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


SanDisk recently announced its iXpand flash drives to transfer data to and from iPhones and iPads as well as laptops and PCs using the lightning connector. In two recent articles, we take a look at the addressable market for iXpand flash drives is, how much SanDisk can expect from iXpand sales and how it will impact the company's removable storage division as a whole.

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Sprint continues to struggle in terms of its postpaid subscriber performance, with the carrier posting an especially high churn rate in the last quarter. However, management mentioned that the company's low-cost promotions began seeing traction at the end of the quarter. We expect the company's market share to moderate going forward, and eventually increase as its network upgrades are completed.

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Here's Why Micron Will Benefit From Higher Mobile Shipments
  • By , 11/26/14
  • In 2012, macro weakness, the demand-supply imbalance, intense competition and declining selling prices lowered  Micron Technology’s (NASDAQ:MU) top line growth and impacted its profitability. However, increasing consolidation in the industry, rising demand from non-PC markets, increasingly diversified end markets, and improving memory product prices, returned the company to profitability in fiscal 2013. For fiscal year 2014 (ended August), Micron reported record revenue of $16.4 billion, record net income of over $3 billion and record free cash flow of $2.6 billion. ( Read Our Earnings Article ) The company’s stock price has increased from around $6 two years ago to $35 at present. With a large and diverse memory product portfolio across a number of end-market segments, and the second largest installed manufacturing capacity, Micron is in a strong position to benefit from the improving industry dynamics, in our view. The company intends to be measured and prudent in its capital spending in the future. Beyond ongoing advanced component and technology development, its main operational focus areas for fiscal 2015 are: technology deployment, optimizing manufacturing capacity and focusing on growing the memory systems and subsystem solutions. The rapid expansion of smartphones and tablets is one of the primary factor that has fueled growth in the memory market in the last few years. Micron develops different types of DRAM, including mobile DRAM products, that are specialty DRAM memory devices designed for applications demanding minimal power consumption, such as smartphones and tablets. Additionally, the company also manufactures NAND flash products, which with fast read-write times, high density and low cost per bit, are ideal for mass storage devices, such as mobile phones, solid-state drives, tablets, and computers. Being one of the biggest players in the DRAM and NAND markets places Micron at a distinct advantage in the mobile segment in the long-run. Our price estimate of $32.40 for Micron is just slightly below the current market price.
    ABX Logo
    A Look At Barrick Gold's Strategy For Adapting To The Prevailing Subdued Gold Pricing Environment
  • By , 11/26/14
  • Gold prices have fallen considerably over the last year and a half. The Federal Reserve announced its plans to wind down its quantitative easing (QE) program in June of last year. Gold prices have fallen around 13% since then and are currently trading at levels of around $1,200 per ounce. Gold mining companies such as Barrick Gold Corporation (NYSE:ABX) have needed to adapt to an environment of subdued gold prices. Measures taken have included reductions in operating costs and capital expenditures, the disposal of non-core assets and enhancing exposure to other commodities. In this article, we will take a closer look at Barrick’s strategy to operate competitively in a subdued gold pricing environment. See our complete analysis for Barrick Gold Gold Prices Gold prices have fallen over the course of the last year, reacting to cues regarding tapering of the Fed’s QE program. The tapering of QE implied strengthening U.S. economic growth. Gold is often viewed as a hedge against inflation and economic weakness. The strengthening of the U.S. economy reduced the investment demand for gold and led to a fall in prices of the metal. As per the World Gold Council, investment demand for gold fell from 1,623 tons in 2012 to 893 tons in 2013. This led to a fall in overall gold demand and prices. Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates sometime in 2015. However, the exact timing of an interest rate hike is contingent upon the pace of economic recovery and jobs growth in the U.S. An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets. Portfolio Optimization With gold prices expected to remain subdued in the near-term, Barrick has divested non-core assets in order to lower its average production costs. Since mid-2013, the company has reduced its portfolio of mines from 27 to 19. These include the sales of the Darlot, Granny Smith, Lawlers, Plutonic and Kanowna mines in Australia, the Tulawaka mine in Tanzania, the Marigold mine in Nevada, and the closure of the Pierina mine in Peru. Further, the company recently sold a 10% equity stake in African Barrick Gold.  Lastly, the company also sold off its oil and gas business, namely Barrick Energy in 2013. The combined proceeds of these asset sales total approximately $1 billion. The focus of the company’s portfolio optimization efforts has been getting rid of high-cost mines. This is reflected in the All-in Sustaining Cost (AISC) metric for these mines. The AISC metric includes the total cash cost, sustaining capital expenditures, general and administrative costs, minesite exploration and evaluation costs, mine development expenditures and environmental rehabilitation costs. It provides a comprehensive view of costs required to sustain a company’s current mining operations. In 2013, the AISC figures for the Australia Pacific mines segment, African Barrick Gold, and Pierina stood at $994 per ounce, $1,362 per ounce, and $1,349 per ounce respectively. The reportable segment of North American mines, which included the Marigold mine, reported an AISC of $1,235 per ounce in 2013. All of these figures are higher than the company-wide AISC of $915 per ounce for Barrick’s gold mining operations in 2013. The sales of these assets helped lower Barrick’s AISC for its gold mining operations from $1,014 per ounce in 2012 to $915 per ounce in 2013. Focus on Core Assets The Cortez and Goldstrike mines in Nevada, the Pueblo Viejo mine in the Dominican Republic, the Lagunas Norte mine in Peru, and the Veladero mine in Argentina are Barrick’s core, low-cost mines. These mines collectively had an AISC of $668 per ounce in 2013, as compared to $915 per ounce for all of Barrick’s gold mines. These mines will collectively account for over 60% of Barrick’s gold production in 2014. Apart from the construction of a Carbon In Leach (CIL) plant at its Bulyanhulu mine in Africa, the company’s minesite expansion capital expenditure for 2014 is focused on its core assets. The construction of the Goldstrike Thiosulfate Technology project, and feasibility and development expenditures related to the Cortez Hills Lower Zone expansion, which will extend the life of the Cortez mine by around 7 years, are the major components of its minesite expansion capital expenditure plan in 2014. This indicates that the emphasis for Barrick lies on its core assets going forward. Enhancing Exposure to Copper In addition to the company’s focus on its low-cost, core gold mines, Barrick has also taken steps to increase its exposure to copper. Copper sales accounted for only around 13% of the company’s revenues in 2013. Barrick announced the setting up of a joint venture with Saudi Arabia’s Ma’aden to develop the Jabal Sayid copper project. The mine will commence production in 2015 and will produce between 100-130 million pounds of copper at full capacity. This will significantly boost Barrick’s copper production, which is expected to range between 440-460 million pounds in 2014. An increase in Barrick’s exposure to copper will reduce some of the risks of volatility in gold prices over the short and medium term. Copper is an industrial metal with diverse applications in industry, particularly in the manufacturing, power and infrastructure sectors. The demand for copper is positively correlated with macroeconomic cycles. On the other hand, gold is often used as a hedge against economic uncertainty. Usually, investment demand for gold and gold prices are negatively correlated with macroeconomic cycles. Thus, increasing its exposure to copper may provide some protection to Barrick against volatility in gold prices over the short and medium term. However, over the long term, gold prices will largely be influenced by increasing jewelry demand for gold from emerging economies and will be less prone to fluctuations in investment demand for the commodity. Jewelry demand constitutes the bulk of the overall demand for gold. Reductions in Capital Expenditure The company expects its capital expenditure to range between $2.2-2.5 billion in 2014. This is much lower when compared to its capital expenditure for 2013, which stood at $5.37 billion. The reduction in Barrick’s capital spending resulted from the suspension of the Pascua Lama project due to legal and regulatory issues and reductions in the company’s sustained capital expenditure. The reduction in capital expenditure will significantly boost cash flows. The Road Ahead Going forward, Barrick Gold’s prospects will to a large extent be determined by what trajectory gold prices take. However, after its portfolio optimization, capital expenditure reduction, and business diversification efforts, the company is better prepared to deal with a scenario of lower gold prices. With the U.S. economy strengthening, the upside for gold prices is limited in the near term. Thus, Barrick is well-placed to deal with such a scenario. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research  
    NEM Logo
    A Look At Newmont's Response To Low Gold Prices
  • By , 11/26/14
  • tags: NEM ABX FCX SLW
