Tuesday, January 31, 2012

Yum Pins Its Future on China

There is perhaps nothing more ubiquitous in America than McDonald's (NYSE: MCD). The fast food giant has restaurants it seems in virtually every town and city in the country.

One of McDonald's rivals, Yum Brands (NYSE: YUM), dreams one day of having a restaurant in every town across the country. Yum Brands owns a number of fast food brands including KFC, Pizza Hut and Taco Bell.

But the country Yum management is dreaming about is not the United States where the company continues to struggle. When talking about its performance here in the United States, management called 2011 “disappointing” and “terrible” thanks to the weak domestic economy.

No, the country Yum Brands has its sights set on is China, where it already has a large presence and leads it rival, McDonald's, 3 to 1 in market share.

Fast food in China is definitely a growth business. This industry has recorded double-digit annual growth every year since 2003. But it is still half the size of its U.S. counterpart. When one thinks in terms of the size of the Chinese population, one can only think of the potential for more growth.

Yum Brands has had great success in China where its KFC brand is the number one fast food restaurant chain and its Pizza Hut brand is the number one casual dining restaurant chain in the country. Yum is still growing rapidly in China, opening one new restaurant every day in the vast Asian nation. The continued rapid growth led to Yum earning about $900 million in net income from its Chinese business in 2011.

The company's goal is to set up its fast food restaurants in all of China's second and third-tier cities over the next decade. It plans to more than double its restaurants in China by 2020, when it expects to have 9,000 of them spread across the country.

To accomplish this, Yum plans to build small restaurants in Chinese rail stations and airports and to use its well-developed distribution network to expand into the second and third-tier cities in China. These restaurants in the smaller cities should be very profitable because both labor and rents in these areas are cheap and the company's brands are already well known.

The company's hunger for growth extends beyond China too. Yum has also its sights set on other emerging markets besides China. It is trying duplicate its success in China in India and other developing Asian markets.

As in China, Yum plans to do this by offering innovative dishes catered to local tastes. In addition, the company plans to have extended hours and offer tasty breakfast choices to its consumers in these markets.

This is all part of the management's grand plan to pare back ownership of restaurants in developed markets while accelerating its push into emerging markets around the globe.

Currently, the breakdown of restaurants owned is 53% in emerging markets and 47% in developed markets. But Yum wants to tilt that heavily in favor of emerging markets.

The company says by 2014 it expects that 70% of the restaurants it owns will be in emerging markets with just 30% in developed markets.

Emerging markets now make up 58% of its operating profits. The management at Yum would like to raise that up around 75% over the next few years and they likely will.

This makes Yum Brands a good choice for investors looking to gain exposure to the growth of the developing market consumer. And without having to buy a foreign stock.

This article was originally written for the Motley Fool Blog network. All of daily articles for the Motley Fool can be found at http://blogs.fool.com/tdalmoe/

Friday, January 27, 2012

Tablet Wars Heat Up

Tablet PCs are becoming more and more popular with consumers. The research firm NPD DisplaySearch last week estimated that the tablet PC market grew 250% in 2011 versus 2010 to 73 million units.

This heady growth not surprisingly has led to a heated battle for turf in this market between Apple (Nasdaq: AAPL) and its global rivals.

Last year tablet PC manufacturers from all over the world charged into battle against the preeminent tablet PC, the iPad from Apple. They all boasted they had the device which would knock the king off the throne.

None succeeded. Apple's iPad still retained a two-third market share.

In fact, some iPad rivals failed miserably...most notably the Touch Pad from Hewlett-Packard (NYSE: HPQ) and Research in Motion's PlayBook (Nasdaq: RIMM) But that does not mean the others have given up trying.

Apple's rivals this year are counting on a new Android operating system from Google (Nasdaq: GOOG) and the arrival of Microsoft's (Nasdaq: MSFT) Windows 8 to cut into Apple's market share. The addition of improved content from the likes Samsung and Sony ADR (NYSE: SNE) will be another weapon in the battle with Apple.

The release in 2011 of the Android 3.0 version, called Honeycomb, was not a success. It was designed specifically for tablets so it, in effect, split the Android operating system into two. It therefore did not get much developer support, ending up with a small base of Honeycomb tablets that offered very few applications.

