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Apparel Week In Review: L Brands, Urban Outfitters And American Eagle Outfitters
  • By , 10/20/14
  • The past couple of weeks were very pleasing for L Brands (NYSE:LB) as its September results beat analysts’ estimates, for which it was rewarded with a ratings upgrade from a few firms. On the other hand, Urban Outfitters (NASDAQ:URBN) had a bleak couple of weeks as its stock took a beating after it provided third quarter sales update. Nothing much happened for American Eagle Outfitters (NYSE:AEO), apart from Shopkick announcing its success and the retailer being reassured of its popularity. Here is a quick roundup of news that mattered for these companies.
    MSFT Logo
    Weekly Review: Microsoft, IBM, HP And Adobe
  • By , 10/20/14
  • S&P declined by 3% in the week,  marking a four consecutive week decline for the first time in three years. The AMEX Information Technology Index (NYSE:XIT), which is compromised of large cap technology stock listed on New York Stock Exchange, outperformed the broader technology market, NASDAQ 100 Technology Sector(NASDAQ:NDXT) as it rose slightly during the week. In the week, most of the companies in the enterprise services space unveiled upgrades and associations in the Cloud services domain. In this report, we discuss some of the key events from the past week for  Microsoft Corporation (NASDAQ:MSFT),  International Business Machine (NYSE:IBM),  Hewlett-Packard Company (NYSE:HPQ) and  Adobe (NASDAQ:ADBE). Microsoft Corporation During the week, Microsoft was in the news for unveiling upgrades for its big data offerings, all of which will give Azure customers new options for cloud deployment and data-analysis applications. Currently, Azure has a revenue run rate of over $1.2 billion, and is expected to power Microsoft’s cloud business in the future. The upgrades, which incorporate Apache storm capability to process big data in realtime, will help the company to propagate its cloud services (including services like machine learnings) to cash strapped small and medium size businesses. We have a  $44.28 price estimate for Microsft, which translates to a market cap of around $366 billion. Our price estimate represents a slight upside to the current market price. We estimate the company’s Calender Year 2014 EPS at around $2.72 (Company has financial year ending in June), compared to a consensus estimate of around $2.69 according to Reuters. IBM IBM’s stock declined during the week, inline with the broader market. During the week, IBM partnered with SAP to launch SAP’s Hana Enterprise Cloud managed services platform and applications for its cloud services.Our valuation of $227 (market cap of $237 billion ) for the company is 26% above the current market price of $180 (market cap of $187 billion). As we go to press, IBM announced earnings, reducing its forecast and divulging its sale of its chip making assets to Global Foundries. We are presently working on an earnings update and will update the reader as soon as possible. We expect IBM to report revenue of around $101 billion and net income of $16.87 billion for 2014. We forecast non-GAAP diluted EPS of $16.75, which is below the market consensus of $18.41 (Reuters). HP HP announced launch of the HP ConvergedSystem 200-HC StoreVirtual system and the HP ConvergedSystem 200 HC EVO: RAIL, uses VMware’s pre-integrated EVO: RAIL. Both the HP ConvergedSystem 200-HC StoreVirtual system and HP ConvergedSystem 200 HC EVO: RAIL will be available from December. The new offering will provide ready-built integrated systems designed to make it easier for organizations to build and operate data centre infrastructure optimized for virtualized workloads. Our valuation of $29.79 (market cap of $55.7 billion ) for the company is 15% below the current market price of $34 (market cap of $64 billion). We expect HP to report revenue of around $115 billion and net income of $6.1 billion for calendar year 2014. We forecast non-GAAP diluted EPS of $3.2, which is below the market consensus of $3.6 (Reuters). Adobe Adobe was in the news as it was positioned by Gartner, Inc. as a Leader in the 2014 “Magic Quadrant for Web Content Management1” research report. This further affirms Adobe’s position as a leader in the digital marketing space. However, the stock was down nearly 10% in the week as sell off on broader market took toll on it. Currently,  our valuation of $57.79 (market cap of $28.8 billion ) for the company is 10% below the current market price of $62.86 (market cap of $31.4 billion). We expect Adobe to report revenue of around $4.28 billion and net income of $283 million for calendar year 2014. We forecast non-GAAP diluted EPS of $1.25, which is inline with the market consensus of $1.26 (Reuters). Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Emerging Storage, VMware To Drive EMC's Q3 Results As Core Product Sales Decline
  • By , 10/20/14
  • Storage giant EMC (NYSE:EMC) is scheduled to announce its Q3 earnings on October 22. The company reported a 5% year-on-year increase in net revenues to $5.9 billion in the second quarter, with growth mainly coming from combined EMC services, which grew by almost 9% over the prior year quarter to $2.6 billion. Comparatively, consolidated product revenues stayed flat at about $3.3 billion during the quarter. Among the various divisions within the company, VMware, Pivotal and RSA Security have been the fastest-growing divisions over the last few quarters, while EMC’s core business has remained nearly stagnant. The second quarter this year was no different, with EMC’s core information storage business generating revenues of $4 billion during the quarter, which was nearly flat over the year ago period. EMC’s consolidated gross margin was up by 100 basis points sequentially to 63.8% in Q2, mainly driven by an increasing proportion of revenues by sales of high-margin VMware licenses and services. However, margins for EMC’s core information storage division were compressed due to pricing pressure for high-end products from competing storage providers. As a result, gross margin for the information storage division in Q2 was 150 basis points lower than the prior year quarter at 55.1%. We have a $30 price estimate for EMC, which is about 10% higher than the current market price.
    GOOG Logo
    Google Earnings: Profitability Disappoints Even As Revenue Grows
  • By , 10/20/14
  • Google (NASDAQ:GOOG) posted its third quarter results on October 16. The company reported 20% year-on-year growth in revenues to $16.52 billion, which was in line with our expectations. Furthermore, it’s operating income from continuing operations declined by approximately 1% to $3.72 billion, primarily due to increased investment in research and development. The markets reacted a bit negatively to the results as the stock was down by over 2% in the aftermarket trading hours. Pricing pressure on online ads continued to drive a 4% year-over-year decline in cost-per-click (CPC). However, aggregate paid clicks, which represent the number of ads served across Google properties, grew by 17% year-over-year. In this note, we will discuss Google’s results. Click here to see our complete analysis of Google Cost-Per-Click Falls as Ads on Mobile Increases We currently estimate that PC search ads and mobile search ads contribute approximately 65% to the firm’s value. Online ad spending is expected to increase in general. eMarketer has predicted that worldwide mobile ad spending will exceed $32.71 billion in 2014. Even though mobile search ads are expected to only generate 17% of the company’s total revenues in 2014, we expect the proportion to increase to over 35% by 2021. The cost-per-click, a metric that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years. The recent trend is indicative of geographic mix, device mix, property mix, as well as the ongoing product and policy changes. While international revenue contributes nearly 58% of the total revenues, mobile devices account for a huge influx of queries for Google. Advertisers have realigned their ad budgets in favor of mobile devices. Traditionally, CPC for mobile ads is lower compared to that of a PC. As a result, the average blended CPC (CPC for both mobile and PC) declined by 4% year-over-year during the quarter. Furthermore, CPC declined by 1% sequentially as pricing pressure took its toll. However, Google is trying to improve its mobile CPC by directly linking advertisers with mobile applications that are downloadable. Additionally, it continues to develop its estimated total conversion tool, a mechanism designed to understand how mobile ads drive conversions to phone calls from customers, with features like cost device measurement for display ads to improve understanding of how mobile display ads affect advertising campaigns. Going forward, we expect that the growth in mobile advertising will continue to weigh on CPC. Youtube Boosts Ad Volumes In our  pre-earnings note, we mentioned that we would be closely watching YouTube because it caters to the rapidly growing online video ad space. During the earnings call we got some encouraging metrics from the management, which makes us confident about YouTube as an essential driver of revenue growth going forward. The management stated that it had sold out the majority of its U.S. Google Preferred offering, which represents among the top 5% of popular channels inventory on YouTube. To ensure that YouTube’s dominance continues across mobile devices, the company announced new ad formats customized for mobile screens, and expanded YouTube’s TrueView ads into AdMob’s network of more than 650,000 mobile apps. Considering Google’s dominance in the video ads industry, with nearly 159 million unique viewers as of August 2014,  we expect it to do well in the mobile video space too. Going forward, YouTube is important for Google because, according to our estimates, this division constitutes just under 10% of its value. Revenues from this division were around $3.7 billion in 2013, and we think that they will continue to grow and reach around $18 billion by the end of our forecast period. Capitalizing on the Popularity of Android With Play Store Google’s phone division makes up 8% of its value. Google continues to leverage the growing popularity of its Android operating system with app sales on its Play store. Furthermore, Google’s apps (such as Google Play, Search and the YouTube app) have over 50% reach for the mobile audience according to comScore. This was reflected in the growth of Google’s other revenues, which grew by 50% year-over-year to $1.8 billion, and is primarily composed of revenues from sale of digital content. Going ahead, we expect revenues from digital content to grow to $5.6 billion by 2021, bolstered by the increasing use of Internet to deliver content such as movies, books and music. Capital Expenditure Continues to Soar Google continues to invest heavily in Internet infrastructure and reported $2.4 billion in capital expenditures in the third quarter of 2014. Majority of capital investments are for IT infrastructure, including data center construction, servers and networking equipment. Google has been steadily ramping up its spending for the past couple of years, in an effort to improve its return on investment and quality of service. We are in the process of updating our model. We currently have a  $544 price estimate for Google, which is in line with the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Las Vegas Sands Earnings Grow 2% While Revenues Decline Amid A Slowdown In Macau Gaming
  • By , 10/20/14
  • tags: LVS MGM WYNN
  • Las Vegas Sands (NYSE:LVS) recently reported its Q3 2014 earnings. A decline in VIP gaming in Macau weighed over the company’s performance and China revenues declined 0.4% to $2.33 billion. However, the EBITDA increased by 3% to $809 million due to mass-market gaming growth. Las Vegas Sands’ consolidated revenue decreased 1% to $3.53 billion and earnings per share jumped 2% to $0.84 for the quarter. Sands Cotai Central continued to perform well with revenues at the property rising 11% and EBITDA up 19% to $267 million. Cotai has been the driving force for Las Vegas Sands in the recent past, and we believe that it will continue its uptrend in the coming years driven by higher mass-market gaming. VIP gaming accounted for only 16% of Macau profits while mass-market gaming contribution was around 53%. Given the recent decline in Macau gaming, the company has been shifting its tables from VIP to mass segment for the past few quarters. VIP table count decreased by 21% to 370 tables while mass-market gaming tables increased 9% to 1150 tables during the third quarter. We continue to believe that mass-market gaming will be a key driver for future growth in Macau and for Las Vegas Sands. In Singapore, the company witnessed a decline in gaming volume but non-gaming operations did well, especially the hotel, which saw 17% jump in ADR (average daily rate). We have revised our price estimate for Las Vegas Sands from $78 to $74 reflecting the impact of the recent quarterly earnings.
