Transcript: Nightly Business Report – July 25, 2017

 

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Earnings driven rally.

 

The S&P 500 hits a record, so does Nasdaq, as companies like Caterpillar (NYSE:CAT) and McDonald`s (NYSE:MCD) power the game.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Debates begin in dramatic
fashion. The Senate health care bill passes its first big hurdle, but get
ready for some new challenges ahead.

MATHISEN: And a new employee perk — a microchip implant. We`re not
kidding. One Wisconsin company is doing it. Is it a step toward the
future or an invasion of privacy?

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

HERERA: Good evening, everyone, and welcome.

It was another earnings driven-day on Wall Street. The S&P500 powering to
a fresh record, along with the Nasdaq. The Dow was closing in on one. And
a number of very big companies reported upbeat results, something investors
were hoping for given the high overall valuations for stocks.

And as for the most part, investors pretty much got what they wanted — the
Dow Jones Industrial Average rose 100 points to 21613, the Nasdaq added
one, but that was enough for a new high, and the S&P 500 was up seven, also
a record.

MATHISEN: Caterpillar (NYSE:CAT), United Technologies (NYSE:UTX) and 3M
(NYSE:MMM) helped define today`s market. They have a few things in common.
They`re all Dow components that reported earnings. They`re all
industrials, a key part of the economy, and they all sounded upbeat.

But reaction was much different with Caterpillar (NYSE:CAT), the best-
performing Dow stock. United Tech fell and 3M (NYSE:MMM), the worst among
the Dows.

Morgan Brennan explains why.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A busy day for the
industrial giants, making everything from excavators to jet engines to
post-it notes.

Caterpillar (NYSE:CAT) bulldozed expectations, thanks to strong demand for
both construction machinery in China and gas industry equipment in North
America. The maker of earthmoving machines is also forecasting sales
growth after four years of decline, all positives that sent the stocks
soaring today, even as analysts question whether it will last.

ANN DUIGNAN, MACHINERY ANALYST, J.P. MORGAN: History would say that
Caterpillar (NYSE:CAT) delivers great incrementals for a couple of quarters
when they get volume back. I mean, we shouldn`t forget that they`ve spent
$3.5 billion on restructuring, and they`ve 16 percent pure workforce today
versus at the peak of the cycle. So, you know, they can probably deliver
another couple of quarters like they normally do.

BRENNAN: The company is also still under federal investigation tied to
taxes which did not come up in the earnings call today.

But a different story for two other Dow components, United Technologies
(NYSE:UTX) tumbled despite its better than expected results because the
manufacturer of elevators and HVAC systems will still likely see earnings
flip this year, as it struggles to produce the next generation jet engines.

And at 3M (NYSE:MMM), sales from the maker of industrial coatings and post-
it notes missed estimates, sending those shares sliding despite a better
forecast. Experts say, for industrials, the results need to be Teflon
strong to warrant the sky-high valuation and until global economic growth
picks up, that`s not likely.

JASON WARE, CIO, ALBION FINANCIAL: The story and industrials is one of
moderate growth, one of perhaps a weakening dollar year-to-date which has
helped boost results a little bit. But I don`t think we`ve seen too much
in the way of excitement in the industrial sector. It`s just — it`s more
of an earnings growth and economic growth story that isn`t terribly
exciting but also isn`t bad either.

BRENNAN: So far this season, industrial earnings have grown percent
according to Thomson Reuters (NYSE:TRI), thanks to names like Honeywell,
Lockheed Martin (NYSE:LMT), Arconic, and even General Electric (NYSE:GE),
which continues to come under pressure for its cash flow.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan.

(END VIDEOTAPE)

HERERA: Shares of McDonald`s (NYSE:MCD) are also helping to lift the
market. The Dow component reported a 4 percent rise in sales in its
flagship U.S. market. Its recipe for success: premium hamburgers and cheap
soda.

Analysts say McDonald`s (NYSE:MCD) turnaround strategy which included
overhauling its menu and modernizing its in-store operations is taking
hold. Shares of the world`s largest fast food chain rose more than 4-1/2
percent to a record. And so far this year, the stock has gained about 30
percent.

