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Trefis Analysis


AT&T is betting big on the Internet of Things (IoT) space, as it looks to find new avenues for growth amid increasing saturation in its mobile business. In a recent note we take a look at how much value AT&T can generate from IoT.

See Complete Analysis for AT&T
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Microsoft's dominant share in the productivity software market has declined slightly in recent years due to competition from hosted suites such as Google Docs. We expect further declines, but the company's market share is still likely to remain above 90% in the coming years.

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How Ericsson Plans To Be An IoT Powerhouse
  • By , 10/8/15
  • The rapid evolution of the Internet of things (IoT) domain is likely to provide the next wave of growth for network infrastructure companies such as Ericsson  (NASDAQ:ERIC) and Nokia (NYSE:NOK). In fact, Ericsson is aiming to become a leader in the market, investing heavily in the development of technologies for 5G, which is expected to trigger a widespread adoption of IoT. The company believes that 5G network will play a key role in enabling IoT communication and connectivity across markets. In addition to pushing 5G, Ericsson is striving for the development of cost- and power-efficient IoT devices, applications and software, working closely with several ecosystem companies. Ericsson has even collaborated with Nokia and Intel (NASDAQ:INTC) for the development and roll-out of NB-LTE (narrow-band LTE), which can help it square off against Chinese rival Huawei. Ericsson, which is involved in almost all stages of IoT transformation, has its eyes set on Asia, which is a big potential market for IoT deployment. The number of connected devices in Asia is already huge, and it is set for further growth going forward with the improvement in network infrastructure. Ericsson sees Thailand as an important market in the region, and it is urging regulators to allocate more spectrum to operators in order to accelerate the expansion of 5G and IoT.
    DATA Logo
    Just How Big a Threat is Amazon’s Quicksight to Tableau and Qlik?
  • By , 10/8/15
  • The supremacy of Tableau (NYSE:DATA) and Qlik (NYSE:QLIK) in the business intelligence (BI) market may soon be threatened by the entry of a proverbial big fish in a small pond. E-commerce behemoth Amazon ’s (NYSE:AMZN) cloud computing arm, Amazon Web Services (AWS) introduced a competing product, Quicksight, at the AWS Re:Invent conference. At first sight, Quicksight appears to pose a serious threat to existing BI companies due to the former’s affordable pricing and ease of use. Nevertheless, Tableau and Qlik do have some respite because Amazon’s product will be usable exclusively over its cloud, leaving on-premise data integration and analysis to the former. In this report, we compare the key driving factors of Amazon’s Quicksight against Tableau and Qlik to see which comes out ahead. See our complete analysis for: Tableau | Qlik Growth Potential: Cloud Constraint Could Hold Back Quicksight Amazon is initially likely to benefit from its massive AWS customer base which could facilitate rapid adoption of Quicksight. However, in the long run, its growth potential is likely to be limited because Quicksight will operate exclusively with data clients manage in Amazon’s infrastructure. Quicksight does offer integration with third party data sources like Salesforce and Oracle, but the analytics and visualization will be carried out over its cloud. This is a potential drawback because despite the rapid adoption of the cloud, most corporates prefer to store critical datasets locally. Integration of such datasets with Quicksight would not just be a complex issue, but may also be considered as a security risk, which is the reason the datasets are stored on-premise in the first place. Customers will also have to wait to see how easily they are able to integrate their third-party datasets with Quicksight, which is a major factor in choosing big data analytics products. On the other hand, Tableau and Qlik both offer on-premise integration for their BI products. Therefore, while Amazon may be able to convince small and medium sized enterprises to use Quicksight, larger companies are unlikely to opt for cloud-based BI products. We currently expect Tableau’s customer base to expand from 26,000 in 2014 to 71,000 by 2022. We estimate Qlik’s customer base to expand at a slightly lower clip, from 34,000 in 2014 to a little over 60,000 by 2022. Features: Quicksight’s Depth of Analysis Unlikely to Match Tableau and Qlik One of the key features propounded by Amazon is the ease of use of Quicksight. Amazon claims that users do not have to be data analytics and visualization experts to use Quicksight, which “automatically infers data types and relationships” to generate analysis and visualizations. Nevertheless, Quicksight is unlikely to offer the depth and scope of analysis and visualization offered by traditional BI companies like Tableau and Qlik. Both these companies are categorized as leaders in Gartner’s Magic Quadrant for Business Intelligence and Analytics Platforms. This is indicative of the depth of their products, since Gartner uses “ability to execute” and “completeness of vision” in its Magic Quadrant methodology. Pricing: Quicksight’s Aggressive Pricing Gives it an Advantage Quicksight wins hands down in the pricing department. AWS has priced Quicksight aggressively, starting from a mere $9 per user per month. In comparison, a Tableau license costs $200 per annum, after paying an initial $1000 in the first year for a “perpetual license”. Still, Quiksight’s entry into the BI market is unlikely to set off a price war because of its limited reach, as detailed in the previous two sections. We currently expect Tableau’s average revenue per customer to increase from $11,700 in 2014 to $17,000 by 2022. Qlik’s average revenue per customer is lower than that of Tableau and is expected to grow at a slower pace, from $9,260 in 2014 to just over $10,000 by 2022. In summary, we believe that Amazon’s Quicksight does not pose a major threat to either Tableau or Qlik primarily due to uncertainty about the former’s ease of integration with external datasets, and its limitation to the cloud. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    A Comparative Look At The Valuation Of Amazon, Alibaba and eBay
  • By , 10/8/15
  • tags: BABA AMZN EBAY
  • Amazon (NASDAQ:AMZN),  eBay  (NASDAQ:EBAY) and Alibaba  (NYSE:BABA) represent the leading companies in the global e-commerce sector. In this article, we take a look at the fundamentals and market valuations of these online retail giants to see which stock looks cheaper. In our view,  Amazon’s stock appears to be trading around fair price, with respect to its current valuation metrics and its forecasted revenue growth.  In contrast, we believe Alibaba’s stock represents a buying opportunity vis-a-vis its growth fundamentals and strong margins. Under a more base-case scenario for the Chinese economy, we believe Alibaba could continue to see healthy growth in the coming years, owing to the rapid growth being seen in the country’s e-retail market. Simultaneously, we think eBay’s stock could see some upside in the coming future, owing to its cash-rich business model and some recovery in its marketplaces business. See our complete analysis for eBay   Amazon: Amazon’s stock has run up by over 45% over the past six months, driven by various positives such as an improvement in profitability and higher than expected top-line and bottom-line results in the cloud services business. The company supports the highest valuation among its peers in the online retail sector. Amazon’s revenue is not directly comparable to that of Alibaba and eBay; the latter two companies operate as marketplaces, in which they do not own any inventory and only act as a medium between third-party sellers and buyers. In contrast, Amazon owns a large portion of the inventory it sells on its websites; however, it is also moving towards the marketplaces business model. Third-party owned units accounted for around 45% of all paid units sold during the most recent quarterly results. This varied business model also displays lower profitability, given the degree to which Amazon competes on price. In addition, we think the company is undertaking various investments in several growth strategies (such as Prime, content, cloud services, etc), and hence its margins cannot be directly compared to those of eBay and Alibaba. We believe Amazon’s market price is almost fairly-valued presently, since the company’s top-line outlook over the next 5-10 years looks quite strong, in our view. We estimate the company will gain market share over the coming years, in both the U.S. as well as in the international online retail market. At the same time, an improvement in profitability will lead to