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


SanDisk's stock dropped by over 18% on Thursday after the company announced that its Q1 revenues could be around $1.30 billion, lower than the previous guidance of about $1.40 billion. This would imply a 15% decline in revenues compared to the prior year quarter. SanDisk could have a tough year for client SSD sales, mainly due to losing out on a major customer in January, which contributed to the revised guidance. In a recent note we discuss the implications of this.

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Qualcomm charges chipset vendors royalties on each device sold using its proprietary technology. Qualcomm's royalty rate has declined over the last several years, due to declining average selling prices for mobile devices and lower royalty rates on 4G-LTE technology. We forecast that Qualcomm's royalty rate will decline to 2.4% by the end of our forecast period.

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Here Are Some Key Triggers For Groupon's Stock
  • By , 3/27/15
  • tags: GRPN EBAY AMZN
  • Groupon (NASDAQ:GRPN) has set ambitious long-term growth targets, as it aims to grow its revenue and adjusted EBITDA by more than 20% and 25% by 2017. In order to accomplish these goals, the company aims to significantly expand its merchant network and move towards non-email based marketing strategies to increase its traction among customers globally. We believe more-than-anticipated success in these strategies could hold huge upside for the company’s stock, assuming the market prices in these plausible developments correctly. In addition, Groupon is also taking aggressive measures to enhance its goods margins in North America. We believe developments in this regard could lead to certain events that could trigger stock price changes for better or worse. So we assess three specific scenarios below: 1) an increase in the active merchant count to 1.3 million; 2) an increase  in monthly unique visitors to 450 million; and, 3) goods margins remain unchanged.
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    Home Depot: Will The Impact Of The Data Breach Be Significant?
  • By , 3/27/15
  • tags: HD LOW TGT
  • Home Depot (NYSE:HD) holds the dominant position in the U.S. home improvement industry, accounting for approximately 60% of all revenues. With 1,977 stores across the U.S., Home Depot has been a one-stop shop for many consumers looking to buy home improvement goods. Since the recession, the stock has grown continuously, registering an approximate 45% increase in the last 52 weeks alone. While we expect continued optimism in the U.S. economy, specifically in the housing markets to aid further growth, the impact of a huge data breach announced last year continues to loom over the retailer’s prospects. We have a  price estimate of $100 for Home Depot’s stock, which is below the current market price. Our complete analysis for Home Depot’s stock Home Depot was the latest in the chain of large companies under a cyber attack targeted at their payment terminals, where a security breach left approximately 56 million credit and debit card numbers exposed. Although the company did not lose business in the quarters after the revelation of the breach, the management has indicated significant expenses in terms of “legal help, credit card fraud, and card re-issuance costs” going forward. Trefis attempts to quantify the impact of the data breach and analyze the consequences of this for the retailer in the future. A report by Ponemon Research estimates the cost of a data breach at upwards of $194 per compromised record. Typical costs related to a breach can be classified into investigation, remediation, notification to individuals, identity theft repair, and credit monitoring, regulatory fines, disruptions in normal business operations, lost business, and related lawsuits. Let’s look at each of these in turn with respect to Home Depot’s case: Investigation and Remediation: While investigation typically involves costs related to examining how and why the data was compromised, remediation involves costs related to setting up safeguards to avoid cases of breach going forward. The retailer indicated a $43 million pre-tax expense in investigation and remediation in the third quarter of 2014 alone. Home Depot, in its recent earnings report, has indicated higher investments in IT security going forward. For one, they have already rolled out enhanced encryption of payment data at the point of sale in their U.S. stores and are expected to carry this into their Canada stores in 2015. We assume an expense of approximately $60 per record in investigation and remediation. Notification: This involves the costs related to information provision to relevant individuals, regulators, and media personnel. In a case as large as the one at Home Depot, involving 56 million individuals, the costs of notifying could be daunting. At 49 cents per stamp, the one time cost of notifying just those affected comes to a whopping $27.44 million. Identity theft and credit monitoring: The cost of identity theft protection could range anywhere between $7 to $15 per victim. Assuming a $10 price per victim, the price of this runs into an approximate $560 million cost for Home Depot. Disruptions in normal business operations: The opportunity cost of spending on cleaning up after a data breach involves reduced investments in the company’s operations. Furthermore, with the management spending more time communicating breach-related developments, this also reduces the time spent on standard business activities. We assume a loss of $20 per record on this front. Lost business: Data breach also results in loss of customers to fellow competitors. Ponemon’s research estimates a “high churn rate” at 6% for breach cases in the financial, communication, and health-care industries. We assume a 3% churn rate for Home Depot, given the duopolistic set-up with Lowe’s. This brings us to a loss of approximately $30 per record. In spite of dealing with a case that is bigger than the data breach at Target in late 2013, Home Depot is not expected to lose out on much revenue. Part of this is because the retailer will continue to reap the benefits of an upbeat U.S. economy and housing market. Furthermore, unlike Target, where consumers moved to the likes of Costco or Kohl’s, there are hardly any substitutes when it comes to buying material such as plywood, saws, cement, or the like. Lawsuits: Lastly, there’s the matter of lawsuits. Home Depot has already been slapped with 44 lawsuits related to the breach, which could go further up in number as state and federal agencies continue to investigate. Furthermore, Home Depot is likely to incur millions as card networks make claims against the company in counterfeit fraud losses and the issuance of new cards. According to credit protection firm Billguard, Home Depot is likely to incur close to $3 billion in fraud with an average of $332 spent per credit or debit card. This amounts to approximately $54 per record. Based on our calculations, we arrive at an estimated cost of $176 per compromised record in recurring expenses or a total cost of approximately $10 billion to be incurred by the end of the decade. On account of disruptions in business and lost business, we expect a modest 6% fall in EBITDA going into 2017, which is expected to once again reach it’s forecasted levels by the decade-end as consumers regain confidence in the retailer. The management’s candidness in the face of adversity, and the steps that they have taken to mitigate the chances of such an attack in the future, in terms of investment in cyber security, could recoup confidence among existing customers and also increase appeal among new ones. We expect higher capital expenses as the retailer continues to invest in cyber security enhancements, such as enhanced encryptions and EMV Chip-and-PIN technology. Taking all these factors into account, we anticipate a modest 4% downside to our current price estimate on account of the breach for Home Depot. See our complete analysis for Home Depot in the scenario of the data breach 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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    Analysis Of the Kraft-Heinz Merger
  • By , 3/27/15
  • tags: KRFT
  • Investment firms, 3G capital and Berkshire Hathaway, have teamed up to create a new company through the merger of H.J. Heinz Co. and The Kraft Foods Group (NASDAQ:KRFT). The new company thus created will be called The Kraft Heinz Company. In terms of annual sales, it is expected to be the fifth-largest food company in the world  and the third-largest in the U.S.. In this article, we summarize the details of the deal and analyze how the fortunes of this new enterprise might evolve. We currently have a $64 per share price estimate for Kraft Foods Group, which is significantly below its current market price. See Our Complete Analysis For The Kraft Foods Group The Merger According to the terms of the deal, the current shareholders of Heinz will hold a 51% stake in the newly formed company. These shareholders include 3G Capital and Berkshire Hathaway. The remainder will go to the current shareholders of Kraft. To sweeten the deal for Kraft’s shareholders, they have been provided a one-time cash dividend of $16.50 per share. The cost of this dividend, which amounts to $10 billion, will be borne by 3G Capital and Berkshire Hathaway. This will be paid out as soon as the deal is finalized. The amount of this dividend is more than a quarter of the closing share price of Kraft on March 24. Each share of the Kraft Foods Group will entitle the shareholder to one share of the new entity. The shareholders will however have to be more patient to enjoy the full benefits of any improvement in operations of the combined entity, since the transaction is expected to be EPS accretive only by 2017. The agreement to form a new company was unanimously approved by both the companies’ board of directors. The deal has been valued at around $45 billion. The combined company will have annual sales revenue of approximately $28 billion. The new company will have at its helm leaders drawn from the two merging entities. The chairman of Heinz, Alex Behring, will assume chairmanship of the new company. The vice chairmanship will be reserved for Kraft’s current chairman and CEO, John Cahill. Bernardo Hees, the CEO of Heinz, will retain his title as the two companies merge into a single firm. Synergies Expected: International Growth and Economies Of Scale There are various ways in which the management hopes to leverage the synergies that the combination of these two large food companies should provide. Heinz has a global footprint. It derives 60% of its sales from regions other than North America. Emerging economies contribute 25% of its sales. Kraft, on the other hand, derives 98% of its sales from North America. This provides scope for the combined entity to sell Kraft’s brands in international markets. However, that opportunity set would be limited by Kraft’s agreement with Mondelez International, which was spun off from Kraft’s namesake parent company in 2012 to focus on international growth. During the spin-off, Mondelez acquired the rights to sell many of their shared brands in international markets. Going by Kraft’s presentation on the deal, some iconic brands that don’t fall under this purview are A.1., Velveeta, Planters, MiO and Lunchables. The sales of such brands outside North America could provide a boost to the new firm’s revenue growth. The management of the two companies have also announced that they expect to realize $1.5 billion in annual cost savings by the end of 2017, as a result of this deal. The cost synergies will mostly come from higher economies of scale in the North American market. Having larger volume of sales will help the company drive better bargains with clients such as large retail outlets and specialty food stores and restaurants. This will improve operating margins of the company and also give it an advantage in getting more shelf space in retail outlets. Some part of the cost savings will also come from the ability of the combined company to refinance Heinz’s high-yielding debt. Since Kraft has a much better credit rating, the combined entity will be able to replace such debt with low-yielding, investment-grade debt. Additionally, Heinz’s preferred stocks that become callable in June 2016 will also be replaced with such debt. This will help reduce the total cost of capital for the combined company. In addition, changes to the operations strategy can also contribute to cost savings. These could be targeted at reducing headcount, shutting down less efficient manufacturing facilities and implementing zero-based budgeting. Zero-based budgeting means that the managers have to explain every forecast expense for the year from scratch, without appealing to previous years’ trends. This helps the top management enforce a more stringent form of cost control and realize cost savings. Since the chairman-CEO team at the new company will be the same as that which implemented drastic cost cutting measures at Heinz, including a reduction in force of 4%, closing several factories and grounding corporate jets, there is reason to believe that the projected changes to the combined company’s operations strategy would be successfully implemented. 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 Tech Update: TXN, BRCM, CREE, QCOM, INTC
