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RAD Logo
Rite Aid Poised For Long-term Growth But Short-term Concerns Remain.
  • By , 1/23/15
  • tags: RAD
  • Between 2009  and 2012, market leaders such as CVS Health (NYSE:CVS) and Walgreens (NASDAQ: WBA) were able to achieve a revenue growth (CAGR) of 6% and 2% respectively. However, Rite Aid ‘s (NYSE: RAD) revenues remained flat and it devised a turnaround plan to set a new course. While the topline was stressed during this period, higher interest costs due to an over-leveraged capital structure and higher costs (due to inefficient operations) kept earnings down. This was a challenging period for the pharmacy retail industry altogether primarily because of lower reimbursement rates which led to lower profit margins. In 2013, Rite Aid’s revenues plateaued as the number of its stores remained fairly stable. However, its strategic initiatives started paying off and the company returned to profitability which drove the company’s stock price up from $1.30 at the start of 2013 to a $7.50 at present. Our price estimate of $6.27 for Rite Aid is at about a 15% discount to the current market price. We believe that the current Trefis estimate fairly represents the growth potential that Rite Aid holds. View our detailed analysis for Rite Aid Management Confident Of Turnaround Amidst Favorable External Conditions The U.S. Census Bureau projects a 60% increase in the number of Americans age 65 and older between the years 2000 and 2020, who fill almost thrice as many prescriptions as those filled by the younger group (younger than 65 years of age). Considering that prescription drugs constitutes about 70% of Rite Aid’s revenues, the future holds immense potential for growth in this segment. Additionally, ObamaCare is further driving the demand for affordable, high-quality health care and is estimated to bring another 30 million people under health insurance coverage. An Impending Patent Cliff And Increase in Availability of Generics Bodes Well For Pharmacy Retailers From 2015 through 2018, a total of $78 billion is expected to be exposed to generic competition. While this significantly impacts drug manufacturers’ sales negatively, it is going to be all smiles for drug retailers. Even though branded drugs contribute a significant portion to a drug retailer’s topline, generics have historically provided higher margins. With higher availability of generics, they will form a higher proportion of the topline and will provide some support to the company’s margins, which have been under pressure due to rising generic costs. During the recently concluded JP Morgan Healthcare Conference, Rite Aid CEO John Standley noted that there are “a few question marks in terms of how a couple of drugs may play out,” possibly referring to the delay in FDA approval for the manufacture of generic copies of AstraZeneca’s heartburn drug Nexium and Roche Holding’s antiviral Valcyte. Inspite of such occurences, we are confident the that the generic boom would still remain intact and is going to help Rite Aid generate higher profitability. More Efficient Distribution Process To Support Margins Conversion to a new drug distribution and purchasing process with McKesson Corporation (MCK), the largest distributor of pharmaceutical and medical supplies in the U.S., is providing Rite Aid with purchasing efficiencies and direct-to-store delivery for all its pharmacy products. Early in Q3’15, all its stores and four pharmacy distribution centers were converted to this new distribution process and the benefits have started to be reflected in the income statement in the form of higher gross profits, arising from increased pharmacy revenue and the purchasing savings made. With time, we expect further optimization in their distribution process will push costs further down. This in turn helps Rite Aid reduce working capital requirements due to lower pharmacy and distribution center inventories. Source: Reimbursement Rate Pressure To Continue Rite Aid anticipates negative pharmacy sales impact of approximately 208 basis points in FY15 from new generic introductions and continued reimbursement rate pressure. While Obamacare is expected to benefit the pharmacy industry by bringing in millions of patients under coverage, it also means that a larger proportion of patients will be covered by government insurance plans rather than private insurers. As reimbursement rates provided by government insurance are less-friendly relative to that provided by private insurers, there will be added pressure on the reimbursement rates. Even though Rite Aid expects the reimbursement rate pressure to continue to pose a challenge in the future, we believe that the cost savings from the new distribution and purchasing process with McKesson will help ease pressure off the company’s bottom line. Overall, we believe Rite Aid is well poised to turn its operations around amidst favorable conditions for the industry. While the challenges it is facing such as reimbursement pressure or generic inflation are short-term in nature, it has strategies in place to secure its long-term growth. The firm believes that with so many factors in their favor, they are well placed to overcome the headwinds of reimbursement pressure and continue to register strong growth. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    ANF Logo
    Abercrombie & Fitch Changing Its Long Standing Strategies
  • By , 1/23/15
  • tags: ANF AEO ARO
  • In an unrelenting retail environment, U.S. buyers have been severe on  Abercrombie & Fitch (NYSE:ANF), which was a prime name in the industry a decade ago. Mike Jeffries took over his role as the CEO of the company in 1992 and transformed the brand into somewhat of an exclusive club for attractive teenagers. Within the first two years of his tenure, Abercrombie’s sales doubled to $165 million and five years later, the figure reached $1 billion. Abercrombie’s logo became extremely popular among youngsters, who regarded the brand as a “must have” for their wardrobe. During his tenure, Mike Jeffries employed several strategies  that worked very well at that time, but have lately contributed to the company’s downfall. Our price estimate for Abercrombie & Fitch stands at $39, which is about 35% above the current market price. See our complete analysis for Abercrombie & Fitch What It Used To Do There was a time when Abercrombie’s logo on basic t-shirts and jeans was enough to attract customers, but it is no longer the case. Over the past two to three years, U.S. shoppers have shown great interest in fashion-forward products from Zara, Forever 21 and H&M, but little affinity towards logo branded basic products from Abercrombie. As a result, the company’s revenues have declined significantly, since it persistently relied on logo business hoping that its iconic brand image would eventually bring customers back. Mike Jeffries’ strategy of not offering XL, XXL and sizes over 10 for women, and his “cool kids” comments were actually aimed at keeping the brand exclusive for its target audience. While it worked very well initially, the company faced significant media criticism a couple of years back after this strategy was highlighted negatively. After Jeffries’ and the company’s image took a hit, some investors singled out the CEO for some of his failed strategies and held him responsible for Abercrombie’s weak performance. For the better part of the last decade, Abercrombie sold apparel with shirtless male models for in-store staff. While this was a strategy to create a unique shopping environment, the biased hiring process got the human rights involved. It was reportedly stated that Abercrombie’s in-store staff did not include professional models, but individuals who had applied for regular retail jobs and were given a dress code that did not include a shirt. In 2013, France’s official human rights watchdog began investigating the company’s hiring procedure in the country. And Now It appears that Abercrombie has finally realized that what it used to do, will no longer help it attract customers. In fact, it will continue to deter the company’s image and sales. As U.S. buyers have shunned basic logo products altogether irrespective of the brand, Abercrombie has decided to aggressively transition its portfolio from basic logo products to non-logo fashion products. Last year in an earnings announcement, the management stated that they will reduce their logo business to “almost nothing” within 12 months and replace it with fashion-forward inventory. Although the change appears too drastic, we believe that this was a much needed step. Indeed, this will result in significant revenue decline in the near term, but Abercrombie’s sales were falling rapidly even without this strategy. However, with this transition, the company stands a better chance of improving in the current retail environment, where only fast-fashion brands are thriving. Abercrombie’s strategy of not having plus-sized clothes in its portfolio resulted in significant negative publicity. In response, the retailer announced in late 2013 that it will start offering plus sizes for some of its women’s clothes in 2014. This was clearly a move intended to salvage the brand image and expand the customer base. However, even a year after the inclusion of plus sized clothes for some of the categories, there has not been any change in the financial performance. The company may have to add plus sizes across the board in order to see a notable impact on its growth. Abercrombie’s advertisements and models have offended parents for too long, becoming a part of several controversies surrounding the company and Mike Jeffries. However, now the retailer has decided to put shirts on its previously shirtless male models, as a small part of its ongoing efforts to reinvent itself. While we do not expect Abercrombie & Fitch to completely come of its slump in the near future, it will certainly be doing things a lot differently in 2015. A better product portfolio, new leadership and new strategies can help it regain some of its lost brand value, which can subsequently bolster sales growth. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    GM Logo
    SUVs Key To GM's Plans of Cadillac Revival
  • By , 1/23/15
  • tags: GM F VLKAY TM
