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Barclays reported better-than-expected performance figures for the third quarter on Thursday, with the results validating the bank's reorganization plan. Barclays' revenues saw a slight improvement, while thanks to a 30% reduction in loan impairments and an 8% reduction in adjusted operating expenses, the bank's pre-tax income jumped 41%. In our earnings note we discuss these results and the bank's outlook.

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

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Shutterfly's Q3'14 Results Hit by Scaling-up Operations and Seasonal Slowdown
  • By , 10/30/14
  • tags: SFLY
  • Leading internet based image publishing service, Shutterfly (NASDAQ:SFLY) reported its Q3 2014 earnings on October 29th.  The company, on the back of a failed acquisition deal,  a seasonal slowdown of demand for its offerings, and internal restructurings, presented a lukewarm third quarter. Net revenues of $142 million (16% year-on-year growth) marked the 55th consecutive quarter of year-on-year increases. The topline performance was a consequence of customer order growths for the consumer brands, complemented by a boost from the enterprise business. Consumer net revenues for the quarter were $127.3 million, reflecting a 13% year-on-year rise. The Enterprise business displayed a 47% year-on-year rise in revenues amounting to $14.7 million. However, gross profit margin was lower by 506 basis points year-on-year due to production related expenses, relocation of the data center to Nevada, and the start-up of the Shakopee production facility. Hit by lower gross margins and increased M&A related expenses (due to inbound acquisition offers), adjusted EBITDA reflected a loss of $9.7 million as against a $1.1 million loss in Q3 2013. For Q4 2014, the company has guided net revenues between $466.7 million to $481.7 million with GAAP gross profit margin ranging from 57.5% to 59.1% of net revenues.. In this article we discuss the key trends which affected Shutterfly’s performance in the third quarter. Our $49.29 price estimate for Shutterfly is above the current market price. We will update our valuation shortly. See our complete analysis for Shutterfly Striving To Boost Demand With Product Upgrades And New Feature Introductions Shutterfly is on a constant trajectory of improvement and innovation across its wide array of offerings. This led to increased mobile monetization and the expansion of the customer base. The transacting customer base for Q3 2014 was 2.5 million, translating into a 6% year-on-year growth. Orders grew by 7% year-on-year to 4.2 million with an average order value (AOV) growth of 5% to $30.63. AOV is defined as total net revenues (excluding Enterprise) divided by total orders. Q3 is a seasonally weak quarter with no big holidays and, according to the management, this is the reason for a slower growth. They are gearing up, however, for the holiday season of Q4 where they expect the demand to surge. Some of the initiatives taken in the third quarter are discussed here. The Shutterfly flagship brand updated its popular tri-fold cards into ¾ fold cards, and migrated card options like oil stamping and additional edge treatments from TinyPrint to Shutterfly collection. Personalized stamps and an expanded variety of stationery types were also introduced. Within photo books, features such as new dust jackets, gift boxes and glossy pages were launched. Keeping the upcoming Christmas holiday season in mind, new products such as personalized gift wrap, glass ornaments, Christmas stockings, framed prints, candles, personalized portable chargers and iPhone 6 cases were launched. The TinyPrints brand also enhanced its collections, features, and user experience. In September, a TinyPrints mobile application was introduced. New features were added into the existing Shutterfly iPhone, Android, Kindle, and Fire phone applications. The company is also trying to target the professional photographer clientele in a larger manner and might combine its two erstwhile acquisitions, MyPub and BorrowLenses, in the future.   Scaling Up Production Network And New Facility Start Up Costs Adversely Impact Margins The third quarter margin performance was adversely impacted by the start-up costs of the Shakopee, Minnesota production facility, which went live in Q3. Also, the ramp-up of operations across the production network in anticipation of the upcoming holiday season led to hikes in manufacturing, customer services, labor, and training costs. This resulted in a $2 million hit on the gross profit margins, which contracted by 506 basis points year-on-year, to 36.8%. The product upgrades and new features, mobile initiatives, and ThisLife (ts new memory management solution) necessitated strategic investments in technology. This, along with the relocation of the data center to Nevada, resulted in higher depreciation expense, which led to a 22% year-on-year rise in technology and development spending to $33.5 million (24% of net revenues). Sales and marketing expense of $42.1 million amounted to a 20% year-on-year increase. This included headcount, advertising agency fees, direct response media, search fees and online media. However, the management believes that Shutterfly will observe healthier margin performance next year, as the expenses of opening new facilities get absorbed, and with the growth of ThisLife brand, and the wedding and mobile segments..   View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    WYNN Logo
    Wynn's Macau Revenues And EBITDA Decline Amid Lower VIP Gaming Turnover
  • By , 10/30/14
  • tags: WYNN LVS MGM
  • Wynn Resorts (NASDAQ:WYNN) recently reported its Q3 2014 earnings, which came out largely on expected lines with slower growth in Macau due to a 17% decline in VIP gaming turnover. Casinos in Macau witnessed a 7% decline in gross revenues during the third quarter. This can be attributed to ongoing anti-corruption crackdown, which is keeping VIPs away from the world’s largest gambling hub. However, mass-market gaming continues to grow strongly in the region and Wynn has benefited from the same in previous few quarters. For Q3, Wynn’s mass-market table games win amount has increased by more than 36% to $327 million. We continue to believe that mass-market gaming will be a key driver for future growth in Macau and for Wynn. The company did well in Las Vegas with revenue growth of 9% and EBITDA growth of 25%, primarily led by an increase in table games win percentage. Wynn reported adjusted earnings of $1.95 per share as compared to $1.88 it reported in the prior year quarter. We estimate gross revenues of over $7 billion for Wynn Resorts in 2014, with EBITDA of $1.94 billion. We have revised our price estimate for Wynn Resorts from $211 to $186 reflecting the impact of the recent quarterly earnings and continued decline in VIP gaming.
    LUV Logo
    Southwest Is Poised For Growth As Fuller Planes Lift Its Third Quarter Results
  • By , 10/30/14
  • tags: LUV
  • Southwest (NYSE:LUV) recently got free from flight restrictions imposed on it by the Wright Amendment. As a result, since October 13, the low-cost carrier has launched nonstop flights to several destinations from its home airport, Dallas Love Field. So far, the carrier has launched nonstop flights from Dallas Love Field to seven destinations – Denver, Chicago (Midway), Baltimore, Washington D.C., Las Vegas, Los Angeles and Orlando. In early November, the carrier will launch nonstop flights to eight more destinations and in January next year, it will launch nonstop flights from Dallas Love Field to two more destinations. We figure this sudden increase in the number of Southwest flights in the Dallas market, in which the carrier is very well established, will drive its near term growth. Separately, at its third quarter earnings presentation, Southwest said that bookings for November and December are good and that it is seeing no impact from Ebola on advance booking rates. In early October, all airline stocks including Southwest fell sharply due to mounting Ebola concerns, and we at the time wrote that this sudden sell-off seemed to be factoring in a worst-case scenario, which was not likely. In line with our expectations, airline stocks have recovered through the past 2-3 weeks. We currently have a stock price estimate of $35 for Southwest, marginally above its current market price. See our complete analysis of Southwest here Solid Demand For Flights & Lower Fuel Costs Lift Southwest’s Q3 Results Southwest reported solid growth in its third quarter results on higher demand for flights in the U.S.. Even though the carrier expanded its flying capacity just marginally, its occupancy rate (percentage of seats occupied by passengers in a flight) rose by about 3.5 points to over 84% in the third quarter. Fuller flights coupled with slightly higher average passenger fare lifted Southwest’s third quarter revenue by nearly 6% annually to $4.8 billion. Lower crude oil prices during the third quarter also helped lower Southwest’s fuel costs, which constitute nearly a third of its overall operating costs. Together, the higher revenue and lower fuel cost increased Southwest’s third quarter profit (excluding special items) by nearly 62% annually to $382 million. Southwest Is Well Poised For Growth Looking ahead, as Southwest takes over the remaining international routes being serviced by AirTran currently and completes integrating AirTran by 2014-end, we figure the carrier will be able to increase its focus on growth. Accordingly, Southwest could begin expanding its flying capacity at higher rates in 2015. The carrier has near term growth opportunities out of Dallas Love Field and long term growth opportunity in near international markets, which currently constitute a very small portion of its overall service network. This growth oriented capacity stance will in turn boost Southwest’s passenger traffic, growing its results in coming months. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    REV Logo
    Revlon's Near Term Sales Growth Could Suffer With Strategic Focus On Fewer, Bigger Brands
  • By , 10/30/14
  • tags: REV AVP
  • Revlon (NYSE:REV) reported third quarter earnings on October 29th. Quarterly sales exceeded analyst estimates, although they were lower on a proforma adjusted basis from Q3FY13. The company reported quarterly sales of $472 million in Q3FY14, supported by a 4% increase in sales in the U.S. However, international markets failed to add to overall sales growth for Revlon, generating a 0.2% growth in constant currencies. Including currency fluctuations, sales from international markets fell 4.5% in Q3FY14. Revlon’s consumer product line generated sales of $348 million, marginally lower from $351 million in proforma sales in Q3FY13. Its professional products segment, which has lifted Revlon’s sales since the acquisition of The Colomer Group in December 2013, witnessed a marginal expansion in sales to $124 million this quarter. Excluding the impact of currency fluctuations, sales from both the consumer and professional product lines increased 2% in Q3FY14 in comparison to proforma Q3FY13. The constant currency increase in sales from the consumer segment was primarily a result of favorable returns reserve adjustments in the U.S. during the quarter. Going forward, the company expects lower discontinued products in the future as part of its strategy to focus on fewer, bigger and better innovations, and a slump in demand for these products could decrease sales by the reserve amount. Professional products from American Crew, Revlon Professional and Creme of Nature increased year on year in Q3FY14, partly offset by a decline in CND nail products. On a constant currency basis, segment profits for the consumer product line increased 1.6% due to the returns reserve while profits from the professional product line remained flat on a year on year basis. Total operating profit declined to $160 million from $184 million for the quarter as a result of higher advertising expenses. Revlon’s pre-tax income from operations declined on a year on year basis to $23 million, resulting from foreign currency losses due to balance sheet devaluation in its Euro-denominated intercompany loans. See Our Full Analysis for Revlon Near-term Sluggishness in Sales to Continue During the conference call, Revlon Chief Executive Officer Mr. Lorenzo Delphani stated that the company intends to reach its desired new rate of innovation in terms of quantity and quality in the next 2-3 years depending on the speed and effectiveness of executing of its strategy. This time frame in its brand renewal program indicates that core organic sales for the company could remain under pressure going forward. For Q3FY14, Revlon had nearly $9 million in returns reserve added to sales. The company’s new strategy to use individual performances of specific stock-keeping units (SKU) to either reset the SKU or keep it on retailer shelves is a good way to streamline its portfolio to market demands. Revlon will review the returns from retailers quarter by quarter to assess SKU performance and replace underperforming brands and products with new and innovative products to accelerate sales growth. While this might play out in the long term, near term sales are likely to see some fluctuations due to the addition and removal of these reserve adjustments. Additionally, the weakening economic environment in Europe and the depreciation of the Euro against the Dollar would add pressure to the company’s bottom-line in the near term. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Yahoo! Japan's Results: Revenue Grows As Mobile Platform Gains Traction
  • By , 10/30/14