generation of significant cash flows over the long-run. Alibaba: After generating a lot of heat post its IPO last year, when Alibaba’s stock almost climbed up to $120, the Chinese e-commerce behemoth more recently seems to be losing favor with Wall Street investors. A host of concerns, spanning from counterfeit products on its platform to risks in the Chinese economy and increased competition from, have weighed on the company’s stock over the past few months. However, we think Alibaba’s stock could represent a unique buying opportunity at this point. This is as the company’s financials—primarily revenue growth, EBITDA and free cash flow margins—look promising (as can be seen in the table above). Our $82 price estimate for Alibaba’s stock represents near 30% premium to the current stock price, as we believe the company will continue to account for a dominant share of the Chinese e-commerce market. Plus, the rapid growth in the Chinese e-commerce market is expected to continue in the near-term, owing to rising Internet penetration in the country. Moreover, we have a positive view of Alibaba’s investments in the online-to-offline (O2O), mobile, and cloud computing services businesses. We believe these bets could pay-off over the next five years, leading to corresponding rise in Alibaba’s profitability. eBay: After the recent divestiture of its payments business, eBay has a number of challenges ahead to regain its prominence in the e-commerce market. Battling increased competition and a drop in traffic due (the result of the Google Panda update and last year’s security breach), eBay’s management will find it hard to accelerate the company’s business in the coming years. As a result, we forecast eBay will  lose some market share in the global e-commerce market over our forecast horizon. On the positive end, the company’s marketplaces business model leads to the generation of healthy cash flows. Plus, the company’s margins are quite stable and high (as compared with Amazon). At current valuation ratios, we believe eBay’s stock is trading cheaply with respect to its fair price, even after factoring in the drop in market share. Our $31 price estimate for the company’s stock represents more than 20% upside to the current market price. View Interactive Institutional Research (Powered by Trefis):
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    Dunkin' Brands: Trefis Estimate Revised To $48, Still Bullish On The Stock
  • By , 10/8/15
  • Where is the DNKN stock heading to? Is it an attractive buying opportunity or will the stock witness further lower levels? Dunkin’ Brands ’ (DNKN) stock suffered another major blow as the investors panicked following a moderate full-year guidance presented by the company at its annual 2015 Investor & Analyst Day. The company hosted its annual Investor & Analyst Day on October 1 and presented its future plans, strategies, and guidance for the next few years. Concerned about the possible threats from the hurricane Joaquin and the company’s unchanged guidance for fiscal 2015, the investors became wary of the company’s near-term prospects. As a result, the company’s stock went tumbling down from $49 to $43 within a day, and is currently trading close to roughly $42. Trefis has updated its price estimate for DNKN stock from $56 to $48, which is still roughly 13% above the current price estimate. Here are the reasons why Trefis is still bullish on the stock, even after the estimate revision. See full analysis for Dunkin’ Brands Guidance Isn’t That Bad After a robust performance in Q1 2015, the company raised its guidance for the fiscal year 2015. Before Q1 results After updating the guidance Revenue Growth 5-7% 6-8% Adjusted Operating Income Growth 6-8% 7-8% Adjusted EPS $1.83-$1.87 $1.87-$1.91   However, much of the revision of this guidance was due to the company’s agreement with J.M. Smucker Company and Keurig Green Mountain to make Dunkin’ K-Cup Packs available at retail outlets nationwide. Furthermore, despite the decline in comparable sales for Baskin-Robbins International, the second biggest segment, the company kept its guidance unchanged, as it believed that the temporary headwinds, which hampered the segment’s growth in Q2, would fade away in Q3. (Read: U.S. segments help drive Dunkin’ Brands top-line growth in Q2 2015 ) That brings us to the Investors & Analyst Day event, prior to which the market was hoping the company would raise its EPS guidance to $1.92 for the fiscal 2015. However, keeping in mind the other probable future headwinds and the potential overlapping impact of previous headwinds of Q2 into Q3, the company again kept its full-year targets unchanged. Apparently, this did not go down well with the investors, who were critical about this move. Source: Dunkin’ Brands IR (Investors & Analysts Day) However, this might be a panic move by the investors, as keeping the guidance unchanged despite all possible headwinds is a bold move by the company, if not a positive one. Hurricane Joaquin To Play Spoilsport Hurricane Joaquin is one of the threats lurking near the east coast area of the U.S.  Some of the states, including South Carolina, North Carolina, and Georgia, are under huge threats from the storm. This has raised concerns among Dunkin’ Donuts’ restaurant operators in the area. Most of the Dunkin’ Donuts stores are concentrated in the Northeast region of the country and the company is worried that this hurricane might disrupt all the operations in that region, leading to a potential decline in comparable sales and thereby revenue growth. As a result of this threat by the Hurricane Joaquin, Dunkin’ Brands expects its Dunkin’ Donuts U.S. segment to deliver only a 1.1% growth in comparable sales with a significant decline in customer traffic. Restaurant Development To Remain Stable Despite Closings Dunkin’ Brands also mentioned that it will be closing 100 of its Dunkin’ Donuts U.S. stores in the next 15 months. The decision is made on account of poor performance of those stores; the stores being closed represent merely 0.1% of Dunkin’ Donuts sales. Despite the huge cut down, the company promises to keep the net new openings unchanged. Despite these factors, the company is firmly holding on its 2015 targets, which indicates a positive approach. Restaurant Development Is Picking Up Pace As of June 2015, there are currently 19,095 total restaurants, with 8,240 Dunkin’ Donuts U.S. restaurants, 2,490 Baskin-Robbins U.S. restaurants, and the remaining international stores. Dunkin’ Brands is one of the fastest growing companies by unit count among quick service restaurants. Moreover, Dunkin’ Brands plans on focusing more on emerging and western markets, where the company has higher growth potential. In the long-term plan, the company plans to add around 5,000 Dunkin’ Donuts units in the western market, around 3,000 in the emerging markets, and only 400 in its core eastern market, to take the total Dunkin’ Donuts U.S. units to 17,000. (See:  Expansion in the Western U.S. to remain key factor for Dunkin’ Brands’ top-line growth ) On a broader perspective, the company aims on taking its total count above 30,000 in the future, with a majority of operations in the U.S. With a target of 6% growth rate for Dunkin’ Donuts U.S. stores development, the company has already picked up pace by opening its Dunkin’ Donuts stores in California. More importantly, the 6% growth rate is higher than what the company has achieved in the last 5 years. Trefis has revised its estimates for number of restaurants for each segment. Number of restaurants by 2022 Previous Estimate New Estimate Dunkin’ Donuts US 11,222 11,122 Dunkin’ Donuts International 4,293 4,293 Baskin-Robbins US 2,579 2,587 Baskin-Robbins International 6,918 6,848   However, the pace of expansion for both brands has picked up lately and incremental revenues from the new stores might contribute to revenue growth in the coming years. Dunkin’ K-Cups: Going Strong As already discussed in our prior article, Dunkin’ Brands’ market share in the single serve K-Cups segment grew 80 basis points over the 4 week period ended September 5, 2015, and it now has a 5.4% market share in this category owing to the solid momentum of its K-Cups. The market expects the company to further improve this number in the coming few months. (Read: Why DNKN stock has the potential to go 20% higher in the coming quarters) With the winter season coming, the sales of K-Cups might further accelerate, providing a further boost to average revenue per outlet for the Dunkin’ Donuts U.S. segment. The above mentioned factors might just overshadow the impacts of Hurricane Joaquin and other small headwinds. This compels us to believe that the recent drop in the company’s stock price might just be a temporary panic. As a matter of fact, this might be a better entry point for long-term investors. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    MCD Logo
    Why Is It Important For McDonald’s To Focus On Quality?