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    Qualcomm Acquires CSR To Accelerate Its Growth In IoT
  • By , 10/20/14
  • Last week, leading mobile chipmaker Qualcomm (NASDAQ:QCOM) agreed to buy UK based Cambridge Silicon Radio (CSR) for $2.5 billion. U.S. based chipmaker Microchip Technology made a bid for CSR in August this year, but the latter rejected it saying the offer was not enough. Qualcomm has agreed to pay 900 pence a share in cash for CSR, which represents a 56.5% premium on the share price before the start of the offer period. CSR, which spun-off from Cambridge Consultant in 1998, is a pioneer in bluetooth technology for machine-to-machine communication. It is growing in areas like automotive and wearable devices. Its chips are used in products such as portable audio speakers and Apple-owned Beats headphones. Qualcomm believes that CSR’s leadership in Bluetooth, Bluetooth Smart and audio processing will strengthen its position in providing critical solutions for the Internet-of-Things (IoT) market. IoT, which includes all the other computing devices apart from PCs, tablets and smartphones, is the next big wave in computing. Gartner estimates the market will grow by almost 30 times, from an installed base of 0.9 billion in 2009 to 26 billion by 2020. It will result in $1.9 trillion in global economic value-add through sales into diverse end markets. Qualcomm is the No.1 mobile chipmaker in the world. The acquisition of CSR will complement its current offerings by adding products, channels, and customers in the important growth categories of IoT  and automotive infotainment, accelerating Qualcomm’s presence and path in these fast growing markets. In May 2014, Qualcomm agreed to acquire Wilocity, a maker of wireless HDMI connections, used to transmit video between computers and displays, and it developed AllJoyn, an open-source platform that allows devices to share information with other nearby devices. Qualcomm believes that CSR’s highly advanced offering of connectivity technologies, and the strong track record of success it has in these areas, will unlock new opportunities for growth. Subject to regulatory approvals and assuming that there are no alternate bidders, Qualcomm expects the acquisition to close by late summer 2015.  The is expected as well to be accretive to non-GAAP earnings per share in fiscal 2016, the first full year of combined operations. Our price estimate of $74 for Qualcomm (market cap of 125 billion) is only marginally lower than the current market price of $76 (market cap of $129 billion). We expect the company to report revenue of around $28 billion and net income of $7 billion for calendar year 2014. For fiscal year 2014 (ended September), we forecast non-GAAP diluted EPS of $5.14 as compared to market consensus of $5.31.
    MET Logo
    Insurance Week In Review: MetLife, UnitedHealth
  • By , 10/20/14
  • Last week saw a few noteworthy events in the insurance space. On the health insurance front, UnitedHealth Group (NYSE:UNH) announced earnings for the third quarter, while on the life insurance and retirement front, MetLife announced the expansion of its investments in agriculture. Below we review the week ended October 17 for the sector.
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    Weekly Oil & Gas Notes: Petrobras' Production Update And Chevron's Deepwater Projects In Indonesia
  • By , 10/20/14
  • Oil and gas stocks continued their decline last week amid falling benchmark crude oil prices due to slowing demand growth. The growth in demand for crude oil has been slowing down recently due to moderating economic growth in emerging markets such as China and India and signs of slower economic recovery in the Euro-zone. Earlier last week, the International Energy Agency (IEA) in its latest monthly report cut its forecast for the growth in global oil demand this year. It now expects demand, which stood at around 90.5 million barrels per day last year, to increase by just around 0.7 million barrels per day this year. The price of front-month Brent crude oil futures contract on the ICE declined by around 4.5% last week and is currently trading at around $86/barrel. The  NYSE Arca Oil & Gas Index (^XOI) also declined by around 1.8% last week. Below, we provide an update on some of the key events that occurred last week related to the oil and gas companies we cover. Petrobras’ Upstream Production On The Rise Petroleo Brasileiro Petrobras (NYSE:PBR) recently announced its September 2014 hydrocarbon production figures. The company’s total oil and gas production from Brazil increased to 2,565 thousand barrels of oil equivalent per day (MBOED), up more than 8.5% over last year. Its domestic crude oil production grew by 7% from 1,979 thousand barrels per day (MBD) last year to 2,117.6 MBD this year. The month-on-month growth in crude oil production from Brazil stood at 0.6%. Most of the increase in hydrocarbon production primarily came from the ramp up of P-55 and P-62 platforms at the Roncador field located in the offshore Campos Basin that holds more than two-thirds of the company’s total proved hydrocarbon reserves in Brazil. Petrobras also announced the start-up of commercial production from a new platform at the Santos Basin pre-salt area of Iracema Sul, in Lula field, located on the block BM-S-11. Petrobras holds a 65% operating interest in the BM-S-11 concession, while BG Group and Petrogal holds a 25% and 10% interest in the block, respectively. The new platform, which is located around 240 km off the coast of Brazil, has a capacity to process up to 150 thousand barrels of oil and 8 million cubic meters of natural gas per day. This start-up is expected to provide a further boost to Petrobras’ pre-salt production. The company recently announced that oil production from fields operated by it in the pre-salt areas of Campos and Santos Basins, which averaged just 302 MBD last year, hit a record level of 618 MBD on September 18. We currently have a  $21/share price estimate for Petrobras, which is around 40% above its current market price. The company’s share price decreased by around 4.5% last week. We currently estimate Petrobras’ 2014 diluted EPS to be at $2.1, compared to the consensus estimate of $1.61 reported by Reuters. See Our Complete Analysis For Petroleo Brasileiro Petrobras Chevron Acts On Deepwater Projects In Indonesia Chevron (NYSE:CVX) recently made a final investment decision (FID) on a deepwater natural gas development project in Indonesia after it received all required government approvals. The company holds a 62% operating interest in the Bangka project that includes a subsea tieback to the West Seno floating production unit (FPU), with a design capacity of a 115 million cubic feet of natural gas and 40,000 barrels of condensate per day. The Bangka project is a part of Chevron’s Indonesia Deepwater Development (IDD) plan, which also includes the Gendalo-Gehem project. The Gendalo-Gehem project that includes the development of two separate hubs (each with its own FPU and pipelines) at an estimated cost of around $4 to $7 billion was also expected to reach FID this year. However, Chevron is reported to have delayed the final decision on this project, as it found additional reserves in the targeted fields that led it to revise the development plan for the multi-billion dollar project. The immediate financial impact of this announcement on the company is limited since it takes several years for deepwater projects to advance from FID to first commercial production. We currently have a  $126/share price estimate for Chevron, which is around 10% above its current market price. The company’s share price decreased by around 1.8% last week. We currently estimate Chevron’s 2014 Non-GAAP diluted EPS to be at $11.02, compared to the consensus estimate of $10.35 reported by Reuters. See Our Complete Analysis For Chevron 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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    Yelp Earnings Preview: Revenue Growth From Local Ads, Mobile and DPO In Focus
  • By , 10/20/14
  • Yelp (NYSE:YELP) is set to release its Q3 2014 earnings on  Wednesday, October 22 nd . While the company continues to report good growth in its core local ads business, the pace of this growth is directly related to the duration of its presence in the regions where Yelp operates. In the last few years, Yelp has expanded to regions outside the U.S, where the purchasing power of businesses and users is low compared to the U.S. Therefore, we believe that the pace of local ads growth will slow down as cohorts within the U.S. mature, and revenues from newer regions kicks in. Therefore, in this earnings announcement, growth in the local ads business will be the key focal point, and will give us a fair indication of the expected revenue growth in the coming quarters. Furthermore, we will continue to monitor revenue growth from mobile devices and the Deal, Partnership and Other services (DPO) business as we expect the revenues from these services to form a significant portion of division’s revenues in the coming quarters. Check out our complete analysis of Yelp Outlook for Q3 and 2014 For Q3 FY14, the company expects revenues to be in $98 – $99 million range, representing growth of approximately 61% compared to the third quarter of 2013. Adjusted EBITDA is expected to be in the range of $18 million to $19 million. For the full year, Yelp has announced an improvement in guidance, and projects net revenue to be in $372 – $375 million range, while adjusted EBITDA should be in $67 – $69 million range. Growth In Local Ads Business To Continue The local ads business currently accounts for around 80% of Yelp’s stock value, in our view, and is its biggest revenue source. During Q2 FY14, active local business accounts grew by 55% year over year to approximately 80,000. The primary drivers for Yelp’s account growth are its international expansion efforts and the cumulative increase in reviews on the Yelp site for its existing markets. The company has a total addressable market (TAM) of 73 million local businesses in the world, of which 53 million are present in North America, Europe and New Zeland. As the company continues to expand in internationals markets, we expect the active local business accounts to grow in the coming quarters. Furthermore, we expect average revenue per active business account, which is a function of the duration of Yelp’s services in a region, to grow from $2,890 in 2013 to $3,250 by 2021, as the monetization rate in older cohorts increases. With this earnings announcement, we will continue to monitor these performance metrics to ascertain whether the company will be able to maintain its growth trajectory going forward. Revenue Share From International Operations To Increase Recently, the company added Hong Kong, which is one of the most densely populated cities in the world, into its addressed markets. As a result of this and other expansions, international traffic, which grew over 80% year over year to approximately 31 million unique visitors on a monthly average basis in Q2, has become an important indicator for Yelp’s expected revenue growth. Revenue from international markets now contributes nearly 30% to Yelp’s top line and at some point will exceed revenues from the U.S. While it is still early for Yelp to report any significant traction in revenues from international markets, we continue to closely monitor the revenue from these markets, as it will help us in ascertaining the monetization rate in newer regions. Growth In Mobile Ads Metrics In Focus Although, Yelp has been successful in expanding its local ads business by inorganic and organic means, it still needs to monetize its properties