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HOG Logo
Harley-Davidson's Success Story In The U.S.
  • By , 12/18/14
  • tags: HOG TM HMC
  • Harley-Davidson (NYSE:HOG) is America’s largest heavyweight motorcycle manufacturer, holding 55% share of the market, which is expected to grow by 2-2.5% this year. Demand for larger bikes stalled during the recession, bringing down net heavyweight motorcycle sales in the U.S. to approximately 260,000 units in 2010, less than half the volume sales during the peak in 2006. Naturally, Harley also felt the impact of the weaker economic conditions, with U.S. sales for the company falling at a CAGR of 16.7% through 2006-2010. But interestingly, since 2009, Harley has outperformed the country’s heavyweight motorcycle market in terms of volume growth rate. The percentage volume declines in 2009 and 2010 for Harley were lower as compared to the overall market, and the company’s volume growth percentages since industry volumes rebounded in 2011 have been more than the corresponding figures for the market. Harley already holds a massive share in the U.S. heavyweight motorcycle market (601+ cc), and despite the entry of new players in the country such as the resurgent Indian motorcycles, Harley has managed to grow its share each year since 2009. Harley was only one of two American motorcycle manufacturers to survive the Great Depression, and has outperformed the U.S. heavyweight motorcycle market in the last five years. As economic conditions are expected to strengthen in the U.S. in the near term, and given Harley’s domination in the large bike segment, the company’s volume sales in the U.S., which accounts for two-third’s of its net shipments, could continue to rise going forward. Is There Room For Growth In The U.S.? The U.S. heavyweight motorcycle market is expected to cross 310,000 unit sales this year, up 2.1% year-over-year. However, industry volumes are still much lower than the 543,000 unit sales in 2006, which could mean that there is room for growth, especially as the unemployment rate slides and disposable incomes grow. Following a negative 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second and third quarters, increasing by 4.6% and 3.5% respectively.  Also, the unemployment rate has dropped to  a six-year low of 5.8% in the U.S.  Given Harley’s iconic brand image and loyal customer following, the company’s volume sales are expected to rise with an increase in the heavyweight motorcycle market size. However, despite improving macroeconomic conditions, the demand for heavyweight motorcycles in the U.S. might not get back to 2006-2007 levels. The core customer base comprising the baby boomer generation is aging, and millennial customers tend to prefer fuel-efficient, lighter, and cheaper modes of transport, and might be wary of leisure and luxury spending, especially having been through the recession. This could limit growth of the heavyweight motorcycle industry in the U.S. in the coming years. To overcome this, and in order to simultaneously evolve with the shifting market trends, Harley has increased its focus on its outreach customers, comprising young adults (ages 18-34), women, African-Americans, and Hispanics. In 2013, Harley’s volume growth rate for outreach customers in the U.S. was more than twice the growth rate for core customers. This means that even with the growing population of outreach customers in the country, and an aging baby boomer generation, the company’s volumes might still be headed for positive development. The Hispanic population in the U.S. is expected to grow by 12% between 2015-2020 to form nearly 20% of the country’s net population, which is estimated to grow by only 4% during this period. The Street Bikes Target Outreach Customers The Street 500 and Street 750, built on the new “Revolution X” platform, are the first lightweight motorcycles for Harley-Davidson since the 350 cc Sprint, which was discontinued in 1974. The highly anticipated bikes went on sale in the U.S. in June, and are expected to be crucial as Harley aims to attract millennial customers. After overcoming start-up issues that limited product availability in the second quarter, Street sales grew significantly in the third quarter in the U.S.  Proportionate sales of the Sportster and Street motorcycles increased by nearly four percentage points compared to the previous year to 25.8% of the net retail sales in Q3. Harley expects combined sales of the Street 500 and 750 in the U.S., Spain, Portugal, Italy, and India to range between 7,000-10,000 this year, around 2.5-3% of the net volume mix. Proportionate sales of the Street pair could grow to 4.5-5% of Harley’s net annual volumes next year — the first full year for the Street bikes. We have focused on the importance of the Street 500 and 750 because these motorcycles are likely to add incremental volumes for Harley, rather than cannibalizing sales of other company models. According to surveys conducted by the company, the Street motorcycles are attracting outreach customers that are new to the Harley-Davidson brand. This bodes well for Harley, which is actively trying to increase its outreach sales. While considering the U.S. heavyweight motorcycle market, which as aforementioned, is expected to grow to over 310,000 unit sales this year, registration data for motorcycles with engine displacement below 601 cc is excluded. Thus, registration data for the Street 500 and its competitor bikes, roughly including the 251-600 cc segment, is not accounted for. This means that Harley’s market size is in fact not limited to the traditionally assumed U.S. heavyweight motorcycle market. Given Harley’s stronghold in the large bike segment, launch of the new lighter motorcycles, and focus on the growing population of outreach customers, the company is poised for growth in the domestic market. 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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    News Corp Benefits as Higher Demand For E-books And Harlequin Acquisition Will Drive Growth
  • By , 12/18/14
  • tags: NWS NWSA CBS NYT
  • News Corp ‘s (NASDAQ:NWSA) book publishing operations have been trending well over the past few years. The segment revenues have grown at a steady pace and account for more than 15% of the company’s overall revenues. However, the margins are lower and stood at 7% in 2013, according to our estimates. Earlier in August 2014, the company acquired Harlequin from Torstar Corporation for around $390 million. The acquisition has strengthened News Corp’s book publishing unit and the segment revenues jumped 24% while EBITDA grew 28% in the September quarter. We believe that the book publishing segment will continue to see growth in the coming years primarily driven by Harlequin and growth in e-books sales. We estimate revenues of around $8.77 billion for News Corp in calendar year 2014, with EPS of $0.53. We currently have a  $18 price estimate for News Corp, which is around 20% ahead of the current market price.
