Transcript: Nightly Business Report – October 26, 2016

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Profit slide. Apple posts its first annual earnings decline in 15 years. But gives investors hope with an upbeat forecast.

Blue chip trend. Now that more than half of the Dow has reported earnings, what does that tell us about the strength of the economy?

Sticker shock. Costly premiums insurers are scaling back. What, if anything, can be done to fix the Affordable Care Act?

Those stories and more tonight on NIGHTLY BUSINESS REPORT, for Tuesday, October 25th.

Good evening, everybody. I’m Sue Herera. Tyler Mathisen is on assignment.

We begin tonight with Apple, a stock you likely own if not outright, then in a retirement account or a mutual fund. The world’s most valuable company reported its first decline in annual revenue and profit since 2001. The Dow component said revenue fell for the third consecutive quarter, as iPhone sales dropped from a year ago.

But remember, despite the falloff in numbers, Apple is still the most profitable American company. And it did issue a rosy outlook.

For the latest quarter, Apple earned $1.67 a share, one cent better than estimates. Revenue fell 9 percent to more than $46 billion, just about in line with expectations. The stock popped, then dropped, in initial after hours trading.

Josh Lipton has more now on Apple’s results.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Forty-five-point-five million, that was the big number in Apple’s latest earnings reporting and first to iPhone units in the company’s fourth quarter. Now, That was a drop of about 5 percent year over year, but it did beat analysts expectations of $44.8 million.

Question for investors is where this iPhone franchise heads from here. Bears will say the best days are behind it. Like a lot of hardware, you will now see dropping average prices and margins. Bulls say there is a growth left in the franchise, and specifically they’re looking to the new models, the iPhone 7 and iPhone 7 Plus to return the iPhone franchise to growth.

I did have the chance to sit down and speak to Apple CEO Tim Cook. He certainly is bullish about the iPhone looking ahead, pointing notification, the record number of Android switchers to his platform he’s and the growth he’s seeing in emerging markets like India, where iPhone growth was up 50 percent.

For NIGHTLY BUSINESS REPORT, I’m Josh Lipton, Cupertino, California.

(END VIDEOTAPE)

HERERA: Today one of the biggest days in earnings season, and that’s what investors were focused on. Some results were disappointing, but others were encouraging. And that led to small declines in the major averages. The Dow Jones Industrial Average fell 53 points to 18,169, the NASDAQ was off 26, and the S&P 500 dropped 8.

A bright spot in today’s market was Procter & Gamble. The Dow component and the maker of Tide, Pampers and Gillette Razors reported better than expected quarterly profit. It also posted strong organic scales, which excludes things like currency moves and divestments. But the company says that growth could be spotty in the near term.

(BEGIN VIDEO CLIP)

JON MOELLER, PROCTER & GAMBLE CEO: We’ve got some tougher comps ahead of us. We’re managing through a lot of geopolitical and economic dynamics in places like Egypt, Nigeria, Argentina and now even the Philippines. And, of course, our competition doesn’t stand still. But 2 percent is a significant improvement versus last year, and we hope by the end of the year, we’ll be improving beyond that.

(END VIDEO CLIP)

HERERA: P&G was the best performing stock on the Dow today, rising more than 3 percent.

Dow component Merck reported a strong quarter helped by higher sales of vaccines and a closely watched cancer treatment which works by harnessing patients’ immune systems to attack tumor sales. The drug maker reported an increase in both profit and revenue and it narrowed and raised its full year earnings forecast. That was good for 2 percent gain on the trading session.

The industrial sector as you may know was not expected to do well this quarter as weak global growth and low commodity prices weighed on its business. And that was exactly what we heard from Caterpillar and 3M, but not from fellow Dow component United Technologies.

Morgan Brennan has more on this mixed picture.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Amid an onslaught of disappointing industrial earnings, one company bucks the trend today. The United Technologies reported better than expected sales and profits and raised the lower end of its 2016 guidance. A stark contrast to fellow Dow components Caterpillar and 3M, which also posted results this morning.

On a conference call with analysts, United Technologies’ CEO Greg Hayes chalked the earnings beat to strength in key areas of construction and aerospace.

