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XOM Logo
Weekly Oil & Gas Notes: Exxon's Proved Reserves And Petrobras' Ratings Downgrade
  • By , 2/27/15
  • tags: XOM PBR RDSA CVX BP
  • Oil and gas stocks remained largely flat this week amid continued volatility in benchmark crude oil prices. Brent crude oil futures soared more than 5% in a single day during the week on positive signs of demand growth. The flash HSBC/Markit Purchasing Managers’ Index (PMI) for China – the world’s second largest oil consumer – edged up to a four-month high, signalling a pick up in demand. In addition, Saudi Arabia’s oil minister also said the same day that the demand for oil is growing and current price levels are not too far off the bottom. On the other hand, the Energy Information Administration (EIA) data showed that commercial crude oil inventories in the U.S. rose by 8.4 million barrels last week to over 434 million barrels. The price of the front-month Brent crude oil futures contract on the ICE increased by around 1.9% this week and is currently trading around $61 per barrel, while the  NYSE Arca Oil & Gas Index (XOI) remained largely flat around the 1,380 level. Below, we provide an update on some of the key events that occurred this week related to the oil and gas companies we cover. Exxon’s Proved Reserves ExxonMobil (NYSE:XOM) recently released its latest proved reserves stats. The company announced that it added proved oil and gas reserves of around 1.5 billion oil-equivalent barrels last year, 4% more than what it produced over the same period. The amount of proved hydrocarbon reserves is an extremely critical metric for oil and gas companies, as it directly impacts their sustainability and production growth outlook. At the end of last year, Exxon’s total proved hydrocarbon reserves stood at 25.3 billion barrels of oil equivalent, which comprised of 54% liquids – predominantly crude oil and natural gas liquids – and 46% natural gas. The company’s average reserve replacement ratio, which represents the amount of growth in net proved reserves relative to the total production in a given year, for the last 10 years has been around 123%. This speaks volumes of Exxon’s successful exploration program and the long-term sustainability of its core business. We currently have a  $96 per share price estimate for ExxonMobil, which is around 10% above its current market price. The company’s share price decreased by around 1.4% this week. See Our Complete Analysis For ExxonMobil Petrobras’ Ratings Downgrade Credit ratings firm, Moody’s, recently stripped  Petrobras (NYSE:PBR) of its investment grade rating, lowering its credit rating by two notches from Baa3 to Ba2. The global credit ratings firm primarily attributed the change in its stance to corruption allegations and related investigations that have triggered the auditors, in this case PricewaterhouseCoopers (PwC), to delay the signing off on Petrobras’ annual financial statements. Moody’s believes that this delay, which already restricts the company’s access to the debt capital markets, could potentially lead to a call for accelerated repayment by its bondholders because of a covenant breach, which would significantly increase its financial risk. This is expected to increase the state-owned oil company’s cost of capital significantly and result in the lowering of its intrinsic value, which was also reflected in bond market activity soon after the announcement, as yield spreads on Petrobras’ international bonds widened by as much as 50 basis points. We currently have a  $13/share price estimate for Petrobras, which we will soon update to reflect the change in the company’s cost of capital and our revised medium-term outlook for global crude oil prices. The company’s share price decreased by around 5.6% this week. See Our Complete Analysis For Petrobras View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    F Logo
    Ford Returns To Rapid Growth In China After Overcoming Production Constraints
  • By , 2/27/15
  • tags: F GM TM VLKAY
  • Ford Motors (NYSE:F) had a tremendous 2013 in China, with sales up 49% for the year. However, the sales growth slowed down in 2014. The company management blamed the slowdown on capacity constraints. Since then, with the opening of a new assembly plant in the region, the company’s sales have picked up again.The U.S. automaker posted double digit gains in the first seven months of 2014, but its sales growth slumped to only 9% in August and sales declined marginally in the months of September and October. Some of the slowdown was attributable to tough year-on-year comparisons, but the company was also utilizing its production capacity to the fullest. Ford has enjoyed an extraordinary spell in China in recent years. In 2012, the company laid out a plan to double its production capacity and sales in China by 2015. However, in 2013 and 2014, sales rose even faster than the growth in production capacity. Consequently, it was not surprising that the company hit production bottlenecks by the end of the year 2014. New Production Capacity Arrives In November of 2014, Ford opened a third assembly plant in China. The plant, which opened in Chongqing, will increase the company’s production capacity in the region by 360,000 units per year. Another plant is expected to come up in Hangzhou sometime next year and will add another 250,000 units in production capacity. Concomitantly, the company’s sales targets will also increase from 1.1 million units a year to about 1.5 million units a year. The Chongqing plant will build the recently launched Ford Escort, which is a major part of Ford’s attempts to gain market share in China. The Ford Escort is an entry-level offering which is positioned in between the Ford Fiesta and Ford Focus. The car has deliberately conservative styling and its main target audience is budget conscious families. The car also offers a big backseat, which is a major selling point in China. Ford’s China sales have been dependent on the strong growth in SUV models, the Ford Kuga, and Ford EcoSport. The addition of the Ford Escort will allow the company to reach a different demographic and hence boost its sales. The company also started selling its luxury vehicle Lincoln in China late last year and plans to open eight Lincoln retail outlets in seven different cities in the region. Growth Picks Up Again The added production capacity from the new Chongqing assembly plant helped Ford pick up growth again in China. In the month of December, the company returned to the double digit growth rate it posted in the first seven months of the year, with sales growing by 13%. This brought the full year sales growth to 19%. In January, sales grew again by 19%. As the company continues to introduce new models, the demand for its vehicles should continue to increase through the year. Moreover, the company should be able to do this without running into capacity constraints over the next two years. With the addition of the Hangzhou plant, the company’s production capacity should reach about 1.5 million vehicles a year. This is about 35% greater than Ford’s 2014 sales in China. Ford still imports some of its vehicles into China and its two assembly plants have been running beyond capacity in recent times. As a result of the added capacity, the company should be able to grow sales by over 50% and post sales figures of around 1.7 million or 1.8 million in 2015. In the long run, the company might need to increase its production capacities again in a couple of years. By 2017, it is quite likely that the company will again run into production constraints and might need to add more assembly plants in the country. Therefore, investors should watch out for an announcement related to the expansion of production capacity in the country later this year. See full analysis for Ford Motors View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research  
    DUK Logo
    Three Factors Which Resulted In Lower Reported Q4 Earnings For Duke Energy
  • By , 2/27/15
  • tags: DUK DVN KMP CHK
  • Duke Energy (NYSE:DUK) disappointed investors with its fourth quarter earnings. In our note below, we take a closer look at the factors that affected the company’s earnings. 1) Rough Residential Sales : In the fourth quarter of 2014, Duke Energy saw its weather-normalized residential sales decline by 2.2%. Regulated utilities usually make money by getting more customers at a standardized rate. Over the full year, the utility company saw its number of customers rise by 1%, the average energy usage per customer has declined, and as a result its revenue collection has fallen. For the full year, the company’s revenue collection fell by 0.1%. The reasons behind this declining use of electricity are energy saving initiatives and a number of people choosing to live in multi-family housings, which result in lower electricity usage per capita and hence lower electricity bills. On the industrial and commercial front, the company saw 1% growth for the full year. Going forward, this means that in order to hedge revenue collections against the volatility in demand, Duke must lower the expenditure on power plants and downsize to new demand levels. 2) International Businesses : Duke is a multinational business with operations in Guatemala, El Salvador, Ecuador, Peru, Brazil, Argentina, and Chile. As a result, its revenue collections are spread out across South America. In order to invest in future opportunities, multi-national companies need to repatriate cash. This is a step many companies approach with trepidation, but Duke has gone ahead and decided to repatriate its cash. The company will repatriate $2.7 billion worth of cash over the next eight years. While the company plans to repatriate all this cash strategically over the eight year period, it took a $373 million one time hit in taxes over the quarter. The move coincides with the company’s efforts at holding on to its international business assets. The international business unit contributes about 10% to Duke’s overall business mix. While lower earnings might alarm shareholders, the repatriation is a good move because it will help the company strengthen its balance sheet and credit quality, as well as support investments and dividends for the whole period. 3) Higher Costs : Duke makes its revenues from the sale of electricity to customers. However, it has to produce or buy the electricity first. In the full year, the company’s U.S. earnings from the commercial sector came in $21 million below the company’s guided figure. This was primarily because of higher power purchase costs. In the first quarter, the polar vortex pushed prices higher and there was a power outage at Duke’s mid-west power generation fleet. Similarly the company’s international business suffered from higher power purchase costs. The company’s hydroelectric dams in Brazil were affected by irregular water levels at its reservoirs due to lower than expected rainfall. Going forward, the U.S. based company needs to make sure that its power generation costs are not affected so significantly by fluctuations in the price of power. It will have to pursue more stable electricity generation sources for this purpose in the future. A good sign on this front was the unexpectedly large $60 million in earnings that the company’s renewables division generated in the fourth quarter. It might be a good idea for the company to increase the mix of energy from such sources in its overall sales mix going forward. Understand how a company’s products impact its stock price on Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    MCD Logo