    BRCM Logo
    Why Broadcom Will Benefit From The Digitization Drive In India
  • By , 12/18/14
  • tags: BRCM AMD NVDA INTC QCOM
  • At a conference in Shanghai earlier this year, Broadcom (NASDAQ:BRCM) announced that India and China are critical markets for the company and it is inventing a set of new architecture for these emerging countries. Broadcom’s investments in research and development in India are probably the highest outside of the U.S. Its R&D center is Bangalore, India, is the second largest after its headquarters in California, and has grown more than four times in the past five years. The company has been making deep inroads in the country, especially in the area of pay TV with technology solutions for set-top boxes that are suited for Indian conditions. The Indian government’s initiative to connect every village with broadband and the digitization of analog cable TV provides significant growth opportunities for Broadcom. The company derives over 20% of its revenue from its Home Entertainment & Broadband business. Broadcom’s set-top box business continues to grow and the company claims to have gained market share in emerging markets in Q3 2014.  ( Read Our Earnings Article ) In this article we discuss how Broadcom can benefit from the ongoing digitization in India. Our price estimate of $41 for Broadcom is almost in line with the current market price. See Our Complete Analysis for Broadcom Here Changing India TV Industry Landscape The TV industry in India underwent significant transition over the past several years, with the Telecom Regulatory Authority of India (TRAI) mandating digitization in the country. The compulsory digitization has been one of the key factors contributing to the growth of the set-top box market in India as digitization requires a new digital set-top boxes for every digital TV set to enable viewing. The estimated market in India today is around 140 million sets and growing. The Indian government has been making digitization necessary in a phase-wise manner, with the final phase expected to be complete by 2015. India has completed the transition from analog to digital with 12 million digital set-top boxes seeded and 80% of consumer application forms processed by TRAI. Broadcom’s India managing director, Rajiv Kapur, expects digitization to continue with a high momentum as phase III and IV have just begun. The number of households with a TV in India is expected to grow from around 160 million currently to 200 million by 2017, with growth in both cable digitization and direct-to-home services. The total subscription revenue of the cable TV industry in India is expected to reach $6.4 billion by 2020, up from $4.2 billion in 2011, including broadband growth. This presents a massive opportunity for companies such as Broadcom. Broadcom Has Developed A Special Low-Cost Chip For India & Tied Up With Key Players In The Market Broadcom is a global leader in the set-top-box market and the segment is a large focal point for the company. It has a full suite of mid- and high-end set-top box platforms providing a number of solutions for operators to offer to their subscribers. These range from the very basic cost sensitive SD zappers to entry HD platforms to higher end PVR and server class solutions. It has a diverse portfolio with cable, direct-to-home (DTH), terrestrial, IPTV, cable modems, Ethernet over Coax (EoC), Wi-Fi, Bluetooth and passive optical networking (PON) leadership. Broadcom offers a host of solutions for the cable industry and specific to emerging markets like India. The company sees huge opportunities in the digitization drive in India, and has even developed a special low-cost chip keeping in mind the low average revenue per user (ARPUs) in the country. Its turnkey solution for the low end cable TV market includes a ready hardware and software stack to go along, which is so optimized that the memory footprint is very small, thus reducing costs. Broadcom claims to have a host of suppliers ready to ship as operators place future orders for the next wave of digitization in the country. Some of Broadcom’s tie-ups in India include - TataSky, MCL and DishTV – which are key players in the Indian pay TV market. Watching higher-quality TV programs is just the beginning of digital TV offerings in India, in Broadcom’s view. Additional demand for features and applications that run on set-top boxes, including multi-room and multi-screen experiences as well as over the top content, will be made possibly by higher-end STBs in the future. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    BMY Logo
    Battle In Hepatitis C Market: Bristol-Myers Squibb Needs To Speed Up
  • By , 12/18/14
  • tags: BMY JNJ MRK
  • The market for Hepatitis C drugs is hot, thanks to Gilead Sciences’ breakthrough drug Sovaldi. The incredible financial incentive is encouraging other players such as  Bristol-Myers Squibb (NYSE:BMY), Johnson & Johnson (NYSE:JNJ) and Merck (NYSE:MRK) to invest in R&D operations and grab a share of this growing market. Hepatitis C is a blood-born diseases which affects an estimated 3.2 million people in the U.S., most of who will or have developed chronic infection. The overall market is likely to grow at a rapid pace and we believe that Gilead Sciences will continue to be the leader. However, there could be tough competition for the second spot between Johnson & Johnson’s Olysio and AbbVie’s experimental drug. The advantage that AbbVie has is that it is working on an interferon-free therapy. In case of Johnson & Johnson, interferon-free delivery can only be achieved by a combination of Olysio and Sovaldi, but the company has the advantage of early market entry. Let’s take a look at how the market is shaping up and what this means for Bristol-Myers Squibb in particular, which recently launched its hepatitis C drug Daklinza in Europe and Japan. Our current price estimate for Bristol-Myers Squibb stands at $36 .
    TWX Logo
    Time Warner Boosted By Record Foriegn Box-Office Opening For The New Hobbit Movie
  • By , 12/18/14
  • tags: TWX DIS CMCSA FOX
  • Time Warner ‘s (NYSE:TWX) studio, Warner Bros., recently released the final sequel in Hobbit series in international markets. The movie topped the past weekend in several markets including, Germany and the U.K. Warner Bros. currently commands 14% market share in the U.S. for 2014 with grossing of over $1.36 billion so far. If we include international box-office, total gross is close to $3 billion. The movie business benefited from the success of  The Lego Movie, Godzilla, Edge of Tomorrow and  300: Rise of An Empire. Looking at the first three quarters, studio’s revenues stood at $8.27 billion, up 4% over the prior year period. The studio revenues include box-office revenues, home entertainment and studio’s TV production and distribution revenues. The segment operating income was $840 million during the first three quarters of 2014 as compared to $751 million in the prior year period. We wonder if Warner Bros. can continue to ride high over the success of its movies in the coming months. The performance of a studio can be erratic as it largely depends on the audience and box office response, which can be fickle and hard to anticipate.
    AMZN Logo
    Amazon Vs. eBay — Which Is A Cheaper Stock To Buy?
  • By , 12/18/14
  • tags: AMZN EBAY BABA
  • In this article, we compare the fundamentals of eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN), vis-a-vis their market valuations to see which stock looks cheaper. Examining various factors that impact free cash flow  and thereby valuation — such as top-line, bottom-line, and capital expenditure indicators — we note that eBay seems slightly under-priced currently. Though Amazon is clearly ahead of eBay in terms of factors including number of active buyers, transaction volumes, revenue growth, etc., its profitability levels are very low compared to eBay’s. The latter’s asset-light business model lends to high cash flows and margins; coupled with the rapidly growing payments business, eBay’s Marketplaces business’s outlook for revenue growth is quite strong, in our view. In addition, eBay’s low capital expenditure requirement allows significant cash for expansion and share buybacks. Stacking these fundamentals against relative valuation metrics, we believe eBay’s P/E and P/FCF ratios trade at a discount to Amazon’s metrics. We have summarized our findings in the below given info-graphic so that our readers can go through these comparisons easily. See our complete analysis for eBay Amazon Is Winning In Terms Of Market Share and Revenue Growth In terms of revenue and market share growth, Amazon is clearly the winner against eBay. Amazon’s global active customer base of around 260 million, far outnumbers eBay’s 152 million buyers in its marketplaces segment. In terms of GMV, this translates into Amazon’s transaction volumes being around 50% greater than eBay’s volumes. The revenue of both companies is not directly comparable, as eBay’s marketplaces model primarily generates revenue through its take rate on transactions undertaken by third-party sellers and on net-payments facilitated by PayPal; in contrast, Amazon owns a large portion of inventory that it sells, and hence it derives gross revenues on the sale of these products; along with that, it also recognizes its share of revenues from sales generated by third-party sellers on its sites. As a result, this makes ratios based on sales (such as P/S and capex as a % of sales) less comparable between the two companies. Considering the rapid growth being seen in the e-commerce market, we think that investors have assigned a significant weight on Amazon’s rapid market share growth in their estimate of the company’s intrinsic value, as they think that prices and margins could be improved later after capturing a dominant share of the market. The trailing twelve months (TTM) revenue growth for Amazon came in much higher at 21.5%, against eBay’s 9.3% and 13% sales increase in its marketplaces and overall business. We think the top-line outlook for Amazon is strong in the coming years, since it invests large portions of its profits on growth initiatives. The same outlook looks weaker for eBay taking into account the recent traffic-related challenges being seen on its websites. However, the sweet spot in eBay’s business is the rapidly growing payments business, and we think this segment could be slightly undervalued at this point. However, eBay’s Business Generates Higher Cash Flows and Margins Amazon’s competitive strengths seem to completely fade, when we compare its bottom-line results with eBay’s. eBay’s asset-light marketplace model generates high cash flows and margins, making it a much more attractive business from a value perspective. During the last twelve months, eBay posted EBITDA and free cash flow margins of 29.5% and 26.1% respectively — in comparison, the same ratios for Amazon were recorded at a dismal 5.2% and 1.3% respectively. Hence, even while eBay is losing some of its ground in the e-commerce business to Amazon, it’s much more successful in terms of creating value for shareholders. We have projected Amazon’s profitability to rise slightly in our valuation model, as we think its management will now start focusing more closely on margins given the recent investor pressure. The increasing proportion of third-party sales in Amazon’s business could improve its margins. In addition, we expect Amazon to raise its prices where it can, rein in costs, and look at new investments more analytically from a risk/return tradeoff perspective in this outlook. Capital Expenditure Requirement Is Lower For eBay eBay requires lower capital expenditure (in absolute terms) in its business, since it does not have to invest heavily in warehousing, distribution centers, data centers, etc.  This reflect its marketplace model, as we noted, which is unlike Amazon. However, when seen as a % of sales, capex requirement seems to be higher for eBay, as its revenue gets understated (compared to Amazon) as discussed earlier in the article. All In All, We Think eBay Is Cheaper From A Valuation Perspective Taking into account, several relative valuation metrics including P/E, EV/EBITDA and P/FCF, we think that eBay represents a better value to the investor, as compared to Amazon at current pricing levels. Particularly, at around 17x forward earnings and 16x last twelve month free cash flows, eBay seems to be trading at a discount as compared to Amazon. In addition to relative pricing, our absolute valuation models also present a similar picture. Our valuation model for eBay results in a  $67 price target for the company, which represents around 20% premium to its current market price. In comparison, our $303 price estimate for Amazon, is in line with the current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    GE Logo
    How Will GE Fare In The Low Oil Price Environment?
