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Best Buy announced earnings that beat expectations on Thursday, with earnings up slightly year-over-year, and more than 5% sequentially. This was driven by sales growth in computing, gaming, televisions, tablets and appliances. The company's progress with respect to its RenewBlue initiative has helped it stabilize its domestic sales. In our earnings note we discuss these results and our outlook for the company.

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Sprint continues to struggle in terms of its postpaid subscriber performance, with the carrier posting an especially high churn rate in the last quarter. However, management mentioned that the company's low-cost promotions began seeing traction at the end of the quarter. We expect the company's market share to moderate going forward, and eventually increase as its network upgrades are completed.

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Weekly Oil & Gas Notes: Petrobras, Chevron and BP
  • By , 11/21/14
  • Oil and gas stocks slightly strengthened this week as benchmark crude oil prices remained largely flat after falling sharply by more than 30% since hitting a short-term peak of $115/barrel in June. The growth in demand for crude oil has been slowing down recently due to moderating economic growth in emerging markets such as China and India and signs of a slower economic recovery in the Euro-zone. In China, the rate of growth in demand for petroleum products has fallen to almost half of what it was a year ago. As a result, the International Energy Agency (IEA) expects the growth in global oil demand this year to hit a 5-year low. It expects demand, which stood at around 91.7 million barrels per day last year, to increase by just around 0.74 million barrels per day this year. The price of the front-month Brent crude oil futures contract on the ICE remained largely flat around $80/barrel this week and is currently trading at the same level. The  NYSE Arca Oil & Gas Index (^XOI) has grown by around 1.5% so far this week. Below, we provide an update on some of the key events that occurred last week related to the oil and gas companies we cover. Petrobras Updates Production Growth Outlook Petrobras (NYSE:PBR) recently updated its 2014 full-year crude oil production growth outlook from Brazil. The company now expects to grow its average daily crude oil production from Brazil by 5.5% to 6.5% over last year, down 150 basis points from the mean level of the earlier estimate. Having delayed the announcement of its third quarter financial results by at least a month last week due to ongoing corruption investigations, Petrobras also divulged some details about the key metrics of its downstream business like refinery throughput capacity, utilization rates and the amount of refined petroleum products produced. Based on these announcements and the recent decline in crude oil prices, we have revised our price estimate for Petrobras to $14/share. The revised price estimate also includes our estimate of the potential write-down the company could face as a result of the ongoing corruption investigations. We will soon publish a detailed analysis describing the key changes to our assumptions. We now have a  $14/share price estimate for Petrobras, which is around 35% above its current market price. The company’s share price has decreased by around 2.4% this week. We currently estimate Petrobras’ 2014 diluted EPS to be at $1.37, compared to the consensus estimate of $1.52 reported by Reuters. See Our Complete Analysis For Petrobras Chevron’s New Gulf of Mexico Project Starts Up Chevron (NYSE:CVX) recently announced first production from the Hess Corporation-operated Tubular Bells deepwater project in the U.S. Gulf of Mexico. Tubular Bells is a deepwater oil and gas field located in Mississippi Canyon Block 725 of the United States Gulf of Mexico. The field lies in water depths of approximately 1,310 to 1,400 meters and is situated about 217 km southeast of New Orleans, Louisiana. Hess Corporation, an integrated energy company located in  New York City, holds a  57.14% operating interest, while Chevron, its co-partner in the project, holds the remaining 42.86% interest in the project. Tubular Bells, which is expected to deliver around 50 thousand barrels of oil equivalent per day at its peak, will boost Chevron’s net hydrocarbon production going forward. We currently have a  $120/share price estimate for Chevron, which is in line with its current market price. The company’s share price has increased by around 1% so far this week. We currently estimate Chevron’s 2014 Non-GAAP diluted EPS to be at $10.54, compared to the consensus estimate of $10.21 reported by Reuters. See Our Complete Analysis For Chevron BP Urges Judge To Limit Oil Spill Liabilities In an effort to limit its costs associated with the 2010 Deepwater Horizon incident,  BP Plc. (NYSE:BP) has reportedly urged the U.S. District Judge, Carl Barbier, to cap the per barrel penalty associated with the Clean Water Act at $3,000, ignoring higher rates set by the Environmental Protection Agency (EPA) and the Coast Guard. The third phase of the ongoing civil trial over the deadly incident in which the judge will evaluate fines for BP and its partners in the failed Macondo well is scheduled to begin in January. On September 4th, the judge ruled that BP was grossly negligent in the lead-up to the incident, which means that the company could be charged a fine as high as $4,300 per barrel. If, however, the company is able to convince the judge to lower the cap, it could potentially escape more than $5 billion in fines. We currently have a  $52/share price estimate for BP, which is more than 20% above its current market price. The company’s share price has increased by around 2% so far this week. We currently estimate BP’s 2014 diluted EPS to be at $4.16, compared to the consensus estimate of $4.21 reported by Reuters. See Our Complete Analysis For BP View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Weekly Metals And Mining Notes: Newmont Mining, Cliffs Natural Resources And Alcoa
  • By , 11/21/14
  • tags: AA RIO
  • Metals and mining stocks had an eventful week with the Goverment of Suriname exercising its option to participate in Newmont Mining’s Merian gold project, Cliffs Natural Resources announcing its intention to exit from its Eastern Canadian Iron Ore operations,  and Alcoa completing the acquisition of Firth Rixson. Here are some of the major events of the week pertaining to companies that Trefis covers in the metals and mining space. Newmont Mining The Government of Suriname has exercised its option to participate in Newmont Mining’s (NYSE:NEM) Merian gold project through a 25% equity stake. The most immediate benefit of the participation of the Government for Newmont is a reduction in capital outlay for Newmont. The total capital expenditure for the project is expected to range between $900 million to $1 billion. With the Government’s participation, Newmont’s capital expenditure outlay for the project will be reduced to $600-700 million. In addition to the lowering of Newmont’s capital expenditure and future operating expense commitments, the Government’s direct participation will reduce risk for the company and facilitate the timely completion of the project. The Government’s participation will also make it easier for Newmont to obtain various clearances and permits that are typically required during the course of the construction of a mining project. Production at the Merian mine is expected to commence in 2016. We have a  $19 price estimate for Newmont, which is slightly lower than the market price. We estimate revenues of around $7.4 billion for the company in 2014 and an EPS of $0.97, against a consensus estimate of $0.96. Cliffs Natural Resources Cliffs Natural Resources (NYSE:CLF) has announced that it is pursuing exit options for its Eastern Canadian Iron Ore operations. This may result in the closure of the Bloom Lake mine, Cliffs’ only operational mine in Canada. The company has made the decision to exit its Eastern Canadian Iron Ore operations, as it has been unable to attract strategic investors in order to undertake Phase II expansion of the mine. The management had stated  in its Q3 earnings conference call that the ongoing Phase I operations at Bloom Lake are not economically feasible, and that it would continue to operate the mine in 2015 only if it could find equity investors for Phase II expansion by the end of the year. Cliffs’ review of its Bloom Lake mine was prompted by the sharp decline in iron ore prices over the last twelve months. The decline in iron ore and metallurgical coal prices has negatively impacted Cliffs’ operations. We have a $9 price estimate for Cliffs, which is slightly lower than the market price. We estimate revenues of around $4.3 billion for the company in 2014 and an EPS of $0.42, as against a consensus estimate of $0.13. Alcoa Alcoa (NYSE:AA) has announced the completion of its acquisition of Firth Rixson, a leading jet engine components manufacturer. The company had announced the Firth Rixson aqcusition in June. The total consideration for the acquisition is $2.85 billion, consisting of $2.35 billion in cash and $500 million in stock. In addition, there is a potential $150 million earn-out, the payment of which depends on Firth Rixson’s performance through 2020. The acquistion of Firth Rixson is a part of Alcoa’s ongoing product portfolio transformation towards value-added products, as it seeks to reduce its dependence on volatile aluminum prices. Alcoa’s shift towards value-added products is reflected in its revenue figures. The percentage contribution of value-added products, represented by the Global Rolled Products and Engineered Products and Solutions business segments, to the company’s total revenues has steadily increased. This figure stood at 52.1%, 54.4%, 55.7% and 57.1% in 2011, 2012, 2013 and the first nine months of 2014, respectively. In calculating these figures, we have only considered third-party sales. Value-added businesses will drive Alcoa’s results in the near future, with cost reduction expected to keep its commodity businesses competitive. We have a  $16 price estimate for Alcoa, which is around 8% below the market price. We estimate revenues of $24.2 billion in 2014 for the company and an EPS of $0.89, as against a consensus estimate of $0.82. 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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    Insurance Weekly Notes: MetLife, UnitedHealth
  • By , 11/21/14
  • tags: MET UNH
  • During the week ended November 21, the stocks of both MetLife (NYSE:MET), which completed a merger of its subsidiaries, and UnitedHealth (NYSE:UNH), which increased its presence on health exchanges for the second open enrollment period, posted positive gains. Below we review the week for the two companies. MetLife Earlier in the week, MetLife completed the merger of its subsidiaries MetLife Insurance Company of Connecticut, MetLife Investors USA Insurance Company, MetLife Investors Insurance Company and Exeter Reassurance Company Limited. According to the company press release, all the required regulatory approvals have been received and the new entity will be called MetLife Insurance Company USA. The company in 2013 announced the decision to merge the abovementioned entities in order to meet collateral requirements laid out in the Dodd-Frank Act, to address regulations related to the captive reinsurance companies, and also to improve the risk profile and transparency of MetLife’s U.S. variable annuity business. The company also mentioned that all previous policies, benefits, contracts and terms and conditions of the retained assets will remain unaffected as a result of this merger. MetLife’s stock gained about 2.5% during the week, and is now just slightly below our price estimate of $59 for the company’s stock. During the recently announced third quarter results, the company posted a 22% year-over-year increase in its operating income on the back of higher income from investments and a robust growth in emerging markets. See our complete analysis of MetLife here UnitedHealth UnitedHealth started offering health insurance coverage on twenty-three health exchanges across the U.S. for the second open enrollment period that began on November 15, 2014. This is a significant and much awaited expansion by the health insurer from just about a dozen health exchanges during the previous open enrollment period. In our article Health Insurance Exchanges And Their Impact On UnitedHealth Group, we discussed the impact of health exchanges. See Full Analysis For UnitedHealth Group Here
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    Weekly Tobacco Notes: Philip Morris' Asia Situation, Reduced-Risk Products Strategy
  • By , 11/21/14
