Transcript: Wednesday, February 5, 2014

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


BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Unfollow? Twitter shares plunged following the company`s first report on earnings as a publicly-traded company, which failed to impress investors. We`re zeroing in on the one thing investors need to watch.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Economic deep freeze. Snowstorms put some hiring on hold in January, adding to evidence that the winter chill is coming at a big cost to the economy.

GRIFFETH: Kicking the habit. CVS (NYSE:CVS) will no longer sell cigarettes, foregoing about $2 billion in annual sales. But will the short-term loss lead to long-term gains?

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, February the 5th.

Good evening, everybody. I`m Bill Griffeth, in for Tyler Mathisen, who`s off tonight.

GHARIB: And I`m Susie Gharib.

Nice having you here, Bill.

Here`s a tweet that Twitter didn`t want to get — after the closing bell, it released its very first earnings report after going public back in November. But the news was mixed. Twitter earned 2 cents a share while analysts were expecting a loss of 2 cents a share. Revenues also beat forecasts and its guidance for the period is strong.

But a key metric was not good. Growth in the number of new users was anemic, a gain of only 3.8 percent. Investors expected much more.

Twitter shares plunged more than 10 percent in after-hours trading.

Sheila Dharmarajan joins us now with more on Twitter`s result.

Big surprise on Twitter, Sheila. What was your take away on it?

SHEILA DHARMARAJAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, it was a big surprise. Investors were very disappointed. The big key takeaway here is scale.

Remember, how does Twitter make money? Through advertising. In order to pitch the Twitter platform to advertisers, it needs to come (ph) in as big, it has scale, it`s growing, it`s worth their time.

This number all of a sudden, put lot of doubt into that. And that`s why people are so concerned. If it doesn`t have the scale, if it doesn`t have the user growth, what does mean for advertising and ultimately Twitter`s profit?

GRIFFETH: Did they have an excuse for that? Have we heard from them of why they — why it was as anemic as it was?

DHARMARAJAN: Not yet. You know, the conference call is still undergoing right now. So, we`re still monitoring that. Right now, they`re focusing on the positives, which was good, right? Profit, sales beat estimates, their mobile stats are very good. But we`re still waiting to go hear the question and answer session.

GRIFFETH: All right. We`ll wait for that. But in the meantime, stay there, Sheila. We also heard from Disney (NYSE:DIS) after the closing bell with reports from last quarter showing a big improvement in its movie studio division. And CEO Bob Eiger cited box office hits like “Thor” and “Frozen” and “Saving Mr. Banks”, which, of course, is about company founder Walt Disney (NYSE:DIS).


BOB IGER, DISNEY CHAIRMAN & CEO: When we bought Pixar, we had a few goals in mind. We wanted to protect and allow Pixar to continue to prosper with the great movies that they are making. And we wanted to use the Pixar leadership, namely John Lasseter and Ed Catmull, to come in and run Disney (NYSE:DIS) animation and turn Disney (NYSE:DIS) animation around. They`ve clearly succeeded in doing that.

“Frozen” is not the first example of their success. “Tangled” came before” Wreck-It Ralph.” But this is clearly the biggest.


GRIFFETH: Disney (NYSE:DIS) earned $1.04 per share, easily beating estimates of just 92 cents. Revenue was above forecasts as well. And shares in the after-hours rose 1 percent during the day and were initially hire than in after-hours trade.

Sheila D, what was the big takeaway for you on Disney (NYSE:DIS) on this?

DHARMARAJAN: The Disney (NYSE:DIS) magic is still very much alive. A lot of people love to talk about Disney (NYSE:DIS) being old school, a lot of these technologies coming in. Look, when Disney (NYSE:DIS) has a hit movie, it really does well. You can see that strength in the Disney (NYSE:DIS) franchise.

I think what`s also important is the theme park, sales there were up 6 percent. That`s a real key indicator of how the consumers do. They`re still taking vacations, spending the money a big deal. Also one thing that`s overlooked is the company`s interactive division, that division sales were up 22 percent. Again showing how Disney (NYSE:DIS) is taking its franchise and brand and putting night the new digital age.