Trip Miller is managing partner at Gullane Capital and he joins us now to
talk about that.

Trip, welcome. Nice to have you here.

TRIP MILLER, MANAGING PARTNER, GULLANE CAPITAL: Thanks for having me back
on today.

HERERA: The success of this report is being laid at the feet of Mr.
Easterbrook and his turnaround plan, and that it is indeed being very
successful. Would you agree with that?

MILLER: I would agree with it. Steve`s done a marvelous job turning
around McDonald`s (NYSE:MCD) and roughly an 18-month period, and we believe
that the strategy that he was implementing in Europe prior to taking over
the entire country — entire company — is serving investors well. So, we
think it`s a great start and hopefully an early sign to more good things to
come for the company and for McDonald shareholders.

MATHISEN: What are they changing about the food specifically?

MILLER: Specifically, they`re going to higher quality. I think that, you
know, one of the things that you see out there is a demand for fresher,
higher quality food across the price spectrum and whether it being a happy
meal for my children or a higher-end burger, they`re delivering that. And
so, I think fresher, higher quality is in high demand today and they`re
listening to the consumer out there and trying to fulfill that need.

HERERA: You know, there was some question as to whether the remodeling of
some of their stores was a necessary part of that kind of makeover for
McDonald`s (NYSE:MCD), but Mr. Easterbrook argued that that`s part of the
overall experience and that consumers, especially millennials, want more of
a food experience. Would you agree?

MILLER: I would. I think millennials do want a different experience when
they eat and dine. Obviously, a fresher, more technology friendly
McDonald`s (NYSE:MCD) will attract more of a younger audience, that for the
last five years had tended to move away and go to other offerings that were
out there.

But I think one of the biggest things to that you see is with the smaller
floor plans that you`ll see in these newer stores that are fresher. It
allows it to be lower capex for the franchisees, which I think is an
attractive move for them to accept these changes more rapidly.

MATHISEN: Let`s talk about two things I never thought I would see at
McDonald`s (NYSE:MCD) one is table service. How is that going to roll out
change the economic model? That`s number one. And number two, delivery.
How important is delivery going to be in five years?

MILLER: Sure. Number one, on the table service side, they`re serving
about 2,500 stores currently right now. You`ll see that rollout increase
about 600 over the next year. So, for us, a little bit too early to tell
how big of a piece of their 36,000 plus stores globally that will be, but
they`re certainly testing it. And in the areas where they`re finding
success, I think you`ll see that increase.

The more important piece that you touched on is delivery. We believe and
we get this from McDonald`s (NYSE:MCD) and other competitors, the delivery
will be over 25 percent of the sales in the QSR space over the next five-
plus years. So, for them, that`s a really big opportunity. They`re an
early adopter in this space. They`re seeing great success both
domestically and internationally, specifically in China.

HERERA: OK.

MILLER: On the delivery side. So, we think that that`s going to serve
them well.

HERERA: On that note, Trip, thank you. Trip Miller with Gullane Capital
Partners.

MILLER: Thank you.

MATHISEN: Du Pont was the fifth Dow component to report profits today.
The company topped analyst at profit and revenue estimates, helped by
higher sales in the agricultural business. Du Pont, which is merging with
Dow Chemical (NYSE:DOW), expects that deal to be completed next month. The
stock up today by more than 1 percent.

HERERA: It was day one of the Federal Reserve`s two-day policy meeting.
It is widely believed that the central bank will not increase rates when it
releases its statement tomorrow. In fact, a new CNBC poll shows that many
economists and fund managers have actually pushed out of the timetable for
the next interest rate increase to December from September. The Fed hiked
rates in both March and June of this year.

MATHISEN: Consumer confidence is closing in on a 16-year high. The
conference board says the rise is because of a strong job market,
increasing home values and a record stock market. Americans also appear
upbeat about future economic conditions.

Investors follow these surveys because a boost in optimism can translate
into increased consumer spending and that spending makes up about 70
percent of U.S. economic activity.

