Transcript: Nightly Business Report – February 16, 2018

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

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Strong rebound. Stocks have
their best week in years as the bulls appear to have regained control of
Wall Street.

Coke`s fizz. What this blue chip American company is doing to battle a
shrinking market for its core products.

Hollywood game changer. Why a new super hero movie could be a turning
point for the film industry.

Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Friday,
February 16th.

Good evening, everyone, and welcome. I`m Sue Herera. Tyler Mathisen is
off tonight.

What a comeback. The S&P 500 posted its best weekly gains since 2013
following a week that saw the biggest drop in stock market history. The
climb higher was not only big. It was broad.

After a big run-up this morning stocks pulled back when special counsel
Robert Mueller indicted several Russian organizations and individuals for
allegedly interfering with the 2016 presidential election.

But the decline was brief and the Dow and the S&P posted their sixth
straight day of gains. The Dow rose 19 points to close at 25,219. The
Nasdaq fell 16. And the S&P 500 added one. For the week, the major
averages were all up 4 percent or more.

Mike Santoli takes a look at what could test the market next.

(BEGIN VIDEOTAPE)

MIKE SANTOLI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The stock market`s
impressive comeback this the past week has been almost enough to make
investors forget the short sharp drop that preceded it. The S&P 500 has
recovered more than two-thirds of the 11 percent loss suffered in the prior
two weeks and is now up more than 2 percent for the year to date.

As encouraging as the rebound has been, investment strategists say there
still are a few tests ahead of the market that will signal whether stocks
are back on firmer footing. First is the level of the indexes themselves.
Rallies that come after dramatic selloff often initially recover one half
to 3/4 of the ground lost before faltering again as investors take the
chance to sell shares near the former peak. The S&P 500 is right in the
zone where it might be expected to stall out if this pattern were going to
happen.

The second test is valuation. The market correction made stocks appear
less expensive relative to corporate earnings that are still growing
nicely. But before January of this year, stocks during this bull market
had never been as highly valued when compared to bond yields, a common way
to gauge the attractiveness of equities.

So, if the ten-year treasury yield stays near the current levels just under
3 percent, investors will need to show they will tolerate still higher
stock valuations if the indexes are to challenge the former record high set
in late January.

And finally, the market will probably need simply to calm down if stocks
are to mount a sustain push higher, after one of the calmest years on
record in 2017, volatility has struck the market in recent weeks and even
though with the recent rebound, measures of market jumpiness are still a
bit elevating, and bullish investors are looking for them to retreat toward
more normal levels to indicate a return to stability. While the bull
market has certainly won back the benefit of the doubt with one of its
strongest weeks in years, it`s a bit premature to sound the all clear for a
new rush to fresh record highs for stocks.

For NIGHTLY BUSINESS REPORT, I`m Mike Santoli.

(END VIDEOTAPE)

HERERA: Let`s talk now about the strong rebounds that stocks managed to
stage this week and what might be ahead. Here to talk about that is John
Augustine, chief investment officer of Huntington Private Bank.

John, nice to see you. Welcome.

JOHN AUGUSTINE, CIO, HUNTINGTON PRIVATE BANK: Thanks, Sue. Nice to see
you.

HERERA: What did you think of what happened over the past two-week period?
A lot of people are saying it is the end of the bull market, beginning of
increased volatility. Others disagree with that. Where do you come down
on where we are now?

AUGUSTINE: Well, what caught our attention was the catalyst to bring us
down a week ago Friday or so was coming from a position of strength.

It was coming from a better than expected jobs report. And that kind of
brought all markets down — not just in particular stocks, but commodities,
gold, and bonds as well with bond yields going up. So that was the first
thing that caught our attention.

Then, we all learned about the VIX and how it can accelerate to the
downside a week ago Monday or so, which was a surprise to us. So, out of
that, what our thought was was once the stock market regained its footing,
time to rebalance — again, all markets had kind of come down.

So, we were surprised by the VIX. We knew we were coming in from a
position of strength. We didn`t see a big asset allocation adjustment
taking place. So our counsel begin to look at one of rebalancing, then
look at moving into positions of strength within stocks, those that have
been taken down sharply. So, that was our view coming in, Sue, when we saw
the volatility first pick up.

HERERA: So, were you doing some buying, and will you — do you feel as
though, perhaps with more volatility, the market can continue to move
higher?

AUGUSTINE: Yes. So, yes, and yes. We were doing some buying. Our equity
teams were looking at stocks they had been looking at that hadn`t come down
very much.

Amazon (NASDAQ:AMZN) was one of those stocks. New Corps Steel was one of
those stocks. Lockheed Martin (NYSE:LMT) was one of those stocks.

