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

COMPANY OF THE DAY : CHINA TELECOM

China Telecom reported a steady improvement in August, as it gained about 1.8 million new 3G subscribers. This marked the sixth consecutive month of improvement in 3G user adds for the carrier, and the first time this year that China Telecom recorded more monthly high speed user adds than China Unicom. In a recent note we discuss these results as well as our outlook for the company going forward.

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FORECAST OF THE DAY : VERIZON'S U.S. WIRELESS MARKET SHARE

According to a recent report by RootMetrics, Verizon's wireless network remains the best in the U.S. in terms of network speed, network reliability, call performance and data performance. The company's upgraded XLTE network allowed it to build a significant lead in terms of speed. We expect the carrier's network advantage to allow it to defend its market share amid increasing price competition from smaller rivals.

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MGM Logo
MGM To Benefit Post An August Gaming Decline As Outlook Still Remains Positive
  • by , yesterday
  • tags: MGM LVS WYNN
  • After five months of gaming growth, Nevada witnessed a 4% drop in gaming revenues for August. Revenues at the Las Vegas Strip dropped by more than 6% to $553 million. However, it must be noted that the Strip witnessed a 20% jump in revenues in the prior year period amid an unusual higher baccarat hold of 18.92%. The money being wagered on Baccarat continued its uptrend and grew 2.4% for the month. This will benefit casino operators such as  MGM Resorts (NYSE:MGM), who have a significant presence at the Strip. The casino operators have been trying to attract more Asian high rollers, who prefer baccarat to other casino games, and the growth of baccarat is helping the company grow. Going forward, the economic recovery and higher consumer spending will only make things better for the casino operators at the Strip. Total value of MGM’s Las Vegas table games money wagers was $4.2 billion in 2013. The reported win percentage of 20.5% translates into revenues of $861 million for the year. The estimated EBITDA margin of 14% for the company’s Las Vegas casino operations translates into EBITDA of $123 million, representing 7% of MGM’s overall EBITDA for 2013. The U.S. casino table games contribute more than 6% to MGM Resort’s stock value, according to our estimates.
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    Here's Why We Believe Cree Is Still Worth $58
  • by , yesterday
  • tags: CREE TGOSY EPIS AGVO
  • Despite reporting strong earnings growth this year,  Cree’s (NASDAQ:CREE) stock price has declined by approximately 40% year to date. Lower gross margin, doubts regarding the company’s capability to sustain its growth in the long term, and rising competition from bigger players such as General Electric (GE) are some of the key factors contributing to the negative sentiment around Cree’s stock. Our price estimate of $58 for Cree is at a 40% premium to the current market price of $41. Product innovation in the last few quarters has opened new applications and improved LED returns, in turn driving additional demand for Cree’s products. The continued growth momentum, combined with a strong balance sheet, gives Cree the flexibility to respond to new opportunities in the market. LED penetration is expected to increase in the future, and being one of the leading global LED manufacturers, Cree will benefit from the trend, in our view.
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    Amazon's CEO Believes In India's Growth Story
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  • tags: AMZN BABA EBAY
  • Amazon ‘s (NASDAQ:AMZN) CEO Jeff Bezos was in headlines due to his recent visit to India, and the decision to move ahead with $2 billion of investment in Amazon’s operations in the country. THis prompts us to wonder:  Was this a significant visit?  And can India become integral to Amazon’s future growth? One thing is certain:  Amazon’s management is showing a strong belief in India’s growth story. The country’s GDP growth could get back on track this year and recent developments suggest that there is a lot of interest from investors in e-commerce companies. To put things in perspective, Amazon’s 2013 revenues stood at little under $75 billion and the company enabled $1 billion of gross merchandise volume in India where it operates a marketplaces model. Therefore, actual revenues from India would have stood below $100 million assuming a take rate similar to that of eBay (NASDAQ:EBAY). Thus, we estimate that India accounts for less than 1% of Amazon’s business, even if we assume that its marketplaces model in India has much higher margins that its inventory-based model in the U.S. and other countries. However, we believe that Indian e-commerce market will grow multi-fold over the course of next five years and, at some point, the Indian government will allow FDI (foreign direct investment) in the country, thus allowing Amazon to stock-in inventories and sell them directly. Over time, we believe that India can be integral part of Amazon’s business. Our price estimate for Amazon stands for $348, implying a slight premium to the market price.
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    Key Growth Drivers For SanDisk's Embedded Storage Division
  • by , yesterday
  • tags: SNDK AAPL SSNLF MU
  • SanDisk (NASDAQ:SNDK) is one of the largest manufacturer of NAND flash products, which are used as embedded storage in smartphones, tablets and other consumer electronic devices. Embedded storage products (not including embedded solid-state drives) generated more than a quarter of SanDisk’s overall revenues of $6.2 billion in 2013. According to SanDisk’s estimates, its total addressable market (TAM) for smartphone, tablet and other portable device storage is expected to grow from over $12 billion in 2013 to nearly $18 billion by 2020. Below we take a look at the products included in this division and key trends affecting growth.
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    American Eagle Outfitters: Why Omni-Channel Was An Inevitable Move
  • by , yesterday
  • tags: AEO ANN ARO
  • Over the past few years,  American Eagle Outfitters ‘ (NYSE:AEO) direct-to-consumer business (which mainly includes e-commerce) has grown rapidly, driven by the increasing popularity of online shopping and proliferation of smartphones and tablets. From $307 million in 2008, the retailer’s direct revenues increased to $467 million in 2012. Even as the company struggled during fiscal 2013 through a tough retail environment, its e-commerce revenues increased by 13% to $527 million. So far in fiscal 2014, American Eagle has failed to recover from its slump and hasn’t reported its online growth. However, we believe that a steady rise in its e-commerce revenues has continued this year, given the industry-wide gradual shift towards online shopping. Despite this growth, e-commerce hasn’t turned into a big business for the company, which has been the case with other retailers as well. In response, the U.S. apparel industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across stores and the online channel. This is becoming an inevitable move for U.S. apparel retailers, including American Eagle, which is working hard to develop its omni-channel platform and has shown significant progress so far. Our price estimate for American Eagle Outfitters stands at $13.45, implying a discount of about 10% to the market price.
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    Alibaba Hands Out Generous Fees To Investment Banks Involved In Its IPO
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  • tags: C CS DB GS JPM MS
  • Given the size of  Alibaba’s (NYSE:BABA) long-awaited IPO, the banks and brokerages that worked in it no doubt expected handsome fee revenue from the Chinese e-commerce giant in return for their services. But when the better-than-expected market response to the offering made it the world’s largest IPO, the company was happy to announce an additional incentive fee of $50 million for its lead bankers – bringing the total fees to an unprecedented $300 million. Given that the IPO raised $25 billion, this represents total fees of 1.2% of the offering size. To put things in perspective,  Facebook (NASDAQ:FB) handed out $175 million in fees for its $16-billion IPO, or a fee of 1.1% (see Banks Earn Nice Facebook Fees Despite Shares Trading Lower Post IPO ). Equity underwriting fees as a percentage of deal size generally falls with an increase in the value of the deal, which is why Alibaba’s  compensation package is a windfall for the banks. Notably, Alibaba chose a different approach for splitting the fees, rather than pursuing the usual practice of giving each bank a pre-determined proportion of the fee pool. It gave each of the five lead bankers —  Morgan Stanley (NYSE:MS),  Credit Suisse (NYSE:CS)  Deutsche Bank (NYSE:DB),  JPMorgan (NYSE:JPM) and  Goldman Sachs (NYSE:GS) — a 15.7% share of the $250-million base fee, followed by a 7.9% share to  Citigroup (NYSE:C). The remaining 13.6% was shared by 28 lower-tier underwriters. The $50-million incentive fee was shared only by the six main banks in proportion to their involvement in the deal.
