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FOX Logo
Fox Will Raise $9 Billion Cash By Selling Its Italian And German Pay-TV Business
  • by , 3 hours ago
  • tags: TWX DIS CBS CMCSA
  • Twenty First Century Fox (NASDAQ:FOX) has agreed to sell its pay-TV business in Italy and Germany to British Sky Broadcasting Group (BSkyB) for more than $9 billion. BSkyB is a satellite broadcasting, broadband and telephone services company with operations in the U.K. and Ireland. It is the largest pay-TV broadcaster in the U.K. and Ireland with over 10 million subscribers. The potential merger with Sky Deutschland and Sky Italia would give BSkyB access to a large subscriber base (around 20 million) in Europe, and it can bid for pan-European rights to media content including sports and television series.  21st Century Fox owns a 39% stake in BSkyB, 57% of Sky Deutschland and 100% of Sky Italia. This deal will significantly boost Fox’s cash balance and arm it for any fresh bid for Time Warner (NYSE:TWX). As part of the deal, BSkyB will also transfer its 21% stake in the international National Geographic channels to Fox, thereby raising Fox’s stake to 73%. Understand How a Company’s Products Impact its Stock Price at Trefis
    UL Logo
    Unilever's Home & Personal Businesses Take A Hit Due Emerging Market Weakness
  • by , 3 hours ago
  • tags: UL CL PG KMB
  • In the past few quarters, currency devaluation in many developing countries has created inflationary pressures on buyers who in turn have reduced their consumption.  Unilever (NYSE:UL) registered 3.7% growth in underlying sales (sales from continuing operations excluding acquisitions, disposals and currency movements) in the first half of fiscal year 2014, lower compared to 4.3% growth achieved in 2013 due to the slowing growth in the emerging markets. Currency headwinds further had a 8.5% negative impact on the company’s revenue, which fell by 5.5% to EUR 24.1 billion ($33 billion) due to foreign exchange losses. Unilever’s focus on saving costs and developing higher margin products helped the company to increase its gross margin for H1 by 10bps to 41.5%. The company saved about €1.5 billion (less than $2 billion) through its cost savings program in 2013. Starting next year, the company expects to save an incremental €500 million ($684 million) annually. This is will be achieved via a combination of measures such as reduction in marketing headcount by 12% globally (mostly in slow growing economies such as the U.S.) and a 30% cut in the number of stock keeping units by the end of this year. The company will also focus on launching more high-margin products in the market to generate higher levels of income. We believe these initiatives will help the company to post further expansion in gross margins. We are in the process of updating  our $44 price estimate for Unilever’s stock, based on the recently announced results. Home And Personal Care Most Impacted By Currency Woes Unilever achieves the majority of its overall growth from developing economies such as Brazil, Argentina, India, Indonesia, and South Africa. These markets witnessed their currencies depreciate rapidly in the second half of 2013, thus creating an inflationary environment and forcing consumers to reduce buying activity. As a result, Unilever’s underlying sales growth in the emerging markets decelerated to 6.6% year-on-year in H1 2014 from 8.7% in 2013. “Our markets have been challenging and we have experienced a further slow-down in the emerging countries whilst developed markets are not yet picking up.” — Paul Polman, CEO of Unilever In line with our expectations, Unilever’s home and personal care divisions were most affected by the slowdown. These two categories together generate about 80% of Unilever’s emerging market sales, and hence are most prone to emerging market volatility. H1 underlying sales growth in home care decelerated to 6.8% from 8% in 2013 while that of personal care fell to 4.5% from 7.3%, contemporaneously. Towards the end of 2013, Mr. Polman warned the market that the emerging markets slowdown will stay for a long period due to the lack of economic reforms. We expect the company’s growth in home and personal care to remain subdued amid a prolonged emerging market slowdown.  Also, the company intends to raise prices in the developing countries to counter commodity cost inflation which could further weigh on the demand. Despite the deceleration, we think that these categories will grow faster than others as emerging market growth is expected to outpace growth in the developed world. Foods Business On Track To Recovery, Will Take Some Time To Regain Momentum Unilever’s foods business has been suffering due to the sluggish performance of spreads, which generate close to 7% of the company’s total revenue. High promotional activity and pricing competition in developed economies are causing consumers to switch to private label spreads manufacturers. Additionally, health concerns over the presence of trans-fat in margarines (an important spreads category for Unilever) is leading consumers to shift back to butter and other healthier alternatives. Euromonitor expects retail volumes for margarines in the U.S. to decline annually by approximately 5% over the 2011–2016 