2. Alcoa starts second-quarter earnings season with a bang
Like the dinner bell for to a hungry hound, the earnings report from Alcoa means the beginning of a glorious thing -- earnings season. The former Dow Jones Industrial Index member (till it got kicked out in ignominy like Brazil for losing) announced its second-quarter earnings on Tuesday with a refreshing helping of profits. Cost-cutting and selling more specialized alloys paid off for the American steel company, as profits jumped from negative-$119 million to positive-$138 million.

Lawsuits will get to you. But so does pre-lawyering up, which is what has destroyed Alcoa's profits the past three quarters. It's been on a cost-cutting binge and fired lots of people, which cost the company huge "restructuring costs" (paying people severance and pensions and whatnot so they don't sue), and a foreign subsidiary got the real thing with a major lawsuit payout. But that pain is all over, and now it's about profits (cue the blue steel look).

The takeaway is that this is what a restructuring is supposed to look like. When demand for steel declined and supply blew up, steel prices dropped and Alcoa suffered (more than just the tears of getting ousted from the prestigious 30-member Dow club last year). The stock price jumped 1.3% in after-market trading. Now ice up and get ready for bigger names to report later this week.

3. Small-biz "optimism" surprisingly slows
We love summer, but apparently the neighborhood bodega doesn't. That's because according to the poll by the National Federation of Independent Businesses, optimism among small business owners surprisingly dropped last month after three straight monthly gains.

The takeaway is that mom-'n'-pop shops are worried about whether the economic recovery can get back on track after winter weather slowed things down in the first quarter. But despite the "Debbie Downer" attitude, analysts point out that a growing number of small businesses are hiring.

As originally published on MarketSnacks.com

The Dow Jones Industrial Average broke a two-day losing streak on Wednesday, as investors expressed their relief with minutes from the Federal Reserve's most recent policy meeting. The head honchos at the central bank indicated that the monthly bond-buying program will likely end in October, bringing an end to the gradual "tapering" process that began late last year. The Fed also vowed to keep interest rates low for the time being, an outlook that helped send the Dow up 78 points, or 0.5%, to end at 16,985.

Walt Disney finished as the top performer in the Dow today, tacking on 1.6%. The global entertainment giant will begin selling its movies through Apple's iTunes in Japan once more, after briefly interrupting their availability due to a disagreement on terms. That's good news, of course, but Disney's reach in Japan is far wider than the iTunes store. It also earns regular royalties from the Disneyland in Tokyo, operates film studios in the country, and boasts several other lines of business. But Disney's Asian operations don't stop there; the company is constructing a theme park in Shanghai, further diversifying its global empire and showing its belief in Asia.

Shares of The Container Store , meanwhile, suffered through a miserable 8.4% plunge today after the retailer reported a surprising drop in same-store sales last quarter. It was the first such decline in more than four years for the company, which helped contribute to the stock's precipitous decline today. Also not helping matters was The Container Store's earnings guidance, which reduced full-year earnings per share forecasts from $0.56-$0.61 to the $0.49-$0.54 range. Motley Fool analyst Simon Erickson sees the core conflict at the company as a clash between culture and growth as the newly public Container Store adjusts to life under the quarterly scrutiny of Wall Street.

Image Source: American Airlines

Finally, American Airlines Group finished as one of today's big winners, tacking on 4.3%. American Airlines boosted its margin forecasts for the second quarter, an announcement investors cheered as they chose to ignore roughly $600 million in charges related to fuel hedging and bankruptcy reorganization. Other company trends looked promising, however; passenger traffic rose 1% last month, and passenger revenue per available seat mile, a widely watched metric in the industry, should rise about 6% in the second quarter by the company's projections.

Wednesday brought some relief to the selling pressure in the stock market from earlier this week, as favorable comments in the minutes of the Fed's latest Federal Open Market Committee meeting restored confidence that the central bank remains poised to help support the U.S. economic recovery if it begins to falter. Major-market benchmarks were up about half a percent on the day, with bond yields falling and gold prices on the rise. But some stocks nevertheless lost substantial amounts today, with Molycorp , Container Store Group , and Gigamon among those with the worst performance in Wednesday's trading session.

Source: Molycorp.

Molycorp plunged 17%, with the producer of rare-earth metals seeing speculative activity in the private-equity arena that could result in a bankruptcy filing for the company. Reports that a major private-equity player was buying up a large amount of Molycorp's convertible debt as a method toward a backdoor takeover of the company. Essentially, by using the bankruptcy code, bondholders would potentially be able to restructure Molycorp to make current shares of stock worthless, with highest-priority debt getting repaid in full and lower-priority debt being issued new shares of stock. With prices of rare-earth metals having been low for a long time, Molycorp is running out of option to keep creditors at bay.

Container Store fell 8% after the organizational-products and home-furnishings retailer reported weak quarterly results and gave poor future guidance last night. Same-store sales at Container Store dropped 0.8%, leading to a loss that was slightly worse than investors had expected to see. Yet the comment that got the most attention was that of CEO Kip Tindell, who characterized Container Store as being captured by a "retail funk" that had affected its competitors as well. As Container Store sees its traffic fall slightly, the takeaway for investors is that just because certain portions of the consumer economy might be doing well doesn't mean that things are well throughout the entire consumer sector.

Gigamon plummeted 32% in response to its preliminary second-quarter financial results. The enterprise networking company reduced its revenue expectations for the quarter by 10% to 20%, with Gigamon's CEO saying that it has taken the company longer to close sales deals as it faces more extensive requirements for customer review and approval of contracts. Despite adding 84 new customers during the quarter, Gigamon hasn't inspired much confidence among shareholders, with several analysts issuing downgrades and slashing price targets on the stock. Given how much demand there has been for network-related services and equipment recently, Gigamon's news is particularly bad for shareholders as they assess the company's future prospects.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some real estate investment trusts, or REITs, to your portfolio but don't have the time or expertise to hand-pick a few, the iShares US Real Estate ETF  could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in lots of REITs simultaneously.

Why this ETF, and why REITs?
Adding some exposure to your portfolio via real estate can really boost its diversification, but actually owning real estate can be costly and risky. So consider REITs instead. They trade like stocks and offer instant diversification and the ability to invest in a range of properties, such as residential, commercial, industrial, retail, and medical. Better still, REITs must pay out at least 90% of their income in the form of dividends, so they're good income-generators for a portfolio.

ETFs often sport lower expense ratios than their mutual fund cousins. This ETF is no exception, with an annual fee of 0.46%. It edged ahead of the world market over the past decade and topped it handily over the past five years. The ETF yields about 3.6%, too -- more than many of its peers.

A closer look at some components
On your own you might not have selected American Realty Capital Properties or Annaly Capital Management as REITs for your portfolio, but this ETF includes them among its 100 holdings.

The geographical diversification of American Realty Capital Properties. Source: arcpreit.com.

American Realty Capital Properties
American Realty Capital Properties, which went public less than three years ago, is the largest publicly traded "net lease" REIT (as measured by enterprise value) and one of the largest U.S. REITs. It focuses on single-tenant retail and office properties and, as a net-lease REIT, expects tenants to pay some (or all) of the expenses associated with the property, such as maintenance, taxes, utilities, and insurance. Its hefty 7.9% dividend yield attracts considerable interest, but there are some compelling reasons to think twice before investing in it.

For one thing, the company is growing briskly via acquisition, which is costing it a lot in debt and has also led the company to issue a lot of stock, diluting the value of existing shares. Then there are its earnings: It doesn't have any yet, and its free cash flow is negative, meaning it's burning cash. One of the company's most recent deals was spending $1.5 billion on 500 Red Lobster properties. There are favorable terms to the deal, but Red Lobster is not exactly flourishing.

