Transcript: Tuesday, May 6, 2014

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

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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Ready or not. Here comes Alibaba, widely expected to be one of the biggest IPOs ever. But what made the company such a success in China?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: The mouse that roars. Disney (NYSE:DIS) blows past Wall Street earnings expectations. What’s driving the results? What’s the one key takeaway for investors?

MATHISEN: Shifting focus. Merck (NYSE:MRK) sells its unit that makes well-known brands like Claritin and Coppertone. Is shedding assets part of the company’s new strategy?

All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, May 6th.

GHARIB: Good evening, everyone.

Open sesame, Alibaba could be spreading some magic on Wall Street. Or at least that’s the hope. The giant Chinese e-commerce company filed paperwork with American regulators this afternoon so it can sell its shares here in the U.S. market. Alibaba has been often described as China’s Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) and PayPal all rolled into one Internet powerhouse.

It could be the biggest IPO since Facebook (NASDAQ:FB) went public two years ago.

Jon Fortt joins us now to tell us more about Alibaba.

So, Jon, I know you’ve been pouring over these hundreds of pages about Alibaba, what new do we know about this company? How big is it and how might it change the whole Internet world now it will be a public company?

JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, Susie, one of the things we know is that their ambition is they really want to serve China primarily. So, a lot of people are wondering, well, do they want to expand to the U.S.? Are they interested in going global as a consequence of this IPO? At least based on what they say here, they are still focused on China.

Now, the value of the goods sold there, in an enormous marketplace, nearly a quarter trillion dollars worth of goods flowed through Alibaba’s platforms. Put that into perspective, that’s twice as much as Amazon (NASDAQ:AMZN), four times as much as eBay (NASDAQ:EBAY).

And there is a huge play just in China. If you — if you look at the mobile transactions, the value, say, out of every $4 worth of transactions done on mobile, Alibaba gets three.

GHARIB: That’s amazing.

MATHISEN: What do we know about if anything more about how valuable this company may be? You just gave us some numbers that would indicate that Alibaba is going to be four times as valuable as Amazon (NASDAQ:AMZN).

FORTT: Well, we don’t know that. They — I have a place holder number in here in terms of how much they want to raise. They say a billion dollars. We know that changes overtime.

And their business model is different from eBay’s and Amazons in terms of revenue, $6.5 billion revenue for the last fiscal year. That’s not a huge amount of revenue.

MATHISEN: That is much smaller — much, much smaller than either eBay (NASDAQ:EBAY) or Amazon (NASDAQ:AMZN).

FORTT: And it’s because their model is a patient model. They’re taking less money off of the transaction, but they’re touching so many transactions in China and their pitch is, China is not like the U.S. There is not a lot of federal government retail properties. People — it’s really happening digitally and we are a huge part of that happening digitally in China.

GHARIB: Real quickly. I know in this prospect us, in this filing. They didn’t say anything about what the shares might be priced at. That’s a number everybody is wondering. Do you have a clue what it might cost to own a piece of Alibaba?

FORTT: We don’t know exactly how they’re going to divvy that up. That’s going to change for the last. We don’t know. But it’s probably north of $150 billion, the total value of the company once it goes IPO.

MATHISEN: What’s that going to do to Yahoo (NASDAQ:YHOO)? It’s going to boost the value of Yahoo (NASDAQ:YHOO), right? Because they’ve got 24 percent of it.

FORTT: It could be good. Right now, a lot of that’s already priced into Yahoo (NASDAQ:YHOO). We’ll see where it goes from here.

MATHISEN: Jon Fortt, thank you.

So, why is Alibaba so successful in China? For one thing, it operates a number of businesses, including the Taobao Marketplace, one of China’s most visited online shopping sites.

And as Eunice Yoon reports, Alibaba has changed the way Chinese consumers buy almost everything.

(BEGIN VIDEOTAPE)

EUNICE YOON, NIGHTLY BUSINESS REPORT (voice-over): Joe Li is a self-described addict of China’s online shopping site Taobao. Nearly everything he buys now is bought on the virtual bizarre of soon-to-be listed e-commerce giant Alibaba. He is on Taobao multiple times a week, purchasing furniture, his guitar, and today, food for his cat.

JOE LI, ALIBABA’S TAOBAO SHOPPER: Taobao changed my mine (INAUDIBLE).

YOON: Taobao is a national obsession in China, in a country where the consumers still mainly save, within they do shop, many log on and browse here.

(on camera): On Taobao, which means search for treasures, you can buy an outfit, try it on and hand it right back to the delivery man to have it returned. You can also you buy something and have it delivered right to your door. Millions of these packages are shipped out across the country.