time frame. Unilever is working to improve the taste profiles and naturalness of its products by responding to consumer feedback. The company is trying to market margarine as a healthier yet great tasting alternative to butter. It has also divested many of its non-core brands such as Ragu sauce, Bertolli, Wishbone and Skippy in order to increase its focus on spreads. All this helped the company to grow its market share in margarines in the first half of 2014. Despite this, underlying sales at the foods division fell by 0.5% owing to the declining market for margarines. We believe that Unilever’s market share in margarines will continue to grow as the company ramps up its efforts to establish a stronger foothold in the market. However, driving market growth in the margarine category itself is a challenge the Anglo-Dutch consumer goods company is confronting, and that is why investors must be patient while expecting a turnaround in foods. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
    CHK Logo
    Chesapeake Deleveraging, Increasing Natural Gas Liquids Volumes To Ride Out Slump In Natural Gas Prices
  • by , 3 hours ago
  • tags: CHK
  • Chesapeake Energy (NYSE:CHK) reported a strong set of Q1 2014 numbers on the back of higher production volumes. Chesapeake’s overall quarterly production grew by 2% year-over-year to around 60.8 million barrels of oil equivalent (boe). Adjusting for recent asset sales, production rose by an encouraging 11%. Oil production improved by around 6%, although natural gas production saw a slight decline. However, natural gas liquids(NGL) remained the key growth driver for the quarter, with production rising by about 55% year-over year to 7.6 million barrels. This growth came from strong production in the Utica and Southern Marcellus regions. Chesapeake’s output from the Utica shale increased by around 422% year-over-year, and natural gas liquids production has accounted for roughly 30% of its Utica volumes. Infrastructure has for long proved a bottleneck in the Utica shale, and the commencement of shipments on pipelines such as the ATEX  pipeline (which provides connectivity to the Gulf) during the quarter has provided much-needed takeaway capacity from the shale. Chesapeake also raised its 2014 total production growth outlook to 9-12%, up from a previous estimate of 8-10%, on the back of better natural gas liquids volumes. See our complete analysis for Chesapeake Energy here Our price estimate for Chesapeake Energy is ~$28, in line with the current market price. Higher Ethane Recovery To Help NGL Production Chesapeake is developing the Utica and Marcellus shales to meet the long-term target of 1 million barrels of oil equivalent production per day. To this end, it has plans to make $5 billion worth of investments, which will help the company drill more than 250 wells in the next two years. As natural gas prices remain low, the move to increase the share of NGL in the total production mix is a sound strategy. The company has stated that NGL production will be contributing about 13% to the total production. The company’s NGL production could also be helped by higher ethane recovery from its natural gas production. Low ethane prices made natural gas companies recover less ethane from the gas they shipped onto pipelines, resulting in a richer and higher value (since ethane has a higher energy content) gas. However, this year, Chesapeake has indicated that it would be recovering a greater percentage of ethane from its gas stream, which could lead to lower gas prices while boosting natural gas liquids production. NGLs contain a mix of hydrocarbons such as ethane, propane, butane, isobutene and pentane, which have different applications and fetch different prices in the market. Ethane is typically the largest component of NGLs (roughly 40%, could vary by producer) followed by propane. Reduced Debt Burden CHK has decided to spin-off the Chesapeake Oilfield Operating Company into Seventy Seven Energy, which will help the company to unload $1.1 billion worth of debt off its balance sheet. Additionally, the sale of shares of Chesapeake Cleveland Tonkawa to preferred shareholders will also remove about $1 billion in equity belonging to third-parties from the balance sheet. It will also allow the company to remove $160 million of liabilities from the balance sheet. With these deals, Chesapeake expects to reduce its debt burden by $3 billion. The sale of Oklahoma and Texas based non-core assets will also bring in over $300 million in cash. The company also locked-in more cash inflow by selling its non-core assets with minimum production in Southwest and Powder River Basin. The sale of acreage in these regions will help the company bring in about $290 million in cash. These asset sales will reduce the company’s debt burden by a significant amount while only affecting production by 2%. These measures will result in a reduced debt burden, lower maintenance costs(because fewer assets) and increased market value of its remaining assets. The company has generated about $925 million in cash through asset sales so far. The aim is to generate about $4 billion by the end of the year. See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
    TM Logo
    Toyota's Strategy To Revive Sales In Europe
