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Sarkozy vs. Hollande
First round results Hollande: 28.8% Sarkozy: 26.1% Right: 18.5% Left: 11.7% Center 8.8%
Runnoff: Sarkozy v.s. Hollande (+ Left & Center) First time that incumbent didn’t have majority Outcome (still) uncertain, leaning towards Hollande
vs. Globalization, EU and cooperation with Germany
vs. Austerity
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Argentina Nationalizes YPF
Argentina is one of the few countries that doesn’t control its own oil
In the face of slumping oil output and investments by YPF, Argentine President expropriated Spanish owned, YPF, the nation’s largest crude oil producer(34%) and refiner(50%)
Ousting the Spanish owners Repsol(57.4% stake) Setting a terrible precedent
“expropriating assets rather than going through fair market means to gain control of a company effectively closes the country off to foreign-direct investments”
Retaliation by the EU could risk Argentina exports to its 2nd largest trading partner
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Two Minute Drill
Guest Lecturer:
Topic:
Shayra Kamal
Healthcare Pipeline
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Increased Bidding for Medicare Supplies Administration announced using competitive bidding to buy Medicare
supplies in order to save money for patients and taxpayers Sharp break from fee-for-service purchasing for Medicare patients
Health and Human Services reports bidding pilot program already saved $202 million (reduced Medicare costs by 42%) Mainly from purchases in oxygen equipment and wheelchairs
Expansion for bidding planned to cover over 100 metropolitan areas by in 2013 and the entire country by 2016
MD&D providers that start off at low bids at distinct advantage
Expected savings of $25.7 billion to Medicare program in 10 years
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Pipeline
Set of unique compounds ,devices, and processes that a company has in development at any given time
Primary tool used to evaluate R&D activities, spending, and overall potential for success and growth
More pipeline compounds=greater valuation
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FDA Approval
Food and Drug Administration (FDA) is primary agency that process applications for drugs to exit compound and enter market, including patent protection for prescription drugs
Can take up to 10 years from synthesis of pipeline compound to final approval
Backlog of over 100,000 application per year
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Clinical Trials
Three stages of drug development in FDA approval process Pre-clinical, clinical, and marketing (post-approval)
Three phases of clinical trials determined by number of human and animal subjects in each phase Phase I has fewest subjects, Phase III the most Pipeline with majority of drugs in Phase II/III expected
to rollout drugs within 2-5 years
Clinical trials results often used to increase investor confidence
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Apple (AAPL)17
Technology SectorAleksandar Zvorinji
Guo Jie Chin
Jerald Watson
Morgan Beller
James Ying
Raj Merchant
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Investment Thesis
Ecosystem that connects success in one generation of devices to successive consumer purchases
Top-line growth that is unjustified in light of several near- and long-term growth drivers
Big iPhone (130MM) /iPad (60MM) unit revisions
Short: upside to iPhone shipments, new Macbook Air, the new iPad
Long: iPhone upgrade cycle, lower priced 3G iPhone, larger tablet market, continued Apple market dominance, expanding distribution in China, and potential for Apple to enter the Smart TV market in 2012-13.
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Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Company History
Apple is a multinational corporation focused on designing and selling consumer electronics, software, and personal computers. Mainstream products include mobile
communication and media devices such as iPod, iPad, iPhone
Founded in 1976 by Steve Jobs, Ronald Wayne, and Steve Wozniak
As of Sept. 2011, there are 357 retail stores worldwide
Currently the largest publicly traded company Market Cap: > 530 billion
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Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technicals
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Product Description
iPod First released in October 2001, iPod is now in
its 8th generation, and has four different products in its line: shuffle, nano, classic, touch
iPhone Originally launched in 2007, iPhone has sold
over 100 million units. The latest iPhone 4s sold over four million within the first three days of release.
Macbook/iMac Macbook Pro, debuted in 2006, is the highest
selling personal computing apple device.
