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Can Ello Become the Anti-Facebook?

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Facebook so thoroughly dominates social media that its nearest competitor, Twitter , produced $7.2  billion less revenue than Mark Zuckerberg's brainchild did in 2013. 

With over $7.8 billion in 2013 revenue, as well as 757 million daily active users and 1.2 billion monthly active users, Facebook so thoroughly dominates Twitter that if it's Coke, its rival isn't Pepsi, it's homemade bathtub cola. Compared to Facebook's numbers Twitter's $664 million in 2013 revenue and 241 million monthly active users seem cute -- like a Little League player showing Barry Bonds a video of an infield single.


Facebook has grown so big that it's no longer a question of if you want to be there, you pretty much have to be there. You may not like it, but the social media giant is where babies, weddings, and oddly enough, deaths get announced, where reunions are planned, and where everyone from your boss, to your mom, to your high school sweetheart expects you to be.

By sheer user volume Facebook has become hard to compete with. This has allowed the company to essentially do whatever it wants whether its users like it or not. That has led to a social media site crammed with ads, which has turned off many users who stay because anyplace else they could go would leave them in the online equivalent of a ghost town.

There have been some niche social media successes -- LinkedIn has carved out a space for job-seekers and career-related networking -- but attempting to take on Facebook would be like Fiji invading the United States. We might not notice at at all, and if we did, we'd have to get the Army to stop laughing before it sent a few people armed with rubber bullets to rebuff the attack.

Still, giants can be toppled and social media audiences have been transient -- as any veteran of MySpace or Friendster can tell you. That's why Ello -- a very simple, stripped down social media network that has been gaining traction -- may have a chance.

What is Ello?
Ello is a Facebook-like site with no ads and whole lot less clutter. Members get to invite five friends to join, which is how I became a member (though I have not used the site other than to test it for this article). When I joined, Ello, greeted me with the following text.

Hi @dankline. Welcome to Ello, a simple, beautiful & ad-free social network.

Ello's minimal design puts emphasis on high-quality content, and makes it easy to connect with the people you really care about. Ello does not allow paid ads, and will never sell user data to third parties.

The site has two categories -- "friends" and "noise" -- where you can follow people you know or set aside content you like from people you don't. Ello is still in beta, which explains some missing or coming soon features, but it looks sleek, and some of the "noise" content was interesting.

Its founder, Paul Budnitz, explained his vision in an email to TechCrunch

Most of the excitement we're experiencing comes from a combination of Ello's simple & elegant interface, and the fact that the network will never have ads. Without ads, we are free to design features for users first, without advertisers in mind. We also don't sell data, and even offer our users the option to opt-out of analytic tracking of their sessions when they use the network.

A screenshot from Ello. Source: author 

Ello has a long way to go
Not being Facebook will only get you so far. Ello's biggest challenge is that even if it manages to sign up the tens, if not hundreds of millions of users it needs, it has to worm its way into the collective consciousness and become something people check multiple times daily. More importantly, Ello needs an interface that's intuitive and its current design is most certainly not. It's easy to post on Ello, but finding friends and searching for specific content is not. By launching as an unpolished beta, Ello may blow its goodwill.

People may have their problems with Facebook, but they know how to use it. It's one thing to get people to sample Ello and a much bigger thing to get them to integrate into their lives.  

Blowback is inevitable
Marketing your company as the good guy, the business that only cares about customers not dollars, means walking a very narrow tightrope. Since Ello is not a nonprofit, no matter how good its intentions are, it eventually has to monetize, and even that vague future promise has already turned off one major supporter. Aral Balkan, an author and designer, was approached by Budnitz in May to advise the Ello team. He participated in a few Skype calls, but has since posted an online rant about the site saying he was "leaving you for your own good."  

Balkan left because he is upset that Ello took that $435,000 in seed funding from FreshTracks Capital. His logic is that venture capital means needing an exit strategy, which means having to value profit over people. Never mind that Ello has not done anything to compromise is no ads, pro-privacy mission, but it might have to because it took money, so Balkan is out.

That is exactly the type of backlash that's to be expected when a company bills itself as holier than thou.

