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

COMPANY OF THE DAY : GOLDMAN SACHS

Goldman reported strong earnings on Thursday, with net income increasing 50% year-on-year. However, the stock declined due to concerns about the sustainability of these results. Q3 2013 was one of the bank's worst quarters in the last three years, making this quarter look better in comparison, while a big portion of the earnings were driven by highly volatile businesses. In our earnings note we discuss these earnings in more detail.

See Complete Analysis for Goldman Sachs
Screenshot of forecast demo
To use this tool, please upgrade Adobe Flash Player here.
 
Sign up for the complete Trefis experience.
Your Email Address:
 

Want to learn more? View a Trefis Webinar.

FORECAST OF THE DAY : RADIOSHACK'S U.S. STORE GROSS MARGIN

RadioShack's recent debt restructuring deal will give the company more runway for a turnaround. It has been plagued by declining sales and compressed gross margins of late. While we expect the company's gross margins to bounce back slightly, there could be a significant upside to our price estimate if it is able to stabilize sales and cut costs, thereby expanding margins further.

Read more...
Screenshot of forecast demo
To use this tool, please upgrade Adobe Flash Player here.

RECENT ACTIVITY ON TREFIS

ETFC Logo
E*Trade Earnings Preview: Growing Asset Base, Recovering Trade Volumes To Drive Results
  • By , 10/20/14
  • tags: ETFC AMTD SCHW
  • E*Trade Financial (NASDAQ:ETFC) is scheduled to announce its Q3 2014 earnings on Tuesday, October 21. In the second quarter, E*Trade’s asset-based business grew by 11% year-on-year (y-o-y) to $270 million, while low trading volumes kept trading commission revenues flat over the prior year quarter at $105 million. Since E*Trade exited its G1X market making services business in Q1, the brokerage posted flat net revenues over the prior year quarter at $438 million. We have a $21 price estimate for E*Trade’s stock, which is about 10% higher than the current market price.
    ISRG Logo
    Intuitive Surgical Earnings Preview: Procedure Volumes In Focus
  • By , 10/20/14
  • tags: ISRG
  • Intuitive Surgical (NASDAQ:ISRG) is expected to announce its Q3 2014 results on Tuesday, October 21. In the previous quarter, the da Vinci robot maker surprised the market with better-than-expected results, although both the top and bottom line continued to decline. Net income dropped about 35% year-over-year (y-o-y) from $159 million in Q2 2013 to $104 million in Q2 2014. However, this was an improvement of about 136% over the income reported in the first quarter ($44 million). Total revenue for the second quarter was about $512 million, down 11% on a year-over-year basis but up 10% sequentially. This was also about 2% ahead of the analyst consensus compiled by Thomson Reuters. The spike in revenue and earnings on a sequential basis was attributed to the greater-than-expected rise in total procedures, which increased 9% y-o-y and 8% over the first quarter.  When the company announces its third quarter earnings, we expect overall sales to remain under pressure owing to lingering concerns surrounding its da Vinci robotic surgical system and a reduction in the number of robot-assisted surgical procedures. Considering the concerns surrounding its da Vinci system and recent adverse reports about the safety of power morcellators (also used in da Vinci surgeries), Intuitive Surgical lowered its guidance for growth in the number of procedures for 2014 from 9-12% to 2-8% in the first quarter before slightly revising it to 5-8% in Q2. A lower number of procedures generally results in a longer replacement cycle for instruments and accessories, which leads to lower instruments and accessories revenue. On the cost side, the company’s gross margin in Q2 2014 was 67.1% compared to about 71% in the same period last year. We expect gross margins to decline further in the near term due to higher costs owing to overall lower production and the company’s focus on new products such as the da Vinci Xi and da Vinci Sp (which have slightly lower margins). However, we expect margins to improve in the long run as production volumes increase and its new products gain more acceptance. We currently have a  price estimate of $455 for Intuitive Surgical, which is in line with the market price.
    VMW Logo
    VMware Earnings Preview: Software-Defined Storage, Networking, Hybrid Clouds In Focus
  • By , 10/20/14
  • tags: VMW MSFT EMC NTAP CSCO
  • VMware (NYSE:VMW) is scheduled to announce its Q3 2014 earnings on October 21. The company reported a year-over-year (y-o-y) increase in both product license revenues (+16%) and services revenues (+18%) in the second quarter, with net revenues of $1.46 billion for the quarter slightly higher than its guidance range. The company expects its Q3 net revenues to be about 17% higher than the prior year quarter at $1.47 billion, while license revenues are expected to be around $640 million, 13% higher than the year-ago period. Management mentioned that the company is currently focused on three main areas of growth, namely software-defined data centers (SDDC), hybrid cloud and end-user computing. The company witnessed strong demand for products and services in these domains in the last few quarters, while the continued demand for hybrid cloud and SDDC is expected to drive revenues in the coming quarters as well. As a result, VMware appears on course to meet its full year revenue expectation of $6 billion. We have a $100 price estimate for VMware’s stock, which implies a 10% premium to the current market price.
    VZ Logo
    Verizon Earnings Preview: Wireless Subscriber Adds, Margins In Focus
  • By , 10/20/14
  • tags: VZ T S
  • Verizon (NYSE:VZ) is set to report its Q3 earnings on Tuesday, October 21. In the previous quarter, the carrier recorded its highest sales growth in the past six quarters, with total operating revenues increasing by 5.7% over the prior year quarter to $31.5 billion. This was driven by double-digit sales growth in the wireless business and positive growth in the wireline business, marking the first quarterly year-over-year increase in overall wireline revenues in more than seven years. The wireless major added about 1.4 million postpaid connections during the quarter, including a record 1.15 million tablet connections. In wireline, Verizon added 139,000 net new FiOS Internet connections and 100,000 net new FiOS Video connections, taking its total subscriber base to 6.3 million and 5.4 million, respectively. For the third quarter, the company’s retail postpaid net additions are likely to increase by about 40% over the prior year quarter’s count of 927,000, based on indications provided by Chairman and CEO Lowell McAdam in an investor conference last month. McAdam also indicated that the percentage of subscribers opting for the company’s Edge plan is likely to decline from about 18% in Q2 to about 12-13% in the third quarter. This, in addition to higher discount offerings, is expected to put some pressure on the wireless segment’s service margins, which in Q3 2013 and Q2 2014 were 51.1% and 50.3%, respectively. Third quarter results are also expected to be impacted due to seasonal fluctuations and certain non-recurring billings and costs. According to our estimates, Verizon’s wireless division accounts for over 90% of its total enterprise value, after the company completed the acquisition of Vodafone’s 45% stake in Verizon Wireless in February. We have a price estimate of $52 for Verizon’s stock, which is slightly ahead of the current market price.
    A Low-Vol Fund for a Volatile Market
  • By , 10/20/14
  • tags: SPLV SPY
  • Submitted by Wall St. Daily as part of our contributors program A Low-Vol Fund for a Volatile Market   By Alan Gula, Chief Income Analyst     As human beings, sleep is one of our most basic requirements. Not only does sleep help us stay alert and attentive during the day, but it also plays a vital role in memory formation. Chronic sleep loss can even harm cardiovascular health and impair immune function. Therefore, anything that prevents you from sleeping should be avoided at all costs . . . including poorly timed market decisions. Indeed, I bet the market’s volatility is starting to keep more and more investors awake at night. But just think how peacefully you’d rest if your investments protected you from stock market drawdowns – while providing upside participation during the rallies at the same time! Luckily, there’s a group of funds that seems to do just that . . . Low-Volatility Anomaly These innovative exchange-traded funds (ETFs) follow a low-volatility strategy, and attempt to take advantage of a specific market anomaly. Over time, investors have been conditioned to think that they must take on more risk – and endure higher volatility – to earn high returns. However, many long-term studies show that, on average, low-volatility stocks earn higher risk-adjusted returns than high-volatility stocks. Unsurprisingly, there’s a growing list of low-volatility ETFs. According to ETF.com, there are now 19 in existence. The PowerShares S&P 500 Low Volatility Portfolio ( SPLV ) was the first, and thus has the longest track record. The fund holds the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. Since its inception on May 5, 2011, SPLV has produced an annualized total return of 13.5%. It has actually slightly outperformed the SPDR S&P 500 Trust ( SPY ), which has returned an annualized 13.2%. Yet, over this entire period, SPLV has only exhibited around 70% of the volatility of the S&P 500 Index. The second half of 2011 provides a good illustration of how SPLV has reduced losses. On a closing basis, the S&P 500 Index peaked on July 7, 2011 and had declined 18.4% by the end of the drawdown period on October 3, 2011. SPLV suffered a drawdown of only 8% during the same timeframe. True to form, SPLV held up well during one of the most volatile periods since the end of the credit crisis. The fund has also exhibited reduced drawdowns during more recent periods of market stress. That’s partly because low-volatility funds tend to hold stocks that are less sensitive to the business cycle (fluctuations in economic growth), such as consumer staples and utilities. However, it’s important to note that their sector exposure is dynamic. For example, if utilities were to begin a massive decline due to rising interest rates, then individual utility stock volatilities will start to increase markedly. In theory, low-vol funds will be able to avoid the bulk of losses by reducing exposures to sectors that are falling out of favor. Although the constituents will gradually change with each rebalancing, income seekers will appreciate SPLV’s 2.4% trailing 12-month yield, which is higher than SPY’s trailing yield of 1.9%. Bottom line: SPLV is an excellent core portfolio holding for risk-averse investors focusing on capital preservation. Just be aware that you’ll probably underperform during the most frenetic stock market rallies. Of course, with market volatility on the rise, this is probably an acceptable trade-off for investors who value sleep-filled nights. Safe investing, Alan Gula, CFA The post A Low-Vol Fund for a Volatile Market appeared first on Wall Street Daily . By Alan Gula
    Gold Mining Companies Selling for Pennies on the Dollar
  • By , 10/20/14
  • tags: GG GLD NUGT
  • Submitted by Profit Confidential as part of our   contributors program Gold Mining Companies Selling for Pennies on the Dollar The fundamentals for higher gold bullion prices continue to impress. The table below illustrates the output from U.S. mines in the first six months of 2014 compared to the first six months of 2013. In the below chart, we quickly see that since March of 2014, production of the precious metal has been quickly declining. Meanwhile, on the demand side of the equation, we see increased demand for gold bullion from the East—especially from China. China recently launched a gold bullion market on the Shanghai Gold Exchange (SGE) for international investors. The goal of this exchange is to gain more control over the price of the precious  metal in yuan (the official currency of China). China wants to have price control over gold bullion, just like the West does with their daily settings in New York and London. ___________________________________________________ U.S. Gold Mine Output, First Six Months of 2014 & 2013 Month 2014 Output (Kilograms) 2013 Output (Kilograms) % Change January 17,800 18,500 -3.78% February 16,400 17,200 -4.65% March 17,500 18,700 -6.42% April 16,500 17,900 -7.82% May 17,200 18,800 -8.51% June 17,700 19,400 -8.76% Total 103,100 110,500 -6.70% Data source: U.S. Geological Survey web site, last accessed October 7, 2014. For seven years in a row, the SGE has been the top spot for gold bullion trading in the global economy. In 2013, the volume at the exchange reached 11,600 tons. Quality gold bullion mining companies continue to offer significant value. Some of the most well-known miners are selling for pennies on the dollar. Goldcorp Inc. (NYSE/GG), selling for $23.00 a share for a market cap of just over $18.5 billion, is a great example. If we just look at the proven and probable reserves of the company, it had 54.38 million ounces as of December 31, 2013. (Source: Goldcorp Inc. web site, last accessed October 7, 2014.) These reserves alone amount to $65.2 billion at a price of $1,200 an ounce of gold. And the company has massive silver reserves, too. In respect to gold bullion, I would like to offer you these words from my esteemed colleague and gold guru, Robert Appel, BA, BBA, LLB: “Wasn’t it just late 2011, three years ago, when gold bullion was selling at $1,900 an ounce and almost every advisory on the planet was bullish on gold? What’s happened since then? Well, the economic recovery has failed, if we take out the fake numbers. The number of people who have left the workforce is at levels not seen for 30 years. There is food and medical inflation, but few talk about it, and there has been a massive transfer of wealth from the middle class to the elites. Europe and Japan have collapsed and ditto for Argentina and Venezuela. We have a potential world war in Ukraine and ISIS has taken back Iraq. It seems the U.S. president has recently preferred Iran over the Saudis, which jeopardizes the petro-dollar. Russia and China are taking active, ongoing steps to bypass the greenback, and Ebola is loose. Against all this unpleasant backdrop, gold bullion is down almost 40%, sentiment is at depths never before seen, and the only two remaining bulls on the planet may be myself and Michael Lombardi. And despite all the talk about ‘gold manipulation,’ the fact is that no sane trader wants to invest in a commodity that ‘mysteriously’ gets beaten up every single time a reversal seems close.” But in the end, all manipulations, all imbalances, all extremes face regression to the mean. The shares of quality gold bullion producers, which have been severely oversold, offer investors a great opportunity to buy low before they sell high.     The post Gold Mining Companies Selling for Pennies on the Dollar appeared first on Stock Market Advice | Investment Newsletters – Profit Confidential .