more effectively to increase its overall revenue. While Yelp has been using display ads to monetize its websites, it launched display ads for its mobile platform last year (2013). Yelp reported that 50% of unique visitors (~68 million monthly users) used mobile devices for accessing Yelp’s services in Q2 FY14, and 40% of new reviews came from mobile devices. Considering the rampant growth in the usage of mobile devices, we expect the mobile platform to become a major revenue driver for Yelp’s brand ads division. In this earnings announcement, we aim to quantify the revenue generated through mobile display ads. We expect that Yelp will continue to report growth in monthly mobile users in Q3, and are closely following this number in the upcoming earnings announcement. Growth In Revenues From Deals Platform Yelp’s deal, partnership and other services (DPO) division contributes 5.6% to its value. Currently, Yelp generates revenue from this division through any transaction that might occur on its website. Yelp’s deals platform allows merchants to promote themselves, and offer discounted goods and services on a real-time basis to consumers directly on Yelp’s website and mobile app. Yelp charges a fee on Yelp Deals for acting as an agent in these transactions. In Q2, Yelp reported 27% year-over-year growth in deals revenues to $4 million. In a move to diversify its revenue stream, Yelp expanded its services in 2013 by introducing new features. These include the Call to Action program, which lets a business promote its services by offering discounts, as well as a new delivery platform to serve its clients. If these delivery services gain traction among Yelp users, Yelp’s DPO division can be an important growth driver going forward. In this earnings announcement, the focus will be on revenue growth from these services. Currently, Yelp’s DPO division contributes only 6% to total revenues. However, we expect its contribution to increase to 8% by 2021. Our price estimate for Yelp stands at  $60.44, which is 11% below its current market price. We invite the reader to adjust the model and create his or her own alternative valuation. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis)  Get Trefis Technology
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    Higher 737 and 787 Production Rates Will Likely Lift Boeing's Profit Despite Lower Government Military Spending
  • By , 10/20/14
  • tags: BA
  • Boeing (NYSE:BA) will announce its third quarter earnings Wednesday, October 22. The airplane manufacturer is coming off a good second quarter in which its profit rose sharply on higher commercial airplane deliveries. We figure the company will likely continue to post healthy growth in its profit in the third quarter as it delivered more commercial airplanes to airlines, compared with the same period last year. Boeing delivered 186 commercial airplanes in the three months ended September 30, 2014, up from 170 airplanes that it delivered in the year ago period. Given that the commercial aviation business constitutes nearly 65% of the company’s top line, this significant growth in commercial airplane deliveries will likely lift its third quarter results. Having said this, a weakness from lower U.S. military spending will likely weigh on the remaining portion of Boeing’s business, consisting of primarily defense equipment manufacturing. We currently have a stock price estimate of $136 for Boeing, around 10% ahead of its current market price. See our complete analysis of Boeing here Higher Production Rates Of 737 and 787 Dreamliner Will Drive Q3 Results Boeing raised the production rate of its best selling narrow-body airplane, the 737 Next Generation, from 38 airplanes a month to 42 a month in March earlier this year. As a result, the company delivered 120 of these jetliners in the third quarter, up from 112 in the third quarter of 2013. Boeing also benefited from a production rate hike executed in its wide-body 787 Dreamliner program in December last year. The company at the time hiked its 787 production rate to 10 airplanes a month from 7 a month. As a result, Boeing delivered 31 787s to airlines in the September quarter of this year, compared with 23 787 deliveries in the same period last year. Higher deliveries for these two highest selling Boeing airplanes accounted for the entire increase in Boeing’s total commercial airplane deliveries in the third quarter. In our view, the company executed these rate hikes as backlogs for both these airplanes rose sharply over the past few years. With global air passenger traffic recovering strongly in the aftermath of the financial crisis, airlines from around the world placed large orders for these jetliners. Through September 2014, Boeing’s backlog for the 737 swelled over 4,000 airplanes and backlog for the 787 Dreamliner increased to about 860 airplanes. At current production rates, the company will take approximately 7-8 years to clear off this backlog. The issue with this long time period is that airlines will have to wait many years before taking delivery against their orders. This long waiting time period could compel a few airlines to look towards other manufacturers, especially Airbus. So, in order to prevent airlines from looking towards other manufacturers just because of a long waiting time period, Boeing executed production rate hikes in its 737 and 787 programs. In the third quarter, we figure higher airplane deliveries driven by these rate hikes will be the primary growth driver in Boeing’s results. Weak U.S. Defense Spending Will Likely Temper Growth From Commercial Aviation On the flip side, flat-to-declining military spending from the U.S. government will likely weigh on Boeing’s defense contracting business, which constitutes the majority of its remaining 35% top line. Boeing generates nearly 70% of its defense business from U.S. government contracts, so weak government spending will weigh on the company’s defense business. In the first half of 2014, due to government austerity, Boeing’s defense sales fell by 6% annually, and we anticipate this trend to persist in the third quarter. For full year 2014, Boeing anticipates its defense segment sales to fall by 7-10% annually to $30-31 billion. But, given the solid growth in the company’s larger commercial airplane segment, we figure the company will likely be able to more than offset this weakness in its defense business to post good third quarter results. 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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    Honeywell’s Revenues Grow On ACS And Margins Due To Aerospace
  • By , 10/20/14
  • tags: HON UTX JCI
  • Honeywell International (NYSE:HON) reported its third quarter 2014 results on October 17, 2014, posting 5% growth in revenue, to reach $10.1 billion. Honeywell’s Automation & Control Solutions and Performance Materials & Technologies segments grew in the high single digits, whereas, the Aerospace segment  remained flat. However, Aerospace contributed significantly to the improvement in operating margins, which increased 100 basis points, to 16.2%. The margins improvements, driven by higher volumes and productivity, helped increase net profits by 14%. Earnings per share increased 19% for the quarter. Given the strong performance in the third quarter, Honeywell revised its earnings per share guidance upwards $5.50 – $5.55, from $5.45 – $5.55. See our complete analysis of Honeywell here Automation & Control Solutions grows on Intermec Honeywell’s acquisition of Intermec has had a significant impact on its Automation & Control Solutions segment. In the third quarter, the segment’s revenue grew 9%, to reach $3.67 billion, of which 5% came from Intermec. Even in the second quarter, most of the 10% growth in revenue came from the acquisition. We believe that sales of Honeywell and Intermec’s data capturing products such as radio frequency identification (RFID) and barcode scanners and tags should continue to drive growth in the segment’s revenue. Sales of Honeywell’s heating, ventilation and air conditioning (HVAC), ssafety and security products should also contribute to growth. The demand for RFID and barcode scanners and tags has been growing due to the demand for efficient means of data collection. RFID and barcode technologies are being increasingly adopted by the retail industry for tagging clothes and keeping account of sales and inventory. These trends are expected to drive growth in the global Automatic Data Capture industry at an average rate of 12.29% per year through 2016. Sales of HVAC, safety and security products are the highest in developed countries due to the high disposable incomes and standards of living. However, demand for these products is rising in developing countries as well, primarily due to the increase in urbanization and rising disposable incomes. Development of commercial spaces, such as offices, malls and airports are driving the demand for HVAC, safety and security products. Additionally, with rising per capita income in the developing countries, consumers are looking to spend on products that help make their lives comfortable and safe. This will also help drive demand for HVAC, safety and security products. In order to capture this demand growth, Honeywell has been offering products such as air cleaners, portable masks, water purifiers and packaging material in China that will help protect health and the environment. Aerospace flat but D&S growth drives positive sentiment Honeywell’s Aerospace sales have been suffering from the decline in U.S. defense spending. In 2013, Honeywell’s Defense and Space (D&S) sales, which are a part of the Aerospace segment, declined 5% due to a 7.2% decline in U.S. defense outlays due to the impact of sequestration as well as the winding down of the war in Afghanistan. The first and second quarter 2014 D&S sales were down 8% and 1% respectively. However, due to double digit growth in international markets and stabilization in sales to the U.S. Department of Defense (DoD), Honeywell’s D&S sales were up 3% in the third quarter. In the fourth quarter, we expect to see continued growth in the D&S sales driven by international markets. Many countries, other than U.S. and Russia, have been actively voicing their intentions of increasing defense spending. U.S. defense outlays are projected to decline 5% in 2014, which should keep sales to U.S. DoD suppressed. The primary reason behind Aerospace flat revenues seems to be the divestiture of the Friction Materials business. Friction Materials business, which accounted for around 18% of the Transportation Systems, was divested in July 2014 following a decision to focus on differentiated technologies and on businesses that are in line with its long-term plans. The impact of divestiture will continue till the second quarter of 2015. The Aerospace segment, though did not contribute to Honeywell’s revenue growth, made a significant impact on Honeywell’s margins. Honeywell’s productivity measures, such as Honeywell Operating System, the synergies between turbochargers and aerospace technologies, and the divestiture of Friction Materials business helped improve Aerospace margins by 150 basis points. The margin improvement is expected to continue in the coming quarters driven by the same trends. Strong growth in turbochargers sales volume contributed towards offsetting the impact of divestiture of the Friction Materials business. Turbochargers can efficiently deliver an increase in vehicle performance while reducing fuel consumption and emissions, and therefore are an effective solution to the growing demand for fuel efficient vehicles that are compliant with the stringent emissions norms being implemented across the globe. The global turbocharger market is expected to grow at an average rate of 10.12% each year through 2019 driven by the increased use of turbochargers by manufacturers as they try to fulfill the demand for fuel efficient vehicles. Since Honeywell is the leading turbocharger manufacturer in the world, its large market share positions it well to capture a major portion of the growth in the turbocharger industry. However, the fourth quarter 2014 Transportation Systems revenue are up for a tough comparison on a year-on-year basis since revenue grew 15% in the fourth quarter last year. 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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    Philip Morris' Q3 Earnings Along Expected Lines
