Wednesday, October 30, 2013
Previously, we analyzed the workings of the steel industry and the major factors that impact its performance. In this piece, we will analyze the performance of major players in the industry and which ones are our best investment picks.
This article is a short introduction of the four most prominent steel production companies in the US, followed by a brief analysis of their financial metrics and overall performance.
US steel producers have recently been unable to price their products higher due to stiff competition in the domestic market, while earnings have been dented by significant ‘other post-employment benefits’ (OPEB) and pension liabilities. Read More: AKS, NUE, STLD, X
Chevron Corporation (CVX) is the second-largest integrated oil company in the US, after ExxonMobil Corp (XOM). It is included in the ‘Big Oil’ category, which comprises the six largest publicly-owned oil and gas companies, namely: Exxon, Royal Dutch Shell plc (RDS.A), BP plc (BP), Total S.A. (TOT) and ConocoPhillips Co. (COP). Chevron is involved in the exploration of oil and gas reserves, their extraction, the production and refinement of crude oil, and the marketing of petroleum products to end-users. Exploration and production (E&P) forms its upstream segment, while refining and marketing activities (R&M) are part of its downstream segment.Read More : BP, COP, CVX, RDSA, TOT, XOM,
Athletic footwear – a sub-industry of the global textiles, apparel and luxury goods industry – comprises manufacturers and marketers of athletic footwear, apparel, and sports equipment who sell to end consumers all over the world through online stores, company-owned outlets, wholesalers and franchises.
The total size of the US athletic footwear industry in terms of revenues is approximately $53.7 billion, 82.8% of which are contributed by Nike, Inc. (NKE) and Adidas AG (ADDYY). Nike has the larger market share of 47.1%, despite it being a younger company than Adidas. Other key players in the industry include Under Armour (UA), Wolverine World Wide, Inc. (WWW) and Deckers Outdoor Corporation (DECK). Read More: ADDYY, DECK, NKE, US,WWW,
Fertilizers account for up to two-thirds of the agricultural chemicals industry. Currently, China is the biggest consumer and producer of fertilizers in the world, with 55.6 million tons consumed in 2010. With $16.5 billion worth of fertilizers imported in 2010, the US is the biggest importer. Russia is the largest exporter, with $27 billion worth of fertilizers exported in the same year.
Fertilizer consumption and prices have been in a secular uptrend, with consumption increasing 14.5% over the last five years. The prices of nitrogenous, phosphatic and potash fertilizers slumped following the financial crisis, but have recovered steadily since then. Read More: DD, MON, MOS, POT,TSN
ExxonMobil Corp’s (XOM) market capitalization is around $379 billion, which makes it the world’s largest non-state-owned oil company in terms of market cap. This article takes a look at the base, bull and bear cases for the company’s stock, and a look into why its recent selloff makes it a good buy.
Base Case:The base case target price for Exxon is $92.52, assuming that it will earn $8.54 per share for the next year and the P/E multiple at which Exxon is currently trading (10.84x) will not expand. We have calculated the EPS value using our EPS model with $106.17 per barrel (bbl) as the Brent crude oil price for next year, which is also the mean sell side estimate.
The estimate for the oil price assumes that the Federal Reserve will quit its quantitative easing program in the last quarter of 2014; geopolitical unrest in the Middle East and North Africa will ease; and OPEC producers like Saudi Arabia, UAE and Kuwait will develop existing reserves.
The Henry Hub natural gas price is expected to average $4.14 per million British thermal units (MMBtu) through 2014, according to sell side analysts. The price is expected to rise to that level from the current $3.49/MMBtu following increased coal-to-gas switching in the power generation industry, which will spur natural gas demand.Read More : BP, COP, CVX, RDS, TOT, XOM
Steel has been the backbone of the global industrial economy since its mass production was standardized following the development of the Bessemer converter in 1857. It is an alloy of iron ore, carbon and other elements, and is used in residential and non-residential construction and fabrication, in the production of machinery, vehicles, appliances, oil and gas rigs and ships, and in various other products.