    Scared After The MLP Selloff? The Insiders Aren’t.
  • By , 10/20/14
  • tags: AMJ ETE
  • Submitted by Sizemore Insights as part of our contributors program Scared After The MLP Selloff?  The Insiders Aren’t.   by Charles Lewis Sizemore, CFA It’s been a bare-knuckle beating in the MLP space, i.e., the market for Master Limited Partnerships.  The JPMorgan Alerian MLP ETN ( AMJ ), a popular proxy for the sector, is down about 15% in less than a month.  And that is after bouncing off of its deep intraday lows.  AMJ is now in negative territory for the year before taking distributions into account.  Many individual MLPs are down well in excess of 20% over the same period. What gives? Corrections don’t necessarily have to have a reason.  But in today’s case, a sharp selloff in the price of crude oil has led investors to dump virtually all energy-related assets. Before you join them, let me share a little detail with you.  Kelcy Warren, CEO and cofounder of Energy Transfer Equity ( ETE ), just bought 1,178,567 shares of his own company this week for an estimated $60.5 million.  This follows his purchase of 33,000 shares last month for an estimated $2.0 million. Warren is a wealthy man, of course.  Forbes ranks him as the 81 st richest person in America with a net worth of over $6 billion.  But $62.5 million isn’t chump change, even for a billionaire like Kelcy Warren. Company insiders can sell their stock for any number of reasons.  Perhaps they are looking to diversify…or buy a seaside home worthy of a billionaire.  It’s hard to draw serious conclusions from the occasional spate of insider selling. Insider buying, however, is an entirely different story.  There is only one reason why an insider would aggressively buy their own stock: They consider it underpriced and highly likely to appreciate. You and I are not insiders.  We do our research, and we consider ourselves to be better informed than the unwashed investing masses.  But we’re not privy to the inner workings of a company, and we lack the information and expertise that an insider like Kelcy Warren would have. This doesn’t mean we should blindly follow insider trading moves, of course, but it does mean we should take it under consideration, particularly at times like these when the market is sending us very scary signals. When I see a stock I own drop by 15%-20% in less than a month, I get scared.  I wonder if the market knows something I don’t, and I consider selling as a matter of prudence.   But when I see insiders buying with both fists, I’m far more willing to ride out the volatility and even use the dip as a buying opportunity. Returning to the MLP space, does the sudden drop in the price of crude oil justify the moves we’ve seen in the MLP sector? Absolutely not.  Some MLPs do indeed have sensitivity to the price of oil, but the largest players that dominate the cap-weighted MLP indexes do not.  They are pipeline operators, and their profitability is based on the volume of oil and gas that passes through them, not the price. So, unless you believe that the price of energy falls to a point that U.S. onshore production becomes uneconomic to produce, it’s difficult to see the sudden drop in oil prices having much of an impact on midstream MLPs. My advice: Follow Kelcy Warren’s example and use the recent selloff as an opportunity to load up on all of your favorite MLPs.  And I’d start with Warren’s ETE. Disclosures: Long ETE and AMJ. Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. This article first appeared on Sizemore Insights as Scared After The MLP Selloff? The Insiders Aren’t.
    Off-the-Radar Company Delivering Attractive Earnings
  • By , 10/20/14
  • tags: DOW NDAQ TTC PEP
  • Submitted by Profit Confidential as part of our   contributors program Off-the-Radar Company Delivering Attractive Earnings On the day that the DOW, S&P 500, and NASDAQ Composite dropped two percent on global growth worries, once again, several companies reported very good numbers. But investors are paying less attention to corporate results and more attention to economic news from around the world that suggests that the only mature economic engine running at any positive speed currently is the U.S. economy. PepsiCo, Inc. (PEP) had another good quarter. The company’s two businesses, food/snacks and beverages, produced modest single-digit growth in consolidated sales. Net earnings grew five percent, while earnings per share grew seven percent over the third quarter last  year. Management also increased its expected constant currency earnings-per-share growth for this year from eight to nine percent. The company expects to return a total of some $8.7 billion to shareholders this year, comprising approximately $3.7 billion in dividends and $5.0 billion in share buybacks. PepsiCo is on track to deliver what investors expect. The stock just hit a new all-time record-high still with a 2.8% dividend yield. Getting into third-quarter earnings season a little further should help focus the stock market’s attention but clearly, sentiment has really turned. If the trading action continues to wane, good businesses are going to become more attractively priced and equity investors looking for new positions will have better choices. I do believe that for the investment risk, sticking with existing winners is a good strategy regarding large-cap, dividend-paying blue chips. Dividend income really matters in a slow-growth environment, and corporations would still rather return cash than take on major new ventures. Previously in these pages, I’ve written that for long-term investors, I like NIKE, Inc. (NKE), The Walt Disney Company (DIS), PepsiCo, Microsoft Corporation (MSFT), Union Pacific Corporation (UNP), Johnson & Johnson (JNJ), and 3M Company (MMM) as investment-grade, dividend paying stocks for conservative portfolios. With companies like these, you mostly get a good track record of operational and equity market success, earnings reliability, share repurchases, and rising dividends. One company I would add to this list that falls into the mid-cap tier is The Toro Company (TTC). (See “ What Sets This Company Above the Rest .”) It’s the kind of enterprise you don’t really think of or hear about, but it has proven itself to be a very good business. Toro makes turf maintenance and irrigation equipment. It’s been around for years and also sells equipment under the “Lawn-Boy,” “Lawn Genie,” “Pope,” and “Unique Lighting Systems” brands among others. In its most recent fiscal third quarter, the company’s sales grew 11% to a record $568 million. Management noted that it experienced strong demand for its products both for professional and residential products. Third-quarter earnings came in at $50.0 million, or $0.87 per share. This compares to earnings of $40.1 million, or $0.68 per share, in the same quarter last year, which represents a very good comparative gain. Like most other stocks, Toro has been doing very well the last several years. But the position’s been waning and is now worth putting on your radar for those interested to buy on weakness. If sentiment keeps deteriorating, a lot of very good businesses are going to become attractively priced. It will be great to see how third-quarter earnings season unfolds. So far, a lot of numbers are very satisfactory.       The post Off-the-Radar Company Delivering Attractive Earnings appeared first on Stock Market Advice | Investment Newsletters – Profit Confidential .
    AMD Logo
    Weekly Tech Update: AMD, INTC, CREE, FFIV, NVDA, QCOM, TXN
  • By , 10/17/14
  • tags: AMD INTC CREE FFIV NVDA QCOM TXN
  • The semiconductor industry has been one of the strongest performing sectors in 2014.  As of market close on October 3rd, its benchmark (the Philadelphia Semiconductor Index, or Sox) was up 16% year to year and 6% year to date, driven by the improvement in the PC market, continued strength in personal, network and service provider communications, and increasing electronics adoption more broadly in the global markets.  However, in the recent past, there have been signs in the past week of decreased demand in at least certain markets and regions. A leading microcontroller manufacturer, Microchip (MCHP, not covered) pre-announced negatively, attributing lower-than-expected revenues to a fall of in demand in China. The Sox fell a very large 7% on the news.  It is now up 15% year to year and just 8% year to date. We are in the midst of the earnings season and look forward to the same to get a better perspective on different companies’ view on the long-term industry demand. Below is a weekly update for some of the technology companies that Trefis covers. See Our Complete Analysis for These Companies Here AMD AMD (NYSE:AMD) reported its Q3 2014 earnings on October 16. (Read: AMD Misses Its Q3’14 Guidance: Weak Computing & Graphics Performance But Semi-Custom Business Remains Strong ) The company missed its revenue guidance and expects a significant sequential  decline in revenue in the current quarter. The stock price declined marginally last week (~7%). Our valuation of $4.17 is more than 50% above the current market price. The company’s current market cap is around $2 billion. We forecast AMD’s 2014 revenue to increase to $5.4 billion and net income to turn positive by year end. Our GAAP and non-GAAP diluted EPS estimates stand at $0.15 and $0.37, respectively. We are in the process of updating our price estimate for the company. Intel Intel (NASDAQ:INTC) set new records for revenue and earnings per share (EPS) in Q3 2014, reported on October 14. (Read: Intel’s Growth In Q3’14 Fueled By Stabilizing PC Demand, Higher PC Market & Strong Data Center Performance ) The company announced the launch of Padphone Mini in the U.S. in collaboration with ASUS and AT&T. Intel also introduced the industry’s first solution (Data Protection Technology) to provide end-to-end encryption of consumer and financial data that is built into the point of sale (POS) platforms and launched the “The Intel Experience” exclusively in 50 Best Buy retail stores across the U.S. ( Read Press Releases ) Our valuation of $34 (market cap of $165 billion ) for the company is now at a approximately 10% higher than current market price (market cap of $151 billion). We expect Intel to report revenue of around $53 billion and net income of $11 billion for 2014. We forecast non-GAAP diluted EPS of $2.38, which above the market consensus of $2.18. CREE Last week, Cree (NASDAQ:CREE) expanded its award winning silicon-carbide (SiC) module family with a new 20-A, all-SiC module. ( Read Press Release ) The LED manufacturer will report its Q1 2015 earnings October 21. ( Read Our Pre-Earnings Aticle ) Cree’s stock price has been on the downhill since the company announced its preliminary results for Q1 2015 but the stock gained approximately 10% last week. Our valuation of $52 for the company is now at a more than 50% premium to the current market price. We will update our valuation after the full Q1 2015 earnings release on October 21. For calendar year 2014, we forecast Cree’s revenue and net income at $1.77 billion and $160 million, respectively. For fiscal year 2014 (ended June), we estimate non-GAAP diluted EPS of $1.87 as compared to the market consensus of $1.85. F5 Networks F5 Networks (NASDAQ:FFIV) was identified as one of the industry’s top Web Application Firewall vendor in recent benchmarking reports from NSS Labs, last week. ( Read Press Release ) Our price estimate of $118 for F5 Networks is marginally below the current market price, which translates into market cap of approximately $8 billion. We expect the company to witness double digit growth in its revenue for calendar 2014. Our non-GAAP