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COMPANY OF THE DAY : SAMSUNG ELECTRONICS

Samsung Electronics is set to publish its Q1 results on Wednesday. The company likely relied on its semiconductor business to drive earnings, with its high-profile smartphone unit focused on stabilizing sales and prepping for the launch of the Galaxy S6 flagship, which hit stores in early April. Our pre-earnings note discusses our expectations for the quarter, as well as for the new device.

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FORECAST OF THE DAY : CHINA MOBILE'S SHARE OF THE CHINESE WIRELESS MARKET

China Mobile enjoys a dominant, majority share of the Chinese wireless market, and we expect it to remain the dominant player going forward. However, we expect its market share to stagnate over the next few years as competitors China Unicom and China Telecom expand their 4G service, an area in which China Mobile had a significant head start.

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RECENT ACTIVITY ON TREFIS

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Strong Comparable Sales Growth In The U.S. Drives Q1 Revenues For Dunkin' Brands
  • By , 4/27/15
  • tags: DNKN MCD SBUX CMG QSR
  • Dunkin’ Brands (NASDAQ: DNKN) delivered strong numbers in its first fiscal quarter earnings report for the fiscal 2015, as the company reported 8.1% year-over-year (y-o-y) increase in its net revenues, despite the severe weather conditions in many parts of the country. Amid the stiff competition in the U.S. restaurant industry for the breakfast and coffee market share, Dunkin’ Brands is one of the few food and beverage chains to report an increase in customer traffic and transactions in all the dayparts. The company reported positive comparable store sales in all its segments. Dunkin’ Donuts U.S. reported comparable store sales growth of 2.7%, whereas Baskin-Robbins U.S. reported comparable sales growth of 8%. The company’s operating income rose 21.2% y-o-y to $84 million, as the operating margins rose to 45%. Moreover, the adjusted net income jumped 13% y-o-y, with diluted EPS jumping 21% to $0.40 for the quarter. We have a $48 estimate for Dunkin’ Brands, which is roughly 10% below the current market price. See full analysis for Dunkin’ Brands Positive Comparable Store Sales Across All Segments Dunkin’ Donuts U.S. Dunkin’ Donuts U.S. showed improvement this quarter, as the segment reported a 2.7% increase in the comparable store sales, compared to 1.2% in the same period last year. Despite the severe cold weather and snowfall across many of the company’s main markets, such as New England and New York, the segment showed positive customer traffic growth. However, harsh weather in February and March partially offset the positive impact of favorable weather in January. DD Perks loyalty program and strong performance of new product platforms contributed to the improved comparable sales. Average ticket growth was mainly due to the net increase in pricing, which contributed approximately 300 basis points, according to the company. The segment witnessed strong challenges in the packaged coffee segment, and the company expects the headwind to impact the second quarter as well. Nonetheless, the company expects 1% to 3% comparable store sales growth for the segment in the fiscal year 2015. Baskin-Robbins U.S. Baskin-Robbins U.S. was the highlight this quarter with the comparable store sales growth of 8%, compared to 0.5% last year. This significant improvement was led by positive growth in cups and cones, desserts, beverages, and sundaes. On the other hand, the segment’s ‘One Plus Up’ marketing initiative, where the customer receives a free waffle cone on every purchase of a second scoop drove sales and profitability. Online cake ordering was another major driver in the cake category growth, which translated to positive comparable store sales. In 2015, the company plans to expand the Baskin-Robbins online and mobile platform, along with the launch of Baskin-Robbins mobile and loyalty program. Dunkin’ Donuts International Dunkin’ Donuts International delivered a 1.7% growth in comparable store sales in this quarter, compared to a negative 2.4% decline in the same period last year. This segment’s growth was led by positive performance of Dunkin’ Donuts Korea and in Europe. Over the next couple of years, the company plans to target some of the big markets, such as China. Baskin-Robbins International In 2014, Dunkin’ Brands’ growth was somewhat slowed down by the performance of its Baskin-Robbins brand, especially in the international markets. Declining margins of Baskin-Robbins International has slowed down the company’s overall profitability. According to Trefis estimates, Baskin-Robbins International’s EBITDA margins declined by 9 percentage point in 2014, as the direct expenses grew 17.4% for the segment. In the first quarter, Baskin-Robbins International segment reported 0.3% growth in the comparable store sales, compared to 1.4% in the same period last year. The company’s stores in the Middle East and Southeast Asia showed strong comparable store sales, offset by poor performance of Baskin-Robbins Japan. Expansion In Western Market Strengthens Dunkin’ Brands is one of the fastest growing companies by unit count among the quick service restaurants. In the first quarter, the company opened 79 net new restaurants worldwide, with 78 net new Dunkin’ Donuts stores in the U.S. Among these new developments, 8% growth was in the core markets, 45% in the established markets, 23% in emerging markets, and 24% in western markets. The company’s stores in California and Colorado are showing significant growth potential and are performing above expectations. On the other hand, there were 21 net store closing of Dunkin’ Donuts stores internationally and 22 net new openings of Baskin-Robbins in the international markets. The company opened its first Dunkin’ Donuts in Denmark, and got enthusiastic response from the customers. However, the net closings of Dunkin’ Donuts internationally were primarily due to closures of kiosk-type locations in the Philippines. On January 8, Dunkin’ Brands announced its intent to expand Dunkin’ Donuts in China. The company has signed a long-term franchise agreement with Golden Cup Pte. Ltd, as wholly owned subsidiary of RRJ Capital Master Fund II, which will serve as the franchise partners to open and operate nearly 1,400 Dunkin’ Donuts stores in the country. For the fiscal 2015, the company expects to open between 410-440 Dunkin’ Donuts outlets and 5-10 Baskin-Robbins outlets in the U.S.  Internationally, the company plans to open 200-300 net new stores across both brands. K-Cups Revenues Boost Top-Line Growth Dunkin’ Brands, along with J.M Smucker Company (NYSE: SJM), expanded its partnership with Keurig Green Mountain (NASDAQ:GMCR) by signing agreements for the manufacturing, marketing, distribution, and sale of Dunkin’ K-Cup packs in the U.S. and Canada. The company announced the expansion of its Dunkin’ K-Cups availability from 8,000 company restaurants to more than 60,000 locations in the U.S., as well as online. This step was taken to strengthen the consumer packaged goods business, as the company also deals with the sales of packaged coffee, creamers, and Baskin-Robbins products. The company’s 8.1% increase in the net revenues was partially due to the revenue contribution from the K-Cup licensing agreement and partially from increased royalty income. As a result, the company’s adjusted operating income rose 15.8% (or, $12 million). K-Cup revenues contributed about $0.04 to the net EPS. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    United Technologies Earnings: Cost Cutting Boosted Profitability Despite Currency Headwinds
  • By , 4/27/15
  • tags: UTX
  • United Technologies ‘ (NYSE:UTX) profit rose 8% year over year in Q1 2015, even as a stronger dollar slashed gains from the company’s international sales growth. The rise in profitability was primarily driven by continued cost reduction efforts, with some additional favorable impact from contract settlements and additional licensing income. On the other hand, the company’s revenues decreased due to a stronger U.S. dollar in Q1 2015. United Technologies (UTC) generates more than 60% of its total sales from international markets, so a stronger dollar meant that organic growth from these markets translated to lower absolute revenues. Overall, UTC’s first quarter revenues reduced by 1% year over year, as 3% organic growth was partially offset by the stronger dollar. UTC revenues of $14.5 billion in Q1 2015 missed analysts estimates by $0.4 billion. The company posted an impressive 20% year-over-year increase in earnings per share of $1.58, beating analyst estimates. Net of restructuring costs, the increase in reported earnings per share still remained high at 7%.  