GREG HAYES, UNITED TECHNOLOGIES CEO: While addressing some near-term challenges with the GTF production ramp up, our Pratt candidate (ph) and Pratt military businesses continue to perform well. We’ve also seen solid performance out of our UTC aerospace systems business, OTIS and CCS. All of these guys picking up the slack. In the end, balance still works at UTC.

BRENNAN: It suggests increasing confidence at the aerospace, elevator and building controls company, which has struggled with delivery delays of its Pratt and Whitney jet engines. Analysts say this is a step in the right direction with Stifel Nicolaus Robert McCarthy calling it, quote, “one of the less messier quarters in recent periods”, and R.W. Baird’s Peter Arment noting that short term risks do still exist.

Indeed, the company, which soared in trading, did warn profits will be flat next year, thanks in part to the cost of building those new engines.

But United Technologies is largely the exception. Caterpillar continues to struggle with the top manufacturer of mining and construction equipment, falling short of estimates, and revising its forecast lower again.

In addition to ongoing weakness in the oil and gas market, the biggest drag on sales was actually transportation equipment, as locomotives in North America and mining trucks around the world sit idle in the commodity slump.

3M, which posted an earnings beat also trended its own outlook for 2016. The maker of Post-It notes, Scotch tape and Ace bandages believes sluggish economic growth will drag in the next year, curbing demand for many of its consumer and industrial products. The results today come on the heels of muted forecasts by Honeywell and General Electric last week.

And the bad news is likely to continue. As weak global growth, a strong dollar and depressed commodity prices continue to pressure the broader industrial sector.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan.

(END VIDEOTAPE)

HERERA: And as you probably expect, shares of Caterpillar and 3M fell in trading today. But as Morgan mentioned, United Technologies was higher.

And while not a blue chip stock, Under Armour is struggling with growth just like Dow component and rival, Nike. Under Armour reported its slowest profit growth in six years, as the company faces increased competition and the effects of several sporting good retail bankruptcies. The athletic apparel maker also said it expects operating income growth to trail revenue growth over the next two years. That sent shares tumbling 13 percent in trading today.

So, so far, more than half the companies in the Dow Jones Industrial Average have reported their earnings and the results, as we’ve been telling, have been mixed.

John Canally is here to discuss the trends that he’s seeing in the numbers and what those results may be telling us about the health economy. He is chief economic strategist at LPL Financial.

John, welcome back. Nice to have you here.

JOHN CANALLY, LPL FINANCIAL CHIEF ECONOMIC STRATEGIST: Good to be here.

HERERA: So, wrap it up for me. So far, as we mentioned, about half the Dow has reported. But it seems to be better, at least, the earnings, than they have been during the so-called earning recession.

CANALLY: Yes. So the earnings recession began in early part of 2015, first or second quarter. And since then in every quarter until now, we have seen earnings fall year over year. That was largely due to the big drop in commodity prices, especially oil prices and the big rise in the value of the dollar.

Now, here in the third quarter, those things have kind of stabilized a bit. And looking ahead to the fourth quarter, we are likely to see a year over year gain in earnings in the fourth quarter. But so far, those Dow components, we had about 21 reports so far. Everyone beat expectations. The guidance, however, has been kind of mixed.

HERERA: Yes. What does that tell us about the economy? Or can you draw a parallel between the earnings performance and economic performance?

CANALLY: You know, you have to remember what these Dow companies are? These are big, gigantic, multinational corporations that do a lot of exporting, also very manufacturing heavy. Our economy is only about 10 percent, 15 percent manufacturing.

The companies in the Dow, they’re going to derive 30 or maybe even 40 percent of their revenues from manufacturing. That’s one big difference. The other big difference is exports.

Our economy, maybe 10, 15 percent of our economy is exports. Some of the big Dow components, it’s upwards of 50, sometimes even 60 percent, and as we know, overseas economies have struggled a lot.

So, I wouldn’t draw too much inference. But we do want to see that earnings recession end so we can push those stock indexes back to all-time highs.

HERERA: Does it take the prospect of recession off the table?

CANALLY: You know, the — if you look out to the data we have in hand and some of the more data that’s leading on the economy, it puts the odds of recession pretty low. I’d say somewhere in the 10 to 15 percent chance of a recession over the next year or two. So, from the data itself, pretty low odds recession.