diluted EPS estimate for fiscal year 2014 (ending September) stands at $5.12, as compared to the market consensus of $5.33. Nvidia Last week, Nvidia (NASDAQ:NVDA) announced that Airbus, CH2M Hill and MetroHealth and the first companies to try its GRID virtual GPU. The company also announced that Google’s Nexus 9 tablet, which is powered by Tegra K1, is the first tablet to feature the latest version of the Android operating system. ( Read Press Releases ) Nvidia’s stock fluctuated between $17 – $18 last week. Our price estimate of $19 for Nvidia is marginally above the current market price. The company has a market cap of approximately $10 billion. We estimate Nvidia will report revenues of around $4.3 billion and net income in excess of $600 million this year. We forecast a non-GAAP diluted EPS of $1.42 as compared to the market consensus of $1.00. Qualcomm Qualcomm (NASDAQ:QCOM) agreed to acquire UK based chipmaker CSR for approximately $2.5 billion to expand in technology for connected devices, last week. The company also announced a quarterly cash dividend of $0.42 per common share, payable on December 18, 2014. Our price estimate of $74 for Qualcomm (market cap of 125 billion) is only marginally above than the current market price of $72 (market cap of $122 billion). The stock traded between $71 and $73 last week. We expect the company to report revenue of around $28 billion and net income of $7 billion for calendar year 2014. For fiscal year 2014 (ended September), we forecast non-GAAP diluted EPS of $5.14 as compared to market consensus of $5.31. Texas Instruments Texas Instruments (NASDAQ:TXN) declared a quarterly cash dividend of $0.34 per share of common stock, payable November 17, 2014, and announced a series of new products, last week. ( Read Press Releases ) TI’s stock price increased marginally last week (~5%) Our valuation of $42 (~ $45 billion market cap) for TI is slightly below the current market price. We expect the company to report $13.1 billion and $2.6 billion in revenue this year. Our GAAP diluted EPS forecast for TI stands at $2.43 while the market consensus is at $2.41. We will update our valuation for TI after the Q3 2014 earnings release on October 20. ( Read Our Pre-Earnings Article ) View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    CBS Logo
    Weekly Media Notes: Comcast Gets The Nod, CBS Has a Launch and Fox a New JV
  • By , 10/17/14
  • tags: FOX DIS TWX NFLX CMCSA
  • The media industry saw significant activity last week, with Comcast’s NBCUniversal (NBCU) getting the nod to build a theme park in Beijing, China. In an another development, CBS Corporation announced its video on demand service, which will offer CBS’ programming on the connected devices in 14 markets in the U.S. And in yet another, 21st Century Fox and private-equity firm Apollo Global Management have formed a programming partnership that will combine three television production companies into one. On that note, we discuss below these developments related to the media companies over the last week or so.
    AMD Logo
    AMD Misses Its Q3'14 Guidance: Weak Computing & Graphics Performance But Semi-Custom Business Remains Strong
  • By , 10/17/14
  • tags: AMD INTC NVDA QCOM
  • AMD (NYSE:AMD) reported its Q3 2014 earnings on October 16. At $1.43 billion, revenues were below company guidance and declined 2.2% annually. While AMD saw strong growth in its semi-custom business, the computing and graphics segment (which accounts for over 50% of AMD’s revenue) declined 6% sequentially and 15.6% annually, primarily due to lower chipset and GPU sales. On the positive side, the company retained its gross margin at 35% and delivered its fifth straight quarter of non-GAAP profitability. It managed it operating expenses well, reduced inventory and shipped a record number of semi-custom SoCs in Q3 2014. AMD’s Enterprise, Embedded and Semi-Custom (EES) segment delivered sequential and year-over-year revenue and operating profit improvement in the quarter. Despite short-term weakness, we believe in AMD’s long-term growth potential. The company in still in the midst of its transformation process and remains committed to deliver great products, deepen its customer relationships and continue to simplify and streamline the organization. It plans to reduce its workforce by approximately 7% by the end of Q4 2014 and further streamlining its global real estate assets, which can bring in much needed cash. Our price estimate of $4.17 for AMD is at a more than 50% discount to the current market price. We are in the process of updating our valuation for the company. See our complete analysis for AMD Weal Performance In Computing & Graphics Slows Growth; AMD Focuses On Improving The Financial Performance Of The Segment AMD continues to struggle in the Computing and Graphics business due to ongoing weakness in the consumer PC market. The company clearly lost some market share to Intel (NASDAQ:INTC) in Q3 2014, since the latter reported strong growth in PCs despite a relatively flat PC market. (Read: Intel’s Growth In Q3’14 Fueled By Stabilizing PC Demand, Higher PC Market Share & Strong Data Center Performance ) Though AMD has significantly lowered its dependence on PCs, it continues to derive a considerable portion of its revenue from the segment. Earlier this year, AMD laid out several important objectives to improve the financial performance of this segment which includes:  expanding in the commercial client market, improving its mix in consumer notebooks, gaining share in professional graphics and increasing component and AIB (i.e., Add-In Board) channel sales. The company believes that its increasing focus on the commercial PC segment will help it improve its performance in this segment. AMD has a larger presence in the consumer PC segment, which still remains weak. AMD launched its Pro A-Series APU in Q2 2014 and claims to have met its goal to double the number of AMD-based commercial client design wins from last year, in Q3 2014. New commercial client offerings from Dell, HP, Lenovo have started ramping, resulting in approximately a 50% sequential increase in AMD’s commercial APU shipments. AMD also claims to have improved its notebook APU mix in the quarter, as its Kaveri processors ramped in mobile design wins and its higher-end mobile processor unit shipments increased nearly 50% sequentially. Mobile discrete GPU unit shipments also increased as new design wins entered production. This week, Apple (NASDAQ:AAPL) announced a number of new iMacs powered by AMDs Radeon GPUs, a trend that AMD believes will play well to its strengths in discrete GPUs. Although AMD managed to increased its desktop processor unit shipments from the previous quarter, its performance in the component and graphics channel was weak. It witnessed slowing sell-out momentum, particularly in China, and believed there was some downstream inventory build in the quarter, causing distributors to be more cautious managing their inventories. Nevertheless, AMD remains committed to this market and has started taking actions in conjunction with its channel partners to improve sell-through in the coming quarters. AMD Shipped Record Semi-Custom SoCs In Q3’14 AMD reported  a 20.9% annual and 5.7% sequential increase in Enterprise, Embedded and Semi-Custom revenue, primary driven by strong growth in its semi-custom division. The company shipped a record number of units for its game console customers, as Microsoft (NASDAQ:MSFT) and Sony prepared for the holiday season. Additionally, its secured two new wins, meeting its goal to close one to two semi-custom wins in 2014. The two new semi-custom SoCs are expected to deliver combined total lifetime revenue of approximately $1 billion over approximately three years. Design work for these opportunities has started and AMD anticipates first silicon revenue from these deals in 2016. One of the wins is the first 64-bit ARM-based semi-custom design, building on the company’s growing ARM 64 momentum in the embedded and server markets. The other is an x86 device. AMD devised a unified gaming strategy in March 2013 that addresses its plan to drive the gaming market across consoles, cloud platforms, tablets and PCs. AMD powers all major next generation consoles including Sony’s PlayStation 4, Nintendo’s Wii U and Microsoft’s Xbox One. The company is diversifying its semi-custom business beyond gaming, and claims that the semi-custom design win pipeline remains strong. Embedded & Server Business Also Remain Promising AMD witnessed strong embedded processor revenue growth and secured multiple new design wins across priority markets, in Q3 2014. The company started sampling its first embedded ARM SoC in the quarter. AMD has a broad range of embedded processors for different segments in its portfolio, offering a number of price, performance and power options to meet the needs of embedded designers. The company intends to take on the different segments in the embedded market by offering its customers a range of solutions to chose from —  from low-power to high-performance — with a broad ecosystem of software and hardware partners supporting multiple operating systems, including Windows and Linux. There is a growing need for more advanced embedded solutions in healthcare, finance, education and retail services. We expect new product launches this year to accelerate AMD’s growth in the embedded market. After successfully sampling to major ecosystem partners such as firmware, OS, and tools providers, AMD announced the immediate availability of its Opteron 64-bit ARM based processor, code-named Seattle, in Q3 2014. AMD is the only provider to offer the standard ARM Cortex-A57 technology. AMD claims that the ARM-technology based server processors will be faster and more powerful than its existing low-power x86 server processors. In October 2012, the company had announced its collaboration with ARM Holdings to design server processors using the ARM technology in addition to its x86 processors for multiple markets, starting with cloud and data center servers. The collaboration with ARM makes AMD the only processor provider to bridge the x86 and 64-bit ARM ecosystems. AMD believes that ARM CPUs have the potential to account for 20% of the server market (by volume) by 2016 or 2017. The company continues to build out its 64-bit ARM Server Ecosystem in advance of system launches expected next year. Q4 2014 Outlook - Revenue to decrease 13% sequentially, +/- 3%, due to lower semi-custom revenue and a weak PC environment. - Gross margin to remain flat, at 35%. - Non-GAAP operating expense of approximately $385 million. - Interest expense and other to be approximately $46 million. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    ATVI Logo
    Weekly Notes On Gaming Industry: Activision Blizzard, GameStop & Electronic Arts
  • By , 10/17/14
  • tags: ATVI ERTS GME EA MSFT
  • The gaming industry has started showing signs of revival as software sales gained momentum after the release of new editions of some of the most popular franchises. Top video game developers, such as  Electronic Arts (NASDAQ:EA) and  Activision Blizzard (NASDAQ: ATVI) launched their most awaited title releases of the year. Electronic Arts, the dominant leader in sports genre, released Madden NFL 15 and FIFA 15 in the last two months. On the other hand, the FPS genre leader, Activision Blizzard launched Destiny and Skylanders: Trap Team; and is yet to release its blockbuster title: Call of Duty: Advanced Warfare in November. According to the September NPD report, Destiny, Madden NFL 15 and FIFA 15 topped the charts for the most title units sold in the month of September. In the U.S., gamers spent $1.1 billion on new physical games and consoles, up 2% year-over-year (y-o-y). The new generation consoles continued to maintain its momentum, as the hardware sales were $432.7 million in September, up 136% y-o-y and up nearly 100% compared to hardware sales in August. Although, revenue from software sales was down 36% y-o-y, it was twice the August software sales’ figure. This indicates the increasing consumer’s interest in video games, primarily driven by new AAA title launches. Moreover, in September 2013, the sales were high due to the mega release of Grand Theft Auto (GTA) V. According to the report, if the sales of GTA V are excluded, the software sales increased y-o-y in September 2014. Here’s a quick round up of some companies related to the gaming industry covered by Trefis. GameStop Major video game retail chains, such as GameStop (NYSE:GME) is most likely to benefit from the increasing demand of software titles and consoles. GameStop, with its unique buy-sell-trade model, might witness revenue growth in the coming few months. The company reported triple-digit growth in hardware sales in its latest second quarter report, eventually leading to a 22% increase in comparable store sales year over year. Moreover, September’s top seller Destiny performed better on both the new generation consoles: Microsoft ’s (NASDAQ:MSFT) Xbox One and Sony’s PlayStation 4. GameStop’s stock traded around the $38 mark for the first three days of the week, before rising up to $40 on Thursday.  