  • By , 10/20/14
  • tags: PM
  • Philip Morris reported its Q3 earnings on October 16, more or less meeting general expectations. Earnings per share stood at $1.38 per quarter, 2 cents more than the analyst’s consensus estimate at Bloomberg Businessweek.  We had earlier reported on the likelihood of such a result, and the causes that may lead to it (See Philip Morris Q3 Earnings Preview ). In this article we review the management’s commentary on the earnings and try to understand what it means for Philip Morris for the rest of the year. See Our Full Analysis For Philip Morris Causes Of Earnings Decline In our pre-earnings article we had identified unfavorable currency impacts and three other sources of costs that could bring the revenues down. The first of these are the investments that were to be made towards the commercialization of reduced risk products. The second of these costs related to the roll-out of Marlboro Red 2.0. The final source of increased costs were the expenses to be incurred in completing the shutdown of its factory in the Netherlands as part of optimizing its manufacturing infrastructure. Going by the management’s presentation, unfavorable currency fluctuations took a chunk out the earnings and reduced it by 72 cents per share. This was due to the steady strengthening of the U.S. dollar versus other currencies, especially those of Europe. The dollar index, which measures the strength of the dollar against other major international currencies, saw the dollar strengthen by ~7.5% this quarter as its value went from 80 in July to over 86 in September. Since Philip Morris earns significant income in these international currencies, its earnings suffer when these currencies decline against the dollar. The restructuring of its manufacturing network including closure of facilities in the Netherlands and Australia have also impacted earnings in a bad way. This is likely to be on account of the expensing of several associated costs. Asset impairment costs reflect the write-down of property, plant and equipment happening on account of the closure of factories and similar production facilities. The plant closed in the Netherlands was Philip Morris’ largest such facility in the world. There are costs associated with shifting production from the Netherlands to the rest of Europe, and from Australia to South Korea. A decline in demand in these countries has precipitated this move. Then there are the costs associated with lay-off of employees and the benefits that have to be provided to them. Together, these costs described by the management as costs of optimizing their manufacturing footprint have taken 27 cents per share from the earnings. Market dynamics in certain geographies also affected the earnings. For instance, Japan saw a reduction in both the market size for cigarettes as well as market share for Philip Morris. The market size reduction for cigarettes in Australia was made worse for Philip Morris by the consumer’s tendency to down-trade to more affordable varieties of cigarettes, especially those of its competitors. This was in response to an excise tax increase by the Australian Government. Outlook For Q4 2014 Philip Morris’ management expects a more challenging quarter ahead. Some of the costs we identified as potential sources of earnings decline in Q3, seem to have been partly postponed to Q4. The first among these is the cost involved in commercialization of reduced risk products. While a pilot plant for market study purposes has been built, the construction of a large scale facility for commercialization of these products is still ongoing. Together these facilities located near Bologna in Italy are expected to cost around €500 million. This quarter will also see more of the costs associated with commercialization of the Marlboro Red 2.0 brand architecture. As part of the revamp of the brand identity, several product level changes had been introduced to this brand. Such changes include redesigned packs and filter. The commercial roll-out of these products and the associated marketing spends are expected to weigh on Q4 2014 earnings for Philip Morris. The manufacturing network restructuring costs that reduced earnings in Q3 are also expected to have a similar impact in Q4. 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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    Union Pacific Earnings Preview: Agricultural And Industrial Shipments Will Likely Offset Sluggish Chemicals Shipments
  • By , 10/20/14
  • tags: UNP CSX NSC
  • Union Pacific Corporation (NYSE:UNP), one of the leading railroads in the U.S., is set to announce its second quarter results on October 23. We expect to see an increase in revenue and volume driven by growth across Union Pacific’s Agricultural, Industrial and Intermodal segments. Union Pacific’s Chemicals shipments may be sluggish due to narrow crude oil spreads. Revisiting first quarter 2014 Union Pacific posted overall revenue growth of 10% in the second quarter 2014 to reach $5.7 billion, driven by double digit volume growth in its Agricultural and Intermodal segments. Union Pacific’s Chemicals segment was the only one that showed a decline in carloads during the quarter. Despite the 6% year-on-year  increase in operating expenses, Union Pacific’s operating ratio (operating expenses expressed as a percentage of revenue) improved by 2.2%, to reach 63.5%. This was primarily due to strong revenue growth. Net income increased 17%, driving a 20% increase in earnings per share. See our complete analysis of Union Pacific here Chemical carloads could be sluggish due to crude oil shipments Union Pacific’s crude oil shipments are highly dependent on the spread between Western Texas Intermediate (WTI), produced in the US, and Brent crude oil, which is sourced from the North Sea. The spreads represent the price difference between WTI and Brent. If the spread is wide enough such that even after accounting for transportation costs, WTI is cheaper than Brent, then it makes more sense for refineries to use WTI. The narrower the spread, the less profitable it becomes for refineries to ship crude by rail since shipping costs would eat into their margins. Refineries would then prefer to ship crude oil through pipelines or import Brent rather than use WTI. During the three months ended September 2014, the spread between the WTI and Brent averaged $4 per barrel, which is significantly narrow. The impact of this narrow spread can be seen on Union Pacific’s petroleum products carloads, which declined 3% year-on-year during the third quarter through the week ended September 27, 2014. This should have a negative impact on Union Pacific’s Chemicals shipments. However, growth in other chemical shipments should more than offset the decline in crude oil shipments. Union Pacific’s chemicals carloads were up 4% during the third quarter through week ended September 27, 2014. This reflects the increase in chemical activity in the U.S. during the third quarter. According to the latest data provided by the American Chemistry Council, chemical activity was up 3.9% year-on-year during the third quarter. Last year’s strong harvest should drive Agricultural shipments Last year’s strong corn and soybean harvest should help drive Union Pacific’s Agricultural shipments. In 2013, corn production grew 30% and soybean by 8%. This had a favorable impact on Union Pacific’s first and second quarter grain shipments which grew by 39% and 43% year-on-year respectively. We believe that the same trend has continued to impact Union Pacific’s grain shipments in the third quarter, which grew 33% during the third quarter through week ended September 27, 2014. Union Pacific’s grain mill products carloads have also benefitted from the high corn production. High corn production has led to a decline in its price. Low corn prices encourage an increase in ethanol production, which is a part of Union Pacific’s grain mill products carloads. This should have a favorable impact on Union Pacific’s Agricultural shipment volumes and revenue. Housing and construction activity will drive Industrial shipments Housing starts have been fluctuating a lot in 2014. After a strong 1.117 million in July, housing starts declined to 956,000 in August. However, these numbers were up 24% and 8% year-on year in July and August respectively, indicating a continued upward trend. Housing starts increased 18% year-on-year in September. Building permits have also been up year-on-year. These trends are driving the forecast for a 7.7% increase in housing starts in 2014. Additionally, construction spending in the U.S was also up 6% year-on-year over the two months, July and August 2014. Union Pacific’s Industrial shipments, which includes shipments of housing and construction related material such as lumber and gravel, should benefit from the growth in housing and construction activity. 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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    Revlon Q3FY14 Preview: Impact Of Euro Depreciation In Focus
  • By , 10/20/14
  • tags: REV LRLCY EL AVP
  • Mass market cosmetics manufacturer  Revlon (NYSE:REV) is scheduled to report its third quarter fiscal year 2014 results on October 22. In the first two quarters, Revlon has outpaced consensus estimate figures, notching up nearly $968 million in sales. Comparatively, standalone sales for Revlon stood at $677 million in H1FY13. Including sales from The Colomer Group (TCG) on a proforma basis, Revlon’s total H1FY13 sales stood at $934 million. This represents a growth rate of 3.6% year-on-year. Much of this growth in sales is a result of the integration of TCG into Revlon’s operations. Year-on-year growth rate for the Consumer and Professional segments were 0.5% and 12.9% respectively. The robust growth from the Professional segment (acquired from TCG) has masked the weakness in Revlon’s own Consumer line of products. For the upcoming Q3FY14, consensus estimates for Q3FY14 stand at $470 million, compared to our estimate of $439 million. Below, we discuss key trends that could influence quarterly results for Revlon. See Our Full Analysis for Revlon Euro Depreciation Could Impact Sales and Margin Performance The Colomer Group derives more than 50% of sales from the Europe, the Middle East and Africa (EMEA) region. This high proportion of sales from a region that has witnesses significant currency headwinds is likely to weigh on reported revenues for Revlon. In the July – September quarter, the Euro has depreciated nearly 8% against the U.S. Dollar. This could slowdown reported revenue growth, leading to substantial deceleration in overall sales for Revlon. On the flipside, consumer sentiment in the domestic U.S. market has been upbeat, which would accelerate sales for Revlon’s consumer product line. The company increased its advertising budget by $12 million last quarter to spur demand in a slowing mass cosmetics market, which dragged down operating profit margins from 18% to 12.5% on a year-on-year basis. Consequently, segment profit from the Consumer Products division, which mainly includes mass market cosmetics, decreased to $82 million in Q2FY14 from $85 million in Q2FY13 on a pro-forma basis. Segment profit for the Professional Products division increased 42% on a year-on-year basis, from $22 million in Q2FY13 to $31 million in Q2FY14. For the upcoming quarter, we expect the downward pressure exerted by the depreciating Euro in the European Union to be greater than any increase in sales from the advertising campaigns through higher volumes in the U.S. In addition, the market for prestige and luxury cosmetics is cannibalizing sales from mass market cosmetics products in developed markets. Furthermore, the recovery in consumer spending coupled with the holiday season in Q4FY14 should only attenuate the decline in the mass cosmetics market. We expect Consumer segment profit margins to be lower than current levels of about 22% in Q3FY14. Margins from its Professional segment could marginally decline during the quarter, impacted by the depreciating Euro. For the six months into 2014, margins from the TCG business grew to 24% from 17% in H1FY13, facilitated by strong revenue growth rate in the segment. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Delta Shows Solid Operating Performance Even As Special Charges Clip Its Profit
