Transcript: Nightly Business Report – October 24, 2019

ANNOUNCER:  This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  Profit slide.  Amazon`s  earnings fell for the first time in more than two years as it ramps up  spending on faster delivery.  

Return to growth.  Intel`s revenue is revving.  Its outlook is better than  expected and it`s buying back billions in stocks.  

Soft patch.  3M (NYSE:MMM) hit it.  The industrial conglomerate cut its  earnings outlook and it`s blaming weakness in China.  
Those stories and more tonight on NIGHTLY BUSINESS REPORT for Thursday,  October 24th.  

Good evening, everyone, and welcome.  Bill has the evening off.  
It was the busiest day of earning season and that`s where we begin tonight  with late-day results from Amazon (NASDAQ:AMZN).  The company`s earnings  fell short of Wall Street expectations as its heavy investments cut into  the profitability.  Amazon (NASDAQ:AMZN) has been spending a lot of money  on everything from one-day delivery to its cloud business and its  advertising sales force as well.  

The good news is that revenue grew at a healthy clip, but its guidance  wasn`t what analysts were looking for.  That sent the stocks lower in  initial afterhours trading.
Josh Lipton takes a closer look at Amazon`s quarter.  

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Good quarter, bad  guide.  That`s how on lists are describing the latest earnings report,  specifically of the company`s Q4 forecast disappointed analysts calling for  $80 billion to $86.5 billion.  The street wants to see $87.4 billion.  
Brent Thill at Jefferies says that`s critical.  Q4 is the company`s big  quarter, the holiday quarter, though he does caution Amazon

(NASDAQ:AMZN)  is typically conservative in its forecast.  He also notes the company is  clearly back into investment mode, spending a lot of money to bring one-day  shipping to its prime members and that`s weighing, he says, on the bottom  line.  
For NIGHTLY BUSINESS REPORT, I`m Josh Lipton, San Francisco.  

HERERA:  So, now, let`s turn to Tom Forte to talk more about Amazon`s  earnings miss.  He is a senior research analyst at D.A. Davidson.  
Tom, welcome.  Nice to have you here.  


HERERA:  I don`t think you were surprised by the results that much.  You  had been saying that you thought this big investment that they had been  doing might weaken the bottom line a little bit, correct? 

FORTE:  Sure.  So, looking in the September quarter, our profit  expectations were lower than others to the extent that we thought  investment spending for faster prime shipping and then also for content on  their video platform would result in profits that were lower than expected  for the September period, which, as it turned out, happened.  

HERERA:  Now, how long do you think, though it`s going to take to recoup  some of this investment?  I noted on the call — the earnings call today,  the CFO said they were investing heavily in hiring software engineers.   There`s a lot of money going into personnel.  Part of that, of course, is  to drive content.

But how long do you think it will take to recoup the cost?  

FORTE:  Yes.  So, historically, actually, investors would be well-suited on  buying shares when they`re under short-term pressure because Amazon  (NASDAQ:AMZN) is ramping its investment spending.  And I think the good  news is that while they`re investing in faster shipping for prime, you`re  seeing faster revenue growth because consumers can now get more products to  them quickly, opens the opportunity to buy different things in Amazon  (NASDAQ:AMZN) than in the past.  And advertising and cloud computing —  those are still two big profit centers for Amazon (NASDAQ:AMZN).  

So, it might be sooner for a payoff in profits than historically.

HERERA:  Are you at all worried about the fact that their cloud business  did slow a little bit?

FORTE:  The answer is absolutely.  And if you look at the competitive set,  especially Microsoft (NASDAQ:MSFT), I think you`re starting to see some  incremental competitive pressure, and it is important because cloud  computing, again, along with advertising and when other people sell on  Amazon (NASDAQ:AMZN), third-party retailer Amazon (NASDAQ:AMZN) sales,  those are the big sources of profit for Amazon (NASDAQ:AMZN).  So,  incremental competitive pressure and cloud is concerning.

