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


BlackBerry posted a surprise net profit on Friday on the back of lower costs, though it missed revenue expectations due to weaker smartphone sales and slightly lower than expected software sales. While BlackBerry's financial health is no longer an issue in our view, revenue growth will be key to driving earnings as the company runs out of areas in which it can cut costs and inefficiencies. Our earnings note discusses these results in more detail.

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Netflix has seen strong growth in international streaming subscribers as it continues to launch in new markets and release original content. We expect the company's international subscriber count to exceed 50 million by the end of our forecast period, up from less than 20 million at the end of 2014.

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Time Warner's TNT And TBS' Advertising Income Will See Slower Growth Amid Softer Ratings And Weaker Markets
  • By , 3/30/15
  • Time Warner’s (NYSE:TWX) TNT and TBS networks have gone through tough times amid declining ratings in the recent past. The recent NCAA tournament fueled the network ratings, driving the company for the week ended March 22 to the top network among total viewers in primetime. However, overall ratings for most of the cable networks are down and this will impact the upfront ad sales. Lower ratings translate into lower advertising income for the content owners. Given the ratings trend, ad spending on upfront sales for 2015-16 television season could decline by 7%, according to a research by Magna Global. The decline in ratings can be attributed to a combination of growth in alternative video platforms and changes in the measurement methodology used by Nielsen. Adding to the woes of cable networks, the overall ad spending is moving away from television to digital platforms. On that note, we discuss below the impact of the softer ratings and unfavorable advertising marketplace on Turner’s TNT and TBS network. We estimate revenues of about $29 billion for Time Warner in 2015 with EPS of $4.48, which is slightly lower than the market consensus of $4.66, compiled by Thomson Reuters. We currently have an  $91 price estimate for Time Warner, which is more than 5% ahead of the current market price of $85.
    LULU Logo
    Product Diversification and E-commerce Can Drive Lululemon's Growth In 2015
  • By , 3/30/15
  • Lululemon Athletica (NASDAQ: LULU) posted a 13% increase in revenue in fiscal 2014. The company has guided for a 10%-12% growth in fiscal 2015. The company’s growth in the last quarter of 2014 was driven by unexpected factors such as its men’s and youth businesses and its e-commerce segment. In this note we take a closer look at the trends the company benefited from and how it should navigate those trends in the coming period to continue on its growth path. We have a $61 estimate for Lululemon, which is about 6% below the current market price. See our complete analysis for Lululemon Men’s Business Since the company’s launch in 1998, its products have been most popular with women between the age of 18 and 44. However, in the fourth quarter of 2014, the retailer’s men’s brand began to gain momentum and posted a 16% year-over-year growth. The men’s product has grown to 17% of total store assortment. The main product that drove the segment’s growth in the quarter was the $128 per pair, new, comfortable, ABC Pants. This product lives up to the company’s image of providing fabric solutions that are versatile and functional but also chic. The pants are available in a number of modes: post sweat, pre-sweat, and no sweat, and hence suitable to any kind of situation. In November, the company also opened its men’s only store in New York. The store is staffed with tailors who can customize fit and lining, something that is quite unique among makers of technical fabrics.  The retailer believes that the market size for its men’s products is around $1 billion, but did not divulge any target date by which it plans to achieve that revenue figure. Ivivva Business In 2009, Lululemon launched its ivivva brand targeting girls between the ages of 6 and 15. The products available in this brand are made from the same material that is used to make its adult products, but come in brighter colors and lower prices, though these prices are still a lot higher than the yoga apparel sold by competitors such as Under Armour and Nike. In 2014, Lululemon opened 48 new stores of which 10 were Ivivva stores. The new store openings and fresh products drove sales from the brand 51% higher compared to 2013′s sales. The brand is fulfilling a similar function for the company that some of Under Armour’s products do for it. Under Armour designs special products for its younger customers, who are known to be highly loyal and devoted to the brand. This is a way in which the company is creating a captive market to which it can sell many more products in the feature and thus guarantee recurring revenue. E-commerce The company’s sales in the fourth quarter were driven by the company’s direct-to-consumer (DTC) segment. DTC sales were up 20% on the back of strong growth in e-commerce and other direct-to-consumer initiatives. In contrast, sales from brick-and-mortar company-owned stores increased by only 5% on a year-on-year basis, which is still a respectable performance considering the appreciation of the U.S. dollar over the period. E-commerce contributed around 18% to the company’s top line and around 26% to its income. Income from e-commerce operations grew by a significant 21%, a much faster rate than the company’s overall 1% income growth rate. One factor which aided the rapid income growth was the launch of a mobile application that allowed consumers to order the company’s products from their smartphones. Around 8% of the company’s online sales came from the mobile application in the fourth quarter of fiscal 2014. For the company to keep growing in the future, especially as it begins to target newer customers and newer demographics, it is important that it keep increasing the reach of its business by driving e-commerce sales higher through the use of its mobile application and other innovative technologies. See our complete analysis for Lululemon Athletica here
    HAL Logo
    Oilfield Services Notes: Baker Hughes-Halliburton Merger, Rig Count, Schlumberger's Fine
  • By , 3/30/15
  • tags: BHI HAL SLB
  • The oilfield services sector had another relatively news-filled week. While shareholders of both Halliburton (NYSE:HAL) and Baker Hughes (NYSE: BHI) voted in favor of the mega-merger between the two companies, Schlumberger (NYSE:SLB) agreed to pay about $233 million in fines for violating U.S. trade sanctions in Iran and Sudan. The PHLX Oil Service Sector (^OSX) index ended the week relatively flat at levels of about 190. On the macro front, benchmark Brent crude prices saw a moderate increase through the last week, owing to geopolitical tensions, with Saudi Arabia leading a military campaign against Yemen. In other news, Baker Hughes reported that the U.S. oil rig count fell by about 12 units through the last week to 813 units. The number marks the smallest weekly decline in the metric year-to-date. The oil rig count is down by roughly 45% since the beginning of this year and around 49% from its mid-October 2014 highs. Here is a brief look at the news that mattered for the oilfield service stocks that we cover.
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    Here's Why We Changed Zynga's Price Estimate To $2.30
  • By , 3/30/15
  • tags: ZNGA EA FB
  • We recently updated our price estimate for Zynga’s (NASDAQ:ZNGA) stock from $2.83 to $2.30, implying a change of around 20%. Our current valuation reflects ongoing challenges to the company’s business, including a decrease in user base, increasing losses, as well as a lack of new major game launches. Two key factors compelled this change in our valuation. First, we have reduced our revenue estimates over our forecast period, owing to the uncertainty surrounding the company’s business. Second, we believe that there is a grim outlook for profitability and accordingly have lowered EBITDA margin for the next few year.  This is because we think the company will have to incur high sales & marketing  and research & development expenses in the near-term as it seeks to rebuild its upcoming game pipeline. Our $2.30 price estimate for Zynga, represents near-15% downside to the current market price.
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    How The iPhone Can Drive Apple To A $1 Trillion Market Cap
  • By , 3/30/15
  • tags: AAPL aapl GOOG SSNLF
  • Apple’s (NASDAQ:AAPL) dependence on the iPhone cannot be understated. iPhone revenues as a percentage of Apple’s total revenues stood at around 69% during Q1 FY 2015. Moreover, growth in iPhone revenues stood at around 57% year-over-year for Q1, while the rest of Apple’s products and services combined saw revenues shrink by about 7%. The iPhone’s contribution to Apple’s earnings is even more profound, given its high gross margins. We estimate that the iPhone constitutes about 57% of Apple’s total value. While there has been a lot of speculation as to where Apple’s next wave of growth is likely to come from – rumored product lines include Apple branded electric cars and TV sets – we don’t presently see another product or market that will have the ability to move the needle for the company the way that the iPhone can (see  Thoughts on an Apple Car ). Case in point: if Apple is able to maintain iPhone gross margins and ASPs at present levels – versus a long-term decline according to our valuation model – it could add about $180 billion to the company’s valuation. For perspective, that’s more than the market cap of the big three U.S. automobile companies combined. In this note, we spell out our base assumptions for our valuation of Apple’s iPhone franchise and two possible iPhone-related scenarios that could result in a significant upside or downside to Apple’s stock price.
