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VMW Logo
Hybrid Clouds, End-User Computing, SDN To Boost VMware's Q1 Earnings
  • By , 4/17/15
  • Virtualization and cloud computing provider VMware (NYSE:VMW) is scheduled to announce its first quarter earnings on Tuesday, April 21st. VMware has been one of the fastest growing companies in its domain, with a 16% year over year growth in net revenues to $6 billion in 2014. The company reported a 14% increase in product license revenues over the prior year period to $2.6 billion. On the other hand, services revenues were up by 17% year over year  to over $3.4 billion. Management attributed much of the growth to fast-growing market segments such as hybrid cloud services, end-user computing and network virtualization, now often called software-defined networking (SDN). Management expects 2015 revenues to be 10-12% higher than 2014 at about $6.7 billion. VMware’s services revenue stream is likely to continue to witness a higher growth rate (of about 14%) than revenues generated through license bookings (+8%). The company has given revenue guidance for Q1’15 at about $1.5 billion or about 11% higher than the year-ago period. License booking revenues are expected to rise by 5%-6% on a year-over-year basis, while services revenues could rise by about 13%. VMware’s licenses gross margin (GAAP) expanded by almost 2 percentage points to 92.6% through 2014. On the other hand, VMware’s cost of services rose by nearly 40% year over year  to $725 million for the full year as the company generated higher service revenues from hybrid cloud services and end-user computing. As a result, the gross margin (GAAP) for the services division in 2014 was over 3 percentage points lower than the previous year at 78.9%. Moreover, VMware’s full year cash operating expenses, including research and development, sales, marketing and other administrative expenses, were 23% higher than the previous year at nearly $4.1 billion. Consequently, the company’s reported net income was 13% lower than previous year levels at $886 million. However, VMware’s non-GAAP adjusted net income was about 6% higher than prior year levels at $1.5 billion. See our complete analysis for VMware here Fast-Growing Product Lines Over the last few quarters, the company has seen a strong customer response for VMware NSX, its network virtualization platform launched by the company in late 2013. VMware’s software-centric approach to networking threatens to cannibalize Cisco’s (NASDAQ:CSCO) market share in the SDN market. What makes VMware’s SDN appealing to enterprises is that it allows them to put third-party software on cheap white-label networking hardware, making it potentially much cheaper to implement than installing Cisco’s hardware products that come with embedded software. Moreover, the NSX can be integrated with vSphere, VMware’s existing server virtualization platform. VMware made significant progress in Q3 this year through strategic partnerships and reseller agreements with technology and networking companies such as F5 Networks (NASDAQ:FFIV), Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL). VMware reported over 400 paying customers for NSX by the end of December, up from 150 at the end of June last year. Management articulated that VMware’s infrastructure-as-a-service (IaaS) offerings would be built on open source platform OpenStack and would be made available integrated with NSX offerings going forward. Going forward, VMware’s NSX suite seems like an attractive option for new customers, especially small and medium enterprises (SMEs), as it cuts huge capital expenses required for hardware and equipment, while the company expects strong revenue growth in the coming quarters. VMware’s hybrid cloud business grew by over 100% year over year in the March quarter last year, after which the company introduced its cloud-based disaster recovery services. The growth continued through Q2 and Q3, with this business growing by 80% year over year  in both quarters. The company rebranded its hybrid cloud business to vCloud Air after Q2. The December quarter continued to be a strong period of growth for vCloud Air with a 100% annual increase in revenues. As a result, hybrid cloud and software-as-a-service offerings combined formed about 5% of VMware’s net revenues through 2014, up from under 3% of net revenues in the 2013. Although hybrid cloud is one of the fastest growing sub-segments within the company, management expects a stronger dollar and tougher year-over-year comparisons to limit growth in this segment in the coming quarters. The third key area of growth for VMware was end-user computing and mobile device management, which was boosted by the $1.5 billion Airwatch acquisition in January last year. The company has since witnessed strong demand for mobility solutions, as evidenced by 50-60% year-over-year growth in end-user computing license bookings through Q2, Q3 and Q4. At the end of Q4, the total number of AirWatch customers stood at over 15,000, while net revenues generated through license bookings crossed the $200 million mark in the December quarter. Owing to a significantly large customer base VMware is the clear leader in the enterprise mobile management market domain, with nearly twice the customers of its closest competitor. We have a $90 price estimate for VMware’s stock, which is slightly higher than the current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    TWX Logo
    Weekly Media Notes: Game of Thrones Ratings, News Corp Amazon Deal And Media Networks Guarantees To Advertisers
  • By , 4/17/15
  • tags: VIA. NWSA CBS DIS
  • The media industry saw significant activity last week, with HBO’s Game of Thrones scoring record viewership. On another note, Time Warner and Viacom are in talks with advertisers to look at measuring options beyond traditional Nielsen ratings. In yet another development, News Corp and Amazon ink a multiyear publishing deal. We discuss below these developments related to the media companies over the last week or so.
    ISRG Logo
    Intuitive Surgical Earnings Preview: Unit Sales and Procedural Volumes to Continue to Grow
  • By , 4/17/15
  • tags: ISRG
  • Intuitive Surgical (NASDAQ:ISRG) is expected to announce its Q1 2015 results on Tuesday, April 21. In the previous quarter, the company reported positive results with overall sales increasing by 5% year over year  as it reported growth across three business divisions:  Instruments and Accessories, Systems, and Services. The spike in quarterly revenue was due to higher unit sales of its new da Vinci Xi model and a 10% rise in total procedures. The growth in total procedural volume for the full year 2014 was driven by a 6% rise in U.S. procedures and a 20% rise in international procedures. For the first quarter report, we expect Intuitive  maintained its growth streak with the continued adoption of its new da Vinci Xi model. Last quarter the company also won a 5-year contract with the U.S. Department of Defense worth $430 million, which is likely to further push the growing user base of da Vinci Xi system. We currently have a  price estimate of $479 for Intuitive Surgical, which is about 10% below the market price. See our full analysis for Intuitive Surgical da Vinci Xi To Drives System Sales In 2014, the company’s da Vinci Xi and da Vinci Sp successfully received FDA clearance. The da Vinci Xi system is equipped for multi-port procedures and boasts of a better imaging system with 3D and high-definition visuals. It also has better mobility than the previous model. In the fourth quarter of 2014, the da Vinci Xi model accounted for around 71% of the total system sales (97 out of a total of 137 units), which drove the growth of da units by 23% over the previous quarter, although year-over-year sales were almost flat. This driver could be one of the reasons why the average selling price of a da Vinci system increased by 6% year over year to $1.55 million in the fourth quarter of 2014. The da Vinci Xi, which obtained its CE mark (for EU approval) in June 2014, also drove system sales in the international market as well. In 2014, total system sales increased 39% year over year  in Europe. The new system also received approval in Korea in 2014, whereas in Japan the approval status is still pending. This was reflected in a decline in sales in Japan from 21 units in Q4 2013 to 6 in Q4 2014. Going forward, we expect the company to maintain the growth momentum of its da Vinci units in both U.S. and Europe. Additionally, the company’s $430 million contract with the U.S. DoD will help its surgical robots and related instruments and accessories gain acceptance in the Urology, Gynecology and General Surgery, the primary markets to which it caters. The contract also turns around the image of a product and company that faced headwinds over a number of factors, including concerns over the efficacy and cost effectiveness of the systems, reduced sales due to budget constraints following the Affordable Care Act, and lawsuits stemming from complexities arising from the use of its equipment. Procedure Volumes Likely To Improve Intuitive Surgical procedure volumes grew by 10% year over year  in 2014 to 570,000, driven by consistent growth in general surgery and urology procedures, though gynecology procedures witnessed a moderate decline in the quarter. As procedure volumes grow, the demand for da Vinci units is likely to increase, as many new hospitals and healthcare institutions buy the systems or trade-in old machines and add more capacity. Rising procedure volumes mean a shorter replacement cycle which would bolster the sale of related instruments and accessories. Therefore, the number of procedures directly impacts the company’s revenue. In the upcoming earnings, we expect procedural volume to maintain its momentum, as the company focuses on promoting the use of da Vinci Xi system in gynecology and urology procedures worldwide and da Vinci sp system for simpler procedures. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research    
    SNDK Logo
    SanDisk Cautious About 2015 After Unimpressive Q1 Results
  • By , 4/17/15
  • SanDisk Corporation (NASDAQ:SNDK) announced its first quarter earnings on April 15th, with a 12% year-over-year decline in net revenues to $1.33 billion. Revenues were roughly in line with the company’s revised guidance given at the end March, anticipating weakness in its SSD product sales. Moreover, SanDisk’s gross margin (non-GAAP) for the quarter was over 8 percentage points lower than the comparable prior year quarter at 43% due to a lower mix of high-margin SSD products. The company had a solid 2014 for solid state drive (SSD) sales, with a 60% annual growth in SSD segment revenues to $1.9 billion. However, SanDisk’s SSD product sales (including both client and enterprise SSDs) fell by 15% year over year to $360 million for the quarter. Moreover, removable storage product sales were also down by over 17% year over year to $506 million. However, embedded storage product sales rose by 10% over the prior year quarter to $333 million during the March quarter. The company attributed the revenue shortfall to: 1)  product qualification delays that impacted embedded storage and enterprise SSD sales; 2) lower than anticipated demand in the enterprise storage market due to shifting market trends; 3) pricing pressure across segments; and, 4) and supply challenges. We have a revised our $74 price estimate for SanDisk’s stock, which is about 10% higher than the current market price. SanDisk’s stock price plummeted by nearly 20% to $66 per share on March 26 when the company revised its revenue guidance for Q1. See our complete analysis of SanDisk here Have SSD Sales Hit A Roadblock? SanDisk’s SSD division has witnessed explosive growth over the past few years, with revenues growing from around $150 million in 2011 to almost $2 billion in 2014. As a result, the contribution of SSDs to SanDisk’s net revenues jumped from 2.6% in 2011 to almost 29% in 2014. The contribution of SSDs to the company’s top line was slightly lower than 2014 levels at about 27% in Q1 with revenues declining by about 15% over the comparable prior year period to $360 million. Within the SSD division, the client SSD revenues were down by a massive 48% on a year-over-year basis to $173 million for the quarter. The company attributed the decline to