  • Yahoo! Japan Corporation (OTC:YAHOY) reported its Q2 FY 2015 results on Ocotber 29. (Fiscal year end with March) The company posted 2.5% year-over-year growth in revenues to ¥103 billion ($960 million). However, operating income declined by 7.6% to ¥46 billion ($430 million) due to the implementation of ‘no fee’ strategies for its shopping division. While the company reported 7.2% growth in its advertising revenues to ¥60.5 billion ($560 million), its transaction value across shopping, auctions and listing services grew by 11.9% to ¥281.1 billion ($2.6 billion). The highlights of the results are as follows. See our complete analysis of Yahoo! JAPAN here Mobile Boosts Revenue And Transaction Value In  our pre-earnings note, we stated that we would closely watch the progress the company has made in its mobile advertising division. The increase in mobile ads revenue was instrumental in bolstering search ads revenues. According to our estimates, mobile advertising contributes nearly 20% to Yahoo! Japan’s total value. During the quarter, the firm posted a healthy increase in mobile ad revenues, which grew by 74% to ¥17.4 billion ($160 million), and now account for 33.7% of total ad revenues. Furthermore, e-commerce transaction value through smartphones now amounts to 32% of total transaction value, and stands at ¥91.4 billion($850 million). We believe that revenues from this division will account for almost 25% by 2020, as ad budgets increasingly shift to mobile users. During the quarter, the company reported 55.6% year-over-year growth in smartphone daily unique browsers (DUB) to 39.43 million. As a result, the number of monthly smartphone pageviews grew by 66.5% year over year to 29.90 billion. As the company is increasing content across its properties, we believe that the company will be able to leverage its dominant position in the Japanese Internet landscape to drive mobile revenue growth in the coming future. Transaction Value Across E-commerce Properties Grows as Listings Rise While the search and listings ads division contributes 17% of Yahoo! Japan’s total value, the online shopping and auction division contributes 15%, according to our estimates. The company removed listing and tenant fees for its websites in Q2 FY14 (Q3 CY13), to stimulate growth and increase the number of listed sellers. The number of listed sellers is important for Yahoo! Japan’s shopping division because as listings grow, more users are likely to find and buy products on its site, which will increase the transaction value across Yahoo! Japan’s shopping websites. As a result of this new strategy, the company added over 193,000 store ids for its shopping portal in the last twelve months. 60, 000 of new ids were added in Q2. With this increase in store ids, the number of products listed across its shopping website increased by 50% year over year to nearly 120 million. The transactions value, across shopping, auction and listing divisions, grew by 11.9% year-over-year to ¥281.1 billion. However, the company reported 8.3% year-over-year decline in revenue to ¥23.6 billion ($220 million) as it had to forgo listing fees and cut down its take rate for transaction across its shopping sites. We expect that as this strategy gains traction, Yahoo! Japan’s revenues will increase due to higher transaction value across its sites. Currently, we estimate that by 2020, the transaction value from shopping and auction divisions will grow to ¥400 billion and ¥780 billion respectively. We are in the process of updating our Yahoo! Japan model. At present, we have a  $14.86 price estimate for Yahoo! Japan . Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    HMC Logo
    Honda's 2015 Accord Can Help The Company Overcome Difficulties In Its Other Businesses
  • By , 10/30/14
  • tags: HMC GM TM
  • Honda Motors (NYSE:HMC) had seen its share of the U.S. auto market drop from 9.7% to 9.1% through the first seven months of 2014. In the mean time, competitors managed to capitalize on a recovering auto market by offering incentives such as discounts and no-interest deals in order to attract buyers. However, the recent surge in the sales of the Honda Accord might help Honda arrest the decline. In the month of August, Accord sales grew by nearly a third as the company sold over 51,000 units of the vehicle. For the month, the company’s total vehicle sales exceeded 151,000 units. Honda repeated its performance in September by selling nearly 33,000 units of the Accord, implying a near 33% increase compared to last year’s 25,171 units sold in September. The Accord is a very significant model for the Japanese car manufacturer, having accounted for nearly a fourth of the company’s sales in the U.S. in 2013. The model accounted for 26% of the company’s overall sales through the month of September, this year. The recent spike in sales of the Honda Accord is likely a result of the shift in focus from retail sales to individuals by the company. Additionally, Honda offered attractive discounts on the model, making it attractive to owners who own an older model vehicle. The success of this model is highly important to Honda’s prospects in the U.S., its biggest market, especially as other divisions are stagnating. Below, we take a closer look at both these aspects. The Accord is extremely important for the company and the launch of the 2015 Accord is highly important to the company for the same reason. The new model will face competition from the 2015 version of Toyota’s Camry. The new Accord, which comes with better fuel efficiency and operational features such as the Homelink Wireless Control, will go on the market at cheaper price than the new Camry. If the lower price can persuade consumers to buy the Accord instead of the Camry, it will go a long way to improving the company’s profitability. We have a $43 price estimate for Honda Motors, which is slightly more than the current market price. Motorcycles Division Struggling The global demand for motorcycles has been declining. However, this issue is cyclical rather than structural. A company like Honda relies on improving economic conditions in emerging markets like Brazil, India and Thailand for sales growth. As the disposable incomes of consumers in these economies rise and as they get easier access to cheap financing, it is easier for Honda to be able to sell more motorcycles. However, demand in recent times has been flat due to uncertain economic conditions in these markets. There are bigger issues in Brazil and Thailand, where financing for motorcycle has been made difficult to procure, thus impacting volumes even though the company has knocked several price points off its models to lure back customers. It is estimated that about half of the consumers use debt to finance their motorcycle purchases, making tighter loan requirement a significant drag on motorcycle sales. Additionally, as interest rates are raised, consumers are likely to prefer paying down their debts instead of taking on loans. To combat this difficult environment, Honda has responded by increasing incentives and discounts, which has resulted in increased competition for prices among the manufacturers of original equipments, which is another factor putting pressure on the company’s finances. Loss of Market Share in China Japanese automakers have lost a quite a bit off market share in China over the last five years. In 2008, Toyota, Honda and Nissan boasted a combined market share of 25% but the figure dropped to 15% by 2012. Following the global market crash in 2008, Japanese autos held off their expansion plans in the country and focused on cost cutting instead. The global recession however, never really affected the Chinese automotive market. In the last few years, Chinese automotive market has more than doubled to 20 million units. Western auto companies, which continued to pour in investments into China, gained market share at the expense of Japanese automakers. The situation was exacerbated by the unfortunate natural disasters in 2011, which constrained the production of Japanese companies. Things were only normalizing before tensions flared up between China and Japan and negatively impacted the sales of Japanese companies. With the situation now stabilizing and Japanese automakers once again generating solid profits, Honda is looking to start afresh in the world’s most populous nation. The automaker feels that if it is able to offer cars tailored to the needs of the Chinese customers, it can grow its sales significantly. China is one of the biggest markets for Honda, accounting for about a sixth of its total sales. Honda’s sales were down 5.5% in August from a year earlier, even as the industry wide sales grew by 6.7%. The August decline followed a 22.7% year-on-year fall in July. Honda’s sales in 2011-2012 were abysmally low, following the tensions that sparked off between China and Japan on claims over the disputed islands. The islands are known as Senkaku in Japan and Diaoyu in China. Overall, Honda’s sales in China are up 5.2% for the first eight months of the year. See our full analysis for CME Group View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    ANR Logo
    Alpha Natural Resources Will Have To Solve More Than Simply Liquidity Issues In The Long Term
  • By , 10/30/14
  • tags: ANR KMP CHK DUK
  • As a result of lower natural gas prices, stricter enforcement of environmental regulations and weak economic conditions in important global markets, the coal industry has been experiencing a downturn. Both the thermal and met coal markets remain weak. As a result, Alpha Natural Resources (NYSE:ANR), the leading met coal exporter in the U.S., has been taking measures to address balance sheet and liquidity concerns. The company has been trying to reduce operational costs and capital expenditures in order to improve its cash position. Additionally, ANR has been amending its credit facility to make itself more flexible financially. However, these measures will only help the company survive the downtrend in the coal industry in the short term; to ensure long term profitability, the company will need to address some concerns in the weak coal market. Thermal Coal In international markets, reduced demand for coal from China and an oversupply of coal from Indonesia and Australia based companies have resulted in low thermal coal prices. American companies, like Alpha Natural Resources, can not compete at these low prices. Domestically, the situation is expected to improve. The domestic demand for thermal coal depends primarily on weather and the prices of natural gas. If the prices of natural gas is high, many buyers of fuel sources tend to raise the demand for coal. For example, it becomes profitable for railroad companies to carry out their transportation operations from the Powder River Basin and the Illinois Basis when the price of natural gas is above $4 per Million British Thermal Units(MBtu). However, it is only profitable to switch from North Appalachia and South Appalachia when the price of natural gas rises above $6-$7/Mbtu. Additionally, the demand for thermal coal has been affected by pile ups in the railway sector, which has been overwhelmed by the increased demand for the transportation of oil. However, the thermal coal market is expected to improve in the coming quarters, as rail issues are resolved and the prices of natural gas rise. The net result is likely to be an increase in demand for coal-fired electricity. The U.S. Energy Administration Information(EIA) predicted that the contribution of coal-fired electricity to the total electricity production in the U.S. to rise from 39% in 2013 to 40.1% in 2014. All these trends bode well for the coal market. Metallurgical Coal The met coal market is expected to remain weak in the near term as it is suffering from oversupply and weak demand. Chinese coal imports have dropped by nearly a sixth so far this year, thereby adversely affecting met coal prices. In addition, the weakening of the Australian dollar forced Australian coal producers to keep supply high in order to maintain competitiveness, even as prices are low and supply is high. ANR’s met coal division faces some other challenges as well in the near term. While the firm produces higher quality met coal than what is available in China and some emerging markets, it still trails some other manufacturers such as Canada’s Teck Resources and Australia’s BHP, which are well positioned in the premium hard coking coal market. ANR’s variety is largely composed of “hi-volatility B” coal, which is more volatile than premium hard coking coal and produces a lower quantity of coke.  ANR and other American producers face a disadvantage on the cost front as well, compared to Australian producers. Things could get worse as some Australian companies like BHP have recently brought new mines online and are expected to ramp up their exports further, increasing supply in the seaborne coal market. According to the world steel association, global steel demand is projected to grow by around 3.1% in 2014, down from around 3.6% growth seen in 2013, and then further expand to around 3.3% in 2015. While Chinese steel consumption is expected to grow by around 3% this year, it may not help overall met coal demand much since China has also been boosting its met coal production. India, which was ANR’s largest export market last year, could see met coal demand grow further since steel production in the country is expected to grow by around 3.3% in 2014 and by around 4.5% in 2015, on the back of  structural reform which will support infrastructure investment. Europe, one of the key markets for Alpha’s metallurgical coal, is expected to increase its steel demand by around 3.1% this year. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    TM Logo
    The Three Trends Driving Toyota's Europe Strategy
  • By , 10/30/14
  • tags: TM HMC
