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Apple released a strong set of earnings on Monday, beating market expectations on revenues and earnings. The results were largely driven by strong shipments of the latest iPhone models, higher Mac sales and better revenues from the App Store. Additionally, Apple Pay - the company's new payments service - went live on Monday. In our earnings article we discuss these earnings and our outlook going forward.

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RadioShack's recent debt restructuring deal will give the company more runway for a turnaround. It has been plagued by declining sales and compressed gross margins of late. While we expect the company's gross margins to bounce back slightly, there could be a significant upside to our price estimate if it is able to stabilize sales and cut costs, thereby expanding margins further.

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The “Walking Dead” CEOs
  • By , 10/22/14
  • tags: LGF KO
  • Submitted by Wall St. Daily as part of our contributors program The “Walking Dead” CEOs By Robert Williams, Founder   With blood, guts, and even a few red meat explosions, Season Five of AMC’s smash hit series, The Walking Dead, hit the airwaves last week. As it turns out, interest in the coming zombie apocalypse is only getting hotter, as the debut episode set cable television records, pulling 17.3 million viewers. So in the spirit of The Walking Dead, I compiled a list of five big shots on Wall Street who are far beyond saving. Epic failures have left each without a heartbeat, and their fall from grace won’t be pretty. A word of caution, though . . . this list may shock you. 1. Jon Feltheimer, CEO, Lions Gate Entertainment Corp. ( LGF ) Lions Gate has been an entertainment industry darling since 2012, when it released the first installment of The Hunger Games trilogy and also acquired Summit Entertainment, the company with rights to the Twilight series. In fact, from 2012 until October 2013, shares skyrocketed almost 350% higher. Since then, though, Jon Feltheimer’s group has struggled to live up to its own success. The second installment of The Hunger Games trilogy : Catching Fire, failed to move share prices, and the latest installment of a once-profitable franchise, The Expendables 3, bombed at the box office. With no new films to speak of, Lions Gate is relying on the final chapter of The Hunger Games to stop its current slide (shares are down 20% from their peak). Top it all off with a lawsuit from Boardwalk Empire actress Paz de la Huerta, and it looks like Feltheimer’s days are numbered. 2. Michael Corbat, CEO, Citigroup Inc. ( C ) If you thought the situation was grim for Walking Dead’s post-apocalypse survivors, then you haven’t seen Citigroup lately. Consider this: The United States’ third-largest bank, which actually makes a majority of its income from foreign markets, is pulling its business out of a whopping 11 different countries. CEO Michael Corbat calls it a strategy to “simplify the firm’s international division,” according to Industry Leaders Magazine, but the reality is that Citigroup has far too many unprofitable ventures in up-and-coming markets. Additionally, Co-President Manuel Medina-Mora – who many saw as the future CEO – is being forced out by the board after extensive fraud was uncovered in his Mexico unit. That’s bad news for Corbat, who could be next on the chopping block. 3. Muhtar Kent, CEO, Coca-Cola Company ( KO ) As America slowly, reluctantly faces its obesity epidemic, Coca-Cola has been faced with a daunting task: Continue selling soda to people who don’t want to be fat anymore. As John Sicher, Publisher of Beverage Digest, put it, “Carbonated beverages are in precipitous decline. The obesity and health headwinds are difficult and getting stronger.” In response, Coke has made a few interesting (read: desperate) moves. First, the company announced its collaboration with Keurig Green Mountain ( GMCR ) to put Honest Tea products in K-Cup packs. While tea may indeed be a more sustainable beverage than soft drinks, it’s hard to imagine it replacing Coca-Cola. Next, Coke decided to resurrect Surge, a brand that lasted just six years after its initial launch, and sell it exclusively on Amazon. Coke claims that it brought Surge back “in part” due to “a passionate and persistent community of brand loyalists,” but that sure sounds like a last-ditch cash grab to me. If it doesn’t work, CEO Muhtar Kent is as good as dead. 4. John Paulson, Founder, Paulson & Co. John Paulson is known as one of the most aggressive hedge fund managers in America, and it’s made him a billionaire. But this time, it looks like Paulson’s aggression is coming back to haunt him. His hedge fund, Paulson & Co., placed a huge bet on a tax inversion strategy and bought nearly 28 million shares (just under 5%) of Irish biotech company, Shire ( SHPG ). Unfortunately for Paulson, the company planning to acquire Shire has now reconsidered its bid because of new tax regulations that make the deal – and the tax inversion – less attractive. The news sent Shire plunging, with shares losing 23% on the London Stock Exchange on Wednesday. To put that into perspective, Business Insider reports that Paulson suffered $782.8 million in paper losses in just one day when the news broke. That’s a gruesome figure, and it could prove to be the end of Paulson. 5. Jonathan L. Steinberg, CEO, WisdomTree Investments ( WETF ) WisdomTree has built its business as an ETF sponsor and index developer, and share prices are up 163% since the firm launched its first ETF in 2006 – but that doesn’t tell the whole story. You see, WETF shares peaked last December and have been on a brutal slide since then, losing 40% of their value in 10 short months. Part of the problem is that ETFs charge relatively high fees, while many holdings are based on the size of the companies as opposed to their quality. On top of that, new investment vehicles like Acorns and Motif Investing are changing the way people think about retail investing. Motif allows user to essentially build their own index for one small fee, thus cutting out the ETF middle man. It’s a game-changing technology that could end up being the kill shot to ETF providers like WisdomTree and its CEO, Jonathan Steinberg. Onward and Upward, Robert Williams The post The “Walking Dead” CEOs appeared first on Wall Street Daily . By Robert Williams
    Expected 10-Year Returns for Major World Markets
  • By , 10/22/14
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program Expected 10-Year Returns for Major World Markets by  Charles Lewis Sizemore, CFA Research Affiliates, the research firm led by “smart beta” pioneer Rob Arnott, recently created a great  research tool that enables you to choose any eight world markets and compare their valuations.  Research Affiliates then takes it a step further by forecasting the expected return over the next 10 years based on those valuations.  For those who like to delve into the nitty-gritty details, the forecasting methodology is explained here .   Estimates are exactly that: estimates.  Real-world results will almost certainly look a lot different than these estimates suggest, but this gives us a nice “quick and dirty” way to gauge how attractively priced a given country is. As you might suspect, after the run we’ve had since early 2009, the U.S. is priced to deliver pretty disappointing returns over the next decade.  But much of the rest of the world is looking pretty attractive. (Incidentally, Meb Faber’s Idea Farm alerted me to this. If you don’t already subscribe to Idea Farm, I highly recommend you do.  It’s a never-ending stream of fantastic resources like these.) As an example, I chose the following eight markets: the developed markets of the United States, Australia, Spain, the United Kingdom and the emerging markets Brazil, China, India and Russia: Don’t be intimidated by graphics in the bottom-most graph.  Essentially, this graph compares today’s valuation (“CAPE” or “Shiller P/E”) to the historical norm by country.  The blue dot is today’s valuation and the yellow box is what you might consider a “normal” range. Certain countries–such as India–would appear expensive at first glance but are actually still below their long-term averages.  Others–such as Spain, Brazil, China, and Russia–are below their “normal” ranges and would thus appear to be absolute bargains with expected annual returns after inflation of 6.5% to 13.8%. The one outlier here is, of course, the United States.  You’ll notice that the blue dot is well above the yellow box that indicates a normal valuation range.   Because of this high starting point, Research Affiliates expects inflation-adjusted returns of less than 1% per year over the next decade, which is actually less than the current dividend yield.  In other words, don’t expect much in the way of capital appreciation from an S&P 500 index fund. And what about the cheap markets of Spain, Brazil, China and Russia? All are cheap for a reason, of course.  Spain is still suffering from the fallout of the Eurozone sovereign debt crisis, Russia is the target of Western sanctions and is getting battered by falling crude oil prices, Brazil is suffering from low growth and a lack of competitiveness, and China is sitting on a demographic timebomb from its aging population.  Yet these are precisely the times that should excite a value investor.  Valuations are cheap and expectations are low. Is there short-term risk in any of these “problem” markets?  Obviously yes.  But an intrepid contrarian should use any short-term dips as a buying opportunity for what I expect to be a fantastic decade in non-U.S. equities. Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. This article first appeared on Sizemore Insights as Expected 10-Year Returns for Major World Markets
    Former Wall Street Tech Favorite Set for a Comeback
  • By , 10/22/14
  • tags: MSFT AAPL
  • Submitted by Profit Confidential as part of our   contributors program Former Wall Street Tech Favorite Set for a Comeback The financial media and analysts are talking endlessly about the state and fragility of the stock market and whether a bottom may be near. I discussed the vulnerability to the downside in my last article. If you missed it, you may want to go back and read what I said. (See “ Strategies to Protect Your Capital While Investing in This Market .”) While stocks appear to be heading to negative ground in 2014, I view continued weakness as a buying opportunity to accumulate some stocks at a discount. For the majority of you, I would advise staying away from the higher-beta small-cap and momentum stocks at this time and wait for things to settle down. In other words, I want to see some sustained buying support emerge to show some evidence the downside selling is coming to an end. In the meantime, take a look at some of the bigger S&P 500 and DOW stocks that have moved lower to much more attractive entry points. In the technology area, I like what’s happening at former Wall Street darling  Microsoft Corporation (NASDAQ/MSFT) under the stewardship of CEO Satya Nadella. While Nadella recently said some disparaging remarks on females in the workforce, what he has done at Microsoft since taking over from former CEO Steve Ballmer has been encouraging. The rise in the stock price in Microsoft has even allowed Ballmer to pay an obscene $2.0-billon-plus for the LA Clippers. Ballmer’s failure to recognize and fully understand the big impact the mobile sector has on the technology space helped to make Microsoft insignificant for years. Chart courtesy of Nadella has shifted his focus to make Microsoft a much more relevant company for the technological age we are in. While the company is known for its “Windows” platform, Microsoft is looking to develop solutions for the mobile space. The personal computer (PC) is not dead yet, but Microsoft has shifted its focus to smartphones, tablets, and its increasingly popular “XBox One” entertainment gaming console. Microsoft also operates the “Skype” call and text solution that is excellent but probably somewhat underappreciated by the stock market. Finally, the company is also developing applications that can be used on the massively popular Apple Inc. (NADSAQ/AAPL) “iPad”—clearly a smart and strategic move by Nadella to ride the coattails of Apple. Now, this is not to say that Microsoft is the next big thing; however, in my view, the company does offer investors a less risky buy in the technology space. The bottom line is that Microsoft is an excellent play in technology and is worth a look on the current market weakness.     The post Former Wall Street Tech Favorite Set for a Comeback appeared first on Stock Market Advice | Investment Newsletters – Profit Confidential .