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Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technicals
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Revenue and Profit Margins21
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technicals
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Revenue Breakdown (Geo)22
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technicals
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14.24%5.46%
52.70%
19.75%
3.47%
Macs
iPod
iPhone
iPad
Periph-erals
As of Q1 2012: Macs (desktops/laptops): 14.24% iPod: 5.46% iPhone (including software sales): 52.70% iPad (with software) : 19.75% Peripherals: 3.47%
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Revenue Breakdown (Product)
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technicals
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Q1 2012: Total Revenue – 46.33 billion
EBITDA: 18.06 billion (Operating Margin: 38.98%)
Net Income: 13.06 billion (Net Margin: 28.19%)Competitor figures: Google
Operating Margin: 32.11% Net Margin: 27.09%
Hewlett-Packard: Operating Margin: 8.41% Net Margin: 4.75%
Microsoft Operating Margin: 38.44% Net Margin:
31.95%
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Quick Comparison
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technicals
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SWOT Analysis
Strengths:• Brand recognition and dominance• Stable and strong financial and
revenue growth; investor confidence is high
• Many avenues of growth and revenue sources
• Commitment to R&D; emphasis on innovation over profit
• Strong relationship with Intel, helps reduce costs
Weaknesses:• Foxconn labor issues• Patent Infringement Law Suit
could affect brand name and profit margins
• Product recall will damage brand name significantly
Opportunities:• Continual growth in smartphone
markets• Potential for Apple TV and iCloud:
syncing/linking all company products and App Store
• International expansion of Apple retail stores
Threats:• Competition in smartphone and
tablet markets (e.g. Android, Kindle, etc)
• Risk in continuity of management/innovation with replacement of Steve Jobs
• Dependence on Intel
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Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technicals
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Short Term Drivers: Pros
FQ2 earnings blow past expectations Tuesday: earnings surged 93% in the March
quarter, largely powered by stronger-than-expected sales of the iPhone
Set up well for months ahead and iPhone 5 release CEO, Tim Cook: PC market is slow overall (probably
partly due to the iPad), but that the Mac still outperformed the rest of the market
Spain: subsidies cut by country's wireless carrier Bifurcation of iPhone pricing to capture emerging
market demand Improved iPhone and iPad shipment momentum Rising gross margins driven by iPhone and iPad
scale
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Short Term Drivers: Cons
Threats Android (HTC, Samsung), Windows 8
(Nokia), Kindle Shortage of 28-nanometer chipsets used in
smartphone devices from Qualcomm No current phones use them but may delay
iPhone 5 release Cook dismissive of idea to combine PC and
tablet
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Long term drivers
Risk-reward profile Revenue and earnings growth Market penetration rates in tablets, PCs, China
and enterprise Enabling the burgeoning social
media/networking adoption curve Expanding store, online and carrier distribution
in China or other developing markets Returning cash to shareholders through
buybacks and dividends Shipment upside and continued evolution of the
iPad line Potential Smart TV launch in 2013
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Investment Risks
Android competition in smartphones, and Android and Windows competition in tablets
Regulatory and legal risk as Apple gains profit share momentum in mobile devices
Weak global consumer demand Rate of new product cycles / CEO transition
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Main Competitors
Personal Computers: Acer, Dell, HP, Lenovo, Samsung Electronics
Wireless Handsets: HTC, Nokia, RIM, Samsung Electronics
Software/Media: Microsoft, Google, Amazon
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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The PC Market: Steady Growth
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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PC Market: A Paradigm Shift
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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King of Tablets
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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PC Market: All About Margins
2011 Q4 Acer Dell HP LenovoSamsun
g Apple MeanGross Margin 8.97% 22.25% 20.56% 11.40% 25.17% 44.68% 22.17%EBITDA Margin 0.27% 7.39% 10.91% 2.92% 19.07% 39.28% 13.31%EBIT
Margin (0.02%) 5.83% 6.56% 2.32% 11.30% 37.72% 10.62%Pretax Margin (0.19%) 5.68% 6.08% 2.30% 10.89% 37.72% 10.41%
Net Margin 0.07% 4.79% 4.90% 1.83% 8.22% 28.20% 8.00%
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Wireless Handsets
2011 Q4 HTC Nokia RIM Samsung Apple MeanGross Margin 25.74% 26.94% 29.81% 25.17% 44.68% 30.47%EBITDA Margin 13.80% (5.73%) 6.01% 19.07% 39.28% 14.49%EBIT
Margin 12.95% (9.53%) (3.27%) 11.30% 37.72% 9.83%Pretax Margin 12.94% (9.74%) (3.27%) 10.89% 37.72% 9.71%
Net Margin 10.79% (10.71%) (2.98%) 8.22% 28.20% 6.70%
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Solid Growth
36-Month
Apple Inc.
