Transcript: Tuesday, January 21, 2014

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —


SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Driving the Dow. The index dragged lower by earnings from Verizon (NYSE:VZ), Travelers, and Johnson & Johnson (NYSE:JNJ). And IBM, which reported results after the closing bell, could add to the misery tomorrow.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Oil slick. Halliburton (NYSE:HAL), Schlumberger (NYSE:SLB), and Baker Hughes (NYSE:BHI) all post strong results. But it`s not just the American energy boom that`s helping propel profits.

GHARIB: And staying warm. What`s behind the shortage of heating fuels across the country and a rise in prices?

We have all of that and more tonight on NIGHTLY BUSINESS REPORT for this Tuesday, January 21st.

MATHISEN: Good evening, everyone. Thanks for joining us.

On this cold and snowy day for much of the eastern part of the country, IBM, one of the priciest and therefore one of the most important stocks in the price-weighted Dow index tried its best to warm things up on Wall Street. The world`s largest technology services company reported better-than-expected earnings in its latest quarters. It made $6.13 a share. That`s 14 cents better than the forecast.

But the good news sort of ended there. Margins narrowed ever so slightly and revenue declined 5 percent, ending about a half billion dollars short of estimates. That sent shares initially lower in late trading today, as you see on that graphic.

Josh Lipton joins us from Silicon Valley with more on IBM`s earnings. Josh, what is the key takeaway from these results?

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, Tyler, you know, listen, IBM reports and the big number investors focused on, $27.7 billion. That was IBM`s revenue for the fourth quarter and it was a miss. Analysts covering IBM, they had wanted to see more like $28.3 billion.

IBM CFO Martin Schroeder on the call with analysts said some of IBM`s business segments appeared solid like software, where revenue was up 4 percent, says IBM has moved more aggressively into the Cloud services, saw revenue also edge higher.

But the pain was really in hardware where revenue tumbled. There were reports say that Lenovo is interested in IBM server business, which the company, you know, has been looking to divest. Importantly, though, besides that disappointing revenue number, IBM, though, did reiterate its commitment to generate at least 20 bucks in EPS in 2015 — Tyler.

MATHISEN: All right, Josh. Josh, thank you very much.

GHARIB: Our next guest is a big believer in Big Blue. IBM is on his buy list. Joining us now, Dan Morgan, senior portfolio manager at Synovus Trust.

And, Dan, thanks for joining us.


GHARIB: All right. So, make your case for owning IBM. What does it have going for it?

MORGAN: Well, there`s no doubt that this quarter in terms of revenue was disappointing and hardware continues to be disappointing.

But you look at some of their growth drivers in terms of the new initiatives they got involved in in the last couple of quarters, very good growth in their Cloud business. It was up 69 percent. You look at Business Analytics was up 9 percent. Smarter Planet was up 20 percent. So, that`s really been the key for them going forward, as obviously continuing to show progression in the software area. That was up 4 percent.

The big drag as you know, Susie, is hardware. That was a really tough area this quarter and if they can spin off to Lenovo like they did their PC unit, which was a great move, when you look at the problems at Dell (NASDAQ:DELL) and HP have had in that space, that might be the key for them to moving forward to try to really jump start revenues again.

MATHISEN: You know, Dan, you say that Ginny Rometty`s success or failure will be determined by her ability to drive the top line. But so far, that hasn`t happened. Seven consecutive quarters of declining revenue.

What`s going to change that?

MORGAN: Well, hopefully, some of these growth drivers like I mentioned to get that going again.

And potential improvements in China and some of these other markets, the most recent quarter, I believe, emerging markets were down significantly. So, hopeful that, you know, that can get going for them.

But, really, her success I think is going to be determined, like you said, the ability to drive revenues and the ability of these new areas, these growth drivers that I just mentioned, to really get going and pick up the whole ship to rise, so to speak, which has been a struggle for IBM as you mentioned on the top line.

GHARIB: Dan, you just mentioned China, and IBM does get a lot of its business from China, although we heard over the weekend that even China`s economy is slowing down from that big engine of growth that it had.

I mean, to what extent is China a big drag on IBM`s earnings?

MORGAN: Well, obviously, on this quarter, that particular unit hurt a lot. So, you know, China is a faster growing economy than the U.S. but they`re not growing as fast as they have in the past. I don`t think it`s a drag. It`s something that hopefully down the road will pick back up again.

But, you know, it was a tough quarter, but you look at the installation base, the huge amount of markets that IBM is involved in, the tremendous recurring revenue through the services business, they really kind of steady Eddie technology company and you know, hopefully China will recover and that will help them going forward.