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    Coca-Cola's Carbonates Offer Growth Despite Unfavorable Market Trends
  • by , yesterday
  • tags: KO PEP DPS
  • Carbonated soft drinks (CSD) have declined for nine straight years in the U.S. as consumers continue to restrict calorie consumption and switch to more natural means of quenching thirst. This category forms around 43% of the country’s liquid refreshment beverage market by our estimates, and is mature, with Coca-Cola, PepsiCo and Dr. Pepper accounting for almost 90% of the industry-wide volumes. With more and more consumers choosing to avoid sugary soft drinks, the leader of this market,  The Coca-Cola Company (NYSE:KO), also witnessed a 2.2% fall in CSD volumes in the U.S. last year. Coca-Cola derives close to 20% of its sales from the domestic market, and with volume growth in core carbonates remaining flat to negative in recent years, the beverage maker has looked to further expand into emerging markets and invest in growing beverage segments such as bottled water, ready-to-drink tea, sports and energy drinks. However, defying current market trends, Coca-Cola’s CSD portfolio in the U.S. could be headed for growth, not only in terms of margins, but also volume-wise. See our full analysis for The  Coca-Cola Company Coca-Cola’s stock has risen by only a modest 3% so far this year, reflecting how the investors believe that the company could continue to report stable but only slight organic growth. The company has locked in its share in the fast growing energy drinks market, by buying a 16.7% stake in Monster Beverages, and in the at-home beverage market, by raising its stake to 16% in Keurig Green Mountain. These equity investments will ensure steady income growth, even if Coca-Cola’s own beverage operations fail to grow at expected levels. But the company seems to have found a way to sustain growth in its core carbonates business in the U.S. as well, banking on new launches, higher marketing expenditure, and by using innovative means to re-establish customer bonds. Can Coca-Cola manage to squeeze-out growth from the ailing CSD market in the U.S.? We give reasons why we think the beverage giant might just be headed in the right direction. Volumes Grow On The Back Of Share-A-Coke Campaign Coca-Cola has looked to spur sales of its most popular and namesake cola drink Coca-Cola and its low calorie versions through experiential marketing, which aims at creating an emotional connect with customers. According to the chief marketing and commercial officer at Coca-Cola, Joseph Tripodi, the company spends over $4 billion on marketing around the world. Coca-Cola spent $3.3 billion on advertisements in 2013, representing 7% of its net sales, more than the $2.4 billion spent by chief rival PepsiCo, only 3.6% of its net sales. But the world’s leading beverage company and already one of the most recognizable and valued brands doesn’t plan to stop here. In February, Coca-Cola announced its plans to save an incremental $1 billion in productivity by 2016, which would be redirected to media investments. In line with this productivity savings plan, the company plans to save $550-$660 million this year. Coca-Cola launched the “Share a Coke” campaign in the U.S. this year, and has seen a rise in U.S. soft drink volumes since. The company labeled Coca-Cola, Coke Zero and Diet Coke bottles with common names of individuals, hoping for customers to buy these personalized bottles and cans and then promote this activity later on through social media. By forming an emotional connect with customers and leveraging present day trend of self expression on social platforms, Coca-Cola managed to grow U.S. CSD volumes and sales by 0.4% and 2.5% year-over-year in the twelve weeks through August, while both PepsiCo and Dr. Pepper Snapple witnessed declines in both volumes and revenues. Coca-Cola is rolling out its Share a Coke campaign in over 80 markets this year, and could very well extract growth in the CSD category, and that too in the ailing cola segment. The drink Coca-Cola, which generated close to $11 billion in revenues last year, grew by 1% last quarter. The flagship drink could end the year with positive volume growth in the U.S., reversing the 0.5% volume decline of last year. Small-Sized Packages Back Health Initiatives And Margin Growth Apart from a possible rise in volumes, Coca-Cola now aims to derive higher profitability by leveraging consumer health concerns that have for long subdued CSD consumption levels. Coca-Cola, alongside PepsiCo and Dr. Pepper, announced its aim of reducing calorie consumption through soft drink offerings by 20% by 2025 in the U.S. These companies plan to achieve this through promotion of low-calorie substitutes and smaller packs, which provide lower cumulative calories in one go. Fighting alongside health activists could help these beverage makers not only to spur positive consumer perception but also expand margins, as smaller packs are relatively more profitable. Over three-fifths of the 1% volume growth for the brand Coca-Cola in Q2 was bolstered by double-digit percent increases in smaller packages, including 7.5-ounce mini cans and 16-ounce immediate consumption packages. Demand for small-sized offerings has risen, despite the mini cans containing the same calorie count per ounce as the regular 20-ounce bottles, as customers look for lesser cumulative calorie consumption. According to Euromonitor, while sales in the overall U.S. CSD market remained flat last year, mini can sales rose 3%. The smaller 7.5-ounce mini cans have higher pricing per ounce, as compared to the 20- and 24-ounce packages, thereby boosting net pricing for companies. Fueled by growth in small-sized packages, Coca-Cola’s net pricing in the sparkling category grew 3% in North America in the second quarter. Owing to the higher unit prices of smaller quantity cans, margins for Coca-Cola could also expand going forward. Beverage makers will aim to attract impulse buyers with their mini cans due to their lower prices and fewer cumulative calories, adding incremental volumes and also simultaneously boosting margins as these mini cans have higher price-per-ounce. New Product Launches Could Attract Customer Traffic Much hype already surrounds the launch of the naturally-sweetened Coca-Cola Life in the U.S. this year. The stevia-sweetened drink enters the U.S., Mexico and the U.K. this year, after boosting volume growth in Argentina and Chile last year. Apart from a potential winner in the ailing low-calorie soda segment, Coca-Cola could also have another sugary soda hit in the making. The beverage giant brought back its popular citrus flavored drink Surge, heeding to continual demand by consumers on online portals, this month. Surge was launched on Amazon.com, selling at $14, plus shipping, for 12 packs of 16-ounce cans. The initial demand for Surge remained high, with the drink temporarily selling-out twice on September 15. Gauging the encouraging consumer response to Surge, Coca-Cola might even launch the drink in retail channels in the future, which would then bring the drink in direct competition with PepsiCo’s flagship drink Mountain Dew. With dollar sales of  nearly $668 million in measured convenience store channels in the U.S. last year, Mountain Dew was the highest-selling CSD, beating even the popular cola-flavored drinks Coca-Cola and Pepsi. Surge was debuted in 1996, but was pulled after sales didn’t catch-up, and the drink failed to compete with Mountain Dew. However, with initial online sales reflecting strong demand, Coca-Cola might once again launch Surge in retail stores, adding another option in the CSD category, which has been ailing amid health concerns and lack of alternatives. Due to expected volume growth on increased marketing initiatives and new product launches, in both diet and full-calorie segments, and margin expansion owing to higher sales of smaller packages, Coca-Cola’s CSD portfolio could be headed for growth in the U.S. We currently estimate gross margins for Coca-Cola’s entire CSD portfolio to remain relatively flat through the end of our forecast period. However, if the figure gradually rises to 64%, there could be a 3% upside to our current price estimate for Coca-Cola. We estimate a $41.86 price for Coca-Cola, which is roughly in line with the current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Impact Of Changing Dining Preferences In The U.S. On Chipotle Mexican Grill
  • by , yesterday
  • tags: CMG MCD SBUX BKW
  • According to the  NPD ’s foodservice market research, the restaurant industry has been negatively impacted by the changing dining habits in the U.S., primarily driven by changing economic and cultural conditions. Quick Service Restaurants (QSR) have been witnessing sluggish growth for the past 18 months, due to many factors such as rising commodity costs, entry of many new competitors and declining customer traffic growth. According to the report, the reason for the declining customer traffic is the widening income gap between the high-income groups and middle-class groups in the U.S. The income split is affecting the customer count in the QSRs such as  McDonald’s Corporation (NYSE:MCD), Yum! Brands &  Burger King (NYSE: BKW). According to the report, the customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. Fine dining restaurants have an average customer spend of $40 and QSRs report an average check of $5. A decrease in low-income customers, who prefer going to low-cost fast food restaurants, is affecting the revenue growth of the QSRs. Moreover, customer traffic in the fine dining restaurants is not enough to make up for the declining traffic count. As a result, these restaurant chains are depending on middle-class groups to fill the void. Source: NPD report Fast Casual Segment To Benefit the Most As per the chart, the segment that benefits the most with the changing dining habits is the one with the average check of $10-$20, or what is called as the fast-casual segment, which includes companies such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread. This segment accounts for 16% of the total customer traffic share and has had a consistent growth in customer traffic for the past 5 years. The segment is witnessing consistent increases in its customer base, and the only segment with a greater share of customer traffic, QSRs, is facing decline in customer base. Fast casual restaurant is a relatively fresh and rapidly growing concept, positioned somewhere between fast food restaurants and casual dining restaurants. Technically, being the hybrid of the two concepts, they provide counter service and offer more customized, freshly prepared and high quality food than traditional QSRs, all in an upscaled and inviting ambiance. However, they also have minimum table service but the typical cost per meal ranges from $8 to $15. Fast casual restaurants most often does not have drive-thru outlets. Brands such as  Chipotle Mexican Grill (NYSE:CMG), Panera Bread, Qdoba Mexican Grill and Baja Fresh are considered as the top restaurants in this category. We have a $628 price estimate for Chipotle, which is about 5% lower than the current market price. See Our Complete Analysis For Chipotle Mexican Grill Has Chipotle Mexican Grill Made The Most Of It? Chipotle Mexican Grill, which has an average check of $13-$15, has been an impressive performer over the past few years, with increase in average check and rise in customer count. With excellent revenue growth, increase in customer count and stable margins, Chipotle has established its brand in the industry. Chipotle’s shares are up 55% over the past 12 months and 37% up since the start of 2014. Sustained Growth In Comparable Store Sales According to  Technomic’s 2014 Top 500 chain restaurant report, sales for fast casual chains  grew by 11% and store count by 8% in 2013. Although, in 2013, Chipotle generated $3.2 billion in revenues, which in comparison to McDonald’s revenues seems to be a much smaller figure, the revenue growth has been consistent at around 20% for Chipotle for 5 years now. Chipotle’s net revenues rose by a whopping 75% over the last 3 years. Chipotle’s revenue for the second quarter of the fiscal 2014 rose to $1.05 billion, up 28.6% year-over-year, primarily driven by an increase of 17.3% in the comparable restaurant sales. Strong comparable sales has been the highlight of the company and it believes that its extraordinary service and exceptional dining experience in addition to unique food culture hold the key for its improved comparable store sales. Additionally, the rising health concern among the people of the U.S. is one of the major reasons that fast casual restaurants are witnessing more traffic every quarter. The company’s policy of ‘food with integrity’, where it focuses on serving naturally raised meat and  fresh ingredients, have struck a chord with consumers and is forcing other restaurant chains to remodel their strategy and supply chain in order to respond to this newly created demand. As a result, people with higher disposable income are inclined more towards quality and hygienic food. Customers Not Dissuaded By Menu Price Hike According to Morgan Stanley research report, Chipotle’s stores have witnessed more than a 6% increase in customer usage, the highest in the industry, over the last eight years. Chipotle initially decided to raise its menu prices in 2013, but refrained from doing so and deferred the move to 2014. After ensuring that the QSRs have raised their prices, due to the rising commodity costs, Chipotle raised the prices of its steak burritos by 4%-6%, or 32-48 cents in the second quarter, whereas the overall menu prices went up by 6.5% on average. Many feared that the price hike would affect the company’s customer traffic, but it had minimal impact on them. People are willing to pay 4-5% extra for hygienic and better quality food. This led to an increase in the average spend per customer visit. The correct timing and method of price hikes, innovative new menu additions and strong marketing has helped the company in stealing market share from QSR brands. Considering the above facts, it hardly leaves any doubt that the fast casual leader has made the most of the situation and has a further growth potential. 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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    Marvel Characters In Disney's Infinity 2.0 Will Aid The Interactive Media Revenue Growth
  • by , yesterday
  • tags: DIS ATVI
  • Disney (NYSE:DIS) released Infinity 2.0 on September 23 priced at $74.99 for starter pack and $13.99 – $34.99 for additional characters. The first version of Infinity was released in August last year and the game has seen tremendous success since. It was the 10th best-selling new physical game at retail in the U.S. last year. The first edition of the game has generated over $500 million from the sale of more than 3 million starter packs and the second version may repeat the success as it will now feature Marvel’s superheroes for the first time. Disney Infinity is part of the interactive media division, which is involved in developing and distributing video games and related content.  The division has been struggling in the past few years due to the poor performance of its releases. However, Infinity’s positive trend might help Disney to turnaround the unit which, until recently, has been posting losses. The interactive media division generated revenues of $1.18 billion in 2013. The estimated segment EBITDA margin of 15% translates into EBITDA of $177 million, representing a little over 1% of Disney’s overall EBITDA for 2013. Understand How a Company’s Products Impact its Stock Price at Trefis
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    Anheuser-Busch InBev: Headwinds In Russia To Lower Europe Volumes
  • by , yesterday
  • tags: BUD DEO TAP SBMRY KO PEP
  • Anheuser-Busch InBev (NYSE:BUD) has looked to draw growth through mergers and acquisitions such as Grupo Modelo last year, Oriental Brewery this year and a possible SABMiller deal. But what about organic growth? Taking aside possible M&A activities, the company has tapped into emerging markets in South America and Asia and also expanded margins through economies of scale and optimization of operations. However, mature beer markets in the developed world pose a threat to Anheuser’s growth. Beer operations in North America (U.S. and Canada) constitute over one-third of the valuation for the world’s largest brewery, according to our estimates. 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 might be limited in the coming future in North America . The North American beer industry witnessed a 6% drop in volumes between 2009-2013, with the exception of a slight rise in 2012. Europe is another important market for the brewery, constituting 12% of the net revenues last year. Russia is the largest market for Anheuser-Busch InBev’s 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. Europe forms less than 6% of Anheuser’s valuation by our estimates, as we estimate sluggish beer performance in the continent going forward. 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 Beer Volumes To Remain Weak For Anheuser-Busch The Russian economy has been struggling lately amid geopolitical issues with Ukraine. The U.S. and the European Union issued sanctions against Russia for supporting separatist rebels in Ukraine, an accusation denied by Russia. Due to the continual weakening of domestic demand and high levels of inflation, and with the Western countries looking to tighten restrictions on Russia’s financial, defense and energy sectors, the International Monetary Fund lowered its outlook on the country’s GDP growth rate to 0.2% this year and 1% in 2015, down from the previously estimated growth rates of 1.3% and 2.3% in 2014 and 2015 respectively. Lower consumer spending due to negative sentiment is expected to hamper sales of beer in the Russian market and consequently for AB InBev. 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 decline this year owing to the geopolitical tensions. 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. Despite rebounding disposable incomes, Western Europe might not be able to offset this expected decline due to health and wellness concerns and relatively high per capita consumption. Beer Was Already Declining In Russia Prior To The Crimea Crisis Beer decline in Eastern Europe started before the Russia-Ukraine political blowout. In 2012, reclassification of beer from foodstuff to alcohol in Russia resulted in some trading restrictions, prohibitions on selling beer between 11:00 pm and 8:00 am, and in public locations, and advertisements, thereby reducing volume sales of beer. In addition, higher taxes on beer also raised product prices, causing subdued consumer demand. Beer excise rate increased six times between 2009-2014, from $0.09 per liter to $0.55 per liter. In addition, the government plans to increase taxes on beer progressively between 2012-2015. Higher taxes will prompt further price rises and could dissuade consumers, who are already reeling under a weak economy, from beer consumption, going forward. Despite our current estimate of low volume sales in Europe, higher marketing expenditure and strong brand recognition could spur volume growth in parts of Western Europe. AB InBev has a strong foothold in Europe, holding a massive 53% share in Belgium, and 17.2% and 8.8% volume shares in the U.K. and Germany respectively, owing to popular brands such as Budweiser, Hoegaarden and Beck’s. AB InBev’s Jupiler leads the Belgian beer market and is also the official sponsor of Belgian national football team. On the other hand, Chernigivske is the best-selling beer brand in Ukraine and also the sponsor of the Ukrainian national football team. In addition, the beer brand Hasseröder also gained exposure in Germany by leveraging its sponsorship of the 2010 FIFA World Cup. The brewer attracted customers in Europe during the FIFA World Cup due to football related sponsorships, which resulted in 9.3%, 3.2% and 13.5% volume growths in Belgium, Germany and the U.K. respectively, in Q2 2014. Strong brand awareness as a result of higher investments in marketing and advertising during global events could spur beer volumes for Anheuser in Western Europe in the coming future. If the brewer’s Europe volumes in the long term rise to 5.5 million liters, still less than 2011 levels but more than the figure of 4.8 billion liters last year, and EBITDA margins remain flat, there could be a 3% upside to our current price estimate for AB InBev. 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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    Q3 Results At RBS To Benefit From $1.3 Billion Provision Release
  • by , yesterday
  • tags: RBS BCS CFG
  • Nearly six years after it was pulled from the brink by the British government,  The Royal Bank of Scotland Group (NYSE:RBS) seems to have finally turned the corner. While the global banking group has yet to recover fully from the impact of the economic downturn of 2008, with the U.K. government still holding an 81% stake, the bank has worked extremely hard over the years to streamline its operations and improve efficiency. And with economic conditions in Europe returning to normal, RBS’s business model is well poised to churn out steady profits. Going by RBS’s performance figures for the first half of the year as well as the bank’s preliminary update about Q3 results released on Tuesday, September 30, it appears that the bank’s poor profitability may be a thing of the past. A key factor behind this is improving credit conditions in the region, which have helped the bank dip into the huge loan reserves it has created over the years. Notably, RBS will release £800 million ($1.3 billion) in provisions in Q3 – significantly higher than the £93 million ($150 million) in loan recoveries for Q2. Coupled with the absence of any one-time impairment costs, this should help RBS post one of its best quarterly performances since the economic downturn of 2008.
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    Time Warner Price Estimate Revised To $80 Given The Split From Time Inc.
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  • tags: TWX TWC NWSA
  • Time Warner (NYSE:TWX) completed the separation of its publishing business, Time Inc., at the end of the second quarter this year and we have updated our model to reflect the impact of the split. We have estimated the revenues for the first two quarters of 2014 to be around $1.5 billion and have forecast zero income from this business in the coming years. We will be completely removing this segment from our model after Time Warner releases the annual filings for 2014 with details of balance sheet items and the cash flows. We have revised our price estimate from $83 to $79 for Time Warner. Time Warner has been shrinking dramatically over the past decade with the exit of Warner Music, AOL, Time Warner Cable (NYSE:TWC) and now Time Inc. We believe that the split of publishing business is a step in the right direction, as this will allow Time Warner to focus purely on media content and keep itself away from the troubled print media industry. The company’s decision to exit publishing was partly driven by the challenges faced by the publishing industry, which is seeing continuous declines in advertising as well as subscription revenues given the growth in digital media. Time Inc. generated revenues of $3.34 billion in 2013. The estimated EBITDA margin of 18% for publishing segment translates into EBITDA of $607 million, representing 7% of Time Warner’s overall EBITDA for 2013. The publishing business contributed close to 3% to Time Warner’s value before the split, according to our estimates.