  • In our tobacco industry notes for this week, we focus on Philip Morris ‘ (NYSE:PM) presentation at the the Morgan Stanley Global Consumer & Retail Conference. The CEO of the company spoke on the challenges facing Philip Morris in the Asia-Pacific region, especially the Philippines and Indonesia. We also take a look at the information provided by the company on the latest commercialization of their reduced risk heat-not-burn product in Japan and Italy. Our price estimate for Philip Morris’ stock is $79 per share, which is about 10% below the market price. The stock dropped slightly over the week. We have a revenue (net of excise tax) estimate for Philip Morris in 2014 of $30 billion, in line with the analysts consensus estimate compiled by Bloomberg Businessweek . See Our Complete Analysis For Philip Morris International Philip Morris’ State Of Affairs In Indonesia We have written previously on how Indonesia is one of the most promising markets for Philip Morris in Asia (see  Philip Morris Likely To Further Gains In Asia ). An estimated 70% of the men in Indonesia in the age group 20 and above are smokers. This has led to strong growth in revenues in recent years. The robust growth of the industry was expected to halt temporarily in 2014 following a decline in disposable income and an excise tax increase. Disposable income decreased due to the anemic growth of the economy, with the Indonesian economy’s third quarter growth being the lowest in five years. The government also increased the excise tax on cigarettes by an average of nearly 9%. The price increase by Philip Morris in response to this excise tax hike caused the price of cigarettes to cross a psychologically important level of 1000 rupiah (roughly 8 cents) per stick. This proved to be beneficial to the company. Competitors who had been undercutting prices raised them to match Philip Morris, thereby reducing the decline in the sale of its cigarettes due to the higher prices. This has led to a steady increase in the company’s market share since the first quarter of this year. The Philippines Philip Morris has complained for a long time about the malpractice with respect to excise tax avoidance perpetrated by its key competitor in the Philippines. The excise tax in the country was alleged to be favoring the excise tax avoidance by its rival, Mighty Corporation. Taxation of tobacco products was based on two tax slabs, with a flat rate that did not vary within a tax slab. Cigarettes priced under 11.50 Philippine pesos (PHP) per pack were taxed at 2.72 PHP per pack. However, cigarettes priced above 11.5 PHP per pack were taxed at 12 PHP per pack. This huge rift between the two rates of taxation provided an opportunity for Mighty Corporation to mask its excise tax exposure and pay the lower taxes corresponding to the lower rate. However, the government has now decided to rationalize the tax code and create a single specific tax tier system by 2017. In the interim, tax hikes geared towards the lower tax segments are being implemented to close the gap between the two segments. This should improve Philip Morris’ position in Indonesia as its key competitor’s tax burden increases, making it unsustainable for them to maintain their low prices. Launch Of IQOS In Japan and Italy Philip Morris launched its heat-not-burn e-cigarette iQOS in two cities, Nagoya in Japan and Milan in Italy. IQOS does not burn tobacco to release nicotine, but heats a capsule filled with nicotine solution to release nicotine-containing vapors. We have written earlier on how Philip Morris entered this segment in early 2014 (See Philip Morris Finds Its Footing In The Electronic Cigarette Industry ). The company is holding off on any claims of health benefits vis-a-vis tobacco based cigarettes, pending results from detailed scientific tests. IQOS is being sold through 1000 retail outlets including one flagship store in Nagoya, which is Japan’s fourth largest city. They have been priced to maintain parity with regular Marlboro cigarettes. Initial consumer reaction has been reported by the company to have exceeded expectations. There are favorable headwinds on the regulatory side as well, with the Japanese Government deciding to tax these products at a lower rate than tobacco-based cigarettes. Price parity with traditional cigarettes is being maintained during the launch of IQOS in Milan. Although these are slated to be taxed at the same rate as traditional cigarettes, the company has expressed hope that the Italian Government will reconsider this decision going ahead. After national roll-outs of these products in Japan and Italy in 2015, they will be launched in other markets in 2016. 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 Media Notes: BskyB Transaction, CBS Blackout Averted And Disney's Focus On China
  • By , 11/21/14
  • The media industry saw significant activity last week, with BSkyB completing the acquisition of Sky Italia and Sky Deutschland. In an another development, CBS Corporation and Dish Network has agreed to extend the deadline for carriage agreement, thus averting a blackout. However, Time Warner has warned Dish subscribers that the satellite company may also drop TNT and TBS networks. And in yet another, Disney expands its partnership with Shanghai Media Group to co-produce movies in the region. On that note, we discuss below these developments related to the media companies over the last week or so.
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    Weekly Pharmaceutical Notes: Pfizer, Johnson & Johnson, Bristol-Myers Squibb And Roche
  • By , 11/21/14
  • It was a week of new approvals, cancer drug deals and promising clinical trials for big pharmaceutical companies. However their shares, as a whole, did not move significantly and mostly traded in range. While Pfizer (NYSE:PFE) signed a research deal with Merck KGaA for developing a cancer drug, Johnson & Johnson (NYSE:JNJ) entered an agreement with Geron for developing a blood cancer candidate. Bristol-Myers Squibb ‘s shares benefited slightly from positive clinical trial results for its lung cancer drug Opdivo. As far as the Swiss pharmaceutical giant Roche Holdings (NASDAQ:RHHBY) is concerned, it was a good week as its blockbuser drug Avastin got the FDA approval for expanded usage.
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    Best Buy Beats Its Q3'14 Guidance As Its Renew Blue Initiative Starts To Pay Off
  • By , 11/21/14
  • Best Buy (NYSE:BBY), the largest specialty retailer of consumer electronics in the U.S., reported surprisingly strong Q3 2015 earnings on November 20th. The company reported $9.4 billion in sales, up 5.4% sequentially and a roughly flat 0.6% year to year.  Comparable store sales grew 2.4%, driven by sales growth in computing, gaming, televisions, tablets and appliances, partially offset by declines in other categories, including services and mobile (excluding the impact of installment billing). Best Buy initially expected its same-store sales to decline in Q3 2015 on account of lower expected industry-wide sales in many of the consumer electronics categories the company sells. The sales in the NPD-reported Consumer Electronic categories declined 0.2% in the quarter. The better than expected results were primarily driven by the lower than expected sales declines in the NPD-reported Consumer Electronics categories, higher than expected revenue in computing and tablets, higher mobile revenues due to better than expected results from new phone launches, as well as the better performance of s new credit card agreement, and greater pricing and promotional effectiveness.  Offsetting this were increased investments in customer-facing initiatives.The higher revenue base and the flow-through of Best Buy’s Renew Blue initiatives, along with other SG&A cost reduction initiatives, helped the company report better than guided non-GAAP earnings of $0.32 in Q3 2014, versus $0.18 in Q3 2013. Though the external pressures are driving structural changes in the industry, meaningful progress against its RenewBlue initiative helped Best Buy stabilize its domestic comparable sales, eliminate approximately $1 billion in costs through operational efficiencies, and lower domestic SG&A rate by approximately 170 basis points in Q3 2014 compared to two years ago. Best Buy believes that the following customer experience and profitability initiatives will help it drive growth in the next few quarters:  1) customer-facing changes that it has made on its webiste and stores; 2) installment billing plans in the mobile phone category; 3) a more inspirational gifting strategy (including a greater assortment of products below $100); 4) a more defined and structured approach to its promotional strategy; 5) more relevant and targeted marketing investments; 6) increased inventory availability due to the rollout of ship-from-store to 1,400 stores versus 400 stores last year; 7) the regional release of large appliances and TVs; and, finally, additional online exposure of certain open box inventory. However, the company did caution that the success of the above is subject to internal and external factors. Our price estimate of $30 for Best Buy is at a more than 20% discount to the current market price. We are in the process of updating our model for the Q3 2014 earnings. See our full analysis for Best Buy Introduction of Installment Billing Plan For Mobile Best Buy introduced the selling of new installment billing plans with Sprint and Verizon in Q1 2015, and started selling AT&T’s plans in Q2 2015. It is now the only national retailer to launch installment billing plans with multiple carriers. Despite major phone launches being quantity constrained, the company reporetd that the adoption of installment billing plans continued to accelerate throughout Q3 2014. Within these plans, Best Buy saw higher average phone prices and higher attach rates of services and phone accessories. In phone accessories, it expanded its exclusive assortment through new partnerships with fashion designers and growth in its own private label brands. The company expects the above factors to benefit it in the long-term, though it anticipates uncertainty around the availability of iconic phones in Q4 2014. Athene Initiative To Improved Targeted Marketing In Q3 2014, Best Buy contineud to shift marketing dollars away from TV and print to digital media and display campaigns including a successful traffic-generating back-to-school initiative. Additionally, it continued to provide increasingly powerful customer communication through the leveraging of its new Athena database. The company has been working on a big data project called Athena with an aim to shift its marketing efforts to more personalized email messages and offers, enabling a more targeted approach to customer marketing. Best Buy has one of the largest repositories of customer data derived from individuals’ past purchases, browsing histories, locations and demographics. While the company is still in the early stages of being able to personalize marketing messages to individual customers, it is beginning to see better click-through rates on these new campaigns when compared to mass non-targeted e-mails. Best Buy views Athena as a two to three year initiative. An Improving Platform To Increase Online Sales Accelerating growth in its online segment remains one of the main focus points for Best Buy, as it aims to update its website to get on par with  Amazon (NASDAQ:AMZN) and other competitors. In Q3 2014, Best Buy’s domestic online revenue stood at $601 million and comparable online sales increased 21.6% due to substantially improved inventory availability made possible by the chain-wide rollout of ship-from-store in January this year, a higher average order value, and increased traffic driven by greater investment in online marketing. As a percentage of total domestic revenue, online revenue increased 110 basis points to 7.5%, versus 6.4% last year. Ship-from-store, which enables all its distribution centers (and not just the ones previously allocated to e-commerce) to handle online orders, accounted for over half of the online sales growth. Best Buy launched several customer-facing site improvements in Q3 2014, namely:  1) significantly richer visual and editorial content for the home theater, mobile, appliance and gaming categories; 2) expanded ‘wish list’ capabilities; 3) more inspirational holiday gift center; and, 4) an improved checkout process that provides faster and precise ‘get it by’ delivery dates on approximately 60% of Best Buy delivered SKUs, rather than the present up to five-to-eight day range. In the next 24 months, Best Buy aims to further improve its online shopping experience by enhancing search tools, recommendations, and product and price information to make it easier for customers to find and choose products. Enhancing Custom Experience In Retail Stores Though the traffic trend to Best Buy retail locations remained negative in Q3 2014, the same improved compared to the first half of 2014. While a rising number of consumers shift online, Best Buy believes that physical stores remain important and are preferred for high-touch and large-cube transactions. During Q3 2014, Best Buy continued to improve the physical presence and shopping experience in its stores by expanding its fleet of appliance and  home theater stores-within-a-store, increasing its investments in store refresh initiatives by adding compelling vendor displays, increasing sales training and integrating new vendor-funded labor its our premium customer experiences. Q4 2014 Outlook - Net flat year-on-year revenue and comparable sales growth, assuming revenue declines in the NPD-reported consumer electronics categories are in line with Q3. - An improvement in the year-over-year gross profit rate. - A flat year-over-year SG&A dollars due to higher incentive compensation and intensified investments in customer-facing initiatives. - An approximate 50 basis points year-on-year expansion in the non-GAAP operating income rate. - Diluted earnings per share impact of the discrete tax items to be in the range of a negative $0.09 to $0.10. 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 Illicit Cigarettes On Philip Morris' European Business
  • By , 11/21/14
  • tags: PM
  • The European Union (EU) contributes around 35% of  Philip Morris International’s (NYSE:PM) revenues (net of excise) and is the most profitable division for the company, with adjusted EBIDTA margins of over 50%. The division contributes over 25% to the company’s total value, by our estimates. However, as we have written earlier, the changing patterns of illegal trade in tobacco pose a threat to Philip Morris in Europe (See Philip Morris Potential Downside From The EU’s Illegal Cigarette Trade ). In this article we revisit the issue of illicit tobacco in Europe in the light of new research.