HERERA:  What about — what about regulatory risk?  That`s something that  in your notes you`ve pointed out a number of times.

FORTE:  I`m so glad you brought that up.  So I like to think about Amazon  (NASDAQ:AMZN) is kind of the great white shark in retail and I think of  regulatory risk is the Megalodon, so the prehistoric shark.  

And the basic concern is that the government, like they did with Microsoft  (NASDAQ:MSFT), could institute rules that would cause Amazon (NASDAQ:AMZN)  to not be able to maximize sales and profits in the future and it`s  something that we`re monitoring closely.

HERERA:  On that note, Tom, thanks so much.  
FORTE:  Thank you, Sue.
HERERA:  Tom Forte with D.A. Davidson.

It was a different story for Intel (NASDAQ:INTC).  The semiconductor  company trounced earnings and sales expectations, thanks to better than  expected sales in its data center.  Its guidance was also above estimates  for the full year and that sent the stock higher in initial after-hours  trading. 
Jon Fortt has more on Intel`s quarter.  

JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The big takeaway from  Intel`s report today is that it`s really not about the PC business anymore.   The company has been saying that for a while, but no quarter perhaps a  recent memory has underscored it like this one.  The PC-centric business  was down 5 percent and yet, Intel`s surprise big to the upside because of  data and the data center the businesses that Intel (NASDAQ:INTC) has been  touting as their growth area for years now.  
They really did deliver we`re talking everything from cloud to the regular  server hardware that companies buy to put in their own data centers,  perform strongly not just for this quarter but so strong that Intel  (NASDAQ:INTC) upped its full-year guidance.


HERERA:  It has indeed been a rollercoaster ride for semiconductor stocks  this year.  The chip makers have been caught in the crosshairs of the trade  war between the U.S. and China, making the sector very volatile and  creating a lot of uncertainty.  But are things about to change for the  group.
Joining us to talk about that is Michael Bapis, managing director with Vios  Advisors at Rockefeller Capital Management.

Nice to have you with us, Michael.  Welcome back.  

MICHAEL BAPIS, MANAGING DIRECTOR:  Thanks, Sue.  Good to be here.
HERERA:  Let`s start, first of all, with Intel`s report.  A lot of people  were surprised that they did so well given some of the pressures that the  chip sector as a whole has been under?

BAPIS:  Yes, look, I think it`s a long time coming for Intel (NASDAQ:INTC).   Since we`re in the middle of the World Series, let`s say, they hit a walk- off grand slam with these earnings numbers.  And I think, you know, there – – even with this growth they`re still trading at times earnings which is a  low P/E obviously, and they`re yielding a dividend about two and a half  percent. 

So in this interest rate environment not only is it trading cheaply from a  valuation standpoint, you`re also getting two and a half percent roughly to  wait and own the stock for the long term.

HERERA:  And is it an Intel (NASDAQ:INTC) specific success story or do you  think that translates to the entire chip sector?

BAPIS:  That`s a good point look we are in the middle of a technological  revolution that we will never see again probably in the next 500 years.   So, data is more important than ever as we just saw.  And from the cloud to  everything that they provide, everything that Intel (NASDAQ:INTC)

provides,  until someone comes along and starts to compete with them in a meaningful  way, I don`t think — you know, the sector is going to grow just because of  technology but Intel (NASDAQ:INTC) is definitely a leader in the sector and  I see that continuing for the foreseeable future.

Look, it`s not even up that much.  It`s up I think 11 or 12 percent this  year.  Well, obviously, the S&P; is up much higher and it`s been trading in  the middle of its range.  It hasn`t even hit as its highs yet.  So, you`ll  see this to months out higher.  

We do have a little bit of fear with the trade wars, but I think like  anything else, like any other name, any other equity any other — anything  in our world today, those will get solved at some point, hopefully sooner  than later.  But I don`t think we`ll have an impact that everyone`s expecting.  

