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FB Logo
These Scenarios Could Impact Facebook's Stock
  • By , 5/28/15
  • tags: FB TWTR LNKD
  • Facebook’s (NASDAQ:FB) stock price has risen by around 40% over the past year on the back of its increasing monetization and growth of its user base. Though our $87.83 price estimate for Facebook’s stock, represents near-10% premium to the market, we believe there are certain plausible scenarios that could move the stock considerably over the coming years, assuming the market prices in these triggers correctly. Specifically, we think the possibility of better-than-expected monetization of the Search and Messenger businesses could yield upside to our valuation.  Conversely, lower-than-expected growth in revenues from Instagram and WhatsApp would induce a stock price change  for the worse. Let us consider these alternative scenarios in tandem.
    CSX Logo
    Coal and Fuel Could Temper CSX’s Growth
  • By , 5/28/15
  • tags: CSX NSC UNP
  • Prices of coal and fuel have been fluctuating for quite some time now. For railroad operator  CSX (NYSE:CSX), the price movements of these commodities have a significant impact on its income statement. Coal is the single largest revenue generating commodity for CSX, while fuel is one the most important operating expenses. In this article, we take a look at how CSX’s business has been impacted by the change in prices of these commodities and what might be in store in the near term.
    BUD Logo
    Can Anheuser Achieve More Growth In The U.S.?
  • By , 5/28/15
  • tags: BUD TAP DEO SBMRY
  • Anheuser-Busch InBev (NYSE:BUD) is the largest brewer in the world, with annual revenues of over $47 billion last year. The company’s sales are spread across 130 countries, but 30% of this net revenue last year was contributed by the U.S. alone. The country is the single largest market for AB InBev, but with a mature beer market, and an already peaking market share for the company, it might be difficult to extract more growth going forward. What’s worse for AB InBev is that its presence is mainly in the domestic beer category, which is the most underperforming category of the U.S. beer market. The brewer has looked to derive growth from international markets such as China, Brazil, and Mexico, but especially now, when the U.S. dollar is strengthening against most foreign currencies, and economic volatility in certain emerging countries has dragged down beer sales, growth in the U.S. has become more pivotal for AB InBev. Beer is a mature market in the U.S., and an aging population of baby boomers and lesser consumption of beer among young adults (ages 18-29) has hampered beer volume growth in the country. Beer consumption in the U.S. declined by 6% from 2009-2013, with the exception of a slight rise in 2012 (as seen in the table) due to new innovative product launches. But in the last year, with improving economic conditions in the U.S., due to lower energy prices and historically-low unemployment rates, higher customer purchasing power led to lower rates of decline in the nation’s beer market. In fact, industry production levels rose slightly in 2014. According to Anheuser’s estimates, the industry-wide selling-day adjusted sales-to-retailers declined 0.6% in 2014, after a larger 1.8% decline in 2013, and in the first quarter, the figure fell by only 0.5%. Beer sales are directly tied to customer spending capabilities, and although the country’s beer market might not recover strongly any time soon, an upbeat business environment and higher customer purchasing power could prevent a larger fall in beer volume sales going forward. The problem for Anheuser in the U.S. is not only that the beer market is relatively mature, but also that its volumes are declining at a faster rate than the overall industry. The brewer has a massive 46.4% market share in this beer market, but this figure has fallen little by little each sequential year from 48.86% in 2009. As can be seen from the table, Anheuser’s sales-to-retailers growth has either been lower than that of the overall industry, or the decline in volumes has been worse compared to the overall industry. … So why does Anheuser keep losing share in the U.S.? This is because the brewer has a vast presence in the domestic beer segment, which is the main source of decline in the overall beer market. Domestic beers formed around 74% of the industry-wide volumes last year, but volumes in this segment have been falling, while imported and craft beer volumes have been rising. Anheuser holds a massive 46.4% share in the U.S. mainly on the back of large volumes for domestic beer brands Budweiser and Bud Light, which have been losing out in the U.S. in the last few years. Budweiser’s global volumes rose 5.9% year-over-year last year, but as has been happening for more than a decade, the drink lost both volume and value share in the U.S. In domestic beers, Budweiser lost its position as the highest selling brand to its sister-brand Bud Light, a premium light beer, in 2001, and further lost its position to MillerCoors’ Coors Light and Miller Lite in subsequent years. Budweiser’s share of the $100 billion U.S. beer market is down to less than 8%, from approximately 14.4% a decade ago. In fact, Budweiser sold six-times the volumes for all the craft breweries combined in the U.S. a decade ago. However, craft breweries, which form around 11% of the country’s beer market at present, have been outselling Budweiser since 2013. Growth in the U.S. will come from Craft and Imported beers Imported and craft beer volumes grew by 6.9% and 17.6%, respectively, in the country last year, outpacing the 0.5% growth in the overall market. These two segments form 15% and 11% of the industry-wide volumes at present, and their share is expected to grow going forward, at the expense of the domestic beer segment. Why Anheuser is losing out on this growth is because it doesn’t have a solid presence in each of these segments. Anheuser-Busch cannot benefit from the high demand in the U.S. for Corona and Modelo, whose variants form three of the top four imported brands in the country, with combined annual sales of over $1 billion. This is because as part of an antitrust agreement with the U.S. Justice Department, Anheuser-Busch had transferred the operations of the Mexican Piedras Negras brewery and sold the exclusive rights to market and sell Corona as well as some other beers made by Grupo Modelo in the U.S. to Constellation Brands, before the brewer could go ahead with the Grupo Modelo combination in 2013. Why losing out on the growth for the Mexican brands Corona and Modelo is a blow to AB InBev is because the Mexican imported beer segment, which forms around 8-9% of the U.S. beer market, grew 11% in 2014, and continues to thrive on an increasing Hispanic population in the country and higher customer demand. On the other hand, growing demand for diverse beer products and increasing global taste preferences have boosted craft beer volumes, which rose as a percentage of overall industry volumes to 11% in 2014, from 8% in 2013 and only 2.6% in 1998. Local and regional breweries, such as Samuel Adams and Sierra Nevada, rely on experiential marketing to form strong bonds with consumers, and leverage novelty names and unique marketing initiatives to further expand their customer base. With increasing sales of smaller craft breweries, Anheuser could continue to lose sales in the U.S. Anheuser is taking steps to penetrate Imported and Craft beer segments Mindful of the areas where the potential growth lies, AB InBev has looked to strengthen its presence in the imported beer segment, as well as to acquire budding craft brewers, such as Oregon’s 10 Barrel Brewing, Elysian Brewing Company, Blue Point, and Goose Island. Distribution of the Mexican brand Montejo spreads to eight additional states in 2015, and more Mexican imported brands are expected to follow from Anheuser in the U.S.  The beer brand started selling in September last year in California, Arizona, Texas, and New Mexico, where 70% of America’s Latino population resides, and the initial roll-out of Montejo has been successful. However, although Anheuser is looking to grow its presence in imported and craft beer segments, which are growing at a relatively faster rate, and operate at higher price points, it might be a few years before the growth in these segments offsets the numerically larger declines in the sales of Bud Light and Budweiser. …Till then..higher average revenue per hectoliter will fuel growth Although Anheuser’s volume sales in the U.S. were down 1.4% in 2014, revenues from the country rose 0.3%, mainly on a 1.7% rise in beer only revenue per hectoliter. In Q1 as well, Anheuser’s beer only revenue per hectoliter grew by 1.3%. The conducive market conditions in the U.S. helped improve the industry-wide average revenue per hectoliter, bolstering the beer market’s net value to $101.5 billion last year, up 1.5% over 2013 levels. Anheuser has a premium brand image, with Bud Light as the number one premium beer brand in the country. More jobs and increasing incomes in the U.S. could prompt customers to switch to higher priced beers, and consequently boost sales of AB InBev’s premium brands such as Bud Light and Budweiser, going forward. In addition, imported and craft beers also operate on higher price points, which fits right into Anheuser’s premium brand image. Anheuser’s lineup of ‘Above Premium brands’ gained approximately 20 basis points of total market share in the last quarter, with the strongest performances coming from Michelob Ultra, Stella Artois, and Goose Island. Higher proportionate sales for Anheuser’s higher-priced premium brands could lift the average revenue per unit volume. This could somewhat offset the decline in volume sales, fueling net sales for Anheuser in the U.S. going forward. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    BCS Logo
    Taking Stock Of How Much Banks Have Paid For Settling Forex Manipulation Charges
  • By , 5/28/15
  • tags: BAC BCS C HSBC JPM RBS UBS
  • Last week, six of the largest banking groups in the world announced details of another round of settlement with regulators over their alleged manipulation of foreign exchange rates. The settlement, which was led by the U.S. Department of Justice (DoJ), will see the banks cough up $6 billion in fresh fines for their forex misgivings. The deal was reached six months after the banks closed joint settlement talks with U.S., British and Swiss regulators for a total payout of $3.4 billion (see Five Banks Settle Forex Manipulation Charges For $3.4 Billion ). Since last November, seven global banks – Barclays (NYSE:BCS),  UBS (NYSE:UBS),  JPMorgan (NYSE:JPM),  Citigroup (NYSE:C),  RBS (NYSE:RBS),  HSBC (NYSE:HSBC) and Bank of America (NYSE:BAC) – have signed forex settlement deals in excess of $10 billion. All the banks have already set aside sufficient cash to cover the costs of their latest deal, so their Q2 results are not expected to be negatively impacted. This is not the end of the matter for all banks, though, as Bank of America and HSBC are yet to settle with the DoJ.
    NOK Logo
    Nokia Networks Buys Eden Rock To Boost SON Capabilities
  • By , 5/28/15
  • tags: NOK ERIC
  • Nokia (NYSE:NOK) has signed an agreement to acquire Self-Organizing Networks (SON) player Eden Rock Communications for an undisclosed sum. The transaction is expected to close in the third quarter this year. SON is one of the fastest growing segments of the mobile broadband infrastructure market, and it helps to increase operational efficiency in the management of heterogeneous networks. It provides automation to eliminate manual equipment configuration and helps improve network quality and efficiency. Nokia stated in its press release that Eden Rock’s SON solution, Eden-NET, is “highly complementary” with its own SON capabilities and should help it improve efficiency of its mobile broadband network offerings. SON is likely to help in cutting down network operating costs and enhance customer experience, thus helping improve overall profitability of the company. Nokia launched a new SON solution – iSON Manager- at the Mobile World Congress in March this year. This solution showed great promise in a trial with Korean wireless operator KT prior to its launch, helping reduce KT’s LTE network energy consumption by 40%. The global SON and network optimization software market is estimated to grow to more than $4.5 billion by 2016 and $5.6 billion by 2018 on the back of migration of networks towards 3G and 4G and benefits of reduced operating expenses. Our $7.50 price estimate for Nokia is slightly ahead of the current market price.
    AAPL Logo
    Apple: Too Big To Grow?
  • By , 5/28/15
  • tags: AAPL aapl SSNLF GOOG IBM
  • Apple (NASDAQ:AAPL) has been strengthening its position as the world’s most valuable company, with its stock price rising by more than 40% over the last 12 months. The company’s $750 billion market cap stands at about twice as much as the next biggest company, and accounts for about 4% of the S&P 500. The enormous valuation is certainly not without reason: Apple’s high-margin flagship product, the iPhone, has been seeing unprecedented demand, allowing for solid sales and earnings growth. Apple’s track record of execution and beating expectations has been so good that few analysts and commentators want to bet against the company. For instance, when Apple  became the world’s most valuable company back in 2011, with a market cap of about $340 billion, overtaking Exxon Mobil, there was a lot of skepticism whether the winning streak would continue. However, it went on to more than double its market cap to current levels of about $750 billion. Many in the market believe that Apple stock has a lot more room to run, with prominent activist-investor Carl Icahn valuing the stock at $240, a premium of over 70% above the current market price. Our  $144 price estimate for Apple is about 10% ahead of the current market price. See Our Complete Analysis For Apple Here However, despite the heady growth and track record of beating expectations, the markets assign Apple stock an earnings multiple of just 14.5x FY 2015 earnings (still lower ex-cash), making the stock look like a complete bargain in the current market. The S&P 500 trades at about 18x projected earnings. However, there could be two good reasons behind this, namely growth prospects and risk. The law of large numbers – which implies that financial growth begins to slow for very large companies as it becomes difficult to find new markets to expand into – is likely to be something that is on the back of investors’ minds. The increasing concentration of revenues around the iPhone could also be of concern. The iPhone accounts for about 60% of Apple’s revenues. Additionally, while iPhone revenues grew at rates more than 50% year-over-year over the last two quarters, all other product lines combined actually saw revenues decline. So that brings us to an important question – how much more valuable can Apple really get, or is the company peaking? In this note, we examine the company’s growth trajectory thus far, and take a look at the prospects for Apple’s current product lines and potential future products. Apple’s Growth Trajectory So Far Since the iPhone was launched in 2007, Apple’s stock price has grown at about 33% CAGR, while average revenue growth rates have also come in at similar levels. However, the increase hasn’t been consistent. While Apple’s sales grew at an average rate of 39% during FY2007 and FY2008, riding on demand for the original iPhone and the iPhone 3G, growth rates moderated to about 14% in 2009  - a year in which the company had no major product launches. However, revenue growth averaged 54% between 2010 and 2012, driven by the introduction of the iPad and due to an important redesign of the iPhone line-up with the iPhone 4. Revenue growth slowed down considerably over FY2013 and FY2014, averaging about 8% a year as the company’s product upgrades largely remained evolutionary.  Apple looks set for another growth spurt this financial year, with revenue growth expected to come in at about 25% (based on consensus revenues), owing to demand for the new big-screen iPhones and the introduction of Apple Watch. In summary, as the above chart shows, the law of large numbers is certainly kicking in, with overall revenue growth rates falling from levels of over 40% (2007-2012) to about 14% (2013-2015E). That said, growth rates do see a spurt every time a major new product is launched, or when existing products see a significant upgrade. So rather than applying the law of large numbers abstractly, let’s also take a look at the outlook for Apple’s major product lines and some potential new markets that the company could tap into to gauge its growth prospects going forward. Existing Product Lines Should Remain Key Levers Of Apple’s Valuation iPhone Has Some More Room For Growth: The iPhone is the single-largest driver of Apple stock and we estimate that it accounts for about 59% of the company’s market cap and over 70% of its gross profits. It’s safe to say that the iPhone will continue to be the primary lever of Apple’s valuation in the medium term, and possibly the longer term. iPhone revenues soared by over 57% and 55% respectively, year-over-year  for Q1 and Q2 FY2015, driven by demand for the iPhone 6 and iPhone 6 Plus, which offered the larger screens that Apple resisted adopting for nearly three years. Apple commanded 18.3% of the smartphone market during Q1 2015, up from about 15.2% a year ago, according to IDC and the near-term outlook remains solid. For example, Apple estimates that just about 20% of its active iPhone users have upgraded to the latest iPhone 6 and 6 Plus units, leaving room for growth. Apple has also been seeing strong momentum in China, emerging as the country’s top smartphone vendor during Q1 2015, according to IDC. While the broader Chinese smartphone market is saturating, demand for premium smartphones  should  remain strong as customers upgrade to more capable and premium devices, and Apple is likely to be a big beneficiary of this trend.  Apple has also invested considerably in building on its already robust iPhone ecosystem – with products such as Apple Watch, Apple Pay, and the upcoming streaming music service – which could increase switching costs for the platform.
    CAT Logo
    How Oil Price Movement Could Impact Caterpillar's Stock
  • By , 5/28/15
  • tags: CAT
  • Caterpillar ’s (NYSE:CAT) Energy & Transportation segment provides customers with reciprocating engines, turbines, diesel-electric locomotives, integrated systems and solutions, and related parts. It caters to a wide variety of industries such as oil and gas, power generation, industrial, marine applications and rail related businesses.  After its Resource Industries business tanked due to the decline in mining commodity prices and customers’ capital expenditure cutbacks, Caterpillar’s Energy & Transportation segment became the most valuable segment for the company, contributing more than 43% to total revenues from its equipment businesses. Sales to the oil and gas industry account for around a third of Caterpillar’s Energy & Transportation revenues. The industry has lately been suffering from the decline in oil prices, which has led to a slowdown in Caterpillar’s Energy & Transportation segment. In the fourth quarter of 2014, Caterpillar reported flat revenues for the segment and  forecast a 10-15% decline in revenues for the full year 2015. In this article, we take a look at how two extreme scenarios for long-term crude oil prices could impact the company’s valuation.
    RIO Logo
    A Look At Rio Tinto's Oyu Tolgoi Copper Mine
  • By , 5/28/15
  • tags: RIO FCX VALE ABX NEM
  • The Oyu Tolgoi copper mine in Mongolia constitutes one of the world’s largest copper deposits. The mine is operated by Turquoise Hill Resources, a subsidiary of Rio Tinto (NYSE:RIO). The Oyu Tolgoi mine had commenced operations in 2014, but the development of the underground phase of mining operations had been put on hold due to a dispute between the Mongolian government and Turquoise Hill Resources over unpaid taxes. Rio Tinto recently announced that the outstanding disputes holding up the development of the mine have been resolved, paving the way for the development of underground mining operations. In this article, we will take a look at the implications of this news for Rio Tinto. See our complete analysis for Rio Tinto The Oyu Tolgoi Mine Turquoise Hill Resources owns a 66% stake in the Oyu Tolgoi mine, with the balance held by the Mongolian government. Rio Tinto holds a 51% stake in Turquiose Hill Resources, which effectively gives the company a 33.5% interest in the Oyu Tolgoi mine. As per the figures reported by Rio Tinto, the Oyu Tolgoi mine accounted for 49,8oo tons, or around 8%, of the company’s mined copper production in 2014. This figure includes Rio’s 33.5% share of production from Oyu Tolgoi. The Oyu Tolgoi mine boasts 2.7 million tons of  recoverable copper and 1.7 million ounces of recoverable gold reserves. With the development of the underground mine, Oyu Tolgoi’s copper production is expected to average close to 430,000 tons of copper a year over its mine life. The mine is expected to ramp up to full production by 2021. The company’s equity share of production from the mine would average approximately 144,000 tons, which is around 25% of the company’s current mined copper production. Thus, the Oyu Tolgoi mine would significantly boost the company’s copper output, going forward. Copper Prices (Copper Prices, Source: London Metal Exchange) Copper has diverse industrial applications, particularly in the manufacturing, power, and infrastructure sectors. London Metal Exchange (LME) copper prices fell sharply from over $7,000 per ton at the start of 2014 to levels below $5,400 per ton earlier on in 2015. The fall in prices was mainly because of concerns over copper demand from China due to its recent signs of economic sluggishness. China’s GDP growth is expected to slow to 6.8% in 2015, down from 7.4% and 7.8%, in 2014 and 2013, respectively. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand for copper.. Thus, concerns over weakening demand from the world’s largest consumer of copper weighed on prices earlier in the year. Despite signs of weakness, copper prices have recovered somewhat lately, and currently stand at levels of over $6,300 per ton. The recent rally in prices has largely been due to expectations of the tightening of copper supply. As a result of the weakness in copper prices, large copper mining companies have put on hold several new projects. In addition, given the adverse pricing environment, funding has become hard to come by for smaller copper mining companies. Furthermore, declining ore grades have negatively impacted copper output for many mining companies. As a result of these supply side constraints, copper prices have risen over the past couple of months. Prices have also been bolstered by improving economic conditions in the developed world, particularly in the U.S., and to a lesser extent, in Europe and Japan. The improved pricing environment has certainly boosted the prospects of copper mining companies. Given the decline in new copper projects, demand for copper is expected to exceed supply in the coming years. Though the exact timing of such a supply deficit materializing is debatable, a supply deficit is likely to provide  a boost to copper prices. Given that the Oyu Tolgoi mine is expected to ramp up its production in the coming years, reaching peak production by 2021, it could benefit from higher copper prices. Thus, the resolution of the issues surrounding the Oyu Tolgoi mine couldn’t have come at a better time for Rio Tinto. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    HMC Logo