  • Newmont Mining (NYSE:NEM) has announced that it has made a $100 million prepayment towards a five-year term loan which matures in 2019. The prepayment on the term loan was made largely through the proceeds from the Government of Suriname’s decision to exercise its option to participate through an equity stake in the Merian gold mine. This is the latest in a series of steps taken by the company to enhance its flexibility to operate in an environment of subdued gold prices. See our complete analysis for Newmont Mining Gold Prices Newmont’s average realized gold price for the third quarter stood at $1,270 per ounce, down from $1,322 per ounce in the corresponding period last year. The fall in realized prices for Newmont mirrors the decline in spot prices of gold over the same period. Gold prices have fallen over the course of the last year, reacting to cues regarding tapering of the Federal Reserve’s Quantitative Easing (QE) program. The tapering of QE implied strengthening U.S. economic growth. Gold is often viewed as a hedge against inflation and economic weakness. The strengthening of the U.S. economy reduced the investment demand for gold and led to a fall in prices of the metal. As per the World Gold Council, investment demand for gold fell from 1,623 tons in 2012 to 893 tons in 2013. Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates some time in 2015. However, the exact timing of an interest rate hike is contingent upon the pace of economic recovery and jobs growth in the U.S. An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets. Newmont’s Response to Low Gold Prices In response to the fall in gold prices, Newmont has made efforts to optimize its portfolio of mines through the sale of high-cost and non-core assets over the past year or so. These assets include the Jundee mine in Australia, the Midas underground mine in Nevada, stakes in Paladin Energy Limited, Canadian Oil Sands, and the Penmont joint venture. Newmont has generated $1.4 billion through the sale of non-core assets since 2013. In addition to the sale of non-core assets, the company has tried to reduce costs and improve the efficiency of its operations. The company has saved around $1.7 billion through cost savings and productivity improvements since 2013. These savings were reflected in the company’s all-in sustaining costs (AISC) metric in Q3. The AISC metric provides a comprehensive view of costs required to sustain a company’s current mining operations. The AISC for Newmont’s gold production fell to $995 per ounce in Q3 2014 from $1,018 per ounce in the corresponding period last year.. AISC includes costs applicable to sales, remediation costs, general and administrative costs, advanced projects and exploration expenses, treatment and refining costs, sustaining capital expenditure, and other miscellaneous expenses. All of these steps taken by Newmont over the course of the last year or so have been tailored towards increasing the flexibility of the company to operate in an environment of low gold prices. The company’s latest effort to lower its debt has a similar objective. With the U.S. economy strengthening, the upside for gold prices is limited in the near term. Newmont has placed itself in a good position to deal effectively with such a scenario. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    FB Logo
    Facebook Through The Lens Of Porter's Five Forces
  • By , 11/26/14
  • tags: FB TWTR GOOGL
  • Social networking giant  Facebook (NASDAQ:FB) has shown tremendous growth in the recent past, resulting in almost doubling of its stock price from the IPO level of $38 per share. The market values the company at more than $200 billion, with a P/E ratio of around 70. Its top-line has risen by over 60% during the last nine months, and this impressive growth is expected to continue in the future. In addition to its core platform, Facebook also has other platforms including Messenger, Instagram, WhatsApp and Search, each of  which have the potential to become multi-billion dollar businesses. In many respects, the company has not even begun scratching the surface of this opportunity. In this article, we analyze how Facebook stacks up along Porter’s Five Forces to understand whether there are factors which could hamper its growth story and cause its market valuation to drop. According to our analysis, the social networking market is highly competitive and is prone to rapid change through the introduction of disruptive technologies. Facebook needs to continuously innovative and adapt to changing user trends to keep the engagement levels stable on the platform. The low barriers to entry in the Internet business further intensifies the competition in this market. Moreover, Internet usage is increasingly shifting to mobile devices, where the landscape is quickly evolving; hence we think investors need to keep an eye out for popular mobile apps as they could impact Facebook’s popularity. The switching costs for users are low and hence they could easily shift to newer apps for sharing information and micro-blogging.  Our $64 price estimate for Facebook’s stock, is around 15% below the current market price.
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    Ctrip Q3 2014 Earnings Show Aggressive Investment and Dampened Margins
  • By , 11/26/14
  • Leading Chinese online travel agency, Ctrip International (NASDAQ: CTRP), announced its Q3 2014 earnings on November 25 th . The company displayed above guidance revenue growth, though margins still remain dampened for Ctrip. The main reason for the weak margin were Ctrip’s expenses in areas related to branding, product promotion, serving lower tier cities, and increasing headcount. At $347 million, net revenues for the third quarter experienced a year-on-year growth of 38%, exceeding the guidance of 30% to 35% growth. The main contributors to this growth were accommodation (contributing to 56% of the revenue) and transportation ticketing (contributing 32%). Ctrip has expanded its hotel coverage to approximately 170,000 domestic hotels and 510,000 international hotels. Air tickets contributed majorly to the booking volume of the transportation ticketing business. Over Q3 2014, Ctrip added more than 160 international airlines. This brought the number of its total international air partners to over 300. The year-on-year growth for accommodation and transportation revenue was 69% and 98% respectively. The revenue boost came at the cost of margin contraction, due to a surge  in spending. There was around 83% year-on-year growth in product development, which amounted to $100 million, and sales and marketing expenses increased by 69% to $97 million. As a result, the margins were adversely impacted. There was a 71% year-on-year decline in operating income, which amounted to $14 million in the third quarter of 2014. The operating margin swooped down to 4% in the Q3 2014, as against a 19% in the same period last year. The net income for third quarter was $35 million representing 42% year-on-year decrease. The company expects the margins to remain weak in the next quarter as well. The Chinese travel website reports that its mobile application has been downloaded more than 350 million times, with more than 150 million of these applications being activated. This strong adoption of the mobile platform has also translated into bookings growth. During the third quarter of fiscal 2014, mobile contributed to 45% and 35% of hotel and air ticket bookings respectively (compared to 30% and 15% in Q3 2013). Around 80% ticket booking in rail, bus and truck segment was done via mobile platform. The company states that over 5 million daily users access the Ctrip application on peak days. Ctrip’s main strategies are to provide the entire universe of travel related products on its platform at the best available price. It follows a two pronged approach to achieve this: Investments in technology and branding efforts to strengthen the flagship brand and gain a greater share of the online travel market Striking strategic partnerships with market leaders in all its product segments to expand its domestic and global presence So far, Ctrip has been able to gain market share across all its segments through its investments and joint ventures. The company expects the Chinese income growth to be higher in 2015 than 2014, which will translate to accelerated travel consumption, especially in the high end of the market such as outbound travels and luxury hotels. Ctrip also predicts that the focus areas for travel business in China are business travelers and the second and third tier cities, where there is immense growth potential. Our price estimate of $54.55 for Ctrip is marginally lower than the current market price. We will update our valuation shortly. See Our Complete Analysis For Ctrip International Strategic Partnerships Will Further Ctrip’s Dominance In China And Also Expand Its Global Footprint On November 21, Ctrip announced a partnership with Royal Caribbean Cruises Ltd., a global cruise vacation company operating 40 ships in over 490 destinations. The joint venture aimed at serving the Chinese cruise market will operate through SkySea Cruises, with each of the two entities owning 35% of the new company. The remaining portion will be owned by SkySea management and a private equity firm. The new cruise line is expected to start service with one vessel from mid-2015 and will and additional ships in the future. Chinese cruise market is expected to be the world’s second largest by 2017. In 2013, around 530,000 Chinese tourists took cruises beyond the mainland, more than double the previous year. The Chinese government is aiming at 4.5 million cruise traffic by 2020. The Ctrip management stated that cruise travel in China is expected to grow by an average of 30% over the next five to ten years. Ctrip’s aim is to create a synergy between international expertise and tailor-made products through SkySea Crusies. Ctrip’s cruise booking business delivered three digit growth in Q3 2014. Ctrip launched a new cruise booking platform in September 2014 with which Ctrip became the world’s largest cruise reservation platform in Chinese language. The partnership with Royal Caribbean and the size and prospect of the cruise market in China, is expected to accelerate Ctrip’s growth in the cruise market even further. Earlier this year,  Priceline (NASDAQ:PCLN) strengthened its commercial partnership (initiated in 2012) with Ctrip, by investing $500 million in the company. Through the investment, both the companies intend to increase the cross-promotion of each other’s hotel inventory and other travel services. This expanded partnership will allow Ctrip to access Priceline’s global hotel network comprising of over 500,000 accommodations. This should contribute to revenue acceleration and market share gains for Ctrip. Focus On Open Platform To Provide Comparative Advantage To Ctrip Ctrip is focusing on the development of an open platform which will enable it to consolidate all its partner operations on a single platform. Consequently, this will lead to more pricing transparency and a greater array of available products. Ctrip’s partners and users alike will benefit from this seamless offering and competitive pricing, thus generating greater sales for Ctrip. Though open platform  is still in its early stage, it generated business worth $163 million (RMB 1 billion) in Q3 2014. Open platform lends an unique comparative advantage to Ctrip over  its competitors, as open platform offers an entire gamut of travel related products, from small hotels to whole sellers, all in a  single platform. The pricing advantage and the market coverage due to this is unparalleled. During Q3 2014, open platform contributed to 60% of air revenues, 5%-10% of hotel revenues, and 15% of packaged tour revenue. Investments In Technology, Branding, and Promotional Activities In Second Tier Cities Will Further Depress Margins Ctrip plans to continue its investment in mobile internet, open platform, technology, brand awareness, and innovation. Hence, it expects further erosion of its bottom line in Q4 2014 with non-GAAP operating margin expected to reach negative 17%. The main contributors to this slowdown would be: Increasing branding campaigns and product promotions Lower seasonality Product development initiatives which include hiring more R&D and business development personnel Increasing headcount to promote products in the lower tier cities New business unit expansion View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    How Big Can Nike's Women's Business Be?
