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Higher Pricing & Accelerated Expansion In New Beverage Segments Drive Starbucks' Top-line Growth in FY2014
  • By , 10/31/14
  • Starbucks Corporation (NASDAQ: SBUX) ended its 2014 fiscal year on a high note, as the company reported an increase of 5% in the global comparable store sales in the fourth quarter, marking the 19 th consecutive quarter with above 5% comparable store sales. The Seattle based coffee giant reported its record Q4 net revenue figure of $4.2 billion, up 10% year-over-year (y-o-y). As a result, the company was able to report an 11% y-o-y annual growth in the consolidated net revenues for the whole fiscal year. Starbucks’ non-GAAP operating margins in Q4 improved 280 basis points y-o-y to 20.5% and non-GAAP EPS grew 23% to $0.74. For the fiscal year 2014, all the major segments of the company reported a more than 5% increase in comparable store sales. As a result, the company’s non-GAAP operating income grew 25% y-o-y to $3.1 billion. The non-GAAP EPS rose 21% y-o-y to a record $2.66 per share. Starbucks’ was an outperformer in the industry despite major headwinds, such as bullish coffee trends, shifting consumer trends and stiff competition from other major brands. We have  $82 price estimate for Starbucks, which is 6.6% above the current market price. See our full analysis for Starbucks Corportion Price Hike And Continued Innovation In Beverages Drive Comparable Store Sales In the third quarter, Starbucks raised prices on some of its drinks by 5 to 20 cents, whereas it raised prices of its packaged coffee sold in supermarkets and other retail stores by $1 (8%) to $9.99 per bag. The company targets a more affluent demographic of coffee drinkers that typically exhibit strong brand loyalty, making demand for its coffee more inelastic with respect to price fluctuations. After ensuring that majority of the customers were aware of the reasons for the hike and the possibility of losing customer traffic was minimal, the company did not hesitate to raise its coffee prices. As a result, the company’s comparable store sales grew 6% in the fiscal 2014. Net revenues of the Americas segment increased 9% y-o-y, primarily driven by a 5% y-o-y increase in the comparable sales. The average spend per customer visit increased 4%, whereas customer traffic increased 1%. However, the company is unsatisfied with the slow customer traffic growth. Starbucks, being one of the elite brands in the industry, relies on its innovative menu items and loyal customer base for its continued growth. However, the company is aware of the shifting consumer preferences to ecommerce purchasing, and believes that the company is well positioned and prepared to benefit from the anticipated trend shift. Starbucks promises to make organized effort to increase its customer base through numerous initiatives, such as introduction of Starbucks gift card, new handcrafted beverages, formation of new Starbucks reserve retail stores and innovation in digital cards and mobile platforms. Apart from turning its cups to red colour, the company plans to expand its gift card initiative, which has been reaping enormous benefits to the company. One of the major driving initiatives is the ‘Starbucks For Life’ promotional offer, where every customers who uses a gift card or its ‘My Starbucks Reward’ (MSR) account for payment can win around 500,000 food and beverage surprises, and it also includes 13 ‘Starbucks For Life’ lucky offers. All the initiatives are aimed at increasing the customer traffic for better top-line growth. New Store Expansions Remains Top Priority Starbucks opened nearly 500 net new stores in the fourth quarter, bringing the total new store count for the fiscal 2014 to 1,599 stores, which include 742 stores in the China and Asia-Pacific region (CAP). The company is accelerating its expansion growth in Asia, as the number of stores in China approaches 1,400. China, one of the strongest markets for the company, has been reporting excellent results off lately due to rapidly growing customer base and accelerated expansion. The company added a record 120 new stores in China in the fourth quarter. Moreover, on September 23, the Seattle-based coffee giant announced to acquire the remaining 60.5% of Starbucks Japan through a two-step tender offer process for about $914 million. The main idea behind the company’s expansion into this lucrative coffee market is to expand product sales through food service channels, to accelerate the retail sales and to provide a boost to the smaller share of RTD products. Starbucks has introduced the concept of a new super premium sub-brand ‘Starbucks Reserve’ that would be dealing with a premium quality of the product. The company plans to add the hundred of these reserve stores around the world, starting with San Francisco. Moreover, the company acquired 337 more Teavana stores in this fiscal year, including 60 Teavana Tea bars. The incremental revenues from new store openings, especially in the CAP region, have contributed significantly to the net revenues. New Beverage Segments And Channel Development To Provide Incremental Boost Apart from its renowned coffee stores, the company also owns and operates other brands such as Tazo, Seattle’s Best Coffee, Teavana, Evolution Fresh and La Boulange. The company introduced three new carbonated drinks under its Fizzio brand- Spiced Root Beer, Golden Ginger Ale and Lemon Ale. With the Teavana segment, the company is trying to enter the hot and iced tea segment, which is a $90 billion market. The Teavana products are already driving the revenues growth for this segment, as Teavana hand-shaken Iced teas proved to be the most profitable menu addition this fiscal year. Teavana hand-shaken iced teas accounted for one-fifth of the growth in iced tea platform. (See  Starbucks To Enter Into New Beverage Segments With Teavana & Fizzio Brands ) On the other hand, the channel development segment of the company reported a 12% y-o-y increase in the net revenues to $400 million, primarily driven by 26% increase in sales of K-Cups. The company shipped 750 million K-Cups during the fiscal 2014 and expects to reach 1 billion in 2015. 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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    Volkswagen Earnings Review: China Growth And Luxury Volumes Lift Overall Profitabilty
  • By , 10/31/14
  • Volkswagen AG (OTCMKTS:VLKAY) reported strong operating results for Q3 on October 30, highlighting the company’s commitment to expanding profitability, in addition to boosting vehicle deliveries. Revenues from the automotive division, which constitutes around 88% of the net sales, rose 2.2% this quarter to 48.9 billion euros (around $61.4 billion), to consolidate a flat sales growth through the first three quarters for this division. Despite a 5% increase in vehicle deliveries through September, sales were marred by unfavorable currency translations, particularly in South America and Eastern Europe. However, what bodes well for Volkswagen is that sales this year in Western Europe have remained strong, following economic instabilities in the prior years, and could continue to drive vehicle volumes in the coming quarters. Despite the sales downfall in Russia and Ukraine, rejuvenated vehicle volumes in Western Europe fueled growth in overall passenger vehicle deliveries to nearly 3 million through September, up 5.4% year-over-year. Apart from strengthening sales in the domestic market, Volkswagen’s China business, which is accounted for in the financial result using the equity method, continues to bolster income growth for the German automaker. The company recently announced plans of further extending cooperation with its joint venture partners in China, in a bid to expand production capacity in the country and further gain from future growth in the country’s automotive industry. In addition to the business growth in China, what boosted Volkswagen’s cash flow this quarter was a rise in automotive profits by 20% over 2013 levels, pushing margins up by almost 100 basis points to 6.4%. In this article, we will focus on Volkswagen’s China plans and anticipated margin growth, as the German company gears up to overthrow Toyota Motor Corp (NYSE:TM) as the world’s highest-selling automaker this year itself. We have a  $48.14 price estimate for Volkswagen AG, which is roughly 15% above the current market price. Automotive stocks have in general remained weak in the last three months, and Volkswagen’s stock has fallen 10% during this period, amid the news of China fines, and slowing automotive activity in South America and Eastern Europe. See Our Complete Analysis For Volkswagen AG Volkswagen’s deliveries have risen 5% year-over-year in the first three quarters to 7.54 million units, and if this growth rate continues in Q4, overall deliveries for the company will rise to over 10.2 million units in 2014. Toyota, on the other hand, has witnessed only a 2.8% rise in volumes through September, allowing Volkswagen to narrow the sales gap to roughly 74,000 units. But apart from gaining volumes over its chief competitor, Volkswagen eyeing strong growth in margins going forward, to near the 10% figure reported by Toyota. Margin Expansion To Be Fueled By Modular Toolkit Although Volkswagen’s automotive margins expanded 100 basis points to 6.4% this quarter, higher research and development investments, particularly related to the company’s own brand of passenger cars, are weighing down profitability. Volkswagen’s own passenger car volumes fell 3.2% through September, not only dragging down top line growth, but also narrowing margins for the group. The division’s operating margins stood at 2.3% for the quarter, mainly as volumes remained low in South America and the company continued to invest higher on new models. The company has now launched an efficiency program for its passenger cars in order to improve operational return on sales to around 6% by 2018. As this division forms over 10% of the group’s valuation by our estimates, curbing extra manufacturing costs and improving efficiency could lift Volkswagen’s overall profitability. One of the main reasons for cost reductions in production could be the increasing implementation of the Modular Transverse Toolkit (MQB) and Modular Production Toolkit (MPB), creating an extremely flexible vehicle architecture capable of bringing down manufacturing costs. This platform allows the German car maker to standardize its production process for small, medium and long cars. So far the system has been used to manufacture the Volkswagen Golf, Audi A3, Seat Leon and Skoda Octavia, and the company plans to use this system for most cars in the Volkswagen, Audi, Seat and Skoda portfolios in the coming years. The platform enables the company to make enormous cost savings by reducing