Trefis Helps You Understand How a Company's Products Impact Its Stock Price

COMPANY OF THE DAY : GAP INC.

Gap recently reported earnings, with its net sales declining 3% and missing expectations, while EPS was in line with expectations at $0.56. The sluggish figures are mainly due to its struggling premium brands and negative foreign exchange impact. A near-term turnaround for Gap and Banana Republic is unlikely, though they have shown some positive results, but the company is confident that Old Navy will sustain its growth momentum throughout the year.

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FORECAST OF THE DAY : NASDAQ'S SHARE OF U.S LISTED OPTION CONTRACTS

In 2014, NASDAQ's options trading market share fell by a percentage point to 26.9%. Management attributed the decline to intense competition, leading to significant pricing pressure. However, the company's share has picked up slightly in 2015 thus far, to 27.8% of total trades in the first quarter. We forecast NASDAQ's combined market share in the derivatives trading market in the U.S. to gradually decline to under 26% through the end of our forecast period.

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ArcelorMittal Maintains Strategic Thrust On Automotive Steel With Announcement Of Indian MoU
  • By , 5/27/15
  • tags: MT
  • ArcelorMittal (NYSE:MT), the world’s largest steel producer, recently announced the signing of a Memorandum of Understanding (MoU) with Steel Authority of India Limited (SAIL), India’s largest steel producer, for the setting up of an automotive steel facility under a joint venture arrangement. The signing of this MoU is a part of ArcelorMittal’s strategic focus on automotive steel. Given the uncertain global demand and pricing environment for steel, automotive steel, with its relatively high and stable margins, constitutes an important focus area for the company. Coming on the heels of a similar joint venture agreement between ArcelorMittal and China’s Hunan Valin Iron and Steel Company last year, the move also increases the company’s exposure to high growth emerging markets. See our complete analysis for ArcelorMittal Steel Demand And Prices The principal consumers of steel products are the automotive, construction, appliance, machinery, equipment, infrastructure, and transportation industries. The nature of business of these sectors is cyclical, with demand generally correlated with macroeconomic conditions. Thus, demand for steel products is generally correlated with macroeconomic fluctuations in the global economy. Steel prices have fallen over the last few years, driven primarily by weak demand due to adverse macroeconomic conditions in the developed economies and an oversupply situation. This is indicated by trends in the London Metal Exchange (LME) Steel Billet Prices. ArcelorMittal derives around 75% of its revenues from developed markets, primarily Europe and North America. Over the course of the last year or so, steel prices have recovered in the North American Free Trade Agreement (NAFTA) region, which consists of the U.S., Canada, and Mexico, driven by an economic recovery in the U.S., particularly in the manufacturing sector. However, over the course of the last year, there has been an increase in cheap steel imports into the U.S., partly because of the strengthening of the U.S. Dollar against global currencies. The penetration of finished steel imports as a percentage of the U.S. domestic steel market increased to 28.1% in 2014, up from 23.2% in 2013. The increase in steel imports has negatively impacted realized prices and shipments for the company in North America. As a result of the competition from cheap steel imports, the NAFTA division’s realized prices fell 5% year-over-year to $796 per ton in Q1. In addition, the division’s steel shipments declined 3% year-over-year to 5.5 million tons in Q1. As a result of these weak market conditions, the World Steel Association has revised downward expectations of steel demand growth in the North American Free Trade Agreement (NAFTA) region to -0.9% in 2015, from previous estimates of 3.4% growth. ArcelorMittal’s prospects in Europe have been negatively impacted by the depreciation of the Euro against the Dollar. In Q1 2015, the company’s European operations reported a 22% decline in year-over-year realized prices  to $633 per ton, primarily due to the depreciation of the Euro against the U.S. Dollar. Though the demand for steel in Europe is expected to rise by 2.1% in 2015, the weakening of the Euro against the Dollar remains an area of concern for the company. With demand for steel still recovering, and a pricing environment that is relatively subdued, ArcelorMittal has focused on its automotive steel sales. Automotive steel commands relatively higher margins, with 20-30% of the average selling price being attributable to the value-added nature of the product. Further, with its core markets of Europe and North America relatively subdued, the company is also trying to increase its exposure to high growth emerging markets. ArcelorMittal’s Automotive Focus Automotive steel is a major thrust area for ArcelorMittal. As per the company’s estimates, its flat products accounted for approximately 17% of the global automotive steel market in 2014. Shipments of automotive steel accounted for around 16% of ArcelorMitttal’ s total shipments in 2014. The company’s automotive steel shipments are mainly delivered in the geographic markets of its production facilities in Europe, North and South America, and South Africa. Given the limited exposure of ArcelorMittal to emerging markets, it is consciously trying to increase its exposure to high growth opportunities in these markets. Automobile markets in China and India are set to experience rapid growth in the years to come. The Chinese automobile market is set to grow rapidly with automobile sales set to rise to around 30 million units by 2020, around 40% higher than current levels. India’s automobile sales are expected to double to 7 million units by 2020, from current levels of around 3.5 million. Considering this opportunity, ArcelorMittal invested $832 million last year in an automotive steel plant in a joint venture with Hunan Valin Iron and Steel Company. The plant’s production capacity of 1.5 million tons of automotive steel significantly boosted ArcelorMittal’s automotive steel production capacity and gave the company additional exposure to the Chinese market. Similarly, the company’s recently announced MoU with SAIL is aimed at tapping growth in the Indian automotive market. As far as developed markets are concerned, ArcelorMittal’s acquisition of Thyssenkrupp’s automotive steel plant in Calvert, Alabama last year was aimed at increasing its presence in the North American Free Trade Agreement (NAFTA) automotive steel market. The Calvert plant is a state-of-the-art facility which is capable of producing advanced high strength steels. ArcelorMittal has invested heavily in R&D in order to produce advanced high strength steel (AHSS) grades that cater to automobile manufacturers’ needs for fuel economy, safety, and reduced carbon dioxide emissions. The company is focused on preventing Original Equipment Manufacturers (OEMs) from turning to alternative materials such as aluminum. Prominent examples of ArcelorMittal’s innovation are the S-in motion project, which reduces the body weight of a typical C-segment vehicle by up to 23% and reduces vehicular carbon dioxide emissions by 14%. The company’s management has repeatedly stressed the strategic importance of automotive steel in the company’s plans for the future. Given the recent activity pertaining to the automotive sector at ArcelorMittal, the company management has been true to its word. 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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    What If Electronic Arts & Activision Develop Skill-Based Games For Las Vegas Casinos?
