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Transcript of 11/16/2009 November 16, 20009
11/16/2009
November 16, 20009
TONIGHT'S AGENDA
Portfolio Update Market Update Buy Pitch: Polo Ralph Lauren Buy Pitch: Research in Motion Sales and Trading 101
PORTFOLIO UPDATE11/2 to 11/16
Market UpdateBy: James Cullen
11/16/2009
PORTFOLIO STATUS
Market Value of $275,211 Cash of $33,786 (12.28%)
28 Positions Avg. Position Size of $8,312 (3.02%)
+24.41% YTD vs. +21.06% for S&P 500
RECENT TRANSACTIONS
November 4th
Sold 147 Shares Pfizer (PFE) Sold 400 Shares EquityOne (EQY)
October 21st
Bought 250 Shares Short 20+ Yr. Treasury (TBF) Sold 400 Shares CarMax (KMX)
PORTFOLIO PERFORMANCE
+4.56% Since 11/2 vs. +6.60% for S&P 500
Laggards Through 11/13 (Friday): Cal-Maine (CALM), -6.80% Ultra Petroleum (UPL), -1.88% VeriSign (VRSN), -1.73%
5 LARGEST POSITIONS
USG (Building Products) KBR (Infrastructure) Waters (WAT - Semiconductor Equipment) TBF (Short Long-Duration Treasuries) XTO Energy (Oil and Nat. Gas E&P)
Total $61,709 (22.42% of Portfolio)
5 SMALLEST POSITIONS
IBKR (Online Brokerage) CHL (China Mobile) UPL (Oil and Nat. Gas E&P) NTAP (Electronic Data Storage) ADP (Payroll/Business Services)
Total $23,696 (8.61% of Portfolio)
November 16, 20009
Market UpdateBy: Kevin Kelly
THIS WEEK’S PERFORMANCE
WHILE THE MARKET’S RALLY FROM THE LOWS CAN BE ATTRIBUTED TO ECONOMIC GROWTH, SUBSTANTIAL GOVERNMENT STIMULUS, AND SUCCESSFUL ‘CRISIS MANAGEMENT’, THE RALLY IS NOW BEING FUELED BY “LIQUIDITY”
Because investors can’t expect a reasonable return on cash, they mustallocate capital into ‘risk assets’, which offer higher potential returns.
“RISK ASSETS” SHOWING REMARKABLE CORRELATION Equities (S&P), commodities (oil/gold), consumer-
discretionary (retail stocks [RTH]), emerging market equities (EEM), high-yield bonds (JNK) all moving higher.
LIQUIDITY =/= INFINITY We must wonder if capital indiscriminately
returning to risk assets is a) sustainable; and b) based on underlying fundamentals
The market will continue to trade higher until investors become concerned about sources of new capital/liquidity Then: Risk of Losing Money > Risk of Missing
Continued Rally Potential causes of less liquidity
money managers no longer have ‘dry powder’ to invest higher taxes (marginal, capital gains, state) less government stimulus tighter Fed policy (either direct, i.e. increasing rates, or
indirect, i.e. winding down ‘innovative’ tools employed during the crisis)
WHY IT MATTERS…
“One of the keys to understanding the current environment is that there is a lot of financial liquidity, which obscures a lack of demand for products that are not staples. With unemployment so high, and perhaps worsening, it is difficult to invest in new plant and equipment..” – David Merkel
“Right or wrong, in an over-liquefied world risk assets can trade in a vacuum.”-Goldman Sachs
IMPORTANT NEWS
Gold Reached all time high on Thursday, $1,123 Investors view gold as an inflation hedge and
alternative to fiat currencies. Foreign Governments Support U.S. Dollar
Net exporters to the U.S. are concerned, as a weaker dollar makes their goods more expensive E.g. South Korea
Dollar bottom? Intel/AMD
Intel paid AMD $1.25 billion to settle patent dispute.
“Meaningful positive” for AMD according to FBR
BUY: POLO RALPH LAUREN CO.