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    Gap Cuts Full Year Guidance And Promotes Executives To Brand Presidents
  • By , 11/21/14
  • tags: GPS URBN LB
  • Gap Inc (NYSE:GPS) reported its Q3 fiscal 2014 earnings, which turned out slightly better than the consensus estimate. The company reported 11% rise in its profits to $351 million or $0.80 per share, marginally ahead of the analysts’ estimates of $0.79. However, its revenues fell short of expectations as sales at Gap continued to slip and Old Navy faltered after several strong quarters. Gap Inc’s revenues for the third quarter totaled at $3.97 billion, while analysts polled by Thomson Reuters were expecting the figure to be around $4.04 billion. For the past several quarters, despite the lull in demand for the company’s premium brands, Old Navy had been very strong. Due to this, the retailer was able to maintain a steady growth in its comparable sales. However, the recent slump in Old Navy’s demand has emerged as a big concern for the company. It appears that the brand is finally feeling the impact of significant foot traffic decline across the U.S. apparel industry. Driven by weak sales growth across the board and anticipation of a competitive holiday season, Gap Inc slashed its full year EPS guidance from $2.95-$3.00 to $2.73-$2.78. Following these results, the company’s stock fell by morer than 5%. While Gap Inc’s results were mostly disappointing, there were a few bright spots. Despite the highly promotional environment, the company’s gross profits improved during the quarter, driven by strong margin performance at Old Navy . While there was a lull in demand during the quarter, Gap Inc was able to maintain its inventory properly, which  prevented unnecessary markdowns. In other news, the newly appointed CEO, Art Peck, who will take over his responsibilities beginning next year, decided to promote two of the company’s executives to lead Banana Republic and Gap . Jeff Kirwan, current president of Gap Inc China, will become Gap global president in December and Andi Owen, who currently leads the Gap Outlet division, will start working as global president of Banana Republic in January. Our price estimate for Gap Inc is at $51.86, implying a premium of less than 30% to the market price. However, we are in the process of updating our model in light of the recent earnings release.
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    Weekly Chinese Internet Notes: Baidu In Focus
  • By , 11/21/14
  • In this Chinese Internet weekly recap, we catch up with online search giant Baidu (NASDAQ: BIDU). Baidu made news this week for various reasons. It released further details of its smart bike, courted controversy by reporting discrepancies in rival Qihoo’s business practices and subsequently got sued, while video hosting site IQiyi, which constitutes a little under 8% of our price estimate of Baidu, received $300 million in funding from mobile phone maker Xiaomi. Our price estimate for Baidu’s stock is about $225, which is slightly below the current market price. It was not a great week for Baidu, as its stock price dropped about 5% through Thursday. We forecast 2014 revenues of $7.7 billion for Baidu in 2014, which is slightly lower than analyst consensus estimates compiled by Bloomberg Businessweek . Details Emerge On DuBike Baidu has been working on a smart bicycle that will make cycling workouts more effective and social (see previous  Weekly Chinese Internet Notes ). This week the company posted photos and videos of the device on its website. The device, called DuBike, is expected to become available for sale in China by the end of the year. The bike helps gauge the effectiveness of exercise by measuring various health metrics. It also facilitates route guidance through indicators on its handlebars. Riders can locate friends nearby and share route maps with them over the Internet, making the workout more social. Additionally, it features a bike locating system to aid recovery of the bike in case it gets stolen. The bike recharges its battery during cycling and therefore does not need to be plugged in for recharging. Baidu Gets Sued By Qihoo Baidu got sued this week by online search rival Qihoo for 5 million yuan. Baidu had put up certain posts on its websites alleging that Qihoo was behind a recent virus attack that affected a large number of Apple products. This attack compromised sensitive user information. Baidu’s posts alleged that Qihoo, which also sells antivirus products, had invested in an online company identified as the source of the virus. Qihoo had gone on to release an update to its users that removes this virus from their devices. The posts allege that Qihoo released the virus as a scare tactic to boost sales of its products. Such legal battles have happened before in the hotly contested online search market in China. Baidu has a market share of over 80% in the Chinese search market, while Qihoo has a low single digit share. There have also been reports that Baidu had gained the lead over Qihoo in transitioning to mobile search. In fact, the third quarter of this year marked the overtaking of PC traffic by mobile traffic on Baidu’s network (see our article on  Baidu’s Q3 Results ). Xiaomi Invests In IQiyi Xiaomi has invested $300 million in online video hosting service IQiyi, aiming to generate content for Xiaomi’s foray into the smart television market. Xiaomi is the fifth largest mobile phone maker in the world and the market leader in China. The collaboration could increase IQiyi’s user base among Xiaomi users, both on the smart TV and mobile platforms. IQiyi’s content, including licensed Hollywood movies and U.S. TV shows, will also help Xiaomi attract customers to its smart TVs. IQiyi has also embarked on crowdfunding of movies. Its first project, a movie called The Golden Era, raised $3 million in 3 minutes through crowd funding. It intends to make 8 more films next year and license over one thousand Hollywood movies for distribution in China. Meanwhile Baidu, the largest shareholder of IQiyi, is said to have also upped its stake in IQiyi. Baidu CFO Speaks On The Future Of E-Commerce Speaking at a conference organized by Fortune magazine, Jennifer Lee, the CFO of Baidu, shed new light on Baidu’s recent moves. Baidu was party to an $800 million deal along with fellow Chinese Internet giant Tencent and mall network operator Dalian Wanda, seeking to dislodge Alibaba from its dominant position in Chinese e-commerce by leveraging Baidu’s competency in search to disrupt the O2O (Online to Offline) model. Currently the online in O2O is dominated by Alibaba, while its brick and mortar partners are the offline element. Baidu seeks to use deep learning, a technology that finds patterns among audio-visual data fed by users to their devices through cameras and smart eye-wear, to help users make purchase decisions. Baidu’s service will inform users about the availability of goods identified through deep learning at their offline merchant partners. It will also guide them, by means of the location-based services of its maps, to the stores to complete the purchase. 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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    Railroads Weekly Review: Norfolk Southern, CSX and Union Pacific
  • By , 11/21/14
  • tags: UNP NSC CSX
  • During the past week, amid speculation of a merger between Norfolk Southern (NYSE:NSC) and Canadian Pacific Major, came the news that Norfolk Southern had agreed to purchase a few hundred miles of track from Canadian Pacific’s subsidiary. CSX and Union Pacific had a comparatively quite week, with both the railroads releasing their carloadings reports, which indicate continued growth into the fourth quarter. Norfolk Southern On Tuesday, November 18, Norfolk Southern agreed to purchase around 282 miles of track from Delaware & Hudson Railway, a subsidiary of Canadian Pacific railroad, for $217 million. The rail line between Sunbury, Pa., and Schenectady, N.Y. will allow Norfolk Southern to offer connectivity in central Pennsylvania, upstate New York and New England with domestic and international markets. Norfolk Southern’s stock declined by about 0.5% over the week through Thursday.  We currently have a price estimate of $95 for Norfolk Southern. We estimate revenues of $11.9 billion, compared to a consensus estimate of $11.85 billion and EPS of $6.57 for this year. Click here to see our complete analysis of Norfolk Southern. CSX’s Carloading Report CSX released its carloading report for quarter to date ending November 15. The highlight of the report was CSX’s petroleum products shipments, which have grown 58.8% compared to the same period in the previous year. It is also encouraging to see low-teens growth in its coal shipments. We believe that this may be the result of the contract win early in the year. CSX’s agricultural and food product shipments have declined significantly, but only partially offsetting growth in other segments. Construction related shipments such as lumber, sand, crushed stone and gravel continued to grow, driven by the strong housing construction activity in the U.S. CSX’s stock gained by around 1.4% over the week through Thursday.  We currently have a price estimate of $28 for CSX. We estimate revenues of $12.63 billion, compared to consensus estimate of $12.55 billion and EPS of $1.87 for this year, in line with consensus estimates. Click here to see our complete analysis of CSX. Union Pacific Union Pacific released its carloading report for quarter to date ending November 15. Its coal shipments grew 10% compared to the same period in the previous year driven by the rejuvenation in domestic demand for coal at utilities. Union Pacific’s intermodal shipments grew in high single digits, benefiting from trucking capacity constraints in the U.S., which have led shipments to move from highway to rails. Union Pacific’s stock gained slightly over the week through Thursday, November 20.  We currently have a price estimate of $97 for Union Pacific. We estimate revenues of $23.8 billion, compared to consensus estimate of $23.7 billion and EPS of $5.51 for this year, in line with consensus estimates. Click here to see our complete analysis of Union Pacific. 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 Brokerage Notes: Trading Activity Rises for Ameritrade, E*Trade and Charles Schwab
  • By , 11/21/14
  • tags: AMTD SCHW
