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ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Rocky week. But is volatility here to stay? If you`re looking for answers from corporate America, then you may want to hang on tight.
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: A Rust Belt revival. What Pittsburgh is doing to reinvent itself as a center for modern technology.
HERERA: That`s how he rolls. Meet the entrepreneur who started a sushi operation in his house and turned it into a fast-growing business.
Find out how he made his millions, tonight on NIGHTLY BUSINESS REPORT for Friday, June 17th.
MATHISEN: Good evening, everyone, and welcome.
A quiet day on Wall Street, but not a quiet week at all. Stock market volatility is back and it may not go anywhere any time soon. This week`s ups and downs were caused by all of the global uncertainties we`ve been telling you about, including Great Britain`s vote next week whether to leave the European Union and the Federal Reserve`s forecast of slow economic growth.
The Dow Jones industrial average capped this rocky week with a decline of 57 points, finishing at 17,675. NASDAQ dropped 44. And the S&P 500 fell 6.
For the week, all of the major indexes lost more than 1 percent. And concerns over slow growth may not bode well for one of the most critical forces in investing, corporate profits.
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MATHISEN: Forget the Fed. Set aside the vote on Britain leaving the European Union. In the long run, and probably the short run too, what matters most to stock prices is, yes -- corporate profits, the mother`s milk of money-making. And the profit outlook, weak all year long, is getting worse.
FactSet says U.S. corporate profits will likely fall more than 5 percent this quarter. S&P global market intelligence thinks they`ll slide 4.7 percent. If profits do decline this quarter, and there`s only two weeks left to go, it will make for the fifth such quarterly decline in a row. That will be the worst such skid since 2009 in the midst of the Great Recession.
Make no mistake, lots of companies are earning plenty, just not as much as a year ago. Banks are one example. For them, profits are simply harder to come by in today`s highly regulated, low interest rate world. Ditto energy companies, likely to show the biggest earnings declines from last year. There`s not much glitter in materials and mining either, or for that matter in technology.
Once the driver of corporate profit growth, tech companies overall may make less this quarter than they did last year. One contributor to the slide, amazingly, is Apple (NASDAQ:AAPL). Sure, it`s making tons of money. Just not like it used to.
So, get ready, folks, for a lumpy, bumpy run of corporate profit reports as summer heats up.
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HERERA: John Butters joins us to tell us what he expects when companies start reporting their second quarter earnings results a couple of weeks from now. He is senior earnings analyst at FactSet.
Welcome. Nice to have you here, John.
JOHN BUTTERS, FACTSET SR. EARNINGS ANALYST: Great. Thank you for having me.
HERERA: So that is the question. They`re pretty low comparisons for some of these companies certainly. But, you know, we left off with a bumpy earnings season ahead. Would you agree with that?
BUTTERS: Exactly. It`s interesting, if you look at how analysts have revised their estimates, though, companies have been a little bit pessimistic than normal coming in this earning season. So, as you noted, we are expecting the decline of 5 percent year over year for earnings second quarter and that`s larger than the decline of 3 percent expected at the beginning of the quarter, back in March 31st.
However, 2 percent drop is actually a smaller drop than normal in terms of estimate cuts. Typically, we see about a 3 percent cut. The reason for that is the energy sector, which is a little bit surprising. In quarters past, we`ve seen analysts slashing estimates across the board in the energy sector. This time around analysts have raised their expectations slightly, a 1 percent bump in expectations for earnings. If you look at companies such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), both seeing numbers come up during the course of the quarter.
MATHISEN: So, maybe not as bad as earlier in the quarter, in part because oil prices have gone up. Give me some good news here, John. Are we anywhere near sort of the bottom of this trough in corporate earnings? In other words, might this be the worst and might it start to improve afterwards?
BUTTERS: Well, based on analyst expectations, this will be the last quarter of year over year declines in earnings. As you noted, this quarter if we do finish with a decline, it will be the fifth straight year of year over year declines. But starting next quarter in Q3, analysts are looking for growth at 1 percent. And on fourth quarter, that jumps to 8 percent. And second half of 2017, we`re looking at for double-digit growth.