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    Further Delays In The Approval of Kinder Morgan's Trans Mountain Expansion Project Can Hurt Company's Profitability
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  • tags: KMP
  • Kinder Morgan Energy Partners’ (NYSE:KMP) Trans Mountain Pipeline Expansion Project plans to twin the the pipeline that carries crude oil from the Alberta oil sands to tankers in Burrard Inlet, British Columbia. This is the only pipeline from Alberta to the West Coast providing access for oil sands production to reach markets outside North America. The expansion will triple the carrying capacity of the pipeline from 300,000 barrels of oil equivalent per day(boe/d) to 900,000. This has become a concern for environmentalists: in 2007, Kinder Morgan operated the pipeline that burst in Burnaby, British Columbia, spilling a large amount of oil into Burrard inlet, and a smaller spill happened in January, 2012 at the company’s Abbotsford facility in the Sumas Mountains. Trefis has a  price estimate of $83 for KMP, which is about 10% below the current market price. See Our Complete Analysis For Kinder Morgan Energy Partners Approval Delayed Canadian regulators have delayed the date for the review for approvals of the Trans Mountain Expansion by seven months, pushing the date back to January, 2016. The project has come in for a lot of criticism, with more than 70% of Vancouver’s residents opposed to the expansion, according to a poll. This makes the proposal a touchy subject, especially with the Federal elections coming up in 2015. Another issue concerns Aboriginal Rights: even though the proposed expansion is still pending approval from Canada’s National Energy Board, many Aboriginal community members feel that the board has gone beyond its rights and considered reviewing the project without their approval. The city of Burnaby has flat out refused cooperation with Kinder Morgan, banning engineers or other specialists hired by the company onto city property. This has prevented the company from being able to carry out several studies required for the expansion application. Financial Impact Taking into consideration all of the above points, it appears that the Trans Mountain expansion project may be pushed back beyond its initial target date of 2017. However, 2018 or 2019 might not be out of the question given there are several factors that could work in Kinder Morgan’s favor. Even though the population in British Columbia is against the pipeline expansion, the company has some strong allies in the Canadian oil and gas producers. The absence of a pipeline that can be reliably used to transport oil across the West Coast means that there is a huge discount applied to their production, in turn impacting their profitability. It is estimated that the Canadian Government might be losing as much as $8 billion a year in taxes in the absence of this pipeline. As far the company is concerned, this project represents just under one-third, or $5.4B, of its current $17.0B capex budget. Kinder Morgan believes that this project can deliver a steady stream of future cash flows. As the image below taken from a company presentation makes clear, the company’s targeted 10% annual dividend growth rate presupposes $5.2 billion in annual spending on the Trans Mountain pipeline. Any further delays in this project might impact the company’s profitability significantly. Considering the economics of oil transportation, it is possible that project can triple Kinder Morgan’s revenues from the Canadian crude transportation segment. Midstream assets work on long-term contracts and generate stable cash flows derived from fee-based revenues. Pipelines are usually low-risk assets as they are not extremely sensitive to the prices of the commodities being transported. Transportation contracts are generally based on volumes and fluctuations in the price of commodity do not impact the contract prices directly. 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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    How Is Philip Morris Doing In Russia?
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  • tags: PM
  • Russia is an important market for cigarette companies. The cigarette market in Russia is estimated to be worth $20 billion. About 40% of the population there smokes, and the average smoker there smokes around 2700 cigarettes a year. Unlike the U.S., where the average smoker used to be at these levels in 1990, the market for cigarettes in Russia is shrinking much at a much slower pace. Russian leaders have also decided to significantly lower import duties on cigarettes by the year 2017. We have written earlier on the regulatory challenges faced by Philip Morris (NYSE: PM) in Russia.(See  Philip Morris Earnings Preview ) In this article we review some of those regulatory hurdles and take stock of Philip Morris’ current standing in Russia. See Our Full Analysis For Philip Morris Review Of Regulatory Challenges For Tobacco Majors In Russia Last year, Philip Morris’ sales volume in Russia declined by almost 7% as a result of the implementation of excise tax hikes and other anti-tobacco measures. Specific excise tax on cigarettes was increased by more than 40% y-o-y last year. Apart from this, a new anti-tobacco bill that was signed into law on February 25, 2013, also came into effect on June 1, 2013. This anti-tobacco law aims to reduce annual smoking-related casualties in Russia by half over a decade by restricting smoking in public areas and the marketing and sale of cigarettes. It also includes provisions for implementing a minimum price on cigarettes starting 2014 and banning tobacco sales at street kiosks. As a result of these measures, the size of the cigarette market in Russia is estimated to have further decreased by 8.5% in the first half of 2014. Philip Morris has also increased the price of its cigarette packs by four Rubles a pack across its portfolio. Accounting for reduced consumption due to this price increase, it expects the market size reduction for the year 2014 to be in the 9-11% range. The silver lining  for the company is that its market share has increased across all price categories. Its overall market share increased by 0.9 percentage points over the first quarter to end at 26.8% in the second quarter. Morris’ Strategic Investment Bears Fruit In the face of the decreasing demand for cigarettes, the market leaders in the industry had chosen to try a bit of forward vertical integration. Philip Morris and its rival Japan Tobacco had each picked up a 20% stake in the large Russian cigarette distributor Megapolis in December 2013. Japan Tobacco, with its signature brand Winston, has a 36% share of the Russian cigarette market, roughly 10 percentage points more than Philip Morris. It also has four factories in Russia, as opposed to Philip Morris’ two. Megapolis has a near monopoly on the Russian branded cigarette market, having delivered 260 billion cigarettes in 2012. Its also the exclusive distributor for Japan Tobacco, Philip Morris and Imperial Tobacco in Russia. The investment in its major distributor could have had a hand to play in Philip Morris enhancing its market share last quarter. Philip Morris had agreed to pay up to an additional $100 million based on Megapolis’ performance in increasing sales. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap |  More Trefis Research
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    Can GE Continue To Grow Its Oil & Gas Business?
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  • tags: GE
  • GE ‘s (NYSE:GE) oil & gas business has grown at strong rates over the last many years through strategic acquisitions and organic growth. The industrial conglomerate currently is one of the largest suppliers of oil and gas drilling equipment with leading position in many segments such as subsea and turbomachinery solutions. During 2009-2013, revenues from GE’s oil & gas segment increased at a compounded annual growth rate of nearly 15%, from $9.7 billion in 2009 to $17 billion in 2013. Profits from this segment also rose steadily during this period, from $1.5 billion in 2009 to $2.2 billion in 2013. But with global crude oil prices expected to remain stable over the next few years with rising oil production from the U.S., can GE continue to grow its oil & gas business at such strong rates? We figure with global demand for oil & gas continuing to grow, especially from the developing countries, oil & gas production will likely also rise in coming years. Accordingly, GE anticipates oil & gas industry’s total spending to rise by 6% annually through 2017. In our view, this rising industry spending will grow GE’s oil & gas results, as the company holds a leading position as an equipment supplier. GE’s simplification initiative, which is lowering costs, will ensure that this revenue growth translates into strong profit growth. So overall, we figure GE will likely be able to grow its oil & gas business in coming years. GE’s oil & gas segment will constitute about 12% of its overall revenues in 2014. We currently have  a stock price estimate of $28.33 for GE, around 10% ahead of its current market price. See our complete analysis of GE here GE Has Built A Formidable Position As An Oil & Gas Equipment Supplier Over the last two decades, GE acquired many oil & gas equipment suppliers. The company started with the acquisition of NuovoPignone, which enabled the industrial conglomerate to establish a foothold in the turbomachinery space. Since then, GE has undertaken strategic acquisitions to build leading positions in specific areas. Today, GE is a leading player in the subsea segment, in which capital expenditure from the oil & gas industry is expected to grow by 9% annually through 2017. The acquisitions of Wellstream in 2011 and of vectogray before that enabled GE to build its product portfolio in the subsea space. Similarly, the acquisitions of Well Support, Sondex, Hydril and Lufkin helped GE build its formidable position as a drilling and surface equipment supplier. Several other acquisitions have allowed GE to establish itself in the downstream segment as well. Overall, today GE is one of the largest suppliers of oil & gas products, which have applications across the entire value chain from drilling to downstream processing by refineries. In addition, GE has an extensive support network comprising of 40 service centers in the world’s main oil and gas extraction regions, including the Middle East and Latin America. We figure this is crucial for growth as buyers prefer service centers in the vicinity of their operations as this helps minimize their equipment downtime. Strong Long Term Growth Fundamentals In the first half of 2014, GE’s oil & gas revenues have risen by 23% annually, and the segment’s margins have expanded by 60 basis points. For the full year 2014, the company anticipates its oil & gas revenues and profits to be higher than those in 2013. In our opinion, the long term growth potential for GE’s oil & gas business is solid. With a rising global population, demand for energy is bound to grow. We figure that a significant portion of this growing energy demand will have to be fueled by oil & gas. This will compel oil & gas extraction, transportation and and refining companies to invest more capital, thereby growing the market for GE’s oil & gas equipment products. Currently, large developing countries like China and India consume significantly less oil per person, compared to developed countries. China and India currently consume 7 and 3 barrels per day (bbl/day) per 1000 people, respectively. The corresponding figures for Japan is 35, for Australia is 44, for the U.S. is 61 and for Canada is 64. So, as consumption of oil in developing countries rise, GE’s oil & gas business will likely grow. 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 Closer Look At Freeport's Indonesian Mining Operations
