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Trefis Week in Review

Posted
3/6/2011 10:50:00 AM
By: Trefis
Referenced Stocks:CME;NDAQ;NYX

The Week in Review

Below is a summary of the activity on Trefis during the past week that we thought you would find interesting.

Insights from the Week

Technology Media & Telecom

YouTube's reach is massive and AOL should benefit here as videos carry higher RPM rates than online text content …

Qualcomm also mentioned that it is designing a new dual-core chipset named MSM 8660 that would be well suited to both tablets and smartphones …

The decline in tablet pricing will be mainly a result of pricing pressure from other tablet vendors, and should not be as sever as that of desktop PCs …

We currently estimate that E-commerce will rise to about $1.5 billion in our forecast period which may prove conservative given the amount of information Facebook is storing and starting to share with third parties …

Given that a significant 22% of News Corp's stock value is exposed to "old media", it makes sense for the company to make the $30 million investment to expand its digital magazine products …

One silver lining is that there has been much needed improvement in Expedia's Egencia corporate travel services from under 8% in 2009 to over 12% in 2010, but it is still much below the company's overall EBITDA margin which is still in excess of 25% …

Although our 24 million unit estimate seems a little conservative by comparison, we believe that Google's new Android operating system for tablets (Honeycomb) could pose a meaningful challenge to Apple …

While this 5% may not be much, the hidden value of shedding this weight could be the re-alignment of Cisco's resources towards core businesses like routers and switches …

We could see around 13.5 million Android-based tablet unit sales in 2011, and a 30% share among Android tablets would mean that Motorola could sell around 4 million tablets in 2011 …

RIM's app store will get the much needed strength of Android apps, which in-turn will help make the PlayBook more attractive …

The wild card in Juniper's corner is the broad trend towards enterprises pursuing a multi-vendor approach. This development would ultimately help Juniper and others to compete better against Cisco …

The company is looking to add flexibility to add LTE services in the future, migrate iDEN subscriber base to CDMA network and improve in-building coverage …

An additional risk is with Google in charge may be that ITA could refuse to continue working with Kayak and similar providers - or do so with unfavorable terms …

If we take this revenue number as a baseline, and assume the show continues beyond 2012, a back-of-the-envelope calculation would indicate that ad revenue generates roughly 7.5% of CBS Network's equity value …

The bright spot for RIM, however, is the enterprise market, a segment that its smartphones currently dominate with a 67% market share as of August 2010 …

The ECM market has witnessed rapid growth over the past few years and was one of the few markets that even grew during the recession …

Tablets are growing fast and this means more data revenue opportunities for service providers like Verizon since consumers often prefer a mobile data network for such devices …

We anticipate moderate growth of the business security software market from around $5 billion in 2010 to around $7 billion by the end of our forecast period …

The rationale behind this price rise could fall within Dish Network's available room to raise prices, observations from DirecTV's success, an increased focus on improving financial metrics and pressure from content owners concerning higher carriage fee demands …

We believe Priceline could adopt other payment mechanisms, such as cash-on-delivery and cash-on-arrival to fully exploit the growth opportunities in tourism …

If Microsoft's push into new mobile devices doesn't gain the traction envisioned, this could hurt profitability as the company has invested in these markets …

Consumer habits are shifting, technology is evolving and one can not blame companies like Viacom for adapting to these changes by seeking new revenue streams …

(Trefis Pro Exclusive) Consumer, Retail & Automotive

Going forward, the company expects to open two to three BHLDN stores, each 3,000 to 4,000 square feet in size, in 2012 …

Previously, the retailer had used equity accounting for its Mexico business, but beginning fiscal year 2011, it started consolidating these stores …

As the U.S. economy stabilizes, consumer discretionary spending is likely to improve, sparking demand for luxuries like travel and entertainment …

Large coffee producers like Brazil, Columbia and Mexico have had to deal with unfavorable weather conditions leading to low-yielding crops …

Though India largely consists of tea drinkers, the demand for coffee is rising, largely due to a changing demographic and globalization …

Revlon's home turf, the U.S. market, showed a 3% decline in sales during 2010, following a 4% decline in 2009. Comparatively, Revlon's sales in the Asia-Pacific region grew at over 11% in 2010 …

The EBITDA margin for Victoria's Secret stores in the U.S. increased by an estimated 3.5% in 2010 over the same period last year, as gross margin for the firm improved by 2.7% …

Increase in international sales largely resulted from the company opening stores in lucrative markets like China and Europe and introducing international shipping to many countries for online orders …

(Trefis Pro Exclusive) Energy & Financial Services

If mining operations are loss-making on a stand-alone basis for the company, then it makes all the more sense for Chevron to sell this segment and focus on core operations that effectively carry its entire stock value …

If prices were to remain elevated during our forecast period, our price estimate for Anadarko could rise by as much as 14% …

While Lundin's copper sales figure is dwarfed by Freeport's 3.85 billion pounds of copper for 2011, the increased output would have a significant positive impact on Freeport's revenue …

Transaction volumes decline if mobile payments are linked to bank accounts directly bringing on the pending 'death star' combined with lower spending going forward due to macro concerns or an oil price shock …