    Running a Financial Advisory Practice in the Age of the Robo-Advisor
  • By , 10/22/14
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program Running a Financial Advisory Practice in the Age of the Robo-Advisor by  Charles Lewis Sizemore, CFA Here’s a novel idea: Advisors might actually need to earn their advisory fees in the years ahead.  With the arrival of online financial planning sites like and robo-advisors like Covestor, which allow an investor to mimic the trades of a portfolio manager, a real in-the-flesh advisor has to offer something more than generic, packaged advice if they are to convince a skeptical investing public to pay them. While this might feel threatening to some advisors, it shouldn’t. Yes, the rise of the robos commoditizes entry-level financial planning.  But it also allows advisors to scale their practices and to focus their energies on higher-valued services.  Used correctly, robo-platforms can be also used alongside social media and traditional news media as a powerful marketing tool. The Flattening of an Industry The internet has flattened industry after industry over the past twenty years as technology has eliminated traditional gatekeepers.  First, Napster and its successors destroyed the economics of the music business, leaving Apple and iTunes to pick up the pieces with an entirely new business model. Then disrupted the business of bookselling twice—first by cutting out the traditional brick-and-mortar book store with home delivery and second by eliminating the paper book altogether via the Kindle. Netflix is in the process of revolutionizing TV and movie distribution. Today, the financial services industry is undergoing a revolution of its own.  Discount online brokerage houses continue to replace traditional full-service brokerage houses, and the wide availability of free or inexpensive high-quality investment research has made brokerage research—ostensibly what you are paying for from a full-service brokerage house—far less valuable. The decline of the traditional broker-dealer transaction-based model has led to the rise of the RIA advisory-based model.  And now, even this model is being transformed by automated “bots” that handle basic planning and portfolio management. Building a Robo-Proof Practice Rather than fight the rise of the machines, I embrace it.  I run several of my investment models on the Covestor platform and make my trades and performance available for the world to see.  Some might say that I’m giving away the secret sauce—and indeed, an investor could essentially piggyback on my trades for free or with only a very minimal investment. Guess what?  I’m counting on it. The most important elements in building a client-advisor relationship are trust and credibility.  By posting my portfolios online—and by posting regular commentary on my blog and via social media—I help to establish both while building name recognition.  A potential client can get to know me by reading my work and by following my models with only a modest portion of their portfolio.  They can follow me anonymously, which is an attractive selling point to a generation of investors that has grown desensitized to sales pitches, marketing letters and cold calls.  When you produce quality content, the readers find you ; you don’t have to pound the pavement looking for them . The internet has spawned the “freemium” model in which a consumer gets to try a basic, scaled-down version of a product in the hopes that they will upgrade to a higher-end paid version.  It may seem discouraging to an advisor to give so much of their intellectual capital away for free in the hopes that a follower might pick up the phone and call. But if you provide value, the clients will follow.  It’s a long game that requires consistency and commitment.  But it works. There are other practical reasons to embrace a robo platform.   Sometimes, it is impractical to take on smaller clients, no matter how much you might want to.  Each additional client involves fiduciary responsibility and a sea of compliance paperwork.  If time is money, taking on smaller clients can actually be a money-losing proposition.  This is an area where robo-advisors are a godsend.  If a prospect with a modest account size comes to me for help, I can refer them to one of my Covestor models rather than turning them away.  They get substantially the same portfolio management, and I avoid the time-consuming back-office headaches. Going Upscale Finally, I want to highlight a major opportunity that robo-advisors offer to in-the-flesh advisors.  By effectively outsourcing much of the compliance and back office responsibility, it allows the advisor to leverage their time and focus on the higher-valued-added aspects of building a wealth management practice.  Every minute not spent in dealing with new account paperwork and routine trading is a minute you can spend being more responsive to your clients, whether that means meeting them face to face or simply looking for better investment opportunities on their behalf. This article first appeared in Investment News. Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. This article first appeared on Sizemore Insights as Running a Financial Advisory Practice in the Age of the Robo-Advisor
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    Roche's Cancer Drug Sales Continue To Grow, May Face Competition In Medium Term
  • By , 10/21/14
  • tags: RHHBY PFE MRK
  • Swiss pharmaceutical giant Roche Holdings (NASDAQ:RHHBY) released its Q3 2014 earnings and nine month year-to-date results last week, and they were not bad. The company’s pharmaceutical sales grew by 4% on constant exchange rate basis led again by its HER2 franchise, comprising key cancer drugs. It was the strengthening of Swiss Franc against the U.S. dollar and Japanese Yen that was a dampener, and resulted in overall net sales remaining flat. On diagnostics side, the company reported 6% growth on constant currency basis which was again mitigated by the strengthening of Swiss Franc. What do we make of this? It is clear that Roche is still dominant globally when it comes to cancer drugs. Despite the fact that this segment brings in more than $26 billion in annual revenues for Roche, the company still managed to grow it by a moderate rate (constant exchange rate basis). However, the threat from biosimilars may become real by 2016 as Roche itself acknowledges, and the efforts from other pharmaceutical firms such as Merck, Bristol-Myers Squibb and AstraZeneca suggest that the competition in the oncology industry can intensify in the near future. Our current price estimate for Roche stands at $38.54, implying a slight premium to the market price.
    SAP Logo
    SAP Lowers FY14 Profit Guidance On Faster Cloud Expansion
  • By , 10/21/14
  • tags: SAP IBM ORCL
  • Shares of SAP SE (NYSE:SAP) trended lower after the company reported lower than estimated profit in Q3FY14, with shares declining about 5% on Monday, October 20. Q3’14 revenues stood at €4,256 million, marginally higher than consensus estimates of €4,246 million. However, non-IFRS operating profit for the quarter was slightly lower than estimated, at €1,355 million against consensus estimates of €1,360 million. SAP cut its operating profit forecast range for full fiscal year 2014 by about €200 million to €5.6 - €6 billion to accommodate the higher cost structure of its accelerating cloud business. However, the company believes it can meet its operating profit margin (non-IFRS) target of 35% by 2017. Additionally, SAP also increased its cloud revenue run-rate from €1 - €1.05 billion to €1.04 - €1.07 billion for full fiscal year 2014. We have a  $96 Trefis price estimate for SAP and are in the process of incorporating the latest Q3FY14 earnings. See Our Complete Analysis For SAP SE Recap of Q3’14 Results Total cloud revenues increased 39% to €334 million this quarter, supported by a strong increase in cloud subscriptions and support services. Customers continued to move from traditional on-premise applications into software-as-a-service modules. This resulted in a decline in year-on-year sales for on-premise software licenses. New license sales stood at €952 million in Q3’14 compared to €977 million from a similar period a year ago. Cloud subscriptions now account for 22.6% of new software deployments for SAP. Comparatively, the contribution from cloud in a year-prior period was 16.8%. In addition to the rapidly expanding base in cloud subscriptions, software support remains an integral driver of sales for SAP. Software support sales account for nearly 56% of total revenues for SAP, and have grown 8% year on year to €2,371 million in Q3FY14. This robust growth in support revenues, along with strong cloud growth, has masked weaknesses in new on-premise software license sales and professional service sales for multiple quarters. Gross margins and operating profit margins declined in Q3FY14 primarily due to higher costs relating to its cloud product portfolio. Costs associated with software and software-related services increased 14% year on year on a non-IFRS basis to €618 million. Similarly, costs associated with SAP’s cloud business expanded 97% year-on-year, and were the main source of the depressed operating profit performance for the quarter. The accelerated shift to cloud also resulted in higher sales and marketing expenses, which were 6% higher on a year-on-year basis at €994 million in Q3FY14. Cloud Sales Accelerate at Expense of Margins For the nine months into fiscal year 2014, SAP has been able to grow its total cloud and cloud-related professional service revenues to €894 million, up 33% from the January – September period in FY13. Cloud billings on a non-IFRS basis rapidly accelerated from the start of the year, increasing 23%, 41% and 51% on a year-on-year basis in Q1FY14, Q2FY14 and Q3FY14, respectively. Cloud billings include recognized revenues and the difference in deferred revenue reserves over a particular period that are yet to be recognized. The growth in cloud subscriptions has also induced growth into SAP’s flagship in-memory database platform, HANA. The company states that it has more than 1,450 customers for its BusinessObjects Suite on HANA compared to 450 a year ago. To further expand the reach of HANA, SAP forged partnerships with IBM and HP to deploy its software applications running on HANA on HP’s and IBM’s infrastructure-as-a-service platforms. In addition to providing customers with varied deployment options, the hosted cloud model could ease margin pressure on SAP as it doesn’t own these data centers. In the near term, we believe margins are likely to remain under pressure due to its investments into sales and marketing and other costs to increase its cloud footprint. However, longer term margins will benefit from a rapidly expanding revenue base and the ratable revenue recognition model for cloud subscriptions. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    TI Reports A Strong Q3'14 & Believes Its Business Remains Healthy
  • By , 10/21/14
  • Defying the general view that chip demand might slow down into the year end and early next year, Texas Instruments (NASDAQ:TXN) reported a strong Q3 2014 and believes that its business remains healthy. Microchips’s revenue miss earlier this month triggered a sell-off of most chip stocks in the belief that the next industry correction had begun. At $3.5 billion, TI’s Q3 2014 revenue grew 8% annually and was in the upper half of company’s guided range. Growth in the quarter was driven by strong performance in TI’s core businesses of analog and embedded processing. Combined revenue of the two segments grew 10% from a year ago. In terms of end markets, TI saw growth in communications equipment, industrial, automotive as well as the enterprise market. Earnings per share of $0.76 was at the top of TI’s guided range and beat the Thomson Reuters consensus estimate of $0.71, by $0.05. TI’s orders in the quarter were $3.34 billion, up 6% from a year ago and its book-to-bill ratio was 0.95. The company claims that the ratios would have been higher except for the effect of the conversion to consignment of some products sold at distribution. TI’s strategy is centered around analog ICs and embedded processing and is bolstered by an efficient manufacturing operation and a broad sales channel. The company is growing its 300 millimeter output and continues to follow the strategy of purchasing assets ahead of demand at the stressed prices. It estimates its sales force team to be three to four times larger than its nearest competitors. Possessing scale others lack, it is beginning to get a lot more revenue per sales person which gives it the ability to grow revenue without having to grow operating expenses as fast as revenues. Our price estimate of $42 for TI is at a marginal discount to the current market price. We are in the process of updating our model for the Q3 2014 earnings. See our complete analysis of Texas Instruments here Analog & Embedded Divisions To Drive Growth After its planned exit from the smartphone and tablet market in September 2012, TI has transitioned its operations to become a pure analog and embedded processing company, segments that it believes will offer long term growth and less volatility, compared to the past. The company derived 82% of its revenue from these segments in Q3 2014 compared to approximately 72% in the quarter ended September 2012. TI’s analog revenue grew 11% annually led by power management, high volume analog and logic, high performance analog and silicon valley analog. (The last categoy refers products and assets acquired with National Semiconductor.)  