And again, the main reason for that is the energy sector. And there are two reasons, one, comparisons for earnings get a lot easier as we move into the second half of this year and then next year. Energy earnings have been week the last year.
HERERA: Absolutely, yes.
BUTTERS: So, the comparisons get easier.
The second factor is analysts are expecting the price of oil to increase over the next year or so. And earnings estimates typically correlate with oil prices so analysts are calling for higher earnings.
So, again, higher earnings estimates, easier comparisons, and energy is really a driver of the expected growth going forward in the second half of this year into early next year.
HERERA: So, let`s sectors that you`re expecting to see the highest earnings growth for the second quarter. Telecom is one of them, and basically a couple of companies in there that have done deals?
BUTTERS: Exactly. So overall, just for the ten sectors, they`re expecting growth this quarter. As you said, the telecom service sector is expecting the highest growth at 8 percent. That sector, AT&T (NYSE:T) is driving growth and that company is benefitting from its acquisition of DirecTV from last year. If we take AT&T (NYSE:T) out of the sector, that 8 percent growth drops to a decline of 4 percent. You can see AT&T (NYSE:T) really the driver of growth in the telecom services sector.
HERERA: Can we go through the laggards?
MATHISEN: Yes, go through the laggards and I was going to asking, what`s tripping technology?
BUTTERS: So, if we look at the sectors expecting the lowest growth, again, energy sector, we`ve talked about that. A significant decline of 75 percent. And although as I said the estimates have come up on a year over year basis, you`re still looking at a significant decline.
The sector expecting the second-highest decline is materials, down 11 percent. Weakness in metals and mining there.
And the third is technology as you mentioned. That`s expected to be down 7 percent. A lot of the weakness there can be attributed to Apple (NASDAQ:AAPL) and the reason for that is lower iPhone sales.
As we know, iPhone is one of the main drivers of revenue growth for Apple (NASDAQ:AAPL). IPhone sales expected down 20 percent. So, Apple (NASDAQ:AAPL) expecting to see a decline in earnings overall. We take Apple (NASDAQ:AAPL) out, that`s 7 percent decline for tech improved to a decline of 2 percent.
Again, energy, materials, and tech, the weakest sectors.
HERERA: On that note, John, thank you. John Butters with FactSet.
Ty?
MATHISEN: A Fed official today made a significant shift in his outlook for the economy. St. Louis Fed President James Bullard says low economic growth will likely remain in place through 2018. And he forecast just one interest rate hike between now and then.
This is a reversal in thinking for Bullard who previously said growth would pick up and rates would rise. He now says the long run outcome or outlook for the U.S. economy remains uncertain.
HERERA: We`ve been reporting on the risk of the U.K. referendum and what it poses for the market and the economy. In an interview today, the head of the International Monetary Fund said the outcome of the vote is a concern for the entire world.
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CHRISTINE LAGARDE, IMF DIRECTOR: It`s going to cost, it`s going to be negative for income purposes. It is going to be reduced trade, most likely as a result of uncertainty. Those are blatant facts.
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HERERA: Lagarde went on to say being a member of the European Union has enriched the United Kingdom`s economy.
MATHISEN: So, which U.S. companies have the most at stake should the U.K. vote to leave the European Union?
Wilford Frost has our report.
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WILFRED FROST, NIGHTLY BUSINESS REPORT CORRESPONDENT: There`s already been a clear effect on U.S. bonds, the yield on the 10-year declining from over 1.9 percent to below 1.6 percent in the space of a couple of weeks. But while European equities have declined sharply the last 10 days, the DAX down around 5 percent, U.S. equities have been more resilient. The Dow down just under 1 percent.
What about U.S. companies with high U.K. exposure? Some big names like Ford, eBay (NASDAQ:EBAY), PPL (NYSE:PLV) Corps appear in the top U.S. companies based on U.K. sales and that will be affected by U.K. growth slow-downs, as well as falls in sterling as they report earnings in dollars.