This situation should change in 2012 with the introduction of the Android 4.0 version, called Ice Cream Sandwich. It is a unified operating system which already appeared in November operating Samsung's Galaxy Nexus smartphone. Since it is a unified system, the assumption is that developers will come up with lots of apps for it.

Microsoft's Windows 8 will come out sometime in the second half of this year. The excitement here will be its touch-optimized 'Metro' interface offering a bold alternative to the traditional Windows desktop. Tablet makers like Toshiba say “we're very excited about Windows 8 and we think it will grow the market for tablets in 2012.”

Also entering the fray are the makers of ereaders like Amazon (Nasdaq: AMZN) which have hit hard with their versions of tablet PCs selling for under $250. Amazon's Fire led its Kindle tablet to sales of more than 1 million a week in December.

One important aspect to Amazon's success so far has been its ability to sell its content and services, offering consumers a quality experience.

The ereader companies, with their low prices, will likely put the squeeze on Apple's other competitors who are trying to sell their tablets at somewhere near the $500 iPad level. A survey by the consumer electronics site Retrevo last month showed that consumers are unwilling to pay more than $250 for a non-iPad tablet.

But the survey showed consumers are willing to pay $500 for the iPad thanks to its apps and content.

The launch of iPad 3 in the spring may give consumers even more reasons to stick with Apple. It will be hard to dethrone this king.

This article was originally written for the Motley Fool Blog Network. Please check out my daily articles for the Motley Fool at http://blogs.fool.com/.

Monday, January 23, 2012

China, Rare Earths and Quotas

Rare earths are an important group of 17 elements used in a variety of manufacturing industries including technology.

They are broken into two groups – 'light' rare earths and 'heavy' rare earths. Light rare earths are actually relatively common and are often a by-product of producing heavy rare earths. These elements are much rarer than 'light' rare earths and are used in products such as magnets, lasers, smartphones and plasma TVs.

The list of heavy rare earth elements include: yttrium, promethium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, lutetium and yterrbium.

China currently is the dominant supplier of rare earths, accounting for 97% of global production, so any action it takes in this sector is important.

Recently China raised its export quota for rare earths for the first time in six years. The country has used export quotas to restrict global supplies and therefore prop up prices. China lifted its export quota by a mere 3% from 30,246 tons in 2011 to 31,130 tons in 2012.

Even though the amount China raised the quota is small, it looks set to reinforce a trend that has already been in place...falling prices for many rare earths. Many prices are down 30% to 40% from record highs set in July 2011. Prices are down due to a stifling of demand from users by the historically high prices.

This is not good news for one of the two major non-Chinese companies in the industry- Molycorp (NYSE: MCP) – which has been adding to its rare earth production capacity. Its stockholders have seen the value of their shares fall by two-thirds from the 52-week high of $79.16 to $25.50.

The exchange traded fund which tracks a basket of rare earth stocks has also fallen sharply. The Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) is down from a peak of $28.91 a share to $15.65 currently.

However, it may not be all gloom and doom. In the newly announced quota system, China set up separate quotas for 'light' and 'heavy' rare earths. The government did this in an effort to stop companies from exporting those rare earths with the highest prices in order to increase profits.

Industry executives say the quota for the 'heavy' rare earths, 15% of the overall quota, may actually make supplies of these elements scarcer.

In addition, over the past few years China has been trying to clean up the highly polluting industry. The government has closed illegal mines, consolidated smaller mines and forced some processing plants to upgrade their environmental systems.

China's rare earth miners and processors are still adjusting to the country's new regulations concerning rare earth mining. This in itself will likely lead to reduced availability of heavy rare earths and push up prices for the scarcest ones.

The Chinese government is also well aware of the value of heavy rare earths over the long term.

Canadian rare earth company Neo Material Technologies operates rare earth processing plants in China. Its CEO, Constantine Karayannopoulos, expects shortages in heavy rare earths in 2012 due to changes in Chinese regulations and quotas.

He said the new quota system announced by China shows the country is serious about “the preservation of the heavy rare earth resources”.

The situation in China may mean it will be a bit of a bounceback year for shareholders in both Molycorp and the Market Vectors Rare Earths ETF. But the historically still-high prices for rare earths will continue to limit demand for the elements and price gains for MCP and REMX.