  • By , 3/27/15
  • Most semiconductor stocks slumped this past week after SanDisk, a flash storage solutions company, cut its first fiscal quarter revenue forecast due to certain product qualification delays, lower than expected sales of enterprise products and lower pricing in some areas of the business. Recent signs of weakening PC demand added to the downward pressure on semiconductor stocks. The Philadelphia Semiconductor Index (SOX), which increased by approximately 30% in 2014, has declined by almost 8% so far this month. Despite short-term weakness, the Semiconductor Industry Association (SIA) believes that the semiconductor market is well-positioned for continued growth in 2015 and beyond. The market achieved record sales for two consecutive years (2013 and  2014). Below is a weekly update for some of the technology companies that Trefis covers.
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    Scenario Analysis: How Dish Might Not Be Able To Monetize Its Spectrum Holdings
  • By , 3/27/15
  • We recently revised our price estimate for Dish Network (NASDAQ:DISH) to $79.80 based on the estimated valuation of the company’s spectrum holdings. (See our related article  Dish Network Price Estimate Revised To $79.80 Based On Spectrum Valuation .) Dish has made significant investments in spectrum over the past few years and the company is now the fifth largest holder of wireless spectrum in the United States. The spectrum provides Dish with a number of options, such as launching its own nationwide wireless network, partnering with an existing wireless carrier and either leasing or selling the spectrum. We believe that Dish will be able to suitably monetize its spectrum, whichever plan it chooses. That sais, there is a possible scenario in which the company fails to monetize this investment. In this piece, we try to figure out how such a scenario might come to pass and what is Dish’s worth without its spectrum. See our complete analysis for D ish Network
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    Alaska Air’s Rapid Capacity Ramp Up Will Likely Impact Its Margin & Yield
  • By , 3/27/15
  • tags: ALK
  • Alaska Air’s (NYSE: ALK) plan to ramp up its Seattle capacity by 10% in 2015 will likely weigh on its load factor and passenger yield. Alaska’s strategy is an attempt to defend its dominant market position in its largest hub, Seattle, which has been challenged by aggressive capacity addition from Delta (NYSE: DAL). While Delta, in the past, relied on Alaska’s passenger traffic to feed into its connecting flights through code-sharing agreements, its decision to build Seattle as its core hub has resulted in direct competition between the two carriers. In this article, we discuss how Delta’s decision will impact Alaska’s performance. Our current price estimate for Alaska Air stands at $69, roughly 5% higher than  its market price. See our complete analysis for Alaska Air Group Delta’s Capacity Expansion So Far Delta’s move comes from its aspirations to expand its offering in the Asian market, which is being viewed as a key growth market by airline companies globally. While the San Francisco market is dominated by United (NYSE: UAL), and the Los Angeles market is highly fragmented, Seattle was an obvious choice for Delta, given that it is the closest mainland U.S. city to Asia. Thus, Delta’s decision to establish Seattle as its international gateway to Asia is well founded. As part of its strategy, Delta has introduced flights from Seattle to all major cities in the Western U.S., growing its Seattle operations from 34 peak-day departures to 15 destinations at the beginning of 2014, to 85 peak-day departures to 26 destinations at present. Delta is also using marketing techniques such as billboards, airport signage, in-flight magazine editorials, and community involvement to strengthen its presence in the Seattle market. As a result, Delta’s market share in Seattle has increased to 20%, second only to Alaska’s market share, which stands at about 55%. Delta aims to grow its Seattle capacity to about 150 peak-day departures to 35 destinations across three continents, over the next couple of years. This will increase Delta’s capacity overlap with Alaska from 41% in 2014 to 50% in 2015.
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    The Week That Was: Beverage Stocks
  • By , 3/27/15
  • tags: KO DPS PEP
  • This week we will discuss the new figures made available by research firms Beverage-Digest and Beverage Marketing Corporation, which will help us understand the trends in the U.S. liquid refreshment beverage market better. The Coca-Cola Company (NYSE:KO),  PepsiCo (NYSE:PEP) and  Dr Pepper Snapple (NYSE:DPS) continue to witness headwinds in the ailing carbonated soft drink (CSD) segment, as is also clear from the recently released figures. As expected, the diet variants continue to underperform the overall CSD category. However, the silver lining for these beverage companies is that while the core soda business, which still forms a majority of the U.S. beverage industry, continues to decline, the improving economic conditions in the U.S., and higher customer purchasing power, have boosted the non-carbonated beverage category. Ready-to-drink (RTD) tea and coffee, sports drinks, and energy drinks, witnessed strong volume growth in 2014. Growing popularity of these budding segments presents growth opportunities to Coca-Cola, PepsiCo, and Dr Pepper going forward. Biggest Winner — The Dr Pepper stock growth continues to beat growth in Coca-Cola and PepsiCo stocks, with the former’s stock jumping 3% this week, compared to the increase of 0.7% and 1.3% for the Coca-Cola and PepsiCo stocks. All three stocks performed better than the overall S&P 500 Index this week. Coca-Cola The good news for the U.S. CSD market, and for its largest contributor Coca-Cola, is that volume sales declined only 1% year-over-year in 2014, following the 3.1% decline in 2013. Improving economic conditions in the U.S. and higher customer purchasing power, owing to falling oil prices and historically-low unemployment rates, have bolstered sales of soft drinks as well. A lower-than-expected fall in CSD volumes, coupled with successful pricing strategies, could restore revenue growth in this category going forward. Coca-Cola has emphasized sales of smaller packs, which have lower cumulative calories and higher unit pricing — a win-win for both the health activists, who are pushing for lower calorie consumption, and Coca-Cola, which is benefiting from the higher average revenue per unit volume of the smaller cans and bottles. We estimate a $41 stock price for Coca-Cola, which is slightly above the current market price. See our full analysis for  Coca-Cola Now for the bad news. After years of holding the second place behind the trademark cola-drink Coca-Cola, Diet Coke slid to the third spot behind Pepsi in 2014. This was due to a 6.6% fall in volume sales year-over-year for Diet Coke, more than the 5% fall for Diet Pepsi. Customers are wary of diet/low-calorie products as they use artificial sweeteners, such as aspartame, which are considered unsafe. Coca-Cola launched its Stevia-drink Coke Life in the U.S., U.K., and Mexico last year, and will hope that customers come back to the diet category, as Stevia is a natural sweetener and holds a positive customer perception. PepsiCo Pepsi jumped to the second largest soft drink spot in the U.S. in 2014, which however, by no means was a positive year for the company’s namesake brand. Volume sales for the trademark Pepsi declined 3% last year. But the flavored soda, Mountain Dew, grew 1.5% last year, which is a bright spot for the company. PepsiCo has for some time now fended-off activist investors who are pushing to spin-off the ailing beverage business, in a bid to allow the snacks business to unlock its true potential. However, the management remains committed to deriving synergies between the food and beverage divisions. Apart from the cost-benefits and increasing shareholder return that PepsiCo needs to appease its investors, one would think that the company also needs its core CSD business to turn a new leaf sometime soon, and add to the top line growth. We estimate a $102 price for PepsiCo, which is above the current market price. See Our Complete Analysis For PepsiCo Mountain Dew’s growth is a shot in the arm in this respect, and PepsiCo will look to continue to spend behind its brands and hope to boost demand. In fact, the company is also looking to come out with a Doritos-flavored Mountain Dew. Apart from CSDs, two other major beverage brands for PepsiCo — Gatorade (sports drink) and Aquafina (bottled water), witnessed robust growths of 3.7% and 7.4% respectively in 2014, mainly as the demand for sports drinks and bottled water remained strong. Dr Pepper Snapple Dr Pepper doesn’t have many strong brands in the non-carbonated segments such as sports drinks, energy drinks, and bottled water. However, the company does have a strong RTD tea brand — Snapple.  Overall, still beverage volume sales declined in Q2 as Snapple volumes fell, but in Q3 and Q4, the brand’s volumes rose to fuel growth in the overall category. This bodes well for the company, as despite de-emphasizing a focus on its value line, which typically formed around 10% of the brand’s net unit sales, Snapple volumes have increased. The Snapple premium business grew mid-single-digits in 2014, boosting the top line. We have a price estimate of $78 for Dr Pepper Snapple, which is lower than the current market price. See Our Complete Analysis For Dr Pepper Snapple RTD tea is a segment of the U.S. beverage industry that is growing at a fast pace, due to a healthier, more natural perception. Volume sales grew by 3.7% in this segment in 2014, which bodes well for Snapple — the third largest RTD tea brand in the country, after Arizona and Lipton. Dr Pepper could continue to leverage the high demand for RTD tea in the U.S. to grow volume sales, and also improve profitability due to a higher emphasis on the premium line, in a bid to boost its non-carbonated beverage unit, which forms 25% of the company’s valuation, by our estimates. 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 Pay-TV Notes: Netflix's New Content Deal, NBCUniversal's Partnership With WWE
  • By , 3/27/15
  • tags: NFLX CMCSA
  • The pay-TV industry saw significant activity this week, with Netflix entering into content deal with Chinese streaming provider LeTV. Additionally, Comcast subsidiary NBCUniversal and WWE will be forming a more integrated partnership in their advertising campaign. On that note, we discuss below these developments related to the pay-TV companies over the past few days.
