WSJ : Youku Streams Problems Alibaba's Way (-ve YHOO)

Alibaba's entertainment investments are creating an awful lot of static.

After it disclosed possible accounting issues last week at its recently acquired film studio, news came Wednesday that Alibaba's big bet on streaming video has stumbled out of the gate. Streaming site Youku Tudou, YOKU +1.85% in which Alibaba made a $1.1 billion minority investment earlier this year, reported a much wider-than-expected net loss in the three months to June, sending shares down 8% in after-hours trading. Youku shares were already 30% below the premium price that Alibaba paid.

The basic problem with Youku is that its business model doesn't seem to make money. It hasn't turned an annual profit since listing in 2010. Its rival, Tudou Holdings, was also unprofitable until the two companies merged in 2012.

A simple comparison with online video sites in the U.S. helps explain why. Google's YouTube gets content for free and earns revenue from advertising. Netflix pays for professional content or produces its own, but charges a subscription fee.

Youku and its Chinese peers, such as those owned by Tencent and Baidu, are the worst of both. They combine expensive licensed and original programming, plus some user content, and stream it all for free, relying almost entirely on ads to earn revenue.

Competition among the Chinese streaming sites is stiff as they scrape for finite ad dollars while outbidding each other for content. In the three months to June, Youku's content costs were equivalent to 44% of revenue, up from 40% a year earlier. Investors who might overlook the lack of profits will find little solace from declining revenue growth, up 27% from a year earlier, compared to 36% growth in the previous quarter and 42% in the fourth quarter of 2013.

Youku executives say its tie-up with Alibaba gives it access to a massive data set on online shoppers that will help better target ads. While that should improve advertising performance, it hardly seems like a game-changer.

Alibaba is separately working on a fundamentally new way to approach entertainment in China, namely getting people to pay for content. Though the full strategy remains hazy, it involves a set-top box, content produced at its movie studio, and premium paid content. How Alibaba's Youku stake fits into this scheme is unclear.

While prepping for what could be the biggest IPO in U.S. history, Alibaba looks to have paid a handsome premium for a problematic business. To make this investment work, it may need to transform the entire entertainment landscape in China.

>>> Hertz -14% Pre mkt on -ve guidance...Gabelli out +vely, move good opp.

Hertz Global discloses it expects to be well below the low end of its previously provided 2014 guidance due to operational challenges and withdraws guidance

Co disclosed the following:

"The Company now expects to be well below the low end of its 2014 guidance due to operational challenges in the rental car and equipment segments as well as the associated costs related to the accounting review previously disclosed. These ongoing challenges include:
  • Record level, industry-wide OEM vehicle recall activity, which has constrained the Company's U.S. fleet available for rent;
  • Significantly higher-than-expected adjusted direct operating expense in U.S. rental car;
  • Issues and delays associated with the installation of its Enterprise Resource Planning (ERP) and counter systems, which have adversely impacted anticipated synergy capture flowing from the Dollar Thrifty acquisition; and
  • Continued soft demand in the equipment rental business segment.
Due to the foregoing, as well as potential revisions related to the ongoing accounting review, the Company has decided to withdraw its 2014 financial guidance."

--> Gabelli...
Hertz Global: With shares down over $4 premarket, use this as opportunity to Buy

Gabelli & Co. notes, with HTZ shares trading down over $4 premarket, firm would use this opportunity to Buy. Once HTZ sorts out its accounting issues, firm believes both the car and equipment rental business remain undervalued verses their respective peers. Both businesses have long term defensible industry positions with the opportunity for above GDP topline growth and subsequent operating leverage. The HERC business in particular remains of significant value, given the benefits of scale in the equipment rental industry and the secular shift by construction companies to rent vs buy equipment.

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: AEO +11.7%, ZPIN +10.2%, LITB +6.1%, HAIN +4.1%, GLOG +3.6%, EJ +3.5%, EJ +3.5%, SPLS +3.3%, PETM +3.2%, EV +1.7%,.

M&A news: FCS +3.9% (reports Infineon (IFNNY) may be looking to acquire US co, no company mentioned), TMUS +0.7% (Iliad SA (ILIAY) seeks help to make another TMUS bid, according to NYPost).

Select metals/mining stocks trading higher: BHP +1.2%, GFI +1.2%, HK +1.1%, RIO +0.9%.