HERERA: Meantime in Washington, Senate Republicans voted to advance to
debate their efforts to repeal and replace Obamacare. It`s a procedural
vote but Vice President Mike Pence was needed to cast the tie-breaking
vote.

And in a very dramatic moment, Senator John McCain appeared on the floor to
applause from both parties following his recent diagnosis with brain
cancer. While his vote was critical for Republicans, he called for a
bipartisan remake of the health care bill.

John Harwood is following this story for us from Washington.

And, John, how does Senate Majority Leader Mitch McConnell win this vote?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s quite
impressive, Sue. He had faced resistance from staunch conservatives and
also from the more moderate Republicans, and he managed to pull enough of
them along. He only lost two votes, Lisa Murkowski and Susan Collins, by
letting them feel as if the process was going to be fluid once it went to
the floor, they weren`t endorsing any specific bill by doing this. And he
managed to do what he himself had said about a week ago, he wasn`t going to
be able to do.

MATHISEN: What exactly did he win, John?

HARWOOD: Well, what he won, Tyler, was the opening of debate. That`s
distinct from moving any particular piece of legislation, so they could try
to pass the House bill. They could try to pass a revised version of the
Senate bill that they had earlier been considering, or they could fall back
to the so called skinny repeal which just eliminates the individual mandate
and some other regulations and that would get them into a conference with
the Senate. Who knows where that would go?

HERERA: Right. You know, I said it was a dramatic moment and indeed it
was. When John McCain walked onto the floor, he got a standing ovation
from both sides of the aisle.

What role did he play in the ultimate outcome of today`s vote?

HARWOOD: Well, since they only got 50 Republicans with Mike Pence breaking
the tie, they needed every one of those votes, including John McCain`s. It
provided an emotional boost for the Republican leadership to have him back
and John McCain, interestingly, had previously criticized the process, he
voted to continue the process but then he criticized it again in that floor
speech saying that he wanted a bipartisan way forward.

Now, the question is whether that can happen. He still has the power to
make it happen by withholding his vote, but he didn`t withhold it today.

HERERA: It`s going to be fascinating to watch.

John, thank you so much. John Harwood in Washington.

MATHISEN: The health insurer Centene (NYSE:CNC), one of the largest
players on the public exchanges under the Affordable Care Act, reported
better than expected profits. Profit for the insurer rose nearly percent
in the most recent quarter. Unlike its rivals, Centene (NYSE:CNC) is
increasing its presence in the Obamacare exchanges. Centene (NYSE:CNC)
plans to enter Kansas, Missouri, Nevada next year, and expand in six other
states where it currently sells individual policies.

HERERA: Still ahead, the big questions hanging over GM as sales slow for
the whole auto industry.

(MUSIC)

MATHISEN: The former Dow component AT&T (NYSE:T) saw its profit coming
better than expected. The number two U.S. wireless carrier was able to
attract more customers with new promotions. The company earned 79 cents a
share. That was 6 cents better than estimate.

Revenue did fall from a year ago though to nearly $40 billion, but it also
topped expectations. And investors liked the results, sending shares
higher initially in after-hours trading.

Julia Boorstin has more on AT&T`s results.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bottom line of
AT&T`s earnings, the company outperformed expectations, with better
performance across its phone and video businesses and projected as AT&T
(NYSE:T) maintained its full-year guidance.

The big number in focus was 2.8 million. That`s how many wireless
subscribers AT&T (NYSE:T) added far more than expected, and its new DirecTV
Now skinny bundle is helping its video business. AT&T (NYSE:T) saying it
help compensate for traditional video subscriber losses.

As for the future of AT&T (NYSE:T), its pending acquisition of Time Warner
(NYSE:TWX), CEO Randall Stephenson says the deal is on track to close by
year-end.

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

(END VIDEOTAPE)

HERERA: Michael Kors goes shoe shopping and tries on a pair of Jimmy Choo,
and that`s where we begin tonight`s “Market Focus”.

In an attempt to diversify his products amid falling sales, Michael Kors
said that it would buy the luxury accessories maker known for its stilettos
for more than $1 billion. Michael Kors says the deal will allow the
company to gain greater exposure to foreign markets and grow its men`s
footwear line. Shares of Michael Kors were essentially flat on the day at
$34.93.