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    Weekly Auto Update: Tesla Adds Another Arrow To Its Quiver
  • By , 3/30/15
  • tags: TSLA TM VLKAY
  • Tesla Motors (NYSE:TSLA) announced a new software update that will add four new features to the Model S. The Silicon Valley based electric vehicle manufacturer will dispatch a software update to the vehicles that will add new features like range assurance, trip planning, new safety features, and self-driving capability. These technological enhancements further confirm Tesla’s status as a unique, innovative auto company, that is always thinking ahead of the curve. This is likely to impress a number of consumers and alleviate any concerns related to range anxiety (the fear that an electric vehicle will run out of battery far away from a charging station), thus making it more likely that people will go out and buy an electric vehicle. The new added features will allow Tesla owners to plan trips through routes that contain Tesla charging stations without having to worry about having to plan trips to these stations in advance, because the car will communicate in real time with charging stations and direct itself to one in case the battery is running out. Additionally, the cars will become equipped with a self-driving feature that will allow drivers to go hands free on interstate highways and the cars to go driver-less on private property. This feature might run into some trouble with regulators since no state in the U.S. allows a self-driving car to run on its roads other than in testing mode. A number of regulators have already been alerted about this and are trying to figure out laws that will make it clear under what conditions such a car will be allowed to drive on the country’s roads. The main concerns have to do with the delineation of insurance liabilities- it is not yet clear whether the liability in case of an accident will belong to the car company or the driver. Unless such details are resolved, the feature may have to lie dormant in the vehicles. Another piece of information that the press release contained was that Tesla plans to build out supercharger networks all through the United States (except Alaska), Northern and Western Europe, most of Greater China (except the far inland regions), Japan, and Southern Australia. This would mean that the company is now planning to deliver cars in more regions than before, which could help it meet the ambitious 55,000 units target in 2015. This also means that the company will be using some of its projected $1.5 billion in Capital Expenditures not just on the gigafactory but also in the development of charging networks, service centers, and showrooms in these new markets. Currently,  our valuation of $170 (market cap of $21.2 billion) for the company is about 8% below the current market price of $185 (market cap of $23 billion). We expect Tesla to report revenue of around $8 billion and gross profit of $2 billion for calendar year 2015. We forecast non-GAAP diluted EPS of $0.95, which is higher than the market consensus of $0.67 ( Financial Times ). 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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    European Banking Weekly Notes: HSBC, RBS and Deutsche Bank
  • By , 3/30/15
  • European bank shares fared much better than their U.S.-based counterparts last week largely because their share prices did not suffer from the negative impact of a strengthening U.S. dollar. While U.S. banks lost between 3-4% of their share value over the week, the Swiss banks UBS (NYSE:UBS) and Credit Suisse (NYSE:CS) followed by nominal gains for  Deutsche Bank (NYSE:DB). However, the British banks  HSBC (NYSE:HSBC),  RBS (NYSE:RBS) and Barclays (NYSE:BCS) saw a reduction in share prices this week. The banking sector-specific STOXX Europe 600 Banks index gained over 3% over the week – signficantly outperforming its multi-industry equivalent, the STOXX Europe 600 index which only rose 1.1%.
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    Weekly Oil & Gas Notes: Chevron's Myanmar Deal and Shell's Nigerian Asset Sale
  • By , 3/30/15
  • tags: CVX RDSA XOM BP
  • Oil and gas stocks slightly declined last week despite an increase in benchmark crude oil prices. This could be because oil prices pushed higher mostly because of an increase in the geopolitical risk premium, with Saudi Arabia launching a military campaign against its neighbor, Yemen, which has become a crucial front in the world’s largest crude oil producing nation’s region-wide rivalry with Iran. This led to concerns regarding the security of crude oil supplies because although Yemen itself is a small producer of crude oil, it lies at the heart of some of the most important energy routes, with almost 7% of global maritime trade passing by its coast. However, the fundamental demand-supply scenario remained largely unchanged last week, as the U.S. Energy Information Administration (EIA) data showed that commercial crude oil inventories in the U.S. increased by 8.2 million barrels during the week ended March 20th, 2015. At 466.7 million barrels, U.S. crude oil inventories currently stand at their highest level for this time of the year in at least 80 years, reflecting still robust production growth from tight oil plays in the U.S. This, despite the recent decline in oil prices and drilling activity, is a cause of concern for oil-linked equities, as it could prolong the recovery in oil prices. The price of the front-month Brent crude oil futures contract on the ICE increased by around 1.6% last week and is currently trading around $56 per barrel. The  NYSE Arca Oil & Gas Index (XOI) fell by almost 0.9% last 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. Chevron’s Myanmar Deal Chevron (NYSE:CVX) recently announced that its subsidiary, Unocal Myanmar Offshore Co. Ltd., has entered into a Production Sharing Contract (PSC) in Myanmar with the national oil and gas company, Myanmar Oil & Gas Enterprise (MOGE), to explore for hydrocarbons in the Rakhine Basin. The company that reported net natural gas production of 99 million cubic feet per day (MMCFPD) or around 16 thousand barrels of oil equivalent per day (MBPD) from the Southeast Asian country, announced that the new contract covers an offshore area known as Block A5, which lies 200 kms (124 miles) northwest of Yangon and spans more than 10,600 square kilometers. According to the terms of the deal, Chevron’s subsidiary, Unocal Myanmar Offshore, will be the operator of the block with a 99% interest in the exploration project, while a local company, Royal Marine Engineering Co. Ltd., will hold the remaining share. We currently have a  $114/share price estimate for Chevron, which is around 8% above its current market price. The company’s share price decreased by around 2.6% last week. See Our Complete Analysis For Chevron Shell’s Nigerian Asset Sale Anglo-Dutch oil major,  Shell (NYSE:RDSA), recently completed the sale of its interest in a Nigerian oil field and related infrastructure for total cash proceeds of around $1.7 billion as a part of its ongoing divestiture program. The company sold its 30% operating stake in the oil mining lease (OML) 29 and the 62-mile long Nembe Creek pipeline to Aiteo Eastern E&P Co., a Nigerian company. Aiteo Eastern also acquired French oil major, Total’s, 10% stake and Nigerian Agip Oil Company’s 5% stake in the project, giving it a total 45% holding, with the remaining 55% being held by the state-owned oil company, Nigerian National Petroleum Corporation (NNPC). The project produced an average 43,000 barrels of oil equivalent per day last year. Shell announced its intent to offload some of its oil producing assets in the Niger Delta in June 2013, primarily because of rising operational challenges, including theft of crude oil by organized gangs, and pipeline  attacks by vandals.  In addition to the most recent sale, the company has offloaded assets worth almost $6 billion in the region since then. We currently have a  $67 per share price estimate for Shell, which is around 10% above its current market price. The company’s share price decreased by around 1.7% last week. See Our Complete Analysis For Shell 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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    Strong Demand For Next-Gen Consoles & Growth In Technology Brands Drive GameStop's 2014 Fiscal Revenues