Our price estimate for the company’s stock is $42.65 (market cap of $4.8 billion), which is 8% above the current market price (market cap of $4.4 billion). For 2014, we expect GameStop to report revenue of around $9.15 billion for 2014 and GAAP diluted EPS of $2.81. The market consensus for EPS for year ending Jan-14 is $3.03 (Reuters). See our complete analysis of GameStop Electronic Arts Electronic Arts (NASDAQ:EA) recently released its two major franchises:  Madden NFL 15 and  FIFA 15. Both the titles, along with The Sims 4 and NHL 15, are among the top 10 games played by the gamers in the U.S. in the month of September. Sony Corporation reported that Madden NFL 15, FIFA 15 and NHL 15 were played more on PlayStation consoles. For the second week, FIFA 15 retained its top 1 spot in the U.K., despite tough competition from 3 new titles. EA’s stock dropped from $34 to $32 during the last week.  Our price estimate for the company’s stock is $36 (market cap of $11.5 billion), which is 12% above the market price (market cap of $10.2 billion). For the year 2015, we expect the company to report revenue of $4.5 billion and non-GAAP diluted EPS of $1.87. The market consensus for EPS is $1.92 (Reuters). See our complete analysis of Electronic Arts stock here Activision Blizzard In the last one month,  Activision Blizzard (NASDAQ: ATVI) released two of its three most awaited titles:  Destiny and  Skylanders: Trap Team . Destiny topped the charts in the month of September, with more units sold for Xbox consoles. Moreover,  Skylanders’ new edition is helping the company generate higher revenues due to add-on accessories required to play this game. Diablo III also managed to grab a position in the top 10 titles chart. However, later this year, the company is yet to release another major title  Call of Duty (COD): Advanced Warfare, which might drive the company’s revenues even further. Activision’s stock traded in the range between $18 and $19 during the last week.  Our price estimate for Activision is $21.64 (market cap of $16.1 billion), which is 14% above the market price. For the year 2014, we expect the company to report revenue of around $4.7 billion and non-GAAP diluted EPS of $1.23. The market consensus of EPS is $1.32. See our complete analysis of Activision’s stock here View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    TSLA Logo
    Weekly Notes: Tesla Shares Down On Low Oil Prices
  • By , 10/17/14
  • tags: TSLA TM GM
  • Although Tesla Motors (NYSE:TSLA) announced a new model late last week, its shares were down by as much as 14% during the week. Previously, Chief Product Architect Elon Musk has said that the biggest threat to the company is not so much other electric car companies as the internal combustion engine(ICE) remaining popular. The question is whether customers are buying Tesla’s cars because they are cheaper to drive than ICE driven cars or because of their luxury appeal. In case of the former, oil prices remaining low would definitely erode Tesla’s advantage. However, attributing the decline in Tesla’s shares entirely to the slump in oil prices would entail making the claim that the slump isn’t temporary, which is most likely not the case. Of course, the market was also down this past week, and that will also have had something to do with the decline in Tesla’s stock price as they are highly valued but, in our view, the majority of the decline can only be explained by investor disappointment in the newly announced Tesla D Model. The new model, which was announced late last week, has better acceleration, better safety features and more self-driving capability than Tesla’s Model S. The car, however, will be available at a price range starting from $89,000 and finishing at $120,000, placing it well out of the reach of the American auto consumer. In order to justify its very high price multiple, the company will have to release a car that is viable as a mass market model, meaning it will have to release a car in the price range of $30,000 to $40,000. Tesla is said to be planning a model in that price range called the Model E, but it won’t be available until 2017. Tesla’s $5 billion gigafactory is perhaps the strongest piece of evidence we have so far testifying to the company’s seriousness about building a mass market car. However, the gigafactory could also be a hedge for the company, ensuring that even if the Tesla brand name doesn’t take off, the company can still cover its costs by selling lithium ion batteries to other alternative car makers and any other consumers of lithium ion batteries. Currently,  our valuation of $150 (market cap of $18.5 billion) for the company is 33% below the current market price of $226 (market cap of $27.9 billion). We expect Tesla to report revenue of around $4 billion and operating income of $700 million for calendar year 2014. We forecast non-GAAP diluted EPS of $0.79, which is lower than the market consensus of $1.01 ( Financial Times ). 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
    BIDU Logo
    Chinese Internet This Week: Baidu's New Moves
  • By , 10/17/14
  • tags: BIDU
  • This Chinese Internet note looks at Baidu’s (NASDAQ: BIDU) new business and technology forays over the past week. Baidu announced the release of a faster and lighter version of its anit-virus. It is also developing an operating system for smart bicycles in the U.S. It released a smartphone to monitor blood pressure. It also bought a controlling stake in a Brazilian group buying firm. We review these developments, which we believe are a part of the continuing effort of Baidu to grow away from its core business of Internet search and online advertising. See our complete analysis of Baidu here New Antivirus Released Baidu released a new version of its Baidu Antivirus 2015, the version 5.0. The company claims 20% faster computer scans, and reduced memory usage while scanning with this antivirus. Furthermore, it claims that the antivirus has a more intuitive interface to make scanning for viruses easier. We have written earlier on how Baidu may have a significant revenue opportunity in its computer fine-tuning program, PC Faster (See Market Potential For PC Faster ). The anitvirus is used alongside PC Faster. Together they represent Baidu’s foray into cyber-security. The international market for cyber-security is forecasted to be worth over $150 billion by 2019. The market for anti-virus is highly fragmented. Microsoft controls 23% of the market, with Avast coming in a distant second at 16%. If Baidu can break into this market and claim a market share of about 10%, its revenue potential in 2019 from this product could be up to $15 billion. Given the rapid growth expected in China of Internet Services, the challenge to such a development is likely to be Baidu’s small footprint in the international arena. Despite its small presence outside China, it has managed to reach the 70 million download mark for its PC Faster software. This makes us hopeful of Baidu’s prospects in this segment. More Hardware Explorations Baidu has been experimenting with hardware development with projects relating to semi-autonomous cars, smart eye-wear and even a pair of smart chopsticks that can gauge the purity of ingredients used in ones food. It is now coming out with a system that will make working out by cycling smarter. Baidu has come out with a software that can add new functionality to smart bikes, which are bicycles with a computer in them. This system will enable users to keep better track of calories burnt and distance traveled. Riders can operate the bike through voice commands. The bike will have measure to safeguard itself against theft, and also will facilitate social networking and recharging of other devices. While we do not have data on the market potential of smart bikes, Baidu’s technology could prove a useful addition to electric bikes. The market for electric bikes is expected to reach $11 billion by 2020. Supplying software for these devices could prove an attractive opportunity for Baidu to gain a part of this revenue. Baidu has also developed a smartphone accessory that will measure blood pressure. It has partnered with another Chinese company, Mumu Health Technology to develop this device. It connects to smartphones via Bluetooth, and shows the heart rate and blood pressure on the phone display. The device is expected to have compatibility with the iOS and Android devices.  In late 2013, the market for blood pressure monitoring was estimated at 6-7 billion dollars with an expected annual growth rate of 7-9%. Its uncertain how much of this market Baidu can hope to corner eventually. The competition is however pretty hot in this segment. Mobile phones manufacturer Xiaomi had also come out with such a device before Baidu. Their’s is however a wired device developed in association with a health technology partner based in Silicon Valley. Baidu Expands Its Group Buying Business To Brazil Brazilian online group buying company Peixi Urbano was bought over by Baidu. Peixi Urbano has more than 20 million customers and 30,000 merchant partners in Brazil. It claimed to have helped customers save $1.24 billion since its inception in 2010. The Brazilian e-commerce sector is expected to grow 18% annually till 2016. It was estimated to have hit a size of $13 billion in 2013. This provides Baidu an opportunity to make up for its late entry into group buying by expanding internationally. Baidu had strengthened its online group buying business in China by buying Noumi, which currently has a 10% market share. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap |  More Trefis Research
    AA Logo
    Alcoa Announces Sale Of Stake In Alumina Refining Joint Venture As Part Of Cost Reduction Efforts
  • By , 10/17/14
  • tags: AA MT X
  • Alcoa (NYSE:AA) has announced the signing of a definitive agreement that will result in the company selling its its ownership stake in the Jamalco bauxite mining and alumina refining joint venture to the Noble Group for $140 million.  The Jamalco joint venture is 55% owned by Alcoa Minerals of Jamaica (AMJ) and 45 percent owned by Clarendon Alumina Production Ltd. AMJ is part of the Alcoa World Alumina and Chemicals (AWAC) joint venture, owned 60% by Alcoa and 40% by Alumina Limited. The move to sell its stake in Jamalco is a part of the company’s efforts to lower the cost base of its upstream alumina and primary aluminum businesses, in order to make them more competitive in an uncertain aluminum pricing environment. The company is giving greater emphasis to its value-added businesses going forward and reducing its dependence on its commodity businesses. See our complete analysis for Alcoa Aluminum Prices Aluminum has diverse applications in industry. It is an important input in the packaging, aerospace, automotive, construction, commercial transportation, power generation, capital goods and consumer durables industries. Thus, demand for aluminum is broadly correlated with industrial growth. The European debt crisis and slowing Chinese growth have contributed to the weakness in aluminum demand, and consequently prices over the last few quarters. On the supply side, production capacity was not reduced corresponding to the subdued demand conditions over the last few quarters. Persistently high aluminum inventory levels relative to demand have kept LME aluminum prices depressed. This inventory was built up partially as a result of aluminum being tied up in financing deals, which were made possible due to low interest rates. Despite inventories being at a record high, market forces failed to rationalize supply through the shutdown of smelting capacity. Though global aluminum majors like Alcoa and Rusal did make significant smelting capacity cuts, the same was not true of Chinese companies. This was primarily due to state intervention in the form of provision of subsidies or renegotiated power contracts to smelters, which serve as a disincentive to cut production. China accounted for around 45% of the world’s aluminum production in 2013, and the expansion in production by Chinese producers more than made up for capacity cuts by global majors.  This oversupply situation kept aluminum prices depressed over the last few quarters. Aluminum prices have rebounded recently. Global smelting capacity cuts in response to low prices have finally taken effect. LME warehouse stocks of aluminum were down around 10% in July, since the start of the year. In view of the global smelting capacity cuts, as per a poll conducted by Reuters in July, the market for aluminum is expected to move from an oversupply of 235,500 tons in 2014 to a deficit of 4,444 tons in 2015. LME aluminum prices averaged roughly $1,800 per ton over the course of the third quarter in 2013. These prices have averaged close to $2,000 per ton in the third quarter this year. However, global smelting capacity restarts in response to higher aluminum prices are expected to lower or eliminate the extent of the deficit next year. In addition, the trajectory of Chinese economic growth will influence aluminum prices to a large extent. With slowing Chinese growth, there is unlikely to be any significant upside to aluminum prices. A significant proportion of Alcoa’s alumina pricing contracts are based on LME aluminum prices. Thus, the uncertainty in aluminum prices affects Alcoa’s Alumina business segment as well. In view of the uncertainty regarding aluminum prices, Aloca has sought to reduce its dependence on its commodity businesses. Closure of High-Cost Upstream Capacity Alcoa’s stake in Jamalco accounted for around 4.6% of Alcoa’s consolidated alumina refining capacity of 18.1 million tons per year. The company had announced the closure of the Portovesme smelter earlier on in the year, which reduced Alcoa’s base smelting capacity by 150,000 tons to 3.6 million tons per year. The company has shut down high-cost smelters in response to an uncertain aluminum pricing environment over the past few years. The company’s base smelting capacity stood at 4.23 million tons per year at end of 2012. The company has stated that its intends to further lower its average cost of producing both aluminum and alumina in the years to come. In tandem with its cost reduction initiatives for its commodity businesses, the company has laid emphasis on its value-added businesses, driven by the aerospace segment. Alcoa’s shift towards value-added products is reflected in its revenue figures. The percentage contribution of value-added products to the company’s total revenues has steadily increased. This figure stood at 52.1%, 54.4%, 55.7% and 57.1% in 2011, 2012, 2013 and the first nine months of 2014, respectively.  In calculating these figures, we have only considered third-party sales. Value-added businesses will drive Alcoa’s results in the near future, with cost reduction expected to keep its commodity businesses competitive. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    TZOO Logo