This article was originally for the Motley Fool Blog Network. Please see all of my articles for the Motley Fool Blog at http://blogs.fool.com/tdalmoe/

Thursday, January 19, 2012

Electric Vehicle Sales in Neutral

The latest generation of electric cars came to life thanks to two factors – higher fuel prices and the development of advanced lithium-ion batteries with the ability to power cars over longer distances, around 100 miles.

However, sales of these latest models of electric vehicles have failed to show much spark. Not really surprising considering that hybrid vehicles, with both a lithium-ion battery and a conventional engine, have grabbed only a 2.3% market share in the United States since first becoming available over a decade ago.

In their first full year of sales, both the Volt from General Motors (NYSE: GM) and the Leaf from Nissan Motor ADR (OTC: NSANY) have come in below even the modest expectations of 30,000 vehicles sold combined.

Slow sales for these electric vehicles were attributed to supply bottlenecks and still too high prices, despite government subsidies.

Of course, in the case of General Motors, it did not help that their batteries caught fire shortly after undergoing crash tests. But even before then, GM reported that it would not meet its modest target of selling 10,000 Volts in 2011.

Nissan is doing better with its Leaf car than GM is with Volt. The company sold 20,000 vehicles through November which was just slightly below company expectations. Nissan did this despite having to overcome problems caused by the earthquake and tsunami in Japan last year.

The company is optimistic enough for 2012 that it said it will produce 40,000 Leafs this year. Its CEO Carlos Ghosn remains the industry's strong proponent. He continues to maintain that his company will sell 1.5 million electric cars annually by 2016 and he believes electric vehicles will make up 10% of the global market within a decade.

However, others are not as optimistic as Mr. Ghosn. PricewaterhouseCoopers estimates that all-electric vehicles will make up a mere 1% of the global car market in 2017. Pike Research says they will account for 3% of the global market in 2017. JD Power believes that these cars will make up only 3% of the global market a decade from now.

The main sticking point with all-electric vehicles seems to be price, according to the latest report from Pike Research. Other negatives for all-electric vehicles pointed out in the report include a limited driving range and unproven battery technology.

All three points are valid, especially price. The Volt and the Leaf, even after sizable government subsidies, still sell for nearly double the price of internal combustion engine cars.

The report also pointed out there is no first-mover advantage for GM and Nissan. People surveyed by Pike said they were more likely to buy an electric car from Toyota Motor ADR (NYSE: TM), Ford (NYSE: F) and Honda Motor ADR (NYSE: HMC) ahead of GM and Nissan.

What most likely will happen is that consumers will buy an electric vehicle from whatever company gives them one at a reasonable price and with a longer driving range.

But that may have wait until the next-generation of battery power for electric vehicles comes out within a few years.

Then when these vehicles are mass produced, we will get a true reading of who the winners will be in this industry, if any.

This article was originally writtern for the Motley Fool Blog Network. You can find all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/

Tuesday, January 17, 2012

Yahoo and Microsoft Again

There is a scramble on for Yahoo (Nasdaq: YHOO). The company has entered talks with at least two private equity firms – Silver Lake and TPG – among others.

Let's not forget too there is also Jack Ma and his company, Alibaba, which is looking to break its ties with Yahoo, even if it involves buying out the company. It said that he and Softbank, Yahoo's partner in Japan, may make a joint bid for Yahoo.

Back in 2005, Yahoo acquired a 42% stake in the Chinese e-commerce company. A recent private equity investment valued Alibaba at $32 billion, so Yahoo's Alibaba stake is one of the few jewels left in its crown.

The corporate melee over Yahoo was triggered several months ago by the firing of CEO Carol Bartz and the news that Yahoo was considering strategic options for the company.

These options initially concerned only plans for turning around the company, but they have quickly expanded. Options now include sale of its Asian operations or even the entire company.

So with Yahoo back in play, one question investors are asking is whether Microsoft (Nasdaq: MSFT) should take another run at the company.

As investors will recall, Microsoft attempted a takeover of Yahoo in 2008 at $33 a share, but its bid collapsed. Sadly for Yahoo investors, that price is more than twice the current stock price.