  • By , 3/30/15
  • tags: GME EA ATVI MSFT
  • The video game retailer, GameStop (NYSE:GME) missed its financial guidance in its fourth fiscal quarter report, released on March 26. In Q4, the company’s net global sales were $3.48 billion, down 5.6% year-over-year (y-o-y), due to a decline in demand for new video-game hardware. Comparable store sales declined 1.8%, with a 1.4% decline in the U.S. and 2.6% decline internationally. On the other hand, mobile and consumer electronics, as well as the new video-game software segment, showed promising growth. The highlight of the quarter was the increase in digital receipts by 41.4% to roughly $369 million, primarily led by growth of downloadable content and mobile digital downloads. Despite a dull fourth quarter, the company managed to outperform last year’s sales figures by roughly 2.8% to reach $9.3 billion in the fiscal 2014. Moreover, the full year comparable store sales increased 3.4%, driven by growth in console sales and the pre-owned category. In 2014, GameStop’s full year diluted EPS grew 16% to $3.47. In 2014, GameStop achieved its highest ever market share, with 28% share of next-generation hardware, 46% share of next-generation software, and roughly 42% market share of the downloadable content. Growth in the technology brands contributed significantly to the operating income and consequently, to the annual gross margins of 29.9%, which the company claims to be the highest gross margin rate in its history. According to the company, core game business and technology brands together drove 8% y-o-y growth in the operating income and 16% growth in EPS. Our price estimate for the company’s stock is $39, which is slightly below the current market price. See our complete analysis of GameStop Decline In Q4 Hardware Sales Offset Growth In Other Segments The gaming industry witnessed a decline in software title sales in 2014, due to a fewer number of AAA title releases. However, the top game developers in the country released some of the year’s most awaited popular titles just before the holiday season to drive software sales. This strategy worked and the software sales increased in the holiday period. However, on the other hand, hardware sales somewhat slowed down due to early purchases of the consoles in 2014. According to the NPD January report, the software sales outperformed last year’s figures, with a 5.5% year-over-year (y-o-y) increase in software sales in January. On the other hand, the declining demand of video-game hardware continued in January, as the hardware sales declined 23% y-o-y. As a result, GameStop’s hardware sales declined 30.2% to $ $808 million in the fourth quarter, due to tough comparison with last year, which witnessed the launch of the eighth generation consoles. Additionally, software sales grew 6% y-o-y to $1.29 billion, due to an increase in demand of titles for the console systems. Also, for the fiscal year, the whole scenario was just the opposite of what happened in Q4. For the 2014 fiscal year, GameStop’s hardware sales grew 17.3% y-o-y, whereas the software sales were down 11.3% y-o-y. Hardware sales outperformed expectations by $500 million, due to strong console sales, whereas the physical software sales fell short by $800 million. Gross profit for the hardware segment also declined 43% y-o-y in the fourth quarter, whereas it increased nearly 11% y-o-y for the whole year. Pre-owned and value product segment still remains the most profitable segment for the company, with net sales of $2.39 billion (up 2.6% y-o-y) and gross profits of $1.146 billion (gross margins of 48%) for the whole fiscal year, despite the decline in software revenues. GameStop’s game sales through the 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. This trend might have slightly changed in fiscal 2014. On the other hand, for the fourth quarter, the decline in the hardware segment affected the pre-owned segment more, as the revenues for Q4 declined 1.7% y-o-y. Growth In Digital Domain GameStop’s Non-GAAP digital receipts rose 31% y-o-y, as the company delivered nearly $948 million in digital revenues. However, the company might fall short of its digital growth guidance given way back at its 2010 Investor Day. Nonetheless, the growth in this segment is still better than its competitors. According to DFC Intelligence data provided by the company, out of the total number of AAA titles, 12% were downloaded and 88% were physically sold. Out of the 12% downloaded games, 40% were actually paid by the customers. So according to the estimates, full game downloads of AAA titles accounted for 2% of total physical and digital software sales. Even in this small market, GameStop managed to capture a considerable amount of growth, with currently 42% market share. GameStop is still confident of its performance in downloadable content, full game downloads, and fast growing Steam PC download business. Technology Brands To Provide Future Growth In Revenue Stream After just two years, the company’s technology brands business has been reaping significant profits, thus, improving its margins. In the fiscal 2014, the revenues from technology brands reached $329 million, with operating margins of 10%. According to the company, the technology brands contributed $0.19 to the EPS. GameStop has shown interest in some of the store locations of RadioShack, which declared bankruptcy earlier this year. RadioShack got the approval from a U.S. Bankruptcy Court Judge to auction its 2,000 stores. GameStop has been aggressively expanding its Spring Mobile stores, and the strategy took a further step when the company bid for the right to take 163 leases from RadioShack. This allowed GameStop a two month period to decide whether to go forward with the deal or not. GameStop agreed to pay $15,000 for each RadioShack store lease. GameStop expects a potential IRR of 25% from these stores. In 2014, the company acquired or opened net 266 technology brand stores around the world. GameStop expects growth of 350-550 technology brands stores in 2015 to include acquisitions and conversion of GameStop stores . The company expects the segment to contribute over $1.4 billion in sales and $170 million in operating profits by 2019. It might become one of the most profitable segments for the company in the coming few years. 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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    Key Takeaways From BlackBerry's Q4 Earnings And What Lies Ahead
  • By , 3/30/15
  • tags: BBRY bbry SSNLF MOBL
  • BlackBerry (NASDAQ:BBRY) surprised the markets by posting a Q4 FY 2015 net profit on the back of lower costs, although it missed revenue expectations due to weaker smartphone sales and slightly lower than expected software sales. Quarterly revenues came in at about $660 million, down by about 32% year-over-year, while net income stood at $28 million, versus a loss in the prior year. While BlackBerry’s financial health is no longer an issue in our view (cash flow of $76 million, cash balance of $3.27 billion), revenue growth will be key to driving earnings, as the company runs out of areas in which it can cut costs and inefficiencies. EPS growth rests with stabilizing revenues and improving margins for the handset business, while replacing fast-declining service revenue dollars (company projects 15% quarterly service revenue declines) with revenues from the fledgling software business. Here’s a brief look at the key takeaways from the earnings call and what lies ahead for BlackBerry. We have a  $10 price estimate for BlackBerry, which is slightly ahead of the current market price. We will be updating our valuation model and price estimate for the company to account for the earnings release.