a production issue related to the material used in a new embedded SSD component, which was in the process of being qualified for use for one of its largest customers. As a result, the company is currently working on the fix while the re-qualification may take some time. SanDisk’s management mentioned that this decline was the largest contributor to the company-wide revenue shortfall and it could continue to impact both Q2 and full year revenues. The company posted solid results in the client SSD space last year, with revenues growing by 36% year over year to almost $1.3 billion. On the other hand, SanDisk’s enterprise SSD sales doubled to $186 million in the March quarter. Although the rise in revenues was slightly lower than the 140% annual growth observed in 2014, it partially offset the revenue decline in the client SSD space. The company was cautious about its outlook in the enterprise SSD domain, citing lower expected demand for its PCIe SSD solutions . SanDisk expects the total addressable market for its enterprise SSD offerings to be lower than previously anticipated since it expects many of its customers to switch to low-end SATA enterprise-grade SSDs. However, management mentioned that it could only be a short-term trend lasting through 2015, with PCIe SSD shipments likely to pick up from 2016 onwards. Embedded Storage SanDisk’s embedded storage division, which includes non-SSD storage products attached to a host board, has witnessed a decline in revenues due to an increasing mix of embedded SSDs used in tablets, smartphones and other portable devices. As a result, the contribution of embedded storage to SanDisk’s net revenues has dropped from 27% in 2013 to 22% in through 2014. However, revenues were up by 10% to $333 million in Q1, while their contribution to  net revenues rose to 25%. Although, SanDisk expects embedded storage products to continue to post healthy numbers through the latter half of the year with sequential improvement in revenues, the company is not very optimistic about a sustained year-over-year growth in the same period. We currently forecast SanDisk’s embedded storage revenues to decline moderately to about $1.3 billion in 2015 and subsequently to about $1.2 billion by the end of the decade and SanDisk’s share in this market to decline from about 11.4% in 2014 to about 7.5% through the end of our forecast period. Declining Removable Storage Revenues SanDisk’s removable storage division has witnessed mixed demand for storage products in 2014 in the last few years, sales volumes rising across various product categories including USB storage, memory cards for imaging devices and SD and micro SD cards. However, the declining average selling prices have limited revenue growth. As a result, revenues generated by SanDisk’s removable storage division fell by about 6% year over year to $2.5 billion in 2014. Correspondingly, the contribution of removable storage to net revenues declined from 43% of overall revenues in 2013 to about 38% in 2014. SanDisk has made efforts to revamp its product line over the last few months in order to boost revenues. The company recently introduced the world’s highest-capacity micro SD card in March, with a capacity of 200 gigabytes, the iXpand flash drives for Apple devices and USB flash drives for Android-based devices in December and January, respectively, and flash memory cards designed for use in the automobile industry . However, the combined revenues generated by removable storage products through the March quarter declined by 17% year over year to $506 million. Despite unimpressive Q1 figures, the company is optimistic about future revenues due to the upcoming 48-layer 3D NAND technology which it plans to include in removable storage products. We forecast combined removable storage revenues this year to be about 8-9% lower than 2014 levels at about $2.3 billion. Forecast For 2015 SanDisk expects its Q2 and full year revenues to take a hit owing to recent developments. The company expects Q2 revenues to be around $1.2 billion, which is over 25% lower than the prior year quarter, primarily due to low client SSD sales through the quarter. Furthermore, the company expects full year revenues to be around $5.4-$5.7 billion, which is a 14-18% annual decline. As a result of low SSD sales, gross margins are also likely to be adversely impacted. The company expects expected Q2 gross margins to be as low as 37-40%. However, margins could pick up slightly in the latter half of the year due to expected increase in high-margin product sales of both SSDs and X3 memory. We have a conservative forecast for SanDisk’s adjusted gross margins, which we expect to compress by about 3 percentage points through 2015. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    UL Logo
    Currency Tailwinds Help Unilever Post Strong Q1 Results
  • By , 4/17/15
  • tags: UL PG EL CL KMB
  • Global consumer processed goods giant Unilever (NYSE: UL) announced strong 2015 first quarter results on April 17th. First quarter revenues expanded by 12.3% on currency tailwinds of over 10% percentage points. Unilever’s performance was hammered in 2014 by adverse currency volatility in the emerging markets. Now, the gradual recovery of some emerging market currencies has resulted in significant revenue growth in the first quarter of 2015, compared to the same period previous year. Underlying (non-GAAP) sales growth of 2.8% was driven by price hikes, while volume growth remained moderate as expected. Total first quarter revenues stood at €12.8 billion, which is notably better than the consensus estimate of €12.4 billion. (Read: Price Hikes and Currency Tailwinds to Drive Unilever’s Growth in Q1 ) The company did not report profits and EPS in the first quarter. We have a price estimate of $40 for Unilever, which is about 10% lower than its current market price. See our complete analysis for Unilever here Price Hikes Continue to Drive Topline Growth As in the case of the last few quarters, revenue growth in the first quarter of 2015 was again driven by price hikes rather than volume expansion. Volume growth contributed only 0.9 percentage points to the underlying sales growth of 2.8%, while increased pricing comprised the rest. Price hikes were highest in the Personal Care and Refreshments segments, with 2.6% underlying price growth in each. The sole exception to this trend was the Foods business, which witnessed growth of 3.0% in volumes. In contrast, prices in the Foods business fell by 0.1%. The volume expansion in the Foods business is attributed to strong sales in the run up to Easter. It was further helped along by the success of cooking ingredients in emerging markets and soups in Europe. The flailing spreads business also witnessed some relief thanks to Easter sales. It is pertinent to note that brand disposals had a negative impact of 5.4% on the Foods business. Thus, non-GAAP revenues may have also benefited from the sale of underperforming brands during the quarter. Home Care Segment Leads The Way Unilever’s Home Care business continued to lead the way with 3.1% underlying sales growth in the first quarter. Increased pricing contributed 2.3% to underlying sales growth, while volume expansion was 0.8%. In GAAP terms, the segment’s revenues expanded by a commendable 16.8% year on year. However, the bulk of it was due to the 12.3 percentage point positive impact of favorable currency movements. With revenues of €2.5 billion, the Home Care segment accounted for about 20% of the company’s total revenues. Unilever hinted that higher pricing of its laundry products may have tempered their volume growth in the first quarter. Further, the launch of new premium laundry products may have contributed to the tilt towards higher prices rather than higher volumes in the first quarter. Volumes Sluggish in Personal Care Business The Personal Care business is Unilever’s largest business segment. It had revenues of €4.8 billion in the first quarter of 2015, accounting for over 37% of the company’s total revenues. However, volumes remained sluggish in the Personal Care segment and expanded by a marginal 0.1%. The underlying sales growth of 2.7% was achieved predominantly due to price hikes. The company expects volumes to pick up in the second half of 2015, thanks to a slew of new additions lined up to the Personal Care product pipeline. GAAP revenues may also benefit slightly from Unilever’s recent acquisitions in the personal care space. Asia Offers Hope Unilever’s revenues from the Asia, AMET (Africa, Middle East and Turkey) and RUB (Russia, Ukraine and Belarus) region stood at €5.5 billion in the first quarter, which is over 40% of its total revenues. Volume expansion as well as price hikes contributed almost equally to the 3.3% underlying sales growth in emerging markets, although the impact of price hikes was slightly higher at 1.8 percentage points. The culmination of de-stocking measures in China facilitated an improvement in performance in the country. Revenues from Europe declined amid a fall in pricing of 1.9 percentage points due to deflationary conditions in the region. The Americas region was a mixed bag, as volumes declined slightly but prices increased significantly during the first quarter. Consequently, the 5.9 percentage point impact of higher prices more than offset the 0.4% volume contraction, leading to positive underlying sales growth in the region. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    DISH Logo
    Weekly Pay-TV Notes: Dish Adds Netflix, Netflix Soars After Earnings, DirecTV Adds More Streaming Content
  • By , 4/17/15
  • tags: DISH NFLX DTV
  • The pay-TV industry saw significant activity this week, with Dish launching Netflix on its Joey receiver. Additionally, Netflix reported a good set of numbers for the first quarter which sent the stock soaring. In yet another, DirecTV added 22 new channels to its streaming service. On that note, we discuss below these developments related to the pay-TV companies over the past few days.
    CREE Logo
    CREE’s Q3 2015 Earnings Preview: Continuous Innovation and Portfolio Expansion Can Drive Better Results in 2015
  • By , 4/17/15
  • tags: CREE
  • Leading LED manufacturer,  Cree (NASDAQ: CREE) is set to report its Q3 2015 earnings on April 21st. (Fiscal years end with June.)  Driven by strong growth in its LED lighting business, CREE reported revenues of  $413 million in Q2 2015, beating analysts consensus estimates. Gross margins increased 1.3 percentage points sequentially, which, along with the retroactive reinstatement of the federal R&D tax credit, increased net income by 28% sequentially. For Q3 2015, the company estimates revenue in the range of $395 million to $415 million, with lighting sales flat to slightly higher (as lighting factory utilization remains very high and execution continues to be a critical factor), LED sales down single digit (due to normal seasonality and the Chinese New Year holiday), and power and RF in a similar range as Q2 2015. Cree anticipates EPS for the quarter in the range of $0.21-$0.25, versus the consensus estimate of $0.21. Lower LED demand and margin pressure are two keys trends which have impacted Cree’s growth prospects in the last few quarters. However, the company continues to see strong growth in its lighting segment, and it does not foresee any change in the trend as the segment still remains a largely untapped opportunity.  CREE has remained a top performer in the LED industry for many years. The company’s revenue growth has averaged 18.6% over the past three years, while the industry has seen its top line increase at a far lesser rate of 3.4%. Going forward, Cree plans to focus on the following  key priorities:  1) leverage its technology to lower up-front customer cost and further improve payback; 2) continue to drive LED lighting growth and build the Cree brand in both the consumer and commercial markets; 3) expanding its work with manufacturing partners to enable growth in LEDs and lighting; 4) allow its factories to focus on the newest technologies that are not otherwise available in the market; and,  5) generate incremental operating profits by increasing revenue growth and incremental operating leverage across the business. Our price estimate of $37 for Cree is marginally higher than the current market price. We will update our valuation after the Q3 2015 earnings release.