  • By , 10/8/15
  • tags: MCD CMG
  • In Q2 2015,  McDonald’s ‘ (NYSE:MCD) global comparable sales declined 0.7%.  This figure was -2% for the U.S. and -4.5% for the APMEA region.  The decline in comparable sales now seems to be a common highlight of the company’s results (Read Fifth Consecutive Negative Comp. Sales Quarter Looking Over McDonald’s ). McDonald’s is losing its existing customers to competition and its turnaround plan has not shown any immediate results.  Loss of reputation seems to be weighing on its business, and McDonald’s in its current form is losing some of its popularity.  A renewed focus on the quality of its products, and food safety, should help McDonald’s regain its customers. See Our Complete Analysis For McDonald’s Corporation Japan Meat Scandal Still Impacts Asia A region-wise comparison of same store sales for McDonald’s over the past 6 quarters is given below. Apart from US, Europe, and AMEA, global comparable sales in the above table include  other countries such as Latin America, Canada, and the corporate segment of McDonald’s. We note that while McDonald’s was gaining customers in Asia in the first half of 2014, after the meat supplier scandal its same store sales declined significantly, and are not showing any significant signs of recovery. Customers viewed McDonald’s in Asia as a company which lacked a focus on food quality.  This reputation loss appears to have led to a significant loss of customers in the APMEA region. Declining Reputation Score In the U.S. Market A recent report by the Reputation Institute mentions that on a scale of 1-100 McDonald’s reputation score declined to 55.3 in 2015 from 64 in 2014. Chipotle on the other hand increased its score to 74.2 in 2015 from 69.4 in 2014.  Chipotle’s “Food with Integrity” approach has been viewed positively by customers.  Its recent action to stop serving pork in its restaurants till it finds a pork supplier meeting its strict requirements went down very well with its customers and investors. McDonald’s, on the other hand, suffered reputation loss due to the meat scandal in Japan.  In the U.S. consumers are shifting towards healthy food options. McDonald’s move to use chicken raised without antibiotics should have a positive impact in the long run. The number of customers per McDonald’s restaurant is a key value driver for its business.  The impact of change in this figure on McDonald’s valuation can be analyzed below. The recent move by competitors to focus on quality and McDonald’s slow response to food safety concerns has impacted its reputation in the U.S. and Asia.  This has had a direct impact on its comparable store sales.  While the company has a turnaround plan in place, serious measures to demonstrate its focus on quality are needed to salvage the situation. View Interactive Institutional Research (Powered by Trefis): Global Large Cap  |  U.S. Mid & Small Cap  |  European Large & Mid Cap More Trefis Research
    MSFT Logo
    Microsoft’s Azure To Boost Cloud Revenues In The Coming Years
  • By , 10/8/15
  • tags: MSFT IBM GOOG
  • Microsoft  (NASDAQ:MSFT) launched its Azure platform in 2010, and since then it has posted triple digit growth. Azure services are built out on the public, private, or hybrid cloud, and some of the services are available under different cloud umbrellas (infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS).  And last fiscal year Azure generated over $1.2 billion in revenue, according to reports. The company continues to launch new products, including those discussed at the recently concluded AzureCon. The company unveiled new features for the Azure Data Lake Store and a cloud-based scalable analytics tool to better manage the cloud-based data. This is relevant as the company tries to expand its footprint in the fragmented cloud analytics market. In this note, we explore the new offering and how Azure will boost Microsoft’s cloud revenue. See our complete analysis of Microsoft here Azure Data Lake And Analytics The Azure data cloud simplifies managing large swaths of data and does all types of processing and analytics across platforms and languages. It can also be integrated with legacy systems for identity management and security for extension of existing data applications. One of the key features of Azure Data Lakes is scalability that can be achieved for Apache Hadoop, Spark, HBase, and Storm clusters. Microsoft’s Cloud Strategy And Revenue Opportunity Currently, Microsoft makes $90 billion revenues annually. Most of its revenue stems from sale of perpetual software licenses such as Windows OS, Windows Office and SQL server to enterprise clients. However, over the past few years, a host of factors have forced Microsoft to extend its services in the cloud domain. Declining sales of PCs  lower demand for the associated  software. Also a factor is the price sensitivity of clients that want to cut down their costs and only pay for services that are rendered, based on the scale of operations. As a result, Microsoft has adopted a cloud first strategy to bolster its revenue in the coming years. The Microsoft’s vision of cloud services allows customers to offer not only standalone applications, but also to interact seamlessly with Microsoft infrastructure and on-site applications such as Hyper- V, Windows Server and System Center, as well as other SaaS offerings. Over the past few years it has invested close to $15 billion to build its cloud infrastructure. The company said that Microsoft’s cloud computing business (which includes revenues from Azure, Office 365 and Dynamic CRM online) is on track to generate over $20 billion in revenues by FY 2018.   (Fiscal years end with June). In its fourth quarter earnings (For FY15), the company announced that it annualized commercial cloud run-rate surpassed $8 billion. Furthermore, according to Gartner research, Microsoft Azure is a a leader in public cloud market and ranks second behind Amazon Web Services in its Magic Quadrant. Microsoft is trying to close the gap between itself and Amazon’s AWS services through lower prices and by rapidly introducing new features to its Azure platform. At the recently concluded Azurecon, Microsoft said that it continues to add 90,000 new subscribers each month for its Azure platform. Furthermore, over 1.5 million databases are running on Azure, together with over 777 trillion storage transactions each day. We believe that Microsoft continues to leverage its brand, existing customer relationships, history of running global-class consumer Internet properties and engineering prowess to sell its Azure (Cloud, IaaS and PaaS) services. If this were to happen, and Azure’s share were to increase 15% of total PaaS and IaaS market (estimated at $84 billion by 2020) then Azure’s revenues can increase from $1.8 billion  (estimated at the end of FY2015) to over $12 billion by 2020. This could result in a 15% upside to our current price estimate. We have  $44.12 price estimate for Microsoft, which is inline 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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    Why It Makes Sense For Boeing To Continue Increasing Its Production Rate
  • By , 10/8/15
  • tags: BA
  • Ethiopian Airlines may soon place a $7.5 billion order with  Boeing  (NYSE:BA), according to a media report. This would take Boeing’s 2015 orders to over 460 commercial airplanes. This compares with 815 net orders for Airbus. Both Boeing and Airbus have hefty backlogs in commercial jet orders. In the most recently reported figures, Boeing’s and Airbus’ backlogs stood at over 5,650 and 6,750 commercial jets, respectively. Given the sheer size of the backlog, it will take longer times for both companies to fulfill the orders at current production rates, which, in turn, could reduce the inflow of new orders. Having said that, both Boeing and Airbus are considering an increase in their production rates. In fact, Boeing has so far delivered 580 airplanes in 2015, of which, 101 were 787s . The initial target was to deliver 100 787s for the full year and it is likely to end up somewhere around 130 by end of the year, in our view. So, Boeing is working on enhancing the production capacity and clearing the backlog faster, so as to best accommodate customers needs and minimize cancellations. So far in 2015, Airbus has emerged to be the winner in terms of total orders and commitments secured, with a backlog that is much larger than Boeing’s $500 billion. A huge backlog may not be healthy in the long run, as any signs of a negative macroeconomic environment can result in more delivery deferrals. It is evident that during distress, such as the recessionary period, orders as well as deliveries see a slowdown. China is seeing slower economic growth and that has already sparked fears among investors and global equity markets have corrected. If indeed China’s economy continues to see slower growth, the demand outlook for airplanes might change slightly. There is always a risk of oversupply, especially in emerging economies, which, in turn, would result in order cancellations. So, the airline manufacturers are aiming for faster delivery but there are constraints on the supply side. Suppliers to both commercial jet manufacturers feel their capacities are already tapped out, and it thus becomes more difficult to continue increasing the production rate. Also, if demand slows down, Boeing will have more flexibility to tune its production rate in the U.S., as compared to Airbus, which is based out of Europe with stricter labor laws and unions. For now, Boeing plans to raise its 787  production rate to 12 per month in 2016 and then to 14 per month by the end of this decade, from 10 per month currently. Boeing also plans to raise its  737  production rate to 47 per month in 2017 and then to 52 per month in 2018. At this pace, it will take more than 7 years for Boeing to clear the existing backlog. This surely is a long waiting time for airlines, although lead-times for commercial aircraft are notoriously long. Also, Boeing is not competing with Airbus alone, but also with newer players in commercial airplanes segment, such as China’s Comac C919, Brazil’s Embraer and Canada’s Bombardier. On the brighter side, Boeing sees around half of its airplane demand coming from replacements over the next two decades, reflecting a good mix of low risk as well as high growth opportunity in the coming years. Overall, we feel Boeing is well placed for growth in the foreseeable future, given its increased production rates. This will help manage its backlog and move faster on production of newer airplanes, possibly the envisioned – middle-of-the-market – which is generating a lot of excitement in the industry. See our complete analysis of Boeing 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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    Price War For Holiday Sales Heats Up As Target Raises Ante With New Price-Match Policy
