GLOBAL BRANDS UPDATE
30 June 2007
Canon
Canon performed
well since the last quarter of 2007. The company
reported strong first quarter earnings: sales
growth of 12.6% on a yearly basis and improving
operating profit. The profit margin improved
in most segments. The principal contributors
to the margin growth was the yen's weakness,
market share gains in office equipment, demand
for color laser printers, robust sales of consumables
(toner and ink), and the maintenance of relatively
high prices in the digital camera market.
A negative was that management reduced costs less than its initial target. This appears to be the result of product launch timing, which left insufficient possibilities for the company to cut costs once they had entered commercial production. Greater cost cutting is possible during this quarter as production volumes of new products increase.
Management raised its full year forecasts. Conditions in major product markets suggest that the new figures are realistic. Further upside in the share price depends however on price competition in the printer and digital camera markets. Especially in the printer market, competition is heating up but Canon is well positioned in this market segment.
Citigroup
Citigroup’s shares
rose about 8% since November '06. The stock had
a strong performance at the end of 2006 after
its CEO announced that Citigroup was again reconsidering
its strategic options. The CEO was also hinting
towards cost initiatives to be taken. In the
beginning of 2007 the shares dropped after Citigroup
presented new disappointing 4Q06 results. The
shares recovered after management presented new
cost cutting initiatives in their US retail/consumer
banking activities.
This segment is operationally
underperforming and suffering from the generally
difficult competitive banking environment. This
can be explained by a relatively flat yield curve,
strong competition and the US housing slowdown.
Citigroup’s
performance in its other divisions corporate & investment
banking as well as international retail banking
(outside the US) is clearly better. This can
be explained by better operational efficiency
as well as a healthy banking and financial market
environment. The success of the initiatives
in US retail banking as well as the continued
performance in the other divisions will be key
determinants of Citigroup’s future share
price evolution.
DaimlerChrysler
The key driver
for the strong stock price performance
was the announcement that it will sell 80%
of Chrysler to Cerberus capital Management.
With this sale, DaimlerChrysler ended its
nine year ownership of a money losing low-margin
business. Daimler has never managed to
unlock cost synergies and has encountered
massive value destruction over the years.
It has transferred the healthcare liabilities
to Cerberus Capital Management, which improves
the risk profile of the company. The company
can now refocus on two buoyant markets,
the premium segment for cars (Mercedes) and
as a global player in trucks. Apart from
healthy product momentum (with the launch
of new models), DaimlerChrysler will benefit
from a very strong truck division. This will
improve margins and the strong balance sheet
bodes well for shareholder friendly strategies
going forward.
L’Oréal
L’Oréal showed a strong stock performance
in the past quarters. Since 23 November 2006, the
stock price increased 13%. The cosmetics producer
was able to show a robust revenue growth in the
past quarters. In the past years, L’Oréal
was struggling with its market share in Western
Europe. In the past quarters, the company was able
to increase its Western European market share again.
The cosmetics producer benefits from the strong
growth in the emerging countries where it is well
positioned. The company is increasing its investment
in research & development to increase the number
of new product releases. The take-over of the Body
Shop is a perfect fit for L’Oréal
and gives the company a stronger foothold in
the highly profitable health and wellness segment.
In 2007 the company bought the American companies
Beauty Alliance and PureOlogy. The company expects
6% to 8% organic revenue growth in 2007 and aims
at increasing its market share in all regions
and to further improve profitability.
Nestlé
Nestlé’s stock price
increased 4% since 23 November 2006. The company
was able to beat the profit expectations in the
past quarters. Nestlé was like all other
food producers confronted with a strong increase
in grain and recently also milk prices. Nevertheless
the company was able to remain its profit margins
rather stable by the execution of different cost
savings programs such as Operation Excellence 2007.
Nestlé is restructuring its portfolio to
improve the product mix and profit margins. For
that purpose, the company bought the clinical division
of Novartis and its baby food division Gerber.
