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COMPANY OF THE DAY : BLACKBERRY

BlackBerry reported its fiscal third quarter earnings on Friday morning. The company surprisingly posted a profit, despite a 34% drop in revenues that missed estimates, signaling that its cost cutting efforts have been paying off.

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FORECAST OF THE DAY : APPLE WATCH UNITS SOLD

We estimate that Apple will ship a total of around 18 million units of the Apple Watch when it launches in 2015. We expect shipments to rise to about 33 million units by 2021. Given that the watches will be tethered to an iPhone, it is useful to look at Apple Watch sales as a percentage of iPhone shipments. We estimate that about 10% of iPhone buyers will purchase the watch in 2015, increasing to about 15% by 2021 as the use cases for the watch improve and pricing declines.

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RECENT ACTIVITY ON TREFIS

GM Logo
Improved Management of Fleets Business Bodes Well For GM's Profitability
  • By , 12/19/14
  • tags: GM F VLKAY TM HMC TSLA
  • For a number of years, the over dependence of General Motors (NYSE:GM) on fleet sales has been seen as a key problem. Fleet sales involve bulk sales of cars and trucks to corporate customers, governments, and rental-car firms. GM has long seen them as a way to keep factories running at full speed. But this strategy has meant a compromise on profits, as fleet sales tend to be a low-margin business. Sometimes, with less-competitive or dated models, fleet sales represented a huge percentage of total production – production that wasn’t making much money for the automaker. All fleet sales are not bad. If done correctly, commercial and government sales are a solid, profitable, steady business. However, rental cars tend to problematic. The reasons behind this are two-fold. First, the rental companies demand and get deep discounts. Second, rental-car companies sell off their vehicles after a few short years, flooding used-car wholesale auctions with thousands of similar cars, which depresses the retail value of those relatively new models, complicating the automakers’ leasing businesses and making it harder to get premium prices for those cars at retail when they’re new. However, recently GM has started to turn around its fleet businesses. We have a  $40 price estimate for General Motors, which is about 25% higher than the current market price. See full analysis for General Motors There are two main ways in which GM has improved the management of its fleets business. 1) Model re-brands : A key point about the fleets business is that, if done right, selling cars to rental fleets can serve the purpose of good marketing, exposing people who might not otherwise be interested to try your brand. GM is now beginning to realize this as the re-branding of its flagship sedan Chevrolet Impala shows. The Chevy Impala was previously only known as a successful fleet vehicle but a redesigned version of the car became the first domestically manufactured car in over two decades to win Consumer Reports’ top ranking for a large sedan. This should make the car much more popular with retail buyers. The company expects as much and has made bold predictions for the model on the business side of things. Management at GM believes that 70% of the model’s future sales will come from retail buyers, a segment of buyers who have shown a willingness to pay much higher prices for cars in the past. Thus, if sales pan out as the company expects them to, the redesigned model should contribute a great deal more to the bottom line than its previous versions, which although successful as fleet vehicles, only sold to retail customers about 30% of the time. Additionally, another model seems to be performing well for General Motors. The 2015 model version of the Chevrolet Cruze was named 2014′s car of the year by Automotive Fleet and Business Fleet Magazines. Sales of the Cruze are up by more than 40% on a year-to-date basis. GM has also been charging higher prices for this version, as the model offers better connectivity, through an Onstar 4g LTE and a standard built-in Wi-Fi hotspot. 2) Price Management : When vehicles are retired from rental fleets, they are sold on the used car market in auctions. The price that a car company fetches for these vehicles depends quite a lot on their supply. An oversupplied market means that the average transaction price for a retired-from-rental-fleet model is usually quite low. Due to poor management of its fleet business, GM did not do very well in this area. However, in November, the number of GM vehicles available at auctions was as low as 70 compared to about 800 in October. By temporarily cutting sales of these retired fleet vehicles GM will be able to restrict the supply of these vehicles into the used car market. If the company had not done so, consumers would have been able to buy these cars from dealerships which bought these cars cheaply at these auctions. This also means that the downward pressure that lower prices for used cars put on new car sales will be averted. This is important for GM, especially as sales generally pick up during the holidays. Consequently, GM should be able to squeeze out higher revenue on these vehicles, while also keeping demand higher for the newer models. Management decisions like these might be one reason why the company has managed to increase average recorded transaction prices for its vehicles for 26 consecutive months. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    ACN Logo
    Accenture Earnings: Revenue Soars Even As Order Booking Disappoints
  • By , 12/19/14
  • tags: ACN IBM MSFT HPQ
  • Accenture (NYSE:ACN) reported its Q1 FY 2015 results on December 18te, and the results exceeded market expectations as the company posted nearly 10% year-over-year growth in revenues to $7.9 billion (in local currency). This was above the company’s guided range of $7.55 billion to $7.80 billion. In  our note published earlier, we stated that we expected outsourcing revenues to outpace the industry in the first quarter. Furthermore, we also expected consulting revenues to register growth, albeit at a slower pace. The results were in line with our expectations, as outsourcing revenue grew 14% year over year in constant currency to $3.80 billion, while the consulting business revenues grew 7% year over year to $4.09 billion. These are the highest growth rates in over two years in both consulting and outsourcing. However, the point of concern was lower than expected order bookings across both consulting and outsourcing. While the company had announced earlier that they were expecting lighter booking in Q1, but the subpar  $7.7 billion order booked in the quarter (compared to $8.7 billion in Q1 FY2014) puts added pressure on Accenture’s existing order pipeline that needs to be bolstered with higher value in the ensuing quarters. The company reported a strong order pipeline for consulting at $3.9 billion, while its outsourcing order book, at $3.8 billion, disappointed. See our full analysis for Accenture Guidance For Q2 and FY15 In its outlook for Q2 FY2015, Accenture expects revenues to range from $7.25-$7.5 billion. For fiscal year 2015, Accenture has raised its net revenue growth for FY 2015 to 5%-8% range and GAAP operating profit margins (OPM) to be in 14.4%-14.6% range. However, it now assumes a foreign-exchange impact of negative 5% compared with fiscal 2014. Furthermore, the company expects its diluted EPS to be $4.74-$4.88 range. The company continues to target new bookings for fiscal 2015 in the range of $34 billion to $36 billion, which is similar to the FY2014 order book. Revenue Growth Continues At Outsourcing Division But New Orders Disappoint According to our estimates, the outsourcing division contributes approximately 43% to Accenture’s value. This division continued to outpace the outsourcing industry as revenues grew by 14% to $3.8 billion (In local/constant currency).The book-to-bill ratio, which indicates the dollar amount of new order received for every dollar amount of revenue billed, declined to 1.0x during the quarter. Accenture reported tepid demand for its outsourcing services with new bookings at $3.8 billion. This does not bode well for growth in future revenues of the company as it can only book revenues against orders booked. However, it said that it see positive trends in overall pipeline and was well positioned to