An activist investor is pushing Barnes & Noble (NYSE:NE) (NYSE:BKS) to sell
itself. Hedge fund Sandell Asset Management said it acquired a, quote,
meaningful stake in the bookstore chain and believes that Barnes & Noble
(NYSE:NE) (NYSE:BKS) could be an attractive buying opportunity for a media
company searching for of retail presence. The firm said Barnes & Noble
(NYSE:NE) (NYSE:BKS) could likely attract bids of $12 a share in a deal
that would take the company private. Shares surged almost 17 percent to
$8.30.

Eli Lilly (NYSE:LLY) posted a rise in earnings and revenue, prompting the
drug maker to raise its outlets for the year. The CEO said much of the
quarter`s strength came from new medicines.

(BEGIN VIDEO CLIP)

DAVID RICKS, CHAIRMAN, PRESIDENT AND CEO, ELI LILLY: New products for us
were a little over a billion dollars in the quarter, 18 percent of the
company now products launched since 2014. So, it`s really a new product
growth story that led 8 percent top-line growth, held expenses flat, grew
gross margins and 34 percent reported growth on the bottom line.

(END VIDEO CLIP)

HERERA: But Eli Lilly (NYSE:LLY) shares were off 3 percent to $82.19.

And the data storage company Seagate said inconsistent demand for its
products caused sales to slip more than expected and while earnings were
higher, it wasn`t enough to impress Wall Street. The company also said
it`s cutting 600 jobs and that its CEO is stepping down in October but will
remain as executive chairman. Shares got crushed. They fell 16-1/2
percent to $33.20.

MATHISEN: Dominoes reported revenue in same store sales that rose and
topped expectations. The pizza chain also saw profit edged higher, beating
estimates. But international same store sales rose just under 3 percent.
Analysts were looking for a 5 percent gain, and that sent shares down 10
percent to $192.40.

The hospital operator HCA Healthcare said fewer patients and an increase in
cost hurt results in the latest quarter. The company reported profit and
revenue that missed estimates and HCA also cut its full-year earnings
guidance. Shares fell more than 4 percent to $82.18.

Meantime after the bell, Chipotle reported earnings that had improved with
the company saying it`s all pickup in customer traffic and an increase in
its average check size. But the burrito chain did miss street targets for
same store sales and revenue. Shares initially rose following the results
may also ended the regular session up 2 percent to $348.62.

And the drug maker Amgen (NASDAQ:AMGN) said strong growth in its newer
products and lower expenses help the company report profit and revenue that
top forecasts. Amgen (NASDAQ:AMGN) also raised its earnings outlook for
2017, but the midpoint of the range sits below some analysts` estimates.
Shares were initially pressured in after-hours trading. They also ended
the regular session down a fraction at $180.89.

HERERA: General Motors (NYSE:GM) posted its second most profitable quarter
ever. Despite the strong profit, questions are hanging over that company
as it wrestles with slowing sales for the entire auto industry.

Phil LeBeau has our story.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Business has seldom
been better for General Motors (NYSE:GM). In the second quarter, it made
almost $2.5 billion, with strong earnings and profit margins in North
America thanks to surging sales of highly profitable crossover utility
vehicles and solid demand in China, especially for the Cadillac brand.

So, why are shares of General Motors (NYSE:GM) still lagging the market
overall? Mainly because auto sales in the U.S. have cooled off and many
doubt GM can drive strong profits in a slower market.

COLIN LANGAN, AUTO ANALYST, UBS: I think the problem here is they`re
fighting the cycle. I think people have been extremely skeptical that they
could deliver results and even today, they had a very solid quarter and
they continue to remain skeptical.

LEBEAU: A big problem for GM is the fact people are buying fewer cars.
Take the Chevy Impala. In 2017, sales have been cut almost in half. With
fewer buyers looking for sedans, there are reports GM could kill certain
models in order to convert assembly lines to build more crossovers and
SUVs. But for now, GM is downplaying that possibility.

