WSJ : Apple's iPhone Margin Call


Apple's iPhone Margin Call

Apple's fans love its gadgets. Apple's investors love those gadgets, too—for their high profit margins that are still unmatched by its peers.
There was actually some worry on this front around last week's launch of the iPhone 6 and iPhone 6 Plus. Apple expanded the screen size on its base model while keeping the same price. The display is the most expensive component of a smartphone, typically making up more than 20% of the estimated build cost.
Yet Apple appears to have struck the necessary balance on costs, according to teardown reports that have emerged since the new iPhones went on sale. On Tuesday, IHS iSuppli estimated an estimated build cost for the iPhone 6 of $200, up less than 3% from the iPhone 5s. Reductions in memory prices helped to offset the price of the larger screen, according to the study.
These types of studies don't include costs related to software and patent royalties, nor do they always reflect the actual prices a company like Apple might pay for components. But Apple itself guided for gross margins to remain flat in the September quarter. The teardown studies lend weight to this and indicate that the new iPhones won't be a drag on the company's margins.
That is crucial for Apple, which has had to increase its spending to stay competitive in the smartphone race. Its gross margin overall fell from about 44% in fiscal 2012 to 38% in fiscal 2013. That happened to coincide with a selloff that chopped nearly 28% of the company's market value.
The stock has since recovered that ground and more, based in part on the hope that Apple can still command a premium for its high-end phones. So far, those hopes look justified.

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WSJ : China Considers Replacing Central Bank Head, Party Officials Say

China Considers Replacing Central Bank Head, Party Officials Say
Top Contender to Replace Zhou Xiaochuan at PBOC Is Shandong Gov. Guo Shuqing, Officials Say

BEIJING—China's long-serving central banker Zhou Xiaochuan —the face of the Chinese economy to markets globally—may be swept out of office.

Chinese leader Xi Jinping is considering replacing Mr. Zhou, say party officials, as part of a wider personnel reshuffle that also comes after internal battles over economic reforms.

The discussions occur as Mr. Xi, now two years in office, tries to place more allies into top positions in the government, military and Communist Party, according to the officials with knowledge of the plans. The personnel shifts are expected around a major party conclave to be held next month, the officials said, while cautioning that no final decision about Mr. Zhou has been made.

The top contender to succeed Mr. Zhou at the People's Bank of China is Guo Shuqing, a former banker and top securities regulator who is currently governor of Shandong, a prosperous eastern province, the officials said.
Within the central bank, word of Mr. Zhou's coming retirement has been water-cooler talk for weeks, according to PBOC officials and advisers. They were especially surprised when Mr. Guo unexpectedly and unusually attended a monthly meeting convened by the secretariat of the central bank's monetary-policy committee on Sept. 16, according to the PBOC officials and advisers.

President Xi named Mr. Zhou to a third term in March 2013, despite Mr. Zhou having passed the retirement age of 65 for senior Chinese officials. Over the past few months, Mr. Zhou has continued to press for market reforms, including liberalizing interest rates. The Chinese leadership, meanwhile, has become concerned that reforms now will add another burden on an economy that is struggling to meet the government's target of 7.5% annual growth.

Removing Mr. Zhou "could suggest a subtle shift in the balance of power between reformist and reactionary forces, with the momentum for reforms being eroded by the loss of growth momentum in the economy," said Eswar Prasad, a Cornell University China expert.

One reason to retain Mr. Zhou is fear of the market reaction to his departure, say the party officials. Mr. Zhou is perhaps China's best-known economic official. He represents China at meetings of the International Monetary Fund and Group of 20 and plays tennis with central bankers and senior economic officials. He and Lawrence Summers, U.S. President Barack Obama's then chief economic adviser, once jokingly bet when they played doubles against each other that the winner of the match would set the U.S.-Chinese foreign exchange rate. (Mr. Summers lost and asked for a rematch.)

Removing Mr. Zhou could add to uncertainty about the direction of China's economic policy making and the strength of the leadership's commitment to reform, said the party officials, at a time of when many other parts of the global economy are sputtering.

Messrs. Zhou and Guo couldn't be reached for comment. In a statement to The Wall Street Journal, the PBOC said that Mr. Zhou wouldn't be stepping down soon. The Communist Party's Organization Department, which controls personnel decisions for key government posts, declined to comment.

Should Mr. Zhou be replaced, his departure would be portrayed as a matter of his age, said the party officials, although only 18 months have passed since his latest reappointment. He is now 66 years old.

But there are larger policy issues involved.

Mr. Zhou kept pressure on leaders to stick with reform even if it diminished the growth rate. While the government and party in principle backed the idea of letting bank deposit rates float freely, for instance, Mr. Zhou tried to nail down a date for lifting government controls, a move he has said is critical in forcing banks to compete and allocate credit more efficiently. In March 2014, he said the goal could be accomplished in two years, and on July 10 reiterated that goal.

That was out of tune with top leaders. Two weeks later, the State Council, the government's top decision-making body, said the reform would be carried out in an "orderly" way—usually code words for moving slowly.

Top party leaders are also considering splitting the roles of PBOC governor and party chief after Mr. Zhou retires, the officials said. Currently, Mr. Zhou has both jobs. Leaders considered such a plan in late 2012, with Mr. Zhou remaining as PBOC chief and someone else taking the party job, but they viewed the idea as unworkable because it could be seen as a demotion for Mr. Zhou. In China, party officials generally outrank government officials in an organization.

Still, splitting the PBOC job could lead to confusion about who runs the institution. In China, the central bank—known locally as "yang ma," or "Big Mama"—isn't independent. For major decisions, it needs approval from the State Council, and sometimes the ruling seven-member Politburo Standing Committee, the inner sanctum of party power.