Hewlett-Packard Google
Research In Motion
Industry Median
Market Median
Revenue Growth
49.37% 2.44% 20.26% 18.55% 6.65% 2.77%
Net Income Growth
75.03% -5.30% 32.07% -14.96% 18.05% -1.30%
EPS Growth
72.85% 0.71% 30.76% -12.38% 21.67% --
Dividend Growth
-- 7.72% -- -- 12.28% --
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Competitive Analysis
Unrivaled margins among hardware manufacturers
Supreme (and increasing) market share Innovation leader with phenomenal
growth Threats: Android (HTC, Samsung),
Windows 8 (Nokia), Kindle
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Earnings Release
April 24, 2012 Apple Released Earnings Reports for the first quarter of 2012
Total Revenue: $39.2 Billion (59.7% Increase Year over Year)
Net Profit: $6 Billion (94% Increase Year over Year)
EPS: $12.3 (92% Increase Year over Year) Gross margin rose slightly to 47.4
percent Beat expert estimates of 10.08 EPS
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Earnings Release (2)
iPhone 4s and iPad sales were the primary drivers of revenue within the quarter
35.1 Million iPhones Sold (88% Increase Year over Year)
11.8 Million iPads Sold (151% Increase Year over Year)
International sales attributed to over 64% of the quarter’s total revenue
Apple CEO Tim Cook promises further innovation “across the year”
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Valuation
Bloomberg price target blend: $720 Upside: +18%
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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DCF
Growth MultipleWACC 1.5 2.0 2.5 7.5 8.5 9.5 Prob (%)
9.5 850 894 944 726 792 857 17.5
10.0 800 838 882 714 778 842 65
10.5 756 789 827 703 765 828 17.5
Prob (%) 20 22.5 7.5 15 30 5
∑ price matrix X probability matrix = $798Upside: +31%
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Technical Analysis
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Williams %R
Williams %R Current = -40.95%
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Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Bollinger Bands
Bollinger Bands April 25 Lower Bound = 566.64, Upper Bound = 642.52, Price =
607.87
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Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Relative Strength Index
Relative Strength Index (RSI) Current: 54.89
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Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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MACD
Moving Average Convergence Divergence (MACD) Current: 1.49%
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Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Summary
Ecosystem that connects success in one generation of devices to successive consumer purchases
Strong valuation (big upside) Short: upside to iPhone shipments, new Macbook
Air, the new iPad Long: iPhone upgrade cycle, lower priced 3G iPhone,
larger tablet market, continued Apple market dominance, China (emerging markets), Smart TV market
Returning cash to shareholders through buybacks and dividends
Recommendation: Buy 4 shares at $610 for $2,440.
Investment Thesis
Company Analysis Drivers Summa
ryCompetitive Analysis
Earnings Release Valuation Technic
als
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Analysts: Adrian Diaz-Granados, Andrea Cheung, Michael Wolcott, Tom Jaeger
Whole Foods Market, Inc. (WFM)
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Company History & Overview
Founded: 1980 Headquarters: Austin, Texas Over 310 stores in the U.S., Canada,
and the U.K. Began expanding to other domestic
markets in 1984 by acquiring other natural food retailers
Entered Canadian market in 2002 and the U.K. market in 2004
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Management Structure & Culture
Co-CEOs John Mackey (Co-Founder)
Ernst & Young CEO of the Year in 2003 Walter Robb
The work culture is centered on the company’s grassroots level management, which helps it eliminate bureaucracy
Tight-knit team of five senior executives have functioned as a sort of CEO committee for the past 10 years
Great employee relations that create a fun and exciting atmosphere
Excellent training program Diverse workforce: 44% women, 43% minorities
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Favorable Behavioral Trends
Organic usage remains strong, with 75% of U.S. consumers purchasing organic products
35% of the consumers polled indicated they buy organic products monthly, up from 22% in 2000.