The company accounts for 18% of the analog market and it expects to gain additional market share in 2014. Since 2006, TI has increased its R&D investments in the sector by 77%, resulting in steady increases in market share over the years. The embedded processing division reported its eighth quarter of consecutive year-on-year growth as TI’s investments over the past few years in strategic areas yield favorable results. In Q3 2014, embedded revenue grew 6% annually, driven by growth in processors, connectivity and micro-controllers. With increased investments over the past few years and new product launches, TI continues to expand its embedded portfolio every quarter. TI’s plan to reduce investment in certain embedded processing product lines, that either have matured or do not offer the return opportunities it is looking for, has resulted in higher margin from this business segment. The company has clarified that is does not plan to exit any market or discontinue any existing embedded products, but is simply realigning its resources to better cater to market opportunities. Gross Margin Hit New Record In Q3’14 Having seen its gross margin decline from 53.6% in 2010 to 49.7% in 2012, on account of lower revenue increased capacity, under-utilization charges and the acquisition of its large analog competitor, National Semiconductor, TI has marked a continuous improvement in gross margin since 2013. At 58.4%, gross margin hit another new record, increasing 1.2% sequentially and 3.5% annually, driven by higher revenue and an improved product portfolio focused on analog and embedded processing. The analog and embedded processing products are more profitable and less capital intensive compared to wireless products. Thus, the company benefits by deriving a larger portion of its revenue from these two divisions. In addition to a favorable revenue mix and improved manufacturing efficiency, the gross margin will also benefit from lower depreciation in the future. At present, depreciation is ahead of TI’s capital expenditures. The company expects its capital expenditure to remain at low levels (4% of revenue) for the next few years. As depreciation starts to work itself down over the next couple of years, it will boost gross margins. Q4 2014 Outlook - Revenue in the range of $3.13 billion to $3.39 billion, an 8% annual increase at the mid-point of the guided range. - Earnings per share in the range of $0.64 to $0.74. - Effective tax rate of 28%. 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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    Comcast's Q3 Earnings Preview: Pay-TV Subscriber Trends And NBCUniversal In Focus
  • By , 10/21/14
  • Comcast (NASDAQ:CMCSA) will report its Q3 2014 earnings on October 23. While we expect steady growth in the broadband business, we are eager to see how pay-TV subscriber additions trended in the quarter. The company lost 144,000 subscribers in the previous quarter, marking its best Q2 for this metric in the past six years. Triple play bundling has helped Comcast gain more subscribers in the past few quarters. The company’s media arm, NBCUniversal (NBCU) has been an important growth driver for the company in the recent past. We believe that NBCU is likely to benefit from the continued success of its cable as well as broadcasting network, and the theme parks. We will be looking for an update on the recent nod to develop a theme park resort in Beijing.
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    Microsoft Earnings Preview: Focus on Hardware And Cloud Sales
  • By , 10/21/14
  • Microsoft (NASDAQ:MSFT) is set to announce its Q1 FY 2015  earnings on Thursday, October 23. (Fiscal years end with June.)   Microsoft is undergoing change in its business as it focuses less on the aging operating systems business, which is dependent on the sale of personal computers, and more on the cloud business that comprises a developing ecosystem of devices and value added services. The aim is to assure that Microsoft’s businesses accommodate the major changes underway in computing, including Big Data and the Cloud.   For this quarter, we continue to monitor its hardware and cloud service, and expect it to report growth in both these verticals. Additionally, we will continue to closely monitor its revenue growth from mobile devices and operating systems division. See our complete analysis of Microsoft here Focus On Hardware Sales Microsoft is increasingly pursuing its devices and services strategy to reduce its reliance on PCs and expand its footprint into the mobile hardware domain. At the end of June, it launched Surface Pro 3 to boost its ecosystem and cater to the high end of the tablet market. Furthermore, it recently announced launch of upgrades to its existing line of Nokia’s Lumia phones. In this earnings announcement, we will closely monitor Microsoft’s unit sales and revenue numbers for its devices and consumer hardware segment. This would give us a fair indication of how these devices have fared and whether its devices are gaining traction among users. Cloud Products To Drive Revenue Growth At Office Division Microsoft is steadily making progress in the cloud domain. Its Office 365 offering continues to bolster revenues for Windows Office division, which makes up 40% of our estimated value. On the other hand, the strong adoption of cloud based Azure platform continues to drive growth at the server division, which makes up 24% of our estimated value for Microsoft. In the previous quarter, the company reported 147% growth in its cloud revenues, which includes both Office 365 and Azure sales. The company continues to support the adoption of its cloud services through a host of initiatives such as free Office 365 for  iPad . We believe that these steps will augur well for the company and help it in maintaining its market share in the future. In Q4 2014, Microsoft reported that Office 365 had over 5.6 million subscribers and that revenue from this cloud offering in the quarter more than doubled year over year. As subscription model for office sets in, revenues for this division are expected to become more recurring and predictable going forward. Currently, we estimate that the company has close to 93% share in productivity software market. In the upcoming earnings announcement, we expect Microsoft to report increase in subscribers and revenue run rate for Office 365 as its clients adopt the feature-rich, cloud-based Office software. We anticipate that Office 365 will clock in over $1.7 billion annual revenue run rate as its clients adopt the feature-rich, cloud-based Office software. Focus On Cloud Services To Bolster Server Division Microsoft’s Windows server division is the second largest business unit, making up over 24% of its total value. Its flagship Azure platform continues to gain traction even as the company continues to form partnerships with companies such as Salesforce to boost its portfolio of services. We believe that the Azure platform will be a key growth driver for Microsoft going forward as companies around the world are looking to lower costs by adopting cloud based services. Additionally, many Microsoft customers depend on SQL servers for mission critical and business intelligence needs, specifically in the big data analytics domain. The company can leverage the popularity of its SQL server and Azure platform to sell the recently launched Business Intelligence tool. We expect the server division revenues to fillip due to bundling of these services and the company to report good growth in revenues in this quarter as well. PC Sales To Affect Windows OS Sales Windows Operating System (OS) is Microsoft’s third largest division and makes up around 10% of its stock value by our estimates. Recently, this division has reported growth in revenues, primarily due to Microsoft’s termination of support for Windows XP, which is forcing laggards to upgrade from this popular OS. While the severity of PC shipment sales eased off in Q3 2014, we expect new PC shipments, together with the existing installed base of Windows PCs, should help Microsoft post growth in license sales during the quarter. In this earnings announcement, we will continue to pay close attention to the numbers of licenses of Windows sold in both desktop and mobile verticals. We also expect to get an update on Microsoft’s next OS, Windows 10, which it recently released for technical preview as an early beta. Bing Revenues In Focus The Online Services Division has negatively impacted Microsoft’s overall profitability as it continues to post operating losses. However, due to rise in Bing’s penetration, the division’s revenues have increased by 40% year-over-year in Q4. Furthermore, its market share in the search market industry in the U.S. has increased by 1.4 percentage points in September 2013 to 19.4%.. We expect this trend to positively impact revenues, and the company to report growth in revenues and profitability from Bing in this earnings announcement. We have  $44.26 price estimate for Microsoft, which is inline with 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  
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    Constant Contact To Retain Its Growth Momentum In Q3 2014
  • By , 10/21/14
  • tags: CTCT
  • Constant Contact (NASDAQ:CTCT), the digital marketing service provider for SMEs (Small and Medium Enterprises), will release its Q3 2014 earnings on October 23rd. In the first half of fiscal 2014, the company experienced 16% growth in revenue ($160 million) compared with the same period last year, driven by an expanding customer base and increasing average revenue per user (ARPU). With a customer base of 615,000 in the first half of FY 2014, the company has added nearly 10,000 gross new unique customers every quarter in 2014. The ARPU grew by 8% in the first half of 2014, as against 4% growth in the same period in 2013. The reasons behind such growth is the introduction of the Toolkit Platform and the improvement and expansion of its existing services. Our price estimate of Constant Contact at $30.45 is at an approximate 10% premium to the current market price. We will update our valuation after the Q3 2014 earnings release. See our complete coverage of Constant Contact Toolkit’s Introduction And Success Of Existing Offerings Drive Customer Addition and ARPU A major reason for Constant Contact’s strong performance in 2014 was the introduction of Toolkit in Q1 2014. Toolkit helps to expand the campaign reach for SMEs beyond emails to mobile devices, social media, and the web, in the form of an integrated marketing suite. It comes with 3 levels of service and functionality tiered with three different price options. Hence, with Toolkit’s introduction, Constant Contact has broadened its scope of service offering beyond email marketing, and consequently attracted more customers and driven up the ARPU. Q2 2014 ARPU was $44.40 as against Q2 2013 figure of $41.06. The company plans to migrate its existing customer base into this platform gradually and the initial tests to this end have begun in Q3 2014. The other offerings by Constant Contact are also growing. SinglePlatform, its digital listing service, was chosen by Facebook as the platform to display menus, specials and other information for restaurants in the US and Canada. Hence, millions of Facebook users in the US and Canada will access SinglePlatform in seeking the pages of restaurants in which they have an interest. Also, SinglePlatform gained 11 enterprise deals, each with above 100 locations in the second quarter. In its Q1 2014 earnings call, the management claimed that each of these initiatives will provide the business with over $100 million growth opportunities in the future. Healthy Margin Forecasts Point Towards Better Days To Come Constant Contact reported EBITDA margin of 15% in Q2 2014. For Q3 2014, the company expects revenue in the range of $83.4 million to $83.7 million, with an adjusted EBITDA margin between 21% to 21.5%. In Q2 2014, the sales and marketing expense (which accounts for about 40% of revenue) is expected to have reached its peak in absolute terms. It was primarily spending on helping customers in the adoption of its new product offerings, particularly the Toolkit platform. The company’s monthly user retention rate is 98% in the second quarter with 10,000 new customers being added to its subscriber base every quarter since Q1 2013. This proves the increasing demand and stickiness for Constant Contact’s offerings. Thus, lower spending coupled with the fact that new product and services are strongly received, Constant Contact is set for an even better performance in Q3, than the first two quarters of 2014 . View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research  
