AT&T Could Find a Lesson in Comcast’s Media Merger
Comcast is schooling AT&T on media mergers and acquisitions.
The cable giant now gets more than one-third of its revenue from NBCUniversal, a deal it concluded in early 2013 when the regulatory and political climate was more accommodating and the strategy of the company’s chief executive, Brian L. Roberts, was sound. AT&T’s $85.4 billion bid for Time Warner, by contrast, is a mess.
The top line at NBCUniversal, home to the Peacock Network, MSNBC and a giant movie studio, jumped 28 percent in the third quarter, to $9.2 billion. Granted, the unit got a huge lift from broadcasting the Olympics in the United States. But even after stripping out the sporting event, revenue increased about 6 percent thanks to strong growth at its theme parks.
Comcast’s two-part deal for NBCUniversal, which it bought from industrial conglomerate General Electric, was prudent by today’s standards. Regulators insisted on a variety of conditions before approving the deal, including that Comcast take a passive role in its ownership of video-streaming service Hulu. G.E.’s then-huge finance division was also under duress thanks to the financial crisis, and the parent company was eager to rid itself of media assets that made little sense in its portfolio of jet engines and capacitors.
By contrast, AT&T is offering a whopping $20 billion above Time Warner’s market value before word of a deal leaked out. The cost savings cited by AT&T, some $1 billion, barely cover a third of the premium. The telecommunications giant also has little experience in producing TV shows and movies.
Mr. Roberts himself has learned some hard deal lessons. Comcast’s earlier attempt to take over the Walt Disney Company was a failure. So too was his proposal to buy Time Warner Cable after trustbusters denied the union. AT&T argues it will have no problem sailing through the review process. Based on Time Warner’s shares, which are now trading $20 below the offer price of $107.50, AT&T may want to take a more humble tack.
Tesla Posts Second Profitable Quarter Ever
Shares rise after hours as revenue jumps sharply
Tesla Motors Inc. posted the second quarterly profit in its history as a public company, as the auto maker had its best sales period on record, helped by the new Model X sport-utility vehicle.
The Palo Alto, Calif., company posted a profit of $21.9 million, or 14 cents a share, compared with a loss of $229.9 million, or $1.78 a share, in the year-earlier quarter. On an adjusted basis, the company posted per-share earnings of 71 cents. Revenue shot up 81% to $2.3 billion.
Tesla shares rose 6.2% to $214.80 a share in after-hours trading following the third-quarter report.
Deliveries of Model S sedans and Model Xs rose to 24,821 during the quarter, more than double the same quarter in 2015. That included 8,774 Model Xs, which are new. The company also said an additional 5,065 vehicles were in transit to customers at the end of the quarter, which would be recorded as deliveries for the fourth quarter.
The auto maker it is on track to make 50,000 vehicles in the second half of the year.
Increased sales helped the company churn a profit as Chief Executive Elon Musk pushes the company to create new models, including the Model 3 sedan slated for next year, and to finish building the world’s largest battery factory.
The improved results could assist him in making the case that he can handle merging with SolarCity Corp. and help him raise additional cash down the road. The combined companies may ultimately need to raise $12.5 billion for spending through 2018, according to estimates by Oppenheimer, while others say Mr. Musk needs less. Tesla and SolarCity shareholders will decide on Nov. 17 whether to merge.
Tesla ended the third quarter with $3.1 billion of cash and cash equivalents, compared with $3.2 billion at the end of the second quarter.
Carlyle aims to raise $100bn over next 4 years
Private equity group hopes to build firepower in case of market downturn
Carlyle said it aimed to raise $100bn over the next four years, drawing on investor demand for returns after assets overseen by the US private equity group have shrunk for four straight quarters.
The ambitious target, disclosed on Wednesday on the company's earnings call with analysts and investors, compares with the $169bn Carlyle oversees now, down from $188bn last year. The Washington DC-based group hopes to capitalise on investors turning to alternative investments that may help them generate returns that outstrip stocks and bonds.
Carlyle will seek to invest the new money across financial services, energy and natural resources, US real estate, global infrastructure and private equity fund-of-funds, among other things.
Amassing such firepower indicates that the company may be preparing for a market downturn that could then create buying opportunities. The company already has $54bn of dry powder, and has been putting new money to work cautiously at a time of volatility but still high valuations. It invested $1.6bn in equity in the three months that ended in September, the same amount as in 2015.