    Weekly Notes On Restaurant Industry: McDonald's, Restaurant Brands International & Dunkin' Brands
  • By , 2/27/15
  • tags: QSR DNKN
  • According to Black Box Intelligence, a financial performance research group for the restaurant industry in the U.S., restaurants showed improved performance in the month of January, as their increasing momentum in the last couple of months strengthened. Relatively mild weather conditions, cheaper gas and a stable economic environment in the U.S. are being considered as the reasons behind the increased sales and traffic. Customer count was up 2.4% year-over-year (y-o-y) in January, whereas the comparable store sales in the Midwest region was up to 11.2% owing to favorable weather conditions. Overall restaurant comparable sales growth was 6.1%, a 3 percentage point improvement compared to December’s sales figures. Despite a few winter storms, January’s average sales per restaurant increased by 2.5% over the December figures. Here’s a quick round up of the restaurant companies covered by Trefis. McDonald’s After a disappointing performance in the fiscal 2014,  McDonald’s Corporation (NYSE:MCD) recently released its January comparable store sales report, where the company reported a 0.4% year-over-year (y-o-y) improvement in U.S. comparable sales, driven by the above mentioned factors. However, the company’s Asian segment still continues to struggle with a 12.6% decline in the comparable store sales. On the other hand, the company’s stock announced its dividend record date as March 2, as a result of which the stock price jumped 5% from $94 to $99. Furthermore, the company’s new CEO, Steve Easterbrook, will be taking over the position on March 1. McDonald’s stock rose sharply from $94 to $99 during the last week. Our price estimate for the company’s stock is $96 (market cap of $94 billion) which is roughly 3% below the current market price. See Our Complete Analysis For McDonald’s Corporation Restaurant Brands International Restaurant Brands International Inc (TSX/NYSE:QSR), the parent company of the two iconic brands: Tim Hortons (THI) and  Burger King (NYSE:BKW), released its full year and fourth quarter 2014 fiscal results. The company’s  net revenues for the quarter rose 56% y-o-y to $416 million, including the Tim Hortons’ contribution to the revenue stream from the transaction date of December 12, 2014. However, Burger King’s revenues for the quarter alone were $274 million, up merely 3.3% y-o-y. In 2014, the key highlights were the company’s successful launching of joint ventures in Europe and its entry into India. Burger King’s joint ventures in South Africa and France are off to a good start too, as the customers liked the new menu offerings and popular burger items. The company’s stock rose from $41.50 to $43.50 during the last week. We are currently in the process of incorporating Tim Hortons operations and revamping the structure for the company. After the release of the report, QSR stock jumped more than 10% from $39 to $43. See full analysis for Burger King Dunkin’ Brands Dunkin’ Brands released mixed results in its fourth quarter earnings report, as its Dunkin’ Donuts U.S. segment’s comparable store sales increased just 1.4%, and that of Baskin-Robbins U.S. grew by 9.3%. The highlights of the company’s performance in 2014 were: strong growth of both brands in the U.S., the increase in number of transactions despite the economic headwinds, the launch of the DD Perks Loyalty program, and the international expansion and developments in countries, such as Sweden, Austria, and China. On January 8, Dunkin’ Brands announced its intent to expand Dunkin’ Donuts in China. The company has signed a long-term franchise agreement with Golden Cup Pte. Ltd, as wholly owned subsidiary of RRJ Capital Master Fund II, which will serve as the franchise partners to open and operate nearly 1,400 Dunkin’ Donuts stores in the country. Dunkin’ Brands’ stock traded between  $46 to $48 during the last week.  Our price estimate for the company’s stock is $43 (market cap of $4.5 billion), which is 9% below the current market price. See full analysis for Dunkin’ Brands View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    UPS Logo
    Logistics Weekly Review: FedEx, UPS
  • By , 2/27/15
  • tags: UPS FDX
  • For FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS), the most notable news during the week was the entry of a new participant in the package delivery business. Waffle House, a breakfast food chain, has partnered with Roadie, a startup, to provide an app-based platform that will help connect people looking to get packages delivered and people driving that route, who can then exchange the package at a Waffle House restaurant. The service has made around 50 deliveries to date. However, it seems unlikely that the app-based service will be able to compete with logistics giants FedEx and UPS, since it may turn out to be more expensive than FedEx and UPS. Below we take quick look at other notable events that took place during the week. FedEx Earlier in the week, FedEx refused to ship Defense Distributed’s new product, Ghost Gunner, which allows owners to 3D-print lower receivers of an AR-15 semi-automatic rifle without any embedded serial numbers. FedEx denied service, stating that it was uncertain about regulations pertaining to the device. FedEx’s stock declined around 1.6% over the week through Thursday. We currently have a price estimate of $164 for FedEx. For the year 2015, we estimate revenues of $48.0 billion, compared to a consensus estimate of $47.7 billion, and EPS of $8.70, compared to a consensus estimate of $8.90. Click here to see our complete analysis of FedEx UPS UPS was presented the Climate Leadership Award by the U.S. Environmental Protection Agency (EPA) Center for Corporate Climate Leadership. The award recognizes UPS’ efforts to reduce greenhouse gas emissions. UPS has already achieved its goal of reducing carbon intensity by 10% and is now looking to further reduce it by 20% by 2020. UPS’ stock was stagnant over the week through Thursday. We currently have a price estimate of $112 for UPS. Click here to see our complete analysis of UPS View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    ADP Logo
    Payroll Processors Weekly Review: ADP, Paychex
  • By , 2/27/15
  • tags: ADP PAYX
  • This week in the Human Capital Management industry,  Paychex (NASDAQ:PAYX) released its Small Business Scorecard providing insights regarding change in trends in small business hiring. Meanwhile,  Automatic Data Processing (NASDAQ:ADP) opened a “center of excellence” to provide enhanced services to clients. Automatic Data Processing On February 24, ADP announced that it had opened a “center of excellence” in Bucharest, Romania. The center will serve as a global delivery center providing support and services to clients across the globe. It also helps ADP expand its geographic presence. ADP has two other “centers of excellence”, one in Prague, Czech Republic, and the other in Barcelona, Spain, which was opened last year. ADP’s stock was relatively stagnant through Thursday. We currently have a price estimate of $76 for ADP. We estimate revenues of $11 billion and EPS of $2.96 for fiscal 2015, in line with consensus estimates. Click here to see our complete analysis of ADP Paychex Surepayroll, Paychex’s online payroll services arm, released its Small Business Scorecard, which pointed towards a change in factors that are currently driving hiring in small and micro businesses (1-10 employees). A year ago, businesses rated salary and benefits as the major hurdle to hiring. However, these factors have taken a backseat, with businesses now focusing on finding the right candidate. Also, there has been a significant increase in the use of LinkedIn for recruiting. Paychex’s stock rose slightly over the week through Thursday. We currently have a price estimate of $45 for Paychex. We estimate revenues of $2.7 billion and EPS of $1.83 for fiscal 2015, in line with consensus estimates. Click here to see our complete analysis of Paychex View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    FOX Logo
    Weekly Media Notes: Mayweather-Pacquiao, M&A And More
  • By , 2/27/15
  • tags: CBS TWX
  • The media industry saw significant activity last week, with 21 st Century Fox denying the rumors about a takeover of Discovery Communications. In other news, a hedge fund proposed that CBS should spin out its radio stations business and merge it with Columbus Media. In yet another, HBO and Showtime team up for Mayweather and Pacquiao fight in a historic boxing event scheduled on May 2 nd . On that note, we discuss below these developments related to the media companies over the last week or so.