  • By , 10/20/14
  • tags: DAL
  • Delta Air Lines (NYSE:DAL) reported solid core operating results in the third quarter with strong top line growth and margin expansion. The carrier’s top line rose by 7% annually to $11.2 billion as it expanded flying capacity on domestic and Latin international routes. Gains from cost cuts, which Delta initiated about two years back, helped expand its operating margin to 15.8%, resulting in third quarter profit of nearly $1 billion, excluding special charges. However, on a GAAP basis, which includes special one-time charges, Delta’s third quarter profit shrank to $357 million, from nearly $1.4 billion in the year-ago period. The company’s results were impacted by primarily one-time charges resulting from the accelerated retirement of its 747 fleet. However, as these charges are one-time in nature, we figure the company’s future results are better indicated by its core operating results, which were solid in the third quarter. Separately, Delta CEO Richard Anderson said that the carrier is not seeing any impact on its advance booking rates from Ebola. Recently, after a second nurse who cared for the Liberian Ebola-infected man was diagnosed with the disease, concerns about the spread of this disease mounted in the U.S.. Many airline stocks including Delta fell sharply at the time, reflecting these concerns . Investors and traders feared that many people could shelve their travel plans around the holiday season, which is a peak travel period for airlines. However, Delta put those concerns to rest in its third quarter earnings announcement saying that it has not seen any impact on its advance booking rates. On the contrary, the carrier said that it is anticipating a record fourth quarter with solid top line growth and margin expansion. We currently have a stock price estimate of $39.25 for Delta, about 15% ahead of its current market price. We are in the process of incorporating the third quarter results and shall update our analysis shortly. See our complete analysis of Delta here Third Quarter Top Line Rose On Capacity Expansion Delta expanded its flying capacity by 3% annually in the third quarter, focusing on domestic and Latin international markets. With the demand for flights remaining solid in these markets, the carrier’s higher flying capacity was well absorbed and its third quarter passenger traffic rose by 4% annually. Driven by this higher passenger traffic, Delta’s overall passenger revenue rose by 6% annually to $9.8 billion in the third quarter. Separately, Delta’s cargo revenue also rose to $244 million in the third quarter after steadily falling for many past quarters. This recovery in cargo revenue could be indicative of a steady recovery in global cargo markets, and we could see some tailwind from cargo revenue in Delta’s results in the coming quarters. Gains From Cost Cuts Ensure Strong Operating Margin On the margin front, Delta was able to expand its operating margin to an impressive 15.8% in the third quarter. For a fifth consecutive quarter, the carrier was able to control growth in its non-fuel CASM at under 2%, when measured on a year-over-year basis. Non-fuel CASM (cost per available seat mile) is a standard metric used in the airline industry to measure an airline’s cost efficiency. Fuel costs are excluded from this metric to more accurately assess how well an airline manages the costs it can control. We figure the cost cutbacks that Delta initiated two years back are helping control its non-fuel costs. Those cost initiatives, some of which are ongoing, focused on restructuring the carrier’s domestic fleet and enhancing its employee productivity. Delta anticipates that gains from these measures will keep growth in its non-fuel CASM at under 2% in the fourth quarter as well. On this basis, the carrier has forecast its fourth quarter operating margin to be around 10-12% – a quarter in which operating margins of airlines remain under pressure due to additional costs imposed by the onset of winter. Outlook For The Fourth Quarter All in all, Delta posted a solid third quarter, and it looks set to carry forward this momentum in the fourth quarter. The carrier plans to increase its flying capacity by 3% annually in the fourth quarter as well, and we figure with the demand environment likely to hold steady, this capacity increase will help grow the carrier’s passenger traffic and top line. Healthy operating margin will ensure that this top line growth gets translated into a strong fourth quarter bottom line. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    McDonald's Earnings Preview: Headwinds In Eastern Markets Might Deliver A Huge Blow To Top-Line Growth
  • By , 10/20/14
  • McDonald’s Corporation (NYSE:MCD) is scheduled to announce its third fiscal quarter earnings report on October 21. The fast food giant’s bad phase does not seem to end, as the company faced some major operational headwinds in the last couple of months. For the last 2 years, quick service restaurants (QSRs) such as McDonald’s, Yum! Brands, Burger King (NYSE: BKW) and  Dunkin’ Brands (NASDAQ: DNKN) have been facing stiff competition from fast-casual restaurants in terms of customer traffic. Since the onset of this year, the industry has been witnessing commodity inflation at a higher rate. While most of the restaurants managed to recover from the scenario, McDonald’s situation continued to worsen. The company faced problems in its eastern markets with the ‘China meat scandal’ followed by the temporary restaurant shutdowns in Russia. McDonald’s stock has dropped 12% from its year-high of $103.5 in May. In the second quarter, the company continued to deliver disappointing results, as the comparable store sales remained relatively flat and the reported consolidated revenues grew just 1%. In the U.S., comparable store sales decreased 1.5% while operating income rose 1%. The company’s second quarter results reflected negative comparable guest traffic, rising commodity prices and increasing competition in the industry. We have a  $103 price estimate for McDonald’s, which is about 11% above its market price. See Our Complete Analysis For McDonald’s Corporation Problems In The Eastern Markets To Hamper Revenue Growth China Meat Scandal In July, Shanghai Husi Food, the company’s major meat supplier in China, was found guilty of using expired and contaminated meat products. Nonetheless, McDonald’s decided to continue its 50-year long business with the food processing group by using a different plant. Soon after the issue came to light, China’s government issued a ban on import and sales of products processed by Husi Food Group. As a result of the ban, sales of McDonald’s popular chicken nuggets and chicken fillets were suspended in many Shanghai branches. The impact of this incident was visible in the company’s monthly sales report. In August, McDonald’s reported that its global sales for the month of July dropped 2.5%, with 7.3% drop in the APMEA segment. The company operates over 2,000 restaurants in China, of which most stores in Northern and Central China witnessed plummeting sales due to the unavailability of beef and chicken products, whereas restaurants in Southern China were unaffected. The scandal has built a negative reputation among the Chinese customers, leading to a drastic decline in customer count. Moreover, the incident also affected McDonald’s Japanese unit, as 20% of the meat for chicken items in McDonald’s Japan were supplied by the Husi Food Plant.  As a result, McDonald’s Japan lowered its annual guidance at the end of July, on account of declining consumer confidence in Japan. Considering that Japan and China together account for 10.5% of the company’s net revenues, we might witness a significant drop in company’s revenue growth in the third quarter, as well as for the whole fiscal year. Temporary Closures In Russia After facing a food safety scare in China, the Golden Arches has been facing temporary shutdowns in Russia. In August, Russia’s food safety watchdog ordered the temporary closure of five McDonald’s restaurants in Moscow and Southern Stavropol region on claims of alleged sanitary violations. This count rose to 12 by the end of August. However, experts are sceptical that the decision comes as a result of tense U.S.-Russian political ties over Ukraine. (See  Temporary Shutdown Of Outlets & Agricultural Ban In Russia To Worsen McDonald’s Sluggish Growth ) Russia has become an important operational market over the last five years, as the company believes that the country is one of its top seven major markets outside North America. For the last two years, growth in the European region is primarily driven by positive comparable sales in the U.K. and Russia, and partly by expansion in Russia. As a result of the Russian goverment’s decision, the company might witness decline in net sales and customer count from this region. Declining Customer Count To Affect The Top-Line Growth According to the NPD ’s foodservice market research, the restaurant industry has been negatively impacted by the changing dining habits in the U.S., primarily driven by changing economic and cultural conditions. The increasing income gap between the high-income groups and middle-class groups is taking a toll on quick service restaurants (QSR) in the U.S. The customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. Fast-Casual restaurants, such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread, are gradually stealing the market share from QSRs with more average spend per visit and better customer traffic growth. A decline in customer traffic would result into drop in comparable store sales, which might consequently lead to sluggish growth for the company. McCafe’s Canada Expansion To Boost McDonald’s Coffee Portfolio Over the last three years, breakfast has become the highest grossing and fastest growing daypart for the quick service restaurants (QSRs). The most popular breakfast item in western markets is coffee, which has been introduced as a major menu item in all the top quick service restaurants. In September, McDonald’s announced the introduction of McCafe ground coffee in Canadian grocery and retail stores. After its plans for introducing McCafe in the U.S., the company decided to expand the reach of its coffee product in Canada to counter the bitter competition in the breakfast market. The company thinks that it has less than fair share of the coffee market; McCafe accounted for less than 13% of the U.S. market in 2013. However, considering the fact that McDonald’s coffee sales have increased 70% since the introduction of McCafe specialty coffees in 2009, McCafe is the company’s best bet to capture some breakfast market share, by attracting new customers in a country where retail prices are slightly higher. This in turn can give a boost to the company’s average spend per customer visit. 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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    3M's Earnings Preview: Revenue Growth Driven By Electronics & Energy, Safety & Graphics And Industrials Segments