MATHISEN: Ms. Rometty had a couple of tough acts to follow and Mr. Palmisano, Mr. Gerstner.

How do you grade her tenure so far or is it too early to grade it at all? If not, why not?

MORGAN: Yes, Tyler, you`re right. I mean, the jury is still out. I mean, again, we got to see how these things work out for her going forward. She`s been there, what, two years, short period of time. So, it`s just too early to see if she can really pull this off and get that top line going.

GHARIB: Real quickly, Dan, we just have a few seconds left. You have a buy on the stock. That`s where we start our conversation. What`s your target for 2014 in terms of IBM stock, at $189 trading now?

MORGAN: Well — yes, Susie, I`m not an analyst so I don`t have price targets. I`m a portfolio manager. We have about 355,000 shares of the stocks.

So, we still believe in it in the long run. It`s conservative, patient dividend technology stock. That`s the best way to sum it up.

GHARIB: OK. That`s fair enough.

Thank you so much, Dan — Dan Morgan, senior portfolio manager at Synovus Trust.

MATHISEN: Before the bell, three more Dow components reported their latest quarterly results and the earnings were pretty good. But the outlooks for the future, well, they weren`t so great. Travelers made by about $1 billion in profit by charging higher premiums and paying out less in claims, but travelers and other insurers are likely to face increased price competition in the year ahead.

Verizon (NYSE:VZ) netted $5 billion in profit, signing up more wireless and FiOS customers. But investors are worried about tough competition from the likes of T-Mobile and Sprint. And net income at Johnson & Johnson (NYSE:JNJ) up 19 percent on strong sales of prescription drugs and medical devices, but its full year earnings outlook was below Wall Street forecast.

But J&J`s CEO Alex Gorsky says he`s optimistic about the future.


ALEX GORSKY, JOHNSON & JOHNSON CHAIRMAN & CEO: What we`ve seen a lower but steadier uptake among some of our medical areas, particularly in the orthopedics group in the fourth quarter. So, we`re watching it. We`re cautiously optimistic that some of the uptake in the demand that we`re seeing is related to people getting a little bit more certainty and frankly to some of the enrollment taking place in Affordable Care Act. But we`ll have to watch and see over the longer term.


MATHISEN: Shares of all three of those Dow components fell more than 1 percent today.

GHARIB: Well, that mixed bag of earnings led to mixed results on Wall Street today, with the costliest blue chip stocks ending the session lower, including Visa (NYSE:V), Goldman Sachs (NYSE:GS) and IBM, as we mentioned earlier. The Dow was the only one of the three major averages posting a loss.

Let`s take a look. The Dow lost 44 points but the NASDAQ was up by 28, closing at the fresh 13-year high and S&P added 5 points.

MATHISEN: Blue skies ahead for Delta Airlines (NYSE:DAL), lower jet fuel cost and higher revenue for more ticket sales helped the airline to almost $3 billion in profit in its latest quarter. Shares rose 3.25 percent today after the carrier told investors that it expects 3 percent growth in the current quarter by focusing on higher revenue on the routes it already offers.

But some of those flights may be having a bit of a rough day. Massive snowstorm on the east coast forced the cancellation of almost 3,000 flights and caused another 2,000 delays.

Jim Corridore of S&P Capital IQ says today`s storm is more bad news for Delta and other carriers.


JIM CORRIDORE, S&P CAPITAL IQ: We`re off to a very poor start to a winter season. So, there`s going to be obviously tens of millions of dollars of additional cost added, lost revenue opportunities as passengers cancel their flights. So, yes, this is another in a string of bad weather-related events with the airline.


MATHISEN: Forecasts call for upwards of up a foot of snow, all the way from Philadelphia, up into New England by Wednesday morning.

GHARIB: That snowstorm, along with the blast of arctic air across much of the country is sending temperatures lower and price of natural gas higher. There are also reports of a shortage of propane.

So, what will that mean for the cost of heating your home this winter?

Sharon Epperson has more.


SHARON EPPERSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: This winter storm is causing shortages of heating fuels in some parts of the country and a sharp rise in prices. A shortage of propane gas supplies forced Ohio`s governor to declare a statewide energy emergency, in order to expedite propane shipments to suppliers.

More than a third of households in the Midwest use propane gas to heat their homes. And propane futures traded over the counter and cleared through the CME Group (NASDAQ:CME) have risen 10 percent in the past three months. Even before the recent cold spell, a huge corn crop harvest had significantly increased the demand for propane in the central United States. Propane, a byproduct of natural gas, is used in the equipment that dries corn.