HERERA:  It was interesting that you say that because the company has  basically given the indication that they think that they are better  prepared to handle the trade war than some other players in the sector.   Would you agree with that?

BAPIS:  Yes, I think they probably are.  I mean, look they`ve expected it  for a long time.  They`re repatriatizing some of their plants.  They`re —  you know, they`ve expected this for let`s say a year now and even though,  it`s not solved, they`re very prepared.  

And I think — I`m sure they`ve spent the money to be able to manage  through it, as it gets solved.

HERERA:  Is your favorite name in the space?
BAPIS:  Definitely, it`s one of my favorite names in general —  
HERERA:  Especially technology, as well as just in general.
Michael, thanks so much.  
BAPIS:  Thanks, Sue.

HERERA:  Michael Bapis with Vios Advisors at Rockefeller Capital  Management.

Dow component Visa (NYSE:V) topped earnings expectations and delivered  revenue that was higher than last year, but in line with estimates.  The  company said an increase in its payments volume helped drive its results  for the quarter.  The stock was volatile in initial extended hours trading.

Fellow Dow component 3M (NYSE:MMM) is the latest global manufacturer to be  hit by slowing global economies.  Revenue fell in about a third of its  markets and the company cut its earnings outlook for the year and that sent  the stock down four percent in trading, making it the worst performing Dow  stock today.
But as Seema Mody reports, the CEO has a plan to try and offset that  weakness.

SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT:  From diapers to cars,  3M`s adhesive products can be found everywhere, and that`s why its earnings  report is widely regarded by Wall Street as an indicator of the global  economy.  And the results we`re not good.

Third quarter revenue slowed, forcing the industrial giant to cut its  profit outlook due in part to ongoing weakness in China.  Analysts say  gaining market share in the country is becoming a bigger struggle for 3M  (NYSE:MMM) as China`s economy slows.  At the same time, competition from  Chinese players is making it harder to win new business.
On a call with analysts, 3M (NYSE:MMM) CEO Mike Roman says he doesn`t see  the situation in China changing in the near term.

MIKE ROMAN, 3M (NYSE:MMM) CEO:  We as I said in my remarks are still  anticipating some — that — that`s slowing in China, automotive and  electronics, could continue through 4Q.  So, our outlook continues to  remain the same.

MODY:  This quarters results are seen as a setback for Roman who became CEO  in 2017, and is under growing pressure by shareholders to turn around the  company.  

ROMAN:  The first year of our five-year plan hasn`t turned out as we  anticipated, and given the slowdown and in those key on markets we`ve been  talking about.

MODY:  While those markets, which include China, electronics and  automotive, slow, the company is betting that acquisitions and investments  in its healthcare business will pay off, having recently acquired wound  care company Acelity for more than $4 billion.

ROMAN:  The medical solutions business getting stronger with the  integration of Acelity.  

By the way, the results in health information are reflecting some of the  early synergies.

MODY:  While the sales in the company`s health business did rise in the  quarter, analysts caution it may not be enough to offset the weakness it`s  experiencing in other parts of its business.

HERERA:  While there were some big moves in individual stocks, the broader  market struggled for direction.  Results from 3M (NYSE:MMM) weighed on the  market, offsetting a strong report from Microsoft (NASDAQ:MSFT) which we  told you about last night.  All of that resulted in a mixed finish for the  major averages.  The Dow Jones Industrial Average fell 28 points to 26,805,  the Nasdaq was up 66, and the S&P 500 added five.

It is time to take a look at some of today`s “Upgrades and Downgrades”.
Ford was downgraded to hold from buy at Deutsche Bank.  The analyst cites a  weak earnings outlook and pressure on pricing in the U.S. and volumes in  China.  The price target is $11.  The stock fell 6 percent to $8.60.
EBay was downgraded to market perform from outperform at Raymond James.   The analyst says the stock will likely remain range-bound following the  company`s soft guidance for its 2020 earnings growth.  The price target is  $45.  The stock fell 9 percent to $35.62.