  • General Motors (NYSE:GM) has surprised industry watchers this year. Despite being significantly responsible for the auto industry’s worst ever year of car recalls, the U.S. based auto maker has managed to convince consumers to buy even more of its vehicles. The company sold a record 9.9 million vehicles in 2014, a 2% increase compared to sales in 2013, the company’s previous record year. Sales increased by 12% in China, the world’s biggest auto market, and by 5.3% in the U.S.  Sales of all GM brands increased in the U.S. last year, except for the company’s luxury brand, Cadillac, unit sales of which fell by 6% on a year-over-year basis. That is extremely disappointing for the company since the U.S. comprises nearly two-thirds of global Cadillac sales. A common theme that has emerged in the auto industry over the past few years is that it is extremely important for car companies to have a successful luxury brand. Global luxury brands are heavily influenced by the China and U.S. markets. Even though luxury brands only contribute in about 10%-11% of new car sales in any given year, they contribute nearly 20% to overall revenues, given their much higher unit prices, and about one-third of overall profits, given the higher margin on each unit sale. In order for GM to raise its profitability, it is imperative that it revives Cadillac sales in the U.S. and China. Below, we take a look at the company’s $12 Billion investment for the brand’s resurrection. We have a  $40 price estimate for General Motors, which is about 20% higher than the current market price. See full analysis for General Motors Bringing More SUVs to the U.S. GM’s diagnosis of its weak position in the U.S. market is simple: the brand is under represented in the luxury SUV segment. Luxury SUVs was the fastest growing car segment among all car segments in the U.S. in the year 2014, having grown at 14.2% compared to 2013.  GM, which has long been known for making excellent full-size pick-up trucks and SUVs, has only one vehicle representing it in the segment: CRX. Recently, Cadillac president Johan de Nysschen told the media at the North American International Auto Show that the Cadillac  brand would put a strong emphasis on the crossover SUV segment. Compared to Cadillac’s solitary offering in the segment, BMW has five vehicles in the segment, while Audi has three. Therefore, the company will invest $12 billion into eight new Cadillac models, which it plans to bring to the market by 2020. Three of those vehicles are expected to be SUVs. The success of the new SUVs will be critical to the brand for two reasons: 1) SUVs tend to be higher priced and boast higher margins than passenger cars and 2) recent data suggests that a lot of people have been ditching the Cadillac luxury brand for non-luxury cars, which is bad for the company’s profitability. The booming SUV/crossover segment should allow the company to be able to reverse this trend. Growing China Sales General Motors, along with its joint venture partners, offers a wide range of vehicles and brands in China.  GM’s offerings in China are comprised of the cars sold under Baojun, Buick, Cadillac, Chevrolet, Jiefang, Opel, and Wuling brands. In 2013, GM sold nearly 3.2 million vehicles in China, representing a sales growth of 11.2% from 2012. The U.S. based automaker derives close to a third of its sales from China. Despite the solid performance in 2013, GM was overtaken by German car company Volkswagen as the market leader in new car sales in the country. Capitalizing on the growing preference for luxury cars in China, Volkswagen sold nearly 3.3 million cars in 2013, to grow its market share from 14.6% in 2012 to 14.9%. Meanwhile, GM’s share declined from 14.7% to 14.4%. The loss of market share can be attributed to GM’s inability to identify market shifts such as the surging sales of SUV’s, crossovers, and the booming luxury car market. In October 2013, when GM’s position as market leader was merely under threat from Volkswagen, the company gave out details of a plan to invest $11 billion in China by 2016. Now, GM has announced plans of investing $12 billion in the country from 2014 to 2017 and build more plants as it fights to regain the market leader position. GM’s planned 65% expansion will put GM’s capacity close to 8 million vehicles a year, the largest vehicle manufacturing footprint in the region. The company plans to introduce 60 new or refreshed vehicles between 2014 and 2018, with special focus on expanding GM’s range of utility vehicles and luxury cars, including the Cadillac lineup. The company plans to launch 11 new SUV’s in China over the next 5 years. GM estimates SUV sales to account for 7 million units in China by 2020, more than thrice the current size of the segment. Similar growth is expected in luxury sales, which are expected to comprise nearly 10% of the market by 2020. To this end, GM responded by starting the production of its full-sized sedan, Cadillac XTS, in Shanghai in 2013. The company also plans to build 95% of its Cadillac vehicles in China by 2018.  GM plans to keep adding one new locally produced Cadillac brand to its portfolio through 2016. The automaker sold 64,000 Cadillacs in China in the first eleven months of 2014, representing a 51% increase. It expects annual sales of the brand to reach 100,000 by 2015 and capture 10% of the luxury market by 2020. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    SBUX Logo
    Starbucks' Gift Cards Initiative and Mobile Commerce Drive Customer Traffic In Q1 2015
  • By , 1/23/15
  • Starbucks Corporation (NASDAQ: SBUX) is off to a great start for the fiscal 2015 year, as the coffee giant reported impressive numbers in its Q1 earnings report released on January 22. The company’s consolidated net revenues in Q1 rose an impressive 13% year-over-year (y-o-y) to $4.8 billion, with a significant contribution by each segment. Moreover, the company’s operating income rose 12% y-o-y to $916 million and non-GAAP EPS rose 16% y-o-y to a record $0.80, primarily due to the gain on the acquisition of Starbucks Japan. Starbucks managed to deliver 9 million more transactions in its U.S. stores, and 12 million more transactions globally compared to that in Q1 2014. As a result, the company’s global comparable store sales rose 5% y-o-y, with a 2% increase in customer count, marking the 20 th consecutive quarter with above 5% comparable store sales. Moreover, the company’s non-GAAP operating margins improved 80 basis points y-o-y to 19.5%, as the company increased its share of premium single serve, premium packaged coffee and packaged tea. The channel development segment of the company reported a 10% y-o-y increase in net revenues to $442 million, primarily driven by an increase in sales of K-Cups during the first quarter. The company shipped approximately 100 million K-Cups in December 2014 alone, up 20% over December 2013. We have an $82 price estimate for Starbucks, which is slightly above the current market price. See our full analysis for Starbucks Corportion Gift Card Initiatives & Mobile Commerce Drives Customer Traffic Apart from Starbucks’ beverage and food platform, the company’s innovative new features, such as Starbucks gift cards, have managed to attract more customers over the last few months. Starbucks gift cards proved to be a huge success in the U.S., as the increase in sales of Starbucks gift cards led to an increase in the membership of the My Starbucks Reward (MSR) program. This initiative led to the increase in the number of guest counts at the company’s U.S. stores. In Q1, Starbucks added 0.9 million MSR members, taking the total membership count to 9 million. Among these, 5.5 million members hold the gold membership privilege. With an increase in profitability, resulting from this initiative and positive response from its customers, the company is confident of the future of the MSR program. The success of this initiative in the future, not only guarantees incremental revenues and profit for the company, but also provides the company with increased loyal customers for the longer term. On the other hand, mobile payment features provided by the company has not only been convenient for current customers, but also has been attracting many new customers. The Starbucks mobile Order and Pay is an integrated technology that allows customers to place an order at a store of their convenience and pick up the completed order and pay through the app as well. This saves time and effort for the customers and faster service for the company’s outlets, giving a better experience to the customers. According to the data provided by the company, around 13 million customers are using the Starbucks mobile app in the U.S. alone, with 7 million transactions per week. The company plans to launch this initiative in 600 stores in the Pacific Northwest in the coming months. Starbucks is planning on introducing a “delivery” feature in the second half of 2015, which when coupled with mobile order and pay, might increase customer traffic in the coming years. Expansion Plans On The Cards Starbucks hosted its 2014 Biennial Investor Day in the first week of December, where the company’s CEO Howard Schultz mentioned that the company is prepared to enter and unlock new markets and channels through different store formats around the world. Drive-thru and roadside stores provide good growth opportunities for the company. The company opened 512 net new stores in the first quarter of fiscal 2015, taking its total count to 21,878; and it plans to increase the count to 30,000 over the next five years. Starbucks has introduced a concept of new super premium sub-brand ‘Starbucks Reserve’ that would be dealing with a premium version of the product. The company plans to add one hundred of these reserve stores around the world, starting with San Francisco. China & Asia-Pacific (CAP) Starbucks reported an 8% y-o-y increase in the comparable store sales in the CAP region this quarter, primarily due to an increase in the customer count. The segment remains the prime focus for the company’s future growth, as the region has nearly 4,800 stores. China is the company’s largest market outside U.S., with stores across 86 cities in the country. The company plans on taking the country’s store count to 3,400 by the end of fiscal 2019. Shanghai has 320 Starbucks stores, making it the city with the most Starbucks stores in the world. Moreover, Starbucks China launched 8 Reserve Stores in 5 cities. On December 17, the company opened a new Chengdu Taikoo Li store in China, as a part of its plan for innovation and expansion in China. The Starbucks’ flagship store is designed to introduce and encourage Starbucks’ Reserve Coffee — a rare and exquisite Arabica coffee. On September 23, Starbucks announced its plan to acquire the remaining 60.5% of Starbucks Japan through a two-step tender offer process for about $914 million. Through this deal, the company plans to expand into this lucrative coffee market and thereby expand product sales through food service channels, to accelerate the retail sales and to provide a boost to the smaller share of RTD products. As a result of this acquisition, coupled with 767 net new store openings, the revenues for the segment grew 86% y-o-y to $496 million. The deal will be completed by the end of the second quarter of fiscal 2015, making Japan the company’s first international market outside North America. Growth Opportunities: New Beverage Segment Starbucks is already one of the dominant forces in the coffee industry, with 13% of the single-serve coffee market, behind only  Keurig Green Mountain (NASDAQ:GMCR). Apart from its renowned coffee stores, the company also owns and operates other brands such as Tazo, Seattle’s Best Coffee, Teavana, Evolution Fresh, and La Boulange. With complete integration of Teavana, the company now plans to double the business to $2 billion over the period of 5 years, with a primary focus in the CAP region. With its tea segment and recently introduced cold carbonated beverage segment, the company is entering into lucrative markets with completely different target customers. Both the new brands provide excellent platforms for the company to expand into bigger markets, apart from its coffee business. The company’s handcrafted tea beverages in retail stores are driving revenue growth, with overwhelming market response to Teavana branded Shaken Iced Tea and Teavana Tea Lattes. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    F Logo