Shoppers have become increasingly interested in knowing where their food comes from
Last year, sales flourished among grocery retailers who jumped on the movement among consumers to “buy local”
Source: The Hartman Group’s “Beyond Organic and Natural 2010” report
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Favorable Behavioral Trends
A growing number of farmers are educating communities about buying organic foods and local-grown foods by using blogs and social media sites 99% of farmers and ranchers aged 18 to 35 have access
to and use the Internet and 75% of those surveyed have a Facebook page
77% of those surveyed view this type of communication as an important part of their jobs as farmers and ranchers
Marketing boom has pushed retail sales of organic foods up to $28.6 billion in 2010 from $3.6 billion in 1997
Organic handlers are selling more organic products to conventional retailers and club stores than ever before
Source: American Farm Bureau’s 2010 “Young Farmers and Ranchers” Survey
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Favorable Behavioral Trends
Natural product sales through retail channels were approximately $65 billion, a 7% increase over the prior year Driven by:
Heightened awareness of the role that healthy eating plays in long-term wellness
A better-educated and wealthier public whose median age is increasing each year
Increasing consumer concern over the purity and safety of food as well as environmental concerns
Source: Natural Food Merchandisers 2011 Report
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Macroeconomic Analysis
U.S. Mortgage rates sit at a record low Private sector employment is posting year-ago
increases not seen since 2006/2007 Analysts forecast sturdy economic growth, citing
real GDP expansion as a key factor generating new jobs and cutting into employment
The jobless rate appears set to fall below 8% by year’s end
In the coming months, economic data will turn a bit soft as the effects of the warm winter fade Surging gasoline prices have the potential to take a toll
on consumer sentiment
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Macroeconomic Analysis
Analysts also expect lawmakers to make significant policy changes after the presidential election Most likely they will again extend the Bush-era tax cuts
for middle and lower income taxpayers, delay spending cuts, and allow the payroll tax programs to expire
The fiscal drag next year is expected to be closer to 1.5 of a percentage point of GDP
Global The global economy continues to expand at a
moderate pace, with financial stresses in the mature economies remaining a key theme
Persistent economic weakness in the Euro Area is likely to be a continued drag on the global economic expansion
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Macroeconomic Analysis
The perception that there is no clear solution to the deeply-rooted problems of the Euro Area is weighing on confidence regionally and globally
There is a persistent divergence between weak performance in mature economies and solid performance in emerging economies
Inflation pressures will remain subdued in mature economies and have recently subsided somewhat in many emerging economies
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Industry Overview
Grocery Industry Focus on natural/organic food product sales through retail
channels Competes with other major supermarkets
Kroger SuperValu SafeWay
U.S. organic industry grew 8% in 2010 – direct tie to WFM Opposes current trend where “flat is the new growth”
In 2010, the organic industry grew to over $28.6 billion
Source: Organic Trade Association’s 2011 Organic Industry Survey
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Competitive Advantages
Best operator of small, hip, and natural food retailers This market position is powerful and sustainable
Now the only major organic grocer in the country (post-acquisition of Wild Oats in 2007)
Selling “normal” food alongside organic food does not have the same market penetration as Whole Food’s strategy
Size of their stores exceed 20,000 sq. feet Customized layout in order to target customers of
that region
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Competitive Advantages
Depth and breadth of item selection Offer an economic value-added management
and incentive system for employees Variety of selection of prepared foods for lunch,
dinner, and dessert 30% of shoppers do not know what they are
having just two hours before the meal, making the prepared meal appealing to grocers