What we’re hearing from corporations, they expect slow growth, but not recession. If we do have recession, we can expect earnings growth to be down 20, 30, 40, 50 percent in some cases. But what companies are telling us is that they see modest earnings growth over the next 12 months.

HERERA: All right. John, thank you so much for joining us tonight. Appreciate it.

CANALLY: Thank you.

HERERA: John Canally with LPL Financial.

And still ahead, the big fix, but is there one for all of the issues that are plaguing the Affordable Care Act.

(MUSIC)

HERERA: Home prices are still rising. According to the latest S&P Case-Shiller Index, prices gained more than 5 percent in August from a year ago. A lack of inventory and low interest rates helped push them to near record levels. The strongest year over year increases were in Portland and Seattle, both up more than 11 percent. And Denver, it was up more than 8 percent.

It is open enrollment season, the time of year when people can make changes to their benefits and health coverage. But as we reported last night, those who get their health insurance through the Affordable Care Act, are in for some sticker shock. Average premiums are rising sharply.

And as Bertha Coombs reports, that’s raising a lot of questions about the program.

(BEGIN VIDEOTAPE)

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Consumer shopping for Affordable Care Act will see premium increases that average about 25 percent for next year, according to the Health and Human Services Department. And nearly half a dozen states where consumers are now down to just one insurance choice, that increase could be even steeper.

In Arizona, where nearly all but one has just one insurer, rates will more than double for those who are buying without subsidies. It’s the result of insurers scaling back on exchange participation because of steep losses.

LES FUNTLEYDER, SQUARED PORTFOLIO MANAGER: Some of the losses were subsidized by the government in order to get insurers to join. Those protections are rolling off, and, you know, without those protections, you saw insurers lose a lot of money in this program last year.

COOMBS: The underlying problem has been the mix of people who have signed up for ACA plans, mostly older, sicker members, who use an awful lot of medical services. While younger, healthier people have not signed up in droves. Insurers say part of the reason is that the ACA forces them to offer plans that are richer and more costly than young people want.

They say one of the solutions is to allow them to offer cheaper plans that offer more flexibility.

ELLEN TAUSCHER, EHEALTH BOARD CHAIR: Plans that really are market-targeted to different audiences and demographics to deliver for them what they need at that time, but to get them involved in buying insurance.

COOMBS: After Aetna, United and a number of other insurers have scaled back their participation in the ACA, millions of Americans will also have to change insurers next year, and in many cases, they may find that the plans they are offered are going to look very different.

FUNTLEYDER: Probably, the networks and the formularies are getting more narrow. So I would say most people are also going to see a decline in what they think of as their health plan access.

COOMBS: The Obama administration says the majority of people on ACA plans, 85 percent of them, qualify for subsidies, which will go up right along with the premiums. But that won’t help those in the middle class, who are not subsidized, who will have to absorb the price hikes out of their own pockets.

Bertha Coombs, NIGHTLY BUSINESS REPORT, New York.

(END VIDEOTAPE)

HERERA: From the big hike in premiums, to insurers leaving the health exchanges, what, if anything can be done to fix the Affordable Care Act?

Let’s turn now to Benjamin Isgur, leader of the PWC Health Research Institute to get his thoughts on that.

Nice to have you here, Benjamin. Welcome.

BENJAMIN ISGUR, PWC HEALTH RESEARCH INSTITUTE LEADER: Thanks for having me.

HERERA: Now, I don’t want to have a political discussion. I guess I want to have a structural discussion. How do you restructure this particular program to make it work?

ISGUR: Well, I think, you know, first we need to start with the ACA is a big law. It’s been in place for over six years, things working well, that certainly all eyes are on the exchanges right now and some of the challenges around them. And as we heard, we’ve seen anything from premium increases for those plans to also fewer insurers in some of those states.

Well, the answer is really going to be cooperation from a few different entities. The federal government has a role to play in terms of providing more subsidies for the insurance companies for those that are taking on a sicker population. The states have a role to play. They’re the ones that have a lot of people on the ground that can reach out to some of these communities who are not signing up for insurance. And bringing them in to the insurance pool to make it more balanced.