    What Honda Is Doing To Overcome The Slowdown In The Chinese Auto Market
  • By , 5/28/15
  • tags: HMC GM TM VLKAY
  • Things seem to be going wrong again for Honda Motors (NYSE:HMC) in China. The Japanese auto maker reported a 4.1% increase in unit sales in 2014, 150 basis points higher than the 2.6% growth in 2013, but its growth slowed to only 0.6% in the first quarter of calendar year 2015. The last two years came as a relief for the company after the 2011-2012 period when sales were abysmally low, following the tensions that were sparked between China and Japan on claims over the disputed islands. The islands are known as Senkaku in Japan and Diaoyu in China. To remedy this situation, the company is planning on looking to introduce a dealer advisory system similar to the ones in the U.S. and European car markets. Below, we detail why the company is taking this measure. We have a $34 price estimate for Honda Motors, which is in line with the current market price. Losing Market Share Japanese automakers have lost quite a bit of market share in China over the last five years. In 2008, Toyota, Honda, and Nissan boasted a combined market share of 25%, but the figure dropped to 15% by 2012. Following the global market crash in 2008, Japanese autos held off their expansion plans in the country and focused on cost cutting instead. The global recession, however, never really affected the Chinese automotive market. In the last few years, the Chinese automotive market has more than doubled to 20 million units. Western auto companies, which continued to pour money into China, gained market share at the expense of Japanese automakers. The situation was exacerbated by the unfortunate natural disasters in Japan in 2011, which constrained the production of Japanese companies. Things were only normalizing before tensions flared up between China and Japan and negatively impacted the sales of Japanese companies. When the situation stabilized, Japanese automakers once again started generating solid profits. But now that seems to have come to a halt. So once again, Honda has to start afresh in the world’s biggest car market. The automaker feels that if it is able to offer cars tailored to the needs of the Chinese customers, it can grow its sales significantly. China is one of the biggest markets for Honda, accounting for about one-sixth of its total sales. China Market Slow Down The Chinese car market has grown at a startling pace over the last few years. In 2014, volumes in the world’s biggest auto market grew by close to 10%, but that rate is expected to slow to 8% in 2015. As a result of a slowdown in the Chinese construction market, the economic growth rate of the country has fallen. Consumers are now looking for bigger discounts in the car market, making it tougher to sell cars for many dealerships. This is especially visible in a segment such as sedans, in which sales growth has almost stalled in recent months, as buyers in this segment are most exposed to the economic situation. Comparatively, the commercial vehicle market offers a brighter picture, as it is tied to the property market. Industry wide sales are slowing down and the increase in average inventory turnover rate from 45 days to 53 days in recent months is evidence of the same. Honda must take the problem seriously because there is the potential threat of dealers dropping out of the company’s network as the recent events at Toyota show. In the last few months of 2014, a number of dealers at Toyota threatened to drop out of the company’s network citing poor sales and a lack of profits. According to the China Automobile Dealers Association, as many as 10% of the dealers could abandon the brand. Out of a total 523 distributors for Toyota’s vehicles in the country, as many as 95% are losing money. A number of dealers have already either stopped sales, or shutdown already because of the losses, as well as a tough economic environment, which saw vehicle sales slowing in tandem with the country’s slowest economic growth in 24 years. In response to these emerging trends, Honda is planning to launch a dealer advisory system similar to the one it has in place in its U.S. and European operations. Recent surveys of dealers point out that when the car market was growing rapidly, it was easy for them to sell cars. This meant that the situation was favorable for car companies to dictate terms to dealerships, but now the situation is changing. Dealers have complained in recent months that inventory levels are too high and sales targets set by companies are unrealistic. The new system basically will offer dealerships advice on both marketing and after-sales strategy. Under this system, dealerships will also undergo a review to decide whether showrooms and shops are located in the right places or whether they need to be relocated. Dealership owners will also get a chance to offer more feedback to line managers appointed by the company, making it easier for them to air their grievances as well as share their findings. See our complete analysis for Honda stock here Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    GM Logo
    Why GM Cannot Afford To Ignore Cadillac Any More
  • By , 5/28/15
  • tags: GM F VLKAY TM HMC
  • Even though General Motors (NYSE:GM) sells almost as many cars as Japanese auto maker Toyota Motors, it makes far less in profits than the latter. For example, for the quarter ended March 31, 2015, GM’s adjusted earnings before interest and taxes (EBIT) were $2.1 billion on revenue of ~$36 billion, while Toyota’s EBIT stood at $5.3 billion on revenue of $59.5 billion. Even though the units sold by both companies weren’t far apart (2.4 million for GM vs 2.54 million for Toyota), their reported revenues differed by nearly $23 billion. This means that Toyota’s average unit price per vehicle sold is roughly $23,400 compared to $15,300 for GM. The puzzle that these facts immediately raise, is what is Toyota doing differently compared to General Motors? If one were to write a cheat sheet named How To Make Profits While Selling Cars based on trends of the past few years, the following items would be on the list: 1) Sell lots of SUVS and trucks in the U.S., 2) Keep your business as small as possible in Europe and South America, 3) Have a successful luxury vehicle brand (or two or three) and, 4) Don’t keep your pension plans underfunded. (Another item that might soon be added to the list: convince the world that you’re a genius, so that they’ll give you money at really low costs for really far-fetched ideas, but that’s still in the future.) GM manages to do only the first of these four items. It makes huge losses in its European and South American operations and so far has only ideas about how to make money with its luxury brand Cadillac.  Toyota does three of four and is inching ever closer to doing all four in the near future. Naturally, this means that there is pressure on GM’s management to work on these aspects of its business. In this article, we take a look at a scenario in which GM operates a successful luxury brand. We have a  $38 price estimate for General Motors, which is about 5% higher than the current market price. Cadillac’s Importance To GM In 2014, three of GM’s four main brands did really well, with sales of Chevrolet, GMC, and Buick increasing by 4.4%, 11.3%, and 11.4%,  respectively. However, sales of Cadillac, GM’s luxury brand, fell by 6.5%. Operating a successful luxury brand is highly important for an auto company since luxury companies contribute about 20% in revenues and about 33% in profits. In order for GM to raise its profitability, it is imperative that it revives Cadillac sales in the U.S. and China. To do so, the company is focusing on two specific areas: First, the company will invest $12 billion into eight new Cadillac models, which it plans to bring to the market by 2020. Three of those vehicles are expected to be SUVs. Luxury SUVs was the fastest growing car segment among all car segments in the U.S. in 2014, having grown at 14.2% compared to 2013.  GM, which has long been known for making excellent full-size pick-up trucks and SUVs, has only one vehicle representing it in the segment: CRX. Recently, Cadillac president Johan de Nysschen told the media at the North American International Auto Show that the Cadillac  brand would put a strong emphasis on the crossover SUV segment. Compared to Cadillac’s solitary offering in the segment, BMW has five vehicles in the segment, while Audi has three. Second, the company plans to increase offerings from its Cadillac brand in China and start producing Cadillacs in China. GM estimates SUV sales to account for 7 million units in China by 2020, more than thrice the current size of the segment. Similar growth is expected in luxury sales, which are expected to comprise nearly 10% of the market by 2020. To this end, GM responded by starting the production of its full-sized sedan, Cadillac XTS, in Shanghai in 2013. The company also plans to build 95% of its Cadillac vehicles in China by 2018.  GM plans to keep adding one new locally produced Cadillac brand per year to its portfolio through 2016. The automaker sold more than 73,000 Cadillacs in China in 2014, representing a 51% increase. It expects annual sales of the brand to reach 100,000 by 2015 and capture 10% of the luxury market by 2020. Contribution to Bottom Line In 2014, GM sold roughly 264, 000 units of Cadillac, which represented a 5% year-on-year increase for the brand. Most of that growth came from China, where sales grew from 50,000 units in 2013, to 73,000 units in 2014. In 2015, China sales are expected to grow to 100,000. Since GM does not break out earnings figures separately for the Cadillac, we’ll have to make some assumptions in estimating the impact of Cadillac to the company’s bottom line. In 2014, GM’s average revenue realized per vehicle sold was around $15,900. The industry average revenue realized per luxury vehicle sold is roughly twice that of other vehicles. Using the same standard for GM, we get an average revenue realized per Cadillac sale of $32,000. This means that GM realized around $8 billion in revenues from Cadillac sales in 2014, or 5% of revenues. This is far lower than the industry standard, where luxury sales, even though making up only 10% of overall units sold, contribute 20% to revenues. It is evident that this an area where GM still has a lot of work to do. Applying similar assumptions to cash profits — average cash profit realized per luxury vehicle is roughly 3.3 times that of other vehicles — we get cash profits from Cadillac of roughly $1 billion. Overall cash profits for the company stood at $11.6 billion in 2014. The contrast is staggering: even though Cadillac sales only make 3% of units sold by the company, they contribute close to 9% of the profits. Increasing the number of units sold should therefore improve the company’s bottom line at a far higher scale than improving sales of any other brand or any geography. In our model, we have forecast GM’s revenue to grow from $158 billion in 2014 to $193.2 billion by the end of our forecast period. This forecast encodes Cadillac sales of around 400,000 units. However, if the company can increase Cadillac sales to roughly 5% of overall sales by that period, or 600,000 units, owing to the additional profitability of the brand, it can increase its cash profits by $2 billion or 25%. That is an enormous amount, and it clearly shows why the importance of Cadillac cannot be understated by the company any more. 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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    How Successful Endorsement Deals Can Propel Under Armour To Great Heights
  • By , 5/28/15
  • tags: UA NKE
  • Under Armour (NYSE:UA), a developer and distributor of sportswear, has been on a hot streak for the past few years. The company has been posting consecutive quarters of top line growth on the basis of its fast-growing performance apparel business. In fact, the retailer has now posted 20 consecutive quarters of above 20% overall top line growth, with 22 consecutive quarters of 20% growth in the apparel segment. On the agenda now for the retailer is growing its international business, women’s business, and footwear segment. At the base, the business of sports retailing is very simple: it involves the design of a product, setting up a distribution channel for the product, and using endorsements from sports stars and celebrities to sell the product. Almost all successful companies in the market have followed this business model, including giants Nike and Adidas. Although there are subtle differences in product design and quality between companies, the main differentiating factor between these companies is the appeal they have for their customers, which is mostly a function of the quality of advertising and popularity of the endorsements they use. Consequently, this is where companies focus their budgets and energies. Last year, Under Armour tried getting NBA star Kevin Durant to sign up as an endorser for the company’s footwear products, but was pipped to the post by Nike. Durant could have helped the company’s footwear business to grow by 50%, and this is why the company was willing to spend as much as 10% of its marketing budget on paying Durant alone. However, the company failed and it will have to try harder in the future to get up and coming super stars to sign on with the brand if it is to compete in the highly lucrative footwear market. Importance of Footwear The key difference between Nike and Under Armour is that the former was initially a basketball shoe company that branched out into other areas, while the latter is still primarily a seller of textile apparel trying to grow its footwear business. Nike generates roughly 60% of its sales from footwear, while Under Armour makes around one-eighth  (or 12.5%) of its revenues from footwear. To give a sense of proportion, Nike makes more money through footwear sales in China alone than Under Armour from all of its footwear business operations. However, there is an enormous opportunity for Under Armour to grow in this space. Nike has a monopoly in footwear in the U.S. market with roughly 60% market share if you include sales of Converse and Jordan, and 96% market share in the basketball segment – the biggest segment in the footwear space.  If Under Armour can increase its market share to even 10%, it would end up growing its footwear sales four-fold and overall revenues by 33%. In our forecast, we have projected the company’s footwear line to grow at a rate in the mid-30′s. However, if the company can convince high performing athletes to endorse its brand, it can post a higher rate than that. One example of this is the effect current endorser Stephen Curry’s strong performances in 2015 have had on sales of the CurryOne line of shoes released by Under Armour. The CurryOne has been available from Under Armour since mid-February for $120. Under Armour, which has less than 1% market share of the basketball shoe market compared to Nike’s 96%, will not gain much in terms of top and bottom line from Curry’s success, but will definitely add to its growth story. If Curry goes on to win the MVP and sells as many as 1 million units, the company will make $120 million in sales, implying an increase of nearly 33% to the footwear segment’s revenues from a single line of shoes alone. Therefore, if the company can pull off similar deals in the future and post an average growth of 50% year-on-year, which is highly possible given the low base the segment is starting from, $430 million in 2014 would theoretically grow to close to $6 billion by the end of our forecast period. This can have an impact of around 15% to the company’s stock price alone. 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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    How Growing China Businesses Benefits Nike
  • By , 5/28/15
  • tags: NKE UA LULU
  • Nike (NYSE:NKE) has done extremely well over the past two years. The company has continued to post remarkable gains in its core North American business, while taking over from Adidas as the biggest retailer of sportswear in Europe, and reviving its business in China, the world’s fastest growing market.  In 2014, Nike recorded its most profitable year ever in North America, with reported earnings before interest and taxes rising faster at 14%, than reported revenues at 10%. That momentum has continued into 2015 with North America revenue growing in the high teens in the first four months of the year, led by strong growth in basketball, sportswear, and men’s training, along with modest growth in the women’s training and young athletes businesses.  The remarkable performance in this geography shows the strength of the Nike brand as it has managed to capture the growth in the market and take market share from an ever rising number of competitors at the same time. The company is a market leader in the basketball and running categories, and leverages the insight gained from those segments to capture the significant growth opportunities in areas like e-commerce, apparel, women’s, and young athletes businesses. Nike applies discrete strategies to individual segments, identifying the opportunities in each category, and applying different strategies to capitalize on these opportunities, instead of applying a one-size-fits-all strategy common to the sportswear market. See Our Full Analysis For Nike Impact of China on Nike’s Prospects Nike faces two fundamental problems in China, both of which are cultural. 1) Nike is a running and basketball shoe company from the U.S.. Its expansion into Europe was based on the strategy of targeting key players for sponsorships and leveraging those sponsorships to forge relationships with large-scale commercially organized leagues like the Barclays Premier League in England, and La Liga in Spain. A similar strategy isn’t possible in China for two reasons: no opportunities similar in scale to those in Europe exist, and the more popular sports in China, i.e. football and baseball, have limited appeal in urban areas. 2) Nike’s training and running categories haven’t received much traction in China because health clubs are traditionally seen as activities for rich people in the region. On the other hand, a culture of biking to work exists in China, but people do so mostly in street clothes, instead of spandex. Nike’s branding is based on encouraging strong identification with iconic sports-stars it uses to endorse its products. In  a culture where parents are excessively focused on academic achievement, such a strategy has limited appeal. However, the company’s performance in China exceeded our expectations in the previous three quarters. For example, in the previous quarter, China revenues grew by 17%. Given that China is one of the largest markets for athletic footwear and apparel in the world, the geography provides a significant growth opportunity for Nike.  And Nike’s strong performance over the past three quarters has helped Nike achieve the leading position in both the athletic footwear and apparel markets. Previously beset by the accumulation of unsold inventory and an  indifferent response to new product launches, Nike decided to reset its strategy for China in fiscal 2014. The company believes that it has made good progress on that front and expects to achieve sustainable double-digit growth from the region soon. The sports retailer also changed the assortment of inventory it sells to wholesale partners in China, undertook the re-profiling of multiple stores in the region, and reduced the levels of inventory considerably. However, Nike has positioned itself as a relatively premium brand in China compared to its brand positioning in Europe and North America. As a result, its wholesale partners are seeing strong comparable store sales growth and the profitability of stores that were re-profiled is also increasing. For the nine months ended February 28, 2015, close to 45% of Nike’s revenue came from North America operations. In comparison, revenue from China formed less than 10% of the company’s overall revenue. Given that the Chinese economy can be potentially as big as the U.S. economy, we believe that Nike has the potential of growing its revenue to similar levels as that in North America. If that happens, and assuming the company retains its operating margins, the company can unlock significantly greater amounts of value. Additional revenue of $1.6 billion each year, with a net margin of 10%, and  free cash flow margin of 8.5%, will translate into an additional 16 cents in earnings per share each year, and $2 billion in free cash flow over the period. This is not significantly accretive to the bottom line and shows that the company must increase its net profit margin to capitalize on the growth in its China business going forward.   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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    Incomplete Recovery of F-150 Sales Can Hurt Ford In The Long Run
  • By , 5/28/15
  • tags: F GM TSLA VLKAY