It's not going to work
Though Ello has created a bit of a buzz, Facebook has little to fear for the moment. Ello can't be a Facebook alternative for the masses because it can't pull enough people in fast enough. Where it can succeed is the niches and areas where Facebook fails.

The social media leader, for example, requires people to use their real names in their profiles, which has alienated the small but active drag queen community. These individuals use alternate personas and the most prominent drag queen, RuPaul, has spoken out against Facebook and touted Ello as an alternative.  

Facebook itself did not start as the behemoth it is today. It grew from one college campus and slowly morphed into a broad interest platform. For Ello to work it needs to downscale its ambitions and target communities disenfranchised by Facebook. To truly disrupt Facebook, Ello will have to operate in the margins and grow slowly, otherwise it risks being yet another fad that went viral then disappeared.

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The article Can Ello Become the Anti-Facebook? originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Facebook, LinkedIn, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

 

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Want to Know Where Wal-Mart's Investing Billions of Dollars?

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American retail giant Wal-Mart has been investing heavily to expand and keep pace with the changing dynamics of the market. The big-box retailer's annual capital expenditure has consistently been north of $12 billion in the past decade, with the exception of 2009 when it was $11.5 billion.

For investors, it could mean an enormous figure eating into the company's cash flow, and naturally they might be curious to know where all that money is going. Let's take a deep dive to see whether Wal-Mart's huge capital investments are necessary to spur growth and enhance shareholder returns.


In $billion, chart by author, Source: Morningstar


Peer comparison
In the last 10 years, Wal-Mart has controlled its capex, scaling it down from over 4% of sales in the prerecession period to less than 3% in the last couple of years. Costco Wholesale invests a lower proportion of its sales on capex than Wal-Mart. But this is to be expected because Costco is a warehouse club and needs to spend minimally on things like decor and attractive store layout. In comparison, other than Sam's Club, which has a business model similar to Costco's, Wal-Mart has to invest more on design and décor of its various other store formats.

Bringing into the picture Target's capital spending, we find that Wal-Mart has been more prudent than Target. Though the latter has also lowered spending in the post-2008 scenario, Target's capital budget is nearly 5% of its revenue because of ongoing expansion in Canada. So, Wal-Mart's spending appears reasonably balanced considering its scale of operations, but we need to see whether it's investing the money in profitable avenues.


Chart by author, Source: Morningstar (Wal-Mart and Target have their fiscal years ending in January, while Costco's ends in August)

Investing for future growth
Wal-Mart expects the capex for its current fiscal year, ending Jan. 31, 2015, to be in the range of $12.4 billion to $13.4 billion. This is $600 million more than what the company had forecast for the year back in October 2013.

It plans to invest more in U.S. operations than envisaged earlier. Wal-Mart will exhaust more than half of its capital budget on Wal-Mart U.S., around 33% on Wal-Mart International, and around 8% each on Sam's Club, and Corporate & Support. New investments will be centered around increasing small format stores in the U.S., international expansion, and e-commerce.


Source: Wal-Mart

Neighborhood Markets and Express stores: The reason behind Wal-Mart's stepped up capital spending in the U.S. is the fast expanding dollar store chains that are eating into the retail giant's market share by drawing its low-end customers. It needs to win over consumers preferring to visit local groceries, dollar stores and neighborhood pharmacies. Presently, Wal-Mart has two small-store concepts: Express stores and Neighborhood Markets. It plans to open 90 to 100 Express stores and about 180 to 200 Neighborhood Markets in the U.S. this fiscal year. 


Source: Wal-Mart

Expanding global operations: With flat same-store sales in the U.S., strengthening international operations has become crucial. Wal-Mart entered the global market in 1991 and currently operates more than 6,100 stores in 26 countries.Its international efforts have reaped results as sales moved up 3.1% to $33.9 billion and operating income grew 8% to $1.4 billion in the second quarter, ended July.

To continue the growth momentum Wal-Mart's kept a $1 billion capital budget for its largest market, Mexico (2,300 stores), which will see 149 new stores this year. There will be more investments in China and India especially with focus on e-commerce. Notably, Yihaodian, Wal-mart's e-commerce grocer platform in China, is recording triple-digit growth. In Canada, Wal-Mart is stressing home and apparel as the grocery market is highly competitive and has become tougher with Target's entry.