    Travelzoo's Weak Performance Continues in Q3 2014, as Expected
  • By , 10/17/14
  • tags: TZOO TRIP PCLN EXPE
  • As anticipated by the company, Travelzoo’s (NASDAQ:TZOO) top line continued to decline in Q3 2014. The global internet media player’s revenue fell by 10% year on year to $33.5 million, mainly due to the weak performing Search and Local Deals division. The Search revenue for Q3 2014 was $4.4 million, which declined by 27% year on year. Travelzoo has been performing poorly in this segment since 2012, experiencing 11% decline in FY 2013. Taking into consideration the previous failed attempts to generate profitability, Travelzoo has started reducing marketing expense in this segment. However, Search does help in customer base expansion and gives an idea about the kind of deals users are searching for—hence, it is a necessary evil for the company. The revenue for Local Deals stood at $6.5 million, which translates into a 19% year-on-year decline, one that was driven by a change in focus from selling voucher formats of pre-existing deals to offering more deals based on user demand. Travelzoo has started repositioning itself in this segment by increasing the flexibility of its products. Earlier, customers were forced to choose from a pre-existing set of deals offered at specific dates. This push-based strategy wasn’t reaping profits for the company, as there was a demand supply mismatch. As a result, there was a 3% year-on-year decline in FY 2013. In the last two quarters, the company  experienced losses due to this segment. The company is molding its local deals to better align with changing consumer needs, by offering user demand-based deals versus forcing them to choose from whatever is available. Towards this end, it is increasing the number of live deals on its platform and is also trying to find an alternative to the rigid voucher format of booking. Consequently in Q3, the year-to-year number of “pull” or demand based purchases has risen as a percentage of sales. At present, the lower demand for push-based deals will mask this growth rate, though future performance can improve  as pull-based deals become predominant. Our price estimate of $21.39 for Travelzoo is at a significant premium to the current market price. We are in the process of updating our valuation for the company. See our full analysis of Travelzoo Currently, Travelzoo is in a transition phase with new product developments and strategy changes. The company is developing its new hotel booking website, repositioning itself from a discount offer dealer to selling packages based on client needs.  In so doing, it is building its user base through mobile applications and social media, as well  as reducing its focus while still maintaining the Search segment. Expenses On Building Hotel Platform And Increasing Subscriber Base Impacts Short Term Profitability Travelzoo’s major strategic initiative has been its hotel booking platform. This is a primary contributor to its Travel Segment, which accounts for two thirds of its revenue.  Travelzoo’s hotel booking platform aims to simplify the booking experience by allowing bookings through multiple mediums and by offering a greater number deals to suit the user’s chosen dates. The content is still being built which requires additional expense. The hotel booking website, introduced to a subset of subscribers, has increased the customer service cost. Also, the company spent $1.8 million in Q3 2014 to expand its subscriber base, which hit its operating margin adversely. The subscriber base had a year-on-year growth of 4% in FY Q3 2014. Travelzoo has charted a road map for long term profitability and it seems it is ready to take a hit in the short term performance to reach that stage gradually. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    DOW Logo
    Dow Crosses All Federal Regulatory Barriers To The Commercialization Of Enlist
  • By , 10/17/14
  • tags: DOW DD MON
  • The Dow Chemical Company (NYSE:DOW) recently announced that the U.S. Environmental Protection Agency (EPA) has granted a final approval to its Enlist Duo herbicide. The approval came under a month after the company received a final approval from the U.S. Department of Agriculture (USDA) to commercialize its ‘Enlist’ labeled corn and soybean seeds. These seeds are a part of the new Enlist weed control system developed by Dow. They are genetically modified to tolerate the application of more effective herbicides, such as Enlist Duo, as weeds in the U.S. are growing increasingly resistant to the glyphosate-based herbicides most commonly used today. This herbicide contains 2,4-D that adds another mode of action to the glyphosate-based herbicides. The technology aims at providing higher crop yields through better protection against tougher weeds that are growing resistant to glyphosate. With the EPA’s approval of Enlist Duo, Dow has successfully crossed all federal regulatory barriers to the commercialization of its Enlist weed control system. The company expects to launch the new corn and soybean seed varieties in the U.S. next year, after a delay of almost two years. We believe that the commercialization of the Enlist weed control system could boost Dow’s market share in the robust agricultural products market significantly. (See: The Enlist Weed Control System Holds Huge Growth Potential For Dow ) Dow is a diversified chemical industry giant operating in 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 approximately $57 billion and earning adjusted net income of around $2.9 billion. We currently have a  $53/share price estimate for Dow, which is 18.9x our 2014 full-year adjusted diluted EPS estimate of $2.80 for the company. See Our Complete Analysis For Dow View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    MT Logo
    The Prevailing Demand, Pricing Environment And Future Outlook For Metals
  • By , 10/17/14
  • tags: MT SLW ABX
  • This year has been characterized by extreme volatility in the prices of both precious metals as well as metals used in industry. Broadly, metals have been characterized by subdued pricing environments this year and this has been reflected in the stock prices of companies in the metals and mining space. In this article we will take a closer look at the reasons for the prevailing demand and pricing environments for various metals, as well as the outlook for demand and pricing going forward. Steel 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. Over the course of last year or so, steel prices have recovered somewhat, driven by an economic recovery in the developed economies, particularly in the manufacturing sector. The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. This indicates strong manufacturing activity in the U.S. This was reflected in the half-yearly results of ArcelorMittal, the world’s largest steel producer. Average realized steel prices in the North American Free Trade Agreement (NAFTA) region rose 1% year-over-year in the first half of 2014 to $848 per ton, from $838 per ton in the first of 2013. Going forward, steel demand in the NAFTA region, which consists of the U.S., Canada and Mexico, is expected to grow by 3.8% and 3.4% in 2014 and 2015, respectively. Thus, steel pricing in the U.S. and the broader NAFTA region is expected to remain strong. The Manufacturing PMI for the Eurozone has faltered somewhat lately, indicating slowing manufacturing activity. The Manufacturing PMI for the Eurozone, which stood at 54 for January 2014, has declined to 50.3 for September. Sluggish manufacturing activity in the Eurozone was reflected in ArcelorMittal’s half-yearly results. Average realized steel prices in Europe fell around 1% year-over-year in the first half of 2014 to $804 per ton, from $813 per ton in the first of 2013. With faltering economic growth and manufacturing activity, as indicated by the manufacturing PMI figures, steel pricing is expected to remain weak in Europe. Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. A slowdown in economic growth has tempered the demand for steel. China’s GDP growth is expected to slow to 7.3% and 7.1% in 2014 and 2015 respectively, from 7.7% in 2013. Further, a Chinese government crackdown on polluting steel plants has forced many of them to shut down. In addition, tightening of credit by Chinese banks to steel mills that are not performing well, will negatively impact these mills’ prospects. Furthermore, the Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for steel in the long term. Chinese Manufacturing PMI, reported by China’s National Bureau of Statistics, stood at 51.1 for September, and has ranged between 50.2 and 51.7 for the whole year. With weak Chinese manufacturing growth, demand for steel is expected to remain subdued in China. Iron Ore and Metallurgical Coal Both iron ore and metallurgical coal are major inputs in steel making and the demand for these commodities is to a large extent correlated with the demand for steel. International iron ore prices are largely determined by Chinese demand since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. Weak Chinese demand for steel has translated into weak demand for iron ore as well. On the supply side for iron ore, expansion in production by majors such as Rio Tinto and BHP Billiton despite weak Chinese demand, has created an oversupply situation. A combination of weak demand and oversupply is likely to result in lower iron ore prices in the near term. Iron ore prices stood at $82.38 per dry metric ton (dmt) at the end of September, around 38% lower than at the corresponding point of time last year. As per Goldman Sachs, the worldwide surplus of seaborne iron ore supply will rise to 175 million tons in 2015, from an expected 72 million tons for 2014 and 14 million tons for 2013. In view of the persisting oversupply situation, iron ore prices will remain subdued in the near term. China is also the largest consumer of metallurgical coal in the world. Demand for the commodity by the Chinese steelmaking industry has been weak, adding to subdued demand from other major consumers such as Japan and the EU. Weak demand coupled with an oversupply situation due to expansion in production by major mining companies, has resulted in plummeting coal prices. The benchmark Australian metallurgical coal price stands at around $119 per ton, around a third of its 2011 peak level of $330 per ton. In view of the oversupply situation, metallurgical coal pricing is expected to remain subdued. Copper Copper prices fell to their five-month lows recently due to concerns over weakness in Chinese demand for copper. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand of copper.  Copper has diverse applications in industry, particularly in the manufacturing, power and infrastructure sectors. The HSBC China Manufacturing Purchasing Managers’ Index (PMI) reported a value of 50.2 in September, lower than previously expected. LME spot copper prices stood at levels of around $6,700 per ton at the end of September. These are sharply lower as compared to levels of around $7,200 per ton at the end of September last year. With concerns about Chinese economic growth persisting, copper prices are expected to remain weak in the near term. The trajectory that these prices take in the years to come will to a large extent be determined by Chinese demand for the commodity. Aluminum Aluminum has diverse applications in industry. It is an important input in the packaging, aerospace, automotive, construction, commercial transportation, power generation, capital goods and consumer durables industries. Thus, demand for aluminum is broadly correlated with industrial growth. The European debt crisis and slowing Chinese growth have contributed to the weakness in aluminum demand, and consequently prices over the last few quarters. On the supply side, production capacity was not reduced corresponding to the subdued demand conditions over the last few quarters. Persistently high aluminum inventory levels relative to demand have kept LME aluminum prices depressed. This inventory was built up partially as a result of aluminum being tied up in financing deals, which were made possible due to low interest rates. Despite inventories being at a record high, market forces failed to rationalize supply through the shutdown of smelting capacity. Though global aluminum majors like Alcoa and Rusal did make significant smelting capacity cuts, the same was not true of Chinese companies. This was primarily due to state intervention in the form of provision of subsidies or renegotiated power contracts to smelters, which serve as a disincentive to cut production. China accounted for around 45% of the world’s aluminum production in 2013, and the expansion in production by Chinese producers more than made up for capacity cuts by global majors.  