    MCD Logo
    Market's Positive Speculation Ahead Of McDonald's New CEO's Business Plans Drives Stock Price Close To $100
  • By , 2/27/15
  • tags: MCD QSR DNKN CMG
  • McDonald’s Corporation (NYSE:MCD), the struggling leader in the U.S. restaurant industry, has been witnessing a lot of activity, both operational and financial, over the last few weeks. The Golden Arches began 2015 fiscal year with a plan to regain the momentum. On January 28, the company’s Board of Directors announced the retirement of Don Thompson as President and CEO of McDonald’s, to be succeeded by Steve Easterbrook, the current chief brand officer and senior executive vice-president of the company, on March 1. Soon after the announcement, the company’s stock (MCD) jumped 5.6%, the highest in the last 12 months, from $88 to $93. Don Thompson’s decision came as a result of the company’s sluggish performance over the last two years, especially in 2014, when the fast food leader faced challenges in all the geographical segments. In the fiscal 2014, the company’s net revenues declined 2% y-o-y, driven by the declining consumer traffic in Asian markets, as well as stiff competition in the domestic market (U.S.). Due to the China meat scandal in August, as well as weak performance in the U.S., the company’s operating income for the fiscal 2014 year declined 9% y-o-y. McDonald’s reported a diluted EPS of $4.82, down 13% y-o-y. For the fourth quarter, the company reported a 0.9% y-o-y decline in the comparable store sales, which resulted in a 7% y-o-y decline in net revenues. Diluted EPS for the fourth quarter was down 19% y-o-y to $1.13, primarily due to the supplier issue in China. The company expected its January comparable sales for Asia-Pacific to be negative as well, due to the declining consumer confidence in Japan. We have a  $96 price estimate for McDonald’s, which is roughly 3% below the current market price. See Our Complete Analysis For McDonald’s Corporation No Respite In Asia For McDonald’s On February 9, the company released the sales figures for the month of January. McDonald’s reported increased comparable store sales in the U.S. and Europe by 0.4% and 0.5% year-over-year (y-o-y) respectively. In the U.S, the slight improvement was driven by the company’s performance during the breakfast day part, partially offset by strong competitive activity by other fast food chains, such as Restaurant Brands International Inc. (TSX/NYSE:QSR), Dunkin’ Brands (NASDAQ: DNKN), and Yum! Brands. McDonald’s Europe  segment was influenced by positive growth in the U.K. and Germany, partially offset by negative results in France and Russia. The company plans to strategically improve sales in and customer count in Europe by strengthening local platforms and revamping the breakfast menu. On the other hand, APMEA (Asia/Pacific, Middle East and Africa) segment’s comparable store sales further diminished 12.6% y-o-y, indicating the declining customer trust in the brand in Japan and China. The recovery campaign in Japan has not been that effective. To add insult to injury, new issues have emerged in the country, as there were reports that a piece of vinyl was found in the chicken nuggets at one of the outlets in Aomori, Japan.  McDonald’s Japan might take much more time to return to a normalized level. Stock Jumps As Ex-Dividend Record Date Nears In the fourth quarter, McDonald’s increased the quarterly cash dividend per share by 5% to $0.85, taking the annual dividend to $3.28 per share. Moreover, the company’s stock went ex-dividend yesterday with the record date on March 2. As a result, the company’s traded volume rose to 16.6 million for the last two days, which is 2 to 3 times the normal traded volume this month. However, the highlight is the fact that the increase in volume traded is almost twice the volume traded on the last three similar occasions (announcement of ex-dividend date) in 2014. The probable reason behind this situation might be the take-over of the CEO position by Steve Easterbrook on March 1. This indicates that the buyers are expecting a positive outlook by the new CEO, and hence an optimistic market led to a 5% jump in the stock price from $94 to $99. It will be interesting to see the business plan and strategy that will be undertaken by the new CEO, and the market’s reaction thereafter. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    CSX Logo
    Railroads Weekly Review: Norfolk Southern, CSX and Union Pacific
  • By , 2/27/15
  • tags: NSC UNP CSX
  • In this review, we will be taking a look at carloads for major U.S. railroads -  Norfolk Southern (NYSE: NSC), CSX (NYSE: CSX), and  Union Pacific (NYSE: UNP). For railroads operating in the eastern U.S., Norfolk Southern and CSX, we expected to see some impact on carloads due to the bad weather experienced over the past month. However, it seems that the weather has got to Union Pacific as well. All three railroads reported declines across most commodities during the week ended February 21. Norfolk Southern Norfolk Southern’s carloading report revealed that only its petroleum product carloads were in the positive during the week ended February 21. Petroleum product carloads increased 38% year-on-year during that week and 24% in the quarter to date. For the quarter to date as of February 21, carloads of crushed stone, sand and gravel were the highest growing commodities, with 34.5% year-on-year increase. As we pointed out last week, this growth is most likely due to poor comparables from the previous year’s first quarter. Norfolk Southern’s stock declined around 1.6% over the week through Thursday. We currently have a price estimate of $105 for Norfolk Southern. For the year 2015, we estimate revenues of $11.9 billion, compared to a consensus estimate of $11.6 billion, and EPS of $6.84, in line with consensus estimates. Click here to see our complete analysis of Norfolk Southern. Union Pacific Unlike Norfolk Southern and CSX, Union Pacific’s petroleum products carloads declined during the week ended February 21. Narrow spreads between Western Texas Intermediate (WTI), produced in the U.S., and Brent crude oil, which is sourced from the North Sea, and high crude production in the PADD 3 regions have eaten into Union Pacific’s crude oil carloads leading to a decline in its petroleum carloads. Carloads of construction related materials, such as crushed stone, sand, gravel and lumber and automobiles were in the positive during the week. During the quarter to date ended February 21, Union Pacific’s intermodal carloads declined 7% as a result of the extended labor contract negotiations between the ILWU and PMA. Union Pacific’s stock declined around 2.3% over the week through Thursday. We currently have a price estimate of $105 for Union Pacific. For the year 2015, we estimate revenues of $25.3 billion, compared to consensus estimate of $25.0 billion, and EPS of $6.61, compared to a consensus estimate of $6.59. Click here to see our complete analysis of Union Pacific. CSX CSX’s petroleum products, metallic ores and military, machinery and transportation equipment carloads were in the positive for the week ended February 21. Petroleum product carloads grew 34% during the week and quarter to date. CSX’s coal carloads declined 39%, the heaviest of all commodities, during the week ending February 21. CSX’s stock declined 3.5% over the week through Thursday. We currently have a price estimate of $28 for CSX. For the year 2015, we estimate revenues of $13.0 billion, compared to a consensus estimate of $12.9 billion, and EPS of $2.16, in line with consensus estimates. Click here to see our complete analysis of CSX. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    VALE Logo
    Higher Iron Ore Shipments And Cost Reductions Partially Offset Impact Of Lower Iron Ore Prices On Vale's Q4 Results
  • By , 2/27/15
  • tags: VALE CLF RIO MT
  • Vale (NYSE:VALE), the world’s largest iron ore mining company, announced its fourth quarter results and conducted a conference call with analysts on February 26. As expected, the sharp decline in iron ore prices over the course of the last year negatively impacted the company’s results. However, a boost in quarterly iron ore shipments driven by record Q4 production levels, in addition to the company’s cost reduction efforts, partially offset the impact of a fall in prices on the company’s results. Despite a sharp 48% year-over-year decline in realized prices for Vale’s shipments of iron ore fines, the decline in the company’s adjusted EBITDA margin was far more gradual. Vale’s adjusted EBITDA margin stood at 33.1% in Q4 2014, as compared to 24.1% in the corresponding period of 2013. The company’s net operating revenues for Q4 2014 stood at  $9.07 billion, flat as compared to its revenues in the corresponding period of 2013. See our complete analysis for Vale Iron Ore Prices The average realized price for Vale’s iron ore fines stood at $61.57 per ton in Q4 2014, nearly 48% lower than its average realized price for Q4 2013, which stood at $118.77 per ton. The sale of iron ore fines and pellets collectively accounted for around 65% of Vale’s net operating revenues in Q4 2014. Thus, the decline in iron ore prices was primarily responsible for Vale’s poor quarterly results. Iron ore is an important raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its prices. Benchmark international iron ore prices are largely determined by Chinese demand, since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. Chinese steel demand growth is expected to slow to 2.7% in 2015, from 6.1% and 3%, in 2013 and 2014, respectively. Weak demand for steel has indirectly resulted in weak demand for iron ore. On the supply side, an expansion in production by major iron ore mining companies such as Vale, Rio Tinto, and BHP Billiton has created an oversupply situation. A combination of weak demand and oversupply is likely to result in weak iron ore prices in the near term.  