However, most of this top ten, their sales are predominantly within the U.K. So we`d not really be affected by renegotiations of trade deals between the U.K. and the E.U. and thus not face a potential collapse in sales.
What about a sector basis? Well, banks are likely to be the worst hit. As a whole, the U.K. has a trade deficit with the rest of Europe, making retaliation less likely. Within just financial services, it has a big surface, making it the area most likely to see tough and vindictive response in future trade negotiations.
Of the top five U.S. banks, Goldman Sachs (NYSE:GS) has the highest exposure to EMEA at 27 percent. Bank of America (NYSE:BAC) the lowest at 7 percent. But, of course, the biggest impact on Brexit on banks has already happened, delayed rate hikes and lowered yields.
For NIGHTLY BUSINESS REPORT, I`m Wilford Frost.
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HERERA: Still ahead, big changes coming to Costco (NASDAQ:COST), and millions of shoppers will be affected.
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MATHISEN: The Justice Department has reportedly abandoned its case against former head of Countrywide Financial. As first reported by Bloomberg, prosecutors have decided not to pursue charges against Angelo Mozilo, a pioneer in the risky subprime mortgages that were at the center of the financial crisis. The decision draws to a close a two-year quest to bring a civil suit against him.
HERERA: Beijing`s patent regulators have ordered Apple (NASDAQ:AAPL) to stop selling its iPhone 6 and 6-plus in that city. The ruling says the design violates patents held by a Chinese company. But Apple (NASDAQ:AAPL) is appealing that ruling, and the company says it will continue to sell those iPhone model in the world`s second-largest economy until the appeal makes its way through the system.
MATHISEN: A big switch about to take place for millions of credit cardholders. If you plan of heading to Costco (NASDAQ:COST), you`ll need to check your wallet to make sure you have what you need.
Kayla Tausche explains.
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KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Planning to use a credit card at Costco (NASDAQ:COST)?
Well, starting Monday, you`ll need a new piece of plastic. For the first time in nearly two decades, Costco`s 11 million credit cardholders will be bearing a Visa (NYSE:V) card issued by Citigroup (NYSE:C), replacing the American Express (NYSE:EXPR) (NYSE:AXP) card that Costco (NASDAQ:COST) exclusively accepted before a bitter fallout. While customers aren`t shy about their brand loyalty, most seem unfazed by the switch.
UNIDENTIFIED FEMALE: Well, I prefer American Express (NYSE:EXPR) (NYSE:AXP).
UNIDENTIFIED FEMALE: I have multiple AmEx cards but benefits are becoming less and it`s better with other cards. So, I`m looking more to using my Visa (NYSE:V) card.
UNIDENTIFIED MALE: I think more people carry the Visa (NYSE:V) card. American Express (NYSE:EXPR) (NYSE:AXP) is a little pricey.
UNIDENTIFIED FEMALE: I don`t like it at all because I use American Express (NYSE:EXPR) (NYSE:AXP) for everything.
UNIDENTIFIED FEMALE: My son is happy about it because he only holds a Visa (NYSE:V) or MasterCard (NYSE:MA) so he`s happy about it, because he`d always go in with cash.
UNIDENTIFIED MALE: I don`t think it will affect spending one way or the other. I think it`s just a matter of probably Costco (NASDAQ:COST) having negotiated a better deal for their customers with Visa (NYSE:V).
TAUSCHE: That`s exactly it. The new card gives customers much more cash back. Citi executive said Costco (NASDAQ:COST) executives were involved in everything down to the graphics.
JUD LINVILLE, CITI CARDS CEO: As we talked about how do you construct something like this, they were willing to go in and say, hey, we`re in this with you, we want to make this product the best. So, you can imagine that can make negotiations and some of the financials perform a little bit different.