This oversupply situation kept aluminum prices depressed over the last few quarters. However, aluminum prices have rebounded recently. Global smelting capacity cuts in response to low prices have finally taken effect. LME warehouse stocks of aluminum were down around 10% in July, since the start of the year. In view of the global smelting capacity cuts, as per a poll conducted by Reuters in July, the market for aluminum is expected to move from an oversupply of 235,500 tons in 2014 to a deficit of 4,444 tons in 2015. LME aluminum prices averaged roughly $1,800 per ton over the course of the third quarter in 2013. These prices have averaged close to $2,000 per ton in the third quarter this year. However, global smelting capacity restarts in response to higher aluminum prices are expected to lower or eliminate the extent of the deficit next year. In addition, the trajectory of Chinese economic growth will influence aluminum prices to a large extent. With slowing Chinese growth, there is unlikely to be any significant upside to aluminum prices. Gold and Silver Gold and silver are often viewed as an inflation hedge and safe haven investment by investors. Thus, the prices of these metals are to a large extent influenced by a set of related factors including the macroeconomic outlook for the U.S. and world economies, the performance of alternative assets such as equities and the U.S. Dollar, the trajectory of interest rates and geopolitical uncertainty. A strengthening U.S. economy has fueled expectations of an interest rate hike. This was responsible for the decline in gold and silver prices last month. London PM Fix gold prices fell nearly 8% in the first week of October, from levels of close to $1,290 per ounce at the beginning of September, before recovering to levels of around $1,240 per ounce by the middle of October. The recovery in prices was primarily due to demand for gold as a safe haven asset in the backdrop of global economic weakness and indications by the Fed that weaker foreign economic growth posed a risk to U.S. economic growth. This dissipated fears of a sooner than expected interest rate hike. Unless there is extended global economic weakness, the consensus is that the Fed will raise interest rate some time in 2015, though 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 lead to a decline in the prices of gold and silver, as investors shift towards higher yielding assets. Thus, the prices of these precious metals will be influenced to a large extent by the unfolding macroeconomic situation both in the U.S. and internationally.  View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    NFLX Logo
    Netflix Sinks On Subscriber Growth Decline, Is The Market Saturating?
  • By , 10/17/14
  • tags: NFLX CMCSA AMZN
  • Netflix’s (NASDAQ:NFLX) shares fell significantly following the company’s Q3 2014 earnings announcement. Even though the revenues were more or less in-line with the expectations, domestic streaming subscriber additions fell significantly short of the company’s guidance. The massive sell-off was not surprising, considering that Netfix’s stock has traded mostly on its subscriber growth. It is important to assess whether the market is saturating for the company domestically. We estimate that despite the strong international growth potential, the U.S. still accounts for roughly 65% of Netflix’s value. Based on our analysis, we find some evidence of subscriber growth moderating and we believe that incremental customer additions will become difficult for Netflix. However, the results from the next two quarters will make the situation more clear. We believe that the stock may continue to feel the effect of subscriber miss in the coming months. Our price estimate for Netflix stands at $300, implying a discount of about 15% to the market.
    DB Logo
    Financials Weekly Notes: Wells Fargo, Goldman Sachs and Deutsche Bank
  • By , 10/17/14
  • tags: DB GS WFC JPM COF
  • Over the last few weeks, a string of worse-than-expected economic indicators across the globe have battered investor sentiment by raising doubts about the pace of economic growth among key developed and developing nations. Reacting to these signs as well as reports highlighting an impending correction in the equity market, investors have dumped shares frantically since late September – with this trend being quite pronounced over this week. Having reached an all-time high of 2,019 less than a month ago, the S&P 500 index fell to an intra-day low of 1,820 on Wednesday, October 15, before investors cautiously bought into the dip to lead the equity market slightly higher. Bank shares have fared worse than the market at large over the week, with the KBW Bank index tanking around 3.5% through Thursday. Most of this decline came on Wednesday, when the Commerce Department reported that retail sales in September fell 0.3% and the Federal Reserve Bank of New York reported that the monthly manufacturing index shrunk 6.2%. The slowing economic indicators dashed investor hopes of an early revival of benchmark interest rates by the Fed, and as banks were expected to gain the most from an improved interest rate environment, this conclusion triggered a sell-off in bank shares.
    LXK Logo
    Lexmark Earnings preview: Focus On Laser Printer And MPS Business
  • By , 10/17/14
  • tags: LXK HPQ
  • Lexmark International (NYSE:LXK) is set to release its Q3 2014 results on October 21. Lexmark’s revenues continue to decline as it transitions from low margin hardware centric ink jet printer business to high margin services business. However, recent results indicate that the decline in Lexmark’s revenues is slowing. Nevertheless, operating income and net income are growing, reflecting a shift in focus from low margin business to high margin software services. We expect the company to report similar trend in its Q3 earnings announcement. However, 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 2014 For Q3 FY14, the company expects revenues to decline by 2% year over year and non-GAAP earnings per share to be in the $0.85 to $0.95 range. Lexmark has revised its revenue guidance for FY 2014 upwards and expects revenue to decline at a slower rate, specifically by 2% or less. Non-GAAP EPS guidance has also been revised upwards to $3.95 to $4.15 range. The consensus estimates for fourth-w=quarter and full-year revenues are $890 million and $3.65 billion, respectively. Laser And MPS Revenues to Boost Supplies Revenues Laser printer and cartridge division is its biggest business unit and makes up for over 77% 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.   This is impacting both laser printers and inkjet printers, which the company no longer produces. We expect Lexmark to gain grounds in the laser market in Q3, and buck the downtrend in Hardcopy Peripherals Market, which declined by 2.3% year over year in Q2. 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 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 10.8% 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 53% in the Enterprise Content Management (ECM) business in 2013, and reported $239 million in revenues for FY13. 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 Q3, and in 2014. We also expect that the growth in Perceptive’s licensing revenue will contribute to the bottom line in Q3 as it is a high margin business. In this earnings call, we will continue to closely follow the deal pipeline for Perceptive software business. We currently have a  $44.77 Trefis price estimate for Lexmark, which is 12% above 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      
    PBR Logo
    Petrobras' First Nine Months Production From Brazil Up 4.2% Over Last Year
  • By , 10/17/14
  • tags: PBR XOM CVX BP
  • Petroleo Brasileiro Petrobras (NYSE:PBR) recently announced its September 2014 hydrocarbon production figures. The company’s total oil and gas production from Brazil increased to 2,565 thousand barrels of oil equivalent per day (MBOED), up more than 8.5% over last year. Its domestic crude oil production grew by 7% from 1,979 thousand barrels per day (MBD) last year to 2,117.6 MBD this year. The month-on-month growth in crude oil production from Brazil stood at 0.6%. Most of the increase in hydrocarbon production primarily came from the ramp up of P-55 and P-62 platforms at the Roncador field located in the offshore Campos Basin that holds more than two-thirds of the company’s total proved hydrocarbon reserves in Brazil. 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 oil production in Brazil was 1,931.4 thousand barrels per day (MBD), an estimated 90.9% of Brazil’s total oil production. We currently have a  $21/share price estimate for Petrobras, which values it at almost 10x our 2014 diluted EPS estimate of $2.1 for the company. See Our Complete Analysis For Petroleo Brasileiro Petrobras Upstream Production On The Rise Petrobras’ upstream production is expected to grow significantly in the coming years as it continues to develop its pre-salt reserves. 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. The total depth of these rocks can be as much as 7,000 meters from the surface of the sea. Between 2014 and 2018, Petrobras plans to invest $153.9 billion in the exploration and production of hydrocarbons in Brazil. It plans to invest a lion’s share of this amount ($112.5 billion or 73%) in the development of existing proved reserves, with more than 64% of that going into the development of pre-salt reserves. Currently, production from pre-salt reserves accounts for just around 22% of Petrobras’ total oil production, but the company plans to increase this figure to 53% by 2020. During the first 9 months of this year, Petrobras’ crude oil production from Brazil has grown by almost 3.8% y-o-y, primarily driven by the development of its hydrocarbon reserves in the Campos and Santos basins, located off the country’s southeast coast. The company recently announced that oil production from fields operated by it in the pre-salt areas of Campos and Santos Basins, which averaged just 302 MBD last year, hit a record level of 618 MBD on September 18. Petrobras plans to grow its average daily crude oil and natural gas liquids production by 6.5-8.5% y-o-y this year. However, given the progress made so far, we believe the target to be very ambitious and have factored in a 4% y-o-y increase in its total upstream production for the full year. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    RENN Logo
    Factors Driving Our $3.67 Price Estimate Of Renren
  • By , 10/17/14
  • tags: RENN
  • Renren Inc (NYSE:RENN) operates a social networking site, a professional networking site and an online gaming platform. Besides this, the company also operates a video sharing site. The advertising and online games businesses are heavily dependent upon the popularity of the social network among users.. In this article we take a look at other factors driving our valuation of Renren. See our complete analysis of Renren here Renren’s revenues have grown from $112 million in 2011 to $157 million in 2013. However, the company’s operating margins have declined during the same period from 8% to -50%, mainly on account of investments in R&D (related to mobile strategy), and sales expenses. Loss from operations reduced in Q2 2014 to ~$26 million (~60% of revenues) from ~$29 million (~116%  of revenues) in Q1. This was mostly on account of increased revenues, a trend expected not to continue into the rest of the year. Moreover, the sales expenses and R&D expenses have also increased fron Q1 to Q2 by 71% and 29% respectively, further adding to concerns about widening losses. After a dismal performance in the first quarter of 2014 with revenues of only ~$25 million, Renren managed a strong comeback in Q2 2014 with ~$45.3 million in quarterly revenues. The guidance given by the company for Q3 2014 revenue is between 19 and 21 million dollars, while analyst’s estimates on Bloomberg Businessweek averages out at ~$20 million. Similar estimates for revenues for the year 2014 stand at $91 million, down 42% from 2013. Going ahead, we expect EBITDA margins to be pressurized in the near term as the company continues to spend on R&D and sales related expenses. In our view, margins will turn positive in the long term as the company’s user base expands with rising popularity of its games and social networking site. We have a  $3.67 price estimate for Renren’s stock, slightly above its current market price. Our model for Renren breaks down the value of its stock into three segments plus a cash component. What Are The Key Drivers For Renren’s Business Segments? 