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  • tags: FCX NEM ABX SLW RIO
  • Freeport McMoran Inc (NYSE:FCX) resumed exports of copper concentrate from its mining operations in Indonesia last month. This ended a near seven-month suspension of exports of copper concentrate from the country for Freeport as a result of negotiations over regulatory changes governing mineral exports from the country. The resumption of normal operations in Indonesia was a major boost to Freeport as the company’s operations in the Grasberg minerals district in Indonesia constitute a major component of the company’s plans to boost its copper production. In this article we take a closer look at Freeport’s mining operations in Indonesia. See our complete analysis for Freeport McMoran Freeport’s Indonesian Operations Freeport’s copper and gold mining operations in Indonesia’s Grasberg minerals district are located in the remote highlands of the Sudirman Mountain Range in the province of Papua, which is on the western half of the island of New Guinea. It holds a 90.64% interest in these mining operations with the balance held by the Indonesian government.  The Grasberg minerals district has three operating mines: the Grasberg open pit, the Deep Ore Zone (DOZ) underground mine and the Big Gossan underground mine. The open pit mining operations produce the bulk of the company’s output, with output from the underground mining operations gradually ramping up. However, the company will transition to underground mining from open pit mining in 2017, with the cessation of production from its open pit mines. As on December 31, 2013, Freeport’s Indonesian operations accounted for around 27% and 95% of the company’s consolidated proven and probable copper and gold reserves, respectively. The company’s proven and probable reserves in Indonesia stood at 30 billion pounds of copper and 29.8 million ounces of gold. Low-cost Mining The Indonesian operations are extremely profitable for the company. These accounted for roughly 20.5% of Freeport’s mining revenues in 2013, but nearly 27% of the operating income generated from mining operations. The high-grade ore bodies at the Freeport’s mines in Indonesia translate into low-cost mining operations. The company measures operating cash costs associated with its copper mining operations through the unit net cash cost metric. This metric stood at $1.12 per pound of copper for the Indonesian operations in 2013, as compared to $1.49 per pound of copper for the company as a whole. The Indonesian operations were expected to account for around 24% and 94% of the company’s consolidated copper and gold shipments in 2014, respectively, at the time of the release of its 2013 annual results. As a result of the suspension of exports from Freeport’s Indonesian operations for close to seven months, Indonesia is now expected to account for roughly 17% and 85% of Freeport’s consolidated copper and gold shipments in 2014, respectively. However, with the ramp-up of underground mining operations at Freeport’s Indonesian operations, Indonesia is expected to contribute around 28% and 97% to Freeport’s copper and gold sales by 2016. This share is expected to decline in 2017, as the transition from open pit to underground mining is completed. However, the importance of the company’s Indonesian operations to Freeport, particularly in the near term is evident. Thus, the resumption of normal operation in Indonesia was a major boost to Freeport. Resumption of Exports from Indonesia Freeport recently entered into a memorandum of understanding (MOU) with the Indonesian government under which the two parties will negotiate an amended COW to address various dimensions of the company’s operations in Indonesia. The negotiations over the amended COW are expected to be completed over a period of six months. Along with the signing of the MOU, Freeport has agreed to provide a $115 million assurance bond to support its commitment for smelter development in Indonesia and to pay higher royalties of 4.0% for copper and 3.75% for gold, up from the current rates of 3.5% and 1% respectively. Freeport will now pay a revised duty of 7.5% on its copper concentrate exports, which will decline to 5% when smelter development progress exceeds 7.5%, and 0% when development progress exceeds 30%. The negotiations for the amended COW will also address the sharing of costs between Freeport, the government and any other partners involved in the project for smelter development, the terms for continuation of Freeport’s operations post-2021 including legal and fiscal guarantees, as well as the divestment of up to a 30% stake in its Indonesian subsidiary to Indonesian nationals or the government. Though these terms are unfavorable compared to the pre-existing ones governing Freeport’s mineral exports, given the importance of the company’s Indonesian operations to its overall plans to boost copper production in the near term, the company management would have been relieved with the resumption of normal operations in Indonesia. 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 Look At Silver Wheaton's Streaming Agreement For The Constancia Mine
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  • tags: SLW ABX NEM VALE FCX
  • Silver Wheaton (NYSE:SLW) is a precious metals streaming company which signs long term purchase agreements with mining companies producing silver or gold as a by-product. It provides funds for capital expenditure upfront when a project is being developed and obtains the right to buy precious metals produced at low, fixed prices. The silver or gold obtained at a fixed price is sold at market rates. The company does not pay for any ongoing capital or exploration costs at the mines. Such a business model greatly lowers its business risk, as compared to other companies that are directly involved in mining. In this article, we focus specifically on the company’s precious metal streaming agreement for Hudbay Minerals’ Constancia mine. We will incorporate various dimensions of the streaming agreement such as the reserve base at the mine, expected output, upfront payments made by Silver Wheaton, and the per ounce cash cost paid. See our complete analysis for Silver Wheaton The Constancia Mine and Streaming Agreement The Constancia copper project is located in the Chamaca and Livitaca districts in the province of Chumbivilcas in Southern Peru. Constancia will be an open pit mine, producing molybdenum in addition to copper, along with silver and gold by products. The project is expected to begin commercial production in 2015. On August 8, 2012, Silver Wheaton entered into an agreement with Hudbay to acquire 100% of the life of mine silver production from the Constancia project. On November 4, 2013, the company amended the agreement to include the acquisition of 50% of the life of mine gold production from Constancia.  Under the amended agreement, Silver Wheaton will pay Hudbay a total cash consideration of $429.9 million, of which $294.9 million has been paid as at June 30, 2014, with an additional payment of $135 million to be made once capital expenditures of $1.35 billion have been incurred at Constancia. In addition, Silver Wheaton will make ongoing payments of the lesser of $5.90 per ounce of silver and $400 per ounce of gold, both subject to an inflationary adjustment of 1% beginning in the fourth year, or the prevailing market price per ounce of silver and gold delivered. The Constancia mine will average 2.4 million ounces of silver and 35,000 ounces of gold production attributable to Silver Wheaton between 2015 and 2019. Gold production will average 18,000 ounces of gold over the rest of the mine’s life, which is expected to be 16 years.  As on December 31, 2013, the Constancia mine’s proven and probable reserves stood at 61.1 million ounces of silver and 0.56 million ounces of gold. This is sufficient to support the envisaged rates of extraction over a 16-year period. Benefits to Silver Wheaton As per the information available on the company website, we will assume a 16-year life for the Constancia mine. The $429.9 million upfront payment for the streaming agreement translates into an average cost of roughly $26.87 million (~429.9/16) per year. As per the terms of the streaming agreement, the mine is expected to average 2.4 million ounces of silver and 35,000 ounces of gold over the first 5 years. The mine is expected to average 18,000 ounces of gold for the next 11 years. We will assume that that just like the expected gold production, silver production will drop to around half of initial production as well, that is 1.2 million ounces, for the remaining 11 years of the mine life. Over the life of the mine of 16 years, the average annual acquisition cost of precious metals under the agreement will be $18.62 million. Adding the average upfront cost, the total annual cost adds up to $45.49 million. Taking current market prices of gold and silver of roughly $1,220 per ounce of gold and $18 per ounce of silver, the average market value of precious metals purchased per year under the agreement is $56.79 million. Thus, Silver Wheaton would make a profit of around $11.20 million per year on average, or around 25% of the average annual cost, on its streaming agreement for the Constancia mine. Even if we consider an inflationary adjustment of 1% on the purchase price under the deal, there is still scope for a profit. Taking into account an inflationary adjustment of 1% on the purchase prices under the deal, the purchase prices in the final year (year 16 in our estimate) would be roughly $455 per ounce of gold and $6.71 per ounce of silver. The company would still make a profit of around $0.43 million in the final year of production, including the average annual upfront cost, considering today’s market prices of silver and gold. Thus, Silver Wheaton’s streaming agreement for the Constancia mine looks like a good deal. Demand for gold and silver over the term of the agreement will mainly be driven by major emerging economies such as China and India. With robust economic growth, rising middle class populations with growing disposable incomes, these countries will drive the jewellery, investment and industrial demand for gold and silver. In 2013, China accounted for 26% of the global private sector demand for gold. Chinese private sector demand for gold is expected to grow from 1,132 tons per year in 2013 to 1,350 tons per year in 2017. Between 2009 and 2020, the global middle class will grow from 1.8 billion to 3.2 billion, with Asia’s middle classes tripling to 1.7 billion by 2020. These trends will provide support to gold and silver prices and ensure the success of Silver Wheaton’s streaming agreement for the Constancia mine. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Weekly Natural Gas Notes: Natural Gas Storage Deficit To Five-Year Average Continues To Narrow
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  • tags: CHK