    AMD Logo
    Despite A Dismal Q1'15, AMD Remains Optimistic About Its Long-Term Growth Potential
  • By , 4/17/15
  • As pointed out in our pre-earnings article, the weaker than expected PC sales and a seasonal decline in the semi-custom business led to a disappointing Q1 2015 for  AMD (NYSE:AMD). At $1.03 billion, the company’s net revenue for the quarter came in at the lower end of its guided range, declining 17% sequentially and 26% annually. The reduced client and graphics product sales along with the lower game console royalties in the quarter led to a 3% decline in gross margin. AMD reported non-GAAP loss of 9 cents per share, lower than Wall Street expectation. Though AMD was up marginally after the earnings release, the stock was down almost 10% in after hours trading. Despite the grim results, AMD remains optimistic about its long-term growth opportunities. Though the company agrees that the next several quarters will be challenging due to the adverse market environment, it remains focused on its strategy to improve its financial performance and building on its strengths by continued investment in its technology and IP, which will drive product innovation and differentiation. AMD expects the second half of 2015 to be stronger than the first half, across the board for all its businesses. In an effort to prioritize its R&D investments and simplify its business, AMD has decided to exit the dense server systems business to increase investments in its server processor development. The company has retained the fabric technology as a part of its overall IP portfolio. It believes that there are strong opportunities for next-generation high-performance x86 and ARM processors for the enterprise datacenter and infrastructure markets, and will continue to invest strongly in these areas. The exit from the Seamicro branded dense server business resulted in additional restructuring charges of $75 million in Q1 2015, including $7 million in cash. Our price estimate of $3.76 for AMD is at a considerable premium to the current market price. We are in the process of updating our model for the Q1 2015 earnings release. See our complete analysis for AMD PC Environment Remains Uncertain; AMD To Focus On Re-Balancing Its Channel Inventory, Expanding Its Product Portfolio & Growing Its Commercial Client Sales AMD’s Computing and Graphics business segment reported revenue of $532 million, down 20% sequentially primarily due to decreased desktop and notebook processor sales, as a challenging market environment was compounded by adverse currency fluctuations. Original equipment manufacturers’s (OEM) demand was below seasonal expectations in the quarter, as customers actively managed inventory levels amid uncertain end-user demand. AMD claims to have reduced its downstream channel inventory levels in Q1 2015 and is on track to return to normal inventory levels by the end of the current quarter. The operating loss for the segment increased from $56 million in Q4 2014 to $75 million in Q1 2015. On the positive side, AMD saw progress in several of its strategic initiatives. Mobile APU ASPs and revenue increased compared to Q4 2014, highlighted by increases in commercial client APU shipments and revenue, setting a record for commercial client processor sales. AMD is currently over indexed in the consumer and channel space, which has impacted its revenue base in the Computing and Graphics business in the last few quarters (even when the PC market stabilized). The company believes that its focused commercial client strategy is gaining momentum and its investments are driving awareness and generating pull with commercial and government buyers. Given the ongoing macroeconomic and currency uncertainties, AMD believes that the PC market will remain challenging as its OEM customers and channel partners focus on carrying lean inventories based on the uncertain market conditions. Nevertheless, the company is preparing for the second half of the year, when PC demand is expected to pick up post the Windows 10 launch and the consequent new products in the market. Irrespective of market consitions, AMD intends to complete its channel inventory re-balancing, introduce new APU and graphics products, and continuing to grow commercial client sales. The company is focusing on introducing a strong product portfolio in 2015, and plans to launch Carrizo this quarter. AMD claims that Carrizo delivers the largest ever generational leap in performance per watt for its mainstream APUs, and the design win momentum for Carrizo continues to grow. Despite Short-Term Weakness, The Semi-Custom & Embedded Business Will Continue To Be A Key Growth Driver Due to a seasonal decline in sales of semi-custom SOCs and lower game console royalties, AMD’s Enterprise Embedded and Semi-Custom revenues declined 14% sequentially in Q1 2015, to $498 million. Lower sales, along with an unfavorable product mix, lowered operating income for the segment from $109 million in Q4 2014 to $45 million in Q1 2015. Embedded processor sales were roughly flat year-on-year, with weaker than expected thin client demand offset by continued adoption of the company’s embedded APUs across targeted market segments. The game console business has a cycle of three to four years. Microsoft and Sony launched new products in late 2013 and thus AMD expects another few years of strong game-console revenue growth from them. Last year, AMD announced securing two new wins in the segment, which are expected to deliver combined total lifetime revenue of approximately $1 billion over approximately three years. Design work for these opportunities is underway and AMD anticipates first silicon revenue from these deals by mid-2016. AMD has a broad range of embedded processors for different segments in its portfolio, offering a number of price, performance and power options to meet the needs of embedded designers. The company intends to take on the different segments in the embedded market by offering its customers a range of solutions to chose from —  from low-power to high-performance — with a broad ecosystem of software and hardware partners supporting multiple operating systems, including Windows and Linux. The embedded market is a very competitive market and AMD’s strategy is to play to its strengths. The company is focusing on its strengths in efficient computing and image processing, factors that it believes differentiates it from other players and will fuel its growth in the embedded market. In Q1 2015, Samsung introduced a new AMD powered digital signage solution, and both Fujitsu and GE intelligent platforms released new industrial computing boards powered by AMD embedded SoCs. AMD continues to align larger portions of its R&D investments to take advantage of the long-term growth opportunities in the Enterprise Embedded and Semi-Custom segment. Q2 2015 Outlook - Revenue to decrease 3% sequentially, +/- 3%. - Non-GAAP gross margin of 32%. - Non-GAAP operating expenses of $355 million. - Interest expense, taxes and other to be approximately $35 million. - Inventory to be approximately up $100 million sequentially. 2015 Outlook - Non-GAAP operating expenses to be between $340 million and $370 million per quarter. - Taxes of approximately $3 million per quarter. - Cash equivalents and marketable securities to be in the range of $600 million to $1 billion. - Capex of approximately $100 million. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    DAL Logo
    Delta's Profits Surge, Plans To Cut International Capacity To Improve Margins
  • By , 4/17/15
  • tags: DAL
  • Delta Air Lines (NYSE:DAL) kickstarted the earnings season by announcing its first quarter operating results on Wednesday, a week ahead of all major US airlines. The airline’s stock price soared close to 5% in the last two days, as the airline managed to post net income of $746 million, almost triple what it recorded in the same quarter last year, despite a seasonally weak quarter. However, the major highlight of the earnings release was the announcement of a cutback in international capacity in the following quarters to reduce exposure to markets that are facing currency fluctuations. Our price estimate for Delta stands at $46 per share, slightly above its current market price. See our complete analysis for Delta here A Good Quarter driven by Capacity Additions The Atlanta-based airline registered its most successful March quarter, both operationally and financially, as its revenue rose to $9.39 billion, a 5.3% increase year-on-year, on a capacity increase of 5% during the quarter. While revenue was largely in line with the analysts’ estimate, Delta’s passenger unit revenue (PRASM) declined 1.7% year-on-year, slightly higher than the 1.5% drop projected by the airline earlier this month. While domestic unit revenue increased 2.1% on capacity growth of 7%, concentrated mostly in Seattle and New York-JFK, the airline’s international unit revenue suffered due to foreign currency weakness, particularly in the Pacific region, which experienced a 9.2% decline in unit revenue primarily due to the weakening of the Japanese Yen. On the expense side, Delta’s average fuel price dipped from $3.03 per gallon in March 2014 to $2.93 per gallon in the latest quarter. However, the carrier could not take complete advantage of the prevailing low oil prices due to hedging losses of $1.1 billion. The non-fuel unit costs (excluding profit sharing and one-time items) dropped 1.4% on a year-on-year basis. Overall the first-quarter operating expenses fell to about $7.9 billion, a 3.7% decline from the same quarter in the last year. Consequently, Delta reported an operating margin of 8.8%, representing operating profit of $1.4 billion, more than double the $620 million recorded a year ago. The airline earned net income (excluding one-time items) of $372 million or 45 cents per share, beating market expectation of 44 cents per share. As announced in its investor update on 2 nd April, Delta returned $500 million to its shareholders through dividends and share repurchases. The airline also contributed over $900 million in pension plans and recorded $136 million as profit sharing expense during the quarter. International Capacity Cuts To Improve Margins Delta’s international operations, which account for over 30% of its total sales, have been struggling due to the strong US dollar and increased competition from foreign airlines, particularly the Persian Gulf carriers. As a result, the airline has announced a reduction of 3% in its international capacity in the coming quarters. This pullback will be focused on markets such as Japan, Brazil, Africa, India, and the Middle East, that are most affected by volatility in currency and low oil prices. Of late, the airline had been expanding its operations in Brazil to provide connecting passengers to its partner Gol Linhas Aereas Inteligentes SA and in Asia through its hub at Tokyo’s Narita International Airport. However, now the airline has decided to trim up to 15-20% of its services in these markets to improve its pricing power and long-term margins. In addition to this, Delta will suspend all flights to Moscow during winters. We anticipate similar capacity adjustments by the other two large network carriers – American and United – to curtail the rising pricing pressure in the international markets. Both legacy carriers will release their first quarter results next week. Capacity Discipline and Fuel Costs Savings to Drive Earnings in 2015 and beyond For the second quarter, Delta expects its revenue to rise by 2% on a 3% increase in capacity. The airline estimates its unit revenue to be down by 2-4% due to continued currency fluctuations. However, the company plans to keep its non-fuel unit costs growth under 1% on a year-on-year basis. Delta also expects to realize savings of over $2 billion from the low fuel costs as its has significantly reduced its fuel hedging exposure for the last two quarters of 2015. Hence, we expect the airline’s profits to accelerate in the latter half of the year, if oil prices continue to remain at the current low levels. Consequently, the airline aims to achieve operating margin of 16-18% in the second quarter. Delta’s full year system capacity will remain flat due to the capacity adjustments in the international markets. Given that the capacity adjustments will be completed by the fourth quarter of this year, we forecast Delta’s profitability to improve going into 2016, driven by improved unit revenues and more sustainable international margins.