  • TD Ameritrade (NYSE:AMTD), E*Trade Financial (NASDAQ:ETFC) and Charles Schwab (NYSE:SCHW) released their monthly volume figures for the month of October at the end of last week. October was a positive month for all three in terms of trading activity and a growth in their client assets. The brokerages reported a continued increase in their respective client assets under management. The companies’ stocks fell by 2-3% in the second half of the week following the release of their respective monthly figures. Here’s a quick roundup on the individual metrics and October performance for the brokerage firms. TD Ameritrade Ameritrade’s trading volume in October was almost 18% higher than the 2013 period with an average of 494,000 trades per day. This was a significant improvement from Ameritrade’s Q4 FY 2014, when the average trades per day were up by an average of 5% on a year-on-year (y-o-y) basis through the quarter. Ameritrade’s Insured Deposit Account (IDA) balances grew both sequentially (2%) and annually (4%) to $75.7 billion, continuing the trend from the previous twelve months. Additionally, its interest-earning assets grew both sequentially (1%) and annually (13%) to $19.6 billion in October. Ameritrade’s total client assets were up to $664 billion from $574 billion in August last year. Trefis has a $33 price estimate for Ameritrade’s stock, implying a market cap of $18.3 billion. This is slightly lower than the current market price which fell by 2% during the week. We estimate the company’s 2014 calendar year revenues to be around $3.2 billion and an earnings per share of $1.78 in FY 2015 ending September, compared to a consensus of $1.61 according to Reuters. See our full analysis for TD Ameritrade E*Trade Financial E*Trade witnessed a similar improvement in trading activity. Daily average revenue trades (DARTs) for the month of October were 9% higher than September levels and 10% higher than prior year levels at 175,000 trades per day. E*Trade’s net client assets rose by about 2% y-o-y to $45.7 billion. E*Trade’s total client assets (customer assets in brokerage accounts and banking accounts combined) were up to $288 billion from $248 billion in the year ago period. Trefis has a $21 price estimate for E*Trade’s stock, translating into a $5.9 billion market cap. This is about 10% below the market price, which fell by 2-3% during the week. We estimate the company’s revenues to be over $1.8 billion and earnings per share of $1.10 in 2014, compared to a consensus of $1.08 according to Reuters. See our full analysis for E*Trade Financial Charles Schwab Charles Schwab added 76,000 new accounts in October taking the total number of active brokerage accounts to over 9.3 million. Schwab’s total client assets under management were over $2.44 trillion in October, up from just over $2.17 trillion in October 2013. We currently forecast Schwab’s total client assets to breach the $2.5 trillion mark before the end of next year. Trefis has a $27 price estimate for Charles Schwab, translating into a $33.2 billion market cap. This is about 10% lower than the current market price. We estimate the company’s 2014 revenues to be $6.2 billion. See our full analysis for Charles Schwab 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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    Industrials Weekly Review: Deere, 3M, Corning and Johnson Controls
  • By , 11/21/14
  • tags: DE MMM JCI GLW
  • During the past week, Deere (NYSE:DE), 3M (NYSE:MMM) and Corning (NYSE:GLW) announced new product launches, while Johnson Controls announced an increase in its quarterly dividends. Below we give a quick rundown on the most notable events in the last week related to the companies. Deere On November 17, Deere introduced three small-frame 6R tractor models. These new tractors were introduced to fulfill the growing demand for tractors, which are compact and more maneuverable so that they can be used to handle a wide variety of tasks. Deere will be reporting its fourth quarter earnings on November 26. Deere’s stock declined by about 2.5% over the week through Thursday.  We currently have a price estimate of $96 for Deere, just over 10% higher than its current market price. We estimate revenues of nearly $35 billion for calendar year 2014 and EPS of $8.50 for fiscal year 2014, in line with consensus estimates. Click here to see our complete analysis of Deere 3M On November 20, 3M announced that it had entered an agreement to market Alcohol Monitoring Systems’ SCRAM Remote Breath alcohol testing device due to the growing demand from its corrections and law enforcement customers for a portable breath alcohol testing solution. 3M also announced some changes to its senior management. Paul A. Keel will be replacing Christopher D. Holmes as Senior Vice President, Supply Chain. James L. Bauman has been appointed as Senior Vice President, Business Transformation, Americas, a newly created position. Additionally, on November 17, 3M introduced Twin Axial Cables Assemblies, which help save a significant amount of space inside data centers. This will help reduce congestion within servers and increase the options for server architecture. 3M’s stock gained slightly over the week through Thursday, November 20.  We currently have a price estimate of $142 for 3M, approximately 11% lower than its current market price. We estimate revenues of $32 billion and EPS of $7.39 for this fiscal year, slightly below consensus estimates. Click here to see our complete analysis of 3M Corning Corning launched the newest version of its popular cover glass, Gorilla Glass. According to Corning, Gorilla Glass 4 is around 2 times tougher than other cover glasses available in the markets. Corning’s scientists had developed new drop-test methods, wherein devices equipped with Gorilla Glass 4 were dropped from a height of one meter such that it the cover glass fell on a rough surface. The results revealed that 80% of the time Gorilla Glass 4 did not break, compared to soda-lime glass, which broke every time. Corning’s stock gained nearly 1% over the week through Thursday.  We currently have a price estimate of $20 for Corning, which is slightly lower than its current market price. We estimate revenues of $10.1 billion and EPS of $1.53 for this year, about in line with consensus estimates. Click here to see our complete analysis of Corning Johnson Controls On November 19, Johnson Controls announced an 18% increase in its quarterly dividend to $0.26 per share, marking the 34 th increase in the past 36 years. The new dividend will be paid on January 5, 2015. Johnson Controls’ stock gained 1.34% over the week through Thursday.  We currently have a price estimate of $52 for Johnson Controls, slightly higher than its current market price. We estimate revenues of $44.1 billion and EPS of $3.25 for this fiscal year 2014. Click here to see our complete analysis of Johnson Controls 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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    Market Share Expansion Remains Primary Focus For Keurig Green Mountain
  • By , 11/21/14
  • Keurig Green Mountain (NASDAQ:GMCR), the leader in speciality coffee brewers, ended its fiscal 2014 on a high note, as the company reported strong numbers in its annual report released on November 19. In the fourth fiscal quarter, the company generated net revenues of $1.2 billion, up 14% year-over-year (y-o-y), primarily driven by improved performance of its portion packs. Net portion packs sales increased 22% y-o-y to $950 million in Q4, primarily driven by a 28% increase in the portion pack volumes. However, the brewer and other accessory sales declined by 5% to $180 million, as the brewer volumes declined 8% and brewer pricing declined 11%. Effectively, the company’s gross margins grew 160 basis points to 37.6% in Q4, positively impacted by favorable green coffee costs. Due to the strong performance of its brewers and portion packs businesses over the last few quarters, Keurig Green Mountain managed to post excellent annual net revenue figures, which grew 8% y-o-y to $ 4.7 billion, whereas the GAAP net operating income grew 24% y-o-y to $950 million. Portion pack net sales increased 13% for the year, driven by 18% increase in its volumes. However, the most striking highlight in the report was the decline of brewer and accessories net sales by 1% y-o-y, primarily due to net price realization of brewers. For the next fiscal year, the company expects the net sales, as well non-GAAP EPS to grow by 6-9% y-o-y. However, Keurig Green Mountain is concerned by the rising coffee prices, despite being hedged 90% for fiscal 2015, as a further bullish trend in green coffee prices might hamper its margins. See our full analysis of GMCR here Focus On Increasing Keurig Brewer Customer Base After the expiration of Keurig’s patents in 2012, many competing companies came out with their brewer systems and K-Cup portion packs. As a result, Keurig started losing its customer base to its rival companies. As a counter measure, the company focused on increasing the installed base of active Keurig brewers in households. To drive the volumes, the company lowered its net pricing for brewers. Moreover, with one month left for the fiscal year end, Keurig Green Mountain released its new brewer system: Keurig 2.0 in the U.S. Keurig was aware of the fact that the product was already in huge demand among coffee lovers, who want to upgrade to a more convenient option. Keurig can now serve a wider range of customer base, with different coffee tastes, as it now serves more than 50 top coffee brands. According to the data provided by Keurig, nearly 60% of the non-Keurig owners and 72% of the current Keurig owners, want a technology that can brew more than one single cup in one go. Keurig 2.0 can readily serve the customers’ growing needs, as it can brew up to 4 packs at a time, with the help of its new larger K-carafe pack. The company’s retail customers ordered portion packs more aggressively in the fourth quarter. However, the brewer sales declined 5% in the fourth quarter, resulting in a 1% overall decline in the brewer and accessory sales for the whole fiscal year. The decline was primarily due to a 10 percentage point drop in the net price realization, as the company focused on investing some of the favorable commodity cost to boost the installed base of Keurig brewers. As a result, the volumes grew by 6% y-o-y. In 2015, the sales figure of Keurig brewers might improve, as more households upgrade from Keurig 1.0 to the slightly more expensive Keurig 2.0. Keurig Cold: Entry To Cold Beverage Market Keurig entered into a partnership with  Coca-Cola (NYSE:KO), where the two companies are together developing the Keurig Cold machine. The cold brewer provides a huge platform for Keurig to enter into cold beverage market which would expand its business to Carbonated Soft Drinks (CSD) and non-carbonated drinks. According to our estimates, CSDs constitute about 43% of the 30 billion gallon Liquid Refreshment Beverage (LRB) industry in the U.S., forming the largest segment. Keurig Green Mountain plans on introducing Keurig Cold in the fall of 2015 for its North American customers. Currently, the company is still in the development stage, including the manufacturing of pods and appliances. However, the Keurig Cold might find it easier to penetrate into the households compared to the hot beverage systems, as the awareness and brand appeal of the Keurig brand among customers has increased tremendously over the last decade.  Once the Keurig Cold machine is out, the company might look to utilize Coca-Cola’s strong distribution channels. Keurig can also take advantage of Coca-Cola’s global brand appeal to expand its presence internationally, particularly in the budding ready-to-drink coffee and ready-to-drink tea segment, which is the most dominating market in Asia-Pacific, whereas North America is the fastest growing market in this segment.. Increased Number Of Licensed Brands To Attract Customers The number of licensed coffee brands offered by Keurig Green Mountain increased from 30 to 70 over the last 18 months, providing almost 500 different varieties of coffee, tea and other beverage options. Keurig Green Mountain has accelerated its pace in joining hands with major coffee brands and other retail chains such as  Dunkin’ Brands (NASDAQ: DNKN), Peet’s Coffee,  Starbucks Corporation (NASDAQ:SBUX), Nestle U.S. division and   Kraft Foods Group (NASDAQ:KRFT). These deals give the company an advantage in the industry to widen its market share in the single-serve coffee segment, as these brands constitute 75% of the total U.S. coffee consumption and have a huge customer base. Customers who like Maxwell House’s coffee, Starbucks’ premium coffee taste, Nestle’s creamer with their coffee, or Dunkin’ Donuts coffee, instead of going to the respective coffee outlets to get a cup would rather buy portion packs and enjoy their favorite cup of coffee at home. In Q4, the company joined hands with famous retail brands, such as Krafts Food Group, Meijer and Supervalu, and has also started shipping its manufactured store brands to Walmart and Sam’s Club. With several big brands under its arsenal, customers who prefer at-home consumption of their favorite coffee brands might opt for Keurig branded portion packs and brewers. 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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    GameStop: Lower Software Sales Offset Growth In Pre-Owned Products and Hardware Sales
