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


Facebook posted revenue of $3.9 billion in Q4, a year-over-year increase of 49%, and came in slightly ahead of our expectations. However, the top-line growth decelerated somewhat due to tough year-over-year comparisons. Facebook's monetization should continue to improve rapidly in the coming quarters, due to several factors. In our earnings note we discuss these factors and the highlights from the earnings.

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We recently updated our price estimate for Lululemon to account for our expectation of growth in sales per square foot in conjunction with a rapid increase in the number of retail sales. The company's strong store productivity should allow it to maintain growth in its already impressive sales per square foot.

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Tata Motors Accelerates Capital Expenditures To Drive Future Growth
  • By , 1/30/15
  • Tata Motors (NYSE:TTM) is on an investment spree, looking to launch new products, develop new technologies, and expand its production capacity around the world. Capital expenditure for the luxury vehicle division Jaguar Land Rover (JLR), which forms more than 95% of the group’s valuation according to our estimates, rose to 12.4% of the divisional revenues in fiscal 2014 (ended March), and is expected to further rise this fiscal year as the division is expected to incur a massive 40% increase in capital expenses. This is as a result of higher investments in new product lines such as the Jaguar XE, a compact sedan to be launched this year, and capacity expansions in markets such as China and Brazil. On the other hand, Tata is looking to make a comeback in India, where its standalone business has reported falling vehicle volume sales in both the passenger and commercial vehicle segments in the last two fiscals.  For this purpose, the company is looking to raise its standalone business’ average annual CapEx by 25% to Rs.4,000 crore rupees (around $650 million). This will result in a cumulative $1.6 billion increase in the group’s average annual capital expenditure in the near to mid term. Trefis’ price estimate for Tata Motors is $44, which is around 11% below the current market price. The stock has fallen by 1.6% this week. See Our Complete Analysis For Tata Motors JLR Expanding Production Capacity Volume sales for Jaguar Land Rover rose 16% and 18% in the last two fiscal years respectively, owing to the high luxury vehicle demand around the world. The British marquee car maker has also looked to augment its current volume sales by building more manufacturing facilities closer to the end customer and in low-cost countries. The company will begin local production in its single largest market, China, by Q4 of this fiscal year, and has started building its first fully-owned manufacturing facility outside the U.K., in Brazil. Local production will help the automaker feed local demand at competitive prices and also help evade supply constraints that limit the sale of JLR vehicles. The company aims to build three models in the China plant, in partnership with the Chery Automobile Company, with an initial annual production capacity of around 130,000 vehicles, by 2016. On the other hand, the $290 million (750 million Reals) Brazil plant in Itatiaia, near Rio de Janeiro, will employ 400 employees, include an education and business center, and have an annual production capacity of 24,000 vehicles. On the other hand, JLR is also extending its manufacturing capacity in the U.K., where the new Jaguar XE and the SUV F-Pace are being built. Both the models will be built on the same lightweight aluminum monocoque at JLR’s Solihull factory, where for the first time Jaguar models will be manufactured (only Land Rover models were built before this). The company has already invested £1.5 billion (around $2.3 billion) to support the introduction of its new aluminum and lightweight technologies, and plans to create 1,300 new jobs. Extending production capacity will remove supply constraints at JLR, and could possibly fuel volume growth going forward. Tata Motors Looks To Spur Domestic Sales Tata Motors’ R&D spend in its domestic operations has risen over the last few years, from 3.3% to 6.3% of the net sales in fiscal 2014, as the company looks to launch new products and revamp its existing model-lineup, in a bid to reverse the trend of declining sales in India. Tata announced Horizonext in 2013, which is an aggressive strategic plan for its passenger vehicle business unit. Over the last two years, the company unveiled eight newly upgraded and enhanced products across five passenger vehicle brands and introduced new products such as the E-max range of CNG vehicles and the Nano Twist with electric power steering. Recently, Tata launched its new models (without a predecessor), the Zest and Bolt, to compete in the fast-growing compact segment. Higher CapEx will dent Tata’s financials in the near term, but with higher investments in research and development and more capital spending, the company hopes to revitalize its domestic sales and push for higher growth in the luxury space through Jaguar Land Rover, going forward. 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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    Weekly Review: Ford's New In-Car Infotainment System Will Attract More Customers To The Brand
  • By , 1/30/15
  • tags: F GM TM HMC
  • January has been a busy month for Ford Motors. The company launched its 2017 version of the GT Super car at the North America International Auto Show and also showed two other performance oriented vehicles, the F-150 Raptor and Shelby Mustang GT350R at the event. There is another piece of news relating to the company that should be of interest to investors. Back in 2010, Ford debuted its MyFord Touch System, an inbuilt infotainment system for the drivers of Ford’s cars. The system was well received on its launch, but consumers didn’t take to it nearly as well. The system was ranked no.5 in JD Power’s Initial Quality Study of automotive brands, but after falling into disrepute with consumers, it fell down to no.23 in the rankings. The company’s infotainment system has been one of biggest complaints against its products in the past and the U.S. auto maker has realized this. Consequently, the company redesigned its in-car infotainment technology and named it SYNC 3. The new technology will be available on full Ford and Lincoln lineups by the end of 2015. Recently, Ford also announced intentions to roll out Ford SYNC App Link 3.0, a technology that will give consumers the ability to access compatible navigation apps on a touch screen inside the car in a manner similar to how they access these apps on a smartphone. The AppLink will have an open-source SmartDeviceLink initiative which should improve the in-vehicle experience through a better integration of smartphone applications with the car infotainment screens. Additionally, Ford is working with global consumer internet service company Alibaba to improve its map navigation and music services in its vehicle system. We estimate gross revenues of about $160.1 billion for Ford Motors in 2015, with EPS of $1.19. We currently have  a $15 price estimate for Ford Motors, which is just about in line with the current market price. 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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    The Week That Was: Coca-Cola And PepsiCo
  • By , 1/30/15
  • tags: KO PEP DPS
  • As we move closer to the announcement of full year results for the beverage giants  The Coca-Cola Company (NYSE:KO) and  PepsiCo (NYSE:PEP) in February, we take a look at the recent developments at the companies this week. Carbonated soft drink (CSD) sales have declined for ten consecutive years in the U.S. as consumers continue to shift away from sugary sodas and choose healthier alternatives such as sports drinks, ready-to-drink teas, and organic juices. Both Coca-Cola and PepsiCo are heavily dependent on CSDs for organic growth, with this segment constituting 64% and 17% of their net valuations respectively, according to our estimates.  Beverage companies have looked to reverse the trend of declining soft drink sales by introducing low/no calorie drinks, but the diet alternatives have in fact been more severely hit in terms of volume sales, due to safety concerns regarding artificial sweeteners, such as aspartame, and the bitter aftertastes of natural sweeteners. Coca-Cola and PepsiCo are looking to solve their low-sugar problem, and with this aim, the companies launched Coke Life and Pepsi True respectively, both of which are Stevia-sweetened, in the U.S. last year. Another effort to reduce calories has been the reduction in sizes of cans and bottles, which gives customers the comfort of consuming lower cumulative calories in one go. Both Coca-Cola and PepsiCo, along with Dr Pepper, pledged to reduce calorie consumption through their offerings by 20% by 2025 in the U.S., and so we discuss the latest initiatives by the two biggest beverage companies in the country as part of this plan. Both the Coca-Cola and PepsiCo stocks fell this week, but the declines were lower than that in the overall S&P 500 Index. Coca-Cola This week Coca-Cola announced that it will reduce the sugar content in the Coke sold in Canada, which used to be much sweeter than the Coke sold elsewhere. The company is reducing the size of its widely-bought 591 milliliters (~20 ounce) bottles by 15% to 500 ml (~17 ounce). In addition, Coca-Cola is introducing smaller 310 ml cans and increasing the availability of 222 ml mini-cans and 237 ml small glass bottles in the country. As Coca-Cola reduces calories by 8% in Canada, the company will look to win-back customers in a market where CSD sales are declining by roughly 4% each year, and appease health activists that have for long criticized sugary-soft drink makers for contributing to obesity. In fact, 66% of Canada’s adult population is either overweight or obese. We estimate a $42 stock price for Coca-Cola, which is roughly in line with the current market price. The stock has declined 1% this week. See our full analysis for  Coca-Cola Canada volumes form only approximately 1.3% of Coca-Cola’s volumes, and large volume changes in sales in the country might not significantly impact Coca-Cola’s net results. However, the beverage giant’s strategy when it comes to its CSD lineup remains clear — to increase emphasis on smaller packs that carry lower cumulative calories. This move will also help Coca-Cola gather higher profits as smaller-sized bottles and cans have higher unit pricing, and thus positively impact the price mix. PepsiCo PepsiCo is also taking steps to battle declining diet soda volumes in the domestic market, and is rolling out its Stevia-sweetened Pepsi True in Denver this week. Denver is only one of three test markets for Pepsi True, which was initially only available on last year. Pepsi True is a naturally sweetened drink containing 60 calories in a 7.5 ounce can, as opposed to 150 calories in a 12 ounce can. The company aims to leverage the positive customer perception of natural sweeteners to spur its diet soda sales, which fell by high mid-single percentages in 2013 and in the first nine months of last year. However, during its initial launch on Amazon, Pepsi True received many negative customer responses, reflecting how PepsiCo’s attempt to launch a Stevia-sweetened low-calorie drink might have gone awry. Although the initial response to Pepsi True was disappointing, the company is now testing the product in different test markets in the U.S., and will look to launch new products and provide more options in the future in order to gather customer attention. We estimate a $91 price for PepsiCo, which is roughly 5% below the current market price. The stock has declined 1.3% this week. See Our Complete Analysis For PepsiCo 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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    Weekly Casino Notes: Las Vegas Sands' Earnings And More
  • By , 1/30/15
  • tags: LVS WYNN
  • The past week was eventful for casino operators as Las Vegas Sands reported a 28% jump in its earnings for the fourth quarter. On a separate note, Union Gaming Research came out with a report stating that the casino stocks have bottomed out. This led to a buying spree in the casino stocks. The Macau data for the week ending January 25th also came in positive with a 7% growth over the previous week. However, it remained 7% lower when compared to the prior year period. On that note, we discuss below some key developments in the casino industry over the past week or so.