  • by , 3 hours ago
  • tags: TM HMC
  • Toyota Motor Corp (NYSE:TM) is hoping to capitalize on the European auto market’s revival. After suffering a six year long slump, the European car market is expected to grow by 2-3% this year. Car sales in the five most important markets-Germany, U.K., France, Spain and Italy-are either growing or expected to grow in the near future. Toyota, which used to sell over a million cars and SUVs a year in Europe in 2008, wants to become profitable in Europe again. To achieve this target, the Japanese auto maker has targeted three specific areas- mini cars, hybrid cars and a partnership with BMW, the world’s biggest luxury car maker. In our analysis below, we outline Toyota’s thinking behind targeting each of these areas. See Our Full Analysis for Toyota Here Minicars Mincars form Europe’s third largest auto segment, behind subcompacts and small SUVs. Sales in the segment are forecast to rise by nearly 20% in the next three years. The highly competitive segment-13 of the top 20 minicars have been added or refreshed in the last four years- is witnessing a huge product offensive with a fleet of new or refreshed models from Renault, Peugeot Citroen, Suzuki and Toyota set to hit the market. Research firm IHS automotive predicts the size of the minicar segment to grow from 2013′s level of 1.1 million to 1.3 million by 2016 on the back of this huge segment refresh. In the past, Toyota has acknowledged that the partnership with Peugeot is profitable, therefore we expect the growth in sales of the Aygo to boost the company’s margins and thus the bottom  line as well. Hybrids There is a big opportunity in the hybrid segment in Europe for Toyota, a global leader in hybrid sales. As a result of the sovereign debt crisis and stagnating income levels, people are slowly becoming budget conscious and paying more attention to the low emissions and fuel efficient hybrids. Consequently, Toyota is planning to introduce 15 new hybrid models globally over the next two years, and Europe, the third largest market for hybrids after Japan and the U.S., will get a fair share of those. In 2013, sales in Europe’s hybrid market grew by 40% to 214,237 units — and close to 90% of the growth was contributed by Toyota’s Yaris and Auris models. According to research firm JATO Dynamics, in 2013, sales of the U.K.-built Auris hybrids were up 131% to 53,426 units, and the France-built Yaris were up 103% to 48,758 units. Toyota’s strategy here is simply but effective — it’s using traditional European designs to appeal to popular tastes, but steadily bringing down the prices by adapting advanced technology. In 2013, hybrid sales grew an impressive 43% to 156,863 units. The hybrids also contributed heavily to the 56% operating margin growth the company recorded in Europe in the first three quarters of fiscal 2014.A significant advantage for Toyota in this market is that there is almost no competition, especially as Honda Motor Corporation has decided to essentially exit the segment. Even though Honda entered the European hybrid market a year before Toyota, sales have been slow. According to JATO Dynamics, Honda sold just 1,242 units of Insight and 695 of CR-Z last year, down 62% and 66%, respectively, from 2012. It has decided to stop selling both models, leaving the Jazz hybrid as its sole car on the market. Alliance With BMW Nearly 55% of all new cars sold in Europe every year run on diesel. That number can rise to 70% in the next few years, especially in countries like France and Spain. Consequently, Toyota is looking to improve its diesel offerings in Europe. To this end, Toyota has signed a deal with BMW for the supply of diesel engines. Future versions of the Verso, Toyota’s compact minivan, will come with BMW-supplied 1.6-liter diesel engines. Currently, the Verso only comes with 2.0 and 2.2 liter diesel engines. The Japanese auto maker expects the new engines to be able to boost the sales of the Verso to 44,000 units this year, implying a growth of 12%. The ambit of the Toyota-BMW deal is not merely limited to the development of a diesel engine for the Verso- it extends to an agreement to develop next-generation, eco-friendly technologies together. The two companies plan to collaborate on developing a fuel cell system, lithium air batteries, light-weight vehicle body technologies, and also a sports car. The deal should be beneficial for both companies but it is likely to have a significantly positive impact on Toyota’s European operations. See More at Trefis | View Interactive Institutional Research (Powered by Trefis)| Get Trefis Technology
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    P&G's Gross Margins Supported By Cost Savings As Innovations Fuel Market Share Growth
  • by , 3 hours ago
  • tags: PG CL UL KMB