    Weekly Auto Notes: Why Ford's New Supercar GT Is Important For The Company
  • By , 1/23/15
  • tags: F GM TSLA
  • Ford Motors (NYSE:F) is setting up a new global performance division under whose umbrella it is expected to release 12 performance cars through 2020. The division will pull together the SVT team from the U.S., the RS team from Europe, and Ford Racing. At the North American International Auto Show (Detroit Auto Show) Ford introduced the new Ford GT, a V6 super car that is expected to go into production late next year. The GT is an ultra high-performance car with a new twin-turbocharged 3.5-liter Eco boost engine that can operate at 600 horse power. Ford is reintroducing the car after a 10 year hiatus, having offered the car on the market briefly between 2004 and 2006. The company plans to introduce as many as 12 performance vehicles by 2020. Performance cars don’t tend to do well on the fuel-efficiency front, so it might seem like a counter-intuitive move for Ford, which has been making a big push towards making fuel-efficient products; like the all-new, aluminum bodied F-150 series of trucks, to suddenly enter this market. However, there are two good reasons for this move by Ford, including some that are supporting of the push to make more environmentally friendly cars. 1) Performance Vehicle Sales Are Trending Upward : Global sales of high-performance vehicles are up 70% since 2009, according to Ford. In comparison, light vehicles have grown by only 55% during that time period. 2) Performance Vehicles Attract Customers To The Brand : Sales numbers are not the only reason the performance vehicles are important to Ford. One cannot reasonably expect super cars to outsell any  of the company’s mainstream vehicles in the coming years. However, they generate considerably more buzz among car enthusiasts than the mass-market models. Car enthusiasts are generally loyal to brands and play a key role in influencing the views of younger consumers. According to the company, nearly two-thirds of the customers who buy the high-performance ST versions of the Fiesta and Focus are newcomers to the brand. What’s more: most of these tend to become regulars with the brand, with nearly 35% going on to buy another Ford. Additionally, these buyers tend to be a lot younger. Younger people see their incomes rise faster and as a result they tend to buy ST models at twice the rate that other people buy Ford’s products. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    PBR Logo
    Weekly Oil & Gas Notes: Petrobras' Asset Writedown and Exxon's New Project Startup
  • By , 1/23/15
  • Oil and gas stocks slightly strengthened this week as benchmark crude oil prices remained largely flat after falling sharply by more than 57% since hitting a short-term peak in June of last year, due to slower demand growth and rising tight oil supply in the U.S.  The price of the front-month Brent crude oil futures contract on the ICE remained largely flat around $49/barrel this week and is currently trading around the same level. The  NYSE Arca Oil & Gas Index (^XOI) grew by around 3%. We believe that the recent decline in oil prices could sustain for a longer period amid slower demand growth and diminishing price-controlling power of the OPEC (Organization of Petroleum Exporting Countries). According to our estimates, annual average crude oil prices (Brent) could bottom out around $80-85 per barrel by 2017 and rise back to $100 per barrel by 2020. (See:  Where Are Crude Oil Prices Headed In The Long Run ) 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’ Asset Writedown The O Globo newspaper recently reported that  Petrobras (NYSE:PBR) might take a $3.9 billion write down in its delayed 2014 third quarter earnings announcement, citing unnamed sources in the Brazilian government. The amount is very close to the $4 billion asset devaluation that we have already included in our current price estimate for the company. The expected write-down is a result of ongoing investigations into the bribery and corruption scandal that hit Petrobras after one of the company’s former executives alleged that it systematically overpaid construction companies hired on contract work and that the excess funds were kicked back to politicians from the ruling party and its allies. We currently have a  $13/share price estimate for Petrobras, which is around 70% above its current market price. The company’s share price increased by around 5.5% this week. We currently estimate Petrobras’ 2015 diluted EPS to be at $1.45, compared to the consensus estimate of $1.24 reported by Reuters. See Our Complete Analysis For Petrobras Exxon’s New Project Startup Exxon Mobil (NYSE:XOM) recently announced the start-up of production from the Arkutun-Dagi field located off the northeast coast of Sakhalin Island in the Russian Far East. The development of the field is a part of the company’s Sakhalin-1 project that includes two other fields – Chayvo and Odoptu – which began production in 2005 and 2010, respectively. Exxon expects production from the Arkutun-Dagi field to be ramped up to 90,000 barrels per day in the coming months. This would boost total production from the Sakhalin-1 project to over 200,000 barrels per day. Exxon is the operator of the Sakhalin-1 project with a 30% interest. Other stakeholders in the project include Sakhalin Oil and Gas Development Company Ltd. (30% Stake), ONGC Videsh Ltd. (20% Stake), Sakhalinmorneftegas-Shelf (11.5% Stake), and Rn-Astra (8.5% Stake). We currently have a  $98/share price estimate for Exxon Mobil, which is around 5% above its current market price. The company’s share price increased by around 1% this week. We currently estimate Exxon’s 2015 GAAP diluted EPS to be at $7.43, compared to the consensus estimate of $4.65 reported by Reuters. See Our Complete Analysis For Exxon Mobil View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    PCLN Logo
    Expedia And Priceline's Mobile Application Releases And The Trends That Govern These Launches
  • By , 1/23/15
  • Expedia’s Real Time Feedback and Sell Tonight: Improving Service Experiences For Both The Traveler And The Hotelier On January 13, Expedia (NASDAQ: EXPE) announced the release of two new products called Real Time Feedback and Sell Tonight — tools which will be useful for both travelers and hoteliers. The products are currently available in test markets in the U.S. and will be gradually introduced on a global scale later this year. The products are latest features added to the hotel-facing tool suite called Expedia PartnerCentral (EPC). Real Time Feedback’s target audience are mobile-savvy travelers. The product is designed on the basis of feedback from hoteliers who wished to gain more support from Expedia in securing positive hotel reviews. The real time interface sends an email or notification via mobile application to a guest, shortly after the guest checks into an hotel. The email/notification contains three questions: “How was your check in?”; “How is your room?” and “Are you happy with the location?” Guests are encouraged to provide specific feedback, which are transmitted in real time to the hotelier via Expedia PartnerCentral. The hotelier gets the opportunity to act upon the feedback, thereby avoiding a potential negative trip review from the traveler later on. The other product, Sell Tonight (accessible via Expedia PartnerCentral), allows hoteliers to push out same day rates and availability to and customers, through the customers’ mobile applications. The product also informs hoteliers about the same day rates prevalent in their markets, hence making the hoteliers better equipped to compete and increase the same day bookings. Expedia’s investment in technology was to the tune of $650 million for twelve months ending September 30, 2014. We have a price estimate of $84 for Expedia’s stock, almost in line with its current market price. See Our Complete Analysis for Expedia Here Priceline’s Launches Booking Now: Expanding Booking Options And Enhancing The Travel Experiences For Impromptu Travelers On January 15, Priceline’s (NASDAQ: PCLN) accommodation site, announced the launch of Booking Now -a mobile application that aims at providing a customized booking experience to its users, by utilizing user behavior data and GPS technology. The application is currently available for download in the U.S. in Apple’s App Store but will gradually be rolled out globally. The application platform will comprise of over 580,000 properties across the globe, and provide custom accommodation recommendations for spontaneous travelers wishing to book accommodations within 48 hours. Booking Now personalizes real time search results for travelers based on the profile they create on the website, with specific preferences such as desired price range and options like parking, breakfast and Wi-Fi. Booking Now suggestions can also be based on the user’s current street location anywhere in the world. Priceline would offer stiff competition to brands such as Hotel Tonight with its Booking Now. Hotel Tonight popularized the concept of same day bookings in 2010 and enjoyed huge growth ever since, along with a $80 million funding. Although, there were competitors who tried to gain market share, Hotel Tonight never before experienced competition from such a formidable adversary like Priceline. We have a price estimate of $1108 for Priceline’s stock, which is at a 10% premium to the current market price. See Our Complete Analysis for Priceline Here The application releases by the two online travel behemoths point towards the importance of quick-turnaround bookings, primarily completed on the mobile platform. Expedia and Priceline both seem to understand that the present day traveler needs to book services at a very short notice, and also, that the travelers expect the ubiquitous presence of the online travel agencies at every stage of the booking process and even thereafter. Hence, embracing these aspects are of crucial importance for gaining competitive edges in the market place. Hence, some of the trends that will rule the online