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    Weekly Notes on Coffee Industry: Starbucks & Keurig Green Mountain
  • By , 3/27/15
  • tags: SBUX
  • With coffee prices showing a bullish nature for the first half of 2014, improved weather and rain conditions in South America in the last calendar quarter of 2014 gave some respite to the coffee companies, as coffee prices dropped more than 15% over the same period. The prices touched its 12 month low at the start of March. However, the prices are showing some signs of a rebound, as May Arabica coffee prices were up 2.95 cents, due to the speculations of a drop in Brazil’s output of production this year at 44m-45.5m bags. 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%. On the other hand, sugar prices touched a  6-year low, due to a high quantity of supply and lesser demand. 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 excellent results 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. 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 signed an agreement with Tingyi Holding Corp., the leading Chinese food and beverage producer, to manufacture and expand Starbucks’ ready-to-drink (RTD) products throughout China. Moreover, on March 18, Starbucks’ Board of Directors announced a 2-for-1 stock split. Shareholders of record as of March 30, 2015 will be eligible for this split. The new shares will be payable on April 8, 2015. Starbucks’ stock has dropped from $98 to $94 during the last week and is now trading at close to $95.  Our price estimate for the company’s stock is $92, implying a market cap of $70 billion, which is 3% below the current market price. 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 March 2, the company announced the addition of Keurig 2.0 K200 series to its well known Keurig 2.0 brewer series. The new Keurig 2.0 K200 has the ability to brew both a single cup and a four-cup carafe, and will be available at a retail price of $120 to $130. On February 21, Keurig Green Mountain entered into an agreement to repurchase roughly 5.2 million shares of Keurig common stock beneficially owned by Luigi Lavazza at a purchase price of $119.18. Keurig Green Mountain’s stock declined from $125 to $114 during the last week.   Our price estimate for the company’s stock is $102, implying a market cap of $16.5 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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    Here's Why We Think Zynga's Gross Margin Could Decline In The Future
  • By , 3/27/15
  • tags: ZNGA EA FB
  • Zynga’s (NASDAQ:ZNGA) business has lost some of its sheen over the last few years due to several challenges, including a decline in its user base, a surge in losses, and an inability to come up with new hit games. Correspondingly, its gross margin has come down from 74% in 2012 to 70% in 2014. In this article, we analyze the key reasons why we think Zynga”s gross margin could trend downward going forward by assessing the various factors that affect gross margins. The company’s cost of revenue includes data center and hosting expenses, consulting expenses pertaining to third-party customer support functions, payment processing and licensing fees, as well as headcount-related expenses (salaries, benefits, stock-based compensation) for customer support and infrastructure teams. We believe the key contributing factor to Zynga’s gross margin decrease in the future will be its ongoing shift towards the mobile platform, as mobile revenue is recognized on gross basis, as compared to Facebook-related revenues, where the revenue is recognized on net basis. Moreover, the continued decline in its Facebook business will further put pressure on margins. We think it is unlikely that Zynga’s business will re-accelerate in the short-term, and this could cause some operating de-leverage. The ongoing decline in its user base and the shut-down of web-based games will lead to a reduction in not only hosting and data center costs, but customer service expenses and headcount related expenses as well. Still, we think this may not be enough to offset the decline in gross margin.
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    Weekly Notes On Restaurant Industry: McDonald's & Dunkin' Brands
  • By , 3/27/15
  • tags: MCD
  • With just a couple months gone in the new fiscal year, the U.S. restaurant industry is gearing up for another year of tough competition in the first calendar year quarter. Last year, harsh weather conditions resulted in declining customer traffic in the breakfast daypart. As a result, most of the top fast food chains, and other restaurant chains, found it hard to sustain their comparable store sales growth. According to Black Box Intelligence, a financial performance research group for the restaurant industry in the U.S., restaurants showed improved performance in the month of January, as their increasing momentum in the last couple of months strengthened. Moreover, relatively mild weather conditions, cheaper gas, and a stable economic environment in the U.S., are being considered as the reasons behind the increased sales and traffic. However, the situation might change in the coming few months, as commodity inflation might also impact the businesses. Prices of beef and other meat products are expected to remain higher in 2015. This might force the companies to raise their menu prices. Here’s a quick round up of the restaurant companies covered by Trefis. McDonald’s After a disappointing performance in fiscal 2014,  McDonald’s Corporation (NYSE:MCD) recently released its February comparable store sales report, where the company reported a 1.7% decline in the comparable store sales, with 4% year-over-year (y-o-y) decline in U.S. comparable sales, and a 4.4% decline in Asia-Pacific comparable store sales. On March 4, McDonald’s announced new menu sourcing initiatives in the U.S., including sourcing of chicken raised without antibiotics. McDonald’s stock rose sharply from $97 to just below $100, and then declined back to $97 during the last week.  Our price estimate for the company’s stock is $96 (market cap of $94 billion) which is roughly the same as the current market price. See Our Complete Analysis For McDonald’s Corporation Dunkin’ Brands Dunkin’ Brands, after mixed results in its fourth quarter earnings report, has signed a long-term franchise agreement with Golden Cup Pte. Ltd, as wholly owned subsidiary of RRJ Capital Master Fund II, which will serve as the franchise partners to open and operate nearly 1,400 Dunkin’ Donuts stores in China. Moreover, Dunkin’ Brands, along with J.M Smucker Company (NYSE: SJM), expanded its partnership with Keurig Green Mountain (NASDAQ: GMCR) by signing agreements for the manufacturing, marketing, distribution, and sale of Dunkin’ K-Cup packs in the U.S. and Canada. Dunkin’ Brands’ stock traded between the range of $47 and $48.50 during the last week.  Our price estimate for the company’s stock is $48 (market cap of $4.7 billion), which is roughly the same as 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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    Why February's U.S. Sales Results Are Very Encouraging For Toyota Motors
  • By , 3/27/15
  • tags: TM F GM VLKAY HMC
  • In the month of February, sales of Toyota Motors (NYSE:TM) grew by 13.3%, while those of Ford Motor grew by only 2%. This is unusual, in that it only happens once or twice a year, but what’s disconcerting for the U.S. based auto maker is the manner in which it was upstaged by Toyota in the previous month. We have  a $168 price estimate for Toyota, which is about 20% higher than the current market price. SUV Sales on the Rise for Toyota Just a few years ago U.S. auto makers were struggling in their homeland. Rising gas prices and the recession convinced many U.S. consumers to be more budget conscious and as a result they started ditching their SUVs and trucks in favor of more fuel-efficient vehicles from import brands like Toyota and Honda. This helped Japanese auto maker Toyota Motors (NYSE:TM) overtake Ford Motors for the no. 2 position in terms of market share in the U.S. auto market in 2007. However, the supremacy of the fuel-efficient passenger car in the U.S. auto market was short lived. It has only been a short while since the price of gas fell below $3 per gallon, but consumers have already started ditching passenger vehicles for heavier, more spacious cars. Sales of cars are falling, while sales of trucks, SUVs, and crossovers are rocketing. Once again consumers are preferring the extra space, power, and carrying ability of bigger vehicles and are willing to pay up for it. Each of the Japanese auto maker Toyota’s car brands-Toyota, Lexus, and Scion-sold extremely well in the month of February. Including all car brands, the sales of Toyota’s vehicles rose by 13.3% compared to the same month in the previous year. The growth in sales of Toyota’s vehicles can be attributed partly to the recently refreshed versions of its best selling vehicles Camry and Corolla being present in the dealer lots. But the demand for heavier vehicles from Toyota is also growing. Sales of SUVs, crossovers, pickups, and minivans from Toyota grew by 17% on a year-over-year basis. Additionally, sales