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Weekly Wrap: Digging Into Downbeat Data

We put this week’s disappointing auto and job numbers in perspective. Plus, fair value changes for two utilities after an outrageously priced deal.

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Jeremy Glaser: A busy week for data as the Fed meeting starts to loom large, a pricey utility merger, and were auto sales as disappointing as the market thought? This time on the Morningstar Weekly Wrap.

It was a mixed week for economic data starting with Tuesday’s strong consumer spending data, but ending with today’s disappointing jobs numbers. Does this mean the Fed will stand pat in June? 

Bob Johnson: Year-over-year GDP growth has been falling for the past 12 months.  Employment growth has not fallen nearly as fast. The only real question was would employment drop back slowly, or would it fall in one fell swoop? Today we have our answer, as the employment report showed disappointing job growth of just 73,000 workers excluding the impact of the Verizon strikers.

Glaser: A piece of data that didn’t look so great was May’s auto sales, which came in below expectations and took down the stock prices of some major automakers. Rich Hilgert thinks that this reaction was overblown and that there is still some value in the sector.

Richard Hilgert: So May auto sales came in at a little bit lower rate versus the same month a year ago. We’re expecting auto sales this year to be at a plateau level, so on a month-to-month basis it’s likely that we could see ups and downs as the year progresses. At this point, we don’t see anything in the economic conditions to cause us to be concerned about a severe drop-off in auto sales. We think we’re just going to bounce along here and plateau for a little while. However, the bright spot was that even though total sales were down 6%, passenger trucks, crossovers, and sport-utility vehicles were up 2%. Now in this market, we think that General Motors and Ford are undervalued stocks and represent compelling valuations for investors, but I’d like to highlight Fiat Chrysler because at Fiat Chrysler, passenger trucks are roughly 80% of the production portfolio versus 20% for passenger cars. So brands like Jeep are going to do very well, Ram trucks are going to do very well in this market.

Glaser:  In merger & acquisition news, utility Great Plains is paying $8.6 billion for Westar. Our Travis Miller thinks that this is a pretty rich price.

Travis Miller: We weren’t surprised to see another utilities merger this week. This time Great Plains buying Westar for what we consider an outrageous price at 25 times earnings and taking on more than $4 billion of new debt. The price isn’t necessarily as concerning as the new debt for Great Plains. We cut our fair value estimate for Great Plains to $25 from $29, and we raised our fair value for Westar from $40 to $55. We think the $60 per share price that Westar got is a phenomenal deal and encourage shareholders to take that deal.

Glaser:  Also on Morningstar this week, Christine Benz explores the best way to handle investing a lump sum so deep into a market rally.

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