  • Procter & Gamble (NYSE:PG) is set to release its results for the final quarter and complete fiscal year 2014 on Friday, August 1. The world’s leading consumer goods company posted a 3% year-over-year increase in organic sales (excludes the impact of acquisitions/disposals and foreign currency movements) in Q3 FY2014, at the lower end of its guidance. The increase was largely driven by a 3% rise in organic volumes as a 1% increase in prices offset an equivalent amount of decline due to adverse geographic and product mix. Selling prices in certain geographies and for certain products were lower than average which reduced organic sales. Foreign currency translation effects further weighed on the company’s quarterly results and, as a result, net sales ended flat compared to the year-ago period at $20.6 billion. In early 2014, P&G lowered its guidance for sales and earnings growth for FY 2014 (fiscal year ends in June) due to unfavorable exchange rate movements in many developing economies and policy changes by the Venezuelan government. It expects currency translation effects to reduce all-in sales (accounting for the impact of currency movements) by 2%-3%. However, it maintained its guidance of 3%-4% growth for organic sales (excludes the impact of foreign currency movements). Consequently, all-in sales are now expected to register up to 2% growth, compared to the initial forecast of 1%-2% growth. We have  a $70 price estimate for P&G’s stock, about 10% lower than its market price. We will update our model after the upcoming results are announced. See our complete analysis of Procter & Gamble Innovations Will Drive Gains In Market Share P&G’s recent launches in fabric care, such as Tide pods, Ariel pods and Gain flings, are gaining traction in the developed markets. This helped the fabric care & home care segment to outshine all the other segments, and register organic sales growth of 6% year on year and net sales growth of 2% in the third quarter. The segment accounts for about 30% of the company’s net sales. The remainder comes from beauty, grooming, family care, health care, baby care and feminine care products, all of which posted organic sales growth of 2% or less and net sales declines of 2% or more. Innovation and new product activity is especially important to accelerate market share growth in developed markets as they are saturating. Seven of the company’s products made it to leading market research company IRI’s list of top 10 non-food US consumer product innovations in 2013, with Tide Pods topping the list. Additionally, six products made it to their list of rising stars. P&G intends to continue innovating which should help drive market growth, a better product mix and market share increases, going forward. Cost Savings Will Help Offset Currency Translation Losses Unfavorable exchange rates reduced P&G’s gross margins in Q3 by 100 basis points. However, a 200 basis point improvement from manufacturing savings (resulting from restructuring program announced in 2012) helped it to absorb the impact. The agenda behind the cost savings program is to have financial flexibility in order to maintain investment levels and drive long-term growth, even in weaker micro environments. P&G aims to save $6 billion in costs of goods sold through the program. It saved $1.2 billion in FY2013 and expects to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. Moreover, P&G is redesigning its supply chain and distribution network through which it expects to save an incremental $200-$300 million annually over three to four years. We believe these savings will continue to help the company in overcoming currency headwinds, thus providing increased support to gross margins. We think that gross margins can also expand as the company strives to lift its beauty division. Beauty is a higher margin business compared to other product categories such as fabric care and paper. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
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    How Will Kinder Morgan Benefit From Rise In Natural Gas Consumption: A Look At Kinder Morgan's Natural Gas Assets
  • by , 4 hours ago
  • tags: KMP
  • The Natural Gas Pipelines business contributes around 46% to our valuation of Kinder Morgan Energy Partners (NYSE:KMP), the largest midstream company in North America. The contribution is likely to grow in the future as the production and consumption of natural gas is set to increase. The industrial and electric sectors in U.S. are shifting from conventional coal-fired power generation methods towards the more environmentally friendly and low cost natural gas power generation. According to the U.S. Energy Information Administration(EIA), the consumption of natural gas is set to increase from 25.6 Trillion Cubic Feet(Tcf) in 2012 to 31.6 Tcf by 2040. Natural gas consumption in the industrial sector is expected to increase at an average rate of 1% each year. The Power generation sector is estimated to increase its consumption of natural gas at an average rate of 0.8% each year as regulatory requirements and cost disadvantages make coal-powered electricity increasingly unfeasible. This increase would mean that the share of electricity generated from natural gas will increase from 15% in 1998 to 40% by 2020.  