deliver a higher level of bookings in the second quarter. Considering strong order pipeline in the previous quarters, we expect that outsourcing will continue to deliver growth in Q2. However, any further weakness in order booking can hamper its ability to report growth in the coming years. Consulting Revenues Post Growth Backed By Expansion Of Order Pipeline Management and technology consulting are important drivers for Accenture’s value and account for around 45% of our price estimate combined. The company reported 7% year-over-year growth in revenues to $4.09 billion. Furthermore, the company’s momentum for new orders increased as it booked orders worth $3.9 billion during the quarter. Since the company reported record revenues, the book-to-bill ratio, the key metric that ascertains the growth in new contracts, declined marginally to 0.9. One of the key announcements during earnings discussion was the change in consulting business sentiment in Europe, which contributes nearly 40% to its revenues. Accenture’s European consulting brightened as clients are now starting to re-invest in consulting. This bodes well for Accenture’s future revenue from consulting. We are in the process of updating our model. At present, we have a  $76 price estimate for Accenture, which is 15% below its current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    RAD Logo
    Rite Aid Raises Its 2015 Outlook Backed By A Strong Q3 2015
  • By , 12/19/14
  • tags: RAD CVS WAG
  • The third largest drugstore chain in the U.S.,  Rite Aid (NYSE: RAD) saw its stock price increase by more than 10% as the company exceeded its own expectation and beat wall street estimate in Q3 2015 (reported on December 18th). Rite Aid raised its guidance for fiscal 2015 (mentioned at the end of the article) on account of the stronger than expected performance in the quarter, after lowering it last quarter. A Quick Snapshot Of The Q3’15 Earnings At $6.7 billion, Rite Aid’s Q3 2015 revenue was 5.3% higher compared to Q3 2014. The increase was mainly driven by a 5.4% year-on-year jump in total same-store sales, which in turn was fueled by a 4.5% year-on-year increase in same-store prescription count on account of higher utilization in Medicaid expansion states, the success of RiteAid’s various pharmacy initiatives, and an increase in flu shots administered during the quarter. Rite Aid’s front-end same-store sales increased by 1.6% annually. Pharmacy same-store sales were higher by 7.2%, which included an approximate 228 basis point negative impact from new generic drugs. Rite Aid saw its gross margin improve from 28.3% in Q3 2014 to 28.7% in Q3 2015, as the continuing reimbursement rate pressure was offset by a lower LIFO charge and cost reductions from the company’s purchasing arrangement with McKesson. Operating income and net income increased by 33% and 47% year on year, respectively, as Rite Aid focused on managing expenses to effectively leverage its top line growth. Our price estimate of $5.66 for Rite Aid is approximately 15% lower than the current market price. We are in the process of updating our model for the Q3 2015 earnings release. View our detailed analysis for Rite Aid The New Drug Distribution & Purchasing Process With McKesson Eases Pressure Off Margins Q3 2015 was the first full quarter of Rite Aid’s conversion to the new distribution process with McKesson, the largest distributor of pharmaceutical and medical supplies in the U.S. The tie-up with McKesson provides Rite Aid with purchasing efficiencies and direct-to-store delivery for all its pharmacy products. Rite Aid converted all its stores and four pharmacy distribution centers to this new distribution process by early Q3 2015. With all its stores receiving direct-to-store delivery five days a week, the company expected to generate working capital benefits and improved in-stock positions to better serve its customers. In Q3 2015, the distribution process yielded savings and benefits that were in line with Rite Aid’s expectations. The company expects a working capital benefit of approximately $250 million as a result of the McKesson agreement in fiscal 2015. Even though Rite Aid expects the reimbursement rate pressure to continue to pose a challenge in the future, we believe that the cost savings from the new distribution and purchasing process with McKesson will help ease pressure off the company’s bottom line. Expanding Healthcare Offering To Provide A Higher Level Of Care Rite Aid believes that its long-term strategy centers around the continued expansion of its healthcare offering, and it claims to have made significant progress in this area during Q3 2015. The company continues to strengthen its portfolio of health and wellness services. Some of the examples are: - Expanding efforts around flu administration: Rite Aid has administered more than 3 million flu shots so far this year. The company is working diligently to engage patients by educating them about the value of this convenient health and wellness service. In addition to flu shots, it believes that raising awareness about other immunizations represents a great opportunity to help protect the health of the communities. To capitalize on this opportunity, Rite Aid launched a comprehensive offering of tools and resources known as Vaccine Central, in Q3 2015. Through Vaccine Central, customers can visit Riteaid.com or any Rite Aid store and take a comprehensive immunization evaluation that helps determine their specific vaccination needs. - Quit for you smoking cessation program: This is a free program initiated which offers counseling by Rite Aid pharmacists to help customers develop and complete a personalized quit plan. The program empowers the pharmacists to provide additional care beyond prescriptions. The company claims that the customer engagement in the program has been encouraging so far. It plans to launch further enhancements to Quit For You in time for the New Year’s quit season, including personalized text message support for quit tips and positive affirmations. It is also enhancing its online support available at riteaid.com by adding video tutorials, a quit calendar and an evaluation tool to identify customers’ best nicotine replacement therapy option. - Adding HealthSpot stations to select stores: Rite Aid announced a new initiative in Q3 2015, which bring private walk-in HealthSpot stations to select Rite Aid stores in three Ohio markets in the near future. Though these conveniently accessible health stations, customers will be able to use videoconferencing and interactive medical devices to connect with medical professionals and be treated for common health conditions. A key benefit is that most insurance plans will be accepted for these appointments. Wellness Store Remodel Program Is At The Center Of Rite Aid’s Growth Strategy Rite Aid believes that it is doing a good job in executing the store remodels as it builds up its real estate pipeline to support relocation and new store initiatives over the next several years. Wellness stores continue to outperform the non-wellness stores in terms of same-store front-end sales and script counts. In Q3 2015, front-end same-store sales in wellness stores that have been remodeled in the past 24 months were approximately 321 basis points higher than the non-wellness stores, and script growth in these stores was 278 basis points higher. A key growth driver for the Wellness format is the higher level of service provided by more than 2,000 wellness ambassadors. The company is also in the process of expanding the level of service that it provides in the beauty category. It has 50 Wellness stores with expanded beauty departments that feature a broader selection of prestige brands and specially trained beauty advisors. At the end of Q3 2015, Rite Aid has a total of 1,529 Wellness stores, which is more than a third of its total store base. Fiscal 2015 Outlook - Total sales between $26.25 billion and $26.40 billion. - Adjusted EBITDA between $1.28 billion and $1.31 billion. - Same-store-sales growth in the range of 3.75% to 4.25%. - Net income in the range of $315 million to $370 million. - Earnings per diluted share in a range of $0.31 to $0.37. - Capital expenditure of approximately $525 million, with approximately $250 million related to remodels and approximately $100 million for file buys. - Free cash flow in the range of $325 million to $375 million. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    NKE Logo