CHUCK STEVENS, CFO, GENERAL MOTORS: We are always going to be very, very
focused on aligning supply and demand, and as we`ve seen the shift from
passenger cars to crossovers, you know, we`ve taken very proactive action
to reduce our production of passenger cars.

LEBEAU: If General Motors (NYSE:GM) restructures its U.S. assembly plant
so they build more trucks and SUVs and fewer cars, it would not be the
first automaker to do so. Ford is in the midst of shifting some small car
production to China, and Fiat Chrysler will soon stop building cars in the
U.S. altogether.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

MATHISEN: Coming up; getting under your skin. Would you let your employer
implant a microchip in your hand? One company in Wisconsin is actually
doing it.

(MUSIC)

HERERA: Hundreds of Facebook (NASDAQ:FB) cafeteria workers are unionizing.
More than 500 food workers at the company`s headquarters in Menlo Park,
California, are pushing for higher wages and more affordable health
benefits. The union says these workers are struggling to afford the rising
cost of living in that area.

And there`s a story of one family who lives in a garage and others who
commute from far distances. Contract workers like janitors shuttle bus
drivers and security guards from other major Silicon Valley firms have also
moved to unionize.

MATHISEN: Well, it is something it seems out of a science-fiction movie or
for those of you like me who would remember it, the twilight zone.
Employees of a vending machine company in Wisconsin are being offered
microchip implants that let them access the building, log into their
computers, even pay for things.

NBC`s Ron Mott reports.

(BEGIN VIDEOTAPE)

RON MOTT, NBC NEWS CORRESPONDENT (voice-over): Now, fantasy is one step
closer to reality, when about 50 workers at the Wisconsin-based Three
Square Market, suppliers of 21st century vending machines for micro markets
will literally get a hand up on the competition.

(on camera): Is this really the future?

TODD WESTBY, CEO, THREE SQUARE MARKET: This is the future.

MOTT (voice-over): They`re getting micro chip, perhaps the first business
in the nation to do it. Opening doors, booting up their computers, even
paying for break room snacks with the simple wave of a hand, using
technology already in widespread use in smart phones.

Todd Westby is CEO.

WESTBY: What I`m going to do is pay for it with my hand. The chip in my
hand will be linked to my credit card.

MOTT (on camera): Any of your employees worried about you knowing where
they are 24/7?

WESTBY: Well, remember, for GPS device to work, it needs to be powered.
And your cell phones are powered. So, therefore, they can give GPS device.
This is a passive device, there`s no power in it.

MOTT (voice-over): The chips about the size of a grain of rice are
injected by a needle. Something our Keir Simmons experienced two years ago
in Sweden. That same company is partnering with Three Square.

TONY DANNA, THREE SQUARE MARKET: Once they showed me the technology, I
actually asked them, what do I have to do to get that implanted in me
before I leave here?

MOTT: For now, at least, marketing executive Katie Langer isn`t sticking
her hand out.

(on camera): Why aren`t you getting chipped?

KATIE LANGER, THREE SQUARE MARKET: While I like the idea, I definitely see
that there`s benefits to it. I still haven`t seen a lot of research on
long term health effects. There`s still a foreign object going into your
body.

MOTT (voice-over): Health isn`t the only concern tech experts say how
secure is the data stored on the chip, what are the checks and balances on
the keepers of that information. And what happens when an employee leaves,
who owns the chip and are they easily removed?

So, is this big brother?

WESTBY: It`s basically a convenient form of making payments, starting your
car, getting access to the building, logging into your computer. You know,
not carrying credit cards.

MOTT (on camera): So, I can get rid of my wallet?

WESTBY: Oh, yes.

(END VIDEOTAPE)

HERERA: That was NBC`s Ron Mott reporting.

So what do you think about being microchip by your employer? We asked and
many of you were skeptical.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: If you can microchip somebody to go into a factory, you
could also microchip them if they`re at a political meeting.

UNIDENTIFIED FEMALE: I think if it`s convenient, it`s easier for people to
keep track of stuff, I say go for it. But I also don`t know the negative
effects of it.