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    Unilever Earnings Preview: Home And Personal Care Products Should Mask Weakness In Foods' Portfolio
  • By , 10/21/14
  • tags: UL PG CL
  • Unilever (NYSE:UL) is scheduled to report Q3FY14 results on October 23, 2014. Last month, the company warned of slower market growth for consumer goods during its presentation at the Sanford C. Bernstein Strategic Decisions Conference. In the first half of FY14, the Anglo-Dutch conglomerate had revenues of €24.1 billion (~$33 billion), down almost 5.5% from a similar period last year. In addition to volatile exchange rates, underlying sales slowed down considerably in H1FY14. Underlying sales grew 3.7% between H1FY13 and H1FY14 compared to 5% between H1FY12 and H1FY13. On the flipside, Unilever has been able to prudently preserve its margins by trimming its product portfolio. Its core operating profit margin, which excludes the impact of disposals, acquisitions, impairments and other one-off expenses, remained steady at H1FY13 levels of 14% in H1FY14. Operating profit margins (including impact of all the above expenses) expanded from 15% in H1FY13 to 18% in H1FY14, driven by a strong increase in margins from its Foods segment and offset partially by a decline in margins in its Refreshments segment. Other segments such as Personal Care and Home Care registered strong underlying sales growth during H1FY14, in addition to marginal swings in their profit margins. See our complete analysis of Unilever here HPC Brands Should Boost Volume Sales in Key Emerging Markets Despite their weakening domestic currencies against the U.S. Dollar in 2014, inflation in emerging markets such as India has come down considerably. For example, preliminary data from the Reserve Bank of India for the month of September 2014 shows that retail inflation in India has declined sharply to 6.46% from over 11% a year ago. The lower inflation number should aide a recovery in volume sales for fast moving consumer goods (FMCG) companies. Unilever operates in India through the Hindustan Unilever Limited (HUL), in which it owns a controlling stake of 67%. Last quarter (April – June 2014), HUL reported sales of nearly $1.3 billion, with approximately $990 million and $229 million in sales from Home and Personal Care (HPC) and Foods and Beverages segments respectively. On a proforma basis, this amounts to about $663 million and $155 million in sales for Unilever from its Indian subsidiary. The HPC segment in India accounts for nearly 9.9% of total HPC sales for Unilever, making it a very important market. Unilever plans to further strengthen its presence in specific product categories such as Home Care in key emerging markets such as India. The company generates more than 80% of total Home Care sales from emerging markets, with detergent brands such as Ariel, Skip, Surf and Radiant generating nearly 70% of Home Care sales. In India alone, soaps and detergent sales for HUL witnessed a year-on-year growth rate of approximately 13% last quarter. Similarly, HUL’s personal care product line, which includes brands such as Dove, Pepsodent, Sunsilk etc., reported a year-on-year growth rate of over 14% in the April – June 2014 period. The Foods segment on the other hand makes a smaller portion in Unilever’s global geographic portfolio, amount to nearly 2.6% of total Foods and Refreshments’ sales. For the upcoming quarter, we expect this robust growth trajectory from key emerging markets like India to partially offset any weakness from developed markets such as Western Europe. However, overall results will be weighed down by a decline in volumes from developed markets due to sluggish demand from consumers, coupled with significant currency headwinds from the considerable depreciation of the Euro against the U.S Dollar. Foods Segment Should Drag Down Overall Sales and Volumes Contrary to the HPC segment, Unilever’s share from emerging markets is small in the Foods segment. Unilever’s Foods portfolio includes product categories such as spreads, sauces, soups and stocks, which are widely used in developed markets. This smaller contribution from the high growth emerging markets has limited growth prospects for Unilever’s Foods segment, where underlying volumes shrank by nearly 1% on a year-on-year basis. To boost volume sales in these markets, the company divested its Ragu and Bertolli pasta sauce brands in the U.S. and its Slim.Fast brand later in H1FY14. Despite the disposal of under-performing brands, we expect volumes from the Foods segment to decline year on year due to weakening consumer sentiment, particularly in Western Europe. Improving consumer sentiment in the U.S could partially offset this weakness, although the lower presence in emerging markets should weigh on overall volume growth for the segment. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Amazon Pre-Earnings: Electronics and General Merchandise Will Drive Growth, But Profitability Could Disappoint
  • By , 10/21/14
  • tags: AMZN BABA EBAY
  • Amazon (NASDAQ:AMZN) has been primarily focused on growing its revenues.  In a quest to gain scale, management has made growth the priority over improving margins, reinvesting profits through both lower pricing and higher expenditures.  Its low profitability has been a long standing concern, and will once again be the key highlight of the upcoming Q3 2014 results on October 23rd. While the revenue growth is expected to be strong, it will come at the expense of a decline in profits. During its last earnings call, Amazon guided a revenue between $19.7 billion and $21.5 billion, and operating loss between $810 million and $410 million for Q3. We expect strong growth in the electronics and general merchandise category and North American region to be the pillars for Amazon’s top-line increase during the third quarter. Also, Amazon Web Services segment will likely continue to see robust demand due to rapid innovation and lower pricing. The number of Prime subscriptions should continue to see healthy growth rates.  This, in turn,  is expected to play out as a major competitive advantage for the company in the long-term. Our price estimate for Amazon stands for $348, implying around 10% premium to the current market price.
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    Trends In Silver Demand By The Solar Photovoltaic Industry
  • By , 10/21/14
  • tags: SLW
  • Silver and gold are compared to each other as both metals are viewed by investors as inflation hedges and safe haven investments. However, in addition to its characteristic as a safe haven investment, silver is widely used in industrial applications. It is used in the manufacture of semiconductors, solar photovoltaic (PV) cells and batteries, in the fabrication of jewelry, in photography and has a variety of applications in nanotechnology. With the rapid adoption of solar energy across the world, the demand for silver from the solar photovoltaic industry is expected to rise rapidly. In this article, we will take a closer look at the trends in the demand for silver by the solar PV industry. How is Silver Used in Solar PV Cells Silver has the highest electrical and thermal conductivity of all metals. This property of silver makes it an important constituent of solar cells. It is used in the form of silver paste, which is used to conduct electricity out of solar cells. Approximately 20 grams of silver are used in each crystalline silicon solar panel, which accounts for around 85% of the total market. Roughly 80 metric tons of silver or approximately 2.8 million ounces of silver are needed to generate approximately 1 Gigawatt (GW) of solar power. Growth in Installed Solar PV Capacity Globally, installed solar capacity stood at 139 GW at the end of 2013. Installed solar capacity has risen exponentially from a paltry 1.3 GW in 2000. Most of this growth in installed  capacity in the past has come from Europe, particularly Germany, with favorable government policies facilitating the incorporation of a greater share of renewable energy into the country’s energy mix. Europe accounted for around 75% of global installed solar PV capacity in 2010. However, the pace of new installed capacity in Europe is expected slow down due to a reduction in incentives for PV installations in some major markets, such as Germany. In recent years, China has made a push for greater PV installation. Chinese installed solar capacity has increased from 0.8 GW in 2010 to around 18.6GW in 2013. China leads the way in terms of additions to installed PV capacity in 2013, with the installation of 11.3 GW of grid-connected solar PV capacity. This was followed by Japan, the U.S. and Germany with 6.9 GW, 4.75 GW and 3.3 GW in additions to their installed solar capacity, respectively. Installed solar capacity is expected to grow by 20% this year or around 44.5 GW. China, Japan and the U.S. will be lead the way in terms of newly installed solar capacity, with around 12GW, 10.5 GW and 6 GW of additions to installed solar capacity, respectively. The growth in installed solar PV capacity will be driven by China in the years to come. China is making a concerted effort to reduce its dependence on coal as a source of energy. The country is targeting 70 GW in installed solar capacity by 2017, as compared to 18.6 GW in 2013. Thus, China’s thrust on solar energy will provide the impetus for growth in solar PV capacity additions. As per European Photovoltaic Industry Association (EPIA) estimates, by 2018, cumulative installed PV capacity will grow to 430 GW in an optimistic scenario and 321 GW in a pessimistic scenario. The incremental PV capacity addition in 2018 is expected to be 69 GW in the optimistic scenario and 39 GW in the pessimistic scenario. The risks to growth in installed PV capacity that will determine which scenario materializes are discussed later in the article. If we consider an intermediate scenario where installed capacity grows to about 375 GW by 2018, it represents a compounded annual growth rate of about 22% from the 139 GW in installed solar capacity in 2013. This will correspond to roughly 54 GW in incremental solar PV capacity addition in 2018. Silver Demand from PV industry The sharp growth forecast for installed PV capacity bodes well for silver demand by the PV industry. If we assume that over the next five years, crystalline solar silicon panels will continue to account for roughly 85% of the market, then these will account for approximately 38 GW in installed capacity in 2014 and around 46 GW in installed capacity in 2018. We will estimate the demand for silver from the PV industry under the simplifying assumption that solar panels for incremental solar PV capacity additions are manufactured in the same year in which they are installed. Taking into account that roughly 2.8 million ounces of silver are required to generate 1 GW of solar power, the demand for silver translates into roughly 106 million ounces and 151 million ounces in 2014 and 2018 respectively. To put this into perspective, global silver mine production is expected to be roughly 800 million ounces and 750 million ounces in 2014 and 2018 respectively. Mine production accounted for roughly 75% of silver supply in 2012. If we assume that this ratio holds till 2018, overall silver supply will stand at roughly 1.07 billion ounces and 1 billion ounces in 2014 and 2018 respectively. Assuming a balanced market in which supply matches demand, the demand for silver from the solar PV industry will rise from 10% of the total demand for silver in 2014 to around 15% in 2018. Risks and Opportunities The pace of adoption of solar energy and consequently demand for silver from the PV industry, is contingent upon a number of factors. These include policy support for solar energy, competitiveness of solar power versus conventional sources of electricity generation and the price of silver itself. Price decreases through technological advancement and rising costs of electricity in Europe have made solar power more competitive than before vis-a-vis conventional sources of electricity. However, this is contingent upon policy support for solar power. For example, in Germany, which accounted for the largest share of global installed solar capacity in 2013 at 26%, the cost of generating solar power stood at 0.078-0.142 Euros per Kilowatt hour (kWh). This compares favorably with the average end-customer price in Germany, which stood at Euro 0.289/kWh in 2013. However, due to lowering of policy support with the imposition of a tax on clean energy plants, incremental addition to installed capacity is expected to fall to 3.3 GW in 2014 from roughly 7.4-7.6 GW in each of the previous three years. Lowering of policy support in Germany made solar power less attractive as compared to conventional sources of energy. Thus, favorable government policy is a must in order to accelerate the adoption of solar power at a global level. The cost of silver itself is another major factor that will determine the cost of generating solar power. Silver is currently trading at levels of around $18 per ounce.  A significant increase in the price of the metal may raise the costs of producing solar panels and solar power, thereby retarding the pace of the adoption of solar power. In addition, any technological changes that reduce the amount of silver used in producing a unit of solar power, may also reduce the demand for silver by the PV industry. These variables would determine the pace of growth in installed solar capacity between the optimistic and pessimistic scenarios discussed previously, and consequently, the demand for silver by the solar PV industry. 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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    Beechcraft Acquisition Lifts Textron's Results As The Business Jet Market Improves