HERERA: You know, something that the gentleman Bertha interviewed mentioned, he said, “You need to restructure in order to make it attractive for the younger participant.” And it kind of reminded me of a target date maturity fund, where you change the investment as you get older.

Would it be possible to structure it something like that, when you’re younger, you need less services so provide less services in that particular policy? As you get older, you can add on other services? Is that feasible?

ISGUR: Well, you know, right now the way the law is written, the plans are very standardized. And they’re trying to give people a feeling of really understanding what’s going to be covered and really be ready for kind of any situation.

I think the key to the younger population is, you know, two-fold. One, it’s going to require a lot of outreach and education in terms of the benefit that’s there for them to go ahead and buy in, because, you know, for any of us, we’re just one car wreck away from maybe a very large bill. And the other thing is educating people around the subsidies that are available to them, and it was mentioned earlier, 75 to 80 percent or more of the population are subsidized in these exchanges. And they may actually be paying a very small amount for their insurance, even with some of these increases.

You know, one other thing I would say, our research has shown the states that have expanded Medicaid seem to have healthier health insurance exchanges. They have more plans operating in those states. And the price increases seem to be less.

HERERA: All right. On that note, Benjamin, thank you very much for joining us.

ISGUR: You’re welcome.

HERERA: Benjamin Isgur with PWC Health Research Institute.

Medicaid expansion helped health insurer Centene’s profits rise and that’s where we begin tonight’s “Market Focus”.

The company said its revenue nearly doubled with a rise in the number of participants enrolled in some of its Medicaid plans. But despite the upbeat results, Centene missed analysts’ expectations. Nonetheless, shares ended up more than 3.5 percent, to $65.36.

Cost cuts helped Du Pont post better than expected earnings, leading that company to raise its profit outlook for the year. Du Pont also said its merger with Dow Chemical likely will not close until early next year, as the deal remains under the microscope of antitrust regulators around the globe. Shares were down 52 cents to $69.62.

Automaker General Motors said solid demand for trucks and SUVs in the North American market lifted property and revenue. Those results easily topped expectations. The company’s chief financial officer says he likes what he sees.

(BEGIN VIDEO CLIP)

CHUCK STEVENS, GENERAL MOTORS CFO: We’ve grown our retail market share account year-to-date by about a half percentage point. Our transaction prices continue to improve on the strength of our products. And actually, we’re quite excited about our launch cadence when you think over the next 12 to 18 months and fundamentally refreshing our entire crossover portfolio. So, we’re very, very optimistic about continuing to drive strong performance 10-plus percent margins in North America, even in a plateaued environment.

(END VIDEO CLIP)

HERERA: GM shares, though, were off 4 percent to $31.60.

Currency headwinds and lower demand for products caused Whirlpool to post lower than expected earnings and revenue. The appliance maker also slashed its profit guidance for the year. Whirlpool shares plunged almost 11 percent to $152.09.

And data and analytics firm Nielsen said costs tied to restructuring charges and disappointing results in the U.S. caused profit to fall more than expected. The company did see overall revenue grow, but that also came up short of expectations. The shares were punished. They fell nearly 17 percent to $45.65.

You might call this a money-makeover. Technology is quickly changing the way we borrow, manage our cash and buy just about everything.

Kayla Tausche gives us a glimpse into the digital payment’s future from the world’s biggest event dedicated to financial services innovation. She is in Las Vegas.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: One week a year, the conversation on this Strip turns to this strip. At Money 2020, companies from major credit cards to brand-new startups trying to change the way we pay for good.

Take Erica, a new virtual assistant from Bank of America. Her goal is to simplify your bills and help you save money — though how much money is still undetermined.

MICHELLE MOORE, BANK OF AMERICA HEAD OF DIGITAL BANKING: It’s going to be different by customer, because we have 45 million households, 60 million customers and it’s all different. So, how you spend and save your money is different than I do it, how much you keep in the bank, what you’re trying to save for. And so, that’s the power of predictive analytics, is that we can look at individual behaviors and pattern and customize to them.

TAUSCHE: Other advances are invisible, using data collected behind the scenes to help banks lend better.