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    Yahoo Earning Preview: Revenue Growth From Display And Mobile In Focus
  • By , 4/17/15
  • Yahoo! (NASDAQ:YHOO) is set to report its first-quarter results on Tuesday, April 21st. The shares have under-performed the market  for the first three months of this year, post Alibaba’s listing on the U.S. stock exchange in the last quarter of 2014. The stock has declined by over 7% in Q1, while the return on NASDAQ composite index is close to 7%. One of the primary reasons for this under-performance has been Yahoo’s core business, which has failed to deliver the necessary traction in revenues in the online ads industry. While the online advertising revenue in the U.S. rose by 16.9% annually in Q3 2014 to $12.4 billion, according to reports by the Interactive Advertising Bureau (IAB) and PwC US, Yahoo’s gross ad revenues declined by 1.3% to $4.61 billion in 2014. In this earnings announcement, we believe that company will continue to report little or no improvement in revenue growth from organic business. However, the BrightRoll acquisition, which occurred in Q4 2014, will boost display revenues. Additionally, we continue to closely monitor the search and display ads divisions for growth in revenues from the mobile segment as the company continues to push for more services in this domain. Furthermore, we expect the company to disclose the progress it has made on the planned Alibaba investment spin-off   during this earnings announcement. See our complete analysis of Yahoo! here Outlook For First Quarter 2015 For the first quarter, Yahoo expects revenues (ex-TAC, or excluding Traffic Acquisition Costs) to be in $1.11-$1.15 billion range. Additionally, it expects adjusted EBITDA to be between $200 million and $240 million, and non-GAAP operating income to be between $50 million and $90 million. The guidance indicates that the much-needed improvement in core business continues to elude Yahoo management despite numerous product refreshes and acquisitions. Display Ads Under Scanner The display ads division makes up 5.2% of Yahoo’s estimated value. In Q4, the display ad revenues (ex-TAC) declined by 5.34% year over year to $464 million. While the number of display ads sold across Yahoo properties rose by 17%, the price per ad declined by 24% due to the unfavorable shift in mix of premium ads to low cost ads. Even though the company continues to roll out premium display content, it has yet to be fancied by advertisers who continue to spend less across Yahoo properties. Furthermore, we expect the international mix of total display ads to increase, which can drag ad prices down. We believe that these trends will continue to impact display ads revenues in Q1 as well. However, inorganic revenue from the BrightRoll acquisition should boost revenues for  the division. Furthermore, Yahoo has stated that Mobile, Video, Native and Social ads, which grew 95% to 100% year over year in Q4, are expected to help stem decline in display revenue in the future. As a result, we expect organic revenue to decline marginally in Q1. Mobile Audience To Boost Ad Served and Revenues Yahoo’s display ads and search ads divisions make up 5.2% and 6.7% of its value, respectively, according to our estimates. Both these divisions have struggled for substantial growth in revenues due to the stiff competition from companies such as Google and Microsoft. To address this decline, Yahoo is aggressively targeting mobile devices and acquiring companies with the objective of integrating the underlying mobile technology into its products. As a result of past efforts, Yahoo’s mobile platform hit approximately 575 million unique visitors in 2014. Furthermore, as the company has focused on developing and delivering content on its mobile platform, user engagement has improved. This growth was instrumental in increasing its page views as it translates to more consumption of content across Yahoo properties. In Q4, Yahoo’s mobile revenue was $254 million, up from $207 million in Q3, an increase of 23% quarter over quarter.  Gross revenue for the year was $1.260 billion and GAAP mobile revenue was $768 million, exceeding Yahoo’s estimates by 5% and 10% respectively. In the upcoming earnings announcement, we will be closely monitoring the growth in unique mobile visitors, which will thereby improve revenues from its display ads business. Additionally, we want to know what impact the growth in search on mobile devices will have on Yahoo’s revenue per search (RPS). SpinCo Details And Progress Yahoo! owns a total of 384 million ADRs of Alibaba, which comprises 15.4% of Alibaba and is worth nearly $40 billion based on Monday’s closing Alibaba share price. With the Alibaba ADR listing in Q3 last year, these shares became subject to a one-year lock-up agreement that runs until September 21, 2015. If these shares were to be sold or transferred through ordinary means, the proceeds will be subject to a tax of approximately 40%. This will translate into a tax liability of approximately $16 billion or roughly $16 per share of Yahoo!.  In a landmark decision, Yahoo! board has authorized a plan to pursue a tax-free spin-off of 100% of the company’s remaining holdings in Alibaba. The company expects to effectuate the spin-off in Q4 of 2015. This will result in two independent publicly traded companies. The spin-off company, which has been christened SpinCo, will be a newly formed independently registered investment company that will hold 384 million shares of Alibaba. In this earnings announcement, we continue to monitor the developments around this proposed plan. We currently have a  $47.55 price estimate for Yahoo!, which is inline with the current market price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Weekly U.S. Carrier Notes: AT&T, Verizon And Sprint
  • By , 4/17/15
  • tags: VZ T
  • After an extremely competitive 2014, 2015 is poised to be another exciting year for the U.S. wireless industry. In the last week,  Verizon (NYSE:VZ), along with  AT&T (NYSE:T), sued the Federal Communications Commission (FCC) over its decision to introduce net neutrality rules. The biggest concern for telecom and cable companies is that the FCC may now have the ability to control prices and limit business offerings according to what it deems reasonable. Sprint (NYSE:S) was also in the news for its new Wi-Fi calling offering as well as its Direct 2 You service launch. Below we discuss the noteworthy events pertaining to the top U.S. carriers from last week. AT&T AT&T (NYSE:T) has sued the Federal Communications Commission (FCC) over its recent decision to introduce net neutrality rules and is arguing to reclassify ISPs as common carriers under Title II of the Communications Act. In a separate case, the FCC imposed a fine of $25 million on AT&T for data privacy violations on April 8. It said that telecom carriers were expected to “zealously guard” their customers’ personal information and that the industry should “look to this agreement as guidance.” AT&T’s stock was about flat over the week. We currently have a  $38 price estimate for A&T, which implies a market cap of around $196 billion compared to the current market cap of about $171 billion. We estimate revenues of about $141 billion for AT&T in 2015, which is in line with the market consensus of $128-$154 billion, compiled by Thomson Reuters. Verizon Sprint Sprint returned to positive postpaid subscriber adds last quarter, and it is not slowing down in its price war with a steady stream of attractive plans to lure customers. The third largest carrier in the U.S. recently introduced a software update to allow its iPhone subscribers to start using free Wi-Fi calling from their phones. The carrier is looking to introduce innovative ways at improving network and call quality where their coverage is not adequate. It is worth noting that Sprint ranked third in Rootmetrics’ 2nd Half 2014 network quality report where its score in Call Performance was 90.6/100, behind Verizon and AT&T’s scores of 93.5/100 and 91.5/100, respectively. Last month, Rootmetrics released a report which stated that Sprint was behind its major rivals Verizon, T-Mobile and AT&T in overall performance and data speeds at airports in the second half of 2014. It managed to provide median download/upload speeds of 20 Mbps/10 Mbps in only one of the 50 airports tested by Rootmetrics, as opposed to 23 for Verizon. Sprint recently also launched the Direct 2 You service, bringing the in-store experience to the comfort of peoples homes. With this service, customers will be able to buy/upgrade their phones in the comfort of their homes/offices by just calling the carrier and scheduling an appointment. In another interesting development, Sprint’s subsidiary Boost Mobile launched a prepaid cell-phone service to Cuba, taking advantage of the recent thaw in relations between the U.S. and the neighboring country. Sprint’s stock rose about 3% over the week through Thursday. We maintain our  $6.20 price estimate for Sprint, which implies a market cap of about $24 billion. We estimate revenues of over $35 billion for Sprint in calendar year 2015, which is towards the higher end of consensus estimates compiled by Thomson Reuters. 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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    Scenarios That Can Impact Keurig Green Mountain's Stock
  • By , 4/17/15
  • Keurig Green Mountain (NASDAQ:GMCR) has been busy joining hands with coffee companies and other retail chains over the last two years, to increase its market share in the single-serve market. Keurig’s net revenues increased by 300% over the last four years, as it reached $4.7 billion in 2014. The company’s stock skyrocketed from $75 at the start of 2014 to $154 in November, before falling over 25% to $115. According to Trefis estimates, Keurig’s Single-Serve Cup Packs segment accounts for over 70% of the valuation, whereas Brewers and Accessories accounts for roughly 15% of the valuation. In 2015, Keurig’s main  focus will be on the launch of ‘Keurig Cold’ in North America. Keurig Cold will be designed to dispense single servings ranging from carbonated drinks to non-carbonated beverages, such as juice drinks and iced teas. There could be a significant upside for Keurig Green Mountain if Keurig Cold turns out to be a bigger than expected segment for the company over the next 5-6 years. Another event that could significantly impact the Keurig’s business is the increase in coffee prices. We have a  $102 price estimate for Keurig Green Mountain, which is 10% below the current market price. See our full analysis of GMCR here We have already discussed one scenario that has a potential to affect Keurig’s business model considerably. (See: Scenario: Is This The Stagnation Stage For Keurig Brewers? ) Here are two other scenarios that can impact Keurig’s stock. Keurig Cold: How Big Can It Get? Keurig Cold, a joint venture of Keurig and  Coca-Cola (NYSE:KO), is scheduled to be launched in the fall of 2015. Keurig recently added  Dr Pepper Snapple (NYSE:DPS) as another beverage partner, as the two companies will be joining hands in developing a selection of Dr Pepper Snapple’s brands for the upcoming Keurig Cold Platform. Moreover, later in December, the company entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd. (See: Keurig Green Mountain- Bevyz Deal: More Than Just An Acquisition ) With Bevyz under its product line, Keurig will have a strong technology advantage, too. Trefis has structured the Keurig Cold segment on the assumptions that Keurig will generate revenues from the sales of Keurig Cold brewers, and also will receive royalties on sales of portion packs. Currently, we have taken a conservative estimate that the annual volume of brewer sales will rise from 0.75 million in 2015 to 2 million in 2021. As a result, our estimate for revenue generation from Keurig Cold brewer sales reaches $204 million in 2021 . On the other hand, we estimate annual volume of portion packs per cold brewer to rise from 