  • In the first quarter of fiscal 2014, Chesapeake Energy’s (NYSE:CHK) earnings benefited from the more than 30% increase in natural gas prices on the back of severe winter weather conditions in the Northern and Eastern parts of the country, which brought about higher heating related demand. This high growth rate came down in the second quarter as the price of natural gas dropped. Storage levels of natural gas had been falling since November 2013, and had dropped more than 50% below the average level for the last five years by the end of March 2014. This decline was caused by the high demand for natural gas from commercial and residential sectors. However, storage levels have since started to increase, in turn bringing down the price of natural gas. The residential and commercial sectors together account for nearly 50% of the demand for natural gas in the U.S. During the first two months of 2014, demand from these sectors for natural gas grew by about 16% year-on-year, as the unusually cold winter season brought about need for more heating. However, this only forms an isolated event that does not represent the underlying behavior of these sectors. Consequently, the demand from these sectors for natural gas is expected to decline in the coming months. Additionally, the U.S. Energy Information Administration (EIA) also forecasts the demand from the power sector, which accounts for 20% of the demand for natural gas in the U.S., to decline in the coming months. According to the United States Energy Information Administration (EIA), Natural Gas storage injections have continued to outpace the five-year (2009-2013) this April-October period. Inventories as of September 5 stood at 2,801 billion cubic feet (Bcf). ( (Weekly Natural Gas Storage Report, EIA, September 2014)) During last year’s winter there was a huge draw down in inventory levels; stocks at the end of March were down by almost 1 trillion cubic feet and at their lowest level since 2003. According to the EIA’s short-term outlook, this trend is expected to continue this year, with forecasts pegging inventory levels at 3,477 Bcf at the end of October, or the lowest October-end level since 2008. However, the effect of the low inventories in the winter natural gas markets is likely to be mitigated by an expansion in production. The EIA cites the decreasing seasonality in natural gas futures contracts as evidence to support their forecast. Since natural gas accounts for more than half of Chesapeake’s total sales, the drop in prices could curtail Chesapeake Energy’s sales growth in the coming quarters. One factor that might offset the impact of declining natural gas prices on CHK’s profitability is that the company’s price realizations have grown faster than the broader market since the company benefited from some firm gas transportation contracts that it held on the Spectra pipeline in the North East.  The benchmark gas price on this pipeline, which carried some of  Chesapeake’s output from the North Marcellus, is based on the TETCO-M3 hub, which has been seeing a significant premium over NYMEX 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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    McDonald's McCafe To Face Stiff Competition In Canada
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  • tags: MCD BKW SBUX DNKN
  • McDonald’s (NYSE:MCD) McCafe lovers in Canada, finally have a reason to cheer up, as the customers can now add McCafe coffee to their grocery lists to take home. On September 16, the fast food giant announced the introduction of McCafe ground coffee in Canadian grocery and retail stores. Roast ground coffee at retail stores, as well as coffee in single serve formats are expected to be available at major grocery retailers across Canada by the end of September. The competition among the fast food restaurants in the U.S. has intensified over the last decade, with the entrance of new fast food brands fighting for market share. Over the last three years, breakfast has become the highest grossing and fastest growing daypart for the quick service restaurants (QSR). The most popular breakfast item in western markets is coffee, which has been introduced as a major menu item in all the top quick service restaurants such as Starbucks Corporation (NASDAQ: SBUX), Burger King (NYSE: BKW) and Dunkin’ Brands (NASDAQ: DNKN). Most of the top QSRs have established themselves quite well in the U.S., their biggest market, and now are shifting their focus to the untested Canadian market. We have a  $103 price estimate for McDonald’s, which is about 9% above its market price. See Our Complete Analysis For McDonald’s Corporation McCafe: Expansion & Its Probable Reasons In August, McDonald’s and Kraft Foods Group (NASDAQ:KRFT), one of the largest consumer packaged food and beverage companies, announced a deal to expand the manufacture, marketing and distribution of McDonald’s McCafe brand in the U.S., with effect from early 2015. Shortly after this deal, Kraft Foods entered into a  multi-year licensing, manufacturing and distribution deal with the Vermont based K-Cups maker,  Keurig Green Mountain (NASDAQ:GMCR). Available for both at-home and away-from-home channels, the portion packs of Kraft’s coffee brands, including McCafe, will be offered in K-Cups format, K-Carafe packs and Keurig Bolt Packs. After its plans for introducing McCafe in the U.S., the company decided to expand the reach of its coffee product in Canada, which is its fifth largest market in terms of number of restaurants. However, the company’s plan to expand its McCafe portfolio might be due to various factors: To Counter Tough Competition In the Breakfast Market McDonald’s is going through a tough period, as it continues to face headwinds in its path for top line growth. From restaurant shutdowns in Russia to poor performance in China driven by the China meat scandal, the company is reporting sluggish growth in all its segments. To add to its woes, tough competitive activity in the industry for the breakfast share of the market has forced the company to further expand its customer base internationally. The company thinks that it has less than fair share of the coffee market; McCafe accounted for less than 13% of the U.S. market in 2013. However, considering the fact that McDonald’s coffee sales have increased 70% since the introduction of McCafe specialty coffees in 2009, McCafe is the company’s best bet to capture some breakfast market share, by attracting new customers in a country where retail prices are slightly higher. This in turn can give a boost to the company’s average spend per customer visit. Canada: A Coffee Loving Nation In 2013, coffee retail value in Canada surged to reach $1.9 billion, an increase of 21% year-over-year (y-o-y). Also, the per capita coffee consumption in Canada is one of the highest in the world, with a daily coffee consumption rate of 3.2 cups per day per person. Canada takes the second spot among all the coffee drinking nations when it comes to percentage of coffee cups consumed away from home. Coffee consumption patterns are very similar across the U.S. and Canada; however, there are differences in preparation. Reported single-cup brewer ownership is higher in Canada (20%) compared to the U.S. (12%). The single-serve K-cups account for $750 million in annual sales in Canada. Source: Coffee Association of Canada Considering that the coffee market in Canada has potential for further growth, McDonald’s finds the region to be a lucrative market for expanding its coffee portfolio. McDonald’s launched the McCafe coffee brand in Canada in 2011, and since, the company has doubled its market share in coffee and tripled its coffee sales. Around 78% of the coffee consumption in Canada is through at-home format, and the company wants to capture this market through its retail coffee products. Strong Competition Might Hinder Desired Volume Growth Canadian coffee market is dominated by some top retailer and coffee chain brands such as Kraft Foods Group, Tim Hortons (NYSE: THI) and Starbucks Corporation (NASDAQ: SBUX). Kraft Canada leads the overall retail coffee sales in Canada with a market share of 32%, as of December 2013. Moreover, Tim Hortons has more than double the number of McDonald’s restaurants in Canada, with better system-wide sales as well. Also, the company has over 70% share of baked goods market in Canada and more than 75% of Canadian coffee market, much ahead of Starbucks and McDonald’s. Interestingly, Canada is the world’s largest per-capita market for Starbucks. In such a market, where almost 95% market is dominated by well established brands, McCafe might find it difficult to penetrate the Canadian market to such an extent. Customers will need a strong reason to shift their coffee preferences from the likes of Starbucks and Tim Hortons to McCafe. This might create problems for McDonald’s to generate expected sales in the initial years. However, one of the most prominent reasons for people to shift to McDonald’s coffee is that McCafe is slightly cheaper compared to Starbucks’ coffee. McCafe’s success in Canada might provide a huge boost to the company to expand its McCafe portfolio in its other major markets in Europe and Asia. 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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    Electronic Arts' FIFA Franchise To Maintain Dominance In Sports Genre
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  • tags: ERTS EA ATVI GME MSFT
  • Finally, the wait is over for FIFA lovers around the world, as  Electronic Arts (NASDAQ:EA) released its annual edition of the most popular football simulator franhcise- FIFA 15 - on September 23 in North America, September 25 in Europe and September 27 in the United Kingdom. Unlike the last year’s edition, it was released on both the new generation consoles-Sony’s PlayStation 4 and Microsoft ’s (NASDAQ:MSFT) Xbox One- and previous generation consoles (PS3 and Xbox 360) together. The game is the most awaited title every year and the excitement is much more this year due to the recently held Brazil FIFA World Cup. Apart from improved graphics, this year’s edition has new exciting features such as addition of new soccer legends in the all new ‘Concept Squad’, new stadium chants and songs, as well as addition of all 20 Premier League stadiums, requested by FIFA fans last year.FIFA 15 is more popular in Europe than in North America, where Madden NFL is the key title. FIFA has always been the highlight of the year for the company in terms of sales; the soccer franchise accounted for 27% of the company’s net revenues and 23% of the company’s gross profits in 2013. With technological advancements, improved graphics, detailed visuals and new digital content features, the demand for FIFA has increased exponentially over the last five years. The number of FIFA units sold has almost doubled from 6.4 million in 2010 to 12.45 million in 2013. Our price estimate for the company’s stock is $36, which is in line with the market price. See our complete analysis of Electronic Arts stock here FIFA 15 Sales Might Accelerate In Holiday Season According to Gfk Chart-track, the number of FIFA 15 units sold in the first week is almost same as the number of FIFA 14 units sold. However, FIFA 15’s higher price range (Price of £54.99 in the U.K and $60-$70 in the U.S.), compared to that of FIFA 14, led to a 6% jump in FIFA 15′s first week revenues. The new generation consoles accounted for 54% of the net game unit sales, whereas the previous generation consoles accounted for 45%. Hardware sales in August reached $196 million, up 116% year-over-year (y-o-y). Considering the fact that the demand for next generation consoles was tremendously strong in the last 3 months, the performance of core titles on these consoles was fairly average. If we exclude the sales of FIFA 14 on next generation consoles and consider only the sales on PS3 and Xbox 360, then FIFA 15’s one week sales in the U.K is up 15% in volume and up 23% in revenues y-o-y. However, these figures only include 3 days’ figures in the U.K. One can expect an exponential increase in sales in the next two months, primarily due to the increase in title demand during the holiday season. Sales of the annual FIFA franchise went up 25% after the last world cup in 2010. The higher prices of core titles this year might offset the loss in revenues due to decreasing software demand over the last 6 months. Considering the above factors, Trefis estimates the FIFA unit sales to rise by 18% in 2014. Almost one third of FIFA 15’s sales in the U.K. was on the PlayStation 4, as the game accounted for 80% of all video game sales last week in the region. Moreover, the title alone accounted for 87% of the total revenues. PlayStation 4 version of the game is estimated to be about 100,000 units ahead of Xbox One version, despite