The CEO of chip giant Intel (Nasdaq: INTC), Paul Otellini, recently stated that “there's a golden age ahead of us [Intel]”. He made this statement based on his belief that the age of “cannibalization” of PCs – consumers choosing tablets over laptops – would be replaced by age of “reverse cannibalization” as new Windows 8 laptops come out with touchscreens later this year. Windows is, of course, the new operating system soon to be brought out by Microsoft (Nasdaq: MSFT).
Intel and Microsoft are not the only companies hoping Windows 8 is a runaway success. Others in the PC world need it to be a success in order to turn their fortunes around.
Take Dell Computer (Nasdaq: DELL) for one. Its stock recently fell by a fifth in one day on the back of poor results. According to its chief financial officer, Brian Gladden, the PC market has turned into a low-growth ghetto. And this past week Hewlett Packard (NYSE: HPQ) took a $1.2 billion write-off on its decade-old acquisition, Compaq Computer. Its CEO, Meg Whitman came right out and said “We are betting heavily on Windows 8”.
These companies are facing a steep uphill climb against the competition - smartphones and tablet computers. Smartphone sales exceeded PC sales for the first time ever last year, with 427 million sold versus 353 million PCs sold. According to technology research firm Gartner, smartphone sales will be twice as big by 2013. Tablets, led by the iPad from Apple (Nasdaq: AAPL), looks like the next device which will capture a global mass market, with some in the industry predicting sales could rival those of PCs within three years.
As a whole, the number of “smart” devices sold annually will double between now and 2016, reaching 1.84 billion according to research firm IDC. In that period, traditional PCs are forecast to shrink from 36 percent to 25 percent of the total number of smartphones, tablets and PCs. Hardly a golden age.
Part of the decline is due to shifting consumer tastes. The emergence of web-based services has made software applications less relevant to consumers. For example, music lovers today are much more likely to turn to streaming service such as the iCloud where there favorite tunes are stored on Apple servers. The same can be said with regard to personal data too.
Intel and others are banking on consumer acceptance of hybrid PCs (which Apple thinks will never be viable) thanks to Windows 8. But these type of devices failed miserably in the past. Take Dell's Inspiron Duo which was launched to much hype in 2010. Consumers thought it was too heavy, the screen and battery life were poor and it did not even come close to the touchscreen experience of the iPad.
Windows 8, however, does seem to be the best offering from Microsoft since Windows 95. It will have an user interface, called Metro Style, that is based on colored tiles operated by touch and which is currently being used on Windows phones. Microsoft is also using a programming model that enables developers to create apps easily and computing architecture and operating system that will run tablets. The architecture is required for devices that run low-powered chips (which expands battery life) designed by the UK's Arm Holdings.
Microsoft's Windows 8 should give PC companies an opening to pull customers back into the PC universe. But that window may close rather quickly, leaving others like Samsung and Apple to further gain market share.
This article was originally written for the Motley Fool Blog Network. Make sure to read of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
Thursday, May 31, 2012
Tuesday, May 29, 2012
Asset Sales Galore Coming for Chesapeake
Despite having some of the best assets in the natural gas business, Chesapeake Energy (NYSE: CHK) has become the poster child for the type of company that investors should give a wide berth. Among the problems which ail Chesapeake are very questionable corporate governance, large amounts of debt both on and off the balance sheet, strained liquidity and murky accounting. No surprise then that the company's stock has fallen roughly 45 percent in the past six months.
Chesapeake Energy, the second-biggest natural gas producer in the United States, now has one choice to survive...it will have to liquidate some of the juiciest energy assets in the country. That is where this story gets interesting for investors in the sector as its rivals look to scoop up some of Chesapeake's prime assets at a good price. In fact, industry analysts believe there are at least $25 billion in valuable acreage that Chesapeake owns which should find eager buyers.
The company's principal assets are oil and gas leases covering roughly 15 million acres in key areas all across the country including Texas, Louisiana, Oklahoma and Pennsylvania. Chesapeake is the largest or second-largest leaseholder in many of the most promising in the US for producing shale gas and oil that have been opened by advances in drilling technology.
Even before the recent problems came to a head, the company had planned to make some assets sales as it has done the past several years. The biggest planned deal is the sale of 1.5 million acres of leases in the Permain Basin oil fields of west Texas and eastern New Mexico. It is believed this sale should fetch the company at least $6 billion since these fields hold much more oil than they do gas.
The most obvious possible buyer for these assets is Anadarko Petroleum (NYSE: APC) which is Chesapeake's partner in many wells in the Permian Basin. Its CEO Al Walker has publicly stated Anadarko plans to “take a look” at those assets. Another possible buyer for these assets is Occidental Petroleum (NYSE: OXY). This company is the biggest oil producer in the Permian Basin. In the past, it showed interest in these assets, offering Chesapeake about $3.5 billion for it (the offer was rejected).
