Ed’s Daily Notes for October 4th   Leave a comment

New York Times: Samsung Soars While HTC Reports First Quarterly Loss

You know earnings season is about to start? Although traditional bellwether Alcoa (AA) doesn’t report earnings until next Tuesday, I prefer Samsung as my bellwether, which usually gives an early earnings estimate:

Samsung, which is benefiting from its status as a leading provider of semiconductors as well as a broad range of smartphones, said it expected to post operating profit of 9.9 trillion to 10.3 trillion won, or about $9.2 billion to $9.5 billion, in the third quarter, up from 8.06 trillion won a year earlier. Sales are expected to rise to a range of 58 trillion to 60 trillion won from 52.2 trillion won a year earlier.

The outlook contrasts strikingly with a report from HTC, which posted its first ever quarterly loss on Friday. The company, which is based in Taiwan, posted a net loss of 2.97 billion Taiwan dollars, or about $101 million, in the third quarter, after net income of 3.9 billion dollars a year earlier.

Samsung did not provide an explanation of the drivers of its growth, but analysts said the company was probably benefiting from a recent recovery in the price of memory chips after a fire at a factory owned by a Samsung rival, SK Hynix, in China.

Samsung is not only the biggest maker of smartphones, it is also the leading maker of memory chips. It sells chips to other companies, like Apple, in addition to supplying them to its own smartphone production lines.

…Though HTC had previously forecast a loss, the number was bigger than analysts had expected. The company’s flagship smartphone, the HTC One, has failed to catch on with buyers of high-end smartphones, who have favored devices from Samsung and Apple.

HTC has focused on premium-price models, even though much of the growth in the smartphone business is now coming from the lower end of the market, where Chinese companies like Lenovo, ZTE and Huawei are experiencing rapid growth.

…Still, the situation at HTC looks increasingly dire. Sales plunged to 47.1 billion Taiwan dollars in the third quarter from 70.2 billion a year earlier.

According to Gartner, a research firm, the company’s share of the worldwide smartphone market fell to 2.6 percent; in 2010 and 2011 it flirted with double-digit percentages.

I think it is safe to ignore HTC now. Even the critically-acclaimed HTC One can’t make a dent in the high-end smartphone market.

Samsung is still the 800 pound gorilla of the smartphone industry. Even when Apple rocks, they do it with Samsung chips, which are now more expensive. That said, I see Samsung as topping out. They won’t go down overnight, and they may even continue to grow. But the risk/reward is shrinking on the reward side. If you can trade in the Korean market, Samsung could make a nice long-term hold, but I would begin looking at it as strictly a dividend play. And since it doesn’t pay a dividend there, why would you even bother?

As for the smartphone market, there is still growth, but the growth is at the bottom end of the spectrum: Lenovo (LNVGY), ZTE Corp. (ZTCOY), and Huawei (not traded in the U.S.). Of the two companies available, Lenovo is the better play, but it already has some growth priced in. Also, it carries tight margins now (profit margin of 1.9% and an operating margin of 2.4%). Unless Lenovo builds a breakout product, growth could be sluggish as there is a lot of competition in their end of the tech spectrum, including Samsung.

The “next big product” from the smartphone industry could be Google Glass, but that is controversial and expensive. It is too early to tell how that will sell.

So how to play smartphone growth? Unless you are buying a dividend-paying stock like Apple (AAPL) or Microsoft (MSFT), I would go with the companies which will make advertising money from smartphone users: Google (GOOG), Facebook (FB), Yahoo (YHOO), or even Baidu (BIDU) for Chinese growth. In fact, Baidu might be undervalued currently, with a PEG ratio of 1.52. However, I am adding it to my watchlist, because I don’t see it as a bargain currently. It will have to be below $150 before I would consider initiating a position, and it wouldn’t be a bargain unless it was closer to $100.

Financial Times: Twitter woos investors with safe sales pitch

Boring is good.