LI: You can easily find some stuff which is hard to get from the local supermarket to a lot of shoppers.

YOON (voice-over): Today, this cat food is coming from a warehouse across town in Beijing. This retailer, one of the Taobao’s 7 million, used to have a proper pet food store, but switched to sales online.

UNIDENTIFIED MALE (through translator): “We have more customers with their online shops. They’re all over China. Not just limited to Beijing,” he says.

YOON: Li got his cat food in less than a day, after paying through Ali Pay, Alibaba’s version of eBay’s PayPal. The payment system is one of China’s most trusted, though buyers and sellers say they hope Alibaba builds faith in its site further by cracking down on the sale of fakes.

Even so, Li is still using Taobao for all his needs.

For NIGHTLY BUSINESS REPORT, I’m Eunice Yoon in Beijing.

(END VIDEOTAPE)

GHARIB: Despite all that excitement about Alibaba, our next guest says the IPO market is going through a reset. She’s Kathleen Smith, co-founder and chair of Renaissance Capital, an IPO investment advisory firm.

So, Kathy, I know you have been saying that this is a harsh environment for companies that are going public. But you just heard the news about the Alibaba filing.

Could that company be the exception? How do you think it’s going to do when it goes public this summer?

KATHLEEN SMITH, RENAISSANCE CPAITAL CO-FOUNDER & CHAIR: Well, we do think that Alibaba could certainly break the code we were saying in the IPO market, which has been a pretty harsh environment where since mid-April the deals that have been priced the last 20, 70 percent of them have been priced below the range. So, issuers have not been treated very well in the current IPO market and, you know, there is a lot of investors want to see high growth companies.

But they want to see profits. Alibaba has profits. So, that’s going to be an IPO that will be looked at and of interest we think to the IPO market.

MATHISEN: So, would you expect it will buck the trend of those numbers that you just said, in other words, 70 percent falling below the forecast range?

SMITH: We think so, because you can look at Alibaba and actually put a multiple on their earnings and come up to maybe a valuation of that $150 billion. So, that is going to make it a little easier to value. And I think almost every portfolio manager is going to want to own this company, which will be the world’s largest ecommerce company.

GHARIB: You know, back to the overall IPO market, it was really strong in the first couple months of this year, and just recently, the last couple of weeks, it’s really gone kind of soft. And we’ve got a lot of companies going public this week. And, in fact, there are a couple of them that are Chinese companies as well, Cheetah Mobile and Tuniu, which is sort of Priceline-type company. How do you think these companies are going to do this week?

SMITH: I do think investors are going to be very selective about these and there will be some pricing pushback, particularly the ones that aren’t making money, and I do think that there’s a focus on the very largest most valuable internet properties. So I do think it may be harder for this large back-up of IPOs that we are seeing to get done.

This is actually a good thing for the IPO market. Because we need the IPO market to work for investors and that had been the case all the way through about the first quarter. But the second quarter, it has not been a profitable place for investors and so, the prices have to adjust downward and then investors will make money. That’s how it works. That’s a good thing.

MATHISEN: What changed and why?

SMITH: Well, if you look at the overall market, all the high growth, particularly non-earning high growth tech and biotech health care companies had a reset in their valuations. Many of the Internet companies are down 20 percent to 30 percent from their highs. That had to affect IPOs, because IPOs are priced relative to the already traded companies.

So, investors, they have — you know, there are institutional investors and they need to make, have the logic in where these prices are trading. They just can’t trade. Trees don’t grow to the sky.

GHARIB: All right. So, give us your quick outlook in half a minute of how you think the IPO market will end the year, 140 IPOs so far this year.

Well, we have been very optimistic until about the last month. But we think we can get to above levels of 250 or so. We will go through a slow period now. But I think that once this adjustment is made, we’ll see the IPO market come back to more normal levels.

GHARIB: All right. Kathleen, thank you so much for coming on the program — Kathleen Smith of Renaissance Capital.

And here is something Twitter probably won’t be talking about. Six months after it first went public, the company’s lockup period expired today, and shares took a tumble. Today is the first time that company insiders and early investors were finally aloud to sell shares they own in the micro-blogging site. And apparently, a lot of them did. Shares of Twitter tanked falling nearly 18 percent. The shares are still higher than November’s IPO price of $26 a share.

MATHISEN: On Wall Street, stocks sold off right from the opening bell as disappointing earnings from the insurance giant AIG weighed on financial shares, and sell-off in Twitter that Susie just mentioned impacted other Internet and social media stocks. More on that in a moment.