It's not all bad, though. The company does sport 3,809 properties across the U.S. now, with a very high portfolio occupancy rate, above 99%. These properties are generating lease payments (many from big, well-known tenants), which makes for relatively reliable income. American Realty Capital Properties carries considerable debt, but it's mostly fixed-rate and low-interest.

There's growth potential here, but risk, too. Before investing, consider waiting for net gains instead of net losses and a slowdown or reversal of debt and share-count growth.

Annaly Capital Management
Annaly Capital Management, the largest mortgage REIT, or "mREIT," offers an even more gargantuan dividend yield -- 10.3%. Here, too, investors should proceed with caution, as steep dividends are sometimes too good to be true. Annaly's dividend has been cut before and may well be cut again. Like other mREITs, Annaly is vulnerable to interest rate increases, and with rates having been low for a long time, increases will come sooner or later. Still, Federal Reserve Chairwoman Janet Yellen expects that rates will not rise quickly anytime soon.

Meanwhile, those interested in Annaly can also take heart in knowing that insiders have been buying shares lately. Insider buying is rarely anything but a sign of confidence. The company has also taken steps to reduce its risk somewhat by decreasing its leverage and by acquiring commercial property specialist Crexus -- the commercial market is seen as more stable than the residential one. Annaly stock is trading at a lower valuation than many of its peers, too. 

All that might make the stock seem like a great income-generator for your portfolio. You might still want to steer clear, though, because of Annaly's management. The company has been criticized for its lavish executive compensation, and in response, it changed its structure so that it no longer discloses compensation levels. That's not very shareholder-friendly, and it's enough to keep me away.

Texas Instruments is a $52 billion semiconductor giant that has provided investors with slightly better than market returns over the past five years.

TXN data by YCharts

Texas Instruments' revenue growth, however, has pretty much stalled over the past few years.

TXN Revenue (TTM) data by YCharts

The company clearly needs to grow its top line, but where is it looking to for future growth?

Motley Fool analyst Rex Moore was able to put that question to Kent Novak, senior vice president of DLP Products at Texas Instruments, at the recent International CES in Las Vegas. In this video, Novak notes that Texas Instruments should see opportunities in two of the biggest new trends in technology: connected cars and the connected home. Both of these growth areas are key components of the emerging Internet of Things trend. 

Transcript:

Kent Novak, senior vice president of DLP Products, Texas Instruments: We've had a traditional focus on automotive. I think that's one of the emphasis areas you see here inside this area -- really a combined solution, which is our processor solutions for infotainment, our connectivity solution which ties all that together and which give the connected car access to the outside.

Then as we put that together with our display solutions so you can get a great-looking display or the right information presented at the right time. That's clearly been one of our pushes. You mentioned the Internet of Things ... having a connected or intelligent household, more intelligence inside other appliances, or the vehicle. That's going to become more and more important, and I think that fits very well into our very broad portfolio and what we can offer in that solution as well.

Source: General Motors.

General Motors has essentially been a black eye on the entire automotive industry this year. Its massive recall debacle involving faulty ignition switches led to tragic deaths and millions of recalled vehicles. In fact, it sadly wouldn't surprise me if General Motors held a fresh press conference saying it would recall every single vehicle it has ever made, just to be safe -- that's how bad the situation has become.

However, despite the massive number of recalls, sales of General Motors' vehicles have only driven higher. It should be insane to think that GM's tragic recall could be an advantage over any automaker, but no negative sales effect has yet to surface, so there's actually a silver lining for America's largest automaker.

How bad is it?
To put in context how bad General Motors' recall of epic proportions has been, consider these facts. With half of the calendar year remaining, the automotive industry in the United States has already recalled more vehicles than it has in any other year on record.

The National Highway Traffic Safety Administration reported that vehicle recalls in the U.S. have reached 37.5 million cars this year, far ahead of the record 30.8 million units in 2004. General Motors, by itself, accounts for roughly two-thirds of that total recall figure.

The 37.5 million vehicles recalled by automakers this year in the United States is roughly equal to the number of cars sold since the end of 2011; sales for 2012 and 2013 totaled 14.5 million and 15.6 million, respectively, while sales this year through June have reached 8.1 million. Put another way, those 37.5 million vehicles have been recalled at a pace of nearly 200,000 every single day this year, or more than 8,000 every single hour.

Despite the recalls, where the brunt of negative attention has been directed at General Motors -- and rightfully so -- sales of GM's vehicles have yet to hit as much as a speed bump. Two months ago, in May, General Motors posted its best monthly sales total since 2008, and June's sales were up 9% compared to last year, when adjusted for selling days. Overall, General Motors' sales are up 2.5% this year, despite all the negative attention.

With no consumer backlash in regard to sales, this actually presents General Motors a silver lining around the recall cloud. Every single one of General Motors more than 25 million vehicles recalled means a potential visit from the consumer to a GM dealership, as repairs for the ignition defect are free. That's essentially more than 25 million fresh opportunities to upsell consumers from an undesirable vehicle to a newer, and more profitable, vehicle.

Paul Stanford, president of Les Stanford Chevrolet-Cadillac in Dearborn, told the Detroit News just that in an interview in an interview Monday:

That is an opportunity ... How do you buy that? You really can't buy that. On the one hand, it's been a curse to us. On the other, it's been a blessing.

According to a GM spokesman, roughly 5,000 customers have opted for a $500 credit incentive for owners of recalled vehicles to switch to a new GM ride. That's merely 1.7% of the 296,000 vehicles that have been repaired by the last week of June; but consider what that means if the percentage holds true as the repair process goes on: 1.7% of more than 25 million vehicles is potentially 425,000 new sales. Put another way, those potential sales are the equivalent of 75% of General Motors' May and June sales combined.

Bottom line
General Motors' recall debacle has been tragic and a major black eye on the company, its investors, and the automotive industry; yet, the company has a ray of hope from incremental foot traffic in dealerships, and thus, a potential rise in sales through the back half of 2014.

The stock market reversed a two-day slide on Wednesday after minutes from the Federal Reserve's June policy meeting were released, reassuring investors that interest rates will remain low for some time. Following a stellar jobs report last week, Wall Street was fearful that the U.S. central bank might start raising rates sooner than previously expected. Although markets were generally bullish today, shares of Garmin , Kraft Foods , and Coach finished deeply in the red on Wednesday, even as the S&P 500 Index added 9 points, or 0.5%, to end at 1,972.

Garmin was by and large the S&P's worst performer today, shedding 4.6% after an analyst badmouthed the stock. Pacific Crest downgraded the stock to underperform from sector perform, citing stiff competition from the likes of GoPro and Apple products as the primary catalysts. From a consumer standpoint, Garmin's vulnerability here is old news, as sexier, sleeker, smaller products from stronger brands continue to win over the hearts of consumers. That said, Garmin's consumer-facing business isn't its focus, and its tools are still widely used in the automotive and aerospace industries.

Cool Whip is just one of the many fine brands under the Kraft umbrella. Image Source: Kraft Foods

Kraft Foods, of course, has no industrial presence to speak of -- its strengths lie solely and squarely within the consumer market. Shares lost 1.6% on Wednesday, in what was mostly attributable to the stock going "ex-dividend" today. Kraft Foods doles out its hefty 3.5% annual dividend in quarterly payments, which are given to every shareholder who holds the stock at the end of a given date. The day after that is considered the "ex-dividend" date, which exposes the stock to negative pressure as short-term investors sell shares but still ensure their next quarterly dividend payment.