  • By , 10/21/14
  • tags: TXT
  • Textron (NYSE:TXT) reported solid growth in its third quarter results on higher business jet deliveries and cost synergies from the acquisition of Beechcraft, the maker of King Air turboprops. The company’s third quarter revenue rose 18% annually to $3.4 billion. Beechcraft’s acquisition, which was completed in March earlier this year, contributed roughly 14% to Textron’s third quarter top line growth, while the company’s remaining top line growth came primarily from its industrial segment. Higher margin at Textron’s aviation segment, which includes the businesses of Cessna and Beechcraft airplanes, boosted the company’s third quarter earnings to 57 cents a share, up from 35 cents a share in the year ago period. This sooner-than-expected realization of cost synergies from Beechcraft acquisition enabled Textron to raise its 2014 earnings guidance to $2.05-2.15 per share, from $1.92-2.12 per share announced earlier. Last year, the company had earned $1.75 per share. We currently have a stock price estimate of $38 for Textron, around 5% ahead of its current market price. We are in the process of incorporating Textron’s third quarter results and shall update our analysis shortly. See our complete analysis of Textron here Beechcraft’s Acquisition Drove Growth In Textron’s Q3 Results On March 14, 2014, Textron completed the acquisition of Beechcraft, which is a major manufacturer of general aviation airplanes. Textron obtained the highly valuable King Air turboprop airplane franchise from this acquisition, which nearly doubled Textron’s aviation revenue to $1.1 billion in the third quarter. During the quarter, this segment delivered 33 new business jets to customers worldwide on higher demand, up from 25 jets that the segment delivered in the same period last year. At its earnings presentation, Textron said that it is seeing availability of used business jets and turboprops decline in the market. We figure this trend likely helped grow Textron’s business jet deliveries in the third quarter, and if availability of used general aviation airplanes continues to fall in coming months, then buyers will likely be compelled to purchase new airplanes, boosting Textron’s airplane sales. During the third quarter, Beechcraft also delivered 30 King Air turboprops, compared with 26 turboprops that it delivered in the third quarter of last year. Thus, the acquisition of Beechcraft has come at a time, when shipments of business jets and turboprops are rising. Additionally, at the time of announcing Beechcraft’s acquisition, Textron had said that it will likely realize significant cost synergies from integrating its Cessna unit with Beechcraft. Gains from these synergies were evident in the third quarter results, as margin at Textron Aviation, which was constituted by merging Cessna and Beechcraft, rose sharply resulting in segment profit of $62 million, compared with a loss of $23 million in the year ago period. In addition, higher delivery volume of business jets and turboprops also likely helped in margin expansion at Textron Aviation. Looking ahead, we figure with a gradually improving global general aviation airplane market, Textron Aviation’s operating margin could continue to improve in coming years. Gains from Textron Aviation were supported by modest revenue growth at Textron’s industrial segment, which includes various businesses: Kautex automobile fuel tanks, Jacobsen turf care equipment, E-Z-GO golf cars, and Greenlee power tools. Many acquisitions including TUG Technologies, Dixie Chopper and HD Electric completed in the recent past contributed to this revenue growth at Textron’s industrial segment in the third quarter. Lower Commercial Helicopter Deliveries By Bell Tempers Q3 Growth Surprisingly, commercial helicopter deliveries by Textron’s Bell unit fell sharply to 41 units in the third quarter, from 54 units in the same period last year. The global commercial helicopter market had improved steadily over the past few years on rising demand from the emerging countries especially China, resulting in Bell’s commercial helicopter deliveries rising to 213 units in 2013, from 188 units in 2012. However, in the nine months ended September 2014, Bell has been able to deliver just 121 commercial helicopters to customers worldwide, With only one quarter remaining in 2014, we figure Bell’s commercial helicopter deliveries in 2014 will likely fall short of its 2013 tally of 213 units. So, commercial helicopter deliveries will likely continue to temper growth from higher business jet deliveries in Textron’s results in the fourth quarter. 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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    Dow Chemical To Draw Earnings Growth From Thicker Margins
  • By , 10/21/14
  • tags: DOW DD MON
  • The Dow Chemical Company (NYSE:DOW) is scheduled to announce its 2014 third quarter earnings on October 22. We expect the company to primarily draw growth from thicker margins as a result of productivity cost savings and higher operating leverage. According to Dow’s recent presentation at the Credit Suisse Basic Materials Conference, a 100 basis points improvement in the annual operating rate boosts its EBITDA by more than $200 million. During the first half of this year, Dow’s operating rate stood at 82.5%, up by 250 basis points from the same period last year. This was the key factor that drove the net improvement of around 50 basis points in the company’s consolidated adjusted EBITDA margin over last year. We expect to see a similar margin improvement during the third quarter. During the earnings call presentation, we will be closely watching for any updates on Dow’s ongoing divestiture program and the U.S. Gulf Coast expansion plan, which is expected to play a key role in driving its long-term cash flow growth. Dow is a diversified chemical industry giant operating in specialty chemicals, advanced materials, agro-sciences and plastics business segments. It delivers a broad range of technology-based products and solutions to customers in approximately 160 countries, and in high growth sectors such as electronics, water, energy and agriculture. Last year, Dow reported annual sales of approximately $57 billion and earning adjusted net income of around $2.9 billion. We currently have a  $53/share price estimate for Dow, which is 18.9x our 2014 full-year adjusted diluted EPS estimate of $2.80 for the company. See Our Complete Analysis For Dow We believe that Dow’s long-term growth potential and its valuation depends significantly upon the successful implementation of its margin expansion plan in the short to medium term. The company has been pursuing the divestment of slow growth, low-margin businesses over the last several years in order to increase its focus on more profitable, less volatile segments where it sells more differentiated end products. Having completed the divestiture of businesses generating more than $8 billion in revenues, in March last year, the company announced its plan to raise around $1.5 billion from further divestments. However, looking at the volatile demand scenario in emerging markets and continued slowdown in the developed ones, during the 2013 third quarter earnings call, Dow announced an extension of its divestiture target to $3-4 billion. The company officials said that their focus would be on businesses that fall under the chlorine value chain, such as the chlorinated organics and epoxy businesses that generate single digit EBITDA margins, which compares to the more than 25% EBITDA margin that the company earns on its Performance Plastics business. In March this year, Dow further expanded its divestiture target to $4.5-6 billion. The company officials did not disclose the specific nature of the businesses that were added to the divestment plan. However, they did mention that these would be some smaller units from its Performance Materials division, which has an adjusted EBITDA margin of around 10%, compared to the company wide average of over 15%, by our estimates. (See: How Does Dow Chemical Plan To Expand Its Performance Materials Margins? ) Most recently, Dow announced that it is actively marketing three of its non-core businesses for divestment and expects proceeds of more than $2 billion by early next year.  Through these divestments, the company aims to divert its resources towards more profitable segments, especially the Performance Plastics division, which best leverages its integrated value chain for a low-cost advantage and differentiated end products for higher margins. According to our estimates, the division’s adjusted EBITDA margin stood at around 26% last year, well above the company-wide average. Most of the products sold by the Performance Plastics division are derivatives of the simplest unsaturated hydrocarbon, ethylene, which is most commonly derived from the steam cracking of either naphtha or ethane. With the shale gas supply boost in the U.S. resulting in a cheap source of ethane, there has been a divergence in operating margins between naphtha and ethane based ethylene production plants in the U.S. Dow is therefore pursuing huge investments (more than $4 billion) in the U.S. Gulf Coast region to tap into this opportunity. The company expects to generate incremental EBITDA of more than $2.5 billion (on a run rate basis by 2017) by ramping up its plastics operations in the U.S. Gulf Coast region. Just to give some perspective, the company’s consolidated EBITDA stood around $7.8 billion last year by our estimates. (See:  Cheap U.S. Natural Gas Is Attracting Huge Investments From Chemical Companies ) 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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    Caterpillar’s Earnings Preview: Revenue And Profits Could Decline On Poor Mining And Construction Sales
  • By , 10/21/14
  • tags: CAT GE DE