China is the largest producer and consumer of steel in the world. A total of 1.51 billion tons of steel was produced globally in 2012, out of which 708.78 million tons was produced in China. ArcelorMittal S.A. (MT) is the world’s largest steel producer, with an annual production capacity of 119 million tons. Read More: AKS, MT, NUE, SLX, STLD, X
Lockheed Martin (LMT) is involved in the research and development, design, manufacturing and servicing of advanced aerospace technology and information systems. Lockheed is the largest US defense contractor: in 2012, the company generated $38 billion, or almost 82% of its total revenues, from sales to the US military. However, Lockheed’s heavy dependence on US defense contracts also makes the company highly vulnerable to military spending cuts. Read More : LMT
To know more about the shift from traditional to internet TV, Netflix’s competitive edge or an investment analysis of potential beneficiaries of the rising demand for broadband services, read our articles ‘Small screen is the next big thing’, ‘Netflix: Streaming Growth’ and ‘Traditional TV Caught in a Web, but Comcast Remains Safe’.Read More: CLWR, CMCSA, DISH, DTV, NFLX, S, SFBTF, TWC
CL, KMB, LRLCY, PG, RBGPY, UL, UNICY
Previously, we left our discussion with a brief introduction to the companies involved in the iron mining industry. The table below shows the extent to which four major mining companies are exposed to the iron ore industry.
Although commodity prices have followed a long-term secular uptrend, a recent cyclical downtrend has exerted pressure on prices. However, as China – the largest consumer of commodities in the world – moves back on track to meeting growth targets, mining stocks are once again becoming a profitable investment.Read More : VALE, CLF, BHP, RIO
Tesla Motors’ (TSLA) shares took a hit last Wednesday following the release of a viral video on the internet in which a Tesla Model S caught fire after colliding with a metallic object. Tesla’s stock price fell around 6% to $181 that day, as analysts questioned the viability of the company’s battery technology and its future growth prospects. The stock fell a further 4% to $172 the following day on news that Robert Baird & Co., a financial services firm, had downgraded its target price for the stock citing execution risks.
However, the stock did make its way back up to $181 on Friday, following Tesla CEO Elon Musk’s statement that Tesla cars are in fact much safer to operate than conventional gasoline vehicles, and that the battery fire was an isolated incident caused by the rupture of one of the car’s battery cells.Read More: BMW, GM, TM, TSLA
Caterpillar Inc. (CAT) is the bellwether for the machinery manufacturing industry. It designs, manufactures, markets and sells heavy machinery and equipment to the construction, mining and power generation industries.
The company operates on a global scale, and its performance is tied to macroeconomic conditions in different countries worldwide. For this reason, Caterpillar’s order growth and dealer inventory levels are considered a leading economic indicator. Read More : CAT, DE, JOY, RIO
Intel is heavily dependent on its PC Client Group business segment, and PC sales have traditionally been a driving force for Intel. However, a secular decline in the PC industry has hurt its profits, and smartphones, tablets and wearable technology will be the key revenue drivers for Intel in the future. Read More: AMD, ARMH, INTC, QCOM
The total size of the US hypermarkets and super centers industry by revenues is $644 billion, 99% of which is controlled by Wal-Mart Stores, Inc. (WMT), The Target Corporation (TGT) and the Costco Wholesale Corporation (COST). Costco is the youngest company among the three. It opened its first store in 1983, nearly 21 years after Target and Walmart opened their first stores in 1962.Read More: AMZN, COST, EBAY, TGT, WMT
However, the increasing popularity of internet TV is also creating greater demand for high-speed broadband services. Some traditional TV companies also provide broadband internet services, and are therefore positioned perfectly to gain from the growth opportunity created by internet TV. Read More: CMCSA, DISH, DTV, NFLX, TWC
UTC has been providing investors with steady returns for more than 75 years, and the company is considered a “Dividend Achiever” for consistently raising dividends for over a decade – 17 years to be exact. We will look at the company’s ability to sustain its dividends as it faces uncertainties in the near future.Read More: UTX,
Credit cards are being increasingly viewed with skepticism, mainly due to their high annual percentage rates (APRs) and often vague contract terms, many of which the average consumer fails to understand. It’s no wonder then that the average credit card debt for US households stands at $7,100 as of August 2013, down 1.08% from last year. It is also not surprising that after the 2008 financial crisis, as a result of tightening credit policies, the average number of credit cards held by Americans declined to 1.96, as of July 2013. The average number of cards held by Americans stood at 3.7 in 2009 .Read More: AXP, COF, DFS, MA, V
When a short position in a particular stock is assumed, it implies borrowing a share and anticipating that its price will decrease. Short interest ratio is used to identify the number of days it takes to cover that short position and is calculated by dividing the short interest with the average daily trading volume. Read More: CVX, XOM
It goes without saying that BP is past its glory days. The Macondo incident in April 2010, also known as the Gulf of Mexico oil spill, has left BP in a crippling situation. The company has already spent around $50 billion since 2010 on fines, new regulatory requirements and cleaning costs. Its market capitalization has fallen around 30% since the incident, making it the least valuable of the world’s five biggest non-state oil companies. Meanwhile, the market capitalization of Exxon, Chevron (CVX) and Royal Dutch Shell (RDS) has risen by 18%, 38% and 11% respectively since 2010. The rumors are not unwarranted; it might be the perfect time to buy BP, now that its down and out.Read More: BP, XOM
Home Depot (HD) is one of the world’s largest retailers of home improvement goods and services. It is a cyclical company whose performance has a direct correlation with the US housing industry. It was founded in 1978, and it currently operates around 2,260 stores throughout the US, Mexico and Canada.