  • By , 10/20/14
  • tags: MMM
  • 3M (NYSE:MMM), a multinational conglomerate, is set to announce its second quarter results on October 23. In the second quarter, 3M’s revenue grew 4.8% year-on-year, to reach $8.1 billion. All five of 3M’s business segments – Industrial, Safety and Graphics, Health Care, Electronics & Energy, and Consumer – posted positive organic local currency sales growth in the quarter, in line with the company’s guidance. Organic local currency sales do not include the impact of acquisitions or currency fluctuations. We expect to see broad-based growth across all of 3M’s segments in the third quarter as well. Sales of display materials, purification systems and automotive OEM products could be primary driving factors for the third quarter revenue. The growing industrial and housing and construction activity will also contribute to 3M’s revenues. During its second quarter meet, 3M reaffirmed its full year earnings per share guidance range of $7.30 to $7.55. The company reduced its guidance for capital expenditure from $1.7-$1.8 billion to $1.5-$1.6 billion citing better understanding due to portfolio management efforts. 3M reiterated its intention to invest $5 billion to $10 billion in acquisitions through 2017. See our complete analysis of 3M here Electronics & Energy Segment to grow on sales of display materials 3M’s display materials include films that help enhance viewing pleasure on devices with displays and adhesives that help bonding display parts, lens, LCDs, and touch screens. These products are purchased by electronic original equipment manufacturers and display manufacturers. The sales of display materials and systems are highly dependent on sales of consumer electronics. In 2013, the U.S. Consumer Electronics industry generated $207 billion. Growing demand for smartphones, tablets, and LCD, UHD and OLED TVs will continue to drive growth in the U.S. Consumer Electronics industry, the sales for which are expected to cross $211 billion in 2014. In the second quarter, sales of 3M’s Electronics & Energy segment grew 6.4% year-on year driven by 11% growth in display materials and systems. Continued growth in sales of consumer electronics will help drive sales for 3M’s display materials in the coming quarters. Growth in industrial, housing and construction activity will drive 3M’s Safety & Graphics Segment 3M’s personal safety products portfolio includes maintenance-free and reusable respirators, personal protective equipment, head and face protection, body protection, hearing protection and protective eye-wear, and they are used to protect workers’ health and ensure their safety in an industrial environment. Growth in industrial activity encourages sales of these safety products. Industrial activity in the U.S grew 3.2% in the third quarter of 2014, which is close to the average quarterly increase since the end of 2010. Sales of 3M’s safety products in the second quarter will have benefited from growth in industrial activity in the U.S. But sales in Europe may have been sluggish given the fluctuation in industrial activity in July and August. It grew 1.7% year-on-year in July but decreased 0.8% in August. 3M sells roofing granules directly to roof shingles manufacturers. Sales of granules are highly correlated to the construction industry, which has been booming in the U.S. Housing starts have been fluctuating a lot in 2014. After a strong 1.117 million in July, housing starts declined to 956,000 in August. However, these numbers were up 24% and 8% year-on year in July and August respectively, indicating a continued upward trend. Housing starts increased 18% year-on-year in September. Building permits have also been up year-on-year. These trends are driving the forecast for a 7.7% increase in housing starts in 2014, which should continue to have a positive impact on sales of 3M’s roofing granules. Purification systems and automotive OEM products will help drive 3M’s Industrial segment 3M’s purification business offers air and water filtration products for residential, commercial and industrial use. The global market for water purification equipment is expected to grow 10% every year till 2018, driven by growing awareness and need for clean water in developing countries like India and China. 3M’s global presence and large number of water purification products position it to benefit from the growth, leading to an increase in its Industrial segment revenues. 3M offers a number of products that are used for manufacturing, repair and maintenance of automobiles. Sales of these products are highly correlated to production of vehicles and average vehicular age. Driven by recovery in the economy, the North American light vehicle production has grown from 8.6 million units in 2009 to 15.5 million units in 2013. Production is expected to grow at a rate of 4% in 2014 driven by increase in consumer spending and high average vehicular age. 3M is set to benefit from continued growth in automobile production since it will have a positive impact on sales of its automotive OEM products, which will help drive overall revenue. 3M expects its industrial segment to grow 3%-6% in 2014. We believe this growth will be driven by continued strengthening in the global economy and growth in end markets such as automotives, chemicals, industrials, construction and packaging. The recent acquisition of Sumitomo 3M should also be accretive to its revenues. 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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    Kimberly-Clark Q3FY14 Preview: Emerging Markets Should Boost Sales And Margins
  • By , 10/20/14
  • tags: KMB
  • Kimberly-Clark (NYSE:KMB) is set to release its third quarter results of fiscal year 2014 on Tuesday, October 21. The company is a leading manufacturer  of professional and consumer tissue products, with brands such as Kleenex and Huggies in its portfolio. Year to date, Kimberly-Clark has posted sales of nearly $10.6 billion, marginally higher from a year-prior period. Sales from the Asian and Latin American markets, which contribute about 40% of total sales, increased nearly 3% in H1FY14. However, this modest performance from these emerging markets were negated by flattish sales in North America and severe currency headwinds in Europe. The flattish sales in its largest market, North America, pressured operating margins in the region. Operating profit from North America shrank 2% during H1FY14, to approximately $1.06 billion. However, the emerging markets of Asia and Latin America posted a 14% increase in operating profit, helped by about $145 million in cost savings from the FORCE (Focused On Reducing Costs Everywhere) program. This along with lower administrative costs have supported overall margin expansion for the company despite sluggish sales in North America and Europe. Below, we take a look at some of the key areas of focus in the upcoming third quarter results. We have  a price estimate of $112 for Kimberly-Clark’s stock, marginally higher than its current market price. See Our Full Analysis for Kimberly-Clark Demand from Emerging Markets Will Lift Overall Sales As noted above, emerging markets such as Asia and Latin America have been pillars of growth for Kimberly-Clark and have offset sluggish performances from developed markets. Kimberly-Clark’s International segment led the growth last quarter with a 10% increase in organic sales. K-C International registered double-digit growth in feminine care, adult care and diapers, and mid-single digit growth in baby wipes, helped by the company’s focus on both premium innovation and category development, as well as the expansion into newer cities. Geographically, organic sales of diapers increased approximately 30% in Russia and Eastern Europe, 20% in China and 15% in Brazil. Within Asia and Latin America, China and Brazil drove organic volumes higher in baby care products, with penetration rates growing rapidly in both markets, owing to their large population base, increased purchasing power and greater brand and product awareness. The company has already exited the baby care and diaper markets in Western and Central Europe in Q2FY12 to focus exclusively on these high growth, high potential markets. In the near term, baby care and diaper products are likely to drive sales higher for K-C International. However, other products from segments such as feminine and adult care could see greater penetration rates on the back of higher brand awareness for Kimberly-Clark in the long term. Margins in Emerging Markets to Rise Higher In addition to expanding sales from volume gains, margins in emerging markets are likely to benefit from low manufacturing overhead and cost synergies from economies of scale. Year-to-date, operating profit margins from emerging markets of Asia and Latin America have increased from 13.3% in H1FY13 to 14.7% in H1FY14. Comparatively, Kimberly-Clark’s margins in North America stand at 19.7% for H1FY14. Margins are higher in North America compared to emerging markets due to their higher price points, despite having greater manufacturing overhead charges. For the upcoming quarter, margins from emerging markets are likely to rise higher due to significant cost inflation in raw materials. Compared to developed markets, emerging markets continue to have relatively low manufacturing overhead charges. Hence, the cost inflation in raw materials can be passed onto the consumer as higher price points. Given the rapidly expanding discretionary income levels in these markets, there is the possibility of the strong demand absorbing higher priced products without a slump in volume growth. In mid-2013, the company carried out a de-sheeting exercise across its Kleenex and Cottonelle line of tissue products, reducing the number of tissues per box by 13% without changing the price of the box. Kimberly-Clark conducted a similar exercise across its Huggies diapers range and began shipping the new packages in February. Such activities should aide an expansion in margins for the company. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Aviation And Oil & Gas Lift GE's Net As Its Portfolio Shifts Towards Core Infrastructure
  • By , 10/20/14
  • tags: GE