  • By , 5/27/15
  • tags: ATVI ERTS EA
  • The U.S. gaming industry has undergone a major change over the last few years, with the gamers shifting from physical software titles to digital gaming. On one hand, the new physical software sales dropped gradually, driven by lack of core titles in the market. On the other hand, the launch of next generation consoles by Microsoft (NASDAQ:MSFT), Sony, and Nintendo, revived the hardware (console) sales. According to the research group NPD, the software sales in the U.S. declined 22% from $6.9 billion in 2012 to $5.3 billion in 2014, whereas the hardware sales rose nearly 28% from $4 billion in 2012 to $5.17 billion in 2014. Source: NPD research group Top U.S. video game developers, such as Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ: ATVI), have changed their business plan over the last few years. Both the companies decreased the number of new franchise releases and focused more on improving the existing core franchises. The core titles of both the companies are the top selling games in their respective genres. However, the increasing popularity and demand for digital gaming has already started affecting the physical media sales for video games. The U.S. game developing companies have already started looking for new markets to tap into, primarily online gaming. Recently, a bill has been proposed in the state of Nevada that will allow the entry of slot machines with arcade-game elements, skill-based games, and other unique features, which would require more skill and less luck, in Las Vegas casinos. Considering all the industry and company trends, as well as the current financial condition of the companies, this scenario can strongly impact the stock of both the companies. Our $60 price estimate for  Electronic Arts’ stock is 3% below the current market price, whereas our $25 price estimate for Activision Blizzard ’s stock is in line with the market price. See our complete analysis for Electronic Arts | Activision Blizzard Arcade Gaming In Las Vegas Casinos To Provide Incremental Revenue Stream In December 2014,  the Association of Gaming Equipment Manufacturers (AGEM) proposed a bill (Senate Bill 9) that allows adding an element of skill to the slot games in Nevada casinos. It requires the Nevada Gaming Commission to adopt regulations relating to the development of technology in gaming, as well as to allow flexibility in payout percentages or a game’s outcome. The bill is aimed at introducing arcade-game style gambling and video game technology in Nevada casinos. This means that if a player masters certain skills included in these games, his/her chances of winning would improve. We have discussed this in detail in our prior article. (See: Skill-Based Slot Machines To Provide A Win-Win Situation For Casinos & Gaming Industry ) These games, if the bill becomes law, will be introduced on the slot machines in the Las Vegas casinos. Slot machine gambling in Nevada is alone a $7 billion market, which now makes it a very lucrative segment for the game developing companies. If Electronic Arts and Activision Blizzard plan to enter this market, after the bill becomes a law, it will be a whole new market for the two major gaming giants and it can provide them with incremental revenues. Impact On Activision Blizzard For Activision Blizzard, Trefis estimates the revenues from distribution segment to reach $572 million by the end of 2021. Moreover, according to our estimates, the distribution gross profit margins were nearly 30% in 2014, and it might remain around the same figure till the end of our forecast period. If Activision enters the new market, and develops & distributes arcade and hybrid games to Las Vegas Casinos, the annual revenues from the segment might cross $1 billion by the end of our forecast period, with the gross profit margins reaching 40% over the same period. This scenario will provide a 7% upside to the Trefis price estimate for the company. Impact On Electronic Arts For Electronic Arts, Trefis estimates the number of games other than FIFA and Madden NFL released per year to be 11 in 2015 and to remain close to this number by the end of 2021. Moreover, we estimate the product gross margins to be 63.6% in 2015 and thereafter, to rise to 70% by the end of our forecast period. If Electronic Arts taps into the casino gaming market, and starts developing new games for the Las Vegas Casinos, the number of games other than FIFA and Madden NFL released per year might jump to 16 by the end of our forecast period, whereas the product gross margins might jump to 72% by 2021. This scenario will provide a 15% upside to the Trefis price estimate for the company. 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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    3 Key Trends Driving Our $11 Per Share Price Estimate For Petrobras
  • By , 5/27/15
  • tags: PBR XOM RDSA CVX BP
  • We recently revised our price estimate for Petroleo Brasileiro Petrobras (NYSE:PBR), also known as Petrobras, to $11 per share, which is around 14.5x our 2015 full-year diluted earnings per share (EPS) estimate of $0.76 for the company. Petrobras is a vertically integrated oil and gas company, which operates in both the upstream and downstream segments of the industry. The Brazilian multinational energy giant is one of the largest companies in Latin America by annual sales revenue. Its operations account for a large majority of the total oil and gas production in Brazil. Last year, Petrobras’ average daily crude oil production in Brazil was around 2,034 thousand barrels per day (MBD), more than 90% of Brazil’s total oil production. Petrobras holds a large base of proved hydrocarbon reserves in Brazil, a vast majority of which (almost two-thirds) are located in large, contiguous and highly productive fields in the offshore Campos Basin. This allows the company to optimize its infrastructure and limit costs associated with the exploration, development, and production of these hydrocarbon reserves. In addition to exploration and production of hydrocarbons, Petrobras also operates substantially all of the oil refining capacity in Brazil and distributes refined products through its own retail network and to other fuel wholesalers. Like other integrated oil and gas majors, the company is also involved in the production of petrochemicals. Below, we discuss the four key trends that are driving our current price estimate for Petrobras. See Our Complete Analysis For Petrobras Rising Pre-salt Production A bet on Petrobras is essentially a bet on the development of pre-salt reserves offshore Brazil. The expression “pre-salt” refers to an aggregation of rocks that hold hydrocarbon reserves and are located in ultra-deep waters in a large portion of the Brazilian coast. It is called “pre-salt” because the rock interval ranges under an extensive layer of salt, which can be as much as 2,000 meters thick. The term “pre-” is used because these rocks were deposited before the salt layer and are therefore older. The total depth of these rocks can be as much as 7,000 meters from the surface of the sea. Most of the growth in Petrobras’ net proved reserves in recent years has come on the back of large pre-salt discoveries. Today, pre-salt deposits contribute more than 30% to the company’s total net proved reserves. Production from these ultra-deepwater reserves has grown significantly over the last few years. Just eight years after the first pre-salt discovery in 2006, Petrobras reported that gross oil and natural gas liquids production from pre-salt reserves, which averaged around 300,000 barrels per day in 2013, reached a record level of 800 MBD on April 11th 2015. As the chart above shows, the figure has been growing at an increasing pace of late. It rose from a monthly-average rate of just around 300 MBD in February 2013 to 715 MBD in April this year. And Petrobras continues to maintain a strong focus on the development of these reserves despite significant headwinds from lower crude oil prices, ongoing corruption investigations, and the strengthening of the U.S. Dollar against the Brazilian Real. The company plans to invest a lion’s share (more than 60%) of its net capital investments on the development of these reserves. As of now, it has several new floating production units under construction, while production from some of the recently-started ones is being ramped up. These projects are expected to help Petrobras meet its production growth target of 3.5-5.5% for this year. We currently forecast the company’s total net hydrocarbon production in Brazil to grow from around 2.28 million barrels of oil equivalent per day (MMBOED) in 2014 to 3.26 MMBOED by the end of our forecast period, primarily driven by the ramp-up of production from pre-salt reserves. Thicker Downstream Margins Petrobras’ downstream operations in Brazil have been under considerable pressure over the past few years. According to our estimates, the company’s refining, marketing, and distribution EBITDA margins have declined significantly from around 14% in 2009 to -0.9% in 2014. This has been primarily because of lower price realization by the company for its refined products sales in Brazil due to government regulations. Up until recently, since January 2012, Petrobras was selling gasoline, diesel, and other refined petroleum products in Brazil at a sharp discount (around $10-15 per barrel on average) from international prices. This is because the Brazilian government did not allow the company to pass on higher input costs to its end consumers. The government’s reluctance in allowing the price of petroleum products to be increased can be attributed to its policy focused on controlling inflation. Gasoline and diesel are heavily weighted in the country’s benchmark IPCA inflation rate. However, because of the change in the global supply/demand equation for crude oil, with a faster than expected non-OPEC supply growth, primarily driven by tight oil development in the U.S., and a slower than expected growth in global demand, benchmark crude oil prices declined sharply last year and continue to remain low currently. This has led to a sooner than expected convergence in international and domestic refined petroleum prices for Petrobras. In addition, Petrobras also began crude oil processing at the new RNEST refinery in December last year. Located in Northeastern Brazil, RNEST is designed to process 230 MBD of crude oil to produce 162 MBD of low-sulfur diesel (10 ppm) along with LPG, naphtha, bunker fuel, and petroleum coke. The company also initiated the start-up of the second crude oil processing unit at RNEST in March this year and expects to commission it by the end of this month. Once the refinery is completely up and running, Petrobras’ reliance on imported refined petroleum products would shrink significantly. We believe that this new refinery start-up, combined with the increase in domestic fuel price, and the recent decline in global crude oil prices, will help improve its downstream margins significantly in the short to medium term. However, the positive impact from these factors is likely to be partially offset by increased demand for petroleum fuel products in the domestic market due to the growth in passenger vehicle fleets. This is because higher domestic demand means an increased need for costlier imported fuel to replenish that, which ultimately weighs on the company’s operating margins. Slower Capital Investments Controlling capital expenditures while maintaining modest cash flow growth prospects is the highest priority for Petrobras right now, primarily due to the changed crude oil price environment. With a deteriorated image and downgraded credit ratings after the unfolding of the corruption scandal in Brazil, raising fresh capital has become significantly more difficult for Petrobras. Therefore, the company is trying to meet as much of its investment needs as possible through cash flows from operations and divestments. (See:  Petrobras’ Cost of Capital Set To Rise After Moody’s Downgrade ) According to the cash flow plan outlined by the company during the 2015 first quarter earnings call, it expects to invest around $29 billion in its operations (all divisions combined) this year, and divest assets worth around $3 billion. This gives us a net investment figure of around $26 billion for the year, most of which (around 87%) is expected to be spent on the Brazil Oil and Gas division. Our forecast for the Net Capex as % of Brazil Oil and Gas EBITDA is based on the same assumption. In 2016, Petrobras plans to divest assets worth more than $10 billion, so that’s driving the sharp drop in our estimate of the metric for that year. Beyond that, it is just a function of the projected recovery in crude oil prices, cash flow growth, and continued pace of capital investments. 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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    In The Wake Of The Expedia-Ctrip Alliance, Priceline Further Increases Investments In Ctrip
