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Trefis Analysis

COMPANY OF THE DAY : SAMSUNG ELECTRONICS

Samsung's disappointing Q2 earnings indicate that its smartphone turnaround is not going as planned. In our earnings note, we review the results and examine the company's options in an increasingly competitive smartphone market.

See Complete Analysis for Samsung Electronics
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Related Companies: Apple | Qualcomm | BlackBerry
 
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FORECAST OF THE DAY : STARBUCKS' BEVERAGE SPEND PER CUSTOMER VISIT

Starbucks' Beverage Spend Per Customer Visit has been increasing steadily over the past few years, due to price hikes and the popularity of premium products. We expect these factors to result in further growth, though at a more moderate pace, going forward.

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RECENT ACTIVITY ON TREFIS

SFLY Logo
Shutterfly Demonstrated A Healthy Second Quarter With Broad-based Growth, Though Average Order Value Declined
  • By , 7/30/15
  • tags: SFLY CTCT VRSN
  • Shutterfly (NASDAQ:SFLY), released its Q2 2015 earnings on July 29th. The company delivered a solid second quarter. While the revenues were within management guidance, the adjusted EBITDA exceeded the guidance range. The flagship Shutterfly brand and the enterprise segment were the prime drivers of the solid growth, and overshadowed the slow demand for brands such as Tiny Prints and Wedding Paper Divas. The company has intentionally reduced investments in the aforementioned brands and directed the resources to its upcoming Shutterfly 3.0 platform. Shutterfly 3.0 will integrate the services of all its brands such as This Life, Tiny Prints, and Wedding Paper Divas, with the Shutterfly flagship brand, into a common platform. This consolidation will be cost effective for the company and also more user-friendly. The company’s second quarter earnings also reaped the benefit of deferred revenue recognition from one of its unredeemed flash sales. The second quarter also got the advantage of growth because of some expenses shifting to the third quarter. The management believes that the profitability improvement will continue right up to 2016 as the company is effectively managing both its COGS and operating expenses. For Q2 2015, the revenues reflected 16% year-on-year growth to amount to $184 million. There was a 14% growth in the consumer business ($171 million) and 40% growth in enterprise revenues ($12.6 million). Growth in the enterprise segment was primarily because of a new multi-year project with a Fortune 50 client. The flagship Shutterfly brand witnessed double digit organic growth. Shutterfly’s customers and orders grew by around 20% across all segments to reach around 3 million and 5 million, respectively. However, after excluding the impacts from the flash sale deferred revenue, closure of the Treat brand, and the GrooveBook acquisition, customers grew by 5%, orders grew by 9%. For the full year 2015, the company expects revenues to the tune of $1.04 billion to $1.06 billion (an year-on-year growth of 13% to 15%) and adjusted EBITDA to lie between $186 to $194 million (reflecting around 18% year-on-year growth). We are in the process of updating o ur $49 price estimate for Shutterfly . See our complete analysis for Shutterfly GrooveBook Brings About Customer Expansion At The Cost Of Reduced Average Order Values In the second quarter, Shutterfly’s average order value (AOV) declined by 10% year-on-year to reach $32.50. As projected in our Q2 pre-earnings report, Shutterfly’s AOV continued to be dampened at the cost of its customer base expansion. Shutterfly’s 2014 acquisition, GrooveBook – a mobile photo book application subscription service, is mainly responsible for the lower AOVs. In Q1 2015, Shutterfly’s AOVs declined by 14.5% to $28.86. This is because GrooveBook provides services at a lower price point than most of Shutterfly’s other brands. On the flip side, Shutterfly’s unique customers increased by 25% on a year-on-year basis, in the first quarter, to reach 3.2 million. Shutterfly has strategically positioned GrooveBook’s services as a stand-alone application, as well as an integrated functionality across its multiple brands. This helped the company in preserving Groovebook’s earlier user base and by offering a new service to Shutterfly’s existing users, the company is expected to gain a hitherto unexplored user base. GrooveBook services provide value for money. Prior to the acquisition, Shutterfly’s normal services offered 100 prints for a month at a total cost of $22 to $23. Groovebook, on the other hand, provides the whole package for $2.99. Though the cost reduction comes with lower quality, it is still attractive to the younger population with lower disposable income. Hence, Shutterfly is gaining a segment of revenues from a younger demography (while earlier, most of its customers were mostly from affluent backgrounds, such as, couples about to get married or mothers with young children). Hence, at the cost of a lesser average order per customer, Shutterfly is gaining a wider user base. As these young people mature and get married or have children, they’d be the company’s prospective clients for the other (more expensive) brands, as well. Marathon’s Representation On Shutterfly’s Board Might Help The Company’s Long-Term Prospects Marathon Partners Equity Management recently won two seats out of three on Shutterfly’s board of directors. Marathon intends to influence Shutterfly in implementing shareholder-friendly reforms. Over the past, Marathon had been critical of Shutterfly’s policies, including lack of incentives for long-term investors and lack of prudent decisions regarding investments and acquisitions. Shutterfly’s management had implemented more favorable changes with Marathon representatives on its board. The executive compensation had been tied to earnings and long-term financial goals. Also, shareholders will be given back the excess capital in a tax efficient way after having sufficient capital for acquisition considerations. Marathon’s intention was to bring about strategic changes to improve the long-term health of the company. This includes strategic decisions including looking for suitable acquisitions. Shutterfly 3.0 Will Focus On Higher Mobile Penetration In Q2 2015, 14% of Shutterfly’s orders came through the mobile devices. The company wants to increase this percentage and believes Shutterfly 3.0 will help it towards this end. Like other digital marketing companies, Shutterfly wants to take advantage of the secular trends  of rising demands that emerge from the mobile platform. Also, Shutterfly 3.0 might come up with smart phone applications that will enable users to create a card or a photo book on the phone itself. The company feels that its competitive advantage lies on being platform agnostic, and being available through iPhones, Androids, or Kindle devices. These unique propositions help it in standing on its own with a  15-year-old brand equity,  in a marketplace flooded with photo applications. 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 Q2 2015 Earnings: Currency Headwinds Dampen An Otherwise Healthy Quarter
  • By , 7/30/15
  • tags: REV EL LRLCY AVP
  • Revlon (NYSE:REV) announced its second quarter 2015 earnings on July 29th. On an XFX basis (excluding the impact of foreign currency fluctuation), the company witnessed a 4.7% year-on-year growth in sales and a 6.5% year-on-year growth in adjusted EBITDA. The adjusted EBITDA growth was primarily because of Revlon’s previous brand support investments which seemed to be generating positive returns on investment. However, Revlon’s reported sales continued being dampened by currency headwinds. Revlon’s reported sales declined by ~3% on a year-on-year basis to $482.4 million. Revlon’s adjusted EBITDA grew by 5.1% on a reported basis to $90.1 million. The EBITDA growth was due to the fact that Revlon gains lower profits from countries where there were significantly weak foreign exchange rates. Revlon suffered most of its currency headwinds from Venezuela in this quarter. We are in the process of updating our current price estimate of $31 for Revlon’s stock . See Our Complete Analysis For Revlon Here Revlon’s Professional Segment Growth Rate Surpasses That Of The Consumer Segment On an XFX basis, Revlon’s Consumer segment grew by 1.4% to $354.7 million. However, excluding Venezuela, the growth rate was 3.7% on an XFX basis. The growth was mainly due to Almay and Revlon’s color cosmetics. Revlon grew by 4.1% on an XFX basis to $24.3 million in its Professional segment. The growth was driven by brands such as American Crew and Revlon Professional products. The main growth drivers were Revlon’s increase in brand support investment by $7 million in this segment and increased sales in the Professional division. The major part of the brand support investments for 2015 has been undertaken in the first two quarters of 2015. Hence we can expect an increase in profitability over the next quarters. The company has been supporting and boosting profitability for its brands, American Crew and Revlon Professional, in two ways.  One is by increasing their presence in the existing countries through distributors, and by expanding to newer territories. Secondly, Revlon is launching brand support initiatives, such as campaigns to spread the brand awareness for these products.   