  • By , 12/18/14
  • tags: GE
  • General Electric (NYSE:GE) has spent many billions on acquisitions over the past decade to build its oil and gas business. Today, the infrastructure company is one of the largest suppliers of oil and gas drilling machinery and equipment to energy companies. In recent years, this business has been a key driver of GE’s growth, as rising oil prices drove up orders for machinery and equipment from energy companies. In the first nine months of 2014, GE’s oil and gas revenue rose in double-digits, constituting nearly 13% of the company’s total revenue. But, with the recent decline in oil prices, GE’s oil and gas business is bound to be impacted. Brent crude oil has fallen from about $100 per barrel in early September, to about $60 per barrel currently. And with U.S. oil production rising and OPEC not resorting to production cuts, the supply glut in the market will likely persist in the near term, maintaining pressure on oil prices. So, how will GE fare in this low oil price environment, which will weigh on its oil and gas business? We think GE will do fine, as the decline in its oil and gas business will likely be more than offset by growth from its other businesses, especially aviation, power and transportation. Rising sales of aircraft engines, gas turbines and locomotives will likely outweigh lower sales of oil and gas machinery in 2015, growing GE’s overall results.
    BRCM Logo
    Broadcom Launches A New Platform To Benefit From Mexico's Analog-to-Digital TV Transition
  • By , 12/18/14
  • tags: BRCM AMD NVDA INTC QCOM
  • Earlier this week,  Broadcom (NASDAQ:BRCM) launched a new digital-terrestrial video platform (BCM7543) for Mexico. The new BCM7543 system-on-chip (SoC) offers a cost-effective and featured-optimized device for new HD converter boxes and set-top box (STB) platforms, providing a wider choice of content and value-added features. Mexico is in the process of transitioning from analog-to-digital television broadcast, with conversion scheduled for completion by December 2015. The country faces the need to rapidly increase DTV penetration, and counting on DTV receiving options for the public  (such as low-cost televisions and set-top boxes) is an important issue for the continuity of service, in Broadcom’s view. Broadcom believes that the digital TV transition in the region will foster growth of more HDTV programming, as well as the development of new content offers. Latin America reported 63.73 million legal users of Pay TV services by the end of Q1 2014. With a total of 15.56 million subscribers, Mexico is the second largest region (after Brazil) in the pay TV market in Latin America. An estimated 40% of households in Mexico have access to cable at present. Broadcom derives over 20% of its revenue from its Home Entertainment & Broadband business. Its set-top box business continues to grow and the company claims to have gained market share in emerging markets in Q3 2014 as it deployed new HD designs, particularly in Latin America. Broadcom is a global leader in the set-top-box market and has a full suite of mid- and high-end set-top box platforms providing a number of solutions for operators to offer to their subscribers. It offers a host of solutions for the cable industry and specific to emerging markets. The company benefits from the rising digital penetration in emerging markets and a ramp to richer features, including multi-stream transcoding, more tuners and a stronger mix of MoCA-enabled platforms. Driven primarily by rising demand from emerging markets, the global set-top box shipments are forecast to grow at a CAGR of 9.7% through 2016. We believe that the digitization drive in many emerging economies will benefit Broadcom in the future. (Read: Why Broadcom Will Benefit From The Digitization Drive In India ) Another long-term growth driver for the set-top box market is the transition to HEVC and Ultra HD. Broadcom claims that the industry is still in the early transition (to Ultra HD) phase and sees this strength as a powerful product cycle that will contribute growth over the coming years. Our price estimate of $41 for Broadcom is almost in line with the current market price. See Our Complete Analysis for Broadcom Here 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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    Mining Royalty Rate Hike To Adversely Impact Barrick Gold's Zambian Copper Mining Operations
  • By , 12/18/14
  • tags: ABX NEM FCX SLW
  • Zambia’s parliament has approved the government’s proposal to hike mining royalty rates in the country. Starting in 2015, corporate income taxes on mines will be replaced by increased royalties. The new regulations will result in an increase in the current royalty rate of 6% for all mines to 8% for underground mines and 20% for open-pit mining operations. This increase in royalty rates will threaten the viability of Barrick Gold Corporation’s (NYSE:ABX) Lumwana open-pit copper mining operations, which would be subject to the revised royalty rates of 20%. As reported by Bloomberg, the company is considering the suspension of its copper mining operations in Zambia. See our complete analysis for Barrick Gold Proven and probable reserves at the Lumwana copper mine attributable to Barrick Gold stood at 594 million pounds  at the end of 2013, which accounted for around half of the company’s attributable reserves at the end of 2013. The Lumwana mine accounted for around 57% of the company’s overall copper production in Q3 2014. Barrick’s copper mining operations accounted for around 13% of its overall revenues in 2013. Changes in the regulatory environment are major risks for mining companies, especially for their international operations. A similar development impacted Freeport-McMoran Inc. (NYSE:FCX) and Newmont Mining (NYSE:NEM) earlier this year. As part of new regulations governing mineral exports from Indonesia, the Indonesian government imposed an export duty of 25% on exports of copper concentrate from the country, which would have progressively risen to 60% by 2016. As per their respective investment agreements with the Indonesian government, neither Freeport nor Newmont were supposed to pay any export taxes on mineral exports from Indonesia. The introduction of these regulatory changes proved to be the cause of an eight month long standoff between major international mining companies and the Indonesian government, which resulted in the suspension of mineral exports from Indonesia by both Freeport and Newmont. Ultimately a compromise was reached, which enabled Freeport and Newmont to resume normal operations under revised terms, including revised export duties of 7.5% on the exports of copper concentrate. Despite parliamentary approval to the hike in mining royalty rates, Barrick Gold will most likely be hoping for a compromise with the Zambian government, similar to that between the Indonesian government and Freeport and Newmont. Otherwise, the viability of Barrick’s Zambian copper mining operations could be under threat. The company’s profitability is already under pressure due to the environment of subdued gold prices. Realized gold prices for Barrick Gold have fallen nearly 11% year-over-year in the first nine months of this year. Barrick Gold’s adjusted net earnings, which exclude the impact of one-time items, fell nearly 62% in Q3 2014. Barrick has divested a number of non-core assets over the last year or so, in order to lower its average production costs. Since mid-2013, the company has reduced its portfolio of mines from 27 to 19. The company also sold off its oil and gas business, namely Barrick Energy, in 2013. The combined proceeds of these asset sales total approximately $1 billion. Given Barrick’s track record of taking decisive action in response to adverse business conditions, if the Zambian government does not alter its decision to sharply raise mining royalty rates, it would not be surprising to see the company suspend its Lumwana mining operations. 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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    Oracle Q2’15 Earnings Review: Cloud’s Success Helps Beat All Expectations
  • By , 12/18/14
  • tags: ORCL CRM SAP IBM MSFT
  • Oracle Corp. (NYSE:ORCL) posted strong results for the second quarter of fiscal 2015 on December 17th.  (The company follows June-May fiscal year.) The software giant reported revenues of $9.6 billion and EPS of $0.69, exceeding consensus revenue estimates of $9.52 billion by a comfortable margin and EPS estimate of $0.68 by one cent. With a revenue growth rate of 7% compared to the previous year, the company also beat its own estimate of 0% to 4% growth. The reported EPS was at the higher end of Oracle’s estimated $0.66 – $0.70 range as well. Strong revenue growth also trickled down to the bottom line, as non-GAAP operating income expanded by 7% year on year to reach $4.4 billion, achieving a non-GAAP operating margin of 46%. Check out our complete analysis for Oracle The highlight of the quarter was the cloud business, revenues from which grew by 47% year over year on the back of new bookings from previous quarters. On-premise software licenses grew by 6%, while hardware systems revenues beat expectations of a decline and expanded by 4%. However, strengthening of the US dollar had a significant impact on the results. Total revenue suffered by four percentage points from currency headwinds, while growth rate of software and cloud as well as hardware systems was affected by three percentage points. The company guided total revenue growth in the third quarter to grow between 4% – 8% year to year, while non-GAAP EPS is expected to be in the $0.69 to $0.74 range in constant currency basis. For this guidance, the company has assumed a non-GAAP tax rate of 24%, although the actual tax rate may vary notably on account of currency headwinds. Cloud Business Continues to Impress Oracle’s cloud business surpassed expectations to reach total revenue of $590 million, up from $475 million in the previous quarter at a 47% year-over-year clip. Its constituents, Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS), accelerated by 41% compared to the previous year to reach $364 million in revenues. Infrastructure-as-a-Service (IaaS), which competes with Amazon’s Web Services (AWS) to provide on-demand server and storage space to businesses, expanded by 62% year over year to reach revenues of $155 million. While all three of these segments exceeded growth expectations, we believe that the high growth rate is partly a result of low base in the previous year. Details of Database-as-a-Service (DaaS), which was introduced in September and forms the final component of the cloud business, were not reported. Bookings remained strong and grew in excess of 50% across all categories. Further, bookings in Oracle’s Fusion apps, Enterprise Resource Planning (ERP), Human Capital Management (HCM) and Sales Force Automation (SFA) repeated the triple digit growth that they achieved in the first quarter. The company added over 860 customers in SaaS and 150 in PaaS, compared to the combined 500 additions in the first quarter. These new bookings represent over $170 million in new annually recurring revenues from SaaS and PaaS. The company expects to add over $250 million of new annual SaaS and PaaS subscriptions in the fourth quarter, indicating a run rate of over $1 billion for fiscal 2015.  If achieved, it will bring Oracle up to the level of Salesforce.com (NYSE: CRM), the market leader in cloud. Oracle’s guidance for non-GAAP SaaS and PaaS revenue growth stands in the 30% – 34% range on constant currency basis, while IaaS is expected to grow 29% to 33%. We believe that the strong bookings achieved in each of the three categories will sustain revenue growth rates of the cloud business in the near term. The company’s rapidly increasing clout in the cloud business will be further bolstered by revenues from the recently released DaaS, allowing it to pose a major challenge to the market leader, Salesforce. On-Premise Software Licenses Recover After declining by 2% in the first quarter, on-premise software license revenues regained positive territory in the second quarter and expanded by 6% year-on-year. Revenues from new software licenses were an impressive $2 billion, compared to $1.37 billion in the first quarter. The company guides total cloud and software revenue, including new software licenses, to grow between 5% to 8% in the third quarter. This growth in on-premise software revenue is a welcome exception to the general shift in the industry to the cloud.  Indeed, for companies with sufficient scale, there will always be advantages on-premise database management. That said, the  key take-away in these results is the far stronger growth of Oracle’s cloud business.  We believe that, on balance,  sales of new software licenses will continue to decline in the medium to long term. Hardware Grows Against Expectations The hardware business recovered from a disastrous first quarter and despite expectations of deceleration, managed a commendable 4% growth (7% in constant currency). This expansion is even more notable considering that the company had guided a decline of as much as 10% in the first quarter earnings call. Hardware systems product revenues stood at $717 million while hardware support revenues were $690 million on a constant currency basis. Engineered systems product category, which falls under the hardware systems division, continued its double digit growth rate. Bookings for Exalogic, SuperCluster and big data appliance engineered systems grew more than 50% during the quarter. The company guides third quarter hardware revenue, including hardware products and hardware support, to be between negative 2% and positive 8% in constant currency. We believe that new engineered systems bookings acquired during the first two quarters will boost Oracle’s revenues from engineered systems in the following quarters, which will in turn partially prop up the troubled hardware business revenues. Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    High Trading Volumes Could Lead To A Profitable Year-End For CME
  • By , 12/18/14
  • tags: CME ICE NDAQ
  • Leading global derivatives exchange operator CME Group (NASDAQ:CME) recently reported its monthly trading metrics for the month of November. After witnessing record trading activity in the month of October (17.6 million contracts traded a day), trade volumes slumped to just under 13 million contracts per day through November. However, trade volumes were about 4% higher than the year ago period. Interest rate and equities derivatives saw the largest sequential drop among the various asset classes traded on CME’s platform, while energy derivatives trading volumes continued to rise. On a year-over-year comparison, all asset classes witnessed a rise in trading activity with the exception of interest rate and equities contracts. CME Group witnessed 7% annual growth in clearing and transaction fee revenues in the most recent quarter, with trading activity rising for interest rate and foreign exchange (FX) derivatives during the quarter ending September. Growth in trading activity has continued through Q4, despite a sequential drop in trading volumes in November. Below we take a look at CME’s November performance across key asset classes.
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    Western Digital's Skyera Acquisition Adds To Flash Storage Consolidation
  • By , 12/18/14
  • tags: WESTERN-DIGITAL WDC STX SNDK EMC NTAP
  • Hard drive manufacturer Western Digital Corporation (NASDAQ:WDC) announced that its subsidiary HGST (Hitachi Global Storage Technologies) will acquire flash storage array maker Skyera in an all cash transaction. The financial terms of the deal have not yet been disclosed, but the acquisition has been estimated to cost Western Digital somewhere between $200 million and $500 million. ( (Drive-making kingpin WD gobbles Skyera..to give to HGST, The Register, December 2014)) Western Digital has acquired multiple companies in the flash storage arena in recent quarters, leading to a better solid state drive (SSD) portfolio and constantly increasing high-margin SSD sales. Among these acquisitions were SSD manufacturer sTec, enterprise flash systems maker Virident Systems and storage input/output optimization software company Velobit for a combined $1 billion. Below we take a look at Skyera and the possible impact on Western Digital’s flash storage offerings.
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    Boeing Looks Set To Beat Airbus In Orders And Deliveries In 2014
  • By , 12/18/14
  • tags: BA
  • Boeing (NYSE:BA) is set to beat competitor Airbus in the race for new commercial airplane orders and deliveries in 2014. Through November this year, Boeing has received net orders for 1,274 commercial airplanes, while Airbus has received net orders for 1,031 commercial airplanes. The launch of the wide-body 777X by Boeing in late 2013 has boosted its order tally this year. On the other hand, Airbus has suffered from a large order cancellation for its A350 from Emirates. This order tally of Boeing relative to Airbus is in stark contrast to last year, when Airbus led Boeing in net commercial airplane orders. In 2013, Airbus bagged orders for 1,503 commercial airplanes, while Boeing managed to get orders for 1,355 airplanes. For most of the last decade, Airbus has led Boeing in annual commercial airplane orders, driven by strong demand for its narrow-body A320s. However, the gap in annual orders received by Airbus and Boeing has been very narrow, reflecting the intense competition that exists between these two global airplane manufacturers. We currently have a price estimate of $136 for Boeing, about 10% ahead of its current market price.
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    Why 2014 Was A Challenging Year For Samsung's Smartphone Business
  • By , 12/18/14
  • tags: SSNLF ssnlf AAPL GOOG
  • Samsung Electronics (PINK:SSNLF), one of the world’s largest electronics companies, had a difficult 2014. The company’s once rapidly growing smartphone division has been under significant pressure due to lackluster sales of its flagship Galaxy S5 handset, the launch of Apple’s large-screen iPhones and intense price competition from Chinese vendors. As of Q3 2014, Samsung’s smartphone market share fell to around 24% from around 32% a year ago. Revenues from the mobile division have declined by around 18.5% year-over-year for the first 9 months of 2014, while operating margins have fallen from around 19% to about 15%, on the back of higher marketing and promotional costs and lower average selling prices. The division has dragged down Samsung’s overall performance, with the company reporting a 30% decline in operating profits during the first 9 months of this year. We believe that things could remain challenging for the foreseeable future, given that the company’s traditional strengths of marketing and manufacturing are unlikely to compensate for its lack of product differentiation, in a smartphone market that is contending with slowing growth and higher competition. Trefis has a  $1,170 price estimate for Samsung, which is slightly ahead of the current market price. The mobile division accounts for about half the company’s revenues and close to 25% of the company’s value, according to our estimates.