  • By , 11/26/14
  • tags: NKE UA LULU
  • One of the key growth strategies outlined by sports giant  Nike (NYSE:NKE) to achieve its stated target of $36 billion in annual revenues by fiscal 2017 is growing its women’s business. To this end, the company appointed long time company executive Amy Montagne as the head of its women’s business in 2013. Nike’s women’s business grew by nearly 12% to $5 billion in 2013, outpacing the company’s overall 9% top line growth. The company sees enough opportunity in this market to grow revenues from the segment to above $7 billion by fiscal 2017, which would represent ~20% of its overall total revenues. Nike is not alone in seeing women’s athletics as a key source of growth for its business: women’s athletics is seen as an important driver of revenue growth for a number of athletic brands including Adidas, Under Armour, and Lululemon. Nike is taking those businesses head-on by introducing a number of products that compete for the same customers that Under Armour and Lululemon products also target. Nike’s Legend Tights pose a challenge to Lululemon, a company whose core product is tights. Meanwhile, both Nike and Under Armour have pushed their own lines in a bid to capture more of the yoga and training market. See Our Full Analysis For Nike Women’s Sports Market Currently, most sports apparel companies derive most of their revenues from the men’s business. For example, Nike’s women’s business only contributed 18% to the top line in fiscal 2014. Despite this, apparel producers are targeting more revenues from the women’s business, based on the belief that figures for sports participation by women are not accurately reflected in sales figures. This confidence is supported by some studies while others oppose it. Although studies vary in their exact tallies, most agree that boys and girls participate about equally in sports activities while in school. According to one study done by the Women’s Sports Foundation in 2011, more boys participate in sports activities in urban areas than girls. Between 3rd and 5th grade students, 80% of boys in urban areas participated in sports compared to only 59% of girls. In suburban and rural areas, however, the difference is much smaller, with 81% of girls participating compared to 89% of boys, while 69% of girls participate compared to 73% of boys in rural areas. In aggregate, between 3rd grade and 12th grade, 8 million girls participate in sports activities compared to 12 million boys. That sort of split between female and male participants has led Under Armour to believe that it can make equal revenue from its men’s and women’s divisions. Currently, Under Armour brings in about $1 billion annually from the men’s business and $500 million from women’s apparel. Nike’s split is even more tilted towards the men’s business, generating $14 billion in men’s sales last year compared to only $5 billion in women’s. However, there are other studies that, instead of corroborating the above cited evidence, show a wider gap in sports participation between the genders. One such study done by the U.S. Bureau of Labor Statistics concluded that on average men spend twice as much time per day on exercise and sports than women. In addition, more men participate in exercise and sports. If those statistics are more reflective of the population as a whole, then an overzealous push for women’s sales could result in a sales stall-out before any revenue goals are achieved. However, even if the BLS study turns out to be more accurate, there would still be an enormous opportunity in youth sales. Strategy Options Nike has historically based its business by associating itself with a sport chosen specifically for its reach and popularity in specific geographies. For example, the company initially started out as a manufacturer and distributor of basketball apparel and shoes in the U.S., and branched out by capturing incremental segments in other sports. In Europe, Nike based its business around soccer and gradually grew large enough to become the preferred sporting brand in the 10 most important cities for the sports gear business in the continent. The strategy for the women’s business should be the same. Nike can take some notes from Lululemon for successfully spotting yoga as one of the fastest-growing activities in the U.S., with a largely female participant base. The company associated itself with the activity by offering several apps that allowed people to find not only yoga centers but also like-minded people interested in the same activities. It then promoted those activities and sold its products to the target audience created.  In the calendar year 2013, Lululemon made $1.6 billion in revenues. Since, the company derives most of its revenues from the sale of yoga pants to women with an average price of $80, we can assume that the company sold 20 million yoga pants. With the added assumption that each customer bought four yoga pants, we arrive at a figure of 5 million customers, or roughly 9% of the female population aged 18-44. Nike can pursue a similar path and achieve similar revenues by targeting running. Alternatively, the company can look at competitor Adidas’ work in China. Adidas recognized that voluntary participation in sports in China is not comparable to that in Europe and North America. Instead of seeing sports as something serious enough to build a lifestyle around, Chinese consumers mostly see it as a recreational activity. The company used this insight and ran its extremely well-received #allinformygirls campaign centered around women doing fun things in Adidas gear.. Given the nascency of the sports apparel market in China, Nike can catch up with Adidas by forming strategic alliances with distributors and producers, as well as grass root organizations that help promote such activities in the region. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    HP Earnings: Barring PC Sales, Revenues Decline
  • By , 11/26/14
  • tags: HPQ IBM MSFT LXK
  • Hewlett-Packard (NYSE:HPQ) posted its fourth quarter earnings for fiscal year 2014 on 25th November. In line with our expectation, HP’s revenues declined moderately by 2% year over year to $28.4 billion. While the enterprise divisions, which include enterprise group, HP services, software and HP Finance, failed to deliver growth yet again, its computer hardware group posted year-to-year growth. The primary reason for decline in revenue was the lack of the much anticipated growth in the server and storage division, indicating that server demand across the globe remains tepid, and the challenging economic environment across IT services business. The company delivered $0.70 in GAAP diluted earnings per share, marginally down from the year-ago quarter. Except printing and personal systems group, which comprises the personal system division that witnessed growth, the company reported division wide decline across all its reporting segments. Enterprise services revenues declined by 7% year over year to $5.51 billion, the enterprise group revenues declined by 4% to $7.27 billion, and software revenues declined by 1% to $1.08 billion. See our full analysis on HP Outlook for Q1 and 2015 For Q1 FY15, HP estimates non-GAAP diluted net EPS in the range of $0.89 to $0.93, and GAAP diluted net EPS in the range of $0.72 to $0.76. For fiscal 2015, HP estimates non-GAAP diluted net EPS between $3.83 and $4.03 and GAAP diluted net EPS between $3.23 and $3.43. Shipment Sales Spur PC Division HP’s PC and Workstation division is the fourth largest division, contributing nearly 30% to its revenue and 11% of its estimated value. According to Gartner, worldwide PC shipments experienced marginal decline in the third quarter of 2014. However, HP’s personal systems division outperformed the industry as both the number of shipments and revenue grew. The company reported 5% growth in total units shipped during the quarter, buoyed by a 8% increase in notebook shipments. While commercial revenues were up 7%, consumer revenues declined by 8%. As a result, the company reported 4% year-over-year growth in revenues to $8.94 billion against the backdrop of a 0.5% decline in PC units in the third calendar quarter. Operating profit also improved to $355 million or 4% of revenue. The surge in PC sales suggests that HP’s clients are looking to refresh their aging installed base as Microsoft has withdrawn support for Windows XP. We believe that this will augur well for the company in the coming quarters, albeit the release of Windows 10 may postpone the buying decision to later quarters. HP Service Revenues Continue To Suffer The services division makes up 24% of HP’s estimated value. HP’s enterprise services division reported a 7% year-over-year decline in revenue to $5.5 billion, primarily due to key account revenue run off and softness in new signings for the quarter. Within this segment, the infrastructure technology outsourcing division reported a 7% year-over-year decline in revenues to $3.44 billion, due to a revenue run-off of lapsed contracts and pricing pressures. Furthermore, its application and business services revenues declined by 6% year over year to $2.06 billion, primarily due to softness in the applications business. Enterprise Group Stalls As Server Demands Fails To Materialize The Enterprise Group is HP’s second largest business division and makes up 20% of its value. Notably including HP’s Industry Standard Servers (ISS), the division reported 2% year-over-year decline in revenues to $3.37 billion. Additionally, the company continued to experience decline in its business critical systems division as revenues declined by 29% year over year to $669 million. However, ISS revenues were up 9% sequentially and the high end was mildly positive  across the same metric.The storage division revenues declined 8% to $878 million as revenues for traditional systems declined by 14%. However, storage revenues grew 10% quarter to quarter, while converged storage grew by 9% and mid-tier 3PAR storage unit continued to gain traction. In sum, sequential comparisons suggest momentum is increasing, even as the year-to-year counterparts remain negative. Pricing Pressure Drags Printing and Ink Cartridge Division The printer and ink cartridge division is HP’s third largest division and makes up 22% of its value. The printer division reported 5% year-over-year decline in revenues to $5.7 billion in the quarter as supplies revenues declined by 7% to $3.59 billion. The primary reason for decline in supplies revenue was reduction in channel inventory from the consolidation of U.S. retailers, which also suggest some softness in demand in the future. Furthermore, a 1% year-over-year decline in the number of hardware units shipped accentuated the decline in average selling prices and revenues. While the commercial hardware unit sales grew by 5%, consumer hardware unit sales declined by 4% year over year. Software Division Revenues Flat lines The software division makes up 7.8% of HP’s estimated value. The company reported 2% growth in license revenues, 3% decline in service revenues and 1% decline in support. The primary reason for growth in license revenue was good recovery in the IT management category, which was buoyed by demand in software as a service (SaaS). As a result, HP’s software division revenues witnessed marginal 1% year over year decline in revenues to $1.08 billion. Furthermore, HP reported double-digit revenue growth in its cloud, security and big data services. We believe that cloud services are potentially the biggest new revenue source for HP in FY2015. We are in the process of updating our model. We presently have a  $29.70 price estimate for HP, which is 20% below the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Wide Geographic Presence, Diversified Product Portfolio Will Continue To Drive 3M’s Growth
  • By , 11/26/14
  • tags: MMM
  • 3M (NYSE:MMM) has seen continued growth of late, beating market returns by a large margin. In the past 10 years, 3M’s stock has grown 95.5%, whereas the S&P 500 grew 74.6%. The primary reason behind 3M’s performance is its vast diversification, both in terms of geographies and products. Its vast presence allows it to capture growth in all economies and product segments. We believe that continued growth in the global economy and 3M’s focus on research and development (R&D) will continue to drive growth for the company. 3M’s shareholders are likely to benefit from this growth in the form of higher dividends and share repurchases.