That is the message that Twitter has attempted to project on its path to the most anticipated stock market debut by an internet company since Facebook.

The publication of its prospectus that officially set the share sale in motion was unerringly true to form.

Conspicuous by their absence were the grand flourishes seen from other Silicon Valley notables at such times, such as Google’s promise to “make the world a better place” or Facebook’s pledge to create “a more open culture.”

Instead, the company that revelled in being a tool for revolutionaries during the Arab Spring contented itself with a brief and understated promise to always work “in ways that improve – and do not detract from – a free and global conversation”.

I fail to see how Twitter is radically different from Google and Facebook in that respect. But I digress…

Nor will Twitter, as a public company, be the preserve of its all-powerful founders, as has been the case with other recent internet IPOs that have involved the use of dual-class share structures to enshrine founder control. Instead, it revealed straightforward leadership and boardroom governance arrangements that will make it more akin to a traditional company.

Equally absent were the unpleasant surprises that have sometimes made investing in internet IPOs a minefield. Those have included, in recent years, Facebook’s warning about a possible dent to its business from the shift to mobile internet use, as well as Groupon’s attempt to foist an unconventional way of calculating its profits onto potential investors – at least, until regulators intervened.

…Still relatively small and likely to remain lossmaking for a while, even if it is growing strongly, Twitter has already stirred hopes for a stellar stock market debut that the disclosure of its actual business performance did nothing to damp.

At $448m over the past 12 months, Twitter is approaching Wall Street with double the revenue that LinkedIn, the professional networking site, reported ahead of its own IPO in 2011. Yet LinkedIn, already at the time a profitable company, was valued at $4.3bn – well below the $12bn-$15bn that is being talked about as likely for Twitter by some shareholders and advisers, as well as analysts and tech investors who have no interest in the stock.

Meanwhile, at roughly $2 for each of its 215m active users, its annual revenue is below the level of arch-rival Facebook, which had reached $4.28 before it went public, or even LinkedIn, at $3.24.

And its base of active users, though still expanding at more than 40 per cent a year, is growing more slowly than the pre-IPO LinkedIn and at only around the same rate as Facebook – even though the bigger social network had more than 800m users at the time.

Twitter is a nice little company, but that is all. It will grow, but it will never be more than a niche on the internet. It is like a local pub: It will do good business, and it will have loyal and happy customers, just don’t expect it to become McDonald’s. At best, look at Yahoo right now for an example of Twitter’s full potential (and that is being generous). For Twitter to become more than that, it will have to do something else, which means expanding into another area. Since they don’t have any currently announced plans, that is a risk beyond buying the IPO.

I won’t be buying the Twitter IPO.

PR Newswire: Union Pacific Provides Third Quarter 2013 Update

Good news and bad news for my Union Pacific (UNP) stock:

Union Pacific Corporation (UNP) today provided details on its earnings expectations for the third quarter of 2013. The Company expects to report best-ever quarterly earnings in the range of $2.45 to $2.48 per diluted share, a double-digit increase compared to last year.

…Third Quarter 2013 expectations include:

–Operating revenue growth of 4 to 4.5 percent.
–Solid core pricing of about 3.5 percent, somewhat negatively impacted by lower coal volumes.
–Positive top-line business mix, although less favorable than traffic mix in the second quarter 2013.
–Operating ratio improvement of about 1.5 points from third quarter 2012 performance of 66.6 percent.
–Lost revenue and increased costs from the flooding in Colorado, expected to negatively impact operating income by roughly $10 million.

…The Company will report its third quarter 2013 earnings on Thursday, October 17, 2013, at approximately 8:00 a.m. Eastern Time, followed by a conference call that will be broadcast live over the Internet and via teleconference at 8:45 a.m. Eastern Time.

The bad news in that is that analysts were expecting $2.56. “Best-ever quarterly earnings” may not be good enough when the analysts were expecting even better.


Posted October 4, 2013 by edmcgon in Market Analysis, News, Stocks, Technology

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