  • By , 11/21/14
  • tags: GME EA ATVI MSFT
  • Video game retailer  GameStop (NYSE:GME) was negatively impacted by the lackluster performance of AAA titles released in the third quarter, as the company reported a 0.7% decline in net revenues in its Q3 earnings report, released on November 20. The company’s comparable store sales declined 2.3% year-over-year (y-o-y), resulting in a 6.3% y-o-y decline in the net earnings. The positive impact of strong new hardware sales was offset by a delay in the release of Assassin’s Creed out of the third quarter into the fourth quarter. The decline in the sales of software titles for previous generation consoles, due to the shift of gamers to next generation consoles, was much more than the company’s anticipation. The company expects the comparable store sales in the fourth quarter to range from -5% to +2% and full year comparable store sales to range from 2% to 5%, primarily due to the shift of several title launches to next year. Our price estimate for the company’s stock is $43, which is above the current market price. See our complete analysis of GameStop Lagging Software Sales Offset Strong Hardware Sales According to the research group NPD, gamers spent nearly $1.6 billion on hardware over the last six months, up 102% year-over-year (y-o-y). On the other hand, consumer spending on new physical game sales over the last six months in the U.S. was nearly $1.8 billion, down 11% y-o-y, primarily due to a lack of core titles for new consoles. GameStop continued its excellent performance in the hardware category, as the company’s Q3 hardware sales grew 147% to $450 million due to strong console performance in the U.S. With sustained demand for Xbox One and PlayStation 4, the company expects the sales to further increase in the holiday period. However, despite the launch of blockbuster titles by major game developers, such as  Electronic Arts ’ (NASDAQ:EA) and Activision Blizzard ’s (NASDAQ:ATVI), software sales declined 34% y-o-y to $744 million, as last year’s third quarter witnessed some hit titles, including Grand Theft Auto. Since the impact of lagging software sales was felt all over the industry, the company managed to achieve over 47% of the total software market share this quarter. Moreover, GameStop’s software market share on Xbox One and PlayStation 4 reached all time high of 56% in Q3. In the fourth quarter, the gamers would have several core titles ranging from sports titles to First Person Shooter (FPS) games, which were released in November. The company expects the situations in the software industry to improve in the fourth quarter. Pre-owned Segment and Digital Segment Keeps GameStop Strong GameStop’s Pre-owned and value product segment still remains the highest revenue generating segment for the company, with $500 million net sales in the third quarter, up 2.6% y-o-y. For the last three quarters, the pre-owned segment has been an outperformer among all the segments. Healthier inventory positions, coupled with expansion of the international loyalty programs to engage customers drove the segment’s sales, offset by declining software sales. GameStop’s game sales through its buy-sell-trade model are highly correlated with new game sales, as the latter help replenish the company’s inventory; pre-owned game sales have consistently been around 65% of new software sales for the last four years. Nonetheless, the segment’s gross margins improved over 300 basis points. Trefis estimates the revenue from this segment to have a double digit growth of around 15% over the prior year and to account for nearly 43% of the company’s gross profit in the fiscal 2014. On the other hand, the contribution of GameStop’s digital segment to the net revenues has been increasing at a faster pace.  The digital revolution, particularly the advent of extra downloadable content (DLC), has revolutionized the gaming industry and gamers are shifting from physical games to digitalized content. In the third quarter, the digital receipts grew 52% y-o-y to $210 million, with 80% growth internationally, primarily due to the strong demand for digital content of Destiny and FIFA. As a result, digital gross profit grew 10.3% to $35.2 million. Expansion Continues With Technology Brands In Focus GameStop added nearly 285 stores in the third quarter, taking the total count to 6,664, including 4,183 U.S. video game stores, 2,173 international video game stores and 408 technology brand stores. The company added 55 new technology brand stores through acquisition, and opened 34 more stores. GameStop added the Technology brand segment in the fourth quarter last year, after it acquired Spring Mobile and Simply Mac brands.  The company estimates that the annual sales per store from Simply Mac in 2014 alone will surpass the corresponding figure of GameStop’s video game stores; $2-$3 million annual sales per store as compared to $1.3 million from GameStop stores. With the current pace of growth, coupled with new product launches by Apple, the technology brands might contribute more than 5% to the net operating profits. The demand for iPhone 6 has remained higher after its launch in September, and the company expects the demand to continue in the holiday season. The company plans to accelerate its expansion in the technology brands segment with 500 technology brand stores by the end of 2014. 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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    Alcoa Completes Firth Rixson Acquisition As Part Of Ongoing Strategic Shift Towards Value-added Products
  • By , 11/21/14
  • tags: AA MT X
  • Alcoa (NYSE:AA) has announced the completion of its acquisition of Firth Rixson, a leading jet engine components manufacturer. The company had announced the Firth Rixson aqcusition in June. The total consideration for the acquisition is $2.85 billion, consisting of $2.35 billion in cash and $500 million in stock. In addition, there is a potential $150 million earn-out, the payment of which depends on Firth Rixson’s performance through 2020. The acquisition is a part of Alcoa’s ongoing strategic shift of its product portfolio towards value-added products, which are more profitable as compared to its upstream businesses. See our complete analysis for Alcoa Benefits of the Acquisition The acquisition of Firth Rixson will widen Alcoa’s jet engine components portfolio. Through this acquisition, Alcoa has become the number one global producer of seamless rolled jet engine rings, engineered from nickel-based superalloys and titanium. The company has also become one of the world’s leading suppliers of vacuum melted superalloys, which are used to make aerospace, industrial gas turbines, oil and gas products and structural components for landing gear applications. It has also entered into a highly specialized segment of jet engine forgings that require isothermal forging technology. The acquisition is a significant boost to Alcoa’s aerospace revenue. It grows Alcoa’s aerospace revenue in 2013 by 20% on a pro forma basis, from $4 billion to $4.8 billion. The acquisition will boost Alcoa’s overall revenue by $1.6 billion by 2016, and by $2 billion by 2019. The acquisition will also result in significant cost synergies, primarily driven by purchasing and productivity improvements, optimizing internal metal supply, and leveraging Alcoa’s global shared services. Cost savings are expected to exceed $100 million annually by the fifth year after completion of the acquisition. The acquisition of Firth Rixson is a part of Alcoa’s ongoing product portfolio transformation towards value-added products, as it seeks to reduce its dependence on volatile aluminum prices. Aluminum Prices Aluminum has diverse applications in industry. It is an important input in the packaging, aerospace, automotive, construction, commercial transportation, power generation, capital goods and consumer durables industries. Thus, demand for aluminum is broadly correlated with industrial growth. The European debt crisis and slowing Chinese growth have contributed to the weakness in aluminum demand, and consequently prices over the last few quarters. On the supply side, production capacity was not reduced corresponding to the subdued demand conditions witnessed over the last few quarters. Persistently high aluminum inventory levels relative to demand have kept London Metal Exchange (LME) aluminum prices depressed. This inventory was built up partially as a result of aluminum being tied up in financing deals, which were made possible due to low interest rates. Despite inventories being at a record high, market forces failed to rationalize supply through the shutdown of smelting capacity. Though global aluminum majors like Alcoa and Rusal did make significant smelting capacity cuts, the same was not true of Chinese companies. This was primarily due to state intervention in the form of provision of subsidies or renegotiated power contracts to smelters, which serve as a disincentive to cut production. China accounted for around 45% of the world’s aluminum production in 2013, and the expansion in production by Chinese producers more than made up for capacity cuts by global majors.   This oversupply situation kept aluminum prices depressed over the last few quarters. Aluminum prices have rebounded recently. Global smelting capacity cuts in response to low prices have finally taken effect. LME warehouse stocks of aluminum were down around 10% in July, since the start of the year. In view of the global smelting capacity cuts, as per a poll conducted by Reuters in July, the market for aluminum is expected to move from an oversupply of 235,500 tons in 2014 to a deficit of 4,444 tons in 2015. LME aluminum prices averaged roughly $1,800 per ton over the course of the third quarter in 2013. These prices have averaged close to $2,000 per ton in the third quarter this year. However, global smelting capacity restarts in response to higher aluminum prices are expected to lower or eliminate the extent of the deficit next year. In addition, the trajectory of Chinese economic growth will influence aluminum prices to a large extent. With slowing Chinese growth, there is unlikely to be any significant upside to aluminum prices. A significant proportion of Alcoa’s alumina pricing contracts are based on LME aluminum prices. Thus, the uncertainty in aluminum prices affects Alcoa’s Alumina business segment as well. In view of the uncertainty regarding aluminum prices, Aloca has sought to reduce its dependence on its commodity businesses . Portfolio Transformation Alcoa’s shift towards value-added products is reflected in its revenue figures. The percentage contribution of value-added products, represented by the Global Rolled Products and Engineered Products and Solutions business segments, to the company’s total revenues has steadily increased. This figure stood at 52.1%, 54.4%, 55.7% and 57.1% in 2011, 2012, 2013 and the first nine months of 2014, respectively. In calculating these figures, we have only considered third-party sales. Value-added businesses will drive Alcoa’s results in the near future, with cost reductions expected to keep its commodity businesses competitive. 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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    HP Earnings Preview: Revenue Growth In Focus