Revlon’s Professional segment has been witnessing significant growth over the last few quarters, primarily due to the acquisition of  The Colomer Group (TCG). Prior to its TCG acquisition, Revlon had mainly been a specialty color cosmetics manufacturer, deriving more than 50% of revenues from Color Cosmetics. The acquisition of TCG diversified Revlon’s product portfolio by adding a mix of Professional Products. Through the acquisition, the company has gained significant manufacturing and distribution capability for professional cosmetics products both domestically in the U.S. and internationally. TCG also contributed to diversifying Revlon’s geographic base. For 2013, the company derived approximately 56% of revenues from the U.S. and the remaining 44% from other geographies (reported revenues). This ratio changed to 53% for U.S. and 47% from international geographies in 2014, owing to the fact that TCG generates more than 50% of its sales from the EMEA region. Post CBB And SAS Acquisition, Revlon Is On The Lookout For Licensing Fragrance Brands  In Q2 2015, Revlon acquired U.K. based fragrance company CBBeauty (CBB) and its U.K. distributor, SAS & Company.  CBB products are available in over 80 countries, and the company provides sales and strategic services to select celebrity and fashion fragrance brands. SAS & Company distributes and markets perfumes and beauty products from leading brands such as Burberry, Carven, One Direction, and Rihanna. Prior to the acquisition, Revlon’s consumer segment was dominated by color cosmetics. Revlon’s current fragrance segment had so far reflected fragmented growth. CBB would provide more exposure to Revlon’s fragrance business and boost its growth. Additionally, by acquiring U.K.-based distributor SAS, Revlon aims to enter into the fragrance licensing business in the U.K. Post the achievement of the licensing capability, Revlon plans to pursue the acquisitions of select fragrance companies and expand its fragrance selection, even further. In its second quarter earnings call, Revlon’s management stated that the fragrance industry is largely fragmented and therefore not intensely competitive.  Revlon has a good scope for  licensing smaller brands and hence, acquire and develop those brands. The licensing capability can, in turn, help Revlon earn a significant market share of the fragrance industry.   View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap
    YELP Logo
    Yelp Earnings: Revenue Guidance Revised Downwards To Hit Stock Price
  • By , 7/30/15
  • tags: YELP GOOG YHOO MSFT
  • Yelp (NYSE:YELP) reported its earnings for Q2 FY15 on July 28th. The company once again posted growth as revenues increased by 51% year over year to $133.9 million. Yelp reported a sequential and year on year decline in net income to a loss of $1.35 million. However, adjusted EBITDA improved to $22.73 million compared to $17.24 million in the prior year quarter. As stated in our pre-earnings note, the company continued to report sub-par growth. Most of its performance indicators declined on a sequential basis, albeit they were up compared to Q2 of last year. Furthermore, the company lowered its revenues and EBITDA guidance for the year. As a result, the stock was down by over 20% in after market hour trading. While the company reported 35% year-over-year growth in cumulative reviews to 83 million, the sequential growth was stalled at a paltry 7.8%. Furthermore, while average unique monthly visitors grew by 6% year over year to 143.9 million, it was flat on a sequential basis, indicating user and business fatigue. Engagement on mobile devices increased as unique visitors from mobile grew to 83 million during the quarter. Overall, we are disappointed by Yelp’s results and think that the business seems to be maturing as organic expansion has taken a back seat. We have revised Yelp’s price to $30.29, 40% below our previous estimates, based on the new guidance given by the company and its inability to control its sales and marketing expenditure, which forms a makor chunk of its operating expenditure. Below we review Yelp’s Q2 FY 15 results by segment. Check out our complete analysis of Yelp Outlook for Q3 and 2015 Revised Downwards For Q3 FY15, the company expects revenues in $139-$142 million range, representing growth of approximately 37% compared to the third quarter of 2014. Adjusted EBITDA is expected to be in the range of $12 million to $15 million. For the full year, Yelp has guided that revenues will grow at a slower pace and projects net revenue between $544 million and $550 million (compared to $574 million and $579 million earlier). The primary reason for this is the phasing out of Brand advertising. Given that brand is relatively high margin, lower brand revenue will have a disproportionately large effect on adjusted EBITDA, which is reflected in Yelp’s lower outlook for full year 2015. As a result, adjusted EBITDA is also revised down to $72 million -$78 million compared to $102-$105 million range earlier. This downward revision soured market sentiments and the stock price declined by over 20% in after market hours. Revising Price To $30.29 Based on the Q2 results and the trend in the first half of 2015, we have revised our price of Yelp to $30.29. The single most important factor that drives Yelp’s value after its revenue growth is the growth in its operating expenses. Yelp has had to incur high operating expenses to fuel its rapid expansion. Historically, Yelp’s operating expenses have been 85% of its overall revenues. It was close to 84.68% in Q2. While SG&A expenses account for 72%, R&D expense accounts for 16% of the revenues. Given the current situation and its ongoing efforts, we now expect sales and marketing costs to decline to around 47.75% of revenue by the end of the forecast period. This will reduce Yelp’s cash profits in the future. Furthermore, despite growth in topline, its gross margins have also declined due to higher cost of revenues related to network cost, which is increasing due to expansion. We have also revised our estimate for deals division due to assimilation of Eat24 and SeatMe businesses. This assimilation will positively impact the topline by $20 million in 2015. Local Ads Division Performance The local ads division makes up 73% of Yelp’s estimated value. One of the primary drivers for local ads division is the number of active business accounts on Yelp. During Q2 FY15, active local advertising business accounts grew by 40% year over year to approximately 97,000, driven by international expansion underway and assimilation of Eat24 and SeatMe business, which enhances Yelp’s appeal to users and advertisers alike. Furthermore, the company said that revenue from international markets is expected to gain traction in the coming quarters as it monetizes these regions. The company expects to achieve revenue of $1 billion by 2017. However, as discussed earlier, we believe that as the company monetizes existing regions, and expands to new territories, its selling, general and administration (SG&A) and marketing costs will increase and lower the company’s profitability and cash flow as a percent of sales. Mobile To Bolster Revenues Unique visitor is one of the primary drivers for Yelp as it affects both its local ads business, deals and partnership and brand ads division, and during the quarter monthly unique visitors grew to 144 million. However, most of the growth was due to 22% growth in mobile unique visitors (~83 million monthly users). In Q2, more than 70% of its page views were from mobile app. Additionally, 65% of all Yelp’s searches were via mobile and mobile app installation grew by to ~18 million users. Considering the rampant growth in the usage of mobile devices, we expect the mobile platform to become a major revenue driver for Yelp in the future. The growing number of consumers searching for local businesses online constitutes Yelp’s existing market, and in addition to company’s global expansion plans, we believe the adoption of Yelp’s mobile platform will drive this growth in unique visitors. We have revised our price estimate to $30.29 for Yelp, which is 10% above with the current market price after the trading hours. 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
    TWTR Logo
    Twitter's Earnings Disappoints On User Growth, Leading To Fall In Stock Price
  • By , 7/30/15
  • tags: TWTR FB LNKD
  • Twitter  (NYSE:TWTR) delivered a lacklustre quarter in Q2 2015,  leading to 14% fall in its stock price.  Even while its top-line growth surpassed its prior guidance, its user growth came in way below market expectations.  In addition, the company expects its user growth levels to stay depressed in the coming quarters. With over-70% growth in the ad business (in FX-neutral terms) during the quarter, the company’s troubles with respect to direct response ads seem to have ended (at least for now). However, these earnings make us quite skeptical on the future of the micro-blogging platform. In addition to the management uncertainty (which remains due to the ongoing search for CEO), it remains to be seen whether the new efforts being undertaken will help in accelerating new user growth on the platform. Also, in the event these features make the platform less attractive for power users, it could also lead to lower engagement levels on the platform.