TAUSCHE: American Express (NYSE:EXPR) (NYSE:AXP) called those new terms uneconomical. And the two companies can`t decide who exactly broke up with whom, but breakups can be messy when they`re with your single-biggest customer, in AmEx`s case. It`s trying to get Costco (NASDAQ:COST) shoppers to sign up for a new AmEx card and former customers still owe the company around $12 billion in Costco (NASDAQ:COST) card balances.
But all spending from Monday forward goes to Citigroup (NYSE:C) and Visa (NYSE:V), whose other Visa (NYSE:V) credit cards will be accepted at Costco (NASDAQ:COST) too. That is a first. If you`ve been wanting to sign up in- store for a new Costco (NASDAQ:COST) card, maybe wait until after next week once the dust settles.
For NIGHTLY BUSINESS REPORT, Kayla Tausche in New York.
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HERERA: Viacom (NYSE:VIA) lowers its earning guidance for the first time since 2008. And that`s where we begin tonight`s "Market Focus."
The media company expects earnings for the current quarter to fall well below Wall Street targets. This is due to the disappointing performance of the latest Teenage Mutant Ninja Turtle movie. The media company blamed the ongoing management dispute for a delay in completing an on-demand video agreement. Shares of Viacom (NYSE:VIA) down more than 1 percent to $44.42.
Government regulators have closed their investigation into Lumber Liquidators Chinese-made laminate flooring. The Consumer Products Safety Commission said no unsafe formaldehyde levels were found in the flooring during its tests conducted in thousands of homes. In addition, the company has agreed to not sell any remaining inventory of that product. Shares surged 19 percent to $15.78.
MATHISEN: Satellite TV provider Dish Network has dropped two channels owned by the National Football League. The two companies failed to reach a new distribution agreement. The NFL Network said this is the first time a service provider has blacked out the network to subscribers. Shares of Dish little changed, ending the day down a tick at $53 even.
Synaptics (NASDAQ:SYNA), which makes touch screen parts for Apple`s iPhones, plans to lay off 9 percent of its workforce and shut down some of its offices. This according to the regulatory filing. In addition, the company`s CEO has requested a temporary reduction in his base later of 20 percent. Also when the last time you heard that? Shares plunged nearly 11 percent to $53.85.
HERERA: This week`s market monitor likes strong growth companies he says can do well in any macro economic environment. This is his first time joining us on the program. He is Joe Dennison, portfolio manager at Zevenbergen Capital Investments.
Welcome. Nice to have you here.
JOE DENNISON, ZEVENBERGEN CAPITAL INVESTMENTS PORTFOLIO MANAGER: Thank you. Great to be here.
HERERA: Joe, you also mentioned that you want founder-led company-centric business models, correct?
DENNISON: Yes, that`s correct.
We love strong growth companies, customer-obsessed, founder-led. Founders have a much longer-term vision and over the long-terms, revenue and earnings growth that drives stock prices.
MATHISEN: Let`s start with your first pick and that`s Netflix (NASDAQ:NFLX). Why do you love it?
DENNISON: Sure. Netflix (NASDAQ:NFLX), we think it`s clear all TV is moving toward on-demand streaming. Millennials like myself are not going to schedule our lives around primetime viewing windows. Netflix (NASDAQ:NFLX) is the clear global leader. They`ve got the largest, most- compelling content library and a differentiated economic model that doesn`t rely on advertising.
U.S. business proves the model can work profitably, and now launched in 130 countries this year, we think subscribers and material profits will follow.
HERERA: OK. Founder-led kind of defines your next pick, which is Tesla -- to put it mildly. You`ve owned it since the IPO?
DENNISON: That`s correct. We`ve owned Tesla since the IPO in 2010. Skeptics at the time didn`t think they could build a single car from the ground up and here we are today. They`re a clear technology leader in electric vehicles in a market where we haven`t seen a competitor bring a compelling product to market yet.