  • General Electric (NYSE:GE) posted healthy growth in its third quarter results as higher airplane engine deliveries and oil & gas equipment shipments outweighed lower earnings from a smaller GE Capital. The industrial conglomerate’s top line rose by 1% annually to $36.2 billion as 3% year-over-year revenue growth from its industrial segment was partially offset by a 1% year–over-year revenue decline from its financial arm, GE Capital. Revenue from GE Capital fell as GE continued to sell non-core assets of GE Capital, resulting in lower revenue from a smaller asset base. The company is currently trying to increase focus on its core infrastructure industrial businesses, and accordingly it is reducing the size of GE Capital. GE’s third quarter profit rose by 6% annually to $3.5 billion as gains from cost cutbacks expanded its industrial operating margin to 16.3%. All in all, with these third quarter results, we figure that GE is on path to achieve its 2014 targets for revenue and profit growth. At the start of 2014, GE set targets of 4-7% industrial organic sales growth and 10% industrial profit growth. Through the first nine months of this year, the company has been able to grow its industrial organic sales by 6% annually and its industrial profit by 10% annually. So, GE remains on track to achieve its annual revenue and profit growth targets. Additionally, with GE’s backlog rising to a record $250 billion in the third quarter, we figure the company is well positioned to maintain its growth momentum in the fourth quarter of 2014. We currently have  a stock price estimate of $28.33 for GE, approximately 15% ahead of its current market price. We are in the process of incorporating GE’s third quarter results and shall update our analysis shortly. See our complete analysis of GE here Aviation And Oil & Gas Segments Drove GE’s Third Quarter Revenue Growth In the third quarter, GE’s revenue growth was driven by its aviation and oil & gas segments, which together constitute nearly 40% of the company’s total industrial revenue. In aviation, as airplane makers such as  Boeing (NYSE:BA) and Airbus hiked their production rates in response to the growing global demand for new airplanes, shipments of jet engines manufactured by GE rose. At the same time, GE Aviation’s revenue from jet engine servicing also rose driven by an expanding worldwide fleet of commercial airplanes. In the oil & gas segment, with rising demand for energy from the emerging countries, sale of GE’s oil & gas drilling equipment increased. Driven by these trends, revenue from GE’s aviation and oil & gas segments rose by 6% and 7%, respectively, in the third quarter. This strong growth from aviation and oil & gas segments was supported by moderate revenue growth from other GE industrial businesses including healthcare. Cost Cutbacks Boosted GE’s Profit Growth The industrial conglomerate derived additional gains from cost cutbacks in the third quarter. In the first half of this year, the company took out $382 million from its structural costs through various measures, which included headcount reduction, plant consolidation and removal of excess enterprise resource planning (ERP) systems. In the third quarter, as these measures continued, the company was able to further slash its structural costs by $292 million. With this, GE has taken out $674 million from its structural costs in the first three quarters of 2014. For the full year, the company plans to remove about $1 billion from its structural costs, so GE has a significant cost-out left to achieve in the fourth quarter. The company expressed confidence during its third quarter earnings presentation that it will be able to achieve this target. We figure profit growth driven by this cost reduction is crucial for GE as the current global economic environment is not allowing strong revenue growth. This was also evident from the company’s third quarter results, in which cost cutbacks enabled GE’s industrial profit to rise by 9% annually, despite just 3% year-over-year growth in its industrial revenue. GE Capital Weighs On Growth Due To Its Declining Asset Size The solid performance from GE’s industrial businesses was partially offset by lower revenue and profits from its finance segment. GE Capital’s third quarter revenue and profit fell due to its declining asset base. The segment has been selling its non-core assets such as real estate, and instead focusing on its core financing business, which includes financing mid-market customers (extending loans to customers that generally do not get a lot of attention from big banks) and extending loans in sectors like aviation and energy where GE possesses deep domain knowledge. Due to these ongoing divestiture of non-core assets, by the end of the third quarter, GE Capital’s Ending Net Investment (ENI), which provides a measure of its asset size, fell by 5% annually to $365 billion. In turn, this lower asset base yielded lower loan and lease revenue. However, from a long-term perspective, we figure this a good strategy as it will reduce GE’s vulnerability to future shocks in global financial markets. During the 2008-09 crisis, at which time GE was generating more than half of its total earnings from its financing arm, GE’s stock price fell to single digits and the company was forced to slash its dividend due to the sudden meltdown in global financial markets. Ever since, the company has focused on expanding the share of its industrial businesses in its overall earnings. Portfolio Changes Will Enable GE To Increase Focus On Its Strengths During the third quarter, GE also executed many changes in its product portfolio. In July, the company launched the IPO of its North American retail financing business, Synchrony Financial, in a planned staged exit from that business. Thereafter in September, the company decided to  sell its appliances business to Electrolux for $3.3 billion . Prior to these two developments,  GE obtained approvals from Alstom’s board and the French government to purchase power and grid businesses of that company . As a result of all these major portfolio changes, GE will likely generate about 75% of its earnings from its industrial businesses by 2016, up from about 60% currently. At a strategic level, we figure these portfolio changes will make GE more focused on its strengths – core infrastructure and related technology. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Daimler Pre-Earnings: Strong Mercedes Volume-Growth And Cost-Benefits To Boost Margins
  • By , 10/20/14
  • Daimler AG is scheduled to announce its third quarter results on October 23. According to the preliminary release, the automaker’s free cash flow this quarter has increased by over 80% from 2013 levels to €2.9 billion ($3.7 billion), excluding the effects of disposals and acquisitions. Apart from creating value for shareholders, this additional cash will now boost Daimler’s efforts to aggressively invest in expanding its luxury vehicle division Mercedes-Benz, which forms over 60% of the company’s valuation by our estimates. Through September, Mercedes-Benz still lagged BMW and Audi in terms of global premium vehicle volumes but has outpaced both its compatriots in terms of volume-growth so far this year. Mercedes lost its global luxury sales crown to BMW in 2005, and aims to regain the lead by the end of the decade. Apart from a relatively higher increase in global volumes, what bodes well for Mercedes is that the automaker is now closing the gap on BMW and Audi in terms of operating margins as well. One-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% a couple of years ago, but the German automaker has since sequentially improved profitability and looks to target the operating margins figure of 9-10% in the near-to-midterm, closer to the margins reported at BMW and Audi. We have an  $87 price estimate for Daimler AG, which is roughly 16% above the current market price. However, we are currently in the process of revising our estimates. See Our Complete Analysis For Daimler AG Mercedes-Benz sold 412,018 units in Q3, up 12% year-over-year. Volumes have remained strong mainly on the back of strong growth in the U.S. and China, the two largest premium vehicle markets in the world. The compact models A-, B-, CLA- or GLA-Class, which formed almost 30% of the net unit sales during this period, led the volume-growth for the brand, with sales growing by 25% compared to 2013 levels. Strong U.S. And China Growth To Boost Mercedes’ Top Line With volumes growing 8.4% and 30.5% respectively in the U.S. and China in the first three quarters, Mercedes makes a strong case for competing for the global premium vehicle sales lead. The reason we stress on the company’s performance in these two markets is because while U.S. is the largest premium vehicle market and also Mercedes’ largest sales-base, China is the fastest-growing luxury vehicle market. In order to maintain and further push its overall vehicle volumes, Mercedes depends significantly on sales in the U.S. and China, which together formed 37% of the net volumes through September. Both these countries present further growth opportunities for the automaker. Although the North American vehicle market is relatively mature, growth lies in potential upgrades to luxury vehicles and/or the replacement of ageing vehicles in the region. On the other hand, premium vehicle sales in China form only roughly 7% of the net automotive sales, less than the figure of 10-11% for the U.S., and with increasing disposable incomes, more customers might be inclined to purchase luxury vehicles. With increasing cash flow, Mercedes has looked to further its growth in the U.S. and China through expansion of local manufacturing and launch of new and revamped models. Mercedes Closes On BMW In The U.S. After C-Class Launch The C-Class is a high-volume model for Mercedes, and absence of its new model year from the U.S. lineup this year is one of the reasons why Mercedes lost out on the sales lead in the country to BMW through August. Following the introduction of the new C-Class at the end of August, Mercedes outsold BMW in the U.S. in September, growing unit sales by 10.6% year-over-year, with the C-Class constituting 23% of the net volumes. Apart from the incremental revenues contributed by the new C-Class in the country, we expect the model to also improve Mercedes’ profitability in the region. The C-Class is the first sedan to be produced in the company’s U.S. plant in Tuscaloosa, Alabama, which manufactured only the sports utility vehicles (SUVs) M-, R-, and GL-Class before this. For this purpose, the automaker spent over $2 billion on the Alabama plant to expand capacity for the C-Class along with other models. Local production of this model allows Mercedes to save added costs such as import taxes and transportation expenses, and mark down the model prices due the absence of these additional costs, making the car relatively more affordable. By manufacturing closer to the end customer, Mercedes could expand margins by sourcing materials locally and evading aforementioned incremental costs. The C-Class is the first Mercedes-Benz model to be produced in four continents, and being a volume model due to the high demand for compact luxury vehicles worldwide, could boost the company’s profits due to cost-benefits from local production. Mercedes Aims To Further Build On Strong China Volumes China is a crucial luxury vehicle market, expected to grow by at least 13% this year, and overthrow the U.S. as the largest premium vehicle market by 2016. So far this year, Mercedes has outpaced the overall expected growth in the Chinese luxury vehicle market, gaining market share on competitors. Daimler recently announced plans to extend partnership with the Chinese BAIC Motor, investing around $1.27 billion for localization of additional compact sedans other than the GLA in China. Both the companies will jointly invest around $5 billion through 2015 to increase automotive production in China. Smaller-sized luxury vehicles are gaining popularity as they attract a wider consumer base, comprising people who intend to buy premium vehicles but have limited resources. Compact sedans are already the highest-selling models for luxury automakers in China. With just over 200,000 units sold in the country so far in the year, Mercedes still sold less than half the vehicles sold by Audi in the country. Further expansion in China, especially through local production of highly popular smaller luxury sedans could help Mercedes further encroach upon competitor market share in the country. Higher Profits in Q3 On Revenue Growth And Cost Benefits Daimler’s top line growth this quarter is expected to be fueled by the 12% rise in Mercedes volumes, with incremental sales from the newly revamped C-Class launched in the U.S. and China. On the flipside, tough economic conditions in South America and Eastern Europe could somewhat drag down the top line this quarter. The inflationary environment in Russia and Brazil could have dissuaded consumers from purchasing luxury vehicles. At the same time, as high interest rates and inflation tend to have a milder impact on affluent individuals, the target customer base for premium automakers, volumes might not decline substantially in these countries. Revenues, however, will be impacted by unfavorable currency translations, as Mercedes imports all of its vehicles into Russia, which constituted around 3% of the net volumes in 2013, thus exposing the company to the depreciation of the ruble against the euro. In the preliminary release, Daimler has already reported a nearly 30% rise in Mercedes’ Q3 operating profits. Strong volume growth and higher proportionate sales of the relatively higher priced E- and S-Class models, which carry fatter margins, could push the luxury division’s margins beyond 8% this quarter, up from 7.26% in Q3 last year. 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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    Broadcom's Q3'14 Earnings Preview: Infrastructure, Broadband & Connectivity To Drive Growth