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    Why GM Must Revive Cadillac
  • By , 11/26/14
  • tags: GM F HMC TM VLKAY
  • Profitability in the automobiles market has been falling. The reasons for the shrinking bottom lines are manifold, but chief among them are as follows:  Firstly, used car sales in the U.S., the second largest car market in the world, are on the rise. Since, these cars sell for low prices, automakers are being forced to offer discounts and incentives on new cars to remain competitive. A drop in average transaction price per vehicle sold reduces an auto company’s profitability. ( (Falling U.S. used-car prices will drive up new-car incentives, Reuters, August 2014))  Secondly, in recent years, most of the gains in the U.S. auto market have come from the luxury car segment. However, the trends within the luxury car segment are such that the total segment has been unable to grow faster than industry wide sales. Consumers, benefiting from generous lease programs and incentives, are preferring to buy smaller luxury cars. Even though luxury car sales only contribute about 10-12% of overall sales, they contribute nearly half the sector’s profits. Thirdly, most of the growth in the global auto market is expected to come from the emerging markets.  Sales growth in these markets is driven by smaller cars. The margins on these cars is usually lower than on sedans and SUVs. As a result, car companies are being forced to look at other opportunities for improving their margins.  Some companies, like Volkswagen, Toyota, and Ford, have tried to bring all their global production under one platform. The rationale behind this trend is that using standardized production methods not only allows them to lower the marginal cost of production but also allows them to reduce the difficulty of the recall and repair process, should it need to be carried out. Apart from cost cutting, the other path being followed by companies in  search of higher margins is the increasing weight of luxury cars in their sales mix. Consider Volkswagen for example: the German automaker’s luxury brand Audi contributes nearly 40% to its operating profits and has an EBITDA margin of nearly 22%.  The heavy presence of Audi in its sales mix means that the company is able to post EBITDA margins of nearly 12%. (See our full analysis of Volkswagen AG here ) General Motors (NYSE:GM) has been trying to follow a similar strategy since 2012. The U.S. based auto maker has been working hard to revitalize its premium car brand Cadillac.  Reviving sales of Cadillac can help GM reach a pre-tax margin of 10%, nearly 2 percentage points higher than its current pre-tax margin of just under 8%.  For a while, it looked like GM might achieve its targets. However, Cadillac’s sales growth ran out of momentum towards the end of 2013. In the first ten months of 2014, Cadillac sales fell by more than 9.5% in the U.S.  Even though Cadillac has introduced several new models, sales have failed to pick up. We have a  $40 price estimate for General Motors, which is about 25% higher than the current market price. See full analysis for General Motors New Model Launches In 2012, the Cadillac portfolio was down to just three models — the CTS mid-size car, the SRX crossover, and the Escalade SUV.  Towards the end of the year, the company launched two new models — the XTS full-size sedan, which targeted Cadillac’s pre-existing customer base, and the ATS compact sedan, a car designed to be competitive with the popular German compact luxury cars. The introduction of these two cars worked like a charm for the company, making Cadillac the fastest growing luxury brand in the U.S.  Even though the sales of the CTS, Escalade, and SRX were either falling or stagnant, overall Cadillac sales grew by about 22% in 2013. Cadillac’s sales momentum began flagging towards the end of fiscal 2013 and deliveries have continued to fall ever since. For the month of July, ATS volumes fell by 11% and XTS volumes fell by 34% compared to the previous year.  On a year-to-date basis, ATS sales are down by nearly 21% and XTS sales are down by 24%.  Both these models performed well in their first year but it appears as though demand for both models peaked last year. The decline in sales can be explained by what the models set out to achieve: the XTS was targeted at Cadillac’s pre-existing customer base and it is clear that that market does not have room for continued growth; the ATS was launched to steal market share from German luxury makers and this is proving difficult for GM. So far this year, BMW has sold over three times the number of cars sold by Cadillac and Mercedes has sold nearly twice that number. Outlook Surprisingly, Cadillac’s older models have all posted gains in the number of unit sales in 2014, with the Escalade SUV the biggest gainer at a sales growth rate of 35% on a year-to-date basis. GM launched a re-modeled version of the Escalade late last year. The model refresh has been extremely successful and sales of the model have nearly doubled so far this year. GM now holds 37% market share in the large luxury SUV segment. Another Cadillac model to post a sales increase this year has been the SRX crossover, which is benefiting from the surging popularity of small utility vehicles. However, GM might not be able to cash in on this trend as small utility vehicles will be one of the last segments to be refreshed by the company. Cadillac is expected to offer a redesigned SRX for the 2016 model year. GM also has plans to introduce 2 more Cadillac crossovers around 2017. The luxury crossover market is booming but GM has decided to focus on updating other models before its SUVs and crossovers. Consequently, it is hard to foresee Cadillac posing a credible challenge to the likes of BMW, Mercedes, and Audi. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    New Plants, Models Can Help Ford Achieve Even More Success In China
  • By , 11/26/14
  • tags: F GM TM HMC VLKAY
  • China continues to get better and better for Ford Motors (NYSE:F). The units sold by Changan Ford, Ford’s passenger car joint venture in China, have risen by 23% compared to those in the same period last year. Through October, Changan had sold 660,566 cars, up from 536,421 in the same period last year. Jiangling Motors Corporation(JMC), Ford’s Commercial Vehicle investment in China, sold 216,300 vehicles in the first 10 months, up 16% from 186,920 in the same period last year. Overall, Ford China’s sales have gone up by 22% so far this year. ( (Ford China Sold 906,613 Vehicles in October, Annual Sales Up 22%, Ford Investor Relations, November 2014)) After selling 935,813 vehicles in China in 2013, the automaker is targeting sales in excess of 1 million in 2014. Ford’s sales jumped 49% during 2013, after the automaker debuted the Explorer and the Ecosport, in addition to earlier introductions of the Kuga and the Focus. Due to the continual rollout of new models, the incremental sales result in unusually high year-over-year gains. The growth rate will inevitably slow down as the year progresses. Moreover, these growth rates come on top of a low base, so it is relatively easier to post growth rates of this magnitude. Although 1 million is by no means a small figure, it is less than 5% of the overall automotive market. On the other hand, General Motors and Volkswagen command a market share of close to 15% each. Ford was a late entrant in China, primarily because it chose to concentrate more on its American operations. However, the automaker is making up for lost time by investing $5 billion in the four years beginning with 2011. A total of 15 new models will be introduced in China through 2015. In the same time frame, Ford’s annual production will also touch 1.2 million units, twice the level it was in 2012. In fact, Ford is so bullish on China that it expects 40% of its unit sales to come from the country by the end of the decade. We have a  $20 price estimate for Ford, which is about 25% more than the current market price. Market Size The Chinese automotive market is huge. In fact, it is the largest in the world, with sales touching 22 million units last year. In contrast, the U.S. automotive market totaled about 15.5 million units in 2013, and is expected to rise at a gradual rate now that the figures are close to pre-recession levels.  However, there is plenty of opportunity still left in China. After the rapid urbanization along the coastal regions that drove the demand for vehicles in the earlier years, sales are now being driven from the regions in the interior. Through October, industry-wide sales rose 6.6% on a year-over-year basis.  Chinese automotive sales could easily rise another 7-8% in 2014, at least that’s what the two month data suggests. Our forecasts for the Chinese automotive market are conservative; we expect sales to rise at an average annual rate of 4-4.5% in the long term. The recent economic slowdown in China, combined with increasingly stringent regulatory environment to curb pollution, are the reasons why we estimate that the growth rate could slow down in the coming years. Additional Opportunities Going forward, the proportion of luxury cars within the overall market should also rise. This is typically common in the development of the automotive market in a country. The initial acceleration of sales is provided by low-end cars, but as the market consolidates, more and more people opt for high-end cars. In more mature markets, luxury vehicles typically account for about 10-12% of the total sales. In China, the corresponding figure stands at ~8%. Consistent with the growing demand for luxury autos, Ford plans to launch its Lincoln brand in China in 2015. However, the automaker doesn’t plan to manufacture the Lincoln nameplates in China and intends to export them from the U.S. As a result, Ford will not be able to circumvent the high import duty levied on foreign vehicles. This could potentially limit the upside of the Lincoln brand in China, as high prices could nudge the potential customers to opt for the locally produced German cars, which already have a better brand perception. Despite low volumes, Lincoln could be crucial to Ford’s Chinese operations since luxury cars enjoy fatter margins. Moreover, luxury automakers often keep the prices of their luxury vehicles at a significant premium, due to the fascination of the Chinese public for Western products. This can result in significant contribution to the bottom line. Additionally, the company is planning to bring online two new assembly facilities in China, in Hangzhou, and in Chongqing. The Hangzhou plant will add to the company’s supply capacity  by 250,000 and the Chongqing plant by 300,000 when they come online in the next year. As a result, the company’s overall production capacity for China will exceed 1.5 million units a year by 2015. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Can CME Keep Up Trading Momentum?