  • Ford Motors’ (NYSE:F) F-150 series of trucks has been the best selling model in the U.S. for multiple decades now. Last year, the company decided to do a changeover of the model. Previously manufactured with steel bodies, the new model will be made out of aluminum. The thinking behind this move was that as aluminum is lighter than steel it would allow the company to make more fuel-efficient and easier to handle trucks. Ford makes the F-150 series of trucks at two factories — one in Dearborn, Michigan, and another in Kansas City. The two factories were closed down to install tooling for the launch of the 2015 version and a reasonable estimate can be made of having lost 100,000 units in sales because of the long shutdowns. The Michigan plant began production again in November, while the Kansas City plant started in March. But the two factories are not operating at full capacity right now, and it will be a while before they do. As a result, dealerships are running shop with very few trucks to sell. According to Ford management, a pickup truck on average spends 50-60 days in inventory at a dealership, but the popularity of the F-150 trucks in the U.S. has meant that each existing stock unit is spending around 20 days in inventory. In order to maximize profit, the company prioritized retail sales, which fetch higher margins, over commercial sales. The auto maker posted a 10% year-over-year gain in retail sales for March. From Ford’s perspective, this strategy makes sense. While supplies are low, it makes sense to sell to retail buyers who prefer higher-trim trucks than commercial buyers buying for their fleets. But commercial sales are a big part of Ford’s business around F-150, and it lost  out to GM on that front. We have a $14  price estimate for Ford, which is slightly lower than the current market price. Risky Move In the first quarter of 2015, Ford’s F-series sales, which include the F-150 and other Super Duty stylings, grew by 2% year-over-year. In comparison, sales of GM’s Chevrolet Silverado grew by 17.6% over the same period.  However, GM didn’t raise the sales of Chevrolet Silverado by offering incentives to buyers. It appears that the auto maker is simply taking those commercial sales at a time when Ford can’t or isn’t willing to. In March, commercial sales of Silverado and GMC Sierra grew by a massive 41% compared to the same month last year. Sales of trucks to commercial fleets — contractors, mining companies, and large corporations who buy 100′s of pickups at a time – are not as profitable as sales to retail buyers, but they are profitable in their own right, and usually Ford and GM compete hard for those sales. Presently, GM is winning out on that terrain quite comfortably. It would be difficult to argue that Ford will not win back those sales when its plants return to full production capacity and dealerships have sufficient stock to meet demand, but the recent GM rally will put some doubt in the mind of investors. There is a chance that buyers will like the Silverado enough to keep buying it in the future. This matters because pickup trucks are the main drivers of profits for both Ford and GM in North America, and small shifts in pickup sales can have a significant impact on the bottom lines of both companies. In the first quarter of 2015, Ford reported a profit in North America ($1.3 billion), but the number was far lower than usual for Ford due to the impact of the slow roll-out of the remodeled F-150 and Edge crossover. The U.S. automaker sold 40% fewer  F-150 pickup trucks compared to the first quarter of last year, and over 50% fewer units of Edge. According to Ford CFO Bob Shanks, the company would have made a profit of $1 billion higher if it were not for higher product launch costs and lost sales due to low inventory. While we expect F-150 sales to recover over time, if the rate of the recovery is slow and if some of GM’s recent gains in the market turn out to be permanent, it could heavily impact Ford’s profitability going forward. If Ford’s market share only improves to 20.7% by the end of our forecast period and average unit price per truck sold falls by $1,000 (or 3%), it can have a downside of close to 10% on the company’s stock price. See our complete analysis for this scenario 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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    Soda Makers Wonder: Where Could Growth In U.S. Come From?
  • By , 5/28/15
  • tags: KO DPS PEP
  • The U.S. carbonated soft drinks (CSD) market declined for the tenth consecutive year in 2014. As customers continue to shift away from sugary, calorie-filled sodas to alternatives such as sports drinks, carbonated water, and ready-to-drink teas and coffees, at no time soon is the CSD market expected to rebound strongly. However, the rate of decline fell last year, on increased customer spending on perishable products, amid an improving economic environment in the country, reflecting that there might be some fight left in the CSD category. Why this category is particularly important is because approximately 41% of the industry-wide volumes in the U.S. liquid refreshment beverage market, which stood at 30.88 billion gallons last year, is constituted by CSDs alone, as per our estimates. In turn, this segment in the country’s beverage market is also pivotal for juggernauts The Coca-Cola Company (NYSE:KO),  PepsiCo (NYSE:PEP), and  Dr Pepper Snapple (NYSE:DPS), which together command 87.6% of the market share. Let’s see why… 43% of Coca-Cola’s net revenues came from the U.S. last year, and CSDs in the country alone form approximately 15% of the company’s net volume sales. On the other hand, 25% of PepsiCo’s last year revenues were from CSDs, and the U.S. alone formed 51% of the net revenues. Coca-Cola and PepsiCo derive a considerable chunk of their sales from international markets, but the domestic market still contributes approximately half of their respective sales. Especially now, when most foreign currencies are depreciating against the U.S. dollar, and with increased volatility in some of the key emerging markets such Russia, China, Ukraine, Venezuela, and Brazil, growth in the home country has become more crucial for these players. Domestic growth is, in fact, the most crucial for Dr Pepper, which derives almost 90% of its top line from the U.S., and 80% of its net volume sales are from CSDs. We estimate a $44 stock price for Coca-Cola, which is above the current market price. See our full analysis for  Coca-Cola The rate of decline of CSDs in the U.S. might have fallen in the last year, but this can be tied to a general upbeat business environment in the country, and higher customer spending capabilities, also boosted by the lower fuel prices. What this statistic also tells is that despite improving conditions in the U.S., the CSD market continued to decline, and couldn’t shake off this decade-long-trend. Introducing low/no calorie sodas has also not gone down well with customers, which is evident from the following table, which shows how the Diet products have fared even worse. This is mainly as customers remain skeptical about the safety aspects of the low calorie drinks, especially due to the usage of artificial substances, such as the sweetener aspartame. The only slight exception to the worse-fall-for-diets case is Coke Zero. A major win for Coca-Cola in the last quarter was the 5% growth in its diet drink, Coke Zero, which along with the new Coke Life (which uses the natural sweetener Stevia), represents how Coca-Cola might be ahead of its competition in terms of low calorie soda sales. PepsiCo just announced that it is removing aspartame from Diet Pepsi, and replacing it with sucralose, better known as splenda, which has a slightly better customer perception than aspartame. On the other hand, Dr Pepper had earlier in 2014 announced plans of launching its naturally-sweetened 60 calorie sodas in the domestic market, but the products are still being tested in regional markets. The diet category forms roughly one-fifth the net revenues for the overall CSD category, according to our estimates. Revenues for this category are expected to trace a bell-shaped curve through 2000-2020, with the peak in 2009, and decline ever since. In 2015, diets are estimated to decline another 5%. So where could the potential growth come from? The answer might be effective product pricing and packaging. One notable trend in 2014 was the rise in unit prices of soft drinks, which meant that higher revenues per unit case made up for declining volume sales. Retailers and beverage makers could increase product prices due to the upbeat economic environment in the country. In addition, more emphasis on the higher-price-per-unit smaller packs has also boosted the average revenue per unit for beverage makers. We estimate a $98 price for PepsiCo, which is above the current market price. See Our Complete Analysis For PepsiCo Coca-Cola put more emphasis on sales of its 7.5 ounce packs, which have higher price per unit compared to value packs. As the company continues to drive top line growth through premiumization of sodas, and higher proportionate sales of small bottles and cans, net domestic revenues grew 6% year-over-year in Q1. PepsiCo also managed to offset the 1% volume decline in PepsiCo Americas Beverages in Q1 due to 3 percentage points of effective net pricing. On the other hand, while Dr Pepper has also gained due to a positive product and package mix, there is still more opportunity for the company to boost its revenue growth, as its pricing is still lower than its peers. A positive mix is what fueled top line growth for the company more than positive pricing. Dr Pepper is not completely in the smaller packages segment, which has been a growth driver for both Coca-Cola and PepsiCo in terms of higher price per unit in recent quarters. This means that Dr Pepper has further growth opportunities when it comes to CSDs, and could emphasize more on the smaller packages and further raise its product prices to spur revenues. We have a price estimate of $79 for Dr Pepper Snapple, which is above the current market price. See Our Complete Analysis For Dr Pepper Snapple Coca-Cola not only leads the U.S. CSD market in terms of volumes, but has also shown more growth in recent times. This might be mainly as the company has a lot of wins in terms of product campaigns, and is mostly the first to spearhead pricing initiatives. Dr Pepper has for years been the trailing third in the U.S. CSD market, behind Coca-Cola and PepsiCo, commanding 17.7% market share as per our estimates. But seeing how it is easier for a smaller company to gain share, rather than for Coca-Cola to expand its share to over 50%, and that Dr Pepper also has opportunity to raise its product prices, there is potential growth for the company, too. In all of this, PepsiCo might have relatively weaker CSD growth going forward, which might give more fuel to the agenda of activist investors to spin-off the food and beverage giant’s drinks business. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    Buybacks: Mostly an Accounting Sleight of Hand
  • By , 5/28/15
  • tags: SPY TLT
  • Submitted by Sizemore Insights as part of our contributors program Buybacks: Mostly an Accounting Sleight of Han d   by Charles Lewis Sizemore, CFA In the world of investing, so many things work better in theory than in practice. Executive stock options? Though originally billed as a way to align management and shareholder interests, they are now reviled by investors as a way for management to quietly loot the companies they are paid to run. When done in excess they massively dilute shareholders over time. They also encourage short-termism and a fixation on raising the company’s stock price in the short term at the expense of planning for the company’s long-term future. Along the same lines, share repurchases have become popular in recent decades as a tax-efficient alternative to cash dividends. Earnings paid out as dividends are taxed twice, at both the corporate and individual investor levels. But when a company uses that same cash to buy back its own shares in the open market, it can boost earnings per share without creating a taxable event. And unlike dividends, which are usually paid quarterly, stock buybacks can be done sporadically as cash allows. Raising the regular dividend is a risky move because it is viewed as a firm commitment, and management doesn’t want to be in that awkward position of having to slash the dividend later if conditions take a turn for the worse. But buybacks can be done quietly behind the scenes and can be stopped at any time without drawing too much unwanted attention. Again, it sounded good . . . in theory. In practice, companies tend to have awful timing. They buy their stock when prices are high, but in a market panic, when prices are low, they are often unable to buy because a bad economic outlook causes them to hoard cash. In the worst cases, they actually have to issue new stock…at low prices that dilute shareholders. Buying high and selling low; this is not exactly a formula for maximizing shareholder value. But the most insidious aspect of stock buybacks is that they often fail to reduce the number of shares outstanding. Hold the phone . . . How exactly could a share buyback not reduce the number of shares outstanding? Simple. The company retires shares bought at full price on the open market to soak up new shares issued at a discount to fulfill employee and executive stock options. That might be a little hard to digest at first, so allow me to explain. Many companies incentivize their workers with employee stock purchase plans in which the workers are allowed to buy shares of the company stock at a discount of anywhere from 5% to 50%. Alternatively, the company might match employee contributions share for share. While the company and the workers tend to view these perks as “free money,” they are not free at all. The shareholders pay in the form of share dilution. And the same is true of executive stock options. The new shares created by the executed options dilute the existing shareholders. It may not be a cash expense, but it is a major reduction of shareholder wealth. To prevent these new shares from diluting earnings per share, management “mops up” by buying back shares on the open market. The problem is that they effectively buy these shares at full price and sell them to employees at a discount, with the shareholders eating the difference. It’s highway robbery that is, sadly, perfectly legal. So, how big of a problem is this? Let’s take a look at the most recent buyback data compiled by Factset . Across the S&P 500, the “buyback yield” over the past two years has averaged a little over 3%. This means that over the preceding rolling 12 months, the companies of the S&P 500 have collectively repurchased a little over 3% of their shares outstanding. Over the course of two years, that means that their shares outstanding should have dropped by around 6%. So, how did that work out in practice? Not so well. The number of shares outstanding has only fallen by a cumulative 2% over the past two years. Not all companies are equally guilty here. There are plenty that are legitimately using their excess cash flow to reduce their share counts to the benefit of their shareholders. But market-wide, the boom in buybacks is mostly a sleight of hand used to hide a massive transfer of wealth from shareholders to management and labor. Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the  Sizem ore Insights blog. Photo credit:  Jonathan This article first appeared on Sizemore Insights as Buybacks: Mostly an Accounting Sleight of Hand
    El Niño Blowing Through Ag Commodities
  • By , 5/28/15
  • tags: SPY TLT
  • Submitted by Wall St. Daily as part of our contributors program El Niño Blowing Through Ag Commodities By Tim Maverick, Commodities Correspondent   After a five-year absence, El Niño is back! Last week, the Australian Bureau of Meteorology predicted a “moderate to strong” El Niño event for this year. This could cause some major disruptions in many commodities markets. Especially if the weather event becomes a “substantial” later in the year. Click to enlarge Wall Street Daily’s Senior Technology Analyst, Greg Miller, explained the broad effects of this weather pattern. During past El Niños, the best-performing commodities have been nickel, zinc, coffee, cocoa, cotton, and soybean oil, according to analysts at Société Générale. But, what about this El Niño? Let’s take a closer look at the possible effect on commodities. Of course, we can’t predict exactly what will happen. We are talking about the weather, here. But, based on historical data, we can hazard a good guess. Getting a Boost The first commodities that come to mind when discussing El Niño are, of course, the agricultural commodities. One crop that is likely to benefit is cocoa . You see, in the past, El Niño caused dryness in Western Africa. And since most of the world’s cocoa is grown in the Ivory Coast and Ghana, cocoa output is likely to experience a hit. Many of the cocoa trees in West Africa are old, too, and may be more susceptible to dry conditions. Supplies could get scarce and drive up the price. Another likely winner will be coffee. Typically, during an El Niño event, Eastern South America experiences unusual dryness, which could affect the Colombian coffee crop. Southeast Asia is also usually hit with extreme dryness. This will greatly affect the biggest producer of robusta coffee, Vietnam. Plus, the country has already gotten less rain than normal. And one forecaster said that El Niño could cause a once in “a 100-year drought” for Vietnam. Other commodities that could possibly be affected in Southeast Asia will be rubber, palm oil, rice, and sugar. Speaking of sugar, El Niño often brings heavy rains to Southern Brazil. If that occurs, expect delays in harvesting from the world’s top sugar producer. And, more importantly, heavy rain will lower the sugar levels in plants. The second-biggest sugar producer is India. Traditionally, El Niño creates weak monsoon seasons there, which would hurt the country’s sugar crop along with its cotton crop. Wheat may also benefit as Australian farmers will likely face extremely dry conditions. Also, the anticipated wet conditions in the wheat growing regions in the United States – the Southern Plains and the Midwest – may affect the quality of the domestic wheat crop. Lastly, soybean oil is usually a good performer because of the lowered output of palm oil in Southeast Asia from dry conditions. Melting Metals Interestingly, a weak monsoon season may adversely affect precious metals, too. Rural Indians are big buyers of gold and silver. Poor crops will translate into less income and, therefore, less demand for precious metals. On the other hand, three base metals may rise in price because of El Niño. Past El Niños have led to dryness in Indonesia. This adversely affects both hydroelectric power and water transportation needed for the country’s copper and nickel industries. But, in Peru, past El Niños have led to flooding. This has an adverse effect on the country’s big zinc mining industry. Plus, the global zinc industry is already facing a shutdown of two of the world’s largest mines – the Century and Lisheen mines – by early 2016. Relief for California? But, what about El Niño’s effects here at home? Well, El Niño should bring much-needed rain to California. Unfortunately, it will not end California’s miseries. The drought is just too great. Reservoirs are still well below where they should be. With the state’s biggest reservoir, Lake Oroville, at just 56% of its capacity. And the Lake Mead reservoir in Las Vegas at just 38% of its capacity. That’s a full 140 feet below what it can hold! Rose Davis of the U.S. Bureau of Reclamation told the Los Angeles Times earlier this month, “Lake Mead hasn’t been this low since we were filling it in the 1930s.” For the drought to end in California, the state would need to see strong El Niño events several years in a row. That’s possible, but unlikely. In the meantime, the coming El Niño promises to keep commodities markets around the world on their toes. And the chase continues, Tim Maverick The post El Niño Blowing Through Ag Commodities appeared first on Wall Street Daily . By Tim Maverick
    10 Dividend Growers Institutional Investors Like
  • By , 5/28/15
  • tags: SPY STX
  • Submitted by Dividend Yield as part of our contributors program . 10 Dividend Growers Institutional Investors Like Goldman Sachs is projecting that nearly half of stock returns over the next decade will be from dividends. That’s a huge number and based on historically data. This is certainly good news for dividend investors. Unfortunately the stock market is trading at an elevated price-to-earnings ratio. As a result, total stock market returns are expected to average just 5% a year over the next decade. If you are looking for more return, you must select the good stocks and eliminate the bad ones. By following the dividend growth rule, dividend growth stocks should perform better than the overall market. Below are 10 that could fit the dividend growth rule. Which do you like? 10 Top Dividend Growers to consider are . . . Seagate Technology — Yield: 3.87% Seagate Technology ( NASDAQ:STX ) employs 52,100 people, generates revenue of $13,724.00 million and has a net income of $1,570.00 million. The current market capitalization stands at $17.71 billion. Seagate Technology’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $2,679.00 million. The EBITDA margin is 19.52% (the operating margin is 12.94% and the net profit margin 11.44%). Financials: The total debt represents 41.30% of Seagate Technology assets and the total debt in relation to the equity amounts to 138.42%. Due to the financial situation, a return on equity of 49.63% was realized by Seagate Technology. Twelve trailing months earnings per share reached a value of $5.75. Last fiscal year, Seagate Technology paid $1.67 in the form of dividends to shareholders. Market Valuation: Here are the price ratios of the company: The P/E ratio is 9.71, the P/S ratio is 1.29 and the P/B ratio is finally 6.43. The dividend yield amounts to 3.87%. Take a closer look at the other stocks here: 10 Dividend Growers Institutional Investors Like…
    The Dow Chemical Company Logo
  • commented 5/28/15
  • tags: DOW
  • Ferric Sulfate Market: Global Industry Analysis and Opportunity Assessment 2015 - 2025: Future Market Insights