of Lexus SUVs and crossovers rose by a whopping 46%. The Difference Between Toyota and Ford This is all good news for Toyota but what February’s sales figures underscored was its dominance in the passenger car market. Toyota only outsold Ford by a tiny margin of a few thousand in the U.S. auto market in February, but it sold many more cars than Ford. In the recent past, Ford’s compact Focus and midsize Fusion have been significant for the company in showing that it could compete with import brands in making fuel-efficient, well-built cars. But in the month of February, sales of Focus fell by 12%, while those of Fusion fell by 5%. In contrast, the Japanese auto maker Toyota gained much ground in the hotly contested compact and midsize markets. The sales of Toyota’s midsize Camry increased by 13.6%, while those of its compact car Corolla grew by 10%. Sales of Toyota’s big Avalon jumped by 34%, even as sales of other big sedans have fallen recently. In fact, among all Toyota car models, only the Prius showed a decline in sales, which is no surprise considering the fall in gas prices recently. Both the Camry and Corolla models are fresh in the market — the Corolla was refreshed in 2014 and the Camry in 2015. Ford is planning on rolling out a refreshed version of the Focus but its Fusion is unchanged for 2015. This is one factor that is contributing to the difference in sales numbers. Another factor has to do with the pricing: the depreciation of the yen against the U.S. dollar has given the Japanese auto maker a big pricing advantage. The company earns more yen for each dollar, allowing it to charge fewer dollars for its cars, thus giving it a leg up against its competition. As a result, Toyota is now offering aggressive lease deals for its cars: a 24-month lease deal for both Corolla and Camry, with a $129 monthly installment for the former and $139 for the latter. The alternative is a loan deal at 0.9% rate of interest if the consumer prefers to buy. 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 Metals And Mining Notes: U.S. Steel And Barrick Gold
  • By , 3/27/15
  • tags: ABX NEM MT
  • The metals and mining space had a fairly quiet week with only U.S. Steel and Barrick Gold witnessing significant activity. U.S. Steel announced the idling of a steel plant in response to weak market conditions. Barrick Gold announced that it has received a favorable ruling from Chile’s Supreme Court pertaining to its stalled Pascua-Lama project. Here are the details pertaining to these major events from this week. U.S. Steel U.S. Steel (NYSE:X) announced plans to idle its Granite City Works steel plant located in Granite City, Illinois. The Granite City Works plant produces flat-rolled steel and accounts for 2.8 million tons out of the company’ 24.4 million tons of raw steel production capability. The company has idled the Granite City Works plant in response to weak market conditions for steel. Capacity utilization at the company’s U.S. Flat-rolled operations stood at 80% of full capacity in 2014. Idling the Granite City Works plant will more closely align production rates with market demand. We have a  $23 price estimate for U.S. Steel, which is around 6% below the current market price. We estimate revenues of $14.7 billion in 2015 for the company. Barrick Gold Barrick Gold Corporation (NYSE:ABX) announced that it has received a favorable ruling from Chile’s Supreme Court pertaining to its stalled Pascua-Lama gold project. The Supreme Court ruled that the Pascua-Lama project has not damaged glaciers within the project’s area of influence. Chile’s environmental regulator, known as the SMA, fined Barrick $16 million in May 2013 for not complying with some of the country’s environmental requirements for its Pascua-Lama project. Barrick announced the temporary suspension of construction activities at its Pascua-Lama project in 2013, except for those required for environmental and regulatory compliance. The suspension of the project was due to a combination of legal and regulatory complications, cost overruns, and an environment of falling gold prices, which impacted the viability of the project. As per estimates in the company’s 2012 annual report, the mine was expected to average 800,000 to 850,000 ounces of gold and 35 million ounces of silver in its first five years of production, at all-in sustaining cash costs of $50-200 per ounce. To put this into context, Barrick’s gold production in 2014 stood at 6.25 million ounces at all-in sustaining cash costs of $864 per ounce. Thus, the Pascua-Lama mine is a low-cost gold asset for Barrick Gold. The company has stated that the resumption of construction activities at Pascua-Lama would be contingent upon an increase in gold prices and greater clarity on the legal and regulatory issues that have dogged the project. Though the ruling does not guarantee the resumption of construction activities at Pascua-Lama, it is a positive development for the company towards the resumption of the stalled project and would lessen some of the legal hurdles in front of Barrick Gold. We have a  $12 price estimate for Barrick Gold, which is around 2% above the current market price. We estimate revenues of $9.5 billion in 2015 for the company and an EPS of $0.65, as compared to a consensus estimate of $0.69. 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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    Accenture Results: Revenue Beats Expectations But Growth In New Bookings Disappoints
  • By , 3/27/15
  • tags: ACN
  • Accenture (NYSE:ACN) reported its Q2 FY 2015 results on March 26th, and the results exceeded market expectations as the company posted nearly 5% year-over-year growth in revenues to $7.49 billion (12% growth in local currency). (Fiscal years end with September.)  This was at the higher end of the company’s guided range of $7.25 billion to $7.50 billion. In our note published earlier, we stated that we expected outsourcing revenues to outpace the industry in the third quarter. Furthermore, we also expected consulting revenues to register growth, albeit at a slower pace. The results were in line with our expectations, as outsourcing revenue grew 13% year over year in local currency to $3.65 billion, while the consulting business revenues grew 11% year over year to $3.84 billion. During the quarter, the company reported new orders worth $9.4 billion. However, the slower growth rate in new signings indicates the underlying softness in demand for IT services, and will impact Accenture’s revenues in future quarters. In this note, we will review and analyze Accenture’s earnings. See our full analysis for Accenture Guidance For FY15 and Q3 Accenture raised its full-year revenue growth forecast for the second time. It now expects net revenue growth in local currency to be in the range of 8% to 10%, compared with 5% to 8% previously. It now expects diluted GAAP EPS to be in the range of $4.61 to $4.71, including the positive impact of its increased revenue outlook, which is offset by the negative impact of its revised foreign-exchange assumption, as well as the negative impact of a settlement charge. Excluding the settlement charge, adjusted EPS is expected to be in the range of $4.66 to $4.76. The company’s previously guided range for EPS was $4.66 to $4.80. Furthermore, Accenture is now targeting new bookings for fiscal 2015 in the range of $33 billion to $35 billion, compared with $34 billion to $36 billion previously. For Q3, Accenture expects net revenues to be in the range of $7.35 billion to $7.60 billion. This range assumes a foreign-exchange impact of negative 11% compared with the third quarter of fiscal 2014. Revenue Growth Continues At Outsourcing Division According to our estimates, the outsourcing division contributes approximately 47% to Accenture’s value. This division continued to outpace the outsourcing industry as revenues grew  6% to $3.7 billion (or 13% on a constant currency basis). Additionally, Accenture continued to report strong demand for its outsourcing services with new bookings at $5.11 billion. Furthermore, the book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, improved to 1.4 sequentially. However, much of the improvement in book-to-bill was due to sequential decline in revenues. Considering the order pipeline, we expect that outsourcing will continue to deliver growth in Q3 as well. The company expects high single digit growth for outsourcing in the remainder of 2015. However, tempered growth in new order signings in H12015 might negatively impact revenue growth in the ensuing years if order bookings do not improve. Consulting Revenues Post Growth Management and technology consulting are important drivers for Accenture’s value and account for around 44% of our price estimate combined. The company reported 4% year-over-year growth in revenues to $3.84 billion in local currency (11% in USD). The Furthermore, the company’s momentum for new orders grew as it booked orders worth $4.25 billion during the quarter. As a result, the book-to-bill ratio, the key metric that ascertains the growth in new contracts, improved to 1.1. As a result, the company expects mid to high single-digit positive growth for consulting in second