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    Storage Companies Week In Review: SanDisk, Western Digital, Seagate In Focus
  • By , 3/30/15
  • SanDisk Corporation (NASDAQ:SNDK) made headlines last week as its stock plummeted by 18% on Thursday, March 26. SanDisk’s stock price fell on the back of revised revenue guidance for Q1’15. On the other hand, hard drive manufacturer Western Digital (NASDAQ:WDC) unveiled its 6 terabyte (TB) enterprise-grade HDD, marketed as the most power-efficient hard drive in the industry. This was a positive step towards delivering high-capacity enterprise hard drives to compete with Seagate’s (NASDAQ:STX) marketing campaign “20TB by 2020″ for laser-assisted hard drives for enterprise and data centers. During the week, Seagate’s management indicated that it could start selling hard drives in the now extinct 5.25″ form-factor. The stocks of Western Digital and Seagate were down by about 6-7% in the last week, while SanDisk’s stock fell by almost 25%. Comparatively, the NASDAQ-100 and S&P-500 indices fell by about 2-3% in the same period. Here’s a quick roundup on the developments in the storage industry. SanDisk Corporation SanDisk announced that its Q1 revenues could be around $1.30 billion, lower than the previous guidance of about $1.40 billion. As a result, its revenues would be about 15% lower than the prior year quarter. This is the second consecutive quarter when the company revised its expected revenues, the prior occasion being January this year. The company expects weakness in its SSD and embedded storage product sales to continue through the March quarter. Additionally, the company is facing certain product qualification delays and there are indications that it has lost one of its largest OEM customers, rumored to be  Apple (NASDAQ:AAPL), which has switched to Samsung (PINK:SSNLF) for sourcing SSDs. The company has yet to announce its expected revenues for the full year and has postponed its analyst day presentation from May to a later unconfirmed date. (See: SanDisk Revises Revenue Guidance, Stock Drops 18% ) Trefis has a $86 price estimate for SanDisk’s shares, translating into a $18.2 billion market cap. This is significantly higher than the current market price, which fell by about 25% during the week. See our full analysis for SanDisk Western Digital Corporation Western Digital introduced the Re+ high-capacity enterprise grade hard disk drives (HDDs) earlier this month. The 3.5″ form factor 6 terabyte (TB) hard drives consume as little as 6 watts of power per drive, which is about 40% lower than its existing range of high-end enterprise hard drives. The Re+ range of HDDs and the previously introduced Helium-filled drives could potentially boost unit shipments in the enterprise and cloud storage segment for Western Digital. Both these drives claim to reduce the total power consumed by data centers and large enterprises. With an extra emphasis on power consumption, Western Digital management expects the total cost of ownership of large-scale deployments to decrease by as much as a few “millions of dollars” annually. Trefis has a $104 price estimate for Western Digital’s stock, implying a market cap of $24.1 billion. This is about 10% higher than the current market price, which fell by about 7% during the week. See our full analysis for Western Digital Seagate Technology Seagate is betting big on its laser-assisted hard disk drive or heat-assisted magnetic recording (HAMR) drives. These drives have a relatively higher (up to 5x) areal density of storage compared to traditional hard drives. Currently, the highest areal density offered by Seagate is 1TB per square inch, while HAMR drives can store up to 5TB/square inch. In a more recent development, Seagate’s management hinted that there could be a comeback for the extinct 5.25″ form factor hard drives. These hard drives were popular in the 90s, before the 3.5″ hard drives became standard. These could be especially useful for Seagate given that the company would require a larger platter size for 20TB hard drives. In the past, Seagate has also explored the option of shingled magnetic recording (SMR) drives to improve storage density within hard drives. Trefis has a $58 price estimate for Seagate’s stock, translating into a $18.9 billion market cap. This is slightly higher than the market price, which fell by about 6% during the week. See Our Full Analysis For Seagate Technology 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, Union Pacific
  • By , 3/30/15
  • tags: NSC CSX UNP
  • Railroad stocks took a beating last week, as Kansas City Southern (NYSE:KSU) lowered its revenue expectations on weak energy sector volumes, which includes coal, coke, frac sand and crude oil, creating panic in investors. The weak thermal and metallurgical coal price environment and low natural gas prices present headwinds for railroads’ coal carloads. We believe that a decline in coal carloads can severely impact railroad revenues. However, the impact from declining crude oil carloads will be minimal, as crude oil accounts for around 2% of U.S. Class I railroad carloads. In this review, we take a look at carloads of Norfolk Southern (NYSE: NSC),  CSX (NYSE: CSX), and  Union Pacific (NYSE: UNP), with particular focus on their energy related commodities. Norfolk Southern According to Norfolk Southern’s carload report, its coal carloads continued to decline, falling 10% year-on-year in the quarter to date March 21, compared to 9% in the quarter to date March 14. Coke carloads were up 9% in the quarter to date March 21, compared to 13% in the quarter to date March 14. Norfolk Southern’s petroleum products carloads, which includes crude oil, were up 24% in the quarter to date March 21, compared to 22% in the quarter to date March 14. In the week ended March 21, intermodal volumes grew 5%, compared to 8% in the week ended March 14. Norfolk Southern’s stock declined 5.9% over the week through Thursday. We currently have a price estimate of $105 for Norfolk Southern. For 2015, we estimate revenues of $11.9 billion, compared to a consensus estimate of $11.6 billion, and EPS of $6.84, compared to a consensus estimate of $6.80. Click here to see our complete analysis of Norfolk Southern. Union Pacific Union Pacific’s petroleum products carloads declined 20% year-on-year in the quarter to date March 21, compared to 19% in the quarter to date March 14. Its coal carloads declined 6% in the quarter to date March 21, while coke carloads were up 23%. Now that the labor contract negotiations between the ILWU and PMA have ended, Union Pacific’s intermodal carloads have also begun to recover, with an 8% increase during the week. However, on a quarter to date basis, its intermodal carloads were down 4%. Union Pacific’s stock declined around 7.9% over the week through Thursday. The stock also suffered from the negative impact of a downgrade by Cowen. We currently have a price estimate of $105 for Union Pacific. For the year 2015, we estimate revenues of $25.3 billion, compared to consensus estimate of $25.0 billion, and EPS of $6.61, compared to a consensus estimate of $6.57. Click here to see our complete analysis of Union Pacific. CSX CSX’s coal carloads declined 3.5% year-on-year in the quarter to date March 21, compared to 3% in the quarter to date March 14. Coke carloads were up 11% in the quarter to date March 21. CSX’s petroleum products carloads, were up 23% in the quarter to date March 21, compared to 28% in the quarter to date March 14. In the week ended March 21, intermodal volumes grew 1%. CSX’s stock declined 5.4% over the week through Thursday. We currently have a price estimate of $28 for CSX. For the year 2015, we estimate revenues of $13.0 billion, compared to a consensus estimate of $12.9 billion, and EPS of $2.16, compared to a consensus estimate of $2.14. Click here to see our complete analysis of CSX. 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 U.S. Carrier Notes: AT&T, Verizon And Sprint
  • By , 3/30/15
  • tags: S T CSCO
  • After an extremely competitive 2014, 2015 is poised to be another exciting year for the U.S. wireless industry. In the last week,  Verizon (NYSE:VZ), along with  AT&T (NYSE:T), sued the Federal Communications Commission (FCC) over its decision to introduce net neutrality rules. The telecom companies are following the likes of USTelecom, Alamo Broadband and others who also recently filed suits against the agency. Although the rules have yet to come into effect, the biggest concern for telecom and cable companies is that the FCC may now have the ability to control prices and limit business offerings according to what it deems reasonable. Sprint (NYSE:S) was also in the news for its new wireless offering as well as its stand on the net neutrality issue. Below we discuss the noteworthy events pertaining to the top U.S. carriers from last week. AT&T AT&T, along with Verizon, sued the FCC recently over its decision to introduce net neutrality rules. Net neutrality is a principle related to the way Internet traffic should be treated. It advocates that Internet service providers (ISPs) and governments should treat all data on the Internet equally, not discriminating or charging differently by user, content, site, platform, application, type of attached equipment, or mode of communication. If the net neutrality laws come into effect, AT&T may not be able to freely manage Internet traffic as it has in the past, which is likely to curtail its ability to charge more for certain services and could thus put a cap on profits. In other news, AT&T launched its new tier of U-verse Internet service called High Speed Internet 75 in Houston, offering speeds of 75 Mbps at a price starting $40 per month. Currently available only in about 18 cities, the service is aimed to compete with Comcast’s high speed service, which offers Internet speeds of 3-150 Mbps to its customers with a pricing of $40-$115 per month. AT&T’s stock was about flat over last week. We currently have a  $38 price estimate for A&T, which implies a market cap of around $196 billion compared to the current market cap of about $171 billion. We estimate revenues of about $141 billion for AT&T in 2015, which is in line with the market consensus of $128-$154 billion, compiled by Thomson Reuters. Verizon Sprint Sprint returned to positive postpaid subscriber adds last quarter and it is not slowing down in its price war with a steady stream of attractive plans to lure customers. The third largest carrier in the U.S. recently introduced a plan to make it easy for potential customers to switch from their existing service providers. Sprint is offering to reimburse all costs, including early termination fees and pending payments on handset installment plans, for customers who switch to its network. In network quality related news, Rootmetrics recently released a report which stated that Sprint was behind its major rivals Verizon, T-Mobile and AT&T in overall performance and data speeds at airports in the second half of 2014. It managed to provide median download/upload speeds of 20 Mbps/10 Mbps in only one of the 50 airports tested by Rootmetrics, as opposed to 23 for Verizon. In other news, Sprint’s CEO Marcelo Claure recently stated that he was in favor of the FCC’s net neutrality laws. He said that without “light touch” regulation, the bigger players Verizon and AT&T were likely to drive it out of business. He also added that the net neutrality laws, in addition to the company’s agreements with rural carriers, were likely to help the carrier in bringing its roaming costs down and improve network coverage across the country. Sprint’s stock dropped about 3% over the last week through Thursday. We maintain our  $6.20 price estimate for Sprint, which implies a market cap of about $24 billion. We estimate revenues of over $35 billion for Sprint in calendar year 2015, which is towards the higher end of consensus estimates compiled by Thomson Reuters. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    Prospect Capital and the Best Stocks for 2015