  • Toyota Motor Corp (NYSE:TM) is hoping to capitalize on the European auto market’s revival. After suffering a six year long slump, the European car market is expected to grow by 2-3% this year. Car sales in the five most important markets-Germany, U.K., France, Spain and Italy-are either growing or expected to grow in the near future. Toyota, which used to sell over a million cars and SUVs a year in Europe in 2008, wants to become profitable in Europe again. To achieve this target, the Japanese auto maker has targeted three specific areas- mini cars, hybrid cars and a partnership with BMW, the world’s biggest luxury car maker. In our analysis below, we outline Toyota’s thinking behind targeting each of these areas. See Our Full Analysis for Toyota Here Minicars Minicars form Europe’s third largest auto segment, behind subcompacts and small SUVs. Sales in the segment are forecast to rise by nearly 20% in the next three years. The highly competitive segment is witnessing a huge product offensive with a fleet of new or refreshed models from Renault, Peugeot Citroen, Suzuki and Toyota set to hit the market. Research firm IHS automotive predicts the size of the minicar segment to grow from 2013′s level of 1.1 million to 1.3 million by 2016 on the back of this huge segment refresh. Toyota has manufactured cars in Europe for the last decade in an alliance with French auto maket PSA Peugeot. Earlier this year, a refreshed version of Toyota’s Aygo minicar, which is manufactured at the joint venture’s plant in Koln, Czech Republic, debuted at the Geneva auto show. The car will hit the market later this year. Karl Schlicht, executive vice president for sales, marketing and product for Toyota’s European business, said he expects the new model to grow the sales sales of Aygo to 80,000 units by 2015, from 65,000 last year. In the past, Toyota has acknowledged that the partnership with Peugeot is profitable, therefore we expect the growth in sales of the Aygo to boost the company’s margins and thus the bottom  line as well. Hybrids There is a big opportunity in the hybrid segment in Europe for Toyota, a global leader in hybrid sales. As a result of the sovereign debt crisis and stagnating income levels, people are slowly becoming budget conscious and paying more attention to the low emissions and fuel efficient hybrids. Consequently, Toyota is planning to introduce 15 new hybrid models globally over the next two years, and Europe, the third largest market for hybrids after Japan and the U.S., will get a fair share of those. In 2013, sales in Europe’s hybrid market grew by 40% to 214,237 units — and close to 90% of the growth was contributed by Toyota’s Yaris and Auris models. According to research firm JATO Dynamics, in 2013, sales of the U.K.-built Auris hybrids were up 131% to 53,426 units, and the France-built Yaris were up 103% to 48,758 units. Toyota’s strategy here is simply but effective — it’s using traditional European designs to appeal to popular tastes, but steadily bringing down the prices by adapting advanced technology. In 2013, hybrid sales grew an impressive 43% to 156,863 units. The hybrids also contributed heavily to the 56% operating margin growth the company recorded in Europe in the first three quarters of fiscal 2014.A significant advantage for Toyota in this market is that there is almost no competition, especially as Honda Motor Corporation has decided to essentially exit the segment. Even though Honda entered the European hybrid market a year before Toyota, sales have been slow. According to JATO Dynamics, Honda sold just 1,242 units of Insight and 695 of CR-Z last year, down 62% and 66%, respectively, from 2012. It has decided to stop selling both models, leaving the Jazz hybrid as its sole car on the market. Alliance With BMW Nearly 55% of all new cars sold in Europe every year run on diesel. That number can rise to 70% in the next few years, especially in countries like France and Spain. Consequently, Toyota is looking to improve its diesel offerings in Europe. To this end, Toyota has signed a deal with BMW for the supply of diesel engines. Future versions of the Verso, Toyota’s compact minivan, will come with BMW-supplied 1.6-liter diesel engines. Currently, the Verso only comes with 2.0 and 2.2 liter diesel engines. The Japanese auto maker expects the new engines to be able to boost the sales of the Verso to 44,000 units this year, implying a growth of 12%. The ambit of the Toyota-BMW deal is not merely limited to the development of a diesel engine for the Verso- it extends to an agreement to develop next-generation, eco-friendly technologies together. The two companies plan to collaborate on developing a fuel cell system, lithium air batteries, light-weight vehicle body technologies, and also a sports car. The deal should be beneficial for both companies but it is likely to have a significantly positive impact on Toyota’s European operations. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    FFIV Logo
    F5′s Strong Performance to Continue Into Q4'14 and 2015, Driven by Enterprise Business, Security Solutions, New Pricing Model & Cisco ACE Replacements
  • By , 10/30/14
  • F5 Networks (NASDAQ:FFIV) closed its fiscal 2014 with a strong Q4 2014 (reported on October 29), where earnings surpassed the wall street expectations and came in ahead of the company guidance. Growth in the quarter was driven by F5′s strength in the enterprise business, growing demand for its security products, the success of the Good, Better, Best bundles in driving million-dollar-plus deals, and broader adoption of its solutions. At $465.3 million, the company’s Q4 2014 revenue was above its guided range of  $453 million to $463 million, up 6% sequentially and 18% year to year. Both GAAP ($1. 26) and non-GAAP earnings per share ($1.57)  also beat company expectation by a significant margin. The company saw year-on-year growth across all major regions, with especially strong results in EMEA and North America and good improvement in Asia Pacific and Japan. For fiscal year 2014 (ended  September 30th), F5 witnessed a 16.9% increase  in its top line and   12.2% growth in its net income. During the Q4 2014 earnings call, F5 announced the retirement of its current CEO, John McAdam, at the end of fiscal 2015. A smooth and effective plan for a successor is one of the top priorities for F5 in fiscal 2015. The company anticipates another year of solid growth and profitability in fiscal 2015. Assuming no material impact to the industry from broader macro issues, F5 believes that growth will continue in the current fiscal year, driven by:  1) an expanding product portfolio; 2) growing customer awareness and adoption of the Synthesis architecture; and, 3) partnerships with key players in the emerging SDN market.  It believes growth will be stronger in the second half of the year compared to the first half. Our price estimate of $118 for F5 Networks is in line with the current market price. We are in the process of updating our model for the Q4 2014 earnings release. See our complete analysis for F5 Networks here Security Solutions Drove A Significant Number Of Large Design Wins In 2014 During its Q4 2014 earnings call, F5 announced that its security solutions drove a significant number of sales wins, including many multimillion-dollar transactions, in fiscal 2014. Approximately 36% of F5′s total product sales in the year  included one or more security products, which represents 41% growth over fiscal 2013. Since its entry in the Internet firewall market in February 2012, F5 has expanded its security solution portfolio with the addition of new products. In fiscal 2014, it added  significant functionality to its web application firewall and access solutions, ASM and APM. F5 believes it is gaining market share in the web applications firewall market. F5′s traditional firewall solution, ASM, grew significantly in fiscal 2014, and it won  several large transactions where it replaced the incumbent competitive solutions. Project wins included both data center firewall solutions and Gi firewall solutions with Tier 1 service providers. As the requirement for customers to protect their applications in on-premise data centers and in private and public clouds continues to increase, the company sees continuing demand for its products in the future. With increasing network complexity, reducing security risk is an important criterium for enterprises. Over the years, data theft technology has become more sophisticated and the global cyber-crime market is currently sized at $104 billion. IDC estimates that companies around the world will spend $491 billion in 2014 for fixes and recovery from data breaches and malware, $127 billion in dealing with security issues and $364 billion dealing with data breaches. F5 also significantly expanded its portfolio of subscription security solutions in fiscal 2014. It added a Secure Web Gateway product, Versafe anti-malware and anti-phishing subscription service via its Security Operations Centers.  And it completed the acquisition of Defense.Net, gaining a high-capacity, cloud-based service for protecting data centers from DDoS attacks. The company claims to now have the most comprehensive, hybrid DDoS solution in the market, engineered to absorb the full threat spectrum of DDoS attacks. F5 plans to formally roll out Versafe and Defense.Net as subscription services to its sales force during the current quarter.  These new security offerings will further expand its addressable market. Though it has yet to formally release these solutions to its global sales force and partner channel, it has already received customer orders for both the new cloud-based DDoS service and the anti- malware and phishing solutions. Good, Better, Best Offerings Drives Software Sales F5 introduced the ‘Good, Better, Best’ pricing model in November 2013 to help customers maximize their value of enterprise application delivery. The program helps customers select a platform that best fits the organizations’ needs, offering advanced traffic management, optimization and security services. The company claims that the model makes it easier to package its solutions together for the customer, giving them some incentive to add more modules. F5 continued to experience strong momentum in the ‘Good, Better, Best’ bundles in Q4 2014, with increasing number of the customers opting for the ‘Best’ solutions. Sales of these bundles now account for a significant percentage of its overall quarterly sales. Cisco ACE Replacement Opportunity To Continue in 2015 In 2012, rival firm Cisco announced its decision to exit the ADC market after losing more than 50% of its market share to F5 and Citrix. F5 has scored big product wins by replacing some of Cisco ACE products in large customer accounts since then. F5 recorded 900 ACE replacement project wins in fiscal 2013, and fiscal 2014 marked another solid year of revenue from new customer ACE replacements.  Contributing as well was solid growth from existing replacements for sales in of additional products in areas like security. F5 expects  the opportunity to continue throughout 2015 and beyond. The ACE installed base is over $1 billion of potential business, but F5′s target market is much larger. In addition to replacing Cisco’s existing solutions, F5 has the added opportunity of providing customers additional functionality including security, access control and application acceleration. F5 customers continue to take the opportunity to add additional functionality, such as its ASM and/or the AFM security modules when they implement the new F5 solutions. Q1 2015 Outlook - Revenue in the range of $460 million to $470 million. - GAAP and non-GAAP gross margin of 82% and 83.5%. - GAAP operating expense of $245 million to $253 million. - GAAP and non-GAAP effective tax rate of 38.5% and 35.5%, respectively. - GAAP and non-GAAP EPS target of $1.10 to $1.13 and $1.46 and $1.49, respectively. - Capex to range from $6 million to $12 million per quarter for ongoing infrastructure investments. Capex to increase to $15 million to $20 million in the second half of the year to support the expansions of facilities in San Jose and Tel Aviv, expected to come online in the summer of 2015. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research  
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    3 Reasons Why Exxon Mobil Should Acquire EOG Resources
  • By , 10/30/14
  • Exxon Mobil (NYSE:XOM) is the world’s largest publicly traded international Oil and Gas Company. It has both upstream as well as downstream operations and generates annual sales revenue of more than $420 billion. On the other hand,  EOG Resources (NYSE:EOG) is an independent oil and gas exploration and production company that primarily operates on the upstream side of the hydrocarbon business generating annual revenue of around $15 billion. A vast majority (around 94%) of the company’s total net proved reserves are located in the U.S. Here, we outline 3 key reasons why Exxon Mobil should acquire EOG Resources. 1. Higher Production Growth Exxon’s upstream production has been relatively flat over the past decade. It actually declined slightly from over 4,210 thousand barrels of oil equivalent per day (MBOED) in 2004 to 4,170 MBOED in 2013. This has also been a case with most of the other large integrated oil and gas players, as they have been unable to add enough new production to more than offset natural field declines. This could partly be attributed to the shear size of these firms, and also fact finding and developing large hydrocarbon reserves is getting more and more difficult and expensive. According to a recent study by Evaluate Energy, finding and development costs for the major integrated oil and gas companies have increased from below $10 to over $20 per barrel of oil equivalent over the past decade. On the other hand, EOG Resources has witnessed a significant growth in its hydrocarbon production over the past few years. The company has played a key role in the tight oil revolution in the U.S., which has taken place primarily due to the evolution of horizontal drilling and hydraulic fracturing techniques that enabled energy companies to tap the huge tight oil reserves in the U.S. at commercially sustainable rates. The company’s net oil and gas production has grown sharply from just around 353 MBOED in 2009 to over 510 MBOED last year, implying a CAGR of more than 9.5%. This year, we estimate EOG Resources’ net oil and gas production to average more than 575 MBOED followed by almost 10% CAGR growth in the next couple of years. During the first six months, the company’s net hydrocarbon production averaged 577 MBOED, up more than 17.5% over last year. Although EOG Resources’ net oil and gas production is only a small fraction (less than 15%) of Exxon’s, the exploding growth from increased development of its acreage in the Eagle Ford and Bakken shale plays could provide a significant boost to Exxon’s overall growth outlook. The chart above highlights the trend in historical and forecasted hydrocarbon production growth for both Exxon and EOG Resources. 