    Strong Europe, China Performance Drives Nike's 15% Top Line Growth In Q2
  • By , 12/19/14
  • tags: NKE LULU UA
  • Sports giant  Nike (NYSE:NKE) recorded another strong quarter in Q2 2015, with revenue rising by 15% annually to $7.4 billion. Gross margin expanded by 120 basis points y-o-y, on the back of a shift in the sales mix to higher margin products and continued growth in all product types, geographies, and the higher margin direct-to-consumer (DTC) business, partially offset by an increase in input costs. The company’s strong performance in Q2 2015 was underscored by high growth in North America, Western Europe, and Greater China. High demand in running, basketball, and football categories continue to fuel the growth momentum for Nike. Additionally, Nike Brand DTC was up 30% for the quarter. We are in the process of revising our $68 price estimate for Nike’s stock. See Our Full Analysis For Nike North America Continues To Be Strong In fiscal 2014, Nike recorded its most profitable year ever in North America with reported earnings before interest and tax rising faster at 14% than reported revenues (10%). That momentum has continued into this year with North America revenue growing by 16% in this quarter, led by strong growth in basketball, sportswear, and men’s training, along with modest growth in the women’s training and young athletes businesses.  DTC revenue grew 18% driven by an 8% increase in comparable store sales and significantly higher revenues from its e-commerce website. The remarkable performance in this geography shows the strength of the Nike brand as it has managed to capture the growth in the market and take market share from an ever rising number of competitors at the same time. The company is a market leader in the basketball and running categories, and leverages the insight gained from those segments to capture the significant growth opportunities in areas like e-commerce, apparel, women’s, and young athletes businesses. Nike applies discrete strategies to individual segments, identifying the opportunities in each category, and applying different strategies to capitalize on these opportunities, instead of applying a one-size-fits-all strategy common to the sportswear market. China Turnaround Underway The company’s performance in China exceeded our expectations this quarter. In the previous quarter, China revenues grew by 18%. Given that China is one of the largest markets for athletic footwear and apparel in the world, the geography provides a significant growth opportunity for Nike. We have already written about the problems Nike faces in establishing a strong foothold in this market. (See: Nike’s China Problem ) But Nike’s strong performance over the past two quarters has helped Nike achieve the leading position in both the athletic footwear and apparel markets. Previously beset by the accumulation of unsold inventory and an  indifferent response to new product launches, Nike decided to reset its strategy for China in fiscal 2014. The company believes that it has made good progress on that front and expects to achieve sustainable double-digit growth from the region soon. In 2014, Nike tested new merchandising concepts in China, which drove comparable store sales for the quarter up 22%. The sports retailer also changed the assortment of inventory it sells to wholesale partners in China, undertook the re-profiling of multiple stores in the region, and reduced the levels of inventory considerably. However, Nike has positioned itself as a relatively premium brand in China compared to its brand positioning in Europe and North America. As a result, its wholesale partners are seeing strong comparable store sales growth and the profitability of stores that were re-profiled is also increasing. Europe Continues To Surprise Nike brand revenues in Western Europe grew by 24% (in constant currency terms) in Q2 2015, further confirming that Nike is gaining ground over market leader Adidas. Similar to the operations in China, Nike undertook a rebasing of its operations in Europe two years ago. The company introduced shop-in-shop concepts at sports retailers like JD Sports, Foot Locker, and Intersport, in addition to trying out new store concepts in its own retail stores and online. The strategy has been successful, with Nike now the leader in the footwear market in all countries key to its business in Europe, and is the preferred sports brand in each of the top 10 cities in Western Europe. Nike brand revenues in Central and Eastern Europe saw 25% annual revenue growth in Q2 fueled by double-digit growth in every geography except Israel. We expect high growth in this market in fiscal 2015 due to growing economic prosperity in the region. Recent futures order growth at 18% (in constant currency terms) supports our outlook. 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
    DFS Logo
    Credit Card Weekly Notes: Discover, MasterCard, American Express
  • By , 12/19/14
  • tags: MA AXP
  • During this week through Thursday, December 18, credit card stocks traded well. In this weekly note, we take a look at the latest delinquency and charge-off rate data released by Discover Financial (NYSE:DFS). We also take a look at  MasterCard ’s (NYSE:MA) push to tap into the growing market in the South-Asian region. Finally, we include a brief on the latest data released by American Express (NYSE:AXP) suggesting a revival in consumer spending as Christmas approaches. Discover Financial Maintains Low Delinquency In November Discover released data on delinquency rates and credit card charge-off rates for the month of November. The company reported loans worth $54.6 billion on November 30, 2014, and its delinquency rate (30-days period) over the month remained unchanged at 1.8% compared to the previous month. Over the past twelve months, the company has been steadily maintaining low delinquency rates in the 1.6-1.8% range. The delinquency rate is the percentage of total loans that are past their due dates. Discover’s net principal charge-off rate (the percentage of loans considered unredeemable) was 2.4% for the month of November, slightly higher than 2.1% in the previous month. Over the twelve month period, the rate has ranged between 2.1-2.5%. In another article Discover, AmEx Maintain Low Delinquency Levels And Charge-Off Rates, we discussed in detail the low rates for Discover. Discover’s stock gained over 3% through Thursday. We have a price estimate of $65 for the company’s stock, translating into a valuation of just over $29 billion, which is about in line with the current market price. See our complete analysis of Discover Financial here MasterCard Makes A Push In Sri Lanka, Maldives MasterCard announced that it is setting up a dedicated country office in Sri Lanka, 25 years after starting operations in the island nation situated south of India. The company also announced the appointment of R.B. Santosh Kumar as the country manager for Sri Lanka and the Maldives, in a bid to strengthen its existing offerings and charting new business gains. With a country dedicated office, the company aims to tap into the potential growth that the country offers. The country is a popular tourist destination and reported close to 1.3 million arrivals in 2013, a strong rise of 26% over 2012. The Tourism and Travel industry directly contributed about 3.5% ($6.3 billion) to the country’s GDP, 84% of which accounted for leisure spending. The Maldives, on the other hand, has already had over 1 million tourist arrivals during the first ten months of 2014. The Tourism and Travel industry’s direct contribution to the Maldives’ GDP was close to 50% ($2.3 billion), 96% of which contributed to leisure spending. During the past week, MasterCard’s stock gained nearly 3% to close trading on Thursday at $87. We have a price estimate of $83 for MasterCard’s stock, slightly below the market price, valuing the company at about $96 billion. See our full analysis of MasterCard here American Express Suggests Higher Spending During Christmas Weekend After a slow start to this year’s holiday shopping season, during which customers showed a reluctant spending pattern, AmEx’s latest Spending and Saving Tracker survey revealed that a majority of consumers (79%) plan to spend more during the Christmas holiday. Consumers are expected to spend $192 per person on the day after Christmas, compared to $188 a year ago. AmEx’s closing price of $93 on Thursday put the company’s market cap at just over $94 billion, compared to our valuation of $106 billion. The stock was up by over 2% during the week. We have a price estimate of $102 for the company’s stock. We estimate EPS of $5.66 for the current calendar year, slightly higher than the consensus EPS of $5.56 for the company. See our complete analysis of AmEx’s stock here