Rising Growth RatesHome Depot’s stock price has risen approximately 250% since January 2009, following an improvement in housing construction activity. The company’s same store sales (SSS) started improving from the first quarter of fiscal year 2011 (1QFY11), and SSS growth rose 10.7% YoY in 2QFY13. Read More : HD
Apple Inc. (AAPL), more specifically the late Steve Jobs, is heralded as the pioneer of smartphones. Apple’s iPhone was introduced in 2007, and it revolutionized the cell phone industry and the world. The iPhone, with its completely touch- and gesture-based user interface, transformed the entire smartphone ecosystem.Read More: AAPL, BBRY, NOK, SSNLF
Amusingly, when the first iPhone was launched in 2007, Jim Balsillie, the CEO of BlackBerry back then, commented that the iPhone is “kind of one more entrant into an already very busy space with lots of choice for consumers … But in terms of a sort of a sea-change for BlackBerry, I would think that’s overstating it.”1 If only Balsillie knew that the iPhone would soon be hailed as revolutionary, and that BlackBerry would suffer financial losses, leading to an eventual buyout at a depressed valuation. BlackBerry’s stock price trend shows how the company, once renowned for its smartphones, has slipped almost into oblivion. From a peak of $144.45 on 18th July 2008, the company is currently trading below $10. Read More: BBRY, FFH
Even though both companies are highly sensitive to iron ore prices, sell side analysts are bullish on Vale but bearish on Cliffs. Here’s a look at the endogenous and exogenous factors that are leading sell side analysts to think differently about two companies that otherwise seem very similar.Read More: CLF, VALE
It was no surprise when Hewlett-Packard (HPQ) – once a celebrated leader and trend-setter in the personal computing (PC) industry – was dropped from the Dow Jones Industrial Average (DJIA) along with two other companies on September 10, 2013. The relegation came following a prolonged deterioration in the company’s performance due to its inability to innovate and keep pace with the changing dynamics of the technology sector.
Industry trends:The PC manufacturing industry has witnessed a steady decline in sales following the growing popularity of smartphones and tablets, and the industry is gradually shifting towards cloud computing. According to the International Data Corporation, PC shipments will decline 9.7% in this year, and the bulk of their lost market share has been taken up by smartphone shipments, which are expected to grow 40% YoY to an estimated one billion units in 2013.Read More : DELL, HPQ
Changes in market shares of smartphone sales can have major implications for wireless carriers, who are operating in an already saturated market with limited growth options. Smartphones are the largest growth drivers for the wireless industry and their owners use more data and therefore have higher data ARPUs, which is the fastest growing revenue stream for the industry. Read More: T, VZ
Coca-Cola (KO) and PepsiCo (PEP), the two largest global beverage companies, have traditionally been considered strong dividend stocks. Both companies are included in the S&P Dividend Aristocrats List, and their stock prices are resilient enough to hold up during a financial downturn.