  • By , 10/8/15
  • tags: TGT
  • Making up nearly 20% of the industry’s annual sales and 30% for a typical retailer, the two-month period of November and December is an important one for both retailers and bargain-seeking consumers. The 2014 season clocked an year-over-year growth rate  of 4.6%, beating expectations for a 3.8% rise, according to ShopperTrak, which surveys spending at brick-and-mortar stores. Given the concerns around job growth and inflation this year, sales numbers will be under even more scrutiny, as they are often used to assess the state of the U.S. economy. The country’s second-largest discount retailer, Target (NYSE:TGT), has caught our attention lately. It announced a renewed price-match policy to strengthen its online sales channel, as the space becomes increasingly crowded. While this decision might help the company gain a larger share of the online market, industry growth is likely to be muted compared to last year. Also, the company’s  gross margin  is likely to come under pressure owing to the ensuing price war. Overall, we believe this move will do more harm than good for retailers, collectively. Below, in this article, we discuss the above mentioned factors in more detail. See our complete analysis for Target Retail Sales Growth Remains Subdued Retail Sales growth hovered around 2% for the most part of this year, unlike 2014 when the rate stayed above 4% . This could be attributed to the low wage growth compared to an year ago, which in turn limits disposable income. Combined with falling consumer confidence and low inflation, middle- and low-income consumers are more likely to put off purchases to a later time. Estimates of growth for the 2015 holiday season are already indicating the slowdown. According to the consultancy firm, AlixPartners, sales are expected to grow 2.8 percent to 3.4 percent during shopping period,notably lower than 4.4 percent in 2014. Margins Will Likely Be Under Pressure Price wars are nothing new in the retail industry. However, slowing industry growth means that retailers will be more aggressive for their share of incremental sales. Target recently announced a renewed price-matching policy aimed at holiday shoppers, who happen to be very price-sensitive. The company already had a limited price-match policy for its physical stores, which they extended to their website and added 24 additional retailers that they’d match on price, including online rivals. Unfortunately, they are not the first to make such an offer. With minor variations to policies, multiple retailers now promise customers that they’d be paid back if they find a better price with a competitor. In fact,  WalMart (NYSE:WMT) has a feature in its mobile application that, upon scanning a receipt, identifies the lowest price among a set of retailers and pays the difference back to the customer in the form of credits. These elevated levels of price competition are likely to drive shoppers to wait till the last minute to find the best deals available. In such a situation, the only way for retailers to capture sales is to hit the bottom in terms of prices, sacrificing gross margins. We currently forecast Target’s gross margin  to remain stable at the current level of 29.5% till the end of our forecast period. However, policies like the one Target announced have the potential to have a significant negative impact on margins. In a scenario where the company’s gross margin falls by 200 basis points (i.e. to 27.5%) by the end of our forecast period, Target’s market value could see a decline of almost 10%. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    T Logo
    How Much Value Can The Internet of Things Add For AT&T?
  • By , 10/8/15
  • tags: T VZ S
  • The Internet of Things (IoT) is touted to be the next big thing for the technology industry, driving growth for a broad spectrum of tech companies ranging from semiconductor manufacturers to cloud computing providers and software developers. IoT is expected to benefit wireless carriers as well, as their networks provide connectivity for a growing number of networked devices.  AT&T (NYSE:T) is betting big on the space, as it looks to find new avenues for growth amid increasing saturation in its bread-and-butter mobile business. In this note, we take a look at what AT&T is doing in the IoT space and examine how much value the trend can add for the carrier and the broader wireless industry.
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    Is Trivago Expedia's Answer To Google and TripAdvisor's Hotel Partnership Spree?
  • By , 10/8/15
  • TripAdvisor ‘s (NASDAQ:TRIP) hotel chain partnerships and Google ‘s (NASDAQ:GOOG) foray into hotel bookings must have shaken up Expedia  (NASDAQ:EXPE) about the value that metasearch engines can create by partnering directly with hotels. Expedia’s metasearch platform, Trivago, is also gearing up to provide stiff competition in the metasearch segment. In a recent interview, Trivago’s managing director and head of hotel relations, Johannes Thomas, stated that the company had changed its focus this year to give more importance to direct hotel relationships. Trivago has also updated its Hotel Manager platform to attract more independent hotels. We believe that Trivago is strengthening its metasearch competency in order to help Expedia in its quest to gain a larger portion of both the hotel suppliers and travelers, on its platform. Partnering With Hotels: Recent Trend Among Metasearch Engines Recently, it has been a prevalent trend among metasearch engines to partner with hotels. Metasearch platforms are providing a fair playing ground to independent hotels alongside OTAs with this move. However, OTAs might not be too happy with losing their competitive edge towards getting the first preference when it came to user searches. TripAdvisor partnered with 10 leading hotel chains for its Instant Booking Platform in the second quarter of 2015, the most prominent among them being Marriott International. Currently, TripAdvisor boasts of featuring 6 out of the top 10 global hotel brands on its platform. A few months ago, Google tied up with Sabre for 20,000 properties, that will enable customers to book accommodations through Google search, Google maps, or Google+. Though its direct relationship with Expedia makes online travel agencies Trivago’s first priority, which Thomas says will continue in the future, however, Trivago’s focus on independent hotels will improve. When Trivago directly partners with the hotel, then it highlights in blue with the tag ‘official hotel website.’ (Image Source: Trivago ) Thomas mentioned that with Trivago’s earlier tie-ups with mostly hotel chains, it was losing out on half the hotel packages offered by independent hotels. According to Thomas, hotels have the best knowledge about their strengths and entering into partnerships with them meant that Trivago can offer more options to its users. Trivago’s Updated Hotel Manager Platform Towards this end, Trivago announced an updated version of its Hotel Manager platform that comes in free and fee-based versions, and allows hotel owners to update their hotel details on Trivago, as well as access the analytics data related to their rates and  their competitors, among other details. (Image Source: Trivago Hotel Manager ) Trivago’s Mystery Shopper Program Might Produce More Authentic Reviews Trivago has recently removed the reviews of its own users from the website because it does not think that providing reviews is its primary function. It might be TripAdvisor’s dominance in the review area that made the company think this way. However, this makes Trivago’s reviews more authentic than its stronger peers. This is because Trivago displays an aggregation of reviews from other websites and has a Mystery Shopper program. Under the program, hotels pay around 20 to 80 Euros to customers in order to visit and rate their properties over some 250 parameters. The hotels don’t know when these customers arrive and Trivago uses a detailed survey and later on shares the ranks of hotels on the various parameters, in order to let its users make more informed choices about their stays. Unlike Its Peers, Trivago Will Remain Focused On Its Cost Per Click (CPC) Model The CPC model in metasearch is a more advantageous one for hotels as it directs customers to their website and helps the hotels in building a loyal customer base. According to Thomas, when a metasearch features the booking functionality, then there might be doubt about the hotel ratings etc in the minds of the customer. Hence, Trivago is aiming to build a bridge between metasearch and hotel website booking. Why Is Trivago’s Growth Important For Expedia? As we’d discussed in a previous article, the OTA industry is seeing a new trend currently. The metasearch engine such as Google and TripAdvisor are entering into the hotel booking arena. TripAdvisor’s Instant Booking platform (currently active across all devices in the U.S. and the U.K.) lets users book hotels directly from the TripAdvisor website. Google has launched its commission based advertising platform called Google Hotel Ads which takes a commission based payment from hotels instead of its previous cost-per-click structure. In the U.S. Google has also started its  Book on Google option from mobiles, desktops, and tablets, which might later be expanded to other geographies. Under these scenarios, when metasearch engines are blurring the lines between their functionalities and those of the OTAs, making Trivago a stronger and better-equipped metasearch engine might work in Expedia’s favor. Expedia’s host of acquisitions had given it an almost 75% online travel market share in the U.S.  