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The Friday Five

The Fed sits still, Facebook gets ahead of itself, Apple's quarter is good enough, and more.

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Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five--five stats from the market and the stories behind them.

Joining me, as always, with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: What do you have for The Friday Five this week?

Glaser: We're going to look at the number 0, 66%, 33.8 million, 6%, and finally 13%.

Stipp: Zero is the amount of tapering that the Fed said they were going to do in the near term, but were there any clues about their longer-term plans?

Glaser: No, there wasn't much of a sign of when tapering is going to begin. As expected, the Fed didn't make any changes in this statement, because they didn't have any economic data to go off of because of the government shutdown.

The Fed has said time and time again that they're trying to key in to the labor market and other economic indicators to see when it's an appropriate time to really scale down their bond-buying program. But they continued in this statement to say that fiscal policy remains a drag, that the economy remains growing, but probably not at a particularly robust rate, and that they continue to feel like inflation is very much under control.

Given that they're focused on the economic data, there's a chance that if things look pretty good in the next couple of months, December could see a taper. But it seems much more likely that 2014 is the timeframe when these bond purchases will begin to slow down a little bit.

For most investors, it's just important to realize that the exact timing of the taper probably isn't really important when making long-term portfolio decisions, when thinking about what you need to do with your money right now. Keeping in mind that interest rates have a good chance of rising over the long term--over years and decades--that's something you need to think about. But the timing to the taper--a few months here, a few months there--probably isn't crucial in making those portfolio decisions.

Stipp: Facebook reported 66% growth in revenue. This looked like a pretty good number, but enthusiasm was tamped down pretty quickly [after they released their earnings report].


Glaser: It was. Facebook had a good quarter. They were able to increase advertising sales pretty aggressively, mainly through new products--things like having more ads in the mobile space, an area that had been weak for them. They've really caught up very quickly there.

Obviously, the market liked that, but [investors] weren't so happy with Facebook's comments that this growth is going to be very hard to sustain. That's because you can only really add so many ads to the [Facebook] Newsfeed before the service just doesn't become usable anymore. They've got about 5% now, and they think that's a pretty good place to be to balance the needs of the company and the needs of the users. I think that kind of talk shows people just how lumpy this advertising growth is going to be, which is something that our [Facebook] analyst, Rick Summer, has been talking about for some time.

Given the run-up in the shares that we've seen over the last couple of months and where the valuation is now, and that we could see these lumpy results, investors are probably better off waiting for a bad quarter, for the stock to sell-off, before really taking a hard look at Facebook.

Stipp: 33.8 million iPhones were sold by Apple [according to] their quarterly report. It really is important to look at the iPhone when you're talking about Apple.

Glaser: The iPhone drives Apple, and they had a decent quarter there. Like you said, they sold over 30 million units, and crucially the average selling price only went down about 1%. One of the fears is that Apple, by selling some of these lower-end devices, would cannibalize [sales of higher-end devices]--people would go for the older models rather than the newer models. Granted, there are only a few days of 5s and the 5c [sales counted] in this quarter. I think it just shows that the iPhone still remains a pretty strong product, and that there isn't any sign yet that the iPhone is really in terminal decline--that there is a precipitous fall and that Android is going to completely take over. I think it's pretty clear that Apple, Android, and possibly even Windows are going to be able to co-exist and all have a niche in the mobile market space.

Apple gave pretty good guidance for Christmas. It seems like they're expecting to sell a lot of iPhones. Another point that our [Apple] analyst, Brian Colello, made when we talked to him earlier this week was that in order to support … the current stock price, what's important is that Apple just keeps executing on what it's doing. You don't need to assume that you're going to have huge market-share expansion; you don't need to assume that something like the iWatch is going to really take off. All of those things really would be upside, but to get to where we are now, you just have to assume that [Apple is] going to be able to keep executing at these levels. This quarter shows that they continue to perform well.

Stipp: BP announced a 6% rise in its dividend this week. This means that they've maybe put the tough last two years behind them now?

Glaser: It's starting to look that way. BP has had a rough time, starting with the BP oil spill, obviously, that took a toll on the company and also, obviously, a toll on the Gulf Coast. They were then forced to divest some of their Russian assets and really were running into some problems for a while.

But it does seem like they've gotten things back on track now. We've seen a dividend increase here of 6%. They're increasing their share-buyback program up to $10 billion, and they're really starting to look forward and not being so concerned about what was happening in the past.

Steve Simko, our BP analyst, sees good balance sheet strength and really expects the company to continue to be able to return capital to shareholders and to see pretty good cash flows. He does expect $27 billion of payments related to the Gulf oil spill over the next 10 years. But even with those payments, it still looks like it could be an evolving and a better story for investors.

Right now it's trading around fair value, not a great bargain by any stretch of the imagination, but it could be one to keep on the radar.

Stipp: Visa reported a solid 13% increase in payment volume. What does this tell us from their most recent quarter about the trends in consumer spending?

Glaser: It's hard to draw too many conclusions just from one quarter of spending. But with Visa's pretty good quarter--and MasterCard had a good quarter, too--I think we learned a few things. The first being that, yes, consumer spending is holding up fairly well. Even given some of the other things that were going on in the third quarter, consumers were out there spending.

The second was that, these networks are very powerful. That network effect is powerful. And as consumers shift away from cash and into electronic payments, Visa is really capturing a lot of that, and because their costs are very fixed, they are able to do that extremely profitably. Their reported operating margin was over 59% in the quarter, which is tough to beat.

The third thing that we saw in the quarter really was that, even if they are having this great profitability, they are still not completely immune to competitive pressures. Jim Sinegal, who covers Visa for us, said that their incentive payments to large merchants had a pretty big increase in the quarter. That was driven by merchants seeing that they may have other options in payments--things like Square and other startups that are really trying to disrupt this space a little bit and trying to bring down costs. But given that Visa has so much scale, we think they're going to be able to overcome some of those potential competitors and continue to be a big force in the spending space.

Stipp: Busy earnings week in the market, Jeremy. Thanks for pulling out the notable news.

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.