125 in 2015 to 477 by the end of 2021. In this driver, our estimate for revenues from Keurig cold portion pack reaches $41 million in 2021, with a royalty rate of 10%. If Keurig Cold turns out to be a blockbuster product and sales of both the separate products increase in the initial few years, the corresponding volumes could rise significantly. Furthermore, if the company expands the segment internationally in the next 3-4 years, the brewer volumes could get an additional boost. Moreover, over the next 5-6 years, the margins could improve by 400 basis points as well. If the annual volume of Keurig brewers rises to 4 million by the end of our forecast period, revenues from Keurig Cold Brewers will almost double to $409 million. Similarly, if portion pack volume per cold brewer rises to 514 in 2021, the revenues from this driver would rise to $86 million. This scenario would result into an 8% upside to our price estimate for the company. Rise In Coffee Prices To Impact K-Cup Prices For the first six months of 2014, prices of the Arabica coffee beans surged more than 90%, shooting above $2 per pound, due to speculations of a decline in coffee production. However, the prices declined by more than 40% in the next 4 months, due to an improvement in weather conditions in the South American countries. Experts still believe that the prices might shoot up again in 2015, foreseeing a decline in the production output in Brazil. FCStone, a U.S. based group, estimates the Brazil overall coffee output at 44 – 45.5 million bags in 2015. The rise in coffee prices will impact the price of portion packs sold by the company. Keurig also deals with the sales of coffee in other package types, such as bagged coffee and cans, in grocery stores and other mass channels, as well as ancillary products, such as coffee for offices. In case of a price rise, the company would be forced to raise the price of its portion packs. Trefis estimates the average price of portion pack to rise from $0.33 in 2015 to $0.39 in 2021. On the other hand, Trefis includes the revenues from packaged coffee sold by the company in ‘Royalty and Other Products segment,’ and estimates the segment’s revenues to rise from $267 million in 2015 to $351 million in 2021 . In the above mentioned scenario, the average price of a portion pack would rise to $0.45 by 2021, whereas the revenues from ‘Royalty and Other Products segment’ would rise to $400 million by the end of 2021. This scenario would provide a 9% upside to our price estimate for the company. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Broadcom's Earnings Preview: Q1'15 To Be Seasonally Down But Long-Term Growth Remains Intact
  • By , 4/17/15
  • A leading semiconductor provider for wired and wireless communications,  Broadcom (NASDAQ:BRCM) will report its Q1 2015 earnings on April 21st. The company delivered record revenues and reportable segment profitability in 2014, with combined broadband-connectivity and infrastructure revenue and profit growing 6% and 25%, respectively, over their prior year levels. Broadcom announced its decision to exit the cellular baseband business in Q2 2014 on account of intense competition in the market, allowing it to eliminate the ongoing losses from the business and shift its focus to its core strengths in other segments. The move helped the company increase its net income from $424 million in 2013 to $652 million in 2014 (54% growth), even though its revenue base remained relatively flat during the same period. Expecting a seasonal decline in its business, Broadcom expects to report revenue of $2 billlion (+/- $75 million) in Q1 2015, with broadband and connectivity down and infrastructure networking roughly flat. We believe the business will see strong growth in the future driven by product cycles and new launches from key customers. Our price estimate of $44 for Broadcom is just slightly below the current market price. We will update our model after the Q1 2015 earnings release. See Our Complete Analysis for Broadcom Here Focus On Adjacent Markets To Spur Growth In Connectivity While Broadcom has expected that its exit from the baseband business would negatively impact the low-end of its connectivity business, it remains confident of retaining its strength in the high-end. Broadcom is the No.1 player in connectivity with most of the high end smartphones using its connectivity solutions. The company does not foresee any change going forward. New phone launches, as well as increasing penetration of 802.11ac and 2X2 solutions, are driving demand for Broadcom’s connectivity business. Broadcom launched the second generation of its 2×2 MIMO 802.11ac combo chip, which improves its industry leading performance for high end smartphones and tablet by offering faster speeds, lower power consumption, less interference and a  smaller footprint compared to its competitors. The 2×2 MIMO 802.11ac combo chip is currently shipping in volume production. Broadcom also launched the industry’s first GPS Sensor Hub combo chip, which significantly reduces power consumption in smartphones and tablets while enabling always-on health fitness and life logging applications. The company is also ramping its newly launched LTE and TDS CDMA Solution while maintaining its market leading position in 3G. In addition to smartphones and tablets, Broadcom sees new growth potential in emerging markets, including the Internet-of-Things (IoT), automotive electronics, wearable devices and small cell technology. The company continues to drive leading-edge features so as to maintain its strength in high end smartphones and tablets. It is strengthening and diversifying its portfolio with new low power connectivity solutions for the IoT and the support of iBeacon and HomeKit. The registrations for Broadcom’s WICED IoT platform have grown significantly, from 2,000 at the beginning of 2014 to over 8,000 at present. The company has announced the expansion of its distribution channel with over 40 new partners to expand its sales reach to IoT customers. Broadcom expects its broadband and connectivity business to be down sequentially in the current quarter, and admits that this year will be a little challenging for the business. However, it firmly believes that the segment offers strong long-term growth potential. Long-Term Growth In The Infrastructure Business Remains Intact 2014 was the third consecutive year of double-digit growth for Broadcom’s infrastructure business, with growth mainly being driven by its leadership in the switch market. Though Broadcom admits that the infrastructure business remains lumpy in the short-term, the company believes it will benefit from new product launches and capabilities rolling out in the near future. In the data center market, Broadcom has a large number of customers in production with Trident II and is building a solid pipeline of design wins for Tomahawk. At 3.2 terabits per second, Tomahawk is the industry’s highest bandwidth switching solution and has been shipped to over 15 different networking box makers, establishing an early lead over competitors. In the service provider market, the company is seeing broad adoption of its 28-nanometer heterogeneous knowledge-based processers. Long-term growth drivers for Broadcom’s infrastructure business include: 1) new build-outs and expansions of data centers; 2)  increasing data traffic at faster speeds; 3)  ASIC conversions to merchant solutions; and, 4) overall enterprise network upgrades as people move to higher speeds. Broadcom expects double-digit growth in the infrastructure business for the next few years. Set-Top Business Benefits From An Expanding Geographic Footprint Growth in emerging markets and new technologies are driving growth in Broadcom’s set-top box business. Operators such as Dish in North America, Free in France and Tata in India, have begun to offer ultra HD set-top boxes to their subscribers. Broadcom expects around 15 operators across multiple regions to launch 4K television service in 2015. Expanding the geographic footprint is an important factor driving growth in the set-top business. Broadcom’s expansion in new territories, including South America, South Asia, and Africa, benefited the company in 2014 and it expects the trend to continue this year as well. Additionally, Broadcom expects to benefit from the transition to 4K HEVC over the next three to four years. In cable modems, people are switching over to DOCSIS 3.1. Though Broadcom expects to see initial shipments this year, it anticipates the technology to really kick in next year onwards. In broadband access, the race to Gigabit speeds in the home continues as telcos invest in and cable MSOs invest in DOCSIS 3.1, while both invest in high speed optical access. Broadcom is leading this transition with its first design wins with and 10-GPON already in place. 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 Bank of America's Lukewarm Q1 Results Are Not Cause For Concern
  • By , 4/17/15
  • tags: BAC
  • Investors were not quite sure how to react to  Bank of America’s (NYSE:BAC) results for the first quarter of 2015 when the diversified banking group released them on Wednesday, April 15. The bank managed to beat earnings expectations despite reporting a worse-than-expected revenue figure, and the earnings announcement included a long list of positive and negative trends. The things that stand out at first glance justify the decline in Bank of America’s shares on Wednesday – especially the year-on-year reduction in revenues and the sharp increase in operating expenses. What stood out in particular was the fact that each of the bank’s operating divisions (except for the non-core Legacy Assets and Servicing division) reported lower revenues year-on-year even as rival JPMorgan Chase (NYSE:JPM) detailed the exact opposite trend a day earlier (see JPMorgan Posts Strong Q1 Results On The Back Of Debt Trading Gains ). However, it should be noted that the single biggest factor behind Bank of America’s depressed top line figure is its shrinking net interest margin (NIM) figure, which fell to a record low of 2.17% compared to 2.29% in Q1 2014 and 2.18% in Q4 2014. This, coupled with a one-time adjustment of $500 million, dragged down the interest income to $9.7 billion – the lowest level the bank has seen since the economic downturn of 2008. This is a factor which is largely beyond the bank’s control, and will see an improvement once the Fed hikes benchmark interest rates later this year. Moreover the year-on-year decline in fee-based revenues from traditional banking sources was reported by both Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB). So that too appears to be systemic in nature, and not an issue pertaining only to Bank of America.
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    Discover Earnings Preview: Loan Segment To Grow Backed By Strong U.S. Economy
  • By , 4/17/15
  • tags: DFS
  • Discover Financial (NYSE:DFS) is scheduled to report earnings for the first quarter of 2015 on Tuesday, April 21. In the previous quarter the company reported a 33% year-over-year decline in net income to $404 million for the quarter, partly due to changes in the structure of the company’s customer rewards program.. However, the company benefited from a modest increase in credit card loans, credit card sales and payment services transaction volume.  The credit card loans division, which accounts for around 80% of the company’s loan portfolio, increased by 6% y-o-y. Overall, the loan portfolio grew over 6% while sales volume increased 5% over the prior year. We expect the company to maintain its loan growth and sales volume momentum. On the cost side, the last quarter saw an 11% year-over-year increase in expenses, primarily due to higher professional fees, increased investment in web and mobile technology and a one-time elimination of $178 million of credit card rewards forfeiture reserves. In the upcoming earnings, we will look out for whether these one-time expenses have improved the performance of the loan segment.