However, given the newer competitors in the OTA segment, it is better for Expedia to strengthen its metasearch engine as well, in order to maximize user footfalls and conversions. While the metasearch engines feel that the commission program is more lucrative than the pay per click structure, Expedia doesn’t need to make a choice or focus on either of the two.  That is because Expedia has the power to focus and develop both its OTA and its metasearch models.   We believe, Expedia is leveraging upon the advantage of owning a metasearch, in gaining customers from different avenues – both from Trivago and from its OTA websites. Expedia had earlier spoken about its aggressive expansion plans with Trivago. In its Q2 2015 earnings call, Expedia’s management stated that it won’t feature on TripAdvisor’s Instant Booking platform presumably because Instant Booking undermines the functionalities of the OTA by getting all the steps of the booking process completed on TripAdvisor’s own website. Hence, Expedia can compensate for the lack of its visibility on the Instant Booking platform by featuring more on the Trivago website. All in all, Trivago presents a win-win scenario for Expedia and hence the company is taking such efforts to develop Trivago’s core competency. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap
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    How The iPhone Upgrade Program Impacts Apple's Financials
  • By , 10/8/15
  • tags: AAPL aapl BBRY SSNLF
  • From an investor’s perspective, Apple ‘s (NASDAQ:AAPL) new iPhone Upgrade Program could be the most interesting announcement the company has made in recent months (related:  Apple’s iPhone Installment Plans: Good For Customers, Great For Apple ). The plan effectively helps to shorten the upgrade cycle for the iPhone, encouraging customers to upgrade every year (instead of the current estimated 2+ year cycle), while up-selling the high-margin AppleCare+ service plan. In this note, we try to size up the potential impact of the plan on Apple’s financials.
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    Why Nokia's Licensing Revenue Growth Can Accelerate Going Forward
  • By , 10/8/15
  • tags: NOK AAPL MSFT
  • Nokia ‘s (NYSE:NOK) licensing division, which accounts for about 22% of the company’s value as per our estimates, generates revenues through royalties paid by other companies for the use of its intellectual property. From 2010 to 2014, the segment’s revenues grew steadily from EUR 100 million to EUR 560 million, with a spike in growth to EUR 840 million in 2011, thanks to a settlement with Apple (NASDA:AAPL). While Nokia’s licensing revenues have increased at a CAGR of just 4% since 2012 – after the settlement of the Apple lawsuit – we expect the growth to pick up going forward. Nokia’s huge patent portfolio, the sale of its smartphone business, which had earlier limited the number of patents it licensed to other companies, and its aggressive stance over patent infringement are likely to drive the division’s growth going forward. Nokia has approximately 4,000 patent families across various wireless standards including 3G and 4G LTE, as well as device design, which it licenses to other vendors for recurring income. However, while operating its own smartphone business, the company licensed out only 10% of its patent portfolio, keeping the remaining ones exclusive for its own devices. With the divestiture of its smartphone business, Nokia can increase the number of patents available for licenses, thus ensuring accelerated growth in royalty income. The company is also reportedly searching for a smartphone hardware partner to re-enter the smartphone business. Nokia has also had a good run with patent infringement lawsuits in the past. One such example is the settlement of a patent infringement case it filed against Apple in 2011, which played a pivotal role in a 730% increase in licensing revenues that year. With so many patented technologies, there is the potential for additional one-time settlements that could support growth in Nokia’s licensing revenues. Our $8 price estimate for Nokia is around 10% higher than the current market price.
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    Diageo: Moving Back To Basics?
  • By , 10/8/15
  • tags: DIAGEO DEO
  • Diageo (NYSE:DEO), the world leader in alcoholic beverages, recently hinted at pursuing the sale of its wine business, which includes key brands such as Blossom Hill, Piat d’Or, Rosenblum, and others. While the deal is still at its inchoate phases, with no sale price revealed, Australia’s Treasury Wine Estate is expected to be the potential candidate. Now, what could this possible sell-off mean for Diageo’s business?   Diageo Under Stress After many years of growth, Diageo’s sales have slowed over the past two years due to weakness across emerging markets and developed markets. While tough economic conditions and policy stances have dragged down demand in developing markets, little reprieve has come from developed markets where consumer demand has remained lull. Furthermore, currency headwinds have only contributed to making Diageo’s financial performance worse. All of these developments have put immense pressure on the company. What Has the Company Done? In response to waning consumer demand, Diageo has resorted to innovations. For instance, realizing that its woes in North America were a consequence of changing customer preferences from vodka to whiskey, and from Scotch whisky to American whiskey, Diageo quickly revamped its portfolio to include brands such as Crown Royal Regal Apple and Bulleit to capitalize on the opportunity. In fact, over the last fiscal year, the company generated over £500 million (~$782 million) in sales predominantly through innovations. However, apart from this, the company has also looked at offloading some of its non-core businesses. Recently, the company announced the sale of its hotel and golf resort business, Gleneagles, and now its wine business. What Does This Mean? This offloading of its non-core components imply a shift from diversification to specialization. Typically, the alcohol business can be a problematic one, right from changes in consumer demand, tastes and preferences, to regulatory issues. At such a time, big players in this domain have resorted to diversification — just like Diageo had with its wine business and hotel and golf resort. However, this offloading could mean a move towards doing what they do best, and achieve the optimum in those areas. Will This Be A Win Or Loss For Diageo?  This move could have little negative impact on Diageo for a number of reasons. For starters, although Diageo has been involved in this business for about 15 years now, wine accounts for merely 4% of the company’s net sales. Furthermore, a number of key markets have actually been showing a declining trend in terms of wine consumption. For instance, traditional markets such as France and Italy have shown 3.7% and 18.1% declines, respectively, between 2010 and 2013.  China, another high growth market, has been showing declines at the rate of 1.5% between 2012 and 2013, after growing at double digits in the previous years against the widespread “anti-extravagance” movement and economic slowdown. According to a report by Vinexpo, consumption per head for top consumers — Italy, France, Switzerland, and Portugal — are all expected to show a decline between 2013 and 2018. While the report suggests some growth in China, this is expected to come from entry-level or medium-range wines rather than the premium options, which could drag down the lucrativeness Diageo could have reaped from the region. The only potential loss for Diageo could come from the U.S., which has seen phenomenal wine consumption growth between 2010 and 2013 at 14.4%, to account for 13.5% of world consumption in 2013. Vinexpo and International Wine and Spirit Research suggest that U.S. consumption could undergo another 11% increase between 2014 and 2018 to steer demand in the global wine market. However, in spite of the phenomenal growth in the region, Diageo was hardly a beneficiary since the beverage house reported a 2% organic volume decline in wine in its North America region last fiscal year, in spite of innovations. Even then, channeling resources from wine to spirits, where Diageo is the champion, could offset any losses from the offloading. Taking the aforementioned points, this renewed focus on Diageo’s core business could support the company’s growth. In spite of near-term headwinds, Diageo’s product portfolio and business fundamentals continue to remain strong. Given this, the company could show promise over the medium to long term. Trefis has a  $115 price estimate for Diageo, which is above the current market price. See Our Complete Analysis For Diageo Here Sources: World Wine Consumption, Trade Data and Analysis U.S. Demand Seen Driving World Wine Market Growth, Deglise Says Diageo Form 20-F, SEC Diageo Presses Ahead With Wine Sale View Interactive Institutional Research (Powered by Trefis): Global Large Cap  |  U.S. Mid & Small Cap  |  European Large & Mid Cap  |  More Trefis Research
    Nag, nag nag, whine, whine, whine . . .