The second planned disposal is a joint venture for its 2 million acres in the Mississippi Line region of Oklahoma and Kansas. This acreage, like many of Chesapeake' other assets, requires significant capital spending to bring it into full fruition. The company's capital spending has exceeded cash flow each quarter since October 2003, according to Bloomberg. This is the one of the main reasons behind the company's high debt burden and why ratings agency Fitch recently said Chesapeake's cash flow shortfall this year may reach $10 billion.
With much capital required, buyers of Chesapeake's assets are going to have to be some deep-pocketed companies. One such company which comes to mind immediately is Chevron (NYSE: CHV). Unlike some of its peers in the industry like ExxonMobil, it has been very slow in acquiring US shale reserves and has to date nearly missed the shale revolution occurring in the United States. Chevron's pockets are even deep enough for it to catch up quick and acquire the whole of Chesapeake Energy if it so desires.
Another possibility is an overseas natural resources company with a strong interest in US energy assets. That company is BHP Billiton ADR (NYSE: BHP). Its management has been trying to shift the company away from a reliance on metals mining and more towards a focus on energy assets around the globe. BHP recently announced a reduction in its capital spending on mining projects. Investors will recall that BHP, which had already bought some US energy assets, spent $12.1 billion to acquire Petrohawk Energy in July 2011. The acquisition of Petrohawk's shale assets in Texas and Louisiana moved BHP into the top 10 of oil and gas companies and it is looking to expand even more in the US.
What will happen to Chesapeake? It could try a piecemeal approach – both selling and buying assets. But this strategy will do the company little good...it will be just running in place with a heavy debt load tied around its neck. Despite its reluctance, management will likely have to put the whole company up for sale sooner or later.
This article was originally written for the Motley Fool Blog Network. Make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
Chesapeake Energy, the second-biggest natural gas producer in the United States, now has one choice to survive...it will have to liquidate some of the juiciest energy assets in the country. That is where this story gets interesting for investors in the sector as its rivals look to scoop up some of Chesapeake's prime assets at a good price. In fact, industry analysts believe there are at least $25 billion in valuable acreage that Chesapeake owns which should find eager buyers.
The company's principal assets are oil and gas leases covering roughly 15 million acres in key areas all across the country including Texas, Louisiana, Oklahoma and Pennsylvania. Chesapeake is the largest or second-largest leaseholder in many of the most promising in the US for producing shale gas and oil that have been opened by advances in drilling technology.
Even before the recent problems came to a head, the company had planned to make some assets sales as it has done the past several years. The biggest planned deal is the sale of 1.5 million acres of leases in the Permain Basin oil fields of west Texas and eastern New Mexico. It is believed this sale should fetch the company at least $6 billion since these fields hold much more oil than they do gas.
The most obvious possible buyer for these assets is Anadarko Petroleum (NYSE: APC) which is Chesapeake's partner in many wells in the Permian Basin. Its CEO Al Walker has publicly stated Anadarko plans to “take a look” at those assets. Another possible buyer for these assets is Occidental Petroleum (NYSE: OXY). This company is the biggest oil producer in the Permian Basin. In the past, it showed interest in these assets, offering Chesapeake about $3.5 billion for it (the offer was rejected).
The second planned disposal is a joint venture for its 2 million acres in the Mississippi Line region of Oklahoma and Kansas. This acreage, like many of Chesapeake' other assets, requires significant capital spending to bring it into full fruition. The company's capital spending has exceeded cash flow each quarter since October 2003, according to Bloomberg. This is the one of the main reasons behind the company's high debt burden and why ratings agency Fitch recently said Chesapeake's cash flow shortfall this year may reach $10 billion.
With much capital required, buyers of Chesapeake's assets are going to have to be some deep-pocketed companies. One such company which comes to mind immediately is Chevron (NYSE: CHV). Unlike some of its peers in the industry like ExxonMobil, it has been very slow in acquiring US shale reserves and has to date nearly missed the shale revolution occurring in the United States. Chevron's pockets are even deep enough for it to catch up quick and acquire the whole of Chesapeake Energy if it so desires.
Another possibility is an overseas natural resources company with a strong interest in US energy assets. That company is BHP Billiton ADR (NYSE: BHP). Its management has been trying to shift the company away from a reliance on metals mining and more towards a focus on energy assets around the globe. BHP recently announced a reduction in its capital spending on mining projects. Investors will recall that BHP, which had already bought some US energy assets, spent $12.1 billion to acquire Petrohawk Energy in July 2011. The acquisition of Petrohawk's shale assets in Texas and Louisiana moved BHP into the top 10 of oil and gas companies and it is looking to expand even more in the US.
What will happen to Chesapeake? It could try a piecemeal approach – both selling and buying assets. But this strategy will do the company little good...it will be just running in place with a heavy debt load tied around its neck. Despite its reluctance, management will likely have to put the whole company up for sale sooner or later.
