Thursday, June 30, 2011
As reported in the release of JOYG’s 2-Q results, China’s stockpiles of coal touched a yearly low in April, which has created a shortage for the coming summer. Also, the effects of major earthquakes and droughts in Asia have created a reduction in the usage of Hydro generation and nuclear generators. This should bode well for coal demand and production. In the 1-Q of 2011, US coal exports rose 49% to its highest level of exports since 1992. The industry witnessed a 160% increase in steam coal demand, in the same period.
Tuesday, June 28, 2011
Nike, Inc. reported 4Q results after the close on Monday and held an investor conference today. The company reported quarterly EPS of $1.24 versus street expectation of $1.16 and our modeled $1.09. 4Q2011 net revenues were $5.7bn, a 14% increase from last year and greater than the 9% analyst consensus. Gross margin, as expected, decreased 310 basis points due to increased inflation and sourcing costs. Full year revenue was $20.8 bn. 7.5mn shares were repurchased during the quarter for a total of $607mn.
Top-line performance was driven by 21% growth in the North American market, 16% in the Greater China region and 19% in Emerging Markets; partially offset by a 1% decline in Central/Eastern Europe and -26% in Japan. Inventory increased 33% on a year-over-year basis, which management commented was due to early summer shipments. Total futures orders, a key determinant of upcoming demand, were up 12% on a consolidated basis versus the expected 9%.
CEO Mark Parker commented during the investor presentation today that “Nike holds more than twice the number of invention patents than its closest top 5 competitors combined.” Last year, Parker stated that a company-wide goal was to report net revenues north of $27bn by FY2014. During today’s conference, he not only stated that they were well ahead of meeting that mark, but also revised the guidance up to $28 to $30bn.
Shares of the stock surged over 10% during the day. Notably, the higher than expected top-line growth was more than enough to offset the significant decline in gross margin. Additional pressure on gross margin continues to be the major risk going forward, as any major deceleration in sales would quickly flow through and affect the bottom-line. Nike is well positioned within the large emerging markets and retains several competitive advantages, solidifying its position as a growth story.
It is my view that the court ruling will not have a significant impact on ENDP. Although Lidoderm is an important part of Endo Pharmaceuticals drug portfolio, with 30% of net revenues, its importance to the firm has been diminishing over the past few years. At one point the drug represented 60% of revenues, but the proportion has been decreasing as the firm has continued to successfully diversify its product line-up. In addition, the court ruling does not absolve Watson Pharmaceuticals from the patent-infringement accusation. Whether or not ENDP will actually face generic competition will not be decided until February 2012. With Lidoderm's impact weakening, and Endo Pharmaceuticals strong prospects in the tamper-resistant Opana, the ruling should not pose a significant threat to the firm or our investment.
-Ryan M. Kennedy
Wednesday, June 15, 2011
Monday, June 13, 2011
- Overall vehicle sales to increase by 50% to about 8 million -- from 5.3 million in 2010
- Global Automotive operating margins will increase to 8 to 9 percent from 6.1 percent in 2010, with operating margins in North America by the mid-decade in the 8 to 10 percent range
- Capex will average about $6 billion annually through mid-decade, an increase from the $3.9 billion in capital spending in 2010
- They will pay down approximately $6.6 billion in debt bringing their total automotive debt to about $10 billion, down from $33.6 billion in 2009
- The company expects to return to investment-grade in the near-term, and resume paying dividends
- The company plans to triple its electric vehicle capacity between now and 2013, going from 35,000 EV sales yearly to more than 100,000 come 2013
Sunday, June 12, 2011
For those unfamiliar with Morningstar, it offers a 1-5 star rating system for mutual funds based off past performance for 1-, 3-, 5-, and 10-year time frames and is highly regarded in the industry by both individual and institutional investors alike. Previously, Morningstar did not offer any forward-looking analysis. Today, they announced a new outlook system similar to the outlooks given by ratings agencies such as S&P or Moody's. Funds will be assigned a positive, neutral, or negative outlook based off of analyst recommendations.
This development will add an entirely new dynamic to analyzing mutual fund companies. Funds with better outlooks will likely be more attractive to prospective investors, thus improving (or conversely, worsening) organic inflows. Depending on the frequency of outlook changes, this change could greatly increase the volatility of an already-volatile industry. The specifics of how Morningstar will use the "Five Pillars" - process, performance, price, people, and parent - are yet to be seen, but it will certainly be interesting to see if/how it will influence fund managers and their investment strategies.
We sold out of TROW at our last conference call, so we currently do not have any direct exposure to the industry. I will stay on top of this as more information becomes available. If it looks like TROW will materially benefit from the new ratings, I will reconsider a position.
Friday, June 10, 2011
For our portfolio, I believe it is best to hold onto CAT despite the significant hits their share price has taken. I believe the company still has strong fundamentals and is making moves that will not only carry them through any economic downturn, but allow them to come up stronger and more competitive on the other end.