The increase in earnings is a direct consequence of UTC accelerating cost-cutbacks along with increased buy-back of shares in Q1 2015. With this growth, the company remains confident to be on track with its previously issued earnings guidance of $6.85-$7.05 per share in 2015. We currently have  a price estimate of $125 for UTC, approximately 6% ahead of its current market price. This price estimate will be revised soon in light of the recent earnings. See our complete analysis of UTC here Falling Revenues From Sikorsky Dragged Overall Organic Revenue Growth Among the five business segments, three segments reported organic growth while one remained flat, making Sikorsky the only segment that reported a fall in organic revenues in the quarter. Sikorsky saw a 7% decrease in organic revenues, driven by lower commercial volumes as well as lower military and commercial aftermarket values. The lower commercial values are an aftermath of falling oil prices which has led to a pullback in exploration and production activity. The company revealed last month that it has been considering spinning-off or selling this business segment, however a concrete announcement is only expected in June this year. Pratt & Whitney witnessed no change in organic revenues. This was driven by flat defense-related sales, while commercial sales continued to witness a growth. The Aerospace Systems segment saw a decline in defense revenues as U.S. military spending did not witness any recovery. However, this fall was offset by a 10% increase in commercial revenues within the segment. Growth in the global commercial aerospace market is likely to continue for the foreseeable future, driven by rising production rates at major airplane makers such as Boeing and Airbus. So, UTC, which is a key supplier of airplane engines and aerospace systems, will likely see its sales from commercial aerospace continue to rise in the coming quarters. Otis reported a 2% growth in organic revenue, as commercial construction markets remained encouraging through the quarter. Sales in America, Asia and China witnessed growth. However, the growth in China of 7% was softer than the anticipated 10% due to slower real estate and construction activity. This slowdown is expected to continue in the near future. However, as of Q4 2014, China contributed only 6% to UTC’s overall revenues, and hence we estimate that the impact from the slowing growth in this region will be limited. The EMEA region saw a fall in organic growth in the quarter. However, on the brighter side, orders here were very strong, showing a growth of 37% across the region. Climate, Controls & Security (CCS) posted a 6% organic growth in the first quarter. This was primarily driven by Transicold, which saw a solid growth in revenues due to a high order intake in Q4 2014. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Qlik Q1 Earnings: Currency Headwinds Take Some Shine Off Of An Otherwise Impressive Quarter
  • By , 4/27/15
  • tags: QLIK-BY-COMPANY QLIK DATA SAP ORCL
  • Qlik Technologies (NASDAQ:QLIK) put out a strong set of numbers in its quarterly earnings report which was released recently. The company’s subscriber base and revenues both registered an uptick for the first three months of 2015. However, unfavorable currency movements also had a detrimental effect on the company’s revenues for the quarter. The company expects this trend to continue as it has released a soft guidance for the rest of the year. We currently have  a price estimate of $33.01 for Qlik, which implies a 5% discount to the market price.
    DIS Logo
    Weekly Media Notes: Disney Lawsuit, Nickelodeon Programming And Media Networks Reaction To Verizon's Slimmed Pay-TV Package
  • By , 4/27/15
  • tags: VIA FOX VZ
  • The media industry remained active last week, with InCom Corp filing a lawsuit against Disney for its use of MagicBands. In an another development, Viacom’s Nickelodeon network acquired the rights to Mary-Kate and Ashley Olsen’s content library. In yet another, 21 st Century Fox along some with other media giants, rejected Verizon’s slimmer pay-TV packages. On that note, we discuss below these developments related to the media companies over the last week or so.
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    Applied Materials Calls Off Its Merger With Tokyo Electron Due To Regulatory Snag
  • By , 4/27/15
  • tags: AMAT INTC TXN QCOM TEL
  • More than eighteen months after announcing a deal to acquire its Japanese rival Tokyo Electron (TEL), U.S. based semiconductor equipment manufacturer,  Applied Materials (NASDAQ: AMAT) announced yesterday that the deal will not go through due to regulatory concerns. Applied Materials announced an agreement to buy Tokyo Electron in September 2013 in an all-stock deal valued at nearly $9.3 billion. In February 2014, Applied Materials announced that this strategic merger would result in the formation of a new company called Eteris. Gary Dickerson, the current CEO of Applied Materials, was expected to head Eteris from Japan. The two companies geared for the merger as demand for their product slowed and turning a profit became tougher. Year-to-date, Tokyo Electron’s stock has fallen 17% while Applied Materials is down 13%. The two companies said the decision for scrapping the deal came after the U.S. Department of Justice told the companies that their proposals for a combined business were not good enough to replace the competition lost from a merger. No termination fees will be payable by either party, added AMAT. Applied Materials announced plans to buy back $3 billion of stocks, while Tokyo Electron, will purchase 120 billion yen ($1 billion) of its own shares. AMAT’s president and CEO Gary Dickerson said: “We viewed the merger as an opportunity to accelerate our strategy and worked hard to make it happen.” The future of the deal between the two companies was put into doubt earlier this year when the merger plan was pushed back due to regulatory approval issues in a number of countries. Had the merger been completed, it was expected to result in $250 million in cost savings by the end of the first fiscal year of the new entity, Eteris. Applied Materials expected total savings to grow to $500 million by the third fiscal year of Eteris’s existence. According to Gartner, the combined entity would have accounted for 25.5% of the semiconductor equipment market. Currently, ASML Holdings (ASML), Lam Research (LRCX), and KLA Tencor (KLAC) have a 12.8%, 7.4%, and 6.5% market share of the semiconductor equipment market, respectively, while Applied has a 16.2% market share. Applied’s management expected the company to maintain its wide economic moat after merging with TEL. The combination of the firms would have bolstered the new company’s overall competitive position and enhanced its status as the nearest thing to a one-stop shop for front-end equipment for chipmakers. As a result, Applied-TEL would have not only been a more robust and comprehensive product line, but also greater technical expertise across a larger number of the process steps involved in semiconductor manufacturing. Our price estimate of $22 for Applied Materials is approximately in line with the current market price. See our complete analysis of Applied Materials here Applied-TEL Would Have Been Better Positioned in Key Etch and Deposition Segments The scrapping of AMAT-TEL merger will affect AMAT’s position in key etched and deposition segment. Although Applied (~47%) has significantly more deposition market share than TEL (~12%), the company had opportunities to fill out its product portfolio and strengthen its competitive position with the merger. The other key player, LAM has already merged with major deposition company Novellus in June 2012 to gain a substantial presence in the segment. Applied is clearly a laggard in the etch segment while it is the leader in dielectric etch. By teaming up, Applied and TEL expected to close the gap with LAM (number-one position in silicon etch and metal etch) in terms of total etch market share. Steady growth is expected in the etch and deposition segments. The opportunities are fueled by technologically-driven demand. The global etch and deposition segments combined are expected to increase to $35 billion in 2015 and $37 billion in 2016. Applied estimated that etch and deposition spending will increase to more than 20% in 2015, even larger than what was in 2014. Merger Would Have Made Sense From Customer Consolidation Perspective Historically, TEL had a strong competitive position in Japan, while Applied had more of a global presence (excluding Japan). Nonetheless, the decline over the years in the number of semiconductor firms that can afford to have their own chip fabrication plants has reduced the customer base for the industry. In 2012, three chipmakers–Intel, Samsung, and Taiwan Semiconductor Manufacturing, accounted for just over 50% of total capital spending in the semiconductor industry, while eight chipmakers made up half of total capital expenditures in 2005, according to Gartner.   This customer consolidation has resulted in some large mergers and acquisitions in recent years, such as Applied’s acquisition of leading ion implant tool supplier Varian Semiconductor in 2011 and Lam Research’s merger with Novellus in 2012. Applied and TEL merger could have been viewed as another chip equipment deal to create synergies in response to a shrinking customer base. Applied Materials, Tokyo Electron and Dutch maker ASML Holding NV are the three largest players in an industry that has consolidated as the rising cost of developing cutting-edge chips and slowing semiconductor demand forced alliances and acquisitions. Even though it’s too early to comment on the ramifications of calling off the merger would have, the unraveling of the Applied-Tokyo would be worse for Tokyo Electron, as takeover targets often lose management focus, and customers, during the negotiation period. CEO Higashi said Tokyo Electron would be “ flexible in considering alliances with others in the future. ” View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    F Logo