    Ferric sulfate is a whitish yellow crystalline compound. It is acidic in nature and is corrosive to copper, copper alloys and galvanized steels. It is soluble in water and is hygroscopic in nature. It can be extracted from its ores such as mikasaite, lausenite and kornelite among others. Commercially, it is manufactured by oxidizing ferrous sulfate. The largest application of ferric sulfate is in waste water purification.

    Browse Full Report@ http://www.futuremarketinsights.com/reports/details/ferric-sulfate-market

    The growing awareness towards health is the primary driver for the growth of ferric sulfate market. The presence of various harmful chemicals and suspended particles in water are undesirable and need to be clarified in order to make it suitable for consumption. Ferric sulfate is used to coagulate contaminants and make water potable. Another key driver for the market of ferric sulfate is the growing semiconductors industry. Double distilled water is used in the semiconductor industry. One of the preliminary steps to obtain double distilled water is the use of ferric sulfate. The growing electronic and micro chips industry is driving the market of ferric sulfate and is expected to continue this trend in the forecast period. Ferric sulfate is however, highly acidic. When ferric sulfate comes in contact with skin it causes severe burns. Thus, the storage and handling of ferric sulfate has to be conducted with extreme caution and is expected to hinder the growth of the market. The growing GDP of BRICS nations is expected to open new areas of opportunities for the ferric sulfate market. Additionally, ferric sulfate is used as an alternative to aluminum salts for water purification, since the presence of aluminum in treated water is undesirable and a cause of concern to many. This is expected to increase the usage of ferric sulfate in waste water treatment, in the forecast period.