  • By , 5/27/15
  • tags: PCLN CTRP EXPE TRIP TZOO
  • Shortly after Expedia’s eLong divestiture and forging of a strategic alliance with Ctrip (NASDAQ:CTRP), Priceline (NASDAQ:PCLN) increased its investment on the Chinese online travel leader. On May 26th, Priceline announced that it will invest an additional $250 million on Ctrip via a convertible bond. Post the deal, Priceline could gain up to 15% of stake in Ctrip. Currently, Priceline owns around 5% of Ctrip’s shares. Our  price estimate of $1040 for Priceline’s stock is slightly below the current market price. See Our Complete Analysis for Priceline Here The Successful 2014 Partnership Expansion With Ctrip, Triggered Further Investments By Priceline Earlier in August 2014, Priceline strengthened its commercial partnership (initiated in 2012) with Ctrip, by investing $500 million in the company. Priceline now has access to Ctrip’s 100,000 accommodations in the Greater China region while Ctrip has access to Priceline’s global portfolio of over 500,000 accommodations. Additionally, Ctrip agreed to promote Priceline Group’s other services, like rentalcars.com and OpenTable, to its customer base. The expanded partnership with Ctrip  reaped substantial benefits for Priceline  in 2014. Priceline’s outbound business witnessed significant growth after Agoda and booking.com were featured on Ctrip. The main reason for that was the growing Chinese outbound market, (which is  the largest in the world). Ctrip’s properties on Priceline’s platform are also gaining traction. In its Q4 2014 earnings call, Priceline’s management talked about plans to accelerate the rollout of its properties in China in the coming months. The Priceline Expedia Rivalry Heats Up Both Priceline and Expedia had a strategically significant year in 2014. In 2014 Priceline generated $50.3 billion (an year-on-year increase of 28%) and Expedia stood at $50.4 billion (an year-on-year increase of 30%), in terms of gross bookings. In January 2015, Expedia (NASDAQ:EXPE) acquired its marketing partner, Travelocity. In February 2015, Expedia announced its intention to acquire Orbitz Worldwide, the Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com. Expedia expects the deal to close by the second half of 2015, once regulatory approvals are achieved. Expedia might own up to 75% of the U.S. online travel market post the Orbitz acquisition, according to the 2013 market shares provided by PhoCusWright. While, Expedia tries consolidating on the domestic front in the U.S., Priceline is on the lookout  for expanding its presence in the international markets (that accounts for over 80% of its revenues). Priceline’s large footprint in Europe through booking.com should complement Ctrip’s offerings in the Chinese region and provide outbound tourists from China with a greater array of choices on the global map. A ccording to Darren Huston, President and CEO of The Priceline Group, with Ctrip being the online travel leader in China and China being a rapidly expanding tourism market, this partnership will bring more bookings from Chinese travelers venturing abroad and also expand Priceline’s geographic reach within China. He describes the situation to be similar to putting more products on the “shelf”, which translates into greater value add for the “store”. Why Is The China Market So Crucial To The Leading Online Travel Agencies? Chinese outbound travel traffic crossed 100 million in the first 11 months of 2014.. This translates to an over 100% growth from 2009 (47.7 million). The number is predicted to surpass 160 million by 2018. China’s total outbound expenditure for 2013 was $129 billion and Chinese travelers are presently considered to be the top contributors to global tourism spending. China’s economic growth, despite slowing more recently, is expected to recover and display a healthy trend in the next half decade. This recovery, along with increased urbanization, point towards a greater propensity for the Chinese to travel in the coming years. Why Are The Online Travel Leaders Vying For Ctrip’s Alliance? China is currently the second largest travel market in the world. Currently, Ctrip is the only Chinese OTA maintaining solid top line growth figures. Additionally, Ctrip’s scalability and aggressive investments in technology would lead to operational efficiencies, in turn resulting in solid margin growth in the long run. Ctrip’s domestic hotel coverage increased to 270,000 in Q1 2015, triple the amount from Q1 2014. China’s hotel market is fragmented and Ctrip is trying to consolidate the hotels on its platforms with an aggressive increase in coverage. Ctrip’s air ticketing volume growth was more than 60%, exceeding management guidance of 50%. Ctrip is planning  for strong bottom line growth by the year 2020, with 20%-30% operating margins. As of Q3 2014, with a 55.9% share in revenues (as of Q3 2014), Ctrip is the market leader in the Chinese online travel market, followed by Elong and TongCheng with a revenue share of 9.7% and 6.3%, respectively. The market is concentrated with the top three players accounting for 72% of revenues. Now, with a 40% stake in eLong, Ctrip will have a greater clout over the China online travel market. Also, post the alliance between two largest online travel agencies in China, the aggressive discount and coupon offers, prevalent in the country, might slow down. In its Q1 2015 earnings call, Ctrip’s management admitted that the company was aggressive in matching the coupon rates or discounts offered by its competitors. Ctrip’s GAAP operating margin in 2014 was a negative 2% due to its investments and its coupon discounts. Ctrip had projected that its coupon expenses will account for 20% of its hotel commissions in 2015. The slowing down of discounts and coupons trends can help Ctrip recover its margins to a large extent. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap  
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    Factors That Can Significantly Increase Our Valuation For Broadcom
  • By , 5/27/15
  • tags: BRCM AMD NVDA INTC QCOM
  • A leading semiconductor provider for wired and wireless communications,  Broadcom (NASDAQ:BRCM) has seen continuous top line growth in the last five years, though its bottom line (net income) shrank from $1.08 billion in 2010 to $424 million in 2013, as its operating expenses grew at a much faster rate. The company announced its decision to exit the cellular baseband business in Q2 2014 on account of intense competition in the market, allowing it to eliminate the ongoing losses from the business and shift its focus to its core strengths in other segments. The strategy seems to have worked well, as Broadcom’s net income increased from $424 million in 2013 to $652 million in 2014 (54% growth), even though its revenue base remained relatively flat during the same period. In the last one year, Broadcom’s stock price has increased by over 50%. We believe that Broadcom’s operating performance will continue to strengthen on a tight operating expense discipline and strong margins, consistent with the company’s objective of driving profitable growth. We believe the business will see strong growth in the future driven by product cycles and new launches from key customers. Our price estimate of $44 for Broadcom is marginally below the current market price. In this article, we list down certain factors that can lead to a significant upside in our valuation for the company. See Our Complete Analysis for Broadcom Here Broadcom’s Wireless Connectivity Market Share Increases to 40%  (~10% Upside) A quarter or two back, Broadcom expected its connectivity business to decline in 2015. However, the company now claims that its overall connectivity portfolio is definitely strengthening, and expects the business to probably be flat or even up on a year on year basis this year. Broadcom claims that a lot of concerns that it had about the loss of business on exiting basebands have not materialized and the company does not expect them to at this point. Broadcom expected that its exit from the baseband business would negatively impact the low-end of its connectivity business. However, the company has in fact gained share in the low-end of the market in the last few quarters. Some of Broadcom’s partners are gaining share in the baseband space, which helps Brodcom’s penetration in the market. New phone launches, rising consumer adoption of new high end phones, growing penetration of new technologies (such as 802.11ac and 2×2), and the ramp of new highly integrated products such as the location hub that all direct higher ASPs, are driving demand for Broadcom’s connectivity business. The company claims to be seeing significant customer interest in its latest 5G Wi-Fi chip that offers an industry first real simultaneous dual band or RSDB. This technology, which allows a smartphone or tablet to transfer data across two bands, is expected to ship later this year. It also at the same time enables new applications and increases the performance of existing applications. In addition to smartphones and tablets, Broadcom sees new growth potential in emerging markets, including the Internet-of-Things (IoT), automotive electronics, wearable devices and small cell technology. The company continues to drive leading-edge features so as to maintain its strength in high end smartphones and tablets. It is strengthening and diversifying its portfolio with new low power connectivity solutions for the IoT and the support of iBeacon and HomeKit. The registrations for Broadcom’s WICED IoT platform have grown significantly, from 2,000 at the beginning of 2014 to over 8,000 at present. The company has announced the expansion of its distribution channel with over 40 new partners to expand its sales reach to IoT customers. We currently forecast Broadcom’s share in the wireless connectivity market to remain at the current level for the rest of our review period. IoT is still at a nascent stage and is widely expected to be the next big wave in computing, after smartphones and tablets. It is likely that we are currently underestimating Broadcom’s potential in the wireless connectivity market. If the company continues to gain additional share in the low-end of the smartphone market, and becomes a significant player in the fast expanding IoT space (Broadcom is the No.1 player in smartphones connectivity so it can easily be expected to be an important player in IoT as well), then its market share in wireless connectivity could increase in the future. If Broadcom’s wireless connectivity market share rises to 40% by the end of our review period, then there will be a 10% increase in our valuation for the company. Infrastructure & Networking Market Increases to $20 Billion (>10% Upside) The infrastructure & networking market has grown from $2.5 billion in 2008 to around $7.5 billion in 2014, growing at a CAGR of 20%. Given the strong growth rate the business has seen in the past few years, we expect the growth to slow going forward. We forecast the infrastructure & networking market to increase to $13 billion by the end of our review period, growing at a CAGR of 7%. Long-term growth drivers for Broadcom’s infrastructure business include: 1) new build-outs and expansions of data centers; 2)  increasing data traffic at faster speeds; 3)  ASIC conversions to merchant solutions; and, 4) overall enterprise network upgrades as people move to higher speeds. Broadcom expects double-digit growth in its infrastructure business for the next few years. Though Broadcom admits that the infrastructure business remains lumpy in the short term, the company believes it will benefit from new product launches and capabilities rolling out in the near future. We expect the overall infrastructure & networking market to grow in double digits for the next two years, and forecast the growth rate to taper off thereon. It is possible that we are being less optimistic and not accounting for the full potential of the infrastructure & networking market. If the market grows faster than we expect, reaching $20 billion in the next 5 – 6 years, there will be a more than 10% upside in our valuation for Broadcom. SG&A Expenses As A Percentage of Gross Profit Remains At The Current Level (>10% Upside) Broadcom’s selling, general and administrative expenses (SG&A), adjusted for stock-based compensation, as a % its gross profit has averaged around 13% in the last three years. We currently forecast the ratio to increase in the next two years and remain stable thereon for the rest of our review period, as we expect Broadcom to incur additional SG&A costs to market its new products and technologies. If SG&A costs as % of gross profit remains around the current level of 13%, then there will be a more than 10% increase in our valuation for Broadcom. 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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    Here’s Why a Takeover of Salesforce May Not Materialize