Early in his most recent term, Mr. Zhou accumulated greater influence than he had under Mr. Xi's predecessors. Mr. Zhou allies were given prominent roles in Mr. Xi's economic-policy making bodies, and Mr. Zhou's ideas of freeing up interest rates and cross-border capital flows were reflected in party and government policy documents.

But as the Chinese economy continued to lose momentum this year, the PBOC came under increasing pressure to help spur the economy by providing credit—or ordering banks to do so.

So far, the central bank has been aiming its stimulus narrowly, to avoid a broad-based lending spree such as the one that propped up growth following the 2008 global financial crisis but also saddled the economy with debt and bad loans. Other government agencies, though, are calling for across-the-board cuts in interest rates.

"Everybody seems to be interested in talking about reform, but they really fear what they are professing to love," said Zhang Xiaohui, head of the PBOC's monetary-policy department, in a May 2014 meeting, according to a transcript of her remarks viewed by the Journal.

>>> US Gapping Down

Gapping down In reaction to disappointing earnings/guidance: GTI -12.8%, AIR -3.6%, CPRT -2.9%, ACN -2.6%, PZZI -2.5%

Other news: ECTE -71.9% (suspends operations to conserve liquidity), ATOS -54.1% (announced that the FDA has issued a determination that the ForeCYTE Breast Aspirator is "not substantially equivalent" to its predicate device; not cleared for marketing in U.S.), NXTD -7.5% (pulling back modestly following recent surge), MMLP -5.1% (commenced public offering of 3 mln common units under its existing shelf registration statement), GLOP -3.8% (announced public offering of 4.5 mln common units), EVHC -3% (announced sale of 17,500,000 shares of stock by selling stockholders), LAND -2% (announced common stock offering of 1.15 mln shares)

Analyst comments: MS -0.6% (downgraded to Neutral from Overweight at JP Morgan), SDRL -0.6% (resumed with a Underperform at Wells Fargo)

>>> US Gapping up

Gapping up In reaction to strong earnings/guidance: ELMD +43.2%, NEWL +9.1%, BBBY +5.5%, SCS +4.3%, MTN +3.2%

M&A news: STRZA +5.7% (Starz considering sale although Fox (FOXA) is not interested, according to reports), ACOR +3.9% (to acquire Civitas Therapeutics for $525 mln in cash) Select metals/mining stocks trading higher: BHP +1%, AG +1%, NEM +0.9%, X +0.8%

Other news: RITT +36.3% (seeing continued strength), MACK +25.9% (co and Baxter (BAX) enter into exclusive ex-U.S. licensing agreement to develop and commercialize novel cancer compound MM-398), LPCN +16.7% (co to host a conference call to discuss top-line results from its Study of Oral Androgen Replacement pivotal Phase 3 clinical study), GDOT +6.3% (co's GoBank Checking Account launches exclusively at Walmart (WMT) ), MTL +6.2% (cont vol surrounding spec of co filing for bankruptcy), IMUC +5.6% (expands cancer immunotherapy platform with antigen-specific T-cell technology licensed from Caltech), ZSPH +5.1% (announced positive top-line results from HARMONIZE (ZS004), a second Phase 3 clinical trial of ZS-9 in patients with Hyperkalemia), AVNR +2.8% (prices 18.2 mln shares of its common stock at $11.00 per share), PLUG +2.6% (cont strength following co's reaffirm yesterday), SNY +2.1% (collaborates on gene therapy for rare disease that causes childhood blindness), GPRO +2% (cont vol pre-mkt trade), SCTY +1.8% (announced launch of a $500 mln convertible senior notes offering), TOT +1.8% (co's Energy Ventures is investing in NexSteppe startup), ALCS +1.7% (MFP Partners liquidated stake in the company), MU +1.3% (in discussions with Advanced Semi (ASX) to setup IC packaging and testing unit, according to reports), BABA +1.1% (cont vol following IPO), YPF +1.1% (Kyle Bass reveals stake in Argentine energy company YPF on CNBC)

Analyst comments: SRPT +4.1% (initiated with a Outperform at Credit Suisse), RIO +1.5% (upgraded to Overweight from Equal-Weight at Morgan Stanley), WGBS +1.1% (initiated with a Buy at Brean Capital), GLMD +1.1% (target raised to $24 at MLV & Co), OXY +1.1% (added to US 1 List at BofA/Merrill), AWAY +1% (initiated with a Buy at Sun Trust Rbsn Humphrey), HCLP +1% (upgraded to Buy from Hold at Wunderlich), ALV +0.9% (initiated with a Outperform at Exane BNP Paribas)

>>> US Early premarket gappers

Early premarket gappers
Gapping up: ELMD +43.2%, LPCN +22.6%, NEWL +9.1%, BBBY +6.7%, AWAY +6.4%, MTL +6.2%, ZSPH +5.1%, JKS +4.7%, SCS +4.3%, PLUG +2.6%, SNY +1.9%, ALCS +1.7%, TOT +1.7%, GPRO +1.6%, FCEL +1.4%, RIO +1.3%, AG +1%, BABA +0.9%, ALU +0.9%, NEM +0.9%, X +0.8%, BHP +0.6%

Gapping down: ECTE -72.8%, ATOS -52.8%, GTI -17.6%, NXTD -5.7%, MMLP -4.7%, GLOP -4.3%, AIR -3.5%, PZZI -2.5%, ACN -2.3%, EVHC -2.2%, LAND -2%, RBS -1.1%