  • By , 11/21/14
  • tags: HPQ IBM MSFT
  • Hewlett-Packard (NYSE:HPQ) is due to release its Q4 earnings on November 25. In the previous quarter, HP’s revenues grew by 1% year over year to $27.6 billion. Furthermore, the company delivered $0.52 in GAAP diluted earnings per share, down 27% from the year-ago quarter. A tough business environment continued to affect its profitability across most geographies and verticals. HP has been able to recoup its market share in the hardware segments such as PCs, desktops, tablets and printers through new product  launches, even though business conditions in the IT services division continue to remain challenging. Therefore, we expect that weak enterprise demand for HP’s services will continue to impact HP’s revenues across its services business divisions, and hardware will continue to bolster revenues. See our full analysis on HP Outlook for Q4 and 2014 For Q4 FY14, HP estimates non-GAAP diluted net EPS in the range of $1.03 to $1.07, and GAAP diluted net EPS in the range of $0.83 to $0.87. For fiscal 2014, HP estimates non-GAAP diluted net EPS between $3.70 and $3.74 and GAAP diluted net EPS between $2.75 and $2.79. Fiscal 2014 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.95 per share, related primarily to the amortization of intangible assets and restructuring charges. Will Revenues Falter Some? Due to a weak macroeconomic environment and restructuring efforts, we expect the company to post a marginal decline in revenue across most of its services divisions. However, we expect revenues from the PC hardware division to grow as the company has been able to buck the downtrend in the past few quarters. For most of the other divisions, we project a mid-single-digit decline in revenues. We continue to closely monitor the following divisions in this earnings announcement: 1. HP Services and Software Division : HP’s services and software divisions collectively account for 32% of the company’s value. During the last quarter, HP reported a decline across both services and software division as business environment was tepid. The business environment continues to be challenging, and considering the revenue run off in the last quarter, we expect that the decline in services revenues will be more profound as compared to previous quarter. Furthermore, the company reported softness in new contract signings in the last quarter, and in this earnings announcement, we’ll be closely watching HP’s new contract signings. Furthermore, we are also monitoring the renewal rate and pricing for HP’s technology and application services as both these metrics were trending lower over the past few quarters. Additionally, HP continues to report double-digit growth in revenues of its strategic enterprise services such as cloud, mobility, security and big data. Therefore, we expect converged cloud services to be the key driver for services revenue during this quarter. 2. Server & Storage Division: The server and storage division is HP’s second largest business division, making up 20% of its value. In Q2 CY14 (which corresponds to HP’s Q3 FY14 as the company has year ending in October), HP’s Industry Standard Server (ISS) division reported 9% year-over-year growth in revenues to $3.09 billion. Considering the 1.3% growth in global server shipment in Q2 CY14, we expect this trend in HP’s server shipment to continue, and the company to report improvement in shipment and revenues for the quarter. 3. Printer Division : HP leads the worldwide hardcopy peripheral market with a market share of over 40%. According to IDC, the worldwide hardcopy peripherals market declined for the first time after three consecutive quarters of growth. The company continues to target the high-end ink market and commercial hardware rather than low-end consumer hardware. This should augur well for HP as most of the revenue growth was in the high end laser sales in Q2. While the tough pricing environment will continue to negatively impact supplies revenue, higher unit sales will offset this decline for the company to post minor growth in revenues. 4. PC Shipment And Revenues To Buck The Trend: HP’s PC and workstation division is the fourth largest division, contributing nearly 30% to its revenue and 10% of its estimated value. According to Gartner, worldwide PC shipments experienced marginal decline in the third quarter of 2014. We believe that HP will continue to gain market share in Q4, as it did in Q3, on the back of new launches  it had undertaken in the previous quarters. Thus, we expect the company revenues from this division to be marginally higher during the quarter. We currently have  $29.79 price estimate for HP, which is approximately 24% below the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Weekly Solar Notes: India's Higher Solar Targets, SunPower's European Downsizing, Trina's Efficiency Record
  • By , 11/21/14
  • The solar industry had an interesting week, with news of panel supply agreements, potentially higher installation targets in India and new cell efficiency records. The Guggenheim Solar ETF (NYSE:TAN), a fund that consists of a broad group of stocks in the solar industry, rose by about 6.5% through Thursday. Yingli Supplies Panels To World’s Largest Floating PV Power Plant Yingli Green Energy (NYSE:YGE) China’s largest solar company, will be supplying panels to the world’s largest floating solar power plant which is being constructed in Japan. The 7.5 MW plant will be built on an agricultural reservoir in the Saitama prefecture. Floating PV plants have been put forward as a potential solution to Japan’s dearth of suitable land for utility scale solar projects. Around 73% of the country’s land is either mountainous or forest, and the country’s population density is also very high. Yingli has a significant exposure to the Japanese utility scale solar markets and expects its shipments to the country to grow 20% in 2015. We have a $3.50 price estimate for Yingli Green Energy, which translates to a market cap of about $650 million. Our price estimate is about 23% ahead of the current market price. We are projecting revenues of about $2.68 billion for FY 2014, with an adjusted net loss of around $0.49 per share. Yingli’s stock has gained roughly 5% through Thursday. India Plans To Raise Its 2022 Solar  Installation Targets India could increase its national solar target to 100 GW by 2022 from a previous target of 20 GW, according to the country’s Energy Minister. India is an ideal market for solar power given its poor base load quality, relatively high energy costs and growing concerns about greenhouse gas emissions. In spite of the strong potential, the country’s solar installations have been slow to take off owing to regulatory issues and challenges related to land acquisition. However, the sector looks set for an overhaul, supported by initiatives undertaken by the country’s new federal government, which is led by a party known to be an advocate of solar power. SunPower Downsizing Workforce In Europe SunPower (NASDAQ:SPWR) has announced plans to lay off about 115 workers over the next year, with a bulk of the job cuts coming from its European operations. SunPower’s performance in Europe has been quite inconsistent,  following the scale back of government incentives in some key markets in the region. During Q3 2014, the company’s shipments to the Europe, Middle East and Africa segment fell by around 38% sequentially, while gross margins fell to 9.7% from 16.5%. Of late, many large solar companies have been moving their focus away from Europe into higher growth markets such as Asia Pacific. Trefis has a $33 price estimate for SunPower, which translates to a market cap of around $4.4 billion. Our price estimate is about 14% ahead of the current market price. We estimate the company’s 2014 revenues at around $2.7 billion, with an adjusted EPS of about $1.31. This compares to a consensus of around $1.33 according to Reuters. SunPower stock gained close to 6% through Thursday. Trina Solar’s Cell Efficiency Records Trina Solar (NYSE:TSL), China’s largest profitable solar manufacturer, announced that it has developed solar cells that set world records for mono and multicrystalline solar conversion efficiency. One of the company’s p-type monocrystalline solar cells, which integrates technologies including back surface passivation and local back surface field, achieved  an efficiency of 21.4% while the multicrystalline p-type solar cell recorded an efficiency of 20.53%. Although the new technologies are not in production yet, the company says that they will be part of its future Honey Plus and Interdigitated Back Contact (IBC) products. Conversion efficiencies are one of the key metrics for solar panels. Higher efficiency panels convert more sunlight into electricity and have a smaller surface area for every watt of rated power output. From a manufacturing standpoint, higher efficiencies often translate to lower per-watt production costs. Trefis has a $14.50 price estimate for Trina Solar, which implies a market cap of around $1.20 billion. Our price estimate is about 38% ahead of the current market price. We are modelling revenues of about $2.56 billion for 2014, with an adjusted EPS of $0.83. This compares to a consensus estimate of $0.89 according to the Financial Times. Trina Solar stock rose by about 9% through Thursday. 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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    Charles Schwab Introduces Its Robo-Advisor: Is This The Next Big Thing In Investing?