weight and enabling easy installation of luxury technologies in high volume models, which then allows the automaker to lower the average price of its vehicles. As a result, Volkswagen could not only compete better on a pricing front and further improve volume sales, but the large cost reductions could help boost profits and subsequently cash flow for the automaker in the coming years. Volkswagen’s own passenger cars have pulled down the overall operational return on sales in the recent years, but with an expected increase in this division’s margins in the mid term, coupled with the high margins for Audi, Porsche and Bentley, Volkswagen could very well reach the 9-10% operating margins figure in five years time. Owing to the high demand for luxury vehicles and their relatively high product prices, Audi, Porsche and Bentley’s margins stood at 9.7%, 15.6% and 9.6 respectively in Q3. These luxury vehicle divisions continue to outpace the overall volume growth for Volkswagen, and are expected to fuel growth in net profitability in the coming years due to higher proportionate sales. China To Boost Overall Volumes Going Forward Buoyed by a 15% increase in vehicle deliveries in China, Volkswagen’s single largest market, the company’s share of operating profits attributable to the Chinese joint ventures grew 11.4% to 3.9 billion euros ($4.9 billion) through September. Volkswagen, together with its Chinese automotive partners FAW and SAIC, already operates around 17 production locations in China. The company recently announced plans to further expand its manufacturing base in the country, to increase the volume of locally produced vehicles. Volkswagen’s joint venture with SAIC, Shanghai Volkswagen, announced the construction of a new production factory in Changsha, while FAW-Volkswagen will build two new production facilities in Qingdao and Tianjin. Local production helps Volkswagen evade China’s 25% import tariffs, in addition to the value-added and consumption taxes, allowing the company to compete on a pricing front. Moreover, amid increased scrutiny of China’s policy regulators on import of luxury foreign-based vehicles, expanding the local manufacturing base might bode well for Volkswagen in the long term. Although the China Association of Automobile Manufacturers forecasts China’s automotive market to grow by 8.3% this year, down from the 13.9% growth seen in 2013, the country is still the fastest growing vehicle market in the world. Volkswagen already leads China’s automotive industry with around 14% volume share, and with volumes rising over 15% so far this year, more than the growth in the country’s overall vehicle market, the company is further growing its market share. Continual strength in Volkswagen’s China volumes is one of the reasons why we expect the German car company to overtake Toyota as the world’s highest-selling automaker this year itself. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    How Chesapeake's Priorities Are Shifting As Natural Gas Prices Remain Low
  • By , 10/31/14
  • tags: CHK DVN
  • As the price of natural gas declines, Chesapeake Energy (NYSE:CHK) has been concentrating on improving the efficiency of its operations. With the Henry Hub benchmark of natural gas falling from a February high of nearly $6.5 per 10,000 Million British Thermal Units(MMBtu) to its current level of around $3.8/MMBtu, Chesapeake’s top line has been shrinking. ( ( NYMEX Natural Gas Futures for December delivery, WTRG, October 2014)) Consequently, the company has been making significant efforts towards steady improvements in its operations to maintain profitability. To demonstrate the shift towards operational discipline, we take a closer look at two of the company’s top assets, the Haynesville and Eagle Ford shales, which together contribute to nearly a quarter of the company’s production. See our complete analysis for Chesapeake Energy here We have a  $26 price estimate for Chesapeake Energy, which is about 25% above the current market price. We will be updating our price estimate for Chesapeake after the earnings release. Reduced Number of Wells Chesapeake Energy has showed a significant improvement in the present value of its oil and gas revenues. Compared to only 46% in 2012, about 85% of its wells were profitable in the first quarter of fiscal 2014. The improvement, due in part to reduced costs, but also to a shift from less profitable wells to more lucrative opportunities. The company has also lowered the number of completed wells: in the first quarter of 2014, it completed 234 wells compared to 274 wells in the same quarter last year and 1,388 during 2013. The company is targeting 1,200 completed wells this year. As part of its ongoing cost reduction efforts, the company has brought up to date its asset-divestment program, which includes the sale of non-core assets in Southwestern Oklahoma, East Texas, and South Texas. But apart from the sale of assets, Chesapeake Energy has also been shifting its operations towards more profitable assets. Haynesville The Haynesville shale, a popular name for a rock formation that underlies large parts of southwestern Arkansas, northwest Louisiana, and East Texasregion, is less profitable for the company than other regions, as it primarily produces natural gas. In the early months of 2014, the recovery of natural gas prices made this region’s output more profitable, but over the long run, the company is expected to cut its production in this region. In the first quarter alone, Chesapeake cut down production in the region by 41% to 495 million cubic feet of natural gas equivalent, year over year. The following chart from a presentation made by the company demonstrates how Haynesville is less profitable than other regions: Source: Chesapeake IR Presentation This chart compares the average cost of wells in the Haynesville shale and Eagle Ford shale. Evidently, Eagle Ford is much cheaper to operate than Haynesville, but when we factor in the fact that Eagle Ford has bigger part in oil operations that are likely to be profitable in the long term, the contrast is made even starker. A lot of other oil and gas producers have backed out of Haynesville: according to Energy Administration Information, the number of rigs in operations in Haynesville has dropped to 50 in 2014 from around 250 in 2010. Natural gas production has also declined over the same period. Eagle Ford The Eagle Ford shale has been gaining in popularity in recent years with other producers, such as Devon Energy, also entering the location. It is estimated that production in the Eagle Ford shale can rise by as much 40% by 2020, from the current level of around 1.4 million barrels a day. Chesapeake’s production at the Eagle Ford shale comprises of around two-thirds oil and one-fourth natural gas, with natural gas liquids making up the rest. Even though, Chesapeake has been cutting down on the number of wells in operation, the number of operating wells in Eagle Ford has increased by nearly 50% compared to last year. Furthermore, net oil production has grown by as much as 17% over the same period. Adjusted for asset sales, the company’s production in the region has grown by 26% over the last year in the region. The company has planned to commit nearly 40% of its total Capital Expenditures(CapEx) towards expanding operations in the region. In comparison, the company only plans to allocated 8% of its CapEx to Haynesville. 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: GameStop, Electronic Arts & Activision Blizzard
  • By , 10/31/14
  • tags: ATVI EA
  • The gaming industry witnessed a dull period over the last few months, as software sales under-performed. According to the NPD’s September report, revenue from software sales was down 36% y-o-y. Despite the decline, it was twice the August software sales’ figure. This indicates the increasing consumer’s interest in video games, primarily driven by new AAA title launches. Moreover, in September 2013, the sales were high due to the mega release of Grand Theft Auto (GTA) V. According to the report, if the sales of GTA V are excluded, the software sales increased y-o-y in September 2014. With the holiday season coming, Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ: ATVI) have unloaded their arsenal, as both the companies released their major titles, including Madden NFL 15, FIFA 15, Destiny and Skylanders Trap Team . Here’s a quick round up of some companies related to the gaming industry covered by Trefis. GameStop GameStop (NYSE:GME) is scheduled to release its Q3 fiscal earnings report on November 20. The company, with its unique buy-sell-trade model, might witness revenue growth due to strong consoles demand over the last 6 months. The company reported triple-digit growth in hardware sales in its second quarter report, eventually leading to a 22% increase in comparable store sales year over year. With numerous blockbuster titles in the market, the company is confident of its software sales in the holiday quarter. Moreover, the company’s technology brands are generating significant amount of revenues, and hence the company plans on accelerating its expansion plans in this segment. GameStop’s stock price increased from $39.65 to $42.5 in the last week.  Our price estimate for the company’s stock is $42.88 (market cap of $4.8 billion), which is in line with the current market price. For 2014, we expect GameStop to report revenue of around $9.15 billion for 2014 and GAAP diluted EPS of $2.81. The market consensus for EPS for year ending Jan-14 is $3.03 (Reuters). See our complete analysis of GameStop Electronic Arts Electronic Arts (NASDAQ:EA) recently released its second quarter earnings for the fiscal 2015 on October 28. The company reported a 17% year-over-year (y-o-y) increase in the net non-GAAP revenues. The company’s strong performance was led by the 3 major titles:  Madden NFL 15, FIFA 15 and  The Sims. Both the titles are among the top 10 games played by the gamers in the U.S. in the month of September. Moreover, EA has a strong lineup for the next calendar year with the return of Need For Speed, Mass Effect and StarWars. EA’s stock price increased from $36 to $40 during the last week.  Our price estimate for the company’s stock is $36 (market cap of $11.5 billion), which is 10% below the market price (market cap of $12.7 billion). For 2015, we expect the company to report revenues of $4.5 billion and non-GAAP diluted EPS of $1.87. The market consensus for EPS is $1.92 (Reuters). See our complete analysis of Electronic Arts stock here Activision Blizzard Activision Blizzard (NASDAQ: ATVI) is scheduled to release its third fiscal quarter earnings on November 4. In the last one month, Activision released two of its three most awaited titles:  Destiny and  Skylanders: Trap Team . Destiny topped the charts in the month of September, with more units sold for Xbox consoles. Moreover, on November 4, the company is all set to release another major title  Call of Duty (COD): Advanced Warfare, which might drive the company’s revenues even further. Call of Duty is the leader in First Player Shooter (FPS) genre and will be a huge boost to the company’s holiday quarter revenues. Activision’s stock traded in the range between $19 and $20 during the last week.  Our price estimate for Activision is $21.64 (market cap of $16.1 billion), which is 9% above the market price. For the year 2014, we expect the company to report revenue of around $4.7 billion and non-GAAP diluted EPS of $1.23. The market consensus of EPS is $1.32. 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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    Monthly Updates: Home Improvement Sector