The Dow, when was said and done, down about 130 points, NASDAQ off 57 and the S&P lower by about 17.

GHARIB: After the closing bell, Dow component Disney (NYSE:DIS) delivered the highest quarterly earnings in the company’s history. Disney (NYSE:DIS) did it with people flocking to its theme parks, to escape this winters bitter cold and snow, filling theaters showing his blockbuster animated movie “Frozen” and turning to ESPN, the ABC network, and all of its other TV holdings.

Here’s a look at today’s numbers: Disney (NYSE:DIS) posted earnings after charges of $1.11 a share. That was 15 cents more than analyst estimates of 96 cents. Revenues also beat forecast, topping $11.5 billion.

In after hours trading, Disney (NYSE:DIS) shares rose as much as 2 percent. They were down a fraction in the regular session.

Here is Morgan Brennan with more on those Disney (NYSE:DIS) results and the key take away for investors.

(BEGIN VIDEOTAPE)

MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Mega blockbuster “Frozen” has been getting all of the attention when it comes to Disney (NYSE:DIS), and with nearly $1.2 billion growth certainly the main driver of growth in the company’s studio division.

But the bigger story is that all five of Disney’s main business — the media and networks, parks and resorts, studio, consumer products and interactive all grew strongly. Each one posted double-digit increases in operating income, contributing to the highest quarterly earnings per share in the history of the company.

And that $1.11 per share, that blew away analysts estimates of 96 cents. Even the company’s smallest unit, interactive, which had been losing money, is now logging a profit. Thanks to its Disney (NYSE:DIS) Infinity video games and toys.

For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in Los Angeles.

(END VIDEOTAPE)

MATHISEN: A wide array of offerings in key acquisitions have helped Disney (NYSE:DIS) make that mouse that roars. The riding big winds of the box office and home entertainment and theme parks to upside surprises in every quarter over the past year. And we took a closer look at what makes Disney (NYSE:DIS) such a darling for investors.

(BEGIN VIDEOTAPE)

MATHISEN (voice-over): Start with “Frozen,” which Disney (NYSE:DIS) certainly isn’t. It’s the highest grossing animated feature film ever. The movie crossed the billion dollar mark in box office in March, just four months after it was released.

“Frozen”, along with “Thor: The Dark World”, has income at Disney (NYSE:DIS) studio group skyrocketing. Overall box office takes of January of 2013, more than $2 billion.

“Thor” is a part of the Disney’s Marvel unit, where the hits keep coming. “Captain America: The Winter Soldier” just made Marvel the most successful movie brand of all time, eclipsing “Harry Potter”. Who is third? Well, Disney’s own “Star Wars,” of course.

PAUL DERGARABEDIAN, RENTRAK SR. MEDIA ANALYST: You can argue that having all of these different brands under their wing, they have a veritable Mount Rushmore of huge movie brands at their disposal.

MATHISEN: Gamers made Disney’s Infinity the most popular high breed toy and videogame since its launch last summer. It’s done so well, they recently announced Marvel’s super heroes will be getting together in a second edition.

LARRY HAVERTY, GABELLI ASSET MANAGEMENT: I think this company could be golden two or three-year period. It’s just going to be a great two or three years for the company. I think the stock has maybe 30 percent, 40 percent upside over that — over that period.

MATHISEN: The other pieces of the Disney (NYSE:DIS) empire have also performed during the past four quarters. Theme park attendance, new record. And the media networks also made more money.

ESPN is still the single biggest piece of the Disney (NYSE:DIS) machine, accounting for 30 percent of the company’s total value. The sports network had higher ad revenues and it is still by far the most expensive cable channel for operators to provide to their subscribers. Those operators also had to pay higher fees to bring the Disney (NYSE:DIS) channel to their customers, making Disney (NYSE:DIS), indeed, the mouse that roars.

(END VIDEOTAPE)

MATHISEN: For the roster of companies Disney (NYSE:DIS) has under its umbrella, it looks so strong right now, some analysts say it is positioned for success that could last decades.

Still ahead, Merck (NYSE:MRK) enters into a mega-deal, selling its consumer unit for $15 billion. Will there be more to come as the drug maker shifts its focus?

Here’s what the new interim CEO at Target (NYSE:TGT) said on his first day on the job, investigators have determined that last year’s massive data thief has been limited to what the retailer has already disclosed. Forty million credit and debit card numbers and personal data from 70 million other customers.

John Mulligan, who was thrust into the top spot yesterday when long time CEO Gregg Steinhafel was ousted, also says he’s not interested in becoming Target’s permanent CEO.