Meanwhile, demand for natural gas is skyrocketing as well and prices are following suit due to the record cold this winter.

ALAN HARRY, SPARTAN COMMODITY FUND: It`s having an impact on what we`ve got supply-wise to last through the winter. So, whenever we get hit with a really cold storm —


EPERSON: — five times historical norms this time of year. More than half of the country uses natural gas to heat their homes and the Energy Department predicts consumers will spend 13 percent more on their natural gas bills this winter than last.
I`m Sharon Epperson for NIGHTLY BUSINESS REPORT, back to you.


MATHISEN: Good news about forecast for global economic growth, the International Monetary Fund just raised its outlook for worldwide growth for the first time in nearly two years, on rising consumer demand and higher inventories, especially in the most advanced economies.

GHARIB: That will certainly be one of the topics of conversation in Davos, Switzerland, this week. It`s where political, business and entertainment leaders around the world are meeting for the annual World Economic Forum. They`ll be talking economic policy and philanthropy and new business deals.

Andrew Ross Sorkin is there with more.


ANDREW ROSS SORKIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Four thousand miles from New York City is Davos, Switzerland. It`s Europe`s highest city and also the birthplace of many modern winter sports. The town itself has a permanent population of 11,000.

But come January every year, many of those residents bolt, making way for the 2,500 or so participants of the World Economic Forum that arrive by train and car and helicopter. They come from more than 100 different countries, heads of state, business leaders and celebrities, all to tackle some of the world`s biggest problems.

KENNETH ROGOFF, HARVARD PROFESSOR: The United States is doing a little better than the average country that got hit. Europe stands to have a recession that by some measures as bad as the great depression. They are a lot richer, you can`t compare but it`s pretty severe.

SORKIN: The theme of this year`s meeting, reshaping of the world — consequences for society and politics and business. A theme that will be tackled by the likes of CEOs for Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) and Goldman Sachs (NYSE:GS), UBS, Marriott and Google (NASDAQ:GOOG), just to name a few.

And with such high profile attendees all in one location, security is extremely tight. From snipers on rooftops to heavily guarded checkpoints getting around isn`t easy.

EDWARD STROZ, EXECUTIVE CHAIRMAN, STROZ FRIEDBERC: Any time you have the chance to answer the questions of who, when and where and how, you give an adversary or any kind of a threat agent, and advantage to do something. So, by its nature, I think you do increase the risk.

SORKIN: It goes far beyond the visible security though. The organizers are making sure information security is safe as well. That includes e-mails, phone calls and any electronic documents.

In a statement the organizers write, “The World Economic Forum takes information security seriously. We look at it from various angles ranging from our reports drawing attention to it as a major area of global business risk to an operational level. We employ encryption technologies where required and subject ourselves to external and internal audits.”

(on camera): This is the place where business meets business, meets philanthropy and meets the arts. It`s a place where Nelson Mandela first found capitalism, and it`s a place where Bill Gates and Bono make some of their biggest philanthropic announcements. It`s also where some of the big mergers and accusations, the seeds of those deals planted here.

So, what is going to be the big headline this year? We`re going to have to see. But there are big names this year. Secretary of State Kerry is going to be joining Davos, as is the secretary of the treasury, Jack Lew. Also, Netanyahu, along with the president of Iran.

For NIGHTLY BUSINESS REPORT, I`m Andrew Ross Sorkin in Davos, Switzerland.


MATHISEN: Still ahead, will Netflix (NASDAQ:NFLX), the best performing S&P stock of 2013, blow past estimates when it reports tomorrow? We`ll tell you what to expect right after this.


GHARIB: Some of the biggest names in oil exploration and oil fuel services are seeing higher profits these days, and that`s thanks to strong performances outside the U.S. energy boom.

Morgan Brennan has more on what`s energizing profits.


MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Don`t credit the energy boom sweeping the U.S. for helping out Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI). Instead, look overseas, analysts say they have been expanding their international operations in search of bigger profits.

MICHAEL URBAN, DEUTSCHE BANK SECURITIES ANALYST: That`s where a lot of the growth is, at least historically seeing strong growth, not only from demand perspective and emerging markets. But that`s also where a lot of resource is. So, again, it`s just a case of follow the oil, follow the money, follow the growth.

BRENNAN: Markets like the Middle East, Africa, Asia Pacific and Eastern Europe have fueled strong revenue growth for the biggest oil field services.

Case in point: Baker Hughes (NYSE:BHI), the world`s third largest servicer, saw a 27 percent increase in revenue growth from its operations in the Middle East and Asia Pacific. The other big growth areas, Europe, Africa and Russia.