1. Online Advertising: Renren’s online advertising business generates about 30% of total company revenues. These revenues are heavily dependent on the reach of the company’s social networking site. Active user base has more than doubled since 2009 and stood at 206 million users in 2013. This rapid growth can be attributed to the increasing penetration of real name social networks and the absence of Facebook in China. Since 2011, Renren’s user base has increased by about 19% annually while the monthly unique logins has grown only by 9%. Slower growth in monthly unique logins suggests low frequency of usage of the service by users. We forecast the user base to continue growing, albeit at a slower pace. This is due to increasing competition from other social networking sites, on account of which the company’s online advertising revenue decreased 23.9% in Q2 2014 versus Q2 2013 (See  Our Q2 Earnings Release Analysis of Renren ). We estimate that Renren’s user base will cross 260 million by 2020. While Renren’s user base has grown every year, its revenue earned per user has witnessed heavy declines in the last couple of years. This is owing to reduced spending by advertisers amid a slowing Chinese economy. We estimate revenue per user to fall this year as well owing to low monetization on the mobile platform. Mobile traffic, which the company began monetizing in the final quarter of 2013, accounts for over 80%of the company’s traffic. However, it contributes merely 11% to its advertising revenues. We expect the revenue per user to grow from next year onwards as the company strives to enhance its monetization on mobile devices. 2. Renren Games: Revenues of China’s gaming industry more than quadrupled from $3 billion in 2008 to $13 billion in 2013. Due to rising Internet penetration in the country, the market is estimated to attain a worth of $21.7 billion by the end of 2017. Online games account for more than 90% of the Chinese gaming market and dominate the video gaming industry. This phenomenon is helped by the fact that video consoles (such as XBox and Playstation) have been banned in the country since 2000. The Chinese government partially lifted the ban earlier this year. Online games generate about half of Renren’s revenues. The company has witnessed sharp growth in online gaming revenues driven by the success of Massively Multi-player Online Role Playing Games (MMORPG’s). Gaming revenues increased from $42 million in 2011 to $89 million in 2012, but declined to $85 million in 2013. In Q2 2014, delays in launching successful new titles lowered gaming revenue by a staggering 56.6% annually. The decline was due to a delay in the game pipeline and restructuring activities. We expect the growth to significantly decelerate in the second half of 2014 since the company intends to release only a few games this year. Thereafter, we forecast growth to pick up as the company launches new games and leverages its games across multiple platforms, including mobile. 3. Internet Value-Added Services: The division makes money from a virtual talent show on their video sharing website, VIP memberships, virtual gifts and other paid applications. Revenue from these sources approximately doubled from $10 million in 2011 to $21 million in 2013. We expect the growth momentum to continue in the near future and then slow over the forecast period. In our view, revenues will increase with growing popularity of the websites. Growth will also be aided by the company forging more partnerships with third-party developers. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap |  More Trefis Research
    KMP Logo
    Earnings Review: Strong Results From The Tennessee Gas Pipelines Business Drives KMP's Growth
  • By , 10/17/14
  • tags: KMP
  • Kinder Morgan Energy Partners (NYSE:KMP), one of North America’s largest midstream energy companies, reported its Q3 2014 results on October 15. The company’s earnings were driven by increased throughput from the Tennessee Gas Pipelines(TGP) on the back of ongoing growth in the Marcellus and Utica shale plays, increased oil and Natural Gas Liquids(NGL) production at Scurry Area Canyon Reef Operators Committee(SACROC) and strong results in its terminals business. While quarterly revenues grew by around 16% year-over-year to around $3.93 billion, operating income  rose by around 33% to $1,161 million. The net income attributable to KMP is up 40% over the past year’s third quarter, largely the effect of exceptional items, the most significant of which is the $230 million gain the company recorded from the early termination of a long term natural gas transportation contract. As a result, the company has increased its quarterly cash distribution by 4% to $1.40 for the quarter from $1.35 in the previous year. In this note, we take a look at some of the key factors that drove the performance of the natural gas pipeline business, which accounts for over half of the company’s revenues. See Our Complete Analysis For Kinder Morgan Energy Partners Trefis has a $82 price estimate for KMP, which is about 10% below the current market price. We are in the process of revising our model to reflect the latest earnings report. Natural Gas Pipelines Transportation Volumes Growth: KMP’s natural gas pipelines division saw its earnings before depreciation, depletion, amortization and certain items rise by around 9% year-over-year, to about $661 million. The earnings growth was primarily driven by the increased demand for natural gas transportation. Overall natural gas transport volumes through Q3 rose by around 9% year-over-year to around 17,562 Bbtu per day. This growth mirrors the disconnect between higher natural gas demand in the Gulf Coast and where most of the supply is being developed(Marcellus, Utica), which shows that there are tremendous growth opportunities for KMP going forward. Tennessee Gas Pipeline System: KMP’s Tennessee Gas Pipeline system operates multiple-line natural gas pipelines, which extend from the natural gas producing regions of Louisiana, the Gulf of Mexico, South Texas to the North Eastern United States. The pipeline also has access to the Marcellus and Utica shale plays. During Q3, the system saw its volumes rise on the back of higher volumes from the Marcellus and Utica Shale plays as well as the effect of several expansion projects that began service late last year and early this year. While the pipeline has largely been northbound, Kinder Morgan has been undertaking some reversal projects for the pipeline, to add more south bound capacity to move gas from the Marcellus and Utica shales to the Southeast and the Gulf Coast. In the previous quarter(Q2), the company added new long-term contracts, with an average life of about 15 years to transport about 1.4 Bcf a day on the Tennessee system. Growth Opportunities In Mexico: The El Paso Natural Gas (EPNG) system in which KMP owns a 50% stake, saw volumes rise through Q3 aided by higher gas export volumes to Mexico, growing shale production and higher LNG exports. The company had been loading a southbound line, which was previously underutilized, with gas to export to Mexico. The rise in U.S. natural gas exports to Mexico could provide a significant growth opportunity for KMP. Over the last five years, pipeline based natural gas exports from the United States to Mexico have risen by around 80%. This has been largely due to strong demand (brought about by the fact that Mexican gas prices are pegged to U.S. Henry hub prices plus transportation costs), weak domestic production and high costs of LNG imports to the country. Increasing Growth Project Backlogs : According to consulting firm Wood Mackenzie, natural gas demand in the United States will rise from around 71.5 billion cubic feet (bcf) per day in 2014 to around 94.5 bcf a day by 2024.  KMP could see its transportation volumes rise in tandem or possibly even faster than the national average, since it has exposure to key shale basins as well as the Mexican market. Over the quarter, the company added growth projects worth about $900 million worth to its backlog for the natural gas pipelines division, which is an increase of about $2.7 billion since its Q4 earnings release, and does not include the $1.1 billion worth of projects that became operational during the quarter and hence were removed from the backlog. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    CMG Logo
    Chipotle's Earning Preview: Increasing Customer Count & New Store Openings To Drive Sales
  • By , 10/17/14
  • tags: CMG MCD BKW SBUX DNKN
  • Chipotle Mexican Grill (NYSE:CMG) is scheduled to release its third fiscal quarter earnings report on October 2o, 2014. In the last couple of years, the Mexican cuisine specialist has had a tremendous run, due to increasing customer traffic in the fast-casual segment. As a result, the company has been witnessing strong comparable store sales growth and accelerating revenue growth. In a short span, the restaurant chain has managed to outpace all other fast-casual restaurants and has grabbed people’s attention. Chipotle’s stock rose by nearly 47% over the last 12 months. In the second quarter, Chipotle delivered excellent results, sustaining the momentum it has gained over the last one year. The company’s revenue for Q2 rose to $1.05 billion, up 28.6% year-over-year, primarily driven by an increase of 17.3% in the comparable store sales. Increased customer count and higher industry-wide average spend per visit are the major factors driving the company’s top-line growth. We have a $632 price estimate for Chipotle, which is about 2% lower than the current market price. See Our Complete Analysis For Chipotle Mexican Grill Increased Commodity Costs Might Not Hamper Chipotle’s Growth Food inflation has been threatening the restaurant industry for the last 9 months. Rising commodity costs and escalating prices of beef & other meat products have forced quick service restaurants (QSRs) such as McDonald’s (NYSE: MCD), Yum! Brands, Subway and  Burger King (NYSE: BKW) to raise their menu prices. According to USDA (United States Department of Agriculture), the production of beef declined 6% year-over-year in the 8-month period from January to August in 2014, whereas the red meat production dropped 4% in the same period. Moreover, the agency expects the production of beef and other meat products to fall further in the next year. As a result, the prices of meat products are expected to rise further, due to prevailing drought and mad cow disease. The Agriculture Department forecasts prices of pork and beef to rise by 6.5% to 7.5% in 2014, whereas the poultry, fish and meat category as a whole is expected to rise by 4%to 5%.. As a result, the customers were aware of the food inflation and were ready to pay extra dollars at restaurants, rather than buying expensive food and preparing it at home. Consequently, most of the top restaurant chains increased their menu prices of their most affected items. Chipotle widened the price gap between its steak burritos and chicken burritos in early May. The price of an $8 burrito increased by 4%-6%, or 32-48 cents. Many feared that the price hike would affect the company’s customer traffic, but it had minimal impact on them. In fact, people are willing to pay 4-5% extra for hygienic and better quality food because of prevailing health concerns. The average check at Chipotle is among the highest in the industry with average spend per visit of $11.6 in 2013. Trefis estimates the figure to further rise by 3% year-over-year by the end of 2014. Innovative Menu Items and Healthier Dining Preferences Might Further Increase Customer Traffic According to the recent NPD ’s foodservice market research, the restaurant industry has been negatively impacted by the changing dining habits in the U.S., primarily driven by changing economic and cultural conditions. The customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. Source: NPD group However, the segment to benefit the most in this scenario is the fast-casual segment with its affordable prices coupled with healthy organic food freshly prepared in an up-scaled and inviting ambiance. People in the U.S. are gradually changing their dining preferences and drifting towards organic food items. Moreover, Chipotle offers some unique, innovative and delicious food items, which have grabbed people’s attention off-lately. (See  Impact Of Changing Dining Preferences In The U.S. On Chipotle Mexican Grill ) The above mentioned factors might boost the company’s revenues, which might rise by 28% year-over-year to cross $1 billion in this quarter too. Expansion In Key Markets To Remain The Major Focus For Chipotle For the last 3 years, growth from new store openings has proved to be a significant driver in the company’s sustained top-line growth. In the second quarter, Chipotle added 45 new restaurants in the second quarter, bringing the total restaurant count to 1,681. Chipotle ended the Q2 with $1.1 billion in cash and cash equivalents and mentioned that it will use most of the cash to invest in well performing and high returning restaurants. Considering the company’s guidance of 180-195 net new restaurants in 2014, we might expect nearly 50 net new restaurants in the third quarter. Although most of the company’s restaurants are located in the U.S., there’s still a lot of scope for domestic expansion. Chipotle expects around 70% of the restaurants to be in established markets, 15% in the developing areas and the rest 15% in the new untested U.S. markets. The company raised its guidance for third-quarter comparable store sales, mentioned in its second quarter earnings call transcript. In conclusion, the company might deliver another impressive quarterly result. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    Find us on Facebook