Even though the two are quite closely matched in terms of dividend yields, debt ratios, and revenue growth, we will be digging deeper to find out which of the two companies is in a better position to pay dividends on a sustained basis. Read More: KO, PEP
Fast food chains, over the years, have been in the news for all the wrong reasons. Studies linking child obesity with the consumption of fast food have given a bad reputation to fast food in general, and no other company has been affected as much as McDonald’s. Read More: BKW, CMG, MCD, PNRA, YUM
Shale gas production constituted only around 5% of total US natural gas production in 2000, but increased to around 27% by 2012 following the rapid development of previously unexploited resources. The increase in shale gas production led to a steady decline in natural gas prices, as witnessed in April 2012 when they touched an all-time low of $1.95 per million British thermal units (MMBtu). The growth in natural gas production looks set to continue in the future, and the US Energy Information Administration (EIA) estimates that shale gas production will eventually contribute around 50% of total natural gas production in the US. Read More: Energy
With technological innovations, the oil and gas equipment and services sector is experiencing rapid growth and improving performance, and in this article, we’re looking at whether it’s better to invest in the ‘Big Oils’ – the five largest publicly-traded oil companies – or in the oil and gas equipment and services sector. Read More: BHI, BP, CVX, FLR, HAL, RIG, SLB, XOM
But that was before President Obama introduced the Patient Protection and Affordable Care Act (PPACA), also called Obamacare or the Affordable Care Act, to address the problem and expand healthcare coverage to previously uninsured Americans. Under the Act, health insurance exchanges will be set up in each state from January 1, 2014, although applications for insurance coverage are already being accepted as of October 1, 2013.Read More: ATE, HUM, UNH, WLP
Netflix’s success can be credited to its early adoption of a secular trend from traditional to digital media. It has surprised the world by continuously growing its subscriber base and consistently outperforming other TV providers like Hulu, Comcast (CMCSA), Time Warner Cable (TWC), Dish Network (DISH) and Direct TV (DTV). Its stock price is up approximately 222% year to date, following continuous innovation and new additions to its content library.Read More: CMCSA, DISH, DTV, NFLX, TWC
Considering how Google has steamrolled its competition in getting to where it is today, it came as a big surprise when, in July 2013, once-upon-a-time competitor Yahoo! Inc. (YHOO) surpassed Google in terms of the number of unique visitors to its search engine. During the month, Yahoo received 196.5 million unique visitors in the US, compared to Google’s 192.3 million. This was the first time since May 2011 that Yahoo had outperformed Google in terms of unique visitors in the US; and Yahoo’s stock price rose 3.1% when the news broke. Read More: GOOG, Yhoo
QCOM, T, VZ,
The different applications of wearable technology were initially limited to the health, fitness and military sectors; but commercial manufacturers are rapidly catching up with their own ideas on how it can be applied in everyday life, as a result, wearable technology is increasingly being fused into chic accessories. Read More: APPL, GOOG, INTC, SSNLF
Video streaming is currently the largest segment within digital content. From home videos and TV shows, to Hollywood blockbusters and everything in between, the viewership of video content on mobile devices has increased manifold during the last decade. This trend has been highlighted in recent research and surveys. For example, according to a report released by Ericsson’s Consumer Lab, 67% of all TV viewers use mobile devices such as laptops, tablets and smartphones to watch TV programs. Read More: CMCSA. DISH, DTV, NFLX, TWC
Crude oil prices seem to be the single most important determinant of oil companies’ performance. For this article, we ran some tests to find the correlation between Brent Crude prices and a few general performance indicators for oil companies. We found that oil prices do indeed affect oil companies’ performance to a great degree, but the extent to which they do so depends greatly on the companies’ positioning in the industry’s value chain.
For future reference, here’s a brief look at the how the industry is broadly categorized:
- Exploration and Production (E&P) oil companies, which explore oil reserves and produce crude oil.
- Refining and Marketing (R&M) companies, which refine crude oil and market it to end consumers.
- Integrated Oil Companies (IOCs), which are involved in everything from the exploration and extraction activities, to transportation and marketing. Read More: APA, BP, CNQ, COP, CVX, ENI, HFC, MRO, RDS, TOT, TSO, VLO, XOM
Due to the robust nature of the industry, telecoms have traditionally been a safe haven for investors looking for steady growth and stable dividends. On top of that, telecom stocks also offer immunity from market swings: for example, Verizon’s Beta value is 0.53, compared to AT&T’s 0.69. Read More: T, VZ
Around 65% of American households currently own their primary residence, an 18-year low for home ownership levels. Home affordability and disposable incomes have not increased as fast as home prices, and as a result, potential young homebuyers are either switching to rental units or moving in with their parents until they can afford to purchase a new home. Read More: DHI. KBH, LEN, NVR, PHM
Players in the telecom industry know that the US wireless market has reached a saturation point. With market penetration exceeding 100%, the prospects for future growth are slim, especially with the Department of Justice (DOJ) intent on preventing major acquisitions in the industry.