Enhancing global e-commerce capability: Increasing its e-commerce reach is one of the Wal-Mart's biggest challenges. Wal-Mart has e-commerce websites in 11 countries and has acquired 14 companies in the last three years. Bloomberg reports that the pace of acquisition is going to increase. In fiscal year 2014, nearly 20% of Wal-Mart's total capex or around $2.5 billion went in e-commerce initiatives.

The company's built a recommendation engine for improving personalized searches, enhanced the experience of mobile shopping, widened the global technology platform, and broadened the assortment of merchandise on Wal-Mart websites. Thanks to these programs the retail giant's global e-commerce sales jumped 24% in the second quarter with phenomenal growth seen in China, Brazil, U.K., and the U.S. In future, the company plans for a better checkout procedure and is also developing a new e-commerce fulfillment center in Indiana.


One of the online fulfillment centers of Wal-Mart. Source: Wal-Mart

What's in it for investors
So, Wal-Mart is putting billions in strategic growth avenues, but the final test lies in assessing whether these investments are creating value for investors. Return on invested capital (ROIC), which measures how well a company utilizes the capital invested in the business, is a relevant metric to assess these strategic plans.

Wal-Mart has consistently generated double digit returns in the last 10 years. In comparison, its weighted average cost of capital, using the last three years' data, is around 5.2%. The wide spread between the two indicates that Wal-Mart is utilizing its capex dollars profitably and maximizing shareholder returns.


Chart by author, Source: Morningstar

Foolish thoughts
Wal-Mart's spending is in line with the industry trends and commensurate with its size and operations. Investors can take heart from the fact that the company is spending its capex dollars profitably and fortifying its future growth prospects.

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The article Want to Know Where Wal-Mart's Investing Billions of Dollars? originally appeared on Fool.com.

ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

 

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Are Video Game Movies a Golden Opportunity for Sony, Microsoft, and Nintendo?

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Adaptation is big business in the film industry. Movies based on comic book properties have shaped the box office over the past decade, and Disney alone since 2008 has generated more than $7 billion in global ticket sales with films in its Marvel Cinematic Universe. If that's not a convincing argument for the financial benefits of familiarity, consider that seven of the top 10 highest-grossing films in history trace their roots to storytelling mediums other than the silver screen. One of the films not to fall into that category is Titanic, with Avatar and Frozen standing as the only other entries in this upper echelon not to have a basis in another medium or historical event.

Take the proven track record of success with adaptations and the fact that video games have never been bigger or more culturally relevant, and it's no surprise that studios are hoping to bring popular gaming properties to the cinema. Previous attempts have mostly fallen short of blockbuster status, but the coming wave of game-to-film projects suggests studios are confident there will be a bigger audience this time around. What do such projects mean for platform holders such as Sony , Microsoft , and Nintendo ? Let's take a look.

Sony bets big on video game movies
Of the three console manufacturers, Sony looks to be banking most heavily on converting successful gaming series to blockbuster films. This isn't surprising, as it is the only one of the three to have a film business, but a new batch of game movies might also be a sign of shifting strategies within the company. Sony's recent $1.7 billion writedown, and subsequent stock collapse, developed from weakness in its mobile unit, which had previously been touted by President Kazuo Hirai as one of the company's chief avenues to success. A smartphone business that looks increasingly inept puts added pressure on the company to rely on, and grow, its media businesses. At the same time, Sony's Amazing Spider-Man 2 did not live up to studio expectations and failed to match the earnings of its predecessor, a major stumble because "Spider-Man" is the company's most important film property.


An adaptation of the popular Uncharted series from premier Sony first-party developer Naughty Dog is scheduled to hit theaters in June 2016, replacing Amazing Spider-Man 3 after the Spider-sequel was delayed to a 2018 release. A film based on Sony and Naughty Dog's The Last of Us is also in development at the company's Screen Gems studio, and a movie based on the console maker's Ratchet and Clank series should bow in 2015. Sony's ability to find cross-medium success reminiscent of what Disney has accomplished looks increasingly crucial to its future.