So, they were looking at upgrading stocks that had never given them that
break, so to speak, to buy. So, that was first and foremost, our equity
teams were active.

Secondly, in volatility. In volatility, just so one asset class in our
view isn`t getting picked on in relation to the others, they all kind of
came down this time but stocks got accelerated from the VIX, in that moment
then we saw VIX start to lower.

So in summary there, we are starting to see the VIX back in the teens.
Could it go back in the 20s? Yes. Unless there was some fundamental
change in earnings or inflation or the economy at our shop in Huntington we
would probably be looking to rebalance again and swap into positions of
strength. That would be our view right now where the VIX and where the
markets are.

HERERA: All right. John, we`ll leave it at that. Thanks so much for
joining us. Enjoy the long holiday weekend.

AUGUSTINE: You too.

HERERA: John Augustine with Huntington private bank.

Dow component Coke reported flat sales of its soda. The company`s
quarterly results were helped by stronger sales of things like teas,
coffees, and vitamin water. And that helped send shares higher. But what,
if anything k this iconic American company do to stem the decline of its
product that it`s known for?

Dominic Chu takes a look.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: When you think of
Coke, you think of fizz. But business at the world`s largest beverage
maker is relatively flat. It is product isn`t the hot item like it used to
be. There is no growth in Coke and Diet Coke and that`s a problem for not
just Coca-Cola (NYSE:KO) but the entire non-alcoholic beverage industry.

BILL CHAPPELL, SUNTRUST ROBINSON HUMPHREY: Some of it is a realization
especially if we are talking about carbonated and sugary type beverages,
it`s realizing you are never going to convince some people. And so
focusing on their other strengths. For Coke, it`s focus more on
Vitaminwater, focus more on Smartwater, focus more on the carbonated
beverages without sugar.

CHU: Changing consumer tastes and buying habits had become a real
challenge for some very big snack and beverage companies. For Coca-Cola
(NYSE:KO), the bright spot was outside of its core products, water, sports
drinks, teas, and coffee products. Those segments posted modest growth.
Sales actually fell modestly for its juice and dairy products. In the
coming months, Coca-Cola (NYSE:KO) will be focused on certain key products
and markets.

CHAPPELL: They have changed to smaller, like minis, because you might walk
into the store and say I don`t want 20 ounces but I am kind of thirsty and
I do like the taste of Coke, so I will take a six ounce version. And they
don`t — not only are they getting you to try more occasions and driving
volume, but the price per ounce for that mini is substantially higher than
if you were going to pay for a 20 ounce.

CHU: Investors in both Coca-Cola (NYSE:KO) and rival PepsiCo will be
watching closely to see whether each company with boost sales momentum.
Whether that`s in the new versions of existing soda lines or investing more
in other growing markets like sparkling water.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

HERERA: So, Dom set the stage for us. Let`s take a closer look now at
Coca-Cola`s quarterly earnings and talk about where the beverage giant
might have found growth.

Joining us to talk about is Sonia Vora. She`s the equity analyst at
Morningstar (NASDAQ:MORN).

Welcome, Sonia. Nice to have you here.

SONIA VORA, MORNINGSTAR EQUITY ANALYST: Thank you for having me.

HERERA: How do you view the company overall? Dominic kind of set the
stage with what their core holdings are, but how do you feel about it I
don`t have all?

VORA: Sure. So, we think that Coca-Cola`s fourth quarter results largely
came in line with our expectations. You know, as was alluded to, a lot of
drivers of growth are related to pricing and better price and mix strategy.

However, we were also very pleased to see the company`s growth margin
expand significantly during the quarter as it concluded the refranchising
of its U.S. bottlers. We think that the shift to a concentrate model as
the company refranchises its bottlers actually will provide a lot of upside
and profitability. A lot of the bottling assets were more capital
intensive. And without those assets, we see a lot of potential for the
company to improve its gross profit and (INAUDIBLE)

HERERA: So, where do they find continued growth? They have moved into
Vitaminwater. They have moved into non-carbonated drinks certainly but
they are still known as Coke, and for Coke. So, how do they find that
growth? Do they have to do acquisitions? How would you advise them?

VORA: So, right now, a lot of growth has been driven by pricing. That`s
consistent with what we are seeing across the non-alcoholic space. About
two-thirds of the non-alcoholic beverage space, about two-thirds of the
organic growth this quarter was driven by price and mix. So, smaller
package sizes, different channels, maybe prioritizing a smaller bottle in a
cooler versus a bulk amount of soda on the shelf.

