TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Google (NASDAQ:GOOG) shake-up. The widely held company is making some major changes, and investors seem to like it, at least initially.
Precision play. Warren Buffett spends more than he ever has before to acquire a company. But did he pay too much?
Wall Street rally. What was behind the strong start to the week for stocks?
All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, August 10th.
Good evening, everyone, and welcome. I’m Tyler Mathisen. Sue Herera has the evening off.
Well, get used to hearing about a new company. A new company called Alphabet. Google (NASDAQ:GOOG) one of the most widely held stocks by mutual funds, perhaps the most famous brand of all these days is creating a holding company with that name, Alphabet in an effort to shake up the way the firm is organized.
And the new holding company will include the business that Google (NASDAQ:GOOG) is best known for. Search. The news which came after the close of trading sent shares higher initially in the after-hours session, as you see there.
Jon Fortt is here with what this move means for the company and for shareholders who either own the stock directly or through ETFs and funds.
Jon, welcome. Good to — good to have you with us.
Was this reorganization in any way rumored and what does it do?
JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Not rumored at all, Tyler. Had to do a double-take to make sure that this was real.
This company, indeed, called Alphabet, within it will exist Google (NASDAQ:GOOG) Inc. And that company has a new CEO. Larry Page, the former CEO of Google (NASDAQ:GOOG), is going to be the CEO of Alphabet.
The CEO of Google (NASDAQ:GOOG) now is going to be a guy named Sundar Pichai. He’s been a fast-rising executive within Google (NASDAQ:GOOG), served as Google’s chief operating officer up to this point. But as of Q4, he will be the CEO, including under his watch will be, yes, search and pretty much all of the revenue producing businesses within Google (NASDAQ:GOOG), including YouTube.
The things that won’t be included, things like Nest, the home automation company that Google (NASDAQ:GOOG) acquired for more than $3 billion. The head of that company, Tony Fadell, is trying to help Google (NASDAQ:GOOG) turn around Google (NASDAQ:GOOG) Glass. Also Google (NASDAQ:GOOG) X, the research and development arm of Google (NASDAQ:GOOG), will not be included within Google (NASDAQ:GOOG). That will now be part of Alphabet. Google (NASDAQ:GOOG) Ventures, Google (NASDAQ:GOOG) Capital, the investment arms will also be part of Alphabet.
A few executives will report to Larry Page and not to Sundar Pichai. They include Ruth Porat, the new CFO. She will continue to report to Alphabet CEO Larry Page. David Drummond, general counsel, will report to Larry Page, as well.
Eric Schmidt, formerly the executive chairman of Google (NASDAQ:GOOG), will now be the executive chairman of Alphabet. And, of course, Sergey Brin, the co-founder of Google (NASDAQ:GOOG) will continue to serve in that capacity at Alphabet. But Sundar Pichai will have control of Google (NASDAQ:GOOG).
In the earnings report, Google (NASDAQ:GOOG) Inc. results will be broken out separate from the overall Alphabet results. So, investors will get a little bit more granularity into what’s making money and what the profitability is. But we don’t know exactly how some of the costs are going to be assigned. Things like that we’ll have to get more detail on, Tyler.
MATHISEN: So in this what sounds like relatively complicated maneuver, it looks like there is a simple sort of strategy behind it. Take all of the revenue generating businesses, or the big ones, YouTube, Google (NASDAQ:GOOG), the ad business there, separate it from the things that are more developmental or investment-oriented, perhaps to juice the stock a little bit.
Is that — is that a wrong reading, John?
FORTT: There’s a bit of that, but Nest does produce revenue so there are a few little businesses that are not part of Google (NASDAQ:GOOG) but a part of Alphabet, Tyler.
MATHISEN: OK. Jon, thank you very much. Jon Fortt, we’ll be watching that one, closely, for the rest of the week I’m sure.
Well, on Wall Street today, stocks got off to a strong start driven by a major corporate acquisition by the most closely watched investor of them all, Warren Buffett. Buffett’s Berkshire Hathaway (NYSE:BRK.A) reached a deal to acquire the aerospace supplier, Precision Castparts (NYSE:PCP) for $37 billion. It’s Berkshire’s biggest deal ever.
Precision Castparts (NYSE:PCP) should be a familiar name to you if you watched the program on Friday. It was a pick by our market monitor guest. And today, on the deal news, Precision Castparts (NYSE:PCP) spiked 19 percent, or sparked. Class-A shares of Berkshire, well, they fell just a little bit as you see there.