    CRM Logo
    There’s More to Salesforce’s Declining Margins Than Meets the Eye
  • By , 7/30/15
  • tags: CRM ORCL SAP
  • Leading Customer Relationship Management (CRM) software vendor Salesforce.com (NYSE:CRM) has relentlessly grown at a breakneck pace over the last few years. Since calendar 2011, its revenues have expanded at over a 30% clip annually. However, the rapid growth in revenues has been accompanied by a concurrent decline in its net profit margin. We believe that this margin erosion is not merely a result of increase in costs outpacing revenue expansion, but because of the timing disconnect between costs and revenues.  Indeed, Marketing and Sales are inherently prospective activities intended to generate future revenues. By timing disconnect, we mean that the expenses that Salesforce incurs towards acquiring new customers result in revenues that are spread over a number of years. This is unlike other traditional business models like the legacy on-premise software licenses model, where all revenues from new customers are recognized upfront. In other words, in a cloud computing business model, expenses are booked upfront while revenues are not, which causes the timing disconnect that drags margins lower. In this report, we explore the reasons for the timing disconnect in detail, its impact on Salesforce’s margins, and when we expect this disconnect to turn into Salesforce’s favor. Our price estimate of $65 for Salesforce.com is about 10% lower than its current market price. See our complete analysis for Salesforce.com here Overview of Salesforce’s Revenues and Margins Salesforce’s revenues as well as market share have steadily trended upwards since 2009. Its revenues from cloud subscriptions expanded at a CAGR of nearly 30% between 2009 and 2014, while its market share in the global CRM market has grown from 11% in 2009 to 18% in 2014. Salesforce’s relentless growth in the global CRM market is attributed at least in part to its substantial marketing machinery. Salesforce’s heavy emphasis on marketing is clear from the fact that its SG&A expenditure as a percentage of gross profit stood at 64% in 2014. In comparison, the same figure for rival cloud vendor SAP SE (NYSE:SAP) was 42% in 2014, while for Oracle Corp. (NASDAQ:ORCL) it was even lower at just 24% . The heavy marketing expenditure has taken a toll on Salesforce’s margins, as the company’s non-GAAP net profit margin has declined from 11% in 2008 to a mere 6% in 2014. However, as we will see in the following section, there’s more to the decline in Salesforce’s profit margin than just high SG&A expenditure. Explaining the Timing Disconnect In traditional businesses like the legacy on-premise software licensing model,  licensing revenues from a new licensing contract are booked upfront. Therefore, the marketing expenditure that went into acquiring that new customer is offset by incremental revenues in the same year. But this isn’t the case in the subscription model for cloud-based software. In a subscription model for cloud computing software, revenues from a new contract are spread over a number of years. An existing customer who wishes to continue to avail the services has to pay a subscription fee every year for the duration of the contract. Therefore, the revenues to be derived from a new contract for future years are booked as “Deferred Revenue” in the balance sheet, rather than as revenues in the income statement. This is in contrast to the licensing model, in which the entire licensing fee is booked as revenue upfront. The impact of this form of accounting in the cloud business is that the entire marketing expenditure spent in acquiring a new customer is booked upfront, but revenues from the new contract are not. Hence, annual marketing expenditure of a company like Salesforce, which is expanding aggressively, seems to increase at a faster pace than its revenues. Indeed, Salesforce’s marketing expenditure in absolute terms has increased at a faster rate than its revenues in four of the six years between 2009 and 2014. This disconnect between the company’s expenditure and revenues is the underlying cause for the decline in its profit margin. Short Term Pain for Long Term Gain It is worth noting that once a new contract has been acquired, Salesforce’s receives subscription revenues every year for the duration of the contract. This implies that the company has a defined source of income without having to incur additional costs towards acquisition of incremental revenue. As a result, once Salesforce scales back on its marketing expenditure, it is likely to witness a disproportionate improvement in its margins. This is because while its marketing expenditure will trend lower, it will continue to earn at least the same level of revenues from its existing customer base. So far, Salesforce was aggressively expanding its presence in the CRM market and incurring heavy sales and marketing expenditure in the process. Now, there are indications that this trend may have tapered off. For instance, Salesforce’s SG&A expenditure as a percentage of gross profit has reduced from 68% in 2011 to 64% in 2014, the lowest level in the previous 7 years. Further, the company no longer expects to maintain a revenue growth rate of over 30%, indicating that its expansion in the CRM market may have plateaued. Thus, we expect the SG&A expenditure increase at a declining rate in the medium term, at least until Salesforce picks it up again to target the cloud analytics market (Read: Salesforce Posts Strong Q4 Results, Eyes Analytics Market to Drive Future Growth ). As a result, the timing disconnect between marketing expenditure and revenues is expected to turn favorable in the medium term, pushing Salesforce’s non-GAAP net profit margin up to 9%. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    AEO Logo
    With The U.S. Market Saturating, American Eagle Outfitters Is Aggressively Inking International Licensing Deals
  • By , 7/30/15
  • tags: AEO ARO ANF
  • American Eagle Outfitters  (NYSE:AEO) is aggressively signing licensing agreements in lucrative markets outside North America in order to compensate for its lack of growth in the U.S. The U.S. apparel market is highly saturated and fragmented with a number of specialty brands, general merchandise stores, fast-fashion players and multi-brand chains competing against one another on design and prices. American Eagle holds less than 1.5% share in the market, which has not been growing too well lately. In fact, whatever growth it has seen has come from fast-fashion retailers, who are nibbling the share of their casual apparel counterparts. And retailers such as American Eagle are consolidating their domestic store networks in the wake of an industry-wide online shift. Consequently, American Eagle has minimal potential for growth in the U.S. and is therefore exploring opportunities in international markets. The company has presence in 28 countries worldwide with a combination of international licensed and company-owned stores. In 2015 alone, it entered five new countries in Latin America, Asia and Europe. Most recently, American Eagle announced that it has signed new licensing agreements in South Korea, Singapore and Greece to strengthen its position in the EMEA and APAC regions. Our price estimate for the company at $15.28  is about 15% below the current market price.
    BP Logo
    BP Earnings: Oil Prices Offset Thicker Refining Margins; Focus on Lowering Upstream Cost Structure
  • By , 7/30/15
  • tags: BP XOM RDSA CVX PBR
  • BP Plc. (NYSE:BP) recently announced its 2015 second-quarter results. The company’s underlying replacement cost profit, which is profit adjusted for one-time items and inventory changes, fell by 64% year-on-year to $1.3 billion, or $0.43 per ADS (American Depository Share). Most of the decline in the company’s earnings was primarily driven by lower oil and gas price realizations, as the average  Brent crude oil spot price was down more than 44% year-on-year during the second quarter, due to oversupply. In addition, despite a significantly colder than normal winter season in the U.S., the average Henry Hub natural gas price was down more than 40% from the year-ago quarter. This led to a significant erosion in BP’s upstream margin, because of which its oil and gas exploration and production earnings fell by more than 89% year-on-year, to just around $500 million. The decline in upstream earnings more than offset the improvement in downstream margins, which drove a more than 154% increase in the company’s adjusted downstream earnings. However, BP is taking measures to reduce its overall cost structure in order to be able to steer through this commodity trough in a good shape. We believe that these measures will be beneficial in lifting the company’s cash profit margins as oil prices recover gradually in the long run. Below, we provide a brief overview of what’s driving changes in BP’s downstream margins and upstream cost structure. Headquartered in London, BP is one of the world’s leading oil & gas multinationals with operations in more than 80 countries. As a vertically integrated oil and gas major, it has both upstream as well as downstream operations. The upstream division primarily includes exploration and production activities for oil and gas, while the downstream division focuses on producing refined petroleum products such as gasoline. Based on the second-quarter results, we have revised our price estimate for BP to $45 per share, which values it at around 17.9x our 2015 full-year adjusted earnings per share (EPS) estimate of $2.51 for the company. See Our Complete Analysis For BP Downstream Margins BP’s second-quarter underlying replacement cost profit before interest and taxes from downstream operations increased by almost 155% year-on-year. Most of this increase was driven by thicker refining margins because of the improvement in the refining environment, in general, and increased refinery optimization by the company. BP’s average refining marker margin (RMM), which is a measure of the difference between the price a refinery pays for its inputs (crude oil) and the market price of its products, increased by almost 26% y-o-y to $19.40 per barrel during the second quarter. This is the highest level for the company’s average RMM since the third quarter of 2012. In addition to thicker refining margins, the company’s downstream earnings were also boosted by a strong performance from its supply and trading business. The income from trading operations depends largely on the level of volatility in commodity prices. Given the recent spike in the volatility of benchmark crude oil prices, BP’s trading operations benefited during the most recent quarter. Going forward, we expect BP’s downstream margin to continue to improve in the long run since the company is targeting significant efficiency improvements in its refinery business. It plans to enhance its feedstock advantage in the U.S. by increasing the proportion of cheaper crude oil — primarily from Canadian oil sands and the Bakken shale — processed by its refineries from around 70% currently, to almost 90% in the medium term. In addition, it also plans to reduce its unit breakeven cost in the petrochemical business by divesting  some of the highest-marginal cost assets and licensing its proprietary technology to third parties. Through these measures and a streamlining of its downstream operations across verticals, BP plans to deliver annual cost savings of around $1.6 billion by 2018, versus a 2014 baseline. Upstream Cost Structure In addition to efficiency improvements in the downstream, BP is also taking steps to lower its upstream cost structure in order to steer through the commodity down cycle. The company’s management mentioned during the earnings call that they are working closely with their suppliers to renegotiate contracts with them in view of the steep fall in oil prices. The chart below highlights the range of rate reductions the company has been able to achieve on renegotiated contracts to date in some of the key upstream cost categories.   Source: BP The benefits of these renegotiations are expected to show up in both capital spending as well as cash operating costs. Examples of both include a more than 30% reduction in drilling costs for a well on the Mungo asset in the UK North Sea and an 18% reduction in logistics costs through more efficient use of boats and helicopters in the company’s operated Gulf of Mexico assets. While we believe that a large part of the drilling and service cost deflation will eventually reverse in the long run, along with a recovery in oil prices, cost savings from efficiency improvements are more sticky and will reduce the company’s overall upstream cost structure in the long run. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    MGM Logo
    MGM's Q2 Earnings Preview: Watchout For RevPAR Growth At Las Vegas Hotels
  • By , 7/30/15
  • tags: MGM
  • MGM Resorts  (NYSE:MGM) will report its Q2 2015 earnings on August 4th. While the company will continue to face the headwinds at Macau, it should post steady growth in its domestic operations, primarily led by the Mayweather-Pacquiao event. The boxing event was very successful for MGM and it surely aided non-gaming as well as gaming operations at its Las Vegas properties. Looking at Macau, the overall market witnessed a 37% decline in gross gaming revenues. Macau continues to face the heat even after 13 straight months of decline amid the government’s crackdown on corruption, which has not only kept VIPs away from Macau but also weighed on the mass-market gaming. However, of late there have been a few positive developments for the casino industry, such as a relaxation of visitation rules to Macau and an uptick in gaming in the last week of June. Given these developments and the supportive measures from Beijing, we believe gaming in Macau maybe at a cusp of rebounding.
