NIGHTLY BUSINESS REPORT for July 26, 2016, PBS - Part 1

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Harwood, Julia Boorstin, Aditi Roy>

LeEco; Mergers and Acquisition; Technology>

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Apple (NASDAQ:AAPL) impresses. The world`s most valuable publicly traded company sells more iPhones than expected, proving demand isn`t wavering for the flagship product.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: So far, so good. Earnings are coming in slightly better than expected. But there`s one that`s starting to make market watchers a little nervous.

HERERA: Ambitious acquisition. A Chinese company is breaking into the U.S. TV market, with a multibillion dollar purchase. And some of the biggest names in Silicon Valley are taking notice.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, July 26th.

MATHISEN: Good evening, everyone, and welcome.

By now, you probably know that we spent a lot of time talking about corporate earnings this time of year. And today was one of the busiest days of all for profit reports led after the bell by Apple (NASDAQ:AAPL). You also probably know that what the pros call earnings season is a game not of thrones but of expectations -- beat the Wall Street forecast and investors love you, even if your sales and profits are lower, maybe even far lower than they were a year ago.

Well, that is exactly what Apple (NASDAQ:AAPL) did and exactly what happened in early after-market trading to day. Apple (NASDAQ:AAPL), a stock you likely own in your mutual funds even if you don`t own it directly blew past expectations. The company earned more than Wall Street reckoned. Its revenue was stronger than analysts thought it would be and the company shipped more than 40 million iPhones in the most recent quarter. That`s notable because analyst had been concerned that consumers just weren`t upgrading their phones as often as they used to.

Here are the numbers. The company earned $1.42 a share. That`s four cents above expectations, a significant beat. Revenue came in at more than $42 billion, about $300 million above the estimates. Best of all, perhaps, management said sales for the fiscal fourth quarter look stronger than consensus.

Presto, the stock took off as you see there in afterhours trading.

Now, never mind that in this game of expectations and not of thrones, sales were down 14 percent from a year ago. And above $1.42 a share, profits were 40 cents lower.

And how about those iPhone sales? Even though they were stronger than expected, seven million fewer were sold than this time last year.

HERERA: Presto. Let`s turn now to Dan Morgan for more on Apple`s earnings beat and what the results suggest about the health of the company and the iPhone. He is senior portfolio manager at Synovus Trust. Both he and his firm own shares of Apple (NASDAQ:AAPL).

Welcome. It`s nice to you have here, Dan.

DAN MORGAN, SYNOVUS TRUST SR. PORTFOLIO MANAGER: Hi, Sue.

HERERA: I know you`re bullish on Apple (NASDAQ:AAPL). You have been bullish on Apple (NASDAQ:AAPL). But give me your thumbnail take on this report in particular.

MORGAN: Well, the fact that it was better than expected at least encouraging. You`re right on all the different matrix they look somewhat negative. But, you know, one thing I thought was really positive is gross margin came in at 38 percent. We didn`t get a big drop off in gross margin with some of the new lower price phones coming out.

As you mentioned before, the guidance going into the fourth quarter was positive. And overall, you know, you talk about the game. It was better than expected. So, the stock up is even though it was negative growth.

MATHISEN: A lot of people are pointing to release presumably later this year of an iPhone 7. Whether they came out with the iPhone 6, it was a huge boost to profits because it was a transformational phone. Bigger screen, more function, so on and so forth.

Can the seven give them that kind of boost or a smaller one?

MORGAN: Well, we`re optimistic that iPhone 7 can. You look at the history you just mentioned iPhone 6 and 5 also. Huge boost in the stock price. Huge boost in profits when those two releases came out.

We`re hoping that we can start to gain some momentum in fiscal year 2017. You remember they had the fourth quarter next quarter. Then they go into the first quarter, hoping for about 74 million iPhone sales in that first quarter of `17. So, start to kind of ramp up for the new iPhone 7. Even though there are a lot of doubters out there.

HERERA: Yes, and that`s reflected the doubters in the stock performance down this year 22 percent. Do you add to your position then, Dan, if you are optimistic and still bullish? What are you going to do with the stock?

MORGAN: We`re still optimistic, Sue. We own the stock since 2005 at a cost basis of $5. So, it`s a huge winner for us. And so, we look at opportunities when the stock pulls back to try to add shares in anticipation of the iPhone 7 and some of the other things they`re doing.