    Earnings Preview: Expect Lower Profits From Ford This Quarter
  • By , 4/27/15
  • tags: F GM VLKAY TM HMC
  • Ford Motors (NYSE:F) is scheduled to announce the release of its earnings for the first quarter of fiscal year 2015 on Tuesday, April 28.  The U.S. auto maker’s management has already warned investors that 2015 is going to be an atypical year for the company. Usually, Ford makes most of its profits in the first half of the year as the second half is usually weighed down by heavy costs associated with the launch of newer models. However, in 2015, the opposite is expected — the company is still incurring heavy costs in rolling out its most profitable vehicle, the F-150 series of pick-up trucks. Below, we take a look at the sales data from the three main regions in which the company operates, to get a better sense of what to expect from the company in the first quarter. North America In North America, sales of Ford’s vehicles showed a slight increase of 2% in the first quarter. While the F-series, the company’s most profitable vehicle, also reported a 2.3% increase in unit sales over the first three months of the year, the overall truck segment did better, growing at 8%, driven by the sales of the full-size commercial van, Transit. North America is not only the most profitable region for the company but also its most critical region, as when profits there suffer, the company’s overall profitability tends to suffer, too.  In the first quarter, profitability in the region was weighed down by the low supply of the company’s best selling F-150 pick-up trucks.  Ford is undertaking a refresh of the F-150, which earlier used to be made from a steel body, but the company closed down production at the two plants where it is manufactured — Dearborn in Michigan, and Kansas City — to allow for their retooling, so that the trucks could be manufactured with aluminum bodies. The plants are still not running at full capacity, and as a result, dealerships are running with lower inventory than usual. The company has tried to make up for the low inventory by trying to sell most of its available inventory to retail buyers, who tend to prefer higher-trim trucks, which command higher margins, as opposed to commercial buyers, who tend to buy 100′s of units all at once, often at a slight discount. As a result, the company has lost out on market share in the commercial sales segment to GM, whose Chevrolet Silverado has done really well over the quarter. Production facilities at the two plants will not reach full capacity for another two months, therefore the company’s profits in the region will only begin to increase in the second half of the year. China China is slowly emerging as an important region for Ford. The U.S. auto maker posted a solid quarter in the region, selling close to 297,000 cars, a 9% increase in unit sales compared to the first quarter of fiscal 2014. China is not only already the world’s biggest auto market, but it is also one of the fastest growing markets. It is expected that new-car sales in China will reach 30 million by 2020, compared to 20 million in 2014. The region will contribute to close to a third of all new-vehicle sales in the world by that time period. As a result, Ford is increasing its presence in the region, both in terms of its car models and production capacity. The company recently opened its sixth assembly plant in the region, increasing its capacity by a quarter of a million vehicles. Additionally, the company also launched the Lincoln brand in the country late last year and that should soon start contributing to the company’s profits. Lincoln has received good customer response according to Ford’s management, and it is quite likely that the company will soon start producing the vehicle in the region to further drive up sales and profitability. Europe Since 2012, Ford has lost over $4 billion in Europe. The region has been slow to recover from the financial crisis and annual new-car sales have still not reached their pre-recession levels. However, Ford is slowly starting to turn around its operations in the region. In the first quarter, the U.S. auto maker sold more than 335,000 vehicles, representing a 12.5% increase compared to the same period last year. More importantly, nearly three-fourths of those sales were made in the retail and fleet channels, which are more profitable than selling to car rental companies. Ford is planning to launch the Vignale Mondeo in the region. The car is essentially a premium version of the Ford Fusion sedan and should help the company achieve a higher margin in the sales of its passenger vehicles. Additionally, Ford seems to have benefited from the departure of the Chevrolet brand from Europe. (See: GM Targets Small Car Segment To Regain Profitability In Europe ) Customers who tended to prefer the Chevrolet brand cars have taken notice of Ford, which is taking over a good proportion of sales in the change-over from Chevrolet vehicles. Despite all these bright points, the reality is that all this merely bodes well for the future, and Ford cannot be expected to report any profits from the region in 2015. See full analysis for Ford Motors View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Merck Earnings Preview
  • By , 4/27/15
  • tags: MRK PFE BMY
  • As  Merck (NYSE:MRK) reports its Q1 2015 earnings on April 28th, we expect the decline it its legacy products to continue due to competitive pressure from generics. Furthermore, we expect the cardiovascular division to remain under pressure due to intense competition and lack of new groundbreaking therapies. This was evident in Q4 2014 when sales of Zetia and Vytorin fell 8% and 15%, respectively. However, a recent study (the IMPROVE-IT trial) specific to Vytorin, which combines Zetia with a statin drug, has shown its advantage over other drugs in terms of reduced cardiovascular events. The the impact will be more clear in the first quarter results. However, currency effects will continue to be a dampener and pull down the growth of Merck’s key franchises, including diabetes and immunology. We believe the key catalysts for the stock are Merck launching a successful hepatitis C drug and its cancer drug Keytruda getting more approvals, and we look forward to any updates on these. (read  These Two Catalysts Can Move Merck’s Stock Up )
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    Lexmark Earnings Preview:Inorganic Growth To Boost Revenues
  • By , 4/27/15
  • tags: LXK IBM HPQ
  • Lexmark International (NYSE:LXK) is set to release its Q1 2015 results on April 28th. In 2014, the revenues improved marginally by 1.17% to $3.71 billion. However, the operating income and net income declined as the company pursued inorganic route to grow its business, especially in the electronic content and business process management vertical. As the company transitions from low-margin hardware business to high margin software services, we expect the profitability to increase. We expect the company to report a marginal decline in revenues from organic streams in its Q1 earnings announcement. However, revenues from acquisitions should offset the decline in organic revenues to some extent, especially for Perceptive software division. Additionally, we will be closely following the growth in the number of new licenses for its Managed Print Services (MPS) business, as it can offset the decline in non-MPS revenues of imaging and software solutions (ISS). See our full analysis on Lexmark Outlook For Q4 And 2014 For Q1 FY15, the company expects revenues to decline by 3% to 5% year over year and non-GAAP earnings per share to be in the $0.70 to $0.80 range. Lexmark expects revenue to decline by 3% to 5% in 2015 and Non-GAAP EPS to be in $3.60 to $3.80 range. Laser And MPS Revenues to Boost Supplies Revenues The laser printer and cartridge division is its biggest business unit and makes up for over 82% of Lexmark’s estimated value. In the recent quarters, unit sales of printer hardware and supplies have declined, both for Lexmark and the market at large. According to IDC, the worldwide hardcopy peripherals market declined 1.16% in 2014. However, to some extent, resilience in laser hardware sales has offset the decline in total sales. While laser printer sales increased marginally from 40.38 million in 2013 to 40.5 million in 2014, inkjet printer sales declined by 2% from 67.66 million in 2013 to 66.28 million. Lexmark has been concentrating on the large work group segment that is typically attached directly to large workgroup networks in corporations. We expect Lexmark to gain ground in