    Owing to the strict European Union norms of water purification and phosphorous removal from drinking water, the usage of ferric sulfate is expected to grow in the European Union. The largest market for ferric sulfate is expected to be China, where treated water is used extensively in agricultural farms for irrigation and in the semiconductor industry. The growing transition of the semiconductor industry from countries such as Taiwan, Japan and Korea to China has fuelled the growth of ferric sulfate market. The U.S and Japan markets are mature and are showing minimal growth in the market of ferric sulfate.

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    Ferric sulfate is also used as an anti-hemorrhagic agent and as an astringent. It contracts tissues to seal injured blood vessels, thereby preventing blood loss due to trauma. This application of ferric sulfate makes it suited for trauma and emergency centers of hospitals. Ferric sulfate produces a dark red color when dissolved in water. Due to this property, ferrous and ferric sulfate are used in dyes and pigment industry. Ferric sulfate is used to remove bacteria, arsenic and heavy metals such as chromium, lead, selenium from water, additionally it prevents odor by eliminating hydrogen sulfide. Ferric sulfate is functional over a wide pH range making it suitable for clarification of a wide variety of water samples. In waste water treatment, it is used as a coagulant and a sludge thickening agent.

    The major players in this market include-Alfa Aesar, Beijin Ouhe Technology Co Ltd, Chengdu XiYa Chemical Technology Co Ltd and Nanjing Vital Chemical Co Ltd among others. This research report presents a comprehensive assessment of the market and contains thoughtful insights, facts, historical data and statistically-supported and industry-validated market data and projections with a suitable set of assumptions and methodology. [ less... ]
    Ferric Sulfate Market: Global Industry Analysis and Opportunity Assessment 2015 - 2025: Future Market Insights Ferric sulfate is a whitish yellow crystalline compound. It is acidic in nature and is corrosive to copper, copper alloys and galvanized steels. It is soluble in water and is hygroscopic in nature. It can be extracted from its ores such as mikasaite, lausenite and kornelite among others. Commercially, it is manufactured by oxidizing ferrous sulfate. The largest application of ferric sulfate is in waste water purification. Browse Full Report@ http://www.futuremarketinsights.com/reports/details/ferric-sulfate-market The growing awareness towards health is the primary driver for the growth of ferric sulfate market. The presence of various harmful chemicals and suspended particles in water are undesirable and need to be clarified in order to make it suitable for consumption. Ferric sulfate is used to coagulate contaminants and make water potable. Another key driver for the market of ferric sulfate is the growing semiconductors industry. Double distilled water is used in the semiconductor industry. One of the preliminary steps to obtain double distilled water is the use of ferric sulfate. The growing electronic and micro chips industry is driving the market of ferric sulfate and is expected to continue this trend in the forecast period. Ferric sulfate is however, highly acidic. When ferric sulfate comes in contact with skin it causes severe burns. Thus, the storage and handling of ferric sulfate has to be conducted with extreme caution and is expected to hinder the growth of the market. The growing GDP of BRICS nations is expected to open new areas of opportunities for the ferric sulfate market. Additionally, ferric sulfate is used as an alternative to aluminum salts for water purification, since the presence of aluminum in treated water is undesirable and a cause of concern to many. This is expected to increase the usage of ferric sulfate in waste water treatment, in the forecast period. Owing to the strict European Union norms of water purification and phosphorous removal from drinking water, the usage of ferric sulfate is expected to grow in the European Union. The largest market for ferric sulfate is expected to be China, where treated water is used extensively in agricultural farms for irrigation and in the semiconductor industry. The growing transition of the semiconductor industry from countries such as Taiwan, Japan and Korea to China has fuelled the growth of ferric sulfate market. The U.S and Japan markets are mature and are showing minimal growth in the market of ferric sulfate. Request Sample@ http://www.futuremarketinsights.com/reports/sample/rep-gb-375 Ferric sulfate is also used as an anti-hemorrhagic agent and as an astringent. It contracts tissues to seal injured blood vessels, thereby preventing blood loss due to trauma. This application of ferric sulfate makes it suited for trauma and emergency centers of hospitals. Ferric sulfate produces a dark red color when dissolved in water. Due to this property, ferrous and ferric sulfate are used in dyes and pigment industry. Ferric sulfate is used to remove bacteria, arsenic and heavy metals such as chromium, lead, selenium from water, additionally it prevents odor by eliminating hydrogen sulfide. Ferric sulfate is functional over a wide pH range making it suitable for clarification of a wide variety of water samples. In waste water treatment, it is used as a coagulant and a sludge thickening agent. The major players in this market include-Alfa Aesar, Beijin Ouhe Technology Co Ltd, Chengdu XiYa Chemical Technology Co Ltd and Nanjing Vital Chemical Co Ltd among others. This research report presents a comprehensive assessment of the market and contains thoughtful insights, facts, historical data and statistically-supported and industry-validated market data and projections with a suitable set of assumptions and methodology.
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  • commented 5/28/15
  • tags: CVS
  • Clinical Trials Market: Global Industry Analysis and Forecast Till 2025 by FMI

    Clinical trials are research studies performed on humans to gain specific information about biomedical interventions such as novel vaccines, devices, treatments and drugs and thereby generating safety data. Clinical trials are regulated by health authorities and ethics committees.

    Documents required for performing clinical trials are investigator's brochure (IB) which include current and relevant scientific information about the investigational product, United States Food and Drug (FDA) form 1572, protocol and amendments, inform consent, other written information for participants, recruitment advertisement, financial disclosure form (FDF), master clinical trial agreement (MCTA), institutional review board (IRB) approval, medical licensure, training records, laboratory accreditation, visit monitor reports, miscellaneous document, signature sheet and documentation of investigational drug destruction. The International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) brings together regulatory authorities of Europe, the United States, Japan and experts from pharmaceutical industry to frame and regulate the technical and scientific aspects of pharmaceutical product registration. The Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) states rules and standard guidelines for clinical trials. ICH guidelines are followed as law by several countries in the world.