  • By , 5/27/15
  • tags: CRM ORCL SAP IBM
  • Salesforce.com (NYSE: CRM) is one of the largest software companies in the world and is the undisputed leader in the global cloud computing market. In late April, reports surfaced that Salesforce was entertaining takeover enquiries from one or more suitors. The news promptly sent investors in a tizzy and the company’s shares jumped by 17% the very next day, reaching an all-time high of $78.46. Global software behemoths Oracle Corp. (NYSE: ORCL), Microsoft (NYSE: MSFT) and SAP SE (NYSE: SAP) were widely considered as the most likely suitors for Salesforce, but Microsoft and SAP have since been ruled out. Microsoft was said to have been in advanced takeover discussions with Salesforce, but failed to reach a deal due to disagreements over the latter’s valuation. SAP vehemently denied being interested in acquiring Salesforce, and instead jumped at the opportunity to deride its bitter rival yet again. This leaves only Oracle from the short list of most likely acquirers, and it remained steadfastly noncommittal on the matter. Speculation  abounds that Salesforce could be acquired by an unexpected party, like Google (NYSE: GOOG) or IBM (NYSE: IBM), but there have been no concrete indications to suggest that these companies are in play. Nevertheless, given Salesforce’s operational scale and market valuation, there are only a handful of companies in the world that could even contemplate a takeover of this size. In this report, we take a look at the key factors that make Salesforce an attractive acquisition, and the roadblocks in the way of a successful deal. We have a price estimate of $65 for Salesforce.com, which is about 15% lower than its current market price. See our complete analysis for Salesforce.com here Salesforce’s Leadership Position in Global CRM Market Salesforce’s had revenues of $5.4 billion in fiscal 2015, making it the largest pure-play cloud computing company in the world. The company specializes in Customer Relationship Management (CRM) software, and leads the global CRM market with an 18% market share . Therefore, the acquisition of Salesforce would give the purchaser an instant lead in the $24 billion global CRM market . By acquiring Salesforce, potential suitors like Google and IBM, which have a negligible presence in the global cloud CRM market, could gain a firm foothold in the market. On the other hand, Oracle already has a significant presence in the cloud computing market. If it were to acquire Salesforce, the transaction would give it a nearly unassailable lead in the cloud computing market. The move, however, would likely be viewed as anti-competitive by regulators. In light of the above, we believe that Salesforce’s position in the global CRM market is the biggest, and perhaps, the only factor that could make it an attractive acquisition target. High Valuation With a current market capitalization of nearly $50 billion, Salesforce is the world’s biggest pure-play cloud computing company by a wide margin. At this valuation level, a takeover will almost certainly be an all-stock deal and cash will account for a minor proportion of the purchase price. Very few companies can afford to undertake such a transaction without incurring substantial equity dilution, while paying the cash component of the purchase price as well. All three of the aforementioned potential suitors, namely, Oracle, Google, and IBM, have sufficiently high market capitalization to orchestrate a takeover without incurring significant equity dilution. Oracle and Google also have sufficient cash reserves, but IBM falls short in this aspect. Oracle has a net cash balance (net of debt) of $12 billion, while Google has $59 billion. On the other hand, IBM’s net cash balance, excluding its finance business,  is negative $6 billion; it thus lacks the financing capacity to consider such a massive acquisition. Therefore, Oracle and Google have the sufficient resources to attempt a takeover of Salesforce, but IBM doesn’t. Unprofitability Salesforce’s high market valuation is based primarily upon its revenue growth potential. The company has remained unprofitable since fiscal 2011, which is unusual for a company of its size. Investors have been willing to overlook this shortcoming in light of the breakneck pace at which Salesforce’s topline has expanded over the last four years. Despite its size and established business, it grows like emerging software company. However, Salesforce’s negative bottom line makes it an unattractive proposition for a potential acquirer, since the latter’s bottom-line is likely to take a hit to absorb Salesforce’s losses. Even if the purchaser implements aggressive cost savings, its profits will drop sharply in the short term. Lastly, Salesforce’s low bottom line is primarily due to its heavy marketing expenditure, which is where potential cost savings are likely to be targeted. However, it may be argued that the huge marketing expenditure is what has been driving Salesforce’s rapid topline growth. Hence, cutbacks on the same may lower the Salesforce’s growth potential. Further, a potential acquirer is likely to attempt to discount Salesforce’s valuation on account of its unprofitability, which may not be acceptable to the latter. This scenario has already played out in Microsoft’s discussions with Salesforce for evaluating a takeover. Technological Complexity Most of Salesforce’s products are built upon Oracle’s database and hardware, which makes a technological transition for another acquirer a monumental task. If Salesforce is acquired by Oracle, then the inclusion of Salesforce’s products into Oracle’s broad framework may be a relatively smooth process. However, if another company were to takeover Salesforce, then the technological implications of the transaction are not clear. This stands especially true if Salesforce is acquired by a direct rival of Oracle in either software or hardware markets. In such a case, the onboarding of Salesforce’s products onto the purchaser’s platform will be an immensely complex and a long drawn-out process that may take years to implement. Oracle’s Co-CEO Safra Catz has hinted as much by stating that if Salesforce were to be acquired by another company, Oracle would benefit from the resultant short-term disruption. Thus, an acquisition of Salesforce by any company other than Oracle would pose a massive technological challenge that will be time consuming as well as expensive to overcome. Regulatory Hurdles An acquisition of the size of Salesforce is almost certain to attract heavy scrutiny from the regulators, including the Federal Trade Commission (FTC) and the Justice Department. Due to Salesforce’s dominant position in the cloud computing industry, regulators will want to ensure that competition and fair play norms are not at risk of being flouted. Oracle has a strong presence in the same product categories as Salesforce, and together the two companies would control a large chunk of the cloud computing market. This could pose a potentially insurmountable roadblock for Oracle’s chances of acquiring Salesforce. However, the regulatory hurdles may be relatively lower in case Salesforce is acquired by a company like Google, where there is negligible overlap between products the two companies. Thus, it is clear that the negative aspects of acquiring Salesforce far outweigh the benefits that a potential purchaser may realize. Therefore, we believe that the possibility of such an acquisition materializing is remote at best. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Here's Why We Think Twitter Will Be Fairly Valued At $48.37
  • By , 5/27/15
  • tags: TWTR FB LNKD
  • Twitter’s (NYSE:TWTR) stock has nosedived by more than 25% over the last one month on the earnings disappointment. Specifically, lower-than-expected monetization on some of the newer direct response ad products (ads that prompt users to take specific action such as downloading an app  or visiting a website) led to this investor reaction. Nevertheless, we think this market reaction could be overblown, and we continue to remain bullish on the company’s long-term growth prospects. We think the market could be undervaluing Twitter’s stock presently, as the challenges pertaining to newer ad products could turn out to be short-lived. While the direct response ad products have elicited less-than-anticipated demand from marketers, we believe the company could improve the quality and measurement of ads over the long run. The recent acquisition of marketing technology company ‘TellApart’, coupled with the partnership with Google’s DoubleClick platform, will help in this direction, in our view. As advertising evolves and becomes more mature on Twitter, we believe this will also spur demand over the coming quarters. In this note, we highlight the key rationale for our $48.37 price estimate for Twitter’s stock. Over a longer horizon, we believe there are several drivers in Twitter’s business model that could propel its revenues in the coming future. An increase in user base, which is estimated to double over our forecast horizon, as well as significant expansion in ad load levels could lead to a sharp increase in advertising revenues on Twitter. In addition, the monetization of a passive user base, that comprises of hundreds of millions of users that visit Twitter but don’t login, as well as hundreds of billions of tweet impressions that are accessed through syndication quarterly, could also propel revenues over the coming years. At the same time, we also expect the company’s margins to expand in the coming years driven by operating leverage and efficiency improvements.
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    Here's Why We Have Changed Monster Worldwide's Price Estimate To $6.41
  • By , 5/27/15
  • tags: MWW LNKD
  • Monster Worldwide (NASDAQ:MWW) posted revenue of $184 million during the first quarter of 2015, which represented a 7% year-over-year decline. The revenue came in below our expectations due to currency headwinds  and challenges in the government and the Internet Advertising & Fees businesses. On the other hand, the company’s adjusted EBITDA margin rose by 80 basis points sequentially to 14.7% in Q1. On the basis of these earning results, we have reduced our price estimate for the company from $6.80 to $6.41. This is as we have lowered the company’s top-line outlook for 2015, even while we have kept the profitability estimates largely unchanged. We believe Monster could continue to see headwinds in the near-term owing to appreciation of the U.S. dollar and weak demand in the European market. However, the company could return to growth over the long-run as its growth strategies are showing progress. This will result in incremental demand for both traditional as well as new product offerings in the coming years, in our view.