    DD Logo
    DuPont To Take Additional Restructuring Charge Related To Performance Chemicals Spin-off
  • By , 12/19/14
  • tags: DD DOW MON
  • DuPont (NYSE:DD) recently announced that it will record a $315 million pre-tax charge during the fourth quarter as a part of its ongoing redesign program, which primarily aims at delivering near-term savings from the movement and elimination of costs related to the separation of its Performance Chemicals division. In addition, the company also announced that the planned spin-off of the division is on target to be completed by mid-next year. It plans to name the new public company created by this transaction as the Chemours Co. DuPont generates annual sales revenue of around $36 billion by supplying high-performance materials and chemicals, electronic materials, high-performance coatings, and agricultural products to industries and consumers worldwide. Most products manufactured by DuPont are used as raw materials by other industries, making it a predominantly B2B (business-to-business) based company with the exception of the agriculture and nutrition divisions. Its consolidated adjusted EBITDA margin stood at around 20% last year. We currently have a  $70/share price estimate for DuPont, which is 17.3x our 2014 full-year adjusted diluted EPS estimate of $4.04 for the company. See Our Complete Analysis For DuPont The Redesign Program DuPont announced the redesign program in June this year, when it announced that it will be taking a pre-tax charge of $270 million during the second quarter. The company revealed later on that in addition to delivering near-term savings through the movement and elimination of costs related to the separation of its Performance Chemicals business, the redesign program is also aimed at driving significant long-term cost savings through productivity improvements across all businesses. The company plans to carry out an extensive redesign of its infrastructure as a part of this program, which will be primarily focused on automation and standardization of its transactional processes across the globe that will improve its overall cost structure. Altogether, these efforts are expected to yield at least $1 billion in cost savings by the end of 2019 from a 2013 baseline – two-thirds by the end of 2015 on a run-rate basis, and the final third occurring between 2016 and 2019. DuPont has already announced a total pre-tax charge of $585 million related to this redesign program so far, which comes out to be around $0.43 per share, after tax. Performance Chemicals Spin-off DuPont’s Performance Chemicals division has been under-performing the company’s overall portfolio for the last several quarters. According to our estimates, the division, which primarily deals in titanium dioxide (TiO2) and fluorochemicals, contributes around 15% to the company’s total value. TiO2 is primarily used as whitening pigment and is a key raw material of the paint manufacturing industry. On the other hand, fluorochemicals are widely used as refrigerants among other applications. Last year, the Performance Chemicals division’s performance was severely impacted by lower TiO2 prices. However, this year weak refrigerant prices are weighing on the company’s results. DuPont sells  HCFC 22 and  Isceon refrigerants, which have been under a significant pricing pressure recently due to oversupply in the U.S. market. During the first nine months of this year, DuPont’s chemical prices declined by around 4% y-o-y, which led to an almost 9% decline in the segment’s adjusted operating income. In order to reduce the impact of cyclical volatility in chemical prices on its portfolio, DuPont decided to spin-off the Performance Chemicals division into a separate company in October last year. Recently, company officials announced that the spin-off process is on-track and is expected to complete by mid-next year. The company plans to name the new public entity created by this transaction as the Chemours Co. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    MET Logo
    Insurance Weekly Notes: MetLife, Prudential, UnitedHealth
  • By , 12/19/14
  • tags: PRU UNH
  • During this week through Thursday, December 18, insurance stocks traded fairly well. In this note we take a look at the recent developments for the insurance companies leading to new businesses and enhancements in various product lines. MetLife (NYSE:MET) continued to add more business to its portfolio of pension products. Prudential (NYSE:PRU) pushed its strategy to advance the retirement business, while  UnitedHealth (NYSE:UNH) launched a pilot project to test newer payment models in cancer care.
    VALE Logo
    Vale Completes Sale of Stake In Fosbrasil As Part of Ongoing Response To Low Iron Ore Prices
  • By , 12/19/14
  • tags: VALE RIO CLF MT
  • Vale (NYSE:VALE) has announced the completion of the sale of its 44.25% stake in Fosbrasil, a Brazil-based producer of purified phosphoric acid, to Israel Chemicals Limited, after fulfilling all conditions for the completion of the transaction, including regulatory approval for the same. The company had announced the sale of its stake in Fosbrasil, subject to regulatory approval, for $45 million in December 2013. The transaction is a part of Vale’s efforts to shed its non-core assets as it grapples with an environment of subdued iron ore prices. The sale of iron ore, including iron ore pellets, accounted for 73% of Vale’s revenues in 2013. Iron Ore Prices Iron ore is the chief raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its prices. International iron ore prices are largely determined by Chinese demand, since China is the largest consumer of both steel and iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. However, weak demand for steel in China has translated into weak demand for iron ore. Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. On the supply side, expansion in production by majors such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in subdued iron ore prices over the next few years. Iron ore prices stood at $74 per dry metric ton (dmt) at the end of November, around 46% lower than at the corresponding point of time last year. Sale of Non-core Assets and Disciplined Capital Allocation Vale’s profitability has been under pressure due to falling iron ore prices. The company’s adjusted Earnings Before Interest and Taxes (EBIT) margin, which excludes the impact of one-time items, fell from around 37% in the first nine months of 2013 to around 27% in the first nine months of 2014. In response to the environment of subdued iron ore prices, the company is focusing on developing its core mining assets, selling off non-core assets, and rationalizing capital expenditures. Including the sale of Fosbrasil, the company has sold off nearly $6 billion worth of non-core assets since 2011. Most of these sales were concentrated in 2013. Vale’s efforts at rationalizing capital expenditure are reflected in its recently released capital expenditure budget for 2015. The company announced a capital expenditure budget of $10.2 billion for 2015. This is sharply lower compared to Vale’s capital expenditures in 2014, which is expected to total approximately $13.8 billion. These measures taken by the company will allow it to operate more competitively in a low iron ore pricing environment. Given that low iron ore prices are expected to persist in the near term, these are steps in the right direction for Vale. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research    
    NFLX Logo
    Why We Believe That Netflix Is Still Overvalued
  • By , 12/19/14
  • tags: NFLX AMZN CMCSA
  • Netflix (NASDAQ:NFLX) reported its third quarter numbers on October 15, 2014 and the stock has fallen approximately 25% since then. Even though Netflix delivered on the revenue guidance, the selloff has largely been due to the disappointing numbers it posted with respect to streaming subscriber additions.  Our price estimate for Netflix stands at $299, implying a discount of about 12% to the market. While we believe that Netflix has a lot going on in its favor, there are some risks that warrant a conservative valuation of the stock.