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    Clinical trials are conducted in four phases namely, Phase I, II, III and IV. Phase I is conducted for safety, phase II is conducted for efficacy, phase III is conducted for final confirmation of safety and efficacy and phase IV is conducted for post sales studies. Risk to participants involved in clinical trials decreases from phase I to phase VI. Number of participants increases from phase I to phase IV resulting in increasing cost of trials. Based on the phases of clinical trials, global clinical trials market is segmented as follows:

    -Phase I
    -Phase II
    -Phase III
    -Phase IV

    Based on indication, global clinical trials market is classified as follows:

    -Blood disorders
    -Ophthalmology
    -Autoimmune diseases
    -Circulatory diseases
    -Cancer
    -Genitourinary diseases
    -Congenital diseases
    -Musculoskeletal diseases
    -Central nervous system (CNS)
    -Infections
    -Dermatology
    -Metabolic disorders
    -Cardio vascular system (CVS) diseases
    -Gastrointestinal diseases
    -Mental disorders
    -Others

    Being relatively costly process, in order to reduce economic burden on company and shift focus on core business activities, many companies outsource their clinical trial activities to contract research organizations (CROs). Contract research organizations provide services such as clinical trial management, clinical research and preclinical research. Factors such as advancement in technology and increasing demand of innovative solutions in healthcare industry are driving the market of global clinical trials towards growth. On the other hand, factors such as high cost and stringent regulations are restraining the growth of clinical trials market globally. Geographically, the global clinical trials market is segmented into North America, Europe, Asia-Pacific and Rest of the World.