Schlumberger (NYSE:SLB) saw revenue increase 18 percent from its Middle East and Asia operations as well, and Halliburton (NYSE:HAL) up 13 percent in the same region.

All of that compared to low single digit growth in North America.

(on camera): So, why is the international market so strong? Less competition and mild deregulations mean more offshore drilling and offshore drilling means bigger profit margins.

URBAN: But if you look at international capital spending, it`s about 70 percent to 75 percent of spending. A lot of the oil and service companies, their revenue is 50 percent, 45 percent North America. So, it`s really a reflection of the investment they made in recent years to catch up with that mismatch.

BRENNAN: It`s not adds if the companies are abandoning the energy boom, in places like Texas and North Dakota, far from it. The service companies all peg those regions as key to their growth going forward. But analysts say that in the rush to cash in on North America`s energy revolution, the stocks positioned to benefit overseas shouldn`t be overlooked.



MATHISEN: Activist hedge fund Third Point Capital has taken a major stake in Dow Chemical (NYSE:DOW) and it`s pushing for a spinoff. And that`s where we begin tonight`s “Market Focus”.

Third Point, which is run by investor Dan Loeb, has a $1.3 billion stake in the company, which is the firm`s largest investment by dollar value. The hedge fund is pushing Dow, the country`s largest chemical maker by revenue to sever its petrochemical business to improve its performance. Shares rose more than 10 percent in Dow Chemical (NYSE:DOW) today to $45.93.

The Oreo cookie maker Mondelez added activist investor Nelson Pelts to its board. That deal ends Pelts` campaign to have the company sell itself to the beverage and snack giant PepsiCo to generate more profit. As hopes for a merger faded, shares fell more than 2 percent today to $34.45.

AMD posted earnings after today`s close. The company swung to a profit as sales of new gaming consoles help to offset the falling demand for PC. The chip maker, however, posted a weak outlook and that disappointed investors. Shares initially plunged after hours as you see on that graphic. The stock ended the regular session down slightly to $4.17.

And shares of the struggling smartphone maker Blackberry spiked after it landed a big government contract. Eighty thousand BlackBerry devices will be linked to the Pentagon`s management system at the end of January. That secures the company`s position as the long time supplier of government phones. Shares popped more than 9 percent to $9.93.

GHARIB: TD Ameritrade (NASDAQ:AMTD) was popular with investors today. Quarterly earnings surged by about 31 percent from last year. The company says that`s because more customers felt confident about trading in the stock market, as well as improving commission and transaction fees.


FREDRIC TOMCZYK, TD AMERITRADE CEO: Our investors and our clients (ph), but they`re investing all the way through this. If you look at our investor movement index, it`s been climbing now for a good, six, seven, eight, nine months. We had one month where it went down. But it`s at the highest levels since we`ve tracked it for the last four years. So, it`s been pretty healthy.


GHARIB: Close about 4 1/2 percent to $33.85.

Now, shares of FireEye took a hit after JPMorgan (NYSE:JPM) downgraded the cyber security firm to neutral from overweight. The analyst said the company is an innovator but slashed its rating because of valuation concerns. Shares tumbled more than 5 1/2 percent to $69.44.

Target`s data breach drama continues. Cowan and Company downgraded the retailer stock and slashed its price target. The analyst is expecting target to indefinitely suspend its buy back which she said is a key support for the stock. Shares tumbled nearly 2 percent to $59.20. That is a 52-week low.

And how about Google (NASDAQ:GOOG) trading at $1,405? Well, that`s the new price target from two leading tech analysts today. Credit Suisse cited the company`s continued growth in ad revenue and Pacific Crest says it expects strong fourth quarter earnings. Google (NASDAQ:GOOG) shares were up 1 percent to close at $1,163.70.

MATHISEN: One of the most anticipated reports of the season is due out after the bell on Wednesday when we hear from Netflix (NASDAQ:NFLX).

So, what are investors of this streaming movie and TV service looking for?

Julia Boorstin has more.


JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): With Netflix (NASDAQ:NFLX) shares up about 225 percent over the past 12 months, Wall Street expecting significant growth in fourth quarter results. Analysts project earnings per share will grow by more than four times to 66 cents. And revenue is expected to grow 33 percent to $1.17 billion.

AARON KESSLER, RAYMOND JAMES: We think it`s still a subscriber growth story. We do think there`ll be upside to earnings as we said. But if there is upside, the streaming sub-growth, that will be a positive, we think, for the stock.

BOORSTIN (on camera): Netflix (NASDAQ:NFLX) is U.S. streaming subscribers will be the number most in focus. Analysts expect the company to add about 2 million more in the fourth quarter, bringing total to more than 33 million at the end of 2013.