Microsoft blamed the breakdown of the talks on Yahoo co-founder Jerry Yang who kept holding out for a higher price. The Yahoo side blamed Microsoft CEO Steve Ballmer who they say simply walked away from the deal.

After that very public and unpleasant experience, it is very doubtful that Microsoft would launch another bid for all of Yahoo.

However, it does seem to be taking an interest in Yahoo again. The reasoning is that, at the least, Microsoft wants a seat at the table when Yahoo's fate is decided so it can protect the relationship it has with Yahoo.

Microsoft has an alliance with Yahoo where it outsources its internet search business to Microsoft. Some analysts estimate this business alone accounts for half of the value of Yahoo's core operations, excluding the company's operations in China and Japan. So it is not surprising that Microsoft is trying to protect its interests.

But perhaps Microsoft has something else in mind.

A full merger of its MSN online service with Yahoo could be advantageous. It would bring together two complimentary and well-known internet properties. The cost savings will be meaningful, even for a giant like Microsoft. And in today's smartphone and tablet-centric world, it may create a powerful portal through which content can be distributed.

Microsoft may also be interested in Yahoo's presence in China through Alibaba. But with Jack Ma battling so fiercely for his independence from Yahoo, it is doubtful he will want to tie up with another American tech giant.

The final outcome in the scramble for Yahoo is anybody's guess right now. But most likely Alibaba and Softbank will gain their independence, while Microsoft is a main contender for the rest of Yahoo.

This article originally appeared on the Motley Fool Blog Network. Please check out all my articles there at http://blogs.fool.com/tdalmoe/

Friday, January 13, 2012

'Crackberry' Addiction on the Wane

The coolest of all mobile devices used to be the Blackberry which is made by Research in Motion (Nasdaq: RIMM). Its qualities made it almost addictive to its users, hence the nickname 'Crackberry'.

But all that began to change in 2007 with the introduction of the touchscreen-based iPhone from Apple (Nasdaq: AAPL).

Today, many of the former 'crackberry' addicts now carry around an iPhone or a smartphone with the Android operating system developed by Google (Nasdaq: GOOG).

In the key North American market, which accounts for 40% of sales for RIM, Blackberry is rapidly losing market share.

According to figures released in early December by market research firm ComScore, the company's share of the U.S. smartphone market fell by 4.5 percentage points to 17.2% in the three months ending in October.

Globally, Research in Motion is not faring any better. IT research firm Gartner estimates that RIM's share of the worldwide smartphone market fell to 11% in the third quarter, down from 15.4% in the year ago period.

Why has this happened? A series of management mistakes and product delays can be blamed. For instance, the one winning product they have – BBM or Blackberry Messenger – is being constantly played down and ignored by management while they continue pushing losers like Playbook.

Things don't look like they will get better any time soon either. The company recently announced a $485 million pre-tax writedown on the value of unsold Blackberry Playbook Tablets. RIM had already been forced to lower the price of the Playbook, which the company had touted as the product which would replace the iPad, from $499 to $199.

RIM also recently took a $50 million charge against revenues to cover the network outage it suffered which left users unable to access its network for days.

These problems, of course, have crushed the stock of Research in Motion. From more than $70 a share a year ago, RIM's shares just hit another 52-week low on Friday to just above $13 a share, a drop of more than 80%.

Can Research in Motion somehow recover from these missteps?

One hope is that the company successfully makes the transition from products based on its old Blackberry operating system to products based on its new operating system, called BBX. Next-generation devices, based on BBX, are expected to hit the market sometime in the first half of 2012.

Another hope is the aforementioned BBM instant messaging service. It looks similar to SMS text messaging, but is both faster and cheaper, coming without the need for a data package. And it is probably the sole reason individual consumers now outnumber business users of Blackberry. BBM is extremely popular among young people in the U.K., Netherlands, Brazil, Indonesia, South Africa and the Middle East.

But it is unlikely any turnaround will occur under the leadership of the co-CEOs of Research in Motion – Mike Lazaridis and Jim Balsille. They have stuck too long with RIM's aging portfolio of products and seemed to have lost touch with the company's user base.

Investors are advised to steer clear until a management change occurs.