    H Logo
    Currency Headwinds May Drag Hyatt's Q2 Earnings Lower
  • By , 7/30/15
  • tags: HYATT MGM
  • Hyatt Hotels (NYSE:H) will report its Q2 2015 earnings on August 4th. The company should post steady growth in average daily rates (ADR) and occupancy levels across its portfolio. Also, management fees have been trending well for Hyatt in the recent past, and we expect this trajectory to continue. However, the company faced currency headwinds in the previous quarter, which led to a decline in the top line as well as the bottom line. This could well be the case with the June quarter report, as the dollar has remained strong against other currencies. Accordingly, Hyatt’s overseas revenues could have taken a hit. On the brighter side, group bookings were up 7% for 2015 at the end of the previous quarter and are expected to continue this trajectory amid a better macroeconomic environment. This is important for Hyatt as the company derives around half of its revenues from group bookings. Hyatt’s operations can largely be divided into two categories: owned and leased hotels, and third-party owned hotels. We estimate that owned and leased hotels account for around 40% of Hyatt’s value. The segment revenues are primarily dependent on ADR and occupancy levels at the hotel properties. The segment ADR and occupancy levels have been on an uptrend and stood at $218 and 75%, respectively, in the previous quarter. We estimate ADR will be around $231 and occupancy to be 77% for 2015. Most of this growth will come from a better macroeconomic environment and continued growth in tourism, especially in the U.S. where International visitor arrivals have grown at an average annual rate of 8% in the last five years. This trend is likely to continue in the coming years and the rise in international tourism will aid overall demand for rooms in the region. Looking at Hyatt’s third-party hotel operations, we expect continued growth in management fees. Hyatt manages and franchises third party owned hotels and charges a fee for this service. Third party owned hotel business accounts for around 60% of Hyatt’s value, according to our estimates. For Hyatt, the management fee is primarily dependent on the revenues and profits of the properties it manages. The estimated Americas third party hotels room revenues grew from $3.26 billion in 2010 to $4.90 billion in 2014. We expect the uptrend to continue driven by growth in the economy, which will boost business travel and convention demand for Hyatt’s hotels. This in turn will boost the ADR and occupancy levels at these properties. On international front, growth seen in emerging nations such as India and Indonesia, and economic recovery in other developed markets such as Japan and some parts of Europe, will drive room revenues and management fees for Hyatt Hotels. We currently estimate revenues of about $4.60 billion for Hyatt Hotels in 2015, with EPS of $1.25, which is slightly higher than the market consensus of $1.18, compiled by Thomson Reuters. We have a  $67 price estimate for Hyatt Hotels, which we will update after the second quarter earnings announcement.
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    Tableau Q2 Earnings: Impressive Growth In Customer Base And Revenues
  • By , 7/30/15
  • tags: DATA-BY-COMPANY DATA QLIK SAP ORCL
  • Tableau Software  (NYSE:DATA) recently released its quarterly earnings report. The subscriber base and revenues both registered an uptick during the quarter. Tableau’s customer base has grown immensely with the increase in demand for data discovery based Business Intelligence (BI) software, and we believe that the company is well on track to acquire 66,000 customers by 2021. Tableau’s “Land and Expand” strategy has been very successful thus far, and will continue to help the company grow its revenues in the years to come. Consequently, we believe that Tableau’s revenues will increase from $413 million in 2014 to over $2 billion by the end of our forecast period.
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    Seagate Earnings Preview: Can Enterprise HDD Sales Offset The Impact Of Low PC Shipments?
  • By , 7/30/15
  • tags: SEAGATE STX WDC SNDK MSFT
  • Seagate Technology (NASDAQ:STX) is scheduled to announce its Q4 FY 2015 earnings on Friday, July 31. The company has witnessed a slowdown in its PC and notebook hard drive unit shipments over the last few years. This trend could reverse in the coming quarters with the expected rise in the number of PC shipments owing to the release of Windows 10 by Microsoft (NASDAQ:MSFT). On the other hand, Seagate has reported mixed results in terms of sales of consumer electronics and branded hard drives over the last few quarters. The company recently unveiled the world’s first 2.5″ form factor 4TB external hard disc drive in June in an attempt to boost branded product sales. Furthermore, Seagate’s enterprise storage has contributed significantly to growth in sales volumes over the last few years. The company has outperformed its closest rival Western Digital (NASDAQ: WDC) in terms of enterprise storage shipments over the last few quarters. Seagate initially gave revenue guidance of about $3.2-$3.3 billion for the June quarter, which it has subsequently revised to about $2.9 billion. This difference is attributable to a lower than expected demand for storage products through the quarter. Correspondingly, the company expects expenses to be about $25 million lower than prior expectation of about $555 million. In the most recent quarter, Seagate reported a 2% year-on-year decline in net revenues to $3.3 billion as overall shipments stayed declined by 9% over the prior year quarter to 50.1 million units. Although the company witnessed strong growth in shipments for enterprise-grade hard drives, which were 18% higher y-o-y at 9.1 million units shipped, the total compute units shipped for PCs and notebooks combined fell by 15% over the prior year quarter to 31.1 million units.
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    Barclays Reports Strong Q2 Results Despite Incurring Heavy Legal Charges
  • By , 7/30/15
  • tags: BCS RBS HSBC JPM C
  • A mix of good fortune and targeted cost cutting measures helped  Barclays (NYSE:BCS) report one of its best operating performances since the economic downturn on Wednesday, July 29. The U.K.-based banking giant, which recently saw its CEO ousted by the board in a bid to speed up the process of improving operating efficiency, witnessed a sequential increase in revenues while operating costs fell slightly quarter-on-quarter. On an adjusted basis, pre-tax profits improved 12% year-on-year. Notably, Q2 2015 was one of the rare occasions in recent years when Barclays’ reported pre-tax profit figure was not far from the operating profit figure. Although the bank was forced to set aside another £850 million ($1.3 billion) in reserves for its PPI-related misgivings, the impact of this on the bottom line was mitigated by a £282 million ($440 million) accounting gain from a revaluation of its own credit, and a one-time gain of £496 million ($776 million) on Lehman assets. It should be noted that Barclays has now incurred more than £7.5 billion (~$12 billion) in total costs related to the PPI and interest rate product issues since Q2 2011 – a figure that could swell further over coming quarters.
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    Cliffs' Earnings Review: Lower Iron Ore Prices Negatively Impact Q2 Results
  • By , 7/30/15
  • tags: CLF RIO VALE MT
  • Cliffs Natural Resources (NYSE:CLF) released its second quarter results and conducted a conference call with analysts on July 29. As expected, the company’s results were negatively impacted by lower realized iron ore prices. However, Cliffs’ cost rationalization efforts helped offset some of the negative effects of a weak commodities pricing environment on the company’s results. Cliffs’ adjusted EBITDA figure, which excludes the impact of one-time and non-cash items on the company’s profits, stood at $65 million in Q2 2015, as compared to $224 million in the corresponding period of 2014. Cliffs changed its reporting structure with effect from Q1 2015. It now reports its North American Coal division separately, since its coal mining operations constitute a part of its non-core operations, which it intends to sell. Excluding the coal mining operations, the company’s revenues in Q2 2015 stood at $498 million, around 33% lower than in the corresponding period a year ago. The decline in revenues was primarily due to a sharp reduction in market pricing for iron ore. In this article, we will take a closer look at the company’s Q2 results. Iron Ore Prices Iron ore is the main raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining their prices. Though a majority of Cliffs’ iron ore sales are to the North American steel industry, sales agreements are benchmarked to international iron ore prices. International iron ore prices are largely determined by Chinese demand, since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. Chinese steel demand is expected to decline by 0.5% in 2015, following on from a 3.3% decline in 2014. Weak demand for steel has indirectly resulted in weak demand for iron ore. On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. The worldwide surplus of seaborne iron ore supply is expected to rise to 300 million tons in 2017, from an expected surplus of 175 million tons in 2015, and a surplus of 72 million tons and 14 million tons, in 2014 and 2013, respectively. Iron ore spot prices stood at $63 per dry metric ton (dmt) at the end of June, around 33% lower year-over-year. Segment-wise Performance Shipments for the U.S. Iron Ore operations fell from 4.34 million tons in Q2 2014 to 4.24 million tons in Q2 2015, primarily due to weaker demand conditions, partially offset by more favorable shipping conditions on the Great Lakes. The sales margin, a measure of segment operating income reported by the company, fell from $33.94 per ton in Q2 2014 to $11.55 per ton in Q2 2015 for the U.S. Iron Ore operations. This was primarily because of a fall in realized prices from $106.80 per ton in Q2 2014 to $78.32 per ton in Q2 2015. The fall in realized prices for the company’s U.S. Iron Ore operations was less severe than the corresponding fall in spot prices. This is because contracts for this division are mostly structured on long-term contracts and the company sells iron ore pellets in the U.S., a value-added product, as opposed to iron ore fines sold by the company’s other iron ore operations. Shipments for the Asia Pacific Iron Ore operations fell from 2.9 million tons in Q2 2014 to 2.75 million tons in Q2 2015, as a result of port maintenance activities hampering shipments. Sales margin for the segment fell from $12.41 per ton in Q2 2014 to $3.01 per ton in Q2 2015, primarily due to a fall in realized prices. The division’s realized price fell sharply from $80.38 per ton in Q2 2014 to $44.29 per ton in Q2 2015. Cliffs’ efforts to reduce operating costs and favorable currency movements helped the division lower its unit cash production costs by nearly 33% year-over-year to $34.32 per ton. However, the fall in iron ore prices more than offset the impact of cost reductions on the division’s sales margin. Outlook During the earnings conference call, the company management reiterated its previously stated strategy of focusing on its U.S. Iron Ore operations in order to operate competitively in a subdued commodity pricing environment. The company is looking to exit its other mining operations in the coming years, which are considerably less profitable than its U.S. Iron Ore operations. Furthermore, the company has lowered its full year production guidance for its U.S. Iron Ore operations to 19 million tons, from its previous guidance of 20.5 million tons. This decision was taken to more closely align production with demand from the North American steel industry, which is operating at lower capacity utilization rates, as a result of competition from steel imports. With a subdued demand and commodity pricing environment expected to persist in the near term, we feel that Cliffs’ management is taking the right steps to boost the company’s prospects. 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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    Samsung Q2 Review: The Smartphone Turnaround Isn't Going As Planned
  • By , 7/30/15
  • tags: SSNLF AAPL GOOG
  • Samsung Electronics (PINK:SSNLF) posted a tough set of Q2 2015 numbers, providing the clearest sign yet that its smartphone turnaround isn’t going as planned. Segment revenue fell 8.5% y-o-y as its crucial flagship Galaxy S6 handsets faced sluggish sales and production constraints. However, the semiconductor division fared better -15% y-o-y revenue growth, 82% operating profit growth – benefiting from the mobile unit’s switch to in-house app processors for high-end devices and stronger memory sales. The earnings were roughly in line with the guidance provided earlier this month, with net profits falling 8% y-o-y to 5.75 trillion won ($4.93 billion) and revenues declining 7% to 48.5 trillion won ($41.7 billion). The company’s near-term outlook remains nebulous, given the increased competition from Apple’s (NASDAQ:AAPL) upcoming new iPhones (due September), FX headwinds in Europe and emerging markets, and a possibility that the current smartphone woes could spill over to the components business. In this note, we review the performance of the smartphone division and examine the company’s options in an increasingly competitive smartphone market.