GRIFFETH: A lot of synergies there in those divisions.


GRIFFETH: Sheila, thanks. Yes.

GHARIB: On Wall Street today, stocks seesawed between slight gains and losses all session long, finally ending the day modestly lower on a mixed batch of earnings and data about jobs. The Dow lost five points, NASDAQ down 20, holding just above the 4,000 mark, and the S&P off three points.

GRIFFETH: Meanwhile, old man winter was striking again, blasting nearly half the country with another major storm. This time leaving hundreds of thousands without power in the Northeast, and up to 15 inches of snow or a thick coat of ice from the Plain states all the way into New England. And more proof that all this wicked weather is having a big impact on the economy.

Payroll firm ADP said that private companies hired 175,000 workers in January. That was less than expected. And the firm blamed the dip on snow storms and extreme cold weather.

So, just how much is the winter chill cooling U.S. economic growth?

Steve Liesman takes a look tonight.


STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): It`s been one of the colder and snowier winters for big swaths of the country. And that means a potential big impact on the nation`s economy. Winter, of course, is expected to be cold and snowy. But this year the numbers relative to normal have come in much higher in the case of snow and much lower in the case of temperatures.

PAUL WALSH, WEATHER & BUSINESS ANALYST: Retail is going to be impacted. There will be fewer people out and about and spending money. It impacts the restaurant industry, fewer people out and shopping.

People basically are frozen in place. They`re home, they`re not going out. They`re not spending money. And it just has an overall blanket on the economy.

LIESMAN: And what a blanket it`s been. Chicago`s 58 inches so far puts the Windy City on track for the fourth snowiest on record. New York headed for a top ten snow year. And Detroit`s 39 inches in January alone is a new record.

Meanwhile, some parts of the country have been colder than normal, and other parts much colder, especially in places where lots of people live.

That means big effects in retail, especially autos and housing. That`s not to mention tens of thousands of canceled flights. And with today`s ice storms, power outages, too.

Big heating bills mean less money left over for other purchases for consumers. But there can be an up side.

WALSH: Because of the fact that it`s been so cold and we`ve had to sort of dampening effect on consumer demand, when you overlay that pent-up demand with the easy comparison to last year, it actually bodes pretty well for the retail economy when we move into March and April.

LIESMAN: Some economists are marking down their forecasts right now by as much as half a point because of the weather. But those forecasts could heat up in a few months with the spring thaw — if the spring ever comes.



GHARIB: Our guest tonight says the U.S. economy`s performance so far is uneven. She`s Lindsay (NYSE:LNN) Piegza, chief economist at Sterne Agee.

You know, Lindsay (NYSE:LNN), at the beginning of the year there was so much optimism about the U.S. economy, about the global economy. And aside from what`s going on with the weather it seems like right now there`s so much of a mood of gloom and doom.

You know, what`s your take on the economy? How would you describe the health of it right now?

LINDSAY PIEGZA, STERNE AGEE CHIEF ECONOMIST: I think right now the best way to describe the U.S. economy as uneven. We`re seeing a strong juxtaposition between some sectors that are holding their own, holding steady, juxtaposed with extreme weakness particularly in the consumer sector.

Now remember, volatility quarter to quarter, the consumer is still spending at just a very stagnant 2 percent pace. So, that doesn`t necessarily bode well for a trajectory pushing us above a 2 percent GDP phase as we roll further into 2014.

GRIFFETH: How much does the weather play in all that, Lindsay (NYSE:LNN)? I know they often use it as an excuse. But we`ve had an extreme winter in the eastern part of the country, and there is a historic drought in California right now.

PIEGZA: You`re exactly right. An extreme winter can have a very negative impact on the economy. When we look at manufacturing, it can impede capacity. When we look at the consumer, it can really limit foot traffic out spending money in the marketplace.

But if we look at this morning`s service sector index, we actually saw that employment picked up. So looking forward to Friday`s employment report, it`s going to be difficult to explain away all of the weakness if there is weakness simply because of the weather.