Tesla got a number of price target increases, including one from  Oppenheimer, which has a $385 target on the stock.  The call follows  Tesla`s earnings which saw solid quarterly results and stronger free cash  flow, which we told you about last night.  The firm has an outperform  rating on the stock.  The shares soared today 17 percent to $299.68.
Both Southwest and American Airlines reported better than expected earnings  and that sent shares of both of those carriers higher.  But they`ve also  been forced to cut their capacity because they cannot fly the Boeing  (NYSE:BA) 737 Max.
And as Phil LeBeau reports, their CEOs are not happy about that.

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Southwest and American  both posted better than expected earnings thanks to strong demand, but both  carriers say they could have flown even more passengers if they had all of  the planes in their fleet.  Not only has the grounding of the MAX for  Southwest and American to cut their flight schedules, they`re tired of  waiting for the plane to be fixed.

GARY KELLY, SOUTHWEST AIRLINES CEO:  I`ve been very clear.  We`re not happy  about our situation.  You know, we put — we put our future in the hands of  Boeing (NYSE:BA) and the MAX, and we`re grounded.

LEBEAU:  The grounding of Southwest planes means the airline which has  exclusively flown the 737 since it started in 1967, will now look at  potentially buying Airbus models in the future.  Meanwhile, American, which  has lost more than a half billion dollars being unable to fly the MAX says  Boeing (NYSE:BA) will have to make up for those losses.

DOUG PARKER, AMERICAN AIRLINES CHAIRMAN & CEO:  So we`re working to ensure  that Boeing (NYSE:BA) shareholders bear the cost of Boeing`s failures, not  American Airlines shareholders.

LEBEAU:  The other challenge for American and Southwest is making sure  customers will want to get back on the MAX when it`s cleared to fly.  Yes,  the plane will be thoroughly checked out by the FAA before it`s declared  safe.  But it could take more than recertification to put everyone at ease.

KELLY:  We`re going to have to convince not just our own people but our  customers that everything is fine and everything is safe.

LEBEAU:  The other issue for airlines that fly the MAX: bringing those  planes back next year.  It may not be a smooth schedule, which could create  some operational challenges as airlines start to fly the 737 MAX again.

HERERA:  Still ahead, demand is strong for new homes.  So why are prices  falling?

HERERA:  Vice President Pence expressed hope for a near-term trade deal  with China while at the same time accusing Beijing of restricting rights  and liberties in Hong Kong.  The policy speech came ahead of a new round of  talks aimed at ending the trade war between the U.S. and China.

MIKE PENCE, VICE PRESIDENT OF THE UNITED STATES:  The opportunity that we  have to set this economic relationship right is where a new relationship  between the United States and China can begin, not end.  But in that  environment of a more fair, mutually respectful, reciprocal relationship as  the president often says, we think — we think there is a foundation for  our nations to move forward.

HERERA:  The vice president also criticized the NBA, accusing it of acting  like a, quote, wholly owned subsidiary of China.  This follows the NBA`s  handling of a team owner`s support for anti-Beijing protesters in Hong  Kong.

And in other news were watching tonight, U.K. Prime Minister Boris Johnson  called for a general election on December 12th.  Johnson said he was asking  parliament to approve a national election as part of his effort to ensure  that Britain leaves the European Union.  Last week, Johnson`s Brexit bill  was passed but he failed to push through an aggressive Brexit timetable.

The European Central Bank held interest rates steady, but the ECB`s  president used his final appearance as Europe`s top central banker to warn  about risks to the eurozone economy, risks that include a no deal Brexit.

MARIO DRAGHI, ECB PRESIDENT:  The lower likelihood of a hard Brexit or a  cliff edge has improved the overall situation.  At the same time, the  medium-term uncertainty is considered with concern.  So — and at the same  — and the rest of the geopolitical uncertainty has continued to affect  markets.

HERERA:  Mario Draghi will leave the ECB after eight years in charge of  that institution.