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    North America is the leading consumer of global clinical trials solutions, followed by Europe. Ample availability of funds to outsource clinical trials serves as the major growth driver for the North America clinical trials market. Asia-Pacific demonstrates impressive growth potential for clinical trials market and is expected to show the highest growth rate as compared to other regions in the world. Countries such as India are attractive markets due to advantages such as availability of skilled practitioners and availability government support in terms development of outsourcing hubs thus attracting pharmaceutical and biotechnology companies to outsource clinical trial activities to CROs in this region. Some of the market leaders contributing to the global clinical trials market include Eli Lilly and Company, Novo Nordisk A/S, Ranbaxy Laboratories, Ltd., Sanofi Aventis A.S. and Roche Group. [ less... ]
    Clinical Trials Market: Global Industry Analysis and Forecast Till 2025 by FMI Clinical trials are research studies performed on humans to gain specific information about biomedical interventions such as novel vaccines, devices, treatments and drugs and thereby generating safety data. Clinical trials are regulated by health authorities and ethics committees. Documents required for performing clinical trials are investigator's brochure (IB) which include current and relevant scientific information about the investigational product, United States Food and Drug (FDA) form 1572, protocol and amendments, inform consent, other written information for participants, recruitment advertisement, financial disclosure form (FDF), master clinical trial agreement (MCTA), institutional review board (IRB) approval, medical licensure, training records, laboratory accreditation, visit monitor reports, miscellaneous document, signature sheet and documentation of investigational drug destruction. The International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) brings together regulatory authorities of Europe, the United States, Japan and experts from pharmaceutical industry to frame and regulate the technical and scientific aspects of pharmaceutical product registration. The Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) states rules and standard guidelines for clinical trials. ICH guidelines are followed as law by several countries in the world. Browse Full Report@ http://www.futuremarketinsights.com/reports/details/clinical-trials-market Clinical trials are conducted in four phases namely, Phase I, II, III and IV. Phase I is conducted for safety, phase II is conducted for efficacy, phase III is conducted for final confirmation of safety and efficacy and phase IV is conducted for post sales studies. Risk to participants involved in clinical trials decreases from phase I to phase VI. Number of participants increases from phase I to phase IV resulting in increasing cost of trials. Based on the phases of clinical trials, global clinical trials market is segmented as follows: -Phase I -Phase II -Phase III -Phase IV Based on indication, global clinical trials market is classified as follows: -Blood disorders -Ophthalmology -Autoimmune diseases -Circulatory diseases -Cancer -Genitourinary diseases -Congenital diseases -Musculoskeletal diseases -Central nervous system (CNS) -Infections -Dermatology -Metabolic disorders -Cardio vascular system (CVS) diseases -Gastrointestinal diseases -Mental disorders -Others Being relatively costly process, in order to reduce economic burden on company and shift focus on core business activities, many companies outsource their clinical trial activities to contract research organizations (CROs). Contract research organizations provide services such as clinical trial management, clinical research and preclinical research. Factors such as advancement in technology and increasing demand of innovative solutions in healthcare industry are driving the market of global clinical trials towards growth. On the other hand, factors such as high cost and stringent regulations are restraining the growth of clinical trials market globally. Geographically, the global clinical trials market is segmented into North America, Europe, Asia-Pacific and Rest of the World. Request Sample@ http://www.futuremarketinsights.com/reports/sample/rep-gb-384 North America is the leading consumer of global clinical trials solutions, followed by Europe. Ample availability of funds to outsource clinical trials serves as the major growth driver for the North America clinical trials market. Asia-Pacific demonstrates impressive growth potential for clinical trials market and is expected to show the highest growth rate as compared to other regions in the world. Countries such as India are attractive markets due to advantages such as availability of skilled practitioners and availability government support in terms development of outsourcing hubs thus attracting pharmaceutical and biotechnology companies to outsource clinical trial activities to CROs in this region. Some of the market leaders contributing to the global clinical trials market include Eli Lilly and Company, Novo Nordisk A/S, Ranbaxy Laboratories, Ltd., Sanofi Aventis A.S. and Roche Group.
    MT Logo
    ArcelorMittal Maintains Strategic Thrust On Automotive Steel With Announcement Of Indian MoU
  • By , 5/27/15
  • tags: MT
  • ArcelorMittal (NYSE:MT), the world’s largest steel producer, recently announced the signing of a Memorandum of Understanding (MoU) with Steel Authority of India Limited (SAIL), India’s largest steel producer, for the setting up of an automotive steel facility under a joint venture arrangement. The signing of this MoU is a part of ArcelorMittal’s strategic focus on automotive steel. Given the uncertain global demand and pricing environment for steel, automotive steel, with its relatively high and stable margins, constitutes an important focus area for the company. Coming on the heels of a similar joint venture agreement between ArcelorMittal and China’s Hunan Valin Iron and Steel Company last year, the move also increases the company’s exposure to high growth emerging markets. See our complete analysis for ArcelorMittal Steel Demand And Prices The principal consumers of steel products are the automotive, construction, appliance, machinery, equipment, infrastructure, and transportation industries. The nature of business of these sectors is cyclical, with demand generally correlated with macroeconomic conditions. Thus, demand for steel products is generally correlated with macroeconomic fluctuations in the global economy. Steel prices have fallen over the last few years, driven primarily by weak demand due to adverse macroeconomic conditions in the developed economies and an oversupply situation. This is indicated by trends in the London Metal Exchange (LME) Steel Billet Prices. ArcelorMittal derives around 75% of its revenues from developed markets, primarily Europe and North America. Over the course of the last year or so, steel prices have recovered in the North American Free Trade Agreement (NAFTA) region, which consists of the U.S., Canada, and Mexico, driven by an economic recovery in the U.S., particularly in the manufacturing sector. However, over the course of the last year, there has been an increase in cheap steel imports into the U.S., partly because of the strengthening of the U.S. Dollar against global currencies. The penetration of finished steel imports as a percentage of the U.S. domestic steel market increased to 28.1% in 2014, up from 23.2% in 2013. The increase in steel imports has negatively impacted realized prices and shipments for the company in North America. As a result of the competition from cheap steel imports, the NAFTA division’s realized prices fell 5% year-over-year to $796 per ton in Q1. In addition, the division’s steel shipments declined 3% year-over-year to 5.5 million tons in Q1. As a result of these weak market conditions, the World Steel Association has revised downward expectations of steel demand growth in the North American Free Trade Agreement (NAFTA) region to -0.9% in 2015, from previous estimates of 3.4% growth. ArcelorMittal’s prospects in Europe have been negatively impacted by the depreciation of the Euro against the Dollar. In Q1 2015, the company’s European operations reported a 22% decline in year-over-year realized prices  to $633 per ton, primarily due to the depreciation of the Euro against the U.S. Dollar. Though the demand for steel in Europe is expected to rise by 2.1% in 2015, the weakening of the Euro against the Dollar remains an area of concern for the company. With demand for steel still recovering, and a pricing environment that is relatively subdued, ArcelorMittal has focused on its automotive steel sales. Automotive steel commands relatively higher margins, with 20-30% of the average selling price being attributable to the value-added nature of the product. Further, with its core markets of Europe and North America relatively subdued, the company is also trying to increase its exposure to high growth emerging markets. ArcelorMittal’s Automotive Focus Automotive steel is a major thrust area for ArcelorMittal. As per the company’s estimates, its flat products accounted for approximately 17% of the global automotive steel market in 2014. Shipments of automotive steel accounted for around 16% of ArcelorMitttal’ s total shipments in 2014. The company’s automotive steel shipments are mainly delivered in the geographic markets of its production facilities in Europe, North and South America, and South Africa. Given the limited exposure of ArcelorMittal to emerging markets, it is consciously trying to increase its exposure to high growth opportunities in these markets. Automobile markets in China and India are set to experience rapid growth in the years to come. The Chinese automobile market is set to grow rapidly with automobile sales set to rise to around 30 million units by 2020, around 40% higher than current levels. India’s automobile sales are expected to double to 7 million units by 2020, from current levels of around 3.5 million. Considering this opportunity, ArcelorMittal invested $832 million last year in an automotive steel plant in a joint venture with Hunan Valin Iron and Steel Company. The plant’s production capacity of 1.5 million tons of automotive steel significantly boosted ArcelorMittal’s automotive steel production capacity and gave the company additional exposure to the Chinese market. Similarly, the company’s recently announced MoU with SAIL is aimed at tapping growth in the Indian automotive market. As far as developed markets are concerned, ArcelorMittal’s acquisition of Thyssenkrupp’s automotive steel plant in Calvert, Alabama last year was aimed at increasing its presence in the North American Free Trade Agreement (NAFTA) automotive steel market. The Calvert plant is a state-of-the-art facility which is capable of producing advanced high strength steels. ArcelorMittal has invested heavily in R&D in order to produce advanced high strength steel (AHSS) grades that cater to automobile manufacturers’ needs for fuel economy, safety, and reduced carbon dioxide emissions. The company is focused on preventing Original Equipment Manufacturers (OEMs) from turning to alternative materials such as aluminum. Prominent examples of ArcelorMittal’s innovation are the S-in motion project, which reduces the body weight of a typical C-segment vehicle by up to 23% and reduces vehicular carbon dioxide emissions by 14%. The company’s management has repeatedly stressed the strategic importance of automotive steel in the company’s plans for the future. Given the recent activity pertaining to the automotive sector at ArcelorMittal, the company management has been true to its word. 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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    What If Electronic Arts & Activision Develop Skill-Based Games For Las Vegas Casinos?
  • By , 5/27/15
  • tags: ATVI ERTS EA
  • The U.S. gaming industry has undergone a major change over the last few years, with the gamers shifting from physical software titles to digital gaming. On one hand, the new physical software sales dropped gradually, driven by lack of core titles in the market. On the other hand, the launch of next generation consoles by Microsoft (NASDAQ:MSFT), Sony, and Nintendo, revived the hardware (console) sales. According to the research group NPD, the software sales in the U.S. declined 22% from $6.9 billion in 2012 to $5.3 billion in 2014, whereas the hardware sales rose nearly 28% from $4 billion in 2012 to $5.17 billion in 2014. Source: NPD research group Top U.S. video game developers, such as Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ: ATVI), have changed their business plan over the last few years. Both the companies decreased the number of new franchise releases and focused more on improving the existing core franchises. The core titles of both the companies are the top selling games in their respective genres. However, the increasing popularity and demand for digital gaming has already started affecting the physical media sales for video games. The U.S. game developing companies have already started looking for new markets to tap into, primarily online gaming. Recently, a bill has been proposed in the state of Nevada that will allow the entry of slot machines with arcade-game elements, skill-based games, and other unique features, which would require more skill and less luck, in Las Vegas casinos. Considering all the industry and company trends, as well as the current financial condition of the companies, this scenario can strongly impact the stock of both the companies. Our $60 price estimate for  Electronic Arts’ stock is 3% below the current market price, whereas our $25 price estimate for Activision Blizzard ’s stock is in line with the market price. See our complete analysis for Electronic Arts | Activision Blizzard Arcade Gaming In Las Vegas Casinos To Provide Incremental Revenue Stream In December 2014,  the Association of Gaming Equipment Manufacturers (AGEM) proposed a bill (Senate Bill 9) that allows adding an element of skill to the slot games in Nevada casinos. It requires the Nevada Gaming Commission to adopt regulations relating to the development of technology in gaming, as well as to allow flexibility in payout percentages or a game’s outcome. The bill is aimed at introducing arcade-game style gambling and video game technology in Nevada casinos. This means that if a player masters certain skills included in these games, his/her chances of winning would improve. We have discussed this in detail in our prior article. (See: Skill-Based Slot Machines To Provide A Win-Win Situation For Casinos & Gaming Industry ) These games, if the bill becomes law, will be introduced on the slot machines in the Las Vegas casinos. Slot machine gambling in Nevada is alone a $7 billion market, which now makes it a very lucrative segment for the game developing companies. If Electronic Arts and Activision Blizzard plan to enter this market, after the bill becomes a law, it will be a whole new market for the two major gaming giants and it can provide them with incremental revenues. Impact On Activision Blizzard For Activision Blizzard, Trefis estimates the revenues from distribution segment to reach $572 million by the end of 2021. Moreover, according to our estimates, the distribution gross profit margins were nearly 30% in 2014, and it might remain around the same figure till the end of our forecast period. If Activision enters the new market, and develops & distributes arcade and hybrid games to Las Vegas Casinos, the annual revenues from the segment might cross $1 billion by the end of our forecast period, with the gross profit margins reaching 40% over the same period. This scenario will provide a 7% upside to the Trefis price estimate for the company. Impact On Electronic Arts For Electronic Arts, Trefis estimates the number of games other than FIFA and Madden NFL released per year to be 11 in 2015 and to remain close to this number by the end of 2021. Moreover, we estimate the product gross margins to be 63.6% in 2015 and thereafter, to rise to 70% by the end of our forecast period. If Electronic Arts taps into the casino gaming market, and starts developing new games for the Las Vegas Casinos, the number of games other than FIFA and Madden NFL released per year might jump to 16 by the end of our forecast period, whereas the product gross margins might jump to 72% by 2021. This scenario will provide a 15% upside to the Trefis price estimate for the company. 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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    3 Key Trends Driving Our $11 Per Share Price Estimate For Petrobras
  • By , 5/27/15
  • tags: PBR XOM RDSA CVX BP
  • We recently revised our price estimate for Petroleo Brasileiro Petrobras (NYSE:PBR), also known as Petrobras, to $11 per share, which is around 14.5x our 2015 full-year diluted earnings per share (EPS) estimate of $0.76 for the company. Petrobras is a vertically integrated oil and gas company, which operates in both the upstream and downstream segments of the industry. The Brazilian multinational energy giant is one of the largest companies in Latin America by annual sales revenue. Its operations account for a large majority of the total oil and gas production in Brazil. Last year, Petrobras’ average daily crude oil production in Brazil was around 2,034 thousand barrels per day (MBD), more than 90% of Brazil’s total oil production. Petrobras holds a large base of proved hydrocarbon reserves in Brazil, a vast majority of which (almost two-thirds) are located in large, contiguous and highly productive fields in the offshore Campos Basin. This allows the company to optimize its infrastructure and limit costs associated with the exploration, development, and production of these hydrocarbon reserves. In addition to exploration and production of hydrocarbons, Petrobras also operates substantially all of the oil refining capacity in Brazil and distributes refined products through its own retail network and to other fuel wholesalers. Like other integrated oil and gas majors, the company is also involved in the production of petrochemicals. Below, we discuss the four key trends that are driving our current price estimate for Petrobras. See Our Complete Analysis For Petrobras Rising Pre-salt Production A bet on Petrobras is essentially a bet on the development of pre-salt reserves offshore Brazil. The expression “pre-salt” refers to an aggregation of rocks that hold hydrocarbon reserves and are located in ultra-deep waters in a large portion of the Brazilian coast. It is called “pre-salt” because the rock interval ranges under an extensive layer of salt, which can be as much as 2,000 meters thick. The term “pre-” is used because these rocks were deposited before the salt layer and are therefore older. The total depth of these rocks can be as much as 7,000 meters from the surface of the sea. Most of the growth in Petrobras’ net proved reserves in recent years has come on the back of large pre-salt discoveries. Today, pre-salt deposits contribute more than 30% to the company’s total net proved reserves. Production from these ultra-deepwater reserves has grown significantly over the last few years. Just eight years after the first pre-salt discovery in 2006, Petrobras reported that gross oil and natural gas liquids production from pre-salt reserves, which averaged around 300,000 barrels per day in 2013, reached a record level of 800 MBD on April 11th 2015. As the chart above shows, the figure has been growing at an increasing pace of late. It rose from a monthly-average rate of just around 300 MBD in February 2013 to 715 MBD in April this year. And Petrobras continues to maintain a strong focus on the development of these reserves despite significant headwinds from lower crude oil prices, ongoing corruption investigations, and the strengthening of the U.S. Dollar against the Brazilian Real. The company plans to invest a lion’s share (more than 60%) of its net capital investments on the development of these reserves. As of now, it has several new floating production units under construction, while production from some of the recently-started ones is being ramped up. These projects are expected to help Petrobras meet its production growth target of 3.5-5.5% for this year. We currently forecast the company’s total net hydrocarbon production in Brazil to grow from around 2.28 million barrels of oil equivalent per day (MMBOED) in 2014 to 3.26 MMBOED by the end of our forecast period, primarily driven by the ramp-up of production from pre-salt reserves. Thicker Downstream Margins Petrobras’ downstream operations in Brazil have been under considerable pressure over the past few years. According to our estimates, the company’s refining, marketing, and distribution EBITDA margins have declined significantly from around 14% in 2009 to -0.9% in 2014. This has been primarily because of lower price realization by the company for its refined products sales in Brazil due to government regulations. Up until recently, since January 2012, Petrobras was selling gasoline, diesel, and other refined petroleum products in Brazil at a sharp discount (around $10-15 per barrel on average) from international prices. This is because the Brazilian government did not allow the company to pass on higher input costs to its end consumers. The government’s reluctance in allowing the price of petroleum products to be increased can be attributed to its policy focused on controlling inflation. Gasoline and diesel are heavily weighted in the country’s benchmark IPCA inflation rate. However, because of the change in the global supply/demand equation for crude oil, with a faster than expected non-OPEC supply growth, primarily driven by tight oil development in the U.S., and a slower than expected growth in global demand, benchmark crude oil prices declined sharply last year and continue to remain low currently. This has led to a sooner than expected convergence in international and domestic refined petroleum prices for Petrobras. In addition, Petrobras also began crude oil processing at the new RNEST refinery in December last year. Located in Northeastern Brazil, RNEST is designed to process 230 MBD of crude oil to produce 162 MBD of low-sulfur diesel (10 ppm) along with LPG, naphtha, bunker fuel, and petroleum coke. The company also initiated the start-up of the second crude oil processing unit at RNEST in March this year and expects to commission it by the end of this month. Once the refinery is completely up and running, Petrobras’ reliance on imported refined petroleum products would shrink significantly. We believe that this new refinery start-up, combined with the increase in domestic fuel price, and the recent decline in global crude oil prices, will help improve its downstream margins significantly in the short to medium term. However, the positive impact from these factors is likely to be partially offset by increased demand for petroleum fuel products in the domestic market due to the growth in passenger vehicle fleets. This is because higher domestic demand means an increased need for costlier imported fuel to replenish that, which ultimately weighs on the company’s operating margins. Slower Capital Investments Controlling capital expenditures while maintaining modest cash flow growth prospects is the highest priority for Petrobras right now, primarily due to the changed crude oil price environment. With a deteriorated image and downgraded credit ratings after the unfolding of the corruption scandal in Brazil, raising fresh capital has become significantly more difficult for Petrobras. Therefore, the company is trying to meet as much of its investment needs as possible through cash flows from operations and divestments. (See:  Petrobras’ Cost of Capital Set To Rise After Moody’s Downgrade ) According to the cash flow plan outlined by the company during the 2015 first quarter earnings call, it expects to invest around $29 billion in its operations (all divisions combined) this year, and divest assets worth around $3 billion. This gives us a net investment figure of around $26 billion for the year, most of which (around 87%) is expected to be spent on the Brazil Oil and Gas division. Our forecast for the Net Capex as % of Brazil Oil and Gas EBITDA is based on the same assumption. In 2016, Petrobras plans to divest assets worth more than $10 billion, so that’s driving the sharp drop in our estimate of the metric for that year. Beyond that, it is just a function of the projected recovery in crude oil prices, cash flow growth, and continued pace of capital investments. 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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    In The Wake Of The Expedia-Ctrip Alliance, Priceline Further Increases Investments In Ctrip