Lastly, shares of the struggling luxury fashion retailer Coach fell 1.4% on Wednesday. Wall Street seemingly loathes this stock more and more by the day, and today's downgrade from Buckingham Research was no exception. Just as rival Michael Kors is heating up, Coach's business is stagnating, and the company said last month that it would be closing about 70 stores in North America alone as it attempts to become a leaner, more profitable outfit. That'll be tough to do with same-store sales plunging by double-digit percentages and Coach's brand strength in a time of crisis. Until Coach starts turning things around, it's difficult to justify a reason to believe in this company in either the long or short term.

One of the best ways to look for investment ideas is to look no further than your kitchen cabinet. You may notice cereal made by General Mills and gravy mixes made by McCormick .

However, it always pays to do your research to check out the fundamentals of the companies before investing. It's especially important to see if a company grows its revenue, net income, and free cash flow (the life blood of any business), and see if it can retain some of that cash on its balance sheet.

Let's take a look to see how these companies fare.

Source: Motley Fool Flickr 

General Mills faces domestic market saturation
General Mills sells branded foods to retailers, foodservice, and baking companies under names such as Chex cereal, Mountain High yogurt, and Grands biscuits.Looking at the long-term fundamentals over the past five years, General Mills would fall into the slow-growth category. The company grew its revenue, net income, and free cash flow 22%, 19%, and 23%, respectively. 

The underlying numbers point to market saturation on the domestic front -- most people in the United States are already in the habit of buying cereal, snacks, and yogurt. International expansion efforts served as the primary catalyst for top and bottom-line growth in this company over the past five years. Steady capital expenditures as a percentage of sales contributed to free cash flow growth.

How does General Mills look now?
Fiscal year 2014 did not deviate from this trend. Revenue in General Mill's international segment grew 3.6% contributing to overall revenue expansion of 0.8%. International revenue represented the only segment to grow its operating income in 2014.

Looking at General Mills balance sheet, cash to stockholders equity and long-term debt-to-equity ratios clocked in at 13% and 98%, respectively in 2014 . Investors should feel comfortable with cash to stockholder's equity of at least 10% or greater. However, interest from long-term debt chokes out profitability and cash flow over the long term, and General Mills' long-term debt to equity ratio resides in the high range. Investors should strive to look for companies with long-term debt to equity ratios of 50% or less.

The best way to gauge a company's dividend is to look at how much of its free cash flow is paid in dividends in a given year. Like long-term debt to equity, investors should look for companies with a dividend-to-free-cash-flow ratio of 50% or less keeping in mind that cash is needed for other things such as research and product innovation. Last year, General Mills paid out 52% of its free cash flow in dividends meaning that it just barely exceeds that threshold. Currently, General Mills pays its shareholders $1.64 per share per year translating into a 3% yield.

Source: Motley Fool Flickr by Chris Mali

What about McCormick?
McCormick sells spices, gravy mix, and food condiments made for the individual consumer and for the commercial industry such as restaurants.McCormick represents another slow grower. Its revenue, net income, and free cash flow only grew 29%, 29%, and 10%, respectively, over the past five years. Price increases and acquisitions contributed heavily to revenue increases in the past four of those years. 

McCormick's overall operating and net margins suffered over the past four years due to restructuring, marketing expense, and lower margins in emerging markets serving as a drag on net income. Cost savings initiatives helped to offset some of these increases in costs.  Like General Mills, McCormick's capital expenditures as a percentage of sales remained roughly the same contributing to the increase in free cash flow. 

McCormick's is having a decent year so far in 2014 with revenue, net income, and free cash flow all increasing 5%, 8%, and 35%, respectively. Margins also increased due to the cost savings initiatives. However, none of those gains came from product volume, which declined 2%. Expansion in revenue came from price increases and acquisitions. 

Looking at McCormick's most recent balance sheet, cash to stockholders equity and long-term debt to equity ratios clocked in at 4% and 51%, respectively, which means that McCormick is cash light and on par with its long-term debt. Last year McCormick paid out 49% of its free cash flow in dividends. Currently the company pays it shareholders $1.48 per share per year and yields 2% annually.

Looking ahead
General Mills needs to come up with new products to refuel growth on the domestic front. International expansion definitely needs to continue. General Mills trades at a forward price to earnings multiple of 17.4 bringing it on par with the S&P 500 forward P/E of 17.4. You shouldn't expect too much on the capital gains front, but it may be worth adding to an income-oriented retirement account.

McCormick faces "competitive pressure" on the domestic front according to its latest earnings call. These are words investors don't want to hear. McCormick confronted this pressure by trying to ship early, new product innovations, and keeping a strategic dialogue with customers. McCormick also trades at a higher forward P/E of 19.8 meaning it's more richly valued.Investors may want to play wait and see to see how things play out with domestic competition and continued expansion overseas.  

Source: Family Dollar

Family Dollar Stores will report its third-quarter results on Thurs., July 10 following a prominent investor's push for the company's sale. The company has lost much of the competitive advantage it gained during the recession and faces increased competition from Dollar General , Dollar Tree , and Wal-Mart .

Will Family Dollar's third quarter prove strong enough to get the company back on track?    

Estimates to beat 
Analysts estimate third-quarter revenue at $2.6 billion with $0.89 in earnings per share. Family Dollar hasn't beaten on either metric for the past five quarters, although it did meet expectations a few times. Family Dollar provided its own outlook during the last report, which included a low-single-digit drop in comparable-store sales and diluted EPS between $0.75-$0.85. 

Shrinking advantage
Family Dollar and the other low-cost stores thrived during the recessions when customers even had to pinch their purses with Wal-Mart's prices. However, their advantage has dwindled as the economy recovers, and Wal-Mart goes on the counterattack with lower prices meant to compete with all of the dollar stores except Dollar Tree -- the only one of the three that actually prices all of its products at one dollar.

Earlier this year Wal-Mart also announced plans to accelerate the openings of its small-format stores, which include the grocery-oriented Neighborhood Market and general-purpose Walmart Express stores. The company doubled the number of small-format stores it planned to open this year to 270 to 300. 

Family Dollar faces competition from both small-format stores. Neighborhood Market poses a threat because consumables remain Family Dollar's strongest growth segment and accounted for 71% of its overall revenue in the second quarter. Note that "strongest" is a relative term, since no segment showed positive growth last quarter but consumables was down the least with a 3.1% drop. 

Icahn's sale demand
Activist investor Carl Icahn wrote a letter last month to Family Dollar CEO Howard Levine in which he urged the immediate sale of the company. Icahn had owned a nearly 9.4% stake in Family Dollar mostly through options, but last week exercised the call to take ownership of those shares. Family Dollar issued a somewhat vague response to Icahn that expressed the company's willingness to explore any routes that could help strengthen its financials. 

Icahn's sale demand focuses more investor attention on the third-quarter earnings release -- particularly when it comes to comparisons to the prior year's quarter and the competition.   

Comparisons to beat
Family Dollar's prior-year quarter included $2.6 billion in revenue -- a 9% year-over-year increase -- and $1.05 in EPS. Comparable-store sales were up nearly 3%. The estimates from analysts and Family Dollar for this year's quarter both came in lower than last year's results. 

How does Family Dollar stack up to the competition?

Dollar General reported first-quarter results early last month in which it missed analyst estimates on both revenue and EPS with $4.5 billion and $0.72, respectively. Comps were up 1.5% and the year-over-year net sales gain was driven by nearly 8% growth in the ever-important consumables category.