So, we still feel that valuation is very low. It trades around 10, 11 times earnings. Has a dividend yield over 2 percent. So, you get paid to wait for earnings to grow again.

HERERA: All right. On that note, Dan, thanks for joining us tonight.

MORGAN: Thank you, Sue.

HERERA: Dan Morgan with Synovus Trust.

MATHISEN: Apple (NASDAQ:AAPL) wasn`t the only blue clip to report, far from it. Six other Dow components released quarterly results this morning. Caterpillar (NYSE:CAT), Verizon (NYSE:VZ), United Technologies (NYSE:UTX), Du Pont and 3M (NYSE:MMM) all topped earnings expectations while McDonald`s (NYSE:MCD) did as well. Its shares, however, came under pressure because of a slump in same store sales. That metric didn`t measure up.

And while the bottom line results may have looked okay, all of these global companies have a little something different to say about their outlooks.

(BEGIN VIDEOTAPE)

MATHISEN: Start with McDonald`s (NYSE:MCD). It disappointed with global existing store sales growing only a little more than 3 percent. That was less than the 3.6 percent investors expected. So, the boost from all day breakfast may be losing a little steam. Still, McDonald`s (NYSE:MCD) has now posted four straight quarters of positive sales.

Caterpillar (NYSE:CAT) beat both earnings and revenue forecast. But just like it did in April, Cat dimmed its outlook for the rest of the year and announced more job cuts. Continued strength of the U.S. dollar is denting Cat`s global sales and hurting demand for its heavy equipment.

DOUG OBERHELMAN, CATERPILLAR CHMR AND CEO: It`s been a challenging period. What I`m most proud of is the way our people are responding, the way we`re getting after cost structure and restructuring and getting through this in a way we never have in prior down turns.

MATHISEN: 3M (NYSE:MMM) also cut its sales outlook for the year, blaming difficulties in its electronic and energy businesses, especially in Asia and Latin America. Revenues missed for the quarter, though 3M (NYSE:MMM) did manage to beat earnings forecast.

Dupont (NYSE:DD) is among the Dow components raising its forecast for the year, after surpassing expectation for both sales and profits. Profits rose almost 8.5 percent in the second quarter. Its CEO says a planned merger with Dow Chemical (NYSE:DOW) remains on track to close later this year.

United Technologies (NYSE:UTX) which beat the earnings and sales expectations also raise its guidance. Politics figure into a climate of uncertainty these days and CEO Greg Hayes thinks it will be a mistake to turn away from free trade agreements.

GREG HAYES, UNITED TECHNOLOGIES PRES. AND CEO: Everybody knows that free trade is what drives growth in this country, the loss of jobs in the manufacturing sector primarily driven by productivity, not by offshoring. And I think as people understand the real causes of some of these reallocation of work to lower cost countries, they`ll understand that we need to continue to support free trade.

MATHISEN: Verizon`s labor issues that seven-week spring strike ate into sales down more than 5 percent. Verizon (NYSE:VZ) says it added 615,000 wireless customers in the quarter, but that`s a 46 percent drop from last year. Verizon (NYSE:VZ) missed revenue estimates but did manage to whip forecasts on profits.

(END VIDEOTAPE)

MATHISEN: Here`s how those companies performed today. Cat, UTX, they were the top performers. Dupont (NYSE:DD) also higher as you sigh there. 3M (NYSE:MMM), Verizon (NYSE:VZ), McDonald`s (NYSE:MCD) did decline in today`s session. Look at the fall for McDonald`s.

HERERA: Earnings season so far does not appear to be as bad as feared. But it`s not great either. The decline in profits is just slightly better than what we saw in the first quarter, thanks in part to strong results from the banks. But now, another part of the market is raising some concerns.

Bob Pisani explains.

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BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The recent decline in crude oil may be a serious problem for earnings in the second half. Oil which is trading between $45 and $50 for past two months is now trading in the $42 range. That wasn`t supposed to happen.

Oil is supposed to stay in the comfort zone between $45 and $50 and then just gently rise in the second half of the year. At the same time, oil company profits were supposed to bottom in the first quarter, improve in the second and third quarter and then dramatically improve in the fourth quarter as firmer oil prices pulled everybody up.

But oil isn`t cooperating. Demand for gasoline is strong. But refiners have produced so much of it there is a glutton the market. That`s pressuring oil prices.