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    Abercrombie & Fitch's Business Transition Will Weigh On Its Q1 Results
  • By , 5/27/15
  • tags: ANF AEO ARO URBN
  • Abercrombie & Fitch (NYSE:ANF) is scheduled to release it Q1 fiscal 2015 earnings on May 28th. Given its weak product portfolio, strategy of aggressively phasing out logo products and an industry-wide decline in foot traffic, we expect another quarter of dismal results. Abercrombie is among those retailers in the U.S. whose persistent reliance on basic logo merchandise has driven customers away to fast-fashion brands. The brand offers products at relatively higher prices than other specialty apparel retailers such as Aeropostale (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO), which has again worked against it. Rather than buying premium logo merchandise from Abecrombie, buyers prefer to spend on equally expensive but high on fashion products from Zara and Forever 21. Buyers with a smaller budget prefer to shop at relatively affordable places such as American Eagle and Urban Outfitters (NASDAQ:URBN). Those who are not too concerned about the brand are content with buying private labels at department stores and general merchandise retailers. Though Abercrombie had identified this trend and was proactively looking to overhaul its merchandise portfolio, its sales have plummeted during this transition. During the last quarterly earnings call, Executive Chairman, Arthur Martinez said that business transition will trouble the company for another couple of quarters, but will help the brand in the long run. It is thus almost certain that Abercrombie will report weak results yet again. Moreover, the industry-wide decline in foot traffic on account of the ongoing online shift likely made things worse for the company. Even though Abercrombie’s direct-to-consumer sales are growing, they aren’t contributing much to overall growth due to the channel’s small size. This trend will be visible again in the upcoming results. Our price estimate for Abercrombie & Fitch stands at $37.30, which is about 60% above the current market price. See our complete analysis for Abercrombie & Fitch Portfolio Transition To Weigh On Growth There was a time when Abercrombie’s logo on basic t-shirts and jeans was enough to attract customers, but it is no longer the case. Over the past two to three years, U.S. shoppers have shown great interest in fashion-forward products from Zara, Forever 21 and H&M, but little affinity towards logo branded basic products from Abercrombie. As a result, the company’s revenues have declined significantly, since it persistently relied on the logo business hoping that its iconic brand image would eventually bring customers back. However, given that U.S. buyers have shunned basic logo products altogether irrespective of the brand, Abercrombie decided to aggressively transition its portfolio from basic logo products to non-logo fashion products. Last year, in an earnings announcement, the management stated that they will reduce their logo business to “almost nothing” within 12 months and replace it with fashion-forward inventory. While Abercrombie has progressed very well in reducing its logo protfolio, it hasn’t been as proactive in replacing that with on-trend fashion inventory and both these factors have weighed heavily on sales. We expect Q1 to be no different, though there might be some signs of improvement in individual categories’ performances with improved fashion content. Online Growth Wont Help Similar to most participants in the retail industry, Abercrombie has seen sturdy growth in its online revenues and has been aggressively deploying its omni-channel strategies. However, the fact remains that direct-to-consumer business constitutes a very small fraction of the company’s overall revenues. Even with rapid growth in online revenues and continued store consolidation, this channel is unlikely to become strong enough to drive overall results in the foreseeable future, let alone Q1 fiscal 2015. Moreover, the online industry in itself is very competitive and Abercrombie’s performance in this arena has not been outstanding. For instance in 2014, Abercrombie’s comparable store sales fell 12% and after factoring in 10% growth in online sales (which is not too good considering the industry standards) the fall in comparable sales could come down by only 2 percentage points. Undoubtedly, online growth is having a noticeable offsetting impact on Abercrombie’s revenue decline, but it is not significant enough. 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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    Catalysts For Bristol-Myers Squibb's Stock
  • By , 5/27/15
  • tags: BMY RHHBY MRK
  • Bristol-Myers Squibb (NYSE:BMY) has been facing the impact of the decline in R&D productivity and the loss of patent protection on some drugs. This has continued in 2015 as Abilify has lost its patent protection this year. However,  the ramp up in sales of Daklinza and Eliquis, as well as the approval of immuno-oncology drug Odivo (Nivolumab) present a silver lining. While European economy and exchange rate movements continue to act as dampening factors, Bristol-Myers Squibb’s future largely depends on how its immuno-oncology pipeline plays out. Below are a couple of catalysts that we believe can cause meaningful movement in the company’s stock price. Our current price estimate for Bristol-Myers Squibb stands at $54.70, implying a discount of about 20% to the market.
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    Declining Video-Game Hardware Demand To Offset Growth In Software Sales For GameStop In Q1 2015
  • By , 5/27/15
  • tags: GME EA ATVI MSFT
  • The U.S. video-game retailer, GameStop (NYSE:GME), is slated to release its first quarter (ended May 2) earnings report for the fiscal 2015 on May 28. After a dull Q4 of the fiscal 2014, the company might witness a year-over-year (y-o-y) increase in the new video game software sales, owing to the improvement in title sales in the last 4 months. Furthermore, the company would be having high hopes from its mobile and consumer electronics segment, which showed promising growth potential in the fiscal 2014. In the fiscal 2014, the company managed to outperform 2013’s sales figures by roughly 2.8% to reach $9.3 billion, despite a dull Q4. Moreover, the 2014’s full year comparable store sales increased 3.4%, driven by growth in console sales and the pre-owned products category. In 2014, GameStop achieved its highest ever market share, with 28% share of next-generation hardware, 46% share of next-generation software, and roughly 42% market share of the downloadable content. Growth in the technology brands contributed significantly to the operating income and consequently, to the annual gross margins of 29.9%. Our price estimate for the company’s stock is $44, which is roughly 10% above the current market price. See our complete analysis of GameStop New Video-Game Software Sales Might Improve According to the research group NPD, gamers spent $595 million on new physical software, hardware, and other accessories, up 3% year-over-year (y-o-y) in April 2015. However, the hardware sales were down 4% y-o-y to $184 million, due to a strong comparison with last year’s April sales, as well as a 55% decline in demand for previous generation consoles. In terms of unit sales, the demand for new generation consoles drove the growth by 12%. On the other hand, software sales witnessed 13% y-o-y growth to $256 million. For the first trimester, hardware sales were down 10% y-o-y, whereas the software sales strengthened by roughly 5%. Source: NPD data This indicates that most of the core gamers, who have already bought new console platforms, are readily buying new titles to test them out on their new console systems. Despite the absence of major game titles, the software sales growth seems to have picked up lately. Electronic Arts ’ (NASDAQ:EA) Battlefield Hardline and Warner Bros’ Mortal Kombat X were some of the new releases this quarter that kept the gamers interested in the physical title sales. We can expect a slight y-o-y growth in the software sales for the first quarter. Double Trouble For Hardware Segment On the other hand, the declining demand for previous generation consoles might negatively impact the hardware segment. The company witnessed a 30.2% y-o-y decline in the hardware sales in Q4 2014, primarily due to a tough comparison with the previous year’s figures. Q1 2014 also witnessed a major increase in the hardware sales, due to the demand for the then newly released next generation consoles. As a result, this year’s declining demand for previous generation consoles coupled with a tough y-o-y comparison, might result in disappointing hardware sales.   Expectations Increase From Technology Brands GameStop has 484 technology brand stores, which generated around $329 million in revenues for the company in the fiscal 2014, with operating margins of 10%.  The 484 Technology brands include 361 Spring Mobile stores, 63 Cricket Wireless stores, and 60 Simply Mac stores. In February 2015, GameStop showed interest in some of the store locations of RadioShack, which declared bankruptcy earlier this year. RadioShack got the approval from a U.S. Bankruptcy Court Judge to auction its 2,000 stores.  GameStop, however, won the auction for the right to take over nearly 163 RadioShack stores, with a payment of $15,000 per store to take over the leases. GameStop expects a potential IRR of 25% from these stores. The company expects the segment to contribute over $1.4 billion in sales and $170 million in operating profits by 2019. It might become one of the most profitable segments for the company in the coming few years. 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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    Costco Earnings Preview: Low Gas Prices & Currency Headwinds Expected To Slow Down Growth
  • By , 5/27/15
  • tags: COST