the laser market in Q1, and buck the downtrend in the Hardcopy Peripherals Market. Furthermore, there has been a gradual shift in hardcopy peripheral devices away from the desktop and towards more shared and centralized solutions. This shift is driving some of the growth in the printer hardware sales. It is also bolstering revenues for companies that provide MPS, which includes procurement, maintenance and other aspects of printing. We expect that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. We also expect MPS to propel the supplies revenues as most of the MPS contracts also contain a clause for supplying printer stationery and cartridges. Going forward, we expect MPS to become the biggest driver of revenue for the ISS. Revenue Growth from Perceptive Software in Focus The Perceptive software division is the second biggest business unit and makes up nearly 8.7% of Lexmark’s estimated value. As Lexmark plans to become an end-to-end solution provider, Perceptive Software is becoming an increasingly important division for Lexmark. Perceptive experienced annual growth of 31% in 2014 and reported $313 million in revenues for FY14. Lexmark has guided 15% growth in Perceptive’s revenue for 2015. To ensure that the growth in this line of business continues, the company continues to acquire companies that can bolster Perceptive’s portfolio and reach across the globe. As a result of these efforts, we expect growth trend to continue in Q1, and in 2015. We also expect that the growth in Perceptive’s licensing revenue will contribute to the bottom line in Q1 as it is a high margin business. In this earnings call, we will continue to closely follow the deal pipeline for the Perceptive software business. We currently have a  $42.20 Trefis price estimate for Lexmark, which is 4.6% below its current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Twitter Earnings Preview: Expecting Solid Growth During First Quarter
  • By , 4/27/15
  • tags: TWTR FB LNKD
  • Twitter (NYSE:TWTR) is scheduled to announce its first quarter 2015 results on Tuesday, April 28th. The company’s share price has rallied by more than 40% in 2015 due to better-than-expected results and rumors pertaining to potential takeover by Google. While Twitter’s management had guided revenue growth to be around 80% during Q1, we expect the company to beat this guidance on the back of solid growth in mobile and international advertising, as well as an increase in ad load levels. Moreover, we expect year-over-year improvement in margins during the first quarter, driven by operating leverage.
    NEM Logo
    Cost Reductions Boost Newmont's Q1 Results Despite Weak Gold Prices
  • By , 4/27/15
  • tags: NEM ABX FCX SLW VALE
  • Newmont Mining (NYSE:NEM) announced its first quarter results on April 23 and conducted a conference call with analysts the next day. Despite lower gold prices, the company’s adjusted net income, which excludes the impact of non-recurring items such as impairments, rose from $121 million in Q1 2014, to $229 million in Q1 2015. Given the subdued gold pricing environment, the company’s cost rationalization efforts played a major role in boosting the company’s quarterly results. The company’s revenues rose to $1.97 billion in Q1 2015, up from $1.76 billion in the corresponding period last year, primarily as a result of higher gold and copper shipments. See our complete analysis for Newmont Mining Gold Prices and Shipments Newmont’s average realized gold price for Q1 2015 stood at $1,203 per ounce, down from $1,293 per ounce in the corresponding period last year. Revenues from gold sales accounted for 90% of Newmont’s total revenues in 2014. Thus, the fall in gold prices weighed on the company’s results. Gold prices have fallen over the course of the last year, reacting to cues pertaining to the tapering of the Federal Reserve’s Quantitative Easing (QE) program. Gold as an investment is often viewed as a hedge against inflation and economic weakness. The tapering of QE implied strengthening U.S. economic growth, which reduced the investment demand for gold and led to a fall in prices of the metal. Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates sometime in 2015. However, the exact timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. An interest rate hike is likely to limit the upside for gold prices, as investors shift towards higher yielding assets. The company’s gold shipments rose marginally to 1.19 million ounces in Q1 2015, up from 1.17 million ounces in the corresponding period last year. The company’s shipments rose year-over-year, despite a loss of around 100,000 ounces in production as a result of the divestment of high-cost mines. This was primarily because of an increase in gold shipments from the Batu Hijau mine in Indonesia, as a result of the resumption of normal operations in Indonesia after the standoff between the company and the Indonesian government, over the issue of export taxes, ended in Q3 2014. In addition, the mining of higher grade ores boosted the company’s production at its Yanacocha mine in Peru. Copper Prices and Shipments Newmont’s copper shipments rose to 85 million pounds in Q1 2015, as compared to 35 million pounds in Q1 2014. This was primarily due to the sale of stockpiled ore from the company’s Batu Hijau copper mining operations in Indonesia, where operations were suspended for four months in 2014 as the company negotiated with the Indonesian government over regulatory changes which impacted the company’s operations in the country. Normal operations resumed at Batu Hijau at the end of September. However, the impact of an increase in shipments was partially offset by a fall in realized prices. The company’s average realized price for copper fell to $2.34 per pound in Q1 2015, as compared to $2.50 per pound in Q1 2014. The fall in realized prices was mainly due to weakness in demand for the metal, particularly from China — the world’s largest consumer of copper, where slowing economic growth has dampened demand for the metal. Chinese GDP growth is expected to slow to 6.8% in 2015, from 7.4% in 2014, which has negatively impacted demand for the metal from China. Costs Newmont’s efforts at cost reduction and productivity improvement were mainly responsible for an improvement in the company’s quarterly results. The company’s All-in Sustaining Cost (AISC) metric for gold production fell to $849 per ounce in Q1 2015, from $1,034 per ounce in the corresponding period of 2014. The AISC metric captures all of the expenditures incurred to discover, develop, and sustain production. AISC includes costs applicable to sales, remediation costs, general and administrative costs, advanced projects, and exploration expenses, treatment and refining costs, sustaining capital expenditure, and other miscellaneous expenses. This metric helps investors better gauge the company’s performance. The improvement in the company’s AISC metric can be attributed to the company’s cost reduction initiatives and the sale of high-cost mining assets, in addition to the mining of higher grade ores at various mines, most prominently the Batu Hijau and Yanacocha mines. In addition, the strengthening of the U.S. Dollar against the Australian Dollar lowered the costs of the company’s gold mining operations in the Asia-Pacific region. Outlook Going forward, the company management stressed that disciplined capital allocation will remain the strategy for Newmont. The company realized $800 million from non-core asset sales in 2014 and $1.4 billion over the last two years. Given the prevailing environment of subdued gold prices, the company intends to focus on its core, low-cost gold mines, and a project pipeline that is focused on developing low-cost mines in the near term. The Merian mine in Suriname is currently the company’s only greenfield project. When it commences production, the Merian mine is expected to produce at an AISC of $650-750 per ounce in its first five years of production, which compares favorably with Newmont’s company-wide AISC of $1,002 per ounce in 2014. Focusing on such low-cost gold mines will position the company to operate more competitively in a variety of gold pricing environments, particularly the prevailing environment of low gold prices. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Pfizer Earnings Preview: Revenue Decline To Continue As Pfizer Searches For New Growth Avenues
  • By , 4/27/15
  • tags: PFE JNJ MRK
  • Pfizer (NYSE:PFE) expects that much of the decline in revenue for 2015 will be due to the effect of recent and expected product losses of exclusivity. This effect is expected to reduce the company’s revenue by $3.5 billion this year. Its revenues will also be adversely impacted by the strengthening U.S. dollar. We believe these expectations will come into play when the company reports its Q1 2015 earnings on April 28th. We expect vaccine and oncology revenues to grow, along with visible ramp up in Eliquis’ sales. However, adverse currency movement and decline in legacy drugs will continue to be a dampener. Pfizer’s current year guidance indicates that the company expects operating conditions to remain challenging in the short to medium term.