  • By , 3/30/15
  • tags: PSEC SPY
  • Submitted by Sizemore Insights as part of our contributors program Prospect Capital and the Best Stocks for 201 5 by Charles Lewis Sizemore, CFA The following is an update to the Best Stocks for 2015 contest. In December of last year, I wrote that I expected to see Prospect Capital Corporation ( PSEC ) generate returns of 40% or more over the course of 2015 . Well, as we near the end of the first quarter, we have a little catching up to do. Prospect Capital is sitting on gains of about 4%. That’s beating the S&P 500 year to date, but it’s certainly nothing to write home about. Meanwhile, one of my competitors, Rave Restaurant Group ( RAVE ), is already up 116% and another, Ambarella Inc ( AMBA ), is up 43%. Up against competition like that, it is time to throw in the towel? Absolutely not. With more than nine months left in the year, Prospect Capital is still very much in the running. To start, Rave Restaurant Group is a microcap stock, and Ambarella is a volatile, high-beta stock. I consider it very likely that one—or both—of these stocks crashes and burns long before year end. I’m a little more concerned about Louis Navellier’s pick this year, Apple Inc ( AAPL ) I myself am long Apple and consider it a worthy competitor. But as much as I like Apple as a long-term holding, I consider Prospect Capital the better buy in 2015. Let’s take a look Prospect’s recent developments. Prospect had a lackluster earnings release last month,  with EPS coming in at 24 cents per share rather than the 28 cents Wall Street expected. But the far more important news in the earnings release was that book value remained stable. Net asset value per share was $10.35, a decline of 38 cents from the previous year. But substantially all of this decline was due to Prospect’s large dividend, which for much of 2014 was well in excess of current earnings. With the turbulence in the energy sector, there were concerns that Prospect might have some significant write-downs. Thus far, this has proven to not be the case. This is a big deal because I specifically mentioned Prospect’s large discount to book value as a major reason to own the stock. If Prospect’s book value had seen serious deterioration, it would have blown a hole in my bullish argument. At year end, Prospect was trading at 80 cents on the dollar. Today, that valuation has crept up to 83 cents on the dollar. That’s still ridiculously cheap. I don’t know about you, but I don’t come across too many 83-cent dollars, so I tend to pick them up when I find them. Now let’s talk dividends. Prospect Capital slashed its dividend last year, which is a major reason why investors are so sanguine towards the stock these days. To many investors, a dividend cut is a breach of trust, and that is not always easy to mend. But in Prospect Capital’s case, it was the right move. As management de-risked Prospect’s balance sheet last year, the lower-risk, lower-return Prospect was not able to sustain its dividend at the current level. Today’s 8.33-cent monthly dividend is far more sustainable. It also equates to a 12% yield at current prices. And 12% yields aren’t particularly easy to come by these days. So, what sort of returns should we expect from here? A return to book value—which I believe is warranted—would add about 20% in capital gains. Add to that about 1% per month in dividends, and we get another 9% for a total of 29%. Add to that the 4% we’re already returned thus far, and we’re looking at 33%. And we could see returns significantly better than that if we see a special dividend or if Prospect trades at a premium to its book value—as it has for much of its life. Is that a recipe for 100% gains in a single year? No, of course not. But it’s still a lot better than I expect the S&P 500 to produce over the next 2-3 years. And I expect that come December 31, it will be enough to make Prospect Capital the Best Stocks for 2015 winner. Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the  Sizem ore Insights blog.     This article first appeared on Sizemore Insights as Prospect Capital and the Best Stocks for 2015
    Unstoppable Mobile Trend Fuels Nonstop Growth
  • By , 3/30/15
  • tags: SWKS AVGO
  • Submitted by Wall St. Daily as part of our contributors program Unstoppable Mobile Trend Fuels Nonstop Growth By Louis Basenese, Chief Technology Analyst   Consumers are obsessive beings. For proof, look no further than the way we fixate on visible, tangible advancements in mobile phone technology . Front- and rear-facing cameras . . .  HD-quality displays . . . ultra-responsive touchscreens . . .  fingerprint sensors . . . and smooth, shiny metal cases to protect all this precious technology. Regrettably, investors are obsessive in much the same way. That is, we become fixated on what can be seen . This narrow-minded view leads us into obvious, overcrowded – and sometimes fatal – investments. The now-defunct sapphire display maker, GT Advanced Technologies, is the perfect example. It’s unfortunate . . . because the most lucrative mobile investments often reside in what’s invisible to the naked eye. Case in point: this triple-digit growth trend that’s just heating up . . . Big Data, Big Problems Opportunity Mobile devices aren’t simply cool gadgets anymore. They’ve become vital extensions of ourselves. Case in point: 91% of us are within arm’s length of our smartphones at any given moment, according to Morgan Stanley ( MS ) data. We’re constantly texting, checking email, surfing the internet, tweeting, gaming, streaming video . . .  The list goes on. Now, aside from whatever social and cultural issues this mobile obsession throws up, there’s another huge problem . . . Our beloved smartphones use 24 times more data than old-school feature phones. Consequently, our always-connected, high-bandwidth, data-intensive lifestyles are putting an immense strain on the mobile communications network. And there’s no end in sight. Cisco ( CSCO ) predicts that on a compounded-annual-growth-rate basis, worldwide mobile data traffic will soar by 57% from 2014 to 2019. The solution? Add more bandwidth – stat! If not, we’ll be unable to handle all of our data demands. Unfortunately, though, it’s not as simple as flipping a switch. Why? Well, first, we need more radio spectrum to be made available. Then, the components inside phones need to be developed so that they can communicate on the new frequency bands. How do we do this? In its simplest terms, this is accomplished with things like filters and amplifiers – technology that makes up what’s known as the radio frequency (RF) front end. As Christopher Bowick says in his book, RF Circuit Design, “This is arguably the most critical part of the whole receiver.” Agreed. It’s what enables phones to communicate wirelessly. And the bottom line is that in order to meet our exploding data demands, more radio frequencies need to be supported in each smartphone. Therein lies the opportunity . . . Rising Costs = Rising Opportunity Not long ago, the typical smartphone only needed to operate on three or four different frequency bands. Nowadays? That number is quickly approaching three or four dozen bands. Translation: Today’s smartphones require a lot more RF parts. Sure enough, the total dollar amount of RF content in high-end phones keeps rising. Take the latest iPhone 6, for example. Total RF front-end content costs checked in at $15.89 per phone, according to Barclays’ analysis. That’s up a staggering 324%, compared to a typical 3G phone. For mobile phone makers, these rising costs keep cutting into margins. But for RF component suppliers, the exact opposite is true – the trend represents a tremendous opportunity. Or as MKM Partners put it, we’re living in “a golden age for smartphone suppliers.” Sounds gimmicky. But it’s not. Just look at the two-year chart for the market’s top RF front-end suppliers – Skyworks Solutions ( SWKS ) and Avago Technologies ( AVGO ). With each company’s business booming, it’s no surprise that the stocks are up roughly 375% and 275%, respectively. Take, Skyworks, for example . . . A Growth Explosion On the back of what CEO David Aldrich described as “an explosion in analog complexity,” the company reported a 59% sales increase to $805 million, and an 88% increase in earnings per share to $1.26 in the most recent quarter. “We’ve been successfully executing with higher and higher dollar content with each successive [smartphone generation],” says Aldrich. I’ll say! This isn’t an anomaly, either. Skyworks has reported nine straight quarters of earnings growth and double-digit sales growth. But even after the impressive growth and run-up in stock prices, we’re still early in the boom. After all, the three key drivers behind it aren’t going to let up any time soon. What are those drivers? Simply . . . the growing number of mobile users, runaway data usage, and more advanced wireless standards (3G, 4G, etc.). Factor them all in, and you can see why this trend is so ingrained and set to last. The Boom Is Here to Stay The savviest way to gauge the growth is to track global long-term evolution (LTE) – or 4G – adoption. Why? Because it’s the fastest and most robust wireless communication network. Enabling phones to communicate on it not only requires more RF content, but also more complex (read: more expensive) RF content. While a just-released report from GSMA Intelligence shows that LTE connections blasted 145% higher last year to about 490 million, it only translates to 7% market penetration. In other words, the RF boom still has another 93% to go. So the go-go days for companies like Skyworks and Avago promise to endure for years to come. Bottom line: Very few investors think about what it takes on the inside of mobile phones to enable them to work properly. But they should, because it’s an incredibly lucrative business for the companies behind such technology – which, in turn, means incredibly lucrative investments. And it’s not too late to profit from the boom. Ahead of the tape, Louis Basenese Editor’s Note: While companies like Skyworks Solutions and Avago Technologies are now critical players in a massive growth boom – free to mint their fortunes from an unstoppable mobile trend – it wasn’t always this way.At one point, they were mere startups, unknown to anyone on Wall Street. Until they weren’t! And the elite group of wealthy investors who helped fund their development and bring them to market got incredibly rich from their investments.  