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    Weekly Software Notes: Oracle, SAP SE and Symantec
  • By , 1/30/15
  • The week ended January 30th was an eventful one for the software industry. Shares of global database software leader Oracle Corp. (NYSE: ORCL) fell by 3% Monday through Thursday, while SAP SE (NYSE: SAP) gained 2%. Software security major Symantec (NYSE: SYMC) fell by 4% during the week. In comparison, the Dow Jones U.S. Software Index was down 6% Monday through Thursday, while the broader S&P 500 declined by 1%. In this report, we take a look at the major events in the software industry during the week ended January 30. Oracle Oracle trended lower during the week following criticisms of the company’s unpopular pay and governance policies.  Two European pension funds, PGGM and Britain’s Railways Pension Trustee Company Ltd, wrote a letter to Oracle complaining about the disproportionate influence exercised by CEO and major shareholder, Larry Ellison, over the board and compensation structure. Mr. Ellison, who owns over a quarter of the Oracle’s shares,, earned $67 million in compensation last year. The aforementioned pension funds have lobbied Oracle regarding their governance and pay policies for the last four years, but to little effect. It is unlikely that their latest effort will be any more fruitful. Meanwhile, Oracle released an update to the Oracle Service Cloud and has integrated advanced co-browsing capabilities in the suite. The company has leveraged the technology gained from the LiveLOOK acquisition last year to allow instant screen-sharing between a customer and the customer service agent. Other enhancements in the update include skill-based routing to customer service agents, visitor browsing histories and social capabilities. SAP SAP had a mixed week on the bourses following release of fourth quarter earnings on January 20th, but managed to close the week up by 3% Monday through Thursday. On January 26th, the company introduced a new marketing gap analysis tool in collaboration with Raab Associates. According to SAP, “the free interactive tool provides marketers with personalized recommendations on focus areas of investment for their organization”. The tool works by asking the respondent a series of questions and running the responses through a set of rules to compare ideal requirements with the existing capabilities. Broadly, the tool is merely a marketing play for customer engagement and is aimed at reeling in unsure marketers by providing a glimpse of what SAP can do for them. Symantec Symantec fell by 2% on Tuesday and Wednesday each to close the week down by 4% Monday through Thursday. The company announced on January 28th that it has chosen to name its proposed independent information management company as ‘Veritas Technology Corporation’. Symantec had previously announced that it will split its information (storage) management business into an independent, publicly traded company. The name is derived from the company that Symantec acquired back in 2005, ‘Veritas Software Corporation’. The Veritas business generated $2.5 billion in revenue for Symantec in fiscal year 2014. The company estimates the current market size for its products to be around $11 billion, and the market is posed to grow at a CAGR of 7% to reach $16 billion by 2018. Meanwhile, in yet another churn in Symantec’s executive suite, its Managing Director Brenton Smith departed from the company on January 29th. Following his departure, Paul Simos, has been appointed as the acting head of enterprise sales, Pacific region. Mr. Smith’s resignation comes amidst unconfirmed reports that Symantec plans to have its senior management team in place by the beginning of April. The latest development follows a string of new appointments to Symantec’s C-suite last year, including CEO, CFO, CIO and CAO (Read: Symantec’s Revival: The Security Business Holds the Key ). Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Amazon's Earnings Came In Above Expectations, But Are They Sustainable?
  • By , 1/30/15
  • tags: AMZN BABA EBAY
  • Amazon (NASDAQ:AMZN)  delivered a beat in the fourth quarter of 2014, with its earnings per share coming in at 45 cents, much higher than the consensus estimate of 17 cents. Strong performance across the North American market, as well as electronics and general merchandise and cloud services businesses, drove a 15% increase in net sales during the quarter. Its operating margin improved sequentially from -2.6% in Q3 to 2.0% in Q4, assuaging some of the recent investor concerns regarding the lack of profitability in the company’s business model. The results were lauded by market participants, and the company’s stock rose by over 10% in after-hours trading. While the earnings report contained some positive news related to Prime subscriptions and efficient management of OpEx, we think it’s still too early to say that the company’s profitability will continue to improve going forward. The guidance for Q1 2015 was soft with top-line growth anticipated in the range of 6% and 16%, and GAAP operating income estimated to be in the range of -$450 million and +$50 million, as compared to +$146 million in Q1 2014. We think Amazon’s top-line growth could slow down in the coming quarters with tougher year-over-year comparisons. At the same time, while the latest results showed higher efficiency against the cost of sales and fulfillment costs, we believe the same costs will have to decrease meaningfully over the coming years for Amazon to improve its profitability. Additionally, while North American results showed higher profitability, profits from the international region were disappointing; we think this lack of profitability within the international businesses could persist over the coming quarters, considering that Amazon is investing heavily in several emerging economies, where the e-commerce markets are highly price competitive. The trailing twelve month free cash flow was  $1.9 billion in Q4 2014. However, if we normalize the figure by subtracting principal lease repayments and capital acquired under capital leases, the figure drops to negative $2.2 billion (according to company reports). Hence, we’d advise investors to exercise caution before investing into Amazon’s stock at present levels. We are in the process of revising our  $263 price estimate for Amazon’s stock .
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    What 2015 Holds For Alpha Natural Resources
  • By , 1/30/15
  • tags: ANR CLF RIO VALE
  • The year gone by has been a fairly tough one for Alpha Natural Resources (NYSE:ANR). The company faced poor market conditions for both metallurgical and thermal coal, which impacted the company’s profitability and liquidity. With little scope for topline growth, the company largely concentrated on rationalizing operating costs in order to boost its profitability. In addition, the company sold off some of its coal assets, partly to boost its liquidity position. With the company expected to face similar challenges in 2015, its strategy is unlikely to change significantly. In this article, we will take a look at the challenges facing Alpha Natural Resources and the company’s likely response to the same. Coal Prices Metallurgical coal is a major input in steelmaking. Thus, demand for metallurgical coal by the steel industry plays a major role in determining its prices. The prices for Alpha Natural’s coal sales are benchmarked to international metallurgical coal prices. International metallurgical coal prices are largely determined by Chinese demand, since China is the largest consumer of metallurgical coal in the world. Demand for the commodity by the Chinese steel making industry has been weak, adding to subdued demand from other major consumers such as Japan and the EU. Chinese steel demand growth is expected to slow to 2.7% in 2015, down from 6.1% and 3% in 2013 and 2014 respectively. Weak Chinese demand for steel has translated into weak demand for metallurgical coal.Weak demand coupled with an oversupply situation due to expansion in production by major mining companies, has resulted in plummeting coal prices. The benchmark Australian metallurgical coal price stands at around $119 per ton, around a third of its 2011 peak level of $330 per ton. This negatively impacted price realizations for Alpha Natural’s metallurgical coal business. Realized prices for Alpha Natural’s metallurgical coal mining business stood at $86.14 per ton in the first nine months of 2014, as compared to $99.70 per ton in the corresponding period in 2013. Given the prevailing weak demand and oversupply situation, Alpha Natural will face a weak demand and pricing environment for metallurgical coal in 2015 as well. Thermal coal prices have also weakened due to an oversupply situation. This is primarily due to the expansion of coal supply by major mining companies, despite weak demand conditions. Demand for the commodity has weakened as a result of weakening demand from China, the world’s largest consumer of thermal coal. As a result of the country’s anti-pollution drive, coal’s share of new generation capacity has dropped to 40% over the past 12 months, from 75% between 2010 and 2012. Realized prices for Alpha Natural’s Eastern Steam Coal business,which produces thermal coal, stood at $58.32 per ton in the first nine months of 2014, as compared to $62.51 per ton in the corresponding period of 2013. Given the prevailing weak demand and oversupply situation, Alpha Natural will face a weak demand and pricing environment for thermal coal in 2015 as well. Cost Reduction As a result of a weak pricing environment in 2014, Alpha Natural Resources focused on reducing its operating costs in order to boost its profitability. The company’s cost reduction measures resulted in lower labor-related benefits and expenses and lower maintenance costs. Alpha Natural Resources lowered its cost of coal sales around 11% from $45.86 per ton in the first nine months of 2013 to $40.87 per ton in the first nine months of 2014. Given that pricing for both metallurgical and thermal coal is expected to remain weak in 2015, the company will have to focus on further rationalizing its operating costs. The company management hinted at a continuation of its efforts to reduce operating costs and improve operational efficiency in 2015 during its Q3 earnings conference call. Capex Reduction and Asset Sales Plummeting coal prices have adversely affected the company’s operating cash flows. The company reported a cash outflow of $253 million from its operations in the first nine months of 2014, as compared to an inflow of $178 million in the corresponding period of 2013. In response to a deteriorating liquidity position and poor market conditions, the company lowered its capital expenditure in the first nine months of 2014 by 21% year-over-year. The company’s capital expenditure is expected to rise in 2015 due to expenses pertaining to regulatory and environmental compliance and expenditure for rebuilding underground mining equipment. However, given that weak market conditions are expected to persist in the near term, the company will be looking for ways to limit the increase in capital expenditure. The company sold off the assets of its subsidiary, AMFIRE Mining Company, for $86 million in December. If market conditions remain subdued or deteriorate further, Alpha Natural Resources may be forced to divest more of its mining assets in order to boost its liquidity. However, it may not receive the best valuations for its assets under current market conditions. All in all, the company’s strategic direction in 2015 is likely to be a continuation of the steps taken by it in 2014 — cost reduction and a focus on boosting its liquidity position. Given that a significant improvement in market conditions for coal is unlikely in the near term, 2015 may be another tough year for the company. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Google Earnings: Strong Mobile Performance Backed By Programmatic Platform Boosts Revenues
  • By , 1/30/15