  • By , 10/31/14
  • tags: HD LOW
  • As we enter November and gear up for the quarterly result announcements for both  Home Depot (NYSE:HD) and  Lowe’s (NYSE:LOW), we take a look at the months events for America’s two largest home improvement retailers. Both stocks have had a similar growth trajectory, growing by around 7% in the last month, while the overall S&P 500 Index rose only 2.5%. Falling unemployment rates, rising builders’ confidence and an increasing number of housing starts- all bode well for the U.S. housing industry in the near term. In turn, this trend should benefit the home improvement industry, which depends on consumers who look to buy home improvement goods and services to furbish their newly bought/rented homes. However, the impact of the data breach at Home Depot last month could have deterred consumers from using their credit/debit cards to make payments, and although the company’s stock has remained strong, a possible decline in sales this quarter could soon catch up with Home Depot’s share price as well. But despite the possible loss in consumer confidence, home improvement sales could benefit from the expected overall surge in demand due to improving macro conditions in the U.S. We look at recent trends that could have bolstered growth in both Home Depot’s and Lowe’s sales in the last month. We have a  Trefis price estimate of $92.65 for Home Depot’s stock, which is roughly 5% below the current market price. Our complete analysis for Home Depot’s stock Accelerating New And Existing Home Sales: Home improvement retailers are impacted by the number of house sales, as new occupants spend on home improvement supplies and construction products and services. Following the first quarter, house sales have picked up in the U.S., with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.17 million last month, the highest sales figure since seen in September last year, and also higher than the overall adjusted figure of 5.07 million for 2013. New home sales also rose to a SAAR of 467,000 last month, highest in over a year. Increases in new and existing house purchases in the last two months could have boosted sales of home improvement equipment in October. We have a  $52.30 Trefis price estimate for Lowe’s stock, which is roughly 8% below the current market price. See our complete analysis of Lowe’s here Improving Employment Rates And Spending: 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. In particular, the recent job growth, that saw the unemployment rate drop to below 6% in September, fueled a rise in consumer spending by 1.8% in Q3. This growth can act as a reference, reflecting how home improvement sales might also have grown in line with increases in employment rates and consumer spending. Mortgage Rates Remain Low As Of Now: According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage climbed to 3.98% this week from 3.92% last week. Even though the mortgage rate is up, it has remained below 4% in the last three weeks, and lower than last year’s levels. Potential home buyers have looked to take advantage of the lowered borrowing costs, boosting home sales. Lending rates are expected to rise going forward, fueled by the Federal Reserve’s announcement of reduction in bond purchases, which had kept the long-term interest rates low. The rates haven’t risen as aggressively as they did mid-last year when the Fed first announced reduction in bond purchases. However, the average rate for a 30-year fixed-rate mortgage is expected to rise to 5.1% by the end of 2015, which could further prompt house purchases in the near term, consequently boosting home improvement sales. 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 Auto Notes: Tesla Shares Up On New Lease Program
  • By , 10/31/14
  • tags: TSLA VLKAY TM
  • Shares of Tesla Motors (NYSE:TSLA) gained by as much as 7% following the announcement of a new leasing program for its electric cars. Currently, Tesla offers a leasing package that allows consumers to purchase a Tesla Model S, which sells at a base price of $71,000, for installments between $800 and $1,300 a month, depending on options, following an initial down payment of $6,500. Tesla’s Elon Musk announced a new agreement with U.S. Bank which could allow consumers to purchase the Model S on a lease that could be 25% cheaper than the lease program currently offered by the company. The option will allow consumers to return the vehicle in case they do not like it, while also getting their lease obligation waived off. Considering the fact that the cost of ownership of a Tesla Model S is already lower than most cars in its class, a cheaper lease program should make the car even more attractive to potential buyers. Tesla was also in the news during the week for doubts over whether the company would be able to meet its target of 35,000 vehicles for the year. Last week, a Barclays analyst said that Tesla would not meet its guidance of 13,000 vehicle deliveries for the fourth quarter, thus failing to meet the 35,000 target for the year. In response, Elon Musk took to Twitter to announce that sales of the Model S sedan were up by 65% in North America and had reached a “record high” worldwide. Tesla will announce its earnings on November 5. Currently,  our valuation of $150 (market cap of $18.5 billion) for the company is about 40% below the current market price of $226 (market cap of $27.9 billion). We expect Tesla to report revenue of around $4 billion and operating income of $700 million for calendar year 2014. We forecast non-GAAP diluted EPS of $0.79, which is lower than the market consensus of $1.01 ( Financial Times ). Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Latin America Adds To Avon's Top Line Woes In Q3FY14
  • By , 10/31/14
  • tags: AVP REV EL LRLCY
  • Avon Products (NYSE:AVP) reported third quarter results that were in-line with analyst estimates on October 30th. Quarterly sales stood at $2.14 billion, marginally lower than consensus estimates of $2.16 billion. Geographically, sales from the EMEA region continued to improve from the change in strategy, registering sales that were 5% higher on a constant currency basis at $620 million. In reported terms, sales from the EMEA market remained flat due to a 5% currency headwind from depreciating local currencies against the U.S. Dollar. However, performance from North America continued to remain dull, with the representatives count and sales declining 18% and 15% respectively. Additionally, its largest market of Latin America failed to deliver on management expectations during the quarter, with weaknesses in Brazil, Argentina, Mexico and Venezuela weighing on constant currency sales. Sales from the Latin American market stood at $1.07 billion, 2% higher from a year prior period in constant currency terms. In reported terms however, depreciating currencies resulted in a steep 14% headwind on sales. In terms of margins, overall gross margins adjusted for certain non-GAAP items declined from 63.1% in Q3FY13 to 62.2% this quarter, primarily impacted by currency fluctuations in EMEA markets. However, operating profits witnessed a strong expansion following prudent cost savings and management realignment from Avon. Q3FY14 operating profit margins, adjusted for various non-GAAP charges, stood at 7.9% compared to 5.4% in Q3FY13. Primarily, the expansion in margins were facilitated by a decline in sales & marketing, general, and administrative expense, which helped boost earnings per share from $0.14 in Q3FY13 to $0.55 in Q3FY14. See Our Full Analysis for Avon Products Weak Brazilian Economy, High Representative Attrition in Mexico Weigh on Q3FY14 Latin American Sales Within the Latin American region, Brazil is Avon’s single largest market. Direct selling penetration is relatively high in Brazil compared to other emerging markets, and this has favored Avon, particularly in the skincare, color and fragrance categories. The direct sales channel in these categories in Brazil accounts for nearly 70% of market sales, making the market attractive and highly competitive at the same time. In the third quarter, organic sales from Brazil remained depressed by approximately 4% in constant currency terms due to a challenging macroeconomic environment. Avon states that the launch of new, premium products in Brazil when consumers were becoming more price sensitive did not help sales, particularly in color cosmetics. However, incremental VAT credits offset this decline of 4% in organic sales from Brazil, leaving overall constant currency sales flat on a year on year basis. Furthermore, sales in Mexico suffered from continued attrition in its representative base. Sales declined 7% in reported terms and 6% in constant currency terms due to a decrease in Active Representatives for the company. In addition to the decline in representative count, Avon’s performance in Mexico was negatively impacted by its portfolio price mix. While the company has made some progress in balancing its product portfolio for the Mexican market, it states that the decline in representatives is due to low engagement with new recruits in the first 6 campaign cycles. To address this issue of high attrition amongst new recruits, Avon plans to roll-out its strategy for the U.K market, which generated nearly double digit gains in sales last quarter, and expects sales from Mexico to stabilize in Q4FY14. Representative Engagement in North American Remains Low For the nine months in FY14, North American revenues declined 19% year on year to $877 million. The decline was primarily a result of low engagement with its independent representative base in the region. Active Representatives, which represent the total number of representatives actively involved in Avon’s field programs, registered an 18% decline in numbers. This sharp fall in the number of representatives the company has in the field has resulted in low unit volumes, which have declined nearly 26% year on year in 9MFY14. Although the third quarter has displayed marginal improvement in the rate of representative attrition, and a subsequent slowdown in the decline rate in sales, it still remains at worrying levels for sustainable running of the business in North America for Avon. The region continues to operate at a  loss, with 9MFY14 adjusted operating profit margins standing at (-1.7%) compared to (-4%) in 9MFY13. The company has a new management team in place to turnaround the business and has made some progress in curtailing excess costs, and expects to turn profitable in the market by 2015. However, the double-digit decline in sales from the market should have substantial impact on North American operations in the near to medium term. We are in the process of updating our model to reflect key trends from the latest Q3FY14 earnings for Avon Products. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Division In Focus: The High Performing Footwear Division Fueling Nike's Growth