And this deal seems to be emblematic of what’s widely known as the Buffett way.
MATHISEN: Even for Warren Buffett, this is big. What’s more, the deal to buy precision Castparts valued at more than $37 billion, also keeps Berkshire Hathaway (NYSE:BRK.A) moving beyond its original base in the insurance business.
In 2010, Buffett landed Burlington Northern Santa Fe Railroad in what is now his second biggest deal, for about $26 billion. In 2013, he bought half of the ketchup maker Heinz for about $12 billion. This year Heinz merged with Kraft (NYSE:KFT) to form the world’s fifth largest food and beverage company.
But Buffett admits his, quote, “big game hunting”, is on hold now for awhile.
WARREN BUFFETT, BERKSHIRE HATHAWAY CHAIRMAN & CEO: This takes us out of the market for an elephant. But we’ll probably be buying a few small things in the next six months.
MATHISEN: The move to buy Precision is a big bet on the aerospace company that buys its parts. Demand for commercial jets made by the likes of Boeing (NYSE:BA) and Airbus is booming.
Precision’s other big customers buy pipes and pipeline parts. That’s the part of the business that’s been hurting, as oil prices slump. Profit was down 17 percent in precision’s latest quarter. And its stock price is down 20 percent in a year.
But that’s precisely the kind of weakness Buffett likes to feast on, especially if beneath the number lies a solid, well-run business, he can hold onto.
BUFFETT: We’re going to be in this business for 100 years. So, I’m not — it doesn’t really make any difference what oil and gas does in the next year in terms of us buying. And I — if somebody told me for sure that the oil and gas business was going to be in the doldrums, say for three years, I still would have made the deal.
MATHISEN: Buffett likes to remind people that Berkshire owns 9.5 companies so large they’d be in the Fortune 500 if they were on their own.
Precision, with annual holds of $10 billion in sales and $1.5 in profit, would add one more. And there’s room for Berkshire to continue expanding. Berkshire recently reported a $67 billion cash reserve. Buffett says he’ll use about $23 billion of that in this deal. Borrow about $10 billion to finance it. That will leave him with more than $40 billion on hand. Just in case he wants to pounce on a deal only he would consider small.
MATHISEN: Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) also owns shares of IBM, but he’s not concerned about the stock’s recent slide saying, quote, “I love it when it goes down. It means the company buys stock cheap.” A comment some interpreted to mean that he, Buffett, would be interested in buying more. Shares of IBM rose today along with the broader market.
And Berkshire Hathaway (NYSE:BRK.A) also owns a big stake in Kraft (NYSE:KFT) Heinz, as we mentioned in that package. Today, Buffett played down speculation that Kraft (NYSE:KFT)-Heinz could buy the snack food giant Mondelez. Many see Mondelez as a takeover potential target following news that activist investor Bill Ackman has amassed a large stake in the company.
Late today, Kraft (NYSE:KFT) Foods and Heinz posted lower sales during the quarter, leading up to their merger and that sent shares lower initially in after-hours trading.
And joining us now is someone who has interviewed and covered Warren Buffett for many years and she’s a familiar face to all of us, and we’re delighted to have Susie Gharib in the house, senior special correspondent at Fortune, and an NBR contributor.
Susie, welcome. Good as always.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT CONTRIBUTOR: Great to see you.
MATHISEN: Good to see you. Susie, come on. We just sit right on earlier —
GHARIB: Any time.
MATHISEN: Listen, is this classic Buffett?
GHARIB: Really classic Buffett. You put your finger right on it. He buys companies that are undervalued, sometimes unloved, unglamorous, and that where the stock may be out of favor. He bought a company that’s undervalued and he’s hoping over the long-term, like you said, the 100 years that it’s going to see a value.
And the other thing is kind of unglamorous. He’s joining a company that’s right in, railroads, utilities, chemicals, Duracell batteries.
MATHISEN: Basic industrial parts here and the reason it’s undervalued as we mentioned there. It’s businesses in the oil patch. There are some who think he may have paid too rich a price.
GHARIB: Yes, and a lot of people are saying that today, Tyler. And I talked to some of the Buffett watchers, too. But they said that about Burlington-Northern and look how well it’s doing now five years later.