travel market in 2015 seem to emerge from these early application releases. These trends are discussed below: The Future Of Online Travel Belongs To Mobile According to Forrester Research, the market for mobile payments in the U.S. will expand from $52 billion in 2014 to $142 billion by 2019. Also, in terms of smartphone ownership, only 19% of U.S. consumers owned a smartphone in 2009. The percentage increased to 66% in 2014. Hence, if we assume the majority of smartphone owners make mobile transactions, then such applications such as Booking Now and Sell Tonight become really crucial in expanding the user base and increasing the number of transactions for the online travel agencies. Travelers and Hoteliers Alike Are Looking Forward To Quick Turnaround Products And Services In this fast paced world, travel booking is not always a leisurely or planned process, wherein consumers book itineraries months in advance. Travelers are looking for hotels or flights just hours before their journey. On the other hand, there are hoteliers who want to offload excess inventory at the best possible prices. Hence, the online travel agencies are taking on the role of ‘matchmakers’: they’re matching both the demand and supply and in turn, increasing their own profitability. Travelers Expect Seamless End-To-End Service From The Initiation Of Booking Till The End Of Their Journeys The intense competition in the online travel space is good news for the customers, whereas for the online travel companies this implies that constant innovation and upgradation of services is the trick to stay ahead of competition. Users expect better service from the online travel agencies, and this includes a seamless end-to-end experience —  from the time they book travel related services until the completion of their journeys. Hence, an application like Real Time Feedback, gives the traveler the benefit of better services, and it also provides hotels the chance to avoid being negatively reviewed. Both the hoteliers and users are presented with a better travel and service experience. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    PFE Logo
    Pfizer Earnings Preview: Vaccines & Oncology Will Shine, But The Company Needs More
  • By , 1/23/15
  • tags: PFE
  • Pfizer (NYSE:PFE) will report its Q4 2014 earnings on January 27th. We expect the results to reflect the continued pressure on the company’s topline growth, which comes from the loss of patents and the termination of co-promotion agreements, partially offset by the growth in vaccines and oncology drugs. The company has been looking at new avenues for growth and its vaccines business and oncology pipeline hold some promise. But given its mammoth size, we believe that the next phase of growth may come from a major acquisition. Last year, Pfizer made an attempt to acquire AstraZeneca but the deal  eventually fell through. Overall, we believe that even though the upcoming earnings may show Pfizer’s financial discipline, investors will still be asking bigger questions related to growth. Our price estimate for Pfizer stands at $35, implying a premium of about 10% to the market.
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    Lexmark Earnings Preview:Growth In Laser Supplies And Perceptive In Focus
  • By , 1/23/15
  • tags: LXK HPQ
  • Lexmark International (NYSE:LXK) is set to release its Q4 2014 results on January 27th. Lexmark’s revenues continue to decline as it transitions from low margin hardware-centric inkjet printer business to high-margin services business. However, recent results indicate that the decline in Lexmark’s revenues is slowing. Nevertheless, operating income and net income are growing, reflecting a shift in focus from low margin hsrdware to high margin software services. We expect the company to report a similar trend in its Q4 earnings announcement. However, we will be closely following the growth in the number of new licenses for its Managed Print Services (MPS) business, as it can offset the decline in non-MPS revenues of imaging and software solutions (ISS). See our full analysis on Lexmark Outlook For Q4 And 2014 For Q4 FY14, the company expects revenues to decline by 2% to 4% year over year and non-GAAP earnings per share to be in the $1.10 to $1.20 range. Lexmark has revised its revenue guidance for FY 2014 upwards and expects revenue to decline at a slower rate, specifically by 1% or less. Non-GAAP EPS guidance has also been revised upwards to $4.05 to $4.15 range. Laser And MPS Revenues to Boost Supplies Revenues The laser printer and cartridge division is its biggest business unit and makes up for over 84% of Lexmark’s estimated value. In the recent quarters, unit sales of printer hardware and supplies have declined, both for Lexmark and the market at large. This is impacting both laser printers and inkjet printers, which the company no longer produces. We expect Lexmark to gain ground in the laser market in Q4, and buck the downtrend in the Hardcopy Peripherals Market, which declined by 4% year over year in Q3. Furthermore, there has been a gradual shift in hardcopy peripheral devices away from the desktop and towards more shared and centralized solutions. This shift is driving some of the growth in the printer hardware sales. It is also bolstering revenues for companies that provide MPS, which includes procurement, maintenance and other aspects of printing. We expect that MPS integrated with Perceptive’s solutions will deliver value to Lexmark’s growing client base. We also expect MPS to propel the supplies revenues as most of the MPS contracts also contain a clause for supplying printer stationery and cartridges. Going forward, we expect MPS to become the biggest driver of revenue for the ISS. Revenue Growth from Perceptive Software in Focus The Perceptive software division is the second biggest business unit and makes up nearly 11.2% of Lexmark’s estimated value. As Lexmark plans to become an end-to-end solution provider, Perceptive Software is becoming an increasingly important division for Lexmark. Perceptive experienced annual growth of 53% in the Enterprise Content Management (ECM) business in 2013, and reported $239 million in revenues for FY13. To ensure that the growth in this line of business continues, the company continues to acquire companies that can bolster Perceptive’s portfolio and reach across the globe. As a result of these efforts, we expect growth trend to continue in Q4, and in 2014. We also expect that the growth in Perceptive’s licensing revenue will contribute to the bottom line in Q4 as it is a high margin business. In this earnings call, we will continue to closely follow the deal pipeline for the Perceptive software business. We currently have a  $44.30 Trefis price estimate for Lexmark, which is 12% above its 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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    Under Armour's Management Changes Show That It Is Focused On Growth
  • By , 1/23/15
  • tags: UA NKE ADDYY
  • Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear, and accessories, is quite unique in being able to boast of the kind of growth it has exhibited over the past few years. The company has posted an increase of greater than 20% in top line growth for 18 consecutive quarters and over 30% top line growth for the last four quarters. Since the company went public in 2005, its stock has grown ten-fold  in value. Recently, the company over took European sports giant Adidas to become the second largest athletic wear company in the U.S.  But the company is not resting on its laurels and is looking to grow even more. To this end, the company underwent significant management changes toward the end of 2014, with multiple managers moving to different positions in different divisions to bring their expertise to various aspects of the business. Below, we take a look at what the company plans to achieve with this managerial shuffle. We have a $74 price estimate for Under Armour, which is about 12% higher than the current market price. See our complete analysis for Under Armour here Growing Footwear Is a Major Concern Under Armour is a relative newcomer in the footwear market. Even in the U.S., from where the company earns nearly 90% of its revenues, the Under Armour brand only has a 2.5% share of the market. Compared to this, Nike has nearly 25% of the global sports footwear market and 60% of the U.S. sports footwear market including the Jordan and Converse brands. The overall global sports footwear market is only expected to grow at a CAGR of 1.5%, expanding to reach $87 billion from the current $78 billion, by 2020. This makes the task of gaining market share in the footwear space more challenge than it already is. If Under Armour is to increase its market share, it will have to grow at a faster rate than the overall market, which means that it will have to attract customers away from competitors like Nike, Adidas, Puma, Skechers, Asics, and Wolverine. This fight for market share is going to first materialize in the stores of footwear retailers like Foot Locker.   These retailers only offer limited floor space to companies and that limits the number of shoes they can sell. One reason for Under Armour’s low market share is simply the limited number of volumes it sells compared to Nike.  Currently, Under Armour is only banking on its running category, which it can up-sell by leveraging its recently acquired fitness technology, MapMyFitness.  