  • By , 10/31/14
  • tags: NKE UA
  • Sports giant  Nike (NYSE:NKE) has continued its upward trajectory in 2014 after an excellent 2013, in which its stock price appreciated by about 60%. The company has been posting solid bottom line growth driven by strong performance across all divisions, product types and geographies. This is likely to continue in the future as the outlook for the global sports footwear market is very promising. According to our analysis, this division makes up about 44% of Nike’s valuation. In this article we take a closer look at the trends impacting our valuation of this division. Our price estimate for NIKE stands at $68, implying a downside of ~20% to the market price. See our complete analysis for Nike What Is The Footwear Division? This is the division that designs, manufactures and markets footwear globally under the Nike brand. Nike footwear is typically designed for athletic purposes, but is also worn as part of casual and leisure attire. The top selling footwear categories include training shoes, running shoes, basketball shoes and sports-inspired casual shoes. Nike also sells flip flops and sandals in addition to shoes, but the percentage contribution to overall sales for these categories is quite low. Global Footwear Market Share The global athletic footwear market is estimated to grow at a CAGR of 1.8% to reach $84.4 billion in 2018, according to a report by Transparency Market Research. In comparison, Nike’s footwear sales have historically grown at a high CAGR of about 20% over fiscal years 2012-2014, a rate far in excess of the average industry growth rate. Nike footwear global market share has consistently grown over the years and reached about 19.7% at the end of calendar year 2013. ( (Forecast of Nike’s global market share in athletic footwear from 2011 to 2020, Statista)) This can be attributed to strong marketing and constant evolution of its product line. We believe Nike will continue to outpace the industry growth rate in the future, helped by its association with major sporting events such as the Olympics and continued innovation. By the end of our forecast period, we expect Nike’s share to grow to 27%. Some factors supporting our projection for Nike’s share in this market are as follows: Nike is currently recognized as one of the top sports brands in the world. Nike doesn’t manufacture the footwear sold under its brand name. Instead, the production is outsourced, allowing the company to focus on design innovation. This gives the company flexibility to get the best products at the right prices and to move production in case a better cost opportunity emerges. Nike has several top sportsmen around the world as brand ambassadors. The company leverages the global appeal of these endorsers to create brand awareness and market its products. Nike has strong R&D potential which is evident from its ever evolving product line and product introduction to the market. Nike has a strong hold of the North American market with nearly 45% share(60% if you also include the AIR Jordan and Converse brands). This is the biggest contributing region to Nike’s topline and the company’s strong performance in the region is expected to continue in the future. Nike’s footwear sales are growing rapidly in Europe, which has historically been a strong hold of the company’s competitors Adidas and Puma. In the fiscal year 2014, Nike’s footwear sales grew by ~25% in Europe, and on the back of this growth the company is edging closer to becoming the market leader in the region. Improving Margins Nike’s gross margins are sensitive to higher product input costs, including materials and labor. However, in the recent past the company has been able to offset the negative impact of higher labor prices in China and rising synthetic rubber prices with higher product selling prices, as well as the growth of its direct-to-consumer business. Some Nike products, such as t-shirts, are quite price sensitive. Increases in their prices tend to result in lower sales numbers. However, Nike’s basketball shoes, one of it’s core products, witnessed stable demand. Over the past few years, demand for these shoes has proven to be inelastic. Price increases have been absorbed by consumers even though this is one of the highest priced product category. Consumers have increasingly shown a willingness to buy premium shoes styled around sportsmen such as Kobe Bryant, Michael Jordan and Lebron James, irrespective of price points. In the running category, Nike’s sales have been driven by increasing unit volumes rather than price increases. Since, the runner’s market makes up about a third of the total U.S. sneakers market, there is a huge opportunity in this market. In fiscal 2014, Nike’s margins increased by 120 basis points to 44.8%. Going ahead, we expect margins to gradually increase in the future and surpass 45% in the long run. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Here's Why Chesapeake Recently Sold $5 billion Worth Of Its Assets
  • By , 10/31/14
  • tags: CHK COP
  • A few days ago Chesapeake Energy announced the sale of non-core assets in its Marcellus and Utica shale plays to Southwestern Energy for $5.4 billion. As part of this sale, the company will divest over 400,000 acres and about 1,500 wells in Western Virginia and Southern Pennsylvania and generate cash flows from assets that are not central to its growth plans. In our note below, we take a look at Chesapeake’s motives in organizing this sale. Chesapeake’s Growth Plans The Texas based company is focusing on three specific areas in order to unlock value for its shareholders: 1) Reducing Leverage: Over the past six months, Chesapeake has increased its cash and cash equivalents by almost 67%, from $900 million in December to $1.5 billion in June. More importantly, the company has reduced its long-term debt by almost $1.3 billion over the last six months.  In the last two years, it has reduced its net leverage by as much as $6 billion. In addition to reducing its leverage in order to strengthen its financial security, CHK has also reduced the complexity of its balance sheet, offloading several term loans, VPP’s and levered subsidiaries. The net result has been the improvement of the company’s liquidity position-its quick ratio has gone from 0.47 in 2012 to 0.75 and the lowering of its net-debt to total capitalization ratio to about 35%. 2) Increasing Production of Oil: The company has consolidated its position in the Powder River Basin, which is seen as a significant resource reservoir by Chesapeake. More importantly, the company is leaning on oil to fuel its sales growth in the region and sees the Niobrara oil play as key in order to diversify its production. The company is already generating returns in excess of 40% in the Niobrara. Unlocking Value in the Marcellus Shale The third area that Chesapeake Energy had been looking at to fuel its future growth was the potential spin-off of its Southern Marcellus shale assets. Even though these assets were generating strong returns for the company, those returns could be even stronger if the assets were no longer a part of Chesapeake. In an investor presentation in August, the company had noted that the asset could generate nearly 50% organic production growth if it were set free. The company estimated the value of its non-core assets in the southern Marcellus shale and the Utica shale plays at $4 billion to $8 billion based on the market valuation of some of its peers. Despite considering the idea of spinning off the asset to unlock its value, the company has decided that a more efficient way of achieving its goal was the sale of this acreage to Southwestern Energy. The sale will provide the company with a bucket load of cash that it can invest in other potentially profitable ventures to fuel even more shareholder value. The deal will also contribute further to the improvement of its balance sheet. Chesapeake can now use its new cash to make acquisitions, buy back shares, or accelerate growth. The company expects the sale will have no impact on its growth because these assets were not a core part of its growth plans, which is why it still expects to deliver a 7%-10% production increase next year even as it maintains a tight capital program. 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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    Time Warner Cable Profits Drop As It Continues To Lose Pay-TV Subscribers
  • By , 10/31/14
  • Time Warner Cable (NYSE:TWC) recently reported its Q3 2014 earnings with a 6% drop in profits to $499 million. However, adjusted earnings grew 10% to $1.86 per share. The revenues grew 3.6% to $5.71 billion, led by 11% growth in the residential broadband business. The company continued to bleed pay-TV customers and lost 184,000 subscribers during the quarter. This is far worse than Cable giant Comcast (NASDAQ:CMCSA), which lost only 81,000 video subscribers in the third quarter (Read More -  NBCUniversal Boosts Comcast’s Q3 Earnings ). Time Warner Cable’s business services segment continued to outperform with 22% revenue gains, driven by a growth in broadband and voice segment. The company has lowered the revenue guidance for the year primarily due to its Los Angeles Dodgers regional sports network failing to gain carriage with major pay-TV operators. While we continue to believe that the company will see robust growth in its broadband business due to the increasing demand for higher speed and connectivity, taming the pay-TV subscriber losses remains a key challenge for the company and it could lead to continued drop in pay-TV market share over the next few quarters. We estimate revenues of about $22.72 billion for Time Warner Cable in 2014, with Non-GAAP EPS of $7.75, which is in line with the market consensus of $7.43-$8.34, compiled by Thomson Reuters. We currently have a $120 price estimate for Time Warner Cable, which we will soon update based on the third quarter earnings announcement.