The key here is that if you do the math, Buffett experts I talked to said that you hold it to the long-term, they’re expecting that earnings, pretax earnings will grow by double digits. And the problem with Berkshire Hathaway (NYSE:BRK.A), which is a good problem to have, it’s so big, $200 billion in revenue. And so, it has to move the needle somehow. You’ve got to do these kind of big deals.
MATHISEN: Yes. And who’s to school Warren Buffett on price?
MATHISEN: You know, really.
GHARIB: You know the other thing? He’s going to keep the same management. Mark Donovan, same headquarters, they’re going to run the company. And this has been a success formula for Warren Buffett for 50 years.
So, you know, don’t second guess Warren Buffett.
MATHISEN: If it’s working, leave it alone. Let’s talk a little bit about IBM. Any perspective there? I mean, he seemed to at least obliquely hint that he liked the price, and he would be open to buying more of it, and that seemed to help the price today.
GHARIB: The stock as you said was up today. People are going to be watching for this SEC filings. You know Warren Buffett is very famous for saying, “Be fearful when others are greedy and greedy when others are fearful.”
IBM is a controversial stock. People are very fearful of it. He’s buying it. Like he said, I love it when it’s cheap.
MATHISEN: And we love you. Nice to have you here.
GHARIB: Great being here.
MATHISEN: Great to see you, Susie.
All righty. As we mentioned at the top of the program, the Buffett deal was one of the reasons for today’s big rally on Wall Street. The Dow Jones Industrial Average climbed 241 points to 17,615, breaking its seven-day losing streak, one of the longest in years, the NASDAQ up 5. And the S&P 500 gained 26.
But it wasn’t just the Buffett deal that got investors moving today. Bob Pisani of the New York Stock Exchange tells us what else was behind today’s push higher.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, it’s about time we had a decent rally. The Dow has been down seven days in a row and there’s been significant destruction this quarter in oil stocks, in other commodity stocks and in big global industrial names, Caterpillars and United Technologies (NYSE:UTX), all of them down on concerns of slowing global growth.
Today, some of that reversed. Why? Well, how many days in a row can you be down? It’s a slowdown, not the end of the world. So, you’re going to get a day with a natural bounce because stocks are so oversold.
Then, you have China. The Shanghai market rallied almost 5 percent overnight, and for all the wrong reasons. The economic news was terrible. Inflation at the wholesale level was negative. That indicates that the demand for goods was weak, and imports and exports were both down about 8 percent compared to July of last year.
Stocks rallied there because everyone now assumes the government is going to try to stimulate the economy again by lowering rates and maybe even buying more stocks. You know they’ve been doing that a lot recently.
Not surprisingly, the biggest bounces occurred in oil names like Chevron (NYSE:CVX), material companies like Du Pont, and big international industrial names like Honeywell and General Electric (NYSE:GE) and Illinois Tool Works (NYSE:ITW). All these companies are very leveraged to the global growth story.
But even beating up social media and Internet names rally today like Twitter and Yelp and Pandora and Yahoo (NASDAQ:YHOO)!
Now, the one thing that was missing was volume. It was a bit stronger than usual but not dramatically so. Many of these commodity and industrial stocks are very heavily shorted. So, it would have been nice to see much heavier volume, which would have indicated at least some traders were covering their shorts and betting that this was a bottom. But that’s a story for another day.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
MATHISEN: Investors are also paying close attention to what the Federal Reserve says about the economy, and the path for interest rates.
Today, the vice chair Stanley Fisher made it clear that he thinks inflation is very, very low. Despite the labor market near full employment. Separately, the Atlanta Fed President Dennis Lockhart said economic conditions have largely returned to what he thinks of as normal. And that a decision to raise rates should come soon.
Still ahead, politics and money. What some of the presidential hopefuls have planned for your social security benefits.
MATHISEN: Covering report on our nation’s air traffic controllers. Two in ten admitted making mistakes in the past year, mainly because of fatigue. The findings were part of a government study which according to “The Associated Press”, the Federal Aviation Administration has kept secret.
Overall, controllers reported averaging under six hours of sleep per day over the course after a workweek.
Well, the Postal Service lost money last quarter. But it was an improvement from a year ago. The independent agency lost about a half a billion dollars in the quarter ended in June. A year ago, the loss was nearly $2 billion. Even though volumes continue to decline, the slide was offset by an increase in prices. Officials at the Postal Service say they are focusing on digital innovation to help improve financial health.