JOHN SCULLEY, LANTERN CREDIT VICE CHAIRMAN: Think of it more like Intel inside, except we’re not a chip. We’re very sophisticated AI intelligence. And it’s really taking something consumers are familiar with, which is the credit score, and saying, let’s take that credit score and make it an interactive experience.

It’s solving really big paying points for consumers. But it’s embedded into many of the new services that the biggest banks are offering.

TAUSCHE: From lending to spending, to shopping, the search is on for the next big thing.

Some, like MasterCard’s selfie pay, are nearly ready for prime time. Others are still in the early stages. What’s clear —

AUTOMATED VOICE: Transaction now.

TAUSCHE: — the question at the register will no longer be paper or plastic.

UNIDENTIFIED FEMALE: Thank you, Pepper!

TAUSCHE: But where’s your phone.

For NIGHTLY BUSINESS REPORT, I’m Kayla Tausche, in Las Vegas.

(END VIDEOTAPE)

HERERA: Coming up, closing the gender gap in the powerful technology sector and why that may be good for the industry’s bottom line.

(MUSIC)

HERERA: A federal judge approved Volkswagen’s $15 billion settlement, making it the largest auto scandal settlement in the nation’s history. The deal requires Volkswagen to buy back cars with two liter diesel engines that had software installed that cheated emissions test. Car owners will be offered between $5,100 and $10,000 each in compensation, along with the option of a buyback or a fix.

The self-driving startup called Otto teamed up with a Anheuser-Busch to deliver a tractor full of beer. The 120-mile trip was made last week. It started in Ft. Collins, Colorado, and ended up in Colorado Springs.

It’s believed to be the first commercial shipment by a self-driving vehicle. There was a driver in the truck, but he didn’t always stay in the driver’s seat. Otto’s technology right now is limited to the highways.

And technology, of course, is playing a bigger role in our lives. But the industry is dominated by men. The push for gender equality was the big topic of conversation at the recent Grace Hopper Conference, the largest gathering of women technologists in the world.

And Julia Boorstin was there.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fifteen thousand women are here at the great hopper celebration of women and computing to work on closing tech’s gender divide. Just 23 percent of U.S. technical jobs are held by women. It’s an issue of the pipeline, only 18 percent of computer science majors are female, down from 37 percent in 1984, as well as an issue of retention. Women leave tech jobs at twice the rate of men. In part due to poor working conditions and poor work life integration, according to new study by the Anita Borg Institute, which runs this conference.

And it could get worse. The percentage of women in the computing workforce is projected to decline to 22 percent by 2025, down 15 percentage points from 1995, if nothing is done to drive change.

TELLE WHITNEY, ANITA BORG INSTITUTE PRES AND CEO: What is important is the companies are releasing numbers year after year. That transparency is critical.

BOORSTIN: The vast majority of execs surveyed by the Anita Borg Institute say there’s a direct correlation between gender diversity and financial success, which is why there are over 300 companies here to recruit, and to talk about best practices.

The Anita Borg Institute ranking Google, Intel, and IBM among the top tech companies for women and highlighting best practices for hiring and retention.

StubHub’s chief marketing officer is here to talk about the work she is doing to make the brand and the company more inclusive.

JENNIFER BETKA, STUBHUB CMO: It’s really about making sure we’re a safe space for that. And why is it important? It goes back to that sense of bringing different skills, different thoughts and diversity of thought is something that keeps companies innovative.

BOORSTIN: Another goal of this conference is to showcase important role models. The executive producer of the “Hidden Figurers”, an upcoming movie about the women who helped send astronaut John Glenn to space, is here to show a sneak peek of her film.

MIMI VALDES, HIDDEN FIGURES EXECUTIVE PRODUCER: Our dream is this movie will inspire young women to pursue careers in STEM. It’s something that I think for a movie, you know, obviously you want it to be entertaining. If it can inspire and educate in some way, I mean, our dream is that when they film young woman who changes the world because she pursued a career in STEM says that hidden figures is what inspired her to pursue the career.

BOORSTIN: And the women here are finding a range of inspirations in career opportunities, as companies increasingly realize that closing the gender gap is good for their bottom line.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Houston, Texas.

(END VIDEOTAPE)

HERERA: And that is NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us. Have a great evening. We’ll see you here tomorrow.

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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