  • By , 11/26/14
  • tags: CME ICE NDAQ
  • In its recent earnings, CME Group (NASDAQ:CME) witnessed 7% annual growth in clearing and transaction fee revenues, with trading activity rising for interest rate and foreign exchange (FX) derivatives during the quarter. Keeping up the trend of the quarter ending September, trading activity rose significantly in October (both sequentially and year-on-year). Average daily trade volumes rose to a record 17.6 million contracts a day in October – 60% higher than the year-ago period. It was also the fourth consecutive quarter of y-o-y growth in trading volume. The last time CME witnessed four consecutive quarters of growth in trade volumes was back in April 2011, with an aggregate 15% rise in trading volumes in that period. Comparatively, CME’s derivative trading volumes have risen by 24% in the four-month period ending October. Given the current trading environment, trading activity could remain healthy through the end of the year, giving the global exchange operator the longest period of sustained growth in the last five years.
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    Abbott Looking To Electrophysiology For Medical Device Growth
  • By , 11/26/14
  • tags: ABT JNJ MDT BSX GE
  • Abbott Laboratories (NYSE:ABT) recently expanded its medical device business and entered the fast-growing catheter-based electrophysiology market with the acquisition of Topera, Inc. Last month, Abbott entered into an agreement to buy the medical device company for $250 million, plus other potential performance-based payments in the future. The deal is expected to close by the end of the fourth quarter. Apart from Topera, the company also secured the right to buy Advanced Cardiac Therapeutics (ACT), a startup working on developing a novel ablation catheter. Heading Abbott’s electrophysiology business will be Michael Pederson, former President and CEO of private medical device company VytronUS. Prior to that, he was also Vice President and General Manager of Boston Scientific’s Electrophysiology business. Abbott’s interest in the electrophysiology market signals the company’s focus on turning around its ailing medical device business, which is significantly impacting its overall top line growth. O perational sales in the medical device division reported negative growth in the first nine months of 2014 year-over-year (y-o-y), compared to a growth of 3.9% in company-wide sales in the same period. Excluding the medical device business, Abbott’s operational sales grew 5.3% y-o-y. The global catheter-based electrophysiology market is expected to grow in double-digits to about $3 billion by 2020. There is significant scope for growth in this business for Abbott but it is also likely to face intense competition from existing players including General Electric (NYSE:GE), M edtronic (NYSE:MDT), Boston Scientific (NYSE:BSX) and  Johnson & Johnson (NYSE:JNJ). We have a  price estimate of $42 for Abbott Labs, implying a slight discount to the current market price.
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    How American Has Traveled From Bankruptcy To Record Profits
  • By , 11/26/14
  • tags: AMR AAL
  • Last quarter,  American Airlines (NASDAQ:AAL) posted a record $1.2 billion in net profit excluding special items, outperforming rivals  United (NYSE:UAL) and  Delta (NYSE:DAL) who posted $1.1 billion and $1 billion, respectively, in net profit. For the third straight quarter, American has led United and Delta in profits, and the carrier seems on track to complete a record breaking 2014. This performance by American is especially notable considering that it emerged from bankruptcy just eleven months back. How has American traveled from bankruptcy to record breaking profits so fast? Apart from the strong demand for air travel and lower fuel prices that have helped all airlines in 2014, there are a few other factors that have driven American from bankruptcy to profits. These include American’s gains from an expanded flight network, smooth integration of US Airways, and cost cutting undertaken by American during its bankruptcy period. We currently have  a stock price estimate of $44 for American, approximately in line with its current market price.
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    Q3 2014 U.S. Banking Roundup: Common Equity Tier 1 Capital Ratios
  • By , 11/26/14
  • tags: BAC C GS JPM MS WFC
  • In early September, the Federal Reserve hinted at implementing stricter capital requirements for the U.S. banking system than those laid out under Basel III norms, with banks that depend considerably on short term funding expected to attract a higher capital surcharge. This did not bode well for U.S. banking giants, who have had to put in a considerable amount of effort over recent years to prioritize Basel III compliance – on several occasions shrinking profitable operating units to clean up their balance sheets. Investors in the banking sector have also felt the impact of the tighter regulatory oversight, as dividend payouts and share repurchases from the banks have remained low since the economic downturn. Further increases to common equity tier 1 (CET1) ratio requirements will force the banks affected to find more ways to reduce their risk-weighed asset bases through implementing additional changes to their business models. The banks will also have to delay their capital return plans, and may even have to issue more shares to make up for any capital shortfalls. So how do these banks actually fare in terms of existing Basel III requirements? In this article, we highlight the degree to which the six largest U.S. banks have improved their Tier I common capital ratios over the last two years. While all these banks have already surpassed their CET1 ratio target – something they need to achieve by the end of 2019 – some of them are in significantly better shape in terms of capital structure compared to their peers.
    Could This Device Destroy the Craft Beer Industry?
  • By , 11/26/14
  • Submitted by Wall St. Daily as part of our contributors program Could This Device Destroy the Craft Beer Industry? By Greg Miller, Guest Contributor   The Brits – those crafters of fine beer and ale – have just gone and created a prototype device that could revolutionize beer production. In short, it employs the same pressurization techniques that a commercial espresso machine uses to squeeze and extract more flavors from coffee beans. Except with beer, we’re talking about extracting fresh flavor from hops. This customizes the taste of each brew – making the beer-drinking experience just as personal as having a local barista whip up your favorite latte. Once getting a custom beer is as easy as visiting a Starbucks ( SBUX ), however, it could mean the end of one industry in particular . . . It’s All About the Hops We’ve all heard of hops in beer. But if you’re unfamiliar with what they are exactly, they’re essentially flowers that contain bitter flavors and aromas that prevent beer from being sickly sweet. “Macrobrews” like Budweiser or Coors might have just a little bit of hops. But high-hopped beers are the backbone of the craft brewing industry – one of the great small business success stories of all time. Consider that over the past 10 years, small, local brewers have increased their collective market share in the United States from under 3% to over 14%. That’s an impressive feat, given the marketing and distribution muscle of the big three beer companies, Anheuser-Busch InBev ( BUD ), Molson Coors ( TAP ), and SABMiller ( SBMRY ). This new device, called Hoppier, brings the craft brew idea to another level entirely… Your Beer Barista Is Here “Beer brewed by engineers.” That’s the tagline that Cambridge Consultants – the designers behind Hoppier – uses for its device. Hoppier is a barista-style device that Cambridge says can be “retro-fitted to beer fonts in a bar.” This allows a bartender to adjust the hop level in each pint on the spot, according to the individual consumer’s taste. The engineers behind Hoppier say they can also infuse other flavors common to craft beers – like pumpkin spices during the fall. Given that the dry-hopping process usually takes up to two weeks before being integrated into a beer, this marks a significant change in current methods. As Brunner states, “We’ve speeded up the dry-hopping process. By adding extra hops at the point of dispense, their volatile aromas are as fresh and intense as possible. Additionally, the aroma of the finished pint can be adjusted by increasing, or decreasing the quantity of hops, and by changing the type of hops used.” But since this Hoppier device allows consumers to customize the amount and type of hops they want, right at the bar, will craft breweries soon be obsolete? Not exactly. In fact, Hoppier could turn out to be a positive catalyst for the craft brew industry . . . Specialized Suds Just as companies like Starbucks have increased consumer interest in high-quality coffees in cafés, specialty retailers, and grocery stores alike, making a product like the Hoppier widely available could further boost interest in the already fast-growing craft beer industry. The Hoppier device isn’t bad news for the big brewers, either. After all, someone has to provide the plain, tasteless beer that the Hoppier alters! In an era where consumers don’t just want products… they want them in their own style… Hoppier fits perfectly into the growing shift towards greater personalization. Consumers want their beer and coffee specialized just for them. Now, if you’re a budding entrepreneur, this could be an opportunity for you. Cambridge Consultants is looking for a partner to help commercialize Hoppier. So if you’re in the brewing industry, or dialed in to product development people at larger chains like Buffalo Wild Wings ( BWLD ) or TGI Friday’s, you could become an investor or partner. You can reach Cambridge at . And while we haven’t experienced Hoppier firsthand, Wall Street Daily’s resident panel of beer experts has tasted freshly-hopped beer before  . . .  and it’s fantastic! Good investing, Greg Miller The post Could This Device Destroy the Craft Beer Industry? appeared first on Wall Street Daily . By Greg Miller
    Income Plays That Benefit From Cheap Oil