Other news: FOLD +20.4% (announces positive Phase 3 data From Fabry Monotherapy study), DGLY +12.3% (following 90%+ move higher yesterday; attributed to police body camera demand), PETM +3.2% (announced acquisition of Pet360; announced exploration of strategic alternatives; co also reported earnings), CVV +3.2% (co receives an order in excess of $2.75 mln from a major aviation component supplier to design and build a CVD system for coating fiber), LRAD +3.1% (may be body camera related play, TASR and DGLY have also made notable upside moves recently), EXXI +2.5% (positve commentary on Mad Money), SEAS +2.2% (PETA confirms additional share purchases in hopes 'to propose shareholder resolutions and submit formal shareholder questions'),YUME +2.1% (Zhengxu He discloses 5.2% passive stake in 13G filing; director of co also disclosed purchase of 20k shares), ZUMZ +1.8% (AEO peer), FFIC +1.8% (announced 1 mln share stock repurchase program), ANF +1.6% (AEO peer), SAVE +1.6% (positve commentary on Mad Money), GNC +1.3% (director disclosed purchase of 30k shares), ACHN +1% (granted U.S. patent for ACH-3102 and structurally related NS5A inhibitors; patent term to last until 2032), NOK +0.9% (Michael Halbherr to step down as CEO of HERE and as a member of the Nokia Group Leadership Team ), CELG +0.7% (Celgene and Bristol-Myers Squibb (BMY) enter clinical collaboration agreement to evaluate immunotherapy and chemotherapy combination regimen), WPX +0.6% (positve commentary on Mad Money), DAL +0.5% (positve commentary on Mad Money), HA +0.4% (positve commentary on Mad Money).

Analyst comments: TNP +2% (upgraded to Overweight from Equal-Weight at Morgan Stanley), CMCM +1.7% (target raised to $30 at Oppenheimer), JBLU +1.4% (upgraded to Outperform from Mkt Perform at Cowen), DNKN +1.2% (upgraded to Overweight from Equal Weight at Barclays ), PNRA +0.9% (upgraded to Overweight from Equal Weight at Barclays), ILMN +0.9% (upgraded to Outperform from Neutral at Wedbush).#

>>> American Eagle beats by $0.03, beats on revs; guides Q3 EPS in-line; Q2 comp

American Eagle beats by $0.03, beats on revs; guides Q3 EPS in-line; Q2 comps -7% vs HSD decline guidance and -8% estimate

Reports Q2 (Jul) earnings of $0.03 per share, $0.03 better than the Capital IQ Consensus Estimate of ($0.00); revenues fell 2.2% year/year to $711 mln vs the $688.93 mln consensus.
  • Q2 comps -7% vs HSD decline guidance and -8% estimate
  • Q2 gross profit rate 33.4% vs ~32% estimate; gross margin reflected the de-leverage of buying, occupancy and warehousing costs on negative comparable sales, which was largely offset by favorability in merchandise and design costs and a slight improvement in the markdown rate.
  • Operating income decreased 59% to $12 mln; operating margin decreased 240bps to 1.7%
Co issues in-line guidance for Q3, sees EPS of $0.17-0.19 vs. $0.18 Capital IQ Consensus Estimate based on expectation for Q3 comps mid single-digit decline vs -3.7% estimate

>>> Target reports EPS in-line, revs/comps in-line; guides Q3 EPS below consensu

Target reports EPS in-line, revs/comps in-line; guides Q3 EPS below consensus; guides FY15 EPS below consensus  

Reports Q2 (Jul) earnings of $0.78 per share, excluding non-recurring items, in-line with the Capital IQ Consensus Estimate of $0.78; revenues rose 1.7% year/year to $17.41 bln vs the $17.38 bln consensus. TGT reports Q2 US comps flat vs 0-2% prior guidance and flat estimate.

Co guided for EPS of ~$0.78 vs. the $0.91 consensus on Aug 5.
US: In second quarter 2014, sales increased 0.7 percent to $17.0 billion from $16.8 billion last year, reflecting the contribution from new stores and flat comparable sales. Segment earnings before interest expense and income taxes (EBIT) were $1,160 million in second quarter 2014, a decrease of 12.8 percent from $1,330
Canada: Second quarter Canadian Segment sales increased 63.1 percent to $449 million from $275 million last year, reflecting the contribution from new stores partially offset by an 11.4 percent decline in comparable sales. million in 2013.
Co issues downside guidance for Q3, sees EPS of $0.40-0.50, excluding non-recurring items, vs. $0.66 Capital IQ Consensus Estimate.