GHARIB: So let`s talk a little bit about the employment report. There is a lot of anxiety about that Friday number. What are you expecting? Is it going to be a good number? Is it going to be a bad number? And how that is going to play out?

PIEGZA: We`re actually looking for about 130,000. So it`s not necessarily the devastating number that we saw in December, but it`s also a far cry from the trajectory of momentum that we saw in October and November with those back-to-back plus 200,000 nonfarm payroll reports.

Now, what`s interesting about Friday`s report is the market is very likely to not react quite as dramatically as it would if we see an upside or down side report simply because there`s going to be a lot of excuses about the weather playing into that number. So, we really won`t get a clean number until the February report.

GRIFFETH: I`ve learned long ago that the stock market is not the economy, but it does try to figure out what the economy is going to do down the road. We had a tough month of January. It`s been a very tough month to begin with for February for the U.S. stock market. Is it trying to tell us something about the economy this year?

PIEGZA: Well, it`s interesting. Going into the end of 2013 the stock market was really driven by animal spirits. Consumers were feeling much more confident. We had energy price reprieve. We had certainty in Washington. We had these temporary wealth effects boosting consumer spending.

But now as we turn the corner into January, especially following that very disappointing December report, I think some of that optimism has been shot as we now focus more on reality and those underlying fundamentals which tell us that we`re not seeing the job and income growth we need in order to sustain this recovery going forward.

GHARIB: All right, Lindsay (NYSE:LNN). Thanks a lot for coming on the program. Really appreciate it.

PIEGZA: My pleasure. Thanks so much.

GHARIB: Lindsay (NYSE:LNN) Piegza from Sterne Agee.

And still ahead on the program: CVS (NYSE:CVS) is willing to lose billions in sales by not selling cigarettes. But will the short-term pain result in healthier long-term gains?


GHARIB: A stunning announcement from CVS (NYSE:CVS) today. The nation`s second largest drugstore chain says it will stop selling cigarettes and all tobacco-related products in its nearly 8,000 U.S. stores starting in October. Is calling it quits and seeing big losses in sales a good decision?

Bertha Coombs has that story.


BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): For CVS (NYSE:CVS) Caremark taking tobacco products off its shelves is a matter of strategy, as it vies to play a bigger role in health care through its pharmacies and prescription drug benefits business.

LARRY MERLO, CVS (NYSE:CVS) PRESIDENT & CEO: Tobacco products have no place in a setting where health care is delivered. And when we asked ourselves where we expect to be in the future as a health care company, it became clear that removing tobacco products from our stores is the right thing to do.

COOMBS: The company says it will lose $2 billion in annual sales which will result in a 1 1/2 percent to 2 percent drop in 2014 profits. But analyst Ross Muchen thinks the move will be positive long term.

ROSS MUKEN, ISI GROUP: They`re going on a large marketing plan for the cessation of cigarette smoking. I think that`s going to create a lot of goodwill with the consumer and actually drive some traffic into the store.

COOMBS: CVS (NYSE:CVS) is the first drugstore chain to voluntarily stop selling tobacco, but pharmacy retailers have been under pressure to stop from health care groups including the American Cancer Society, the American Pharmacists Association, and socially responsible investors such as the Sisters of St. Francis, which has been pushing Walgreens to quit the habit.

TOM MCCANEY, SISTERS OF ST. FRANCIS ASSOC. DIRECTOR: CVS (NYSE:CVS) Caremark has positioned themselves as the leader. And that should put pressure on the other pharmacy chains, particularly Walgreens and Rite-Aid.

COOMBS: Walgreens issued a statement saying it continues to evaluate cigarette sales.

CVS`s decision was years in the making. Former CEO Thomas Ryan talked about dropping tobacco in 2008. But his retail competitors like dollar stores have become bigger sellers of cigarettes, the move now may make more financial sense.

HELENA FOULKES, CVS (NYSE:CVS) PHARMACY PRESIDENT: When you think today about the fact that people used to smoke in airplanes, or that they used to smoke in restaurants, maybe this is the kind of decision that will change our industry in the future and people will look back and think about it in a very different way.