Now, this morning, Morgan Stanley (NYSE:MS) said oil could move into the mid $30 range once again. Now if that happens, earnings estimates for all the oil companies will have to come down because those earnings are based on higher oil prices. This morning, the CEO of BP said he expected oil prices to average between $50 and $60 a year going into 2017.

Lower oil company profits is a big deal because it will likely take down estimates for the whole S&P 500. Traders are expecting the estimates to turn positive in the third quarter after four consecutive quarters of negative earnings growth. So, to justify stocks at historic highs, the bulls need to argue that earnings are improving and declining oil is not helping.

For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.

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MATHISEN: And it did not help again today. Those declining oil prices produced a mix day on Wall Street. Energy shares under pressure as investors comb through all of those earnings reports and the Federal Reserve began a two-day policy meeting.

The Dow Jones Industrial Average 19 points to 18,473. NASDAQ, however, light on energy companies, added 12. The S&P 500 gained a fraction. As for oil, domestic crude fell a half percent to settle just below $43 a barrel.

HERERA: To the economy now. Americans purchased new homes in June at the fastest pace in more than eight years. The Commerce Department reports that new home sales rose 3.5 percent last month and that`s the best level since February of 2008. Low mortgage rates, solid job market and tight inventory have helped lift the real estate market.

A separate report showed a more than 5 percent rise in home prices in May. According to the S&P Case Shiller Index, that is down just slightly from the prior month.

MATHISEN: A gauge of how Americans feel about the economy held steady in July. The conference board survey of consumer confidence virtually unchanged from June. The reading considered to be a sign that consumer spending could continue to support the economy in the second half of the year. Consumer spending makes up about 70 percent of all economic activity.

HERERA: And while the latest economic data is positive, it`s unlikely to sway Central Bank policymakers. An interest rate hike sun likely when the Federal Reserve releases the policy statement tomorrow.

And as Steve Liesman tells us, Wall Street expectations are changing dramatically.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Big changes in the CNBC Fed survey for July. Let`s get right to it. In the prior survey in June, the street was looking for the next rat hike to come in September, that`s now plus-three months. The next rate hike now seen in December of 2016.

And now, when will the Fed allow that big $4 trillion balance sheet to decline? It`s had been expected May 2017. Now, it`s sometime afterwards. When will the Fed finally stop hiking interest rates? It had been thought the fourth quarter 2018. Same now.

But look at where they think the Fed is going to stop. It had been 2.6 percent. Now it`s just 2.4 percent. So, lower interest rates for longer for next year. The street just looking for a 1.2 percent Fed funds rate up from the current 0.37.

Now, looking at the stock market, you can see the street seems to believe that most of the gains already built n a big come back from where we were that concern about the economy and recession in January is giving away the better stocks. But looking for the outlook for 2016, most of the gains are thought to be built in only a 4 percent gain in stocks through 2017.

But taking a look at interest rates, they continue to bring down the expected interest rate of the ten-year yield, currently trading around 1.6 percent. Seeing only rising 1.8 percent next year and 2.25 percent in 2017.

All of that comes with the same 2 percent or a little bit better growth that we`ve had over the past several years, since the expansion began. The outlook for GDP next year, sorry, this year, just 2 percent, rising to 2.25 percent in 2017. That`s the expectation among our 43 respondents who include economists, fund managers and analysts for inflation, 1.6 percent this year, rising a bit to 2 percent in 2017.

Some big changes in the expectations for the presidential election. For the last two months, the survey showed an 80 percent belief that Hillary Clinton would win the White House in November. That`s now falling to 52 percent. Donald Trump, he`s up a bit. Had thought -- 15 percent had thought he could win the election in November. Now that`s just up to 26 percent. But a big change can you see right there is the "don`t knows", up from 5 percent to 21 percent.

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: And now with Wall Street less certain of a Hillary Clinton victory in November than it was, as Steve reported, just a month ago, the Democratic Party prepares to formally nominate her for president, uniting behind the first female candidate to represent a major American political party at the top of the ticket. And tonight, Clinton`s husband, former President Bill Clinton, will be on stage to make the case for Hillary.

John Harwood is in Philadelphia for us to night.

John, in a party that`s being pulled to the left by Bernie Sanders` supporters, is Bill Clinton a centrist still the surefire rock star hit he once was?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, the party moved to the left. But the center has moved to the left. The country has changed. It`s a different makeup. The economy is different. We have more income inequality.