  • Caterpillar (NYSE:CAT) will announce its second quarter earnings Thursday, October 23. The maker of mining and construction machinery is coming off a good second quarter in which despite a decline in revenue, its profits rose on gains from cost reduction activities. In the third quarter, we expect to see a decline in Caterpillar’s (CAT) revenue driven by continued weakness in the Resource Industries segment accompanied with poor Construction Industries sales. Engine and Transportation segment sales will likely get offset by a decline in its mining and construction machinery sales. The company’s third quarter profits will likely decline despite its cost reduction activities. See our complete analysis of CAT here Global mining weakness to weigh on CAT’s revenue CAT has been struggling due to weak demand for machinery and equipment in the global mining sector since the fourth quarter of 2012. CAT’s revenue from its Resource Industries segment, which primarily comprises of sales of mining equipment and machinery, has been declining due to profitability improvement programs at mining companies. Large asset write-offs in late 2012 and 2013, forced mining companies such as Vale, Rio Tinto and BHP Billiton, to cut costs and reduce capital spending. This significantly reduced demand for mining equipment and led to a 37.3% year-on-year decline in CAT’s Resource Industries’ revenue for 2013. The after affects of the 2013 asset write-offs and low mined commodity prices have kept the demand for mining equipment and machinery suppressed in 2014. Declining prices of mined commodities such as coal and iron ore, driven by high production and slowing demand from China, have discouraged mining companies from investing in new mines or expanding operations. CAT’s Resource Industries’ revenue continued to suffer due to this trend in the first half of 2014. In the second quarter of 2014, Resource Industries revenue contracted by 28.5% year-on-year. We anticipate this weakness from the global mining sector to persist through the second half of the current year. CAT’s recent retail sales data seems to corroborate our expectations. In August 2014, retail sales for its Resource Industries products were down 33% globally, with all geographies showing negative growth. It is encouraging to note that the declines in CAT’s mining segment sales have progressively moderated. After falling 37% last year, the company’s mining segment sales decline moderated to 33% year-over-year in the first quarter and to 29% in the second quarter. For full year 2014, CAT forecasts its mining segment sales to contract by 20% annually, which points towards further moderation in the second half of the year. Weak construction sales to add pressure on top line In the past two quarters, sales of construction machinery have been able to partially cushion the decline in mining equipment sales. However, this may be absent in the third quarter. The weak Brazilian economy and tough year-on-year comparison with Latin American markets has taken a toll on CAT’s Construction Industries segment. According to CAT’s retail statistics for August, global retail sales were down 1%, with only North American markets posting positive growth. Sales to Latin American markets declined 23%. In the previous year, CAT had received large orders from Brazil’s government which had significantly increased sales, leading to tough comparisons for this year’s third quarter. In addition, the economic condition in Brazil has been particularly troublesome in 2014 due to the recession brought on by declining investments in the country. Investments in Brazil contracted 5% due to the poor business environment and uncertainty ahead of the elections. The only way CAT would have been able to generate positive growth in construction equipment sales is if its dealer would have restocked their inventories. However, given the current macroeconomic conditions it seems highly unlikely. We therefore expect to see declines in CAT’s Construction Industries segment, which will add to the headwinds presented by the Resource Industries segment. Despite cost cuts, profits to decline on weak mining and construction sales In an attempt to lower its operating costs, CAT has been undertaking cost reduction measures since early 2013. These measures include plant consolidations, which ensure greater sharing of common resources, and headcount reductions, which save salary costs. This enabled CAT to lower its operating costs by $7 billion in 2013 and by $0.5 billion in the first half of 2014. During the recent earnings meet, CAT announced that it will continue with its cost reduction measures in the coming months. However, given the decline in sales of mining and construction equipment, CAT’s third quarter profits might take a hit, despite the cost cuts. Consensus estimates for the third quarter earnings per share are at $1.33, 8.3% lower than the previous year’s third quarter. The consensus earnings per share estimate, which most likely has taken into account the planned $2.5 billion share repurchase in the third quarter, also points towards a decline in profits. 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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    Price Hikes & Increased Customer Traffic Drive Chipotle's Q3 Revenues
  • By , 10/21/14
  • tags: CMG MCD DNKN BKW
  • Chipotle Mexican Grill (NYSE:CMG) delivered yet another impressive performance in its third quarter results on October 20, sustaining the strong momentum witnessed in the first half of the year. The company reported a 31.1% year-over-year (y-o-y) increase in the net revenues to $1.08 billion for the quarter, primarily driven by a double digit growth in the comparable store sales, which grew at 20%. Comparable restaurant sales is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation. As a result, the Mexican cuisine specialist managed to produce diluted EPS of $4.15, up 56% y-o-y. The price hikes and increasing customer count were the primary factors that drove the comparable store sales. In a short span, the restaurant chain has managed to outpace all other fast-casual restaurants and has grabbed people’s attention. The company’s net operating margins rose to 28.8%, an increase of 200 basis points, primarily due to lower food costs and effective management. As a result the net income rose 57% to $130.8 million. We have a $632 price estimate for Chipotle, which is about 3% lower than the current market price. See Our Complete Analysis For Chipotle Mexican Grill Double-Digit Growth In Comparable Store Sales At a time when traditional quick service restaurants are hardly managing to deliver low single digit comparable sales growth, Chipotle’s comparable store sales rose nearly 20% y-o-y, due to well-planned price hikes in the menu and efficient marketing to attract customers. This growth boosted the average sales volume for the restaurants to an all time high of $2.4 million. Higher Average Spend Per visit Due To Increased Prices Of Menu Items Chipotle raised the prices of its steak burritos by 4%-6%, or 32-48 cents, whereas the price of chicken burritos was slightly raised. Many feared that the price hike would affect the company’s customer traffic, but it had minimal impact on them. Customers are willing to pay a little extra for better quality of food rather than paying less for uninspiring food items at traditional fast food restaurants. The effective price increase of 6.3%, coupled with additional revenue growth from catering services resulted in a tremendous growth in the average check for the company. As a result of the price hike, Chipotle’s average spend per visit grew 8.5%. The company believes that its loyal customer base and innovative food menu prepared with high quality ingredients were the key factors for its highest comparable store sales growth ever. Chipotle believes the comparable sales growth in Q4 2014 to be in the mid teen digits, however, it also believes that the comparable sales growth in fiscal 2015 might be slightly lower than this year, as the impact of menu prices will begin to fade out gradually. Customers More Attracted To Better Food Quality With Convenient Dining Experience People in the U.S. are gradually changing their dining preferences and drifting towards organic food items. Moreover, Chipotle offers some unique, innovative and delicious food items, which have grabbed people’s attention off-lately. With the commodity inflation, most of the top fast food chains have compromised on their quality of food for low costs and ease of preparation. On the other hand, Chipotle carried on its ‘food with integrity’ program and charged a fair price at the same time, without compromising on the taste and quality. Due to changing dining preferences, people drifted more towards healthier food options. As a result, during the quarter, the company’s witnessed an increase of six transactions during the peak lunch hour and an increase of six transactions during the peak dinner hour. Increased transactions led to accelerated revenue growth for the company. Increasing Food and Labor Costs To Impact The Margins In Next Few Quarters Chipotle’s lower food costs and consistently strong transaction trends led to 200 basis points improvement in the restaurant level operating margins (28.8%), as the operating costs decreased by 60 basis points y-o-y. Although, efficient marketing led to lower marketing and utility costs, the company expects the marketing costs to increase about 1.5% in the fourth quarter. Moreover, Chipotle expects the food costs to stabilize in the fiscal 2015, despite the elevated costs of beef and other meat products. On the other hand, the price of avocado is expected to further rise due to a shortage of supply caused by drought conditions in California and Chile. According to Economic Research Services (ERS) USDA, the prices of fresh fruits might increase up to 4.5% to 5.5% in 2014 and close to 2.5% to 3.5% in 2015. In addition, Labor costs decreased 160 basis points y-o-y to 21.2% of sales, driven by higher sales volume. However, the company expects the labor costs as a percentage of sales to rise in the coming few quarter, on the anticipation of seasonal lower sales in the fourth quarter. Chipotle Keen On Expansion With The Introduction Of Growth Feed Concepts Chipotle has been focusing on its new store openings, as the opening volumes have been a major factor in the company’s top-line growth. According to the company, the new store volumes are outpacing the volumes of existing stores at a faster pace they had ever before. Chipotle added 43 new restaurants in the third quarter, bringing the total restaurant count to 1,724. The company’s pace is in line with its guidance to open 180-195 restaurants by the end of 2014. Furthermore, the company expects to open 190-205 restaurants in 2015, which will include a small number of international, ShopHouse and Pizzeria Locale restaurants. Out of the 1,724 restaurants, 1,698 Chipotle restaurants are in the U.S., seven in Canada, six in England, three in France and one in Germany. Out of the rest 9 restaurants, eight restaurants are the ShopHouse Southeast Asian Kitchen restaurants and one Pizzeria Locale restaurant, a fast-casual pizza concept. These two new growth feed concepts, are designed on the similar model as that of Chipotle, and are in their early stages of development. Apart from these new store openings, the catering business is proving to be a huge success and the company is planning on introducing the catering business in New York in 2015, as catering accounted for around 1% of the sales in the first nine-months of 2014. Chipotle’s growth is among the highest in the industry and with the present situation, where every top fast-food chain is struggling to keep the customer count stable, the company is bound for further growth in the next few quarters. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    UAL Logo
    Network Airlines' Earnings Preview: United & American Will Likely Post Healthy Third Quarter Results
  • By , 10/21/14
  • tags: UAL
  • United (NYSE:UAL) and American (NASDAQ:AAL) will announce their third quarter results Thursday, October 23. These large network carriers are coming off a good second quarter in which they reported sharp growth in profit on higher demand for air travel on many domestic and international routes. In the third quarter, we figure both United and American will likely post healthy growth in their top line driven by modest capacity expansion. Both carriers will likely also be able to post healthy profits as cost pressures from fuel prices eased during the quarter. In all, both United and American will likely post good results in the third quarter. United’s Q3 Earnings Preview United improved its profit to $789 million in the second quarter of this year, from a loss of $609 million in the first quarter, on better revenue and cost performance. We figure in the third quarter, the carrier will likely be able to retain its strong profit performance of the previous quarter. During the third quarter, United raised its flying capacity just marginally, instead focusing on improving its unit revenue – amount collected from each passenger per seat for a mile of flight. Unit revenue is determined by passenger fares, and in the third quarter, United has forecast its unit revenue to rise by 3.5-4.5% annually. We figure this healthy growth in United’s unit revenue indicates that the carrier likely raised its passenger fares on some routes during the past year. Effectively, higher unit revenue and higher flying capacity mean that United will likely report higher passenger revenue in the third quarter. On the margin front, United has forecast its non-fuel CASM (cost per available seat mile) to rise by only 1% annually in the third quarter. Non-fuel CASM is a standard metric used in the airline industry to measure an airline’s cost efficiency. Fuel costs are excluded from this metric so as to better assess how well an airline manages the costs it can control. In our opinion, this low growth in United’s third quarter non-fuel CASM is a result of its past cost cutbacks. Through various cost initiatives spread across distribution, maintenance, and sourcing operations, United targeted to take out $250-300 million from its costs in 2014. We figure that gains from these ongoing cost cuts will help translate United’s top line growth into healthy profits in the third quarter. We currently have a stock price estimate of $45.20 for United, around 5% below its current market price. See our complete analysis of United here American’s Q3 Earnings Preview Separately, American raised its flying capacity by 1-2% annually in the third quarter. Backed by stable demand for air travel, this increase in seats from American raised its third quarter passenger traffic. Coupled with modest growth in unit revenue, we figure American too will likely post moderate growth in top line in the third quarter. What will be interesting to see is if American can retain its top spot in quarterly profit among U.S. carriers. Last quarter, American posted profit of $864 million, compared with profits of $801 million and $789 million posted by Delta and United, respectively.  Delta last week reported a core profit of about $1 billion, so it will be interesting to see if American can beat that. The pre-tax margin of 10-12% (excluding special charges) that American has forecast in the third quarter gives the carrier a chance. Separately, Delta said in its earnings release October 16 that it is not seeing any impact on its advance booking rates from Ebola. We will watching what United and American have to say about their advance booking rates with regard to any impact from Ebola. We currently have a stock price estimate of $39.25 for American, around 10% ahead of its current market price. See our complete analysis of American here View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    CHL Logo