    — REQUEST COVERAGE —

    Every month, Trefis analysts create a model for the most requested company. Cast your vote today!

    Submit

    You can also view our Full Coverage List.

    — TODAY'S TREFIS QUIZ —

    What percent of Google's stock value comes from YouTube?
    1. 3%
    2. 8%
    3. 10%
    4. 14%

    — GET TREFIS UPDATES —

    MIT ENGINEERS & WALL STREET ANALYSTS GOT TOGETHER TO CREATE TREFIS

    – AS FEATURED IN –

    "Aims right at individual investors,
    giving them sophisticated models"

    "an easy tool for understanding what
    makes a company tick"

    "change the underlying assumptions by
    simply dragging lines on charts"

    "a very cool, very intelligently
    designed financial analytics tool"

    FOR INVESTORS
    FOR EXPERTS
    FOR COMPANIES

    Rigorous & Quantitative

    Led by MIT engineers and former Wall Street professionals, the Trefis team builds a model for each company's stock price.

    Fun & Easy-to-Understand

    In a single snapshot we show you the relative importance of products that comprise a company's stock price.

    Play with Assumptions

    You can personalize any forecast using your local knowledge or expertise to build conviction in your own stock price estimate.

    Consult with Experts

    You can ask questions and vet your opinions on specific forecasts with experts and friends.

    Interact with other experts

    Stay abreast with opinions and predictions from peers.

    Predict Trends

    Share your own opinions, identify and predict trends.

    Monetize Your Expertise (coming soon!)

    Get paid for sharing your opinion.

    Attract the best investors, employees, and business partners.

    Want Trefis to provide coverage of your company? Contact us at admin@trefis.com with email subject - "Interest in coverage"

    – SIGN UP FOR FREE –
    Sign Up for Trefis for FREE

    Get free access to core companies and features.

    Sign Up for Trefis Pro!

    Get access to additional companies and features.

    Already a Member?

    Log in to your Trefis account.

    DISCLAIMER

    By using the Site, you agree to be bound by our Terms of Use. Financial market data powered by Quotemedia.com. Consensus EPS estimates are from QuoteMedia and are updated every weekday. All rights reserved.

    Terms of Use

    NYSE/AMEX data delayed 20 minutes. NASDAQ and other data delayed 15 minutes unless indicated.