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    New York Times Earnings: Digital Services Boost Circulation And Advertising Revenue Even As Profitability Suffers
  • By , 10/31/14
  • The New York Times Company (NYSE:NYT), one of the leading newspapers in the U.S., posted its Q3 results on October 30th. Even though the company rolled out new digital products (e.g., NYT Now, NYT Opinion and Times Premier) to bolster its digital circulation and revenues over the last two quarters, its print circulation and the related ad revenue continue to decline, reflecting the secular downturn in print industry. During the quarter, NYT’s revenues grew by just 0.8% year over year to $364.71 million from $361.73 million. Circulation revenues increased 1.3% and other revenues increased 2.7%, while advertising revenues were flat. However, the company reported an operating loss of $9.03 million on higher compensation and benefits expense, and marketing costs associated with the strategic growth initiatives in digital, as well as higher retirement costs. Click here to see our complete analysis of New York Times Outlook for Q4 2014 The company expects circulation revenues to increase by 1%-1.5% in fourth quarter of 2014 compared with the fourth quarter of 2013, as benefits from its digital subscription initiatives and the increase in print subscription prices bear fruit. Total advertising sales in the Q4 FY14 are expected to decrease at a mid-single digits rate compared with the Q4 FY13, primarily due to a challenging business environment in the print ads business. The company expects to incur a charge of $9 million in non-operating retirement expense in the fourth quarter. In addition, the Company expects the following on a pre-tax basis in 2014: Results from joint ventures: loss of $1 to $3 million, Depreciation and amortization: $75 to $80 million, Interest expense, net: $53 to $57 million, and Capital expenditures: $35 million. Digital Subscription Boosts Circulation Revenues According to our estimates, NYT’s print circulation and digital subscription division contribute over 45% to its stock value. During the quarter, circulation revenues grew marginally by 1.3% to $206.72 million. While NYT’s daily print circulation continues to decline, its digital subscriber base has continued to expand at a fast pace. In Q3, NYT’s paid digital subscriber base grew by 44,000 to 875,000. Digital subscription grew by 13.3% to $42.8 million, and now accounts for nearly 20% of NYT’s circulation revenues. During the quarter, the company announced a host of new steps (such as mobile apps) to bolster its mobile platform and boost its digital subscriber base.  It includes an improvement in content that is delivered through mobile apps at different price points. We currently estimate that the number of NYT’s online subscribers will increase to around 1.4 million by the end of our forecast period. Print Subscription Revenues Stabilize Over the past few quarters, NYT has been able to leverage its brand name and popularity to raise print subscription prices, which has helped the company to stabilize its print subscription revenues, even as volume continued to decline. As per our pre-earnings note, an increase in home-delivery prices of The New York Times more than offset a decline in print copies sold. We expect this trend to continue in the coming quarters, and print subscription revenue to stabilize. Currently, we forecast NYT Times weekly price to increase to $15.40 by 2020. Digital Ads Stem Decline in Ads Revenue With the advent of the Internet, the print ads business has been on a decline as advertisers are increasingly earmarking more funds for online ads. NYT’s print ads division, which makes up 28% of its estimated value, has not been able to buck the trend and continues to report declines in revenue. NYT reported a 5.3% year-over-year decline in print ad revenues. We currently project NYT’s print ads revenues to continue to decline, in line with U.S. national print ad spending. However, the online advertising division, which is the third largest division of NYT and makes up 25% of its estimated value, posted a 16.5% year-over-year increase in revenues to $38.2 million in Q3. The primary reason for this growth was NYT’s native advertising product – the paid post. The company only introduced Paid Posts in January but will end the year with more than 30 clients. NYT continues to add content, especially video content, to its websites to increase user engagement and bolster online ads revenues. Although it still represents a relatively modest portion of our total digital advertising revenue. Additionally, the company continues to experiment with custom advertising and has increased its ads offering on mobile devices such as Tap NYT which is a full-screen, self-propelled tapable story. We estimate these initiatives will improve user experience and boost the number of unique visitors to NYT’s website and expect the unique visitor count to grow to 60 million by the end of our forecast period. We are in the process of updating our valuation to incorporate the Q2 2014 earnings. At present, we have a  $8.33 price estimate for New York Times, which is 35% below the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Why The Japanese Solar Market Could Be Poised For A Slowdown
  • By , 10/31/14
  • tags: TSL YGE SPWR
  • The Japanese solar market has proven to be one of the key growth levers for the photovoltaics industry over the past two years, driven by the void created by the suspension of the country’s nuclear power plants; attractive incentives and the availability of cheap funding for solar power projects. The country is now the world’s second largest solar market in terms of annual capacity additions. The surge in Japanese installations have helped solar companies to largely offset declines in markets such as Spain and Germany, which had previously accounted for a bulk of global panel demand. According to Bloomberg New Energy Finance, Japan’s investment in solar technology rose to about $30 billion in 2013, or almost triple the 2010 level, with about 7 gigawatts (GW) of new capacity being installed through the year. However, the Japanese solar industry has been facing some headwinds of late, as utility companies have been unable to accommodate the flood of new installations on the electric grid and also due to concerns that the government will scale back its solar incentives. In this note, we take a look at some of the factors that could contribute to a slowdown in the Japanese solar market.
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    Financials Weekly Notes: Citigroup, BofA and Deutsche Bank
  • By , 10/31/14
  • tags: C BAC DB
  • Bank shares started the week on a weak note, with concerning economic trends in the U.S. as well as Germany hurting investor sentiments. While U.S. home sales figures for the month of September did not improve as much as expected, the U. S. Services PMI (Purchasing Managers’ Index) also fell to a six-month low of 57.3. At the same time, Germany’s economic data indicated deflation – casting doubts about the pace of recovery in Europe as a whole.  But investors remained hopeful about a positive outcome from the Federal Reserve’s two-day policy meeting over Tuesday and Wednesday (28-29 October), and when the central bank announced plans to wind-up its asset purchase program, share prices across sectors saw a notable jump. Bank shares outperformed the larger equity market over the latter part of the week as the Fed’s move was seen as precursor to an increase in benchmark interest rates in early 2015 – something that will help ease the growing pressure on banks’ net interest margins next year. The KBW Bank Index gained roughly 3% over the week through Thursday.
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    Rupert Murdoch's Worry Over Netflix And Amazon Is Valid
  • By , 10/31/14
  • tags: NFLX AMZN NWSA
  • Rupert Murdoch, the chairman of 21st century Fox, recently made a statement that the media industry must answer to the competitive threat posed by online streaming companies such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN). There is a lot of value to what he said, and considering the recent moves from HBO and the increasing growth and traction of these streaming companies, the appeal subscriber rates of the traditional pay-TV industry are increasingly under pressure.  The possibility of Netflix and Amazon dominating the video streaming market could result in reduced negotiating leverage for media houses. It is going to be a battle for content distribution between traditional pay-TV providers and online streaming companies, and on the surface it appears that content owners stand to gain. However, if there is mass exodus of consumers from pay-TV to Internet for media consumption, the monopolistic effect of the duo (Netflix and Amazon) as well their relatively low revenue generating capacity can ultimately be detrimental for content companies. Our price estimate for Netflix stands at $300, implying a discount of about 20% to the market.
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    Sprint Earnings Preview: Subscriber Additions, Spark Strategy In Focus
  • By , 10/31/14
  • tags: S T VZ
  • Sprint (NYSE:S) is scheduled to announce its Q2 fiscal 2015 earnings on Monday, November 3. The third largest wireless carrier in the U.S. is facing intense competition for new subscribers, with rival T-Mobile stepping up its “Uncarrier” promotions, market leader  Verizon (NYSE:VZ) banking on its superior network quality and “More Everything” offerings and  AT&T (NYSE:T) responding aggressively with its Next plans. Sprint has also been lagging rivals Verizon and AT&T in LTE coverage and network quality, which is proving key to retaining and adding new subscribers in a saturated market. The carrier lost 334,000 wireless subscribers in the previous quarter and has seen net losses of wireless subscribers for seven of the last eight quarters. Looking for a turnaround, the carrier appointed Marcelo Claure, founder/CEO of wireless distribution company Brightstar, as the new CEO in August this year. The new CEO was quick to devise a turnaround strategy and introduced a new set of shared data plans called Family Share Pack, providing customers more data per connection at lower costs than rivals. Sprint’s aggressive marketing and discounts were aimed at regaining its lost momentum in adding new subscribers, and it seems that its efforts are going to pay off, at least in some measure. According to Consumer Intelligence Research Partners, Sprint was ahead of T-Mobile in adding new subscribers in the July-September period, with the former accounting for 43% of all new customers additions, compared to T-Mobile’s 39%. Verizon and AT&T trailed the smaller carriers with 26% and 17% shares in new customer additions, respectively (these percentages combined exceed 100% because new customers include both first-time phone buyers and those joining from other service providers). Considering that T-Mobile added 2.3 million new customers in this three month period, we expect Sprint to report similar figures in its upcoming earnings report. Our  price estimate for Sprint is about $8.50, which is significantly ahead of the current market price.