Carlyle “is doing the right thing being patient, but with just $1.6bn of capital invested in the quarter, dry powder builds, and [assets under management] and fees [falling] for the time being — it’ll be interesting to see if they can keep up this pace of realisations,” said Glenn Schorr, an analyst at Evercore ISI.
Carlyle’s co-chief executive David Rubenstein said that investors would not be “unduly surprised or upset” if returns fell from historic levels.
Carlyle said last week it closed a $3.6bn fund with a longer-term horizon than its traditional funds, which will also target a lower return than usual. The company is moving away from offerings that operate in liquid markets and actively trade, such as its hedge funds. That decision entails “some costs in the short-run”, said Bill Conway, co-chief executive.
Revenues jumped to $540m in the third quarter, from $94m in the same quarter last year, but distributable earnings — the share of profits which it returns to shareholders — fell to $228m, from $244m.
Economic net income, a measure of profit which includes unrealised gains on investments, increased to $54m, or 21 cents per share, compared with a loss of $128m in the same period a year ago. The latest ENI figure came after a $100m reserve for litigation and contingencies.
The improvement in ENI followed a 3 per cent increase in value in its carry fund portfolio, its buyout and real estate funds on which it earns carried interest, a share of future profits with investors.
Carlyle had realised proceeds of $6.6bn, compared with $3.7bn in the same period last year, and more than $19bn over the last twelve months.
Over the past year, the company’s shares have fallen more than 17 per cent. But year to date, the stock has barely moved.
Other private equity groups are also clawing their way out of losses earlier this year: KKR on Tuesday beat analysts’ expectations and posted a second straight quarter of positive earnings.
--> +5.5% in after hours
Tesla Motors beats by $0.69, reports revs in-line; reaffirms margin, op-ex guidance; lowers cap-ex; Model 3 and Gigfactory on track
- Reports Q3 (Sep) earnings of $0.71 per share, excluding non-recurring items, $0.69 better than the Capital IQ Consensus of $0.02; GAAP revenues rose 145.3% year/year to $2.3 bln vs the $2.32 bln Capital IQ Consensus -- note rev may not compare due to change to GAAP (estimate may not reflect this).
- Final Q3 delivery count was 24,821,over 300 more than the estimated delivery count we shared on October 2 nd . Deliveries increased 114% from the third quarter of 2015, and was comprised of 16,047 Model S and 8,774 Model X vehicles. In addition, 5,065 vehicles were in transit to customers at the end of the quarter. These vehicles will be delivered in Q4. non-GAAP Automotive gross margin was 25.0% excluding SBC and $139 million of ZEV credit revenue vs. 25-26% implied guidance. Non-GAAP automotive gross margin excluding ZEV credits increased 140 basis points sequentially because of improved manufacturing efficiency and higher production volume.
- Gigafactory construction and Model 3 development both remain on plan to support volume Model 3 production and deliveries in the second half of 2017.
- Meanwhile, our efforts to transform the solar industry will be demonstrated at our joint product introduction with SolarCity on October 28th .
- Reaffirms guidance: "We maintain our guidance of 50,000 new vehicle deliveries for the second half of 2016, with a Q4 plan of just over 25,000 deliveries, despite the challenges of winter weather and the holidayseason. We expect about 30% to 35% of these deliveries to be accounted for as leases for revenue recognition purposes. As previously provided in our second quarter update, we guided a 2 to 3 percentage points improvement in automotive gross mar gin on a GAAP and non-GAAP basis by the end of 2016. Automotive gross margin on a non-GAAP basis excludes ZEV credits and SBC. We are on track to meet this guidance. We also guided in our second quarter update that full year 2016 operating expenses, both on a GAAP and non -GAAP basis, would grow ~30% from 2015. We are also on track to meet this guidance. We now expect our capital expenditures in 2016 will be ~$1.8 billion as we continue to focus on capital efficiency. Capital expenditures for the past three quarters totaled $759 million.
The Tesla third quarter results reflect strong company-wide execution in many areas. Furthermore, we expect this to continue into Q4 and project positive GAAP net income (excluding non-cash stock-based compensation) despite ZEV credit sales in Q4 likely being negligible. We set new records for vehicle production, deliveries and revenue, which led to GAAP profitability and positive free cash flow (cash flows from operations less capital expenditures). At the same time, GAAP total automotive gross margin and gross profit per car increased substantially. Model 3 on plan for volume deliveries in second half of 2017
Closing Market Summary: Dow Jones Industrial Average Ends Higher, Shrugging Off Apple EarningsThe stock market ended the midweek affair on a mixed note as investors mulled over underwhelming quarterly results and guidance from top-weighted Apple (AAPL 115.59, -2.66, -2.3%). Other factors impacting today's action included a fleeting rally in crude oil, rising long-term bond yields, and weakness in the heavyweight technology (-0.5%) and health care (-0.7%) sectors. The Nasdaq Composite (-0.6%) settled behind the S&P 500 (-0.2%) and the Dow Jones Industrial Average (+0.2%).