  • By , 10/8/15
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program Nag, nag nag, whine, whine, whine . . .  by Charles Lewis Sizemore, CFA I hate exercising. Hate it. I have friends that talk about that elusive “runner’s high.” Well, I’ve never experienced that. Running just gives me shin splints and sore knees. It has certainly never given me a buzz. But you know what? As much as I hate exercising, I do it. And do you know why? Because my wife nags me. My long-suffering wife cares about me and wants me to be healthy. So, she forces me (under much duress) to eat spinach salads and ride my bike up and down the hills surrounding my house at night. And she’s been known to hide my cigars and whiskey too. Which is just mean. I don’t like it. But I listen to her nagging because I know she’s right . So today, I’m going to nag you . Don’t worry, this has nothing to do with exercise. In fact, I’m happy to share a cigar and a swig of whiskey out of my flask later tonight if you happen to be out “exercising” on your bike like I am. No, I’m going to nag you about your 401k plan. And you should listen to me here because I’m right . The 401k plan is the single best savings vehicle for the vast majority of middle-class Americans. If you work for your money, you should be using your 401k plan as your primary savings vehicle. And you should be maxing out your contributions for the year. In 2015, you can contribute $18,000, not including any additional matching from your employer. As I wrote earlier this year, if you find yourself in a high tax bracket, you get an effective “return” of as much as 46% just for contributing and having your employer match. And that’s without putting a single dollar at risk in the stock market. There is no investment anywhere else in the world that offers safe returns at anything close to those levels. So here’s where the nagging comes into play. If you’re not on track to put the complete $18,000 into your 401k plan this year, log in to your account make changes today . You have three months until year end. That’s plenty of time to get to $18,000, even if you’re starting at zero . I can already hear your weak, excuse-laden reply: “There is no way the math works out. I can’t possibly save that much money in that little time.” Yes you can. Man up. If you earn just $72,000, then $18,000 amounts to three months’ worth of income for you… or exactly the amount of time we have remaining in 2015. Yes, I know you have Social Security and Medicare taxes and probably health insurance too. So you can’t technically put 100% of your income into your 401k plan. Let’s not split hairs. The fact is that you still have the means to get to $18,000, or at least awfully close. Of course, you still have to eat and pay your mortgage. I get that. But if you’ve been responsible with your money, you probably have some cash or investments sitting in non-401k savings. If that’s the case, then you can drop your salary to effectively zero, dump every last penny of your paycheck into the 401k account, and live off of your savings until year end. The net result is that you’re effectively converting taxable savings into tax-free savings in your 401k plan. Those savings will now be safe from the tax man until you eventually take them out in retirement. So before you close this page, login to your 401k plan. If you’re not on track to contribute $18,000 by year end, make changes. It’s for your own good. Oh, and try to eat a salad or two while you’re at it. This piece first appeared on Economy & Markets. Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the  Sizem ore Insights  blog.   This article first appeared on Sizemore Insights as Nag, nag nag, whine, whine, whine….
    Take a Look at DARPA’s “Dragonfly Helicopter”
  • By , 10/8/15
  • tags: SPY TLT
  • Submitted by Wall St. Daily as part of our contributors program Take a Look at DARPA’s “Dragonfly Helicopter” By Tim Maverick, Senior Correspondent Ask military helicopter pilots about the toughest situations they’ve faced and you’re likely to get similar answers: The challenge of landing in the middle of a combat situation on a rescue mission. Aside from the obvious conflict taking place, rough terrain can also make it extremely difficult to find an area that’s level enough to land safely. But new technology may be about to change that  . . .   thanks to an idea from nature. Inspired by Insects The Defense Advanced Research Projects Agency (DARPA) is the division of the U.S. Department of Defense responsible for developing military-grade technologies. Together with the Georgia Institute of Technology (Georgia Tech), DARPA’s Mission Adaptive Rotor (MAR) program has just come up with a novel idea. MAR is developing “morphing rotor technology” for both military and commercial helicopters, which is particularly useful in dangerous combat zones or natural disaster areas. The inspiration behind this technology? Insects. Or, more specifically, dragonflies. The “Dragonfly Helicopter” At first glance, it looks like a regular helicopter. But when the landing process gets underway, it morphs into something quite different. Rather than touching down on conventional flat landing gear – or “skids” – four robotic legs unfold. These legs are modeled on the legs of dragonflies, and automatically adjust to the terrain, based on readings from an array of force-sensitive contact sensors. Recent testing showed that the unmanned helicopter had the ability to land on any surface and terrain, even one with a 20° slope. One could imagine that “terrain” in the future would include treacherous areas like battlefields with mortar holes or boulder-laden areas. Or landing on a ship that’s enduring rough seas. The key is that the dragonfly legs allow the rotor to stay as close to level as possible. This greatly reduces the chances of a disaster. Once in flight, the legs fold up neatly next to the fuselage. Again, this is very similar to what a dragonfly does with its legs while in flight. This feature reduces drag. Another plus? The legs are similar in weight to current helicopter landing skids. When available, these new helicopters will not only make difficult and dangerous helicopter missions much less hazardous, they’ll also allow pilots to accomplish tasks that are currently impossible. Good investing, Tim Maverick The post Take a Look at DARPA’s “Dragonfly Helicopter” appeared first on Wall Street Daily . By Tim Maverick
    Billionaire Investor Predicts Danger Ahead
  • By , 10/8/15
  • tags: SPY TLT
  • Submitted by Wall St. Daily as part of our contributors program Billionaire Investor Predicts Danger Ahead By Chris Worthington, Editor-in-Chief of Income Carl Icahn, one of the wealthiest and most famous investors on the planet, has issued a warning. Be prepared, he says, because there’s danger ahead. In a video released Tuesday on his website, Icahn explains why he believes we’re in for tough times in the near future. According to Icahn, short-term thinking in both the government and corporate board rooms has pushed us to the brink of a tall cliff. The culprits are numerous, but they include relentless zero interest rate policy, ill-advised stock buybacks, and junk bond ETFs. Sadly, these are just a few of the catalysts for the coming collapse. And how bad will it be once we go over the cliff? Well, Icahn says he’s “seen this before a number of times.” He references 1969, 1974, 1979, 1987, and 2000. He then says that the turmoil ahead may make those other times look “pretty good” by comparison. That’s a scary thought. Ultimately, Icahn believes that many politicians and CEOs have taken advantage of the system and, unfortunately, the public will get screwed once again. You can watch the video in its entirety on his website . Finally, let us know what you think. Do you agree with Icahn that short-term thinking and corporate greed have brought us to the brink? Or is Icahn misjudging our current situation and really just fear mongering? Good investing, Chris Worthington The post Billionaire Investor Predicts Danger Ahead appeared first on Wall Street Daily . By Chris Worthington
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    Can Jack Dorsey And Project Lightning Save Twitter?