Dollar Tree reported first-quarter results in May with an analyst-topping $2 billion in revenue and $0.67 in EPS. Comps were up 2%. Analyst estimates for the second quarter include $2 billion in revenue and $0.64 in EPS.

Foolish final thoughts 
Estimates from analysts and Family Dollar suggest that the third-quarter report will come in weak. The comps drop could pair up with a further drop in consumable sales to spell continued trouble for the business. Underperformance will only pour more fuel on Icahn's push for the company to sell. 

Microsoft  recently removed Kinect as a required accessory to its core Xbox One bundle, effectively backtracking on its previous insistence that the motion tracking device was an essential part of the experience of using the tech giant's latest video game console.

But the Fool's Steve Symington says in the following video that the move to finally promote the Kinect as an optional accessory isn't Microsoft's biggest blunder with the Xbox One so far. Instead, Steve says, Microsoft's most significant mistake was simply taking so long to do so.

The move makes sense considering that newly promoted Xbox head Phil Spencer recently insisted that gaming will be placed front and center for the Xbox One going forward. And the Xbox One's bread-and-butter hard-core gaming audience simply doesn't value the functionality of Kinect nearly as much as casual consumers do.

It didn't sit too well with gamers that Microsoft initially put gaming on the back burner in favor of promoting the $500 Xbox One bundle as a broader entertainment platform. Meanwhile, Sony opted from the very beginning to simply offer its competing Eye accessory as an add-on purchase, which meant the company could sell its PlayStation 4 for just $400. It should come as little surprise, then, that Sony has already sold an estimated 9 million PlayStation 4 consoles worldwide, compared to sales of just 5 million Microsoft Xbox One consoles. 

To hear more from Steve about what impact Microsoft's decision could have for the future of its Xbox One console, please watch the full video below.

Companies are usually wary of activist investors, but Manitowoc isn't complaining. In an announcement that sent Manitowoc shares soaring late last month, investment firm Relational Investors disclosed having purchased 8.5% stake in the company in a bid to push management to split it in two.

Instead of giving the activist investor a cold shoulder, Manitowoc acknowledged having had "several conversations with Relational Investors" and that it will "consider and review Relational Investors' suggestions." Well, then, Relational might have just sown the seeds of Manitowoc's split. But is the excitement among investors overdone?

Why Manitowoc may not want to split
The case for splitting Manitowoc is pretty strong. Its two businesses are poles apart in terms of product line and the industries they serve. Its crane business caters to the needs of the construction industry, while its foodservice products such as ice machines and fryers serve the needs of restaurants and supermarkets, among other institutions.

Manitowoc's fryers are a hit among food chains. Source: Manitowoc

There are apparently no synergies between the two businesses that would strongly justify running them under the same roof. Perhaps the major reason Manitowoc runs such diverse businesses is the varying degrees of their cyclicality, which has what I would term the "cancellation effect" on its overall performance.

While both businesses are cyclical, construction cyclicality is deeper and generally lasts longer. Moreover, while declining construction activity is a lead indicator of a downturn, slower consumer spending, which directly affects the restaurant industry, is usually part of the aftermath of a recession. So foodservice tends to be the more resilient one among Manitowoc's two businesses, which helps smooth out the imbalances in its performance in the longer run. For example, a stronger foodservice business has helped Manitowoc cancel out some of the weakness in crane sales in the past couple of quarters.

So does Relational Investors' logic make sense?
Manitowoc's diversity is bothering Relational Research, which believes that this unusual business combination is causing the company "to trade at a perpetual discount." Simply put, Relational believes that Manitowoc has remained undervalued because of its business structure.

Relational's argument may appear baseless if you compare the growth in Manitowoc's share price with its peers in recent years, especially after the run up in its shares over the past year. Consider the following chart.

MTW data by YCharts

Having returned 628% over the past five years, Manitowoc has handily outperformed its peer group. Foodservice competitor Middleby  was a strong contender until its shares lost ground following an all-time high this past February.

Comparatively, construction-equipment rivals Terex and Caterpillar  have hugely underperformed Manitowoc, each returning less than half the value over the five-year period. More importantly, the gap between Manitowoc and the two companies has widened substantially over the past year, indicating that the market may have factored in much of the value of its foodservice business.

But Relational goes a step further to justify its stand, and argues that Manitowoc trades at an EV/EBITDA multiple (the ratio determines how much a company's worth) that's more in line with its crane competitors and lags foodservice companies. In other words, Manitowoc's current valuation primarily reflects its crane business, and not its foodservice business. For perspective, Manitowoc sports an EV/EBITDA of 13.4 versus Caterpillar and Middleby, which trade at 11.3 and 17.4 times EV/EBITDA, respectively. 

According to Bloomberg, Manitowoc's foodservice business could have an implied enterprise value worth $3.9 billion based on 2014 industry EV/EBITDA estimates. That's well below Middleby's current enterprise value of $5.3 billion, even though Manitowoc is generating greater revenue from its foodservice business as compared with Middleby over the past 12 months. So on that count, Manitowoc does appear undervalued when compared with Middleby.

The interesting side of the story
Perhaps the disparity in the operational performance of its two businesses is one of the major reasons an investor would favor a Manitowoc split. Despite contributing little less than 40% to its total revenue, Manitowoc's foodservice business has been far more profitable than its cranes business. The following chart shows you how.

Data source: Manitowoc financials. Chart prepared by author

So while operating margins from its foodservice business tops 16%, Manitowoc's crane division is yet to hit the 10% mark.

Here's an interesting fact: Manitowoc's foodservice operating margin has improved 6 percentage points since 2008, when the company acquired food-equipment manufacturer Enodis. In contrast, its crane division margin has dropped nearly as much over the period.

So logically, a standalone foodservice company should enjoy a better valuation, as Relational Investors argues. At the same time, a separate crane company could pose a big challenge for Manitowoc, as it will have to battle out business cycles to maintain profitability. And that's exactly why Manitowoc may shun the idea of breaking up.

Limited upside?
One thing's certain: Relational Investors will not sit tight if Manitowoc chooses to ignore its recommendations. But Manitowoc can easily seek support in Wisconsin state laws, which give corporate boards an upper hand over activist investors. In fact, these laws could prove a major hurdle to Relational's campaign.

Even in an unlikely scenario where Manitowoc decides to split, it will be a long, drawn-out process. So there may not be much upside left in the stock, especially after its 11% jump since the news, as of this writing. I think the market may have overreacted to the possibility of a spinoff, and any fresh bets on the stock from here could turn risky.

It's been a rough ride for Pandora Media, . Shares of the streaming music provider have lost 30% of their value in just the past four months. The company has been under a barrage of criticism and bearish sentiment. As the critics contend, it's only a matter of time before technology giant Apple crushes Pandora. After all, Apple is a huge company with the financial wherewithal to do just about anything it wants. Apple has launched its own radio service, and combined with its high-profile takeover of Beats Electronics, Pandora is taking a lot of heat.

But Apple's iRadio service has been available for some time, and it's simply not been able to topple Pandora. It's true that Apple is likely gearing up for a major revamp of iRadio, but there's no guarantee it will tackle Pandora, which is a highly popular service. Even though Pandora shares are crumbing under the weight of constant attacks, it's growing like a weed and dominates the business.

Here's why rumors of Pandora's demise may be greatly exaggerated.

Pandora still leads the pack in streaming
Pandora's growth is actually accelerating, all while its stock price collapses. That's a curious situation that signifies to me the market is fully expecting Apple to eat Pandora's lunch. But that's far from a foregone conclusion. Until then, what's left is Pandora's tantalizing growth.