  • Google (NASDAQ:GOOG) posted its fourth quarter results on January 29 th . The company reported 15% year-on-year growth in revenues to $18.10 billion, which was in line with our expectations as stated in the note published earlier . However, it’s operating income from continuing operations declined marginally to $4.40 billion, primarily due to increase in  investment in research and development and spending on SG&A (Sales, Marketing, General and Administration). The markets reacted a bit positively to the results as the stock was by 1% in the aftermarket trading hours. Pricing pressure on online ads continued to drive a 3% year-over-year decline in cost-per-click (CPC). However, aggregate paid clicks, which represent the number of ads served across Google properties, grew by 14% year-over-year. The revenues also reflected a change in mix as nearly 56% of revenues were from international markets. In this note, we will discuss Google’s results. Click here to see our complete analysis of Google Cost-Per-Click Continues To Decline As Number of Clicks Grow Due to Programmatic Buying We currently estimate that PC search ads and mobile search ads contribute approximately 65% to the firm’s value. Online ad spending is expected to increase in general.  The cost per click (CPC), a metric that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years. The recent trend is indicative of geographic mix, device mix, property mix, as well as the ongoing product and policy changes. While international revenue contributes nearly 56% of the total revenues, mobile devices account for a huge influx of queries for Google. Advertisers have realigned their ad budgets in favor of mobile devices. Traditionally, CPC for mobile ads is lower compared to that of a PC. As a result, the average blended CPC (CPC for both mobile and PC) declined by 3% year-over-year during the quarter. However, Google is trying to improve its CPC, especially on its mobile devices, by re-inventing its programmatic platform, which matches relevant ads with content, as well as an increase in user-generated online content.  However, this  is negatively impacting Google’s CPC  as the programmatic platform does away with inefficiencies of improper ad matching. As a result, company’s top line growth from search ads has failed to match the growth in search volume. Furthermore, data indicate that over 50% of the web traffic is coming from mobile devices. According to eMarketer, advertisers’ spending on programmatic platforms will increase to $8.36 billion this year in the U.S. alone. It projects that overall spending in programmatic will increase to $20 billion by 2016. To cash on this trend, Google is focusing on its programmatic businesses including AdMob, AdExchange, DoubleClick Bid Manager, and these continue to grow at a strong rate. As a result, DoubleClick Bid Manager, its primary frontend for programmatic buying, has doubled in volume over the past year. Furthermore, Google Partner Select, its premium programmatic video marketplace, now has more than 50 publisher partners including Hearst Television, and Food Network, and includes brands like BMW. Going forward, as Google improves its programmatic platform, we expect that the growth in online advertising will grow but continue to weigh on CPC. Focus on Increasing Internet Penetration 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 the 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. Google, like many other companies such as Microsoft, etc., is contributing  by launching its 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. Google’s business is heavily dependent on the number of users that use its search engines to query the Internet. The company leverages its popularity across PCs (65% market share) and mobile devices (over 90% market share) to sell ads slots to advertisers. As a result, its PC search ads division makes up 35% of its estimated value, while its mobile search ads division makes up 29% of the value. Over the past few quarters, Google’s revenues have grown at a slower pace. Much of it can be attributed to the pricing pressure on the cost of ads and a slower growth in search queries across the Internet. During the quarter, and over the past year, Google has expanded its fiber optic  roll-out to new cities. It recently announced that it will roll out fiber optic capability to 18 cities in four metropolitan areas in the U.S. If Google were to succeed with this project, and the number of broadband Internet users were to increase in the next five years, not only would the total addressable market in the U.S. increase, but it can also look into launching these services in other parts of the world where infrastructure hamper Internet penetration. This would boost sale of PCs and smart connected devices across under-served regions would also increase. As a result, we expect growth in the number of queries originating from both PCs and mobile devices. Youtube Boosts Ad Volumes In our pre-earnings note, we mentioned that we would be closely watching YouTube because it caters to the rapidly growing online video ad space. During the earnings call we got some encouraging metrics from management, which makes us confident about YouTube as an essential driver of revenue growth going forward.  Management stated that YouTube now has more than 1 billion users, and watch time is up 50% year-over-year. The company continues to invest in YouTube Partners and Partner revenue has increased by more than 50% year-over-year. Furthermore, mobile revenue on YouTube is up more than 100% year-over-year. To ensure that YouTube’s dominance continues across mobile devices, the company announced new ad formats customized for mobile screens, and expanded YouTube’s TrueView ads into AdMob’s network of more than 650,000 mobile apps. Considering Google’s dominance in the video ads industry, with nearly 162 million unique viewers as of November 2014, we expect it to do well in the mobile video space too. Furthermore, Google launched YouTube music key beta, a monthly music subscription service that provides ad free music, background play, and offline viewing. This will also include a subscription to Google Play Music with more than 30 million songs, expert queue rated play lists, and more. This adds another revenue stream to YouTube. Going forward, YouTube is important for Google because, according to our estimates, this division constitutes just under 10% of its value. Revenues from this division were around $3.7 billion in 2013, and we think that they will continue to grow and reach around $18 billion by the end of our forecast period. Capital Expenditure Continues to Soar Google continues to invest heavily in Internet infrastructure and reported $3.3 billion in capital expenditures in the fourth quarter of 2014. Majority of capital investments are for IT infrastructure, including data center construction, servers and networking equipment. Google has been steadily ramping up its spending for the past couple of years, in an effort to improve its return on investment and quality of service. We are in the process of updating our model. We currently have a  $546.89 price estimate for Google, which is 8% above 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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    Weekly Notes On Gaming Industry: GameStop, Activision Blizzard & Electronic Arts
  • By , 1/30/15
  • tags: ATVI EA
  • The holiday season is over and the gaming industry, in 2014, has managed to outperform 2013’s performance. For the entire calendar year of 2014, gamers spent roughly $5.1 billion on physical hardware for video games, up more than 18% y-o-y, offsetting software sales, which were nearly $5.3 billion, down 13% y-o-y. As a result, the total revenue for the industry in the U.S. was up 1% y-o-y. This indicates the strong demand for the new console generations: Microsoft’s Xbox One and Sony’s PlayStation4.  Among the titles, Call of Duty: Advanced Warfare, the franchise’s new edition, managed to outsell every other game from every other genre. Just before the holiday quarter, Microsoft lowered the prices of its latest console: Xbox One. As a result, Xbox One outsold PlayStation 4 in November and December. Here’s a quick round-up of some news related to the gaming industry covered by Trefis. GameStop On January 13, GameStop (NYSE:GME) released its sales report for the nine-week holiday period ending January 3 and reported total global sales of $2.94 billion, down 6.7% y-o-y. Furthermore, the results were negatively impacted by the foreign currency exchange rates. Moreover, the comparable store sales dropped 3.1% y-o- y, out of which the U.S. witnessed a 3.3% y-o-y decline, whereas the international stores witnessed a 2.7% decline. If we look at this month-wise, November comparable store sales declined a massive 12% y-o-y, primarily because the last year’s November witnessed the launch of new consoles (PS4 and Xbox One).  On the other hand, December’s comparable store sales rose 4.4% y-o-y. Based on these results, the company changed its guidance for the fourth quarter. GameStop’s stock rose from $37 to $39, before falling to $36 during the last week.  Our price estimate for the company’s stock is $42, implying a market cap of $4.8 billion, which is nearly 15% above the current market price. We are factoring in changes in our model for the company and will update it shortly. See our complete analysis of GameStop Electronic Arts Electronic Arts (NASDAQ:EA) released its Q3 earnings report on January 27 and reported strong numbers, as the company reported non-GAAP net revenue of $1.43 billion, which was 12% above the guidance, but down 9% year-over-year (y-o-y). On a trailing twelve month basis, EA’s non-GAAP net revenue reached $4.337 billion, and digital receipts accounted for more than half of the revenues ($2.178 billion) for the first time ever, up 17% y-o-y. The company’s core sports titles:  FIFA 15, Madden NFL 15, and Hockey Ultimate Team services recorded a massive 82% y-o-y growth. EA’s stock rose from $49 to $55 during the last week, after the release of its Q3 report.  Our price estimate for the company’s stock is $39. implying a market cap of $12 billion and we are factoring in changes in our model for the company and will update it shortly. See our complete analysis of Electronic Arts stock here Activision Blizzard Activision Blizzard ’s (NASDAQ: ATVI) is scheduled to release its Q4 2014 report on February 5, 2015. The company is fairly confident of its performance during the holiday quarter, with Call of Duty: Advanced Warfare and Destiny leading the FPS genre.  As of January 3, Call of Duty: Advanced Warfare has sold approximately 17.6 million units, whereas Destiny sold nearly 10 million units. Considering that Destiny is a new franchise and that it was the 6 th highest title sold globally in 2014, it might just be the next big FPS franchise in the gaming world. Moreover, the company has been introducing new expansion packs for its World of Warcraft (WOW) franchise. Activision’s stock traded between $20 and $21 during the last week.  Our price estimate for Activision is $21, which is roughly the same as the current market price. See our complete analysis of Activision’s stock here View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Weekly Notes On Coffee Industry: Keurig Green Mountain & Starbucks
  • By , 1/30/15
  • tags: SBUX DPS KO
  • The coffee industry saw its ups and downs in 2014, with the price of Brazilian Natural Arabicas rising nearly 80% in the first 10 months of 2014 to reach 197 cents per pound in October 2014, according to the International Coffee Organization. However, in the last three months, the coffee prices have dropped by more than 15%, due to improved weather and rain conditions in South America. Global production of coffee for 2014/2015 is now forecast at 149.8 million bags, which is 2.7 million bags less than the previous year output. World Arabica production is now expected to decline for a second consecutive year, whereas the Robusta coffee production is expected to improve again. As a result, the share of Arabica coffee has decreased from 62% to 55%. Source: USDA Here’s a quick round-up of some news related to the coffee related companies covered by Trefis. Starbucks The coffee giant,  Starbucks Corporation (NASDAQ: SBUX), delivered yet another impressive performance in its first quarter for the fiscal 2015, as the company’s consolidated net revenues rose 13% year-over-year (y-o-y) to $4.8 billion, with a significant contribution by each segment. Moreover, the company’s operating income rose 12% y-o-y to $916 million and non-GAAP EPS rose 16% y-o-y to a record $0.80, primarily due to the gain on the acquisition of Starbucks Japan. The highlight of the quarter was the company’s gift card initiative and mobile payment initiative, which led to an increase in customer count. On the other hand, the company plans on expanding its base in China and plans to take the store count in the country to 3,400 by the end of fiscal 2019. Starbucks’ stock has risen from $82 to $89 since the release of its Q1 report on January 22.  Our price estimate for the company’s stock is $82, implying a market cap of $62 billion, which is 7% below the current market price.  We are updating our model with the recent earnings. See our complete analysis of Starbucks Keurig Green Mountain Keurig Green Mountain (NASDAQ:GMCR) ended its 2014 fiscal year on a high note, with a 14% year-over-year (y-o-y) growth in net revenues in the fourth quarter.  On December 4, the company announced its decision to acquire the remaining 85% outstanding equity of MDS Global Holding Ltd. (Bevyz), in a transaction worth $220 million. The very next week, the company renewed its partnership with Caribou coffee, with a 10-year agreement, which includes the manufacturing, marketing, distribution, and sale of Caribou coffee in Keurig portion packs.  On January 7, Keurig joined hands with Dr Pepper Snapple (NYSE:DPS) to sell the latter’s branded capsules to be used in Keurig Cold machine. Keurig Green Mountain’s stock declined from$133 to $127 during the last week.   Our price estimate for the company’s stock is $108, implying a market cap of $17.5 billion. See our complete analysis of Keurig Green Mountain View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Diageo Half-Year Earnings: What Lies Ahead?