  • Warehouse giant  Costco (NASDAQ:COST) is scheduled to release its Q3 fiscal 2015 earnings after-market hours on May 27. In its April sales update, the company said that its net sales for the 4-week period ended May 3 increased 2% year over year to $8.75 billion, easily surpassing U.S. retail sales year-over-year growth of 0.9% in the same time period. As per the sales report issued in March for the 5-week period ended April 5, net sales on a year-over-year basis remained flat while U.S. retail sales saw 1.7% year-over-year growth. In both March and April, however, organic comparable sales saw growth of 4% and 7%, respectively. While Costco’s organic growth remained strong, as it has been for so long, its net sales were bogged down by negative currency headwinds and declining gasoline prices. Our price estimate for Costco stands at $146.63, approximately 3% ahead of its current market price. See our complete analysis for Costco Low Gasoline Prices Expected To Subdue Costco’s Growth Gasoline prices in the U.S. have been witnessing a decline for several months, thanks to the rise in American oil production and weakening global demand. Since 2008, oil production in the country has gone up every year and American refiners are importing less foreign oil. In addition, a contraction in world oil consumption and economic growth are resulting in oversupply, which in turn has pushed gasoline prices down. Monthly average gasoline prices fell by approximately 30% year over year in each of February, March and April. Costco’s quarter ended on May 10, and its reported results for fiscal Q3 will see the impact of falling gas prices in the three months mentioned above. Since Costco offers discounted gasoline at its stores, we expect that the fall in gas prices will result in lower reported year-over-year revenue growth in Q3 2015. Strong Dollar Thumps International Growth Over the past one year, the US dollar has been witnessing strong growth, which has troubled a number of retailers who earn a significant portion of their revenues from foreign markets. Although the company continues doing well in international markets, which is evident from its 9% organic comparable sales growth in the 4-weeks ending May 3, net sales growth in the same period was -4%  due to currency headwinds. The U.S. Dollar index stood at 94.87 in April 2015, 19% growth compared to its value of 79.76 in April 2014. This is evident in the graph nearby. The strengthening dollar is anticipated to be a pain point for Costco, which gains almost  25% of its net revenues from markets other than the U.S.  This will weigh down its net sales growth in Q3 fiscal 2015. Excluding the impact of gasoline prices and currency headwinds, the company’s most recently released organic comparable sales growth figures in the U.S. remained strong at 7% in the 4-week period ending May 3. In the same period, international organic comparable sales were a solid 9%. These figures clearly imply that Costco has had no problems in driving store traffic and its membership base continued to grow during this quarter as well. We’ll get a better idea regarding the warehouse retailer’s new membership signups and membership renewal rates during its earnings call scheduled on Thursday, May 28th. 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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    Tata Motors Earnings Review: Profits Decline At Both Jaguar Land Rover And The Standalone Business
  • By , 5/27/15
  • tags: TTM-BY-COMPANY TTM F GM TM TSLA VLKAY DAI DDAIF
  • As expected,  Tata Motors (NYSE:TTM) reported a weak set of financial results on May 26, weighed down by the large investments made by the group through its ‘transitional’ year, and also the adverse mark-to-market on unrealized hedges. The pound was around 5% weaker against the dollar in the quarter, which led to revaluation of the £1.7 billion equivalent of dollar debt for Tata. Revenues for the full fiscal year 2015, ended March, rose 13% year-over-year to approximately 263 thousand crore rupees ($41 billion), on higher wholesale vehicle shipments, rich product, and price mix. However, the stock price fell 4.2% just after the announcement of full fiscal results on Tuesday, reflecting investor discontentment with the continual decline in net profit for the company. Tata’s profit after tax remained flat for the full fiscal year, but fell to less than half of the previous year levels in Q4. Trefis’ price estimate for Tata Motors is $43, which is above the current market price. However, we are currently in the process of incorporating the recent quarterly, and full fiscal year, into our forecasts, and revising our price estimate. Net wholesale shipments rose to 470,000 in fiscal 2015, from 430,000 in the last fiscal, and the retail volumes were also higher at 462,000. However, retail sales were down in the last two quarters at Jaguar Land Rover (JLR), which is the most crucial division for Tata Motors, forming slightly less than 90% of the valuation for the company, as per our estimates. Retail sales to end customers fell 0.6% and 0.4% year-over-year in the last two quarters for JLR, following a 14.7% rise in retail sales in the first half of the fiscal year (April-September period). The automaker might look to keep supply in line with demand, going forward, and ease-off shipping vehicles, in order to avoid inventory pile-up and protect its premium brand image. Lower wholesale shipments in the coming fiscal could considerably drag down revenue growth. See Our Complete Analysis For Tata Motors Tata Motors’ financials reflect an underlying operating weakness, but all this could be because the group is somewhat in transition. This year, JLR launched its new compact model Jaguar XE, the locally-built Range Rover Evoque in China–its single largest market — and the company is ramping up production at its engine plants and manufacturing facilities in the U.K. Large start-up costs related to product launches, higher R&D expenses, and CapEx, are expected to dent Tata’s financials in the near term, and the company could be cash flow negative in the next fiscal, starting April 2015. But the company seems more committed to delivering better quality, than expanding scale. And this fiscal onward, it will be interesting to see whether JLR is able to deliver quality, and get back on track, especially in China. China’s economy has slowed down from the high growth levels seen in previous years, mainly due to industry overcapacity, slowdown in infrastructure, and the real estate sectors. However, the GDP growth for the country is expected to be 7% this year, which is still solid. As disposable incomes increase, especially in the Tier-3 and 4 cities, customers are willing to pay a little extra for premium vehicles, especially the more powerful and spacious SUVs–which bodes well for Land Rover, which alone forms approximately 70% of Tata Motors’ valuation, as per our estimates. Sales of passenger vehicles surged 9.9% year-over-year in 2014 to 19.7 million units in China, and retail sales for JLR surged 28% year-over-year in the country during this period. However, since then, demand for the British luxury vehicle brand has been tepid in the country, with volumes down more than 20% in the January-March quarter. Jaguar Land Rover is rolling-out its locally built Range Rover Evoque in China, but is facing some trouble scaling-up its output. Sales in China might have dropped this year mainly as the Chinese customers decided to wait for the locally-built cheaper JLR models, or it might be due to the measures taken by the government to make domestic automakers more attractive, such as encouraging parallel imports of premium vehicles and gray-market vehicles, not authorized by the automakers, which are sold below the official market price. Luxury foreign automakers came under the scrutiny of, and were later fined by, China’s antitrust regulator last year, as many were found guilty of monopolistic practices pertaining to highly inflated vehicle and spare part prices. Foreign automakers tend to mark-up their model prices in China, to account for taxes and costs of transportation and assembly, but still earn a hefty margin on sales in the country. Domestic automakers are taking away share from foreign makers in China in the last few months, mainly due to the surge in demand for budget SUVs. In this case, local production might be the answer for JLR. Local production will help JLR evade China’s 25% import taxes, as well as bring down model prices. In fact, the imported Range Rover Evoque is around 1.61 times as expensive as the locally-built Audi Q5, reflecting how imported cars are less competitive on the pricing front. Jaguar Land Rover’s vehicle prices are expected to fall by 15% on account of local production, which should help the automaker gather higher volume sales, going forward. On the other hand, the domestic business is picking up for Tata Motors’ standalone business. The company’s India operations form approximately 11% of the company’s valuation, according to our estimates. Although Tata’s net India vehicle sales declined 12.4% year-over-year, in a market which picked up pace last fiscal and delivered a 2.5% overall increase in volume sales, car sales are back on track for Tata Motors, it seems. Following the launch of the sub 4-meter compact sedan, Zest, in August last year, the automaker’s monthly car sales in the country rose in each successive month (over 2013 levels), after many consecutive months of decline. Zest and the newly launched hatchback Bolt are a part of the company’s Horizonext initiative, announced in 2013, which is an aggressive strategic plan for its passenger vehicle business unit to reverse the trend of flagging sales. Owing to the encouraging initial sales for the Zest and Bolt, the passenger vehicles segment of the company showed a growth of 19.1% year-over-year in Q4, with the car segment growing by 33%. This fiscal will be crucial for Tata, as the company looks to gain more sales on the back of new launches–at both JLR and the standalone business. By the end of fiscal 2016, JLR’s production capacity is expected to reach around 680,000 vehicles, including an initial annual production capacity of around 130,000 vehicles at the China plant. Extending production capacity, both in the U.K. and overseas, will remove supply constraints at JLR, and could possibly fuel volume growth going forward. However, spending a lot on model makeovers and new production facilities, while unit sales remain low, could pressure Jaguar Land Rover’s, and the overall company’s, margins in the near term, and in turn, reduce free cash flow. 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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    Our Thoughts On The Time Warner Cable-Charter Merger
  • By , 5/27/15
  • tags: TWC
  • Time Warner Cable (NYSE:TWC) and Charter Communications (NASDAQ:CHTR) announced Tuesday that they have entered into a definitive agreement for Time Warner Cable to merge with Charter. Charter is a leading internet communications company and the fourth-largest cable operator in the U.S. As per the announcement, Time Warner Cable (TWC) shareholders will receive $195.71 per share, which represents a 14% premium to the stock’s May 22nd closing price. Charter will provide $100 in cash and the rest in shares of a new public parent company, tentatively called “New Charter”, for each TWC share outstanding. In this piece, we take a look at some interesting observations related to the deal.