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    U.S. Steel Earnings Review: Weak Market Conditions And Competition From Steel Imports Negatively Impact Q2 Results
  • By , 7/30/15
  • tags: X MT
  • U.S. Steel (NYSE:X) released its second quarter earnings results on July 28 and conducted a conference call with analysts the next day. The company’s results suffered from an increase in steel imports and subdued demand conditions, which negatively impacted realized prices and shipments of the company’s Flat-rolled steel division, which accounts for around 60% of the company’s revenues. In addition, the results of the Tubular Steel segment, which primarily serves customers in the oil and gas space, were negatively impacted by a fall in demand as a result of subdued drilling activity. Furthermore, the strengthening of the U.S. Dollar against the Euro negatively impacted realized prices and weighed on the results of the company’s European operations. As a result of the combination of these factors, U.S. Steel’s adjusted net earnings, which exclude the impact of one-time items, stood at a loss of $115 million in Q2 2015, as compared to a profit of $25 million in the corresponding period of 2014. The negative impact of external factors was partially offset by U.S. Steel’s ‘Carnegie Way’ initiative, an ongoing company-wide endeavor to reduce operating costs and increase the efficiency of its operations. Operational Performance Steel shipments for the Flat-rolled Steel segment stood at 2.71 million tons in Q2 2015, as compared to 3.01 million tons (excluding shipments from U.S. Steel Canada, the results of which were deconsolidated from the company’s financial results in Q3 2014) in the corresponding period of 2014. This was primarily because of a surge in the levels of cheap steel imports to the U.S., competition from which negatively impacted the company’s steel shipments in Q2. Steel imports to the U.S. have been bolstered by the strengthening of the U.S. Dollar against global currencies, which has made these imports cheaper in Dollar terms. As per the company, a significant proportion of these steel imports are priced unfairly low. Steel sheet imports to the U.S. accounted for 22% of the domestic market in 2014, up sharply from 15% of the domestic market in 2013. Furthermore, the competition from cheap imports has driven down average realized prices for the division, which fell 12% year-over-year to $695 per ton (excluding the results of U.S. Steel Canada). In addition to the competition from steel imports, prevailing demand conditions for steel in North America are fairly subdued, with the World Steel Association expecting steel demand in the North American Free Trade Agreement (NAFTA) region to decline by 0.9% in 2015. This is partly due to the high base effect, with demand increasing by 12% in 2014, which was higher than expected. Weak growth in U.S. steel demand has dampened the prospects of domestic steel companies such as U.S. Steel. Despite U.S. Steel’s cost reduction initiatives offsetting some of the negative impacts of the weak market conditions on the segment’s results, the Flat-rolled Steel division’s income from operations fell to a loss of $64 million in Q2 2015, as compared to a profit of $30 million a year ago. The U.S. Steel Europe (USSE) segment’s shipments rose to 1.09 million tons in Q2 2015, from 1.05 million tons in the corresponding period of 2014, despite planned maintenance outages for a portion of Q2. This was primarily due to better market conditions in Europe, with firming economic growth. As per World Steel Association estimates, steel demand is expected to grow at 2.1% in 2015 in the Eurozone. However, realized prices for the segment declined roughly 23% to $533 per ton in Q2 2015, primarily as a result of the strengthening of the U.S. Dollar against the Euro. However, there was some deterioration in Euro-based prices as well. Despite the sharp fall in realized prices, the decline in the segment’s income from operations was less pronounced, falling from $38 million in Q2 2014, to $20 million in Q2 2015. This was primarily because of lower raw materials costs. The prices of iron ore, which is the chief input in steel-making, have fallen over 40% over the last twelve months, due to a global oversupply situation. Impact of Low Oil Prices on Tubular Products Segment The decline in oil prices over the last twelve months has negatively impacted the Tubular Products segment’s prospects. The Tubular Products division produces and sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTGs), standard and line pipe, and mechanical tubing. These goods are primarily sold to customers in the oil, gas, and petrochemical markets. Brent crude oil spot prices currently stand at levels of $56 per barrel, around 45% lower year-over-year. As a result of the decline in oil prices, there has been a substantial reduction in drilling activity. This is reflected in U.S. rig count data, which stood at 876 at the end of last week, around 53% lower year-over-year. As a result, the division’s shipments declined 79% year-over-year to 92,000 tons. However, the results of the Tubular Products segment received a boost from the imposition of anti-dumping duties on the bulk of imported tubular steel products in Q3 2014. Competition from imported tubular steels had negatively impacted the division’s realized prices and margins in the first nine months of 2014. The division’s average realized price rose 12% year-over-year to $1,651 per ton in Q2 2015, as a result of the imposition of anti-dumping duties on steel imports. Despite the boost from better pricing, the segment’s income from operations fell to a loss of $66 million in Q2, down from a profit of $47 million in the corresponding period a year ago, as a result of the sharp reduction in shipments. The Carnegie Way With a subdued demand and pricing environment for steel prevailing in 2013, the company had launched an initiative known as ‘The Carnegie Way,’ which is focused on cost reductions and improvements in operational efficiency. The company provided some details about the specific areas where The Carnegie Way benefits have been realized during its conference call. Improvements in manufacturing processes and supply chain and logistics are the main areas where the benefits of initiatives undertaken under The Carnegie Way have been realized. Projects undertaken under this initiative translated into an improvement in margins to the tune of $575 million in 2014. In addition, the company estimates that additional benefits of around $590 million will be realized through The Carnegie Way initiative in 2015. Given the subdued market conditions for steel, this ongoing initiative will boost the company’s results going forward.   View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    Value or Momentum? Try Both.
  • By , 7/30/15
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program Value or Momentum? Try Both. by  Charles Lewis Sizemore, CFA Let’s go back in time 30 years. Remember those “Taste great / less filling” Miller Lite beer commercials from the mid-1980s? You could roughly divide the world’s beer-drinking population into two rival factions: Those that insisted that Miller Lite tasted great . . . and those that insisted it was less filling. I believe many men lost their lives fighting over this in bars. And I suppose as far as causes go, it’s as good of a cause as any to die for. I consider Miller Lite to neither taste particularly great nor be particularly easy on my stomach. As a native Texan, my heart will always belong to Shiner Bock. But I digress. We’re not here today to discuss beer dogmatism but the far more practical world of investing. As with Miller Lite fans, you can roughly divide the investing world into two camps: Those who favor value strategies and those that favor momentum strategies. Both camps will insists that the academic research – and real world experience – prove that “their way” beats the market over time. And both camps are absolutely right. Simple value screens like Joel Greenblatt ’s “ Magic Formula ” have beaten the market by a wide margin, and  research has shown  that a strategy of screening stocks based on simple momentum criteria also beats the market over time. So if value works . . . and momentum works . . .  what would it look like if we combined the two? Pretty good, actually. Quant guru Patrick O’Shaughnessy wrote  an excellent piece  last year in which he parses the universe of stocks into value and momentum buckets. Take a look at the following table, taken from O’Shaughnessy’s article. The bottom row of the table represents the top 20% of all stocks by momentum. The returns get gradually better as you move down the value scale. In other words, momentum stocks that are cheap outperform momentum stocks that are expensive. And it’s not by a small margin. The cheapest high-momentum stocks returned 18.5% per year, whereas the most expensive high-momentum stocks returns 11.6%. And viewing it through a value lens tells the same story. The right-most column represents the cheapest stocks in the sample using a composite of value metrics. All value-stock buckets performed well. But as you move down the column, the returns get a lot better. In other words, cheap stocks that have recently shown momentum perform better than cheap stocks that don’t. This is fancier way of repeating the old trader’s maxim to never try and catch a falling knife. Cheap stocks can always get cheaper. What should we take away from this? Value investing works. Momentum investing works. And combining value and momentum works best of all. This piece first appeared on Economy & Markets . This article first appeared on Sizemore Insights as Value or Momentum? Try Both.