half of 2015. This guidance also indicates that most of the contracts signed by the company are short-term in nature. Orderbook Grows At A Slower Pace Accenture reported new signings worth $9.4 billion during Q2. Despite the 22% sequential growth in new signings in Q2, the order book growth is a concern as new orders booked in the first half of 2015 lag those booked in H12014 by 9%. Even after adjusting for dollar appreciation against the local currency, the new order signings are tepid compared to those of H12014. For Accenture to meet it guidance for 2015, it will have to add orders worth $16 billion in second half of 2015, which is generally weaker. Furthermore, weaker growth in orders can impact the growth in revenues in the coming quarters as the company books revenues against its outstanding order book. Gross Margins Decline Accenture’s gross margins declined by over 140 basis points to 29.9% in Q2, primarily due to an increase in its cost of services, which includes compensation, subcontractor and other personnel costs. Two key indicators to this metric  are the utilization rate (number of employees billable to total number of employees) and attrition rate (employees that leave the company). The utilization rate increased to 91% that added pressure on Accenture’s bench strength, and the need to outsource work to subcontractors at higher cost. Considering that the company plans to expand its operating profit margin in 2015 by 10 to 30 basis points, it will have to closely monitor its employee costs as well as SG&A expenses in the next half of 2015. We are in the process of updating our model. At present, we have a  $77.77 price estimate for Accenture, which is 17% below its current market price. Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Q4 2014 Bank Review: Third-Party Mortgage Servicing Portfolios
  • By , 3/27/15
  • tags: BAC C JPM USB WFC
  • Last week, it was revealed that  JPMorgan (NYSE:JPM) is buying mortgage servicing rights (MSRs) worth $45 billion from Ocwen. While Ocwen announced that it has signed a letter of intent to sell this portfolio of performing loans early this month, it remained silent about the buyer – identified as JPMorgan more recently. The deal consolidates JPMorgan’s position as the second-largest mortgage servicer in the country. We take this opportunity to highlight the mortgage servicing portfolios for each of the country’s largest banking groups, and also to detail how this portfolio has changed over recent years. Notably, the country’s five largest commercial banks – JPMorgan,  Bank of America (NYSE:BAC),  Wells Fargo (NYSE:WFC), Citigroup (NYSE:C) and U.S. Bancorp (NYSE:USB) – take up five of the top six positions in the mortgage servicing industry. Nationstar is the only non-banking financial institution to figure in the top 5 list, at the #4 position.
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    Weekly Notes On Gaming Industry: Electronic Arts & Activision Blizzard
  • By , 3/27/15
  • tags: EA
  • After the holiday period of 2014, the gaming industry has shown some signs of improvement in the software category. Due to the increase in demand of software titles, released by the top game developing companies, such as Electronic Arts, Take-Two Interactive, and Activision Blizzard, just before the holiday season, the software sales picked up in January and February. According to the NPD report, gamers spent nearly $950 million on new game software and hardware in February, up 8% year-over-year (y-o-y). On one hand, hardware sales were roughly $378 million, up 10% y-o-y, primarily due to sales of PlayStation 4, whereas on the other hand, software sales outperformed last year’s figures by 7% to $339 million. The Legend of Zelda: Majora’s Mask and Take-Two Interactive’s Evolve led the charts in terms of units sold in February. Here’s a quick round-up of some news related to the gaming industry covered by Trefis. Electronic Arts Electronic Arts (NASDAQ:EA)  recently launched its much awaited  Battlefield Hardline title last week in North America and Europe. Battlefield Hardline features new features of gameplay that are different from other traditional  Battlefield titles, as the new game focuses on police, heists, and the war on crime, and not the usual military settings. The game features many new gameplay modes, such as Heist, Blood Money, Hotwire mode, Rescue, and Crosshair mode. Recently, EA also announced that the trailers and details of the first downloadable content pack for  Dragon Age: Inquisition- Jaws of Hakkon, will be released shortly.  The expansion pack will be first available on Microsoft’s Xbox One and PC. EA’s stock traded between $55 and $58 during the last week.  Our price estimate for the company’s stock is $54, implying a market cap of $17 billion, which is 3% below the current market price. See our complete analysis of Electronic Arts stock here Activision Blizzard Activision Blizzard ’s (NASDAQ: ATVI) Call of Duty: Advanced Warfare slipped down in the charts of the highest selling titles for the month of February, being replaced by The Legend of Zelda and Take-Two Interactive’s Evolve. On March 18, the company announced the release of the second downloadable content (DLC) for Call of Duty: Advanced Warfare on March 31. It would deliver four new multiplayer maps, bonus weapons, and other exciting features. Moreover, the company announced that the ninth Blizzcon event will be held in Anaheim Convention Center on November 6-7, and its tickets will be on sale on April 15 and 18. Activision’s stock dropped from $23.38 to $22.48 during the last week.  Our price estimate for Activision is $20.68, which is 8% below 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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    Competition Taking A Toll On China Unicom's User Adds
  • By , 3/27/15
  • tags: CHU CHA CHL
  • In another disappointing performance in the Chinese wireless market,  China Unicom (NYSE:CHU) reported a gain of just 561,000 high speed (3G and 4G) subscribers in February 2015, marking its weakest monthly performance in over five years. This is about 75% lower than the carrier’s average monthly gains of 2.2 million in 2014 and 37% lower than the figure in January this year (884,000), which itself marked a new low in the carrier’s monthly user adds since February 2010. China Unicom’s performance was dwarfed by market leader  China Mobile (NYSE:CHL) as well as smaller rival  China Telecom (NYSE:CHA), which gained over 17.7 million and 1.8 million high speed subscribers in the same period, respectively. February 2015 was also the first month in the history of the company that its total mobile subscribers actually declined, which means that the gains in high speed users could not compensate for the loss of 2G customers. The carrier ended the month with 296.3 million subscribers, over 2.8 million less than its tally at the end of January. Since the beginning of the year, China Unicom’s overall share in the Chinese wireless market has declined by 27 basis points to 22.9%, with China Mobile and China Telecom gaining 16 basis points and 11 basis points in the same period, respectively. Until February, China Unicom offered 4G services in select cities on a mixed network using both the TD-LTE and FDD-LTE standards. The license for offering TD-LTE 4G services was granted by the government in December 2013, and the company was slowly testing and expanding its FDD-LTE 4G network on the back of a trial license granted in June last year. The Chinese government finally awarded full FDD-LTE licenses to wireless carriers China Unicom and China Telecom to operate 4G services across the country towards the end of last month. It will be interesting to see how the carrier utilizes this license and achieve its goal of 100 million 4G users by the end of the year considering that its 4G user base is currently negligible. China Unicom’s total high speed subscriber base stood at 150 million at the end of February 2015, with a 3G-4G mix of just over 50%. Our current price estimate for China Unicom is $16, implying a premium of over 5% to the market price.
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    SanDisk Revises Revenue Guidance, Stock Drops 18%
  • By , 3/27/15
  • SanDisk’s (NASDAQ:SNDK) stock has fallen by 35% since the start of the year on the back of revisions made by the company to its previously stated revenue guidance and the anticipated weakness in its fastest growing division – solid state drives (SSDs). SanDisk’s stock plummeted by over 18% on Thursday, March 26 after the company announced that its Q1 revenues could be around $1.30 billion, lower than the previous guidance of about $1.40 billion. This would imply a 15% decline in revenues compared to the prior year quarter. Moreover, this was the second consecutive quarter when the company revised its expected revenues, the prior occasion being January this year. At the time, SanDisk reported weaker than expected sales for Q4’14 and revised expected revenues to $1.73 billion from $1.85 billion previously. The company has yet to announce its expected revenues for the full year and has postponed its analyst day presentation from May to a later unconfirmed date.