2. Better Volume Mix Hydrocarbon production can be broadly split into two categories – liquids, which include crude oil, natural gas liquids, bitumen and synthetic oil, and natural gas. Liquids are generally more profitable to produce than natural gas because of higher price realizations. Last year, Exxon sold liquids at an average price of around $95 per barrel, compared to just around $41 realized per barrel of oil equivalent (BOE) of natural gas. The proportion of liquids is therefore a key driving factor for cash margin earned by exploration and production companies per barrel of oil equivalent. In 2009, liquids made up more than 60% of Exxon’s total hydrocarbon production. However, their percentage contribution declined significantly after the company acquired XTO for $41 billion in 2010, which increased its natural gas production by 31% y-o-y that year. More importantly, most of the increase came from the U.S., where natural gas prices have been significantly depressed by international standards due to a sharp rise in production from unconventional sources. (See:  Key Trends Impacting Natural Gas Prices In The U.S. ) This weighed heavily on its operating margins. Therefore, Exxon has been trying to improve the proportion of liquids in its production mix over the last couple of years by slowing down its shale gas development program in the U.S. Last year, liquids made up 52.7% of Exxon’s total hydrocarbon production, up from 51.5% in 2012. This year, we expect the proportion of liquids to rise further. On the other hand, the proportion of liquids in EOG Resources’ total production volume-mix has improved significantly from just around 22% in 2009 to 56% last year. We expect the company’s sales volume-mix to improve further in the coming years, as it plans to increase its focus on the development of its liquids-rich acreage in the Eagle Ford play. EOG Resources is the leading oil producer and acreage holder in the Eagle Ford shale. It holds 632,000 net acres in the play, a majority of which, around 564,000 net acres fall in the crude oil window of the formation. During the most recent annual investor presentation, EOG Resources pointed out that it expects to grow its liquids production by double-digit percentage points in the long run, while natural gas production is expected to remain relatively flat after declining by around 6% this year. We therefore believe that by merging with EOG Resources, Exxon can unlock a sizeable opportunity to expand its upstream cash EBITDA margin that, by our estimates, stood at 54.5% last year. The chart below highlights the trend in historical and forecasted E&P EBITDA margin for both Exxon and EOG Resources. 3. Lower Crude Oil Prices The price of front-month Brent crude oil futures contract on the ICE has declined has by more than 25% since hitting a short-term peak in June and is currently trading at around $85/barrel. Since lower crude oil prices impact operating margins of all oil and gas companies negatively, the  NYSE Arca Oil & Gas Index (^XOI) has declined by more than 15% over the same period. Year-to-date, the index has fallen by around 2%, compared to a 8.5% gain for the S&P 500. However, the independent exploration and production companies, like EOG Resources, have been hit more severely by the recent decline in oil prices since they do not have downstream refining and chemicals businesses, which provide a relatively stable stream of cash flows to the integrated oil and gas companies like Exxon Mobil. The S&P Oil and Gas Exploration and Production Select Industry Index has declined by almost 28% since the WTI crude oil prices peaked at around $100/barrel in June. Year-to-date, the index has fallen by around 11.1%. EOG Resources’ share price has melted by more than 20% since oil prices peaked out in June, compared to a decline of just 9% in Exxon’s share price. In other words, acquiring EOG Resources has become relatively more feasible for Exxon today than it was just 4 months ago. Additionally, we also believe that the recent decline in crude oil prices on increasing supplies and slowing demand growth has enhanced the case for Exxon Mobil to acquire EOG Resources in order to provide some impetus to its top- and bottom-line growth. This is because lower crude oil prices will pressurize Exxon to increase its focus on boosting hydrocarbon production to drive upstream earnings growth. On the other hand, EOG Resources can partially insulate itself from increasing downward risks to its tight oil development program in the U.S. from lower commodity prices by joining hands with a larger player that has significant exposure in downstream refining and chemical operations than gain from lower commodity prices. 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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    Corning’s Earnings Review: Display Technologies Grows On Holiday Sales; Specialty Materials Flattish Despite High Volume
  • By , 10/30/14
  • tags: GLW
  • Corning (NYSE:GLW) announced its third quarter results on Tuesday, October 28, 2014. The maker of Gorilla Glass reported 23% year-on-year growth in GAAP revenues driven by growth in its Display Technologies, Optical Communications and Environmental Technologies segments. The Specialty Materials segment, despite the higher sales volume of Gorilla Glass, and the Life Sciences segments were flattish year-on-year. Corning’s GAAP net profits increased 148% primarily due to an increase in income from foreign currency transaction and hedge gains. However, on a non-GAAP basis, which excludes impact of foreign currency, net profits grew 16.6%. See our complete analysis of Corning here Holiday season sales help boost Display Technologies sales In preparation for holiday season sales, manufacturers of LCD TVs usually increase their purchases of LCD panels during the third quarter.  But, this year’s third quarter was expected to be slower due to the high sales of televisions in the second quarter, driven by the FIFA World Cup held in June-July 2014. However, LCD panel shipments still remained high in the third quarter purely due to holiday season demand. In the third quarter, Corning’s Display Technologies’ sales benefited from this seasonal phenomenon. Corning also experienced lower sequential price declines during the quarter. The LCD supply chain continues to maintain healthy levels of inventory which will likely ensure further moderation in price declines. Going forward, we expect to see some sequential moderation in sales in the fourth quarter, since it follows the peak season in the third quarter. However, year-on-year sales should remain up due to the consolidation of Corning Precision Materials’ (CPM) sales. Display Technologies third quarter sales grew 55.7% primarily due to inclusion of CPM’s sales. Our long term outlook for Corning’s Display Technologies remains positive primarily due to the growing adoption of LCD TVs and replacement of Plasma and CRT TVs. Sales of Plasma and CRT TVs have been declining due to cost competitive LCDs. By 2015, Plasma and CRT TVs are expected to disappear from the market, giving way to LCD TVs. OLED TVs may offer some competition to LCD TVs, but they there are expected to account for just 1% of overall TV shipments through 2017 due to their higher price. Emerging markets such as India are expected to fuel the demand for LCD TVs as these regions continue shift from traditional CRT TVs to LCD TVs. In 2012, 47% of Total TV shipments to India were LCDs, but by 2015, this is likely to rise to 97%. Price decline offsets Specialty Materials volume growth In line with Corning’s guidance, Specialty Materials sales grew 10% sequentially due to the launch of new mobile phones. However, on a year-on-year basis, sales were flattish. This is because of the continued decline in price of Gorilla Glass, which offset the high volumes experienced in the third quarter. As you might recall, in the first quarter this year, Gorilla Glass faced sharp price declines due to contract re-negotiations at a time of high competition. In order to maintain its market position, Corning had to reduce its prices. The low price also impacted Specialty Materials’ profitability, which declined 20% year-on-year. During the third quarter earnings call, Corning announced that it is planning to launch Gorilla Glass 4 on November 20, 2014. Gorilla Glass 4, which possesses “ dramatically improved performance characteristics” compared to its predecessor, has already begun to be used by Corning’s customers. Corning is betting on Gorilla Glass 4 to help moderate the price declines experienced during the third quarter. We believe that the early adoption of Gorilla Glass 4 bodes well for Corning’s Specialty Materials segment since it will help bolster fourth quarter volume, which is expected to be tempered by the absence of new product launches. Separately, it is worth mentioning that Gorilla Glass’ has been gaining popularity in the automotive industry. BMW recently awarded Corning’s Gorilla Glass for Automotives with the BMW Supplier Innovation award. Gorilla Glass is used in the BMW i8 as an acoustic glass partition to shield sound from the rear engine. The selling point for Gorilla Glass is that it is 50% lighter than the conventional soda lime glass used in windshields, sidelites, sunroofs, and backlites. This helps automakers achieve the objective of reducing vehicle weight in order to facilitate fuel efficiency. However, Corning may not see a significant impact on revenues from Gorilla Glass sales to the automotive industry in the short term due to its exposure to a limited number of customers. But the award from BMW does add to its credibility, which may lead to adoption by other automakers in the long term. 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 Difficult Operating Environment Leads To A Lacklustre Q3 For Kraft Foods
  • By , 10/30/14
  • tags: KRFT
  • In our pre-earnings article for Kraft Foods Group (NYSE: KRFT), we had reflected on how rising commodity costs will make it difficult for the company to defend its gross margins. This has proved to be the case, as gross profits in Q3 2014 declined 13.1% when compared to the figures in Q3 2013. Kraft’s Q3 2014 EPS came in at $0.74 a share, a cent down from the Bloomberg Businessweek analysts consensus estimate of $0.75. This included a 3¢ loss on account of market movements affecting its post-employment benefit plans corpus. Unfavorable volume changes due to price increases and changes in consumer behavior, led the net revenues to fall from its Q2 level of $4.75 billion to $4.4 billion. Our valuation of Kraft Foods Group stands at $66 a share compared to a market price of ~$57. See Our Complete Analysis For Kraft Foods Group Rising Commodity Costs The rise in commodity prices affected the cheese products sales most badly. Milk prices hit a record high in September at $25.00 per unit for Class III milk futures. This is 16% higher than the second quarter high of about $21.50. Looking at the price of cheese, after an initial decline in July, there has been an uptrend that has seen it go from $2.00 per unit to $2.40 this quarter. That represents a quarterly increase of 20%. Combined with the increase in the price of milk, this has reduced the cheese divisions profit margin as pricing was done early in expectation that these commodity prices would stabilize, but they continued to be volatile. Sales And Marketing Execution Issues In the Q2 earnings call, the management had hinted at how the stacking up of discount coupons obtained through online promotional activity was leading to the consumers getting more discounts than the company would ideally give. There was also mention of taking a long-term view and favoring product and process innovation to drive sales, rather than resorting to price discounting. This quarter there was some moderation in the effect of such coupon stacking and trade offers. The management commented that it was difficult to curb it sufficiently when the purchasing power of consumers wasn’t sufficiently high. The company reported a double digit decline in its Sales, General and Administrative (SG&A) expenses. In the conference call, the management identified three drivers of this reduction. The first was the decrease in advertising expenditure in Q3, year on year. Secondly, consumer spending declined as in-store activity was less and finally the third cause was the reduction in overheads. What To Look Forward To For The Rest Of The Year We have written in our pre-earnings report that milk prices are expected to cool going into 2015. Based on milk future prices, it could decrease to $18 per unit next year. If this decrease moves ahead in time a bit, Kraft may yet be able to end 2014 on a positive note than an indifferent one. Falling gas prices, it is hoped, will improve consumers ability to spend on food and beverage. As noted by the Kraft CEO, gas prices remain high in certain places whereas they have fallen elsewhere. Kraft has promised action to address execution issues that plagued it this year. These issues were for the most part relating to recalls in cheese products. The company has decided to add more quality experts, conduct audits more frequently and not be pressurized by deadlines to launch products. For 2014, the Trefis model sees revenues of $18.1 billion for Kraft, as opposed to an analysts consensus of $18.3 at Bloomberg Businessweek. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap |  More Trefis Research