Just this year, the company launched their Model 3 mass market vehicle and saw preorders vastly outpace any expectations. The $17 billion in revenue potential from that is more than double the best iPhone release weekend in history. So, it comes down to execution. And we continue to put our faith in a management team that`s hit all our targets so far.
MATHISEN: You know, you can go ahead and not schedule your life around television, except for NIGHTLY BUSINESS REPORT, OK?
HERERA: That`s right.
DENNISON: There you go.
MATHISEN: Just do that.
DENNISON: It`s on the DVR.
MATHISEN: Your third is XPO Logistics. Not a company I know much about.
DENNISON: Yes, XPO Logistics, is another example of strong management team applying technology to an old industry. They`re a third-party logistics provider, consolidating a very fragmented market, layering their technology to rapidly take market share.
CEO Brad Jacobs has proven success with a similar business plan, rolling up United Ways, United Rentals (NYSE:URI). Key driver for the company is the shift of shopping online as more and more goods are sold online, the shipping complexity and demand has risen significantly.
HERERA: We`ve got to go. Thank you so much for joining us. Great to have you on the program.
Joe Dennison with Zevenbergen Capital Investments.
MATHISEN: Coming up, it`s no fish tale. Meet the entrepreneur who started with nothing and built a sushi empire. It`s tonight`s episode of "How I Made My Millions."
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HERERA: Oregon wants to ban trains from carrying oil through its state. Though there were no injuries in this Union Pacific (NYSE:UNP) train derailment last month which was transporting North Dakota crude oil, it did spill into the Columbia River and people had to evacuate their homes. Oregon`s Department of Transportation has asked the federal railroad administration for a moratorium. Oregon is the first state to ask for such a ban.
MATHISEN: Philadelphia became the second American city to suit institute a tax on soda. The city council yesterday passed a 1.5 cents per ounce tax on sugar-added and artificially-sweetened soft drinks. That adds 18 cents to the cost of a can of soda. The new tax will go into effect January 1 and it is expected to raise $91 million a year in revenue.
HERERA: Well, across the state in Pittsburgh you might expect to find steel companies. But instead, there are startups, a growing number of them.
And as Kate Rogers (NYSE:ROG) reports, businesses large and small are helping to reinvent the Rust Belt.
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KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: I`m charging with every step that I take right now?
UNIDENTIFIED FEMALE: Yes.
ROGERS: While devices from tablets to cell phones improve constantly, the thing can`t be for their battery life, something 25-year-old Hahna Alexander and her startup SolePower are out to change.
HAHNA ALEXANDER, SOLEPOWER CO-FOUNDER & CEO: We make energy harvesting in soles, for charging portable electronics like cell phones, radios, GPS while you walk.
ROGERS: SolePower has raised half a million and is being tested by the U.S. Army.
But Alexander isn`t alone in her desire for change. Other startups designed to solve some of the world`s big problems are doing so not from Silicon Valley or alley but Pittsburgh. The city, once a booming steel town, turned around post-industrial collapse but never lost its spirit of innovation. Pittsburgh is already home to offices for Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), and most recently Uber. But in the past decade, its startup scene bolstered by tech company has taken hold.
The Iron City is also one of the most affordable places to live and work in America. That`s part of the reason why the Kaufman Foundation has ranked it a top ten metro for established mainstream business activity with more than 1,100 small businesses for every 100,000 resident in the area.
Innovation Works, a nonprofit with two nationally ranked accelerator programs, have invested $65 million since 1999 in 300 local companies. They`ve gone on to raise more than $1 billion. More broadly in the past two years, Pittsburgh tech companies have raised nearly $500 million in V.C. funding.
RICHARD LUNAK, INNOVATION WORKS PRESIDENT & CEO: We track entrepreneurs that come to us for help, and that number has literally gone up over 400 percent or five-fold increase just in the last eight years. So, a lot of momentum.
ROGERS: One of those startups was launched by native Ian Rosenberger who started his company, thread in 2010. They take recycled plastics from Haiti and Honduras and turn them into sustainable fabric. The company`s raised $2.8 million and has a deal with Timberland (NYSE:TBL).
