NBR Transcripts - Feb. 3, 2005
Thursday, February 03, 2005JEFF YASTINE, NIGHTLY BUSINESS REPORT ANCHOR: More wedding bells could be in the works for the telecom industry, with Qwest eyeing MCI. A look at the combination and what the $6 billion deal would do to the telecom landscape.
LINDA O'BRYON, NIGHTLY BUSINESS REPORT ANCHOR: Then, President Bush hit the road today, kicking off a two-day tour of five states, as he stumps for support of his plan to overhaul Social Security. The big question: will middle-America buy personal accounts?
YASTINE: And the nation's largest car dealer had a blockbuster quarter, so what's driving earnings? AutoNation chairman and chief executive Michael Jackson joins us live to answer that question.
O'BRYON: Then the countdown to the big game is on, as the Eagles and the Patriots prep for Super Bowl Sunday. Philadelphia owner John Lurie tells us what it takes to play with the pros.
YASTINE: I'm Jeff Yastine.
O'BRYON: And I'm Linda O'Bryon. Susie Gharib and Paul Kangas are off tonight. This is NIGHTLY BUSINESS REPORT for Thursday, February 3.
Good evening, everyone. Another mega-merger is brewing tonight in the telecom industry. Qwest Communications is in talks to buy MCI for a reported $6.3 billion. News of the negotiations came just three days after another baby bell, SBC, announced plans to buy AT&T for $16 billion. And as Suzanne Pratt reports, Qwest may not be the only company interested in MCI.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It comes as no surprise to Wall Street that there's already talk of another big merger in the telecommunications industry. After all, it was just a few days ago that SBC Communications announced it was buying AT&T, a multibillion-dollar deal that sparked a new urge to merge among remaining telecom names. But while further consolidation makes sense to most telecom experts, the pairing of Qwest Communications International and MCI is a bit puzzling to some. MCI would give Qwest access to a global long distance and Internet network, as well as a roster of business customers. On top of that, Qwest, one of the weaker baby bells, could use MCI's significant cash to help reduce its massive debt.
TODD ROSENBLUTH, TELECOM ANALYST, STANDARD & POOR'S: Qwest needs a cash infusion. They have a hefty balance sheet with a lot of debt on their balance sheet, so a cash infusion would be a positive for them. It's also the access to an enterprise customer base, which is largely now going to be going with AT&T in SBC's deal.
PRATT: What's less clear is why MCI, which dropped the WorldCom name when it emerged from bankruptcy last year, would want to do a deal with Qwest. Not only is Qwest a smaller, regional player, but analysts say it's likely to be acquired itself at some point down the road. For those reasons, many believe Verizon Communications would make a better fit for MCI. Verizon has reportedly also been holding talks with MCI and may make a bid.
MICHAEL MCCORMACK, TELECOM ANALYST, BEAR STEARNS: From an MCI shareholder standpoint, I think the preference is to be acquired by a company like Verizon, because you will have more staying power. You'll be a sort of all you can eat company where you have local, long distance, consumer, large business.
PRATT: In the past year, Bear Stearns has done investment banking and other business for Verizon. Most telecom experts agree MCI will ultimately be bought by someone. And once MCI is acquired and assuming the AT&T deal goes through, that will mark the end of independent long distance carriers in this country. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
YASTINE: A choppy day for stocks, as traders looked past the latest earnings reports and await tomorrow's January employment data. The Dow was weighed down by Intel and IBM; in fact, the entire chip sector was weak, and that contributed to the NASDAQ's troubles. In the afternoon session, the blue chips staged something of a recovery, but tech stocks lagged, and few traders were interested in taking a stand ahead of tomorrow's jobs report. So the Dow ended off 3 3/4 points to 10593 and a fraction. The NASDAQ finishing down 17 1/2 points at 2,057 and the S&P 500 falling just over three points to settle at 1189. With yesterday's Fed announcement out of the way, bond traders focused on tomorrow's jobs report and worker productivity, which today posted its smallest quarterly gain in three years. So the 10-year note falling 5/32 to 100 21/32. That puts the yield at 4.17 percent.