  • By , 1/30/15
  • tags: DIAGEO
  • Diageo Plc. (NYSE: DEO) posted weaker half-year earnings on January 29, with operating profits witnessing a 11% decline, on a year-on-year basis, to reach $1,839 million. The leader in alcoholic beverages faced challenging circumstances in the six months, characterized by a slowdown in the U.S. spirits market, economic and political stress in Russia, “anti-extravagance” measures in China, and economic turmoil in Venezuela, which resulted in a 2% decline in volumes. The decline came mostly in global brands such as Johnnie Walker, Smirnoff, Baileys, Captain Morgan’s, and Guinness, which account for almost 30% of the net sales. The worst hit among these was the scotch category in general, and Johnnie Walker in particular, which registered a 9% fall in volumes. Even against this backdrop, reserve brands continued to grow by 10% in both developed and developing markets, and present potential for the company in the future. Here are some key highlights from Diageo’s earnings release along with what can be expected going forward. Trefis has a  $119 price estimate for Diageo, which is in line with the current market price. We will be updating our valuation model and price estimate for Diageo to account for the earnings release. See Our Complete Analysis For Diageo Here Innovation And Tactful Pricing To Aid Growth In North America North America is an important region for Diageo, since it accounts for over 20% of net sales and 45% of profits.  Net sales in the U.S. remained flat, and operating profits registered a 5% decline on a year-on-year basis, even in the face of better economic prospects. This was primarily because of a 9% decline in scotch sales, which was partially offset by further innovations in flavored vodka and whiskey, with Cîroc Pineapple and Crown Royal Regal Apple. Additionally, new launches in tequila under the Peligroso and DeLeón brands, along with Don Julio and Bulleit Bourbon also registered double-digit growth rates. We expect Diageo’s sales in the American market to improve marginally in the second half of the fiscal year. Although the U.S. spirits market expanded by 1.5% in 2014, the top five brands lost ground and declined by 1%.  This development can be attributed to uneven economic growth, which has been weakening demand among middle-income groups. At the same time, the U.S. spirits market has also been witnessing a high influx of new distillers, who offer more competitive prices in comparison to Diageo. For instance, Captain Morgan Spiced costs 25% more than the leading white rum, Crown Royal costs 10% more than the leading Tennessee whiskey, and Ketel One  costs 24% more than its biggest competitor. The company has indicated more subtlety in pricing of brands such as Smirnoff and Ketel One. Moreover, marketing campaigns such as ‘Gentlemen this is Vodka’ and ‘Exclusively for everybody,’ along with the introduction of new offerings such as Smirnoff Sours, are expected to spur demand.  The U.S. is also witnessing a shift away from vodka towards whisky, which is set to grow at 10%, with approximately 70% of the growth coming from flavored whisky, and unflavored bourbon, and rye. Although Diageo holds the dominant position in scotch with Johnnie Walker, it has little presence when it comes to American whisky. However, the end of the fiscal year saw the introduction of seven flavors in whisky between the $14.99 and $24.99 price points. Moreover, Diageo plans to capitalize on the opportunity that exists in the American whisky domain, as evidenced by the higher investments in distilleries in Kentucky and Louisville.  Hence, higher levels of product innovation and better branding, could contribute to sales increases even in whisky. “Anti-Extravagance” Policies Impacts Volumes In China Diageo’s performance in the first half of the fiscal year also reflects sluggish growth in its developing markets, especially China. In the last decade, the Chinese beer and spirits market recorded unprecedented growth to be established as the largest in terms of total consumption in the world. Keeping in mind the kind of opportunities the market presented, Diageo became a stake holder in the white spirit (“baijiu”) brand, Shui Jing Fang. The introduction of “anti-extravagance” policies under president Xi Jinping, and a consequent fall in “corporate entertaining and gifting” resulted in a drastic 78% decline in sales of Shui Jing Fang over the last fiscal year.  Moreover, the scotch category, which brings in almost 30% of revenues for Diageo suffered in China with sales of Johnnie Walker Black label falling by approximately 20% over the same period. These factors among others, resulted in a steep 7.4% sales decline in Asia Pacific in the first quarter of fiscal 2015, surpassing analyst expectations of a 4.5% decline. Although net sales of Shui King Fang advanced 25% in the second quarter, scotch sales continued to suffer the perils of the “anti-extravagance” policies, and fell 22%, resulting in an overall net sales decline of 4% in the second quarter. With China’s growth rates projected to fall going forward, it seems highly unlikely that there will be any reprieve for Diageo in the market in the short term. Currency Depreciation And Economic Turmoil In Venezuela and Russia Impacts Performance Apart from China, the European market also looks dull with operating profits declining 6% on a year-on-year basis mainly due to the ongoing crisis in Russia. A stagnant economy, trade sanctions on Ukraine, and falling oil prices, has led to major depreciation of the Russian ruble against the dollar. Russia’s heavy reliance on imports has made matters worse by resulting in high inflation. There are no signs of reprieve for the Russian economy in the near future with crude oil prices expected to reach $55 a barrel in 2015. Russia’s economic situation has led experts to revise its growth estimates downwards, signalling to the onset of a recession. This has already led to a 6-7% contraction in the Russian beer market. Moreover, government regulation in Russia along with inflationary pressures hit the alcohol industry the hardest, leading to a 15% price increase, which stifled demand for spirits considerably. However, some relief in this respect can be expected going forward with the state agency announcing an approximate 16% slash in vodka prices come February. Yet another country hit by falling oil prices has been Venezuela, which receives almost 97% of its foreign earning through the export of oil and its derivatives. Between September and now, the price of the Venezuelan oil fell from $96 to $38 a barrel. The consequent fall in export earnings and the high reliance on imports even for basic commodities led to widening fiscal deficits for the government. In order to finance this deficit, the government resorted to printing more currency, which has contributed to high inflation rates of over 60% along with major currency depreciation. The tough economic circumstances in Venezuela resulted in a 40% decline in scotch volumes, contributing to a 47% decline in Latin America and Caribbean (LAC) operating profits. Economists expect circumstances to get worse in Venezuela, projecting inflation to cross 64% in the coming months. The high prices for basic commodities could adversely impact Diageo’s performance in the market by reducing demand for discretionary products such as alcohol, going forward. Although Diageo is expected to continue facing tough situations over the next quarter, it can be expected to rebound in the medium to long term. Part of this is because it still dominates the alcohol beverage industry with iconic brands such as Johnnie Walker, Smirnoff, and Baileys, whose competitive advantage is sure to remain for a while. Moreover, proposed higher investments in product innovation and marketing in its bigger markets such as the U.S. can be expected to aid sales going forward. 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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    Earnings Review: Ford Narrows Losses In Europe But Low Volumes In Lieu Of F-150 Re-Launch Impact Overall Results
  • By , 1/30/15
  • tags: F GM TM HMC VLKAY
  • Ford Motors (NYSE:F) announced earnings for the fourth quarter of fiscal 2014 on Thursday. The numbers were disappointing: the company’s profit before taxes was down to $1.1 billion, down $197 million compared to a year ago, while its net income stood at $52 million, down $3 billion compared to a year ago. The net income last year was inflated due to a special $1.2 billion one time tax item. In this quarter, the net income was also impacted by a $1.2 billion write down of the business in Venezuela. The revenue for the quarter stood at $35.9 billion, a decline of $1.7 billion compared to the fourth quarter of fiscal 2013. We have an  $15  price estimate for Ford, which is slightly more than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings. North America Shows Some Weakness But China Remains Strong Ford’s North American wholesale volume and revenue declined by 6%.  Ford’s total U.S. market share was 14.3% in the fourth quarter, a decrease of 1.1% from a year ago. This drop reflects the planned reductions in daily rental sales, and a lower share of F-150 in the sales mix. North America operating margin was 7.4%, down 0.8% from last year, and pre-tax profit was $1.5 billion, down $252 million. In Asia-Pacific, wholesale volume was up by 2%, while revenue declined by 9% compared to a year ago, primarily due to the impact  of unfavorable currency translation. (Ref:2)  The company’s wholesale volume in China grew by 5% over the quarter, but its market share decreased  by 0.1% over the quarter. The growth in volume in China reflects the continued strong performance of Ford’s EcoSport, Kuga, and Mondeo models. The region’s operating margin was 3.6%, down 0.2% from a year ago, and pre-tax profit was $95 million, down $14 million from last year’s fourth quarter. The company attributed the decline to increased expenses related to ongoing investments in products in Asia, including five new plants that are expected to be operational over the next 6 months. (Ref:2) Europe Improves Ford’s total market share in the twenty biggest markets in Europe for the fourth quarter was 7.6%, on the back of a 2.8% increase in market share in the commercial vehicle segment driven by strong performance of the newly introduced line of compact vehicles. (Ref:2) The company’s share in the commercial vehicle segment improved over the quarter to 11.7%, reflecting the strong performance of its new line of Transit vehicles and the Ranger compact pickup. Operating losses in the region narrowed to $443 million for the quarter on improved volume.  The automaker is still trying to achieve an optimal sales channel mix for the region, with a special focus on achieving a higher share of the fleet segment. Ford had earlier aimed to introduce a total of 15 new or refreshed models in Europe over the next five years, but revised those plans in the second quarter and raised that figure to 25, starting with the debut of the affordable SUV EcoSport early last year.  Going forward, The company expects the impact of a more stable automotive market and new model introductions to be offset by uncertainty surrounding Russia and higher pension expenses.  As a result, Ford expects its operating losses to be in the region of  $250 million in 2015. (Ref:2) See full analysis for Ford Motors View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Earnings Review: North America Weakness Dampens Progress Made On Brand Transformation Front For Coach
  • By , 1/30/15
  • tags: COH KORS LULU RL
  • Coach (NYSE:COH), a leading American marketer of luxury handbags and other fashion accessories, posted another set of lackluster results in Q2 fiscal 2015. Coach’s sales in North America dropped by 20% for the quarter (year-over-year comparison) to $785 million, with a 22% fall in comparable store sales. Given the overwhelming dependence of Coach’s business on its operations in North America, the significant decline in North American sales was enough to offset the gains made by Coach in its men’s, footwear, and some international geographies. For the quarter, international sales increased by 5% on a constant currency basis, with China sales, especially, growing at 13% for the quarter.    