COOMBS (on camera): Asked from social media about other products like e-cigarettes, CVS (NYSE:CVS) says it doesn`t sell them and may revisit the issue depending on what the FDA determines about them. When it comes to sugary soft drink and alcohol, it says unlike cigarettes, those can be consumed in moderation.



GRIFFETH: Of course, a lot of investors will be watching this closely because tobacco stocks are big defensive plays and they tend to pay rich dividends.

Joining us to talk about it, Vivien Azer, who`s the U.S. Alcohol and Tobacco analyst at Citi. Vivian, thanks for joining us tonight.


GRIFFETH: Obviously, competitors will be watching this carefully to see what impact this has on the sales at CVS (NYSE:CVS). What do you think the impact is going to be?

AZER: Well, you know, I`m not a retail analyst. But for the tobacco manufacturers we don`t expect any material impact. The total drugstore universe accounts for about 5 percent of U.S. cigarette volumes. So, we don`t expect that consumers will alter their consumption patterns. We think they`ll just switch channels.

GHARIB: And so, what does this mean for tobacco companies and tobacco investments? Are they still a good investment for investors?

AZER: Yes, absolutely. You know, we are recommending Altria and Reynolds American (NYSE:RAI). We think they`re great defensive plays. You know, while exogenous headwinds persist in U.S. tobacco, this is not new news or should not be new news to long-time tobacco investors. Cigarette industry volumes have declined at an average 3 percent to 4 percent compound annual growth rate over the last 10 years.

But cigarette consumption continues to be sticky. There are still 40 million adult tobacco users in the United States, which really supports a very healthy cash flow return profile for those companies.

GRIFFETH: Let me go back to your first question really and kind of re-ask it again. What is the likelihood that other chains will follow CVS (NYSE:CVS) and start to withhold sales of tobacco products? What impact does that have? I mean, could this be a domino effect eventually for these companies?

AZER: Well, you know, 65 percent of the volume sales of U.S. tobacco products are made through convenience and gas channels. So, while I can appreciate the health implications and the messaging that a retailer might want to consider, you know, that`s largely not applicable to the large universe of tobacco retailers.

GHARIB: Let`s look at some of the stocks and how they performed today. All of them were pretty much down by a percent or more. You say you like Reynolds and Altria. Tell us why.

AZER: Yes. You know, for my money, I`d like to avoid headline risk. And within my coverage universe, the third U.S. tobacco stock is Lorillard (NYSE:LO). Hands down, the best earnings growth story in the universe but subject to a fair amount of menthol risk and particular relative to the overhang that you saw.

On all the stocks today, I would mention that there was menthol news out of the FDA, and pending menthol regulation is something that is really top of mind for tobacco investors. So, the move in the stock I wouldn`t fully attribute to the CVS (NYSE:CVS) news.

GRIFFETH: And we`ve mentioned the last few years how dividend-payers were darlings on Wall Street. A lot of people buy these because of the dividend.

Are the dividends in your view secure for the tobacco companies?

AZER: Yes, they absolutely are. These earnings models move very slowly. Drivers and top line algorithm don`t change that much year to year, which makes it very easy for these companies to manage their cash flow.

GHARIB: So, you were saying, Vivien, that these tobacco companies still have a lot of markets, they have other ways of selling cigarettes. But the conversation in the board room must be changing about — I`m guessing — that, you know, they`re going to have to find new ways to reinvent themselves.

Are e-cigarettes a way to go? Are there other markets that they`re thinking about?

AZER: Surely — sure, there`s a lot of new activity going in next gen. Each of the three big U.S. tobacco manufacturers now has the presence in the e-cigarette category. Lorillard (NYSE:LO) really was early out of the gate, with the acquisition of Blue. But both Reynolds American (NYSE:RAI) and Altria are both making inroads in that market as well. That`s specific to the U.S. Bur if you look more globally, heat not burn products and dissolvable tobacco — I think all of these companies recognize that diversification is necessary.