Influential Apple dragged on the broader market as participants weighed a bottom-line beat against some less than impressive guidance and declining year-over-year revenue. The Dow component fell 4.2% in the opening hour, but narrowed that loss to 2.3% by the end of the session. Apple finished at the bottom of the price-weighted average, but continues to sport an October gain of 2.3%.
The heavyweight dampened risk appetite across the broader market, but particularly weighed on fellow technology (-0.5%) bellwethers.
The benchmark index briefly erased its loss near mid-morning as upbeat weekly inventory data from the Department of Energy lifted crude oil futures off their low ($48.88/bbl). The EIA reported that crude oil inventories declined by 0.55 million barrels (consensus: +1.69 million) while gasoline stockpiles fell by 1.95 million barrels (consensus: -0.96 million). However, the energy component was unable to maintain its footing above the $50.00/bbl and soon retraced nearly the entire move. Participants continued to express some misgivings after Iraq indicated earlier in the week that it may seek an exemption from the previously discussed OPEC supply freeze agreement. WTI crude ended lower by 1.4% ($49.17, -$0.70).
Rising long-term bond yields also kept the broader market in check as bond prices fell throughout the complex. The yield on the benchmark 10-yr note settled higher by three basis points at 1.79%. The move corresponded with similar action in the sovereign bond market, but lacked a definitive catalyst. However, it is worth noting that German Finance Minister Wolfgang Schaeuble opined that monetary policy may have reached its limits.
The S&P 500 finished off its worst level of the day as seven sectors ended in the red. Real estate (-1.3%), health care (-0.7%), and technology (-0.5%) finished at the bottom of the leaderboard while financials (+0.6%), industrials (+0.4%), and energy (+0.3%) led the pack.
In the health care space (-0.7%), providers of health equipment and supplies lagged as they moved lower in sympathy with Edwards Lifesciences (EW 94.25, -19.43). The name tumbled 17.1% after missing revenue estimates for the quarter and offering cautious revenue guidance. Dow component Merck (MRK 60.87, -1.08, -1.7%) also weighed, giving back the bulk of yesterday's 2.2% post-earnings gain.
The influential technology sector (-0.5%) displayed relative weakness as quarterly results and guidance from Apple called into question the group's earnings prospects. Alphabet (GOOG 799.07, -8.60) and Facebook (FB 131.04, -1.25) finished lower by 1.0% apiece. On a side note, Alphabet is scheduled to release its quarterly earnings report tomorrow evening.
Some steepening in the yield curve gave a boost to the economically-sensitive financial space (+0.5%). The broader sector's earnings prospects improve with a steeper yield curve since banks borrow in the short-term market and issue longer-term loans. The differential between the 2-yr and 10-yr notes expanded to 92 basis points. In earnings news, Ameriprise Financial (AMP 90.13, -7.70) plunged 7.3% after reporting a mixed quarter.
In the industrial sector (+0.4%), aerospace and defense contractors led as Dow component Boeing (BA 145.54, +6.52) finished at the top of the price-weighted average. The company beat analysts' estimates for the quarter. Conversely, Southwest Airlines (LUV 38.40, -3.55, -8.5%) weighed after issuing cautious passenger revenue guidance.
Today's trading volume was above the average of 853 million as 863 million shares changed hands at the NYSE floor.
Today's economic data included the weekly MBA Mortgage Index, September International Trade in Goods, and New Home Sales for September:
- The MBA Mortgage Index indicated that mortgage applications declined 4.1% in the week ending October 22. This followed a 0.6% decrease in the prior week.
- The advance report on international trade in goods showed a narrowing in the goods deficit to $56.1 billion in September from a downwardly revised $59.1 billion (from -$58.4) in August.
- Sales of new single-family houses jumped 3.1% in September to a seasonally adjusted annual rate of 593,000 (consensus 610k) from a revised August rate of 575,000 (prior 609,000).