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    Bristol-Myers Squibb Earnings Preview: Yervoy, Opdivo And Eliquis In Focus
  • By , 4/27/15
  • tags: BMY JNJ PFE
  • Bristol-Myers Squibb (NYSE:BMY) will report its Q1 2015 earnings on April 28th. We expect the company to report strong operational growth for the oncology business, a ramp up in sales of Eliquis, and the continued adoption of hepatitis C drug Daklinza. However, adverse currency effects will weigh on the company’s results as more than 50% of its revenues come from international markets. We have already seen J&J’s results battered by strengthening dollar. In addition, Bristol-Myers Squibb company will face the impact of expiry of Abilify’s patent in its upcoming results. Abilify is the biggest selling anti-depressant in the U.S. and accounted for about $2 billion of Bristol-Myers Squibb’s revenues in 2014. The company has already lost the marketing rights in EU. The impact will intensify from second quarter onward. Our current price estimate for Bristol-Myers Squibb stands at $50.70, implying a discount of about 20% to the market.
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    Dow Chemical Earnings: Demand For Specialty Products Drives Growth Amid Lower Oil Prices
  • By , 4/27/15
  • tags: DOW DD MON
  • The Dow Chemical Company’s (NYSE:DOW) 2015 first quarter earnings beat analysts’ consensus estimates on the back of thicker margins due to higher specialty products sales volume, cost savings through productivity improvements, and higher capacity utilization. The company’s adjusted diluted earnings per share (EPS) increased by $0.05 or 6.33% y-o-y to $0.84. Although its sales revenue declined by 14% due to lower oil prices and negative currency translation impact – because of the appreciation of the U.S. Dollar – the company’s adjusted EBITDA margin improved by over 284 basis points year-on-year. Some of the increase in Dow’s adjusted EBITDA during the first quarter could be attributed to higher operating leverage or increased use of fixed assets, which results in a decrease in marginal production costs. According to the company’s recent earnings call presentation, a 100 basis points improvement in its annual operating rate boosts its full-year EBITDA by more than $200 million. During the first quarter, Dow’s operating rate stood at 84%, up by 100 basis points over the same period last year. In addition to higher operating leverage, cost savings from the ongoing 3-year, $1 billion productivity drive at the company, also boosted its profitability during the quarter. Cost savings from the program added up to $57 million during the quarter, and are expected to ramp up to $300 through the year. Apart from higher operating leverage and productivity cost savings, Dow’s first quarter adjusted EBITDA margin was also boosted by the higher demand for its high-value, differentiated end products, which is something we discuss in more detail below. Dow is a diversified chemical industry giant operating in basic and specialty chemicals, advanced materials, agro-sciences,  and plastics, business segments. It delivers a broad range of technology-based products and solutions to customers in approximately 160 countries, and in high growth sectors such as electronics, water, energy, and agriculture. Last year, Dow reported annual sales of over $58 billion and adjusted net income of around $3.7 billion. Based on the recent earnings announcement, we have updated  our price estimate for Dow to $56/share, which is approximately 18.7x our 2015 full-year adjusted diluted EPS estimate of $3.00 for the company. See Our Complete Analysis For Dow High-Value, Specialty Products Drive Profitability Gains According to our estimates, Performance Plastics is Dow’s most valuable operating division, contributing more than 30% to its total value. The division primarily sells flexible plastic packaging products, hydrocarbons, and elastomers. During the first quarter, Dow’s Performance Plastics EBITDA increased by almost 2% y-o-y, even while sales revenue from the division declined by almost 23%. This is because the division’s adjusted EBITDA margin improved by 558 basis points over the year-ago quarter. Most of this margin expansion could be attributed to higher demand for Dow’s high-value plastics products, especially elastomers.  Dow’s management noted that EBITDA from the Elastomers unit increased by nearly 60% year-on-year during the first quarter and stood at its highest level since 2012. Elastomers are natural or synthetic polymers that have elastic properties. Dow sells a variety of elastomers including polyolefin plastomers and ethylene propylene diene monomer elastomers (“EPDMs”). These products find applications in many end markets like adhesives, transportation, footwear, housewares, and infrastructure. However, the company stated that during the first quarter, elastomers demand was particularly strong in the transportation sector, which also reflected in the performance of its Dow Automotive Systems unit that is a part of Dow’s Electronics and Functional Materials division. Dow Automotive systems also delivered record EBITDA during the first quarter, benefiting from auto industry trends toward light weighting as well as a growing preference for larger, premium vehicles, driven in part by lower oil prices. These vehicles tend to feature both more, and higher margin, Dow materials, which resulted in a better sales volume-mix for the company, driving thicker margins. Overall, the significance of Dow’s first quarter results lies in the fact that the company was able to grow its earnings through margin expansion despite such a volatile commodity cost environment. Being in the petrochemical business, Dow relies heavily on hydrocarbon feedstocks for manufacturing its end products like packaging films and elastomers. As a result, dynamics in the oil and gas industry impact its operations significantly. However, despite the 50% y-o-y decline in oil prices, the company was able to maintain its earnings growth momentum. This clearly indicates that it has made great progress over the last few years to shift its focus away from low-margin, commoditized end products, to more differentiated, high-value products. These specialized end products have increased Dow’s price-taking ability and partially insulated it from the volatility in input commodity costs, while increasing the marginal benefit of backward integration into the manufacture of basic chemicals like ethylene. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Macau Operations Will Drag Wynn Resorts' Q1 Earnings Lower
  • By , 4/27/15
  • tags: WYNN LVS MGM
  • Wynn Resorts (NASDAQ:WYNN) will report its Q1 2015 earnings on April 28 th . We expect the casino giant to continue to face headwinds from the ongoing decline in Macau gaming. Macau gross gaming revenue fell by 37% in the first quarter amid the government’s crackdown on corruption, leading to the tenth straight month of decline. Its not just VIP gaming that is facing headwinds, mass-market gaming revenues also declined around 27% in the first quarter. Accordingly, we expect Wynn to post lower revenues and EBITDA as compared to the prior year period and the shift of VIP gaming tables to mass-market gaming to continue.  Las Vegas Sands (NYSE:LVS) recently reported its Q1 earnings, which declined over 30% amid Macau slowdown (see -  Macau Slowdown Weighs Over Las Vegas Sands’ Q1 Earnings ). One of the important factors to watch out for will be the table games win percentage . The win percentage of 39.3% in the previous quarter was the lowest hold rate since the third quarter of 2013. Looking at Q1 2014, the figure stood at 43.4%. We currently estimate revenues of over $5.65 billion for Wynn Resorts in 2015, with EPS of $6.93, which is in line with the market consensus of $4.58-$7.37, compiled by Thomson Reuters. We currently have a  $159 price estimate for Wynn Resorts, which we will update after the first quarter earnings announcement.
