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Who's Making Lemonade?

How some firms are striving to make the best out of less-than-ideal circumstances.

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Jason Stipp: I am Jason Stipp for Morningstar and welcome to the Friday Five.

The markets have served up plenty of lemons over the last few years, but who is making lemonade?

Morningstar markets editor Jeremy Glaser is here to give us the rundown.

Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome Jason.

Stipp: So what do you have for the Friday Five this week?

Glaser: Well, this week we're going to take a look at T-Mobile, at Greece, Darden, travel, and finally at privacy.

Stipp: So T-Mobile certainly had some bad news, ... a crate of lemons in a recent deal they tried to get done. What are they doing about it?

Glaser: Deutsche Telekom, which is the parent Company for T-Mobile, was trying to get rid of the unit. They didn't think that the U.S. wireless market had room for a smaller player. They didn't think there was going to be a lot of growth and profit there. So they tried to sell it to AT&T, and AT&T was eager to their spectrum, was eager to get those customers. But unfortunately, regulators were not as eager to let that combination go through. When the deal fell through, as part of it, T-Mobile got about a $4 billion or so termination fee as well as some spectrum from AT&T.

This week we heard from them that they are going to use that money to build out their 4G LTE network, and they are going to use it to strengthen their core services to really try to make a better go at it as a smaller player, because it seems like the regulators are not going to allow any combinations among the existing players right now.

So I think they are trying to make the best of what was a bad situation for them, trying to build up their customer relationships, trying to get those higher data speeds in order to get the higher-value postpaid customers. I think it's going to be a long road for them. These are investments that are going to take years if not decades to pay off, but it's certainly good to seem them have a long-term strategic plan instead of just sitting on this big pile of money wondering what to do.

Stipp: On the global scale, I don't know if there is a bigger lemon today than Greece. Is any one making lemonade out of that big mess over there?

Glaser: I don't know if any one is making lemonade from Greece quite yet, but I think we're starting to get out, maybe, the press to get some of the juice out of the lemon. At least the European Union is trying to make some of those first steps.

I think what we saw this week was the framework of a deal to get that second bailout done. Now there are still some things that need to happen. We need to see some more austerity measures passed by the Greek Parliament--something that, as we've seen before, can sometimes be easier said than done.

But I think that private creditors have finally agreed to take that big swap, to take that big cut on their Greek debt. I think that was absolutely crucial, to admit that you are not going to get a 100 cents on the dollar, even though the so-called "voluntary" debt default wasn't really quite that voluntary. I think one German banker described it as about as voluntary as a confession during the Spanish inquisition. But I think having that out there, saying, "OK, look, this is what's going to happen with this private debt, here's how we're going to try to get Greece back into growth"--the EU is hoping to get back to GDP growth in 2013. Even if that's a little bit optimistic, I think they are trying to put the framework in place to have these transfers keep coming into Greece in order to get the economy back on stable footing.

A lot of pitfalls could be in the road ahead. I think this is not a story that's going to suddenly go away because of the second bailout. It just buys some time. But I think the fact that they are able to get the deal done, and it didn't completely collapse, is a good sign.

Stipp: During the downturn and even amid... the recovery, we saw that consumers could be lemons for consumer companies, including restaurants. Restaurants are one of those things where consumers have to be somewhat confident before they spend money. Are we starting to see some results, though, that some restaurants are now able to make lemonade?

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Glaser: Well, Darden certainly had to buy quite a few lemon wedges for the lobsters at Red Lobster. They had a pretty good quarter. They pre-announced some of their earnings and said that consumers are really going to Olive Garden, they are going to Red Lobster, they are willing to spend a little bit more for those table-service restaurants versus going to the fast-casual or fast food restaurants that were really quite in vogue at the height of the recession.

I think this really highlights, again, this bifurcation between the middle-of-the-road and high-end consumers--who are out there spending money [and] feeling more comfortable in their jobs now, seeing their wages tick up--and lower-wage workers, lower-educated workers--who maybe aren’t feeling so good about their employment prospects, are still working maybe part-time, even if they want to be working [full-time]. And we saw them struggling. We saw from Wal-Mart's results that a lot of those consumers are still being extremely cautious.