    DE Logo
    Industrials Weekly Review: Deere, Corning, Honeywell, Caterpillar
  • By , 12/19/14
  • During the past week, industrial majors Corning (NYSE: GLW), Caterpillar (NYSE: CAT), Honeywell (NYSE: HON) and Deere (NYSE:DE) – saw their stock prices move upwards. Corning and Honeywell announced acquisitions, while Deere announced the divestiture of its crop insurance business. Caterpillar reported its retail sales statistics, showing that its mining equipment business continues to suffer. Below we give a quick rundown on the most notable events in the last week related to the companies.
    ETFC Logo
    Asset Base Continues To Grow For E*Trade, Trading Activity Slows Down
  • By , 12/19/14
  • tags: ETFC AMTD SCHW
  • Brokerage firm E*Trade Financial (NASDAQ:ETFC) released its operating metrics for November, reporting a 7% sequential decline in trading activity after a surge in October. E*Trade’s daily average revenue trades (DARTs) were flat compared to the year-ago period. However, the brokerage had a positive month in terms of net client assets during the month. E*Trade witnessed significant growth in its major revenue streams in Q3, with trading commission revenues rising by 5% year-on-year (y-o-y) to $108 million while its asset-based business grew by almost 12% over the prior year quarter to $269 million. The growth in these revenue streams was largely driven by an increase in trading activity and a gain in client assets complemented by a rise in yield rates. Continuing the trend from the previous quarter, E*Trade’s trading metrics and assets under management have improved in Q4 thus far. Below we take a look at some key metrics and our forecasts for E*Trade.
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    How Is Nickelodeon Network Trending For Viacom?
  • By , 12/19/14
  • tags: VIA DIS TWX
  • Viacom ‘s (NASDAQ:VIA) Nickelodeon network saw a 20% ratings decline in the third quarter. The network was no exception as ratings were lower in the second half of 2014 for most of the cable networks. While the network is currently at the top spot with kids 2-11 for the 4th consecutive month, ratings are lower as compared to the prior year period. Lower ratings translate into lower advertising revenues for the content owners such as Viacom. This could prove meaningful as Nickelodeon U.S. contributes more than 13% to the company’s value, according to our estimates. The contribution is much more significant if we account for the global operations. However, we believe that Nickelodeon will see better ratings in the coming months driven by the network’s focus on original programming and addition of new shows. Nickelodeon earns revenues primarily from two sources, subscription and advertising. The network generated over $700 million in advertising revenues and over $600 million in subscription revenues in 2013. An estimated EBITDA margin of 42% for Viacom’s cable networks translated into EBITDA of over $550 million, representing 12.50% of the company’s overall EBITDA during the same period. We estimate revenues of around $13.92 billion for Viacom in calendar year 2014, with EPS of $5.67, which compares to the market consensus of $5.38, compiled by Thomson Reuters. We currently have  a $91 price estimate for Viacom, which is around 25% ahead of the current market price.
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    Aviation Week In Review: Boeing and GE
  • By , 12/19/14
  • In the past week, Boeing (NYSE:BA) raised its dividend and share repurchase authorization as the upcycle in global commercial aviation has grown the company’s profit and cash flow. Separately, GE (NYSE:GE) was selected by Boeing to supply electrical power and common core systems for its wide-body airplane, 777X, which is under development. The 777X is being developed by Boeing as its next generation wide-body 777 that will replace its current generation 777s.
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    Microsoft’s Azure Cloud Platform Explained – Part 1
  • By , 12/19/14
  • tags: MSFT IBM ACN GOOG AMZN
  • Microsoft (NASDAQ:MSFT) launched its cloud platform, Azure, in 2010. Since the launch, the service has posted triple digit growth, and last year generated over $1 billion in revenue, according to reports. Considering the latest quarterly results, in which the company claimed that its cloud revenue grew a 128% year over year, we estimate that the annual revenue run rate for Azure can be close to $2.3 billion. Azure, currently, is the only major cloud platform that is consistently ranked as a leader for both infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS). While Microsoft continues to use the same platform that is used in Azure for some of its offerings such as X-box live, Bing, Office 365, SQL etc., it is extensively marketing its cloud offering to enterprises to roll out their apps on its platform. This is a two part article. While in the first part we will explore the cloud computing industry, in the second note we will look at Microsoft’s Azure offering. See our complete analysis of Microsoft here The Cloud Market Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. The cloud computing stack consist of three services namely software as a service (SaaS), infrastructure as a service (IaaS) and platform as a service (PaaS). Among the three categories, SaaS is expected to grow the fastest followed by IaaS. However, in the near future all three segments are projected to experience healthy demand. The primary reason for this growth is global demand for technology based services, which in turn depends on the state of global economy. The Three Services Explained The three services in the cloud stack i.e. SaaS, IaaS and PaaS are interconnected and dependent on each other to deliver a cost effective solution to clients. Most of the Cloud services are provided on a “multitenancy” architecture which represents a shared infrastructure and/or resources topology along with the advantages of virtualization and remote access to new business models and services. Each stack or service can either be availed independently or in conjunction.  A brief description of these stack are: Software as a Service (SaaS) is software that is deployed over the internet. With SaaS, a software company licenses an application to customers either as a service on demand, through a subscription “pay-as-you-go” model, or at no charge when there is opportunity to generate revenue from streams other than the user such as from advertisement. An obvious example of SaaS is Microsoft’s Office 365, where the applications run remote from the user’s computer.  Another model that is coming to fore is the hybrid “freemium” model which gives free access to the basic functionality of software, but the user has to pay a subscription fee for using advanced functions. SaaS is a rapidly growing market as indicated in recent reports that predict ongoing double digit growth. According to Forrester, SaaS solutions accounted for $36 billion in revenue in 2013, and are expected to increase to $133 billion by 2020. Infrastructure as a Service (IaaS) is a way of delivering Cloud Computing infrastructure – servers, storage, network and operating systems – as an on-demand service via secure IP-based connectivity. Rather than purchasing servers, software, datacenter space or network equipment, clients instead buy those resources as a fully outsourced service on demand. IaaS is often based on virtualization techniques, i.e., creating a virtual computer that is independent of the actual hardware on which it exists, which may indeed be smaller or larger than its virtualized counterpart. An example of IaaS would be a Microsoft SQL Database implementation  that is sourced remotely from an enterprises own infrastructure.  