  • By , 11/21/14
  • tags: SCHW ETFC AMTD
  • Charles Schwab (NYSE:SCHW) announced that it would be offering  an automated online investment advisory service, Robo Advisor, at the end of October. This announcement comes in the wake of various online-investment advisers and digital investment advisers that have sprung up and led large brokerage firms such as Schwab, Ameritrade and Fidelity to respond. Schwab plans to introduce the Schwab Intelligent Portfolios by Q1 2015 to offer exchange trading funds to customers for comparatively low fees. The brokerage also intends to keep a lower minimum balance (as low as $5,000) as an eligibility criteria for this algorithm-based service. We have a $25 price estimate for the company’s stock, which is about 10% below the current market price. Schwab’s stock price has risen by about 11% since it announced Robo Advisor in late October. See our full analysis for Charles Schwab What is Robo-Advisory? Until recently, portfolio management and financial advisory was done through human interaction. Robo Advisors, as the name suggests, offer automated portfolio management services with minimal human input. They use the same algorithm-based templates used in case of traditional advisory. Automated investment service firms offering this service, such as Betterment, Wealthfront and FutureAdvisor, have caught the eyes of venture capital firms and raised funds to try to become the next big thing in investing. Robo-advisory has advantages over human-based methods similar to those of online banking or online shopping over traditional banks and stores. There is minimal human intervention, practically no time constraints and low minimums of investable assets for eligibility to advisory services. It has several advantages for the companies offering automated advisory, which include negligible employee costs, low administrative and capital expenditures, and a potential faster rate of gaining new customers – often first time investors. The limitation of Robo Advisor is that its service is currently restricted to portfolio management, which basically just includes allocating stocks and investments to various asset classes based on a questionnaire or survey filled by the customer. Based on the answers to the questionnaire, the algorithm invests in a diversified portfolio of exchange traded funds (ETF) taking into account the risk appetite of the customer. However, as of now there is no provision to address other aspects of financial advisory, including tax planning and retirement planning. How The New Automated Services Line Up Against The Big Players Betterment (the operator of has over $800 million in assets under management from about 45,000 client accounts, accumulated over the last few years. Similarly, Wealthfront has amassed over $1 billion in client assets, since it was launched in late 2011. Betterment practices “goal-based investing”, which is different from conventional investing as it focuses on investment yields reaching personal financial goals of customers rather than the average market return on those investments. On the other hand, Wealthfront judges the risk-bearing ability of customers and accordingly prepares a portfolio suited to the customer needs. FutureAdvisor is another such service provider which has just 20 employees, which it plans to take up to 40 by the end of this year. Assets under management at FutureAdvisor have grown from as low as $3 million last year to over $110 million in May this year. According to FutureAdvisor’s founders, its core client base consists of tech savvy and young investors with relatively low assets under management. Somewhat like the Wealthfront platform, FutureAdvisor also uses an algorithm which assesses the risk that customers are willing to take. The company has witnessed a strong customer response, with its assets under management reaching $200 million by August this year. Charles Schwab’s Robo Advisor Schwab announced that it will offer a Robo Advisor service in early 2015. Unlike its traditional business, Schwab Intelligent Portfolios will not charge any advisory fee, trading commission or account-service fee. There will only be a fund-management fee of around 0.15-0.35% of assets under management . The main idea behind introducing this service with virtually no fees is to retain customers that are looking for automated advisory but have been heading to other firms for this service and saving on advisory fees. Moreover, the brokerage firm intends to attract newer clients, particularly those belonging to a younger age group and lower assets under management compared to its core customer base of baby-boomers. Like Betterment and Wealthfront, Schwab Intelligent Portfolios will be restricted to risk profile-based asset allocation and will exclude other facets of financial planning. The automated services will rebalance portfolios in real time based on customer needs and not periodically (quarterly/annually) like the conventional services. Schwab’s total client assets totaled $2.4 trillion at the end of September this year, with the brokerage generating revenues on an implied yield of under 0.11% on these assets. We forecast Schwab’s asset management and administration revenues to be around 13% higher y-o-y in 2014  at $2.6 billion for the full year, as we expect client assets to grow by about 10% y-o-y by the end of the year and a nearly flat yield. According to an estimate by research firm My Private Banking, the assets managed by Robo Advisor services worldwide could be over $14 billion by the end of 2014, which is expected to rise to over $250 billion in the next five years, with over $200 billion worth of assets in the U.S. alone. We currently forecast Schwab’s assets under management to grow at a CAGR of over 8% through the end of our forecast period. If Schwab’s assets under management grow at 10% annually by the end of this decade, it could imply a 5% upside to our price valuation for the company. You can modify the interactive chart below to gauge the effect a change in growth rate of client assets managed by Schwab would have on our price estimate for the brokerage. 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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    Salesforce Q3'15 Review: YoY Sales Growth Slows; Provides Softer FY16 Guidance
  • By , 11/21/14
  • tags: CRM ORCL SAP
  • Cloud Customer Relationship Management company (NYSE:CRM) reported a mixed set of results on Wednesday. Quarterly revenues for Q3FY15 stood at $1.383 billion, higher than its earlier guidance of $1.365 billion – $1.37 billion. However, the growth rate slipped during the quarter, declining from 37% in Q3FY14 to 30% in Q3FY15. Although a part of the slowdown is attributable to Salesforce’s sheer size and scale, which makes it difficult to maintain a growth rate over 35%, we believe company-specific factors also contributed to a possible slowdown during the quarter. Strong operational discipline and cost management helped a strong expansion in operating and net income levels in fiscal year 2015. Non-GAAP operating income expanded nearly 47% on a year-on-year basis from $284 million to $417 million, resulting in an increase in margins from 9.72% to 10.61%. Furthermore, non-GAAP earnings increased from 28 cents per share in Q3FY14 to 38 cents per share this quarter following the robust growth in non-GAAP operating income. However, loss per share in GAAP earnings widened to -32  cents in 9MFY15 compared to -19 cents in 9MFY14, due to an increase in income tax provisions in fiscal year 2015. See our full analysis for Business Realignment Weighs on Q3FY15 Top Line Growth Revenues from subscriptions and support grew 28% in Q3FY15, slower than the 36% reported in a similar period last fiscal year. Similarly, revenues from professional services decelerated from nearly 50% in Q3FY14 to 33% this quarter. Comparatively, year on year growth in Q2FY15 for both the subscription and professional service divisions stood at 37% and 58% respectively. The company reported a change in strategy to provide custom, industry-specific Customer Relationship Management platforms across six industries to enhance customer value. We believe the segregation of sales personnel and allocation of new client accounts following this business realignment could have contributed to a slowdown in revenues during the quarter. Although the third quarter has been a softer quarter for Salesforce, with fewer subscription renewals historically, the move to build solutions for specific industries instead of rolling out an industry-agnostic CRM platform requires significant industry-specific training on part of the sales personnel, impacting near term sales growth. Year-on-year growth in revenues from the Americas region, which accounts for the largest share of sales, decelerated sharply from 41% in Q3FY14 to 29% in Q3FY15. European revenues also decelerated in Q3FY15 compared to a prior year period, due to a challenging macroeconomic environment in the Eurozone region. Shares of Salesforce dropped about 4.5% after the company provided revenue guidance of $6.45 – $6.50 billion for FY16, lower than consensus estimates of about $6.52 billion and our estimate of $6.66 billion. Going forward, we expect near term sales growth to remain constrained, given the reduced efficiency of the sales personnel in the new organizational setup. However, long term sales are likely to benefit from successful execution of the “New Industries Strategy” as new customer adoption and renewal rates are expected to increase from these industry-specific solutions. Expanding Margins Could Improve Valuation Prospects Salesforce has been fueling its robust revenue growth by investing heavily into its operations, driving down margins over the years. The company has always been known for its strategy to prioritize revenue growth over profitability. Non-GAAP operating profit margins have nearly halved in the past five years, dropping from 16.5% in FY10 to 8.93% in FY14. Within the application software vertical, Customer Relationship Management has been the fastest growing sub-segment and is pegged to grow to $37 billion by 2018. Given the rapid evolution of competition in the CRM market in recent times, we believe the pace of investment into Research & Development and Sales & Marketing operations is justified, so as to maximize product functionality while growing its customer base and market share. For the nine months into FY15, non-GAAP margins expanded nearly 1% to 10.6%, driven by lower General & Administrative expenses. Margins in the fourth quarter have historically been close to margins in Q3, and we expect full FY15 non-GAAP operating profit margins at about 10.75%. Going forward, we expect non-GAAP operating margins to gradually expand to 13% by FY21. The competitive nature of the booming CRM market, particularly in the SaaS-based CRM segment, should reign in pricing going forward and subsequently, operating profit margins. We have factored in low margin expansion prospects into our discounted cash flow valuation for Salesforce. However, there could be a 19% increase in our Salesforce price estimate if the company manages to expand its non-GAAP operating profit margins to 14.5% by FY21. Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Financials Weekly Notes: Citigroup, Deutsche Bank and RBS
  • By , 11/21/14
  • tags: DB RBS C
  • The equity market had a roller coaster of a week with a series of mixed economic indicators driving prices in a different direction every day over the period. Investors started the week on a cautious note after Japan reported an unexpected contraction in its economy, but their fears of deterioration in the global economy were quelled to a large extent the same day when the European Central Bank (ECB) reiterated that it will take all steps necessary to ensure economic recovery in Europe. As U.S. manufacturing activity showed signs of an improvement in November after a poor showing last month, and as a survey pointed to improving sentiment in Germany, the market received a boost on Tuesday that sent the S&P 500 to its highest ever intra-day figure. But the trend reversed on Wednesday, when minutes of the Federal Reserve’s meeting held late last month triggered fears of a premature increase in interest rates. The equity market  recouped its losses on Thursday, however, and closed at a new record high after factory and home resales data indicated further improvement in economic conditions in the U.S. Bank shares, however, fell out of investor preference over the latter half of the week due to mixed signals about the timing of the Fed’s rate hike. The KBW Bank Index fell almost 1% through Thursday, compared to a 1% gain for the S&P 500 over the same period.