I think this is a really interesting story. I think it's one that we have seen for the past couple of quarters. I think it’s one we are going to see going forward for possibly the next couple of years. But how do companies react to having these two big markets, one that’s extremely cautious, [and] one that’s being little bit more free spending? Are we going to see some changes in strategy from a lot of these companies to really address some of these disparities between the two groups? I think certainly [the bifurcation] is going to drive results and is going to drive earnings for some time.

Stipp: Another area where we have gotten plenty of lemons throughout the downturn and probably into the recovery as well: the travel industry, hotels. Are we seeing any signs of lemonade there?

Glaser: Travel was hit incredibly hard during the downturn. It really was a double whammy, because if you think of the travel market as being both for business and leisure travelers, both were hit really hard. Businesses decided that they just couldn't afford to send people around the country on sales calls--there was nothing to sell and no one was buying--or for meetings; they went to teleconferencing. They just decided not to have those people on the road.

And consumers, who were really worried about their jobs and saw their stock portfolios just completely decimated in 2008, early 2009, really felt like they didn't want to travel anymore.

So, particularly these companies, a lot of the travel companies, have very high fixed costs, and when you see that demand fall, their profitability can get hurt very quickly.

But we've started to see some really good recovery in hotels, in particular, and I think that this week we got results from two companies--MGM Resorts, which operates the big hotel-casinos in Las Vegas, and then a smaller hotel REIT, Sunstone Hotel Investors--that really showed ... the industry really is recovering.

It's not an incredible, gangbusters recovery; we aren't back anywhere near the daily rates and occupancy we saw at the very height of the boom before the Great Recession, but certainly people are out there are traveling again. They're going to Las Vegas. They are spending that money. That's certainly almost always a discretionary trip, both for business and consumer travelers, and I think that a lot of business hotels are doing well, too, no matter where you're looking across the country.

I think that's a good sign. I think that people, again, being more willing to spend that money is something that shows confidence, and confidence is what I think consumers and the economy are going to need to keep the momentum that we've seen toward the end of last year and the beginning of this year going through 2012.

Stipp: Lastly, Jeremy, in cyberspace, privacy concerns have started to throw some lemons at companies that are hoping to monetize their traffic through ad sales. Are companies going to be able to spin these privacy issues and hopefully get some benefit from it?

Glaser: Privacy is a huge issue on the Internet. I think that when we look at the Facebook IPO, a lot of what they're doing is selling your personal information to advertisers in order to get good display advertising. Google does the same thing. They had some big changes to their privacy policy in order to allow to them to share even more information to track you more. And I think that we're starting to see consumers really push back against this.

This is a trend, again, that's been going on for some time, but this week we heard that a lot of the big companies are going to agree to a "do not track" button, where there is a little thing on your Web browser that you can click and say, "Hey, when I'm going to these sites or overall, I just don't want to be tracked. I don't want advertisers knowing what I'm doing. I don't want these targeted ads, and I'm going to stand up against this." And the companies are saying that they're going to give an easy way to let people opt out, unlike now, where opting out can be a little bit confusing and is sometimes not even possible for a lot of companies.

So, I think the question, when it comes to if Google, if Facebook, if some of these other Internet companies can really turn this into lemonade: Are they able to convince consumers that allowing themselves to be tracked is going to provide actual tangible benefits for them, and that it's worth doing, or to alleviate some of the privacy concerns, that their data is really being kept private, that it's "anonymized", that you don't have to worry about the particular advertiser knowing exactly what you've been doing.

I think, until they alleviate these fears, it's going to be difficult to really keep monetizing it, but I think it's an area they're going to be laser focused on, and we're going to be hearing a lot from those companies about how they're going to deal with these concerns in the coming quarters.

Stipp: Well, Jeremy, the lemonade on the Friday Five this week, not too tart, not too sweet, but just right. Thanks for joining me.

Glaser: You're welcome, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.