The worldwide surplus of seaborne iron ore supply is expected to rise to 300 million tons in 2017, from an expected surplus of 175 million tons in 2015, and a surplus of 72 million tons and 14 million tons in 2014 and 2013, respectively. Due to the persisting weak demand and oversupply situation, iron ore prices will remain under pressure in the near term. Production and Shipment Volumes Despite iron ore prices expected to remain subdued in the near term, the company has adopted a high production volumes strategy. Vale expects to benefit from economies of scale, capitalizing on its low-cost iron ore deposits. In keeping with this strategy, the company’s iron ore shipments in Q4 2014 rose to 71.4 million tons, around 9% higher than in the corresponding period of 2013. Higher shipments were driven by an increase in production volumes due to the ramp-ups of Plant 2 in Carajás and the Conceição Itabiritos plant. In keeping with its high volumes strategy, various projects are expected to result in a growth in Vale’s iron ore production from 331 millions tons in 2014 to 459 million tons in 2019. Nickel production stood at 73,600 tons in Q4 2014, 8.4% higher than in the corresponding period a year ago. This was primarily due to the ramp-ups of production at the Sudbury mining complex in Canada and the Onca Puma mining complex in Brazil, offset by lower production from the company’s operations in Indonesia and New Caledonia. Copper production stood at 105,400 tons in Q4 2014, up 11.4% from the corresponding period in 2013, primarily due to ramp-ups of production at the Sudbury and Salobo mining complexes. Coal production stood at 2.3 million tons in Q4 2014, up 2.3% year-over-year, due to higher output from Moatize, offset by a fall in volumes from the Integra and Isaac Plains coal mining operations, which were idled earlier on in the year. Costs In view of the weak iron ore pricing environment, Vale has adopted a strategy of cost reduction and disciplined capital allocation, in order to remain competitive. In 2014, the company realized $1.2 billion in savings in operating costs as compared to the previous year. The main components of this decline in operating costs were selling, general, and administrative expenses, which decreased by around 21%, and pre-operating and stoppage expenses, which decreased by around 46%. Vale’s capital expenditure in 2014 stood at $12 billion, as compared to $14.2 billion in 2013. The company idled the Isaac Plains and Integra coal mines earlier on in the year. This is consistent with its strategy to allocate capital to projects that will generate better returns. Disciplined capital allocation will continue to be the strategy for Vale in 2015, with capital spending expected to be further reduced to $10.2 billion. With iron ore prices expected to remain subdued, the company’s efforts to reduce costs and capital spending will stand it in good stead in 2015. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    BUD Logo
    AB InBev Earnings Review: Strong Sales Growth In Core Markets
  • By , 2/27/15
  • tags: BUD
  • Anheuser-Busch InBev (NYSE:BUD) reported strong organic growth in revenues and average price per volume, on February 26, delivering solid progress in 2014. Organic growth in revenues stood at 5.9% last year, even as volume sales rose only 0.6%. This was mainly as the brewer remained committed to its premium brand profiling, and lay more emphasis on sales of premium beer brands, thereby growing revenue per hectoliter by 5.7%. AB InBev has focused on M&A activities to grow its business, especially by acquiring strong local businesses in emerging markets that have an already established loyal customer base. The combination with Grupo Modelo and Oriental Brewery yielded positive results in Mexico and South Korea respectively in the last year, and AB InBev was also able to deliver $730 million in cost synergies related to the Grupo Modelo acquisition, and remains on track to achieve $1 billion in cost savings by the end of 2016. But besides the new acquisitions that were incremental to AB InBev’s business in the last year, the brewer was able to deliver solid performances in its core markets comprising U.S., Brazil, and China. We have a  $116 price estimate for Anheuser-Busch InBev, which is below the current market price. However, we are currently in the process of incorporating the recent annual results into our forecasts and revising our price estimate. See Our Complete Analysis For Anheuser-Busch InBev Decline In U.S. Volumes Slows Down The U.S. is the largest market for AB InBev, accounting for 30% of the net revenues last year. Beer consumption has declined in the country in the last few years as millennial customers are more health conscious and look to curb alcohol consumption. In addition, beer penetration is already relatively high at around 80 liters per person in the country, which although less than the 90+ liter per capita beer consumption in most European countries, beats the intake per capita figures of most emerging economies, which are expected to be the major contributors to global beer volume growth in the coming years. The already high beer penetration in the U.S. limits future growth opportunity. However, an improving macroeconomic environment, with historically-low unemployment rates and plunging oil prices, fueled customer purchasing power, which in turn benefited beer sales in the latter part of 2014. Although AB InBev’s U.S. volume sales remained essentially flat in Q4, this was a rather positive outcome after consecutive quarters of declining volumes in the country. The conducive market conditions helped the brewer improve revenue per hectoliter in the U.S., which boosted net sales. Ab InBev ended the year with a 1.4% decline in volume sales in the U.S., but going forward, volumes could grow on improving economic conditions and new product launches. More jobs and increasing incomes 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. Higher proportionate sales for these brands could further lift the average revenue per unit volume, fueling growth in net sales. In addition, AB InBev could gain from the high demand for imported beer going forward, as distribution of the Mexican brand Montejo spreads to eight additional states in 2015. The beer brand started selling in September last year in California, Arizona, Texas, and New Mexico, where 70% of America’s Latino population resides. According to Anheuser, around 8-9% of the U.S. beer market is formed by the Mexican import segment, and the initial rollout of Montejo has been successful. Demand for Mexican beer is already high in the U.S., and with an increasing Hispanic population in the country, the Montejo and other Mexican Grupo Modelo brands that AB InBev looks to launch in the U.S. in the coming years could achieve meaningful volume sales. Brazil Delivers Solid Growth Despite Slowing Economy Despite slowing economic activity in Brazil, AB InBev managed to derive a strong 10.6% revenue growth in the country last year. This was mainly on the back of a strong FIFA World Cup activation and higher penetration of premium beer brands. Case in point is the Q4 revenue growth of 10.4% even when volumes grew only 0.6%. Brazil is one of the most unequal countries in the world. Despite having a small proportion of high net worth individuals (HNWI), Brazil’s combined HNWI wealth of around $4 trillion is the third largest for any country. High interest and inflation rates, and tight credit availability don’t tend to adversely impact the more affluent individuals, and this could be one of the reasons why AB InBev’s premium beers have grown at a rapid pace in the economy that is otherwise struggling. And there is room for further growth. The brewer’s premium brands grew 20% in Brazil last year, with Budweiser registering an impressive 40% growth. But premium brands still form only 8% of the industry-wide volumes in the country, compared to 75% of the net volumes in the U.S. This presents further potential growth opportunities in the premium segment in the Brazilian beer market. Furthermore, growth in the legal drinking age population is expected to continue for at least the next ten years, meaning that AB InBev’s target customer base should continue to grow. AB InBev’s Market Share Improves In China The beer market in China is the largest in the world in terms of volumes, but hurt by rough weather conditions and relatively slower economic activity in the latter part of the year, the industry-wide volumes declined by 4% in 2014. However, AB InBev’s volume growth remained positive at 1.6%, reflecting strong growth in the brewer’s focus brands in the country. The brewer’s core focus group in China comprising Budweiser, Harbin, and Sedrin grew by 7.8% last year, and accounted for approximately 73% of the company’s portfolio in the country. While the 1.6% volume growth figure represents organic growth, volume growth including M&A activities was approximately 9% in 2014. In April 2013, Anheuser acquired four breweries in China, with net beer capacity of roughly 9 million hectoliters, for $439 million, and also acquired Siping Ginsber last year. Anheuser might look to acquire more regional brands to boost its portfolio and penetrate deeper into China. The company improved its market share in the country by 90 basis points to 15.9%, and if we include the recent mergers and acquisitions, the share becomes around 16.8%. AB InBev’s underlying strategy seems clear — to grow its business organically by focusing on premium beers, especially in emerging markets where disposable incomes are growing, and also acquiring locally established breweries that could leverage AB InBev’s strong distribution channels and marketing muscle to grow even further. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Weekly Notes On Gaming Industry: Electronic Arts & Activision Blizzard
  • By , 2/27/15
  • tags: EA
  • After a fairly impressive holiday period by the U.S. gaming industry, all the top major game developers were positive ahead of their quarterly reports. According to the research group  NPD, the gaming industry managed to overtake 2013’s sales figures, with impressive hardware sales offsetting the dull software sales in 2014. The industry generated $3.25 billion in December 2014, down from $3.28 billion in December 2013. However, the highlight of the last year was the strong demand for consoles during the entire year that managed to overshadow the lagging software sales. In December, gamers spent $1.31 billion on hardware, down nearly 4% year-over-year (y-o-y). However, the trend continued in the software segment, as the net software sales for December 2014 reached $1.25 billion, down 2% year-over-year. The sustained demand for new consoles, Microsoft’s Xbox One and Sony’s PlayStation 4, as well as core title releases in the last few months, resulted in a fairly strong holiday quarter in 2014. As a result, for the entire calendar year of 2014, gamers spent roughly $5.1 billion on physical hardware for video games, up more than 18% y-o-y, offsetting software sales, which were nearly $5.3 billion, down 13% y-o-y. As a result, the total revenue for the industry in the U.S. was up 1% y-o-y in 2014. Here’s a quick round-up of some news related to the gaming industry covered by Trefis. Electronic Arts Electronic Arts (NASDAQ:EA) reported strong numbers in its Q3 earnings results, as the company reported non-GAAP net revenue of $1.43 billion, which was 12% above the guidance, but down 9% year-over-year (y-o-y). The company’s core sports titles:  FIFA 15, Madden NFL 15, and Hockey Ultimate Team services recorded a massive 82% y-o-y growth. Electronic Arts released 8 new titles in 2014, excluding FIFA and Madden NFL series, out of which four made it to the top 100 titles in 2014.  