In this case, the data and the analytics exist as a virtualized implementation that utilizes the service provider’s servers.  Compared to SaaS and PaaS, IaaS users are responsible for managing more: applications, data, runtime, middleware, and the O/S. Platform as A Service (PaaS ) is the most complex of the three stacks. PaaS can be defined as a computing platform that allows the creation of web applications or software quickly and easily and without the complexity of buying and maintaining the software and infrastructure underneath it. We can extend our analogies above for Office 365 SaaS and SQL IaaS implementations, by adding development tools, etc., that allow enterprise administrators to customize analytics and applications on the remote,  virtualized machines.   PaaS is similar to SaaS except that, rather than being software delivered over the web, it is a platform for the creation of software, delivered over the web. According to Forrester, a PaaS solution generated $4.7 billion in 2013, and is expected to generate $44 billion in revenues by 2020. Growth In Cloud Services Across PaaS And IaaS Market Over the past few years, cloud services have come to fore for both large and SME (small and medium size enterprise) companies that are looking to improve their businesses by employing IT solutions and services. The advantage of cloud services is the scalability and accessibility to new applications, resources and services. Furthermore, cost associated with using these services are less as the onus of management of these services lie with the cloud services provider. As a result, demand is growing for virtualization services, which enable service provider to create a virtual computer domain independent of the underlying software and hardware that not only increases manageability but also reduces cost. As a result, cloud services are expected to reach a market size of $555 billion in 2020 from $209.9 billion in 2014 at a CAGR of 17.6%, according to the new report by Allied Market Research. However, public cloud services market is expected to grow to $200 billion by 2018 according to market research firm Infonetics Research. Within the public cloud services, IaaS is expected to grow from about $23 billion in 2014 to $34 billion in 2015, and PaaS to grow from 13% of the total cloud revenue in 2013 to 16% in 2018. Considering the size and growth of cloud services, companies such as Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), IBM (NYSE:IBM) and Google (NASDAQ:GOOG) are rolling out new services, and extending functionality in this domain. In the next note, we will explore Microsoft’s Azure cloud services. 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 Chinese Internet Notes: Baidu's Latest Moves
  • By , 12/19/14
  • In our Chinese Internet note this week we take a look at online search giant Baidu ‘s (NASDAQ: BIDU) latest moves. Baidu announced a research breakthrough in voice-based search that improves accuracy in transcription. It also confirmed its investment in Uber. Additionally, it partnered with Nokia to obtain access to Nokia’s Here maps for Baidu users when they travel outside China. We have a price estimate of $211 for Baidu’s stock, compared to a market price of $232. Our estimate for Baidu’s revenue in 2014 is $7.7 billion, slightly lower than the consensus estimate of $7.9 billion.
    USB Logo
    Financials Weekly Notes: U.S. Bancorp, BofA, Goldman and RBS
  • By , 12/19/14
  • tags: USB BAC GS RBS
  • Bank shares saw significant fluctuations in their prices this week, with the sharp decline over the beginning of the week being more than made up for by a jump in prices over the latter half of the week. The continuing decline in crude oil prices remained at the top of investors’ minds this week, with shares across sectors losing value as a direct consequence on Monday, December 15, despite strong U.S. industrial production data released that day. While investors remained cautious of the equity market on Tuesday, the largest U.S. banks took a hit after the investment bank Jefferies reported a loss for the quarter ended November. Top management at some of the country’s largest banks had already lowered investor expectations from their trading units last week, but Jefferies’ results presented a bleaker picture of the bond trading market for the last quarter of the year. Things began to look upbeat on Wednesday when the Federal Reserve reinforced investor sentiments of a steady improvement in the country’s economic outlook as a part of its Federal Open Market Committee (FOMC) meeting. The Fed also eased concerns of a rapid increase in interest rates early next year by committing to “be patient in beginning to normalize the stance of monetary policy.” More good news in the form of better-than-expected employment figures and the highest consumer confidence figures since November 2007 helped shares across sectors jump on Thursday, allowing the market to register its largest two-day gains in more than three years.
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    Why Wal-Mart's Revenue Per Square Feet Will Improve Going Forward
  • By , 12/19/14
  • tags: WMT TGT
  • Wal-Mart ‘s (NYSE:WMT) U.S. revenue per square feet (a measure of store productivity) declined slightly from $437 in 2008 to $424 in 2010, due to a pullback in consumer spending during the economic downturn. The figure ticked up a little to $425 in 2011 and improved further to $435 in 2012, as the macro-economic conditions improved and buyers returned to stores. However, the retailer’s revenue per square feet declined again to $434 in 2013 as increase in payroll taxes weighed on consumer spending, and buyers diverted their spending to long lasting products in the wake of low mortgage rates. Going forward, we expect this figure to improve consistently, driven by Wal-Mart’s aggressive small store expansion, the slow roll-out of Supercenters, an increase in online sales and growth in the grocery business. In addition, growth in U.S. GDP and inflation will have a positive impact on the retailer’s revenue per square feet. However, the consistent decline in foot traffic across the retail industry on account of gradual online shift will continue to weigh on Wal-Mart. We believe that the retailer will lose more from a decline in store traffic, than it will gain from incremental online sales. Overall, we expect Wal-Mart’s revenue per square feet to increase at a compound annual growth rate of close to 2% for the next six-seven years. Our price estimate for Wal-Mart stands at $81, which is just below the current market price.
    SSNLF Logo
    Smartphone Weekly Notes: Apple Pay Alliances, BlackBerry Classic and Samsung's Mobile Payment Plans
  • By , 12/19/14
  • tags: SSNLF AAPL BBRY
  • The mobile industry had an interesting week. Apple (NASDAQ:AAPL) indicated that several more banks would support its mobile payment service, Apple Pay, while BlackBerry (NASDAQ:BBRY)  launched its latest mid-range handset, the BlackBerry Classic. In other news, Samsung (PINK:SSNLF) is reported to be in talks to launch a mobile payment service.