North America contributes around two-thirds of Coach’s sales, and the company has been losing market share to competitors like Michael Kors, Kate Spade, and Tory Burch over consecutive quarters. We believe Coach will continue to struggle in the North American market in the near future due to increased competition. We are in the process of revising our $59.50 price estimate for Coach’s stock to incorporate the changes due to the latest quarterly earnings. Men’s Business Growing But Footwear Business Disappoints Over the past few quarters, Coach has changed its approach to products, stores, and marketing. The company is moving from its core competency of women’s handbags to becoming a dual-gender lifestyle brand. Additionally, Coach has decided to leverage its brand name and expand into footwear, accessories, apparel, jewelry, and eye wear categories. The company managed to grow its men’s business to about $700 million in annual sales in fiscal 2014. This means that the men’s business now contributes about 23% to the company’s overall revenues compared to about 15% in fiscal 2013. It needs to be noted, however, that the increase in penetration is only partly due to increasing sales of products designed especially for men, a large part of the increase in contribution is due to the overall decline in the company’s revenues. According to the company’s estimates, the global spend on men’s luxury wear is about $7 billion, which represents 18% of the total spend on luxury products. The figure is expected to increase at about a 10% rate in the next five years. The company is targeting $1 billion in sales from its men’s business by 2017. For the quarter, sales in the men’s category remained flat, impacted by the weakness of the yen and reduced promotion in North America. However, Coach recently launched its first men’s ready-to-wear line in London. We expect this to boost the company’s earnings in the coming quarters because of a combination of good product quality and affordable brand positioning. (See: Men’s Business A Key Pillar Of Coach’s Brand Transformation Strategy ) Additionally, Coach has been trying to increase the penetration of footwear products in its overall sales. The footwear line was relaunched in March in about 170 retail locations. Over the quarter, its penetration increased from 8% last year to 12% in  North American retail sales. This is encouraging as the footwear segment represents a great opportunity for Coach to make up for its falling market share in the women’s handbags business and still keep its business equally profitable. The company remains focused on building its market share within the highly fragmented global premium footwear category, which it estimates at about $25 billion. Coach has been expanding its distribution of footwear to both international stores and wholesale outlets. It has also been trying to maximize the productivity of footwear to its overall business, through a sales mix with increasing contribution of products with higher average unit prices (AUP). North America Continues To Disappoint Total revenues in North America fell by 20% compared to last year with a decline in same store sales of 22%. In the second quarter, Coach concentrated on the implementation of initiatives for brand transformation. These initiatives involved: The company has cut down on promotional events in both retail and wholesale channels. As a result, its internet comps were down. The number of flash sales events have been reduced from around 12 a month last year, to only about 4 per month in this year’s holiday period. The company had no preferred customer events in its retail stores nor any COACH days in its North America departmental stores. Additionally, the company has reduced its total stock keeping units (SKU) by about 25%, focusing more on higher margin products. The elevated products (products priced above $400) continued to do well this quarter and increased in penetration to around 30% of handbag sales compared to 20% last year. The number of units sold of this elevated product increased by around 12% compared to the same quarter last year. Overall this quarter, traffic in its stores was down year-on-year and conversion was also negative, but the average transaction price rose.  The company management stated that it plans to reduce square footage in its directly operated stores by about 5%, involving the closure of 70 retail stores and 50 outlet stores by the end of FY15. The reduction will be offset by a modest increase in footprint at departmental stores.  The company plans to add 40 new locations this fiscal year — implying a square footage growth of 3%-4% — and the conversion of more than 300 locations from case line presentation to open sale. 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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    Coca-Cola's Low-Sugar Initiative Is Good For Profitability Too
  • By , 1/30/15
  • tags: KO PEP DPS
  • Late last year, the three soft drink giants, The Coca-Cola Company (NYSE:KO), PepsiCo (NYSE:PEP), and Dr Pepper Snapple (NYSE:DPS),  announced their aim of reducing calorie consumption through their offerings by 20% by 2025 in the U.S. These companies plan to achieve this through the promotion of low-calorie substitutes and smaller packs, which provide lower cumulative calories in one go. Fighting alongside health activists could help these beverage makers not only to spur positive consumer perception but also expand margins, and here’s why. We estimate a $42 stock price for Coca-Cola, which is roughly in line with the current market price. See our full analysis for  Coca-Cola Smaller packs have a higher price per unit, and positive product mix is what has driven revenue-growth for beverage companies, even as overall soda volumes keep declining in North America. Growing health and wellness concerns have dissuaded consumers from soft drink consumption, which is why the U.S. carbonated soft drink (CSD) market is expected to have shrunk for the tenth consecutive year in 2014. The pressure of falling CSD volumes has prompted manufacturers to protect their profitability by raising product prices. Higher prices of CSDs provide another reason for consumers that are already concerned about the health impact of these soft drinks to boycott sugary drinks. This is where selling smaller packs is beneficial for the beverage companies. Demand for small-sized offerings has risen, despite the mini cans containing the same calorie count per ounce as the regular 20-ounce bottles, as customers look for lesser cumulative calorie consumption. According to Euromonitor, while sales in the overall U.S. CSD market remained flat in 2013, mini can sales rose 3%. This means that growth for companies such as Coca-Cola, PepsiCo, and Dr Pepper in the core sparkling segment could come from increasing the intake of occasional impulse buyers, who might be inclined to buy mini cans rather than the bulky multipacks. Margins Boosted By Smaller-Sized Cans While Coca-Cola’s overall sparkling portfolio remained flat in the second quarter ended June, the flagship cola drink Coca-Cola grew 1% in North America. Over three-fifths of the 1% volume growth for the brand Coca-Cola was bolstered by double-digit percent increases in smaller packages, including 7.5-ounce mini cans and 16-ounce immediate consumption packages. In the following quarter, while Coca-Cola’s volumes declined in North America by 1% year-over-year, net sales remained even due to a positive price mix, buoyed by a 3% favorable price mix in sparkling beverages. A formidable pricing strategy helped Coca-Cola improve its operating margins in the region to 24.4% through September, up 130 basis from a year ago. The smaller 7.5-ounce mini cans have higher pricing per ounce, as compared to the 20- and 24-ounce packages, and Coca-Cola is now looking to spur its Canada volumes by increasing availability of its smaller bottles and cans in the country. The company is reducing the size of its widely-bought 591 milliliters (~20 ounce) bottles by 15% to 500 ml (~17 ounce). In addition, Coca-Cola is introducing smaller 310 ml cans and increasing the availability of 222 ml mini-cans and 237 ml small glass bottles in the country. The company is also reducing the syrup concentration in Canadian Coke, which used to be sweeter than the Coke sold around the world. As Coca-Cola reduces calories by 8% in Canada, the company will look to win-back customers in a market where CSD sales are declining by roughly 4% each year, and appease health activists that have for long criticized sugary-soft drink makers for contributing to obesity. In fact, 66% of Canada’s adult population is either overweight or obese. On the other hand, despite a fall in overall volume sales, higher proportionate sales of the mini bottles and cans resulted in a 2% year-over-year rise in PepsiCo’s operating profits for the North America beverage division in Q3. The company’s Pepsi True was also launched only in 7.5 ounce cans last year, and going forward, the company might focus on smaller packages to drive margin expansion. Coca-Cola and PepsiCo could take a cue from the U.S. confectionery market, which witnessed a 9% contraction in volumes from 2008 to 2013, but simultaneously grew revenues by 14%, on the back of higher emphasis on smaller packages that target impulse buyers, and new higher priced premium products. Soft drinks form a massive 64% of Coca-Cola’s valuation and 17% of PepsiCo’s valuation, according to our estimates. With no concrete signs of volume growth in this segment in North America going forward, these beverage companies could look to expand margins through profitable packaging. 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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    GameStop Changes Q4 Guidance Based On Holiday Period Performance
  • By , 1/30/15
  • tags: GME EA ATVI MSFT
  • In 2014, video game retailer  GameStop (NYSE:GME) struggled in terms of new video game software sales, as the whole industry witnessed decline in title sales. On the other hand, demand for the current generation of video game consoles: Microsoft’s Xbox One and Sony’s PlayStation 4,  remained strong throughout the year. This maintained the balance in the industry in terms of revenue generation. According to the NPD December report, the industry generated $3.25 billion in the last calendar month, down from $3.28 billion in December 2013. Moreover, in the last calendar month, gamers spent $1.31 billion on hardware, down nearly 4% year-over-year (y-o-y). However, the trend continued in the software segment, as the net software sales for December 2014 reached $1.25 billion, down 2% year-over-year. For the entire calendar year of 2014, gamers spent roughly $5.1 billion on physical hardware for video games, up more than 18% y-o-y, offsetting software sales, which were nearly $5.3 billion, down 13% y-o-y. As a result, the total revenue for the industry in the U.S. was up 1% y-o-y. Top video game developers, such as Activision Blizzard (NASDAQ: ATVI) and Electronic Arts ’ (NASDAQ:EA) launched their core titles just before the holiday period. EA with its sports titles: FIFA 15 and Madden NFL 15, and Activision with its FPS titles: Destiny and Call of Duty Advanced Warfare, which gave the gamers something to cheer about in the months of November and December. All of these titles were the most awaited titles for the year 2014 in their respective genres. Video game retail companies, especially GameStop, was confident going into the holiday quarter with a lot in store for the core gamers. However, GameStop’s Q3 results were below expectations, primarily due to the absence of core titles, leading to a 2.3% year-over-year (y-o-y) decline in the company’s comparable store sales and a 0.7% y-o-y decline in the quarter’s net revenues. The company expects the comparable store sales in the fourth quarter to range from -5% to +2% and full year comparable store sales to range from 2% to 5%, primarily due to the shift of several title launches to next year. Our price estimate for the company’s stock is $43, which is above the current market price. See our complete analysis of GameStop On January 13, 2015, GameStop released its  sales report for the nine-week holiday period ending January 3 and reported total global sales of $2.94 billion, down 6.7% y-o-y. Furthermore, the results were negatively impacted by the foreign currency exchange rates. Moreover, the comparable store sales dropped 3.1% y-o- y, out of which the U.S. witnessed a 3.3% y-o-y decline, whereas the international stores witnessed a 2.7% decline. If we look at this month-wise, November comparable store sales declined a massive 12% y-o-y, primarily because the last year’s November witnessed the launch of new consoles (PS4 and Xbox One).  On the other hand, December’s comparable store sales rose 4.4% y-o-y. Software Sales: Next generation Console Titles Drive Segment Growth The company reported that the new video game software sales for the holiday quarter grew 5.8% y-o-y, driven by a 94.4% y-o-y increase in PS4 and Xbox One software sales. Titles, such as Call of Duty: Advanced Warfare, Grand Theft Auto V, Far Cry 4, FIFA 15,  and Destiny, led the holiday quarter and resulted in an increase in software sales. Call of Duty: Advanced Warfare sold nearly 7.2 million units on all the major platforms in the first week of its release. As of January 3, the title has sold approximately 17.6 million units, leading the holiday quarter in the FPS genre. Moreover, the gamers who have bought the new console systems were eager to buy games to try  out on them, and popular titles in the market just boosted the process. Hardware Sales: Gamers Still Opting For New Console Systems Sales of new video game hardware declined 32% y-o-y; however, this does not indicate the losing demand of the new consoles. This is clear if we look at the December hardware sales, which were nearly 31% more y-o-y. The figures just indicate that last year November witnessed increased hardware sales due to the high initial sales after the launch of new console systems. Xbox One was the best-selling console systems in the U.S. in the holiday period, overtaking PlayStation 4’s dominance, primarily due to decreased prices of Xbox One. Looking at the total sales figures in absolute terms, the company is confident of its hardware sales in 2015. Pre-owned Product Segment The company’s Pre-owned category witnessed a 1% y-o-y increase in sales in constant currency, with a 1.3% y-o-y increase in the U.S.,  GameStop’s game sales through buy-sell-trade model are highly correlated with new game sales, as the latter help replenish the company’s inventory; pre-owned game sales have consistently been around 65% of new software sales for the last four years. Furthermore, the transition of gamers to next-gen consoles might give a further push to  already strong console trades and might result in improved pre-owned inventory. An increase in software and hardware sales in the holiday quarter boosted the performance of the pre-owned product segment. Based on the recent sales figures, the company reiterated its Q4 EPS guidance range of $2.08 to $2.24 and its 2014 full year guidance range of $3.40 to $3.55. Also, the company now expects its Q4 comparable store sales to range from -2.5% to -1%. 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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    Lululemon Price Estimate Updated To $61
  • By , 1/30/15
