $35.

Some live streaming options are more expensive, but more and more are coming online and that competition will drive prices lower. Bottom line: no more excuses for not getting to the gym.

For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.

(END VIDEOTAPE)

MATHISEN: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Tyler Mathisen. Thanks so much 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 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) 2016 CNBC, Inc.

 

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