the fact that Microsoft made a deal with EA for FIFA’s Ultimate Team Legends exclusivity. Sales on Xbox 360 almost equalled that on PS4. However, it is too early to comment on the leader of FIFA unit sales among the consoles. FIFA 15 replaced Activision Blizzard (NASDAQ: ATVI)’s Destiny as the number one selling game in the U.K. in its first week of the launch. Will Konami’s Pro Evolution Soccer 2015 be of any Competition To FIFA 15 This Year? Pro Evolution Soccer (PES), also known as World Soccer: Winning Eleven in Asia, is a football simulation game developed by PES productions and published by Konami (NYSE: KNM), a Japanese game company. Like FIFA, PES is also released annually and this year’s version- Pro Evolution Soccer 2015 is coming to the European markets on November 13. FIFA sales were overshadowed by Pro Evolution Soccer’s sales in the early 2000s, before the release of FIFA 2008 with a total redesign of the game. Since then, FIFA has been a blockbuster release every year, topping the sports titles chart with huge unit sales figures. Apart from better in-game details and excellent graphics, the factor that makes FIFA more widely popular is EA Sports’ exclusive rights with the English Premier League and German Bundesliga. Both these leagues are among the most popular football leagues followed by football fans across the world. As a result, Konami uses inaccurate team jerseys, names and players in their gameplay. However, Konami has exclusive rights with UEFA Champions league, Europa League, Super Cup and several other tournaments from other regions, making it popular among those fans who like these championships. Although PES does not pose a huge threat to FIFA in terms of unit sales, but is the direct competitor in terms of its gamer base. In 2013, a total of 12 million FIFA units were sold, whereas around 3.5 to 4 million PES units were sold in the same period. Nonetheless, EA have no reasons to worry about PES, as the latter is still far behind in terms of actual retail value. In 2013, the increase in demand of Pro Evolution Soccer in South America was offset by the game’s poor performance in Europe and North America. Considering the performance of PES in the last 2 years, EA Sports has nothing to worry about in terms of FIFA’s market share. With no close competition in the sports genre by any other football simulator game, widespread popularity in Europe and Asia, and increasing sales curve of the franchise, FIFA is set to dominate the sports genre for the next 3 to 4 years. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    F Logo
    Ford Continues To Outpace Industry-Wide Growth Rate In China
  • by , yesterday
  • tags: F GM VLKAY TM
  • China continues to get better and better for Ford Motors (NYSE:F). Ford’s sales in the first eight months of the year totaled 717,537 units, up 30% from the same period last year. In August, sales rose by 9% year-on-year, outpacing the 6.7% industry-wide growth rate. The August increase followed a 25% year-on-year rise in July and a 17% increase in June. After selling 935,813 vehicles in China in 2013, the automaker is targeting sales in excess of 1 million in 2014. Ford’s sales jumped 49% during 2013, after the automaker debuted the Explorer and the Ecosport, in addition to earlier introductions of the Kuga and the Focus. Due to the continual rollout of new models, the incremental sales result in unusually high year-over-year gains. The growth rate will inevitably slow down as the year progresses. Moreover, these growth rates come on top of a low base, so it is relatively easier to post growth rates of this magnitude. Although 1 million is by no means a small figure, it is less than 5% of the overall automotive market. On the other hand, General Motors and Volkswagen command a market share of close to 15% each. Ford was a late entrant in China, primarily because it chose to concentrate more on its American operations. However, the automaker is making up for lost time by investing $5 billion in the four years beginning from 2011. A total of 15 new models will be introduced in China through 2015. In the same time frame, Ford’s annual production will also touch 1.2 million units, twice the level it was in 2012. In fact, Ford is so bullish on China that it expects 40% of the unit sales to come from the country by the end of the decade. We have a  $17.66 price estimate for Ford, which is about 15% more than the current market price. Market Size The Chinese automotive market is huge. In fact, it is the largest in the world, with sales touching 22 million units last year. In contrast, the U.S. automotive market totaled about 15.5 million units in 2013, and is expected to rise at a gradual rate now that the figures are close to pre-recession levels. On the other hand, there is plenty of opportunity still left in China. After the rapid urbanization along the coastal regions that drove the demand for vehicles in the earlier years, sales are now being driven from the regions in the interior. Through August, industry-wide sales rose 6.7% on a year-over-year basis.  Chinese automotive sales could easily rise another 7-8% in 2014, at least that’s what the two month data suggests. Our forecasts for the Chinese automotive market are conservative; we expect sales to rise at an average annual rate of 4-4.5% in the long term. The recent economic slowdown in China, combined with increasingly stringent regulatory environment to curb pollution, are the reasons why we estimate that growth rate could slow down in the coming years. Additional Opportunities Going forward, the proportion of luxury cars within the overall market should also rise. This is typically common in the development of the automotive market in a country. The initial acceleration of sales is provided by low-end cars, but as the market consolidates, more and more people opt for high-end cars. In more mature markets, luxury vehicles typically account for about 10-12% of the total sales. In China, the corresponding figure stands at ~8%. Keeping in line with the growing demand for luxury autos, Ford plans to launch its Lincoln brand in China in 2015. However, the automaker doesn’t plan to manufacture the Lincoln nameplates in China and intends to export them from the U.S. As a result, Ford will not be able to circumvent the high import duty levied on foreign vehicles. This could potentially limit the upside of the Lincoln brand in China, as high prices could nudge the potential customers to opt for the locally produced German cars, which already have a better brand perception. Despite low volumes, Lincoln could be crucial to Ford’s Chinese operations since luxury cars enjoy fatter margins. Moreover, luxury automakers often keep the prices of their luxury vehicles at a significant premium, due to fascination of Chinese public for Western products. This can result in significant contribution to the bottom line. See full analysis for Ford Motors See More at Trefis |  View Interactive Institutional Research (Powered by Trefis)
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    New Coverage Launch By Trefis: $107 Price Estimate For Honeywell International Inc. – Part 3
  • by , yesterday
  • tags: HON UTX GE DOW MMM
  • In continuation with our previous two articles (Click here to read Part 1 and Part 2 ), we now move on to giving an overview of Honeywell’s Process Solutions & Performance Materials division and then discuss some important factors driving the division’s valuation and revenue. Overview of Honeywell’s Process Solutions & Performance Materials division Honeywell’s Process Solutions & Performance Materials division refers to Honeywell’s reported segment, Performance Materials & Technology and its Process Solutions business, whose revenues were earlier reported as a part of the Automation & Control Solutions segment. However, as a part of its realignment activity, Honeywell Process Solutions will now be a part of Honeywell’s Performance Materials and Technologies segment and should be completely integrated by 2018. Honeywell’s Process Solutions & Performance Materials division offers process automation services for industrial facilities. Process automation is used to automatically control a process in order to facilitate the desired outcome in the most efficient and safe manner. Honeywell offers software and instruments such as sensors, controllers, measuring and monitoring equipments as part of its process automation portfolio. The segment also manufactures specialty materials and chemicals such as hydrocarbon processing technologies, catalysts, adsorbents, fluorine products, specialty films and additives, advanced fibers and composites, intermediates, electronic materials and chemicals. The segment accounted for 25.2% of Honeywell’s revenues in 2013 and forms 19.7 % of our $106 price estimate for Honeywell. As per our calculations, the segment has an EBITDA (Earnings Before Interest, Depreciation And Amortization) of 20.7%, which is the highest of Honeywell’s three divisions. We have a price estimate of $107 for Honeywell, which is approximately 15% above its current market price. High capital expenditure is taking a toll on the division’s value The point to note about Honeywell’s Process Solutions & Performance Materials division is that despite its significant revenue contribution and high EBITDA, the segment forms only 19.7% of our price estimate. The primary reason is the capital invested in the division. Over the past few years, the division’s capital expenditure has grown rapidly, almost doubling since 2010, overtaking the capital expenditure for the Aircraft & Automotive Components division.  The reduced cash flow due to the high capital expenditure has suppressed the value potential for the segment. Given Honeywell’s plans to further add capacity to the division, we believe that the capital expenditure will continue to rise and keep the division’s value suppressed. However, the high capital expenditure is actually a good thing, since it will help cater to the expected growth in the upstream and downstream oil & gas industry, which in turn will help drive revenue. Growing oil & gas industry should help drive revenues Honeywell’s Process Solutions & Performance Materials offers various process technologies, catalysts and adsorbents, equipment and services that cater to the needs of the upstream and downstream oil & gas industry. Process automation is very significant for these industries since the various processes involved in oil & gas production, and refining of petrochemicals require constant monitoring based upon which certain steps need to be taken. Honeywell provides the measuring equipment, sensors and controllers that are used to automatically collect data regarding pressure, temperature, liquid flow etc. and also the software that is required to analyze this data. Based upon the result of the analysis, process settings are automatically changed to achieve optimum production levels, thereby, helping increase efficiency and reducing costs. Because of this, oil & gas, petrochemicals and refining industries are increasingly adopting process automation solutions. Since the oil & gas industry is one of the primary consumers for Honeywell’s Process Solutions & Performance Materials products and services, the division’s revenues are highly correlated to the growth and capital expenditure in the industry. Given the current trends in the industry, we believe that Honeywell’s Process Solutions & Performance Materials revenue should continue to grow over the Trefis forecast period. Growing capital expenditure by Oil & Gas companies: Annual upstream capital expenditure by major oil and gas companies have increased sharply over the past few years. Upstream capital expenditures are expected to remain elevated in the next few years because of existing project lineups. High capital expenditure by oil and gas companies bodes well for Honeywell due to its high exposure to the upstream oil & gas industry. In June 2013, Petrobras chose Honeywell to supply its UOP Separex membrane systems to process natural gas from Petrobras’ Lula pre-salt oil reserves.  Growing refinery capacity: The global refinery throughput levels in 2014 are expected to be higher than 2013 levels by one million barrels per day. This is primarily due to the capacity additions in China and the Middle East. Honeywell has had some significant wins in the refining industry in these regions which should help drive growth in its revenues. In September 2014, Honeywell announced that Shandong Shouguang Luqing Petrochemical Co. Ltd. will use its UOP C4 Oleflex process technology to produce isobutylene, a key ingredient for making high-octane fuel and synthetic rubber. In July 2014, Petrixo Oil & Gas selected Honeywell’s UOP Renewable Jet Fuel process technology to produce renewable jet fuel and diesel at their new refinery in United Arab Emirates.  Growing Chinese petrochemical industry: China is the world’s largest petrochemical market, accounting for 25% of the global consumption in 2011. Because of its significant processing capacity, it is also expected to be the fastest growing market, growing at an average rate of 6.7% through 2018. Honeywell has considerable exposure to the Chinese petrochemical industry which should help in capitalizing on the industry’s growth. 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 Might Have To Spend More On Promoting Its Cars Following China Setbacks