Tomorrow's economic data will include weekly initial claims (consensus 259k) and Durable Orders for September (consensus 0.0%), which will both cross the wires at 8:30 ET. Separately, Pending Home Sales for September (consensus 0.6%) will be released at 10:00 ET.
- Russell 2000: +6.1% YTD
- Nasdaq Composite: +4.9% YTD
- S&P 500: +4.7% YTD
- Dow Jones: +4.4% YTD
Palantir considers IPO and predicts profit in 2017
Data analytics start-up’s possible flotation would provide liquidity to employees
Palantir, the data analytics start-up last valued at $20bn, is heading for profitability next year and considering an initial public offering, despite being previously reluctant to brave the public markets.
Palo Alto-based Palantir, which counts the CIA’s venture capital arm In-Q-Tel among its investors, is already profitable in its government businesses, where it provides services and software, including that used to track terrorists.
Alex Karp, Palantir chief executive, said the start-up will become profitable overall, including its commercial business, in 2017 “unless we do something rapidly to prevent it”. Speaking at the WSJD conference in Laguna Beach, he said he would now have to consider an IPO to provide liquidity to employees.
“The public option unfortunately gets foisted upon you when you’re profitable,” he said. “We tried to defer profitability for as long as possible.”
Mr Karp said he had previously resisted the idea of going public because he believes large public companies struggle to recruit the most talented engineers. However, he said Palantir was now considering an IPO, working with private equity firms and other possible ways for employees to know the true value of their stock.
“The primary people I care about are the wide-eyed people working at Palantir every day and night,” he said.
Mr Karp also responded to an investigation by BuzzFeed, which claimed that the company had lost large corporate customers such as Coca-Cola. He said Palantir cannot work with every company and by focusing only on clients that can deliver $100m or more in sales, it had achieved tenfold growth over an unspecified time period.
“We’re still single, we date heavily before we’re married,” he said. “Just because a company is great, doesn’t mean they are a great fit … We are a unique company filled with odd people like me.”
Palantir has 20 contracts worth more than $100m including one with the US navy seals worth about $400m over its lifetime, up from just two in 2014, he said. Revenue generated outside the US doubled last year and has doubled so far this year, he added.
Mr Karp studied for a philosophy PhD in Frankfurt before moving to Silicon Valley and being asked to run Palantir by Peter Thiel, the PayPal billionaire who co-founded the data analytics start-up. It used technology designed to detect fraud at the online payments service to track terrorists for US intelligence agencies.
“It wasn’t just to stop terrorism but to prevent the rise of far-right policies that eviscerate our civil liberties,” he said.
Palantir also addressed a recent US government lawsuit, in which the Department of Labor accused the company of discriminating against Asians, who made up an overwhelming majority of the applicants for job openings at the company.
Mr Karp said Asians make up a quarter of Palantir’s staff and 37 per cent of its developers. “One thing I’ve never screwed up is discriminating against somebody,” he said.
Airbus / Boeing: parabolic flight
Order backlogs are stable, but investors should keep their seat belts fastened
Those investors attuned to the smooth hum of the aerospace industry have been hearing some discordant rumblings recently. After some good years after the financial crisis, aircraft orders have slowed. On Wednesday Airbus announced that third-quarter earnings declined year on year by 21 per cent. This was down to supply chain problems, though, more than a zenith in the order cycle. Boeing cut forecasts earlier this year, but results have held up this quarter. Yet, the slowdown’s effect on margins matters more than any sputtering execution.
Previously, aeroplane orders had been rising in reflection of similar increases in passenger numbers. Recently traffic growth has petered out, according to the International Air Transport Association. Load factor, a capacity utilisation measure, declined if only slightly. Airlines will not likely buy many more jets should this continue.
No wonder that aircraft makers are greedily eyeing their suppliers’ margins. Boeing’s total operating margin declined two-fifths to 5.1 per cent in the first nine months of 2016 compared with last year. Although this was in part due to one-off charges in the second quarter, it compares poorly with a 10 per cent margin at Pratt & Whitney, the jet engine supplier owned by United Technologies. Boeing says it wants to “partner for success” — a euphemism for pushing margin pressure further down the chain. Suppliers have countered by consolidating.
Both Boeing and Airbus aim to replace all aeroplanes delivered this year with new sales, to keep the order backlog stable. Nevertheless, analysts expect the earnings of both to decline in coming years, as lower demand for aeroplanes puts pressure on selling prices, and suppliers fight to defend margins.
Order backlogs may keep Airbus and Boeing busy for a while. But investors should have their seat belts fastened in case margins begin a downward spiral.