If you want to join this ultra-wealthy, ultra-powerful group of guys responsible for minting the next generation of all-star tech companies and groundbreaking innovation – and invest at pre-IPO levels – well, we’re tracking their every move very closely. Go here to take your tech investing to the next level . The post Unstoppable Mobile Trend Fuels Nonstop Growth appeared first on Wall Street Daily . By Louis Basenese
    Insider News Reveals Second Oil Crash Coming
  • By , 3/30/15
  • tags: SPY TLT
  • Submitted by Wall St. Daily as part of our contributors program Insider News Reveals Second Oil Crash Comin g By Karim Rahemtulla, Chief Resource Analyst   Oil producers and investors started to breathe a little easier recently. Crude oil prices touched their lowest closing level in six years last week, then rallied on the back of a weakening U.S. dollar. The strength of the dollar started to diminish after the Federal Reserve indicated that rates won’t rise any time soon. Many optimists are expecting oil prices to continue to rise. But that’s just wishful thinking. You see, I’m in Hong Kong right now, and my contacts have revealed some startling facts . . . The Catastrophic Reality The truth is, we may be on the verge of another price collapse that’s likely to occur in the second quarter. Inventories are continuing to rise, and storage tanks are close to capacity. With nowhere for the oil to go, suppliers will likely flood the market, which could cause a plunge in prices that will force the industry to lower production. That will be the point of capitulation. This might seem like an outrageous prediction, but the chance of such a scenario taking place isn’t far-fetched when you consider the factors that may precipitate such an event. Inventories can only climb if one of two things are occurring: Either less oil is being consumed or too much is being produced. Well, both of these factors are at play concurrently right now. The latest figures coming out of Cushing, Oklahoma show that capacity is between 60% and 75%. Early last year, the daily figures were half that. At the current rate of production and consumption, capacity is estimated to be reached by the end of May. Smaller producers are making the situation more difficult by producing even more in an effort to try to capture hedges while premiums still exist. Hedges can be put on for 2016 at premiums of up to $10 more than current spot prices. And when you have debt to service, any increase in projected cash flows is critical. To further exacerbate the situation, oil is priced in dollars. And as the dollar strengthens, the price weakens. But the insider story that could fill storage to capacity comes from 8,000 miles away in China . . . The Last Straw My sources in Hong Kong, who are connected to major players on the mainland, are indicating that the slowdown in China may be even greater than the official numbers. China’s “official” growth rate fell to 7.4% in 2014, the lowest in 25 years. But other sources are saying it will be lower. The International Monetary Fund is projecting growth to come in at 6.8% in 2014. Analysts from Oxford Economics, a well-respected consulting firm that covers global markets with the likes of Accenture ( ACN ), are calling for growth to come in at 6%. China’s own economic leadership estimates that growth must be at least 7% to maintain adequate employment for a growing work force. I’m sure the official numbers from China will be above 7%, but those numbers shouldn’t be trusted. As China’s economy slows, the country will demand less oil. The resulting excess oil could fill storage tanks to capacity. That will be the point of capitulation, which provides excellent entry points across the investing spectrum. As we all know, the Organization of Petroleum Exporting Countries (OPEC) could provide some relief for prices if it culled production. But just a few days ago, OPEC reiterated its goal of continuing to produce at current levels until another country curtails production first. Saudi Arabia seems firm in its plan and is not open to negotiating. Last week, the Algerians tried to convene a summit to discuss prices . . .  but only Angola showed up. Last month, the Nigerians wanted a meeting of OPEC members, but the idea was squashed by the Saudis. Everyone is feeling the pain, but we’re not yet at the point where the pain is significant enough to spur the major players into action. When the price begins to trade south of $40 for a sustained period, we may start to see movement to curtail production globally. The risk to oil prices is still tilted to the downside, and investors should be keeping their powder dry at this point. And the chase continues, Karim Rahemtulla The post Insider News Reveals Second Oil Crash Coming appeared first on Wall Street Daily . By Karim Rahemtulla
    This Is the Year of the Native Ad, Says Yahoo! (NASDAQ:YHOO)
  • By , 3/30/15
  • tags: IZEA YHOO
  • Submitted by Aaron Maley as part of our contributors program . This Is the Year of the Native Ad, Says Yahoo! (NASDAQ:YHOO) Yahoo! (NASDAQ: YHOO) is pushing the native advertising industry forward as fast as it can. With a headline on its blog declaring 2015 “The Year of the Native Ad,” and claiming the industry will double in size within the next three years, Yahoo! CEO Marissa Mayer wants to move to #1 from her current #3 position in the mobile advertising business. Native ads differ from display (“banner”) ads in that native ads look like organic content: sponsored articles, endorsed photographs, or paid blogs. Native ads work particularly well on small screens, because they appear directly within the feed of content, rather than squashed into a small banner area. “Banner ads just don’t work on the phone,” says Mayer. Mayer is banking on mobile and sponsored content to spark growth in Yahoo!’s struggling advertising division. As Trefis noted, Yahoo!’s legacy advertising revenues are declining about 1% overall annually, with banner ad revenues leading the decline at -5% annually. To combat the decline, Yahoo! has made several acquisitions. It purchased mobile ad delivery platform BrightRool in December 2014 and is expanding its in-stream native ad platform Gemini . It was also eyeing native ad revenue when it acquired Tumblr last year for $1.1 billion. Tumblr’s short-form blogs are perfect formats for sponsored blog posts, and the audience at Tumblr is growing, up from 420 million in Q3 2014 to 460 million in Q4 2014. “Native ads are hot right now,” says Mayer. Indeed, Yahoo!’s revenue from native ads doubled last year. Mobile revenue overall increased 23% in just a single quarter, with GAAP mobile revenue beating Yahoo!’s estimates by 10%. Trefis analysts expect continued growth in the coming quarters, “We expect the mobile user base to increase further as the company implements its strategy to deliver personalized content.” Yahoo! reports that “more than 60% of consumers have a favorable view of native ads,” with 79% of its marketers planning to buy native ads in 2015. Yahoo! expects native ad spending in 2018 to reach $9 billion.This would equate to one quarter of the $36 billion U.S. mobile ad industry in 2018. According to the largest native ad study to date, The 2014 State of Sponsored Social Study by IZEA Inc (OTC: IZEA), native ads are currently more effective than celebrity endorsements, online banners, TV radio and print ads. The same study found that a slight majority of U.S. marketers have budgets specifically dedicated to native ads. One of largest native ad platforms, IZEAx, hosts 243,000 registered users with a combined fan and follower base of 2.3 billion people- about 1/3 of the world. Currently CEO of one of the world’s largest native ad platforms, IZEA’s Ted Murphy projects triple-digit sales growth for the platform in 2015. IZEAx has inferior scale to only the native ad platforms within the largest social networks like Facebook (NASDAQ: FB) or Twitter (NYSE: TWTR). Murphy founded the world’s first sponsored blogging marketplace in 2006. A report by OPA/Sharethrough claims that mobile native ads are viewed 53% more frequently and generate 500% higher click through rates than mobile banner ads. E-marketer estimates that online mobile ad spending in 2014 totaled $19 billion, and Forester expects that number to double by 2019. Things are looking up for Mayer, who has spearheaded a remarkable turnaround at Yahoo!’s mobile ad division since becoming CEO in 2012. E-marketer predicts that Yahoo! will finally overtake Twitter in U.S. mobile ad share this year, yet Yahoo! still has a long way to go to catch Facebook, let alone Google (NASDAQ: GOOG). Mayer’s strategy is clear, “For us, mobile, video, native and social — I use the shorthand MaVeNS — is the future.” The debate continues. Critics claim that Yahoo!’s flat revenue over the past three years as a sign that Mayer is failing. Yet Mayer argues that although the revenue has not grown, “the sum no longer represents the dregs of a dying display-ad business, but, in part, the fruits of an entirely new mobile enterprise she has built from the ground up.” The market will ultimately tell. Now that Yahoo! has finally detailed its multi-billion dollar Alibaba spin-off, Mayer will finally be able to stand on her own two legs and face the market’s valuation of her company alone.