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    Sprint's Efforts Hurting AT&T, Impact May Be Short-Lived
  • By , 12/18/14
  • tags: T VZ S
  • Growing competition is going to hurt AT&T (NYSE:T) in the fourth quarter, with expectations of higher churn and lower margins, according to CFO John Stephens. S peaking at UBS’s 42nd Annual Global Media and Communications Conference earlier this month, Stephens said that even though postpaid net subscriber additions were expected to improve year-over-year (y-o-y), postpaid churn was likely to be higher in Q4 than the 1.11% reported last year. In addition, growing competition and aggressive promotions by rivals Sprint (NYSE:S), T-Mobile and Verizon (NYSE:VZ) are expected to hurt margins in the fourth quarter. However, Stephens also stated that the company was not particularly worried about these short term hiccups, as such promotions were unlikely to continue in the long run. AT&T’s confidence also stems from the fact that its network has wider coverage as well as better quality than the smaller carriers who have spearheaded this latest price war in the market. The country’s second-largest wireless carrier now has over 118 million total subscribers, including 75 million postpaid subscribers. In comparison, Verizon has 100 million postpaid subscribers, Sprint has over 29 million and T-Mobile’s postpaid subscriber base is marginally short of 26 million. We have a $36 price estimate for AT&T, which is about 10% ahead of the current market price.
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    How Apple Is Revamping Its iAd Platform
  • By , 12/18/14
  • tags: AAPL GOOG FB
  • Apple (NASDAQ:AAPL) has been a laggard of sorts in the mobile advertising space. Despite being one of the most influential players in the mobile industry, the company’s iAds platform – which allows developers to embed advertisements into iPhone, iPod and iPad applications – accounts for just 2.5% of U.S. mobile advertising revenues, according to eMarketer. This is a far cry from the 50% initial market share that the company set out to garner when it launched the service back in 2010. However, Apple has been looking to revamp the iAd platform by quietly unveiling a series of deals and initiatives aimed at making it more accessible and effective for marketers. In this note, we take a look at how the mobile advertising space is shaping up and what Apple is doing to make a dent in this fast growing market. We have a  $120 price estimate for Apple, which translates to a market cap of about $690 billion. Our price estimate is about 10% ahead of the current market price.
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    FedEx Delivers Strong Growth But Misses Expectations
  • By , 12/18/14
  • tags: FDX UPS
  • Despite strong earnings growth in the second quarter, FedEx Corporation (NYSE:FDX) missed consensus estimates. Its earnings per share grew 36% to $2.14, compared to $1.57 a year earlier. However, according to Reuters, analysts expected $2.22 per share. Analysts were expecting significant benefits from a decline in FedEx’s fuel bill due to declining fuel prices, which would translate to higher earnings per share. However, lower fuel surcharge and high aircraft maintenance expenses prevented FedEx from meeting expectations. FedEx also missed on fiscal 2015 earnings per share expectations. The company had reiterated its guidance of $8.50-$9.00 earnings per diluted share, growth of 26-34% from fiscal year 2014. However, consensus estimates stood at $9.12, driven by strong industry growth expectations and declining fuel prices. The market reacted negatively to FedEx’s earnings, pushing down the stock by about 3% at open. Though FedEx missed consensus estimates, it did deliver a solid performance during the quarter with significant growth in revenue and operating income. Strong volume growth across all segments and profit improvement programs helped drive FedEx’s revenue up by 5%, to reach $11.9 billion, and net profits by 23%, to $616 million.
    Echoes of Financial Crises From the Late ‘90s
  • By , 12/18/14
  • tags: TLT SDS SPY
  • Submitted by Wall St. Daily as part of our contributors program Echoes of Financial Crises From the Late ‘90s By Alan Gula, Chief Income Analyst   The fickleness of financial markets is truly amazing at times. Back in May, I suggested that investors were downright sanguine. I even cautioned that the markets may be too calm. But today, things are distinctly different . . . The price of crude oil has crashed. The Russian ruble is experiencing a proper currency crisis. Emerging markets are getting routed. The situation is reminiscent of the events leading up to the Asian currency crisis in 1997 and Russian default in 1998. Some are even saying that a major blowup, like the one Long-Term Capital Management (LTCM) experienced in 1998, is lurking. The collapse of LTCM, a massive hedge fund, prompted a bailout organized by the Federal Reserve. A similar blowup is certainly possible, but only because crucial warning signs that have been apparent for months were ignored . . . In September, I showed the following chart: I warned that currency market volatility was a “harbinger of doom.” Since sharing that chart, the iShares MSCI Emerging Markets Index ETF ( EEM ) has declined around 15%, and the CBOE Volatility Index ( VIX ) has also spiked above 20 twice in the past three months. Now, emerging market corporate bonds are really taking it on the chin. As you can see below, EM corporate credit spreads have blown out to the widest levels in over two years: Globally, we’re starting to witness the unintended consequences of monetary policy. Stability Breeds Instability Quantitative easing – the Federal Reserve’s bond-buying program – did a great job suppressing volatility, boosting stock prices, and narrowing credit spreads. For instance, it aided energy firms in issuing $550 billion in new bonds and loans since 2010 . So in actuality, the stability bred instability, a process that economist Hyman Minsky examined in his work. The currency markets were the first to portend a phase shift in volatility and the potential for improbable or unforeseen events. The “black swan,” a metaphor developed by Nassim Taleb, is an event that comes as a surprise, but that has massive consequences. In Russia’s currency crisis, we’re witnessing what will be the first of many black swans. Things may calm down a bit over the next two weeks as we celebrate the holidays. However, prepare yourself for the VIX to hit 40 in 2015, just like it did in 2010 and 2011. Safe (and high-yield) investing, Alan Gula, CFA The post Echoes of Financial Crises From the Late ‘90s appeared first on Wall Street Daily . By Alan Gula
    A Tale of Two Drones
  • By , 12/18/14
  • tags: GPRO INTC