These are great for profits and drive top line growth. Also we have seen
them push into categories like coffee and tea, which were up 2 percent in
the quarter. And continued growth in the non-carbonated beverage portfolio
should help the company better aligned its offering with consumer tastes.

HERERA: Do you view their potential bigger domestically or
internationally?

VORA: For soda, I would say the volume potential exists abroad. But in
terms of pricing, we`ve seen strong domestic pricing in North America up 2
percent this quarter, (INAUDIBLE) about a 5 percent in pricing this quarter
of last year.

HERERA: What about other things? We`ve seen Pepsi and other competitors
move aggressively into snacks and things like that. How does Coke rate on
that front?

VORA: I would say that I see Coke staying in the beverage space but within
beverage they have diversified away from carbonated, kind of traditional
soft drinks, and toward non-carbonated beverages, like their push into
coffee recently.

HERERA: All right. Sonia, we`ll leave it there. Thank you so much.

VORA: Thank you.

HERERA: Sonia Vora with Morningstar (NASDAQ:MORN).

In economic news, consumer sentiment climbed to its second highest level in
14 years. According to the latest read from the University of Michigan,
tax cuts offset the recent volatility in the stock market. Economists
watched the survey closely because, in theory, the better people feel, the
more they spend and spending accounts for a large chunk of economic
activity.

Construction of new homes rose nearly 10 percent in January. And that`s
the second highest level since the great recession. While single family
home building increased last month, so did construction of multifamily
homes. Permits for groundbreaking on multiunit residences soared to their
highest levels since the end of 2016. And that`s creating a bit of a mess
in the apartment market.

Diana Olick has our report.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Scan the downtowns of
the nation`s largest cities and you are likely to see a staggering array of
cranes. Most of them are helping to build luxury apartment buildings. In
fact, multifamily construction is now at a 40-year high. Completions last
year jumped a staggering 46 percent, more than doubling the long term
average according to RealPage (NASDAQ:RP).

The trouble is, developers are putting up the wrong kinds of buildings.
Luxury, not affordable.

GREG WILLETT, REALPAGE, INC. CHIEF ECONOMIST: It`s really tough to deliver
product at those lower price points. The cost of land, the cost of
building materials, the cost of labor, it`s really about the same
regardless of what product you are doing. And it`s just tough to make a
deal work financially if you are going toward that middle market price.

OLICK: Developer Toby Bozzuto faces ever more difficult financing on every
new project. The Bozzuto Group has a portfolio of 70,000 units mostly in
the luxury space. His tenants spend a relatively low share of their high
incomes on rent.

TOBY BOZZUTO, THE BOZZUTO GROUP CEO: That being said, it is a tale of two
cities. In the middle income and the lower income markets, people are
spending proportionally more on their rent. So much so that I believe
there is an acute crisis headed our way.

OLICK: Despite rising incomes, nearly a quarter of all renter households
spend more than half their income on rent, that according to Harvard`s
Joint Center for Housing Studies. Non-luxury rents continue to rise
because of the short supply.

So, why don`t developers just put up more affordable products?

BOZZUTO: A two by four doesn`t care whether it is a luxury building or an
affordable building. It costs the same. The differential, of course, is
rent. And there is a huge disparity between high end rent. So, the issue
is that for us to develop an economically viable, feasible project, it has
to be, by its very nature, be high end.

OLICK: Not what most renters today really need.

HERERA: It is time to take a look at some of today`s upgrades and
downgrades.

Wendy`s rating was raised to buy from neutral at Guggenheim. That firm
expects margin improvement and says the stock is attractively valued after
its recent decline. The price target is now 18. Wendy`s is up 4 percent
to $16.39.

Biogen`s rating was cut to hold from buy at Argus. That firm cites drug
trial delays and competition for its multiple sclerosis and Alzheimer`s
drugs. The analyst describes the outlook as challenging. The stock fell
2.5 percent to $291.87.

True car was named to the best ideas list for 2018 over at Stevens. That
firm expects the automotive information Website to unveil a number of
enhancements to its operations. The analyst recommends buying the stock on
any weakness following its mixed earnings report yesterday. The price
target is $18. The shares fell 6 percent to $11.18.

Still ahead, why talk of tariffs sent steel stocks soaring.

(MUSIC)

HERERA: Commerce Department is recommending steep tariffs on foreign steel
and aluminum. While no decision has been made, Commerce Secretary Wilbur
Ross said he felt strong measures were necessary. And that was enough to
send steel stocks higher.

Kayla Tausche is in Washington tonight with the details.

(BEGIN VIDEOTAPE)

KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Commerce
Department found cheap imports of steel and aluminum flooded the U.S. in
recent years. The agency is recommending that President Trump put
restrictions on imports to restore U.S. production to 80 percent of
capacity. Steel plants now are running at less than 3/4 of capacity and
aluminum, less than half.