UNIDENTIFIED FEMALE: It`s a surgical procedure and don`t you want to walk
around with something underneath your skin? No, I don`t think it`s a good
— I don`t think it`s a good idea.

UNIDENTIFIED MALE: I`ve always used an ID card, I don`t see what`s so hard
about that? Swipe, you`re in.

UNIDENTIFIED FEMALE: Yes, I would be totally opposed to that because you
don`t know when that starts, you just don`t know where it ends, right?

UNIDENTIFIED FEMALE: If they`re saying that they`re not going to use it to
track them and that`s in writing and there`s a contract that specifies that
and then I don`t — I don`t see the harm.

(END VIDEO CLIP)

HERERA: We want to hear from you on this topic, so head to our Website,
NBR.com, and there`s a quick poll that you can take there.

MATHISEN: So, what are the pros and cons of a business your employer may
be implanting microchips into you?

Joseph Holt is an ethics professor in the Mendoza College of Business at
the University of Notre Dame. He joins us now to discuss.

What are the ethical or bigger broader questions here about micro chipping
an employee? Presumably, it`s voluntary. You don`t have to do it.

JOSEPH HOLT, ETHIC PROFESSOR, UNIVERSITY OF NOTRE DAME: Yes, I think the
emphasis is that presumably it`s voluntary. One of the questions it raises
for me, Tyler, is, can this be like one of the United Way campaigns where
donations are voluntary, but your boss is evaluated based on the level of
participation he or she achieves. So, that there`s pressure on you to do
it, even if you don`t want to.

So, are these employees being pressured either by peers, you know,
criticized for being luddites, or are they being pressured by management to
go ahead and do it?

HERERA: Yes. One of my questions is why — why is it necessary? I mean,
we have smartphones.

HOLT: Right.

HERERA: There are so many other ways that we can achieve payment for
something. I mean the CEO of this company says it`s in 20 countries
already, and it`s working well. But do we really need it if we have the
devices that we have now that seem to be working well?

HOLT: Yes. So, I think that`s a tremendously important ethical issue. I
mean, if the company can achieve the same objectives of providing
convenience for their employees without implanting an electronic device in
their bodies, wouldn`t that be a better way to go?

I mean I drove to the studio today using this fob from my Toyota (NYSE:TM)
and that enabled me to open the car doors and start the engine without
having to fumble for a for a key. But if the only way to get keyless entry
was by implanting a chip in my hand, then I`d say give me the old-fashioned
key.

MATHISEN: Yes, exactly. I mean, we use here an ID card that gets us into
the building that we use to log on to printers or copy machines that we use
at the cafeteria. I would think there might also be a medical liability
issue here. What if something goes wrong? The injection site becomes
infected. I don`t know the medicine of this. I wouldn`t want the doggone
thing traveling around my body and ending up passing it like a kidney
stone. I mean, it`s crazy, man. Ouch.

HOLT: Yes, and those are crucial unanswered questions. I mean, you know,
is it ethical to move ahead with the wider spread use of the technology
when the health effects of it are unknown? You know, just because it`s a
coolest latest thing.

HERERA: Yes. I guess the other issue is, what`s being done with the
information that`s linked to this chip —

HOLT: Right.

HERERA: — because you`re buying things so, you know, the information is
out there.

HOLT: Right. So, you know, is the information handed to somebody else?
If I always get Twinkies machine and I start seeing pop up —

MATHISEN: They`re going to know.

HOLT: Right. I start seeing pop up ads on my computer from Twinkies.

HERERA: OK.

HOLT: Am I getting a little — am I getting a little nervous?

You know, there are some companies that charge a premium for health
insurance of obese employees, give a discount for the fit ones. What if
CNBC implanted the chips and found out that —

HERERA: We have to leave it. Thank you.

MATHISEN: We have to leave it there, Joe. The chips are down and we`re
down on the chips. Joe Holt at the University of Notre Dame.

HERERA: And that`s it for us.

HOLT: Good be with you.

MATHISEN: Have a good night.

HERERA: Bye, everybody.

END

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