Pandora produced 69% revenue growth last quarter. This represents accelerating growth versus the prior quarter, in which revenue increased 52%. It's simply a mistake to think that Pandora is slowing down.

Importantly, Pandora is nailing it in mobile. Consumers are increasingly utilizing music on their phones and other mobile devices, and Pandora isn't getting left behind. Its mobile revenue now accounts for three-quarters of its total revenue, and its mobile business is gaining momentum. Revenue from mobile nearly doubled last quarter.

And, Pandora's loss is shrinking. Last quarter, the company lost $0.14 per share. This represented a huge 36% year-over-year improvement. Pandora lost $0.22 per share in the same quarter last year. Even better, Pandora expects to turn a profit this year. At the midpoint of its forecast, management projects $0.16 per share this year, up from its previous expectations. This would represent an important milestone and more than double the profit generated last year.

There's a great deal of hype surrounding Apple's $3 billion purchase of Beats Electronics. But while everyone is jumping to the conclusion that the deal is a Pandora killer, that seems far-fetched. If Apple wants to be taken seriously in streaming, acquiring Beats probably isn't going to do it. Beats' recently launched streaming service holds just 200,000 subscribers. Meanwhile, Pandora is still the leader with more than 75 million active listeners.

Apple can't crack Pandora's armor
Try as it may, Apple's iRadio isn't making a dent in Pandora's listener base. Those that use Pandora clearly enjoy the service, and Apple's iRadio has done virtually nothing so far. Of course, now that Beats co-founders Dr. Dre and Jimmy Iovine are in-house employees, it's likely that Apple will make another full-fledged assault on Pandora. But there's little that suggests Apple is about to take over the music streaming business.

Apple's iTunes is in trouble. The company generated 11% revenue growth from iTunes last quarter, but most of that was due to the App Store. Digging deeper reveals that sales of digital music from iTunes actually declined last quarter. As a result, it seems that Apple has a problem on its hands when it comes to music.

Some final Foolish thoughts
As analysts and the financial media obsess over Apple's highly publicized acquisition of Beats Electronics, Pandora investors have rushed for the exits. Shares of Pandora are down considerably from their 52-week highs, as a sense of panic ensues about the possibility of Apple taking over the music streaming business.

But based on everything available so far, there's little evidence of this. Apple's giant iTunes service is actually weakening, and its iRadio streaming service has done virtually nothing. It goes without saying Apple isn't going to just walk away. With Beats, Apple will likely try again to destroy Pandora. Meanwhile, Pandora simply continues to rack up additional users and generate impressive growth.

Akamai Technologies  and Level 3 Communications are both large providers of CDN services. These content delivery networks are widely used in technology and telecom, but as large companies like Apple and, now, Verizon Communications elect to build or acquire their own CDN networks, what does this mean for Akamai and Level 3?

The build-outs begin
Back in early 2014, Apple began the process of building its own CDN. In the past, Apple had used both Level 3 and Akamai for CDN services to deliver applications, services, and content to its users. However, as Apple's network has surpassed 700 million users and continues to grow, creating a proprietary CDN made sense as a way to protect margins long-term.

The other benefit of building, rather than renting, a network is full control. These CDNs are instrumental in how users experience Apple's ecosystem, and it makes sense for the company to seek full control of this power.

What happens to Akamai and Level 3?
The end result will be lost business for both Akamai and Level 3. The former is believed to be Apple's largest CDN client, with more than $100 million paid for services. Akamai has grown revenue at a 15.5% annualized rate over the last three years, as it still finds plenty of business with smaller up-and-coming technology companies in need of CDN services.

However, a $100 million loss would be equivalent to 15% of Akamai's 2013 revenue. In other words, losing too many of these large customers could essentially wipe out Akamai's growth.

As for Level 3, its $6.3 billion in 12-month revenue, and its diversified services, gives it a little more protection against this movement. Certainly, the company has high exposure to this enterprise space, but with more miles of fiber than any other company in the world, it is also a key provider of content delivery on many consumer services like Internet.

The acquisition approach
With that said, Akamai looks to be the real loser in the build-your-own-CDN movement within the enterprise space. Just last week, Verizon presented a new CDN service to improve content delivery in the e-commerce industry.

While Apple builds its own CDN platform, Verizon took the road of acquiring one of Akamai's top competitors, EdgeCast, for $350 million. Therefore, Akamai is not only losing a customer, but also gaining a competitor with this move.

Albeit, CDN services are unlikely to ever become a large piece of Verizon's fundamental pie. However, with telecom companies placing so much emphasis on broadband and increasing content speeds, it's no surprise the company wants full control of the delivery network.

Is Level 3 or Akamai still a good investment?
The bottom line is that it's hard to find a way Akamai comes out on top in this new CDN market long-term. The company may continue to perform short-term, but if it loses too many of its top clients, many of which could then become competitors, the company won't have a hedge for protection.

Level 3 is a much larger global company, and its fiber network is its hedge as these changes occur. Moreover, this fiber network, which includes 35,000 miles for Level 3 and 27,000 route miles for newly acquired TW Telecom (with much being in metropolitan areas), makes it nearly impossible for customers to build a better network.

Foolish thoughts
As a result, there is still a place in this market for Level 3, but Akamai might want to explore strategic options. Albeit, Akamai, at 22.2 times next year's earnings, is very much valued like a company with 15% annualized growth, but the reality is that this growth could be undercut very quickly.

On the other hand, Level 3 is focused on efficiency rather than growth, and with operating margins being half that of Akamai's, there could still be significant room to improve, thus creating shareholder value.

Regeneron Pharmaceuticals  made a big splash last year with a drug prospect it believes just might hit the root cause of several allergic diseases. Today, it's backing up that thesis with some new data showing that the drug might have a place treating one of the world's most common skin disorders.

Tarrytown, NY-based Regeneron and partner Sanofi today are releasing positive results from a mid-stage trial testing their antibody drug hopeful, dupilumab, in patients with moderate to severe forms of atopic dermatitis—a skin condition commonly called eczema, which is characterized by intensely itchy red, scaly skin lesions (results from some earlier trials are also being published today in the New England Journal of Medicine). The data continue to fuel support for dupilumab, which has already showed promise as a treatment for allergic asthma. The two companies expect to kick off late-stage studies in atopic dermatitis in the U.S. and Europe later this year, according to Gianluca Pirozzi, the global project head for dupilumab at Sanofi.

Dupilumab is designed to work by blocking the signaling of the cytokines interleukin 4 and interleukin 13. Cytokines are signaling molecules that aid cell to cell communication in immune responses and stimulate the movement of cells toward sites of inflammation, infection, and trauma. The big idea here is that IL-4 and IL-13 may be key drivers of, potentially, a variety of allergic diseases—like eczema, certain forms of asthma, and nasal polyposis—opening up what could be big returns for the two companies if the drug can continue to produce good results. Last year, Regeneron, which discovered dupliumab with its in-house antibody technology, supported that idea with a mid-stage study in allergic asthma—in the 104-patient study, the drug was able to largely keep patients' asthma from worsening, while improving their lung function.

Now, dupilumab appears to have potential in another market—atopic dermatitis. Pirozzi says that about 1 to 3 percent of the worldwide population has the disease, and roughly a third of those people have the moderate to severe forms of it. Patients are initially typically prescribed a variety of topical corticosteroid creams orphototherapy to control their eczema. While those treatments can be effective for many people, about 15 to 20 percent of those with more severe forms of the disease don't respond, according to Pirozzi. Those patients often have to turn to broad immunosuppressive treatments, such as cyclosporine—which can only be used for a short time because of safety risks (and when those drugs are removed, the lesions return). This is where Regeneron and Sanofi are hoping to position dupilumab.