Source: The Food Marketing Institute 2010 Survey
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‘Health Starts Here’ Brand
New line of private brand products aimed at healthier eating
Includes convenient sides, salads, snacks and ready-to-cook entrée options, as well as frozen vegetables and sprouted grain breads Based on ingredients that are whole, fresh,
natural, organic and neither refined or highly processed
The products are part of a larger effort to help its customers improve and clean up their diets, and include educational efforts, both in store and online
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Marketing & Social Media
Currently, WFM has nearly 900,000 fans on Facebook and over two million followers on Twitter
In addition, all of their stores have their own Facebook and Twitter accounts Used to connect with local/regional customers and
farmers/suppliers Customer events to tighten relationships with
local communities
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Whole Foods in the News…
“Ban on Some Seafood Has Fishermen Fuming” Whole Foods Stops Selling Unsustainable
Seafood “Whole Foods Market Funds Community
Projects in Developing Countries Thanks to World Trade Guarantee Products Whole Foods Market announced that with the
help of its shoppers, it has paid more than $2.5 million in Community Development premiums for Fair Trade Certified produce
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Whole Foods in the News…
“No ‘pink slime’ at Whole Foods Market” Whole Foods Market does not sell any fresh or
frozen meat containing lean finely textured beef (“pink slime”) as the company’s stringent quality standards do not allow for it
“Taste life with new online magazine, Dark Rye” Launched Dark Rye, an online magazine that
explores food, art, health and sustainable living The site features compelling people and
content through storytelling with video, photography, recipes and articles
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Valuation Measures
Price ~ $82 Market Cap: $15B Trailing P/E: 39 (industry average of ~ 18) Forward P/E: 30 EV/EBITDA:16.58 PEG Ratio (5 year expected): 2.09
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Income Statement
Revenue: $10.5B Quarterly Revenue Growth (yoy): 12.6% Gross Profit: $3.54B EBITDA: $892.8M Quarterly Earnings Growth (yoy): 33.4%
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Balance Sheet
Total Cash $850M As opposed to $1B of debt three years ago Cash on balance sheet is being used to finance
more than 50 new store openings in the next two years
Expect to reach 1,000 stores in the United States
Total Debt: $19.3M Book Value per share of 17.65% Current Ratio: 1.87 Debt/Equity: 0.61
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Financials (WFM v. Competitors)
Whole Foods Market
Kroger Safeway
Market Cap$15B $13B $6B
Quarterly Rev. Growth 12.90% 7.60% 6.20%
Gross Margins35.03% 21.48% 28.16%
Operating Margin 5.71% 2.51% 2.70%
EPS2.07 1.01 1.49
P/E39.00 23.00 15.00
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Financial Summary
Extremely high growth and high potential for future growth
Very high margins and efficient operations allowing for high profits
Very low debt Plenty of cash Also to consider: some of this high growth
potential is priced in as evidenced by relatively high P/E and EV/EBITDA ratios
Analyst opinion: 24 out of 24 analysts rank this stock between ‘Strong Buy’ and ‘Hold’
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Major Competitors
Kroger (NYSE: KR) Number one leading grocery store chain in the country Operates over 3,600 stores Runs convenience stores under the names Quik Stop and Kwik Shop Has a host of private-label products that it uses to differentiate products
and to increase customer loyalty
SUPERVALU (NYSE: SVU) Retail grocery chain that acquired Albertsons in 2006 Operates 4,280 stores in 40 states Sales have been falling drastically with competition from Wal-Mart and
Costco
Safeway (NYSE: SWY) Operates in the US and in Western Canada with over 1,725 stores Sales fell 7% in 2009 with severe price competition from Wal-Mart Offers its own brand products and has also been forced to add an “O
Organics” line to fight with competition from Whole Foods in the organic sector
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Comparison of Operational Metrics & Margins
Company (Fiscal Year)
Comp Sales Growth
Square Footage Growth
Revenue per Square Footage (Millions USD)