The company benefited from the strong stock price
performances of its participations in Alcon and
L’Oréal. The company could possibly
sell its participations to invest in high margin
food business. Nestlé expects organic revenue
growth close to 6% in 2007.
PepsiCo
PepsiCo’s stock price increased 5% since 23 November 2006. The company showed a strong revenue growth in all product segments in the past quarters. The strongest growth was realized in PepsiCo International where brands like Doritos, SunChips, Tostitos and Quaker snacks showed good progress, mainly in the emerging countries and in Eastern and central Europe. Sales in its mature home market North America of its divisions PepsiCo North America and Frito-Lay North America were decent. PepsiCo this year acquired the companies Naked Juice and Bluebird. The company plans to buy back 8 billion USD in stock. It increased its buyback program for 2007 with 1 billion USD to 4.3 billion USD. For the full year 2007 the company expects volume growth of 5% and a profit of 3.3 USD per share.
Procter & Gamble
Procter & Gamble’s stock price remained
rather stable since 23 November 2006. The producer
of household and personal care products was able
to show a strong increase in revenues, partly driven
by the integration of Gillette. The further integration
of Gillette will also lead to further cost savings.
The company aims at increasing volumes by product
innovation and wants to strengthen its presence
in the emerging countries. In the past quarters,
the company was confronted with higher input costs,
but was able to pass them on to its customers.
For the fiscal year 2007 that ends on June 30,
Procter & Gamble expects revenue growth of
11% to 12% and 13% to 15% profit growth.
SAP
SAP, the world's largest business management
software company, ended 2006 with a nice run
in December because of higher market expectations.
Sentiment changed though on the 11th of January
when SAP pre-announced its fourth quarter results.
Although license revenue, which is also an
excellent indicator for future consulting and
maintenance fees, rose from 1.18 billion euros
to 1.26 billion it fell significantly below the
analysts expectations of 1.35 billion. The main
reason for this was reduced corporate IT spending
in the US and Asia, something that had already
plagued SAP's main competitor Oracle. And for
European based SAP the strengthening of the Euro
versus the dollar certainly didn't help. In reaction
the share price fell 10%.
Two weeks later SAP
guided towards lower operating margins for the
first time in seven years as a consequence of
the investments needed to enter the mid-market
segment. The share price continued to decline
throughout February and March, reaching a low
point of €33.3
compared to early January's peak of over €42.
The tide turned again in April on the back
of reassuring first quarter results and LBO
speculation. Corporate IT spending is also
ticking up again, and channel checks indicate
traction of SAP's core enterprise products
is strong and expectations for its new mid-market
products are on the rise. All these factors
together made for a satisfying June performance.
Siemens
Since November 23rd, the
shares of Siemens have risen by nearly 40%. Drivers
of this performance were amongst others the excellent
results that the company produced in the first
quarter. At the recent capital markets day, the
management also substantially raised revenue
growth estimates for 3 of its divisions, Power
Generation, Power Transmission & Distribution and Automation & Drives.
We believe this will result in a positive earnings
momentum in the next weeks coupled with the
company significantly reducing its net debt position,
both of which should provide further support
to the shares.
But not all has been rosy as some negative sentiment prevailed earlier this year when CEO Klaus Kleinfeld surprised the market by handing in his resignation in the wake of a bribery scandal, not even one week after Chairman Heinrich von Pierer stepped down. The new CEO Peter Löscher, with extensive experience in the pharmaceutical industry and also having been on the council of GE, one of Siemens' main competitors, is taking office next week and we expect him to strongly execute the "Fit4 2010" restructuring program.
Toyota
After a strong run at the end of 2006 (driven
by a stellar operational performance), the Toyota
share price came down significantly on concerns
about the strength of the US consumer. Nonetheless,
the stock is still up c11 % versus November 23rd
2006. Fundamentally, the company is faring
very well. Toyota has sustained double-digit
operating profit growth for five fiscal quarters
from 3Q FY3/06, and this is most likely to continue
up to 2Q FY3/08. Key factors here are continued
new model launches, a respite in the upward climb
in materials prices and improving export profitability
on the weak yen.
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