  • Lululemon Athletica ‘s (NASDAQ: LULU) stock appreciated by nearly 75% in the second half of 2014. The yoga wear distributor and retailer saw its revenue fall by nearly 25% in the first quarter of fiscal 2014, but posted modest gains of 1.5% and 5% in the second and third quarters. Expectations about future growth have rebuilt following a miserable 2013, in which the company was caught in the eye of multiple PR storms. We have updated our price estimate for the company from $40 to $61. In our note below, we will discuss the key changes in our forecasts and the reasons behind them. We have a $61 estimate for Lululemon, which is about 9% below the current market price. See our complete analysis for Lululemon Revenue Per Square Foot Is Highly Sensitive To Number Of Units Sold Per Day Consider the following data points: - In fiscal 2013, Lululemon’s retail stores division made $1.23 billion in revenue. -The company had 254 corporate owned stores standing by the end of the fiscal period. -This implies that the company made a revenue of $13,256 per store per day in fiscal 2013. -Assuming an average unit price of $80, the company sold an average of 165 units per store per day in the year. -Assuming that each store remained open for 10 hours each day, the company sold 16.5 units per hour or a unit roughly every three and half minutes. By the end of our forecast period, we expect the company to double its retail store count. If the company keeps the same rate of turning over units in all of those stores, we arrive at a CAGR of 9% for retail store revenue for the period. Keeping the rate would mean that by the end of the forecast period, the company’s retail store revenues have grown from around $1.23 billion to $2.63 billion. Based on our forecast, this means that the company’s revenue per store per square foot for retail stores would edge closer to its staggering $1,823 level of fiscal 2012 and reach $1,785 by the end of our forecast period. The new forecast for revenue per store per square foot is derived by pegging it to the unit turnover rate. However, the revenue for the retail division is extremely sensitive to the assumption of the unit turnover rate. For example, if we lower our forecast from a unit sold every three and half minutes to every five minutes, the revenue for each year drops by an average of around 30%. The chart below shows the variation between retail revenues based on the unit turnover rate assumption. The chart below shows the impact of the assumptions on projected cash profits for the company. The assumption of one unit sold every five minutes results in a 38% reduction in cash profits for the period, while an intermediate scenario in which the unit turnover rate declines from 3.5 to 5 over the forecast period results in a 20% reduction in cash profits for the period. Other Revised Assumptions We have changed the forecast for effective tax rate for the company. Previously the effective tax rate increased from 31.5% to 39% over the forecast period. We have changed the forecast to increase from 31.5% to around 35% over the forecast period. The Capital Expenditure (CapEx) as a % of EBITDA for the Direct to Consumer division forecast has been changed. Previously, we applied the same forecast across all divisions for the company. However, seeing as how the CapEx has stayed in the $5 million- $6 million range, even as revenue has increased from $18 million to $263 million over the same time period, we have revised our assumptions for the rate. According to the revised forecast, CapEx as a % of EBITDA for the division should remain in the 5% range for the rest of the forecast period. See our complete analysis for Lululemon Athletica here
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    Harley-Davidson Earnings Review: International Growth And Street Drive Shipment Growth
  • By , 1/30/15
  • tags: HOG HMC TM
  • Harley-Davidson ‘s (NYSE:HOG) 2014 results, announced on January 29, highlighted how the iconic heavyweight motorcycle manufacturer is committed to deriving growth from international markets and through new product launches more suited to the current trends. The company’s motorcycle revenues rose 5.9% last year, and net revenues crossed the $6 billion mark for the first time since 2006.  Overall motorcycle shipments grew 3.9% to 270,726 units, in line with the company’s guidance, which was previously lowered to 270,000-275,000 units following Q2, from the estimated 279,000-284,000 units, as bad weather and low customer demand in the U.S. stalled sales. The U.S. forms approximately two-thirds of the net shipments for Harley, and, as expected, subdued retail sales in the country, which were up only 1.3% in 2014, kept a check on the company’s overall retail sales. Harley’s net retail sales growth has slowed to 2.7% last year, down from 4.4% and 6.2% in 2013 and 2012 respectively. However, the company expects to ship 4-6% more motorcycles to dealers this year, which means that the company expects volume growth to take off after falling sequentially in the last four years. One of the major contributors to this expected growth will be the Street 500 and 750 motorcycles, which after a successful start last year, will aim to significantly impact volume sales in their first full year in 2015. Our current price estimate for  Harley-Davidson stands at $65, which is roughly 1% above the current market price. However, we are currently in the process of incorporating the recent quarterly results into our estimates. See our full analysis for Harley-Davidson Street Motorcycles Drive Shipment Growth In 2014 The Street 500 and Street 750, built on the new “Revolution X” platform, are the first lightweight motorcycles for Harley-Davidson since the 350 cc Sprint, which was discontinued in 1974. The highly anticipated bikes went on sale in the U.S. in June last year, and before that, the Street 750 was launched in India at the beginning of the year. The company also launched the Street pair in Italy, Portugal, and Spain in 2014, and expected to ship a cumulative 7,000-10,000 units throughout the year. The Street pair lured customers who preferred a Harley-branded cheaper and lighter motorcycle, raising overall shipments of these bikes to 9,900 for the full year. In fact, on the back of incremental Street sales, the proportion of Sportster/Street bikes rose to 21% of the net volume sales, up from 19.3% in 2013. High sales for the new Street 750 and 500 further boosted international sales for Harley in Q4, and somewhat offset the declining sales of other motorcycle lines in the domestic market. U.S. Retail Sales Remain On The Lower Side- Harley’s U.S. retail sales remained essentially flat to slightly positive in the first half of 2014, which kept the full-year results subdued. Lower sales were mainly as customers avoided purchasing Sportster motorcycles, in anticipation of the launch of the Street bikes, and due to the absence of the Road Glide motorcycle from the Touring lineup in the first half. But with the launch of the Road Glide along-with other new 2015 model year bikes, sales for the model rose significantly, and represented 14% of Harley’s U.S. retail mix in Q4, up from 4% a year ago. Higher availability of the Street bikes also bolstered growth in the country in the third and fourth quarters. In fact, why Street sales are crucial for the company is because these bikes are drawing customers that are new to the Harley brand, thereby increasing the manufacturer’s reach and customer base, rather than self-cannibalizing sales. With an aging population of Baby Boomers, which form the core customer base for Harley-Davidson, the company has looked to derive growth from its outreach customers, comprising young adults, women, Hispanics, and African-Americans. And for the third consecutive year, Harley grew sales to outreach customers by more than twice the sales-growth to core customers. One reason why retail sales in Q4 in the country were down, was that the company was cycling the large sales growth in the latter half of 2013, buoyed by the launch of the iconic Project Rushmore motorcycles.  But as the Street enters its first full year in 2015, volume sales in the U.S. for Harley could rise considerably. International Growth Buoyed By The Street- Non U.S. and Europe motorcycles form just under 16% of Harley’s valuation by our estimates. The company has for long depended on its domestic sales to fuel growth, but with an expansion of the dealership network outside the U.S., and launch of new models such as the Street, the contribution of Harley’s international volumes has increased to 36% of the net mix, up from 30% in 2008. In particular, fueled by high sales for the Street 750 in India, and resurgence of demand in Japan in the last three months, Harley’s Asia-Pacific retail sales were up 14.2% in Q4 and 11.8% for the full year. On the other hand, low fuel prices, higher customer purchasing power, tax breaks, and incentives, helped Harley improve its Europe retail sales by 6.7% year-over-year in 2014, after volumes declined in the region for two consecutive years. Going forward, Harley hopes to make the Street motorcycles available in almost each of its markets this year, which means that the proportionate mix of these bikes in 2015 could more than double from 3.6% in 2014. Harley-Davidson has looked to evolve with the shifting market trends by launching lightweight motorcycles, and deriving growth from the relatively underpenetrated international heavyweight motorcycle markets. In addition, the company could also launch its first plug-in motorcycle next year, in order to tap the potential of the electric motorcycle segment. Going forward, much of Harley’s growth is expected to come from international markets and the outreach customers in the U.S. 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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    Broadcom's Q4'14 Earnings Review: Better Than Expected Performance In Reportable Segments
  • By , 1/30/15
  • Leading semiconductor provider for wired and wireless communications,  Broadcom (NASDAQ:BRCM) reported its Q4 2014 and full year 2014 earnings on January 29. While revenue of $2.14 billion was at the high end of the guided range, the non-GAAP EPS 0f $0.90  for the quarter came in ahead of the consensus estimate. Excluding cellular baseband revenue (which the company exited in June 2014), total reportable segment revenue was down 3% sequentially and up 10% year over year, as the broadband and connectivity  as well as the infrastructure businesses performed as per the company’s expectation. For full year 2014, Broadcom delivered record revenues and reportable segment profitability, with combined broadband-connectivity and infrastructure revenue and profit growing 6% and 25%, respectively, compared to 2013. In the broadband and connectivity segment, revenues declined less than what Broadcom initially expected, due to the success of new phone launches, as well as increasing penetration of 802.11ac and 2×2 solutions. Broadcom’s infrastructure business declined as expected due to lower data center and service provider spending. Nevertheless, the company continues to see ongoing data center build-outs there as a strong opportunity for future growth. It also expects continued geographic expansion to fuel growth in its broadband business and forsees opportunities for new technologies, like NFC and wireless charging, to drive long-term growth in the connectivity business. Our price estimate of $41 for Broadcom is almost in line with the current market price. We are in the process of updating our model for the 2014 earnings. See Our Complete Analysis for Broadcom Here Broadcom’s broadband and connectivity revenue came in ahead of expectations at $1.48 billion, down roughly 2% sequentially. Upside in the quarter was across the board, including set-top box, broadband access and particularly wireless connectivity. In broadband access, there is significant operator interest to upgrade last mile access technologies such as DSL and PON to the fastest speeds. In set-top box, developed markets are upgrading to new media server architectures and Broadcom claims that it has started to see the first ultra HD boxes roll out. Focus On Adjacent Market To Spur Growth In Connectivity Broadcom saw increased demand for newly introduced smartphones, combined with the increasing adoption of new wireless technologies such as 802.11ac and 2×2 solutions that drove higher ASPs in the quarter. Its 5G WiFi revenues reached a record high in the quarter and more than doubled from last year. The company claims to be seeing significant customer interest in its 4×4 multiuser MIMO 5G WiFi chip targeted for retail routers, broadband access gateways and set-top boxes. Broadcom’s market share in the high end of connectivity remains very strong, and the company is confident of winning new designs based on very strong product execution. In addition to smartphones, Broadcom is focusing on broadening its connectivity business into adjacent markets. It received the first design win for its wireless charging solution, and the company now powers both Denon and Harman Kardon’s WiFi home audio systems. Broadcom remains focused on diversifying into new markets such as Internet-of-Things (IoT), automotive, wearables and small cells. In the IoT market, the company claims that the design activity remains high with its current products. It is in the process of refreshing its portfolio with purposeful products that are optimized specifically for different market segments. The registrations for Broadcom’s WICED IoT platform has grown significantly, from 2,000 at the beginning of 2014 to over 8,000 at present. The company has announced the expansion of its distribution channel with over 40 new partners to expand its sales reach to IoT customers.The small cell market also represents an emerging opportunity. Broadcom is ramping its newly launched LTE and TD-SCDMA solutions, while maintaining it market-leading position in 3G. Broadcom expects its broadband and connectivity business to be down sequentially in the current quarter, and admits that this year will be a little challenging for the business. However,, it firmly believes that the segment offers strong long-term growth potential. Set-Top Business Benefits From An Expanding Geographic Footprint Growth in emerging markets and new technologies is driving growth in Broadcom’s set-top box business. Operators such as Dish in North America, Free in France and Tata in India, have begun to offer ultra HD set-top boxes to their subscribers. Broadcom expects around 15 operators across multiple regions to launch 4K television service in 2015. Expanding the geographic footprint is an important factor driving growth in the set-top business. Broadcom’s expansion in new territories, including South America, South Asia, and Africa, benefited the company in 2014 and it expects the trend to continue this year as well. Additionally, Broadcom expects to benefit from the transition to 4K HEVC over the next three to four years. In cable modems, people are switching over to DOCSIS 3.1. Though Broadcom expects to see initial shipments this year, it anticipates the technology to really kick in next year onwards. In broadband access, the race to Gigabit speeds in the home continues as telcos invest in and cable MSOs invest in DOCSIS 3.1, while both invest in high speed optical access. Broadcom is leading this transition with its first design wins with and 10-GPON already in place. Long-Term Growth In The Infrastructure Business Remains Intact Broadcom’s infrastructure and networking business declined by 4% sequentially in Q4 2014, to $625 million. Nevertheless, 2014 was the third consecutive year of double-digit growth for the company, with growth mainly being driven by its leadership in the switch market. In the data center market, Broadcom has a large number of customers in production with Trident II and is building a solid pipeline of design wins for Tomahawk. At 3.2 terabits per second, Tomahawk is the industry’s highest bandwidth switching solution and has been shipped to over 15 different networking box makers, establishing an early lead over competitors. In the service provider market, the company is seeing broad adoption of its 28-nanometer heterogeneous knowledge-based processers. Long-term growth drivers for Broadcom’s infrastructure business include: 1) new build-outs and expansions of data centers; 2)  increasing data traffic at faster speeds; 3)  ASIC conversions to merchant solutions; and, 4) overall enterprise network upgrades as people move to higher speeds. Broadcom expects double-digit growth in the infrastructure business for the next few years. Q1 2015 Outlook - Net revenue of $2 billion, +/- $75 million. Broadband and connectivity to be down and infrastructure networking to be roughly flat. - Non-GAAP gross margin to be roughly flat sequentially, at 54.7% (+/-75 basis points). - GAAP gross margin to be flat, at 52.8% (+/- 75 basis points). - R&D and SG&A expenses to be up by $5 million to $25 million. 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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    Cliffs' Earnings Preview: Low Iron Ore And Coal Prices To Weigh On Q4 Results