"The advantage here is for the first time you have a drug that can not only effectively solve the disease, but also can be given for a sustained effect over time," Pirozzi says.

It's still early, but the two companies are taking a step toward proving that today. They enrolled 380 patients with eczema that couldn't be controlled by topical treatments and gave them either weekly, bi-weekly, or monthly injections of dupilumab at a high (300 mg), medium (200 mg), or low (100 mg) dose, or a placebo, and tracked their results for 16 weeks. The study's main goal was to significantly reduce patients' symptoms, as measured by a mean change on what's called theEczema Area and Severity Index (EASI)—a clinically validated, composite score used to measure the prevalence and severity of patients' eczema lesions—compared to placebo. Investigators also looked at whether dupilumab could help wipe out the lesions altogether, and if it helped alleviate itching.

Regeneron and Sanofi are saying today that dupilumab hit all of its marks, with the higher doses scoring better than the lower ones. Patients on weekly 300 mg doses of dupilumab, for instance, saw their EASI scores drop by 74 percent over the course of treatment; those on the lowest 100 mg, monthly dose saw their scores drop by 45 percent. By comparison, scores for patients getting the placebo treatment dropped by an average of 18 percent.

The two companies are also saying that between 12 and 33 percent of the patients treated with dupilumab had their lesions either completely or almost completely cleared, as measured by an investigator's global assessment (IGA) scale, compared to 2 percent of the patients in the placebo group (they didn't specify any further). On average, those patients started the trial with a 3.5 on the scale, which essentially means they had moderate or severe eczema lesions, according to Pirozzi.

"That's a pretty impressive result given that even cyclosporine in the short term barely reaches these levels," he says.

Regeneron and Sanofi also reported that patients taking dupilumab had anywhere from a 16.5 percent to 47 percent reduction in their itching, compared to 5 percent on average in placebo.

There is, of course, still a long way to the finish line for Regeneron and Sanofi. The two have to recreate these results in bigger, longer late-stage studies (likely at least a year long with more than 1,000 patients combined), and see them hold up, and also make sure no big safety issues crop up along the way—like serious infusion site reactions, always a potential problem with injectable biologic drugs. While infusion reactions, along with colds, were some of the most common side effects seen so far, Pirozzi says the majority of the reactions have been mild to moderate and tend to go away after a few hours. None were severe.

"That's something that we'll certainly monitor very closely," he says.

Pirozzi notes that the main goal of a Phase 3 study in Europe will be a mean change in EASI score while in the U.S., the primary endpoint will be a change in IGA. The secondary goal for both will be to reduce patients' itching. Pirozzi is confident dupilumab will make it through intact.

"Honestly I think the only thing that could be a problem would be an unexpected safety issue coming up in the Phase 3 that we haven't seen so far," he says.

Dupilumab is one of several drugs that are part of Regeneron's big partnership deal with Sanofi, which also includes two late-stage antibodies—cholesterol-lowering drug alirocumab, and rheumatoid arthritis prospect sarilumab—and a few other candidates in earlier testing. Regeneron gets $160 million in R&D funding per year through the collaboration and splits the profits from the drugs that come out of the deal with Sanofi 50/50 in the U.S., and on a sliding scale internationally.

Sanofi, meanwhile, has also been accumulating more and more shares in Regeneron over the years. Sanofi held about 16 percent of Regeneron in January; it now owns 22.5 percent of the stock, and is allowed to hold up to 30 percent. Sanofi has publicly shot down the prospect of a takeover several times, however.

This article originally appeared on Xconomy, along with:

• Houston's ChaiOne Sees a Role for the Internet of Things in Industry
• Madison's Tech Future: 5 Ways It Could Succeed, 5 Ways It Could Fail
• Regado Halts Big Heart Drug Trial, Shares Hammered

The Dow Jones Industrials bounced back from losses earlier in the week, as the release of the minutes from the latest Federal Reserve meeting prompted investors to become more confident that the five-year-old bull market could have further to run before tighter monetary policy takes away some of the tailwinds that have helped push the Dow higher. Yet today's gain of almost 79 points proved insufficient for the Dow to reclaim the 17,000 mark, and as arbitrary as that milestone might seem, the success of the bull market depends on the Dow climbing back above that hard-fought level without a lot of delay. Despite favorable performance from Dow components Disney and Nike today, the Dow's long spell without a major correction still looms on investor sentiment as shareholders try to position themselves for whatever may come for the rest of 2014.

Source: Disney.

Disney gained 1.6%, with the primary catalyst coming despite somewhat tepid analyst coverage from Barclays. The analyst gave the entertainment giant an equal-weight rating, with a price target that's more than $2 per share below where the stock currently trades. More importantly, Barclays believed that a couple of Disney's competitors in the media space deserved more favorable ratings, including network rival Fox. Disney has celebrated successes with its World Cup coverage and the ongoing prospects for blockbuster movie releases that could spur revenue increases across its multiple business lines. Yet the big question Disney faces is whether it will be able to release content directly to viewers, or whether it will have to go through intermediaries to deliver content that could take away some of Disney's profit potential.

Source: Nike.

Nike climbed 1.3%. The athletic shoe and apparel leader made a strategic move today that many are interpreting as marking a key turning point in the industry, as Nike chose not to go after a renewal of its sponsorship relationship with English Premier League club Manchester United. With its current deal expiring in 2015, Nike will reportedly give up the sponsorship opportunity to rival Adidas, with a future decade-long deal potentially costing Adidas as much as 750 million British pounds. Some argue that the decision seems out of place with Nike's emphasis on soccer recently, with Nike's pursuit of World Cup marketing victory having taken a big hit with Brazil's exit yesterday. Yet Manchester United has seen its fortunes weaken in the past year, and it's unclear whether Man U's historical value will bounce back as the departure of former manager Sir Alex Ferguson last year left the club faring poorly during the most recent season.

The 17,000 figure is an arbitrary one for the Dow, but it still has psychological importance. The Dow needs to get back above 17,000 in order to convince investors that the bull market still has legs.

Last month, Aereo and its subscribers were dealt a death blow by the Supreme Court. The streaming television service was found guilty of copyright infringement against broadcasters like CBS , Twenty-First Century Fox , Disney , and Comcast .

Many believed that the broadcasting companies filed suit to protect themselves against pay-TV operators that use tactics similar to those of Aereo to avoid high retransmission fees. Broadcasters have strategic measures they could take, however, to avoid such a fate.

The real reason why broadcasters shut down Aereo is because there's more money in it if they stream the video themselves.

TV -- now with 20% more ad revenue!
Chief Research Officer at CBS David Poltrack stated earlier this month that the broadcaster actually makes more money per viewer on streaming content than it does on traditional television. On average, the company makes 10%-20% more ad dollars per viewer on streaming content, and Poltrack expects that number to keep increasing.

Aereo brought more eyeballs to the broadcaster's shows, but those viewers technically still counted as traditional television viewers. Disney couldn't harness the power of the Internet to better target its ads to Aereo users like it can with the WatchABC app.

What's more, Aereo's DVR feature allowed subscribers to fast forward through ads altogether. The broadcasters' streams have compulsory ads regardless of whether they're live or time-shifted.

Broadcasters obviously have more to gain by offering more streaming content themselves rather than letting a company like Aereo do it for them. Nonetheless, they're remarkably hesitant to provide more access to their content. None of the major broadcasters offer live streams of their channels without a cable subscription.

No free TV!
Even though they can make more money on streaming audiences than broadcast audiences, the biggest reason why broadcasters are hesitant to offer streaming versions of their channels is because it weakens their positions with cable operators.