  • Submitted by Wall St. Daily as part of our contributors program A Tale of Two Drones   By Martin Denholm, Editor-in-Chief   As drone technology continues to advance, we’re seeing companies come up with increasingly inventive creations. Some are lifesaving; others are more bizarre. Let’s deal with the most productive innovation first . . . Call 911 for Your Ambulance Drone You know the deal in a medical emergency . . . The paramedics are quickly summoned to the scene . . . but just as a timely response is critical, the ambulance must fight through traffic. What if there was a better way to bypass the jams and fly to the patient instead? There is . . . A Dutch university graduate has developed a novel new emergency response – an ambulance drone. Assuming the patient is with someone else, the drone uses the mobile phone of that person to zoom to the scene 10 times faster than a traditional ambulance on the road. It’s equipped with a defibrillator, camera, and loudspeaker. A medic can then issue instructions to the person. While it’s obviously not designed to replace human paramedics on the scene, inventor Alec Momont says the drone’s ability to get to patients faster is meant to complement the existing emergency response method. Not only that, he says, “Since we’re flying so fast to get to the location at that high speed, we actually only use 5% of the battery.” The design is currently just a prototype, but the fact that it’s so practical – not to mention lifesaving – means there’s a good chance that commercial tests will start soon. Momont says, “We can expect to see this within five years from now – to be as reliable that we can use it in our everyday society.” This is one example of how the word “drone” need not be a negative word these days. Here’s another . . .  albeit not nearly as useful . . . Save Us From the Drone Selfie “More money than sense?” You decide . . . Intel ( INTC ) just awarded a $500,000 grant to three Stanford University designers for a new drone-based innovation. A wearable drone that takes the perfect selfie. No, really. Fitted to the wrist, the Nixie drone is designed for extreme sports enthusiasts so they can capture the perfect action shot. Now, you might think that hotshot action camera maker, GoPro ( GPRO ), has already done this. Well, it has . . .  partly. The key difference is the drone technology. The Nixie is a wristband that undergoes a remarkable transformation at the push of a button. A camera-equipped drone launches from the band, where motion sensors track the user’s moves before swinging back into the wristband like a boomerang. No doubt, Intel is playing off the success of GoPro in spending so much to develop the invention. And while it’s designed to be used for sports, there’s a strong chance that it’ll merely enhance people’s already-irritating obsession with taking narcissistic selfies. Just what the world needs! Cheers, Martin Denholm The post A Tale of Two Drones appeared first on Wall Street Daily . By Martin Denholm
    StockTwits Banter: Trading Russian Stocks
  • By , 12/18/14
  • tags: RSX ERUS
  • Submitted by Sizemore Insights as part of our contributors program StockTwits Banter: Trading Russian Stocks by Charles Lewis Sizemore, CFA Beware the Russian bear!     Think this guy is afraid of a little bear market? Think again! $RSX http://stks.co/q19eJ — Drasko Kovrlija (@NoanetTrader) Dec. 16 at 10:38 AM   It’s been a wild ride for investors in Russian stocks–myself included. Russian stocks have proven to be a frustrating value trap, a cheap market that continues to get cheaper. But at least we can keep a sense of humor about it…and hopefully trade our way through it. Here are some good tweets on the Russia rout:     Never seen this on Stocktwits trending… The Russian mindshare of the stream – 3* bearish fund up 30 Percent $russ http://stks.co/s19Di — Howard Lindzon (@howardlindzon) Dec. 15 at 12:54 PM Every economist and two cent bloomberg terminal user in the world was on Twitter sharing Ruble charts yesterday. None had a trade idea. — Howard Lindzon (@howardlindzon) Dec. 16 at 10:53 AM @howardlindzon punchline; Conservative pundits mancrush on Putin crowing and confusing his desperate belligerence as strength few months ago — Bill Blake (@hotdoggin69) Dec. 16 at 09:03 AM And now it takes a turn for the ridiculous…and hilarious:       Hearing a rumor that @charlesizemore put his entire book and kids college funds in $RUSL at the low… — David Fabian (@fabiancapital) Dec. 16 at 10:31 AM @fabiancapital @charlesizemore that would be a good Texan’s way to do it. (Texas State Motto: Go BIG or Go Home) — Sean McLaughlin (@chicagosean) Dec. 16 at 10:34 AM @chicagosean @fabiancapital No, a true Texas hedge would be to short $RUSS and use the proceeds to buy $RUSL . — Charles Sizemore (@CharlesSizemore) Dec. 16 at 10:43 AM @chicagosean @fabiancapital Which, of course, I OBVIOUSLY did at exactly 9:45EST this morning. — Charles Sizemore (@CharlesSizemore) Dec. 16 at 10:44 AM @CharlesSizemore @fabiancapital reminds me of the ‘ol O’HARE SPREAD, we used to do at the CBOT. (1/2) — Sean McLaughlin (@chicagosean) Dec. 16 at 10:50 AM @CharlesSizemore @fabiancapital Put on HUGE trade. Hop on train to O’Hare. Call office. If position is up, come back. Down, fly ANYwhere. — Sean McLaughlin (@chicagosean) Dec. 16 at 10:51 AM @chicagosean @fabiancapital UPDATE: I reversed the $RUSS short / $RUSL long position at EXACTLY 11:40EST. — Charles Sizemore (@CharlesSizemore) Dec. 16 at 11:07 AM @chicagosean @fabiancapital And I’m flying to Moscow this afternoon to personally advise President Putin on all economic matters. — Charles Sizemore (@CharlesSizemore) Dec. 16 at 11:09 AM @chicagosean @fabiancapital When did this turn into a Dos Equis “Most Interesting Man in the World” commercial? — Charles Sizemore (@CharlesSizemore) Dec. 16 at 11:10 AM @CharlesSizemore are you going shirtless or with the Karate outfit? — Jamie Cox (@jamesacoxiii) December 16, 2014 @jamesacoxiii I believe all Russian cabinet meeting are held shirtless, oiled and on horseback. As they properly should be. — Charles Sizemore (@CharlesSizemore) December 16, 2014   This article first appeared on Sizemore Insights as StockTwits Banter: Trading Russian Stocks
    5 Dividend Champions With Higher Dividends In 3 Months
  • By , 12/18/14
  • tags: MHFI T
  • Submitted by Dividend Yield as part of our contributors program . 5 Dividend Champions With Higher Dividends In 3 Months No one has a crystal-ball but when we look forward in the dividend growth space we have a great possibility to find stocks that may raise dividends in the near future in order to keep their status. Today I like to introduce some Dividend Champions that need to hike dividends over the next three month. They did grow dividend over more than 25 years, why stopping now? In total, 13 stocks must grow dividends of which two are High-Yields. For sure most of the 13 stocks have grown their dividends by a low rate of less than 10 percent annually. The fastest Champ was Archer-Daniels-Midland with a 5-Year dividend growth rate of 7.9 percent. Small dividend hikes are not bad. Remember, the inflation is also low and a 3 percent dividend hike could hedge your investment. The best performing stock from the list was the financial services company McGraw Hill. Since 2010, the company went up 150 percent while the worst performer, AT&T realized only a gain of around 18 percent. These are my 5 favorites… #1 McGraw Hill Financial ( NYSE:MHFI ) has a market capitalization of $23.66 billion. The company employs 17,000 people, generates revenue of $4.875 billion and has a net income of $903.00 million. McGraw Hill Financial’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $1,542.00 million. The EBITDA margin is 31.63 percent (the operating margin is 28.82 percent and the net profit margin 18.52 percent). Financials: The total debt represents 13.18 percent of McGraw Hill Financial’s assets and the total debt in relation to the equity amounts to 61.41 percent. Due to the financial situation, a return on equity of 78.53 percent was realized by McGraw Hill Financial. Twelve trailing months earnings per share reached a value of $3.26. Last fiscal year, McGraw Hill Financial paid $1.12 in the form of dividends to shareholders. Market Valuation: Here are the price ratios of the company: The P/E ratio is 26.55, the P/S ratio is 4.82 and the P/B ratio is finally 18.03. The dividend yield amounts to 1.39 percent and the beta ratio has a value of 1.13. – See more here: 5 Dividend Champions With Higher Dividends In 3 Months …
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    Where Are Oil Prices Headed In The Long Run?