Further, the increase in demand for natural gas will put upward pressure on the prices of natural gas, leading to improved margins for energy companies and hence higher revenues for transportation companies. Accordingly, firms involved in the business of transportation of natural gas will have to build the infrastructure necessary to support this growth. An estimate by the Interstate Natural Gas Association of America estimates this need for infrastructure in excess of $600 billion of pipeline, storage and related equipment during the next 20 years. Kinder Morgan, with its unparalleled natural gas asset footprint, is well-positioned to benefit from the rising natural gas demand. KMP pipelines run more 70,000 miles in the U.S. and are spread out across all geographies. Moreover, the company has a huge backlog of more than $15 billion worth of upcoming natural gas pipelines expansion projects. Trefis has a  price estimate of $83 for KMP, which is slightly ahead of the current market price. See Our Complete Analysis For Kinder Morgan Energy Partners El Paso Natural Gas Network[EPNG]: This pipeline network is KMP’s largest natural gas asset. The network, which spreads out over 10,000 miles, extends from the San Juan, Permian and Anadarko basins to California. California is the biggest market for this pipeline network but it also serves many smaller markets in other parts of the country. This pipeline network is tied into contracts with an average remaining length of 5 years and has reported an average increase in production and gathering of around 3.5% over the last three years. A potential source of revenue growth for this network is the expansion project incorporated with Sierrita Gas Pipelines(SGP). The project involves, among other things, the construction of a 60-mile pipeline extending from Tuscon to Sasabe on the Arizona border with Mexico. This pipeline will be connected with 500-mile pipeline network in northwestern region of Mexico, thereby carrying the potential of substantially increasing the throughput of the Sierrita pipelines network. Copano Operations: This is KMP’s second biggest natural gas pipeline network, covering about 7,000 miles. Even though this pipeline network has lesser reach as compared to EPNG, it has reported a higher(27% vs 3.5%) increase in transportation and gathering of natural gas over the last three years due to its association with Eagle Ford Reserve, one of the highest yielding rock formations in the U.S. Copano’s gathering systems also have access to the DeWitt/Karnes[DK] pipeline systems, which is currently being expanded to attain 24-inch diameter approximately 65 miles Southwest into Texas. This expansion project is already locked into fee-based commitments with credit worthy customers, ensuring a risk-free cash flow in the future. Camino Natural Gas Operations: Compared to the previous two, this is a smaller asset both in terms of gathering capacity and transporting capacity. However, given its proximity to the Eagle Ford shale formations in South Texas, this network has reported a 186% increase in gathering and transportation volumes over the last three years. If the network maintains the same rate of gathering and transportation, its revenue contribution can rise to similar levels as that of the other two networks. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis)
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    Priceline Will Register Solid Top-Line Growth This Quarter But Operating And Revenue Margins May Contract
  • by , 4 hours ago
  • tags: PCLN EXPE TRIP TZOO
  • Priceline (NASDAQ:PCLN) is set to release its results for Q2 FY2014 on Friday, August 1. Despite the large size of its business and uncertain global economic conditions, the leading Online Travel Agency (OTA) grew robustly in the first quarter, registering top-line growth of 26% year over year. This remarkable growth came on the back of a rapidly expanding presence in the international markets and a stronger foothold in the domestic U.S. market. For the second quarter, the company has provided guidance for revenue growth in the range of 19% to 29%. Priceline delivered a 340 basis point expansion in operating margins in Q1 owing to advertising and operational efficiencies. Advertising efficiencies resulted from the acquisition of Kayak, a company that spends less on online and more on offline advertising; ROI (return on investment) on online advertising is lower than on offline advertising. Further, the amount spent by Priceline’s brands for ad placements on Kayak is eliminated from the consolidated results. Although the revenue outlook is good, margins are another story.  We believe that Priceline will not be able to substantially grow its margins in the future, due to increasing competition in the OTA space, falling returns on investments on online advertising and the anniversary of Kayak’s acquisition on May 21. Additionally, the company recently launched offline advertising campaigns for its Booking.com brand in Canada and the U.K. It expects to incur between $220 million and $240 million on offline advertising expense in 2014, which will put increased pressure on margins. We will update  our $642 price estimate for Priceline after the upcoming results announcement. See our complete analysis for Priceline Strong Growth In Both Domestic And International Markets To Fuel Bookings Growth Priceline’s stellar growth in recent years has come primarily from its expansion initiatives in international markets. The company posted 37% year-on-year growth in international gross bookings in Q1, as high growth in the Asia-Pacific region and the Americas boosted hotel room nights by 32% to 83.4 million. Booking.com’s