Some mixed reports on the U.S. economy today.  Durable goods orders fell  more than one percent last month which more than expected and the largest  amount in four months.  Within that report, a closely watched gauge of  business investment was lower for a second straight month.  A separate  report on manufacturing showed economic activity in the sector expanded at  a more robust pace than expected.

And the number of Americans filing applications for unemployment benefits  unexpectedly dipped last week, suggesting the labor market remains tight.

Mortgage rates increased for the third straight week but remain below year- ago levels.  According to Freddie Mac, the 30-year fixed-rate averaged 3.75  percent.  A separate report showed that sales of newly built homes were not  as strong as expected in September but it was the big drop in prices that  got all of the attention.
Diana Olick explains.

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The median price of a  new home sold in September fell to the lowest in nearly three years, but  not because builders lowered prices, instead it was due to a shift in the  type of home selling mainly, cheaper homes.  Exactly half of the homes sold  in September were priced below $300,000.  Compare that with 43 percent just  one year ago, according to the U.S. Census.
Builders are starting to put up more entry-level homes but not nearly  enough to meet the demand.  

ROBERT DIETZ, NAHB CHIEF ECONOMIST:  One of the things that we`ve seen  since the Great Recession is the shift in the new construction market up to  the higher end, larger homes, more expensive homes.  And the reason why is  this cost went up, it was easier to pass along those costs to buyers at the  higher end of the market.

OLICK:  Recently, builders have turned to townhomes which are cheaper to  build and can therefore support lower prices. 

DIETZ:  The challenge is at the local level to make the argument for  building a density, and one of the success cases we`ve seen is building  townhouses.  Townhouse construction has grown 15 percent in 2018.  We think  it will continue to grow going forward in the cycle, and the reason why is  they represent smaller homes.

OLICK:  Lower mortgage rates have also helped demand keeping sales well  above where they were a year ago when rates were much higher.  
But today`s buyers are very sensitive.  Rates move slightly higher in  September and sales fell compared with August.

Newly built homes have always come at a price premium to existing homes,  but existing home prices are now heating up again and that price gap is  shrinking.  That could help builders move more buyers in as long as  mortgage rates don`t make a major move higher.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

HERERA:  A technical bug takes down Twitter`s results.  That`s where we  begin tonight`s “Market Focus”.

The social media company reported 145 million daily active users in the  latest quarter, beating analyst expectations.  But Twitter missed revenue  and profit estimates because of in part what the company says was a glitch  on its advertising platform which denied the ability to target ads and  share data to partners.

NED SEGAL, TWITTER CFO:  The setting was not working as expected.  We were  using the device setting to show ads to them when we realized that we both  tweeted about it so people were aware in the effort to continue to be  transparent and we also stopped using that setting.  There`s some revenue  impact when things like that happen.

HERERA:  Twitter also gave weak guidance and shares fell nearly 21 percent  to $30.75.

Nokia (NYSE:NOK) warned of a profit shortfall driven by increased  competition over the 5G network.  Nokia (NYSE:NOK) will be halting its  dividend to cover the cost for 5G equipment and the company sees weak  demand in China and pricing competition from rival tech company Huawei.   Shares lost nearly 24 percent to $3.90.

Dow posted better than expected results as it cut cost to help offset weak  demand for chemicals use in plastics and other manufacturing products.  The  CEO says it`s all about demand.

JOHN FITTERLING, DOW CEO:  The inventories are down.  You`ve seen some of  the backlog in the industrial sector down.  I think we`re poised right now  where any pull on the inductor industrial sector, any kind of a tailwind  with all means that we`ll get a little bit of earnings momentum and margin  improvement and tightening of the supply-demand balances.

HERERA:  Now shares rose about 5 percent to $49.47.
Higher-priced candy bars and other chocolates help combat rising costs for  ingredients and shipping, and that led to Hershey to top expectations.  But  the company`s North American market which is its most important how drop in  sales and Hershey dropped more than 2 percent to $146.37.
Coming up, for all of those who say the department store is dead, well,  don`t tell that to Nordstrom (NYSE:JWN).