Another huge deal in the pharmaceutical industry, Merck (NYSE:MRK) finalized its sale of its consumer health division today to Germany’s Bayer, selling off popular brand names like Claritin, Coppertone and Dr. Shoals foot care products. Despite that $14 billion sale, shares of Merck (NYSE:MRK) were the biggest decliners in the Dow today. They were off 2 1/2 percent.

Meg Tirrell was at Merck’s analysts’ day up in Boston where she spoke with the drug maker CEO about this latest deal and what’s next for the company.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: Merck (NYSE:MRK) today is announcing it’s selling its consumer over-the-counter health products business to Bayer for $14.2 billion. We talked with the CEO Ken Frazier here at the company’s analysts’ day in Boston. He told us this is a part of the repositioning of Merck’s business to focus on an area where it can be a leader, but that reshaping isn’t done and we could potentially see some more.

KEN FRAZIER, MERCK CEO: We’re going to look for the best growth opportunities within that portfolio. So, I wouldn’t say we’re finished. We’re going to continue to evaluate opportunities to create value, that’s to buy things that will make sense, at a value-creating opportunity, to sell things that we don’t feel our core and, of course, to keep and build on certain things.

TIRRELL: Now, Frazier also highlighted pipeline opportunities in areas like cancer, hepatitis C, HIV, diabetes and Alzheimer’s. We also talked about U.S. corporate tax policy. This, of course, against the backdrop of Pfizer’s $106 billion offer for AstraZeneca. Pfizer (NYSE:PFE) has said it will potentially reincorporate in the U.K. to benefit from the lower corporate tax rate there.

Ken Frazier telling us today that U.S. companies are at a competitive disadvantage when it comes to business development because of the U.S. corporate tax rate.

FRAZIER: I actually think that we need to lower the tax rate. I think we need to have a system that is a territorial system or a hybrid system and I think we got to recognize that we’re in a global war for assets and global war for business and U.S. companies can’t be at this kind of disadvantage.

TIRRELL: Now, Ken Frazier today also focusing on the company’s cancer drug, which had gotten accelerated fast forward at the FDA. And we should see more data on that in the upcoming cancer meeting called ASCO at end of this month.

For NIGHTLY BUSINESS REPORT, I’m Meg Tirrell in Boston.

(END VIDEOTAPE)

GHARIB: Whole Foods reports a miss on the top and bottom lines, and that’s where we begin tonight’s “Market Focus”. The grocer said same store sales rose 4 1/2 percent. But that number trailed estimates.

Whole Foods also lowered its full year sales forecast, that’s after it already trimmed its outlook the past two quarters. Shares initially plunged after the report. The stock was down a fraction in the regular session to $47.95.

Well, it was the opposite story for Electronic Arts (NASDAQ:ERTS). The videogame maker reported its profit jumped about 14 percent on better-than-expected sales of new consoles. It also announced plans for a $750 million share buyback. To top it off, the company raised its four-year guidance. Shares surged after hours, up as much as 14 percent during the regular session. The stock was down 2 1/2 percent to $28 and change.

Groupon (NASDAQ:GRPN) reported a quarterly loss, but it wasn’t as bad as analysts were expecting. And revenues also came in better than expected. But the online deal site issued a light second quarter profit outlook. So, shares initially fell after the bell. During the regular session, the stock was off by 2 1/2 percent to $6.72.

Pandora’s listener hours were up 30 percent in April. The streaming Internet radio company also saw its active listeners increase to 79 million people last month. But investors just didn’t seem impressed. Shares tumbled about 9 percent to $22.52.

Tyler?

MATHISEN: Office Depot (NYSE:ODP) closing 400 of its stores in the U.S. over the next two years as a merger with OfficeMax led to an overlap of location. It says the closures will save the company $75 million by the end of 2016. The office supply chain also posted better than expected quarterlies. Shares up 16 percent today to $4.83.

Shares of Delta took off after the airline announced it will hike its quarterly dividend 50 percent later this year. The company also launching a new stock buyback plan to increase returns for shareholders. The $2 billion buyback will be completed by the end of 2016 and the stock rose a fraction today to $37.69.

Shares of Corinthian Colleges (NASDAQ:COCO) plunged. After the company said it is exploring its options and reported weak results, the for profit education company, which is struggling because of declining enrolment and regulatory scrutiny. It says it’s going to be working with an investment bank and possibly putting itself up for sale. The stock fell more than 9 percent to a buck eight.

GHARIB: The new emerged Fiat Chrysler unveiled an ambitious five-year plan today. Among the goals, the auto maker wants to more than double sales of Chrysler and Jeep vehicles by the year 2018, while building six more Jeep assembly plants in six different countries, including China and Brazil. It’s also aiming for a boost in worldwide sales of Dodge and Fiat cars and targeting explosive growth in sales of Alfa Romeo sports cars. It plans to unveil new models over the next three years.