  • By , 1/30/15
  • tags: CLF RIO VALE MT X
  • Cliffs Natural Resources (NYSE:CLF) will announce its fourth quarter results on February 2 and conduct a conference call with analysts the next day. We expect lower iron ore and metallurgical coal prices to negatively impact Cliffs’ quarterly results year-over-year. Cliffs has been battling a subdued iron ore and coal pricing environment over the past year or so. The company’s loss-making Bloom Lake mining operations recently filed for bankruptcy. In addition, the company has announced the termination of its policy of quarterly dividend payments.  These are the latest steps taken by the company as it grapples with poor market conditions for both iron ore and coal. See our complete analysis for Cliffs Natural Resources Iron Ore and Coal Prices Iron ore and metallurgical coal are important raw materials for the steel industry. Thus, demand for these raw materials by the steel industry plays a major role in determining their prices. Though a majority of Cliffs’ iron ore sales are to the North American steel industry, sales agreements are benchmarked to international iron ore prices. International iron ore prices are largely determined by Chinese demand, since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. Chinese steel demand growth is expected to slow to 2.7% in 2015, from 6.1% and 3% in 2013 and 2014, respectively. Weak demand for steel has indirectly resulted in weak demand for iron ore. On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term. Iron ore prices stood at $68 per dry metric ton (dmt) at the end of December 2014, around 50% lower as compared to prices at the end of December 2013. The worldwide surplus of seaborne iron ore supply is expected to rise to 300 million tons in 2017, from an expected surplus of 175 million tons in 2015, and a surplus of 72 million tons and 14 million tons in 2014 and 2013, respectively. In view of the persisting oversupply situation, iron ore prices will remain subdued in the near term. This will negatively impact the company’s fourth quarter results. China is also the largest consumer of metallurgical coal in the world. Demand for the commodity by the Chinese steelmaking industry has been weak, adding to subdued demand from other major consumers such as Japan and the EU. Weak demand coupled with an oversupply situation due to expansion in production by major mining companies, has resulted in plummeting coal prices. This will have a negative impact on Cliffs’ North American coal business, which primarily sells metallurgical coal, whose prices are linked to prices of Australian metallurgical coal. The benchmark Australian metallurgical coal price stands at around $119 per ton, around a third of its 2011 peak level of $330 per ton. In view of the oversupply situation, metallurgical coal pricing is expected to remain subdued in the near term. This will negatively impact the company’s fourth quarter results. Recent Developments In order to remain competitive in a subdued iron ore and coal pricing environment, Cliffs’ management favors focusing on the company’s profitable U.S. Iron Ore operations and the sale of its other high-cost assets. Earlier this month, the company completed the sale of Logan County Coal, a fully-owned Cliffs subsidiary which represents the company’s coal assets in southern West Virginia, for $175 million in cash. Last month,  Cliffs idled its loss-making Bloom Lake iron ore mining operations in Canada. The Bloom Lake mining operations recently filed for bankruptcy protection and will be deconsolidated from Cliffs ‘ financial statements. In addition, the company has announced the termination of its quarterly dividend payment policy with effect from Q1 2015. The company has prioritized the reduction of its debt over quarterly dividend payments. Using the proceeds from the sale of its Logan County Coal assets and savings from the elimination of its quarterly dividend payments, the company lowered its net debt balance by around $400 million over the last two months. We feel that Cliffs’ decision to prioritize debt reduction over dividend payments is a smart move. It will help boost the company’s cash flows and give it greater financial flexibility to operate effectively in a subdued commodity pricing environment. Expectations from Conference Call With the subdued iron ore and coal pricing environment set to continue in the near term, we would like to know whether the company has identified any other opportunities for reductions in operating costs or capital expenditure. We would also like to know if any asset sales, as per its strategy, are on the horizon. More clarity on this front will shed some light on the road ahead for Cliffs. 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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    Lower Production, Oil Prices, To Drag Down Exxon's Q4 Earnings
  • By , 1/30/15
  • Exxon Mobil (NYSE:XOM) is scheduled to announce its 2014 fourth quarter earnings on February 2. We expect lower crude oil prices to weigh significantly on the company’s upstream earnings growth. Benchmark crude oil prices have declined sharply over the past few months on rising supplies and falling demand growth estimates. The average  Brent crude oil spot price declined by more than 30% year-on-year during the fourth quarter. However, we expect better upstream volume-mix due to higher growth in liquids (crude oil, natural gas liquids, bitumen, and synthetic oil) production, primarily driven by the ramp up of the Kearl project in Canada and the development of unconventional plays in the U.S., coupled with thicker downstream margins to partially offset the impact of lower oil prices on Exxon’s overall performance. During the earnings conference call, we will be looking for an update on Exxon’s ongoing new project development, specifically the Kearl expansion and the Hibernia Southern expansion projects in Canada and the Kashagan oil field in Kazakhstan. We will also be looking for an update on its operating strategy under the changed crude oil price environment. Exxon Mobil is the world’s largest publicly traded international Oil and Gas Company. It generates annual sales revenue of more than $420 billion with a consolidated adjusted EBITDA margin of ~14.7% by our estimates. We currently have a  $98/share price estimate for Exxon Mobil, which values it at around 13.2x our 2015 full-year diluted EPS estimate of $7.43 for the company. See Our Complete Analysis For Exxon Mobil Lower Hydrocarbon Production We expect Exxon’s upstream earnings to decline during the fourth quarter on lower crude oil prices and negative hydrocarbon production growth, primarily due to the expiry of the Abu Dhabi onshore concession agreement. The company lost its 75-year rights to the emirate’s oldest producing fields in January 2014, when the Second World War-era contract expired. These oilfields together account for around 50% of Abu Dhabi’s total oil output (almost 3 million barrels per day) and hold more than a 100 billion barrels of oil and oil equivalent. Until a new concession agreement is signed, Abu Dhabi National Oil Company (ADNOC) will be the sole-risk shareholder of the Abu Dhabi Company for Onshore Oil Operations (ADCO), the current concession’s joint-venture operator. As a result, Exxon and other foreign oil companies, which were previously involved in the concession, will not be able to lift equity oil or book reserves from these oil fields. During the first nine months of 2014, Exxon’s average daily net hydrocarbon production declined by around 5.3% y-o-y, primarily due to the expiry of the Abu Dhabi concession agreement. We expect to see a similar variance in volumes during the fourth quarter as well. Better Production Volume Mix Exxon’s total hydrocarbon production can be broadly split into two categories – liquids, which include crude oil, natural gas liquids, bitumen, and synthetic oil, and natural gas. Liquids made up more than 60% of Exxon’s total hydrocarbon production in 2009. However, their percentage contribution declined significantly after the company acquired XTO for $41 billion in 2010, which increased its natural gas production by 31% y-o-y that year. More importantly, most of the increase came from the U.S., where natural gas prices have been significantly depressed by international standards due to a sharp rise in production from unconventional sources. (See:  Key Trends Impacting Natural Gas Prices In The U.S. ) Liquids have generally been more profitable to produce than natural gas because of higher price realizations. In 2013, Exxon sold liquids at an average price of around $95 per barrel, compared to just around $41 realized per barrel of oil equivalent (BOE) of natural gas. This is the reason why the company has been trying to improve the proportion of liquids in its production mix over the last couple of years. In 2013, liquids made up 52.7% of Exxon’s total hydrocarbon production, up from 51.5% in 2012. During the first nine months of 2014, Exxon’s total liquids production increased by over 31,000 barrels per day, or almost 1.5% y-o-y, excluding the impact of the Abu Dhabi onshore concession expiry. On the other hand, its natural gas production declined by more than 700 million cubic feet per day, or almost 6% y-o-y. Although, lower weather-related demand in Europe exaggerated the decline in natural gas production during the first quarter, we expect the overall trend of improving volume-mix to manifest itself in Exxon’s fourth quarter earnings as well. The company expects its liquids production to grow by almost 2% y-o-y and natural gas production to decline by around 3% for the full year 2014. This is expected to improve Exxon’s price realization per barrel of oil equivalent and potentially help reduce the impact of lower oil prices on its unit profitability. Key Upstream Project Updates During the fourth quarter earnings call, we will be looking forward to an update on Exxon’s Kearl expansion project in Canada. Located 70 kilometers north of Fort McMurray, the Kearl oil sands project holds an estimated 4.6 billion barrels of recoverable bitumen resource and is expected to remain in production for as long as 40 years. The production of mined diluted bitumen from the first of the three froth treatment trains at the project began in April 2013. The initial development phase of the project is currently being ramped up and reached over 100,000 barrels of bitumen production per day by the end of the third quarter, up from 47,000 barrels per day in the fourth quarter of 2013. In addition, Exxon is also working on the expansion of the Kearl oil sands project, which is expected to boost its gross production capacity by a 100,000 barrels per day by the end of this year. Beyond the expansion phase, further debottlenecking of the Kearl oil sands project is expected to boost its total gross output to around 345,000 barrels per day. In addition to the Kearl oil sands project, we will also be looking for an update on the giant Kashagan project, which is also expected to play a crucial role in Exxon’s future production ramp-up plans. During the 2014 second quarter earnings call presentation, the company officials announced that production from the project, which was ramped up to almost 80,000 barrels per day in September 2013, continued to remain shut due to leakage in a gas pipeline connecting one of the drilling islands to the onshore processing facility. The officials declined to provide a timeline for the restart of production from Kashagan. However, a recent report suggested that the project might not produce any oil until at least 2016 because of a major pipeline replacement requirement. The mega oil project located in Kazakhstan’s zone of the Caspian Sea has already been plagued by significant delays and cost overruns due to several technical issues. This has also delayed returns from the project thereby increasing the amount of time that participating oil companies such as Exxon Mobil will have to wait in order to generate a desired rate of return upon their investments. (See:  Kashagan To Continue To Weigh On Exxon’s Returns ) 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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    Weekly Chinese Internet Note: Baidu In Focus
  • By , 1/30/15
  • In our weekly Chinese Internet note we focus on Baidu (NASDAQ: BIDU). Baidu announced a new partnership in big data, and is coming up with a system to make cars smarter. Meanwhile, a smart shoe that incorporates its technology has been launched in China.