Article originally written for the Motley Fool Blog Network. Check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/

Wednesday, January 11, 2012

Video Game Industry Still Thriving

It was 17 years ago when the first popular title in the “first-person shooter” game genre, Doom, hit the store shelves. Ever since, these type of games have become a fixture on consoles such as Xbox from Microsoft (Nasdaq: MSFT) and PlayStation from Sony ADR (NYSE: SNE).

It seems almost as long ago that naysayers have been predicting doom for the industry. But despite industry naysayers, the video game business is still doing rather well.

Look at the new video game from Activision Blizzard (Nasdaq: ATVI), Call of Duty:Modern Warfare 3. It achieved record sales of $400 million on its first day. That is better than many releases of films from Hollywood!

Nevertheless, some analysts continue to be concerned about Activison's future. They point to some of its main franchises such as World of Warcraft which lost nearly 1 million subscribers this year.

These same analysts also worry that the Call of Duty franchise, which has already sold more than 100 million units, may also be reaching a saturation point.

These doubts persist even though Activision once again beat analysts' estimates for sales in the latest quarter by 47.5%. At the time, the company also raised its earnings guidance for the full year.

Yet, ever since the announcement, the company's stock has fallen more than 10%.

Investors seem to be ignoring that Activision is not standing still. It is actively marketing its key franchises like Call of Duty and World of Warcraft.

Activision has also partnered with film directors, Tony and Ridley Scott, to create a TV show featuring highlights of Modern Warfare 3 game play. The program will be available on the 'Call of Duty Elite' network, another initiative from Activision.

The network is a $50 a year online social network. It did stumble a bit out of the starting gate due to glitches brought on by high demand. That's a good thing!

And so is the more than 1 million users who signed up for the network in the first week. With even more programming planned for the network, it will give Activision a solid new revenue stream.

This is an important step for the company. As Activision's CEO Bobby Kotick said, “This is an important evolution of our medium.”

Activision's main competitor Electronic Arts (Nasdaq: ERTS), with its own recent blockbuster title Battlefield 3, is also moving forward. It is moving aggressively into the social media space to expand its business.

The company has two of the top 10 games on Facebook (Activision has none). Electronic Arts also bought a major social gaming company, Playfish, back in 2009. Another social gaming company, Zynga (Nasdaq: ZNGA), recently raised $1 billion in a popular IPO.

Electronic Arts' stock has outperformed Activison's over the past year – up about 30% versus little change for the analyst-disliked Activision.

Look for both Electronic Arts and Activision to do well in the coming year. The negative analysts will find these companies as hard to 'kill' as some of the characters in their games.

Article originally written for the Motley Fool Blog Network. Check all my Motley Fool posts at http://blogs.fool.com/tdalmoe/

Monday, January 9, 2012

The Outlook for Oil Prices in 2012

2011 was a relatively stable year for oil prices. Brent crude oil traded in a narrow band all year between $100 and $120 a barrel. But 2012 may be a very different year with traders bracing themselves for a much rougher ride.

The base case scenario is for oil to remain at about $100 a barrel in 2012. This is founded on relatively healthy oil demand growth of about 1 million to 1.2 million barrels a day in 2012. This outlook also is based on OPEC maintaining its output at the current 3-year high of around 30 million barrels a day and the end of supply disruptions that troubled the oil market in places like Libya.

And indeed, at its recent meeting, OPEC did set a target for output at 30 million barrels a day.

However, despite the apparent calmness in the oil market, there is currently an extreme difference of opinions between the bulls and the bears on oil prices in 2012.

There are traders on opposite sides of the market who are buying large amounts of out-of-the-money oil futures option contracts that would profit from both a collapse in oil prices and a super-spike. These traders are betting on low probability events – either a rise to $150 a barrel for oil caused by Middle East unrest or a drop to $50 a barrel brought about by a eurozone collapse.

The key benchmark Brent crude oil contract is now trading for approximately $108 a barrel.

Although there are bets occurring on both sides, recent options buying on the New York Mercantile Exchange has been skewed toward an upward spike for oil based on risks coming from a possible European Union embargo on Iranian oil.

Since October, many trading firms have noticed persistent interest in call options for prices ranging from $120 to $180 a barrel. The number of options contracts purchased betting on a move for oil to $130-$155 a barrel by the end of 2012 has risen more than 25% over the past six months to more than 93,500 contracts.