Social Security, the federal government’s largest benefits program, of course, turns 80 on Friday. But the entitlement program is in bad financial shape, as we recently reported. The program has enough cash to make payments until 2035. But its disability fund is projected to run dry by the end of next year.
So, where do the presidential candidates stand on the issue of Social Security?
John Harwood is in Washington.
John, Social Security back at the center of the political debate. What are the principle arguments here? And they really don’t have to do so much, do they, with the disability fund?
JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: No, they don’t, because the disability fund is one that it appears likely that Congress will shore up on a temporary basis. They’re really looking long-term at the benefits that go to those 65 and over, and what we know is, after that 2035 point that you mentioned, Social Security can only pay 75 percent of promised benefits through 2089.
That means everybody agrees that this program needs shoring up. The question is how you do it.
MATHISEN: So, if — so what are the leading ways to explore that?
HARWOOD: Well, couple things. You can curb benefits, and some of the Republicans, Chris Christie, Jeb Bush, are both talking about raising the retirement age. Chris Christie is talking about eliminating benefits for retirees with $200,000 or more income, saying they don’t need those checks.
Obviously, you can also raise taxes. Republicans are resistant. Democrats are willing to go down that route.
MATHISEN: Yes, some say a very simple way to do it is just to make the amount of your pay that is subject to that Social Security tax bigger or, even unlimited.
HARWOOD: Exactly. If you currently it’s taxed at around like $120,000. People don’t pay Social Security payroll tax over that.
Bernie Sanders the other night when there was an exchange at the Republican debate said you simply get rid of that cap, this program is going to be solvent for a long time.
Mike Huckabee, the Republican who was in that argument defending benefits, took a different approach. He said we ought to shift the consumption tax so we get more income from high-income people. That’s not the same as lifting the cap, but it’s another way of going at it.
MATHISEN: John Harwood, thank you, as always. John reporting tonight from Washington.
Well, Dean Foods (NYSE:DF) posted a steep sales decline and that is where we begin tonight’s “Market Focus”.
The company’s chairman also suddenly left the firm with no explanation there, which weighed on shares today. The milk processor did manage to beat earnings expectations. Still, shares fell almost 3 percent in an up market. They finished at $17.21.
Sysco (NYSE:SYY) out with mixed quarterlies. Profit fell compared with last year because of charges related to its abandoned plan to buy U.S. Foods. Still, the food distributor managed to beat on the bottom line, while sales were below consensus. The stock up nearly 2 percent today however, it finished at $37.59.
Alibaba will invest nearly $5 billion in a Chinese electronics chain. The e-commerce company’s CEO, Daniel Zhang, says the partnership will offer consumers a larger selection of offerings. Shares of Alibaba up 2 percent to $80.47.
Shake Shack posting a beat on both the top and bottom lines. The fast casual burger chain saw sales rise and it hiked its sales outlook for the year. The chain also announced a proposed secondary stock offering of 4 million shares.
In initial after-hours trading, the stock rose. At the close, shares were off 1.5 percent to $70.64.
Well, cable stocks are bouncing back after losing billions of dollars in market value over the past week, on concerns about the loss of pay TV subscribers. But that’s not the only issue plaguing this industry.
As Julia Boorstin reports, this group is also struggling with a potentially even bigger challenge: declining ad revenue.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: As viewers shift their time to Netflix (NASDAQ:NFLX), Facebook (NASDAQ:FB) and YouTube and other digital content, ad dollars are following them. Viacom (NYSE:VIA) led last week’s media decline as its most focused on millennials who are more likely to stream than watch TV.
Weak ratings driving ad revenue down 9 percent. Meanwhile, weakness at FOX TV properties like “American Idol” drove its TV division’s ad revenue down 14 percent. This as the traditional model struggles to keep with fast-changing taste.
SCOTT KESSLER, STANDAR & POORS: One hit this year is another cancellation the next year. And it’s very difficult when you think for traditional media companies to kind of make those adjustments accordingly, in lockstep with how the audience and viewership changes. But you can do that to a large extent online.
BOORSTIN: Television’s losses have been YouTube’s gains. The amount of time watching videos on YouTube is accelerating, up 60 percent over the last year.
Advertisers are paying note. The number of advertisers on YouTube grew 40 percent over the last year, with its top advertisers spending 60 percent more than they did a year ago.
Google (NASDAQ:GOOG) doesn’t break out YouTube’s revenue but credited the video platform for driving its better than expected quarterly result.