PRODUCT SEGMENTATION Apparel, home (American Living), accessories (new push into handbags), and
fragrances. Revenue by distribution channel (for FY end 3/09):
Wholesale 57.53%Retail 38.58%Licensing 3.89%
Revenue by geography (for FY end 3/09):%sales %growth, YOY
2009 2008 2009
U.S. 71.52 (4.46) (6.86)Europe 20.49 4.54 8.28Japan 7.82 40.14 272.00
“One of the strongest and unique business models in all of retail, leveraging its core brand assets across multiple channels, geographies, and price points.”
(Source: Bloomberg)
PRIMARY COMPETITORS
Market Cap. Rev For. P/E Dil. EPS
RL $8.01B $4.87B 18x $4.00
VFC $8.26B $7.22B13.2x $4.58
PVH $2.15B $2.39B14.1x $1.29
WRC $1.92B $1.96B13.25x $1.48
•52 week range: $31.22 - $83.50•Price as of 4pm:
VALUATION Actual EPS will be higher than expected.
Right now – expected EPS for FY2010/11 (end 3/11) is $4.46.
As of November 9th, GS raised their expected EPS for FY2010/11 (end 3/11) to $5.20.
With forward P/E of 18x, price should settle near $94 in the coming year.
RL has beat EPS expectations for the last 8 quarters by an average of 47%.
EPS DRIVERS Underestimated top-line and bottom-line growth.Prior Est.:
FY10E FY11E FY12ERevenue $4,972 $5,309
$5,696Net Income $452 $497 $540
Present Est. (as of 11/09/09):FY10E FY11E FY12E
Rev: $5,033 $5,327$5,713
NI $466 $503 $546
(Source: GS Research)
GROWTH POTENTIAL GS expects, in the coming years:
I. 6-9% YOY increase in revenue due to:1. U.S. recovery 2. SE Asia build-out3. Category expansion
YOY Revenue growth for last FY:2.84%
10-year average for YOY revenue growth: 11.52%
II. 8-13% increase in EBIT annually by 3/2011 due to:1. Increase in revenue 2. Margin expansion
(Source: GS Research)
U.S.: BET ON AFFLUENT CONSUMER SPENDING 2009Q2 ended 9/09: RL SSS down 6% YOY
Beta of 1.65 Same store sales:
Retail sales grew 1.4% in OctoberDepartment stores sales rose 0.59% in October
But, companies that are more closely associated with RL – SKS, GPS, and JWN, –had year-high same-store sales growth in Oct.
Affluent consumer is spending money again.(Source: Bloomberg)
RL EXPANSION ABROAD
European market accounts for 20.49% of annual revenue and growing.
Japanese market has expanded dramatically:$64.6m $392.6m (507.74% in 2
years) 1/1/10 – RL will assume direct control of its
distribution in SE Asia. “Dynamic, emerging market with incredibly
strong growth characteristics.” –Roger Farah Heavy expected future investment in foreign
markets.
STRONG BALANCE SHEET
Solid Cash Reserves – $925.7m – over $9 cash/ share.
Limited current liabilities – Current ratio: 3.07 95.88% equity – no preferred equity No short term debt – $307.5m in LT debt Interest coverage: 34.6x (3/10 est.) BS can absorb the shock of upcoming
“investment phase"
EPS DRIVERS Buyback authorization increased:
$225m $431mReduces shares outstanding, makes each share
more valuable.Expect near $1000m in buyback power within two
years.
Increased Annual Dividend:$0.20 $0.40
First dividend increase since May 2003.
Both indicators of management’s confidence in future outlook.
RL: RISK
ST – Drop in U.S. revenue.$3,653.10 $3,589.30
ST – Green field investments in SE Asia.
LT – Sustainability of Japanese revenue growth.
LT – 90% of voting power in maintained by CEO Ralph Lauren.
HEDGE AGAINST ITSELF
Unquantifiable opinionBut, I believe when the economy is
up:the middle class buy Polo – for them, it is luxury apparel
When the economy is down:the affluent buy Polo – for them, it
is a cheap standard, opposed to far high-end apparel, without the stigma of cheap apparel.