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    Trends Driving Corning’s Display Technologies Segment
  • By , 3/27/15
  • tags: GLW
  • Corning’s (NYSE:GLW) Display Technologies segment accounts for 40% of the company’s revenues and is a high margin business. It manufactures specialized glass panels for displays used in consumer electronics such as TVs, PC monitors, mobiles and tablets. In 2014, most of the growth in the segment came from the consolidation of Corning Precision Materials. Now that the cycling of previous year’s acquisition-based growth has come to an end, we take a look at the trends that could help Corning’s Display Technologies grow in the next couple of years.
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    Weekly Media Notes: Disney's First British Isles Cruise, Nickelodeon Hotels And HBO's New Programming Deal With VICE Media
  • By , 3/27/15
  • The media industry saw significant activity last week, with Disney announcing its first British Isles cruise starting next year. In an another development, Viacom plans to develop Nickelodeon Hotels in a partnership with Karisma Hotels & Resorts. In yet another, HBO and Vice Media announced their plans to produce a daily newscast and a standalone online channel. On that note, we discuss below these developments related to the media companies over the last week or so.
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    Here Are Some Key Triggers For Groupon's Stock
  • By , 3/27/15
  • tags: GRPN EBAY AMZN
  • Groupon (NASDAQ:GRPN) has set ambitious long-term growth targets, as it aims to grow its revenue and adjusted EBITDA by more than 20% and 25% by 2017. In order to accomplish these goals, the company aims to significantly expand its merchant network and move towards non-email based marketing strategies to increase its traction among customers globally. We believe more-than-anticipated success in these strategies could hold huge upside for the company’s stock, assuming the market prices in these plausible developments correctly. In addition, Groupon is also taking aggressive measures to enhance its goods margins in North America. We believe developments in this regard could lead to certain events that could trigger stock price changes for better or worse. So we assess three specific scenarios below: 1) an increase in the active merchant count to 1.3 million; 2) an increase  in monthly unique visitors to 450 million; and, 3) goods margins remain unchanged.
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    Home Depot: Will The Impact Of The Data Breach Be Significant?
  • By , 3/27/15
  • tags: HD LOW TGT
  • Home Depot (NYSE:HD) holds the dominant position in the U.S. home improvement industry, accounting for approximately 60% of all revenues. With 1,977 stores across the U.S., Home Depot has been a one-stop shop for many consumers looking to buy home improvement goods. Since the recession, the stock has grown continuously, registering an approximate 45% increase in the last 52 weeks alone. While we expect continued optimism in the U.S. economy, specifically in the housing markets to aid further growth, the impact of a huge data breach announced last year continues to loom over the retailer’s prospects. We have a  price estimate of $100 for Home Depot’s stock, which is below the current market price. Our complete analysis for Home Depot’s stock Home Depot was the latest in the chain of large companies under a cyber attack targeted at their payment terminals, where a security breach left approximately 56 million credit and debit card numbers exposed. Although the company did not lose business in the quarters after the revelation of the breach, the management has indicated significant expenses in terms of “legal help, credit card fraud, and card re-issuance costs” going forward. Trefis attempts to quantify the impact of the data breach and analyze the consequences of this for the retailer in the future. A report by Ponemon Research estimates the cost of a data breach at upwards of $194 per compromised record. Typical costs related to a breach can be classified into investigation, remediation, notification to individuals, identity theft repair, and credit monitoring, regulatory fines, disruptions in normal business operations, lost business, and related lawsuits. Let’s look at each of these in turn with respect to Home Depot’s case: Investigation and Remediation: While investigation typically involves costs related to examining how and why the data was compromised, remediation involves costs related to setting up safeguards to avoid cases of breach going forward. The retailer indicated a $43 million pre-tax expense in investigation and remediation in the third quarter of 2014 alone. Home Depot, in its recent earnings report, has indicated higher investments in IT security going forward. For one, they have already rolled out enhanced encryption of payment data at the point of sale in their U.S. stores and are expected to carry this into their Canada stores in 2015. We assume an expense of approximately $60 per record in investigation and remediation. Notification: This involves the costs related to information provision to relevant individuals, regulators, and media personnel. In a case as large as the one at Home Depot, involving 56 million individuals, the costs of notifying could be daunting. At 49 cents per stamp, the one time cost of notifying just those affected comes to a whopping $27.44 million. Identity theft and credit monitoring: The cost of identity theft protection could range anywhere between $7 to $15 per victim. Assuming a $10 price per victim, the price of this runs into an approximate $560 million cost for Home Depot. Disruptions in normal business operations: The opportunity cost of spending on cleaning up after a data breach involves reduced investments in the company’s operations. Furthermore, with the management spending more time communicating breach-related developments, this also reduces the time spent on standard business activities. We assume a loss of $20 per record on this front. Lost business: Data breach also results in loss of customers to fellow competitors. Ponemon’s research estimates a “high churn rate” at 6% for breach cases in the financial, communication, and health-care industries. We assume a 3% churn rate for Home Depot, given the duopolistic set-up with Lowe’s. This brings us to a loss of approximately $30 per record. In spite of dealing with a case that is bigger than the data breach at Target in late 2013, Home Depot is not expected to lose out on much revenue. Part of this is because the retailer will continue to reap the benefits of an upbeat U.S. economy and housing market. Furthermore, unlike Target, where consumers moved to the likes of Costco or Kohl’s, there are hardly any substitutes when it comes to buying material such as plywood, saws, cement, or the like. Lawsuits: Lastly, there’s the matter of lawsuits. Home Depot has already been slapped with 44 lawsuits related to the breach, which could go further up in number as state and federal agencies continue to investigate. Furthermore, Home Depot is likely to incur millions as card networks make claims against the company in counterfeit fraud losses and the issuance of new cards. According to credit protection firm Billguard, Home Depot is likely to incur close to $3 billion in fraud with an average of $332 spent per credit or debit card. This amounts to approximately $54 per record. Based on our calculations, we arrive at an estimated cost of $176 per compromised record in recurring expenses or a total cost of approximately $10 billion to be incurred by the end of the decade. On account of disruptions in business and lost business, we expect a modest 6% fall in EBITDA going into 2017, which is expected to once again reach it’s forecasted levels by the decade-end as consumers regain confidence in the retailer. The management’s candidness in the face of adversity, and the steps that they have taken to mitigate the chances of such an attack in the future, in terms of investment in cyber security, could recoup confidence among existing customers and also increase appeal among new ones. We expect higher capital expenses as the retailer continues to invest in cyber security enhancements, such as enhanced encryptions and EMV Chip-and-PIN technology. Taking all these factors into account, we anticipate a modest 4% downside to our current price estimate on account of the breach for Home Depot. See our complete analysis for Home Depot in the scenario of the data breach View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Analysis Of the Kraft-Heinz Merger
  • By , 3/27/15
  • tags: KRFT