In 2015, EA will come up with  Battlefield Hardline and  Need For Speed title . EA’s stock traded between $57 and $58 during the last week.  Our price estimate for the company’s stock is $54, implying a market cap of $17 billion, which is 6% below the current market price. See our complete analysis of Electronic Arts stock here Activision Blizzard Activision Blizzard (NASDAQ: ATVI) beat its non-GAAP EPS guidance by $0.06 in the fourth quarter of the fiscal 2014 year, as it reported its annual report on February 5. As a result the company managed to deliver record earnings per share of $1.42 for the whole year, up more than 50% from the previous year. For the fiscal 2014, non-GAAP digital revenues grew 40% y-o-y, accounting for 46% of the total revenues. The strong growth in the digital segment was spurred by increasing game downloads in consoles and in-game purchases from the first free-to-play game. In 2014, Activision’s results in all the geographical segments improved y-o-y, with nearly 39% growth in Asia-Pacific and 15% y-o-y growth in Europe. Activision’s shooter games Call of Duty Advanced Warfare and Destiny led the genre worldwide with excellent response from the gamers. On the other hand, Skylanders and World of Warcraft also contributed significantly to the revenue stream. Activision’s stock traded in a small range of $23 and $23.60 during the last week.  Our price estimate for Activision is $21, which is 10% below the current market price. See our complete analysis of Activision’s stock 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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    Q4 2014 Bank Review: Credit Card Payment Volumes
  • By , 2/27/15
  • tags: AXP BAC COF C DFS JPM USB
  • The fourth quarter of 2014 saw U.S. card usage increase to record highs, as a steady improvement in economic conditions over the years and the boost from the holiday season allowed cardholders to be more liberal with their discretionary spending. Although the Credit CARD Act of 2009, and the implementation of several Federal Reserve rules which cap interest rates and fees on cards, have reduced the profitability of this lucrative business since the economic downturn, card revenues remain one of the biggest sources of value for banking giants. With the sharp growth in e-commerce sales giving people an additional incentive to switch from cash payments to the use of cards as well as internet banking options, the size of outstanding card balances and card payment volumes have risen steadily. The country’s largest card lenders have capitalized on this to boost their top-line figures even as the low interest rate environment applies pressure on retail banking revenues. In this article, which is a part of our ongoing series detailing the country’s largest card lenders -  JPMorgan Chase (NYSE:JPM),  Bank of America (NYSE:BAC),  Citigroup (NYSE:C),  U.S. Bancorp (NYSE:USB),  American Express (NYSE:AXP),  Discover (NYSE:DFS) and  Capital One (NYSE:COF) - we detail the growth in their card payments over the last twelve quarters and also hint at the trends one can expect from card fees in the near future.
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    Financials Weekly Notes: BNY Mellon, Morgan Stanley and Deutsche Bank
  • By , 2/27/15
  • tags: BK MS DB JPM
  • It was a largely positive week for bank shares despite a dodgy start, as investor concerns of a possible delay in benchmark interest rates by the Fed took a backseat. Last week, investors reacted negatively to the minutes of the Federal Open Market Committee (FOMC) meeting, but confidence levels improved early this week after Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee. Share prices of the country’s largest banks gained in particular on Tuesday after JPMorgan announced that trading activity has been strong over the first two months of 2015. The KBW Bank Index remained at the same level this Thursday as it was at the close of last Friday – mirroring the change seen in the S&P 500 over the same period.
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    GM's Rumored Stock Buyback Is Short-Term Thinking
  • By , 2/27/15
  • tags: GM F TM HMC
  • General Motors (NYSE:GM) announced earlier this month that Harry Wilson, a treasury department official who helped with the automaker’s restructuring in 2009, has nominated himself for a position on the company’s Board of Directors. Wilson, who represents Tepper’s Appaloosa Management and three other Hedge Funds that own 2.1% of the company’s stock, plans to convince GM to buyback $8 billion worth of stock. The move is consistent with the recent trend of a number of activist investors entering companies and pressuring them to buy back stock in order to profit from the potential rally in market price (by reducing the number of shares, there is an increased allocation of revenue and earnings to each outstanding share). It can be argued that some companies, as they chase growth, do so inappropriately through ill-advised diversification and acquisitions, causing the Return on Invested Capital (ROIC) to decline. Some managers are incented to build empires even as ROIC suffers, implying a real agency problem, given that company managers are only agents acting on behalf of their principals, which are shareholders. As a result, there has been a trend in recent times, with activist investors going into companies and arguing that they should slash spending and return cash to shareholders, even if doing so requires them to increase leverage. This has also made it useful to support the argument that there are no profitable opportunities that they can profitably pursue, an argument given more credence by Larry Summers and the Secular Stagnation Hypothesis. Hence, S&P500 companies sitting with record piles of cash and record stock buybacks in 2014. It is projected that S&P500 companies will redistribute $1 trillion dollars in cash in stock buybacks and dividends to shareholders in 2015. However, the application of this trend to companies that do have productive investment opportunities can result in negative outcomes. Below, we take a look at whether GM fits the description of companies above or not. We have a  $40 price estimate for General Motors, which is about 10% more than the current market price . GM Has A Strong Cash Position As of the end of 2014, GM had $25 billion in cash and $12 billion in available credit lines. The company has stated many times that its strong cash position is part of its “fortress balance sheet” strategy. By this the company means that the company wants to hold onto cash so that it can continue investing in new products even in times of economic distress. The automaker knows, following the 2008-2009 crisis, that having ample cash during a downturn can provide a huge boost to the company’s profits once the downturn subsides. For example, Ford and Hyundai, two companies that went into the recession with highly liquid balance sheets, had a slew of new products in showrooms when the recession ended and their sales picked up considerably. In contrast, GM had to scramble hard, even as competitors took market share from it. The company’s management does not want to make the same mistakes again. What’s more is that its competitors also have strong cash positions: Ford has around $32 billion in cash and credit lines and Fiat Chrysler has about $30 billion. Without the buyback, GM is likely to use the cash to invest in new products, factories, and hire additional workers. The company might use some of the cash to settle lawsuits related to car recalls. If the company uses $8 billion in a stock buyback and has to pay up to settle court cases with some of its remaining cash, it could end up incredibly thin on the amount of cash available for investment. For example, the company needs to invest in fuel-efficient vehicles in order to keep pace with companies like Toyota, Volkswagen, and Ford, which have been taking away market share from it in different markets. The company also needs to invest significantly in its luxury brand Cadillac, in order to increase its profitability and keep pace with German auto makers like Volkswagen, Daimler, and BMW. If the company uses up about $10 billion – $12 billion, it might need to wait another couple of years before it can build up the sort of cash balance that it needs in order to start investing. In 2014 and 2013, the net cash used by the company in investing activities exceeded the cash generated from operating activities by $5 billion and $2.5 billion, respectively. As a result, it had to rely on financing activities for liquidity. In case of a recession, the U.S. auto maker’s ability to raise cash through financing activities will be impaired and it might be hamstrung in terms of its ability to invest in potential productive opportunities. In the previous economic downturn, GM lost $18 billion and $12 billion in operating activities in 2009 and 2008, respectively, and as a result had to invest $21 billion in investing activities in 2009. The company had to be bailed out eventually by the Government. In fact, it raised $44 billion in financing activities, of which $16 billion came from a U.S. treasury loan facility, and another $33 billion from a debtor-in-possession facility. Additionally, the incentives driving Harry Wilson’s nomination may be  focused on short-term gains and not on the long term. If he gets elected, and gets the company to buyback stock, the hedge funds that he represents may also sell their stock into any price rally.   If this is the case, it might not be in the long-term best interest of the company’s management to approve his appointment. 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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    Medical Devices Weekly Notes: Medtronic and Boston Scientific
  • By , 2/27/15
  • tags: BSX MDT
  • Last week was eventful for Medtronic (NYSE:MDT) and Boston Scientific (NYSE:BSX) within the medical device sector. Medtronic is likely to expand its market presence in the Neuromodulation division as it acquired a privately held company, Advanced Uro-solutions. It was also successful in receiving FDA approval for its VenaSeal system. On the other hand Boston Scientific settled an 8 year old lawsuit filed by Johnson & Johnson (NYSE:JNJ), for $600 million regarding the former’s acquisition of Guidant. Boston Scientific is also likely to acquire Endo International’s medical device unit, American Medical Systems (AMS). On that note, we will discuss some key developments within these two companies that has taken place in the past one week or so.