So, Bill Clinton is not going, however, Tyler, to focus his remarks as we understand it on the economic issues themselves. He`s going to try to paint a very intimate portrait of Hillary Clinton as somebody who is committed her life and career to fighting for women, for kids, for social justice, trying to lift some of those unfavorable personal ratings that are weighing her down in this race right now.

HERERA: Yes, some enthusiastic delegates in the roll call vote behind you here, John. As that progresses, do you anticipate it will go smoothly?

HARWOOD: I do. And all the signs are in that direction. Last night, Michelle Obama electrified this convention by saying, you know, I was -- I live in a house built by slaves and now my daughter`s play with their dogs on the law -- pointing that that history making breakthrough they made eight years ago. Hillary Clinton was nominated by John Lewis, the civil rights hero. Bernie Sanders is also nominated and you had a lot of energy in the hall but it was positive energy.

MATHISEN: What was the reaction to the convention`s first night last night and I know Mrs. Obama`s speech was widely praised?

HARWOOD: Her speech was widely praised. Less so for Elizabeth Warren. Bernie Sanders did what he needed to do for Hillary Clinton. You can`t trust polls in the middle of a convention. So, we don`t really know voter reaction.

But if you look at the raw viewership totals, Hillary Clinton`s convention on its first night got 26 million viewers. Donald Trump`s last week, 23 million.

MATHISEN: All right, John, thank you very much. John Harwood reporting tonight from Philadelphia.

HERERA: And still ahead, rough quarter. Twitter did something for the first time since going public and shareholders are not happy.

(MUSIC)

MATHISEN: Twitter`s string of disappointing quarterly results continues. The social media company reported its weakest revenue growth since its IPO back in 2013. It lowered its outlook as it struggles to grow its user base. When it comes to earnings, Twitter reported better than expected results after adjustments of 13 cents a share. Estimates were for ten cents.

Revenue of just more than $600 million, though, was shy of expectations. And investors were not impressed. The stock sold off sharply in an initial after-hours trading as you see there.

Julia Boorstin has the one key takeaway from Twitter`s quarterlies.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The key factor weigh on Twitter shares, the company`s slowest revenue growth since Twitter went public in 2013, with more revenue headwinds ahead. Not only did Twitter`s revenue fall $5 million short of projections, but the company`s revenue outlook for the third quarter is far short of expectations. Twitter`s COO Adam Bain telling me that while they`re seeing advertisers shift over to Twitter`s video ads, that marketers are not increasing their budgets just yet. Bain was bullish though that there is some good signs ahead for Twitter`s advertising potential with the live streaming deal with the NFL coming up.

Bain saying they have seen really strong demand for those ad packages. But not enough demand that the company could issue more bullish guidance.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA: Profits fall 60 percent at Under Armour (NYSE:UA), and that is where we begin tonight`s "Market Focus".

The athletic clothing retailer said the impact of the closing of its rival Sports Authority drags down the earnings. But even, so the results fell in line with estimates. Revenue was better than expected and was helped by strong demand for sports apparel and basketball shoes. Under Armour (NYSE:UA) finished the day, though, down 5 percent to $41.36.

Drug maker Eli Lilly (NYSE:LLY) saw both profit and revenue rise in the latest quarter. Sales were better than expected while earnings fell in line with estimates. The company`s CEO was happy with the results.

(BEGIN VIDEO CLIP)

JOHN LECHLEITER, ELI LILLY CEO: We`re pleased with revenue this quarter. We grew 9 percent. I think it`s important, 8 percent of that was volume growth and of that 8 percent, 6 percent came from new products we launched since 2014. So this is exactly the trajectory we want to be on.

(END VIDEO CLIP)

HERERA: Eli Lilly (NYSE:LLY) shares rose 11 cents to $82.09.

Mobile Eye which makes self driving car technology is cutting its ties with Tesla. The company said it will continue to support existing product plans with the automaker, but will not enter into any new agreements. Mobile Eye said it plans to focus its efforts on creating technology for fully autonomous cars. Shares fell 8 percent to $45.33.

Lower fuel costs helped lift profit and revenue at JetBlue. The airline beat earnings expectations but sales were a little light. The company also said it may begin offering routes to Europe. JetBlue shares took off to $18.67.