    China Mobile's Q3 Earnings Fall On Rising Competition And Higher Taxes
  • By , 10/21/14
  • tags: CHL CHA CHU
  • China Mobile (NYSE:CHL), the world’s largest wireless carrier, continued to see pressure for the fifth straight quarter with net income declining over 12% year-over-year (y-o-y) to about RMB 25 billion ($4 billion) in Q3 2014. This decline in net income can be attributed to increasing competition in the Chinese wireless market, a decline in interconnection fees, the introduction of a Value Added Tax (VAT) and the growing popularity of over-the-top (OTT) applications. OTT applications such as WeChat allow users to share text/picture/video messages over their phone’s Internet connection, and their increased usage resulted in a massive drop in revenues from traditional SMS and MMS messaging services for the carrier. Overall SMS usage on the carrier’s network declined about 21% from 188 billion messages in the third quarter of 2013 to less than 150 billion in Q3 2014, in addition to a decline of 0.5% y-o-y in total voice usage. This decline in SMS and voice usage, along with the interconnection fee revision and tariff concessions due to increasing competition, were key factors resulting in an unexpected fall of 2% in the company’s overall revenue in the third quarter. While growing costs and declining revenues put a dent in earnings, the carrier was able to grow its 3G/4G subscriber base by over 15% sequentially in Q3 2014 to over 285 million. Considering that data traffic is quickly becoming the primary avenue for future revenue growth, the carrier vigorously expanded and promoted its high speed 4G network, gaining 27 million 4G subscribers in the third quarter and about 41 million in the first nine months of the year. The average mobile data usage per subscriber grew to over 124 MB per month at the end of September 2014, from 119 MB per month at the end of June 2014 and 72 MB per month at the end of 2013. Going forward, we expect China Mobile to continue gaining 3G/4G subscribers faster than its rivals, owing to its larger 4G network and its ability to offer higher handset subsidies. This robust growth in 4G subscribers is likely to help the carrier improve its top line performance going forward as 4G subscribers generally use more data than 2G and 3G users, which helps increase ARPU (Average Revenue Per User). However, higher costs and increasing competition from rival wireless carriers  China Unicom (NYSE:CHU) and  China Telecom (NYSE:CHA), as well as OTT applications such as WeChat, might continue to weigh on profitability in the near term. We currently have a  price estimate of $56 for China Mobile, implying a slight discount to the current market price.
    NSC Logo
    Norfolk Southern Earnings Preview: Intermodal To Offset Coal Headwinds
  • By , 10/21/14
  • tags: NSC UNP CSX
  • Norfolk Southern (NYSE:NSC), one of the leading railroads in the eastern U.S., is scheduled to report its third quarter 2014 results on October 22. Its carloadings data for the quarter through week ended September 27, 2014 reported strong growth in its intermodal and merchandise volumes, which should have a significant positive impact on revenues. However, the decline in coal carloads could temper growth. The decline in coal volumes comes as a surprise considering that coal volumes grew in the previous quarter. Revisiting Third Quarter 2014 Norfolk Southern’s revenue increased 8.6% year-on-year on the back of a 7.9% growth in volume. The high revenue growth helped Norfolk Southern drastically improved its operating ratio (operating expense expressed as a percentage of revenues) from 75.2% in the first quarter to 66.5% in this quarter. The company’s diluted earnings per share increased 22.6% compared to the previous year’s third quarter, primarily due to the favorable impact of revenue and operating ratio improvement. See our complete analysis of Norfolk Southern here Low coal volumes likely to present headwinds In the previous quarter, Norfolk Southern’s coal carloads increased 2.2% driven by the demand for coal at utilities as they moved to replenish their inventory. However, as per the carloadings data for the quarter through week ended September 27, 2014, coal volume declined 3.5%. One of the reasons for the decline in coal carloads may be the weakness in demand for U.S. thermal and metallurgical coal in international markets, which is impacting Norfolk Southern’s export coal shipments. Declining prices of thermal and metallurgical coal, due to high exports from Australian coal suppliers and low demand from China, have created a challenging environment for U.S. coal. Recent reports put global prices for thermal and metallurgical coal at their 5 year lows. U.S. coal suppliers are unable to compete at such low prices, which leads to lower coal carloads for Norfolk Southern. It is interesting to note that despite the same macroeconomic factor impacting CSX (NYSE:CSX), Norfolk Southern’s primary competitor operating in the same region, its coal carloads grew 5.6%. This leads us to believe that there might be other reasons as well because of which Norfolk Southern’s coal volumes are down. One of the reasons maybe Norfolk Southern’s loss of contract to one of the northern utilities in the first quarter of 2014. It is most likely that these coal carloads shifted to CSX. The impact of decline in coal volumes on Norfolk Southern’s revenue can be offset by an increase in coal revenue per unit. In the previous quarter, Norfolk Southern’s coal revenue per unit increased 4.5%. This was because of the higher mix of long haul coal originating in the Illinois basin and Northern Appalachia Pittsburgh moving to southern utilities. With natural gas prices at around $4.00 per million btu during the third quarter of 2014, coal from Illinois basin would have remained profitable, which could have a positive impact on Norfolk Southern’s coal revenue per unit due to the long haul. Intermodal revenue per unit could increase Norfolk Southern’s international intermodal volume was up 16% in the second quarter due to the expedited holiday season shipments. Shippers had imported their holiday season merchandise earlier than usual due to concerns regarding the possible disruptions that could have been caused by the ongoing labor contract negotiations between ILWU and PMA. Since shippers have already imported some of their third and fourth quarter merchandise, they will have fewer shipments later in the year, leading to a slowdown in international intermodal volume growth. Though this may affect volumes, lower international intermodal volume is beneficial for Norfolk Southern. Norfolk Southern’s international intermodal revenue per unit is around 33% lower than that of its domestic intermodal shipments. Therefore, lower international intermodal shipments will lead to a favorable product mix, which could help bring up the intermodal revenue per unit. Tightening trucking capacity in the U.S. is driving intermodal volumes away from highways to rails. We believe this is the primary reason for the 9.7% increase in Norfolk Southern’s intermodal carloads during the third quarter through week ended September 27, 2014. This domestic demand is likely to offset the slowdown in international intermodal shipments. Additionally, an increase in rates for its domestic intermodal services should help boost revenue per unit. Norfolk Southern increased the rates for its transcontinental service on June 1, and its Equipment Management Program service effective from September 1. These services represent 17% of Norfolk Southern’s domestic intermodal business. For the remaining 83% of Norfolk Southern’s domestic intermodal service, price increases during the second half of the year will be dependent on escalators included in contracts. Escalators trigger price increases based on the Rail Cost Adjustment Factor, which measures the rate of inflation in railroad inputs such as labor and fuel. Re-pricing of these contracts will have to wait till 2015 since contracts are priced on an annual basis. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    BSX Logo
    Boston Scientific Earnings Preview: New Products To Drive Sales
  • By , 10/21/14
  • tags: BSX MDT
  • Boston Scientific (NYSE:BSX) is expected to announce its Q3 earnings on Wednesday, October 22. After several years of dismal sales, the global medical device maker returned to positive sales growth in 2013 and continued the momentum in the first half of this year. In the second quarter, the company reported a strong set of results with robust growth across divisions. The company’s largest division- Interventional Cardiology (IC) – reported low single-digit growth in the quarter, continuing the growth momentum it picked up in Q1 after consistent sales declines last year. The Cardiac Rhythm Management (CRM) division, contributing over 26% of the company’s top line, turned around in the quarter with 5% sales growth year-over-year (y-o-y) on a constant currency basis. Other divisions such as Neuromodulation, Endoscopy, Peripheral Interventions and Urology also reported consistent low to mid single-digit growth. As Boston Scientific comes out with its third quarter earnings, we expect its global sales to grow in mid single digits driven by increasing acceptance of its new products such as S-ICD (Subcutaneous-Implantable Cardioverter Defibrillators), Promus PREMIER stent, the Lotus Transcatheter Aortic Valve (TAVR) device, the bronchial thermoplasty system Alair and the anti-stroke Watchman device. Accordingly, the company should be able to meet its operational sales guidance of $1.79 billion – $1.84 billion for the quarter. On the cost side, we expect margins to continue improving on account of the company’s effective implementation of its ”Plant Network Optimization” strategy. The company reported adjusted gross margins of 70.3% in Q2 2014 and it expects full year 2014 gross margins to be in a similar 70-71% range. We have a  price estimate of $13 for Boston Scientific, implying a premium of over 10% to the current market price.
    T Logo
    AT&T Earnings Preview: Next Program, Margins In Focus
  • By , 10/21/14
  • tags: T S VZ
  • AT&T (NYSE:T) is scheduled to announce its Q3 2014 results on Wednesday, October 22. The carrier reported a mixed set of results last quarter, with overall revenues growing just 1.6% year-over-year (y-o-y) and EBITDA margins remaining flat at 42.6%, owing to the transition to no-subsidy plans, which shift revenue recognition from service to equipment (handsets), and a higher proportion of bring-your-own-device (BYOD) gross adds. The country’s second largest wireless carrier added over 1 million postpaid subscribers during the second quarter, its strongest gain in nearly five years and almost double the figure from a year ago. The carrier’s strategy to combat T-Mobile’s ‘Uncarrier’ initiatives with equipment financing plans of its own worked well, as Next accounted for 50% of its postpaid smartphone gross adds and upgrades in Q2 – up from 40% in Q1 and 15% in Q4 2013. When the company announces its third quarter earnings, we expect revenues to grow in the low-to-mid single digits, owing to robust wireless postpaid subscriber adds, low churn, an expanding U-verse user base and its continued focus on margins. In a recent press release, the carrier said that it expects third quarter churn to remain under 1% and take rates of its Next plan to remain around Q2 levels of 50%. This is significantly higher than the 18% take rates of Verizon’s Edge plan in the second quarter. AT&T also expects about 58% of its total postpaid user base to be on its Mobile Share Value plans in the third quarter. Growing acceptance of the carrier’s Next program as well as its Mobile Share Value shared data plans is likely to aid robust growth in the carrier’s postpaid user adds in the quarter. We have a  $38 price estimate for AT&T, which is about 10% ahead of the current market price.