    One Company Nears a Sweet Investment Spot
  • By , 10/31/14
  • tags: ECA HAL SLB
  • Submitted by Wall St. Daily as part of our contributors program One Company Nears a Sweet Investment Spot By Karim Rahemtulla, Chief Resource Analyst   The holiday season is almost upon us, and our thoughts are turning to planning trips, buying presents, and dealing with the dreaded in-laws. But before you get swept up in the frenzy, there’s one investment move you should make to ease the Yuletide strain on your wallet. You see, despite the current slump, energy prices are still going to rise this winter. In fact, one stock is already dropping down to Black Friday prices, but it’s sure to climb again. The time to buy is now . . . The Company to Watch More than a year and a half ago, I recommended buying shares of Basic Energy Services ( BAS ) at around $13 per share. In the subsequent months, the shares more than doubled . Then, in March of this year, I wrote that the shares were trading higher than they should be, and that natural gas wouldn’t be able to hold at the over $6 per thousand cubic feet (mcf) level reached last winter. Basic has since corrected along with the rest of the energy sector. The company lost more than 50% of its value and is trading back down in the $13 to $14 level. Accordingly, natural gas is back around $3 per mcf. But the opportunity to profit off of Basic is far from over. At current levels, Basic presents a very interesting speculation. It has overcorrected, and business is much better today than it was a year ago. A Gift Everyone Wants In its latest release, Basic echoed what Halliburton ( HAL ) and Schlumberger ( SLB ) have been saying recently: Oil and oil-related businesses aren’t retreating in the face of lower prices – not yet anyway… Basic hasn’t seen a drop in bookings for its oil and gas services through the first quarter of 2015. Couple that with the recent acquisitions in the energy space by Encana ( ECA ) and the sale of major assets by Chesapeake Energy ( CHK ), and you might just have a very interesting scenario developing. Oil prices are continuing to trend downwards and might hit $70 per barrel. But, energy shares have stopped their correction for now and are falling less. Some are even rising in the face of the most recent decline last week. This might indicate that both energy and energy shares are nearing a bottom… With cold weather approaching and continued global stimulus, energy prices should rebound this winter. Get the Best Deal If the rebound sticks – assuming China begins to increase imports, the eurozone stimulus takes hold, and the Organization of the Petroleum Exporting Countries comes to its senses – then we could see a rally in energy prices in the first half of 2015. Most energy shares are down, and the majors are down less than smaller companies… but their upside is probably 20% to 40% from current levels. Basic, on the other hand, has a much bigger upside due to its leverage in the industry and its much smaller market capitalization and share float. In other words, if the sector moves higher, Basic should outperform. Oil and gas prices over the next few months are anyone’s guess. But if you want to get in during this decline, then you should definitely consider stocks that are about to hit a sweet low spot, like Basic, to boost your returns. Ideally, the $10 to $12 level would be a great entry point. It’s around this level that insiders were buying shares before the rally to the mid to upper $20s. And “the chase” continues, Karim Rahemtulla The post One Company Nears a Sweet Investment Spot appeared first on Wall Street Daily . By Karim Rahemtulla
    3Q14 Earnings Results Suggest Strength into 2015?
  • By , 10/31/14
  • tags: ALXN MMM ALK
  • Submitted by Profit Confidential as part of our   contributors program 3Q14 Earnings Results Suggest Strength into 2015? by Mitchell Clark Corporate earnings are flooding in, and while there are always disappointments—typically in not meeting Wall Street expectations—the numbers are pretty good. The stock market was relieved when conglomerates started reporting. 3M Company (MMM) saw its share price pop almost five percent higher after beating estimates and reporting a solid improvement in U.S. market demand. I continue to like this position for long-term, income-seeking investors. (See “ Off-the-Radar Company Delivering Attractive Earnings .”) The company reported record third-quarter sales growing a modest 2.8% comparatively to $8.1  billion, with local currency sales growing 3.9% and acquisitions adding 0.1% to sales. Currency translation, which is a big issue for any company with international operations, reduced third-quarter revenues by about 1.2%, according to the company. Net income came to $1.3 billion, or $1.98 per share, representing an 11% gain over the same quarter last year with operating margins exceeding 22% in all of the  company ’s operating subsidiaries. It was a very good quarter for 3M Company. It’s important to remember that this is a mature conglomerate, so nobody is expecting double-digit top-line growth in this environment. Still, the bottom line was impressive along with management tightening its 2014 earnings range to between $7.40 and $7.50 per share from the previous $7.30 to $7.55 per share. Also jumping on the stock market after announcing its financial results was Alaska Air Group, Inc. (ALK). The company is up almost seven percent after reporting a record third quarter. This airline has been a very hot stock over the last five years. Passenger revenues in the third quarter grew a solid seven percent over last year. Excluding some one-time items, the company’s adjusted earnings came to $200 million, or $1.47 per diluted share, which is a big improvement over comparable adjusted earnings of $157 million, or $1.11 per diluted share, in the third quarter of 2013. Lower fuel costs should help the company post very good earnings in the fourth quarter this year. This stock is likely to convincingly break above the $50.00-per-share level. With so many prognosticators professing doom and gloom, that expectation is not representative in corporate reporting, which is why it’s so important to ignore the equity market’s noise and just focus on what corporations are saying about their businesses. Alexion Pharmaceuticals, Inc. (ALXN), which is a company I’ve covered for years, leapt more than seven percent higher after beating consensus on revenues and earnings. The company increased its 2014 full-year guidance over its previous forecast. The stock is now back up to where it was in February. A lot of stocks are fully priced in this market, but expectations for corporate performance in 2015 are going up; that means that stocks can still tick higher and not be unreasonably priced, even though they are at record-highs. Second-quarter earnings season quietly beat what a lot of investors were expecting. It was a strong quarter and so far, the third quarter reveals much of the same.       The post 3Q14 Earnings Results Suggest Strength into 2015? appeared first on Stock Market Advice | Investment Newsletters – Profit Confidential .
    India Buying 450% More Gold?
  • By , 10/31/14
  • tags: GLD NUGT
  • Submitted by Profit Confidential as part of our   contributors program India Buying 450% More Gold? by Michael Lombardi, MBA The demand and supply situation for gold bullion, something I’ve often talked about in these pages, has taken a new course . . . one very favorable to gold bulls like me. Gold buying in India is up 450% in the first nine months of 2014 compared to the first nine months of 2013. (Source: Government of India, October 14, 2014.) The jump in gold bullion buying in India is related to the easing of restrictions on gold imports into the country by the Indian government in 2014. The buying of gold bullion in China continues to be strong. And world central banks are increasing their gold reserves, too. In the chart below, I’ve compared the gold holdings of various  central banks now compared to their gold reserves in 2011. Three-Year Change in Gold Reserves of Five Countries Country Gold Holdings in October 2011 (in tonnes) Gold Holdings in October 2014 (in tonnes) % Change Russia 841.1 1112.5 +32.27% Turkey 116.1 511.7 +340.74% Kazakhstan 67.3 181.9 +170.28% Korea 39.4 104.4 +164.97% The Philippines 147.8 194.4 +31.53% Data source: World Gold Council web site, last accessed October 23, 2014 Mind you, the central banks mentioned in the table above are just a few of the many that have posted a significant increase in their gold bullion reserves. Unfortunately, many countries (like China) do not regularly release data on their gold purchases. Meanwhile, the supply side of the gold bullion equation is bleak. As I wrote in 2013 when gold bullion prices got whacked, the lower gold prices go, the more mines taken off-stream as gold mining companies close operations where production costs come in at more than $1,200 an ounce. Below is a chart of U.S. gold bullion mine production in the first seven months of this year compared to the first seven months of 2013. In the chart, you’ll quickly see that gold production has declined in each reportable month of 2014. If the supply of gold bullion is declining and demand is rising, how can gold bullion prices fall? U.S. Gold Mine Production, January–July, 2014 vs. 2013 Month 2013 Production in Kilograms 2014 Production in Kilograms % Change January 18,500 17,800 -3.78% February 17,200 16,400 -4.65% March 18,700 17,500 -6.42% April 18,000 16,500 -8.33% May 18,900 17,200 -8.99% June 19,500 17,700 -9.23% July 20,100 18,400 -8.46% Total 130,900 121,500 -7.18% Data source: U.S. Geological Survey web site, last accessed October 23, 2014 While you may need to take the following words with a grain of salt, they are nonetheless thought-provoking to say the least. I leave you with some thoughts from my colleague Robert Appel, BA, BBL, LLB: “It’s official, the U.S. manufacturing index just showed the weakest numbers in over two years. The Saudis have caved to pressure and cut oil supply, so oil prices are higher. In response, the broad market popped again and the Dow Jones is running up again. If you can’t quiz your fifth-grader about this, because he or she is still in school, here is the answer: That horrible data has somehow ‘assured’ traders that the Fed really has no intention of cutting back on the heroin (oops, sorry, QE), and therefore all the ‘taper talk’ is just that (talk)—and therefore, since this entire bull market is mainly a function of Fed money finding its way into stock somehow as Rome burns (oops, sorry, while the average American struggles)—then, clearly, it’s time to let the good times roll and be merry again. And the greenback is crazy-strong again (which will do even more damage to exports, and, hence, manufacturing). The gold miners are trading at values like it’s the early 1900s, when men were wearing top hats and women hoop skirts. And as we hear when parents read bedtime stories to their children at night, many now start with the words, ‘Once upon a time, when the markets were free…’”     The post India Buying 450% More Gold? appeared first on Stock Market Advice | Investment Newsletters – Profit Confidential .