And Facebook’s big push into video is paying off. CEO Sheryl Sandberg crediting strong demand for video advertising with the company’s upside earnings surprise.
KESSLER: Over time what they’ve been able to do is not just build out the platform and the capabilities, but also they’ve been working with countless advertisers and marketers, and so what they can do is refine their process. Figure out what works. And what doesn’t work.
BOORSTIN: Facebook (NASDAQ:FB) is laying the groundwork to make its video ads as an attractive alternative to TV spots. Sharing ad revenue with video partners and launching live video for celebrities, which opens the door to even more video ad dollars. And even Twitter’s making gains in video, today announcing a partnership to deliver 100 NFL video clips a week, along with ads.
This is Twitter and NFL look to cash in on the appeal of TV’s most popular content on new platforms.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.
MATHISEN: Coming up, the new clues we may get about the health of the consumer this week.
MATHISEN: Here’s what to watch tomorrow, folks:
The small business optimism index is out. So is the productivity, and costs report. That always is a big one for me, measure of labor efficiency.
And another data point, wholesale trade, an important economic indicator.
And that, folks, is what to watch Tuesday.
Gas prices still going down, the average price of a gallon of regular fell 11 cents in the past two weeks. It now sits at $2.71, weighed down by the ongoing slump in crude. According to the Lundberg Survey, prices are down 81 cents a gallon from the same time just one year ago.
Well, despite those lower gasoline prices, a New York survey found consumers plan to slow their spending to the lowest rate in at least two years. A report on consumer expectations found that households will increase spending by just 3.5 percent over the next year. And that’s down from more than 4 percent in last month’s survey.
Well, earnings season isn’t over just yet, but the next big wave of reports will come from the nation’s retailers. And it starts this week, with quarterly results from department stores.
Courtney Reagan has more on what to expect and what we could learn about the health of the consumer.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Department stores are in focus this week with Macy’s (NYSE:M), Kohl’s (NYSE:KSS), Nordstrom (NYSE:JWN) and JCPenney all reporting. And analysts think it will be a mixed bag. It hasn’t been easy to get consumers to spend at department stores recently, unless they’re buying athletic wear and shoes, or accessories.
Consumers are spending, but just not on the traditional goods that make up most department store’s inventory.
STEVE SADOVE, FORMER SAKS CHAIRMAN & CEO: They’re not necessarily buying apparel. They’re going to experiences. They’re going to restaurants, traveling. It’s a different mind-set.
They’re not necessarily going to the department store to buy clothing. But they are getting out there and spending the money.
REAGAN: In order to entice shoppers to buy, department stores have had to increase discounting, which will likely crimp profitability. But retail analyst Dana Telsey thinks the competitive environment could help the more mid-tier department stores.
DANA TELSEY, TELSEY ADVISORY GROUP: Think about the value names. I mean, Kohl’s (NYSE:KSS) of the world should have a little bit better given the fact they have a loyalty program out there. I think JCPenney could be the surprise. They’re prepared for back-to-school. Some of the vendors have been talking very positively about the sell-through.
REAGAN: Macy’s (NYSE:M) has been a standout performer among the department store sector, and broader retail. But it’s also likely the one that will again be the most hurt by lower tourist spending because of the stronger dollar.
Last quarter, Macy’s (NYSE:M) said lower spending by foreign tourists in big U.S. cities hurt comparable sales by 1 percent. And local shoppers aren’t making up the difference.
While consumers named department stores in the top three shopping destinations in back-to-school surveys, many haven’t hit them up just yet. Instead, waiting to buy clothes and shoes for their kids after school begins — shifting more spending into the third quarter, which makes retail executives’ commentary about current sales trends even more important than usual.
For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.
MATHISEN: And finally tonight, there are some big paychecks in tech. Glassdoor released a best of the best-paying companies in the S&P 500. And the top three dish out a median annual salary to their employees of $115,000 a year.
Equinix (NASDAQ:EQIX), an Internet services company, is third on the list. Netflix (NASDAQ:NFLX) came in second place. And Juniper Networks (NYSE:JNPR), the computer networking company, pays its employees the most, the median worker there gets about $135,000 a year.
And that is NIGHTLY BUSINESS REPORT for tonight. For Sue Herera, I’m Tyler Mathisen.
And we want to remind you that this is the time of year your public television stations seek your support. And we thank you for watching. And we will see you back here tomorrow night.
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) 2015 CNBC, Inc.