This article was originally written for the Motley Fool Blog Network. Make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
Thursday, May 24, 2012
Pharmas Need Pain Relief
Investors who have paid any attention at all over the past few years to the pharmaceutical industry are well aware of the so-called patent cliff that nearly every company in the sector faces. The patent cliff refers to the expiration of patents on pharmaceutical firms blockbuster drugs, opening them up to competition from cheaper, generic versions of the medicines. It is this patent cliff which has pushed the drug companies into a flurry of action over the past couple of years, ranging from licensing deals to acquisitions.
This is not new news to savvy investors. But here is what is different...the problems due to patent expiries are set to become much worse in 2012. The list of patents on blockbuster drugs set to expire in 2012 include Actos, Diovan, Geodan, Lexapro, Plavix, Seroquel, Singulair and Tricor among others. Among the major pharmaceutical companies affected are Pfizer (NYSE: PFE), Abbott Laboratories (NYSE: ABT), Sanofi ADR (NYSE: SNY), Astra Zeneca PLC ADR (NYSE: AZN) and Novartis ADR (NYSE: NVS) among others.
The pharmaceuticals analyst with Bernstein, Tim Anderson, said “Nothing like this has ever been seen before. In years past, the rates of erosion were substantially less.” Mr. Anderson is likely correct. Unlike prior patent expiry cycles, this one is so much larger. That means that sales from a single drug, even a blockbuster, will not be sufficient to make up for the series of expiring drug patents.
This fact may threaten the very business model that pharmaceutical firms have used for years to conduct business. Unlike other sectors like technology, the pharma industry faces stringent regulations on authorization and marketing of drugs by the US Food and Drug Administration. This results in higher costs and longer lead times to develop new medicines, making the companies highly reliant on patent monopolies lasting years to recoup their costs.
Now the pharma companies face an unpleasant cocktail of conditions – a patent abyss, stiff competition from generic firms like Teva Pharmaceutical Industries and pressure from insurance companies and governments to lower the price of their drugs. This combination may force drug companies to take their entire current business model and throw it out the window and develop new plans for survival.
One such change is already occurring. Due to the rising cost and falling productivity of research and development, some pharma companies are cutting way back on such research. They are simply farming out the research to specialist firms or plan to just buy promising drugs from the biotechnology companies which developed them.
This approach seems to meet with shareholder approval since companies such as Astra Zeneca and Eli Lilly which have remained focused on internal research efforts are trading at the lowest multiples in the pharmaceutical sector.
Another strategy which seems to be gaining approval among shareholders is diversification. The outperformers in the sector are companies like Novartis and Sanofi which moved into others sectors including generic drugs, medical devices, consumer health products and animal health. The question here remains whether these diversification efforts will pay off in the long term. For now investors seem to think they will.
This article was originally written for the Motley Fool Blog Network. Make sure to read all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
This is not new news to savvy investors. But here is what is different...the problems due to patent expiries are set to become much worse in 2012. The list of patents on blockbuster drugs set to expire in 2012 include Actos, Diovan, Geodan, Lexapro, Plavix, Seroquel, Singulair and Tricor among others. Among the major pharmaceutical companies affected are Pfizer (NYSE: PFE), Abbott Laboratories (NYSE: ABT), Sanofi ADR (NYSE: SNY), Astra Zeneca PLC ADR (NYSE: AZN) and Novartis ADR (NYSE: NVS) among others.
The pharmaceuticals analyst with Bernstein, Tim Anderson, said “Nothing like this has ever been seen before. In years past, the rates of erosion were substantially less.” Mr. Anderson is likely correct. Unlike prior patent expiry cycles, this one is so much larger. That means that sales from a single drug, even a blockbuster, will not be sufficient to make up for the series of expiring drug patents.
This fact may threaten the very business model that pharmaceutical firms have used for years to conduct business. Unlike other sectors like technology, the pharma industry faces stringent regulations on authorization and marketing of drugs by the US Food and Drug Administration. This results in higher costs and longer lead times to develop new medicines, making the companies highly reliant on patent monopolies lasting years to recoup their costs.
Now the pharma companies face an unpleasant cocktail of conditions – a patent abyss, stiff competition from generic firms like Teva Pharmaceutical Industries and pressure from insurance companies and governments to lower the price of their drugs. This combination may force drug companies to take their entire current business model and throw it out the window and develop new plans for survival.
One such change is already occurring. Due to the rising cost and falling productivity of research and development, some pharma companies are cutting way back on such research. They are simply farming out the research to specialist firms or plan to just buy promising drugs from the biotechnology companies which developed them.
This approach seems to meet with shareholder approval since companies such as Astra Zeneca and Eli Lilly which have remained focused on internal research efforts are trading at the lowest multiples in the pharmaceutical sector.
Another strategy which seems to be gaining approval among shareholders is diversification. The outperformers in the sector are companies like Novartis and Sanofi which moved into others sectors including generic drugs, medical devices, consumer health products and animal health. The question here remains whether these diversification efforts will pay off in the long term. For now investors seem to think they will.
This article was originally written for the Motley Fool Blog Network. Make sure to read all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
Subscribe to:
Posts (Atom)
Posts