  • By , 10/7/15
  • tags: TWTR FB LNKD
  • While Jack Dorsey’s appointment to the role of permanent CEO at  Twitter  (NYSE:TWTR) has hardly surprised anyone, it remains to be seen whether he will be able to reinvigorate user growth on the micro-blogging platform. It is noteworthy that product changes have recently accelerated under his formerly interim leadership. Twitter has introduced a host of changes in its recent past, which could both raise the monetization from existing users as well as attract newer users to the platform. The tighter integration of e-commerce on Twitter with buy-buttons, in addition, boosts monetization opportunities as well. At the same time, the latest launch of Moments (formerly code-named Project Lightning) is an encouraging step taken to enhance the value proposition of Twitter among newer users. In the event this feature finds resonance among those users who signed up on the platform but did not convert into active users, Twitter’s stock could see upside in the future, we believe.
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    PepsiCo Earnings Review: Core Performance Remains Strong, Although Marred By Structural Changes
  • By , 10/7/15
  • tags: PEP KO DPS
  • PepsiCo (NYSE:PEP) has for the second time in three months raised its guidance on the full-year core constant currency EPS growth (from 7% to 8%, and then 9%), on the back of solid Q3 results, reported on October 6. Shining bright among various structural shifts and the reclassification of operating units, was the strong performance in North America — the home market, which contributes over 60% to the top line, and approximately two-thirds of the core division operating profit. Although the volatile macro environment in some of the crucial emerging markets continues to be a downer, PepsiCo’s solid organic growth, especially in snacks and non-carbonated segments, reflects strength in the core business. We estimate a $98 price for PepsiCo, which is slightly above the current market price. See Our Complete Analysis For PepsiCo     Organic revenues were up 7.4% year-over-year in Q3, but net revenues declined 5 percent reflecting a 12-percentage-point impact of unfavorable foreign currency translations. But one of the biggest talking points after the earnings release remained the impairment charges of $1.36 billion as PepsiCo deconsolidated assets and liabilities of its wholly-owned Venezuelan subsidiaries from its consolidated balance sheet, and began accounting for its investments in the country using the cost method of accounting, citing the tough economic environment and restrictive foreign-exchange regulations in the country that make it difficult to convert the Venezuelan bolivar back into dollars. But apart from the impact of the adverse currency translations, which continue to cloud PepsiCo’s growth as the U.S. dollar strengthens against foreign currencies, the food and beverage giant’s strong performance in the home market promises a smooth finish to the year. Snacks Growth Continues To Be Solid  North America sales growth carries significant importance for PepsiCo not only because it’s the home market, where the company derives a substantial portion of its revenues from, but also because growth in this market is challenged by the ever-so-growing health and wellness concerns, so it becomes difficult to extract growth. Evolving customer preferences, and a shift to a healthier diet, present obstacles to growth for PepsiCo, which sells savory snacks and beverages that are often blamed for health problems and the widespread obesity concerns. However, organic volume growth seems to be holding up owing to the large American snacking habit, growing 0.5% in Q3 for the Frito-Lay North America division. Following a 3% top line growth in 2014, PepsiCo’s Frito-Lay North America has reported 2% revenue growth through the first nine months of 2015. This division alone constitutes 36.5% of PepsiCo’s valuation by our estimates, and the broader foods business forms roughly 65% of the net valuation. Not only is this because of the continual sales growth for Frito-Lay North America, but this is also PepsiCo’s most profitable division, with 30.5% operating margins this year, compared to 17% for the overall company (we have excluded the Venezuela charges from the 17% operating margins figure). This growth in Frito-Lay North America is fueled by strategic revenue management and pricing gains. A focus on small packs, which are sold for more price per weight, is driving an increase in average revenue per unit and, in turn, profitability. Non-Carbonated Portfolio Boosts Growth In Beverages While beverages have now long been the trailing leg in PepsiCo’s growth mobile, an impressive 10% volume growth for the non-carbonated portfolio made up for the 2% decline in carbonated soft drinks (CSD) volume, to fuel a 3% rise in organic volumes for the North America beverages division (which now doesn’t include Mexico and Latin America) in Q3. CSDs continue to bear the brunt of growing health concerns and customer skepticism regarding the usage of artificial sweeteners and/or bitter aftertastes of the diet/low calorie drinks. This caused a 1% decline in regular soft drinks and a steeper 6.5% decline in diets. But while customers are shifting away from CSDs, what bodes well for PepsiCo is that they are shifting to other beverage segments such as sports drinks, ready-to-drink tea and bottled water, where the company has significant presence, as well. Bottom line is that consumers are not drinking less, they are just not drinking sodas as much, anymore. So a more focused approach, marketing, and media investments behind brands such as Gatorade sports drinks, Lipton teas, and Tropicana fruit juices is driving an increase in PepsiCo’s drinks volume. The question now is whether the shift in volume sales from CSDs to other segments will impact margins. While segments such as bottled water carry narrow margins, segments such as sports and energy drinks carry broader margins. The focus on smaller bottles and packs has boded well for PepsiCo in recent times, and so has the sustained low gas prices, which have boosted customer spending and allowed food and beverage companies to operate at higher price points. This quarter, PepsiCo’s North America beverages realized 2 percentage points of effective net pricing and reported the highest growth in net revenues (4% year-over-year) of any other operating unit. This sales growth is even more than that of Frito-Lay North America, which grew by 1% in Q3. One might say that the argument that beverages are a forever second to snacks when it comes to PepsiCo, and are holding back growth, becomes weak going by the results this quarter, especially for the home market. Another win for PepsiCo this quarter was the growth in margins. Core gross margin expanded 120 basis points, and net gross profit declined only 2.5% (excluding Venezuela impairment charges), despite the adverse effect of currency translations, which dragged down the top line by 5% compared to the year ago period. Effective revenue management strategies and productivity initiatives have helped in achieving higher profitability. The company is optimizing its manufacturing footprint, and has reduced the number of company-owned beverage plants in North America by 23% since 2010, simultaneously increasing capacity utilization by 20%. PepsiCo remains on course to derive productivity savings of $1 billion this year and through 2019, following a similarly aggressive three-year $3 billion program that was concluded last year. 2015 for America-based companies has been a year marred by unfavorable currency translations, which continue to drag down organic growth considerably, and are now expected to be an 11 percentage point headwind on the full-year core earnings per share. But the core performance of PepsiCo’s snacks and even beverages remains strong, supported by the consistent cost-cuts and operational changes which are driving profitable growth. See the links below for more information and analysis: Rising on domestic growth, Dr Pepper’s first half has been solid PepsiCo earnings review: snacks and beverages make a good marriage? Bottled water is a potential growth category that can’t be ignored Soda makers wonder: where could growth in U.S. come from? The strong dollar is weighing down these large beverage companies Trefis analysis: Dr Pepper North America CSD Revenues Trefis analysis: PepsiCo Soft Drink Revenues Trefis analysis: Coca-Cola Revenues 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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    Dish’s Price Estimate Reduced To $71 Based On Revision In Valuation Of Company’s Spectrum Holdings
  • By , 10/7/15
  • We recently reduced our price estimate for Dish Network (NASDAQ:DISH) to $71, primarily due to revision in the estimated value of Dish’s spectrum holdings. Dish has made significant investments in spectrum over the past few years and currently owns licenses to approximately 75 MHz of spectrum nationwide, covering over 23 billion MHz-POPs. However, Dish recently decided to relinquish $3.4 billion worth of its AWS-3 spectrum to the FCC in lieu of the AWS-3 discount that the commission cancelled earlier. Our earlier valuation of Dish’s overall spectrum holdings was over $40 billion which has come down to $37 billion after adjusting for the relinquished spectrum. We believe that Dish’s spectrum holdings contribute close to 60% of the company’s stock price with Dish’s pay-TV business constituting the rest. See our complete analysis for D ish Network
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    How The U.K. Fits In American Eagle Outfitters' European Expansion Plans
  • By , 10/7/15
  • tags: AEO GPS ANF
  • Pittsburgh-based specialty apparel retailer  American Eagle Outfitters (NYSE:AEO) opened its first stores in the U.K. last fall, and introduced a region specific e-commerce website last month. Expansion into the U.K. builds on the company’s international expansion plans in two ways. Firstly, the market holds enough potential (huge size and positive growth forecast) for American Eagle to grow strongly and generate desired returns over the next several years. Secondly, it is the entry ticket for the retailer into Western Europe, which is relatively barren at the moment. American Eagle believes that its success in the U.K. can set the precedent for its seamless expansion in other countries in Western Europe. And, given that the retailer has gone after the most lucrative locations to initiate its expansion in the country, it can somewhat ensure a strong first impression on buyers. Moreover, its rejuvenated product mix will help American Eagle build a strong brand image in the country, which bodes very well for its expansion in the western part of the continent. Our price estimate for American Eagle Outfitters stands at $16.14, which is slightly ahead of the current market price.