    HAL Logo
    Oilfield Services Weekly Notes: A Big Merger, Idled Offshore Rigs And An Uncertain Outlook
  • By , 11/21/14
  • tags: HAL BHI SLB
  • The oilfield services industry had a very eventful week, with Halliburton (NYSE:HAL) announcing a blockbuster deal to buy smaller rival Baker Hughes (NYSE:BHI) in what would be the largest acquisition in the industry’s recent history. In other news, Transocean (NYSE:RIG), the biggest offshore driller, painted a grim picture of the offshore drilling markets in its recent fleet status report, indicating that it had idled 3 rigs and added just $83 million in new contracts since its previous report . On the macro front, things continue to remain nebulous for the upstream energy services sector. While benchmark crude oil prices saw a marginal increase this week, with NYMEX crude creeping above $76 per barrel on Thursday, prices are still down by around 30% since mid-June, amid concerns of abundant global supply and lackluster demand growth. Crude prices are a barometer for long-term upstream spending activity, and if prices continue to remain depressed, oilfield services companies could see demand fall as oil and gas companies dial back on their exploration and production spending. Halliburton Buying Baker Hughes Halliburton, the second largest oilfield services company, will acquire Baker Hughes, the third largest player, creating a services behemoth that could take on industry leader  Schlumberger (NYSE:SLB) in a market in which customers generally prefer firms with broad technological capabilities and wide geographic footprints. The stock and cash deal, which values Baker Hughes’ equity at $34.6 billion or $78 per share as of November 12, represents a 50% premium to the stock price before the news of the negotiations between the companies became public. The transaction is expected to close during the second half of 2015, subject to the approval of shareholders from both companies and regulators. The market reaction to the deal was decidedly mixed, with Halliburton’s stock falling by over 10% since the deal was announced, marking one of the worst performances by an acquirer’s stock this year. Baker Hughes’ shareholders appear to be on the more lucrative side of the transaction, at least from a near-term perspective, considering the healthy cash component and the upside they could realize through stake in the combined company. Although Halliburton may not see a short term upside from the deal, it should gain over the long run since it could realize synergies, expand its product portfolio in areas such as artificial lift, horizontal drilling, drill bits, and strengthen its geographic footprint (see  Why The Baker Hughes Deal Will Eventually Create Value For Halliburton Shareholders ). We have a $70 price estimate for Halliburton, which translates to a market cap of around $59 billion. Our price estimate is 41% ahead of the current market price. We project the company’s FY 2014 revenues at around $32 billion, with an adjusted EPS of $4.05. This compares to a consensus EPS estimate of around $4.04 according to Reuters. Halliburton’s stock declined by over 10% through Thursday, on the back of concerns that it was paying too much for Baker Hughes. Transocean’s Grim Fleet Status Report Transocean published its fleet status report for November, reporting significantly lower contracting activity, lower day rates on new contracts while indicating that it had idled three more rigs. The drilling markets are facing a cyclical downturn, as plummeting oil prices compound the impact of the industry-wide oversupply of ultra-deepwater drilling rigs. Transocean has been badly impacted by this, given its older fleet and also due to a larger number of contracts that expire (or expired) this year. Per the fleet report, the company added new contracts valued at just $83 million since October 15, compared to about $610 million worth of contracts reported in its previous monthly report. Day rates on most new contracts were also lower. For instance, the Discoverer Enterprise ultra deepwater rig was awarded a one-well extension at a dayrate of  $399,000, compared to a previous day rate of $615,000. The company also announced that it would be idling two ultra-deepwater floaters – Deepwater Discovery and Sedco Express – and one midwater rig- GSF Arctic III.  Trefis has a $34 price estimate for Transocean, which translates into a market cap of $12.3 billion. Our price estimate is about 32% ahead of the current market price. We are forecasting revenue of around $9.23 billion for 2014.  Reuters has a consensus EPS estimate of about $4.66 for FY 2014. Transocean’s stock has declined by 2% thus far this week. 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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    Mobile Weekly Notes: Apple Courts Developers With WatchKit, Samsung Plans To Prune Smartphone Portfolio
  • By , 11/21/14
  • This week saw several interesting developments in the mobile space, with Apple releasing the development platform for its Apple Watch, Nokia planning to re-enter the consumer devices space, and BlackBerry planning the launch of its latest handset. Below we discuss some of these items and their impact on the companies. Apple’s Introduces WatchKit Developer Tools Earlier this week, Apple (NASDAQ:AAPL) officially released WatchKit, its development platform for the upcoming Apple Watch, allowing developers to begin creating applications for the device. While several companies, including Samsung, have been participating in the smartwatch space, none of their products have been big critical or commercial successes, plagued by a lack of meaningful use cases and a so-called “killer-application”. Apple is looking to address this issue by getting developers on board well before the watch hits the market, building an app ecosystem that it hopes should help to attract and retain customers on its wearables platform. The Apple Watch is expected to go on sale early next year, with a starting price of $349. We have a  $110 price estimate for Apple, which translates to a market cap of around $640 billion. Our price estimate is slightly below the current market price. We estimate the company’s FY 2015 EPS at around $7.21, compared to a consensus estimate of around $7.72 according to Reuters. We are modeling iPhone shipments of around 176 million units for CY 2014, with the number rising to around 195 million units during CY 2015. We estimate the company’s CY 2014 revenues to come in at around $182 billion. Apple’ stock rose 2% through Thursday, driven partly by analyst upgrades. BlackBerry Targets Its Core User Base with Classic Handset BlackBerry (NASDAQ:BBRY) plans to launch its latest handset, dubbed the Classic, on December 17. Although the specifications haven’t been officially released, it looks like the company is returning to its design roots with the device, which will feature the classic BlackBerry form factor – with a physical QWERTY keyboard and menu buttons, along the lines of the BB7 based Bold and Curve. The Classic will run BlackBerry 10 software and will also support Android apps from the Amazon App Store. While it’s evident that BlackBerry isn’t shooting for the mainstream smartphone market with its new launches, the company is looking keep its core base of users engaged, while driving subscriptions to its software and services offerings. Trefis has an $8.90 price estimate for BlackBerry, which translates to a market cap of around $4.7 billion. Our price estimate represents an 11% downside to the current market price. We estimate the company’s FY 2015 loss per share at around $0.62 which compares to a consensus loss range of between $0.09 to $0.99 according to Reuters. We are forecasting the company’s CY 2014 revenues at around $4.22 billion. BlackBerry declined about 9% through Thursday, owing to analyst downgrades. Samsung Plans To Streamline Smartphone Portfolio Samsung Electronics (PINK:SSNLF) says that it intends to reduce its smartphone portfolio by 25% to 30% next year. While Samsung is still the world’s largest smartphone vendor, its global market share has declined from 32.5% in Q3 2013 to 23.8%, as its low and mid-range handsets have been facing stiff competition from Chinese manufacturers such as Xiaomi and Lenovo while its high-end models have had to compete with Apple’s wildly successful large-screen iPhones. The move should allow the company to prune down manufacturing costs and potentially improve inventory management, while increasing the number of components shared across different models. The company’s current smartphone line-up is somewhat cluttered and is likely to be confusing for potential buyers. For instance, the company’s latest flagship Galaxy S5 alone comes in 5 different variants. Streamlining the line-up should help to better position and market products to customers. Trefis has a  $1,170 price estimate for Samsung, which implies a market cap of around $172 billion. Our price estimate is slightly ahead of the current market price. Samsung Electronics, which trades on the OTC markets in the U.S., remained flat at $1101 through Thursday’s trading. 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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    Nokia Explores Opportunities In Tablet Market With N1
  • By , 11/21/14
  • Nokia (NYSE:NOK) surprised the market this week and announced a return to the consumer devices business with its new tablet, the Nokia N1. The networking major introduced its latest offering at the Slush 2014 conference in Finland. The Nokia N1, designed and built by Nokia Technologies, will be manufactured by Taiwanese contract manufacturer Foxconn and is likely to be priced competitively at around $249. Running the Android Lollipop operating system, its hardware features and specifications are interestingly very similar to Apple’s iPad Mini 3, which suggests that the company is trying to compete with the global tablet market leader but offering its product at a significantly cheaper price.  However, Nokia plans to launch its product only in China initially (in February 2015) and later introduce it in Russia and select European countries. It hasn’t announced any plans to introduce the product in the U.S. any time soon. Considering that Nokia can enter the smartphone market only in 2016 because of a clause in its deal with Microsoft, its decision to launch a tablet by licensing its brand and industrial design is a good way to re-enter the consumer business. However, it also raises a couple of important questions. With the global tablet market showing signs of slowing down, is it prudent to launch a tablet? How tactical is the plan to launch the tablet initially only in China? In this article, we talk about these aspects of the Nokia N1 and also discuss how it compares with the existing products in the market. Our $8 price estimate for Nokia is about in line with the current market price.
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    Intel's New Lineup To Threaten Nvidia's Leadership In The HPC Market
  • By , 11/21/14
  • This week, Intel (NASDAQ:INTC) announced a number of new and enhanced technologies, challenging Nvidia’s (NASDAQ:NVDA) leadership and enhancing its position in the high-performance computing (HPC) co-processor market. In addition to sharing additional details for its “Knights Landing” platform (a 14 nm product), Intel announced the “Knight Hill” platform  (10 nm) for its Xeon Phi co-processor line used in HPC  supercomputer systems. “Knight Hill” will be the successor to Intel’s “Knights Landing” product, which is expected to start shipping in commercial products next year onward. The company also discussed its new architectural and performance details for its Omni-Path Architecture, a new high-speed interconnect technology optimized for HPC deployments, and announced new software releases and collaborative efforts designed to make it easier for the HPC community to extract the full performance potential from current and future Intel industry-standard hardware. Currently, Nvidia has a dominant share in HPC, thanks to the launch of its Tesla co-processors in 2010, which combines the company’s GPU with software to provide HPC acceleration. Intel has been trying to challenge Nvidia’s position in HPC accelerators with its Xeon Phi co-processors, launched in 2012. Our current price of $34 for Intel is almost in line with the current market price. See our complete analysis for Intel The HPC Market Is Expected To See A Major Uptick In Accelerator Adoption In 2015 According to the TOP500 supercomputer ranking, 62 of the world’s top 500 supercomputers use some kind of co-processor or accelerator. Of this around 67% make use of NVIDIA GPUs and 25% have implemented Xeon Phi as the co-processor/acceleration option. Both IDC’s High Performance Computing group and Intersect360 see strong growth for the accelerator/co-processor market now and in years ahead. According to IDC, the number of new implementations using these technologies jumped from 28.2% in 2011 to an incredible 76.9% in 2013. However, only a little over 12% of the Top500 list of supercomputers make use of accelerator co-processors. This seemingly low figure reflects the fact that, in recent years, compute intensive functions have been integrated in the Central Processing Unit (CPU, or the core microprocessor complex). Yet the availability of the compute-optimized Tegra and Phy devices has produced a shift back towards the use of co-processors as accelerators.  As a results, some analysts expect the HPC market to see a major uptick in accelerator adoption in 2015. ISC’s Top500 shows the performance share of accelerated systems matched with the top ten supercomputer rankings that shows quite clearly that these are the key piece for high performance. 9 out of 10 of the systems are outfitted with GPUs or Xeon Phi. Nvidi’s Tesla Processor Compatibility Can Pose A Threat To Intel Nvidia clearly has had the first-mover advantage with the more recent adoption of accelerators as co-processors in HPC platforms. The company just unveiled the Tesla K80, a high-end HPC co-processor said to deliver 8.7 teraflops of single-precision throughput (74% above the prior-gen K40). In its recently announced Q3 2015 earnings, Tesla processors witnessed another quarter of strong earnings as high performance computing customers and deployed large Tesla co-powered systems. Recently, IBM unveiled its first Open Power based system featuring Tesla GPU accelerators which can significantly enhance Java, Big Data and technical computing applications. IBM announced plans to accelerate their enterprise applications using Tesla GPUs, including their nearly pervasive IBM DV2 with Blue database software. According to IDC, 32% of all HPC computing systems are IBM implementations. Nvidia recently announced that its Tesla processors are to be compatible with  the various ARM-based server MPUs in development, which constitue both an alterntive and possibly a threat to Intel’s x86 architecture. The ARM/Tesla approach is already gaining traction, and is planned to be used in a next-generation supercomputer that is to be built in Barcelona. Currently, Intel derives a very small portion of its revenue from the HPC market (so does Nvidia), but the fact that ARM-based low powered processors are threatening to take even more of Intel’s business is a cause of concern for the company. Nevertheless, with new upcoming platforms Intel is confident of competing and challenging Nvidia’s dominance in the HPC accelerator market. Its upcoming Knights Landing product combines both the CPU and the accelerators, possibly posing even more of a threat to NVIDIA. Recent high-profile Knights Landing deals include the Trinity supercomputer, a joint effort between Los Alamos and Sandia National Laboratories, and the Cori supercomputer, announced by The U.S. Department of Energy’s (DOE) National Energy Research Scientific Computing (NERSC) Center. Additionally, DownUnder GeoSolutions a geosciences company, recently announced the largest commercial deployment of current-generation Intel Xeon Phi coprocessors, and the National Supercomputing Center IT4Innovations announced a new supercomputer that will become the largest Intel Xeon Phi coprocessor-based cluster in Europe. 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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