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    Earnings Review: Incremental Investments Beginning To Reap Dividends For Ralph Lauren
  • By , 10/30/14
  • tags: RL
  • Luxury lifestyle company, Ralph Lauren (NYSE:RL), posted better-than-expected earnings in the first quarter of fiscal 2015. The retailer posted year-on-year net revenue growth of 4% for the quarter, with the retail segment driven by a direct-to-consumer strategy leading the growth. Operating margin was 100 basis points below last year’s figure of 14.4%, but still higher than guided for by the company. Due to the timing of payments related to incremental investments in growth initiatives, the company was expecting a lower margin but operational discipline and the favorable impact of currency fluctuations helped it achieve a better margin. As a result of challenges facing the company’s wholesale segment and the weak retail environment in the U.S., RL lowered its guidance for fiscal 2015. The company now expects to grow its revenue by about 5-7% for the full year on the back of store expansion, e-commerce operations and investments to support the launch of the Women’s Polo line, implying a downgrade of about 100 basis points. We believe that the company’s revenue growth can accelerate going forward, benefiting from a variety of growth strategies we discuss below. We also expect the company’s profitability to improve over long term, as investments in these growth strategies bear fruit. Efficiencies gained through the improvement of its management information systems should contribute as well. See our complete analysis for Ralph Lauren Retail Sales Lead Top line Growth Retail sales increased by 7% during Q2 fiscal 2015, driven by double-digit growth in international operations and global e-commerce business, and global store expansion. ( (Ralph Lauren Q1 FY15  Earnings Call Transcript, Seeking Alpha, August 2014))  Retail segment operating margin was 13.6%, 80 basis points below that in the prior year period. The drop in margin reflected the company’s expenditures on its global store and e-commerce development efforts, in addition to increased investments in advertising and marketing. Excluding those incremental investments, RL’s  retail profitability improved from the prior year’s level because of its strong international performance. Wholesale revenues increased by 2% to $943 million. Profitability was unaffected in this segment over the quarter as operating margin was flat as the increased profitability of underlying operations was offset by incremental expenditures in advertising and marketing. Future Growth Drivers Looking ahead, RL remains committed to three key initiatives that it believes will drive sales and profits over the next three to five years. The company has intensified the development of its Polo brand. Currently, 60% of the sales made by the company are in its men’s business, the reverse of the usual industry trend where sales are skewed towards women. During fiscal 2014, the company created Polo for women, which it expects to replace the existing Blue Label line for women. Therefore, the sales made from this switch will not be completely incremental. However, in the longer term the company expects the Polo brand to address a much broader market than the Blue Label line. Additionally, the retailer is still in the early stages of executing the expansion of its Polo stores worldwide. It operates 13 Polo stores currently, with plans of opening 15 to 20 more in fiscal 2015. Over the long term, the company believes there is an opportunity to have between 100 and 200 Polo stores worldwide, with a significant concentration in international markets. The second initiative involves the development of the e-commerce segment. In fiscal 2014, e-commerce brought $500 million in revenues. Based on the high growth and the profit creative dynamics of the channel, the retailer will continue investing in this space. At present, the company’s e-commerce operations behave very differently in different geographies. In the U.S., the management pointed out that if a consumer switches from shopping at a brick-and-mortar store to online, it is profitable for the company. However, the company’s e-commerce operations are only starting to achieve scale in Europe. RL will need to make further investments in its European e-commerce business to reach the same level of profitability as in the U.S. Meanwhile, it’s only just launched the e-commerce business in Asia. The company currently operates in Japan and Korea, with investments still ongoing to bring operations online in Greater China and Southeast Asia.The third initiative involves accessories in general and leather goods in particular. The retailer converted footwear from a licensed to owned segment in 2006 and re-opened operations in 2008. At the same time, the company gained direct control of its licensed handbags and small leather goods business. Since then, the leather goods category has grown at an average of 20% annually. Currently, handbags, footwear and leather goods represent less than 10% of total consolidated sales. The company has stated that it wants to grow this category to about 20% of the top-line, which should favorable margin implications as it is a higher margin category than apparel. We are in the process of revising our price estimate for Polo Ralph Lauren, which stands at $174, implying a premium of around 10% to the market price.
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    All Around Growth For Akamai Re-Affirms Our Valuation
  • By , 10/30/14
  • tags: AKAM T FB
  • Akamai’s (NASDAQ:AKAM) third quarter results were strong. The company displayed growth across its reported business segments or geographies. Even better, the growth is likely to continue, given the secular trends of increasing Internet content and traffic, the growing adoption of online streaming services and the ongoing push from network providers to drive data usage. We expect the there to be continued adoption of Akamai’s security services by businesses large and small as content owners and consumer shift online for media consumption and shopping. Overall, Akamai’s Q3 2014 results support our forecast and valuation, which stands at a premium of about 10% to the market. Our price estimate for Akamai stands at $61.70
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    Exxon Q3 Preview: Lower Production and Oil Prices To Weigh On Earnings
  • By , 10/30/14
  • tags: XOM CVX BP PBR
  • Exxon Mobil (NYSE:XOM) is scheduled to announce its 2014 third quarter earnings on October 31. We expect lower crude oil prices to weigh on the company’s upstream earnings growth. Benchmark crude oil prices have declined sharply over the past few weeks on rising supplies and falling demand growth estimates. The average  Brent crude oil spot price declined by almost 8% year-on-year during the third quarter and will negatively impact the company’s crude oil revenues and operating margins. On the other hand,  spot Henry Hub natural gas prices were up more than 11% y-o-y during the last three months, primarily due to lower inventories compared to last year. Since nearly 53% of the total natural gas produced by Exxon’s subsidiaries comes from the U.S., higher Henry Hub gas prices are expected to boost the company’s upstream earnings. In addition to higher natural gas prices in the U.S., we expect Exxon’s earnings to also benefit from better production mix due to higher growth in liquids (crude oil, natural gas liquids, bitumen and synthetic oil) production during the quarter, primarily driven by the ramp up of its Kearl project in Canada and the unconventional plays in the U.S. During the earnings conference call, we will be looking for an update on Exxon’s ongoing new project development, specifically the Kearl expansion and the Hibernia Southern expansion projects in Canada, the Banyu Urip project in Indonesia and the Kashagan oil field in Kazakhstan. Exxon Mobil is the world’s largest publicly traded international Oil and Gas Company. It generates annual sales revenue of more than $420 billion with a consolidated adjusted EBITDA margin of ~14.7% by our estimates. We currently have a  $107/share price estimate for Exxon Mobil, which values it at around 13.4x our 2014 GAAP diluted EPS estimate of $7.96 for the company. See Our Complete Analysis For Exxon Mobil Lower Hydrocarbon Production We expect Exxon’s upstream earnings to decline during the third quarter on lower crude oil prices and negative hydrocarbon production growth, primarily due to the expiry of the Abu Dhabi onshore concession agreement. The company lost its 75-year rights to the emirate’s oldest producing fields this January, when the Second World War-era contract expired. These oilfields together account for around 50% of Abu Dhabi’s total oil output (almost 3 million barrels per day) and hold more than a 100 billion barrels of oil and oil equivalent. Until a new concession agreement is signed, Abu Dhabi National Oil Company (Adnoc) will be the sole-risk shareholder of the Abu Dhabi Company for Onshore Oil Operations (Adco), the current concession’s joint-venture operator. As a result, Exxon and other foreign oil companies, which were previously involved in the concession, will not be able to lift equity oil or book reserves from these oil fields. During the first half of this year, Exxon’s average daily hydrocarbon production declined by around 5.6% y-o-y, primarily due to the expiry of the Abu Dhabi concession agreement. We expect to see a similar variance in volumes during the third quarter as well. Better Production Volume Mix Exxon’s total hydrocarbon production can be broadly split into two categories – liquids, which include crude oil, natural gas liquids, bitumen and synthetic oil, and natural gas. Liquids made up more than 60% of Exxon’s total hydrocarbon production in 2009. However, its percentage contribution declined significantly after the company acquired XTO for $41 billion in 2010, which increased its natural gas production by 31% y-o-y that year. More importantly, most of the increase came from the U.S., where natural gas prices have been significantly depressed by international standards due to a sharp rise in production from unconventional sources. (See:  Key Trends Impacting Natural Gas Prices In The U.S. ) Liquids have generally become more profitable to produce than natural gas because of higher price realizations. Last year, Exxon sold liquids at an average price of around $95 per barrel, compared to just around $41 realized per barrel of oil equivalent (BOE) of natural gas. This is the reason why the company has been trying to improve the proportion of liquids in its production mix over the last couple of years. Last year, liquids made up 52.7% of Exxon’s total hydrocarbon production, up from 51.5% in 2012. During the first half of this year, Exxon’s total liquids production increased by over 40,000 barrels per day, or almost 2% y-o-y, excluding the impact of the Abu Dhabi onshore concession expiry. On the other hand, its natural gas production declined by more than 900 million cubic feet per day, or more than 7.3% y-o-y. Although, lower weather-related demand in Europe exaggerated the decline in natural gas production during the first quarter, we expect the overall trend of improving volume-mix to manifest itself in Exxon’s third quarter earnings as well. The company expects its liquids production to grow by ~2% y-o-y and natural gas production to decline by around 3% for the full year. This is expected to drive better price realization per barrel of oil equivalent and improve its unit profitability. Key Upstream Project Updates During the third quarter earnings call, we will be looking forward to an update on Exxon’s Kearl expansion project in Canada. Located 70 kilometers north of Fort McMurray, the Kearl oil sands project holds an estimated 4.6 billion barrels of recoverable bitumen resource and is expected to remain in production for as long as 40 years. The production of mined diluted bitumen from first of the three froth treatment trains at the project began in April last year. The initial development phase of the project is currently being ramped up and produced 66,000 barrels of bitumen per day during the first half, up from 47,000 barrels per day in fourth quarter of last year. Exxon is also working on the expansion of the Kearl oil sands project, which is expected to boost its production capacity by a 100,000 barrels of gross production per day by next year. At the end of the first quarter, the project was more than 80% complete. Beyond the expansion phase, further debottlenecking of the Kearl oil sands project is expected to boost its total gross output to around 345,000 barrels per day. In addition to the Kearl oil sands project, we will also be looking for an update on the giant Kashagan project, which is also expected to play a crucial role in Exxon’s future production ramp-up plans. The company officials announced during the last earnings call that production from the project, which was ramped up to almost 80,000 barrels per day in September last year, continued to remain shut due to leakage in a gas pipeline connecting one of the drilling islands to the onshore processing facility. The officials declined to provide a timeline for the restart of production from Kashagan, as the operator is currently investigating the issue. However, a recent report suggested that the project might not produce any oil until at least 2016. The mega oil project located in Kazakhstan’s zone of the Caspian Sea has already been plagued by significant delays and cost overruns due to several technical issues. This has also delayed returns from the project thereby increasing the amount of time that participating oil companies such as Exxon Mobil will have to wait in order to generate a desired rate of return upon their investments. (See:  Kashagan To Continue To Weigh On Exxon’s Returns ) View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Higher Steel Prices And Cost Reductions Boost U.S. Steel's Q3 Results