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    Anadarko Earnings: Lower Oil Prices To Offset Higher Production, Better Mix
  • By , 1/30/15
  • tags: APC COP EOG
  • One of the largest independent oil and gas exploration and production companies in the U.S.,  Anadarko Petroleum (NYSE:APC), is set to announce its 2014 fourth quarter earnings after markets close on February 2. We expect lower crude oil prices to weigh significantly on the company’s year-on-year earnings growth. Benchmark crude oil prices have declined sharply over the past few months on rising supplies and falling demand growth estimates. The average  Brent crude oil spot price declined by more than 30% year-on-year during the fourth quarter. This is expected to result in thinner operating margins on Anadarko’s spot crude oil sales. However, higher production, primarily driven by increased development of the Wattenberg field and other onshore assets in the U.S., coupled with better volume-mix, is expected to partially offset the impact of lower oil prices on the company’s overall performance. Anadarko primarily operates in three segments: oil & gas exploration and production, midstream, and marketing. Its asset portfolio includes positions in onshore resource plays in the Rocky Mountains region, the southern United States, and the Appalachian basin. The company is also an independent producer in the Deepwater Gulf of Mexico, and has production and exploration activities globally, including positions in high potential basins located in East and West Africa, Algeria, Alaska, and New Zealand. At the end of 2013, Anadarko had proven reserves of almost 2.8 billion barrels of oil equivalent. We currently have a  $91/share price estimate for Anadarko, which is around 15% above its current market price. See Our Complete Analysis For Anadarko Higher Production Currently, most of Anadarko’s total hydrocarbon production (~75%) comes from its onshore assets in the U.S. The company’s net hydrocarbon production from its U.S. onshore assets has grown at more than 13.3%  CAGR between 2009 and 2013. This compares to the company’s overall production growth rate of just 7% CAGR over the same period. The spectacular growth from U.S. onshore assets continued in 2014 as well. During the first three quarters of the year, Anadarko achieved more than a 15% year-on-year growth in its U.S. onshore production, spending a majority (~65%) of its gross capital expenditures on the development of its key assets in the area.  A large chunk of this capital has been pumped into the Wattenberg field, which forms the centerpiece of Anadarko’s U.S. onshore development plan. The Wattenberg field is a liquids-rich area where Anadarko operates over 5,200 wells. Recently, the company’s drilling program in the field has been entirely focused on horizontal development. It drilled 335 horizontal wells in 2013, which led to a 21% y-o-y jump in sales volume from the field. Anadarko has identified around 4,000 potential drilling locations in the Niobrara and Codell formations of the Wattenberg field that are expected to provide substantial opportunity for continued activity. The company planned to drill over 360 horizontal wells in the field in 2014, employing as many as 13 horizontal operated rigs on average.  During the third quarter, Anadarko’s oil equivalent sales volume from the Wattenberg field grew by 88 MBOED,* compared to the year-ago quarter. This made up almost 84% of the total year-on-year hydrocarbon sales volume growth for the company. Anadarko expects to grow its hydrocarbon sales volume from the Wattenberg field at 20% CAGR in the long run. We believe that this target is achievable due to a combination of favorable factors. These include rising drilling efficiencies, an increased number of operated rigs, and improving midstream infrastructure. The company is working on more than doubling its oil takeaway capacity from the Wattenberg field to almost 90,000 barrels of oil per day by next year. It also plans to expand the gas processing capacity from around 400 million cubic feet per day (mmcfd) to over 1,000 mmcfd by 2016. Furthermore, the asset swap deal signed by Anadarko in the Wattenberg field will also allow it to leverage this midstream infrastructure even better over the coming years as its development efforts in the region will be more concentrated around the supporting infrastructure. In October 2013, Anadarko exchanged certain oil and gas properties in the Wattenberg field with a third party. Under the terms of the transaction, each party exchanged approximately 50,000 net acres. The transaction increased Anadarko’s production growth potential from the field significantly, and is also expected to drive more than $500 million in cost savings for the company through reduced trucking and water sourcing requirements. Better Volume-Mix Anadarko derives all of its natural gas production from the U.S., where a supply glut has led to severely depressed domestic natural gas prices by international standards. Therefore, despite lower finding, development, and lifting costs per barrel of oil equivalent (BOE) of natural gas, the production of liquids (crude oil and natural gas liquids) has become a far more lucrative source of revenue for upstream oil and gas companies in the U.S. In 2013, Anadarko sold liquids at an average price of around $84.50 per barrel, compared to just around $21 realized per BOE of natural gas. Therefore, the company has been increasing its focus on liquids production to drive margin growth. As a result, the proportion of liquids in Anadarko’s total sales volume has increased from 38.6% in 2009 to 43.5% in 2013. Going forward, we expect the company’s sales volume-mix to improve further with liquids making around 45% of its total hydrocarbon production in the next couple of years. This is expected to partially offset the impact of lower crude prices on its unit profitability in the short to medium term. *MBOED: Thousand barrels of oil equivalent per day View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    GMCR Logo
    Dr Pepper Snapple- New Addition To Keurig Green Mountain's Arsenal
  • By , 1/30/15
  • On January 7, the novelty coffee maker,  Keurig Green Mountain (NASDAQ:GMCR) signed a multi-year agreement with Dr Pepper Snapple (NYSE:DPS), where the two companies will be joining hands in developing a selection of Dr Pepper Snapple’s brands for the upcoming Keurig Cold Platform. Keurig Cold will provide its users the convenience of at-home carbonation technology and the ease of carrying compact flavor sachets, rather than the bulky PET bottles from retail stores. Keurig Green Mountain plans on launching the Keurig Cold Platform in the fall of 2015. Keurig will be the exclusive producer of single-serve carbonated DPS K-Cups and pods used in Keurig Cold in the U.S. and Canada. The financial terms of the agreement has not been disclosed yet. Keurig Green Mountain will be releasing its Q1 2015 earnings report on February 4. Last year, Coca-Cola (NYSE:KO) bought a 10% stake in Keurig Green Mountain, and raised it to 16% in May 2014. Coca-Cola and now Dr Pepper are looking to introduce some of their beverage offerings with the Keurig Cold Machine later this year, and hope to improve falling soda consumption rates. Moreover, it will provide Keurig with nearly 30 different beverage varieties from several brands of the company’s soda partners. We have a  $108 price estimate for Keurig Green Mountain, which is roughly 20% below the current market price. See our full analysis of GMCR here Keurig Preparing To Enter New Market Keurig believes that the cold beverage market has the potential to become bigger than the single-serve hot beverage market. As a result, the company decided on introducing a cold beverage platform. Keurig Cold will be designed to dispense single servings ranging from carbonated drinks to non-carbonated beverages, such as juice drinks and iced teas.  Beverage giants, such as Coca-Cola and PepsiCo, have been struggling with sales of carbonated soft drinks (CSD) in developed markets due to increasing health concerns. Consumers are shifting towards alternatives such as iced coffee, juices, and sports drinks. However, according to our estimates, CSDs still constitute about 43% of the 30 billion gallon liquid refreshment beverage (LRB) industry in the U.S., forming the largest segment. With Coca-Cola already a brand partner, Keurig has been keen on adding more options to its list of beverage varieties. In December, Keurig announced yet another deal, when it entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd., in the first week of December 2014. So adding Dr Pepper Snapple’s brands to its arsenal gives Keurig an additional option. In 2013, Dr. Pepper partnered with Keurig Green Mountain to sell Snapple premium iced teas in K-Cups and Vue packs compatible with Keurig single cup brewing systems. The extended partnership between the two companies will now provide an additional consumption platform for select Dr Pepper brands and could possibly raise sales. The domestic CSD market is mature, with Coca-Cola, PepsiCo, and Dr Pepper accounting for almost 90% of the industry-wide volumes. Two of these brands have joined hands with Keurig, giving them an edge during the initial phase after Keurig Cold’s launch. According to our estimates, Dr Pepper’s market share has risen in each of the last four years, reaching 17.5% last year. More beverage options might translate to more consumers opting for the cold beverage machine. Moroever, with Bevyz under its product line, Keurig might dominate the segment. The Bevyz Fresh machine has a completely different technology, as it is compatible with both hot and cold beverages such as carbonated soft drinks (CSD), frappes, juices, teas, energy drinks, and coffee. An all-in-one machine replaces the need for separate appliances and could attract consumers based on its convenience and counter-top space optimization. Despite the recent marketing disappointments, Keurig sees a great potential in the Bevyz product line. Recently, Keurig has been adding various coffee, retail, and soft drink brands under its portfolio, and now with the addition of new technology and beverage partners, the company might be looking to extend its reach among U.S. consumers and to strengthen its dominance in the carbonation market. Looking at the company’s strategy of adding partners to its list of licensed brands, we can expect Keurig to join hands with more beverage companies in the coming months. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    DIS Logo
    Disney: ESPN And Theme Parks Will Drive Q1 Fiscal 2015 Earnings
  • By , 1/30/15
  • Disney (NYSE:DIS) will report its Q1 earnings for fiscal 2015 on February 3rd.  (Fiscal years end with September.)  We expect Disney to report higher earnings driven by strong growth at ESPN and its theme parks. While the studio business likely benefited from the success of  Big Hero 6, it will have a tough comparison with prior year quarter, which included the massive success of Thor and Frozen . Disney will surely benefit from higher ratings at the sports giant ESPN, which ended 2014 at the top spot in cable ratings. However, the important aspect to watch out for will be the network’s programming costs, which have been very high for some of the events including, Major League Baseball, NFL and College Football. Looking at theme parks, Disney started to reap the benefits of MyMagic+ technology since the previous quarter and it likely boosted the average guest spend at the theme parks in the December quarter as well. We estimate revenues of around $49 billion for Disney in calendar year 2014 and EPS of $4.08. We maintain  a $93 price estimate for Disney’s shares, which we will update after the December quarter earnings announcement. Understand How a Company’s Products Impact its Stock Price at Trefis
    DNKN Logo
    Weekly Notes On Restaurant Industry: McDonald's & Dunkin' Brands
  • By , 1/30/15
  • tags: MCD
  • According to the USDA (United States Department of Agriculture), the forecast for total meat production in the year 2015 has been raised due to increased beef and pork production. Moreover, the forecast for 2015 beef imports to the U.S. has been increased. The beef production estimates for the year 2015 is 23.8 billion pounds, down 1.7% from the 2014’s beef production. However, the production forecast for pork, red meat, and poultry is higher than 2014’s figures. On the other hand, the prices of butter, cheese, and milk is expected to be lower in 2015 compared to 2014’s high prices. Beef prices rose by over 42% between April and September last year, before declining by nearly 12% in the last 3 months of 2014. On the other hand, the restaurant industry in the U.S. is witnessing stiff competition among the fast food chains for customer traffic during the breakfast daytime. With fast casual restaurant leading the race, all the quick service restaurants (QSR) are revamping their menu by introducing innovative menu items and by expanding their beverage portfolio. Here’s a quick round up of the restaurant companies covered by Trefis. McDonald’s On January 23,  McDonald’s Corporation (NYSE:MCD) released its annual report for the fiscal 2014. The company reported a 1% year-over-year (y-o-y) decline in comparable sales, due to a major decline in customer traffic. As a result, the company’s net revenues declined 2% y-o-y. Due to the China meat scandal in August, as well as weak performance in the U.S., the company’s operating income for the fiscal 2014 year declined 9% y-o-y.  McDonald’s reported a diluted EPS of $4.82, down 13% y-o-y. As a result, McDonald’s CEO Don Thompson stepped down from his position and a company veteran Steve Easterbrook will be taking over as the new CEO of the company. McDonald’s stock rose from $89 to $93 during the latter half of the last week.  Our price estimate for the company’s stock is $96 (market cap of $94 billion) which is roughly 3% above the current market price. See Our Complete Analysis For McDonald’s Corporation Dunkin’ Brands Dunkin’ Brands is scheduled to release its annual report for the fiscal 2014 on February 5 2015. Last month, the company announced new and updated performance guidance, where the company provided additional performance expectations for fiscal year 2015.  In the report, the company mentioned that its earnings growth expectation for 2015 is below its long-term targets. As a result of disappointing performance targets, the company’s stock declined nearly 10% from $46.22 to $42. The company expects Dunkin’ Donuts U.S. comparable sales growth to be in the range 1-3%, down from the 2-4% expected guidance mentioned during the Investor and Analyst Day. Moreover, the company expects Dunkin’ Donuts U.S. to add 410-440 net new restaurants and Baskin-Robbins U.S. to add 5-10 new outlets in 2015. The long-term revenue growth targets for the company were lowered from the 6-8% range to 5-7%. Dunkin’ Brands’ stock traded between the range of $45 and $47 during the last week.  Our price estimate for the company’s stock is $43 (market cap of $4.5 billion), which is nearly 8% below the current market price. See full analysis for Dunkin’ Brands 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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