And coming up on the program, a new report concludes climate change is already disrupting our economy. It comes ahead of new regulations that could impact certain industries. We have that story, next.

(MUSIC)

MATHISEN: Lawmakers in Washington taking on high frequency trading, trying to determine whether the U.S. stock markets are rigged and how regulators can police that high speed trading. A Senate panel will hold a hearing next week on the use of complicated high speed computer programs and automated systems that critics say gives some traders an edge over average investors.

GHARIB: Also in Washington today, the Senate Banking Committee will vote on a bill to overhaul the U.S. housing finance system next week. The proposal will wind down a bailed out tax bureau owned mortgage giant Fannie Mae and Freddie Mac and look to shift more home loan guarantees for private lenders.

The Obama administration releasing its latest assessment on climate change. A three-year with inputs from hundreds of scientists, engineers, government officials and other experts on the impact of global warming.

Our Hampton Pearson took a look at how climate change has already affected business and the overall economy.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The latest national climate assessment says extreme weather caused by climate change is damaging the economy and impacting the lives of Americans in every part of the country. In 2012, extreme weather cost the economy $100 billion. The lions share, $65 billion, from Hurricane Sandy.

This past winter, tens of thousands of weather-related flight cancellations cost four major airlines at least half a billion dollars in lost revenue, according to just released earnings report. A three-year drought is impacting California’s $50 billion agriculture economy with more than 800,000 acres of farmland going unplanted. Also, the prospect of a food strike and produce prices on the way at the nation’s grocery stores.

At the White House, President Obama was enlisting the nation’s weather forecasters as a part of his latest call for action.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We want to emphasize to the public — this is not some distant problem of the future. This is a problem that is affecting Americans right now, whether it means increased flooding, greater vulnerability to drought, more severe wildfires.

PEARSON: Environmentalists are praising the report, because it pins much of the increase in climate change on human behavior, specifically carbon emissions, that cause greenhouse gases.

But conservatives say America can’t act alone.

CHIP KNAPPENBERGER, CATO INSTITUTE: The greenhouse gas emissions are — from the United States are not that large compared to the global greenhouse gas emissions. I think the power plants are a small part of that. And I think that the climate change going into the future is not going to be as dire as it’s made out to be.

PEARSON: The report rollout comes just ahead of next month’s release of new regulations from the Environmental Protection Agency, limiting carbon emissions from existing coal fired power plants.

GINA MCCARTHY, EPA ADMINISTRATOR: We can do this. This is not about frightening people. It’s about facing realities that we face today and taking action to protect our kids in the future.

PEARSON: But on Capitol Hill, Senate Republicans continue to push for a vote later this week on approval of the Keystone oil pipeline, as both the job creator and environmentally friendly.

SEN. JOHN CORNYN (R), TEXAS: We need the Keystone XL Pipeline, which will create tens of thousands of new jobs. It will mean we have a safe source for additional oil in addition to what we produce here in America.

PEARSON (on camera): It’s not just Congress that’s stalled on the energies policy and climate change. The latest “Wall Street Journal”/NBC News poll finds climate change at the bottom of voter’s priority lists, with about 40 percent of those being surveyed saying action can be delayed until next year.

For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.

(END VIDEOTAPE)

MATHISEN: Here’s a man with quite a story to tell. Ben Bernanke, the former chairman of the Federal Reserve. He sealed a book deal. The book currently untitled will be published by WW Norton and will tell the story of how he guided the central bank and the economy through the financial crisis. No terms disclosed just yet. The book is scheduled to be released next year.

GHARIB: And finally tonight, a dubious anniversary to note on Wall Street today. One that introduced a lot of people to high frequency trading and the flaws it exposed in the markets. On this day in 2010, the New York Stock Exchange suffered what became known as the flash crash. The Dow suddenly plunged nearly a thousand points late in the trading day, losing 9 percent of its total value in just minutes. By the end of that session, stocks recovered most of those losses, but the debate of pros and cons of super fast automated program rages on.

MATHISEN: It was a frightening day. You felt everything was out of control. But, of course, the computers were controlling it.

GHARIB: The whole fat finger thing.

MATHISEN: The whole fat finger and Procter & Gamble (NYSE:PG) going down $20 a share, it was crazy.

GHARIB: That’s NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Thanks for watching.

MATHISEN: And thanks from me as well. I’m Tyler Mathisen. Have a great evening, everybody. See you back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.

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