But in the future, it will have to expand to other categories, like training, baseball, and soccer, which will be key for international growth. Comparatively, Nike offers running, basketball, baseball, soccer, training, and casual shoes, in addition to slippers and children’s footwear, and it is an influential name in each of these categories. It is possible for Under Armour to channel Nike in terms of market presence, but it first must find people willing to sell all these shoes. For that it will have to take away floor space in these retail chains from competitors, which can only be triggered by the exceptional performance of the Under Armour shoes at these stores. The man entrusted with overseeing this task appears to be former COO Kip Fulks. The company is starting to do well in its footwear operations. In the last quarter, while the overall revenue grew by 30%, footwear revenue grew by more than 50%. The main reason for this jump in revenue was the performance of the company’s new line of running shoes, SPEEDFORM. The shoe surprised industry watchers with the reception it received in the press and consumers responded equally enthusiastically to the shoe when it was released in the market in April 2014. The more than 50% jump in year-over-year footwear revenues shows that the company’s push into this market segment is now working. International Growth Is Another Opportunity The majority of these changes were made to affect the company’s international operations. In the most recent quarter, Under Armour’s international revenues grew by more than 90% year-over-year. Even after that stellar performance, international revenues still account for less than 10% of the company’s overall revenues. Former senior VP of North American sales Adam Peake has now moved to the position of global head of marketing. The company has previously stated that it would one day like its international revenues to be at least half the size of its overall business. Moreover, the company plans to expand its operations in the markets of Asia, Europe, Australia, and Latin America. The share of international sales in overall sales is forecast to rise from 6% in 2013 to 12% by 2016. Attracting More Customers To The Brand Under Armour bought the fitness tracking app MapMyFitness in 2013 for about $150 million. The app allows users to track their fitness with the use of multiple brands of fitness trackers like jawbone and fitbit. Additionally, the company is looking to partner with HTC on a completely new fitness-tracking hardware device to go along with the app. The revenue generation capacity of the app is probably miniscule at best. However, it will work as a marketing tool for the company. The strategy will be to attract fitness conscious consumers to the brand through the use of the app, and then try to sell them the company’s apparel, footwear, and accessories product that meet their needs. Additionally, the company will also gain access to data that allows it insight into the needs of consumers and use it to design products in the future. It should not be surprising if in the near future the company, which is already working on smart clothing that allows it to incorporate technology into active wear, starts taking market share away from Nike in the digital fitness market. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    U.S. Steel Earnings Preview: Robust Market Conditions In U.S. To Partially Offset Impact Of Planned Maintenance Activity On Results
  • By , 1/23/15
  • tags: X MT RIO VALE CLF
  • U.S. Steel (NYSE:X) will release its fourth quarter results on January 27 and conduct a conference call with analysts the next day. Planned maintenance activity in the fourth quarter will adversely affect year-over-year quarterly results of the Flat-rolled Products segment, which accounts for around two-thirds of the company’s revenues. The planned maintenance activity is expected to result in higher repairs and maintenance costs and lower shipments from the segment. Improved market conditions for steel in North America in Q4 2014, as compared to the corresponding period a year ago, as well as the deconsolidation of the results of the company’s loss-making subsidiary, U.S. Steel Canada, which filed for bankruptcy protection in Q3, will partially offset the adverse impact of the planned maintenance activity on the Flat-rolled Products segment’s operating income. Lower raw materials costs and the company’s cost reduction efforts are expected to boost the results of the U.S. Steel Europe (USSE) segment, despite weak market conditions in Europe. Improved business conditions for the Tubular Products segment are expected to boost the segment’s operating income. See our complete analysis for U.S. Steel Steel Demand and Prices The principal consumers of steel products are the automotive, construction, appliance, machinery, equipment, infrastructure, and transportation industries. The nature of business of these sectors is cyclical, with demand generally correlated with macroeconomic conditions. Thus, demand for steel products is generally correlated with macroeconomic fluctuations in the global economy. Steel prices have fallen over the last few years, driven primarily by weak demand due to adverse macroeconomic conditions in the developed economies and an oversupply situation. This is indicated by trends in the London Metal Exchange (LME) Steel Billet Prices. Over the course of the last year or so, steel prices have recovered somewhat, driven by an economic recovery in the developed economies, particularly in the manufacturing sector. The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. This indicates strong manufacturing activity in the U.S., which was reflected in U.S. Steel’s third quarter results. Average realized steel prices for the Flat-rolled Products segment, which primarily serves customers in North America, rose 3.3% year-over-year to $777 per ton in the third quarter, from $752 per ton in the corresponding period last year. As per estimates by the World Steel Association, steel demand in the North American Free Trade Agreement (NAFTA) region, which consists of the U.S., Canada, and Mexico, grew by 3.8% in 2014, as compared to a 2.4% fall in demand in 2013. A strong steel demand and pricing environment in North America will positively impact the results of the Flat-rolled Products segment in the fourth quarter. The Manufacturing PMI for the Eurozone has faltered somewhat lately, indicating slowing manufacturing activity. The Manufacturing PMI for the Eurozone, which stood at 54 for January 2014, declined to 50.8 for December. With faltering economic growth and manufacturing activity, as indicated by the manufacturing PMI figures, steel demand and pricing is expected to remain weak in Europe. The USSE segment’s results will be boosted by weakness in iron ore prices. Iron ore is the chief raw material in steel-making. The USSE segment primarily sources iron ore from third parties, in contrast to the company’s North American operations, which primarily rely on the company’s in-house iron ore production facilities. Thus the USSE segment is more prone to fluctuations in iron ore prices. The recent decline in iron ore prices due to weak demand and an oversupply situation will lower raw material costs and boost the USSE segment’s results. Iron ore spot prices stood at $68 per dry metric ton (dmt) at the end of December 2014, about 50% lower than at the corresponding point of time a year ago. Improved Business Conditions for Tubular Steel The Tubular Products segment of U.S. Steel is primarily involved in the production and sale of Oil Country Tubular Goods (OCTGs). These goods serve customers in the oil, gas, and petrochemicals markets. Energy related tubular products imported into the U.S. accounted for approximately 49% of the U.S. domestic market in 2013. These imported OCTGs are priced significantly lower than U.S. Steel’s tubular products. U.S. Steel and other domestic steel producers had sought the imposition of anti-dumping duties and countervailing duties against these imports, claiming that these products were priced unfairly low. Cheap OCTG imports negatively impacted the fortunes of U.S. Steel’s Tubular Products division over the past couple of years. This was primarily because of a fall in the average realized price for this division. Realized prices for the Tubular Products division fell due to competition from cheap OCTG imports. The average realized price per ton fell from $1,687  in 2012 to $1,530 in 2013, and further to $1,508 in the first nine months of 2014. Gross margins for the division have correspondingly fallen from 15% in 2012 to 11% in 2013 and the first nine months of 2014. The company had announced the idling of two facilities producing tubular steel earlier on in the year, citing difficult business conditions created primarily by the imports of tubular goods. The results for the Tubular Steel segment will be boosted by the U.S. International Trade Commission’s (ITC) recent ruling in the Oil Country Tubular Goods (OCTG) trade case. The ITC ruled that anti-dumping duties will be levied against OCTG imports from South Korea, India, Taiwan, Turkey, Ukraine, and Vietnam.  OCTG imports from these countries account for the bulk of the imported energy-related tubular steel goods in the U.S., which were affecting the sales and realized prices of the Tubular Steel division. The ITC ruling, along with an improved product mix as a result of a reduction in the company’s exposure to welded line pipe, will result in an improvement in realized prices for the segment in Q4. However, shipment volumes will decline as a result of the idling of the McKeesport and Bellville facilities earlier on in the year. The Carnegie Way With a subdued steel pricing environment prevailing in 2013, the company had launched an initiative known as ‘The Carnegie Way’, which is focused on cost reductions and improvements in operational efficiency. The company is expected to realize $495 million in margin improvements through this initiative in 2014.  Cost savings under The Carnegie Way initiative are an integral part of the company’s strategy to remain competitive and will boost the company’s profitability. Expectations from the Conference Call The company’s management is expected to give its outlook on shipments and price realizations for the next quarter. We would be looking at the management’s expectations for its USSE segment, in order to better understand the extent of the impact of the prevailing economic weakness in Europe upon the company’s operations. We would also like to hear the management’s views about the impact of the recent slump in oil prices on the results of the Tubular Products segment in 2015. There is expected to be a significant reduction in upstream capital expenditure in the U.S. as a result of the weakness in oil prices. This is likely to negatively impact the fortunes of U.S. Steel’s Tubular Products segment. Further, details regarding initiatives to be undertaken under The Carnegie Way initiative will be of interest to us. This will throw some light on the road ahead for U.S. Steel. 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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    Freeport-McMoran Earnings Preview: Lower Copper And Oil Prices To Weigh On Results
  • By , 1/23/15