New Store Additions
Closures
Average Store Size (Sq. Feet)
Gross Margin (%)
Operating Margin (%)
Net Profit Margin (%)
Whole Foods Market(FY 2010)
7.1% 6.0% 882.0 16 3 38,000 34.8% 5.9% 2.7%
Safeway (FY 2009)
(4.90%)
(0.40%)
509.99 8 23 46,000 28.62% (1.54%) (2.69%)
Kroger Company (FY 2009)
0.90% 0.01% 518.47 14 27 60,000 22.60% 1.42% 0.07%
SUPERVALU(FY 2009)
(5.1%) (6.2%) 624.57 40 112 29,000 22.50% 2.96% 0.97%
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SWOT Analysis
Strengths Corporate Culture Customer Experience ‘Hip’ Image Double-Digit Growth Product Differentiation (in the offering of high-quality natural
food products) Branding for the affluent and health-conscious
Weaknesses Lack of international expansion (except for Canada and UK) Dependence upon global food prices and suppliers such as
United Natural Foods
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SWOT Analysis
Opportunities Market Leadership in high-demand segment/industry Media coverage focus on organic and natural foods Focus on consumer education Expansion of WFM brand image with the Health Starts Here label Store expansion into new domestic and international markets
Threats Increased Competition Re-branding existing supermarkets Increased inflationary pressure on food items Changes in economic conditions and government regulations
and a possible impact on consumer spending
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Whole Foods
Bollinger Bands April 25 Lower Bound = 81.70 April 25 Price = 82.51
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Whole Foods
Moving Average Convergence Divergence (MACD) Current: .26%
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Whole Foods
Technical Analysis Thesis
Williams %R: Current -76.11% Buy BOLL: March 6: Lower Bound = 81.70, Price = 82.51
Neutral RSI: 43.96 Neutral/Slight Buy MACD: .26% Neutral
Overall technical analysis: Neutral/Slight Buy
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Investment Thesis Summary
Increasing number of people striving to live healthy and protect the environment by buying organic and all natural foods
As the US comes out of the recession, the projected increase in discretionary spending will greatly benefit WFM
Significant growth potential within the United States
Few direct competitors that specialize in organic and all natural foods
Much higher margins than competitors
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Investment Proposal
20 Shares x $82.05 per share = $1641.00
Investment Horizon: 2-3 years Long-Term Position with review after 6
months
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I. Introduction
II. Thesis
III. ETF Composition
IV. Geopolitics & Law
V. Stock movement
VI. Macro Overview
VII. Korea & Corporations
VIII. Analysis
IX. QuanTeam
X. Proposal
Overview
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Introduction -South Korea
Located in the Korean peninsula between China and Japan 12th largest economy in the world
7th largest exporter, 10th largest importer Main trade partners: China, Japan, USA, Saudi Arabia
One of four highly developed Asian economies along with Singapore, Hong Kong, Taiwan (“Four East Asian Tigers”)
One of the world’s fastest growing economies from 1960 to late 1990s
GDP per capita: $2,300 (1980) -> $30,000 (2010) “Miracle on the Han River” Still one of the fastest growing developed countries in
2000s Over the last decade, EWY yielded 160% return
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Introduction -South Korea
Leader in high-tech industries electronics, telecommunications,
automobile, shipbuilding, steel
Chaebol System: Korean family-controlled business conglomerates
Samsung, Hyundai, LG, SK, Lotte, Doosan groups
Receive a lot of government support and finance
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Introduction -Korean Stock ExchangeMSCI South Korea Index
Capitalization-weighted Index provided by Morgan Stanley, acting as an investment decision support to investors
Categorizes Korea’s public stocks into different sectors
KOSPI (Korean Composite Stock Price Index)
Like Dow Jones or S&P 500KOSDAQ (Korean Securities Dealers Automated Quotations)
Like NASDAQ
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Introduction -ETFs
ETF (Exchange-Traded Funds) is an investment fund traded on stock exchanges
ETF usually track an index, such as MSCI or S&P 500 and thus captures the performance of a stock market index
Other types Commodity, Bond, Currency, Leveraged
ETFsWhy ETF versus stocks?