GRIFFETH: Vivien Azer at Citi, thanks for joining us tonight.

AZER: Thanks for having me.

GRIFFETH: You bet.

GHARIB: We begin our “Market Focus” tonight with earnings from Dow component Merck (NYSE:MRK). The drugmaker reported a 14 percent drop in profits last quarter because of tough competition from generics, restructuring charges and some currency fluctuations. Despite that earnings miss, shares rose to multiyear highs in intraday trading after announcing a new alliance with three other drugmakers to market a new cancer drug. But by the close, shares edged up only a fraction to $53.53.

Green Mountain seeing a lot of green after the market close today. It says it`s signed a 10-year deal with Coca-Cola (NYSE:KO) to collaborate on an at-home cold beverage system. Coke will also buy a 10 percent stake in Green Mountain for $1.3 billion. Shares of Green Mountain initially halted on the news, but when it reopened they soared more than 35 percent in after the-hours trading. In the regular session, the stock rose slightly to $80.88.

A warning out of Ralph Lauren, the company said — the clothing company says it expects increased promotions to cut into gross margins this year. Ralph Lauren`s third quarter results came in higher than expected as demand from North American stores lifted sales. But investors focused on that downbeat outlook for 2014. Shares slumped 3.5 percent to $148.71.

Estee Lauder also spooked investors with a weaker than expected forecast this quarter. The beauty products maker said profits fell because of a slowdown in its Asian market. Lauder lowered its revenue outlook because of weakness in China as well as South Korea and Europe. Shares tumbled 5 1/2 percent to $65.36.

GRIFFETH: Time Warner`s fourth quarter profit fell by 12 percent because of high costs and write downs which offset revenue growth at its HBO unit. Still, earnings did beat estimates. The media giant also raised its quarterly dividend and approved a $5 billion stock buy back program which pleased investors. Shares rising by 1 percent, closing at $63.09.

3D Systems (NASDAQ:TDSC) took a big hit in today`s session when the 3D printer maker cut its fourth quarter profit estimates, hurt by falling demand for its consumer printers and printed parts. Other 3D printer companies fell in sympathy, including Stratasys (NASDAQ:SSYS), ExOne and Voxeljet. Shares of 3D systems plunged 15 percent to $64.10.

And Hain Celestial reported a weak earnings report after yesterday`s closing bell. Investors are concerned about the natural food retailer`s margins. They were hard hit by increased commodity costs. Everybody`s facing that right now. Shares at Hain Celestial down 6 percent to $85.44.

GHARIB: Activist investor Carl Icahn is well-known for shaking up companies. For several months, he`s been buying Apple (NASDAQ:AAPL) shares and urging the company`s board to buy back stocks. But now, one of the country`s largest pension funds is pushing back.

Josh Lipton has more.


JOSH LIPTON, NIGHTL BUSINESS REPORT CORRESPONDENT (voice-over): He`s an activist investor who loves a good fight. Carl Icahn has a big megaphone and he enjoys using it, taking on CEOs, corporate boards, and even rival activists.

But in his latest fight, Icahn might have met his match. Icahn wants Apple (NASDAQ:AAPL) to buy back $50 billion of its stock by September. Apple (NASDAQ:AAPL) rejects that idea. The company has already committed to returning $100 billion to shareholders by 2015 and returned nearly half of that in the last 18 months.


LIPTON: Anne Simpson is the senior portfolio manager of investments at CalPERS which owns $1.6 billion of Apple (NASDAQ:AAPL) shares. She agrees with Apple (NASDAQ:AAPL) and has a problem with Icahn`s activism.

SIMPSON: Now, standing outside and lobbing a brick through the window is really not a sensible way to engage in the conversation. We don`t think that, you know, Carl Icahn who`s a relatively small investor with a very short-term agenda should be steering the board of Apple (NASDAQ:AAPL), which is a very big company with a long-term future which many people are relying on.

LIPTON: Simpson says Apple (NASDAQ:AAPL) should focus on product innovation and the quality of its board, not financial engineering.