MATHISEN: Anheuser-Busch has sweetened the takeover bid for British rival SAB Miller, the maker of the Bud and Stella Artois beers, raised its more than $100 billion offer after the drop in the British pound caused SAB Miller shareholders to raise concerns over valuation. Shares of Anheuser- Busch up a fraction at $126.60.

Freeport-McMoRan saw its loss narrow in the latest quarter. But the mining company still missed earnings estimates by a penny. Revenue also wasn`t good enough to top street targets. In addition, the company said it plans to sell up to $1.5 billion worth of shares in an effort to trim debt. Shares up 2 percent on the day to $12.68.

And Panera saw its profit fall as costs associated with refranchising some of its restaurants weighed on results. But the bakery chain still managed to top estimates. Shares initially rose following after the after- hours news, offsetting a 4 percent drop during the regular session where it closed at $207.61.

Profit and revenue up at Centene (NYSE:CNC) as the health insurer added new members and benefitted from a recent acquisition. The results were ahead of estimates. The company also said it set aside $300 million to cover potential losses in its individual commercial businesses in Arizona. And that sent shares down 8 percent to $68.87.

HERERA: Still ahead, why a Chinese company you likely never heard of is making a big move into America`s test hub of Silicon Valley.

(MUSIC)

MATHISEN: Here`s a look at what to watch tomorrow.

Boeing (NYSE:BA) reports earnings continuing the parade of quarterlies from Dow components. The Federal Reserve will issue the decision on interest rates and central bank expected to leave rates right where they are. But the statement will be scrutinized, for clues that a hike may be coming soon. Pending home sales will give us another read on the housing market. And that is what to watch for Wednesday.

HERERA: Fiat Chrysler is revising the way it counts its monthly sales figures. Because of that change, the automaker now says its 75 consecutive months of sales gains actually ended almost three years ago. The decision to change the calculation comes amid reports that it was overstating its monthly tally. Fiat Chrysler recently confirmed that it`s under investigation by the SEC and received inquires from the Justice Department over the way it accounts for vehicle sales.

MATHISEN: A China tech conglomerate is making a two-front push into the U.S. and specifically into Silicon Valley. LeEco is spending billions to buy a U.S. company and it also recently made a big real estate purchase. It has a number of well-known tech firms taking notice.

Aditi Roy has our story.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Silicon Valley has a new player in town, Chinese-based LeEco, known as the Netflix (NASDAQ:NFLX) of China, announced plans today to purchase U.S. electronics maker Vizio for $2 billion.

Under the deal, LeEco will take over Vizio`s hardware and software business while Vizio`s data business will spin out as a private company. LeEco is a tech powerhouse in China and the top TV content provider in the country. Vizio is the top seller of HDTVs in the U.S. With Vizio in its fold, LeEco is better positioned to execute its global strategy and expand its presence in the U.S.

The company also has plan to launch a new line of smartphones and TVs in the U.S. and even has a self-driving car designed to compete with Tesla`s Model X.

CEO Yt Jia who is considered the Steve jobs of China for his big push on innovation spoke exclusively to CNBC about the acquisition and his company`s plans for the future.

YT JIA, LEE[CO] CEO (through translator): After the acquisition of LeEco and Vizio, we`ll insert a great influence in the global TV industry. We hope that through the synergy between the two companies, we can lead the TV industry and the Internet industry into a new age. Call it the ecosystem era.

ROY: The news comes just weeks after the $14 billion tech company expanded its footprint here in Silicon Valley snagging prime real estate from Yahoo (NASDAQ:YHOO). The companies now scouting for local talent but plans to nearly double its workforce by the end of the year.

JIA: We hope that in the future, not so far away, we can bring entire ecosystem model to the U.S. and bring a brand new value and service for the American users including our phones, LET TVs, even our cars and ouyr cloud services.

ROY: In April, Jia told CNBC, Apple`s phones are outdated for the Chinese market. Now with the foothold in Silicon Valley, Jia wants to go head-to-head with Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) in their own backyard.

For NIGHTLY BUSINESS REPORT, I`m Aditi Roy.

(END VIDEOTAPE)

HERERA: And finally tonight, the scientific community may be seeing the rewards of the ice bucket challenge. Two summers ago, you might recall, people dumped ice water on their heads, posted the videos online and challenged others to do the same as a way to raise money for ALS.

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