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    Weekly Oil & Gas Notes: Petrobras' March Production and Financial Results Announcement
  • By , 4/17/15
  • Oil and gas stocks strengthened this week as crude oil prices rose on reports that the U.S. shale oil boom might be very close to a short-term peak. In addition, a much smaller than expected increase in commercial crude oil inventories in the U.S. coupled with a decline in gasoline stocks in the country signaled an improvement in the demand for petroleum products, which further supported the rally in benchmark crude oil prices. The U.S. Energy Information Administration (EIA) expects crude oil production from the fastest-growing tight oil plays in the U.S. to register a sequential decline of around 45,000 barrels per day next month. Most of the decline in production is expected to come from the Eagle Ford and the Bakken shale plays, where the major operators have significantly cut back their growth plans this year to maximize returns when in a more favorable commodity price environment. This means that the OPEC’s (Organization of Petroleum Exporting Countries) strategy of undercutting rising non-OPEC supplies is working, and there could be some recovery in global crude oil prices from current levels by the end of this year. The price of the front-month Brent crude oil futures contract on the ICE increased by around 9.2% this week and is currently trading around $63.50 per barrel. The  NYSE Arca Oil & Gas Index (XOI) grew by around 3.1%. Below, we provide an update on some of the key events that occurred this week related to the oil and gas companies we cover. Petrobras’ March Production and Financial Results Announcement Brazil’s state-owned oil giant,  Petrobras (NYSE:PBR), recently announced its March 2015 hydrocarbon production figures. The company’s total oil and gas production in Brazil increased to 2,574 thousand barrels of oil equivalent per day (MBOED), up almost 10.5% over March 2014. Its domestic crude oil production grew by 9.5% from 1,925.9 thousand barrels per day (MBD) in March 2014 to 2,108.2 MBD during the last month. Most of the growth in production came from increased development of the company’s pre-salt reserves offshore Brazil. Its operated production from pre-salt reserves in the Santos and Campos Basins stood at 672 MBD in March, up more than 70% from last year. The expression “pre-salt” refers to an aggregation of rocks that hold hydrocarbon reserves and are located in ultra-deep waters in a large portion of the Brazilian coast. It is called pre-salt because the rock interval ranges under an extensive layer of salt, which can be as much as 2,000 meters thick. The term “pre” is used because these rocks were deposited before the salt layer. The total depth of these rocks can be as much as 7,000 meters from the surface of the sea. Petrobras plans to invest a lion’s share (more than 60%) of its net capital expenditure on the development of these reserves, which are expected to contribute more than 50% to its net production by the end of this decade. The chart below shows how the company’s crude oil production in Brazil has trended since the beginning of 2013. Source: Petrobras’ Operational Highlights Separately, Petrobras plans to announce its audited financial results for the third quarter and full-year 2014 on April 22, after a delay of several months, primarily because of ongoing investigations into the alleged bribery and corruption scandal that has hit the company. We expect the focus on the potential impact of the ongoing probe to overshadow the improvements in the company’s key business drivers, such as net upstream production and downstream margins. In addition to that, we also expect lower benchmark crude oil prices and the depreciation of the Brazilian Real against the U.S. Dollar to weigh on the company’s financial results. We recently updated our price estimate for Petrobras to $11/share, based on an increase in its weighted average cost of capital (due to higher average bond yield) and the changed crude oil price environment. We expect Petrobras’ 2014 diluted earnings per share to be around $1.36, compared to the consensus estimate of $1.15. The company’s share price increased by around 12% this week. (See:  Petrobras’ Cost of Capital Set To Rise After Moody’s Downgrade ) 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
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    Scenario Analysis: How Will United’s Price Move Under Different Scenarios
  • By , 4/17/15
  • The US airline industry has been one of the top gainers from the downward rally of crude oil prices that started in the latter half of 2014. Since jet fuel costs constitute nearly a third of an airline’s total operating expense, the 50% drop in oil prices over the last six months has accelerated the bottom line of all major US airlines. Among the top three US airlines, United (NYSE: UAL) was the only airline to record an increase of over 2% in its EBITDA margin in 2014 due to the oil price collapse. As a result, the stock price of the Chicago-based airline soared by over 44% in the last ten months. Our current price estimate for United stands at $69 per share, assuming a gradual recovery of oil prices over the next two to three years. However, in this article, we will discuss three scenarios that could have a significant impact on United’s current valuation. See our complete analysis for United here Gradual Oil Price Recovery Since July of last year, crude oil prices have plunged from over $110 per barrel to an all-time low of $45 per barrel in January this year, on the back of weak global demand for oil, led by the slow growth in the Chinese economy, and surplus oil production due to the rising tight oil production in the US. In addition, the Organization of Petroleum Exporting Countries’ (OPEC’s) decision to maintain its current production rates further aggravated the demand-supply mismatch. While the decline has weighed heavily on the oil producing companies in the US, it has been profitable for most of the US airlines, particularly United. In 2014, United’s net profit almost doubled to $1.1 billion due to a decline of more than $670 million in its fuel costs. However, over the last two months, the crude oil prices have revived to $55 per barrel, showing signs of recovery due to the large cutbacks on production by all major oil companies. We currently expect oil prices (Brent) to average around $75 per barrel in this year and gradually increase to $85 per barrel over the next two years. Consequently, in our base case scenario, we forecast United’s fuel costs (when expressed as a percentage of passenger revenue) for US operations to remain under 35% over our forecast period as against its historic average of 38%. During the same period, the international fuel costs are estimated to fall more drastically to approximately 31% versus its 5-year average of over 36%. Given the restructuring and cost cutting initiatives undertaken by United, we expect the airline to remain profitable even if the crude prices rise to $70-80 per barrel in the current year. ( Will Airlines Begin To Post Losses If Oil Prices Rise In Coming Months? ) See our Base Case Scenario for United here V-shaped Oil Price Recovery If we look at a more optimistic oil scenario, where we presume that the demand for crude oil will improve significantly, due to increased economic activity in China and concurrently, the tight oil production in the US will decline, there could be a possibility of a sharper, V-shaped recovery in crude oil prices. Moreover, if the OPEC decides to change its current stance and cut its production, we estimate the crude oil prices to reach an all-time high of over $120 per barrel by the end of our forecast period. In that case, we estimate United’s fuel costs for US operations to rise sharply to 36% trending towards its historical average and its international fuel costs to increase to 32% by the end of our forecast period. As a result, the EBITDA margins of the airline will decline over the next two to three years before reversing to its 2014 levels by the end of our forecast. The price estimate for United in this case would fall to $61 per share, a 12% downside to its stock price in our base case scenario. See our analysis for V-shaped Oil Price Recovery for United here Sustained Decline in Oil Prices Contrary to our V-shaped recovery scenario, the oil price recovery may take longer than expected, if the demand for oil does not improve either because of continued slowdown in the Chinese economy or due to the use of alternative fuels owing to technological advancements. Additionally, if the OPEC continues to operate at its current production levels or alternatively if it plans to increase its production rates to eliminate competition and increasing its market share, the global oil market will experience depressed oil prices for a prolonged period. If this scenario becomes a reality, we expect United’s US fuel costs to fall to 33% and international fuel costs to drop to 30% by the end of our forecast period. Consequently, the airline’s EBITDA margins will escalate to almost 20%, growing at a CAGR of  close to 2% over our forecast period. Thus, we arrive at a price of $75 per share for United’s stock, an upside of 10% to our current price estimate for the airline. See our analysis for Sustained Decline in Oil Prices for United here Seat-Surplus due to Excessive Capacity Additions Now, we look at flying capacity, a key determinant of air fares which in turn drives the profitability of an airline. Large network carriers, including United, have restricted capacity additions over the last few years to match the decline in air travel demand post the financial crisis in 2008-2009. This capacity discipline has enabled these airlines to raise the average ticket fares, which has lifted the industry out of its huge losses ( Restrained Capacity Addition Is Key To Sustaining Airline Industry Profits ). United, American, and Delta which together control more than half of the total domestic capacity, have indicated their intent to add capacity with restraint over the coming years. However, the recent dip in oil prices that enhanced the earnings of these airlines, may force them to indulge in capacity and price wars to increase their market share. Thus, we assume a scenario where these carriers resume capacity expansions at a much faster pace. This will probe the low cost carriers (LCCs) such as Southwest, Alaska, and JetBlue and ultra low cost carriers (ULCCs) such as Spirit, Allegiant, and Frontier to aggressively add capacity to improve their domestic market share. Hence, there will be an oversupply of seats in the market which will undermine the ability of these large airlines to charge profitable fares. In such a scenario, we expect United’s domestic business to experience some weakness as its passenger yields will drop sharply to 0.138, while its  occupancy rates will decline to less than 84% over our forecast period. Accordingly, we forecast relatively flat EBITDA margins for the airline, converging into a stock price of $63 per share, a downside of almost 10% to our current price estimate for the airline. See our analysis on Seat Surplus Scenario for United 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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    China Mobile Earnings Preview: 4G User Adds, Profitability In Focus
  • By , 4/17/15
  • tags: CHL CHA CHU
  • China Mobile (NYSE:CHL), the world’s largest wireless carrier by subscribers, is expected to release its first quarter 2015 earnings on April 21. The carrier’s financials have been under pressure for the last six quarters on account of increasing competition in the Chinese wireless market, a decline in interconnection fees, the introduction of a Value Added Tax (VAT) and the growing popularity of over-the-top (OTT) applications. OTT applications such as WeChat allow users to share text/picture/video messages over their phone’s Internet connection, and their increased usage has resulted in a massive drop in revenues from traditional SMS and MMS messaging services for the carrier. Owing to the aforementioned factors, the carrier’s net profit declined over 12% year-over-year (y-o-y) to about RMB 27 billion ($4.3 billion) in the previous quarter and over 10% to RMB 109.3 billion ($17.64 billion) in full year 2014. Overall SMS usage on the carrier’s network declined about 17% from 734 billion messages in 2013 to about 611 billion in 2014, in addition to a decline of 0.5% y-o-y in total voice usage. Correspondingly, revenues from SMS/MMS and voice services fell by 16% and 13% in full year 2014, respectively. However, overall operating revenues grew by 1.8% to RMB 641.45 billion ($103.53 billion) on the back of robust growth in product sales. In the upcoming earnings release, we expect the company to report robust y-o-y revenue growth backed by aggressive expansion in the 3G and 4G market and a favorable comparable period. The carrier added over 113 million 3G and 4G users in the eleven month period from April 2014-February 2015, of which over 67% users were on the 4G network. This surge in high speed subscribers is also expected to positively impact the company’s monthly Average Revenue Per User (ARPU), which declined by 10% y-o-y to $9.85 last year. However, the rapid user growth would not have been possible without a comparable increase in the company’s handset subsidy costs, discount offerings and marketing expenses. This rise in operating expenses, in addition to the recent introduction of a Value Added Tax (VAT) in the telecom industry, is likely to weigh on China Mobile’s net profit in the first quarter as well. We currently have a  price estimate of about $60 for China Mobile, implying a discount of about 15% to the market price.