Prolonged unrest in Libya could hamper the growth in crude oil and natural gas liquids sales volume and would result in about 3% downside to our price estimate for ConocoPhillips …

The 10% reduction in the number of customers added could spur a drop in asset value from our current end-of-forecast-period estimate of $118 billion to below $100 billion …

A key draw for students is that the card comes with no annual fee and relatively low APR of 19.8%. The card also comes with a low initial credit limit and aims to familiarize cardholders with how credit works …

However if regulations impeded this business over the longer term and the yield grew to only 4% by the end of our forecast period, this would translate to around a 10% downside to our price estimate …

We had estimated $6.3 billion worth of additional costs for each of the next four years, after which there would be insignificant expenses to BP …

Looking ahead steps like setting up its solar module manufacturing plants in low cost locations like Vietnam are likely to bring down its manufacturing cost per watt to almost 60¢ by 2014 …

If the yield on these assets declines to around 2% on greater regulatory scrutiny, especially on higher margin businesses like derivatives, this reduces our price estimate by about 2% …

We currently feel the threat to CME Group from the NYSE Euronext and Deutsche Boerse merger is low as CME already competes with them individually and still managed to increase its average daily volume of energy contracts …

If the recovery in EBITDA margins is slower, and the value increases gradually from its current value of 14% to reach 22% by 2017, this would knock almost 7.5% off of our estimated price for ArcelorMittal's stock …

Chespeake's net revenues increased by just over 20% with revenues from natural gas and oil sales increasing by around 12% …

The declining trend in Exxon Mobil's ability to acquire new sources of oil does raise a concern for investors as natural gas prices are considerably lower than that of oil on an equivalent basis …

The acquisition of Playspan complements Visa's acquisition of CyberSource as the company is now well-positioned to play a larger role in the e-commerce market …

Summaries of Trefis Members' Recent Forecasts

The number of Akamai's media content customers has increased from an estimated 881 in 2008 to 1,000 in 2010, mainly attributable to growth in online media consumption, particularly in HD video, coupled with increased Internet users …

Although Exxon Mobil's oil & gas operations are diversified globally, it has significant exposure to countries that are experiencing political unrest …

We believe introduction of newer versions at regular time periods will keep Adobe's creative software share elevated in the coming years, besides it should benefit from the growing creative software market …

The storage business constitutes so little to Oracle's stock that any gain in market share here will not be of great impact to the company's overall equity value …

Governments of many countries are giving subsidies and incentives to citizens to adopt solar energy use, and this has led to increasing demand for PV modules globally …

The number of diners in the U.K. making restaurant reservations online has drastically increased over the past few years, with the number of diners booking tables online reportedly doubling in 2009 …

Gillette has been adding new products such as advanced razors and blades under the Gillette Fusion Pro-Glide and Gillette ProSeries, launched in 2010, to expand into the premium segment …

If higher margins were able to push ahead to around 20%, we estimate that this could add around 10% upside to our current price estimate for NYSE's business …

Acquisitions of news and content sites such as Patch and Huffington Post should help AOL attract more visitors and increase the total number of ads on its sites, thereby raising its display ad revenues …

Rising input costs could ultimately force retailers to pass on these costs to end consumers, which could hurt retailers' sales numbers …

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CME's Missing Response on NYSE-Deutsche Boerse Merger Not a Concern

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March 1st, 2011 by Trefis TeamRecently speculation arose that CME Group ( CME ) might submit a counter bid for NYSE Euronext ( NYX ) to disrupt the NYSE-Deutsche Boerse merger. CME is the world's leading derivatives marketplace and offers a wide range of products across all major asset classes including futures and options based on interest rates, equity indices, foreign exchange, energy, agricultural commodities, metals, weather and real estate. It also provides clearing and settlement services for exchange-traded contracts and over-the-counter derivatives. Its main competitors historically have been NYSE Euronext and Nasdaq OMX ( NDAQ ) though newer exchanges like BATS Global and Chi-X as well as global exchanges are starting to take market share.

We have a price estimate of $330 on CME Group's stock which is about 5% above the current market price.

Merger Mania Among Exchanges

Stock exchanges around the world have been partnering or merging with other platforms to save cost and compete better against the newer electronic exchanges, which are reducing the barriers to entry for trading. The volume of transactions processed is an important metric for exchanges as the incremental cost of processing transactions after the setup of technological infrastructure is very low.

CME Group is unlikely to bid for NYSE Euronext because the stock trading business of NYSE is a low margin and highly competitive business. Futures and other derivatives trading is a much higher growth and higher margin business for exchanges. In addition, CME  specializes in futures trading and is regulated by the Commodity Futures Trading Commission (CFTC), and if it acquired NYSE, it would be subject to Securities and Exchange Commission (SEC), which could impose additional restrictions on its current business. [ 1 ] A potential merger between CME Group and NYSE Euronext could also spark antitrust concerns as the combined entity could have a significant presence in the U.S. derivatives market. Additionally a CME and NYSE merger would also keep the focus in the U.S. when much of the growth opportunity lies in international markets such as Brazil, India and China.

We currently feel that the threat to CME Group from the merger of NYSE Euronext and Deutsche Boerse is low as CME already competes with them individually and still managed to increase its average daily volume of energy contracts