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    The Strong U.S. Dollar Is Weighing On Harley-Davidson's Financials
  • By , 5/27/15
  • tags: HOG TM PII HMC
  • Harley-Davidson (NYSE:HOG) is going through a rough patch, not only because of the looming threat of an aging core population of Caucasian males, but also because of a strengthening dollar. The iconic manufacturer of heavyweight motorcycles carried its weak form from the previous three quarters into Q1 this year. Revenues from sales of motorcycles and related products were down 3.9% year-over-year to $1.51 billion in Q1, due to a fall in wholesale shipments and the impact of negative currency translations. The U.S. dollar rose approximately 10% against most foreign currencies in the last quarter, and this took a toll on the financials of many large American companies, including Harley-Davidson. Our current price estimate for  Harley-Davidson stands at $60.50, which is above the current market price. See our full analysis for Harley-Davidson Harley has already been struggling in the domestic market, which forms almost two-thirds of its net motorcycle shipments, due to shifting preferences of millennial customers, trouble in speeding up the roll-out of the lighter weight bikes, Street 500 and Street 750, and the unavailability of the Road Glide model in the first half of last year. After lower U.S. sales in Q2 of last year prompted Harley to lower its full-year guidance, the company again lowered its shipment outlook for 2015 on less-than-expected retail sales in the country at the start of this year. Overall shipments were down 1.4% year-over-year to 79,589 units in Q1, near the lower end of the estimated 79,000-84,000 unit shipments. While shipments in the U.S. rose by over 4% in Q1, retail sales were down 0.7%. Lower-than-expected retail sales for Harley-Davidson in Q1 went against previous expectations of solid growth, considering how the economic conditions in the U.S. improved, and low fuel prices boosted customer purchasing power, which meant that customers could afford to pay a little extra for the Harleys. So, what is going wrong for Harley? The U.S. alone constitutes two-thirds of the net volumes for Harley-Davidson, as aforementioned, but forms approximately 40% of the net valuation for the company, according to our estimates. We expect growth in international markets, especially Asia-Pacific, where concentration and penetration of heavyweight motorcycles is relatively low, to drive growth for Harley, going forward. But the company is still heavily dependent on the U.S. and needs volumes to rebound in the domestic market, to get back on track. 2011 saw a surge in sales for Harley-Davidson in the U.S., which can mainly be attributed to pent-up demand, following a slow sales period during the recession. But since, volume growth levels have slowed down. Sales in the country have a major impact on the company’s overall results. Lower retail sales and high shipments in the U.S. in the last few quarters have prompted Harley to lower its shipments to dealers in the near term, in order to keep supply in line with demand, avoid inventory pile-up, and protect its premium brand image. Management now expects to ship between 83,000 and 88,000 units in the second quarter, a 4.5% to 10% decrease from 2014 production levels. Lower guidance and less-than-expected demand sent Harley’s stock tumbling last year. The stock is down 20% since the end of June last year, after rising 316% in the five-year period before that. International demand might be crucial to Harley’s future, but reigniting domestic sales seems like the number one issue for the company. Last quarter, retail sales for Harley were down 0.7% year-over-year in the U.S., even as registrations in the country’s 601+cc motorcycle market rose an impressive 9%. Why Harley couldn’t benefit from the surge in demand in the overall market was mainly due to increased competitive price discounting by the competition, especially international manufacturers who scaled down their product prices in the U.S., as the dollar continued to strengthen against other currencies. Harley’s market share is down 4.7 percentage points from a year ago, to 51.3% in the U.S., mainly as its Japanese and European competitors took advantage of the strengthening U.S. dollar and manufacturing in low-cost countries, and subsequently adopted aggressive product pricing. This trend could continue in the near term, and as Harley is not looking to discount its bikes, this will mean slower volume growth for the company in the next few quarters. Sales for the Street 500 and 750 remained strong in Q1, after the new models sold 9,900 units worldwide in their debut year in 2014, and with increased availability of this lineup going forward, volume sales could get a boost. However, Harley-Davidson’s recent results tell a story of lost sales on strategic pricing by the competition in the U.S., and negative currency translations, which were a 3.5% headwind on the top line in the last quarter, and could continue to dent revenue growth. Going forward, continual discounting by other motorcycle manufacturers could further eat into Harley’s market share in the U.S. and drag down the top line. Harley-Davidson is looking to protect its premium brand image but, in the meantime, the company’s competitors are gaining from the strengthening U.S. dollar. This could continue to drag down sales for Harley.  However, the company will hope to leverage its strong brand appeal, and loyal customer following, to grow sales, once its competitors raise their product prices once again. 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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    NASDAQ OMX Reports Sluggish Volumes For U.S. Trading, European Volumes Continue To Impress
  • By , 5/27/15
  • tags: CME ICE NDAQ
  • NASDAQ OMX Group (NASDAQ:NDAQ) is one of the most well-diversified global stock market operators, with trading products ranging from equities, derivatives, exchange traded funds and fixed income products. The exchange operator announced its monthly volume report for April, reporting a decline in trading volumes in the U.S. On the other hand, the company observed healthy activity in Europe in both equity and derivatives trading. Here’s a quick roundup of NASDSAQ’s metrics across various products for the month of April and our forecasts for them.
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    Q1 2015 U.S. Banking Review: Total Loan Portfolio
  • By , 5/27/15
  • tags: BAC COF C JPM USB WFC
  • The first quarter of the year was a particularly strong period for U.S. banks, with data compiled by the Federal Reserve showing that total loans handed out by the country’s banking industry grew at an annualized rate of 8.1% over the quarter. This compares to growth figures of 5.3% for the year-ago period and 5.4% for the previous quarter. The prevailing low interest rates and growing optimism about the strength of the economy is primarily responsible for this positive trend, as they have coaxed individuals as well as businesses to tap into available credit lines. In fact, Q1 2015 was one of the best quarters in these terms since the economic downturn of 2008, and sets the stage for another year of strong loan growth. As has been seen over recent quarter, the growth will largely be fueled by the strong demand for commercial loans as well as personal loans (including automobile loans, student loans and other loans for discretionary-spending). Although there is no doubt about the brisk pace of loan growth for the industry as a whole over recent years, the loans haven’t grown uniformly across banks. Some banks have reported growth in outstanding loans of 4-5% annually while others have hardly seen any improvement in these figures as they run off loss-making loans handed out before the downturn. Also, the growth rate for each bank has varied considerably across the various loan categories. In this article, we detail the trends in the loan portfolio of the country’s largest commercial banks -  JPMorgan Chase (NYSE:JPM),  Bank of America (NYSE:BAC),  Citigroup (NYSE:C),  Wells Fargo (NYSE:WFC),  U.S. Bancorp (NYSE:USB) and Capital One (NYSE:COF) – over the last three years, and compare the proportion of different loan types in each of their loan portfolios.
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    Scenarios That Could Impact Juniper's Stock Price
  • By , 5/27/15
  • tags: JNPR CSCO NOK ERIC
  • Juniper Networks (NYSE:JNPR) creates networking equipment such as switches and routers used primarily by businesses and Internet Service Providers to route IP data such as emails, videos, files and other digital communication. It is among the four largest suppliers of service provider routers and switches – along with Cisco (NASDAQ:CSCO), Alcatel-Lucent and Huawei – which control over 90% of the global service provider market. In 2014, the company’s overall sales declined by about 1% year-over-year (y-o-y) to $4.63 billion on account of lower demand from American carriers which resulted in a decline in Routing and Security product sales. Switching was the only division registering growth (13%), while Routing and Security reported a decline of 4% and 18% y-o-y, respectively. To counter declining Security sales, the company stated that it was moving away from point-based solutions towards integrated solutions covering a gamut of problems across switching, routing and security domains. To an extent, this was evident in Q1 2015 when it beat market expectations to report overall sales of $1.07 billion. Although all three product divisions reported sales declines, the company issued a better than expected second quarter guidance on expectations that demand from service providers, cable operators and cloud providers was likely to increase. In this note, we take a look at different scenarios which could significantly impact our price estimate for Juniper going forward. Specifically, we will focus on the company’s performance and opportunities in the service provider router market and the global switches market. Our  $25 price estimate for Juniper is about 10% below the current market price.
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    Scenarios That Could Impact Ericsson's Stock
  • By , 5/27/15
  • tags: ERICSSON ERIC NOK S T VZ
  • Ericsson (NASDAQ:ERIC) is a global telecommunications equipment and services provider based in Stockholm, Sweden. It is the leading supplier of mobile networks with products in CDMA, 2G, WCDMA/3G as well as 4G/LTE technologies. It is also a strong player in fixed-network solutions including copper, fiber, microwave transport and Internet Protocol. Established in 1876 as a telegraph equipment repair shop, Ericsson today employs more than 118 thousand individuals in 180 countries generating revenues close to $33 billion. With a portfolio of more than 37,000 patents from its 25,700-employee R&D unit, Ericsson is also one of the leading providers of ICT services such as systems integration, m-commerce and consulting, which contribute about 40% of its revenues. The company reported a sharp fall in its first quarter profit as revenue generation shifted from the more lucrative projects in the U.S. to lower margin contracts in China. The company’s net income fell 14% year-over-year (y-o-y) and 65% sequentially to SEK 1.5 billion ($170 million) in Q1 2015, much lower than Reuters’ compiled consensus estimates of SEK 2.23 billion. Income was also negatively impacted by higher restructuring charges and a higher share of Global Services sales, partially offset by favorable currency trends. This was also reflected in the company’s gross margin, which declined by 110 basis points y-o-y to 35.4% in the quarter. In this note, we take a look at different scenarios which could significantly impact Ericsson’s valuation going forward. Specifically, we will focus on the company’s performance and threats in the mobile infrastructure equipment market and the impact of declining Networks margins on the company’s valuation. We recently launched  coverage of Ericsson with a price estimate of $13, about 10% ahead of the market price.