Icahn is firing back, saying that Simpson`s priorities are misguided. “It is a shame,” Icahn says, “that Anne Simpson is more interested in spewing pejoratives than improving corporate governance in this country, which CalPERS is in a position to do.”

As for Simpson`s criticism that he`s a short-term investor, Icahn says he`s often a long-term holder as well. He has owned Federal Mobile since 2001, for example.

Icahn offers another reason investors should trust him, his returns. Through October, Icahn Enterprises (NYSE:IEP) posted an annualized return of more than 26 percent over the past decade. CalPERS over that same time period generated an annualized return of 7.1 percent.

Of course, Icahn and CalPERS have very different investor styles. Icahn carves out positions in companies and then rattles board rooms for change.

CalPERS is one of the largest institutional investors with assets of $277 billion.

(on camera): It`s not clear how all this will play out at Apple`s annual shareholder meeting on February 28th. One thing we do know, Icahn and Simpson won`t be sitting next to each other.

Josh Lipton, NIGHTLY BUSINESS REPORT, Silicon Valley.


GRIFFETH: Quite a battle there.

Coming up, a perfect storm hits propane supplies in the Midwest, causing severe shortages. And now, governors are taking action. That story, coming up.


GHARIB: And finally tonight, while the U.S. is producing plenty of its own crude and natural gas, a fuel of another kind is soaring in price and supplies are quickly dwindling. It`s propane. It`s causing a lot of problems this winter.

Morgan Brennan has more from Sully, Iowa.


MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): In Sully, Iowa propane is a hot commodity. Key cooperative Lynn Sheet (ph) has been selling the fuel since 1970s and he says this season ahs been unlike any other he`s experienced.

(on camera): Have you ever seen anything like this?

UNIDENTIFIED MALE: No, ma`am, I have not.

BRENNAN (voice-over): So what makes this winter different? An unprecedented propane shortage that has pushed prices to record levels and caused a number of governors to declare states of emergency.

GOV. SCOTT WALKER (R), WISCONSIN: We have people who are at or nearly at no propane in their tanks, anywhere below 30 percent is extremely dangerous in this kind of weather.

BRENNAN: The never-ending cold weather has kept demand high. But the problem first began in October when a record-breaking late and wet harvest required more propane-powered heaters to dry crops.

Another issue has been increased exports. According to the EIA, the U.S. now exports more than 400,000 barrels of propane a day, a historic high.

(on camera): Transportation has also been a problem, thanks to rail car and pipeline issues. And perhaps most pressingly, not enough trucks or drivers to cart supplies from Texas, where one of the country`s largest propane storage hub is located.
(voice-over): All of this has caused the Department of Transportation to issue emergency declarations for 35 states and Washington, D.C., temporarily loosening trucking rules to allow drivers to spend more time on the road.

It`s caused propane prices to skyrocket. In the last week of January alone, the national average topped $4 a gallon, more than the price of gasoline, and a 30 percent increase just from the week before.

ROY W. WILLIS, PROPANE EDUCATION & RESEARCH COUNCIL CEO: We have a period before the winter sets in where inventories can recover. That did not happen this year. And as a consequence, the primary trading hub in Conway, Kansas, is approaching a 10-year low level.

BRENNAN: Iowa Governor Terry Branstad, along with fellow Midwest governors, have written letters to President Obama, seeking additional federal help including financial aid for consumers struggling to pay these higher prices.

GOV. TERRY BRANSTAD (R), IOWA: We`re encouraging people to conserve and only order what they absolutely need to kind of get through this cold snap.

BRENNAN: But with news today that the national propane inventory is down yet again, many fear things could get worse before they get better.

For NIGHTLY BUSINESS REPORT, I`m Morgan Brennan in Sully, Iowa.


GRIFFETH: The winter can`t end soon enough, huh?

GHARIB: I know. Keep conserving.

GRIFFETH: You have to.

GHARIB: Wear warmer clothes.

That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for joining us.

GRIFFETH: I`m Bill Griffeth. Have a great evening, everybody. We`ll see you tomorrow.



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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