ANALYST ESTIMATES
Target PriceGoldman Sachs $94UBS $88Morgan Stanley $80CITI $80Credit Suisse $91
Current Price = $81.79
SUMMARY
Undervalued EPS growth potential $0.40 Dividend
Bet on: 1. Increase in Affluent Consumer Spending.2. Recovery of the U.S. economy.3. Long-term growth potential abroad.
BUY PITCH RESEARCH IN MOTION (RIMM)
Buy: 200 Shares @ 61.67
(*18 month watch)
WHO ARE THEY?
Research in Motion (RIMM) is Blackberry Hardware- Blackberry Phones Software- Operating system, Browsers etc. Service- EDGE network
HISTORIC STOCK PRICE
STRENGTHS Dominant player in the “smart phone”
sector at about 40%Smart phones are gaining market share in
the Cell Phone market
Multiple Programs at Once(iPhone cant)
No encroachment on core market - BusinessRoom to grow
Majority of Sales are US/Canada
WEAKNESSES
Q2 showed less growth in market share than iPhoneBlackBerry Storm is closest competitor but
not as Dynamic
< 1% Market Share in Asia
Margin strength lossesMarket adaptations
STAYING COMPETITIVE
Products are updated Frequently
Touch Screen iPhone
Web Browser iPhone
•Walmart Sales–New markets
•Partnerships with Verizon
•Platform Advertising
FINANCIALS
$1.2B, Stock BuybackThey see their stock as undervalued (we
should too)
D/E .32No long-term debt
ANALYST REPORTS Vivek Arya, analyst at Bank of America/Merrill Lynch, repeated his Buy
rating and $100 target, asserting that the selloff is overdone. Arya says he understands the concerns about the new entrants from Motorola, but that Verizon seems committed to RIMM “judging by its continued aggressive promotions all BlackBerry products.” He also thinks the Street is ignoring the company’s dominant position in the enterprise, which he thinks is worth more than $40 a share alone.
Jesup & Lamont analyst Kevin Dede repeated his Buy rating and $80 target. “We think the handset market is large enough to support more than a few contenders, and believe that RIMM can hold its share and ride the growth wave certain to come as 3G networks expand,” he writes.
Gus Papageorgiou, Scotia Capital repeated his Outperform rating and $103 target. “There has always been competition in smartphones and there always will be,” he writes. “That others are launching devices or software platforms does not guarantee success. We believe RIMM meets all the key success factors for industry success and very few other players come close.”
SALES AND TRADING 101By: Anthony Vitiello
SALES AND TRADING
BC CSOM mentality focus on Investment Banking, Sales and Trading & Consulting
Overview of what S&T is without recruiters Question and answer time period
SALES AND TRADING: INTRO
Large financial institutions offer as service to their clients know as Sales and Trading
To do so, firms act in their capacity of Broker/Dealers to facilitate client transactions in the secondary markets Secondary vs. Primary Markets
BROKER/DEALER
Broker: a company which connects a buyer and a seller to facilitate a client transaction
Dealer: a company which may use its own capital to facilitate a trade, and buy or sell from a client directly
Most modern banks act as both Broker & Dealer
SO HOW DO THEY DO THAT?
Broker/Dealers activities are carried out by Traders, those permitted to make markets on behalf of firm
Making Markets: Quoting a Bid or Ask & Size Firms must transact at the quoted price or risk
losing business Clients find “best” bid and offer and trade
with that firm
THE BID/ASK SPREAD
A trader is fundamentally one who sets prices
Bid: Price a trader will buy from client A client must sell at the bid price
Ask: Price a trader will sell to client A client must buy at the offer price
The spread between what the bid and ask price is the traders profit margin
SEEMS SIMPLE?
By quoting a price, trader is putting firms money at risk Manage risk produced by client order flow
Need to understand entire market, have an opinion
Work with researchers, other traders, risk mangers
When to take a position onto the proprietary “book”
SALESPEOPLE
While the trader is driving the pricing decision, salespeople provide the customers
Talk to customers constantly, understand needs, deliver ideas, market color for trader
Main responsibility is maintaining the relationship with client