Do Microsoft and Nintendo aspire to be movie stars?
Compared to Sony, Microsoft and Nintendo look to be taking slower, possibly more cautious approaches to the silver screen. Microsoft's $2.5 billion acquisition of Minecraft and its developer, Mojang, now finds the company very interested in the reception of Time Warner's live-action film based on the game, but the closing of Xbox Entertainment Studios and production of a Halo digital series after years of rumors about a big-screen effort indicate the company is still trying to find the right way to maximize the value that its properties add to its businesses.

Meanwhile, Nintendo is seemingly taking hesitant steps forward in using its characters in other mediums that could portend big things for the company. Legendary game developer Shigeru Miyamoto is reportedly set to debut a series of short films based on the company's Pikmin game series at the Tokyo International Film Festival later this month. Miyamoto has also expressed interest in attempting to fundamentally change the movie watching experience, perhaps by incorporating viewers' 3DS consoles to make it more intereactive.. As the company's hardware business continues to look vulnerable, Nintendo aims to redefine its offerings while still retaining its core elements. Bringing its characters to new mediums is likely necessary for its long-term success.

Is it reasonable to expect gaming properties to deliver superhero-like performances?
Sony, Microsoft, and Nintendo aren't the only gaming industry players interested in big-screen performance, as publishers Activision Blizzard and Ubisoft are also involved in delivering movie versions of some of their biggest properties. The number of game-based films in development suggests an optimism that deserves some cautious evaluation. Big-budget attempts to transition hit properties to new mediums aren't without risk, and the desired synergistic benefits must be considered alongside the possibility that new ventures will damage the core property.

There are also strong reasons to doubt whether video games are a good basis for blockbuster films. Having compelling characters is a big part of success at the box office, and what makes characters and experiences engaging is not wholly congruous across narrative and game-centric mediums. This is part of the reason Nintendo has historically been cautious about bringing its characters to the movies. It also helps to explain why Disney's Wreck-It Ralph is the top-grossing "video game" movie to date. Wreck-It Ralph is set in the video game world and includes cameos from notable real-world gaming characters, but its star is an original character written and designed for the silver screen.

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The article Are Video Game Movies a Golden Opportunity for Sony, Microsoft, and Nintendo? originally appeared on Fool.com.

Keith Noonan owns shares of Activision Blizzard. The Motley Fool recommends Activision Blizzard and Walt Disney. The Motley Fool owns shares of Activision Blizzard, Microsoft, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

 

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3 Reasons PepsiCo, Inc. Stock May Rise

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Investors in PepsiCo,  especially those fond of reinvesting dividends, should have few complaints about the consumer goods multinational so far in 2014. The company's stock performance is outpacing giant snack food peers like Mondelez International, as well as beverage arch-rival Coca-Cola, while also floating well above the broader market in a year-to-date, total-return comparison:

PEP Total Return Price Chart

PEP Total Return Price data by YCharts.


Is PepsiCo's stock ready to return to the middling performance of its peers, or will it continue to climb in the near future? Below, we'll discuss three reasons which support the possibility of further appreciation.

1) Challenging Peltz's principles
For much of this year, PepsiCo has operated looking over its shoulder at hedge-fund operator Trian Partners and its CEO, Nelson Peltz. Through Trian Fund Management, L.P., Trian Partners owns a $1.2 billion stake in PepsiCo, and has advocated splitting up the snacks and beverages businesses, most notably in a detailed white paper issued earlier this year.

Trian Partners argues that each business would be more profitable, and thus of more value to shareholders, if operated separately. Peltz believes that the snack business, which includes multiple billion-dollar brands in its Frito Lay and Quaker Oats segments, would benefit from a spinoff and subsequent merger with snacks behemoth Mondelez. 

Trian has made a cogent case that PepsiCo's before-advertising earnings before interest and taxes, or EBIT, margin has lagged that of its peers in recent years. The hedge fund blames this on the inefficiency of two very different types of businesses housed under one roof. PepsiCo management, unsurprisingly, sees the current model very differently, and frequently points to its "Power of One" concept, which originally described the benefits of cross-selling its snack and drink products in retail venues, but now appears to apply to the company's operational model, as well.

In 2014, the company has managed to grow organic revenue by 4%, not an easy number in the current global economy. It's doing so through the "Power of One" idea as originally formulated: pairing and cross-selling snacks and drinks.