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    Sirius XM Likely To Report Strong Subscriber Adds And Bottomline Growth
  • By , 4/27/15
  • tags: SIRI P
  • Satellite radio provider  Sirius XM (NASDAQ:SIRI) is scheduled to release its Q1 2015 earnings on April 28th. Since the company didn’t perform too well in the first quarter of 2014, due to only moderate growth in new car sales, we expect Q1 2015 growth figures to be much better, benefiting from both a favorable comparable period and steady growth in new car sales. It must be noted that Sirius XM’s subscriber additions had picked up in the second quarter of last year, driven by a 7% increase in new vehicle sales. In the third quarter, as new vehicle sales increased 8%, Sirius XM’s revenues jumped 10% to $1.06 billion, driven by 5% growth in the subscriber base and a 7% increase in the number of self-pay subscribers. Sturdy growth for the satellite radio provider continued in Q4 2014 with 9% growth in revenues and 7% increase in the number of subscribers. While we believe Sirius XM’s growth continued in the first quarter, we do not expect there was any significant improvement in its new vehicle penetration rate, since it is already on the higher side (71%). Also, we expect the monthly churn rate to remain roughly stable, as it has not changed much over the past several quarters. On the profitability side, we believe that  Sirius XM’s margins continued to improve in the quarter, due to the operating leverage that results from top-line growth. For the full year 2014, the company’s EBITDA (earnings before interest tax depreciation and amortization) margins improved a strong 430 basis points to a record high of 35%. Our current price estimate for the company stands at $3.78, implying a discount of about 5% to the current market price.
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    Akamai Q1 Earnings Preview: Akamai To Continue Firing On All Cylinders
  • By , 4/27/15
  • tags: AKAM AMZN AAPL
  • Akamai (NASDAQ:AKAM) will report its Q1 2015 earnings on April 28th. The company reported strong numbers last quarter and displayed growth across all its reported business segments and geographies. We expect the company to report continued growth in CDN (content delivery network) services, due to growing media content on the Internet and accelerated demand for value-added services. This growth will be driven by the secular trends of more business being conducted online, increased online content and traffic, content providers striving to improve the experience of their users and the increased demand for faster and more secure content delivery. Akamai expects revenue for the quarter to be in the range of $517 to $534 million and EPS to be between $0.60 and $0.63, which is in line with consensus estimates. This outlook takes into account the effects of a stronger dollar and slight moderation in Internet traffic due to the lack of major sporting events. It is worth noting that the video transmission of the Sochi Olympics had a favorable impact on Akamai in Q1 2014.
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    Weekly Notes On Coffee Industry: Starbucks & Keurig Green Mountain
  • By , 4/27/15
  • tags: SBUX
  • Due to political uncertainty in Brazil, the country’s currency the ‘Real’ fell roughly 30% against US Dollars over the last 3 months, reaching a 12-year low. As a result, banks such as Goldman Sachs and Citibank have slashed the price forecasts for Coffee and Sugar by nearly 31%, according to Reuters. Sugar prices are at its lowest levels in the last 6 years, hovering at around 13 cents per lb, and the forecasted price for the second quarter has dropped 3 cents to 13.6 cents per lb. On the other hand, the average forecast price for Arabica coffee fell from $1.90 per lb to $1.52 per lb. Here’s a quick round-up of some news related to the coffee related companies covered by Trefis. Starbucks The coffee giant,  Starbucks Corporation (NASDAQ: SBUX), continues its strong momentum in its second quarter for the fiscal 2015, as the company’s consolidated net revenues incresed18% year-over-year (y-o-y) to $4.6 billion, with a significant contribution by China & the Asia-Pacific region. Starbucks’ global comparable store sales increased 7% in the second quarter, with a 3% rise in the customer traffic. The highlight of the quarter was the comparable sales growth of 12% in the China and Asia-Pacific region (CAP). This segment showed tremendous positive growth, with revenues increasing 124% y-o-y, and a 29% y-o-y increase in the operating income. However, the operating margins dropped 1390 basis points y-o-y to 18.9%, due to the impact of acquisition of Starbucks Japan. Due to the recent drop in coffee prices, Starbucks locked 70% of its coffee supply for 2016. Starbucks’ stock increased from $48 to $51 during the last week.  Our price estimate for the company’s stock is $45, implying a market cap of $68 billion, which is 13% below the current market price. See our complete analysis of Starbucks Keurig Green Mountain Keurig Green Mountain (NASDAQ:GMCR) is slated to release its Q2 2015 earnings report on May 6. On March 30, Keurig Green Mountain and Reily Foods Company announced a multi-year manufacturing and distribution agreement for New England brand coffee, New Orleans Famous French Market brand coffee, and Luzianne brand iced tea pods for Keurig’s hot brewer systems in the U.S. and Canada. Earlier in March, the company announced a multi-year agreement with DS Services to offer DS Services’ Javarama coffee in K-Cups for Keurig’s hot brewer systems. Keurig Green Mountain’s stock traded between the range of $112 and $116 during the last week.   Our price estimate for the company’s stock is $102, implying a market cap of $16.5 billion, which is roughly 11% below the current market price. See our complete analysis of Keurig Green Mountain View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    3M Earnings: Currency Headwinds Temper Revenue And Outlook
  • By , 4/27/15
  • 3M (NYSE:MMM) announced its first quarter results on April 23. The company reported a 3.2% decline in revenues, reaching $7.6 billion, as a result of foreign currency headwinds, which more than offset increased volume and pricing benefits. However, on an organic local currency basis, which excludes the impact of currency fluctuations and acquisitions, revenue grew 3.3%. All five segments – Industrial, Healthcare, Safety and Graphics, Electronics and Energy and Consumer – reported positive growth on an organic local currency basis. Though 3M’s operating margin improved 90 basis points, to 22.8%, its net profits declined 0.7%, to reach $1.7 billion. Despite the decline in net profits, 3M still managed to post growth of 3.4% year-on-year in its earnings per share, to reach $1.85, thanks to its $886 million share repurchases. However, 3M’s stock declined 3% during pre-market trading, as the market was expecting earnings of $1.92 per share. 3M’s lowered revenue and earnings guidance for the year also left investors disappointed.
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    Samsung Q1 Preview: Semiconductors Will Drive Earnings As Smartphone Business Transitions
  • By , 4/27/15
  • tags: SSNLF ssnlf AAPL INTC MU
  • Samsung Electronics (PINK:SSNLF) is slated to publish its Q1 2015 results on April 29, reporting on a quarter that likely saw the company rely on its semiconductor business to drive earnings, with its high-profile smartphone unit focused on stabilizing sales and prepping for the launch of the Galaxy S6 flagship, which hit stores in early April. The company has already issued its preliminary numbers for the quarter, indicating that operating profits likely fell by about 30% year-over-year to 5.9 trillion won (about $5.4 billion), while revenues fell by about 10% to about 47 trillion won (about $43 billion). While this represents the sixth consecutive year-over-year decline in quarterly profit, the numbers were better than expected and could indicate that the profit slide is moderating and things are likely to get better from here on. Here’s a quick look at some of the trends that will drive Samsung’s quarterly numbers (related:  Samsung’s Better Than Expected Q1 Guidance Indicates That It Could Be Turning The Corner ). Trefis has a  $1,285 price estimate for Samsung Electronics, which is about in line with the current market price. We will be updating our price estimate and valuation model for the company following the earnings release.