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    E*Trade's Trade Volumes Improve In January After Strong End To 2014
  • By , 2/27/15
  • tags: ETFC AMTD SCHW
  • E*Trade Financial (NASDAQ:ETFC) released its operating metrics for January, reporting a 12% year-on-year decline in trading activity after a surge in trade volumes in Q4. However, E*Trade’s daily average revenue trades (DARTs) rose by 4% over December levels to 173,000 trades per day. Furthermore, the brokerage had a positive month in terms of average client asset balances, compared to the prior year period. In its most recent earnings, E*Trade reported a 3% year-on-year (y-o-y) increase in net revenues to $461 million.The brokerage’s asset-based business grew by 10% year-on-year (y-o-y) to $283 million, and high trading volumes led trading commissions to rise by 5% over the prior year quarter to $105 million. Additionally, the account maintenance fees and services charged by the brokerage also rose by 14% to $48 million during the quarter. Continuing the trend from the previous quarter, E*Trade’s trading metrics and assets under management have improved in Q1’15 thus far. Below we take a look at some key metrics and our forecasts for E*Trade.
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    Charles Schwab Kicks Off 2015 With High Trade Volumes
  • By , 2/27/15
  • tags: SCHW ETFC AMTD
  • Charles Schwab (NYSE:SCHW), one of the largest brokerage firms in the U.S. with over 9.4 million brokerage accounts on its platform, ended 2014 at just under 300,000 daily average revenue trades (DARTs), which was only about 1% higher than 2013 levels. However, trading activity has picked up this year, averaging over 320,000 trades per day through January and February. On the other hand, the brokerage added over $200 billion worth of client assets during the year, which contributed significantly to its asset-based revenues. Below we take a look at some of Schwab’s key trading and operating metrics and our forecasts for them. We have a $25 price estimate for the company’s stock, which is over 10% lower than the current market price. Schwab’s stock price has risen by almost 15% since the company announced its Q4 earnings at the end of January.
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    Seagate Partners With Micron To Improve Presence In Enterprise SSD Market
  • By , 2/27/15
  • tags: SEAGATE STX WDC INTC MU SSNLF SNDK
  • Hard drive manufacturer Seagate Technology (NASDAQ:STX) recently announced its strategic partnership with chip maker Micron Technology (NASDAQ:MU) to collaborate on building next-gen solid state drives (SSDs). Both companies will initially work on NAND and next-generation SSDs, but will soon engage in developing enterprise storage solutions by using NAND flash memory developed by Micron. Under the agreement, Seagate will source NAND flash chips from Micron that will enable the hard-drive maker to expand its SSD product offerings and ensure cost savings on raw materials. Micron is a key NAND chip manufacturer with a 12% market share in the global NAND flash market. This deal is similar to competing storage company Western Digital’s (NASDAQ:WDC) subsidiary HGST recently extending its agreement with Intel (NASDAQ:INTC) to use the latter’s NAND flash technology to build SSDs. Below we take a look at how the Micron deal can benefit Seagate in a market where its presence is still very limited. We further take a look at the impact of vertical integration with the NAND-flash chip maker to its margins.
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    RBS's Poor Q4 Results Accompanied By Plans To Exit Markets Business In 25 Countries
  • By , 2/27/15
  • tags: RBS HSBC BCS JPM C DB
  • The Royal Bank of Scotland Group (NYSE:RBS) reported worse-than-expected results for the last quarter and full-year 2014 on Thursday, February 26, as a lukewarm operating performance for the period was only made worse by a long list of one-time costs. The U.K.-based banking group incurred an accounting charge of £4 billion ($6.2 billion) from a reclassification of its stake in Citizens Financial Group, a tax charge of £1.9 billion ($3 billion), and a conduct-related charge of £1.2 billion ($1.8 billion) to cover litigation costs for the ongoing foreign exchange investigations as well as to redress customers for mis-selling PPI and interest rate hedging products. As a direct result of these expenses, RBS reported a net loss for Q4 2014 which was large enough to drag its full-year results deep into the red. The bank has now reported a loss for seven consecutive years. But things weren’t all bad for RBS in Q4. Most notably, the bank’s loan charge-offs remained at one of the lowest levels since the economic downturn – allowing it to release another £670 million ($1 billion) in loan provisions for the period. This compares to a total impairment loss in excess of £5 billion ($8 billion) in Q4 2013. RBS also managed to comfortably surpass its target of slashing £1 billion in recurring costs by the end of 2014. With an eye on long-term sustainability, RBS is also looking to implement drastic cuts in its investment banking operations over coming years and will shrink the balance sheet for its Corporate and Institutional Banking (CIB) division by 60% within five years. This move will help RBS make significant progress on several fronts. Firstly, it is in line with the directive issued by the British government (which owns 79% of the bank) for RBS to focus its efforts on its U.K. retail and commercial banking operations. Secondly, it will help improve the weak operating margins for RBS’s investment banking division. And finally, the sale or closure of the capital-intensive units should boost the bank’s capital ratios – taking it closer to the stringent Basel III capital requirement target.
    We Still Have a Glut of Low-Skilled Workers
  • By , 2/27/15
  • tags: SPY WMT
  • Submitted by Wall St. Daily as part of our contributors program We Still Have a Glut of Low-Skilled Workers By Alan Gula, Chief Income Analyst   After the United States Department of Defense and the People’s Liberation Army of China, Wal-Mart ( WMT ) is the next largest employer in the entire world. That’s why the retailer’s decision to increase wages for many of its two-million-plus employees is causing such a stir. In April 2015, Wal-Mart will increase its starting rate to at least $9 per hour or higher in all markets. Early next year, its minimum wage will rise further to $10 per hour. Around half a million workers will be affected once the wage hike takes effect. Many believe Wal-Mart’s move indicates an incipient labor shortage, which will cause increased competition among retailers and fast-food restaurants for workers across the nation. It’s hoped that higher wages will lead to more consumer spending, and more spending will ultimately drive wages even higher. This is the economic liftoff scenario we’ve been hearing so many predict since the recovery began. So, are we on the cusp of a virtuous wage-hike spiral that will invigorate the economy? Unfortunately, Wal-Mart’s move probably has more to do with state minimum-wage increases and company-specific factors than a bona fide labor shortage. For instance, California – where Wal-Mart has 284 stores – will raise its statewide minimum wage to $10 per hour starting in 2016. Wal-Mart is also likely trying to mitigate its relatively high employee turnover. And with anemic same-store sales growth, Wal-Mart would love to improve customers’ shopping experiences by making the employees they interact with happier (by paying them more). A Glut of Low-Skilled Labor Of course, none of these motivations have much to do with a booming economy. Therefore, in order to determine whether we’re entering a self-sustaining wage growth cycle, we’re going to have to assess the health of the labor market in other ways. The following chart shows wage growth for production and nonsupervisory employees, which account for approximately 80% of the private nonfarm labor force. Year-over-year wage growth is still well below peak growth seen in the two prior cycles. Sadly, the labor market is struggling to normalize, as seen below: The ranks of the underemployed – those marginally attached or working part-time for economic reasons – remain above 5% of the labor force. Meanwhile, the average duration of unemployment is still over 32 weeks. This is not what you’d expect from an economy about to catch fire and pay up for human capital. Instead, these figures suggest there’s significant slack in the labor market and/or a skills mismatch between job openings and available workers. Indeed, the last time the job vacancy rate (the number of jobs open as a percentage of the labor force) was this high, the headline unemployment rate was meaningfully lower. This dynamic would be consistent with an aggregate skills mismatch. If employers are, indeed, having a hard time finding qualified candidates for open positions, then we’d expect higher-skilled workers to be relatively better off. And that’s pretty much what we’ve seen over the past several years: The top earners are barely seeing wage growth, but we’re also seeing yawning wage inequality. The lower earners along the wage distribution – presumably the least skilled – have seen their real (inflation-adjusted) wages actually fall since 2007. Negative real earnings growth suggests either a lack of demand for or an excess supply of low-skilled labor. What’s more, this chart seems to confirm that the wage increases we’ve seen recently are a result of government-mandated minimum-wage increase, causing the lowest decile of earners to suffer a smaller decline in real wages than the next lowest decile. In total, these labor market data I’ve shown suggest that there’s a glut of low-skilled workers and that wage stagnation will continue. Editor’s Note: Wages may be stagnated, but we’ve discovered a force that has the power to drive certain stocks through the roof. We’ve seen similar situations produce 100% gains… 1,000% gains… even 2,000%, and more. Here’s how it works… Immediate details here . Furthermore, policymakers aren’t going to be able to increase the minimum wage without negative effects. The higher the wages for low-skilled positions rise, the quicker these positions will be replaced by technology. For example, cashiers are being replaced with touchscreen computers – and we’re now even seeing robots being used to move inventory around warehouses. Ultimately, very few are safe. The grim reality is that fewer and fewer workers possess desirable skills that can’t be automated. And a broad, powerful surge in wages is likely to prove elusive, just like the surge in interest rates and economic growth that we’ve been told is coming for the past few years. Safe (and high-yield) investing, Alan Gula, CFA The post We Still Have a Glut of Low-Skilled Workers appeared first on Wall Street Daily . By Alan Gula