    BLK Logo
    BlackRock Continues To Make The Most Of The ETF Growth Story
  • By , 12/19/14
  • tags: BLK STT
  • The exchange-traded fund (ETF) industry saw one of its largest monthly gains in November, with data compiled by ETF.com showing that U.S.-listed ETFs witnessed $42 billion in net inflows for the month. The strong performance for the extremely popular investment channel helped asset managers rake in more than $192 billion in net new money across their ETF offerings for the eleven-month period this year – comfortably surpassing the $188 billion record figure for full-year 2013. U.S.-listed ETFs are just shy of $2 trillion in total assets – a threshold they are very likely to cross by the end of the year thanks to the record run for the equity market over recent weeks. BlackRock (NYSE:BLK) gained the most over the year, with the financial institution capitalizing on its position as the world’s largest asset manager as well as world’s largest ETF provider to report net inflows of $71.4 billion in the U.S. and almost $90 billion worldwide. Vanguard, which saw an exceptionally strong start to the year (see  Vanguard Trumps BlackRock, State Street To Record Highest ETF Inflows In Q1 ), comes in a close second with $63.5 billion in U.S. inflows and $75 billion in global inflows. This has brought Vanguard within striking distance of  State Street (NYSE:STT) for the position of the second largest U.S.-listed ETF provider.
    ABT Logo
    Abbott's Generic Drug Business Gets A Boost With Veropharm Acquisition
  • By , 12/19/14
  • tags: ABT
  • Global healthcare major  Abbott Laboratories (NYSE:ABT) has completed its acquisition of Russian pharmaceutical company Veropharm for 16.7 billion rubles ($305 million) in an all-cash deal. Veropharm is one of the leading generic drug manufacturers in Russia, and the deal will give Abbott a manufacturing presence in the country. The deal makes sense in light of Abbott’s recent efforts to expand its generic drug business in high-growth emerging markets such as China, India, Latin America and Russia because of sustained sluggishness in developed markets. Per the terms of the deal, Abbott acquired limited liability company Garden Hills, which currently owns 98% of Veropharm. Abbott also assumed Veropharm’s net debt of 4.7 billion rubles ($136 million) as part of the deal. Veropharm is expected to contribute about $150 million to company sales in 2015. This acquisition follows Abbott’s agreement with specialty pharmaceutical company Mylan (NASDAQ:MYL) to divest its developed market generic drug business and its  $2.9 billion acquisition of Chile-based CFR Pharmaceuticals to expand its presence in Latin America. Abbott reshaped its branded generic business this year to focus solely on emerging markets, where it already generates 50% of company wide sales.  We have a price estimate of $42 for Abbott Labs, implying a discount of about 10% to the current market price.
    WAG Logo
    Walgreen's Q1'15 Earnings Preview: Topline Continues To Grow Though Margins Remain Under Pressure
  • By , 12/19/14
  • tags: WAG RAD CVS
  • Walgreen (NYSE:WAG), the largest drugstore chain in the U.S., is set to report its Q1 2015 earnings on December 23th. The company continues to see growth in its daily living business and prescription volumes. It reported the largest quarterly and fiscal year sales increases in three years last quarter. It announced strong sales for  Q1 2015 earlier this month, retaining its topline growth momentum. For Q1 2015, comparable store sales increased 5.8%, while front-end comparable store sales increased 1.5%. Prescriptions filled at comparable stores increased 4.2% and comparable pharmacy sales increased 8.3% in the quarter. While Walgreen’s top line continues to grow, it faces ongoing pressure on gross margins. The company believes that the margin pressure will persist in the short-term. A cautious consumer, ongoing reimbursement pressure, generic drug inflation and significant step-downs from Med D reimbursement rates, are some of the factors that will act as headwinds in fiscal 2015. Nevertheless, Walgreen believes that it is well-positioned to capitalize on the industry tailwinds, which include an aging population,  growth in chronic conditions, the consumerization of healthcare, continuing increases new generics and growing demand for a personalized experience. Our price estimate of $64 for Walgreens is approximately 15% lower than the current price estimate. We will update our valuation after the Q3 2015 earnings release. View our analysis for Walgreens Walgreen Gained Share In The Retail Pharmacy Market In Fiscal 2014 Walgreen claims that its retail pharmacy market share grew 30 basis points to 19%  in fiscal 2014, as it filled a record 856 million prescriptions. It filled 211 million prescriptions in Q4 2014, 4.2% higher compared to the same period last year. According to IMS, Walgreen grew script 60 basis points faster than the retail industry in Q4 2014. The company expects to continue to increase its pharmacy volume and share with high-value customers through growth in Med D, its enterprise specialty business and immunizations. Since 2013, Walgreen claims that its prescription share with Med Part D seniors has grown more than twice as fast as the overall retail prescription share. On an average, Med D seniors fill three time more prescriptions compared to the company’s non-Med D customers. Walgreen is confident of increasing its share further in subsequent quarters, driven by a continued focus on winning high value seniors through preferred relationships with Medicare Part D plans. Walgreen also intends to increase its share in the specialty market by improving and integrating care for patients with complex chronic disease states. As of August 2014 end, it had access to over 100 limited distribution drugs by manufacturers, which the company believes symbolizes the manufacturers desire to work with Walgreen’s unique specialty network of health system pharmacies, its complex therapy pharmacies and fusion pharmacies and its specialty  retail offering. A new report released by  CVS Health (NYSE:CVS) in November 2013 projects that specialty drug spending will more than quadruple by 2020, crossing $400 billion a year. Expanding its presence in the specialty sector will help increase Walgreen’s share in the overall pharmacy market, in our view. Focus On Lowering Internal Costs To Improve Bottom Line Though recent trends have put pressure on margins,  Walgreen’s constant focus on lowering its internal costs, in our view,  will help improve its bottom line in the long run. Though margins continue to grow at the front-end, the company’s pharmacy gross margin remains under pressure from: 1) higher third party reimbursement pressure; 2) increased Medicare Part D in the  business mix; 3) Walgreen’s strategy to continue driving 90-day prescriptions at retail; 4) pronounced generic drug inflation on a subset of generic drugs; and, 5)  the mix of specialty drugs. The company’s gross margins declined from 29.2% in fiscal 2013 to 28.2% in fiscal 2014. Walgreen is focused on driving cost discipline across the company to offset the negative impact on gross margin. Apart from its ongoing store optimization efforts (shutting down the unprofitable stores), it is identifying additional opportunities to lower its expenses. The company expects to achieve $1 billion in cost reductions over three years by incorporating savings at the corporate field and store levels. It has put headquarters and non-labor spending reductions into immediate effect and continues to work toward greater efficiencies in its processes through Walgreens lean Six Sigma. Additionally, positive synergies from new partnerships can help improve the company’s bottom line in the future. (Read More: Walgreen’s Focus On Lowering Internal Costs Will Help Improve Its Bottom Line ) View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    T Logo
    U.S. Wireless Carriers Weekly Review: AT&T, Verizon, Sprint
  • By , 12/19/14
  • tags: S VZ
  • The ongoing price wars have started troubling U.S. wireless players  AT&T (NYSE:T) and  Verizon (NYSE:VZ). This was evident from AT&T’s announcement last week that it was expecting higher postpaid churn in the fourth quarter. Verizon also indicated that its Q4 margins were likely to come under pressure due to the ongoing promotions, though it was experiencing strong momentum in subscriber adds. This is likely due to the race-to-the-bottom pricing strategies adopted by Sprint (NYSE:S) with its most recent ”Cut Your Bill in Half” event.  Below we discuss the noteworthy events pertaining to the top U.S. carriers from the last two weeks.