YASTINE: In North Dakota today, President Bush pitched his Social Security reform plan to college students, saying it would allow them to build a nest egg. Warning that the current system is in trouble, the president said he has an innovative plan to do something about it. One thing Mr. Bush argues his program will not do is help Wall Street. Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The president says he's hitting the road to answer the many questions about Social Security reform. Mr. Bush is also trying to get out in front of his critics. For example, the president describes personal accounts as a set of conservative investment options that includes strict safeguards against a financial industry windfall.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Certain rules that will prevent gouging by Wall Street, so that the fee structure is reasonable and fair.
GERSH: The White House estimates annual administrative fees for personal Social Security accounts would run no more than $3 for every $1,000 invested. The account management structure would be similar to the Federal thrift savings plan offered to government workers. Annual administrative fees in the TSP are $0.40 per $1,000. And investment management fees are believed to be roughly $0.20 per $1,000. While these fees are low, over time, personal accounts might hold many hundreds of billions of dollars and critics say it's clear who the real winners will be.
SEN. BARBARA BOXER (D), CALIFORNIA: If you follow the money, you're on the side of Wall Street, because Wall Street is going to get billions of dollars if George Bush is successful, and it will come straight out of the pockets of working families.
GERSH: Attacks like that help explain why the White House is going out of its way to describe personal accounts as a boring, low-margin business where most of the money will be spent tracking market indexes, answering the phone and mailing out statements.
STUART SWEET, PRESIDENT, CAPITOL ANALYSTS NETWORK: The political accusation is that setting up Social Security accounts involves a hidden agenda, which is to enrich Wall Street. In fact, this is not the case, so the way to prove that this is not the case is to set up a system so that in fact Wall Street gets virtually no fee income whatsoever.
GERSH: The question of fees is a small detail compared to the large questions that remain unanswered. A senior White House official admits that on their own, personal accounts will not improve the long run finances of Social Security. While the president says adjustments to benefits are on the table, so far no Democrats have stepped forward to negotiate with him. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
O'BRYON: Earnings zoomed at America's largest retailer of cars. AutoNation said today its fourth quarter earnings doubled to $0.60 a share. Excluding charges it earned $0.34 a share. That's $0.04 more than analyst estimates. Revenue in the quarter rose almost 9 percent to $4.8 billion. The Fort Lauderdale-based dealer network says sales rebounded thanks to pent-up demand in the wake of the Florida hurricanes that cut into results in the previous quarter. Joining us now to talk more about those earnings and the outlook for this year, AutoNation chairman and CEO Mike Jackson. Welcome to NIGHTLY BUSINESS REPORT.
MIKE JACKSON, CHMN. & CEO, AUTONATION: Linda, good evening. It's a pleasure o to be here.
O'BRYON: Mr. Jackson, after a strong fourth quarter, what is the outlook now for 2005?
JACKSON: I think the overall new vehicle environment is going to be very similar to the last few years. Namely it's going to run in the high 16 million if not 17 million units and if you take the last six years, the marketplace has actually averaged 17 million units. So the overall environment is going to be pretty stable.
O'BRYON: And what about AutoNation in particular? Are you going to be able to keep up this momentum that we saw in this quarterly report?
JACKSON: I would like to have four quarters like the fourth quarter, but I don't think that's too likely. We did not give specific guidance for quarters or for the years but what we do say is that what the overall new vehicle environment is going to be, that we think that we can take out another 100 bases point of cost in the next couple years that we can reinvest our capital at our threshold of 15 percent after tax. And over the years on average, we can increase EPS about 10 to 12 percent a year.
O'BRYON: You mentioned the industry, but the auto sales were somewhat soft in January. How do you think the rest of the year will play out knowing that?
JACKSON: Well, anybody in this business that makes any predictions based off of January, you shouldn't listen to. January is one of the weirdest, quirkiest months in the entire year and it's good to get it out of the way. So for example, depending on who you are talking to and how they calculate, January was either up or down. So the point is there will be a lot of volatility on the way but I'm quite confident by the end of the year, it's going to be high 16 million if not 17 million units.
O'BRYON: So no January effect when it comes to cars. As you know, the Federal Reserve raised rates again yesterday. What impact will that have on consumers and their willingness to buy cars?