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    Expect A Sharp Decline In Baker Hughes' Q1 Numbers As Rig Activity Plummets
  • By , 4/17/15
  • tags: BHI bhi HAL SLB
  • Oilfield services major Baker Hughes (NYSE:BHI) is expected to publish its Q1 2015 earnings on April 21st, reporting on a tough quarter that saw a significant drop in oilfield activity amid upstream capex cuts and weak crude oil prices. We expect the firm’s quarterly numbers to decline meaningfully on a year-over-year and sequential basis given the lower rig activity, service cost deflation and its exposure to the North American tight oil market where a bulk of the cutbacks are taking place. While the turmoil in the oil markets began in the second half of 2014, it didn’t work its way into the Q4 2014 earnings of most oilfield services players, as customers executed as planned against their 2014 budgets. However, the Q1 results should give us better visibility into how the current downturn and spending cuts will impact earnings, going forward. Baker Hughes is in the process of being acquired by larger rival Halliburton (NYSE:HAL). Shareholders of both companies have approved the deal, which is expected to close towards the end of this year, subject to regulatory approvals. The company will not be conducting a conference call to discuss its quarterly results, following a convention among companies being acquired in the energy industry. In this note, we take a brief look at some of the trends that will influence the company’s earnings for the quarter.
    What’s the Story With the Sears Holdings-Simon Properties Deal?
  • By , 4/17/15
  • tags: SHLD SPG
  • Submitted by Sizemore Insights as part of our contributors program What’s the Story With the Sears Holdings-Simon Properties Deal? by Charles Lewis Sizemore, CFA Sears Holdings Corp ( SHLD ) made news this week by partnering with mall REIT Simon Property Group ( SPG ), the largest REIT in the world by market cap. Sears plans to bundle 10 properties worth about $228 million into the venture, which it will then lease back. Sears made a similar deal with rival mall REIT General Growth Properties ( GGP ) earlier this month, selling and leasing back 12 properties located in General Growth malls. Of course, all of this pales in comparison to Sears’ most ambitious move: The planned spinoff of 254 properties worth $2.5 billion into Seritage Growth Properties, a real estate holding and development company. Sears currently owns Seritage, but it is widely believed that Chairman Eddie Lampert plans to list it as a standalone traded REIT. So  . . .  what’s going on here? Lampert Nears His Endgame I’ve been following the developments at SHLD for years, and it appears that this is execution of Lampert’s long-term plan of essentially chopping up Sears — an old retailer that has been dying a slow death for decades — and selling its valuable pieces for spare parts. Just last year, SHLD spun off its Lands’ End, Inc. (LE) brand. This followed the 2011 spinoff of Orchard Supply and assorted sales of real estate along the way. Sears stores have been losing ground to more competitive big-box retailers like Wal-Mart Stores Inc ( WMT ), The Home Depot, Inc ( HD ) and Target Corp ( TGT ) for longer than I have been alive. Yet, due to its age and longevity, Sears is sitting on choice retail sites across the country. Of course, no shoppers visit these sites anymore, but they certainly might if they were rented by higher-quality tenants. At least this was Lampert’s thinking when he bought a controlling interest for $11 billion back in 2004. Though he has never admitted it publicly (it would be bad for business), it was pretty obvious that Lampert had no grand ambition for reviving the Sears retail empire. That would be ludicrous, and Lampert is too smart for that. Lampert’s game plan was to invest whatever minimal amount was necessary to keep the company afloat long enough for him to extract the value out of it via spinoffs of its valuable brands and real estate assets. As I wrote years ago in “ Is Sears the Next Berkshire Hathaway? ” Lampert’s plan probably would have worked well had he not started it immediately before the 2008 crisis and real estate crash. Is there an investment play here? Unfortunately, no. Seritage, were it to go public, might very well turn out to be a decent investment. We’ll have to wait and see there. But the rump Sears Holdings — which today is trading at 2004 levels — is still struggling to turn a profit in a lousy environment for retailers. When I compared Sears to Berkshire Hathaway years ago, I got a lot of raised eyebrows. But the comparison is completely valid. Warren Buffett has publicly admitted that buying Berkshire Hathaway ( BRK-A ) was the worst investment of his career and one that probably cost him $200 billion in lost gains. Once the Sears stores do eventually go out of business — and they will — SHLD, like Berkshire Hathaway, might be a great way for regular investors to invest in the holding company of one of the best managers in the business today. But in the meantime, you’re looking at a slow bleed. Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the  Sizem ore Insights blog. As of this writing, he was long WMT and TGT. This article first appeared on Sizemore Insights as What’s the Story With the Sears Holdings-Simon Properties Deal?
    Chesapeake Insiders Are on to Something . . .
  • By , 4/17/15
  • tags: SYRG CHK EOG
  • Submitted by Wall St. Daily as part of our contributors program Chesapeake Insiders Are on to Something . . . By Karim Rahemtulla, Chief Resource Analyst   As I said yesterday, we’re going to see a flurry of mergers and acquisitions (M&A) between oil majors and energy minors in the coming months. I also pointed out that the best way to profit from this activity is to get in with the more accessible, minor companies, versus the behemoths. Take Chesapeake Energy ( CHK ), for instance, which sports a market capitalization just north of US$9 billion. That’s pretty appealing to any major integrated oil company wanting to acquire high-quality natural gas and shale oil assets at bargain prices. In fact, when you compare it to Royal Dutch Shell’s ( RDS.A ) offer of US$70 billion for BG Group ( BRGXF ), Chesapeake looks downright cheap. Is this the next company to be gobbled up by the M&A machine? Keeping the Faith Despite its massive asset sales over the past few years, Chesapeake still holds many productive natural gas producing properties. And, as Shell pointed out by its purchase of BG Group, natural gas isn’t dead, by any means. When it comes to looking at where future growth in energy usage will come from, liquid natural gas (LNG) stake holders still have faith. Yes, lower oil prices are a threat to natural gas in the short term, not necessarily by acting as a major fuel substitute, but by delaying the conversion of trucking fleets from diesel to compressed or liquefied natural gas. But oil prices are a bump in the road. Chesapeake insiders are betting that the future of natural gas and oil are going to be brighter than the market anticipates, and I agree. It’s not a question of if we’ll see a recovery in energy prices, but when the recovery will occur. And since no one is going to ring a bell when the recovery finally happens, it makes sense for investors to do some select buying of beaten-down names. Gathering Your Eggs I’ve already recommended a few names that I see as benefiting the most during the recovery, including EOG Resources ( EOG ) and Synergy ( SYRG ). Those recommendations still stand, as they’re growing companies with a very low debt load. Chesapeake has a much harder road to travel down, but I think it’ll also emerge as a winner. The company has been slicing its debt over the past five years. And it’s finally in a place where, if prices recover even moderately, the company will start making significant profits from its operations and expanded margins from much lower debt service. One of the best signs of a company’s future success comes from insider purchases. In the energy sector, this usually foolproof guide is a little more challenging. Insiders may love their company and how management is handling the operations, but they can’t control or predict where the price of the commodity they’re selling is headed in the short term. If they could, they would all have been selling last September, and they weren’t. But, assuming reasonable market returns in the future (energy is one of those commodities that cycles fairly regularly from oversupply to undersupply), it’s a good idea to have some of your eggs in baskets where the insiders are steadfast buyers of their stock. In the case of Chesapeake, two insiders – an activist investor and the Chairman – are adding to their holdings. Archie Dunham, the Chairman of Chesapeake, added a million shares to his holdings at the end of March at just under $14 per share. He followed Carl Icahn, who paid slightly more at $14.15 earlier in March. Icahn, through his investment vehicles, now owns more than 73 million, or 11% of the company’s outstanding shares. Bottom line: CHK shares have been rallying as of late, despite lower natural gas prices, because it’s also a major oil producer and has spent the better part of the last five years trying to rebalance its portfolio from all gas to a mix of gas and liquids. The shares are cheap at current levels, and, while they may get cheaper again in the near term, I think we’re looking at a potential acquisition target in a year or so. Follow the insiders on this one. And the chase continues, Karim Rahemtulla P.S. Get paid 12% – or more – on your money! Join me this July 20 through July 21 at the luxurious Park Hyatt Beaver Creek Resort & Spa in Beaver Creek, Colorado, and discover the top new income sources and strategies for getting paid 12% or more on your money. For full details and to register for this can’t-miss event, click here now . The post Chesapeake Insiders Are on to Something… appeared first on Wall Street Daily . By Karim Rahemtulla
    Norfolk Southern Corp. Takes a Dip
  • By , 4/17/15
  • tags: DJT NSC