  • By , 11/26/14
  • Submitted by Wall St. Daily as part of our contributors program Income Plays That Benefit From Cheap Oil By Martin Hutchinson, World Banking Analyst   Oil prices have dropped as much as $25 per barrel since the summer, which has played merry hell with energy sector master limited partnerships (MLPs) – a favorite of income investors. Even MLPs that hedged the price of their output months (or even years) ahead have seen the value of their reserves decline. There is one group of income-oriented companies benefiting from the oil price decline, however, and I’ve identified the three most attractive investment opportunities within this select group . . . Refined Investments When oil prices fall, income investors should turn their attention to MLPs that own refinery assets. That’s because, first and foremost, a decline in the price of gasoline and other oil products increases consumption. Cheaper oil brings product prices down, and oil-based products become more competitive. Secondly, refineries often benefit when crude prices are weak, because their output prices can remain “sticky” as their input prices decline. For example, Exxon Mobil’s ( XOM ) refining profit rose to $1.02 billion in the third quarter of 2014 from $592 million a year earlier, as margins widened on its relatively standardized product range. Oil prices have fallen considerably further since October 1, so margins for refinery companies should remain bloated at least through the current quarter. Three Attractive Opportunities Since refineries themselves have a finite life, require refurbishment, and deliver a fluctuating cash flow, investing in them can be fairly risky, especially over a very long period such as retirement. On the other hand, their yields can be truly attractive – and can become even more so in times like the present, when oil prices are weak. There are relatively few refinery MLPs to choose from, but of the options, the following would appear to be the most intriguing… 1. Calumet Specialty Products Partners LP ( CLMT ) Calumet is a broad-based refinery MLP. Rather than simply formulating gasoline, it specializes in the kind of offbeat petroleum-related products whose sales volume can increase rapidly when prices fall. Its quarterly dividend was $0.63 in 2008, but it fell to $0.45 during the 2009 recession. Today, the dividend has recovered to a current level of $0.685, giving it a yield of 9.8% at current prices. The catch is that third-quarter earnings were only $0.08 per share after $0.25 of derivatives losses – better than last year’s loss, but nowhere near enough to cover the current dividend. That makes CLMT a fairly high-risk proposition. But if you think we’re in for a period of robust economic growth combined with lower energy prices – the opposite of what we saw from 2010 to 2013 – then CLMT is worth a modest investment. 2. Northern Tier Energy LP ( NTI ) NTI offers a truly spectacular current yield of 16.4%, based on the last four quarters of dividends, and appears able to justify that from current operations. However, it only went public in 2012. And since then, quarterly dividends have fluctuated from $0.31 to $1.48 – the classic profile of a refinery MLP. NTI made $1.04 per unit in the third quarter and distributed $1, compared with $0.30 in the same period of 2013. Still, that yield is very attractive, and unlike CLMT, NTI doesn’t seem to pay out more than it earns. 3. CVR Refining, LP ( CVRR ) CVRR is a large refiner in Coffeyville, Kansas, whose shares currently yield 9.4%, based on the last four quarters of dividends. Like NTI, its dividends fluctuate a lot. In fact, since it went public in early 2013, dividends have varied between $0.30 and $1.58. It’s worth noting that in the third quarter, CVRR earned just $21 million, only about a quarter of Q3 2013’s earnings. However, this was partly the result of a July refinery fire, and today, the facility is back up to full production. All three of these companies have recently gone ex-dividend for third-quarter earnings, so the next round of “dividend investor roulette” – based on fourth-quarter earnings – will probably play out around February. Still, for those who like excitement with their yield and believe that softer oil prices are here to stay, these companies are well worth considering. Good investing, Martin Hutchinson The post Income Plays That Benefit From Cheap Oil appeared first on Wall Street Daily . By Martin Hutchinson
    Black Friday 2014: What Are Retailers Expecting?
  • By , 11/26/14
  • tags: MAT TGT WMT
  • Submitted by Sizemore Insights as part of our contributors program Black Friday 2014: What Are Retailers Expecting? by  Charles Lewis Sizemore, CFA The holiday shopping season seems to start a little earlier every year. Given that several national chains–among them heavyweights like Walmart ( WMT ) and Target ( TGT ) –are opening their doors while the sun is still up on Thanksgiving Day, I’m beginning to wonder if Black Friday sales will be much of a meaningful indicator in the years ahead. At any rate, while the holiday shopping season is coming a little earlier for shoppers this year, the retailers have been planning for months. According to research firm Panjiva, most shipments for toys and merchandise to be sold during the holiday season arrive in U.S. ports during the months of August to October. So, in taking a look at that data, we can get a pretty good idea of what the major retailers are expecting this year. According to Panjiva, total shipments of goods coming into U.S. ports from August through October are up five percent from last year. Shipments of toys are up three percent. Those are not blockbuster numbers by any stretch, but they do show that retailers are expecting improvement over last year. Given Wall Street’s recent enthusiasm for consumer discretionary and retail stocks, investors seem to agree. So, the data in aggregate looks decent. Let’s drill down and see what exactly it is that retailers expect their shoppers to buy this year. Puppies and Dolls Rule This Year’s List of “It” Toys From Panjiva’s November 24, 2014 press release: Panjiva analyzed shipment trends of various buzzed-about toys in 2014 and found that, based on their buying behaviors, retailers are expecting consumers will spend sizably on puppies and dogs this holiday shopping season. With 681 shipments from August through October, merchandise from Paw Patrol, a preschool-aged TV series starring a pack of puppies, is among the top new toys on this year’s list. The robotic, interactive dog Zoomer is also a toy retailers are betting big on, with 417 shipments—a nearly 300 percent increase over the toy’s 2013 holiday season shipments. Retailers may be hedging their bets on the aforementioned and other newer toys by also stocking shelves with perennial favorites—especially dolls. Shipments of [ Mattel’s ( MAT ) ] Barbie continue to be among the top overall toys every year. America’s favorite fashion doll experienced 3,000 shipments this year, marking a 32 percent increase over last year .  . .  Doc McStuffins, Monster High and Sofia the First are among the other dolls retailers appear to be stocking on shelves, with 901, 765 and 663 shipments, respectively. All of these items—along with others such as DohVinci, Little Live Pets, Elmo, and Nerf toys—approached or surpassed the 300 shipment mark, which has historically indicated strong performance and wide availability on store shelves. Panjiva didn’t report specifically on toys from Disney’s ( DIS ) Frozen in their press release, though a representative indicated that data for expected  Frozen toy sales was expansive enough to warrant its own report to be released next week. Other market studies have Frozen toys and merchandise ranked very high. A trip to the Disney store would certainly confirm this! Want a little bit of data to help keep your kids behaving this December? Panjiva reports that shipments of coal into the U.S. from August through October are up two percent over 2013, suggesting America’s children might have been a little naughtier this year. 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 Black Friday 2014: What Are Retailers Expecting?
    What are the Masters of the Universe Buying?
  • By , 11/26/14
  • tags: SPY BABA BP
  • Submitted by Sizemore Insights as part of our contributors program What are the Masters of the Universe Buying? by  Charles Lewis Sizemore, CFA You should never blindly follow the investment moves of anyone—not even masters of the universe like Carl Icahn or George Soros .   You never know what their investment game plan is or whether a stock position is part of a larger multi-stock trade. That said, I do consider guru trades a nice starting point for further research.  If investors I respect and follow are piling into a stock, then it’s worth investigating. So, with no further ado, let’s see what the gurus are buying today.  GuruFocus has a handy heatmap utility that shows guru buying activity.  The particular screen I ran today is for large, non-S&P 500 stocks.  The stocks in the upper-left-hand corner (the darkest green) are the stocks with the highest concentration of buying by prominent hedge fund and mutual fund managers. At the top of the list? Chinese ecommerce juggernaut Alibaba ( BABA ) .  Alibaba has been recently purchased by 15 gurus, including funds controlled by Julian Robertson, Daniel Loeb, George Soros, John Paulson and Stanley Druckenmiller. Next up is British oil major BP ( BP ), which has recently been purchased by 12 gurus.  Some names of note: David Einhorn, Bruce Berkowitz and David Dreman. In the interests of full disclosure, I am also long BP. Should you run out and buy any stock on this list because a famous investor owns it?  Obviously not.  SEC 13-F data is already dated by the time it is reported.  For all we know, all of these legendary investor might have already dumped these stocks this morning . . . or they might be part of a broader strategy that they haven’t shared with us.  But I do consider this list a nice starting point for further research.  And given the beating that energy stocks have taken of late, I consider BP an attractive contrarian buy. 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 What are the Masters of the Universe Buying?