  • By , 10/30/14
  • tags: X MT AA
  • U.S. Steel (NYSE:X) released its third quarter results on October 28 and conducted a conference call with analysts on October 29. The company’s year-over-year quarterly revenues rose 11% to $4.59 billion. The company’s income from operations in Q3, excluding the impact of one-time items, rose sharply to $479 million, as compared to $113 million in the corresponding period last year. As expected, the improvement in U.S. Steel’s results in the third quarter was driven by higher realized prices and volumes for its Flat-rolled Products division and the company’s efforts to reduce operating costs across all its business segments. See our complete analysis for U.S. Steel Operational Performance Steel shipments for the Flat-rolled Steel segment rose to 3.69 million tons in Q3 2014 from 3.43 million tons in the corresponding period last year. The average realized price rose 3.3% year-over-year to $777 per ton in the third quarter, from $752 per ton in the corresponding period last year. This was expected, given the improved demand and pricing  environement for steel in North America, as compared to the corresponding period a year ago. The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. This indicates strong manufacturing activity in the U.S., which is reflected in U.S. Steel’s third quarter results. Steel demand in the North American Free Trade Agreement (NAFTA) region, which consists of the U.S., Canada and Mexico, is expected to grow by 3.8% in 2014, as compared to a 2.4% fall in demand in 2013. In addition to the strong price realizations and shipment volumes, lower raw materials cost, lower repairs and maintenance and other operating costs boosted the segment’s operating income to $347 million in Q3 2014, significantly higher than the figure of $82 million reported in the corresponding period last year. The U.S. Steel Europe (USSE) segment’s shipments rose to 987,000 tons in Q3 2014 from 861,000 tons in the corresponding period last year. However, realized prices for the segment declined roughly 6% to $671 per ton in Q3 2014, from $714 per ton in corresponding period last year. The fall in prices is indicative of weak demand in Europe, due to economic weakness. This is exemplified by the Manufacturing PMI for the Eurozone, which has faltered somewhat lately. The Manufacturing PMI for the Eurozone, which stood at 54 for January 2014, has declined to 50.3 for September. Sluggish manufacturing activity in the Eurozone was reflected in U.S. Steel’s third quarter results. Despite a fall in realized prices, the segment’s income from operations improved to $29 million in Q3 2014 as compared to a loss of $32 million in Q3 2013. This was primarily because of lower raw materials cost, lower repairs and maintenance and other operating costs. The Tubular Steel segment’s shipments fell to 428,000 tons in Q3 2014 from 459,000 tons in Q3 2013. This was primarily as a result of the idling of two facilities producing tubular steel by the company earlier on in the year. The  segment’s average realized price rose 1.5% to 1,567 per ton in Q3 2014 from 1,543 per ton in Q3 2013. In addtion to higher realized prices, lower repairs and maintenance and other operating costs boosted the segment’s income from operations to $69 million in Q3 2014, from $49 million in Q3 2013. The Carnegie Way The company management provided updates on The Carnegie Way, an ongoing initiative that is aimed at creating value by enhancing efficiency, reducing costs and boosting profitability. The company provided some details about the break-up of areas where Carnegie Way benefits have been realized. Improvements in manufacturing processes, supply chain and logistics as well as reductions in selling general and administrative expenses are the main areas where the benefits of initiatives undertaken under The Carnegie Way have been realized. Projects undertaken under this  initiative in the third quarter will translate into an improvement in margins to the tune of $85 million in 2014. In addition to the previously announced benefits under this initiative, the total margin improvement as a result of The Carnegie Way will total $495 million for 2014. Outlook The Flat-rolled Products segment’s operating income is expected to fall in the fourth quarter as as result of planned maintenance activity, which is expected to raise repairs and maintenance costs by approximately $150 million. Shipment volumes are expected to decline by nearly 10% from Q3 levels, as shipment volumes for the segment will no longer include the results from U.S. Steel Canada. The results of the company’s Canadian unit from September 16 onwards will be reported separately, as it will undergo restructuring. The USSE segment’s will report better results sequentially in the fourth quarter after scheduled maintenace activity was completed in Q3. Shipments for this segment are expected to rise in Q4. The results for the Tubular Steel segment will be boosted by the U.S. International Trade Commission’s (ITC) recent ruling in the Oil Country Tubular Goods (OCTG) trade case. The ITC ruled that anti-dumping duties will be levied against OCTG imports from South Korea, India, Taiwan, Turkey, Ukraine and Vietnam. OCTG imports from these countries account for the bulk of the imported energy-related tubular steel goods in the U.S., which were affecting the sales and realized prices of the Tubular Steel divsion. The ITC ruling, along with an improved product mix as a result of a reduction in the company’s exposure to welded line pipe, will result in an improvement in realized prices for the segment in Q4. However, shipment volumes will decline as a result of the idling of the McKeesport and Bellville facilities earlier on in the year. 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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    Motorola Solutions' New Products Likely To Boost Sales
  • By , 10/30/14
  • tags: MSI NOK
  • Motorola Solutions (NYSE:MSI) recently introduced a host of new mobile communication devices, catering to enterprises, public safety personnel and individual buyers. For enterprises, the company introduced a 4.7-inch touch computer called Symbol TC70, which runs the Android KitKat operating system and combines the features of a smartphone with the high performance and durability demanded by enterprises. For public safety personnel, the company introduced another 4.7-inch device called the LEX L10 Mission Critical LTE Handheld, which delivers mission critical capabilities to safety personnel to communicate in a secure, smarter and faster manner. This is Motorola Solutions’ first Public Safety LTE device featuring its new Public Safety Experience (PSX) user interface, which is capable of intelligently prioritizing information provided to the responder. In addition to these devices, the company also introduced a new simple, slim and portable push-to-talk communication device called MOTOTRBO SL300 and a two-way radio designed specifically for serious outdoor enthusiasts, called the Motorola Talkabout MU350R. The new devices are likely to help boost the company’s product sales going forward, which have declined consistently over the last few quarters after an already sluggish last year. Motorola’s government business suffered the most, due to global macroeconomic uncertainties and a higher-than-expected overhanging impact of narrowbanding in North America. Now that the company has completed the sale of a major chunk of its enterprise business to Zebra Technologies, it will be able to focus on its core areas such as public safety devices, software products and network infrastructure. With gradually improving macroeconomic conditions, this should translate into meaningful growth in sales going forward. Our  $64 price estimate for Motorola is in line with the current market price.
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    American & United Plan To Add Capacity As Solid Demand & Lower Fuel Prices Lift Their Q3 Results
  • By , 10/30/14
  • tags: AMR
  • American Airlines (NASDAQ:AAL) and United Continental (NYSE:UAL) – the two largest U.S. carriers by passenger traffic – plan to increase their flying capacity in the fourth quarter as solid demand for air travel lifted their third quarter results. The third quarter results of these carriers also received a boost from lower jet fuel prices, as global crude oil prices dipped during the quarter. We figure this growth oriented capacity stance and lower global crude oil prices will help lift results of both American and United in the coming quarters as long as demand for air travel keeps growing. Additionally, in our opinion, American and United are adding capacity to their networks in a disciplined manner, which is essential for the airline industry to remain profitable as a whole. Read here to understand why airlines need to add capacity with restraint to maintain overall industry profitability . American’s Q3 Earning Analysis American reported a profit (excluding special items) of $1.2 billion in the third quarter, up nearly 60% from the same period last year. In our view, this solid profit performance from the carrier reflects gains from the US Airways merger, which has expanded American’s network, passenger traffic and income. This solid third quarter performance comes on the back of equally good results in the first two quarters of 2014. Steady demand for air travel in both domestic and many international markets has played a key role in enabling American to grow its profit so far this year. In addition, lower jet fuel prices during the third quarter lowered American’s fuel costs, which constitute the single largest cost item for an airline accounting for nearly one-third of total operating costs. This tailwind from lower fuel costs in the third quarter boosted American’s profit. The carrier also grew its top line on gains from from capacity expansion. Looking ahead, American plans to increase its flying capacity by about 2% on a year-over-year basis in the fourth quarter. The carrier also anticipates to maintain a healthy pre-tax margin of about 10-12% in the fourth quarter. In all, American looks set to post a highly profitable 2014 after spending the past few years in bankruptcy. We currently have a stock price estimate of $40 for American, approximately in line with its current market price. See our complete analysis of American here United’s Q3 Earning Analysis Separately, United carried forward its solid second quarter performance in the third quarter reporting a profit of $1.1 billion excluding special items. The carrier started 2014 with a huge loss but quickly improved its revenue performance by restructuring its Pacific network . The carrier also undertook several cost cutbacks, which have controlled growth in its non-fuel costs. Through these two measures, United was able to lift its profit performance in the second and third quarters. Additionally, United’s fuel costs also declined in the third quarter, boosting its profit. The decline in global crude oil prices has been considerable as overall fuel costs for both United and American fell despite both these carriers adding capacity. Looking ahead, we figure as Southwest, Delta, Alaska and American have, United could begin paying dividend to its shareholders if it is able to retain this solid profit performance in coming quarters. The carrier has been able to control growth in its non-fuel costs, especially maintenance and distribution costs. Fuel costs are also likely to remain suppressed due to softness in global crude oil prices. So, if the demand environment remains strong and United adds capacity strategically to take advantage of this growing demand, then chances of United maintaining its strong profit performance in the coming quarters are high. So, we could see United initiating dividend payments to its shareholders in the coming months. We currently have a stock price estimate of $49.50 for United, approximately 5% below its current market price. See our complete analysis of United 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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    ADP’s Employer Services And Interest From Client Funds Grow On New Business Bookings
  • By , 10/30/14
  • tags: ADP PAYX
  • Automatic Data Processing (NASDAQ:ADP) announced its first quarter fiscal year 2015 (fiscal year ends Jun 30) results on October 29 2014. The Human Capital Management company reported a 9% year-on-year increase in its revenue, reaching $2.6 billion. New business bookings helped drive growth across ADP’s Employer and also led to an increase in interest earned from client funds. ADP’s net profits from continuing operations grew 12% due to productivity improvements. We should recall that ADP’s Dealer Services segment had recently been spun-off into an independent entity named CDK Global. Revenues from CDK Global are presently reported in ADP’s income statement as a part of its income from discontinued operations net of spin-related costs. During its first quarter earnings call, ADP reiterated its outlook for fiscal year 2015. The management expects revenues to grow 7-8%, with new business bookings increasing 8-10%. Employer services are expected to grow by 6-7% driven by a 2-3% growth in pays per control metric. Additionally, PEO services are expected to grow 13-15%. Interest on funds held for clients is expected to increase $5-$15 million based on an anticipated growth in average client funds balances of approximately 5-7%. However, this may be partially offset by decline of up to 10 basis points in the expected average interest yield to 1.7-1.8%. See our complete analysis of ADP here New business bookings drive revenue growth Companies of all sizes are nowadays looking to outsource their Human Resource (HR) functions in order to concentrate on their core business. Outsourcing also helps reduce many overhead costs, such as labor costs, for the company. Additionally, Human Capital Management companies such as ADP, because of their expertise in the domain and large scale, are able to provide better services to cater to the needs of employees and help in recruiting and retaining the right personnel. In the first quarter fiscal year 2015, ADP benefited from the trend and saw an 11% year-on-year increase in new business bookings. This helped drive its Employer Services segment, which grew 7%. We believe that ADP is likely to see a continued increase in business bookings, given that the global HR Outsourcing industry is expected to grow at an average rate of 12.3 % through 2018 as more and more companies outsource their HR functions. The addition of new business increased ADP’s average client fund balances by 7% year-on-year, which more than offset the 10 basis point decline in average interest yield, leading to a 1% increase in interest earned from client funds. The increase in interest earned from client funds comes after having declined every quarter since 2008 due to the low interest rate environment in the U.S., which was driven by the Quantitative Easing program. The Fed recently announced that it will be ending the Quantitative Easing program this month and will continue to maintain the low interest rate environment, within a range of 0-0.25%, for a “ considerable period of time ”. This has raised speculation of when the Fed will actually begin to increase rates. Earlier on, some sources pointed towards an increase around mid-2015. Till the time interest rates do not rise, ADP’s interest earned from client funds will continue to decline, if it isn’t offset by significant growth in client fund balance. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    EA Logo