dominance over the core European market also contributed significantly. Booking.com is the leading OTA in Europe with  31% share of the market. The brand is now expanding its presence in Australia, Canada and the U.K. through its Booking.yeah advertising campaign. It also increased its hotel supply by 54% in 2013, to end the year with an inventory of 425,000 hotels and accommodations in 195 countries. These initiatives should help Priceline to meet its international gross bookings growth target of 24%-34% for Q2. While Priceline has successfully gained share in the international markets, it has lost out to  Expedia (NASDAQ:EXPE) in the domestic landscape. Priceline has 16% share of the U.S. OTA market, on the other hand Expedia has over 40% share. However, Priceline is taking different routes to increase its share. The company launched its first offline advertising campaign (Booking.yeah) for Booking.com in the U.S. last year.  It entered into a partnership with NYC and Co. to power bookings on New York City’s official tourism website. It also completed the acquisition of Kayak. Kayak is the leading meta-search engine in the U.S., with  over 50% share of the travel search market. Domestic bookings account for about 14% of Priceline’s total gross bookings. The company registered 19.5% year-on-year growth in domestic gross bookings in Q1 and expects to clock 15%–20% growth in Q2. We feel that Priceline’s growing strength in the world’s largest travel market will help offset the slowdown management anticipates owing to the increasingly large size of the business. Revenue Margins To Face Pressure Owing To High Competition And High Proportion Of Agency Model Bookings Accounting for over 85% of Priceline’s valuation, the hotel bookings business forms the most important division in the company’s portfolio. Priceline’s hotel revenue margins have declined, however, from 39% in 2007 to about 20% in 2013, according to our estimates. The primary reason for the decreased profitability is the rapid growth in international markets, where the agency model of bookings is more popular. Priceline’s derives over 80% of its gross bookings from the agency model. Revenue margins under the agency model are lower as Priceline simply acts as a travel agent and earns a small commission on bookings, while under the merchant model revenue margins are higher as the transaction is completed on Priceline’s website itself. Despite the continuous decline since 2007, Priceline’s margins are healthier than that of its closest competitor, Expedia. Priceline does not intend to increase commissions on hotel bookings in order to maintain its competitive position among OTAs. We expect commissions to continue declining due to both, intense competition from other OTAs and supplier websites, and the increasing proportion of bookings coming from international markets. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
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    The Real Reason Why Coach Has Been Struggling
  • by , 4 hours ago
  • tags: COH KORS
  • In 2012, the shares of luxury retailer Coach (NYSE:COH) peaked at nearly $80. In the intervening period, the stock has declined by more than 50%, reflecting the company’s poor financial performance. Last quarter, Coach’s revenues declined by 18% with comparable store sales down by 21%, representing the fourth consecutive quarter of decline in its same store sales. Worse, the company, expecting poor prospects ahead, guided for a decline in same store sales in “high-teens”. Many analyses have been put forward to explain Coach’s poor performance during this period, ranging from its fading brand value in the face of competition from Kate Spade and Michael Kors to an incoherent brand strategy which involved propping up the brand through its retail stores and depreciating it through the factory channel . However, a closer look at the company’s financials gives us a glimpse of the truth behind the decline. Read our complete analysis for Coach, Inc Lack of Reinvestment From 2008 to 2013, Coach increased its annual revenues from $3.2 billion to $5.1 billion backed by 40% expansion in its store count and a 15% aggregate increase in same store sales. Additionally, the company managed to maintain an average EBITDA margin of close to 40% for that period. These seem like indicators of a highly profitable business, so how did these problems arise then? To answer that, we need to take a closer look at what the management was doing with its cash profits. Compared to $6.1 billion in cash profits generated during that period, Coach’s capital expenditures were only $893 million, implying a reinvestment rate of about 14%. For every 1 dollar in cash profits made by the company, only 14 cents were reinvested into the business; the rest was used for buying back stock, thereby inflating the stock price at high multiples of its earnings, sales and cash flow. Capital expenditure as a percentage of revenue for the period was about 4%. Now a 4% reinvestment of revenue generated from sales seems like a really low ratio required to maintain a high-end business where significant expenditures must be made to even keep up the appeal of its stores with high square footage, let alone a ratio high enough to finance