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    Volkswagen Looks To Boost Profits For Its Own-Branded Passenger Cars
  • By , 11/25/14
  • Volkswagen AG (OTCMKTS:VLKAY) is on its way to overthrow  Toyota Motor Corp (NYSE:TM) as the world’s largest automaker in terms of volume sales this year, while simultaneously crossing the record 10 million annual unit sales mark. Volkswagen’s deliveries rose 5% year over year in the first three quarters to 7.54 million units, and if this growth rate continues in Q4, overall deliveries for the company will rise to over 10.2 million units in 2014. Toyota, on the other hand, witnessed only a 2.8% rise in volumes through September, allowing Volkswagen to narrow the sales gap to roughly 74,000 units. Volkswagen might win the battle of volumes with Toyota, but the German manufacturer still trails the latter’s operating performance. While operating margins at Toyota range between 9.5-10.5%, Volkswagen’s margins remain below 7%. We have a  $44 price estimate for Volkswagen AG, which is roughly in line with the current market price. See Our Complete Analysis For Volkswagen AG Let’s deconstruct Volkswagen’s profit problem. Around 60% of the net operating profits for the company last year came from the luxury vehicle divisions Audi, Porsche, and Bentley, which together formed only 16% of the vehicle deliveries, mainly due to the comparatively higher product prices. The let down for Volkswagen has been its own namesake passenger vehicles division, which is dragging down the company’s overall operating performance as margins remain below 3% for this division. The main reasons for lower profits at Volkswagen Passenger Cars is lower volume sales, and high research and development costs incurred by the group to push for innovation at the ailing vehicle division. The company is now aiming to save around 10 billion euros ($12.4 billion) through efficiency initiatives, with the target of 5 billion euros worth of cost-savings at its own-branded passenger vehicle division by 2017. In effect, the automaker aims to improve operational return on sales for its passenger cars to at least 6% by 2018, up from 2.9% last year. As this division forms over 10% of the group’s valuation by our estimates, curbing extra manufacturing costs and improving efficiency could lift Volkswagen’s overall profitability. Large Cost-Savings Expected From Implementing The Modular Toolkit Volkswagen boasts a diverse brand portfolio, including its own branded passenger cars, Skoda, luxury vehicle divisions Audi, Bentley and Porsche, and commercial vehicles Scania and MAN. In 2012, Volkswagen introduced its Modular Transverse Toolkit (MQB) and Modular Production Toolkit (MPB), to help the automaker create a single, more flexible platform to produce vehicles for all the brands across its portfolio, limiting extra assembly costs. The start-up costs for MQB run high, but in the long run, this extremely flexible vehicle architecture is capable of bringing down manufacturing costs significantly. Going forward, increasing implementation of MQB will also allow Volkswagen to reduce development costs, start-up costs, and assembly costs associated with setting-up production of a new model. For example, Volkswagen is currently planning on building a compact SUV in India, and could build this model using the MQB platform. Although localizing MQB would be more expensive at first, other Volkswagen brands in the country such as Audi and Skoda could leverage the very same platform in the future to build their own compact or subcompact SUV in India. The MQB platform allows the German car maker to standardize its production process for small, medium, and long cars. So far the system has been used to manufacture the Volkswagen Golf, Audi A3, Seat Leon, and Skoda Octavia, and the company plans to use this system for most cars in the Volkswagen, Audi, Seat, and Skoda portfolios in the coming years. The platform enables the company to make enormous cost savings by reducing weight and enabling easy installation of luxury technologies in high volume models, which then allows the automaker to lower the average price of its vehicles. As a result, Volkswagen could not only compete better on a pricing front and further improve volume sales, but the large cost reductions could help boost profits and subsequently cash flow for the automaker in the coming years. The company is looking to boost overall operating margins to approximately 8% by 2018, a two percentage point improvement from 2013 levels. We currently estimate adjusted EBITDA margins for the Volkswagen Passenger Vehicles division to rise only to 4.7% by 2018, up from an estimated 4% this year. However, if Volkswagen manages to extract higher profits through the ongoing efficiency program, and adjusted EBITDA margins rise to 7% by 2018 for this division, there could be a sizable 20% upside to our current price estimate for Volkswagen. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Another Cancer Drug Deal, It's Bristol-Myers Squibb This Time
  • By , 11/25/14
  • tags: BMY
  • It appears that lately cancer related drug approvals and deals have been the highlights of the U.S. pharmaceutical industry. Last week, Bristol-Myers Squibb ‘s (NYSE:BMY) shares benefited slightly from positive clinical trial results for its lung cancer drug Opdivo (Nivolumab). And now, the company has signed a deal with Five Prime Therapeutics to test a combination of Nivolumab and latter’s FPA008. Under the deal, Merck will make an upfront payment of $30 million to Five Prime and also finance its phase 1 clinical trials. We note that last week Pfizer (NYSE:PFE) signed a research deal with Merck KGaA for developing a cancer drug, and Johnson & Johnson (NYSE:JNJ) entered an agreement with Geron for developing a blood cancer candidate. Additionally, Roche Holdings (NASDAQ:RHHBY) received the FDA approval for expanded usage of its blockbuster drug Avastin. The takeaway is that going forward, the market valuation of pharmaceutical companies will notably depend on how their investments in oncology, or more specifically immuno-oncology, pan out. Due to increased competition from generics and loss of patent exclusivity for several key drugs, the industry is exploring new growth avenues. Cancer therapeutics stands amongst the most promising ones. The sheer variety of cancer types and the lack of effective treatment options make it a great opportunity, albeit a challenging one. Our current price estimate for Bristol-Myers Squibb stands at $36 .
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    RadioShack's Expanding ‘Fix It Here' Footprint Can Help Increase Its Customer Base
  • By , 11/25/14
  • tags: RSH BBY WMT
  • RadioShack (NYSE:RSH) extended its ‘Fix It Here’ program to 30 stores in Houston, earlier this week. Launched in November last year, ‘Fix It Here’, RadioShack’s national repair program for phones and tablets, is now available in 650 RadioShack stores across the nation and the company aims to roll-out the program in 700 stores by the end of this year. In the last few years, RadioShack has been plagued by an eroding top line growth, declining gross margins, high inventory levels, a string of debt maturities and declining cash reserves. The company reported its tenth consecutive quarterly loss in Q2 2014 (reported on September 11th). Though RadioShack claims to be making steady progress with its turnaround initiatives (which were implemented last year), it has failed to show any significant financial gains so far. Its stock is currently trading at less than $1, down almost 70% year-to-date. Retail and mobility are the two key platforms that RadioShack uses to measure its business. The company claims to be making progress in its retail segment, which accounts for 50% of the sales. It is seeing customers responding positively to the key elements of its turnaround strategy such as the actions it has taken (so far) on reinvigorating the store experience, revamping product assortment and creating a stronger inventory position. However, RadioShack continues to suffer in the mobility segment which accounted for more than 75% of the decline in sales in Q2 2014. The ‘Fix It Here’ Program can provide RadioShack with the much-needed financial hedge as it tries to rebuild its mobility business. See our full analysis for RadioShack ‘Fix It Here’ Can Help Increase Footfall In RadioShack Stores With the ‘Fix It Here’ initiative, RadhioShack offers same day (typically less than two hours) repair services, such as fixing cracked screens, broken buttons, faulty cameras, water damage, audio issues and other maladies, for the most popular smartphones and tablets in the market. Repair starts at $39.99 and include a 90-day warranty. RadioShack claims that its repair technicians are receiving 40 hours of highly specialized, hands-on training to repair these common issues. According to a report by IBISWorld, repairs is a $1.4 billion-a-year market, and its been growing at about 5% a year. The report also states that though there are over 2,300 businesses who offer repair services for phones, there is no company with a dominant market share. RadioShack is the first trusted national brand to offer these services in-house. The company has the largest national presence, with a RadioShack store within 5 miles of 95% of Americans. The ‘Fix It Here’ initiative can help RadioShack lure back old customers as well as attract new customers to its stores, which can help in cross selling other products. Additionally, people who might not want to opt for the repair service (due to high costs) have the option of buying a new device then and there. Providing both the options to customers under one roof can significantly increase footfall in RadioShack stores. RadioShack is witnessing fundamental challenges in its mobility business and is working hard to optimize profitable transactions in this segment. The mobility unit is suffering because of the low consumer interest in the current assortment of handsets, the aggressive promotional environment on these products and intense wireless carrier marketing activities. Customers have delayed purchasing or upgrading their phones, which in turn has led to further aggressive price competition on existing handsets among the wireless carriers and other retailers. RadioShack claims to be addressing the above problems head-on by focusing on profitable sales. It is improving the technology it uses to sell mobile phones and bringing in new wireless offerings. The mobility market has been soft for a number of quarters, but Radioshack expects that new products from key vendors will spur demand in the future. Our price estimate of $0.86 for RadioShack is slightly above the current market price. We maintain a cautious outlook on the company and estimate revenue of around $3.3 billion for fiscal year 2014. Our fiscal 2014 GAAP earnings per share estimate is -$1.74 as compared to the market consensus of -$3.71 (as per Reuters). View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Merck Enters Ebola Vaccine Race
  • By , 11/25/14
  • tags: MRK JNJ PFE
  • Merck (NYSE:MRK) is the latest among the big pharmaceutical firms to join Ebola Vaccine race. The company has just announced a deal with NewLink Genetics under which Merck will get the rights to the latter’s experimental vaccine for Ebola virus and in turn, it will make an upfront payment of roughly $30 million and an additional payment of $20 million at the beginning of clinical trials in 2015. The investment is much smaller than what Johnson & Johnson is putting in, which makes us question Merck’s confidence in the vaccine and potential return. In a recent note, we discussed how Johnson & Johnson would like to target around 4-5 million vaccines annually (read How Will Johnson & Johnson’s Ebola Investment Pay Off? ). Merck is going to compete in the same market, which could be larger than 100 million vaccinations. However, the incremental value addition from a successful launch and commercialization will be low considering Merck’s size and our expectation that the price of vaccine is likely to be low. Our price estimate for Merck stands at $52.50, implying a discount of more than 10% to the market.