  • Investment firms, 3G capital and Berkshire Hathaway, have teamed up to create a new company through the merger of H.J. Heinz Co. and The Kraft Foods Group (NASDAQ:KRFT). The new company thus created will be called The Kraft Heinz Company. In terms of annual sales, it is expected to be the fifth-largest food company in the world  and the third-largest in the U.S.. In this article, we summarize the details of the deal and analyze how the fortunes of this new enterprise might evolve. We currently have a $64 per share price estimate for Kraft Foods Group, which is significantly below its current market price. See Our Complete Analysis For The Kraft Foods Group The Merger According to the terms of the deal, the current shareholders of Heinz will hold a 51% stake in the newly formed company. These shareholders include 3G Capital and Berkshire Hathaway. The remainder will go to the current shareholders of Kraft. To sweeten the deal for Kraft’s shareholders, they have been provided a one-time cash dividend of $16.50 per share. The cost of this dividend, which amounts to $10 billion, will be borne by 3G Capital and Berkshire Hathaway. This will be paid out as soon as the deal is finalized. The amount of this dividend is more than a quarter of the closing share price of Kraft on March 24. Each share of the Kraft Foods Group will entitle the shareholder to one share of the new entity. The shareholders will however have to be more patient to enjoy the full benefits of any improvement in operations of the combined entity, since the transaction is expected to be EPS accretive only by 2017. The agreement to form a new company was unanimously approved by both the companies’ board of directors. The deal has been valued at around $45 billion. The combined company will have annual sales revenue of approximately $28 billion. The new company will have at its helm leaders drawn from the two merging entities. The chairman of Heinz, Alex Behring, will assume chairmanship of the new company. The vice chairmanship will be reserved for Kraft’s current chairman and CEO, John Cahill. Bernardo Hees, the CEO of Heinz, will retain his title as the two companies merge into a single firm. Synergies Expected: International Growth and Economies Of Scale There are various ways in which the management hopes to leverage the synergies that the combination of these two large food companies should provide. Heinz has a global footprint. It derives 60% of its sales from regions other than North America. Emerging economies contribute 25% of its sales. Kraft, on the other hand, derives 98% of its sales from North America. This provides scope for the combined entity to sell Kraft’s brands in international markets. However, that opportunity set would be limited by Kraft’s agreement with Mondelez International, which was spun off from Kraft’s namesake parent company in 2012 to focus on international growth. During the spin-off, Mondelez acquired the rights to sell many of their shared brands in international markets. Going by Kraft’s presentation on the deal, some iconic brands that don’t fall under this purview are A.1., Velveeta, Planters, MiO and Lunchables. The sales of such brands outside North America could provide a boost to the new firm’s revenue growth. The management of the two companies have also announced that they expect to realize $1.5 billion in annual cost savings by the end of 2017, as a result of this deal. The cost synergies will mostly come from higher economies of scale in the North American market. Having larger volume of sales will help the company drive better bargains with clients such as large retail outlets and specialty food stores and restaurants. This will improve operating margins of the company and also give it an advantage in getting more shelf space in retail outlets. Some part of the cost savings will also come from the ability of the combined company to refinance Heinz’s high-yielding debt. Since Kraft has a much better credit rating, the combined entity will be able to replace such debt with low-yielding, investment-grade debt. Additionally, Heinz’s preferred stocks that become callable in June 2016 will also be replaced with such debt. This will help reduce the total cost of capital for the combined company. In addition, changes to the operations strategy can also contribute to cost savings. These could be targeted at reducing headcount, shutting down less efficient manufacturing facilities and implementing zero-based budgeting. Zero-based budgeting means that the managers have to explain every forecast expense for the year from scratch, without appealing to previous years’ trends. This helps the top management enforce a more stringent form of cost control and realize cost savings. Since the chairman-CEO team at the new company will be the same as that which implemented drastic cost cutting measures at Heinz, including a reduction in force of 4%, closing several factories and grounding corporate jets, there is reason to believe that the projected changes to the combined company’s operations strategy would be successfully implemented. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Weekly Tech Update: TXN, BRCM, CREE, QCOM, INTC
  • By , 3/27/15
  • Most semiconductor stocks slumped this past week after SanDisk, a flash storage solutions company, cut its first fiscal quarter revenue forecast due to certain product qualification delays, lower than expected sales of enterprise products and lower pricing in some areas of the business. Recent signs of weakening PC demand added to the downward pressure on semiconductor stocks. The Philadelphia Semiconductor Index (SOX), which increased by approximately 30% in 2014, has declined by almost 8% so far this month. Despite short-term weakness, the Semiconductor Industry Association (SIA) believes that the semiconductor market is well-positioned for continued growth in 2015 and beyond. The market achieved record sales for two consecutive years (2013 and  2014). Below is a weekly update for some of the technology companies that Trefis covers.
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    Scenario Analysis: How Dish Might Not Be Able To Monetize Its Spectrum Holdings
  • By , 3/27/15
  • We recently revised our price estimate for Dish Network (NASDAQ:DISH) to $79.80 based on the estimated valuation of the company’s spectrum holdings. (See our related article  Dish Network Price Estimate Revised To $79.80 Based On Spectrum Valuation .) Dish has made significant investments in spectrum over the past few years and the company is now the fifth largest holder of wireless spectrum in the United States. The spectrum provides Dish with a number of options, such as launching its own nationwide wireless network, partnering with an existing wireless carrier and either leasing or selling the spectrum. We believe that Dish will be able to suitably monetize its spectrum, whichever plan it chooses. That sais, there is a possible scenario in which the company fails to monetize this investment. In this piece, we try to figure out how such a scenario might come to pass and what is Dish’s worth without its spectrum. See our complete analysis for D ish Network
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    Alaska Air’s Rapid Capacity Ramp Up Will Likely Impact Its Margin & Yield
  • By , 3/27/15
  • tags: ALK
  • Alaska Air’s (NYSE: ALK) plan to ramp up its Seattle capacity by 10% in 2015 will likely weigh on its load factor and passenger yield. Alaska’s strategy is an attempt to defend its dominant market position in its largest hub, Seattle, which has been challenged by aggressive capacity addition from Delta (NYSE: DAL). While Delta, in the past, relied on Alaska’s passenger traffic to feed into its connecting flights through code-sharing agreements, its decision to build Seattle as its core hub has resulted in direct competition between the two carriers. In this article, we discuss how Delta’s decision will impact Alaska’s performance. Our current price estimate for Alaska Air stands at $69, roughly 5% higher than  its market price. See our complete analysis for Alaska Air Group Delta’s Capacity Expansion So Far Delta’s move comes from its aspirations to expand its offering in the Asian market, which is being viewed as a key growth market by airline companies globally. While the San Francisco market is dominated by United (NYSE: UAL), and the Los Angeles market is highly fragmented, Seattle was an obvious choice for Delta, given that it is the closest mainland U.S. city to Asia. Thus, Delta’s decision to establish Seattle as its international gateway to Asia is well founded. As part of its strategy, Delta has introduced flights from Seattle to all major cities in the Western U.S., growing its Seattle operations from 34 peak-day departures to 15 destinations at the beginning of 2014, to 85 peak-day departures to 26 destinations at present. Delta is also using marketing techniques such as billboards, airport signage, in-flight magazine editorials, and community involvement to strengthen its presence in the Seattle market. As a result, Delta’s market share in Seattle has increased to 20%, second only to Alaska’s market share, which stands at about 55%. Delta aims to grow its Seattle capacity to about 150 peak-day departures to 35 destinations across three continents, over the next couple of years. This will increase Delta’s capacity overlap with Alaska from 41% in 2014 to 50% in 2015.
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