HERERA:  CVS (NYSE:CVS) is pulling all 22-ounce containers of Johnson and  Johnson`s baby powder off of its shelves and removing it from its website.   J&J initiated a recall of the product last week out of an abundance of  caution and in response to an FDA test that indicated the presence of  asbestos.  Shares of J&J fell further this afternoon when that announcement  was made.

When you think of the new retail, you probably think of online stores or  small boutiques.  But Nordstrom (NYSE:JWN) is betting that a seven-story  thousand square foot department store is the future.
Courtney Reagan is at Nordstrom`s new flagship building in New York City.

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Two decades after  it was first considered and seven years after planning began, Nordstrom  (NYSE:JWN) opened its first flagship department store in New York City  today.  While there are more than 110 Nordstrom (NYSE:JWN) department  stores, the New York location is what executives call a generational  investment.  It spent north of $500 million to capture what the company  estimates is a $700 million possible market.

JAMIE NORDSTROM, NORDSTROM PRESIDENT OF STORES:  This is the single biggest  investment we`ve ever made as a company.  We actually bought the dirt (ph).   We have a condo interest in this property, we`re not leasing, we`re not  paying rent.  We own it.

REAGAN:  It`s seven stories, 320,000 square feet.  The beauty haven has  facials, hair blowouts and even Botox.
Their stylist, alterations and 24/7 online order pickup, 3,000 handbags,  two floors of women`s shoes, a pop up area for online brands like Everlane  changing every month.

Nordstrom (NYSE:JWN) expects the new store will add about a percent to  sales.  The retailer needs a boost.  Its department store business sales  fell six percent in the first half of the year. 

New York is already Nordstrom`s largest market for online sales.  When a  new store opens, area digital sales increase up to 25 percent.
But the retail landscape has changed dramatically since the planning  through the store began, both in New York City and industry-wide.  Neiman  Marcus (NYSE:MCS) opened its first New York City location.  Saks (NYSE:SKS)  underwent a quarter of the billion dollar renovation in its Fifth Avenue  store, but closed its downtown woman`s store after just two years.  

Gordon Taylor closed its flagship and Barney`s is in bankruptcy.
ERIK NORDSTROM, NORDSTROM CEO AND CO-PRESIDENT:  Does New York need another  store?  No, no one needs another store.  Will a great store do well?  Yes.   You know, the thing about New York, it`s — there`s opportunity here.

JAN ROGERS KNIFFEN, J. ROGERS KNIFFEN WORLDWIDE CEO:  I don`t there`s any  risk for Nordstrom (NYSE:JWN) in this store.  There`s plenty of risk for a  Nordstrom (NYSE:JWN) out there.  Clearly, Neiman`s is in trouble.  Saks  (NYSE:SKS) is in trouble.  Nordstrom`s placed in that space, I think  Nordstrom (NYSE:JWN) will stay around and they`ll absorb that business, as  those two struggled.

REAGAN:  The new flagship connects to a network of other Nordstrom  (NYSE:JWN) local service locations, rack stores and a men`s flagship across  the street, that worked together to fulfill inventory take returns and  provide services.  The department store has spent decades dreaming up today  but it will have to hold out a little longer to see if it`s been worth the  wait and the investment.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in New York City.

HERERA:  On this busiest day of earnings for this earnings season, the  major averages finished kind of mixed.  Here are the closing numbers once  again: the Dow fell 28 points to finish at 26,805, the Nasdaq was up 66,  and the S&P 500 added five.

And that is NIGHTLY BUSINESS REPORT for tonight.  I`m Sue Herera.  Thanks  for joining us.  Have a great evening and we will see you right back here tomorrow.

Nightly Business Report transcripts and video are available on-line post  broadcast at The program is transcribed by ASC Services II  Media, 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) 2019 CNBC, Inc.

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