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    Trends Driving Our $7 Price Estimate For Vale
  • By , 3/27/15
  • tags: VALE RIO MT CLF
  • Vale (NYSE:VALE) is the world’s largest iron ore mining company. The company has been battling a subdued iron ore pricing environment over the past year or so. Benchmark 62% Fe iron ore fines prices stood at $63 per dry metric ton (dmt) at the end of February, around 47% lower on a year-over-year basis.  As a result of the fall in iron ore prices, Vale’s adjusted EBITDA margin stood at 24.1% in Q4 2014, as compared to 33.1% in the corresponding period of 2013. As a result of the persisting weakness in the global economic outlook, as well as in market conditions for iron ore, we have a new  $6.77 price estimate for Vale, which is around 14% higher than the market price. In this article, we will look at the trends driving Vale’s business prospects and our valuation of the company’s stock. See our complete analysis for Vale   Iron Ore Prices Iron ore is the primary raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its 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. Weak demand for steel in China, has translated into weak demand for iron ore. Chinese steel demand growth is expected to slow to 2.7% in 2015, as compared to 3% in 2014 and 6.1% in 2013, respectively. A slowdown in economic growth has tempered the demand for steel. China’s GDP growth is expected to slow to 6.8% and 6.3% in 2015 and 2016 respectively, from 7.4% in 2014. This is the latest downward revision to expected Chinese GDP growth by the IMF, which has raised question marks about long term demand for iron ore from China. Furthermore, a Chinese government crackdown on polluting steel plants has forced many of them to shut down. In addition, the tightening of credit by Chinese banks to steel mills that are not performing well, will negatively impact these mills’ prospects. The prevailing weak Chinese economic prospects are captured by the Manufacturing Purchasing Managers’ Index (PMI). The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. Chinese Manufacturing PMI, reported by China’s National Bureau of Statistics, has stood below 50 so far this year. With weak Chinese manufacturing growth, demand for iron ore in the near term is unlikely to grow at rates seen over the last couple of years. The supply side is characterized by an expansion in production by major iron ore mining companies. Companies such as Vale, Rio Tinto, and BHP Billiton are rapidly ramping up their iron ore production, despite weakness in demand. These companies have low-cost iron ore deposits and are able to operate profitably even at current price levels. These companies are betting on the long-term strength of iron ore demand from China, and the curtailment of high-cost iron ore production capacity, to bring the demand-supply equation back into balance. As per projections by major Wall Street banks, 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. With weak demand compounding a supply glut, average iron ore prices are expected to be significantly lower this year as compared to last year. Prices are likely to remain subdued over the next couple of years, too. Vale’s Strategy Despite iron ore prices expected to remain subdued in the near term, the company has adopted a high production volumes strategy. Vale expects to benefit from economies of scale, capitalizing on its low-cost iron ore deposits. In keeping with this strategy, the company’s iron ore production in 2014 rose to 319.2 million tons, around 7% higher than in the corresponding period of 2013.  Various projects are expected to result in a growth in Vale’s iron ore production from 331 millions tons in 2014 to 459 million tons in 2019. However, the drawback of this strategy is that despite the increase in production volumes, Vale may not be able to sell its iron ore output. For example, despite the 7% increase in production volumes, the company’s iron ore shipments rose only around 3% in 2014, partly because of weak demand for the commodity. Thus, the success of the company’s strategy is dependent upon sustained growth in iron ore demand, which may not materialize at the pace envisioned by the company. Trefis Estimate In view of the prevailing subdued market conditions for iron ore, we have revised downward our estimates for Vale’s iron ore shipments, realized iron ore prices, and margins. This has led to a downward revision in our price estimate for Vale from $9.04 to $6.77. With the prevailing subdued iron ore pricing environment expected to persist in the near term, prospects look fairly bleak for Vale. Prospects will only improve substantially for the company if there is a significant improvement in market conditions for iron ore. We will be keenly tracking developments at Vale. 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 Grows On Higher Than Expected Men's Business, ivivva Businesses, But 2015 Outlook Disappoints
  • By , 3/27/15
  • Lululemon Athletica (NASDAQ: LULU) reported its fourth quarter and full year earnings on Thursday, March 26. The company reported a solid set of numbers that confirmed a turnaround from the dip it experienced in 2013. However, the guidance issued by company management for fiscal year 2015 dampened the spirits of investors. The company reported an earnings per share (EPS) of 78 cents for the quarter and $1.66 for the full year. This was slightly above expectations but for 2015 Lululemon forecast an EPS of between $1.85 and $1.90, a figure that is below even 2013 levels, implying a slower growth rate than would have been expected of the retailer. We have a $61 estimate for Lululemon, which is about 3% below the current market price. We are in the process of revising our estimates to incorporate the latest earnings report. See our complete analysis for Lululemon Summary of Q4 and Full Year Results In the fourth quarter, Lululemon reported total sales of $602.5 million, a 15% increase compared to the fourth quarter in fiscal 2013. On a currency-adjusted basis, comparable sales were up 8% year-on-year. The company’s sales in the fourth quarter were again driven by the company’s direct-to-consumer(DTC) segment. DTC sales were up 20% on the back of strong growth in e-commerce and other direct-to-consumer initiatives. Sales from brick-and-mortar company-owned stores increased by 5% on a year-on-year basis, which is a respectable performance considering the appreciation of the U.S. dollar over the period. However, there were a number of points of concern to be found in the earnings numbers. The retailer’s margins suffered over the quarter, with the gross margin falling two percentage points and the operating margin falling by 3.5% to 26.1%. Putting these numbers back into the full-year results, one can gauge just how poor a year the company had. For the full-year, comparable store sales and margins for the company’s store network fell by 1%. Net income fell by a startling 15% for the full year and the company reported a decline in earnings per share even despite taking out one-time charges for tax expenses on repatriated cash and buying back 3.7 million shares. To some extent, the company’s earnings were weighed down by delays in shipments and store openings. The company experienced delays in shipments due to extreme weather conditions on the West Coast and due to the delay in the opening of a flagship store in London, whose opening missed the holiday period and brought in lower sales numbers. Strong Growth In Mens and Girls Businesses The company’s core business is still its women’s business and it performed reasonably well in that segment over the quarter. The retailer delivered growth in the high teens in the bottoms category on the back of new silhouettes, styles and colors. But the more significant aspect of this quarter’s results was the growth delivered by the company’s ivivva (Lululemon’s dance based brand for young girls) and men’s businesses. During the quarter, the company saw a strong response to its newly released $128 ABC pants and technical tops such as Rulu fabrics. The men’s business grew by 16% year-over-year for the quarter. Lululemon’s ivivva brand showed strong momentum with its color and texture mix driving sales across multiple styles and categories. For the quarter, sales for the brand grew by 51% and for the full-year the brand grew by 13%. Outlook for 2015 Lululemon is targeting revenue growth in the mid-single digits for the year 2015. In terms of gross margins, the company is targeting a margin in the high fifties for its North American business in the coming years and in the low fifties for its international business, which will gradually grow to the high fifties as the business continues to scale. The retailer is targeting this growth with modest increase in SG&A, which should grow in the near term and settle near the mid-twenties in the long run. For 2015, the company is targeting a capital expenditure in the range of $130 million to $$135 million on the back of expected investments in strategic IT and supply chain investments, new store openings, and renovations of currently existing stores. See our complete analysis for Lululemon Athletica here
    What Happens When My Stock Get Delisted?