    New Edition Of Sports Titles & Strong Digital Growth Drive Electronic Arts' Q2 Revenues
  • By , 10/30/14
  • Electronic Arts (NASDAQ:EA) continued its streak of strong quarterly earnings, as it delivered excellent revenue figures in its second quarter report, which was released on October 28. The company reported net non-GAAP revenues of $1.22 billion, up 17% year-over-year (y-o-y) and 7% above the given guidance. The company’s non-GAAP diluted EPS was $0.73, up 121% y-o-y. The impressive quarterly performance was greatly boosted by the 3 major titles: Madden NFL 15, FIFA 15 and The Sims. Apart from these major titles, Battlefield 4, Titanfall, FIFA 14 and Plants Vs Zombies Garden Warfare performed pretty well in their respective genres. In the second quarter, gamers played EA’s online modes for more than 1.9 billion hours on the console and PC. The company accounted for nearly 14% of global video game software sales last year. Our $36.76 price estimate for  Electronic Arts’ stock is 5% below the current market price. See our complete analysis of Electronic Arts stock here During the second quarter, EA launched two of its highly anticipated core sports titles: Madden NFL 15 and FIFA 15. Apart from games for consoles and PC, EA’s mobile games were another highlight of the quarter. Moreover, EA’s net non-GAAP digital revenues grew 30% y-o-y to $453 million, which is 37% of the net revenues in the second quarter. Impressive Start For EA’s Sports Titles EA is the leader in sports genre games, with FIFA and Madden NFL accounting for 67% of the total sports title sales worldwide in 2013. Both the titles are the most popular and most widely played sports games in their respective regions.  Madden NFL 15 was released in August and was one of the top selling games in September. It went off to become the most successful Madden titles in recent years, as more than 89 million online Madden 15 games were played, up 48% y-o-y. Within just five days of the release,  Madden NFL 15 was able to outperform all other titles and topped the charts as the highest selling game in August, according to August NPD report. The strong demand for Xbox One Madden NFL 15 bundle boosted the sales of  Microsoft ’s (NASDAQ:MSFT) Xbox One in August, but the game’s sale was still stronger on Sony’s PlayStation 4. The annual edition of the popular soccer simulator, FIFA 15 was released in the last week of September. Within one week, the title was able to break launch records for the franchise, as the title reported nearly 50% more players online compared to its previous version. In September,  Madden NFL 15 and FIFA 15 grabbed the #2 and #3 spot in the top 10 titles list in terms of units sold. The ultimate team modes of all the major sports titles witnessed tremendous growth, with a 40% increase in the ultimate team player base over fiscal 2014. Madden NFL mobile and FIFA 15 ultimate team for mobile were also launched for the iOS and Android in the second quarter. FIFA online 3 was one of the top mid-session games by revenue this quarter, as the online games’ revenue grew 89% y-o-y. EA’s Strong Line-up To Drive Revenues In The Coming Quarters Apart from its core sports franchises, Electronic Arts is confident of its other catalog titles to push up the revenues in the coming quarters. The Sims, Titanfall and Battlefield 4 are some of the popular titles that have boosted the company’s net revenues in this quarter. For the next two quarters, which are generally the higher grossing period for the company, EA expects the sales of Madden and FIFA to accelerate, accounting for the majority of the company title sales. Apart from them, EA recently released its  NBA LIVE 15, which is highly popular in the U.S. among basketball fans. Moreover, the company is all set for the launch of Dragon Age: Inquisition in November. The company is trying to enter into First Person Shooter (FPS) genre with the  Titanfall and Battlefield franchises. Battlefield 4 continues to attract more players with its regular content updates and extended services. The company plans to release the fifth expansion pack, Final Stand, in the third quarter. However, the release of  Battlefield Hardline, which was originally targeted to launch in October, has been delayed to March 2015. EA’s exciting line up extends till the next holiday quarter, with the return of Need For Speed, Star Wars and Mass Effect franchises. Success Of Digital Content Boosts Margins As the gaming industry shifts towards digitalization, EA’s dependence on its premium full game downloads and extra downloadable content (DLC) increases. The company’s mobile games generated $115 million this quarter, up 11% y-o-y. Out of this, 91% revenues came from DLC and advertising. On the other hand, full game PC and console downloads generated $94 million in revenues, up 71% y-o-y. As a result, EA’s net digital revenues grew 30% to $453 million. As a result, the company’s gross margins improved 440 basis points to 66.1%, partially boosted by the launch of The Sims 4. Looking at the success of digital content and a strong line-up of core titles, the company raised its fiscal 2015 revenue guidance from $4.1 billion to $4.175 billion. 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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    Baidu Continues Its Good Run In 2014 Into The Third Quarter
  • By , 10/30/14
  • tags: BIDU
  • Chinese Internet search pioneer Baidu (NASDAQ: BIDU) continued its good run into Q3 2014 by posting a very healthy set of numbers. It met the Bloomberg Businessweek analysts consensus estimate of $ 2.2 billion in quarterly revenues. On the earnings per share (EPS) front, it out did expectations by reporting EPS of $1.79 per share for the quarter, 12 cents higher than the  Businessweek analysts consensus and a 6 cents improvement over the second quarter of this year. This quarter also marks the overtaking of PC traffic by mobile traffic on Baidu’s network. We have a $225 per share valuation of Baidu’s stock, which is at par with the market price. Robust Revenue Growth Revenue had followed a high growth path for Baidu in the previous quarter as well. In Q2 2014, average revenue per online marketing customer was 50.3% higher than its corresponding figure in Q2 2013. This increase is what had led to revenue growth as the increase in number of customers was absymal in comparison, which increased only 4.3% between the second quarters of 2013 and 2014. The low rate of increase in the number of customers was the consequence of the company tightening its criteria in terms of customers. During the second quarter earnings call, the company’s CEO had suggested that most of this selectivity in customer acquisition was over and that customer acquisition should pick up going ahead. In the third quarter, the company delivered on this promise and the number of active online marketing customers increased 6% over Q2. Revenue per customer continued its historically strong trend and increased 7% over the previous quarter. Rising Costs The main component of Baidu’s expense structure is Traffic Acquisition Costs (TAC). These are the costs related to sourcing and managing internet traffic through Baidu’s search engine and network. In Q2 2014, this figure was 12.7% of revenues, which represents a ~1% increase year on year. The increase was explained by the CFO of the company, which was the result of increased contribution from contextual and mobile services. Promotional activity associated with one of Baidu’s websites (Hao123),  an online listings directory that is also the fifteenth most popular website in the world, also added to these costs. In the third quarter, TAC increased marginally to 12.9% of revenues.The reasons for the increase were however the same as contextual and mobile adds added tot the TAC as before. Promotion of Hao 123 continued to add to TAC. The company suggested that going ahead there will yet be more increases in the TAC because of Baidu’s objective to grow contextual ads, which is one of the contributors to TAC. SG&A expenses had nearly doubled in Q2 on a year on year basis, to reach $346 billion. This was on account of the increase in promotional activity for mobile products. It continued a similar trend in this quarter, rising 95% year on year. Apart from the same reason as in the previous quarter, this time around development of sales channel and branding also played important roles. Going ahead, the Online-to-Offline(O2O) businesses such as group buying, where the service/product delivery is through brick and mortar channels, is expected to make this shoot up even further. While R&D costs increased ~85% year-on-year in Q2 2014, in the third quarter it slowed down to 68% year on year. As with the last quarter, the rise in R&D costs was on account of increase in the number of personnel employed. Other smaller contributors to the costs, such as content, bandwidth and depreciation costs showed modest increases this quarter, not unlike the previous quarter. Fourth Quarter Guidance And Estimates Baidu gave a guidance of between $2.25 and $2.32 billion for its fourth quarter revenues. As per our model, Baidu 2014 revenues have been forecast to $7.62 billion. Bloomberg Businessweek analysts consensus estimate for Q4 and full year 2014 revenues are $2.3 billion and $ 7.9 billion respectively. 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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    Higher Profitability In South America And Asia-Pacific To Boost AB InBev's Q3 Results
  • By , 10/30/14
  • The world’s largest brewer  Anheuser-Busch InBev (NYSE:BUD) is scheduled to report its third quarter results on October 31. Last quarter saw AB InBev’s volumes rise 1% on the back of strong FIFA World Cup activation worldwide. Although the impact of the large media and marketing investments centered on the World Cup held in the second quarter should also slightly overflow to the third quarter and boost net volumes, anticipated fall in volumes in some of the developed markets could stall organic growth. However, aside from organic growth, the company will depend on incremental volumes from newly acquired businesses to fuel year-over-growth this quarter. In addition, AB InBev has a history of deriving cost synergies and improving profitability, and we expect higher profits in South America and Asia Pacific this quarter to lift overall margins. The brewer already boasts high industry-leading operating margins, with the figure at 46.7% through the last four quarters. In contrast, rivals Molson Coors and Heineken posted margins of 16.6% and 8.3% respectively during this period. What Could Be The Impact Of Grupo Modelo And Oriental Brewery? Anheuser-Busch InBev has gone through a series of mergers and acquisitions in its history, deriving strong inorganic growth by expanding into newer markets and strengthening operations in existing business units. Q3 results will be crucial in highlighting growth in the Mexico business, more than a year after the acquisition of Grupo Modelo in June 2013, and the impact of the Oriental Brewery takeover in April this year, on Asia-Pacific profits. Grupo Modelo: Latin America is the most profitable business unit for the brewer, with adjusted EBITDA margins of around 52% last year, compared to 40% for the overall company, by our estimates. This is mainly because 40% of Anheuser-Busch InBev’s beer production capacity is concentrated in this region, allowing the brewer to enjoy low labor and raw material costs as well as economies of scale in the region. As Latin America is also a high volume market for the company, producing beer near the end market also reduces additional costs of transportation and distribution. Q2 2013 was the last quarter before Anheuser completed the acquisition of Grupo Modelo, and by cutting duplicate expenses such as administrative, and sales and marketing costs, the latter’s Mexico business’ margins expanded by a massive 1074 basis points year-over-year in this year’s Q2. According to us, cost reductions in Mexico could drive margin expansion again this quarter. Anheuser remains committed to its aim of delivering cost synergies of at least $1 billion by the end of 2016, with the majority of that by the end of next year. The total cost savings relating to Grupo Modelo till Q2 stood at $750 million. If Mexico margins rise to around 52% in a couple of years, similar to the margins reported by