    These 8 Stocks Beat Warren Buffett's Portfolio Return Easily
  • By , 10/31/14
  • tags: VYM ADP
  • Submitted by Dividend Yield as part of our contributors program . These 8 Stocks Beat Warren Buffett’s Portfolio Return Easily Warren Buffett is one of the most trusted investors in the world. When he put money on the table, many institutional investors follow his moves and discover if they could make any money with the stocks he has chosen. When I look at the recent earnings figures of some of his investments, I saw that many stocks reported results not in-line with investor’s expectations. As a result, they got sold massively out. IBM, Coca Cola, Tesco, Exxon and now diabetes drug maker Sanofi who lost yesterday nine percent. Are these long-term opportunities or will they run flat in the future? I don’t know but what I know is that some of the past results of those companies are not comparable to the current economic environment. The market has many great companies to offer which have doubled sales in the past decade and paid 40 percent of the current stock price in dividends over the recent ten years. That’s a good number in my view. Today, when the markets have recovered, I start a new screen of high-quality dividend stocks with attractive fundamentals. I know that it is hard to find cheap companies in highly valuated markets but sometimes we must be creative to calculate the real values. Below are eight stock ideas with double digit-expected earnings per share growth figures for the next five years. They have also a lower beta than the overall market and acceptable debt-to-equity ratios. I’ve compiled many stocks from different sectors and industries in order to create a good diversification. What do you think about my new ideas? Are they good enough to buy or do you still have some of them? Please let me know and thank you for reading and commenting. These are my results: #1 Automatic Data Processing ( NASDAQ:ADP ) has a market capitalization of $36.86 billion. The company employs 61,000 people, generates revenue of $12.206 billion and has a net income of $1.502 billion. Automatic Data Processing’s earnings before interest, taxes, depreciation and amortization (EBITDA) amounts to $2.559 billion. The EBITDA margin is 20.97 percent (the operating margin is 18.09 percent and the net profit margin 12.31 percent). Financials: The total debt represents 6.82 percent of Automatic Data Processing’s assets and the total debt in relation to the equity amounts to 32.75 percent. Due to the financial situation, a return on equity of 23.37 percent was realized by Automatic Data Processing. Twelve trailing months earnings per share reached a value of $3.11. Last fiscal year, Automatic Data Processing paid $1.83 in the form of dividends to shareholders. Market Valuation: Here are the price ratios of the company: The P/E ratio is 24.83, the P/S ratio is 3.05 and the P/B ratio is finally 5.56. The dividend yield amounts to 2.49 percent and the beta ratio has a value of 0.85. – See #2 – #9 here: These 8 Stocks Beat Warren Buffett’s Portfolio Return Easily…
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    Where Is Bed Bath & Beyond's Store Count Headed?
  • By , 10/30/14
  • tags: BBBY LOW HD WMT
  • Specialty retailer  Bed Bath & Beyond (NASDAQ:BBBY) operates a variety of businesses in the U.S., which have been doing reasonably well. This is evident from the fact that the company’s comparable store sales growth has averaged around 4.5% for the past four years. To maintain this growth momentum, Bed Bath & Beyond is focusing on sustaining its customer service excellence and developing a sound omni-channel platform. While same store sales is an important factor for the retailer, its ability to open new stores also plays a vital role in its growth. In this analysis, we look at Bed Bath & Beyond’s expansion across different segments and their probable future. Bed Bath & Beyond has expanded its namesake stores at a steady pace over the past and is likely to continue following the same strategy. For  World Market stores, the retailer will plan its expansion carefully in order to dilute the threat of self-cannibalization. Its  Christmas Tree Shops’ expansion has been slow so far, but the market holds good potential for them. The U.S. market also presents healthy room for growth for  buybuy Baby stores, but we expect  Harmon & Harmon Face Values ‘ expansion to remain slow. However, there exists an opportunity for the company to step up the expansion of  Bed Bath & Beyond,  Christmas Tree Shops, and  buybuy Baby . If Bed Bath & Beyond takes advantage of this opportunity, there can be about 10% upside in its value. Our price estimate for Bed Bath & Beyond stands at $ 75, implying a premium of less than 15% to the market price.
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    How Well Can Abercrombie Do In Its Biggest European Markets
  • By , 10/30/14
  • tags: ANF GPS GES
  • During the last few years,  Abercrombie & Fitch (NYSE:ANF) was very aggressive with its expansion in major European countries.  Ultimately, this resulted in a network of unproductive stores. Despite a slump in demand, the retailer persistently opened stores in key tourist locations and local attractions, that led to self-cannibalization even with a low store count (122 in 2013). However in 2012, the company finally decided to slow down its expansion in Europe in order to protect its bottomline growth. Abercrombie is now planning to target only under-penetrated markets for its expansion. The importance of European markets for Abercrombie’s business is evident from the fact that the retailer earns close to 20% of its revenues from Europe, but has roughly 7% of its store fleet there. The U.K. and Germany are two of the biggest markets for Abercrombie in Europe with a total of 61 stores (2013). While unfavorable economic headwinds still impact the U.K.’s apparel market, its large size and positive growth forecast look favorable for the specialty retailer’s growth. Germany is one of the largest apparel markets in Europe and has seen stable growth in the recent past, despite the uncertain economic environment. Germans have been buying high quality fashion products from popular brands, which bodes well for Abercrombie. It’s worth noting that e-commerce is likely to be the most crucial growth channel for the retailer in both these markets, given their high Internet penetration. In this analysis, we try to analyze how well is Abercrombie positioned in these two markets. Our price estimate for Abercrombie & Fitch stands at $39, which is about 5% above the current market price. See our complete analysis for Abercrombie & Fitch The U.K. Due to low disposable income, high promotions and changing shopping trends, the apparel market in the U.K. witnessed only marginal growth in 2012. Shopper’s not only lowered their spending on apparel products, but also started buying clothing and footwear that can be used for multiple occasions. In the following year, heavy discounting in the industry became prominent as unfavorable weather negatively impacted store traffic. While these factors suggest that the market isn’t too lucrative, it stands large at $59 billion and has seen marginal but positive growth despite the unfavorable economic headwinds. Given that Abercrombie is at a nascent stage in the market, it can continue to grow at a decent pace driven by targeted expansion and growing visibility. The retailer should be encouraged by the fact that casual wear is gaining tremendous popularity in the U.K. During the recent years, several U.K. offices have eased their regulations on professional attire and have adopted the “smart-casual” dress code. Jeans in particular, have become very common in workplaces as well as in social events. Professional attire retailers are struggling in the region as buyers are shifting to casual brands for their personal and professional shopping. For instance, tie retailer Tie Rack ended its operations in the country towards the end of last year due to a drastic decline in tie demand. Another factor that should please Abercrombie is growing market-wide focus on multi-channel retailing in the wake of soaring Internet penetration. About 72% of adults in the U.K. used Internet for shopping in 2013, compared to only 53% in 2008. Moreover, Internet access through mobile devices has doubled over the last three years. Since Abercrombie is no longer expanding aggressively in the region, it can divert its focus and resources towards the development of a sound e-commerce and omni-channel platform, which can help it foster better sales through the existing store network. Germany While Germany’s apparel sales growth has been slow over the past few years, it still remains one of the largest markets in Europe with annual sales of more than $75 billion. Some value growth is expected going forward, as consumer interest in high-end clothing is gradually improving. This was a prominent trend in 2012, when buyers exhibited tremendous affinity towards high quality long-lasting clothing from popular global brands. Although Abercrombie can take advantage of this trend to a certain extent, it is up against strong apparel brands such as Hennes & Mauritz and C&A Mode KG, which have grown strongly in the market. Given that Abercrombie hasn’t done well against fast-fashion retailers in the U.S., it might face a similar problems in Germany as well. Nevertheless, the market is huge and Abercrombie has several growth opportunities at hand in the form of store expansion and e-commerce. Since the company is not planning to expand aggressively in the market, it can focus solely towards the development of a strong e-commerce platform. The biggest positive of the German apparel industry is the robust growth of online apparel retailing, which has emerged as the most dynamic channel. This can be attributed to the fact that the proportion of Internet users in the region’s population is high at 86%. Going forward, online apparel industry is likely to sustain its momentum as Forrester forecasts online sales in Europe will grow at a compounded annual growth rate of 12% for the next few years. It also expects e-commerce sales to take up a significant portion of retail sales in Germany over the long term. Abercrombie operated 24 stores in Germany at the end of fiscal 2013 and all of them were opened during the last five years. Since the company is young in the region, we might see better customer response in the future as the brand gains popularity.  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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    Fox News Sees Ratings Growth In Q3; Subscription To Drive Growth In The Coming Years
  • By , 10/30/14