  • By , 12/17/14
  • tags: XOM RDSA CVX BP PBR COP APC EOG CHK
  • Global benchmark crude oil prices have declined sharply this year on slower demand growth and rising supplies. The growth in demand for crude oil has slowed down significantly this year due to moderating economic growth in emerging markets, such as China and India, and a slower than anticipated economic recovery in the Euro-zone. In China, the rate of growth in demand for petroleum products has fallen to almost half of what it was a year ago. As a result, the International Energy Agency (IEA) expects the growth in global oil demand this year to hit a 5-year low. It expects demand, which stood at around 91.7 million barrels per day last year, to increase by just around 0.7 million barrels per day this year. For next year, the agency expects demand growth to be a bit higher, around 0.9 million barrels per day, but still less than the growth in supply from non-OPEC countries, which is expected to be around 1.3 million barrels per day. The price of front-month Brent crude oil futures contract on the ICE has declined by more than 48% since hitting a short-term peak of $115/barrel in June this year and is currently trading around $59/barrel. In this analysis, we discuss the key factors driving global crude oil prices and our view of how they could trend in the long run. Slower Demand Growth Before we discuss the current slowdown in demand growth for crude oil, it is important to understand what makes up crude oil demand. Crude oil is used by the refining and chemical industries to manufacture petroleum products for transportation and industrial uses. These petroleum fuels primarily include gasoline, diesel, jet fuel, kerosene, and fuel oil. They make up almost one-third of the global energy demand. More than 55% of the global demand for petroleum fuels comes from transportation. The remaining 45% of demand comes from industrial and power generation sectors with the latter contributing just around 5%. Most of the growth in demand for these fuels is expected to come from the transportation sector. This is because the global demand from industrial and power sectors is expected to remain largely stable in the long run, as the growth in demand from developing nations is expected to be mostly offset by the decline in developed nations. However, growing economic activity and vehicle ownership in the developing nations is expected to drive significant growth in petroleum fuel demand for transportation, which would be partially offset by improvements in vehicle fuel efficiency and the growing use of alternatives such as natural gas and biofuels in the transportation sector. Transportation accounts for more than a quarter of the global energy demand. Liquid petroleum fuels including gasoline, diesel, and jet fuel currently meet almost all of this demand. Growth in economic activity and population along with vehicle fuel efficiency are the some of the key drivers for global transportation energy demand. While the demand for petroleum products has been consistently declining in developed economies, primarily due to vehicle fuel efficiency improvements, it has remained buoyant because of increasing economic activity in emerging markets. According to our estimates, the BRIC nations (Brazil, Russia, India and China) contributed almost 85% to the net growth in global crude oil consumption between 2008 and 2013. However, over the last 2-3 years, the growth in economic activity in these countries has slowed down significantly. For example, China’s GDP, which grew at 10.4% in 2010, expanded by just 7.7% last year and the IMF expects the slowdown to persist in the medium term. Similarly, India’s economic growth has also slowed down from 10.3% in 2010 to just 5% last year and it is expected to improve only marginally this year. This moderation in emerging markets’ growth and persistent weakness in the Euro-zone has led the growth in global crude oil demand to hit a 5-year low of around 700 thousand barrels per day (MBD) this year. Rising Non-OPEC Supplies and Diminishing Pricing Power of the Cartel The production of crude oil from non-OPEC (Organization of Petroleum Exporting Countries) countries has increased sharply over the past few years, primarily because of the spectacular growth from U.S. tight oil production. According to our estimates, more than 85% of the net increase in global crude oil production between 2008 and 2013 has come form non-OPEC countries. Almost all of this increase could be attributed to the growth in tight oil production in the U.S., which has been phenomenal to say the least. From almost nothing in 2005, the country’s crude oil production from horizontal drilling of relatively impervious rocks has grown to around 4 million barrels per day (MMBD) currently and the outlook remains positive, as the EIA expects the U.S. to produce more than 25 billion barrels of tight oil over the next 30 years. Apart from the U.S., Canada’s crude oil production growth outlook is also quite robust. Thanks to abundant oil sands reserves, the country’s total proved reserves currently make up more than 10% of the global proved reserves. This makes it the third largest source of future crude oil supply after Venezuela and Saudi Arabia. The EIA expects crude oil production from Canada to grow at 1.8% CAGR in the long run. On the other hand, the OPEC’s price controlling power has been severely restricted over the past few years because of internal conflicts and rising government spending by the member states. For example, Saudi Arabia’s crude oil export revenue, which traditionally exceeded the amount required to fund its government expenditures, enabling it to vary production levels in response to global supply or demand developments in the past, could now fall significantly short of its government expenditures if crude oil prices persist at current levels for very long. This is primarily because the Saudi government has substantially expanded its social and economic programs recently in order to diversify its economy and improve living standards. It plans to spend around $228 billion this year, up by 4.3% over last year. The IMF estimates indicate that the Kingdom would need to sell its crude oil at an average price of around $106/barrel in order to balance its fiscal budget. Therefore, despite the fact that Saudi Arabia maintains large financial reserves, revenue needs have become a more important consideration for the government before it responds to a situation of a steep decline in crude oil prices – like the one seen most recently – due to faster supply growth or a sustained downturn in demand. This was reflected in the OPEC’s decision last month to maintain its production target for the first half of next year despite the recent decline in crude oil prices. Rising Finding, Development and Production Costs On the cost side of things, the fact that finding and developing crude oil reserves is getting increasingly difficult has manifested itself quite profoundly on the financial statements of the world’s largest oil and gas companies over the last few years. According to the latest oil and gas reserves study published by EY, finding and development costs that include costs associated with unproved property acquisition, exploration, and development of proved reserves, increased at more than 14% CAGR between 2009 and 2013 to $22 per barrel of oil equivalent (BOE). Similarly, production costs, which include production taxes, transportation costs, and production-related general and administrative expenses, also increased at more than 14% CAGR between 2009 and 2013 to $19.60 per BOE. We expect the trend to continue in the long run, primarily because most of the growth in future crude oil production is expected to come from higher marginal cost areas like tight oil in the U.S., oil sands in Canada, and pre-salt reserves in Brazil. Our Estimate We believe that at the heart of the recent volatility in crude oil prices is the sharp increase in non-OPEC supplies relative to the overall demand growth. In order to substantiate this argument, we looked at the correlation coefficient between the annual change in global crude oil demand adjusted for the increase in non-OPEC supply and the change in Brent crude oil prices since 2004. We found the two variables to be highly correlated with a correlation coefficient of 0.8. Statistically, this implies that the spread between global demand and non-OPEC supply growth explains around 64% of the overall volatility in crude oil prices. While we agree that correlation does not imply causation, the behavior in oil prices relative to the estimated demand-supply spread does make intuitive sense. For example, as the chart below highlights, when non-OPEC supply growth exceeded the growth in crude oil demand by 1.6 million barrels per day in 2009, crude oil prices fell by almost 37%. Similarly, oil prices increased sharply by almost 29% in 2010 as the growth in demand exceeded non-OPEC supply growth by 1.8 million barrels per day. We currently base our long-term crude oil price forecast on a linear regression model, which assumes that the strong correlation between the two variables described above will continue to hold in the long run. Based on this approach, we expect annual average crude oil prices to continue to decline in the short to medium term and bottom out by 2017 to reach $100 per barrel by 2020. 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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    Salesforce Releases Product That Lets Businesses Create Custom Enterprise App Stores
  • By , 12/17/14
  • tags: CRM SAP ORCL MSFT IBM
  • Salesforce.com (NYSE: CRM), the world’s leading CRM software vendor, has rolled out a new product that allows enterprise users to build their own app stores. Its “AppExchange Store Builder” is an easy to use platform that lets companies build customizable app stores for managing and delivering apps to end-users. The new product is free for existing Salesforce licensees and costs $5 per month for users that don’t have a Salesforce license. In this article, we analyze this product category, its market and what it means for Salesforce. See our full analysis for Salesforce.com First Mover’s Advantage May Give Salesforce a Competitive Edge An increasing number of enterprises are using private marketplaces to deliver pre-approved apps to employees, customers and partners. This allows them to gain direct access to users, thereby bypassing public marketplaces like Google’s Play Store and Apple’s App Store. The enterprise app store is not a new concept and has been around since as far back as 2011, but Salesforce is the first major player to create a common platform and release it ready to use for individual businesses. Until now, such private marketplaces were developed and used in-house by corporate giants like Cisco (NYSE: CSCO) and Symantec (NYSE: SYMC), or were used to deliver specific apps to end-users like in the case of SAP (NYSE: SAP). Salesforce’s new AppExchange Store Builder allows businesses to create customized app stores with their own branding and allows the inclusion of in-house, company-specific apps as well as commercial, publicly available apps. An important feature is that app stores built using this platform can be used on desktop, mobile as well as web-based devices, thereby ensuring across-the-board uniformity. Other than Salesforce, currently only a handful of startups provide such customizable enterprise app stores, chief among them being Apperian. BYOD Culture to Necessitate Need for Enterprise App Stores The AppExchange Store Builder gives Salesforce a first-mover’s advantage in a nascent product category that is set to witness a boom in the near future. With the advent of Bring Your Own Device (BYOD) culture, it is expected that by 2016, 38% of companies will allow employees, business partners and other users to use their