  • By , 10/20/14
  • Leading semiconductor provider for wired and wireless communications Broadcom (NASDAQ:BRCM) will announce its Q3 2014 earnings on October 22. Having exited the cellular baseband business in June this year, Broadcom intends to instead increase its focus and competitiveness in the broadband, infrastructure and connectivity businesses. Broadcom performed well in all three segments in Q2 2014 and expects to see strong growth from these markets in the future as well. The company believes that its decision to exit the baseband business puts it on a path towards being a stronger, more profitable company, that can return more capital to shareholders. Our price estimate of $38.49 for Broadcom is slightly above the current market price. We will update our valuation after the Q3 2014 earnings release. See Our Complete Analysis for Broadcom Here Winding Down The Baseband Business Broadcom announced its decision to exit the cellular baseband business on account of intense competition in the market. The company believes this will allow it to eliminate the ongoing losses from the business and enable it to focus on its core strengths in other segments. Broadcom expects ongoing customer commitments to decline over the remainder of the year and anticipates the wind-down of its cellular baseband business to result in a $700 million reduction in annualized GAAP research and development (R&D) and selling, general and administrative (SG&A) expenses, including $100 million in estimated reductions in stock-based compensation. Broadcom plans to originally reinvest around $50 million of these savings on an annualized basis into projects in the broadband, infrastructure and connectivity businesses. In Q2 2014, Broadcom recorded restructuring costs of $23 million and expects to record an additional $230 million of principally cash based restructuring charges over the next 12 months related to the further reduction of its worldwide headcount by an additional 2,250 employees, the closing or consolidation of 18 locations, and the termination of certain existing contracts. Connectivity Business Remains Strong Broadcom believes that its leadership in connectivity solutions remains intact. It has some new technologies ramping and is generating higher ASPs for its products from the integration of additional functionality ahead of its competitors. Additionally, the  company sees new growth potential in both emerging markets such as for the Internet-of-Things, as well as the increasing electronics penetration in the automotive and wearable devices markets. The company continues to drive leading-edge features, to maintain its strength in high end smartphones and tablets, and is strengthening and diversifying its portfolio with new low power connectivity solutions for the Internet of Things and the support of iBeacon and HomeKit. (Read: Broadcom Aims To Be An Early Entrant In The Booming Wearable Technology Market ) The company expects to see strong sequential growth in connectivity solutions in Q3 2014 driven by product cycles and some launches from key customers. Infrastructure & Broadband Business To Drive Future Growth Broadcom continues to deliver innovative solutions that set the stage for an industry transition to more virtualized scalable data center architectures. Its next generation Trident II is now in volume production and it expects the same to contribute to its growth momentum in networking through 2014. During Q2 2014, in partnership with with other cloud market leaders, Broadcom announced a new 25-gigabit and 50-gigabit  Ethernet specification to drive performance and cost efficiency in data centers. We expect Broadcom to benefit from the ongoing transition to 4G LTE in China, where it has secured wins for switches, processors, the back haul and other technologies. Currently, only China Mobile is aggressively building out its TD-LTE network, but we expect the other carriers to join soon as FDD-LTE licenses are rolled out in the coming years. Broadcom has seen double digit growth in this segment over the last three years and it believes that the additional waves of LTE buildouts, especially in China, will be helpful to sustain that growth for the next few years. The set-top box and access business are key growth drivers for Broadcom’s broadband business. Broadcom claims that in the first half of 2014 it gained share in set-top boxes in international markets on account of rising digital penetration and a ramp to richer features, including multi-stream transcoding, more tuners and a stronger mix of MoCA-enabled platforms. Another long-term growth driver for the set-top box market is the transition to HEVC and Ultra HD. Broadcom is one of the leading players in the worldwide set-top box integrated circuit (IC) market. Broadcom is seeing strong momentum in its VDSL and PON sales due to share gains, increased operator spending and new operator service launches. Its access business is growing as operators continue to deploy the latest technologies, including VDSL upgrades, to power faster connections in the home. Broadcom claims to be gaining share in PON and sees new product cycles coming in Broadband Access. Broadcom’s modem sales reached a multiyear high in Q2 2014, increasing over 15% year on year, with growth across cable, DSL and PON. 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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    Travelers Q3 Earnings Preview: Underwriting Performance, Retention Rates In Focus
  • By , 10/20/14
  • tags: TRV
  • Travelers (NYSE:TRV) is scheduled to report third quarter earnings on Tuesday, October 21. In the second quarter, the company reported a 2% year-over-year increase in revenues, while the operating income declined 18% to $673 million due to higher catastrophe-related losses. The second quarter also witnessed record net written premiums of $6.2 billion, primarily due to the acquisition of Dominion of Canada towards the end of 2013. Revenues were up 2% year-over-year to $6.785 billion. Going forward, it will be important for the company to maintain strong underwriting discipline, particularly in the low interest rate environment that has weighed on returns on investments. The company’s strong retention and renewal rates will also need to be maintained in order to avoid further falls in income. We have a price estimate of $107 for the company’s stock, about 15% higher than the current market price.
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    Discover Financial Q3 Earnings Preview: Direct Banking Will Drive Results
  • By , 10/20/14
  • tags: DFS V MA AXP
  • Discover Financial (NYSE:DFS) is scheduled to report third quarter earnings on Tuesday, October 21. In the second quarter, growth in cards, personal and student loans propelled the company’s net income to $644 million compared to $602 million in the second quarter of 2013. For the third quarter, we expect direct banking to be a key driver for the company’s overall growth. We have a price estimate of $64 for the company’s stock, which is in line with the current market price.
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    E*Trade Earnings Preview: Growing Asset Base, Recovering Trade Volumes To Drive Results
  • By , 10/20/14
  • tags: ETFC AMTD SCHW
  • E*Trade Financial (NASDAQ:ETFC) is scheduled to announce its Q3 2014 earnings on Tuesday, October 21. In the second quarter, E*Trade’s asset-based business grew by 11% year-on-year (y-o-y) to $270 million, while low trading volumes kept trading commission revenues flat over the prior year quarter at $105 million. Since E*Trade exited its G1X market making services business in Q1, the brokerage posted flat net revenues over the prior year quarter at $438 million. We have a $21 price estimate for E*Trade’s stock, which is about 10% higher than the current market price.
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    Intuitive Surgical Earnings Preview: Procedure Volumes In Focus
  • By , 10/20/14
  • tags: ISRG
  • Intuitive Surgical (NASDAQ:ISRG) is expected to announce its Q3 2014 results on Tuesday, October 21. In the previous quarter, the da Vinci robot maker surprised the market with better-than-expected results, although both the top and bottom line continued to decline. Net income dropped about 35% year-over-year (y-o-y) from $159 million in Q2 2013 to $104 million in Q2 2014. However, this was an improvement of about 136% over the income reported in the first quarter ($44 million). Total revenue for the second quarter was about $512 million, down 11% on a year-over-year basis but up 10% sequentially. This was also about 2% ahead of the analyst consensus compiled by Thomson Reuters. The spike in revenue and earnings on a sequential basis was attributed to the greater-than-expected rise in total procedures, which increased 9% y-o-y and 8% over the first quarter.  When the company announces its third quarter earnings, we expect overall sales to remain under pressure owing to lingering concerns surrounding its da Vinci robotic surgical system and a reduction in the number of robot-assisted surgical procedures. Considering the concerns surrounding its da Vinci system and recent adverse reports about the safety of power morcellators (also used in da Vinci surgeries), Intuitive Surgical lowered its guidance for growth in the number of procedures for 2014 from 9-12% to 2-8% in the first quarter before slightly revising it to 5-8% in Q2. A lower number of procedures generally results in a longer replacement cycle for instruments and accessories, which leads to lower instruments and accessories revenue. On the cost side, the company’s gross margin in Q2 2014 was 67.1% compared to about 71% in the same period last year. We expect gross margins to decline further in the near term due to higher costs owing to overall lower production and the company’s focus on new products such as the da Vinci Xi and da Vinci Sp (which have slightly lower margins). However, we expect margins to improve in the long run as production volumes increase and its new products gain more acceptance. We currently have a  price estimate of $455 for Intuitive Surgical, which is in line with the market price.


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