These buyers perceive greater geopolitical risk than just the situation with Iran and its nuclear program. There is also the threat of regional war if Syria were to collapse or even a turn for the worse politically in Egypt or Libya.

Finally, there is even the risk that political turmoil in Russia surrounding the presidential election in March may disrupt output from the world's second-biggest oil producer.

But the bears have their reasons too. They say a eurozone collapse will trigger a worldwide recession that cuts oil demand sharply. The global financial crisis of 2008-09 did see two consecutive years of falling consumption for the first time since the 1980s. This did drive oil prices briefly below $40 a barrel, forcing OPEC to cut production.

Bears also point to a hoped for increase in Iraqi oil production of at least 500,000 barrels by the middle of 2012 as well increased U.S. shale oil production from North Dakota and Texas.

Both bulls and bears could be right depending on if one of these 'low probability' events comes to pass. Either way, 2012 looks to be a far more interesting year for the oil market than 2011 was.

Individual investors can join in with professionals on trading the perceived upcoming volatility in oil prices through the use of exchange traded funds.

Some of ETFs available for purchase include: United States Oil Fund (NYSE: USO), United States Brent Oil Fund (NYSE: BNO) and United States Short Oil Fund (NYSE: DNO).

Article originally written for the Motley Fool Blog Network. Check out my articles there at: http://blogs.fool.com/tralmoe/

Wednesday, January 4, 2012

Shale Boom in Argentina

Many investors are aware of the current shale oil and gas boom in the United States brought about by the use of fracking technology.

What investors may not be aware of though is that this technology is now beginning to used all around the world. One example which was in the headlines recently is Argentina.

That country has some of the largest and highest quality reserves of shale oil and gas. This year, the U.S. Energy Information Agency ranked Argentina third globally in terms of technically recoverable shale gas reserves with 7.74 trillion cubic feet of gas. This total is behind only China and the U.S.

The company at the forefront of shale discoveries in Argentina is the former state-owned oil company YPF SA ADR (NYSE: YPF), which is 57.43% owned by Spain's Repsol YPF SA.

YPF is eying another 1 billion barrel discovery which is adjacent to a field in the Vaca Muerta formation, located in Patagonia, which was found to have reserves six times bigger than original estimates at 927 million barrels. Vaca Muerta compares very favorably to U.S. shale formations. It is three times as deep as Eagle Ford in Texas and its yields may be double.

The company said the hydrocarbons found there were about three-quarters oil and one-quarter gas. The 927 million barrel estimate from YPF is a very conservative one which says only 4 percent of all the hydrocarbons will be extracted.

On top of that, there may be a lot more shale oil and gas to be discovered since YPF has explored only a 502 square kilometer area out of the total 12,000 square kilometer area so far. In 2012, the company plans to spend at least $87 million drilling in the area.

A flood of companies have launched exploration programs in Argentina over the past six months. These companies include many large global firms with experience in shale hydrocarbons such as ExxonMobil (NYSE: XOM), Total SA ADR (NYSE: TOT), Apache (NYSE: APA) and EOG Resources (NYSE: EOG).

Energy industry leaders in Argentina believe the country can follow in the footsteps of the United States and turn the energy industry from a state of decline into a boom.

The energy industry in Argentina has definitely been on a downward slope. For example, the country expects to import a record 80 cargoes of LNG (liquified natural gas) in 2012, a 20% increase from this year.

But for a shale boom to proceed Argentina must overcome some obstacles.

First, oil and gas prices are regulated in Argentina. The government has kept prices so artificially low that investment is discouraged.

Royalties are also low in comparison to other energy-rich countries. The good news here is that the government is offering higher prices for shale oil and gas under the Gas Plus and Oil program which offers better conditions for the industry.

Finally, labor relations stink. There have been a number of strikes by oil workers. This needs to improve before Argentina can enjoy a shale boom.

However, as evidenced by the Gas Plus and Oil program, Argentina finally seems to be moving in the right direction. If it continues along this path, YPF is sure to be the prime beneficiary.

Article originally written for Motley Fool - http://blogs.fool.com/tdalmoe/