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    Norfolk Southern Earnings Preview: Earnings To Take A Hit Due To Fuel Prices
  • By , 4/27/15
  • tags: NSC CSX UNP
  • Norfolk Southern (NYSE:NSC) is set to announce its first quarter 2015 results on Wednesday, April 29. The company has provided its expectations for the quarter in a bid to prepare the market for a disappointment. Plagued by declining coal volumes and fuel surcharge revenues, the railroad expects to report a 5% year-on-year decline in revenues, to reach $2.6 billion. Though Norfolk Southern’s operating expenses will likely decline due to a lower fuel bill, the decline will not be commensurate with the revenue loss, leading to a decline in net profits. The railroad expects its first quarter earnings per share to fall 15% year-on-year, to $1.00. In the fourth quarter, Norfolk Southern reported flat revenues as gains in its Intermodal and General Merchandise segments were offset by the decline in the Coal segment. The railroad’s average revenue per unit (ARPU) declined 4% primarily due to an unfavorable mix in its Coal and Intermodal segments. Though it marginally exceeded analyst expectations, Norfolk Southern’s earnings per share were also flat at $1.64.
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    Corning Earnings Preview: Revenue To Grow On Display, Optical And Specialty Volumes
  • By , 4/27/15
  • tags: GLW SSNLF
  • Corning (NYSE:GLW) is set to announce its first quarter 2015 results on Tuesday, April 28. We expect to see growth in revenues driven by its Display Technologies, Optical Communications and Specialty Materials segments. However, the growth rate will likely slow down due to tough comparables. In 2014, most of the revenue growth had come from the acquisition of Samsung Corning Precision Materials, whose revenues were comparable to those of Corning’s Display Technologies segment. Now that the cycling of the previous year’s acquisition-based growth has come to an end, revenue growth will be completely reliant on volumes, while most of Corning’s segments continue to suffer from price declines. In the fourth quarter, Corning reported 23% year-on-year growth in GAAP revenues, to cross $2.4 billion. Corning’s net profits increased a staggering 135%, primarily due to the integration of Corning Precision Materials, an increase in income from foreign currency transactions and hedging gains. Looking at Corning’s core results, which excludes the impact of foreign currency and other special items, its revenues grew 30% year-on-year, crossing $2.6 billion and beating market estimates by $100 million. Corning beat earnings per share estimates as well, by $0.07, to reach $0.47.
    Small is Still Beautiful (If You Take Out the Ugly Parts)
  • By , 4/27/15
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program Small is Still Beautiful (if you take out the ugly parts) by Charles Lewis Sizemore, CFA In 1939, Sir John Templeton borrowed $10,000 and used it to invest $100 in every stock listed on NYSE selling for under $1. In all, he purchased 104 different stocks. No regard was paid to the quality of the business, profits, etc. In fact, 37 out of these 104 companies were already in bankruptcy. 3 years later, Sir John had profits in 100 out of the 104 stocks he had purchased. Templeton of course is a legendary value investor who believed in investing at the point of maximum pessimism. The above investment was made at the start of World War 2. A contrarian to the bone, he explained his investing philosophy with some humor simply as “help people”. When people are desperate to sell, help them by buying. When people are desperate to buy, help them by selling. The Rise and Disappearance of the Size Premium In 1981 it was discovered that the small cap stocks in US have higher average returns than large stocks.  The difference not explainable by the market beta. This size premium was characterized with irregularities such as its relative absence in international markets, concentration of returns in January, and low statistical significance. Further studies came to conclusions that the size premium essentially disappeared soon after the original discovery was made. This of course is the perennial problem in modern finance – as soon as a pattern emerges that offers significant advantages in expected returns, everyone rushes to cash in, and therefore this advantage disappears. If Sir John Templeton were to repeat his $100 investment in 100 worst stocks strategy after 1980s, it would not have worked. There is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable. There is another theory, which states that this has already happened. -Douglas Adams, The Hitchhiker’s Guide to Galaxy Controlling for the Junk In a recent draft paper titled “Size Matters, If You Control Your Junk 1 ” (good to see these academics and Wall Street guys having fun with the headline), the authors argue that the Size Premium is alive and well if we focus on quality companies. What is more, the variance between returns of the small quality stocks and large quality stocks is more pronounced than thought, and it holds across geographies and consistent over the course of the year (the returns are no longer concentrated in January). You can download the paper here and get the full details of the study and its findings. In short, small quality stocks outperform large quality stocks, small junky stocks outperform large junky stocks, and quality outperforms junk. The key to understand why the studies have shown inconsistent results is that small stocks tend to be loaded with junk companies, while large stocks tend to be primarily quality companies. Keep in mind the following: Junk is defined as inverse-quality, and, quality is deduced based on these indicators – profitability, profit growth, low risk in terms of return-based measures and stability of earnings, and high payout and/or conservative investment policy, and therefore can be measured and analyzed. How Do These Findings Affect Your Investments? In a way, this paper aims to provide a theoretical basis for something that even if it was not formally explained, it was at least implicitly understood by most sophisticated investors. Consider the rise of activist investors in the past few decades. Activism relies on replacing the “junkiness” in a company with quality and then capture the upside. Most other investors that may not be able to buy a voice in the board room should focus on the quality attributes even while seeking outstanding valuations. Thinking of buying a small cap value index fund or ETF? Don’t bother – they are full of junk and give you no particular advantage in the long run. You may receive some positive alpha over market index from time to time, but the long run will not be as kind to your portfolio. The only way to get quality in your small cap portfolio is to find actively managed fund with an experienced manager running it. Note : I normally use P/E, P/B and other similar ratios for screens but not for the actual valuations (in some cases they are appropriate and in others they are not). When you use these ratios to screen for potential ideas, and consciously discard the stocks that have negative values for these ratios, you tweak your sample towards higher quality/less junk as you emphasize profits or some other fundamental measures of quality. For investors in small cap companies, there is no substitute for deep due diligence. Value Investing and Junk Ben Graham is famous for shunning management contact in the companies that he invested in. In fact, he would only go by the numbers and data. Warren Buffett on the other hand pays a lot of attention to the intangibles such as quality of the management, market position of the company, moat, etc. Arguably. Buffett is constrained by the amount of capital he has at his disposal so small quality stocks are hard for him to invest in. However, he did start out by investing in cigar butt stocks, which are by definition junk. Over the years value investors have continued to invest in “situations” and quality tends to be an after thought. It is important to remember though that these studies are done with large samples and as a result they tend to paper over individual stock picking skills. After all, every stock is a buy at a sufficiently  low valuation. 1 Asness, Clifford S. and Frazzini, Andrea and Israel, Ronen and Moskowitz, Tobias J. and Pedersen, Lasse Heje, Size Matters, If You Control Your Junk (January 22, 2015). Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=2553889 or http://dx.doi.org/10.2139/ssrn.2553889
    Microsoft Earnings: Nadella’s Turnaround is Working
  • By , 4/27/15
  • tags: SPY MSFT