There are three categories of recommendations. Blanketed tariffs affecting
all imports into the U.S., the second, targeted tariffs for certain
countries which would include Canada and NATO allies except Turkey.
Finally, a limit on the amount each country could export to the U.S.

The steel and aluminum industries have urged Washington to consider strict
penalties that would preserve their business.

Todd Leebow, CEO of Majestic Steel, was on Capitol Hill this week to push
for action.

TODD LEEBOW, MAJESTIC STEEL CEO: We need to have a strong domestic steel
industry. Without a strong domestic steel industry, it`s proven that that
could be a major risk for our country, whether it comes to national
security, or infrastructure or just general economic needs.

TAUSCHE: But some worry action would lead to higher prices and escalate
trade tensions with China and other U.S. trading partners. In a statement,
the Business Roundtable said, quote: We are very concerned using this tool
will hurt the overall U.S. economy and American companies, workers, and
consumers.

While the recommendation are for strong action, this isn`t the end of the
story. Commerce Secretary Wilbur Ross made clear not everyone in the
administration agrees, and President Trump has until mid-April to decide
what if any action to take.

For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.

(END VIDEOTAPE)

HERERA: A recovery in America`s farmland helped the results over at Deere.
That`s where we begin tonight`s “Market Focus”.

The world`s largest farm equipment maker is seeing stronger demand and
reported rising sales in its key markets. The company topped analysts`
estimates in the most recent quarter and it raised its forecasts for the
year. Deere rose 1-1/2 percent to $169.44.

Campbell`s Soup reported a decline in soup and juice sales despite posting
better than expected profits. The quarter was also hurt by an ongoing
dispute with Walmart over a promotional program. The stock fell 3 percent
to $46.17.

Retailers are stocking fewer products made by Kraft (NYSE:KFT) Heinz. And
that hurt that company`s bottom line. It comes as competition increases
and Americans opt for healthier meals. The trend that`s been pressuring
processed food makers. Shares fell more than 2 percent to $70.80.

And VF Corp, which owns North Face and Wrangler, reported disappointing
earnings and said it`s planning to sell its Nautica business. The apparel
company wants to focus on its best performing labels. The stock was off 11
percent to $74.64.

Wynn Resorts (NASDAQ:WYNN) founder Steve Wynn will not receive any
severance payouts after he resigned from his post following sexual
misconduct allegations against him. Wynn was at one point eligible for a
package totaling more than $300 million. The casino operator also said it
was still considering removing the Wynn name from the brand. The stock
rose fractionally to $164.28.

It is time now for our weekly market monitor who has three picks he says
have reasonable valuations and can weather this period of increased market
volatility. The last time he was on in September, he chose Accenture, up
24 percent, Arch Capital, which is down 7 percent, and Carnival (NYSE:CCL),
which is flat.

He is Michael Mussio, president and portfolio of FBB Capital.

Welcome back, Michael. Nice to have you here.

MICHAEL MUSSIO, FBB CAPITAL PRESIDENT & PORTFOLIO MANAGER: Glad to be
here. Thank you.

HERERA: And congratulations on a couple of those picks.

MUSSIO: Thank you.

HERERA: Let`s get to your new ones. And your picks tonight are JPMorgan
(NYSE:JPM).

You are helping us negotiate all the volatility that`s out there.

MUSSIO: Yes. So, I think that with the additional volatility or
volatility back in the market, focusing on high quality is going to matter
going forward. So, we are looking at industry leaders. And JPMorgan
(NYSE:JPM) is best of breed and has a little bit less execution risk than
Citigroup (NYSE:C) or Wells Fargo (NYSE:WFC) currently. So, we like the
name.

HERERA: You find it fairly valued?

MUSSIO: Yes, it`s actually a little bit undervalued from where we think
that the stock should be. And they are raising the dividend 10 percent a
year. We see a double digit return as interest rates continue to go up.

HERERA: Next is UnitedHealthcare. I think you have recommended this one
to us before if I`m in the mistaken.

MUSSIO: It`s been a couple of years but we still like the stock. We
recommended it before at a lower price in terms of share price. The
valuation is of a kind of similar level today even though the share prices
increased.

And they have a first mover kind of advantage in the health care space, in
addition to the insurance business. And some of the others are trying to
catch up. So, we think they are likely to take market share and are again
a reasonable valuation.

HERERA: The consolidation that`s going on in that business has been kind
of going at breath taking speed.

MUSSIO: It has.

HERERA: You feel as though they have an advantage even with all the
mergers that we are seeing with the pharmacy benefit managers and the like?