The summer launch of two complementary products created for the 7-Eleven Chain, the "Doritos Loaded" snack and a drink named "Solar Flare," is emblematic of this strategy. The products will be marketed together, pushing up potential co-purchases. Similarly, the company has seen a 21% increase in co-purchase transactions within Dollar General stores due to its "Doritos and Dew" promotion. Through its NFL advertising program, PepsiCo promotes "Pepsi and Tostitos." These pairings are more than just cute mashups created to satisfy refreshment cravings; they're at the center of PepsiCo's revenue and profit mixes:

Image: PepsiCo 2013 Annual 10-K SEC filing.

Take a look at the blue wedges in each chart: the acronyms PAB and FLNA represent "PepsiCo Americas Beverages" and "Frito-Lay North America," respectively. PepsiCo's greatest concentration of revenues and profits lies in North American Frito-Lay snacks and North and South American beverages. Thus, the "Power of One" cross-selling of salty snack and liquid refreshment combinations here in the Americas is a core strength of the company's business model, and fertile ground for future growth.

2) Counter-intuitive revenue strategies
Runaway inflation in Venezuela and Argentina has many consumer goods multinationals seeking to limit their exposure in these countries. Last year, PepsiCo took a $111 million writedown to revalue its assets due to the depreciation of the Venezuelan bolivar. You would think this might cause PepsiCo to scale back its ambitions in Latin America, at least in those countries with hyper-inflationary environments.

On the contrary, PepsiCo continues to sell into these economies, where it has appreciable market share. During the company's most recent earnings call, CFO Hugh Johnston described the company's strategy, which is essentially to match pricing to inflation, thus somewhat limiting the foreign exchange impact. In the last quarter, both snacks and drinks in Venezuela grew by "strong double digits," according to CEO Indra Nooyi.

Also, it helps to take last year's charge against earnings into context: Venezuela accounts for roughly 1% of net revenue and 2% of PepsiCo's operating profit. This translates into approximately $660 million in annual revenue, and $194 million in profit. Long term, especially if the company can "take pricing," the $111 million charge to revalue assets within Venezuela can be chalked up to the cost of doing business.

3) A breakup may be inevitable
While PepsiCo has steadfastly defended its "Power of One" metaphor, and despite the retail success discussed above, shareholders may expect that "one" will be divisible in the near future. Management asserts that breaking up the company would result in $800 million to $1.0 billion in dis-synergies -- new expenses incurred from the breaking up of shared operating costs -- if the snacks and beverage businesses eventually part ways. 

Yet, Trian Partners points to PepsiCo's $1.45 billion of unallocated overhead in 2013 as a partial answer to the question of dis-synergy. Outside of a few small items, such as accounting for investment gains and losses and the Venezuelan currency devaluation charge, "unallocated overhead" represents costs that can't be apportioned to any of PepsiCo's six reportable segments.

Trian Partners sees this as an inefficient use of resources; but since Pepsi lumps $1.25 billion of this total into a category called "Other," no outside investor can say whether the costs represent value-added corporate functions, or corporate bloat and duplicated functions. As an example, we know that PepsiCo's R&D budget is contained within the unallocated overhead line item; but Trian rightly questions why R&D costs don't rest directly within business divisions. It does seem inefficient for research and development to be funneled through corporate office decision makers, rather than being directly expensed at the divisional level.

Whether one agrees or disagrees with the Trian thesis, it seems apparent that some of PepsiCo's 2014 rise is owed to shareholders betting that the company will eventually undergo some type of restructuring. Moving forward, this may be the most prominent reason driving buying interest in PepsiCo in the near term.

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The article 3 Reasons PepsiCo, Inc. Stock May Rise originally appeared on Fool.com.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

 

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3 Reasons McDonald's Should Raise Its Wages Before the U.S. Government Does

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The latest pressure to raise employee wages arrives at an inopportune time for McDonald's  and its legion of franchisees. Fast-casual chains like Chipotle Mexican Grill are increasingly threatening the company's business, and all is not well within the kingdom of the Golden Arches. Relations are tense between the corporate base and its independently owned restaurants, with franchisees dissatisfied by low margins on an increasingly complex menu, an abundance of promotional expenditures, and renovation costs.