  • Canada-India Deal to Boost Uranium Prices Microsoft Earnings: Nadella’s Turnaround is Working by Charles Lewis Sizemore, CFA Microsoft ( MSFT ) crushed earnings estimates last night on better than expected growth in its cloud services business. I covered the release for InvestorPlace, and you can read my write-up here . Here is a short excerpt: The figure the Street was watching the closest was commercial revenues, as this gives the best indication as to the success of CEO Satya Nadella’s turnaround plan for the company. Commercial sales came in better than expected, up 5% (7% on a constant currency basis). And within the segment, commercial cloud revenue, which includes Office 365 and cloud computing platform Azure, was the standout with revenue growth of 106% (111% on a constant currency basis). According to the press release, commercial cloud revenue is now on pace to generate $6.3 billion in sales annually. The key takeaway from this quarter’s release is that Nadella’s game plan is working. That’s great for Microsoft as a company. But what’s next for Microsoft stock? At current prices, Microsoft is not dirt-cheap, but it’s certainly not expensive either. It trades for about 15 times next year’s expected earnings, which is a little lower than the broad S&P 500 . Yet a gargantuan 25% of Microsoft’s market cap is sitting in cold, hard cash. Yes, I understand that most of that cash is sitting offshore and that it won’t be repatriated anytime soon. But let’s discount that cash at 65 cents on the dollar to allow for a worst-case tax scenario. Even then, MSFT is sitting on a mountain of cash that would account for more than 16% of its market cap. You can read the full article here . This article first appeared on Sizemore Insights as Microsoft Earnings: Nadella’s Turnaround is Working
    Canada-India Deal to Boost Uranium Prices
  • By , 4/27/15
  • tags: CCJ URA
  • Submitted by Wall St. Daily as part of our contributors program Canada-India Deal to Boost Uranium Prices By Tim Maverick, Commodities Correspondent   “This contract opens the door to a dynamic and expanding uranium market .” Cameco’s ( CCJ ) CEO, Tim Gitzel, said that about his company’s new five-year deal with India. On April 15, the Canadian uranium supplier solidified a deal to sell 7.1 million pounds of uranium concentrate to India through 2020. Canada is the world’s second-largest producer of uranium, trailing only Kazakhstan. This deal is just one of the many signs that Asia’s growing population is looking more and more to nuclear power as a viable source of energy to feed the region’s rapidly expanding economies and populations. This trend has been reflected in the market. So far, the uranium spot price has outperformed the S&P 500 Index this year. It’s near $40 per pound – an 11% increase this year and well above its low of $28 per pound, which it hit in mid-2014. India, in particular, is desperately in need of power. It has one-sixth of the world’s population, and Prime Minister Narendra Modi is focused on nuclear power as a solution for India’s growing needs. India already has 21 active nuclear power plants, but it only supplies 3% of the nation’s power needs. Six new reactors are due to come online by 2017, and another 22 are in the planning stage. By 2032, India says its nuclear power capacity will rise from just 6,000 megawatts to 45,000 megawatts per year. The six reactors under construction are known as the Jaitapur Nuclear Power Project. Once built, the 9,900-megawatt facility will be the largest nuclear power-generating station in the world. This focus has pushed the country to the second-fastest-growing market for nuclear fuel, behind only China. China Nuclear Power Capacity Still Expanding China’s nuclear power program is moving full speed ahead, as well. Even with its economic slowdown, the country’s total power consumption rose by 4% in 2014. He Yu, Chairman of the China General Nuclear Power Corporation, recently said that the country may need to construct as many as 100 new nuclear reactors over the next decade alone. This would meet China’s stated goal of bringing nuclear power’s share of the country’s total generating capacity to 6% by 2030. That would translate to 150 to 200 gigawatts of installed nuclear capacity by 2030, up from just 20 gigawatts at the end of 2014. China currently has 22 reactors in operation and another 26 under construction. It’ll need to approve at least 10 more units in the next two years in order to reach its 58-gigawatt-capacity target for 2020. The China Nuclear Industry Association (CNIA) said in its annual report, released April 22, that the government will approve six to eight reactors this year. And the country is wasting no time. In March, China approved the construction of two reactors – the first such approval since the meltdown at Fukushima. The CNIA also said eight reactors would come online in 2015, the largest annual rise in China’s history. Investments Going Nuclear According to Cameco, there could be 81 net new reactors online by 2024, with 61 of these in China. One way investors can play the Asian buildout of nuclear power capacity is through the aforementioned Cameco. The deal with India was a landmark agreement. According to Rob Chang at Cantor Fitzgerald, “The long-term supply agreement will provide revenue security at profitable prices for the company that could underpin its financial position, possible acquisitions, or even a dividend increase.” Just the reactors being built will increase uranium demand by 4% annually through 2023, says Cameco. The company says the number of operational reactors will rise from 430 at the start of 2014 to 526 by 2023. But the agreement – and others like it – is also a factor in uranium investments… Cameco, which is one of the world’s most reliable suppliers, is going to have more and more of its supplies tied up in long-term agreements, such as the one with India. This should give a boost to the sector in general as supplies become more limited. Exchange-traded funds – including the Global X Uranium ETF ( URA ) – are sure to benefit. For investors looking to avoid company risk and just wanting to win as uranium prices rise, a Toronto-based instrument may be an ideal option. It’s called Uranium Participation Corp. ( URPTF ). And it’s a holding company that has most of its assets in uranium concentrates, either in the form of uranium oxide or uranium hexafluoride. Either way, this commodity is sure to continue to glow. And the chase continues, Tim Maverick The post Canada-India Deal to Boost Uranium Prices appeared first on Wall Street Daily . By Tim Maverick
    Emerging Markets See Demand for Nickel
  • By , 4/27/15
  • tags: NILSY VALE
  • Submitted by Emma Cox as part of our contributors program . Emerging Markets See Demand for Nickel For the past five years or so, we have been witness to a growing global economy, largely due to the participation of developing countries. Established and successful first-world nations such as the United States still play a crucial role, but attention has shifted to emerging markets such as Brazil, Russia, India, and China — the BRIC nations — which have a lot to offer now more than ever before. Spotlight on these four revealed that their respective gross domestic product (GDP) is getting bigger at a much faster rate than Europe or North America — quite an achievement considering troubling global economic events in the past year, such as falling oil prices, the Russian-Ukrainian conflict, the recession in Japan, and more. More new technologies such as mobile communications, modern systems, and a cultural consciousness are adapting to the changing times, their strong industries are their backbone, keeping them upright at the toughest moments. An assessment by Ernst & Young showed that the 21st century is a time for “the dominance of emerging markets,” and that sooner rather than later, these developing countries will have more political and economic power, enabling them to go toe-to-toe with the US and EU in terms of trade and investment. ICEF Monitor further notes that emerging markets in BRIC nations “will be among the world’s largest ten economies by 2020.” As we are nearing the halfway point of this decade, this forecast remains a bright spot for analysts and investors alike. The rise of urban populations with a young demographic, especially in China and India, will see the creation of more businesses and infrastructure, thus bolstering a greater demand for base metals, especially nickel, which is an important component in making stainless steel. Says Narayana Murthy, chairman and founder of Infosys, based in India: “While the US and the European markets continue to be important for us, the Indian market is growing rapidly. The base is small right now, but the growth rates are huge. There are many large software project opportunities in India. Much of it comes from the Government and public sectors — it’s the same in China and Brazil. As we move forward, we will have a more balanced portfolio between the developed markets and the developing market.” Nevertheless, since Indonesia is still enforcing its iron ore export ban, consumers are forced to look elsewhere for new suppliers. While the Philippines is currently a worthy enough alternative, some experts are also looking to BRIC nations helping one another out. After all, Brazil has Vale ( NYSE:VALE ), while Russia has Norilsk Nickel ( OTCMKTS:NILSY ) and Amur Minerals Corporation ( OTC:AMMCF ), the latter touted as having one of the biggest nickel-sulphide projects in the world, with more than 120 million tonnes of mineralization in recorded reserves.
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