    The Six Biggest Mistakes Investors Make
  • By , 7/30/15
  • tags: SPY TLT
  • Submitted by Wall St. Daily as part of our contributors program The Six Biggest Mistakes Investors Make By Tim Maverick, Senior Correspondent Investing isn’t a game. If you screw up, real money is lost. As a broker and supervisor for a major discount brokerage firm for close to two decades, I saw it firsthand. People lost their children’s college tuitions and even their own retirements. Now, I’m no longer an advisor, and the following are simply my opinions. With that in mind, here are the six most common mistakes investors make. 1) Having a Poor Plan – or No Plan at All Having no plan is just foolish. But a poor plan may be even worse. Imagine someone saying, “I’ll just buy XYZ stock. It’s been doing great. That will fund my retirement.” That should give you a sense of what I’m talking about. Whether or not they have an advisor, every investor should have a written plan that lays out their specific objectives, including details concerning time frame and risk tolerance. Also, as an investor’s financial situation changes, the plan needs to grow and evolve accordingly. Keep in mind that life expectancy continues to rise, so a portfolio needs to last longer than most people think. Remember, too, that each person’s circumstances are different. A cookie-cutter approach won’t work, which is why I’m not a fan of robo-advisors . 2) Betting That a Bull Market Will Last Forever Don’t gamble on a bull market in stocks lasting forever. That’s the message you’ll get if you watch CNBC, which is full of permabulls. If you must watch CNBC, I recommend doing so with the mute on. In reality, bull markets aren’t eternal. That’s also the reason I’m not a fan of S&P 500 index funds. If a financial storm hits, you have absolutely no chance – you’ll go down with the market. 3) Trusting an Advisor Implicitly Some of you probably have a professional advisor, and that’s great. Just remember the words of Ronald Reagan: “Trust, but verify.” Most advisors are darn good at their job. But stay engaged, and don’t just leave everything in the hands of your advisor. Follow the markets and see if you think what your advisor is doing is right. If you have doubts, always get a second opinion. I recall the 2008 financial crisis, when many portfolios took major hits. Some advisors resorted to what I call the “Three Stooges defense,” where Curly says, “I’m a victim of circumstances.” In other words, some advisors were saying that no one could have foreseen this. Nonsense. The warnings were all there for someone with the market experience to see. Ask your advisor if he or she has been through a bear market. Or, if not, see if they can even explain to you what a bear market can do to stocks. 4) Thinking You’re Diversified When You’re Not In my time as an advisor, I found that many investors didn’t actually understand what they were invested in. I can’t even recall the number of times I sat down with a client who proudly showed me their “well-diversified” portfolio, which turned out to be anything but. Here’s an oversimplified hypothetical: Bob had a portfolio with seven different mutual funds that looked good on the surface. But when I dug a little deeper, I had to tell my client, “You’re not diversified at all. These funds are all heavily invested in technology stocks. You have 40% of your portfolio in one industry in one country. That is not diversification.” Needless to say, a reshuffling of the deck was required. 5) Ignoring the Rest of the World A related problem is absolute lack of exposure to the rest of the globe. A shocking number of clients had zero exposure to foreign markets. Ten years ago, the United States made up 41% of the world’s stock market capitalization. Five years ago it was 30%, and as of the end of 2014, it was 37% – barely more than a third. Now, there’s no denying that the U.S. market has outperformed its overseas counterparts in recent years. But that’s still no reason to ignore the 63% of the world’s market cap currently outside the United States. I don’t know about you, but I don’t do all my shopping in just one aisle of the grocery store. 6) Trading With Long-Term Money One final, critical mistake investors make is day trading with their long-term money and trying to time the market. You’d be surprised how some people tried to play catch-up in their retirement account by day trading. Warning: I have yet to meet a day trader who has been successful over the very long term. I’m talking decades here. Ultimately, I hope my experience working with retail investors proves useful to you. After all, investing isn’t an easy “game” to master. Good investing to all, Tim Maverick The post The Six Biggest Mistakes Investors Make appeared first on Wall Street Daily . By Tim Maverick
    A Bright Spot Amongst the Chaos in China
  • By , 7/30/15
  • tags: AAPL SWKS QCOM
  • Submitted by Wall St. Daily as part of our contributors program A Bright Spot Amongst the Chaos in China By Louis Basenese, Chief Technology Analyst Conditions in China appear to be going from bad to worse. On Monday, another bloodbath ensued in Chinese stocks. The Shanghai Composite Index nosedived 8.5% – the largest single-day decline in eight years. For every stock that rallied, 75 plummeted. So much for all those government stimulus measures! I’m afraid the latest news on the economic front isn’t much better. Once the poster child for GDP growth, China’s economy is now decelerating – and at a faster rate than many expected. After decades of double-digit growth, we can now expect, at best, 7% growth moving forward. Believe it or not, though, there’s one Chinese trend on the up-and-up that we can safely exploit for double-digit gains. It’s All About Mobile For over four years, I’ve been on the record stating that the exploding use of mobile devices promises to be the world’s biggest tech trend and, in turn, profit opportunity. Ever. Given the country’s population of nearly 1.4 billion people, China is a big part of that trend. The latest data from the China Internet Network Information Center (CNNIC) shows that in the first half of the year, mobile internet traffic increased 36.8 million to 594 million users. That works out to 89% of China’s internet users, up from 85.8% at the end of last year. When we’re dealing with such large numbers, it’s easy to lose perspective. After all, we’re talking about a single country’s mobile internet device user base being bigger than a single continent’s population (North America). Even more mind-boggling, there’s still room to grow. Consider: Over 700 million Chinese citizens still don’t have access to the internet. Now, you’d think the smartest way to play the boom would be to scoop up smartphone manufacturers like Apple ( AAPL ), Huawei, or Xiaomi. Think again! Most don’t make any money. Except Apple, of course. It earns 92% of the industry’s operating profits, despite accounting for less than 20% of global sales volumes. The other 1,000 or so smartphone companies either break even or lose money, according to Canaccord Genuity. Instead, the biggest profit opportunities reside in smartphone component manufacturers. Welcome to the Radio Frequency Boom As I shared in March, in order to meet exploding mobile data demands, more radio frequencies (RF) need to be supported in each smartphone. That means the total dollar amount of RF components in smartphones keeps rising. Take the latest iPhone 6, for example. Total RF front-end content costs checked in at $15.89 per phone, according to Barclays’ analysis. That’s up a staggering 324%, compared to a typical 3G phone. The headiest RF growth can be found in relation to global long-term evolution (LTE) – or 4G – adoption. Enabling phones to communicate on the highest speed network requires more and more complex (read: more expensive) RF content. And that brings us back to China. We learned on the latest Apple conference call that LTE penetration rates in China check in at a measly 12%. In other words, the RF boom has another 88% to go in China. Or as the CEO of Skyworks Solutions ( SWKS ) – a leading RF component supplier – recently said, “I do believe we’re in the early innings in an upgrade cycle with 4G being kind of the operative technology.” Speaking of Skyworks . . . Buy, Buy, Buy! Back in January, during an appearance on CNBC’s Closing Bell, I dubbed Skyworks a “must-own” stock for 2015. Since then, the stock is up almost 30% compared to a 6% rise for the Nasdaq. Last week, I reiterated my stance on CNBC . And I’m going to do it again right now on the heels of the company’s quarterly report and recent price pullback. What’s the basis for my bullishness? The list is long. In the most recent quarter… Sales increased 38% to $810 million. The company’s mobile segment (i.e., RF content), which accounts for more than half of total revenue, grew the fastest – up 120% year over year. Skyworks is growing impressively outside of mobile, too. The company’s broad markets segment enjoyed a 23% year-over-year increase in sales. Gross margins expanded to 49%, up more than three full percentage points. Earnings per share soared 60% year over year to $1.34. Management doubled the dividend. Rest assured, this quarter wasn’t a fluke. On the contrary, this marks the 10 th consecutive quarter of earnings and double-digit sales growth at Skyworks. And with the company coming into its two seasonally strongest quarters, the stage is set for even more outperformance. Not to mention, management is most “excited” about the opportunity in China. They believe they can earn up to as much as $4 per phone. That adds up when you consider 250 million 4G phones are expected to be sold in China this year. Bottom line: As I’ve noted before, very few investors think about what it takes on the inside of mobile phones to enable them to work properly. But they should, because it’s an incredibly lucrative business for the companies behind such technology. Particularly in China. And it’s not too late to profit from the boom with Skyworks. Ahead of the tape, Louis Basenese The post A Bright Spot Amongst the Chaos in China appeared first on Wall Street Daily . By Louis Basenese
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  • commented 7/30/15
  • tags: PRU
  • http://www.trefis.com/mytrefis/comment/129430

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    Textron Q2 Earnings Review: Total Revenues Decline, Profits Remain Flat
  • By , 7/29/15
  • tags: TXT