    Oil Companies’ Positive Outlook Won’t Last
  • By , 2/27/15
  • tags: SPY TLT
  • Submitted by Wall St. Daily as part of our contributors program Oil Companies’ Positive Outlook Won’t Last By Karim Rahemtulla, Chief Resource Analyst   I went to the Oil and Services Conference in San Francisco to speak directly to the top brass in the industry. With Armageddon in the oil patch, I wanted to see the whites of their eyes. I wanted to see fear. I wanted to see them begging for cash and coverage… Instead, what I saw was optimism, with many oil CEOs saying that everything is just fine. But they’re not telling the whole story. In fact, their happy faces indicated to me that we aren’t at a bottom for oil prices or oil stocks yet. And those who are acting like the worst is over are about to get a giant slap in the face. All About That Debt I spent the better part of last week at this exclusive gathering of energy companies. For many of the companies there, it was the first time leadership had appeared in public since the oil-price crash in December and January. The CEOs that presented were all cheerful about their companies’ outlooks, despite the fact that the price for their commodity dropped 50% from last year. These same CEOs were optimistic in 2014, too, when prices were at $100 per barrel. Something just wasn’t right with that picture . . . You see, many will relive higher prices thanks to hedges. But those hedges are likely to expire later in the year, after which reality will soon set in. Both the companies that were hedged and the unlucky ones that weren’t in the first place will be selling oil for $50 or less per barrel! That’s no way to make money for shareholders . . . For the most part, the companies that presented are cutting back spending because they have no other choice. But, in a cruel twist, they’re still going to produce more oil than ever from existing projects. That’s because, as I wrote recently, the new norm will be companies that have to produce a greater amount of oil at lower prices in order to meet their debt payments. Congruently, most of the presentations focused on how reserves were increasing, and how more oil would be produced, despite lower prices. There’s a small minority of companies that don’t have debt issues, and will come out of this crisis on top. They will be able to pick up assets, land, equipment, and personnel on the cheap from leveraged companies that are suffering – a perfect storm on both sides of the oil patch. So if you’re looking to “bargain shop” during this period of low prices – and mark my words, the price of oil will be higher 12 to 18 months from now – then the place to look is at the well-capitalized companies without much debt. These companies can afford to wait it out until they can produce their precious assets for sale at a profit with favorable prices. Bottom line: Oil prices aren’t out of the woods yet, despite the recent mini rally. From a technical and historical perspective, prices need to retest the recent lows and maybe even trade below them before they make their way higher. It’s during that retest that you should be jumping into the shares. In the next issue, I will share which of these opportunities are the pick of the litter – companies that are positioned to succeed for years, and maybe even decades, to come. And the chase continues, Karim Rahemtulla Editor’s Note: We’d like to draw your attention to another opportunity the Wall Street Daily team has been tracking closely for a while now. It involves a little-known force that’s been shown to drive small-cap stocks higher. In fact, the next time you hear about a stock jumping 300%… 500%… or more… you can bet this force was quietly responsible . The post Oil Companies’ Positive Outlook Won’t Last appeared first on Wall Street Daily . By Karim Rahemtulla
    The Apple iCar: Coming to a Showroom Near You?
  • By , 2/27/15
  • tags: SPY GM HMC
  • Submitted by Wall St. Daily as part of our contributors program The Apple iCar: Coming to a Showroom Near You? By Greg Miller, Senior Technology Analyst   Project Titan. These two words had the newswires buzzing frantically last week, as rumors flew that Apple ( AAPL ) is getting into the automotive game. Yes, Apple! The company has hired hundreds of auto engineers for Project Titan. And in our Digital Fortunes update last week, Louis Basenese reported that auto industry spies spotted an Apple minivan equipped with camera gear cruising around the Bay Area. Now, we’ve seen some bizarre coverage on the topic. Rumors have even surfaced, claiming that Apple is buying Tesla ( TSLA )! In reality, we can only confirm that Apple is up to something. It hasn’t hired those engineers to make sure the executives’ cars are properly tuned up. Apple probably isn’t going to make cars. And it’s certainly not going to buy Tesla. But here’s the most likely route the company is going to take . . . Profit Wars: Apple vs. General Motors “I would be highly suspect of the long-term prospect of getting into a low-margin, heavy-manufacturing business.” Those are the words of former General Motors ( GM ) CEO, Dan Akerson. You can bet that Apple is smart enough to heed that advice. You see, Akerson was the CEO that the government brought in to clean up the mess after GM’s massive bailout. But he wasn’t a “car guy.” Since all those guys at GM failed miserably, the government wanted a different approach. Akerson made his reputation in the telecommunications industry, so he knows a thing or two about high-margin and low-margin businesses. And when it comes to Apple versus the car industry in this area, there’s no contest. Apple’s gross margin (the profit percentage on goods production before selling and other costs not related to manufacturing) is a hefty 38%. By contrast, GM’s gross margin for 2014 was just 7%. If you’re counting at home, Apple makes products that are over five times more profitable than GM. And after other expenses, that difference grows further. Apple’s total 2014 profits were over 20% of sales. GM made less than 1% net profit. Even apart from the actual dollars that those profit differences represent, the profit percentages give Apple’s business leeway that doesn’t exist in the auto industry. For example . . . Exploding Batteries . . .  But Not Profits In 2011, Apple learned that the iPod Nanos it shipped in 2005 and 2006 had a significant problem. Its battery manufacturer had made an error and a small number of the batteries were exploding as they aged. Brings a whole new meaning to “death metal”! So what did Apple do? Simple. It offered to replace the devices. All of them . . .   no matter whether they had a problem or not. In fact, to this day, if you have an old iPod Nano, you can check to see if it’s covered by the recall. If so, you can exchange it. When Apple ran out of old iPods to ship to recall customers, it shipped current-generation ones. Apple was able to perform this impressive feat of customer service because the company is so profitable, and the business had grown so much since the devices were first released. But things don’t work like that in the car business. Not even close. Even the most profitable automaker in the world can’t afford an open-ended, full-replacement recall like Apple did. Not to mention the fact that an exploding iPod battery would do far less damage than an exploding car battery. Given the inevitable injuries, and perhaps deaths, the headlines would be taking over the internet. To put it bluntly, there’s no chance in hell that an Apple car business would be as profitable as its computer business. The cost structures are simply too different between the two products. By the time it had bought all the materials to make a car, pounded it into shape, paid the hours of labor required to assemble it, and complied with the extensive regulations necessary to put a car on the road legally, there’s simply no room to make a car affordable enough for people to buy and still turn a 40% profit. Even the most profitable car companies only have profit margins of 7% or so. No, Dan Akerson has the right idea. And as for Apple buying Tesla, this speculation makes no sense. It would simply give Apple the same problems, but at a much higher cost than it could create for itself! So does that mean there’s no iVan in your future? Not necessarily . . . Apple’s Auto Strategy: Profits Without the Pain Apple could pursue a strategy not dissimilar to what it does with products now. You see, Apple designs the products, but does very little manufacturing itself. It outsources that to companies like Foxconn ( 2354.TW ). So Apple could be planning to do everything except actually making and selling the car. Many car companies already “sub-brand” some of their cars with other companies. For example, Harley-Davidson ( HOG ) for a more rogue image, or Eddie Bauer for a preppy touch. Companies making a smart car would welcome the opportunity to co-brand with Apple. For Apple, that would also give it the chance to introduce innovations in stages and across multiple models. Imagine an iPrius or iCamry with an Apple infotainment system and electric drive. Or an Apple-branded iLexus that comes equipped with semi-autonomous driving capabilities. Or a future iToyota that’s fully self-driving . Under a model like this, Apple can keep its money invested in the area in which it excels. And, more importantly, it can maintain its customary high profit margins, avoid auto industry regulatory hassles, and have the world’s best automakers clamoring for its auto designs. To living and investing in the future, Greg Miller P.S. No matter what Apple’s ambitions are in the auto industry, there are plenty of automakers looking to disrupt this traditional area with some incredible new innovations themselves. I’m talking specifically about the dual trend of connected cars and driverless cars.  Believe me, these fast-growing technologies are only set to accelerate in the coming years, as companies battle for that critical “first-mover” advantage and get their innovations on the market before anyone else.  We just dedicated the latest issue of Digital Fortunes to the topic – and highlighted two companies in a perfect position to profit from it. The recommendations are hot off the press, so don’t miss out. Our research team will give you all the details. For more information, just call 877.242.1730 or 443.353.4501. The post The Apple iCar: Coming to a Showroom Near You? appeared first on Wall Street Daily . By Greg Miller