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    Why Frito-Lay Is the Most Valuable Segment For PepsiCo
  • By , 10/7/15
  • tags: PEP KO
  • We estimate that almost 40% of   PepsiCo ‘s (NYSE:PEP). valuation comes from Frito Lay-North America.  This division currently commands around 36% of the growing North American savory snacks market. We expect this market share to remain steady over our forecast period.  Pepsico’s dominance in this business is critical to its long-term growth, as a moderate increase in Frito-Lay’s market share can compensate for a significant decline in the market share of any beverage division.  This is primarily because Frito-Lay’s EBITDA margins are almost double those of the beverage divisions. Each Basis Point Increase in Frito Lay’s Market Share Can Compensate For a 1.5 Basis Point Loss in PepsiCo’s Market Share Using Trefis Interactive technology, we create a scenario where we assume a 20% increase in Frito-Lay’s market share from the current 36% to around 44%  at the end of  forecast period. (An increase of 800 basis points).  This results in around 10% upside to our price estimate. Keeping the above estimate intact, we now reduce the market share of PepsiCo soft drinks to arrive at our original price estimate. To do this, we need to reduce PepsiCo’s Global CSD market share, from the current 20% to a low of 8%, a reduction of 1,200 basis points. Thus, a 20% increase in Frito Lays’ market share can compensate for a 60% decline in PepsiCo’s soft drinks market share to keep the valuation intact. Higher Margins, Better Prospects For Frito Lay The snacks business is more than twice as profitable as the beverage business for PepsiCo.  For each $100 earned, Frito-Lay generates $35 towards EBITDA, while PepsiCo soft drinks generate only $16.  An increase in revenues of Frito Lay’s business would have a significant impact on its valuation. This works tremendously in PepsiCo’s favor.  Its profitable snacks business, of which Frito Lay is a major component, is growing. (Read Pepsi’s snacks more crucial to overall growth )  We expect this market to grow at a CAGR of 2% by value through 2014-2019. The global CSD market, on the other hand, is expected to grow only at 0.5% in the next few years, and this growth is likely to come primarily from emerging markets. There are growing concerns around obesity and diabetes, which may stall growth in this market. From a valuation perspective, Pepsi can compensate for a 150 basis points decline in its CSD market share, with a 100 basis points increase in its Frito Lay’s market share. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Can Royal Dutch Shell Sustain Its High Dividends?
  • By , 10/7/15
  • tags: RDSA BP CVX
  • Royal Dutch Shell ‘s (NYSE:RDSA) dividend yield has reached a high of over 8%, given that its stock price fell by almost 18% in the last three months.  The company has committed to paying its current dividend for the current financial year despite the pressure on its net income. However, it is now uncertain whether the company will be able to sustain this dividend in the future.  The market seems bearish on Shell’s growth prospects.Our current price estimate for Shell stands at around 30% above the market price. In our bear case scenario, our price estimate faces a 20% downside, based on a reduced forecast for global crude oil prices, Shell’s exploration success, and downstream EBITDA margins.  However, we remain optimistic on Shell, given its long standing history of dividend payments, we believe that Shell will not initiate a dividend cut. See Our Complete Analysis for Royal Dutch Shell Plc. Dividend Per Share Is Increasing Despite Declining EPS Below is a quick snapshot of the company’s dividend history:   A steady increase in dividend per share and a significant drop in the EPS brought the dividend pay-out ratio to 80% in 2014.  This implies that the company is using most of its net income to pay dividends, thus putting pressure on its internal reserves. The high dividend pay-out seems to be getting offset by low capital expenditure.  Over the past three years, Shell’s capital expenditure has been reduced from 223% of D&A to only 130% of D&A.  Capital expenditure as a percentage of revenue ranged between 7-9% in these three years. If there is further decline in the company’s EPS, the pay-out ratio would be too high to sustain and will put a strain on liquidity.  The company would then have to depend on free cash flow or borrowings to fund capex requirements. Concerns Around Net Income Growth Our price estimate is almost 30% higher than the current market price.  However, if the company is unable to maintain its downstream EBITDA margins we see a 10% downside in the price.  Our estimates face another 10% downside if the company’s exploration success ratio deteriorates and global crude oil prices remain below $85 a barrel in the long run. Using Trefis interactive technology, if we create a hypothetical scenario by changing key drivers, to arrive at the current market price, we can conclude that the market valuation does not factor in much growth for the company. In the above hypothetical scenario, we have modified several drivers to arrive at the valuation of Royal Dutch Shell.  Reducing the long-term forecast for average crude oil and NGL (natural gas liquids) sales price to around $65 per barrel is just one example.  If the growth in the key drivers is flat, our valuation comes close to Shell’s current market price.  So the market’s expectations are not high. How Much Cash Is Needed To Maintain Dividends? The company paid $9 billion as dividends in 2014. Our net income estimate for 2015 is $13 billion and we expect the figure to grow over the forecast period.  These estimates indicate that Shell might be able to generate enough cash to maintain its dividends.  However, when the business is experiencing growth, cash flows will have to be allocated towards additional capital expenditure.  The balance between using cash generated in operations for dividends and plowing it back into the business for growth, will be the deciding factor for the dividends. Historically, large oil companies do not like to cut their dividends and have weathered financial downturns and not cut dividends even when oil fell to $10 per barrel in the 1980’s.  Royal Dutch Shell last cut its dividend in 1945 . Going by the current market valuation, it appears that Royal Dutch Shell may find it difficult to maintain its dividend per share in the future if the bear case played out instead of our base case.  However, our view about the company’s future outlook is more optimistic. If our bear case scenarios do not play out, then the company should be able to continue paying dividends. 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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