JACKSON: The fact that the Fed is raising rates is a clear indication that the economy is genuinely recovering and we see that and feel that in our stores. I mean there are more jobs being added every month in America. Now from an operating point of view, we're leaving a low interest rate environment into a higher interest rate environment. And clearly we're going to manage our inventories differently. Last year the first half of the year we carried 74 days. As rates started to move, we reduced inventories to 54 days at ended the year at 53 days. From the consumer point of view, I think the robust economy will give them the confidence to continue buying and I don't see much impact on consumer behavior.
O'BRYON: You have spoken out against the generous incentive and discounts from auto manufacturers. Let's assume GM, Ford and Chrysler don't scale back on incentives. How do you adjust to that reality?
JACKSON: Actually, I'm not calling for them to scale back on incentives. And incentives are a structural place in the marketplace. They're here to stay. What I'm saying is considering the inventory levels and the sales rate, if you try to clear the inventory with even higher incentives, I don't think it prudent. I think we've hit the wall of diminishing returns on incentives and scaling back production to bring inventory in line would be the right course. And I think the OEMs are following that. Ford and GM have both cut production in the fourth quarter and the first quarter, doing it twice in the first quarter. So I think that's the road we're going down.
O'BRYON: And finally, very briefly, AutoNation has been a big buyer of its own stock. At what level do you think that buying your own stock is not a good use of that cash?
JACKSON: Well, we always calculate what the multiple is today at the time we buy the stock and calculate factoring in the type of company creating, we're creating and what kind of multiple we could have in the future, repurchasing stock remains a great opportunity for us. At the same time we're always looking at accusations, but we're very disciplined. If they hit our return thresholds we'll go ahead and make the acquisition. So we spend as much time discussing how we redeploy the capital we make as we did in our efforts to make it in the first place.
O'BRYON: Thank you very much.
JACKSON: My pleasure.
O'BRYON: We have been speaking with Mike Jackson, chairman and CEO of AutoNation.
Clearance sales and shoppers cashing in holiday gift cards helped the nation's retailers post solid sales, despite a host of rough winter weather last month. The nation's largest retailer, Wal-Mart, says sales rose just 2 1/2 percent in January. That's slightly lower than analyst expectations. Target, the other big discounter, beating its own forecast with sales rising over 9 percent. Upscale retailers were also in the winning column, with Nordstrom's sales jumping almost 9 percent and Neiman Marcus seeing a 12 percent boost. The big loser, Gap. Sales there fell 7 percent. And Gap says most of that sales decline came at its Old Navy stores, Jeff.
YASTINE: Well, Linda, shares of another big teen retailer Abercrombie & Fitch did quite well today. We'll get to that in a moment. Now let's take a look at our stocks in the news tonight.
And topping our list, Sprint FON Group (FON) climbing $0.12. Fourth quarter profits more than tripled thanks to 1.6 million new subscribers and published reports say Verizon may be looking to acquire Sprint, but a Spring spokesman says their focused on their $35 billion merger of equals with Nextel, which was announced late last year.
News Corp. (NWS) falling $0.35. Strong DVD sales in its motion picture unit helping lift profits in the second quarter. Also Merrill Lynch says that there's a strong possibility Rupert Murdock will buy out Liberty Media's 17 percent stake in his company and that could be quite important going forward here.
Pfizer (PFE) slipping $0.16.
Nortel Networks (NT) ending of $0.07.
And Qwest Communications (Q) gaining $0.20. As you heard it's looking to buy MCI in a $6 billion deal.
Lucent Technologies (LU) slipping a fraction.
And SBC Communications (SBC) gaining $0.23.
And in the minus column, BMC Software (BMC) dropping nearly $2. Third quarter profits improving from year ago levels, but BMC said four quarter results will be hurt by a downturn in software licensing deals.
Citigroup (C) is down $0.09.
And Merck & Company (MRK) was down a nickel.
Here's a look at shares in PepsiCo (PEP) which rose $0.19. The software drink maker, soft drink maker rather, posting an 8 percent jump in fourth quarter profits, thanks to single digit gain across its various food product categories.
Alcatel (ALA) falling $1.83. The French telecom firm will no longer pay its dividend this year, owing to fierce competition in the telecom industry.