  • Freeport-McMoran Inc. (NYSE:FCX) will report its fourth quarter results and conduct a conference call with analysts on January 27. We expect the ongoing weakness in copper and oil prices to adversely impact the company’s results in Q4. Freeport sold off its interest in two of its Chilean copper mines — Candelaria and Ojos del Salado — in November. As a result, the company’s production volumes are likely to be lower in Q4 2014, as compared to the corresponding period the previous year. See our complete analysis for Freeport-McMoran Copper Prices Freeport’s average realized price for copper stood at $3.14 per pound in the first nine months of 2014, as compared to $3.31 per pound in the corresponding period of 2013. Copper has diverse applications in industry, particularly in the manufacturing, power, and infrastructure sectors. The decline in copper prices this year was mainly due to concerns over copper demand from China, due to recent signs of economic sluggishness. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand for copper. The weak Chinese economic prospects are captured by the Manufacturing Purchasing Managers’ Index (PMI). The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. Chinese Manufacturing PMI, reported by China’s National Bureau of Statistics, stood at 50.1 in November, and has ranged between 50.1 and 51.7 for the whole year. The weak PMI numbers are indicative of sluggishness in the Chinese economy. China’s GDP growth is expected to slow to 7.1% in 2015, from 7.3% and 7.7% in 2014 and 2013 respectively. London Metal Exchange (LME) copper prices averaged roughly $6,600 per ton in Q4 2014, as compared to approximately $7,200 per ton in Q4 2013. The weakness in copper prices will adversely affect Freeport’s year-over-year quarterly results. Oil and Gas Operations Freeport’s Oil and Gas division is expected to report lower year-over-year quarterly revenues and profits, as a result of lower volumes as well as realized prices in the fourth quarter, as compared to the corresponding period in 2013. The company sold off its Eagle Ford shale assets in Q2 2014. The Eagle Ford shale assets accounted for 4 million barrels of oil equivalents, or 25% of the company’s second quarter oil and gas sales of 16 MMBOE. Price realizations for its Oil  and Gas division will fall on a year-over-year basis due to a fall in oil prices. Brent Crude spot prices averaged roughly $109 per barrel in the fourth quarter of 2013, as compared to around $76 per barrel in the fourth quarter of 2014. Oil prices have declined recently due to an oversupply situation. Oil supply has been boosted by rising oil and gas output from the U.S., where hydraulic fracturing techniques have helped boost output. In addition, major oil producers of the Organization of the Petroleum Exporting Countries (OPEC) have not lowered output in response to falling prices, in order to preserve their market shares. Demand for oil remains weak in the midst of economic weakness in Europe and slowing Chinese growth. Lower oil prices will negatively impact the results of Freeport’s Oil and Gas division. Other Developments The company completed the sale of its Candelaria and Ojos del Salado copper mines in Chile to Lundin Mining Corporation for $1.8 billion and a contingent consideration of up to $0.2 billion. These mines accounted for around 10% of the company’s consolidated copper production of approximately 4.13 billion pounds of copper in 2013. As of December 31, 2013, the mining complex accounted for 3.4 billion pounds in proven and probable reserves, which translates into roughly 3% of the company’s consolidated proven and probable reserves. The company realized after-tax net proceeds of approximately $1.5 billion from the transaction, excluding the contingent consideration. The focus of this transaction is to use the proceeds to pare down the company’s heavy debt burden. At the end of the third quarter, Freeport’s total debt stood at $19.7 billion, with $658 in cash and cash equivalents. The company is targeting a reduction in its total debt to $12 billion by the end of 2016. Thus, there is still a long way to go for Freeport in its debt reduction efforts. 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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    Coach Earnings Preview: North America Weakness To Dampen Overall Performance
  • By , 1/23/15
  • tags: COH KORS
  • Coach Inc (NYSE:COH), a leading American marketer of luxury handbags and other fashion accessories, will report its Q2 fiscal 2015 next week. Its North American results will be keenly tracked by analysts as the company has reported disappointing results from the region in the previous six quarters. Comparable store sales have been declining as a result of rising competition from brands such as Michael Kors, Kate Spade, and Tory Burch. As a result of declining sales, Coach decided to close as many as 70 stores in North America, resulting in a 13% decline in its North American store count. The company finances its stores through operating leases but has to pay fixed cash rentals to obtain premium in-line store locations in malls. The high ratio of fixed costs in the cost structure of its stores means that when sales decline, the company cannot retain its margins by scaling back on inventory. (See: The Real Reason Why Coach Has Been Struggling ) Consequently, the only way to retain its margins is to close its stores. As a result of the closure of these stores, we expect Coach’s revenues to decline. Even adjusting for these store closures, it is hard to see the company posting gains in sales from the stores that are still standing. We believe that the company’s North American results will remain weak in the near term. Since these operations account for about two-third of Coach’s sales, the retailer’s overall results will also feel the negative impact. However, Coach’s international and men’s business hold some upside for the company’s results, and this could be a highlight in its release. It will be interesting to see Coach’s progress on its brand transformation strategy, as its success is the key for the company to sustain its market share in the North American handbags and accessories market. The strategy has had some time to come into effect and it will be interesting to see if the buzz generated by the campaigns based around the strategy will translate into more sales for the companies’ products. Additionally, Coach has completed the acquisition of shoe maker Stuart Weitzman. (See: Here’s Why Coach Is Being Cited As A Potential Suitor For Stuart Weitzman )  It will be interesting to hear how the management plans to integrate this business into Coach’s overall operations. See our complete analysis for Coach Recap Of Q1 2015 Results After five consecutive disappointing quarters, Coach posted another set of lackluster results in Q1 fiscal 2015. Coach’s sales in North America dropped by 19% for the quarter to $634 million, with a 19% fall in direct sales and a 24% fall in comparable store sales.  Given the overwhelming dependence of Coach’s business on its operations in North America the significant decline in North American sales was enough to offset the gains made by Coach in its men’s, footwear, and international businesses. For the quarter, international sales increased by 6% on a constant currency basis, with China sales especially growing at 10% for the quarter. However, there was a silver lining: the company managed to grow its men’s business to about $700 million in annual sales in fiscal 2014. This means that the men’s business now contributes about 23% to the company’s overall revenues compared to about 15% in fiscal 2013. It needs to be noted, however, that the increase in penetration is only partly due to increasing sales of products designed especially for men, a large part of the increase in contribution is due to the overall decline in the company’s revenues. According to the company’s estimates, the global spend on men’s luxury wear is about $7 billion, which represents 18% of the total spend on luxury products. The figure is expected to increase at about a 10% rate in the next five years. Brand Transformation Strategy Coach is undertaking a brand transformation strategy to position itself as a global lifestyle brand anchored in accessories. It is re-aligning its products, stores, marketing, and executive management team as part of this strategy. Over the past few quarters, Coach has reduced its dependence on flash sales, factory sales, and discount coupons. Additionally, the company has been trying to raise the average unit price of products. Coach’s handbags priced above $400 have been some of the best performing products for the company over the past year. Additionally, Coach has been trying to increase the penetration of footwear products in its overall sales. The footwear line was relaunched in March in about 170 retail locations but its penetration over fiscal 2014 failed to increase from 12% in retail sales. This is highly disappointing as the footwear segment represents a great opportunity for Coach to make up for its falling market share in the women’s handbags business and still keep its business equally profitable. Nevertheless, the company remains focused on building its market share within the highly fragmented global premium footwear category, which it estimates at about $25 billion. Coach has been expanding its distribution of footwear to both international stores and wholesale outlets. It has also been trying to maximize the productivity of footwear to its overall business through a sales mix with increasing contribution of products with higher average unit prices (AUP). It is in this regard that the acquisition of Stuart Weitzman is interesting. Stuart Weitzman made about $300 million in revenues in 2014. The addition of this figure would have raised Coach’s annual revenue by 6% and that of Coach’s footwear business by 50%. It will be interesting to hear what the management has to say regarding their revenue and profit expectations from the integration of this business. International Sales will Continue to Grow at a Healthy Rate Growth in international sales represents one of the key long-term growth drivers for Coach. In Q1 2015, Coach’s international sales rose by 6% in constant currency terms, on the back of a 10% rise in Chinese sales. In addition, Coach’s sales in the Asian markets of Korea, Taiwan, Malaysia, and Singapore continue to rise at a healthy rate. Coach aims to grow aggressively in Europe as well. Coach also intends to enhance its distributor-run business in Latin America, other Asia-Pacific countries (Australia, Thailand, and Indonesia), and in the Middle East. As a result, we believe the proportion of international sales in Coach’s overall sales will rise in the future. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Bristol-Myers Squibb Earnings Preview: Increasing Sales From New Drugs May Ease The Pressure Off Revenue Growth
  • By , 1/23/15
  • tags: BMY MRK RHHBY
  • As Bristol-Myers Squibb (NYSE:BMY) reports its Q4 2014 earnings on January 27th, we expect the growing adoption of Eliquis and the ramp up in sales of Hepatitis C and oncology drugs will ease some of the pressure on the company’s revenue growth. We believe that these segments are likely to be major growth contributors for Bristol-Myers Squibb in the coming years. Sustiva, which brought in more than $1 billion in revenues in the first nine months of 2014, will continue to face the impact of loss of patent exclusivity in Europe. Additionally, we look forward to an update on the FDA review of Bristol-Myers Squibb’s drug Nivolumab which is intended to treat  advanced melanoma. The agency had granted breakthrough status to the medicine and had agreed to review the license application on a priority basis. Once the review is complete, Bristol-Myers Squibb’s revenues should experience significant additional support, perhaps even this year. Our current price estimate for Bristol-Myers Squibb stands at $52.70, implying a discount of about 15% to the market.