  • By , 3/27/15
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program What Happens When My Stock Get Delisted? by  Charles Lewis Sizemore, CFA Even Wall Street has standards. I know that might sound hard to believe, but to benefit from the liquidity, capital-raising power and prestige that come with a listing on the New York Stock Exchange or Nasdaq, a company has to follow a few rules. Among other requirements, to maintain a listing on the NYSE, a company has to have an average market cap and stockholders’ equity of at least $50 million and must have an average share price of $1 or more over a 30-day period. Nasdaq continued listing requirements are slightly different, but the same concepts regarding assets, market cap and share price apply. For both NYSE and Nasdaq listing, companies are also required make timely financial disclosures. Enter Ocwen Financial Corporation’s ( OCN ), which recently made the news for failing file its annual report in a timely manner . Ocwen Financial received a deficiency letter from the NYSE. In plain English, this essentially means that OCN is on the naughty mat until it learns how to obey the rules. Ocwen stock is not at immediate risk for being delisted, however. OCN has six months to get its house in order before the NYSE takes any further action. And if after that six-month period Ocwen still has yet to publish its annual filings, the NYSE has the option to allow another six months to pass before initiating delisting. Of course, the NYSE could also opt to delist the company now if it felt that something dodgy was going on. I expect Ocwen Financial to get its books in order well before a delisting happens. But this brings up a good question — one that all investors should learn the answer to: What happens when the shares of a company you own get delisted? A delisting is scary. And frankly, you generally have no business owning a stock facing delisting because, with few exceptions, a company that fails the continued listing requirements is almost always on the express train to bankruptcy. Take RadioShack Corporation ( RSHCQ ) and its newly minted ticker, for example. Back in February, RadioShack’s plunge reached a low point when, after receiving two delisting warnings, the company was delisted by the New York Stock Exchange after failing to submit a business plan. RadioShack then filed for Chapter 11 bankruptcy protection days later. Here are some general rules you should follow with respect to companies at risk of delisting or already trading over the counter: If the delisting is due to financial distress, stay away. Yes, the company might pull a rabbit out of a hat and recover, but chances are better that delisting is merely a stop on the road to bankruptcy. The over-the-counter market is a playground for manipulators and fraudsters. This is Jordan Belfort “Wolf of Wall Street” territory. Take any information you get on a non-listed stock with a major grain of salt. If the stock also trades on a well-regulated market overseas, it is fair game so long as its over-the-counter ADRs trade with sufficient trading volume. (A couple hundred thousand shares per day in volume is adequate liquidity for most investors.) A recent high-profile example of this last point would be German industrial giant Siemens ( SIEGY ), which opted to be delisted from the NYSE last year due to the reporting headache of being registered in both Germany and the U.S. However, Siemens actually provides a few examples of what to expect during a delisting. Holders of Siemens’ NYSE-traded ADRs woke up one morning to find that the ticker symbols on their shares had been changed from “SI” to “SIEGY.” The five-letter ticker symbol is typical of stocks that trade on the Pink Sheets or Over-the-Counter Bulletin Board (“OTCBB”), which is where most delisted stocks end up. The Pink Sheets and OTCBB are essentially the Wild West of investing, as there is very little in the way of regulation or oversight here. Several quality stocks that I have owned over the year trade over the counter, such as Siemens,  Nestle ( NSRGY ) and Daimler ( DDAIF ) . But all of these stocks have one thing in common: They are blue-chip companies subject to a high standard of financial regulation in their home markets (Germany, Switzerland and Germany, respectively). For these companies, the U.S. over-the-counter listing is merely a way to allow Americans to buy the stocks at home, in dollars. Bottom Line As a general rule, stay away from companies at risk of delisting. Most already have a host of potholes to deal with. Plus, while in theory, nothing will change with respect to your equity in the company, in practice you might find your shares a lot harder to sell. Over-the-counter stocks tend to have low volume and low liquidity because they are shunned by institutional investors. And because of the lax reporting requirements, they are a lot harder to research. 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 What Happens When My Stock Get Delisted?
    How to Play Economic Climate Change
  • By , 3/27/15
  • tags: EZU USO
  • Submitted by Wall St. Daily as part of our contributors program How to Play Economic Climate Change By Alan Gula, Chief Income Analyst   Scientists believe that there have been at least five major ice ages in the Earth’s past, based on geological data and climate cycle analyses. So how much data will it take for economists to embrace the notion that we’re in an Economic Ice Age? Using faulty models and linear extrapolation techniques, the so-called “dismal science” of economics has been slow to accept the possibility of secular stagnation. But another round of abysmal economic data has made it abundantly clear that the economy is frozen in place. As the market action over the past few weeks shows, economic climate change has profound implications for traders and investors alike . . . On March 18, the Federal Reserve significantly downgraded economic growth and inflation expectations. The market ultimately sensed a lack of urgency with respect to the first interest rate hike, as well as a lack of conviction regarding the pace of rate increases. As a result of the “dovish” interpretation of the Fed statement, the U.S. Dollar Index has backed off of the 100 level. Since then, a series of generally atrocious economic data releases has exacerbated the dollar’s weakness. The three-month moving average of the Chicago Fed National Activity Index, representing a blend of 85 monthly indicators, reached its lowest level in a year. Yesterday, we found out that durable goods orders unexpectedly tumbled 1.4% in February. Investment banks – including Barclays ( BCS ), Morgan Stanley ( MS ), Goldman Sachs ( GS ), and JPMorgan ( JPM ) – are falling all over themselves trying to lower Q1 GDP growth estimates. Meanwhile, the market’s reaction, especially in precious metals, has been interesting over the past week. The table below shows various exchange-traded fund (ETF) returns – serving as proxies for macro movements – since just before the Fed announcement at 2 p.m. on March 18: As you can see, commodities were some of the big winners over the past week. Crude oil has posted a surprisingly strong performance in light of continued worries about a supply glut and potential lack of storage. The United States Oil Fund LP ( USO ) has risen 10% since the Fed announcement. However, this move likely has more to do with market positioning and ultra-bearish sentiment rather than a trend change. Precious metals were also strong, as the SPDR Gold Shares ( GLD ) rose 3.9%, and the iShares Silver Trust ( SLV ) jumped 9.1% higher. The prospect of a weaker dollar and higher commodity prices has been welcomed by emerging markets. The beleaguered Russian and Brazilian stock markets bounced solidly, with the iShares MSCI Brazil Capped ETF ( EWZ ) and Market Vectors Russia ETF ( RSX ) showing solid gains. The iShares MSCI EMU ETF ( EZU ), a eurozone ETF, has handily outperformed the S&P 500 on the back of a stronger euro. Treasuries have also been well bid, and rates have fallen along the entire yield curve. The iShares 20+ Year Treasury Bond ( TLT ) has risen 1.9%. With inflation expectations arresting their fall, demand was boosted for Treasury inflation-protected securities (TIPS), as well.     In the U.S. equity markets, sector performance has been a mixed bag: The Energy Select Sector SPDR ( XLE ) is leading the way with a 1.6% advance. Again, beware of a dead-cat bounce. The defensive Consumer Staples Select Sector SPDR ( XLP ) isn’t far behind energy. The large multinationals in this group with significant overseas exposure have benefited from the weaker dollar. It’s interesting to see industrials and financials lagging. We’ll probably need more robust economic growth for these sectors to truly lead. Various industry group performances also stand out: The Market Vectors Gold Miners ETF ( GDX ) has been flying, although from a depressed level. A weaker dollar and relatively low oil prices would be ideal for this group. The Fed’s message is really a relief for housing market, which would be negatively impacted by higher rates. The iShares U.S. Home Construction ( ITB ) is up 2.8% since the Fed release, continuing its strong year-to-date performance. Conversely, transports are down for the year and have continued to struggle this past week, with the iShares Transportation Average ( IYT ) down 3.3%. Commercial banks have also been one of the weakest industry groups in the past week, with the SPDR S&P Bank ETF ( KBE ) down nearly 3%. The yield curve is still relatively flat, and that will likely continue. Basically, that means banks have less opportunity to profit since the spread between short-term borrowing costs and long-term lending rates are narrow. Unfortunately, leadership by the transports and financials is typically seen as healthy for the broader market, so their weak performances are a bit troubling. Will the past week’s movements in currencies and financial assets prove fleeting? Only time will tell. Regardless, traders can take note of the market action depicted in the tables above and devise a plan for further U.S. economic data weakness and related dollar selling. Like I said in December, there are significant downside risks to economic growth . . .   and my far-from-consensus view is already proving credible. For those who are bewildered, surprised, or frustrated with the market gyrations we’ve been experiencing, I urge you to consider this: Investors with broadly diversified portfolios have performed very well (with much less stress) in this shifting market. Safe (and high-yield) investing, Alan Gula, CFA The post How to Play Economic Climate Change appeared first on Wall Street Daily . By Alan Gula
    State Pension Problems Create Hidden Muni Risks
  • By , 3/27/15
  • tags: PRFHX TLT