Whirlpool (WHR) tumbling almost $3. The appliance maker posting an 18 percent drop in fourth quarter profits. Results were way down by the high cost of materials.
And here are some shares (ph) in Aztar (AZR) which took it on the chin, falling $3.79. Profits at the casino operator sinking to $0.05 a share and that was sharply below analyst projections, an 84 percent drop from a year ago levels.
And here's what we mentioned a moment ago, Abercrombie & Fitch (ANF) surging over $5 on a better than expected 17 percent jump in same store sales last month. The retailer says its new spring line of merchandise is off to a good start, thanks to gift card redemptions.
And finally, CarMax (KMX) advanced almost $4. The pick up in used car sales helping the auto retailer. It also raised its fiscal fourth quarter earnings.
Over on the NASDAQ, the NASDAQ 100 (QQQQ) down $0.43.
Shares in Google (GOOG) continuing an upward trek, rising another $5 to yet another new closing high.
Shares in Amazon.com (AMZN) tumbling more than 6. As we mentioned last night, they missed estimates and the stock sank quite a bit today.
Microsoft (MSFT) slipping $0.28.
And Cisco Systems (CSCO) off $0.63. It reports results next week and the stock has not been participating in the tech stock rally of recent days.
eBay (EBAY) down for the day.
And so was Intel (INTC) dipping a fraction.
Also Apple Computer (AAPL) losing nearly $2.
Starbucks (SBUX) gained, losing over $4.50. That was the company posting a same store sales gain of 7 percent, but that was less than analysts expected. S&P cutting its price target and its earnings forecast for the stock.
And finally Nextel Communications (NXTL) slipping $0.13.
Cyberonics (CYBX) jumped $11.50. The FDA reversing an earlier ruling and will allow the use of Cyberonics implantable electrical device for experimental use in treating depression. It's already allowed for use in people having epilepsy for reducing seizures.
And finally CNET Networks (CNET) falling $1.64. It was a profit warning and also a potential accounting problem owing to good will impairment for its acquisition of "Computer Shopper" magazine.
And now moving on to - that's a look at our stocks in the news tonight, by the way. Now moving on to this Sunday, is Super Bowl Sunday of course, with the New England Patriots taking on the Philadelphia Eagles. For the Pats, it's their third appearance in four years. But it's a first for the Eagles under the ownership of Jeff Lurie, who bought the team in 1994. I spoke with Lurie earlier today about the big game and what it took to turn a losing franchise into a winning one.
JEFF LURIE, OWNER, PHILADELPHIA EAGLES: From day one of owning an NFL team, it's your goal to win a Super Bowl and obviously you can't win it unless you're in it and it's a proud moment for us, no question about it. It's just you don't want to get too excited too early because you want to build that excitement, build that adrenaline, just like the players do and kind of peak on Sunday.
YASTINE: You know, if the Eagles were a stock, we'd be calling this a turn around story. You bought the team 10 years ago for roughly $200 million. Now I'm told it's worth around $800 million. You have been to the playoffs seven times and now for Eagles fans finally the Super Bowl. Is it just a matter of opening up your checkbook and getting people like Mr. McNabb as your quarterback? What else is there to being a successful franchise and turning one around?
LURIE: Well, in the NFL, it's really not about checkbook competition because we have a salary cap and each team has the same amount of resources to spend as any other, big market, small market, it doesn't matter. So I think some of the keys on the acquisition of the Eagles were to understand or assess what you were buying into, the condition of the franchise and what could be done to change the culture of the franchise. I knew I was buying the franchise in the fourth largest media market, but it was a franchise that really had not had a lot of historical success so had to assess what had been going on in terms of the culture and the problems that it encountered that it wasn't kind of like the Cowboys and the 49ers and some other marquee franchises.
YASTINE: When I read a lot of the things you have said over the years, you talk a lot about building a franchise for long-term success. Is it possible to build a franchise for long term success in the NFL given that it's set up for equality in the teams?