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    Weekly Tobacco Notes: Altria And Philip Morris
  • By , 1/23/15
  • In our weekly tobacco note, we focus on the Altria Group (NYSE:MO) and Philip Morris International (NYSE:PM). The states of New York and Washington are mulling new proposals to prevent young people from smoking, while Philip Morris is facing a similar situation in the U.K. It has also slashed its prices in South Korea to gain greater market share.
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    Chinese Internet Weekly Note
  • By , 1/23/15
  • In our Chinese Internet note this week we focus on Baidu (NASDAQ: BIDU) and Renren (NYSE:RENN). While Baidu maintained its dominance in mobile Internet search in China in 2014, it is facing strong competition. Meanwhile it is seeking to improve its video hosting site through a partnership with Intel (NYSE:INTC). Another Chinese Internet company, Renren, has invested in a stock trading website. Baidu’s Continuing Dominance In Mobile Search Attracts Competitors Baidu’s mobile search app. which is the market leader with 136 million active users, registered good growth in 2014. The service registered a 105% year on year increase in the number of websites included in the search results. Although the growth in the number of active users of smartphones slowed in 2014, mobile search queries on Baidu’s mobile search increased. This increase was helped mostly by search queries on education and lifestyle. These items registered increase in search queries of 191% and 142%, respectively. Alibaba (NYSE:BABA), meanwhile, is trying to dislodge Baidu mobile search from its perch. Its Shenma service is believed to have a 20% mobile market share by volume, while Baidu has 60%. Shenma is a joint venture of Alibaba with browser maker UCWeb, in which the latter holds the controlling stake. The key selling points of its search engine are more streamlined search results and better integration with Alibaba’s other services. Analysts believe UCWeb browser’s user base and Alibaba’s brand awareness and e-commerce services will help Shenma compete successfully in the mobile search category. However, Baidu’s lead in the category is expected to remain. Its monetization is also expected to improve on the back of more aggressive spending by customers on search advertising. Baidu’s Online Video Arm Partners With Intel Baidu has partnered with Intel to improve its online video hosting service, IQiyi. IQiyi contributes 7.74% of the value of Baidu. The partnership with Intel is aimed at boosting the division’s video storage, cloud computing and big data analysis capabilities. Intel is expected to help IQiyi with the renovation of its data center and content distribution network. To this end, Intel will provide IQiyi with processors, solid state drives and Ethernet adapters. The deal will help IQiyi realize its aim of doubling original content in 2015 on a year on year basis. It also comes close on the heels of another deal with Dolby laboratories for their surround sound technology. We have a price estimate of $211 for Baidu, which is slightly lower than its market price. We have a revenue estimate of $7.7 billion for the company in 2014, which is a little less than the analysts consensus estimate. Renren Invests In Stock Trading Firm Renren has invested $40 million in stock trading site Motif Investing. The website lets users invest in baskets of stocks, and currently has about 120,000 users. It has received investments from Goldman Sachs and J.P. Morgan Chase. With the new funding from Renren, the company plans to diversify into selling portfolio management tools for wealth managers and financial advisors. It will also expand its operations to the U.K. and Hong Kong. It is aiming to eventually enter China, an endeavor in which it will benefit from Renren’s presence in that country. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Yahoo Earnings Preview: Mobile Ads And Monetization Of Content In Focus
  • By , 1/23/15
  • Yahoo! (NASDAQ:YHOO) is set to report its fourth quarter results on Tuesday, January 27th. The stock performed exceedingly well from mid-summer as the price soared from $33 to $50 post the listing of Alibaba’s American depository receipts (ADRs), through which it raised close to $25 billion. However, its core ads business continues to lag the industry, despite numerous website and product refreshes. Additionally, during the quarter, the company acquired BrightRoll for $640 million in cash. While the company reported a 1% year-on-year decline in Q3 in net revenues (excluding Traffic Acquisition Cost or TAC) to $1.094 billion, its non-GAAP operating income declined by 10% to $156 million. 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 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 how it plans to use the cash from the Alibaba listing in the coming quarters during this earnings announcement. See our complete analysis of Yahoo! here Outlook For Fourth Quarter For the fourth quarter, Yahoo expects revenues (ex-TAC) to be in $1.14-$1.18 billion range. Additionally, it expects adjusted EBITDA to be between $340 million and $380 million, and non-GAAP operating income to be between $190 million and $230 million. Mobile Audience To Boost Ad Served and Revenues Yahoo’s display ads and search ads divisions make up 9.3% and 9.1% 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 acquiring companies with the objective of integrating the underlying technology into its products, thus improving its mobile platform. As a result of past efforts, Yahoo’s mobile platform hit approximately 550 million unique visitors in Q3 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 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). Focus on Monetization One of the key factors for the decline in Yahoo’s core businesses of display and search ads is low monetization rates. While the company continues to retool its properties (mostly with technologies from acquired companies) with the aim of improving user experience, it has recently taken some steps to boost its monetization rate. Recently, it has rolled out new ad format, acquired both the ad technology company Flurry and the video ads platform BrightRoll. An increase in monetization rate is key to Yahoo’s revenue growth, as online ad revenues are expected to grow to over $213 billion by 2018. For  2014, we estimate Yahoo’s online ads market share will have been nearly 3.1% (once it is reported), based on $140 billion spent on online ads. Considering that revenue from internet ads revenues is expected to increase to $160.18 billion by 2015, if Yahoo can improve its market share to 3.2% in 2015, with an improvement in monetization rate, then its revenues can rise to $5.12 billion. Therefore, in this earnings announcement, we want to know more about Yahoo’s strategy to boost its monetization rate. We currently have a  $47.29 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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    Norfolk Southern Earnings Preview: Coal Weakness Should Be Offset By Merchandise, Intermodal
  • By , 1/23/15
  • tags: NSC CSX UNP
  • Norfolk Southern (NYSE:NSC) is scheduled to report its fourth quarter and annual results on January 26. As indicated by its carloading data for the quarter through the week ended January 3, 2015, we believe that Norfolk Southern’s fourth quarter revenues will likely rise on strong growth in its intermodal and merchandise volumes. However, the decline in coal carloads will likely temper growth. In the previous quarter, the railroad’s revenue increased 7% year-on-year to reach $3.02 billion, driven by volume growth across all commodities except for coal, which continued to suffer due to the weak export coal environment for the U.S. Norfolk Southern’s operating ratio (operating expense expressed as a percentage of revenues) improved significantly, 2.4% year-on-year, to reach 67%, driving a 16% increase in net profits. Norfolk Southern’s diluted earnings per share increased 17%, to reach $1.79.
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    SSD Sales Offset Weakness In Retail Channel As SanDisk Posts Mixed Q4 Results
  • By , 1/23/15
  • SanDisk Corporation (NASDAQ:SNDK) announced its fourth quarter earnings on January 21, with revenues of $1.73 billion flat over the year ago period. Revenues were slightly lower than the company’s guidance given at the end of Q3 due to weakness in its retail channel and lower iNAND product sales. On the other hand, growth from solid state drive (SSD) sales, which rose by over 48% y-o-y to $538 million for the quarter, offset the decline in revenues generated by removable storage products sold via the retail channel. SSDs contributed 31% of SanDisk’s net revenues in Q4 and 29% for the full year, up from 21% in the prior year quarter and 19% in 2013. SanDisk expects to generate revenues of over $1.4 billion in Q1’15 and full year revenues to be around $6.5-$6.8 billion.
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    United and Alaska's Profits Take-Off On Lower Fuel Expense
  • By , 1/23/15
  • tags: ALK UAL DAL
  • United (NYSE:UAL) and Alaska ‘s (NYSE:ALK) fourth quarter profits rose sharply as the fall in global crude oil prices slashed jet fuel costs for the carriers. United’s profit, excluding special items, rose over 80% annually to $461 million, while Alaska’s profit rose about 60% annually to $125 million, in the fourth quarter. United Continental Holdings Despite steadily losing market share in the U.S. to low-cost carriers such as Southwest and JetBlue, and smaller carriers like Alaska, United’s profit rose in the fourth quarter. The carrier’s fourth quarter jet fuel expense fell by nearly 15%, or $435 million, lifting its profit single-handedly. Based on the current low prices of oil, United anticipates its pre-tax margin to be around 5-7% in the first quarter. In our view, as oil prices are likely to remain weak for the foreseeable future, United’s profit should grow in the first quarter. These higher profits in turn will enable United to accelerate returns of cash to shareholders, and catch up with other airlines. In 2014, United was able to return $320 million to shareholders through buybacks. The carrier currently does not pay dividends due to its high debt load. In comparison, Delta returned $1.35 billion and Southwest nearly $1.1 billion to shareholders through buybacks as well as dividends, in 2014. In the current year, United plans to expand its capacity at a modest rate of 1.5-2.5%, from 2014. The carrier will concentrate on expanding in Latin and Pacific international markets, as it is facing aggressive expansion from low-cost carriers in the domestic market. We figure United’s moderate rate of capacity expansion will constrain growth in its top line. However, the carrier’s 2015 bottom line will likely grow at a higher rate driven by the decline in jet fuel prices. Fuel expense constitutes nearly a third of United’s total operating cost, so the near 50% drop in crude oil prices since September last year will translate to large fuel cost savings for the carrier this year, accelerating its profit growth.