the rest of Latin America, there could be a 3% upside to our valuation for AB InBev. Oriental Brewery: This quarter is the second full quarter for Oriental Brewery under Anheuser-Busch InBev’s ownership, and not only is the South Korean brewery expected to add incremental volumes over the previous year’s third quarter, but also improve profitability for the group. Together with Siping Ginsber in China, additional volumes from Oriental Brewery increased Anheuser’s Asia Pacific volumes by almost 30% in the last quarter. As demand for beer in South Korea is expected to remain strong due to increasing disposable incomes, the country’s beer market is estimated to grow at a CAGR of 3% through 2017. This could further boost volumes for Oriental Brewery, which holds over half the net market volumes with beer brands such as Cass. But what we would like to highlight is the possible growth in profits this quarter from Asia-Pacific, due to the inclusion of Oriental Brewery. South Korea forms only 1% of the Asia-Pacific population but over 5% of the beer industry’s profits in this region, owing to higher sales of premium beer, which tend to carry heftier margins. Due to a favorable product mix and strong volume growth, Anheuser’s EBITDA in South Korea rose 20% in Q2 and could rise again this quarter. We have a  $113 price estimate for Anheuser-Busch InBev, which is roughly 3% above the current market price. See Our Complete Analysis For Anheuser-Busch InBev Russia Could Drag-down AB InBev’s Top Line In Q3 Europe is another important market for Anheuser-Busch InBev, constituting 12% of the net revenues last year. Russia is the largest market for Anheuser-Busch InBev in the European zone, constituting over 24% of the volumes for this division and around 3% of Anheuser’s net volumes. Due to geopolitical tensions in the country invoking negative consumer sentiment, spending in general and on beer could decline. In addition, although markets such as U.K., Germany and Belgium are slowly recovering after the double dip recession, seeing how per capita consumption is already relatively high in Europe, growth in these markets for Anheuser could be limited this quarter. Europe forms less than 6% of Anheuser’s valuation by our estimates and we estimate sluggish beer performance in the continent going forward. After declining 8% in 2013, beer volumes in Russia are expected to fall by a mid-single-digit percent in 2014, according to Carlsberg, a leading brewery. Russia volumes for Anheuser fell 10% in the first half of 2014, after declining 14% last year. Ukraine is also a top ten market for Anheuser and is expected to witness a considerable volume declines in the second half of the year owing to the geopolitical tensions, following a 27% year-over-year volume decline in Q2. With almost one-third of Anheuser’s Europe volumes vulnerable to political impacts, we forecast the brewer’s volumes to remain slightly negative through the end of the decade. As consumers ditch beer for other alcoholic beverages such as spirits, ciders and wine, and with a gradual shift away from a massive beer-drinking culture in the developed markets, due to growing health and wealth concerns, Anheuser’s beer volume growth in North America and Europe might be limited in Q3. But volumes in the emerging markets of South America and Asia-Pacific could more than offset this decline this quarter. Moreover, higher proportionate sales from these regions should lift the net profitability for AB InBev due to the broader margins in these low-cost high volume operating units. 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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    Volkswagen Earnings Preview: Luxury Divisions To Drive Margin Expansion In Q3
  • By , 10/30/14
  • Volkswagen AG (OTCMKTS:VLKAY) is on its way to cross record volume sales of 10 million this year, and possibly even overthrow  Toyota Motor Corp (NYSE:TM) as the world’s largest automaker this year itself. The numbers so far this year support this estimate. Volkswagen’s deliveries have risen 5.3% year-over-year in the first three quarters, and if this growth rate continues in Q4, overall deliveries for the company will rise to over 10.2 million units in 2014. This figure still excludes volumes for the commercial vehicle brands, MAN and Scania, which could then increase net volumes by around 2%. Toyota, on the other hand, has witnessed only a 2.8% rise in volumes through September, allowing Volkswagen to narrow the sales gap to roughly 215,000 units. Toyota has stressed on its focus on building better cars and improving profits, rather than selling more volumes. While the company’s operating margins for the automotive division stood at 10% last quarter, Volkswagen’s automotive margins were only 6.3%, on the back of poor volumes and operating margins of only 2% for its own branded passenger vehicles. Volkswagen might not have let up on investing aggressively in its own passenger vehicle division this quarter again, and coupled with the fact that deliveries for this division remained flat in Q3, segment margins could remain low and drag down the automaker’s overall profitability. Volkswagen expects margins to range between 5.5-6.5% this year, and with low profitability for its namesake passenger vehicle division, which constitutes just over 10% of the company’s valuation according to us, much of the margin expansion in Q3 will be expected to come from luxury vehicle brands Audi, Porsche and Bentley. In view of the scheduled announcement of Volkswagen’s Q3 results on October 30, we focus on what could drive the company’s margin expansion, if at all, this quarter, apart from a rise in volumes. We have a  $48.14 price estimate for Volkswagen AG, which is roughly 16% above the current market price. Automotive stocks have in general remained weak in the last three months, and Volkswagen’s stock has fallen 12% during this period, amid the news of China fines, and slowing automotive activity in South America and Eastern Europe. See Our Complete Analysis For Volkswagen AG Expect Audi, Porsche And Bentley To Drive Profitability In Q3 Audi, Porsche and Bentley together formed 16% of the vehicle deliveries for Volkswagen last year, but these divisions contributed over 60% to the net operating profits for the automobile division, mainly due to the comparatively higher product prices. Our estimated EBITDA margins for Audi, and Porsche and Bentley in 2013 were 22% and 40% respectively, while the overall margins for the company stood at only 13%. The automaker’s profit growth this quarter again will depend on its premium car segments, amid flat volumes for its own passenger vehicles and anticipated lower volumes for commercial vehicles. Volkswagen’s own commercial vehicles delivered 4% fewer vehicles in the third quarter, and together with MAN and Scania, could lower the top line and reduce profits for the company this quarter. This is mainly as volumes remained low in Europe in Q3 due to the large-scale pre-buys of the Euro 5 trucks at the tail-end of last year, and slowdown in the commercial vehicle industries in South America amid tough economic conditions, especially in Brazil. Audi grew vehicle deliveries by 8% in the third quarter, mainly on the back of higher sales in China and the U.S., the world’s two largest premium automotive markets. Audi enjoys the lead in China’s automotive market over its compatriots BMW and Mercedes-Benz, with over 30% volume share, according to our estimates. In fact, Audi has sold more than double the vehicles sold by Mercedes-Benz in China so far this year. According to China Association of Automobile Manufacturers, the country’s automotive market will grow by 8.3% this year, down from the 13.9% growth seen in 2013. But luxury demand in the country still remains strong and this segment is expected to grow by 13.5% or so in 2014, fueled by increasing disposable incomes and high popularity of entry-level luxury sedans. On the back of its stronghold in the Asian country, Audi is expected to sell higher volumes this year. The luxury brand is already the market leader and has further expanded its share in China, by improving volume sales by 16% through September in the country, outpacing the estimated growth in the overall premium vehicle segment in the country so far this year. On the other hand, Porsche, which sells mostly in North America, witnessed an impressive 25% growth in vehicle deliveries in Q3, buoyed by rebounding Western European markets and high growth in the Asia-Pacific region. Porsche volumes also grew 12% in the U.S., its single largest market, while the country’s overall premium vehicle market grew 4% through September. Although Porsche constituted only around 2% of the net volumes for Volkswagen this quarter, we expect the brand to significantly boost the company’s operating profits. In fact, Porsche earns industry-leading profit per vehicle, almost equal to the revenue per unit for a non-luxury passenger car. Last year as well, while Porsche and Bentley together formed only 2% of the overall unit sales, the two high-end luxury vehicle brands formed 22% of the net operating profits for the automobile divisions, owing to the relatively higher price points. Volkswagen Looks To Expand Margins Through Lower Costs Of Production Audi sells around one-third its volumes in China and Porsche sells around 26% of its volumes in the U.S., and with premium vehicle demand in both these countries remaining high this year, contribution of the luxury vehicle divisions to overall Volkswagen deliveries has increased. This favorable product mix should be one of the main reasons if the automaker manages to expand its profitability this quarter, despite the slowdown in sales for the Volkswagen branded passenger and commercial vehicles, Scania and MAN. Going forward, another reason why Volkswagen’s margins could expand is the increasing implementation of the Modular Transverse Toolkit (MQB) and Modular Production Toolkit (MPB), creating an extremely flexible vehicle architecture capable of bringing down manufacturing costs. This platform allows the German car maker to standardize its production process for small, medium and long cars. So far the system has been used to manufacture the Volkswagen Golf, Audi A3, Seat Leon and Skoda Octavia, and the company plans to use this system for most cars in the Volkswagen, Audi, Seat and Skoda portfolios in the coming years. The platform enables the company to make enormous cost savings by reducing weight and enabling easy installation of luxury technologies in high volume models, which then allows the automaker to lower the average price of its vehicles. As a result, Volkswagen could not only compete better on a pricing front and further improve volume sales, but the large cost reductions could help boost profits and subsequently cash flow for the automaker in the coming years. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    SSNLF Logo
    Samsung Could Refocus Growth Strategy As Q3 Earnings Plummet
  • By , 10/30/14
  • Samsung Electronics (PINK:SSNLF) posted its smallest quarterly profit in over two years, as its bread-and-butter smartphone business faces its biggest test yet, challenged  by the arrival of Apple’s much awaited large-screen iPhones and increasing competition from well-received budget offerings from Chinese manufacturers such as Xiaomi and Lenovo. The company’s other business divisions had a decidedly mixed quarter. The semiconductor operations did well, aided by strong DRAM and NAND memory shipments, while the consumer electronics division was weighed down by seasonally lower sales for appliances and lower pricing for televisions.  While the company’s quarterly revenues fell by around 20% year-over-year to $45 billion, net income declined by around 49% to $4 billion. Samsung’s cash balance rose to a record high of around $64 billion during the quarter, but we think that it is unlikely that the company will increase its dividends or initiate share buybacks, given its ambitious semiconductor investment plans and its declining smartphone business. Here is a brief look at some of the key trends from the company’s earnings release.
    BCS Logo
    Impact Of Project Transform Evident In Barclays' Q3 Results
  • By , 10/30/14
  • tags: BCS RBS DB UBS JPM
  • Barclays (NYSE:BCS) reported better-than-expected performance figures for the third quarter of the year on Thursday, October 30, with the results validating the British banking giant’s large-scale reorganization plan under Project Transform. The results were peppered with a string of one-time charges, including a £500 million ($800 million) increase in legal provisions to cover ongoing settlement talks over forex manipulation, a £364 million ($580 million) loss on the sale of its Spanish business, and another £170 million ($270 million) in reserves for its PPI-related misgivings. But the positive impact of a £461 million ($740 million) gain on U.S. Lehman acquisition assets and an unexpected £160 million ($255 million) release in reserves for interest-rate product redressals mitigated the impact of these charges on the bottom line to a great extent – making it easy to see the improvement in performance for the bank’s personal and corporate banking as well as Barclaycard divisions. Barclays’ total revenues (adjusted for all one-time items) saw a 3% improvement year-on-year. Coupled with a 30% reduction in loan impairments from improving credit conditions and an 8% reduction in adjusted operating expenses thanks to the cost-cutting efforts, the bank’s pre-tax income jumped 41% compared to the year-ago quarter to reach almost £1.6 billion ($2.5 billion). It should be noted that while this is slightly below the adjusted pre-tax income figure of £1.7 billion seen in each of the first two quarters of the year, the investment banking division was the only one to witness a sequential reduction in profitability – speaking volumes about the effectiveness of Barclays’ reorganization effort.
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