a rapid increase in store count. Of course, Coach did not need much capital expenditure to finance its store openings as they were all financed through operating leases, and this is where the problems become clearer. Fixed Cash Costs A premium brand like Coach usually places its stores in the in-line section of a mall where the costs of occupancy become fixed cash costs. The problem with running your business with high fixed costs is that when sales go down there is no room for maneuvering. The only way a company can scale back its losses in case of such an event is through store closures. This is exactly what Coach did when it announced last month that it was closing as many as 70 North American stores, which amount to 13% of its North America store count and 7% of its global store count This strategy created another problem: it is highly difficult to run a business with nearly 40% EBITDA margins in a highly competitive luxury market without significant and continuous reinvestment in product design, marketing strategies and merchandizing. But operating leases, which are fixed cash charges for the ongoing business, reduce the amount available for reinvestment in the business, especially when such high margins contribute to the appeal of your stock price. The high margins boasted by Coach were deceptive as they were hiding the significant fixed costs the business was incurring to maintain them. See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
    Ctrip Q2'14 Pre-Earnings: With The Stock Near All-time Highs, Revenue Looks Ready To Beat Guidance
  • by , 4 hours ago
  • tags: CTRIP CTRP EXPE PCLN
  • Chinese Online Travel Agency (OTA) Ctrip International (NASDAQ:CTRP) is scheduled to report second quarter results on July 31, 2014. The company’s stock is currently trading close to life-time highs, ending trade at $66.73 on Monday, July 28. Ctrip expects second quarter revenues to grow between 30%-35% on a year-on-year basis. This amounts to approximately $264-$274 million in revenues for the quarter. Our revenue estimate stands significantly higher at $289 million, representing a 43% expansion in revenues for the quarter. The company guided a 25%-30% growth in Q1FY14 revenues during its Q4FY13 earnings call and delivered a 36% increase in revenues. A similar conservative estimate from the company’s management for Q2FY14 could result in a revenue growth touching 40% at least. However, the accelerated revenue growth for the company is expected to result from a contraction in operating profits. Operating profit margins contracted the most in Q1FY14, reaching 4.5% compared to 13.8% in Q1FY13. The strong contraction in operating margins is a result of over 60% increase in product development, and sales and marketing related expenses, which is expected to continue this quarter as well. In fiscal 2013, operating profit margins in the second quarter increased by approximately 2 percentage points to reach 15.85%. For the quarter, margins are expected to sequentially expand but remain lower than similar figures from a year prior period. See Our Complete Analysis For Ctrip International Increased Product Offerings Should Expand Customer Base and Bookings Ctrip’s revenue acceleration from the guided 25%-30% to 36% last quarter was facilitated by the addition of new reservation options in hostels and vacation rentals into its existing hotels bookings business. The newly formed accommodation reservation business achieved a 67% growth in year-on-year revenues, partly due to the addition of new offerings. A similar strategy in the transportation ticketing services division resulted in a 71% year-on-year growth in revenues. New product offerings such as ticketing services from trains and long-haul buses increased total volume growth, resulting in strong year-on-year growth. This strategic shift to being an end-to-end travel services provider is expected to result in booking volume growth in the near term. With Internet penetration rapidly increasing in China and smartphone access growing at exponential pace, companies in the Chinese OTA industry have embarked in fierce price wars to attract and rapidly expand their customer bases. A recent PhocusWright report indicates close to 47% of Chinese households with a smartphone. These new product offerings are expected to expand customer base by targeting tier 2/tier 3 households with a lower discretionary income base. The company states that the number of bus trips completed in 2013 stood at approximately 30 billion compared to 2 billion rail transits and 300 million air trips. This expands Ctrip’s addressable market by many fold, which could lead to an acceleration in revenue growth as it gains users onto its platform. These products offerings have lower price points and hence, lead to a lower average commission earned per booking in the near term. However, the potential growth in its customer base should more than offset the decline in average commission per booking. See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
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    An Analysis of Silver Wheaton's Streaming Agreement for Vale's Salobo Mine
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  • tags: SLW ABX NEM VALE