  • by , yesterday
  • tags: HMC GM TM
  • Things seem to be going wrong again for Honda Motors (NYSE:HMC) in China. Its 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. We have a $43 price estimate for Honda Motors, which is slightly more than the current market price. Losing Market Share 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. China-Specific Models To Invigorate Product Portfolio In the second half of last year, Honda opened a new R&D center in Guangzhou in order to increase the localization of its product portfolio. Honda plans to introduce a total of 12 models in China within the 2013-2015 period. Out of these, five will be developed exclusively for China. In addition to Chinese specific models, Honda also introduced the refreshed Fit in China earlier this year. The Fit received an encouraging response initially. When the company launched the compact hatchback in China in June, its sales of the model nearly tripled to 8,200 units, on the back of high demand from younger consumers. However, the falling sales of a key model like Accord in the face of increased competition from entry-level premium cars from German automakers, have dented Honda’s sales and cast a doubt over whether the company will be able to achieve its sales target for the year. Honda was pretty bullish about the success of its upcoming models, including Odyssey, Spirior and Vezel, in China and estimates the sales to double to 1.3 million units annually by 2015. Following these results, the company might also have to expand promotion for these cars, which would impact its overall profitability. See our complete analysis for Honda stock here Understand How a Company’s Products Impact its Stock Price at Trefis
    GMCR Logo
    Keurig Green Mountain To Expand Its Ready-To-Drink Beverage Segment With The Launch Of Honest Tea
  • by , yesterday
  • tags: GMCR KO SBUX
  • On September 3, the Vermont based K-Cups maker,  Keurig Green Mountain (NASDAQ:GMCR) and Coca-Cola Company (NYSE:KO) announced they are expanding their partnership to offer some beverages from the latter’s still brands (non-carbonated) portfolio in the Keurig hot brewing system, in the U.S. and Canada. In February, Coca-Cola had initially bought a 10% stake in the company for $1.25 billion, after the release of Keurig’s first fiscal quarter report. In early May, Coca-Cola announced that the company is raising its stake in Keurig Green Mountain to 16%. Evidently, the deal strengthened the relationship the two companies had outlined back in February, and came as a bonus to GMCR’s shareholders as Coca-Cola’s purchase drove up its share price; the shares of GMCR skyrocketed by 53% within the next two weeks, touching its peak stock price of $123.74. (see Coca-Cola-Keurig Green Mountain Deal: A Win-Win Situation For Both ) Honest Tea is the first brand of the Coca-Cola Company that would be available in K-Cup packs. The new Honest Tea K-Cup packs feature two products initially, Unsweetened Just Green iced teas and Just Black iced teas, and they will join Keurig’s Brew Over Ice collection. (Ref:1) Keurig’s Brew Over Ice collection is a special collection to brew hot beverages over ice with Keurig’s hot beverage system, making it easy and convenient for customers to get iced beverages in different flavours at home. See our full analysis of GMCR here Keurig’s Growth Potential In Ready-To-Drink (RTD) Tea Segment Over the last two years, Keurig Green Mountain has managed to attract customers with its innovative new brewer technologies and a wide range of beverage brands. Over the last six months, Keurig has entered into several distribution deals with some of the top retail chains and coffee brands, with the motive of accelerating its top line growth. We have discussed the possible impacts of these deals on the company’s revenue growth in our prior articles -  Keurig-Nestlé Deal: Creamer Added K-Cups To Boost Net Sales and  Keurig Green Mountain’s Partnership With Subway To Boost Volumes Of Brewers and K-Cups . Now the company is keen on exploring beverage segments such as RTD tea & coffee, which are comparatively a smaller share of the company’s portfolio, but are the fastest growing segments in their respective categories. Growing RTD Tea Sector Tea, which contains antioxidants that boost metabolism, is considered as one of the healthier alternatives to carbonated drinks in the U.S. It is the second most widely consumed beverage worldwide, after water. RTD tea is one of the fastest growing segments in the beverage industry. In the U.S., the RTD segment registered a high double-digit percent growth to reach $5.1 billion in sales. RTD tea is expected to generate sales of $5.3 billion in 2014 and grow at a CAGR of over 6% till 2018, providing ample growth opportunities to tea making companies. The per capita tea consumption in the U.S. was 8.9 gallons in 2012. The sales of specialty RTD tea & coffee at retail stores  in the U.S. rose 25% in the last two years.   Source: www.statista.com Considering the above mentioned statistics, it is clearly evident that RTD sector is a widely popular and fastest growing sector in the beverage industry. Keurig Green Mountain is planning to tap into a market that has a huge growth potential, especially in the U.S. This might boost its K-Cup sales, as it targets those Coca-Cola customers who are already fond of the company’s Honest Tea product. Honest Tea: Excellent Growth Figures In the latest Q2 report, Coca-Cola reported 3% year-over-year growth in worldwide volumes, as its ready-to-drink (RTD) tea volumes rose 4% globally, and 6% in North America. One of the factors for excellent growth in North America was the double-digit percent increases in Honest Tea volumes. Honest Tea marked its one billionth beverage sale in June, with 888 million sales since Coca-Cola became a partner in 2008. Although representing a small portion of the U.S., RTD tea segment, including Honest Tea, could continue to grow in the following quarters due to the rising demand for tea drinks. As consumers look to shift away from sugar and calorie-fueled beverages, RTD tea has become one of the fastest growing segments of the U.S. liquid refreshment beverage (LRB) market. Due to the growing demand for iced tea as a healthier refreshment drink, coupled with low current penetration levels, the U.S. RTD tea segment is expected to generate sales of $5.3 billion in 2014, up from $5.1 billion last year, and grow at a CAGR of over 6% till 2018. Keurig might introduce more non-carbonated products, especially tea brands such as Gold Peak and Fuze Tea, in its portfolio to further penetrate this market. Gold Peak, like the Honest Tea, has had a double-digit growth in North America in the last quarter and is widely popular in the U.S. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    U.S. Sanctions Cloud Oil Discovery In The Russian Arctic With Uncertainty
  • by , yesterday
  • tags: XOM BP CVX PBR COP APC EOG
  • Exxon Mobil’s (NYSE:XOM) joint venture partner in the Arctic exploration program, Rosneft, recently confirmed the discovery of oil in Kara Sea (a part of the Arctic Ocean north of Siberia). The commercial viability of producing this oil under current market conditions is yet to be determined but the size of the find (estimated at around 750 million barrels of oil) seems to be huge. While this is great news for both Exxon and Rosneft, the current geopolitical scenario, where the U.S. and European companies are being increasingly banned from cooperating with Russian peers, clouds the development prospects of these reserves with uncertainty. 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 Exxon and Rosneft expanded their 2011 strategic cooperation agreement last year to include seven new blocks in the Russian Arctic in the Chukchi Sea, Laptev Sea and Kara Sea, spanning 600,000 sq. km. With this, both the companies agreed to cooperate in exploring and developing new hydrocarbon reserves in an area almost 190 million acres in size stretching almost halfway across the Arctic shoreline. 2D and 3D seismic surveys along with other data collection activities in the Kara Sea had been going on since then. The companies finally began drilling the first exploratory well in the multi-billion barrel University prospect last month. However, earlier this month, the U.S. government extended sanctions on Russia over the Ukrainian crisis. The previous round of sanctions only restricted the export of U.S. technology for Arctic and shale exploration, which did not prevent Exxon and Rosneft from starting to drill an exploratory well in the Arctic Kara Sea. However, the new set of measures were specifically targeted towards crippling the cooperation between Western and Russian energy companies in Arctic and tight oil exploration, as they required the removal of U.S. workers on these projects by September 26th. Nevertheless, Exxon received a license from the U.S. Treasury Department allowing a slippage of up to 14 days beyond the sanctions’ deadline to enable a safe and responsible wind down of exploration activities. This implies that until the U.S. eases sanctions on Russia, Exxon cannot collaborate with Rosneft on exploration and development projects in the Arctic beyond October 10th. This creates a cloud of uncertainty over the development prospects of newly discovered hydrocarbon reserves in the Kara Sea since it would be difficult for Rosneft to accomplish this technically challenging project on its own. Exploration for new hydrocarbon reserves is a critical and capital-intensive function of all oil and gas companies. It takes years for these companies to conduct initial geological surveys and following exploratory and appraisal drilling activities before the actual development of oil and gas fields begins. Therefore, the immediate financial impact of the new Arctic discovery and fresh U.S. sanctions on Exxon would be limited. However, prolonged restrictions on exploration activities in the Arctic could prove detrimental to the company’s long-term growth prospects. At the end of last year, Exxon’s total proved hydrocarbon reserves stood at 25.2 billion barrels of oil equivalent, which is to say that the company held enough reserves to produce oil and gas for the next 16 and a half years at 2013 production rates. 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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