LURIE: You're right about that, Jeff. You have to buck the trend and there are ways to do it and we have been successful at doing it, but the more success you have, the harder it is to maneuver under the salary cap. You draft of course in lower position than any other teams, so things work against you. But in the end, I think if you have great leadership at the top. You have a great team president who manages the salary cap very well. Andy Reid outstanding coach and very high character, intelligent players that work well together and love the game of football, you have an opportunity to not only build for short-term success, but to sustain that and that's always been our goal. We have been able to achieve that, but it's a significant challenge clearly.
YASTINE: You had a career as a Hollywood movie producer. You have produced three or four films from what I could see. Are there any similarities with things you learned in the movie business that you apply or learn not do rather in running an NFL franchise like the Eagles?
LURIE: I think the biggest parallel is clearly both industries are part of the entertainment industry, but when you're producing movies, you're very dependent on the movie studio to select who you're going to be working with and who the leadership positions are of director and lead actors and all of that. And when you buy an NFL team, you are the movie studio and you finally get to surround yourself and build the organization according to the values you want to bring to it and turn around whatever culture you feel is necessary. When you're producing movies, you're more dependent on the culture of the movie studio that you're producing the movie for.
YASTINE: All right. Mr. Lurie, we're out of time, I wish I could talk to you even further. Thanks for you're time.
LURIE: You're very welcome.
YASTINE: Our guest Jeff Lurie, owner of the Philadelphia Eagles from Jacksonville.
O'BRYON: Tomorrow our Friday market monitor guest is Richard Steinberg, president of Steinberg Global Asset Management. HealthSouth's former chief operating officer was indicted today. A Federal grand jury indicted James Bennett on 39 criminal counts, mostly related to insider trading and the company's $2.5 billion accounting scandal. Prosecutors say Bennett made over $17 million on stock sales after signing off on falsely inflated earnings numbers. The charges come as the fraud trial of former HealthSouth Chairman Richard Scrushy continues.
YASTINE: And it looks like there's a casualty in the battle for Hollywood Entertainment. The company's leader, Chairman and CEO Mark Wattles, resigned today. His departure comes just one day after rival Blockbuster raised its hostile takeover bid to $14.50 a share in cash and stock. But rival bidder Movie Gallery says it's confident its all-cash offer of $13.25 a share for Hollywood Entertainment is superior.
O'BRYON: And here's a look at what's happening tomorrow. We'll see January's employment report and the University of Michigan's final report on January consumer sentiment. Also tomorrow, fourth quarter earnings from media giant Time/Warner.
Tonight's commentator says pro football and the economy are a super combination. Here's Rick Horrow, president of Horrow Sports Ventures and author of "When the Game Is on the Line."
RICK HORROW, PRES., HORROW SPORTS VENTURES: The biggest event on the pro football calendar is days away. And even though the players haven't reached the field, the marketing game is already in high gear. Host city Jacksonville is featuring 120 special events to celebrate the Sunday game between the Philadelphia Eagles and the New England Patriots. All this advance hoopla and the game itself are expected to generate $300 million for the area. Not a bad take for a football game.
It will also anoint Jacksonville as a major league, mega-event city and the economic implications of that can be long lasting. Women make up roughly 50 percent of the Super Bowl audience now and the NFL is hoping to build on that this year. NFL sales of women's products have tripled in the last year alone. Maybe that's why we're seeing more of them doing live game reports on the sidelines.
Super Bowl excitement is not only overcoming some old barriers, but it's crossing new frontiers as well. Over 400 international credentials have been issued for Super Bowl XXXIX and the game will be satellited to hundreds of countries in dozens of languages. Emulating the National Basketball Association, the NFL is also strengthening its schedule in Europe by consolidating franchises and using Europe schedules as a training ground.
The league has also extended its developmental alliance with the Canadian football league through 2006. The Super Bowl will be a prelude to owner/player negotiations with a March 1 deadline to extend the collection bargaining agreement. The afterglow of the Super Bowl should provide substantial momentum to resolve outstanding labor issues and guarantee labor peace through the foreseeable future.
I'm Rick Horrow
O'BRYON: That's NIGHTLY BUSINESS REPORT for Thursday, February 3. I'm Linda O'Bryon. Good night, everyone and good night to you too, Jeff.
YASTINE: Good night, Linda. I'm Jeff Yastine and we'll see all of you again tomorrow night.