Presently, broadcasters are negotiating terms with pay-TV companies for over-the-top streaming. If anyone can already do that, what grounds do the broadcasters have to charge the cable companies for the privilege?

One operator has found a loophole that allows it to stream live broadcasts to its subscribers through a mechanism similar to that of Aereo. Fox is now taking steps to shut down that service after the ruling on the Aereo case.

Indeed, offering live streaming for free to anyone who wants it isn't a viable model for the broadcasters even if they make more ad revenue per viewer than they do on their free over-the-air broadcasts.

But what if they charged?
Aereo proved that people are willing to pay for better access to free over-the-air television. Tech-savvy cord cutters could hack together their own private cloud TV setups, but Aereo offered a convenience that people were willing to pay for.

The broadcasters can offer a similar convenience for a similar fee. Cable operators could receive a discount from the individual rate and include live streaming as part of their bundles. Everybody wins -- broadcasters get more money, consumers get more access, and cable companies get a better product.

Note that the only reason why this model works is because network broadcasts represent an anomaly in the unbundling problem. By their nature, over-the-air broadcasts can already be unbundled, and the people interested in such a product have probably already cut the cord. More importantly, networks make most of their money through advertising, so the premium for a-la-carte service over the bundle doesn't need to be too high.

Time to capitalize
The victory over Aereo was great for broadcasters, and the market rewarded them appropriately. Now it's time for them to capitalize on that and take more control of streaming television. They have an opportunity to significantly boost their revenues through better ad placement and additional fees on individuals and cable companies.

If they don't act, however, it's only a matter of time before consumers find a better alternative like they did with Aereo.

After two straight down days, stocks headed higher today as investors responded bullishly to the minutes of the last Federal Reserve meeting. The Dow Jones Industrial Average  finished up 79 points, or 0.5%, while the S&P 500 added on the same percentage, and the Nasdaq gained 0.6%. 

In minutes released from the Federal Open Market Committee meeting held June 17-18, the central bankers agreed that it was best to end the stimulus program, which they've been tapering since last December, in October. Oddly, investors had feared the start of the taper last year but now seem to welcome the closing of the bond-buying program as a sign the Fed believes the economy is on its way toward full health. In addition, the Fed also seemed to come to agreement on a plan to raise interest rates in the future, though there was little evidence that that decision would come any sooner than the middle of next year. Also, the central bankers seemed optimistic that economic growth would continue, saying that it expected real GDP to expand faster over the second half of the year and the next two years than it did last year.

After hours today, Potbelly Corporation  plummeted, falling 17% after the sandwich chain gave an underwhelming outlook in a preliminary second-quarter report. Potbelly said it expected revenue to grow 6.9% to $83.6 million, below estimates of $86.7 million, and it saw a 1.6% decline in company-operated same-store sales. On the bottom line, the fast-casual chain expected a profit of $0.06 per share, much worse than the consensus at $0.12. CEO Aylwin Lewis called the results "disappointing," noting in particular the drop in same-store results. The poor results led the company to lower its full-year EPS guidance from a range of $0.43 to $0.46 all the way to $0.18-$0.21. Analysts had expected a full-year profit of $0.34. Shares of the company, which made their debut in October, reached an all-time low on the report as earlier enthusiasm for the stock seems to have been misguided. Bullish investors may have pegged Potbelly as the next Chipotle, but with single-digit revenue growth and declining comps, it's hard to justify a P/E over 50 based on this year's updated EPS guidance.

Elsewhere, Lumber Liquidators  shares got taken to the woodshed again, falling 19% after the flooring specialist cut its outlook in a preliminary report. The company said sales increased just 2.3% to $263.1 million as comps tumbled by 7.1%. Profits, meanwhile, fell from $0.73 a share a year ago to $0.59-$0.61 as SG&A costs rose 9%. Both results badly missed estimates as analysts had expected sales of $303.2 million and EPS of $0.90. CEO Robert Lynch said that "customer traffic was significantly weaker than expected" and noted that existing home sales, one of the business' key drivers, are lower than they were a year ago. Operational problems also dented profits as the company ran out of inventory on certain key items and had production delays at some of its mills, resulting in an $18 million sales shortfall. For the full year, management reduced its sales guidance from a range of $1.15 billion to $1.2 billion to a new range of $1.05 billion to $1.1 billion and sees flat same-store sales and an EPS of $2.65-$3.00, down from $3.25-$3.60. Both sales and profit figures were well below analyst estimates. While the company said it's corrected the operational issues for the third quarter, lower home sales may continue to weigh on its performance, pushing shares further down .

The continuing growth of app stores is making it more and more difficult for a game developer to get noticed. In the console world, the big name developers automatically got shelf space at the major retailers, locking out a lot small developers. The mobile world leveled the playing field by making it cheaper and easier to have a game released to the user base of Apple and Google, yet the field is now so saturated that most games go unnoticed.

In steps the advantages of developing recognizable franchises similar to the paths of Glu Mobile and Zynga . In both cases, the game developers are expanding on existing franchises with refreshed games plus purchasing concepts developed by others possibly needing the distribution skills of these two firms. The key is to develop brand recognition that helps drive consistent game players while reducing the at-risk costs of developing brand new game concepts.

Massive app stores
The latest data indicates that the Apple app store has over 1 million apps for the iPhone and iPod and 500,000 for the iPad with a large amount of those listed under the games category. In Dec. alone, app sales surpassed $1 billion and exceeded $10 billion for this year. Even more importantly, these numbers only account for the largest app store and don't include Google Play and other various stores around the world.

It takes a lot to be noticed among the massive amount of games especially considering games out of nowhere such as Flappy Birds can obtain cult followings. The games lucky enough to attract a large following will make millions if not billions, but others will fade away without ever being noticed.

Strong release schedule
Glu Mobile has a solid release schedule starting in the third quarter and highlighted by hopeful mega hits in 2015. The lack of releases in the second quarter will hit revenue short-term, but the recent success of the Kim Kardashian games should shot third-quarter revenue substantially higher.

The big upcoming release is Dino Hunter: Deadly Shores that expands on the Deer Hunter platform and utilizes the engine for game play. A big key is whether the game attracts the same users or if it gets branded a duplicate. The game is targeted for launch in July and follows the releases of Kim Kardashian: Hollywood and Hercules that launched prior to the MGM movie release. As well, the company is making a move into social sports with a baseball title and the latest release of the Contract Killer franchise, Contract Killer 3.

The company targets two megahits for 2015 with the latest addition of the Deer Hunter franchise and a James Bond 007 game. Glu Mobile plans to spend more in order to advance the technology for these hits and hopefully expand the user base and more specifically the amount spent by game players.

Next steps
With some success of developing other titles on the cheap and advancing the concept, Glu Mobile made the purchase of PlayFirst. The game developer provides another set of franchise games for only $12 million equity and $3.5 million in assumed debt. PlayFirst owns the set of Dash games that include Diner Dash. Collectively, the games have been downloaded over 750 million times across multiple platforms providing some hope that Glu Mobile can turn this game set into a solid, repeatable franchise. By the way, the company has only reached 712 million cumulative installs for its games providing s solid example of the upside potential.

The company expects to release the first game in 2014 followed by a couple of launches during 2015.

Interestingly, Zynga is striking out to develop franchises that have repeatable revenue streams in a similar manner to Glu Mobile, but on a much larger scale. It decided to go more for a company with current large hits by obtaining Clumsy Ninja and CSR Racing with the purchase of NaturalMotion.