  • Submitted by Wall St. Daily as part of our contributors program State Pension Problems Create Hidden Muni Risks By Martin Hutchinson, World Banking Analyst   Traditionally, investors seeking retirement income have put a significant portion of their assets into municipal bonds. After all, the risks are supposedly low, and the income is free from federal income tax. That’s an important consideration for those in a high tax bracket even after retirement. But today I’d like to issue a stern warning for all upcoming retirees . . . In the current low-interest-rate environment, the risk-return tradeoff for muni bonds is downright frightening. America’s Growing Gap Across the country, state pension fund deficits have yawned since the 2008 financial crash. And the problem has only appeared to lessen recently because of the Fed-fueled stock market rise. When the Fed normalizes interest rates, it’s likely that the stock market will normalize, too, which will further increase state pension fund deficits. If a recession occurs at the same time, it’s unlikely that state revenue will be able to cover pension fund holes . . .  As a result, numerous state and municipal bankruptcies could occur. If you want to see the kinds of losses muni investors could face if things go wrong, look no further than Detroit’s recent bankruptcy. Even the most senior general obligation bondholders received just $0.74 on the dollar, while more junior bondholders received as little as one-third of their money. Municipal pension recipients, meanwhile, were almost fully protected. It also doesn’t help that valuable assets – in this case, the $8-billion Detroit municipal art collection – proved impossible to liquidate for the benefit of bondholders. That failure reversed the deal bondholders thought they had, where senior debtholders were supposed to rank ahead of almost everybody except the IRS. Editor’s Note: Muni bonds sure look hazardous – but where are investors supposed to turn? Well, did you know there’s a brand-new, private currency sweeping America right now? One simple investment could net $56,700 in the next 9 to 12 months. But you must act fast to maximize your gains … So where are the biggest pitfalls right now? According to a Bloomberg report, 2013’s worst state pension-funding gap was in Illinois, where state pensions are 39% funded. Kentucky (44% funded) and Connecticut (49% funded) weren’t far behind. New Jersey (64% funded) ranked 17th worst. But more recent 2014 data, calculated on a new accounting basis with less “smoothing” of investment returns, suggests that New Jersey pensions were only 28% funded. The problem is widespread, with only six of 50 states more than 90% funded. Naturally, investors should avoid the states with the biggest gaps – especially when bonds from the country’s worst-funded state only yield a little over 2% for a 10-year maturity, according to That yield (which barely covers inflation) carries considerable price risk should interest rates rise. And in no way does it compensate investors for the Illinois default risk. Plus, investors once had an additional advantage when buying their own state’s municipal bonds – interest is free from both state and federal income tax in that instance – but today’s ultra-low interest rates have mostly destroyed that benefit. Consider Illinois’ 5% income tax rate, for example. An Illinois resident only receives an additional 0.1% (2% x 5%) yield on an Illinois state bond compared to an out-of-state buyer. Meanwhile, there’s another factor investors often overlook: If the state gets into financial trouble, taxes on residents will undoubtedly be raised, much as they were in 2011 when the state income tax rate rose from 3% to 5%. Few, if Any, Investments Worth the Time Finally, investing in truly safe municipal bonds doesn’t seem worth the effort, either. The Wells Fargo Advantage Wisconsin Tax-Free Fund ( SWFRX ), for example, invests in the obligations of that fully funded state, but offers a measly 1.4% yield from doing so. While the fund managed a satisfactory 6.9% return in 2014, that gain was the result of a general decline in interest rates; at current levels, the fund is extremely vulnerable to a general rise in rates. Oddly enough, one area where you may do better is in high-yield municipal bonds. These assets focus on revenue bonds related to somewhat-risky municipal-backed investments. Naturally, some of these investments will fail. A recent famous case involved a waste incinerator constructed by Harrisburg, Pennsylvania that suffered a two-fold cost overrun. It caused the city to default on $280-million worth of debt. Still, the risk from rates rising is somewhat less on these bonds, because their yields are already far above the Treasury bond yield. Plus, the tax exemption is naturally worth more when you’re receiving more interest. One potential investment is the T. Rowe Price Tax-Free High Yield ( PRFHX ) bond fund, a $3.4-billion fund that yields a solid 4%. It has also outperformed the Lipper High-Yield Municipal Bond index over the last 10 years. The fund invests in a very broad range of obscure municipal bonds, and the biggest holding is just 1.3% of assets. The risk, therefore, is diversified. Though a deep recession would doubtless affect it badly. In general, though, given the risks involved and the modest size of their tax benefit at current yields, municipal bonds aren’t an especially good deal right now. Good investing, Martin Hutchinson The post State Pension Problems Create Hidden Muni Risks appeared first on Wall Street Daily . By Martin Hutchinson
    Coal Tycoon Making Last Stand for U.S. Industry
  • By , 3/27/15
  • tags: ACI ANR
  • Submitted by Wall St. Daily as part of our contributors program Coal Tycoon Making Last Stand for U.S. Industry By Tim Maverick, Commodities Correspondent   A cloud of coal dust continues to hang over the U.S. coal industry . Lately, the industry has been dealing with some bad publicity from the coal ash spill into North Carolina’s Dan River last year. Coal ash is what you get after coal is burned by utilities for power. This remaining ash can contain a toxic combination of arsenic, selenium, boron, and other substances. On top of that, the coal business in the United States is looking bleak. It’s facing pressure from competing fuels, like natural gas; a strong U.S. dollar; and the Obama administration, which would like to see the industry go away. Down in the Dumps The terrible state of the American coal business was highlighted by a recent analysis from energy consultant group Wood Mackenize. The company found that about 17% of the forecasted U.S. production for this year – about 162 million tons – is “unprofitable.” More specifically, the study said that 14% of thermal coal production and 58% of metallurgical coal production were money-losing operations. Wood Mackenzie pointed to Central Appalachian coal as being in the deepest hole, with 72% of that coal output being unprofitable. Conditions were found to be better for North Appalachian coal and Illinois Basin coal. But the hardest hit is metallurgical coal. Prices are predicted to hit a six-year low (below $110 per metric ton) globally later this year. This is despite 30 million tons of production cutbacks already announced by the likes of privately held Walter Energy and Alpha Natural Resources ( ANR ). Canada’s Teck Resources ( TCK ), the world’s second-biggest exporter, says at least another 15 million tons in cutbacks are needed to stabilize prices. However, Wood Mackenzie’s Senior Research Analyst, Dale Hazelton, did say, “If you’ve got the money to buy a coal asset, this is the time to do it.” Scooping up Hot Deals And it seems Murray Energy is doing just that. The company is forking over $1.4 billion for a controlling stake in Illinois Basin coal producer Foresight Energy, L.P. ( FELP ) and its general partner, Foresight Energy GP, LLC. The deal is expected to close in the second quarter of this year. In late 2013, Murray also acquired five longwall coal operations from CONSOL Energy Inc. ( CNX ) to position itself as a leader in North Appalachian coal. In October 2014, Murray made yet another deal with CONSOL, buying its assets in the Illinois Basin. According to SNL Energy data, with all those deals, Murray is now the top producer in the United States’ two hottest coal basins. These basins have benefited as coal mines from central Appalachia have suffered. The newly combined company is the number three U.S. coal producer overall and the lowest-cost coal producer. Foresight’s average cost of operations was only $20.80 per ton in 2014. Snatching Some Embers The interesting aspect of the deal is not that Murray is staying private company, but that Foresight will remain publicly traded. There is also a very real possibility that some of Murray’s assets will be put into the limited partnership in the near future. This should translate directly into growing distributions. Prior to this, growth depended solely on Foresight opening new coal mines. Currently, its distribution yield is about 9% annually. This should appeal to income investors, allowing Foresight to easily outperform other coal miners like, Alpha Natural, Arch Coal ( ACI ), and Peabody Energy ( BTU ). These stocks have collapsed 98%, 96%, and 89%, respectively, over the past five years. Is this deal the last stand for the U.S. coal industry? Maybe. But if so, it is likely that these dealmakers will be the last survivors. And the chase continues, Tim Maverick The post Coal Tycoon Making Last Stand for U.S. Industry appeared first on Wall Street Daily . By Tim Maverick
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    Las Vegas Sands Price Estimate Revised To $69 Amid Continued Decline In Macau Gaming
  • By , 3/26/15
  • tags: LVS MGM WYNN
  • We have revised our price target for  Las Vegas Sands (NYSE:LVS) stock from $74 to $69, which reflects a change of more than 5%. The current valuation reflects our revised estimates of Las Vegas Sands’ casino operations in Macau. We believe that the company’s VIP gaming turnover in Macau will continue to see some pressure in the coming months amid the ongoing anti-corruption crackdown in the region. However, we believe the growth in this segment will resume next year and partly will be driven by its new casino resort, The Parisian, in Cotai, which will further enhance its market share in the region. We continue to remain bullish on Macau gaming in the long run and expect the VIP gaming turnover to be around $165 billion by the end of our forecast period. The company makes most of its profits in Macau from mass-market gaming, which has been growing rapidly in the region. However, given the recent slowdown, we have revised the non-rolling chip drop from close to $50 billion to $44 billion by the end of our forecast period. We have also restructured Las Vegas Sands’ model to give a better picture of gaming revenues in Macau. We now report gaming revenues, net of commissions. We estimate gross revenues of about $15.5 billion for Las Vegas Sands in 2015, with EPS of $3.52, which is slightly higher than the market consensus of $3.13, compiled by Thomson Reuters. We currently have a  $69 price estimate for Las Vegas Sands, which is around 25% ahead of the current market price of $55.
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