As the possibilities for mergers and acquisitions within North America diminish, AT&T (T) has started looking for strategic acquisitions abroad. The company has already partnered with Latin American providers (it is a strategic partner and investor in Carlos Slim’s America Movil) and is also looking to expand its network to Central American countries. Read More: AT&T
James Hensen, a climate scientist at NASA, has gone so far as to say that coal is the single greatest threat to human civilization and all life on the planet. He may have a point: according to a 2010 study conducted by Conrad Schneider and Jonathan Banks, coal plant emissions cause approximately 10,000 hospitalizations, more than 20,000 heart attacks, and 13,000 premature deaths every year in the US. Read More: ACI, ANR, BTU
Apple Inc. (AAPL) found itself in a similar situation earlier this year when Greenlight Capital Founder and President David Einhorn filed a lawsuit against Apple for refusing to issue 4% perpetual dividend paying preferred shares.
Einhorn eventually dropped the lawsuit, but investors have since started pushing Apple to utilize its reserves for the benefit of shareholders. Apple CEO Tim Cook, who is on record for dismissing Einhorn’s lawsuit as “silly”, may be buckling under the pressure. In a recent shareholders’ meeting, he said that the company is ‘seriously considering’ returning cash to shareholders. Read More: APPL
Industrial machinery has applications across nearly every industry. Major manufacturers like Caterpillar (CAT), Cummins (CMI), Deere & Co. (DE) and Joy Global (JOY) supply machinery and equipment to corporations around the world, and their sales data is an interesting indicator of where the global economy is headed.
Latest sales data from manufacturers and dealers of industrial machinery indicates that emerging economies, especially China, may not be growing as rapidly as they were back in 2010 and 2011. As demand in emergent markets slows down, dealers and distributors of industrial machinery have reported lower sales and a build-up of unsold inventory since the end of 2012. For example, Caterpillar dealers recently reported 30% lower sales year-over-year for the third quarter of fiscal 2013 (3QFY13). Read More: CAT
The use of sweeteners in carbonated beverages has been a topic of intense debate for quite some time. While beverage companies maintain their stance that the type and quantity of sweetener being used in their beverages, high fructose corn syrup, is not harmful to human health, numerous studies have shown a direct link between obesity and the consumption of sugary beverages. Even though beverage companies are sticking to their guns on the use of natural and artificial sweeteners, they are simultaneously looking at ways to cut down on harmful ingredients in their products. Read More: DPS, KO, PEP
As reports make their way to the market that China is restocking iron ore, investors will be looking to make a quick buck speculating on movements in the commodity’s prices. Before you make an investment decision, however, keep Batista in mind and pay heed to what these analysts and executives from the iron ore industry are saying about the metal. Read More: BHP, C, FMG, MS, RIO, VALE
Nouriel Roubini, chairman of Roubini Global Economics, is an American economist and a Professor of Economics and International Business at New York University’s Stern School of Business. He is more commonly known as Dr. Doom due to his consistently pessimistic views and commentary on the economy.
But should anyone take him seriously?
On September 7, 2006, while addressing economists at the International Monetary Fund, Roubini warned of a one-time housing bust that would lead to a protracted recession. Though the markets did initially crash because of a housing bubble, the recession did not follow before the Standard & Poor 500 Index had rallied another 25% by October 2007. If investors had taken his word and taken a short position in the SPDR S&P 500 ETF (SPY), they would have incurred losses for a long period and possibly stopped out before realizing any gains. Read More: GLD, SPY
In anticipation of that trend, AT&T (T) CEO, Randall Stephenson recently announced that the company would revamp the 700 MHz spectrum it purchased in 2010 to provide LTE broadcast services that will enable users to watch digital content on mobile devices. Read More: QCOM, T, VZ
But with its best days behind it, JCPenney has recently seen its performance drop to all-time lows following successive restructuring failures. Its stock price is down 50% year-to-date (YTD), and investors have increasingly started questioning its chances of survival. Read More: JCP, M, WMY
More recently, same store sales (SSS) growth rates for US luxury retailers have averaged around 11% in the third quarter of 2013, higher than SSS growth for all US retailers combined (6%). Similarly, the Dow Jones Luxury Index is up 18% year-to-date, while the S&P Global Luxury Index has a year-to-date return of 23%. Read More: COH, KORS, PVH, RL
It came as a bit of a shock when, just a month after such a major transformation of the company, Ballmer announced that he was planning to retire. Ballmer had joined Microsoft in 1980 as the 30th employee and the first business manager hired by Bill Gates himself. He took over from Gates as the company’s CEO in 2000. Read More: AAPL, F, GOOG, MSFT, NOK