    ETFC Logo
    Weekly Brokerage Notes: Client Assets Rise For E*Trade, Ameritrade And Charles Schwab
  • By , 12/19/14
  • 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 November this week. After a surge in trading activity in October, the brokerages reported a slight sequential decline in trading volumes. However, trading volumes were still higher than the comparable prior year period. November was also a positive month for all three in terms of growth in their client assets. The stocks of Schwab and E*Trade rose by 4-6% during in the week, while the market price of Ameritrade’s stock fluctuated between $34 and $36 over the week. Here’s a quick roundup on the individual metrics and November performance for the brokerage firms.
    ICE Logo
    Weekly Global Exchange Notes: November Trade Volumes In Focus
  • By , 12/19/14
  • tags: CME NDAQ
  • Global exchange operators CME Group (NASDAQ:CME), NASDAQ OMX Group (NASDAQ:NDAQ) and IntercontinentalExchange Group (NYSE:ICE) reported their monthly volume reports for November, with high trading volumes witnessed across cash equities and derivatives trading in the U.S. After a record month for CME in October, trading activity subsided a bit in November. However, reported trading volumes stayed higher than the prior year levels. Similarly, the number of futures and options traded on NASDAQ OMX’s American and European platforms also witnessed growth, albeit lower than October levels. IntercontinentalExchange Group witnessed a sustained period of high trading volumes from September through November. Here’s a quick roundup of the individual metrics and November performances for the exchange operators.
    Harley-Davidson: More Tech, Less Roar
  • By , 12/19/14
  • tags: SPY HOG
  • Submitted by Wall St. Daily as part of our contributors program Harley-Davidson: More Tech, Less Roar By Marty Biancuzzo, Chief Technology Analyst   While watching CNBC’s Squawk Box show last week, I heard Jim Cramer make the following comment: “You know… this may be more of a technology company than we think. It reads like a fantastic semiconductor company.” The company he was referring to? None other than Milwaukee’s motorcycle stalwart, Harley-Davidson ( HOG ). Now, I’ve heard Harley-Davidson get called many things in my day… but a tech company? Not so much. Is Cramer as mad as his Mad Money show? Or is there some truth to his claim? Let’s see… Harley-Davidson Embraces Its Tech Side As we’ve noted here many times before, the “ connected car ” trend is gaining some serious momentum, as in-car technology advances quickly. From augmented reality, to infotainment systems, to driverless cars from the likes of Google ( GOOGL ) and Volvo ( VOLVY ), there’s no doubt that the auto industry is getting increasingly high tech. Tesla ( TSLA ) is getting in on the act, too, with a driverless “autopilot” feature revealed in its Model D car. But the conversation on automotive technology has always excluded motorcycles. That is, until Harley-Davidson launched a few projects it’s been working on . . . Project LiveWire With the introduction of Project LiveWire, Harley officially broke away from two century-old traditions at the company. For starters, it’s the company’s first fully electric motorbike, with the company swapping its signature V-Twin engine for an electric motor. The 460-pound bike boasts 74 horsepower and can race from zero to 60 mph in under four seconds. Second, it’s the first time that Harley has seriously looked to its customer base for feedback. Keep in mind, Harley was one of only two American motorcycle manufacturers to survive the Great Depression. With such longevity and success, company executives have applied the motto, “We know what we’re doing,” and haven’t looked for outside help. But the crippling recession a few years ago changed all that, and was reflected when Harley shares plummeted from $73.77 to $10.10 by February 1, 2009. So Harley started listening more. And to help the company refocus, expand, and put itself in a better position to survive economic turmoil, CEO Keith Wandell decided to make a few innovative changes. LiveWire is one of them. There are a few drawbacks, though… First, the bike only has one gear. That means LiveWire tops out at 92 mph. The second potential downside is noise. Or lack of noise, I should say… While LiveWire roars like a lion at top speed, it sounds more like a lamb when the electric engine initially cranks up. Now, even if you have just cursory knowledge of Harley’s customers, you’ll be able to guess that they’re typically men who buy the bikes precisely because they want to hear the loud roar of the V-Twin engine. So needless to say, this new, “environmentally friendly” approach could be a major turnoff. That’s why the company isn’t selling LiveWire just yet. Instead, it’s taking the bike for a test-drive, soliciting customer feedback every mile of the way. Regardless, Harley isn’t quite heading in the “Flower Power” direction of Volkswagen. Nor is it pushing any type of “Go Green” agenda. In fact, the company’s game plan isn’t even centered on its environmental footprint at all. Instead, it hopes this project will attract a younger generation of bikers in hopes of increasing profits. Project Rushmore Cramer’s comment about Harley’s “tech” status came on the back of the company’s third-quarter results, which showed a 6.8% sales rise, a 16.9% jump in net income, and a 20.1% rise in diluted EPS, compared to Q3 2013. Harley achieved those numbers as U.S. bike sales grew by 3.4% and global sales rose by 3.8% over the past nine months. It also came on the heels of Harley’s “Project Rushmore” campaign, where the company significantly diversified its lineup and made several “semiconductor-esque” upgrades to eight of its 2014 models. For example, the vehicles were given a new camshaft, essentially letting Harley boost low-rpm torque by about 5%. This increased power produces 60 to 80 mph in fifth gear and helps when carrying more weight – for instance, when there’s an extra passenger on board. The upgrades also include a new high-flow airbox that provides more legroom and improved airflow around the driver. But perhaps the most significant upgrade of Project Rushmore is Harley’s new Twin Cam 103 – its “liquid-cooled” V-Twin engine. Why? Because the engine’s liquid coolant not only offers a 10:1 compression ratio, which produces nearly 11% more peak torque than a standard Twin Cam 103, it also gives the rider dramatically improved thermal comfort, especially in situations like stop-and-go traffic on brutally hot days. When you add linked anti-lock braking system (ABS) brakes, a larger, more rigid fork, brand-new “DayMaker” LED headlamps, and a text-to-speech infotainment system, fully equipped with voice-recognition software, satellite radio, and Bluetooth connectivity, you start to see that perhaps mad, old Jim Cramer might have a point. Your eyes in the Pipeline, Marty Biancuzzo The post Harley-Davidson: More Tech, Less Roar appeared first on Wall Street Daily . By Marty Biancuzzo
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