    Fall In Love With These Highest Yielding Dividend Stocks From Nasdaq 100
  • By , 2/27/15
  • tags: CA MSFT
  • Submitted by Dividend Yield as part of our contributors program . Fall In Love With These Highest Yielding Dividend Stocks From Nasdaq 100 Did you notice that the Nasdaq hit the 5,000 yesterday? Congratulations, what a number. The Nasdaq index compromises many growth stocks, more than the Dow Jones does. That’s also one of the reasons why the index is well-know for technology and innovation firms. But the technology sector isn’t particularly known for finding good dividends. Indeed, many of the most exciting technology stocks don’t pay a dividend at all. Assuming they’re profitable (an assumption that doesn’t always hold), technology companies often funnel their cash back into their business rather than pay shareholders a dividend. You may also like my articles related to technology dividend stocks . There are a few great ideas in it. Cash, innovations and growth are main topics. Today I would like to celebrate the 5,000 mark by highlighting some of the highest yielding stocks from the index. Around half of the index members pay a dividend and of them has a high yield of more than 5 percent. Attached is a list of the highest yielding top 20 stocks from the Nasdaq 100 . Here are my favorites in detail: CA ( NASDAQ:CA ) works within the Business Software & Services industry and has a market capitalization of $14.33 billion. The company employs 12,700 people, generates revenue of $4,515.00 million and has a net income of $899.00 million. CA’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $1,860.00 million. The EBITDA margin is 41.20 percent (the operating margin is 24.21 percent and the net profit margin 19.91 percent). Financials: The total debt represents 14.70 percent of CA’s assets and the total debt in relation to the equity amounts to 31.71 percent. Due to the financial situation, a return on equity of 16.15 percent was realized by CA. Twelve trailing months earnings per share reached a value of $1.70. Last fiscal year, CA paid $1.00 in the form of dividends to shareholders. Technical: CA shares are -0.79% away from its 52-Week High and 31.15% above the 52-Week Low. The Relative Strength Indicator as a value of 64.29. SMA 200 — 13.02% SMA 50 — 5.76% SMA 20 — 3.90% Average True Range (NYSE: ATR ) — 0.55 Beta — 1.36 Stock Trading Volume — 2,484,956 Market Valuation: Here are the price ratios of the company: The P/E ratio is 19.17, the P/S ratio is 3.15 and the P/B ratio is finally 2.57. The dividend yield amounts to 3.07 percent and the beta ratio has a value of 1.35. Earnings Growth: CA’s expected earnings growth for the next year amounts to 0.12% while earnings growth for the next five years are estimated at -5.05%. – See more at: Fall in Love With These Highest Yielding Dividend Stocks From Nasdaq 100…
    LOW Logo
    Lowe's Earnings Review: Upbeat U.S. Economy Drives Sales
  • By , 2/26/15
  • tags: LOW HD
  • America’s second largest home improvement retailer,  Lowe’s (NYSE:LOW) reported strong Q4 and fiscal 2014 results on February 25, backed by an improving U.S. economy and upbeat housing market. The retailer delivered a 7.6% sales increase in the quarter to $12.5 billion, with comp sales growing 7.3% on a year-on-year basis. EPS in the quarter gained almost 57%, to reach $0.46, beating Thomson Reuters consensus estimates of $0.44. The stellar performance in the quarter was predominantly guided by a 4.9% increase in average ticket sizes, as the retailer’s pro services continued to strengthen. In the full year, sales grew 5.3% to reach $56.2 billion, with comp sales increasing 4.3% over the same period. Going forward, strong macroeconomic fundamentals seem to be working in Lowe’s favor to ensure positive performance. See our complete analysis of Lowe’s here Home Depot’s results We have a  $55 Trefis price estimate for Lowe’s stock, which is currently below market price. We will be updating our model in light of the recent earnings release. What Drove Sales For Lowe’s This Quarter? There is no doubt that the home improvement names have been among the biggest gainers as the U.S. economy continued to grow over the quarter, with unemployment levels reaching six-year lows. The advantages of an upbeat job market, coupled with falling gasoline prices, left Americans with higher disposable incomes to spend on home renovations. The quarter also witnessed higher activity in the housing market, with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.25 million in October, the highest sales figure in over twelve months. New home sales also increased to a SAAR of 481,000 in December, the highest recorded in over a year. These developments worked favorably for Lowe’s and could continue to benefit them, even in this year. Apart from leveraging the supportive external environment, Lowe’s continued to drive revenues by initiating campaigns to take advantage of various customer occasions. Through their Celebrate the Season winter campaign, Lowe’s drove sales by targeting four important occasions : “interior refresh, holiday decor, gifting, and getting organized.” The pro category continued to be a focus area in the quarter, which was targeted through various initiatives such as the “project specialist program.”  As per the program, Lowe’s aimed at providing a coordinated approach to style selection by providing design expertise from specialists. According to the earnings transcript, the interior project specialist program, constituting an average ticket size of over $10,000, yielded customer satisfaction 15 points higher than industry standards. With expansion to 450 stores in the coming year, we expect this strategy to work well in driving sales in the category. Apart from the project specialist program, Lowe’s also relied on its “canopy program” to further reach out to pro customers. The canopy program aims at improving efficiency in the lumber and building category by displaying select products just outside the pro entrance. Furthermore, LowesForPros, a dedicated online platform for professional customers introduced  last year, was also well received by pilot customers. These efforts and more, resulted in above average comp sales in categories such as flooring, kitchen, appliances, lumber, building materials, millwork, and out-door power equipment. What Lies Ahead? We expect the home improvement industry to continue reaping the fruits of a growing U.S. economy continuing in 2015. According to the IMF, the U.S. economy is expected to grow at 3.1% in 2015 guided by higher demand, better consumer confidence, and a reduction in fiscal deficits. Furthermore, unemployment rates are expected to trend downward to remain below 6% during this year. Based on these factors, the National Association of Realtors project existing house sales, to grow at 7.7%. According to a survey conducted by Lowe’s, around 50% of homeowners believe that the value of their homes is increasing, which could motivate home improvement spending in the future. Leveraging this, Lowe’s expects to deliver total sales increases of approximately 4.5-5% this year, with comps increasing 4-4.5%. The management has also indicated the opening of 15-20 stores over the year, which comprises of six orchards and two city centers that are also expected to bring in revenues. The retailer expects EBIT to increase 80 to 100 basis points, with some seasonality persisting from quarter to quarter. We expect Lowe’s to deliver on these numbers guided by growing pro sales against the backdrop of an improving U.S economy. For fourteen consecutive quarters, sales in the pro category has outdone the overall business for Lowe’s, with the segment growing almost 24% in the last quarter. Lowe’s has made a number of additions in categories that have high pro-penetration, which can be expected to push sales going forward. For example, they have leveraged their relationships with the likes of Hitachi and Kistler to strengthen their presence in pneumatic tools and decorative lighting categories. Also, further consolidation of LowesForPros, which allows pro customers to keep track of purchase histories and also customize products, could also bring in higher customer traffic. In a duopolistic home improvement market, with Home Depot being the other dominant player, Lowe’s could stand on better ground in the future. This is mainly because  Home Depot’s phenomenal performance continues to be threatened by a massive data breach, costs related to which, might drastically impact prospects for the retailer. In this situation, Lowe’s might continue to gain customer traffic going forward to put them in better stead. For now, Lowe’s shares gained 8.6% this year and 1.3% on the earnings news, to reach a record high at $74.69. 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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