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    Enterprise And Compute Storage To Drive Seagate's Earnings
  • By , 1/23/15
  • Hard drive manufacturer Seagate Technology (NASDAQ:STX) is scheduled to announce its Q2 FY 2015 earnings on January 26. Seagate’s net revenues grew by nearly 8% year-on-year (y-o-y) to $3.8 billion in the quarter ending September, primarily due to a 7% y-o-y rise in overall shipments to almost 60 million units. Unit shipments for both enterprise and compute storage (which includes hard drive for laptops and computers) witnessed an 8-9% annual growth during the quarter. The company expects the strong demand for enterprise storage and notebook hard drive units to continue through the fourth calendar year quarter as well. Seagate shipped nearly 60 exabytes (1 exabyte = 1 billion gigabytes) of data via hard disk drives in the Q1’15, which was an increase both sequentially (+21%) and annually (+22%). Additionally, the average capacity per drive shipped by Seagate in the quarter crossed the 1 terabyte (1000 gigabytes) mark for the first time ever. However, the average selling price (ASP) per drive sold by the company declined by 3% y-o-y to $60 for the quarter owing to a higher mix of compute storage drives relative to high-end enterprise storage drives.
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    U.S. Bancorp Capitalizes On Strong Loan Growth To Report Record 2014 Results
  • By , 1/23/15
  • tags: USB WFC JPM BAC C
  • U.S. Bancorp’s (NYSE:USB) risk-averse business model may not be as exciting as those of its larger competitors, but with the U.S. banking giant demonstrating the strength of its operations almost every single quarter since the economic downturn, it has remained an investor favorite over the years. The bank’s results for fourth quarter and full-year 2014 which were released on Wednesday, January 21, go a long way in proving that investors’ confidence in its ability to generate steady profits is not misplaced. The country’s largest regional banking group eked out its highest-ever net interest income figure of $2.74 billion for Q4 2014 despite the negative impact of shrinking net interest margins seen across the banking industry, as its loan portfolio swelled by well over 5% in 2014. Besides strong growth in its payments business, U.S. Bancorp also benefited from a $124 million gain on its equity interest in Nuveen Investments. In fact, the bank witnessed a year-on-year increase in revenues across each of its offerings except for commercial products. Improving credit conditions also helped the bottom line, as it allowed the bank to record its second-lowest loan provision figure since the downturn of $288 million (the lowest for the last six years being the slightly lower $277-million figure for Q4 2013).
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    FX Dampens Johnson Controls’ Strong Performance
  • By , 1/23/15
  • tags: JCI HON UTX
  • Johnson Controls ‘ (NYSE:JCI) first quarter fiscal 2015 revenues grew 1% year-on-year, to reach $10.7 billion, as gains were primarily offset by the negative impact of currency translation, particularly the Euro. Though revenue grew across all segments, currency translation effects led to a decline in Automotive Experience segment, while tempering revenues at the Building Efficiency and Power Solutions segments. Margin improvements across all these segments helped boost profits by 8%. Johnson Controls’ earnings per diluted share for the quarter grew 10% to $0.79, exceeding market expectations, which helped drive the stock up by nearly 5%. In its earnings release, Johnson Controls announced its expectations of $0.74-0.76 earnings per diluted share in the second quarter of fiscal 2015. The company reaffirmed its guidance of $3.55-3.70 for fiscal 2015.
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    E*Trade Q4 Earnings: Growth In Interest Revenues, Trading Commissions Lead To Improved Margins
  • By , 1/23/15
  • tags: ETFC AMTD SCHW
  • E*Trade Financial (NASDAQ:ETFC) announced its Q4 2014 earnings on January 22, reporting a 3% year-on-year (y-o-y) increase in net revenues to $461 million. E*Trade’s asset-based business grew by 10% year-on-year (y-o-y) to $283 million, and a recovery in trading volumes led trading commissions to rise by 5% over the prior year quarter to $105 million. Additionally, the account maintenance fees and services charged by the brokerage also rose by 14% to $48 million during the quarter. Similar to Q4, E*Trade’s full year revenues grew by over 5% annually to $1.8 billion with much of the growth coming from asset-based revenues. Net interest revenues rose by over 10% for the full year to $1.1 billion while trading commission revenues grew by 8% y-o-y to $456 million. Additionally, the account maintenance fees and services charged by the brokerage grew by 20% y-o-y to $186 million for the full year. The company exited its market making business in Q1 due to which the company generated insignificant revenues in principal transactions for the full year. E*Trade’s cash operating expenses in Q4 were nearly flat over the prior year quarter at $258 million. As a result, operating income was up by over 17% y-o-y to $157 million. According to our estimates, E*Trade’s adjusted EBITDA margin declined by about 3 percentage points from over 44% in Q1 to 41.1% in Q2. EBITDA margins further compressed by 90 basis points to 40.2% in the third quarter. However, the trend reversed in Q4 with adjusted EBITDA margin improving to over 44% – which was almost 2 percentage points higher than the prior year quarter. E*Trade’s margin for the full year was significantly higher than the 2013 levels of about 32-33%. The company expects expenses to rise in the mid single-digits through 2015 owing to the anticipated increase in headcount due to an expected rise in trading activity. However, margins are likely to improve, owing to a higher expected revenue growth in the coming quarters. See our full analysis for E*Trade Financial Asset Base Grows With Increase In Trading Accounts E*Trade added about 95,000 net new brokerage accounts in 2013, ending the year with just under 3 million accounts. Comparatively, the brokerage has already added nearly 146,000 net new brokerage accounts in 2014 to take its total active brokerage accounts to 3.14 million. As a result of consistently adding new accounts, the brokerage’s client assets increased by 5% y-o-y to $41.1 billion by the end of December. Moreover, E*Trade’s total client assets (customer assets in brokerage accounts and banking accounts combined) stood at over $290 billion at the end of Q4, up from $261 billion in 2013. We currently forecast E*Trade’s brokerage related cash to increase to about $60 billion through the end of our forecast period. Rise In Trade Activity Trading activity picked up in the fourth quarter after E*Trade witnessed a slowdown in trading during Q2 and Q3. E*Trade’s daily average revenue trades (DARTs) for the quarter rose to 168,000 trades per day up from 159,000 trades per day in Q4 2013. The figure was also a 10% sequential improvement over Q3 levels. Transaction-based revenue generated by the brokerage for the quarter was up by 5% over Q4 2013, with the company realizing a slightly lower revenue per trade during the quarter compared to the year ago period. The implied revenue per trade – calculated by dividing the net trading commission revenue by the total number of trades  - was $11.13 in 2013. This figure declined to about $10.60 in the first quarter before improving slightly to $10.70 in Q2 and further to about $11.05 in Q3. However, revenue realized per trade fell again to $10.84 in Q4, which the company mainly attributed to a lower mix of options traded compared to equity trades on E*Trade’s platform. An increasing mix of derivatives traded could help improve the average commission per trade for the brokerage in the coming quarters. 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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    Higher Spending, FX Headwinds Impact American Express' Earnings
  • By , 1/23/15
  • tags: AXP MA V DFS
  • American Express (NYSE:AXP) announced its fourth quarter and full year 2014 earnings on Wednesday, January 21.  The company reported an 11% year-over-year increase in net income to $1.4 billion, resulting in a 15% year-over-year rise in EPS for the quarter. Total revenues, net of interest expense, jumped from $8.5 billion in the fourth quarter of 2013 to $9.1 billion in 2014. AmEx benefited from higher cardmember spending and an increase in net interest income, while FX headwinds impacted earnings from its international operations. A gain of $719 million in revenues that came from the sale of the company’s stake in Concur Technologies also impacted the results. The fourth quarter earnings also included revenues from the company’s business travel operations, which AmEx has deconsolidated by forming a joint venture with an investor group led by Certares. Below we take a closer look at the company’s performance numbers for the final quarter of 2014. We have a price estimate of $102 for AmEx’s stock, which is about 20% higher than the current market price.


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