  • Submitted by Wall St. Daily as part of our contributors program Norfolk Southern Corp. Takes a Dip By Richard Robinson, Ph.D., Equities Analyst   Since reaching a high of 9,217.44 on December 29, 2014, the Dow Jones Transportation Average ( ^DJT ) has declined 5.3% year to date. It’s underperformed the broader stock market – resulting in the index’s first quarterly loss in almost two years. The index sits just below its 200-day moving average. So investors should read the writing on the wall: A sustained downtrend is certainly possible. If you’ve been ignoring the warning signs, now’s the time to wake up . . . One company in particular is feeling the pressure. Norfolk Southern Corporation ( NSC ) shares declined by more than 4.3% on Tuesday. The decline was on the heels of the resource transportation company’s forecast for significantly weaker first-quarter earnings. The company will release the final results on April 29. But it’s expecting earnings per share (EPS) of just $1.00 on revenue of $2.6 billion. That’s a 21.8% drop against analyst expectations of $1.28 EPS on $2.7 billion in revenue. Facing Coal Challenges Head On While the company indicated that decreases in fuel surcharges affected each of its three operating segments, the chief blame for the sluggish earnings outlook is the continuing struggle with falling coal shipments. Norfolk reports that coal shipments declined 6% in 2014 – after falling 5% in 2013 and 13% in 2012. And with worldwide demand for coal expected to continue falling, Norfolk Southern will likely see no significant improvement in coal delivery through the end of 2016. This means that NSC will see continued weakness in earnings going forward since coal represents about 20% of Norfolk Southern’s operating revenue. It’s not all doom and gloom, though. Sure, the headwinds facing NSC seem significant for investors. But the good news is that the company has done a good job of expanding its non-coal business segments, which were reflected in the company’s overall performance in 2014. So, despite the weakness in coal shipments, the company grew its total revenue by 3% to $11.6 billion in 2014. And Norfolk saw its total traffic increase by 5% on the year, led by an 8% increase in intermodal volume. More importantly, the company successfully took steps to control its costs of doing business, which was reflected in the company’s best-ever operating ratio of 69.2% last year. Don’t Make a Move At the end of the day, the transportation index is a leading economic indicator, and it’s telling investors that slower growth may be just over the horizon. It’s likely the economy grew at a 1.5% annualized rate in the first quarter, which is a decrease of 2.2% compared to the final three months of 2014. These facts – in combination with NSC’s lowered earnings guidance – show that the company is fully valued at about $98.51 per share. Therefore, Tuesday’s decline brought the stock roughly in line with its value based on normalized earnings. Should the economy pick up legitimate speed in the ensuing months, the prospects for a higher stock price increase. But until then, Norfolk Southern shares remain a “Hold.” Good investing, Richard Robinson The post Norfolk Southern Corp. Takes a Dip appeared first on Wall Street Daily . By Richard Robinson
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    Netflix Q1 Earnings: The Stock Soars As Subscriber Numbers Impress
  • By , 4/16/15
  • Netflix ‘s (NASDAQ:NFLX) stock jumped by over 12% in after-hours trading following its Q1 2015 earnings announcement on April 15th. The company reported a strong set of numbers and its revenue came in at $1.57 billion, up 24% from $1.27 billion during the same quarter last year. The subscriber base grew by a record 4.9 million during the quarter and the company’s global subscriber base now stands at 62.3 million. User engagement is at an all-time high and subscribers streamed 10 billion hours this quarter. However, the strong dollar hurt the company’s international revenue and margins. In a letter to shareholders, the company reaffirmed its focus on original content and its commitment to improving its margins in the long term. Netflix also acknowledged the increased competition in the streaming market but stated that it will not have a material impact on the company. Let’s take a look at the key takeaways from the earnings release.
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    Kimberly-Clark’s Push For Alternative Raw Materials Kills Two Birds With One Stone
  • By , 4/16/15
  • tags: KMB PG UL EL
  • Kimberly-Clark (NYSE: KMB) is the world’s largest manufacturer of tissue paper products for at-home as well as away-from-home use. Its Kleenex and Scott tissue brands are the world leaders in at-home use tissue products and generate over $1 billion in annual sales. In 2014, Kimberly-Clark’s Consumer Tissue (at-home use tissue products) and K-C Professional (away-from-home use tissue and related products) segments accounted for over half of the company’s total revenues of $20 billion. Kimberly-Clark has been steadily decreasing its reliance on forest products like tree fiber, wood pulp and recycled paper since 2011. Recently, it announced the roll-out of a new line of tissues and paper towels that use non-traditional products like bamboo and wheat straw. The company’s latest move is geared towards achieving its 2015 sustainability goals, which includes deriving at least 25% of its sales from environmentally innovative products. The connotations of using alternative raw materials are clear from an environmental perspective. After all, it is common knowledge that the dwindling availability of forest resources is a matter of global concern. Thus, incorporating alternative renewable raw materials in the manufacture of tissue products will reduce pressure on traditional forest resources. However, it is not immediately evident that Kimberly-Clark’s sustainability strategy is beneficial for the company’s coffers as well. In this report, we will explore how Kimberly-Clark’s sustainability strategy is not just environment-friendly, but shareholder-friendly as well. We have a price estimate of $101 for Kimberly-Clark, which is about 5% lower than its current market price. See our complete analysis for Kimberly-Clark here Lower Commodity Costs Kimberly-Clark primarily uses wood pulp and secondary fiber as raw materials for the manufacture of tissue products. Wood pulp prices are at historically high levels and are expected to continue to rise over the next three years. Wood pulp prices have declined slightly since touching a 3-decade high in 2011, but are expected to increase again at 2.1% annually through 2017. So far, Kimberly-Clark has addressed the issue of rising input prices by passing on the higher costs to customers. The company does so either by outright price hikes, or through indirect, under-the-radar measures like “de-sheeting”. However, these are temporary measures that are inadequate for protecting the company’s bottom lines over the long term. This is evident from the fact that Kimberly-Clark suffered $240 million in input cost inflation in 2014, which it was unable to offset completely through price hikes. As a result, the EBITDA margin of its Consumer Tissue segment declined 2.5 percentage points, while the EBITDA margin of its K-C Professional segment contracted by 3.4 percentage points in 2014. We believe that the use of alternative raw materials is the long-term solution to the predicament of climbing input costs. Currently, the proportion of alternative materials in Kimberly-Clark’s new GreenHarvest line is only 20%, although there are outliers like a line of copy paper under the Staples brand which uses 80% alternative materials. If Kimberly-Clark is able to increase the proportion of such alternative materials in its tissue products, the potential cost savings would be immense. This is because of the huge disparity between the prices of traditional and alternative raw materials – wood pulp costs over $850 per ton, while wheat straw costs a mere $80 to $90 per ton. Therefore, it is clear that if Kimberly-Clark’s R&D team is able to find ways to increase the proportion of alternative raw materials in tissue products, the potential benefits would be tremendous for mother nature as well as the company’s bottom lines. Addressing the Environmentally-Conscious Consumers The last few years have seen the emergence of a new class of consumers who choose products based on the environmental and sustainability practices of the company. A survey by Nielsen last year showed that these consumers are willing to put their money with their idealism. According to the survey, 55% of the online consumers polled across 60 countries admitted that they would be willing to “pay more for products and services provided by companies that are committed to positive social and environmental impact”. In fact, as many as 52% of the respondents check the labeling of products to ensure that the brand is “committed to positive social and environmental impact”. This clearly demonstrates that a market for environmentally-conscious customers exists and is ripe for capitalizing upon. Consumers are not only becoming increasingly conscious of the aforementioned factors, they are also willing to pay a premium for brands that satisfy the social and environmental criteria. Kimberly-Clark is already well on the way to addressing this class of consumers with its GreenHarvest product line. At a time when the company is reeling from commodity cost inflation, its sustainability initiative can allow it to charge a premium for products that cost lesser to manufacture. Thus, the strategy provides a boost to Kimberly-Clark’s topline by addressing a new market, and its bottom-line through the premium pricing model. Good PR As illustrated by the Nilesen survey, a majority of the consumers prefer socially and environmentally conscious brands. When brands make a push for these factors, it inevitably results in a boost to the company’s public relations (PR) image. And when the company in question is a global consumer products powerhouse like Kimberly-Clark, with a formidable marketing muscle, the PR impact is even more notable. This is evident from the numerous sustainability awards won by Kimberly-Clark. The public relations impact is perhaps the least tangible benefit of the sustainability initiative for Kimberly-Clark’s financial performance. Nevertheless, its indirect influence is substantial enough not to be ignored. After all, good PR is what adds to a brand’s value. Therefore, it can be irrefutably concluded that Kimberly-Clark’s push for alternative raw materials is a socially as well as financially conscious strategy. Over the long term, the company’s sustainability goals are likely to not only benefit the environment, but also its shareholders. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Disney's Broadcasting Operations Will Benefit From The Growth In Non-Advertising Income
  • By , 4/16/15
  • Disney (NYSE:DIS) has been successful with its cable networks such as ESPN, which contribute around 30% to the company’s value, according to our estimates. This can be attributed to high EBITDA margins of over 45% that Disney enjoys on its cable networks and ESPN’s dominance in sports media. On the other hand, the broadcasting business has been a low value contributor for the media giant, primarily due to lower margins of around 19%. The broadcasting business contributes close to 12% to the company’s overall revenues, but the contribution towards EBITDA is much lower (7% in 2014), reflecting lower margins in this business. Broadcasting networks such as ABC rely heavily on advertising income. The broadcast advertising trends are uneven, as they are driven by various events such as political campaigns and sports. U.S. advertisement spending in 2014 grew only 4%, which was lower than anticipated, and it is likely to remain soft in 2015, according to Magna Global. However, ABC has managed to lower the split between advertising and non-advertising income from 70% in 2007 to 50% in 2014. As non-advertising income grows at a faster pace than advertising income, ABC can look forward to stable growth in the long run. We forecast revenues of around $53 billion for Disney in 2015 and EPS of $4.90, which is in line with the market consensus of $4.89, compiled by Thomson Reuters. We currently have  a $105 price estimate for Disney’s shares, which is close to the current market price of $104. Understand How a Company’s Products Impact its Stock Price at Trefis


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