  • 21st Century Fox ‘s (NASDAQ:FOX) Fox News Channel ended the third quarter as most watched basic cable network in primetime. It was up 2% in viewership and 4% in 25-54 demographic. In primetime it was up 11% as compared to the prior year quarter. The network averaged 2.11 million viewers in primetime between June 30 and September 26. Fox News’ performance was much better than its peers, including CNN and MSNBC. While CNN grew only 3% in primetime, MSNBC was down 21% for the quarter. Higher ratings translate into better advertising revenues for cable networks such as Fox News. The network generates revenues from both advertising slots sold to advertisers, as well as subscription fees collected from pay-TV service providers. An uptrend in ratings will boost Fox’s advertising income, which accounted for 25% of the company’s overall revenues for fiscal year 2014 (Fiscal years ends with June). We estimate revenues of about $34 billion for 21st Century Fox in 2014, with EPS of $1.59, which is in line with the market consensus of $1.45-$1.64, compiled by Thomson Reuters.  We currently have a  $39 price estimate for 21st Century Fox, which is about 25% ahead of the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis
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    Shutterfly's Q3'14 Results Hit by Scaling-up Operations and Seasonal Slowdown
  • By , 10/30/14
  • tags: SFLY
  • Leading internet based image publishing service, Shutterfly (NASDAQ:SFLY) reported its Q3 2014 earnings on October 29th.  The company, on the back of a failed acquisition deal,  a seasonal slowdown of demand for its offerings, and internal restructurings, presented a lukewarm third quarter. Net revenues of $142 million (16% year-on-year growth) marked the 55th consecutive quarter of year-on-year increases. The topline performance was a consequence of customer order growths for the consumer brands, complemented by a boost from the enterprise business. Consumer net revenues for the quarter were $127.3 million, reflecting a 13% year-on-year rise. The Enterprise business displayed a 47% year-on-year rise in revenues amounting to $14.7 million. However, gross profit margin was lower by 506 basis points year-on-year due to production related expenses, relocation of the data center to Nevada, and the start-up of the Shakopee production facility. Hit by lower gross margins and increased M&A related expenses (due to inbound acquisition offers), adjusted EBITDA reflected a loss of $9.7 million as against a $1.1 million loss in Q3 2013. For Q4 2014, the company has guided net revenues between $466.7 million to $481.7 million with GAAP gross profit margin ranging from 57.5% to 59.1% of net revenues.. In this article we discuss the key trends which affected Shutterfly’s performance in the third quarter. Our $49.29 price estimate for Shutterfly is above the current market price. We will update our valuation shortly. See our complete analysis for Shutterfly Striving To Boost Demand With Product Upgrades And New Feature Introductions Shutterfly is on a constant trajectory of improvement and innovation across its wide array of offerings. This led to increased mobile monetization and the expansion of the customer base. The transacting customer base for Q3 2014 was 2.5 million, translating into a 6% year-on-year growth. Orders grew by 7% year-on-year to 4.2 million with an average order value (AOV) growth of 5% to $30.63. AOV is defined as total net revenues (excluding Enterprise) divided by total orders. Q3 is a seasonally weak quarter with no big holidays and, according to the management, this is the reason for a slower growth. They are gearing up, however, for the holiday season of Q4 where they expect the demand to surge. Some of the initiatives taken in the third quarter are discussed here. The Shutterfly flagship brand updated its popular tri-fold cards into ¾ fold cards, and migrated card options like oil stamping and additional edge treatments from TinyPrint to Shutterfly collection. Personalized stamps and an expanded variety of stationery types were also introduced. Within photo books, features such as new dust jackets, gift boxes and glossy pages were launched. Keeping the upcoming Christmas holiday season in mind, new products such as personalized gift wrap, glass ornaments, Christmas stockings, framed prints, candles, personalized portable chargers and iPhone 6 cases were launched. The TinyPrints brand also enhanced its collections, features, and user experience. In September, a TinyPrints mobile application was introduced. New features were added into the existing Shutterfly iPhone, Android, Kindle, and Fire phone applications. The company is also trying to target the professional photographer clientele in a larger manner and might combine its two erstwhile acquisitions, MyPub and BorrowLenses, in the future.   Scaling Up Production Network And New Facility Start Up Costs Adversely Impact Margins The third quarter margin performance was adversely impacted by the start-up costs of the Shakopee, Minnesota production facility, which went live in Q3. Also, the ramp-up of operations across the production network in anticipation of the upcoming holiday season led to hikes in manufacturing, customer services, labor, and training costs. This resulted in a $2 million hit on the gross profit margins, which contracted by 506 basis points year-on-year, to 36.8%. The product upgrades and new features, mobile initiatives, and ThisLife (ts new memory management solution) necessitated strategic investments in technology. This, along with the relocation of the data center to Nevada, resulted in higher depreciation expense, which led to a 22% year-on-year rise in technology and development spending to $33.5 million (24% of net revenues). Sales and marketing expense of $42.1 million amounted to a 20% year-on-year increase. This included headcount, advertising agency fees, direct response media, search fees and online media. However, the management believes that Shutterfly will observe healthier margin performance next year, as the expenses of opening new facilities get absorbed, and with the growth of ThisLife brand, and the wedding and mobile segments..   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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    Wynn's Macau Revenues And EBITDA Decline Amid Lower VIP Gaming Turnover
  • By , 10/30/14
  • tags: WYNN LVS MGM
  • Wynn Resorts (NASDAQ:WYNN) recently reported its Q3 2014 earnings, which came out largely on expected lines with slower growth in Macau due to a 17% decline in VIP gaming turnover. Casinos in Macau witnessed a 7% decline in gross revenues during the third quarter. This can be attributed to ongoing anti-corruption crackdown, which is keeping VIPs away from the world’s largest gambling hub. However, mass-market gaming continues to grow strongly in the region and Wynn has benefited from the same in previous few quarters. For Q3, Wynn’s mass-market table games win amount has increased by more than 36% to $327 million. We continue to believe that mass-market gaming will be a key driver for future growth in Macau and for Wynn. The company did well in Las Vegas with revenue growth of 9% and EBITDA growth of 25%, primarily led by an increase in table games win percentage. Wynn reported adjusted earnings of $1.95 per share as compared to $1.88 it reported in the prior year quarter. We estimate gross revenues of over $7 billion for Wynn Resorts in 2014, with EBITDA of $1.94 billion. We have revised our price estimate for Wynn Resorts from $211 to $186 reflecting the impact of the recent quarterly earnings and continued decline in VIP gaming.
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    Southwest Is Poised For Growth As Fuller Planes Lift Its Third Quarter Results
  • By , 10/30/14
  • tags: LUV
  • Southwest (NYSE:LUV) recently got free from flight restrictions imposed on it by the Wright Amendment. As a result, since October 13, the low-cost carrier has launched nonstop flights to several destinations from its home airport, Dallas Love Field. So far, the carrier has launched nonstop flights from Dallas Love Field to seven destinations – Denver, Chicago (Midway), Baltimore, Washington D.C., Las Vegas, Los Angeles and Orlando. In early November, the carrier will launch nonstop flights to eight more destinations and in January next year, it will launch nonstop flights from Dallas Love Field to two more destinations. We figure this sudden increase in the number of Southwest flights in the Dallas market, in which the carrier is very well established, will drive its near term growth. Separately, at its third quarter earnings presentation, Southwest said that bookings for November and December are good and that it is seeing no impact from Ebola on advance booking rates. In early October, all airline stocks including Southwest fell sharply due to mounting Ebola concerns, and we at the time wrote that this sudden sell-off seemed to be factoring in a worst-case scenario, which was not likely. In line with our expectations, airline stocks have recovered through the past 2-3 weeks. We currently have a stock price estimate of $35 for Southwest, marginally above its current market price. See our complete analysis of Southwest here Solid Demand For Flights & Lower Fuel Costs Lift Southwest’s Q3 Results Southwest reported solid growth in its third quarter results on higher demand for flights in the U.S.. Even though the carrier expanded its flying capacity just marginally, its occupancy rate (percentage of seats occupied by passengers in a flight) rose by about 3.5 points to over 84% in the third quarter. Fuller flights coupled with slightly higher average passenger fare lifted Southwest’s third quarter revenue by nearly 6% annually to $4.8 billion. Lower crude oil prices during the third quarter also helped lower Southwest’s fuel costs, which constitute nearly a third of its overall operating costs. Together, the higher revenue and lower fuel cost increased Southwest’s third quarter profit (excluding special items) by nearly 62% annually to $382 million. Southwest Is Well Poised For Growth Looking ahead, as Southwest takes over the remaining international routes being serviced by AirTran currently and completes integrating AirTran by 2014-end, we figure the carrier will be able to increase its focus on growth. Accordingly, Southwest could begin expanding its flying capacity at higher rates in 2015. The carrier has near term growth opportunities out of Dallas Love Field and long term growth opportunity in near international markets, which currently constitute a very small portion of its overall service network. This growth oriented capacity stance will in turn boost Southwest’s passenger traffic, growing its results in coming months. 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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