personal devices for executing enterprise applications. This creates a need for regulation of apps that can be downloaded, installed and executed by end-users in order to ensure internal security and compatibility. Furthermore, end-users often have difficulty in finding in-house apps in public marketplaces and may be misled by fakes or apps with similar names. This problem can be circumvented by having a private marketplace which can be used to manage and deliver in-house as well as pre-approved commercial apps to the companies’ employees, customers and partners. Such enterprise marketplaces have potential added advantages of providing app-usage analysis, simultaneous rollout of updates for all users, and reduced administrative fallout from inadvertent download of unauthorized apps. This untapped demand is further reinforced by Gartner’s estimate that about 25% of enterprises are expected to have an enterprise app store by 2017. Considering the very limited number of companies that have the resources to build custom enterprise app stores from scratch, this presents a lucrative opportunity for introducing ready to use, customizable enterprise app stores. Monetization Given that the AppExchange Store Builder is currently being offered free of cost to existing customers, it will not have any impact on Salesforce’s top line. However, this may be an initial marketing strategy to kickstart adoption and the company may soon monetize this product. Such monetization may occur in the form of either offering the AppExchange Store Builder as a paid add-on, or including its cost in a larger product package. Additional features such as compatibility checks, security reviews and feature updates may be rolled out in the future at additional charge, further augmenting this revenue stream. Adoption of this platform may also be beneficial to Salesforce’s bottom line since it will facilitate smoother roll out of updates for apps across desktop, windows as well as web-based devices. However, long-term success of enterprise app stores is dependent upon adoption of a large number of apps by enterprises, which would increase the return on investment on creation of private marketplaces. We believe that the ongoing shift to mobile enterprise applications, as well as the emerging BYOD culture, will inevitably result in increased app adoption, thus underscoring the need for enterprise app stores. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Four Reasons Why Truck Sales In The U.S. Might Increase In 2015
  • By , 12/17/14
  • tags: F GM VLKAY TM
  • Ford Motors (NYSE:F) will release an updated version of its best-selling F-150 truck for the year 2015. The new truck will have several changes compared to the earlier versions, including new engine options and an aluminum body. For the production of the new model, Ford invested more than $800 million at its Rouge center assembly plant and nearby Dearborn parts facility. Another $1.1 billion is being invested at Ford’s Kansas City facility in Missouri, where the company will cease the production of the current F-150 and close operations for a month around Christmas for the production of the new truck. Together, the two facilities are expected to produce 700,000 units in a year. The use of aluminum in the vehicle manufacturing process isn’t exactly novel. Ford itself has used aluminum in the manufacturing of lower volume models. The Ford GT used an aluminum frame space and body panel for a number of years. Other companies have used aluminum in their vehicles for years. The Jaguar XJ has used an aluminum uni body structure for about a decade, while Audi has manufactured about 750,000 vehicle units which use aluminum in their body parts in the 20 years over which they have used aluminum in their production process. However, the scale at which Ford plans to produce vehicles with aluminum bodies is unparalleled. Moreover, it is highly unlikely that consumers will purchase the new F-150 model just because of the new aluminum body. The obvious impact of the use of aluminum in the manufacturing process will only be to raise the cost of production of the car, since aluminum is at least two and a half times more expensive than steel. If the company decides to pass the higher cost of production onto the consumer, the average unit price of the F-150 will increase. Higher unit prices also mean higher insurance costs, and this is something consumers are quite likely to factor into their decision making process. The cost savings on fuel and maintenance will have to be greater than the increase in unit and insurance costs in order to sway the consumer. Trucks are money makers for automotive companies as truck models are high-volume and high-margin. The current economic environment is set up in  such a way that the pickup truck segment can become even more valuable. There are four main reasons for believing this: 1) A recovery in construction demand will also increase the demand for hauling vehicles: According to the builder’s confidence index, confidence among U.S. home builders is at a nine-year high. The housing market in the U.S. has gradually improved this year, helped by a drop in mortgage rates below 4 percent and a drop in unemployment levels to a six year low. Additionally, wages have picked up in real terms and gains in consumer sentiment are likely to support the continuation of this momentum into the next year and beyond. As builder confidence increases and more houses, institutional developments, and major infrastructure projects are brought into existence, the demand for construction related equipment also increases. Hauling vehicles, such as pickup trucks, form a significant part of this ancillary industry. Consequently, we can expect an increase in pickup truck sales over this period. 2) The decrease in gas prices supports truck sales : Gasoline prices have declined by over 20% through the course of this year, as a result of the global collapse in oil prices. Cheaper gasoline is good for the pickup truck industry and the decline in gas prices has seen the sales of SUVs, crossovers, and pickup truck sales increase over the course of this year. In the month of November, pickup truck sales increased by more than 10% compared to last year, while SUV sales increased by 10.3%, and crossover sales increased by 9.5%. On a year-to-date basis, total SUV and crossover sales have increased by as much as 11.7%, while pickup truck sales have increased by 5.4%. It is difficult to know just how long low gas prices will persist and how long consumers expect them to persist. This is dependent on the economics of oil and on geopolitical considerations but as long as gas prices stay low, the sales of these categories in the auto industry are likely to keep going up. 3) Near-record age of the average U.S. vehicle : According to an annual study by IHS automotive, the average age of around 250 million cars on the road in the U.S. is at an all time high of 11.4 years. This is far higher than the usual average of 7-8 years. Although, IHS automotive predicted the average age to increase to 11.5 years by 2015 and 11.9 years by 2019, it can be argued that the increase in average age of these vehicles is simply an aberration brought about by the weak economic environment and falling real wages. Given the improvements in economic activity and the drop in unemployment levels, it possible that this trend might reverse. If that happens, a number of consumers in the U.S. could be lining up to replace their older vehicles with newer models. This eventuality would also result in a bigger market for pickup trucks. 4) Low interest rate environment : The U.S. Federal Reserve is likely to retain its low interest rate policy until at least July 2015. In 2013, the Federal Reserve announced a reduction in bond purchases, which had kept the long-term interest rates low. The Fed has targeted short-term rates of between 0-0.25% since December 2008, and plans to keep them there for some time after it ends its bond-buying program in the fall of 2014. The Fed’s low rate policy might discourage auto companies from raising lending rates significantly. Additionally, with consumer demand weak for other types of loans and banks flush with huge amounts of money to lend, competition has increased as interest rates on car loans have fallen to the lowest levels since 2008. We have a $20 price estimate for Ford, which is about 35% higher than the current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    TI Set To Showcase A Range Of Consumer Devices At The 2015 CES
  • By , 12/17/14
  • tags: TXN QCOM INTC BRCM
  • In a press release this week,  Texas Instruments (NASDAQ:TXN) announced that it is enabling the newest consumer products on display, ranging from next-generation advanced driver assistance systems (ADAS) to innovations for the Internet of Things (IoT) and wearable technology, at the upcoming 2015 International Consumer Electronics Show (CES) next month. The company, in collaboration with its technology partners, will showcase over a hundred product demonstrations at the event. Since  its exit from the smartphone and tablet market in September 2012, TI has been focusing on transitioning its operations to become a pure analog and embedded processing company, segments that it believes will offer long-term growth and less volatility compared to the past. With a market share of 17%, TI is one of the leading players in the analog semiconductor market and derives around 60% of its revenue from this division. On the other hand, the company derives only 20% of its revenue from the embedded division. However, the fast expanding embedded market offers significant growth opportunities for TI. TI has considerably expanded its embedded product portfolio over the past year. In August this year, the company announced that it has shipped more than 15 million ADAS System-on-Chip (SoC) devices so far, confirming its leadership position in the automotive market. The automotive segment is a large market and is going through a transition to more compute-intensive electronics systems. Specialty Analytics expects the market for ADAS to be worth around $15 billion by 2016, with a CAGR of 23%. TI is also focusing on expanding its footprint in microcontrollers, a segment where it is currently under-represented. (TI has a  6% market share in microcontrollers). Microcontrollers are general purpose, low-cost integrated circuits which are used in a wide range of applications requiring an automoated control function. According to Grand View Research, the global microcontroller market is expected to reach   $27 billion by 2020, driven by growing demand from industries, such as automotive and consumer electronics, and the advent of the Internet of Things (IoT) coupled with declining microcontroller prices.(Read:  TI’s Future Growth Likely To Get A Boost From An Increasing Focus On Microcontrollers ) This year, the company launched two new variants of its Hercules microcontrollers, which offer a 50% increase in computational performance over any of TI’s current MCUs, for industrial, medical, automotive and transportation design applications. With increased investments in this growth area over the past few years and new product launches, TI continues to expand its embedded portfolio every quarter. TI’s embedded processing division reported its eighth quarter of consecutive year-on-year growth in Q3 2014 (reported on  October 20th) as the company’s investment over the past few years in strategic areas yield favorable results. We expect the addition of new products to its portfolio will help TI retain its market share in embedded devices over our review period. Our price estimate of $42 for TI is at an approximate 15% discount to the current market price. See our complete analysis of Texas Instruments here 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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