  • Textron (NYSE:TXT) announced its second quarter results for 2015 on Tuesday, July 28th. The multi-industry company reported a year-over-year decline in overall revenues of 7.4%, hit hard by a 24% decline in revenues at Bell Helicopters. Textron Aviation witnessed a 5% year-over-year decline in revenues due to a change in delivery mix. However, the segment single handedly supported profits, increasing more by more than a factor of two between Q2 2014 and Q2 2015. All other segments displayed a  decline in profits in Q2 2015. Total profits at Textron remained flat in Q2 2015 on a year-over-year basis. Bell Helicopters continued to face the brunt of soft commercial rotorcraft markets and low military spending. The segment witnessed a 24% decline in revenues and 28% decline in profits, hence becoming a drag on overall performance. A decrease in sales of the V-22 to the U.S. military is the cause.  Profit margins in the segment declined by approximately 70 basis points moving from 12.6% in Q2 2014 to 11.9% in Q2 2015, due to under-absorbtion of fixed costs.  The company is confident that no significant fall in margins will occur in the remainder of the year. At the end of Q2 2015, Textron maintains guidance issued at the beginning of the year which outlines 11-12% margin for Bell Helicopters for the full year. Earnings from continuing operations at the end of Q2 2015 stood at $0.60 per share, displaying an impressive 17.6% year-over-year growth. At $0.60 per share, earnings from continuing operations fit in analysts’ expected range of $0.55-$0.64 per share. At the end of the second quarter, Textron believes it is on track to achieve its issued guidance of EPS from continuing operations ranging between $2.30-$2.50 for the full year. We currently have  a price estimate of $43.24 for Textron, which is roughly its current market price. However, this price estimate will be updated shortly in light of the recent earnings release. See our complete analysis of Textron here Strong Aviation Bottom-line Performance Due To Cost Synergies Kicking In From the Beechcraft Acquisition With the acquisition of Beechcraft in 2014, Textron increased its market share from approximately 19% to 27% between 2013 and 2014. The continued impact of this acquisition, along with the uptrend in the global aviation market, was visible in the bottom-line results posted for Q2 2015, even as revenues in the segment witnessed a decline. Revenue at Textron Aviation experienced a 5% year-over-year decline.  However, this should not concern investors much as it is primarily due to a shift in jet deliveries mix in Q2 2015 as compared to Q2 2014. The segment showed impressive bottom-line growth due to improved performance and cost synergies achieved from the Beechcraft acquisition. Segment profit increased by more than a factor of two from $28 million in Q2 2014 to $88 million in Q2 2015. The increase in segment profits also incorporates a $27 million lower fair-value step-up adjustment. The industrial segment reported a 3.7% year-over-year increase in revenues. Organically, without considering the $69 million unfavorable impact of currency headwinds over the quarter, the segment showed impressive 9.8% top-line growth on a year-over-year basis. The higher revenues were driven by higher volumes across the segment. On the other hand, segment profits witnessed a 9% decline on a year-over-year basis. This decline was driven by softer markets and delivery timing issues in the Tools & Test subdivision in the Industrials segment. Bell Helicopter Continued To Be A Drag On Overall Growth Bell Helicopter is continuing to struggle as military spending continues to remain weak and commercial helicopter markets are showing sluggish growth. In Q2 2015, Bell delivered 6 V-22’s and 6 H-1’s as compared to the 10 V-22’s and 8 H-1’s in Q2 2014. Driven primarily by lower volumes, the segment reported approximately 24% fall in revenues and 28% fall in segment profits on a year-over-year basis. Military spending is expected to remain weak through this year and before a recovery from 2016. The global commercial helicopter market is also expected to continue to remain soft through the rest of this year. Consequently, Textron had stated in the beginning of this year that it will be adjusting production levels and engaging in cost-cutting activities to ensure that Bell’s margins for 2015 remain within the targeted range of 11-12%. At the end of Q2 2015, Textron management continues to remain confident about this guidance for margins at Bell Helicopters for full year 2015. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    F Logo
    Earnings Review: Record Profits In North America Boost Ford's Spirits
  • By , 7/29/15
  • tags: F GM TM HMC
  • Ford Motors (NYSE:F) announced earnings for the second quarter of fiscal 2015 on Tuesday, July 28. The numbers were encouraging : the company’s net income stood at $1.89 billion, up $571 million compared to a year ago. The revenue for the quarter stood at $35.1 billion, a decline of $250 million compared to the second quarter of fiscal 2014. While the company lost money in Europe and South America, it reported record profits in North America ($2.6 billion), on the back of higher average transaction prices and strong sales across the product portfolio. We have a $15  price estimate for Ford, which is inline with the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings. High North America Profitability For the full year, Ford was targeting an operating margin in the higher end of the 8.5-9.5% range in North America. However, Ford has already achieved an operating margin of 9.1% for the first half of the fiscal year 2015. With an expected increase in F-150 production of close to 20%, this margin should be expected to go even higher as the F-150 is one of the most profitable vehicles for the company and has been commanding higher than usual transaction prices throughout the year. This might change somewhat as Ford has been restricting sales to commercial buyers, who tend to buy units at slightly lower prices than retail buyers. They generally prefer the higher-trim units which command higher margins. [trefis_forecast ticker=”F” driver=”0103″ North America is not only the most profitable region for the company but also its most critical region, as when profits there suffer, the company’s overall profitability tends to suffer, too.  In the first quarter, profitability in the region was weighed down by the low supply of the company’s best selling F-150 pick-up trucks.  Ford undertook a refresh of the F-150, which earlier used to be made from a steel body.  But the company closed down production at the two plants where it is manufactured — Dearborn (Michigan) and Kansas City — to allow for their retooling, so that the trucks could be manufactured with aluminum bodies. The plants only reached full capacity toward the end of the quarter and, as a result, dealerships were running with lower inventory than usual. On account of the low inventory, the company focused on selling most of it to retail buyers, who tend to prefer higher-trim trucks that generate higher margins, as opposed to commercial buyers, who tend to buy hundreds of units at at a time with a slight discount. As a result, the company has lost out on market share in the commercial sales segment to GM, generating strong sales for its Chevrolet Silverado. Europe Improves Ford’s total market share in the twenty biggest markets in Europe for the first half of the fiscal year increased on the back performance of the newly introduced line of compact vehicles. Ford was also the leading commercial brand in Europe in the first quarter. The automaker is still trying to achieve an optimal sales channel mix for the region, with a special focus on achieving a higher share of the fleet segment. Ford aims to introduce a total of 25 new or refreshed models in Europe over the next five years.  Going forward, the company expects the impact of a more stable automotive market and new model introductions to be offset by uncertainty surrounding Russia and higher pension expenses.  As a result, Ford expects its operating losses in the region to be  $250 million in 2015. China Slowdown While Ford’s profitability in the quarter was boosted significantly by the rise in equity income from its joint ventures in China, its performance in the second half of the fiscal year in China will likely be less favorable. Ford’s profitability in the region was mostly driven by lower costs and a favorable exchange rate. In the first six months of the year, Ford sold close to 543,500 units in China, roughly the same as the number from a year ago. For the full year, Ford sold 1.1 million units in 2014. In 2015, Ford expects to launch 15 new models in the region, including the luxury car Lincoln Continental. The recent stock market crash and slowdown in economic growth will affect the overall market and this was reflected in Ford downgrading its forecast of total units sold in China from a range of 24.5 million to 26.5 million to a range of  23 million to 24 million. See full analysis for Ford Motors View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    AVP Logo
    Avon Q2 2015 Earnings Preview: A Slight Improvement In Brazil And More Probable Strategic Restructurings Expected
  • By , 7/29/15
  • tags: AVP EL LRLCY REV
  • Avon Products  (NYSE:AVP) is slated to release its Q2 2015 earnings on July 30. The company’s performance has been on a downhill slide post 2011. In 2014, its sales declined by 11% to $8.9 billion. In Q1 2015, sales declined by 18% to $1.8 billion. However, in constant dollar terms, Avon’s revenues grew by 1% during the quarter due to growth in Europe, the Middle East, and Africa. Within the Latin American region, Brazil showed signs of recovery. Avon is trying to upgrade its direct selling model to a more social selling structure, whereby its active representatives can sell through the digital media. Though the company’s active representative base declined by 1% on a year-over-year basis, however, there was a sequential quarter-over-quarter improvement in Avon’s representative base for Q1 2015. As of December 2014, Avon had around 6 million active representatives. Our price estimate of $6.55 is significantly above the market price. We will revise our estimate post the Q2 2015 earnings results. Avon’s Performance Revival In Its Most Important Sales Region, Brazil Latin America contributes to over 50% of Avon’s annual revenues. Within the Latin American region, Brazil is Avon’s single largest market. Direct selling contributes to approximately 70% of Brazilian market sales in the skincare, color, and fragrance categories. These factors fueled Avon’s erstwhile growth in Brazil. In 2014, Avon’s Brazil sales received a setback primarily due to the country’s weak economy, competition from retail channels, and Avon’s improper product pricing mix. Hence, as a recovery measure, towards the end of 2014, the company forged strategic alliances with KORRES, a Greek skincare