Bottom line
Glu Mobile continues to make huge progress in not only expanding existing franchises, but also developing new concepts and purchasing interesting brands. Along with Zynga, the management teams have identified the best investment exists around creating reliable hits instead of going for a grand slam game. With over 1 million apps on the Apple app store alone, it makes sense to focus on identified brands and continue making better and better iterations of existing games. Both stocks offer attractive valuations with better growth potential than most investors realize.

The initial public offering of King Digital Entertainment , famous for developing the Candy Crush mobile game series, was one of the most expected market events this year. The IPO, which had orders representing demand that approached ten times the amount of shares the company was selling, became the largest ever IPO for a mobile social gaming company, eclipsing Zynga's  2011 offering, and helped King to raise roughly $500 million through the sale of 22.2 million shares.

The concern that King's cash cow, Candy Crush Saga, was just a one-hit wonder appeared soon after the company went public. Many investors saw in King a perfect example of a tech bubble due to its relatively high market valuation. However, King may be more than a one-hit wonder. Why do King's shares continue rising?

Source: King Digital Entertainment

Not a one-hit wonder
The mobile social gaming industry is usually regarded as a hit-or-miss business. For example, Zynga became famous as a company after the release of FarmVille in 2009. With more than 88 million active users at its popularity peak, FarmVille became the most popular title on Facebook, bringing millions of dollars in revenue to the social gaming company.

Unfortunately, Zynga was not able to replicate FarmVille's success. To make matters worse, the Facebook platform for games started experiencing a considerable decline in popularity after 2010, as gamers shifted to smartphones. By 2012, FarmVille was ranked as the seventh most popular game on Facebook. By 2014, its rank had fallen to the forty-fourth place.

Is King the next Zynga?
Investors worry that King may become the next Zynga, because most of King's revenue comes from Candy Crush Saga. By the time King went public, the game accounted for 78% of the company's gross revenue. Fears that Candy Crush Saga may end up like Zynga's FarmVille probably caused King's shares to tumble 16% in the company's first trading day. 

However, although both companies are in the gaming development business, there are several differences between King and Zynga that need to be taken into consideration.

To begin with, King has generated positive cash flow from its operations for each of the past nine years. It is also more efficient than Zynga, as it generated twice the amount of revenues last year, with only one third the amount of staff as its rival. And finally, King uses a special production development method, the "fail cheap and fast" method.

Fail cheap and fast
King is consistently profitable because it is able to consistently develop new hits. According to King's co-founder Sebastian Knutsson, the secret to develop hits is simple: make simple and fast games, then distribute them to gamers around the world to determine if they are hits or duds. Duds are removed quickly, while potential hits are able to get more resources.

In other words, instead of committing a huge budget in a blockbuster development that can take years, King uses three-person development teams to create simple, single-level games in about three weeks. These games are then published on royalgames.com, a web-based tournament game site. If the game becomes popular on royalgames.com, King will allocate more developers and resources. In this way, only games that have been popular on royalgames.com are allowed to have Facebook and mobile versions. 

King's product development method of "fail cheap and fast" appears to be working. The company is able to avoid huge costs and keep its R&D expenses at only 6% of sales. It is also able to release more games, and maximize the probability of each title becoming a hit.

King became the first and only company ever to have three games in the top 10 grossing on Google Play in the US in Jan. 2014. And King's latest hit, Farm Heroes Saga, has been one of the top 10 grossing games on Google Play every month. Therefore, it shouldn't be surprising to know that King's stock is finally trading above its IPO price, after three months of being public.

Source: El Pollo Loco.

El Pollo Loco describes itself as "a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken in front of our customers" while also serving burritos, tacos, and the usual.  On June 24, the restaurant chain filed a registration statement with the intent of going public. The filing includes a host of information. While El Pollo Loco's fundamentals and stock could possibly resemble that of Chipotle Mexican Grill , make no mistake about it -- the two companies differ greatly and do not compete as directly as you might think. 

Hot off the grill
Chipotle Mexican Grill is fast-casual while El Pollo Loco wants to be known as fast-casual quality but at quick-service pace.  Both have Mexican themes, but one of the most headline-grabbing things about Chipotle Mexican Grill is its ever-exploding same-store sales. Same-store sales are a key metric to watch over time to measure a brand's growing popularity.

Last quarter, Chipotle Mexican Grill grew same-store sales by 13.4%. This is on top of full-year same-store sales growth of 5.6% for 2013 and 7.1% for 2012.

While Chipotle Mexican Grill's numbers have been impressive, El Pollo Loco has been no slouch either. In fact, as you'll see in the chart below, El Pollo Loco's same-store sales growth rate surpassed that of Chipotle Mexican Grill in 2012 and 2013. And it's not working from a small number either.

Same-store sales growth by quarter. Source:  El Pollo Loco.

Last year, the average El Pollo Loco did around $1.8 million in sales, which is a little bit below Chipotle Mexican Grill at $2.17 million, but still within the same league. Unit sales of $1.8 million happens to be a hair higher than what Chipotle Mexican Grill did just four years prior in 2009, so don't be surprised if El Pollo Loco catches up.

How the two part ways and don't compete head-on
First, just because two restaurants have Mexican themes doesn't make them identical just as Taco Bell is much different than Chipotle Mexican Grill. In fact, El Pollo Loco is may be even more different than Chipotle than Taco Bell is. El Pollo Loco serves fire-grilled chicken first and foremost, which makes it more like a grilled version of KFC. On that note, El Pollo Loco, despite potentially higher quality than typical fast food, really fast food and not fast-casual like Chipotle Mexican Grill.

Source: El Pollo Loco

El Pollo Loco mentions in its filing that the definition of fast-casual, according to Technomic, is "a limited or self-service format with average check sizes of $8.00-$12.00 that offers food prepared to order within a generally more upscale and developed establishment." With an average check size of $9, that fits Chipotle Mexican Grill. The $5.83 average for El Pollo Loco fits fast food, which is defined as within the $3 to $8 range. El Pollo Loco is smack in the middle..

Then there is the food. While Chipotle Mexican Grill has nearly 100% Mexican food, El Pollo Loco attributes only around 53% of its sales to its Mexican entrees, with the remaining 47% coming from its bone-in chicken meals. That said, El Pollo Loco believes the rapid overall growth in traffic it has seen in the last few years resulted from the success of chains like Chipotle Mexican Grill, as this has produced more broad-based acceptance of Mexican food in general. 

Finally, while one of Chipotle Mexican Grill's top selling points is the "Food With Integrity" motto that includes sourcing ingredients locally from animals treated humanely along with sourcing non-GMO, non-antibiotics, and fresh. El Pollo Loco only goes the freshly made route. It tries to sound like Chipotle Mexican Grill by saying "food that is minimally processed and maintains its integrity," but that is apparently intentionally vague.

Concentration of El Pollo Loco restaurants. Source: El Pollo Loco.

Foolish final thoughts
It's good news for future El Pollo Loco investors that these restaurant chains differ so much, because who wants to make an investment in a company that needs to take on Chipotle Mexican Grill? El Pollo Loco has an interesting niche. It states, "There are no significant direct competitors with respect to menus that feature marinated, fire-grilled chicken."  While El Pollo Loco still competes with other chicken chains indirectly, it has something quite unique.

El Pollo Loco is no Chipotle Mexican Grill in terms of the type and style of its restaurants, but the opportunity for the company could be just as big or bigger. It has around 400 restaurants that are growing fast, but as you can see from the map, most of them are concentrated in a very small geographic area, which leaves the rest of the country wide open. It will be an interesting story to watch in the years ahead, one that Fools should keep a close eye on.