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    Fox Model Revised After Closure Of BSkyB Deal
  • By , 11/25/14
  • 21st Century Fox (NASDAQ:FOX) has sold its pay-TV business in Italy and Germany to British Sky Broadcasting Group (BSkyB) for $8.6 billion cash and BSkyB’s 21% stake in the National Geographic Channel. Sky Deutschland and Sky Italia were part of 21 st Century Fox’s DBS segment. DBS had been a low margin business for the company. The segment’s revenues had grown at an average annual rate of less than 2% up to 2012. In 2013, Sky Deutschland was consolidated and this led to over 50% jump in segment revenues. If we look at EBITDA margins, they have declined from 19% in 2008 to an estimated 9% in 2013. Moreover, the business involves high capital expenditures. More than 50% of the company’s capital expenditures were associated with its DBS business in the past four years. Given these factors, it was a smart move for Fox to exit the DBS business. However, this deal could help BSkyB negotiate better pricing with the content owners and give the company a potential subscriber base of 97 million in Europe. BSkyB said it expects £200 million of annual cost savings by the end of the second financial year after the transaction is closed. BSkyB is now the largest pay-TV operator in Europe with more than 20 million subscribers in the U.K., Ireland, Italy, Germany and Austria. Fox participated in the BSkyB’s equity offering and purchased $900 million worth of additional shares to retain its 39% stake in the pay-TV operator. With closure of all the transactions, Fox’s cash balance is up by $7.2 billion. We have adjusted the revenues for the first three quarters of 2014 to $4.58 billion and have forecast zero income from this business in the coming years. We will be completely removing this segment from our model after the company files the 10-k for fiscal 2015 with details of balance sheet items and the cash flows. We estimate revenues of about $31.4 billion for 21st Century Fox in 2014, with EPS of $1.54, which is in line with the market consensus of $1.45-$1.64, compiled by Thomson Reuters. We currently have a  $39 price estimate for 21st Century Fox, which is about 15% ahead of the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis
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    Rationale For Google’s Spending On Data Centers
  • By , 11/25/14
  • tags: GOOG
  • Google (NASDAQ:GOOG) is a household name due to the popularity of its search engine. However, the company realizes that the robust growth it witnessed in online ads market in the last decade might not be sustainable in the future, partly due to the limits to the total addressable market (TAM) in the existing market and the rising competition from in mobile app data. As a result, the company is looking to expand its footprint by launching cheaper devices in new markets and propagating new business streams such as cloud services etc. However, in order to achieve this objective, the company continues to build out its data centers, which not only support and complement its core search business but would also help it to expand its services in the cloud vertical. In this note, we will explore Google’s push for data centers. Click here to see our complete analysis of Google Expanding Internet Userbase In the last five years, Internet penetration has increased from 1.8 billion or 26.6% of the world population to 2.8 billion or 39%. Furthermore, companies around the world continue to lure more people to the Internet by introducing cheap smart connected devices. Considering the penetration in mature market, hardware manufacturers are now focusing on emerging countries, which include over 85% of the world population, and contribute almost three quarters of global GDP growth, according to Fidelity Investment Ltd. While majority of the population in these countries is below poverty line, the elite and aspiring middle class make up nearly 20% of the population. However, as economic development gains traction in these countries, many households are expected to move to higher income bracket in the future. For example, India’s middle class has 250 million people, which is expected to grow to 600 million by 2030, according to Deutsche Bank research. We believe that as purchasing power in developing countries improves, discretionary spending will rise as disposable income grows, which will fuel demand for luxury items such as smartphones, net books and tablets that can connect on the internet. Google, like many other companies such as Microsoft etc, has done its bit by launching cheap Android based platform under the Android One name. Furthermore, PC manufacturing companies like HP are also introducing cheap Windows-based thin tablets and laptops. In addition to the traditional devices that log onto Internet, entertainment devices such as Televisions and game consoles can now connect to the Internet to access and download content. All these new devices are adding new users to the Internet community. However, as the user base for smart connected devices grows, so will the need to store data and maintain the quality of service on the Internet. To ensure that it remains unchallenged in its dominance in search (close to 65% in desktop and 90% in mobile), Google must strive to maintain the quality of service. Expansion of Cloud Services Over the past few years, cloud services have come to fore for both large and SME (small and medium size enterprise) companies that looking to improve their businesses by employing IT solutions and services. The advantage of cloud services is the scalability and accessibility to new applications, resources and services. Furthermore, cost associated with using these services are less as the onus of management of these services lie with the cloud services provider. As a result, the demand i s growing for virtualization services, which enable service provider to creating a virtual computer domains independent of the underlying software and  hardware, increasing manageability and reducing cost. This has translated into a CAGR of 17.6% from 2014 to 2020 for the global cloud services market, and expected to reach a market size of $555 billion in 2020 from $209.9 billion in 2014, according to the new report by Allied Market Research. Google’s Spending On Data Centers Google has been steadily ramping up its spending in each of the last ten quarters, crossing the $2.2 billion per quarter mark late last year. This unprecedented level of spending reflects the breadth of Google’s server farm construction program. In the past, Google has undertaken both green field projects (setting up new data centers) and brown field expansion (supplementing capacity at existing centers). In the past nine months, this trend seems to continue. In September, Google announced a new EUR600 million investment over the next four years to build a new data centre in Eemshaven, the Netherlands. The company plans to invest in new facilities in Ireland, Finland, and Belgium in the coming years. Furthermore, it is planning to invest $100 million to $200 million in expanding its Taiwan data center, which was had an investment outlay of over $600 million in earlier phases. In all, the company has spent over $7.5 billion on datacenters in the first nine months of 2014, and the capex is expected to increase to over $10 billion by the year end. While many investors believe that Google may be building data centers even before the company needs them, we believe that it is worth having excess capacity on standby than not having it to support the quality of service and new products. We currently have a  $547 price estimate for Google, which is inline with its current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    A Look At Vale's Copper Mining Operations
  • By , 11/25/14
  • Vale (NYSE:VALE) is the world’s largest iron ore producer. In addition to its iron ore mining operations, which account for the bulk of its revenues, the company is also a significant producer of base metals, coal and fertilizers. Falling iron ore prices have had a negative impact upon the profitability of the company’s iron ore mining operations. Vale’s average realized sale price for its iron ore fines fell 38% year-over-year in Q3. The primary reason for the fall in iron ore prices has been an oversupply situation, created due to a steady increase in production in the face of weakness in demand for the commodity. Prices are expected to remain subdued in the near term. Given the bleak outlook for Vale’s iron ore mining operations, the company’s other businesses will play an important role in driving its business prospects. In this article, we will take a look at the state of the company’s copper mining operations and its prospects in the years to come. See our complete analysis for Vale Vale’s Copper Mining Operations Vale’s copper mining operations are spread across Brazil, Canada and Zambia. The company’s prominent copper mines include the Sossego and Salobo mines in Brazil, and the Sudbury and Voisey’s Bay mines in Canada. Vale’s proven and probable copper ore reserves stood at 1.39 billion tons at the end of 2013, with the Salobo mine accouting for over 80% of these reserves. The company produced 370,000 tons of copper in 2013. Vale generated $1.45 billion in sales from its copper mining operations in 2013, around 3% of the company’s overall revenues. Going forward, the company will significantly raise its production levels, driven by a rise in output at the Salobo mine. The Salobo mine started production in 2013 and completed the Phase II expansion of its processing facilities earlier on in 2014. Salobo produced 66,700 tons of copper in the first nine months of the year, around 52% higher than in the corresponding period last year. Upon ramping up to full capacity by 2016, the Salobo mining operations will produce 213,000 tons of copper. Copper Prices London Metal Exchange (LME) spot copper prices currently stand at levels of around $6,750 per ton. These are around 5% lower as compared to levels of around $7,050 per ton at the corresponding point of time last year. Copper prices have fallen largely because of 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. Weakness in economic growth, particularly in the manufacturing sector, has raised concerns over the strength of Chinese demand for the commodity. China’s GDP growth is expected to slow to 7.3% and 7.1% in 2014 and 2015 respectively, from 7.7% in 2013. The state of China’s manufacturing sector can be gauged through the Manufacturing Purchasing Managers’ Index (PMI). The Manufacturing 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. Chinese Manufacturing PMI, reported by China’s National Bureau of Statistics, stood at 50.8 for October, and has ranged between 50.2 and 51.7 for the whole year. These readings indicate subdued Chinese manufacturing activity. Further, question marks remain over the impact of a proposed structural transformation of the Chinese economy from an investment and export-led growth model to a consumption-driven growth model. Much of China’s consumption of industrial metals such as copper was driven by the country’s massive investment in infrastruture. A structural transformation of the country’s economy could potentially hamper the growth in demand for copper. Outlook Vale’s copper production will rise sharply over the next couple of years as a result of the ramp-up of output from the Salobo mine. Unit production costs costs will fall with the rise in output, providing a boost to margins. However, margins for the company’s copper mining operations will largely be driven by the trajectory of copper prices. These will depend upon the balance of global supply and demand. China will continue to drive the demand for copper in the years to come. With the pace of Chinese growth expected to slow in the near term, demand from China may remain subdued. There are also concerns about long term Chinese demand for the commodity, given the ongoing structural transformation of the country’s economy. On the supply side, a wave of expansions and new projects is expected to boost global copper output in the near term. With demand conditions expected to remain subdued, there could be an oversupply of copper next year. This is expected to limit the upside for copper prices in the near term. Over the long term, the trajectory of copper prices would depend upon trends in Chinese demand for the commodity. It remains to be seen whether China can absorb the expected increase in copper supply in the years to come. Though copper prices look likely to remain subdued in the near term, market conditions for copper are much better as compared to iron ore. Due to a massive iron ore oversupply, iron ore prices are expected to fall sharply next year and remain subdued in the years to come. Given the existing state of affairs, Vale’s copper mining operations will play an important role in boosting the company’s results in the next few years, despite the subdued market conditions for copper.  View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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