Co issues downside guidance for FY15, lowers EPS to $3.10-3.30, excluding non-recurring items, from $3.60-3.90 vs. $3.46 Capital IQ Consensus Estimate.

"While results from the quarter didn't meet our expectations, we are seeing some early signs of progress as we work to improve results in the U.S. and Canada," said John Mulligan, executive vice president and chief financial officer of Target Corporation. "In the U.S., traffic trends continue to recover and monthly sales are improving, with July comparable sales up more than 1 percent. Better U.S. sales have continued into August, driven by early back-to-school results. In Canada, the team is making important changes to operations and the merchandise assortment with a focus on delivering improved results by this holiday season."

(Oppenheimer) Elizabeth Arden: Another rough quarter, with little visibility

Elizabeth Arden: Another rough quarter, with little visibility

Oppenheimer notes RDEN's fiscal 4Q results were highly disappointing though not surprising, weighed down by the same headwinds that have existed throughout fiscal 2014. Further, the co provided directional guidance for fiscal 2015, which is hardly encouraging. As such, they are reiterating their Perform rating on the shares of RDEN, and continue to suggest caution on the name despite the pronounced pullback, as the shares still seem to be pricing in much improved EBITDA amid a lack of visibility.

>>> US Early premarket gappers

Early premarket gappers
Gapping up: FOLD +38.1%, LITB +8.5%, DGLY +7.3%, PETM +3.9%, PETM +3.9%, ACHN +3.3%, CVV +3.2%, EJ +2.3%, YUME +2.1%, AEO +2.1%, FFIC +1.8%, EV +1.7%, SPLS +1.5%, GLOG +1.4%, GNC +1.3%, JASO +1.1%, JASO +1.1%, BHP +0.8%

Gapping down: RGSE -17.1%, YOKU -8.2%, TEDU -7.4%, TEDU -7.4%, LZB -4%, LOW -2.9%, JRJC -1.6%, RDS.A -1.2%, ABB -1.1%, TEF -1.1%, MT -1%, BUD -1%, ALU -0.9%, SAN -0.8%

>>> Infineon: Follow up on M&A report - FCS +4.76% pre makt

As mentioned earlier, Bloomberg is reporting that Infineon (IFNNY) is nearing a buyout of a U.S. semi co for around $2 billion.
  • No buyout candidate was named, but it's worth noting that Fairchild Semiconductor (FCS); mkt cap 1.9 bln; is moving higher on the report.
  • For those considering possibilities, the current market cap of the potential target may be lower than the $2 bln price range named in the reports, as an acquisition would most likely involve some sort of premium to current prices.
  • Other stocks in the semi space around that market cap include the following:
    • International Rectifier Corporation (IRF); mkt cap 1893 mln
    • Silicon Laboratories (SLAB); mkt cap 1872.7 mln
    • Monolithic Power Systems (MPWR); mkt cap 1758.5 mln
    • Intersil Corporation (ISIL); mkt cap 1734.2 mln
    • Power Integrations (POWI); mkt cap 1722 mln
    • Cypress Semiconductor (CY); mkt cap 1697.6 mln
    • Entegris, (ENTG); mkt cap 1669.3 mln
    • Semtech Corporation (SMTC); mkt cap 1571.6 mln
    • OmniVision Technologies, (OVTI); mkt cap 1569.9 mln
    • Tessera Technologies (TSRA); mkt cap 1545.8 mln
    • Veeco Instruments (VECO); mkt cap 1475.7 mln
    • Cirrus Logic (CRUS); mkt cap 1468.8 mln
    • PMC-Sierra (PMCS); mkt cap 1405.4 mln
    • Diodes Incorporated (DIOD); mkt cap 1219.6 mln
    • Spansion (CODE); mkt cap 1180.9 mln
    • M/A-Com Technology Solutions (MTSI); mkt cap 1031.9 mln
    • Cabot Microelectronics (CCMP); mkt cap 1008.6 mln
    • Ambarella, (AMBA); mkt cap 899.2 mln
    • Lattice Semiconductor (LSCC); mkt cap 859.5 mln
    • Advanced Energy Industries (AEIS); mkt cap 745.6 mln
    • Brooks Automation, (BRKS); mkt cap 733.6 mln
    • SunEdison Semiconductor (SEMI); mkt cap 697.3 mln
    • Micrel (MCRL); mkt cap 678.4 mln