Low costs, tax efficiency, stock-like features
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Thesis
European IssuesConsumer-oriented marketStrong growthNot recovered from August
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ETF Composition
An already-diversified portfolio of the most prominent companies in Korea
Samsung, Hyundai, POSCO, LG Its index characteristic enables hedging of company- or sector-
specific risks Captures the performance of Korean economy as a whole Net Assets: $3.04 billion # of Holdings: 105 Total Market Capitalization: $763 billion
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ETF Composition -Top 10 Holdings
Name % Of Fund
SAMSUNG ELECTRONICS CO LTD 22.69
HYUNDAI MOTOR CO 6.29
POSCO 3.79
HYUNDAI MOBIS 3.25
KIA MOTORS CORPORATION 3.00
SHINHAN FINANCIAL GROUP LTD 2.91
SAMSUNG ELECTRONICS-PREF 2.57
LG CHEM LTD 2.51
KB FINANCIAL GROUP 2.47
KYNIX SEMICONDUCTOR INC 2.40
Total 51.84
Mutual Investment Club of Cornell
92
Geopolitics & Law
Political tensions with North Korea and China Trade acting as protection
China & 8% Margin
Korea’s strength Miliatry Alliances Pacific Trade Union
Korean perception of Samsung-Apple lawsuit
Samsung “strong” company in Korea Licencing/manufacturing issues
Mutual Investment Club of Cornell
93
Geopolitics & Law -North Korea Insecurity with NK drag index down
Irrational Fear US & China alliances/trade
“Just for show”
Entry point
Limit buy
Wait for stability in Regime to Sell
Mutual Investment Club of Cornell
95
Stock Movement
Not returned to pre-August levels 4.5-4% Growth “Luxury goods” longer to recover Limited trade with Europe
Near future: Samsung Galaxy S3 on May 3
Samsung supplier for Apple Auto releases in April & May & Hyundai Veloster (2013)
Mutual Investment Club of Cornell
96
Macro Overview
Crisis only stalled Spain’s rising bond yields >8% Greek, French & Dutch Elections
Uncertainty of politics post-election
Lack of market confidence
Austerity: deepening recession Internal political problems
Is the Euro the problem?
John Paulson: short German bonds
Mutual Investment Club of Cornell
97
Macro Overview
Move away from European markets into Asia
Asian markets continue to do fine despite unrest in Europe
Hedge Limited trade with S. Korea
Good entry point
Increase consumer confidence in Asia
Push Asian bond and interest rates down Growth stimulus
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98
Korea & Corporations
Perception of Samsung, Hyundai, KIA, etc. Mentality towards corporations Subsidies
Isolated from Europe
Consumerism
Mutual Investment Club of Cornell
99
Korea & Samsung -Apple
Apple knows Samsung’s goal is to dethrone it as the world’s most valuable company.
Samsung claimed top spot in global smartphone shipments for Q3 2011, Apple slipped to number two
Lawsuits Apple is the only closed source smartphone company Actively trying to sue anyone over any
alleged technology infringements & licencing 3G Wirless Technology iPhone/ iPad design Source code Galaxy Tab
Mutual Investment Club of Cornell
100
Korea & Samsung -Apple
Apple needs Samsung’s “best of breed” components for it’s main products
Anytime Apple makes money, so does Samsung
Samsung accounted for 25% of iPhone’s parts (including processor)
Samsung providing the high resolution touch screen for iPad 3
Mutual Investment Club of Cornell
104
Analysis -DCF (Samsung)
Currency: South Korean Won. Exit multiple method. 5yr % increase: projected to be between 13% to 52%. Median =
Mean = 32%. Change in EBIT per year: 4.1% WACC was 16% with 1% flex. Exit Multiple was 7.9% (similar to the current industry average).
Samsung, Microsoft & Windows 8 on new touch screen computer in 2012.
The date this was announced corresponds with time Samsung's stocks started to rise. Note that Microsoft hasn't even announced the release date
for windows 8.
2011 2012 (projected) 2013 (projected)
EBIT 9.680 24.887 25.453
EBITDA 18.987 40.513 42.890
Mutual Investment Club of Cornell
108
Senior Analyst Applications
Due April 25th at 11:59pm Interviews conducted at this Sunday, April
29th
Between 1:00 and 3:00pm