brand, and Coty, a French beauty and personal care company, to provide a boost to the Latin American, and specifically to the Brazilian, market. In the Brazilian beauty market, fragrance plays a crucial role in the overall product mix, and the launch of Coty products helped Avon in filling the demand gap. Hence, in Q1 2015, Avon witnessed an improvement in sales from this region. Currently, Avon is strategizing on the pricing mix in Brazil and approaching the product price mix in a staged manner in order to regain consumer confidence. However, Brazil’s IPI tax (one of the basic sales taxes in Brazil) will have an estimated 50 basis point impact on the company’s constant dollar adjusted operating margins for the full year 2015. In Brazil, Avon is a leading player in the color and skincare segments, and these segments would be dampened due to the IPI taxes. Avon’s Divestiture Of Liz Earle And The Possibility Of Further Restructurings On June 9, Avon announced the divestiture of Liz Earle, its wholly-owned, UK-based natural skincare brand, that contributed around 1% to Avon’s consolidated revenues and adjusted operating profit in 2014. Liz Earle was acquired for £140 million by  Walgreens  (NASDAQ:WBA). Avon will use the proceeds from the transaction for redemption of its $250 million worth 2.375% notes that are due in March 2016. (See  Press Release ). Additionally, Avon’s weak capital structure is expected to receive a boost as a result of this transaction. Avon’s persistent poor performance and eroding representative base have made it necessary for the company to take some drastic initiatives. The Sell Off May Help Other Avon Brands To Revive In view of its sequential improvement in the skincare segment over the last five quarters leading up to Q1 2015, Avon has planned a few additions to its skincare division. The sale of its skincare brand, Liz Earle, might be one of the measures to sacrifice a less popular brand in order to provide better revival options to its other more popular brands. Avon had planned to launch an upper-market product line called Nutra Effects in Q2 2015. A few key additions were slated for its Anew line too. Within the color cosmetics segment, Avon had planned a few product lineups in mascara, lipstick, and eye color. Avon is boosting its color segment with strong advertisements in key markets. Are More Restructurings Probable In The Future? Avon is reported to have been exploring strategic alternatives since April 2015. There were rumors of an offer in May, where private equity firm PTG Capital Partners was alleged to acquire Avon for a value of around $8.16 billion, not including debt. However, the claim was refuted by an Avon spokesperson shortly afterward. In North America, Avon’s sales have been hit by a drop in the representative pool. In Q1 2015, although some cost management initiatives proved effective, the company still faced a serious slowdown. Revenues in North America declined by 17% on a constant dollar basis and the active representative pool also fell by 17%, on a year-over-year basis. The recovering North American economy, and the subsequent creation of full-time jobs, is expected to pile additional pressure on Avon’s representative base because Avon representatives are usually non-contractual workers. In view of its losses, Avon might be contemplating the sale of its North American business, according to a report from the Wall Street Journal. The company has not yet commented on the issue. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    LRLCY Logo
    L'Oreal Q2 2015 Earnings Preview: Luxe Division Expected To Continue Healthy Growth, While The Consumer Division Might Recover
  • By , 7/29/15
  • tags: LRLCY EL REV AVP
  • L’Oreal is slated to release its Q2 2015 earnings on July 30 . Riding on currency tailwinds, L’Oreal posted a healthy Q1 2015. The company posted revenues of € 6.4 billion, reflecting a 14% year-on-year growth. In line with 2014, L’Oreal Luxe emerged as the star performing division in Q1 2015, as well. However, its previously sluggish Consumer Products division showed signs of recovery in the first quarter. We expect L’Oreal to continue performing well on the back of its strategic acquisitions and expansion of global footprints. (Read more about L’Oreal’s strategic acquisitions in 2014,  here .) We will update our  $33 price estimate for L’Oreal, after the Q2 2015 earnings release. See Our Complete Analysis for L’Oreal Here L’Oreal’s Africa Sale Expected To Grow Post Its Partnership With CFAO L’Oreal had been on the lookout for more robust distribution channels in the African region. Distribution remains unstructured and hence cumbersome in Africa. In a move to further expand its African presence, in Q1 2015 L’Oreal signed an agreement with CFAO, the specialized distributor from Cote D’Ivoire, to cover the production and distribution of cosmetics in the Ivory Coast. The partnership will bolster L’Oreal’s distribution network as CFAO will be the sole distributor of L’Oreal products in French speaking West Africa. L’Oreal aims to add 1 billion new customers by 2020, so as to double its existing user base. The majority of the growth is expected to come from emerging nations in regions such as  Asia, Africa, and Latin America. We believe Africa will play a pivotal role in L’Oreal’s expansion plan. (Read about how L’Oreal is bolstering its Africa presence  here  and  here ). L’Oreal’s Research And Development Focus Might Result In An Innovative Array Of Product L’Oreal has the largest Research and Innovation team in the cosmetics industry with 3,782 researchers and a budget representing 3.4% of its sales. The R&D budget was over $1 billion in 2014, up by 1.6% as compared to the previous year. In April 2015, L’Oreal entered into a skin tissue research agreement with the bio-printing technology firm,  Organovo . The research involves L’Oreal’s skin cell technology along with Organovo’s proprietary NovoGen Bioprinting Platform.The agreement will provide L’Oreal with exclusive rights to use the skin tissue models for the development, manufacturing, testing, evaluation, and sale of non-prescription cosmetic, beauty, dermatology, and skin care products and nutraceutical supplements. In December 2014, L’Oreal announced the acquisition of Israel-based hair research start-up, Coloright. Coloright develops hair-fiber optical reader technology and it will be a part of L’Oreal’s international Research and Innovation network. According to L’Oreal’s estimates, the top two contributors for the global beauty market are skin care (34%) and hair care (24% ). L’Oreal has always been a pioneer in hair research, and this acquisition will further aid the company in being one of the forerunners in hair care related innovations. L’Oreal Luxe Expected To Be The Top Performer In Second Quarter, As Well L’Oreal Luxe has been the most successful division for L’Oreal in Q1 2015, with a reported year-on-year growth of 20.1% to reach sales of €1.8 billion. The strong performance for L’Oréal Luxe was driven by robust sales of brands such as Yves Saint Laurent (which witnessed a double-digit sales growth), Lancôme (its fragrance “La vie est belle,” is a top selling fragrance in France, and is the second most popular brand in Europe), and Giorgio Armani. The alternative lifestyle brands Urban Decay and Kiehl’s continued their international expansion. In Q1 2015, L’Oreal Luxe outperformed the global beauty market, especially in Western Europe and Asia. We expect Luxe to continue in its growth trajectory in Q2 2015, also. L’Oreal’s Consumer Division Reporting Improvements Post Strategic Investments In 2014, L’Oreal’s Consumer Products division, reported a 1% year-on-year decline in revenue to €10.8 billion. The market for mass-market cosmetics remained sluggish both in North America and emerging markets, particularly the Asia-Pacific region. In Q1 2015, L’Oreal’s Consumer Products division reported an 11.6% year-on-year growth in revenue to €3.1 billion. The growth was uplifted by the launch of makeup brands such as Infallible Matte foundation by L’Oreal Paris, Lash Sensational mascara by Maybelline, and the growth of its 2014  acquisition, NYX Cosmetics. NYX Cosmetics is a high-growth mass market makeup cosmetics brand with a presence in more than 70 countries globally. The company is a direct competitor to Estee Lauder’s M-A-C brand of makeup cosmetics, and has seen explosive growth in sales over the last two fiscal years. The consumer division also gained shares in North America, Eastern Europe, and Latin America, in the first quarter.   View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    SIRI Logo
    Sirius XM's Strong Q2 Subscriber Growth Indicates That More Is Coming
  • By , 7/29/15
  • tags: SIRI P
  • Sirius XM ‘s (NASDAQ:SIRI) recently reported Q2 2015 results were exactly in line with the consensus estimates, as it reported a strong increase in subscriber additions driven by a notable improvement in conversion and the retention rate. The company added a total of 692, 000 subscribers during the quarter, which was reportedly its best quarterly performance since 2007. The churn rate was down to just 1.6%, reflecting a year-over-year decline of 20 basis points and the lowest value since Sirius and XM merger. Despite the marginal slowdown in new vehicle sales, the satellite radio company was able to increase its subscriber additions with a marginal increase in new vehicle penetration rate, and a significant rise in used car trials. Encouraged by this, Sirius XM even raised its full year guidance from 1.4 million subscriber additions to 1.6 million. Sustained inroads into the used car market, steady growth in new car sales, household plans and technological advancements can help the company achieve its revised target. It must be noted that this was Sirius XM’s second consecutive upwards revision in number of subscriber additions. At the start of the year, the company had guided its 2015 subscriber additions at 1.2 million. While Sirius XM’s topline growth was good, $108 million paid in pre-tax lawsuit settlement charges related to the pre-1972 dispute over royalties pummeled its profits, with net income falling 14%. Adjusted EBITDA on the other hand climbed 12% to record a value of $415 million. On the topline front, total revenues increased a solid 8% to reach the best ever quarterly figure of $1.12 billion. For the full year, the company raised its guidance marginally from $4.47 billion to $4.5 billion. Our current price estimate for the company stands at $3.82, implying a discount of about 5% to the current market price. However, we are in the process of updating our model in light of the recent earnings release.
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