  • Silver Wheaton (NYSE:SLW) is a precious metals streaming company which signs long term purchase agreements with mining companies producing silver or gold as a by-product. It provides funds for capital expenditure upfront when a project is being developed and obtains the right to buy precious metals produced at low, fixed prices. The silver or gold obtained at a fixed price is sold at market rates. The company does not pay for any ongoing capital or exploration costs at the mines. Such a business model greatly lowers its business risk, as compared to other companies that are directly involved in mining. In this article, we focus specifically on the company’s gold streaming agreement for Vale’s Salobo mine. We will incorporate various dimensions of the streaming agreement such as the reserve base at the mine, expected output, upfront payments made by Silver Wheaton, and the per ounce cash cost paid. See our complete analysis for Silver Wheaton The Salobo Mine and Streaming Agreement Located in Brazil’s Pará state, the Salobo copper-gold mine represents the largest copper deposit ever found in Brazil. The mine began operating in May 2012 with a design throughput capacity of 12 million tons per annum (Mtpa). Vale subsequently began a second phase of construction to expand mill throughput capacity to 24 Mtpa. This expansion reached 97% physical completion during the first quarter of the year and is expected to come on stream in 2014.  The ramp-up to 24 Mtpa milling capacity will be completed in 2015. On February 28, 2013, Silver Wheaton entered into an agreement to acquire from Vale an amount of gold equal to 25% of the life of mine gold production from its Salobo mine. The company made an upfront cash payment of $1.33 billion in order to acquire rights to purchase the gold produced from the mine. In addition the company will pay Vale the lesser of the prevailing market price or $400 for each ounce of gold purchased under the agreement, subject to a 1% annual inflation adjustment starting in 2016. Gold prices are currently trading at levels of around $1,300 per ounce. Thus, Silver Wheaton’s purchase price is likely to be $400 per ounce for the foreseeable future. The mine will average 45,000 ounces of gold production attributable to Silver Wheaton during the ramp-up to 24 Mtpa capacity, that is between 2013 to 2015. Over the long term, the mine is expected to average 60,000 ounces of gold production over a 30 year period. As on December 31, 2013, the Company’s 25% share of Salobo’s proven and probable gold reserves stood at 3.4 million ounces.These reserves are sufficient to provide 60,000 ounces of average gold production over a 30 year period. Analysis of the Agreement As of March 31, 2014, Silver Wheaton has received approximately 27,500 ounces of gold related to the Salobo mine under the agreement. This has generated cumulative operating cash flows of approximately $25 million. As the company expects gold shipments from Salobo for a 30 year period, we will assume a 30 year life for the mine. The mine is expected to deliver 60,000 ounces  on an average over this period. Thus Silver Wheaton will receive approximately 1.8 million ounces of gold under the agreement. The $1.33 billion upfront payment for the streaming agreement translates into an average cost of roughly $44.3 million (~1,330/30) per year. This translates into roughly $739 per ounce (~44.3/0.06). Adding to this the acquisition cost of an ounce of gold ($400 per ounce), the total average cost of an ounce of gold comes out to be roughly $1,139 per ounce this year. Given that gold prices are currently trading at around $1,300 per ounce, this is a fairly good deal. However, one must consider that the inflation adjustment to the purchase price will raise the total cost per ounce for the company. If we take into account the 1% inflation adjustment starting in 2016, the acquisition cost per ounce of gold in the thirtieth year of the agreement would be roughly $523. Thus the total cost per ounce of gold in the thirtieth year of the agreement will be around $1,262 (523+739), as compared to the current $1,139. Thus, from Silver Wheaton’s perspective, for the success of the agreement gold prices must remain above these levels. Demand for gold over the term of the agreement will mainly be driven by major emerging economies such as China and India. With robust economic growth, rising middle class populations with growing disposable incomes, these countries will drive the jewellery and investment demand for gold. In 2013, China accounted for 26% of the global private sector demand for gold. Chinese private sector demand for gold is expected to grow from 1,132 tons per year in 2013 to 1,350 tons per year in 2017. Between 2009 and 2020, the global middle class will grow from 1.8 billion to 3.2 billion, with Asia’s middle classes tripling to 1.7 billion by 2020. These trends will provide support to gold prices. From Silver Wheaton’s point of view, for the success of its streaming agreement for the Salobo mine, these trends must keep gold prices above the the total cost per ounce as calculated earlier in the article. See More at Trefis |  View Interactive Institutional Research (Powered by Trefis)|  Get Trefis Technology  

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