(voice-over): Subscriber numbers are a key indicator of whether Netflix`s big move last year into original exclusive shows like “House of Cards” and “Orange is the New Black” is paying off.

Investors will also be watching how much the cost of content is impacting margins.

On the earnings call, expect analysts to ask about international expansion and whether Netflix (NASDAQ:NFLX) plans to change its pricing.

KESSLER: We think investors are having an assumption that they`ll actually raise pricing longer term from the $8 per month they charge in the U.S. for streaming today to maybe $10 plus longer term. And, in fact, the recent report suggests Netflix (NASDAQ:NFLX) is testing lower price plans. So, we like to hear more about that as well as any updates on competition that they see in the market.

BOORSTIN: Another hot top for Netflix`s earnings call, which will be moderated by two analysts, CEO Reed Hastings outlook on competition, both with the traditional premium cable channels like HBO and also the likes of Amazon (NASDAQ:AMZN), which is spending more on original and exclusive shows, looking for a piece of Netflix`s success.

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


GHARIB: And coming up on the program, what`s causing the tug of war between energy producers and domestic refiners, and what it might mean for you, the consumer?


MATHISEN: Mohammed El-Erian, a familiar face to NBR viewers, is stepping down as CEO and co-chief investment officer at PIMCO, the world`s biggest bond fund operator. El-Erian says he will stay with PIMCO`s parent company, the German giant Allianz after he steps down in March. He`ll serve as an adviser on global economic and policy issues.

GHARIB: With the U.S. currently producing more oil than it imports, the prospects for even more domestic production are good, perhaps enough to begin exporting again to the rest of the world.

That`s causing a tug of war between energy producers and oil refiners.

What does all of that mean for consumers?

Jackie DeAngelis reports.


JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Boomtown USA, it`s here and here and here.

Shale oil will push U.S. oil production to highs not seen since 1971, so says the International Energy Agency. And analysts say U.S. energy independence is on the horizon in the year 2020.

Increased production is driving up supply. The upside for consumers: lower oil prices, maybe cheaper gas, maybe lower heating bills.

We may even have more energy than we need, which has led to a debate over what to do with the excess supply.

Energy producers hoping to find more buyers in higher prices are lobbying the Obama administration to lift the ban on U.S. exports put in place during the Arab oil embargo back in 1973.

Domestic refiners who buy crude oil are pushing back.

ANDY LIPOW, LIPOW OIL ASSOCIATES PRES.: The debate over crude oil exports is one about dividing up the pie between the crude oil producers and the oil refiners.

DEANGELIS: Andy Lipow is an oil industry consultant who says that domestic refiners are enjoying an advantage because the supply of domestic crude is up, making it relatively cheap compared to global oil prices.

LIPOW: If the U.S. were to allow crude oil exports, I expect that the domestic crude oil price is going to rise to world oil levels.

DEANGELIS (on camera): Some experts say it`s way too soon to be having this debate. The U.S. is still importing roughly 7 million barrels of oil every day, just under the 8 million that it produces on its own, making the export debate a nonstarter.

LIPOW: We`re still a long way off from oil independence. One of the things that we do have to look forward to is U.S. production combined with Canada and increases in Mexico could make North America oil independent.

DEANGELIS (voice-over): Traders are also saying that global crude prices now above $90 a barrel would have to come back down close to $70 a barrel. So, the markets could absorb a spike in price.

In the meantime, producers will continue to battle with refiners as both sides look for ways to turn black gold into cash.



MATHISEN: And finally tonight, we`re only two months away from basketball`s March Madness, but things are already getting a little crazy. The mortgage lender Quicken Loans is teaming up with Warren Buffett`s Berkshire Hathaway (NYSE:BRK.A), offering a chance at the $1 billion prize for completing a perfect bracket in this year`s men`s college basketball tournament. Quicken is putting up the money, Berkshire Hathaway (NYSE:BRK.A) is ensuring the grand prize.

Now, you`ve got to know that the odds of picking a perfect bracket every single game are one in nine quadrillion. That`s nine with 18 zeroes after.

But if you select the winner of every single game, you could get 45 annual payments of $25 million or a lump sum of half a billion. I`d say take the lump.

GHARIB: I say you better get your calculator out and start working those numbers.

MATHISEN: And start programming these numbers, absolutely.

GHARIB: That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib, thanks for watching.

MATHISEN: And I`m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody. We`ll see you back here tomorrow night.


Nightly Business Report transcripts and video are available on-line post broadcast at 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) 2014 CNBC, Inc.


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