IAN ROSENBERGER, THREAD FOUNDER & CEO: We could have started a business anywhere in the world and we chose Pittsburgh. We care about who we are as a city. We care about our uncles and dads and grandfathers lost their jobs in the mills in the `70s and `80s. In the ashes of that an incredible ecosystem of businesses that are starting that means something.
ROGERS: For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG) in Pittsburgh.
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HERERA: To read more about America`s new Rust Belt, head to our website NBR.com.
MATHISEN: And now an entrepreneur who`s on a roll. He immigrated to the United States with little money. When he got here he found a nation hungering for sushi. He figured a way to feed it. Building a franchise operation that is a multi-million dollar enterprise.
His rags to riches story is tonight`s "How I Made my Millions".
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MATHISEN: Charlotte, North Carolina, miles from the sea, is not exactly the place you`d expect to find a sushi empire. That`s exactly what you will find inside this 46,000 square foot warehouse. It`s the home of Hissho Sushi, a dynamic food service and distribution company that manages 884 locations in 39 states and the District of Columbia.
UNIDENTIFIED FEMALE: Don`t forget your napkin, soy sauce --
MATHISEN: The big fish in the operation, Philip Maung, the founder and CEO of Hissho Sushi.
PHILIP MAUNG, HISSHO SUSHI, FOUNDER & CEO: People say I`m a workaholic. But I don`t feel like it`s work.
MATHISEN: Whatever he`s doing, he`s got Hissho on a roll.
MAUNG: I like it. Spicy.
MATHISEN: Bursting with 372 employees and more than 360 franchisees across the country, most immigrants like Maung himself.
MAUNG: When I came here, I had no one to help me out. So I decided to help out the newly immigrant.
So, how`s the training go?
MATHISEN: Before putting them behind a counter, Maung makes sure his managers and sushi chefs to-be learn the subtleties of perfect preparation.
MAUNG: Practice more, you will get it.
MATHISEN: It`s the type of specialized training he never received as a young boy, living in a country shattered by war.
MAUNG: I was born and raised in Burma. They treated us like a second citizen.
MATHISEN: So he set sights on more fertile ground.
MAUNG: I decided I like to come here and look for the American dream.
MATHISEN: In 1989, at the age of 22, his parents staked him to an airline ticket to Los Angeles, with only $13 in his pocket and a wealth of ambition. He stayed with a friend, worked overnights at a gas station, and then became a real estate agent.
Before landing a job with a sushi distribution company in the 1990s. He learned the business from the inside out and after just one year, Maung and his wife moved east. They borrowed $100,000 from family and friends and took cash advances on credit cards to start their own sushi business headquartered in their home.
MAUNG: We started office here, and with one computer and one tiny printer about a year before we get into the office.
MATHISEN: They partnered with local retail locations to offer fresh food daily to grocers and cafes. Then in 2002, their first big break. A partnership with Minnesota-based supermarket chain Lund Food Holdings. Together, they placed sushi kiosks in 21 locations.
Three years later, Hissho was able to move into its headquarters, with a freezer that holds up to $1 million worth of frozen product that`s shipped across the country every single day.
It`s also the home of Hissho University, the exclusive training ground for the company`s managers, chefs, and franchisees.
UNIDENTIFIED FEMALE: Train your chefs to use only one ounce of rice --
MATHISEN: After finishing the program, the company partners with trained chefs and places them in locations across the country and splits the profit three ways -- the chef or franchisee, the retail landlord, and Hissho Sushi.
MAUNG: Which one the most popular?
UNIDENTIFIED FEMALE: They really love this one.
MATHISEN: The formula seems to be working big-time. Company revenues were close to $100 million in 2015.
MAUNG: That`s the most beautiful sushi I`ve ever seen.
MATHISEN: Philip Maung, Burmese immigrant turned sushi magnate, has clearly learned the lesson of American business.
MAUNG: Listen to the customer, do what it takes to make the customer happy.