    TIPS Are Unloved and Under-Owned
  • By , 10/21/14
  • tags: TIP TLT WIA
  • Submitted by Wall St. Daily as part of our contributors program TIPS Are Unloved and Under-Owned By Alan Gula, Chief Income Analyst   Let me ask you a personal question . . . Do you use protection? Because based on the recent, wild action in the markets, it seems as though many people have been practicing unsafe investing. Across the market, people are finding themselves overexposed to richly valued equities and underexposed to volatility-dampening U.S. Treasuries . They ignored the myriad warnings the market was sending throughout the year and were poorly positioned. This week, they overcompensated by frenetically selling stocks and buying government bonds, providing what’s known as a “flight to safety” bid for Treasuries. But to be successful, we have to buy safety before the flight to safety. In other words, safe investors buy protection before they need it. There’s nothing worse than getting caught with your pants down, but you shouldn’t be chasing the iShares Barclays 20+ Year Treasury Bond ETF ( TLT ) or iShares Barclays 7-10 Year Treasury Bond ETF ( IEF ) as they move higher, either. That’s because the risk-reward dynamics have changed significantly for Treasuries since the beginning of the year. U.S. 10-year rates hit 1.9% on Wednesday morning amid out-of-this-world Treasury futures trade activity. Perhaps, poorly managed hedge funds have finally capitulated on their bond shorts (bet on rising interest rates). Remember, the 10-year was near 3% at the start of the year. Interestingly, the collapse in the price of oil and global growth worries are stoking fears of continued disinflation (declining rate of inflation), which actually makes government bonds more attractive. Indeed, inflation expectations have reached three-year lows. The predictions for higher interest rates that were so prevalent early in 2014 are starting to give way to predictions of deflation. To be sure, the demographic changes and debt overhangs that are helping to push global government bond yields down will persist for quite some time. However, as astute investors, we should utilize the short-term oscillations and sentiment changes to seek the best opportunities. We should now be looking for securities that are currently on sale, and those that are sensitive to inflation expectations fit the bill. Just the TIPS Treasury inflation-protected securities (TIPS) pay a fixed rate on a principal value that adjusts for inflation as measured by the Consumer Price Index (CPI). The higher inflation goes, the higher the returns will be for TIPS investors. Basically, TIPS provide your capital with protection against the ravages of inflation. The most popular TIPS exchange-traded fund is the iShares TIPS Bond Fund ETF ( TIP ). To give you an idea of how unpopular TIPS are right now, total fund assets for TIP have declined from over $23 billion in 2012 to under $13 billion currently. As intriguing as that is, though, the real opportunity lies in a relatively unknown fund . . . The Western Asset Claymore Inflation-Linked Securities Income Fund ( WIA ) is a closed-end fund that invests at least 60% of its total assets in U.S. TIPS. WIA trades at a whopping 15% discount to net asset value (NAV), and has a 3.3% trailing 12-month yield. So, not only are you opportunistically buying an out-of-favor asset class category, but you have additional protection from effectively buying the securities for $0.85 on the dollar. As the fear of deflation proliferates, TIPS becomes more and more attractive relative to traditional Treasuries. The closed-end fund WIA is a fantastic way to invest in this unloved and under-owned portion of the Treasury market. Safe (and high-yield) investing, Alan Gula, CFA The post TIPS Are Unloved and Under-Owned appeared first on Wall Street Daily . By Alan Gula
    Don’t Panic . . . Yet
  • By , 10/21/14
  • tags: NDAQ SPY TLT
  • Submitted by Wall St. Daily as part of our contributors program Don’t Panic . . .  Yet By Guest Contributor   The stock market is often described as a roller coaster. But unlike the market, a roller coaster is more fun when it’s going down ! Meanwhile, the past month hasn’t been much fun for investors at all. The Dow Jones Industrial Average has fallen more than 6% from its peak, the NASDAQ is doing even worse, and the markets didn’t recoup any losses today, either. These gloomy conditions have investors wondering: Are we in store for another bear market? Is an extended swoon, like the one that occurred in 2011, on the horizon? Or could we even be facing a repeat of the market collapse of 2008? The Fed’s Free Money Tap The short answer is “probably not.” You see, the market got ahead of itself and is correcting . . .  but it’s not high by historical standards. In fact, the market’s current price-to-earnings ratio (P/E) of 15 is right in line with historical norms and seems downright low in this environment, where money for big players (such as banks) is nearly free. Additionally, the valuation reflects the widely held view that, at some point, the Federal Reserve is going to have to turn off the free money tap. But paradoxically, corrections such as this one put enormous pressure on the Fed to keep the money flowing. On the fundamental side, there doesn’t seem to be a near-term threat to corporate earnings. In addition, commodity prices are under control, or even falling. Lower crude prices, which caused the $0.50 decrease in the price of gas since April, have effectively raised nearly $500 for the average American, with more coming during the winter heating season. Elsewhere, manufacturing wages are finally starting to rise in parts of the country, and there are plenty of signs that the consumer is finally getting a break (and can spend a little more freely). If you’re investing in real companies, these trends in the real economy should provide a value base that can overcome the worries of Eurobonds, hedge fund traders locking in gains, and turmoil in the Middle East. For day traders, those latter trends should add some volatility and maybe further price declines in the near term, but longer-term investors can at least see a short-term bottom. So everything is great, yes? Not so fast. A Storm on the Horizon? There are a couple of worrying possibilities on the horizon, including those low oil prices that I just mentioned above. While it’s terrific for consumers, taking another $10 off of  American crude’s price would suddenly make much of the new oil provided by the fracking revolution uneconomical. That’s a lot of high-paying oilfield workers out of work, a lot of steel pipe manufacturers with shrinking order books, and a lot of rail cars suddenly empty. Basically, what’s a boom today could be a bust tomorrow. Another potential problem is home foreclosures. You thought that was behind us, right? Unfortunately, there’s another wave starting now. You see, many states delayed foreclosures through lawsuits and homeowner relief plans. As these programs roll off, we can expect to see a mini-wave of foreclosures. To be sure, things won’t be as bad as the initial set, but it could be enough to put a cap on home appreciation in many parts of the country – and home appreciation is where most Americans have most of their wealth. Even people unaffected by a foreclosure will be wary of opening their pocketbooks if their homes aren’t appreciating in value. That’s a big deal because, in the end, American consumers are the real driver of most U.S. stocks. The key is for them to have money and spend it. So for now, don’t panic… but be careful. Use this market decline to buy stocks you wish you had bought before the latest advance. In the meantime, I’ll keep an eye on the two trends above and any other possible threats to the economy. The post Don’t Panic… Yet appeared first on Wall Street Daily . By Guest Contributor
    Is This Stock Sell-Off Just a Blip?
  • By , 10/21/14
  • tags: DPZ JNJ C
  • Submitted by Profit Confidential as part of our   contributors program Is This Stock Sell-Off Just a Blip? If there’s one thing the stock market needs, it’s a distraction from global growth worries and geopolitical events. And corporate earnings are the ticket for that as this season’s numbers are starting to pour in. Pharmaceutical benchmark Johnson & Johnson (JNJ) once again beat Wall Street consensus, generating another good quarter of both sales and earnings growth. The company completed a major divestiture of its ortho-clinical diagnostics division during its latest quarter; even so, it was able to generate domestic sales growth of 11.6% over the same quarter last year. Total consolidated sales grew 5.1% to $18.5 billion. Excluding the impact of the company’s  recent divestiture, domestic sales would have increased 14.8% comparatively. Excluding gains, litigation accrual, tax adjustments, and integration costs from the large acquisition of Synthes, Inc., Johnson & Johnson’s bottom-line earnings grew 9.5% to $4.5 billion, or 10.3% to $1.50 on a diluted earnings-per-share basis. Once again, global pharmaceutical sales, including over-the-counter products, were the driver of growth, up 18.1% over the same quarter last year. Johnson & Johnson clearly continues to have operational momentum. Positive price action in the stock may be slow near-term commensurate with the broader market, but this company is still delivering the goods. Management increased its full-year earnings guidance and a $5.0-billion share repurchase program is still available at their discretion. Another big-name corporation reporting solid earnings results was Wells Fargo & Company (WFC), the largest U.S. mortgage lender. The company beat Street consensus on revenues and matched the earnings estimate. And Citigroup Inc. (C) experienced a big increase in its revenues, too, coming in at $19.6 billion, up from $17.9 billion. It was a much-improved quarterly comparison for the company on better institutional trading results. Even Dominos Pizza, Inc. (DPZ) beat consensus on both revenues and earnings, with domestic same-store sales growing 7.7% over the same quarter last year. Total sales grew 10.5% to $447 million, while diluted earnings per share grew 19% to $0.63. Global growth concerns are a reality, but the numbers from corporations so far reveal strength in the domestic market. (See “ Another Solid Earnings Season Ahead for Existing Winners? ”) And this, of course, is the big concern in capital markets. Investors want to see more contributions from big economies other than the U.S. market. So far, third-quarter earnings season is looking pretty good—a lot better than many investors anticipated, I think. But as we know, the stock market is always forward-looking and the marketplace is always trying to discount a future stream of corporate financial results. It’s pretty clear that if global economic growth is going to accelerate from the current levels, the U.S. market will be leading the move. At the end of the day, the most important news as an equity investor (other than a change in monetary policy) is what corporations actually say about their businesses. So far, the numbers are holding up and the well-deserved sell-off in stocks should be just a blip following corporate financial growth for now.     The post Is This Stock Sell-Off Just a Blip? appeared first on Stock Market Advice | Investment Newsletters – Profit Confidential .
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