  • By , 5/27/15
  • tags: PCLN CTRP EXPE TRIP TZOO
  • Shortly after Expedia’s eLong divestiture and forging of a strategic alliance with Ctrip (NASDAQ:CTRP), Priceline (NASDAQ:PCLN) increased its investment on the Chinese online travel leader. On May 26th, Priceline announced that it will invest an additional $250 million on Ctrip via a convertible bond. Post the deal, Priceline could gain up to 15% of stake in Ctrip. Currently, Priceline owns around 5% of Ctrip’s shares. Our  price estimate of $1040 for Priceline’s stock is slightly below the current market price. See Our Complete Analysis for Priceline Here The Successful 2014 Partnership Expansion With Ctrip, Triggered Further Investments By Priceline Earlier in August 2014, Priceline strengthened its commercial partnership (initiated in 2012) with Ctrip, by investing $500 million in the company. Priceline now has access to Ctrip’s 100,000 accommodations in the Greater China region while Ctrip has access to Priceline’s global portfolio of over 500,000 accommodations. Additionally, Ctrip agreed to promote Priceline Group’s other services, like rentalcars.com and OpenTable, to its customer base. The expanded partnership with Ctrip  reaped substantial benefits for Priceline  in 2014. Priceline’s outbound business witnessed significant growth after Agoda and booking.com were featured on Ctrip. The main reason for that was the growing Chinese outbound market, (which is  the largest in the world). Ctrip’s properties on Priceline’s platform are also gaining traction. In its Q4 2014 earnings call, Priceline’s management talked about plans to accelerate the rollout of its properties in China in the coming months. The Priceline Expedia Rivalry Heats Up Both Priceline and Expedia had a strategically significant year in 2014. In 2014 Priceline generated $50.3 billion (an year-on-year increase of 28%) and Expedia stood at $50.4 billion (an year-on-year increase of 30%), in terms of gross bookings. In January 2015, Expedia (NASDAQ:EXPE) acquired its marketing partner, Travelocity. In February 2015, Expedia announced its intention to acquire Orbitz Worldwide, the Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com. Expedia expects the deal to close by the second half of 2015, once regulatory approvals are achieved. Expedia might own up to 75% of the U.S. online travel market post the Orbitz acquisition, according to the 2013 market shares provided by PhoCusWright. While, Expedia tries consolidating on the domestic front in the U.S., Priceline is on the lookout  for expanding its presence in the international markets (that accounts for over 80% of its revenues). Priceline’s large footprint in Europe through booking.com should complement Ctrip’s offerings in the Chinese region and provide outbound tourists from China with a greater array of choices on the global map. A ccording to Darren Huston, President and CEO of The Priceline Group, with Ctrip being the online travel leader in China and China being a rapidly expanding tourism market, this partnership will bring more bookings from Chinese travelers venturing abroad and also expand Priceline’s geographic reach within China. He describes the situation to be similar to putting more products on the “shelf”, which translates into greater value add for the “store”. Why Is The China Market So Crucial To The Leading Online Travel Agencies? Chinese outbound travel traffic crossed 100 million in the first 11 months of 2014.. This translates to an over 100% growth from 2009 (47.7 million). The number is predicted to surpass 160 million by 2018. China’s total outbound expenditure for 2013 was $129 billion and Chinese travelers are presently considered to be the top contributors to global tourism spending. China’s economic growth, despite slowing more recently, is expected to recover and display a healthy trend in the next half decade. This recovery, along with increased urbanization, point towards a greater propensity for the Chinese to travel in the coming years. Why Are The Online Travel Leaders Vying For Ctrip’s Alliance? China is currently the second largest travel market in the world. Currently, Ctrip is the only Chinese OTA maintaining solid top line growth figures. Additionally, Ctrip’s scalability and aggressive investments in technology would lead to operational efficiencies, in turn resulting in solid margin growth in the long run. Ctrip’s domestic hotel coverage increased to 270,000 in Q1 2015, triple the amount from Q1 2014. China’s hotel market is fragmented and Ctrip is trying to consolidate the hotels on its platforms with an aggressive increase in coverage. Ctrip’s air ticketing volume growth was more than 60%, exceeding management guidance of 50%. Ctrip is planning  for strong bottom line growth by the year 2020, with 20%-30% operating margins. As of Q3 2014, with a 55.9% share in revenues, Ctrip is the market leader in the Chinese online travel market, followed by Elong and TongCheng with a revenue share of 9.7% and 6.3%, respectively. The market is concentrated with the top three players accounting for 72% of revenues. Now, with a 40% stake in eLong, Ctrip will have a greater clout over the China online travel market. Also, post the alliance between two largest online travel agencies in China, the aggressive discount and coupon offers, prevalent in the country, might slow down. In its Q1 2015 earnings call, Ctrip’s management admitted that the company was aggressive in matching the coupon rates or discounts offered by its competitors. Ctrip’s GAAP operating margin in 2014 was a negative 2% due to its investments and its coupon discounts. Ctrip had projected that its coupon expenses will account for 20% of its hotel commissions in 2015. The slowing down of discounts and coupons trends can help Ctrip recover its margins to a large extent. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap  
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    Factors That Can Significantly Increase Our Valuation For Broadcom
  • By , 5/27/15
  • tags: BRCM AMD NVDA INTC QCOM
  • A leading semiconductor provider for wired and wireless communications,  Broadcom (NASDAQ:BRCM) has seen continuous top line growth in the last five years, though its bottom line (net income) shrank from $1.08 billion in 2010 to $424 million in 2013, as its operating expenses grew at a much faster rate. The company announced its decision to exit the cellular baseband business in Q2 2014 on account of intense competition in the market, allowing it to eliminate the ongoing losses from the business and shift its focus to its core strengths in other segments. The strategy seems to have worked well, as Broadcom’s net income increased from $424 million in 2013 to $652 million in 2014 (54% growth), even though its revenue base remained relatively flat during the same period. In the last one year, Broadcom’s stock price has increased by over 50%. We believe that Broadcom’s operating performance will continue to strengthen on a tight operating expense discipline and strong margins, consistent with the company’s objective of driving profitable growth. We believe the business will see strong growth in the future driven by product cycles and new launches from key customers. Our price estimate of $44 for Broadcom is marginally below the current market price. In this article, we list down certain factors that can lead to a significant upside in our valuation for the company. See Our Complete Analysis for Broadcom Here Broadcom’s Wireless Connectivity Market Share Increases to 40%  (~10% Upside) A quarter or two back, Broadcom expected its connectivity business to decline in 2015. However, the company now claims that its overall connectivity portfolio is definitely strengthening, and expects the business to probably be flat or even up on a year on year basis this year. Broadcom claims that a lot of concerns that it had about the loss of business on exiting basebands have not materialized and the company does not expect them to at this point. Broadcom expected that its exit from the baseband business would negatively impact the low-end of its connectivity business. However, the company has in fact gained share in the low-end of the market in the last few quarters. Some of Broadcom’s partners are gaining share in the baseband space, which helps Brodcom’s penetration in the market. New phone launches, rising consumer adoption of new high end phones, growing penetration of new technologies (such as 802.11ac and 2×2), and the ramp of new highly integrated products such as the location hub that all direct higher ASPs, are driving demand for Broadcom’s connectivity business. The company claims to be seeing significant customer interest in its latest 5G Wi-Fi chip that offers an industry first real simultaneous dual band or RSDB. This technology, which allows a smartphone or tablet to transfer data across two bands, is expected to ship later this year. It also at the same time enables new applications and increases the performance of existing applications. In addition to smartphones and tablets, Broadcom sees new growth potential in emerging markets, including the Internet-of-Things (IoT), automotive electronics, wearable devices and small cell technology. The company continues to drive leading-edge features so as to maintain its strength in high end smartphones and tablets. It is strengthening and diversifying its portfolio with new low power connectivity solutions for the IoT and the support of iBeacon and HomeKit. The registrations for Broadcom’s WICED IoT platform have grown significantly, from 2,000 at the beginning of 2014 to over 8,000 at present. The company has announced the expansion of its distribution channel with over 40 new partners to expand its sales reach to IoT customers. We currently forecast Broadcom’s share in the wireless connectivity market to remain at the current level for the rest of our review period. IoT is still at a nascent stage and is widely expected to be the next big wave in computing, after smartphones and tablets. It is likely that we are currently underestimating Broadcom’s potential in the wireless connectivity market. If the company continues to gain additional share in the low-end of the smartphone market, and becomes a significant player in the fast expanding IoT space (Broadcom is the No.1 player in smartphones connectivity so it can easily be expected to be an important player in IoT as well), then its market share in wireless connectivity could increase in the future. If Broadcom’s wireless connectivity market share rises to 40% by the end of our review period, then there will be a 10% increase in our valuation for the company. Infrastructure & Networking Market Increases to $20 Billion (>10% Upside) The infrastructure & networking market has grown from $2.5 billion in 2008 to around $7.5 billion in 2014, growing at a CAGR of 20%. Given the strong growth rate the business has seen in the past few years, we expect the growth to slow going forward. We forecast the infrastructure & networking market to increase to $13 billion by the end of our review period, growing at a CAGR of 7%. Long-term growth drivers for Broadcom’s infrastructure business include: 1) new build-outs and expansions of data centers; 2)  increasing data traffic at faster speeds; 3)  ASIC conversions to merchant solutions; and, 4) overall enterprise network upgrades as people move to higher speeds. Broadcom expects double-digit growth in its infrastructure business for the next few years. Though Broadcom admits that the infrastructure business remains lumpy in the short term, the company believes it will benefit from new product launches and capabilities rolling out in the near future. We expect the overall infrastructure & networking market to grow in double digits for the next two years, and forecast the growth rate to taper off thereon. It is possible that we are being less optimistic and not accounting for the full potential of the infrastructure & networking market. If the market grows faster than we expect, reaching $20 billion in the next 5 – 6 years, there will be a more than 10% upside in our valuation for Broadcom. SG&A Expenses As A Percentage of Gross Profit Remains At The Current Level (>10% Upside) Broadcom’s selling, general and administrative expenses (SG&A), adjusted for stock-based compensation, as a % its gross profit has averaged around 13% in the last three years. We currently forecast the ratio to increase in the next two years and remain stable thereon for the rest of our review period, as we expect Broadcom to incur additional SG&A costs to market its new products and technologies. If SG&A costs as % of gross profit remains around the current level of 13%, then there will be a more than 10% increase in our valuation for Broadcom. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    CRM Logo
    Here’s Why a Takeover of Salesforce May Not Materialize
  • By , 5/27/15
  • tags: CRM ORCL SAP IBM
  • Salesforce.com (NYSE: CRM) is one of the largest software companies in the world and is the undisputed leader in the global cloud computing market. In late April, reports surfaced that Salesforce was entertaining takeover enquiries from one or more suitors. The news promptly sent investors in a tizzy and the company’s shares jumped by 17% the very next day, reaching an all-time high of $78.46. Global software behemoths Oracle Corp. (NYSE: ORCL), Microsoft (NYSE: MSFT) and SAP SE (NYSE: SAP) were widely considered as the most likely suitors for Salesforce, but Microsoft and SAP have since been ruled out. Microsoft was said to have been in advanced takeover discussions with Salesforce, but failed to reach a deal due to disagreements over the latter’s valuation. SAP vehemently denied being interested in acquiring Salesforce, and instead jumped at the opportunity to deride its bitter rival yet again. This leaves only Oracle from the short list of most likely acquirers, and it remained steadfastly noncommittal on the matter. Speculation  abounds that Salesforce could be acquired by an unexpected party, like Google (NYSE: GOOG) or IBM (NYSE: IBM), but there have been no concrete indications to suggest that these companies are in play. Nevertheless, given Salesforce’s operational scale and market valuation, there are only a handful of companies in the world that could even contemplate a takeover of this size. In this report, we take a look at the key factors that make Salesforce an attractive acquisition, and the roadblocks in the way of a successful deal. We have a price estimate of $65 for Salesforce.com, which is about 15% lower than its current market price. See our complete analysis for Salesforce.com here Salesforce’s Leadership Position in Global CRM Market Salesforce’s had revenues of $5.4 billion in fiscal 2015, making it the largest pure-play cloud computing company in the world. The company specializes in Customer Relationship Management (CRM) software, and leads the global CRM market with an 18% market share . Therefore, the acquisition of Salesforce would give the purchaser an instant lead in the $24 billion global CRM market . By acquiring Salesforce, potential suitors like Google and IBM, which have a negligible presence in the global cloud CRM market, could gain a firm foothold in the market. On the other hand, Oracle already has a significant presence in the cloud computing market. If it were to acquire Salesforce, the transaction would give it a nearly unassailable lead in the cloud computing market. The move, however, would likely be viewed as anti-competitive by regulators. In light of the above, we believe that Salesforce’s position in the global CRM market is the biggest, and perhaps, the only factor that could make it an attractive acquisition target. High Valuation With a current market capitalization of nearly $50 billion, Salesforce is the world’s biggest pure-play cloud computing company by a wide margin. At this valuation level, a takeover will almost certainly be an all-stock deal and cash will account for a minor proportion of the purchase price. Very few companies can afford to undertake such a transaction without incurring substantial equity dilution, while paying the cash component of the purchase price as well. All three of the aforementioned potential suitors, namely, Oracle, Google, and IBM, have sufficiently high market capitalization to orchestrate a takeover without incurring significant equity dilution. Oracle and Google also have sufficient cash reserves, but IBM falls short in this aspect. Oracle has a net cash balance (net of debt) of $12 billion, while Google has $59 billion. On the other hand, IBM’s net cash balance, excluding its finance business,  is negative $6 billion; it thus lacks the financing capacity to consider such a massive acquisition. Therefore, Oracle and Google have the sufficient resources to attempt a takeover of Salesforce, but IBM doesn’t. Unprofitability Salesforce’s high market valuation is based primarily upon its revenue growth potential. The company has remained unprofitable since fiscal 2011, which is unusual for a company of its size. Investors have been willing to overlook this shortcoming in light of the breakneck pace at which Salesforce’s topline has expanded over the last four years. Despite its size and established business, it grows like emerging software company. However, Salesforce’s negative bottom line makes it an unattractive proposition for a potential acquirer, since the latter’s bottom-line is likely to take a hit to absorb Salesforce’s losses. Even if the purchaser implements aggressive cost savings, its profits will drop sharply in the short term. Lastly, Salesforce’s low bottom line is primarily due to its heavy marketing expenditure, which is where potential cost savings are likely to be targeted. However, it may be argued that the huge marketing expenditure is what has been driving Salesforce’s rapid topline growth. Hence, cutbacks on the same may lower the Salesforce’s growth potential. Further, a potential acquirer is likely to attempt to discount Salesforce’s valuation on account of its unprofitability, which may not be acceptable to the latter. This scenario has already played out in Microsoft’s discussions with Salesforce for evaluating a takeover. Technological Complexity Most of Salesforce’s products are built upon Oracle’s database and hardware, which makes a technological transition for another acquirer a monumental task. If Salesforce is acquired by Oracle, then the inclusion of Salesforce’s products into Oracle’s broad framework may be a relatively smooth process. However, if another company were to takeover Salesforce, then the technological implications of the transaction are not clear. This stands especially true if Salesforce is acquired by a direct rival of Oracle in either software or hardware markets. In such a case, the onboarding of Salesforce’s products onto the purchaser’s platform will be an immensely complex and a long drawn-out process that may take years to implement. Oracle’s Co-CEO Safra Catz has hinted as much by stating that if Salesforce were to be acquired by another company, Oracle would benefit from the resultant short-term disruption. Thus, an acquisition of Salesforce by any company other than Oracle would pose a massive technological challenge that will be time consuming as well as expensive to overcome. Regulatory Hurdles An acquisition of the size of Salesforce is almost certain to attract heavy scrutiny from the regulators, including the Federal Trade Commission (FTC) and the Justice Department. Due to Salesforce’s dominant position in the cloud computing industry, regulators will want to ensure that competition and fair play norms are not at risk of being flouted. Oracle has a strong presence in the same product categories as Salesforce, and together the two companies would control a large chunk of the cloud computing market. This could pose a potentially insurmountable roadblock for Oracle’s chances of acquiring Salesforce. However, the regulatory hurdles may be relatively lower in case Salesforce is acquired by a company like Google, where there is negligible overlap between products the two companies. Thus, it is clear that the negative aspects of acquiring Salesforce far outweigh the benefits that a potential purchaser may realize. Therefore, we believe that the possibility of such an acquisition materializing is remote at best. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research

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