    6 Stocks to Avoid This Grilling Season
  • By , 5/27/15
  • tags: TSN BUD
  • Submitted by Wall St. Daily as part of our contributors program 6 Stocks to Avoid This Grilling Season By Chris Worthington, Editor-in-Chief of Income   I hope you had an enjoyable Memorial Day holiday. It’s now (unofficially) summer! If you’re like me, you spent some time grilling with friends and family this weekend. Indeed, all across the country, people were chowing down on burgers, sausages, and chicken ( maybe even a few vegetables). And since barbecue season is now upon us, it’s worth asking: Are the companies providing our summer fare a “Buy” right now? Purveyors of Fine Food and Drink The food and beverage industries offer a number of dividend-paying stocks, including the six below, which are some of the biggest names in the business. First is Tyson Foods ( TSN ), the world’s second-largest processor and marketer of chicken, beef, and pork. Its brands include Tyson (of course), as well as Hillshire Farm, Jimmy Dean, Ball Park, and Sara Lee. Next is Hormel Foods ( HRL ), famous for introducing Spam. Hormel owns its namesake brand in addition to Black Label, Lloyd’s, Saag’s, and Wholly Guacamole. It also owns a few other popular but less barbecue-related brands like Skippy and Chi-Chi’s. Kraft Foods Group ( KRFT ) – which recently merged with Heinz – is virtually inescapable at any barbecue. Among its brands, Kraft counts A1 steak sauce, Country Time Lemonade, Cracker Barrel cheese, Kraft Mayo, JET-PUFFED Marshmallows, Kool-Aid, Oscar Mayer meats, and Heinz condiments. Now, in my opinion, a good barbecue isn’t complete without a few beers. And when it comes to beer, there’s no company quite like Anheuser-Busch InBev ( ABI.BR ). This massive conglomerate owns everything from Budweiser to Stella Artois to Corona. It also owns Beck’s, Leffe, and Hoegaarden. And it even owns craft breweries like Goose Island and Elysian. SABMiller ( SAB.L ) is the world’s second-largest beer company, though its $58-billion market cap is just one-third of Anheuser-Busch’s. SAB owns Miller, Coors, Blue Moon, Grolsch, Foster’s, Keystone, and Leinenkugel’s, among many, many others. Finally, there’s Heineken ( HEIA.AS ), the Dutch brewery that also owns Amstel, Sol, Murphy’s, and many other brands across the globe. With a $46-billion market cap, Heineken is the world’s third-largest beer company. Big Valuations, Small Dividends Let’s start by looking at the current valuation of these companies compared to their median 10-year average: As a group, these stocks are trading at a significant premium right now. In fact, only Tyson and AB-InBev are trading at even somewhat justifiable valuations. The rest are prohibitively expensive. Thus, we’ll narrow our focus to hot dogs, sausages, and beer. Next, let’s take a look at the dividends paid by Tyson and ABI. The latter yields a pretty respectable 2.7% and, with a dividend payout ratio of 68.5%, it’s well below our 80% threshold. Unfortunately, Tyson’s indicated yield is a meager 0.9% – better than nothing, but not what we’re looking for as income investors. That leaves us with just one out of six companies, Anheuser-Busch. And it does have a lot going for it. Total revenue has grown for six consecutive years, including by more than 8% in 2014. It has a decent yield, and the dividend has grown substantially since 2009, when it was cut by 90%. However, the company is still expensive relative to its 10-year median – and perhaps most importantly, the U.S. market is facing increasing pressure from craft beer sales. Consider this: By the end of 2014, craft beer sales were responsible for 11% of the total market in the United States. That’s up from just 2.6% in 1998, an incredible rise. The trend isn’t slowing, either. Last year, craft beer dollar sales grew 22%, faster than in any previous year. Once a niche market, craft beer is now a $20-billion-a-year industry. So, while ABI does pay a decent dividend, it’s on the wrong end of a growing market trend. Plus, the stock isn’t exactly cheap right now. Bottom line: Go ahead and enjoy some sausages, hot dogs, and beer this summer – but don’t bother with these major food and beverage stocks. Good investing, Chris Worthington The post 6 Stocks to Avoid This Grilling Season appeared first on Wall Street Daily . By Chris Worthington
    U.S. Dollar Sends Harley-Davidson Shares Down
  • By , 5/27/15
  • tags: SPY TLT HOG
  • Submitted by Wall St. Daily as part of our contributors program U.S. Dollar Sends Harley-Davidson Shares Down By Richard Robinson, Ph.D., Equities Analyst   Just last quarter, the U.S. Dollar Index rose about 10% against most foreign currencies . . .  and the effect on revenue estimates is readily apparent. Analysts now expect to see a decline of 3.3% for the current quarter instead of the 2.6% decline predicted at the end of last month. Investors, meanwhile, are understandably concerned for the future of American companies. Just recently, the greenback left one U.S. company to be devoured by foreign competition… or so it appears . Competitors Circle Around Due to the crippling effect of the strong dollar, Harley-Davidson ( HOG ) has become an easy target for its foreign rivals. On Tuesday, the company announced its lower forecast for worldwide shipment. Management now expects to ship between 83,000 and 88,000 units in the second quarter, a 4.5% to 10% reduction from 2014 production. HOG shares dove more than 9.7% on the news. As of Tuesday’s close, shares sit perilously close to their 52-week low of $54.22, which was reached on October 15, 2014. And now, Harley’s competitors are zeroing in. You see, they’ve capitalized on the stronger dollar by cutting into Harley’s domestic sales with lower prices for their own bikes. The stronger dollar makes this easy because foreign manufacturers can lower their prices without having any impact on their own profit margins. In spite of this news, though, shareholders still have reason to be optimistic. The Sunny Side: The Gusto to Persevere Harley-Davidson held up pretty well against some rather discouraging headwinds. In the first quarter, the company reported a total revenue decline of 3.8% to $1.51 billion. This was below analysts’ expectations of $1.59 billion. However, the company’s net income rose by 1.5% to $269.9 million. This translated to earnings of $1.27 per diluted share in the first quarter. Furthermore, the net income beat last year’s first-quarter net income of $265.9 million, or $1.21 per diluted share, as well as analysts’ expectations of $1.25 per share last quarter. The company has undoubtedly shown some vigor in spite of the challenges it faces. Wait Till August to Ride These Shares After all, the currency issues won’t last forever, and Harley will benefit from stronger sales as the riding season hits its peak in the coming months. So expect new models to launch in August. Shareholders and investors alike should wait until the third quarter before buying into or adding to existing share counts. By then, maybe the stronger dollar will quit bullying this hog. Good investing, Richard Robinson The post U.S. Dollar Sends Harley-Davidson Shares Down appeared first on Wall Street Daily . By Richard Robinson
    Incredible Prosthetics Powered by the Mind
  • By , 5/27/15
  • tags: SPY TLT
  • Submitted by Wall St. Daily as part of our contributors program Incredible Prosthetics Powered by the Mind By Chris Worthington, Editor-in-Chief of Income   Robotic limbs controlled by the user’s mind . . .  it sounds like something out of a sci-fi movie. Yet this technology is very much real, and the folks at the Johns Hopkins Applied Physics Lab (APL) have been testing this incredible breakthrough with the help of a man named Les Baugh. Baugh lost both arms in a teenage accident, and he’s been getting by ever since with ingenuity, creativity, and an indomitable will. Indeed, it’s Baugh’s story that helps make the technology so awe-inspiring. In the video above, Baugh lights a fire in his stove, cooks himself a meal, and drives his car – all without the use of arms. Yet once the APL team straps on the bionic arms, Baugh is able to perform a variety of tasks – picking up blocks, taking a drink from a water bottle – just by thinking about doing them. The pioneering technology, which has been under development for more than 10 years, is called Modular Prosthetic Limbs (MPLs). There are only about 10 of these prosthetics in existence, according to Gizmodo. To use the limbs, Baugh went through a surgery called targeted muscle reinnervation. The muscles that once controlled his arms and hands were moved to his chest, where the electrical signals are picked up by sensors on the bionic arms. “It’s a relatively new surgical procedure that reassigns nerves that once controlled the arm and the hand,” Johns Hopkins Trauma Surgeon Albert Chi, M.D. told designboom . “By reassigning existing nerves, we can make it possible for people who have had upper-arm amputations to control their prosthetic devices by merely thinking about the action they want to perform.” Mike McLoughlin is the program’s chief engineer of research and exploratory development, and he says that Baugh could even begin to develop sensations from the prosthetics as his nerves re-map. That’s amazing enough on its own! Now, this technology is still in the early stages of development, and it’s far from prepared for – or affordable enough for – public use. But the bottom line is that these prosthetics hold enormous potential for Baugh, as well as others who have lost their limbs. Good investing, Chris Worthington The post Incredible Prosthetics Powered by the Mind appeared first on Wall Street Daily . By Chris Worthington
    20 Best Stocks to Hold for the Long-Term
  • By , 5/27/15
  • tags: SPY JPM
  • Submitted by Dividend Yield as part of our contributors program . 20 Best Stocks to Hold for the Long-Term Forget about buying and selling stocks within a matter of days or months. Morgan Stanley is out with a new note recommending 30 companies that you should hold until 2018. Below is a list of the 20 top dividend payers . That’s not to say you should then sell them in 2018, it’s to say that Morgan Stanley believes these companies are poised to perform well over the next three years. These are the 5 highest yielding resuts in detail: JPMorgan Chase — Yield: 2.63% JPMorgan Chase ( NYSE:JPM ) employs 241,359 people, generates revenue of $51,531.00 million and has a net income of $21,762.00 million. The current market capitalization stands at $248.68 billion. JPMorgan Chase’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $40,815.00 million. The EBITDA margin is 43.33% (the operating margin is 31.62% and the net profit margin 23.10%). Financials: The total debt represents 21.98% of JPMorgan Chase assets and the total debt in relation to the equity amounts to 244.04%. Due to the financial situation, a return on equity of 9.76% was realized by JPMorgan Chase. Twelve trailing months earnings per share reached a value of $5.46. Last fiscal year, JPMorgan Chase paid $1.58 in the form of dividends to shareholders. Market Valuation: Here are the price ratios of the company: The P/E ratio is 12.18, the P/S ratio is 2.64 and the P/B ratio is finally 1.18. The dividend yield amounts to 2.63%. – Read more here: 20 Best Stocks to Hold for the Long-Term….
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