Thursday, June 9, 2011
1.) On Wednesday, the senate voted 54-45 to maintain the scheduled caps on interchange fees. Bloomberg estimates that these new rules, which take effect on July 21st, could cut revenue by as much as $12 billion a year.
2.) Monday, Bernanke, in an exchange with Jamie Dimon, reiterated his support for additional capital restrictions on “systemically important financial institutions” like WFC. This constraint and other Basel III provisions will reduce returns on equity by as much as 3% when they are implemented.
3.) Recently a group of large banks, including WFC, have banded together to negotiate a one-time settlement that would satisfy all state and federal investigations into illegal mortgage origination and processing. The banks have offered to split a payment of 5 billion, but the government may be seeking up to 30 billion.
4.) The tepid housing market is making it difficult for WFC to fix their mortgage problems, and to create new loans.
5.) Net interest margins are being pressured by the low interest rate environment, exemplified by the 10-year treasury that is now yielding less than 3%.
6.) Any positive effects from QE2 will end in June.
At this point, there are significant headwinds affecting the valuation of WFC and all other large domestic banks. UASBIG will now seek more creative ways to invest in the financial sector.
Wednesday, June 8, 2011
Tuesday, June 7, 2011
In the Q&A section, the first important note that came out is that CAT’s issue in China is not for demand but capacity. Investors were beginning to become concerned with increasing competition from Chinese companies, specifically Komatsu. CAT stated that the competition is not the issue, whereas capacity is. Throughout the press conference, they continually spoke about supply constraints in China and commented that most dealers in China would like more inventories if possible. They discussed plans of significant expansion of capacity in Xuzhou, China to come by 2015 so that they will be able to meet the high demand that they are seeing. As for other emerging markets, they feel that competition will continue to grow but that they are positioned well to handle this. As the developed company they are, CAT feels that their ability to produce top of the line products, while providing the fast, efficient service line behind their products provides them with a competitive advantage in the coming years. The second notable topic discussed was concerning the statistics that showed slowdown in economic growth. The company would not specifically comment on this, but they continued to press on that demand is not an issue. The last discussion was concerning the acquisition of EMD, which is one of the leading producers of locomotive technology. CAT feels that this is a great acquisition as locomotive transportation becomes prominent in emerging nations due to the fuel efficiency and effectiveness. EMD is a company known for producing top of the line products, but their distribution ability is what constrains them. CAT believes that the combination of EMD's products with their distribution capabilities will give them the competitive advantage to gain a big market share.
Following the press conference, CAT is trading up $.38. I believe that CAT is making strong moves to meet their long-term growth plans by 2015, assuming there is no recession. With their acquisition of EMD, pending acquisitions of MWM and Bucyrus, as well as expansion of facilities in the U.S. and around the world, CAT is becoming more competitive and responsive to all market needs.
Monday, June 6, 2011
Friday, June 3, 2011
Thursday, June 2, 2011
Joy Global announced that second quarter bookings increased 46 % to $ 1.5 billion and net sales increased 19% to $1.1 billion, compared to the same period last year. Their Operating income of $234 million accounted for 22% of sales compared to the operating income of $181 million which was 20% of sales. Net income was $162 million which is equivalent to $1.52 per fully diluted share up from $1.15 per share.
During the second quarter Joy Global key acquisition of LeTourneau will complement their already successful electric rope shovels and drilling products. New orders for original equipment were 79 percent higher than they were in the second quarter a year ago. The second quarter bookings included benefits of $131 million in the foreign exchange rate, from a weakening in the US dollar compared to the Australian dollar. New equipment orders for electric mining shovels and blasthole drills for use in mining coal, copper and iron ore were received in North America, South America, Russia and South Africa.
The Mining industry remains strong despite slower economic growth. There has been a limited excess mine capacity today and expansion programs are still behind after a hold for most of 2009 into 2010. The seaborne coal has been controlled by the emerging economies, particularly China and India. China’s stockpiles at power plants reached a yearly low for 2 weeks in April, which has created concerns for power shortages this coming summer. Along with fears of a drought, the response would be a reduction in the usage of Hydro generation and it should increase coal burn for replacement power generation. India plans to double its rate of growth in power generation between 2010 and 2012, as well. In Japan, failed nuclear generators are expected to be replaced by previously shuttered coal plants.
The company raised their diluted earnings per share expectations to $5.30 to $5.60 up from $5.10 to $5.40. Following the positive announcement the company was trading at $90.512 + 4.627 (5.39%) on the day.
Large banks seem to have three main factors working against them. One, a deteriorating macro environment reduces total business, and causes more mortgage related problems. Two, the low interest rate environment* compress net interest margins. Three, the federal government is becoming more aggressive in its push for a housing related settlement, which will be anywhere between 5 and 30 billion dollars total, to be split proportionally among the previously mentioned banks.
*10-year treasury closed below 3%
Wednesday, June 1, 2011