MUSSIO: We do. In fact we think a lot of the merger activity is a result
of the rest of the industry trying to catch up and become more competitive
with United going forward.

HERERA: Let`s move on to the third pick, Honeywell. A lot of people on
the street like Honeywell. They have managed to execute. As you can see,
they are up 24 percent on a one-year base.

MUSSIO: Sure.

HERERA: What do you see in that company that you still like?

MUSSIO: So, they are divesting of some of the old line businesses right
now and refocusing on the aerospace and defense business. Aerospace and
defense names, as you know, Sue, have done very, very well over the last
year and a half.

Honeywell has also done well. But there`s a little bit of a discount in
terms of where it`s trading for the rest of aerospace and defense. If they
continue to execute, we think they are likely to catch up and investors
will be rewarded. Again, they have been raising their dividend at 12
percent a clip a year as well. So, investors get paid while they wait.

HERERA: You know, we have been asking all our guests this weekend what
they have been doing with their clients and with their money over the last
two weeks with the market volatility. What were you guys doing over at the
FBB?

MUSSIO: Yes. As we had cash to deploy, we did that. We bought some
stocks in the consumer space. We added to the Honeywell position a little
bit for clients that were late. I will admit when the market ticked down
on Monday, down 700, 1,200, down 1,600 we kind of stepped back and took a
breath and said something is unwinding that we don`t understand.

So, in that environment, like anyone else we feel it`s best to wait until
we get some additional information. But that`s — on whole, we were
buying.

HERERA: I think you had a lot of companies stepping back and watching.

MUSSIO: That`s right.

HERERA: Michael, thanks so much. Have a great weekend.

MUSSIO: Thank you, Sue. Take care.

HERERA: Michael Mussio with FBB Capital.

Coming up, a new film, and a pivotal moment for Hollywood.

(MUSIC)

HERERA: Cyberattacks cost the economy as much as $109 billion in 2016.
That`s according to a new report from the White House. The intelligence
community is quoted as saying that Russia, China, Iran, and North Korea are
the main foreign actors responsible for much of that malicious activity.

Google (NASDAQ:GOOG) is testing a system to help locate 911 callers. It`s
working with a startup that we told you about a while back called Rapid
SOS. The existing 911 systems that struggled to pinpoint the impact
location of cell phones which today make up the majority of phone calls.

According to “The Wall Street Journal”, Google`s system was able to better
locate people in an emergency reducing, the time it takes for EMS workers
to arrive at the scene.

A new movie from Disney (NYSE:DIS) Marvel is expected to have a big opening
weekend. It`s also expected to usher in a new era for Hollywood.

Julia Boorstin explains.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Marvel`s “Black
Panther” is off to a massive start, grossing $25 million in Thursday
night`s preview as Fandango`s fourth biggest pre-seller of all time behind
only to the last three “Star Wars” film, it`s expected to bring in $175
million to the U.S. box office this weekend, a February record.

That`s bolstered by rave reviews. And 97 percent positive Rotten Tomato`s
critics score, higher than any Marvel movie or any superheroes film from
Warner Brothers` rival DC Comics.

BARTON CROCKETT, FBR CAPITAL: You know, I think there has been this
concern about superhero movies, are they too kind of cookie cutter movies
and blocking diversity we see in the world around us. And I think part of
keeping it fresh is migrating into the diverse world we see. I think this
movie is kind of an attempt at that.

BOORSTIN: The film, which cost a reported $200 million to produce, is
expected to drive Disney (NYSE:DIS) to an even bigger share of the box
office this year.

Perhaps most important, “Black Panther” is defying assumptions that films
with diverse casts don`t perform particularly well, especially overseas and
now industry watchers believe the performance of this movie, demonstrating
the broad appeal of a predominantly black cost could prompt Hollywood to
embrace more black protagonists.

MATTHEW BELLONI, THE HOLLYWOOD REPORTER: I think this is a watershed
moment. I think if “Black Panther” does what most people think it`s going
to do, especially internationally, then studios are really going to
reconsider the reluctance in the past to diverse casting on these big
budget movies.

BOORSTIN: “The Hollywood Reporter`s” Belloni predicting that studio
franchise films will start looking different now that Hollywood has a
template for a successful movie driven by an entirely diverse cast.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in San Francisco.

(END VIDEOTAPE)

HERERA: And before we go, here`s another look at the wild week on Wall
Street. The Dow rose 19 points to 25,219. The Nasdaq fell 16. The S&P
500 added one.

For the week, the major averages were all up 4 percent or more.

And that is NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks
for joining us. Have a great weekend.

We`ll see you Monday.

END

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