A corporate-dictated increase of wages at McDonald's restaurants would almost certainly put additional burdens on franchisees. The company could offer owner-operators a financial cushion during a transitional period, but this strategy might prove damaging to McDonald's financials and its stock.

These complications, and others, give McDonald's and its franchisees plenty of incentive to take a wait-and-see approach on the wage issue, but the company might also have strong reasons to get out in front of the mounting controversy and raise employee pay ahead of anything federal or state governments might do.

The federal minimum wage was last raised in 2009 -- putting it at $7.25 per hour -- and in the State of the Union address in January, President Obama called on Congress to raise the national minimum wage to $10.10 an hour. Twenty-three states and the District of Columbia have minimum wages higher than the federal minimum.

Let's look at what McDonald's might gain by getting out in front of a federal mandate and raising wages for its employees.

Federal minimum wage through the years; Source: Wikimedia Commons. The federal minimum wage was last raised in 2009, putting it at $7.25 per hour. Twenty-three states and the District of Columbia have minimum wages higher than the federal minimum.

Proactive wage raises would be good for McDonald's image
It's no secret that McDonald's has an image problem. The company faces an increasingly health-conscious public, and controversies surrounding its employment practices often generate more press than additions to its menu or modifications on its advertising and branding fronts. The wage issue is bound to receive increasing political attention, and it's heating up quickly at the state level, with 34 states in the last year considering bills that would raise the minimum wage within their borders.

McDonald's' employment structure and brand visibility guarantee it will remain at the center of this heated debate, and ongoing protests targeting the company have the potential to do lasting damage to its image.

Chipotle has scored major victories against McDonald's on the battlefield of public opinion by presenting a socially and environmentally conscious image that gels with current cultural trends and sentiments. The fast-casual chain and its peers are succeeding, in part, because they recognize that the choice between restaurants is largely determined by how a given experience makes the consumer feel, physically and psychologically.

Becoming a proactive force in the push to raise the nation's wages would allow McDonald's to add an important, albeit partially symbolic, asset to its vast real estate holdings: the moral high ground.

Better employees could improve customer satisfaction
Recent declines in same-store sales would seem to give franchisees an obvious and well-founded reason to bristle at the prospect of headquarters dictating a wage increase. McDonald's said August sales at its global locations dipped 3.7%, with sales at U.S. stores down 2.8%. This isn't the type of announcement that would typically be followed by an increase in low-level employee wages, but the question of why sales are falling is central when examining whether such a move would be valuable.

Source: McDonalds.com.

Last year saw a McDonald's executive acknowledge "broken" customer service, with rude employees being cited as a major reason for customer dissatisfaction. A recent report from the American Consumer Satisfaction Index ranking the company dead last in customer satisfaction suggests the company has a ways to go. .

Offering higher wages should allow the company to attract and retain better employees. Making this move ahead of government schedules would not only enable the fast-food chain to strengthen its workforce relative to competitors, it would fundamentally change what it means to work at a McDonald's.

Raising wages at its own pace could allow McDonald's to better manage price increases
There's been no shortage of studies that aim to model what wage hikes at McDonald's would mean for its menu prices or bottom line. Many have made projections based on isolated increases to the company's labor costs, without accounting for possible cost increases earlier in the food production chain or inflation that might occur as a result of a new U.S. minimum wage. Accurately modeling the effects of a significant federal minimum wage increase on a store's pricing involves variables that can be fairly described as unknowable.

However, without major advances in automation, increases in employee wages can reasonably be expected to correlate with increased menu pricing. Raising its prices ahead of state and national curves could afford McDonald's better positioning as it sets its own pace. The company's offerings are decidedly price-sensitive, and smaller, staggered increases to menu costs would look better to consumers than big jumps.

Foolish thoughts
With American wealth inequality at record levels, and the wage debate receiving increasing media focus, it's reasonable to expect a significant increase to the national minimum wage within the next several years. If such an increase can be taken as likely within the next five years, McDonald's corporate management should weigh whether the short-term expenses and difficulties created by raising employee wages prior to government mandates outweigh the potential benefits of such a move. Facing identity issues that threaten its long-term future, McDonald's has surprisingly strong incentives to raise its wages ahead of government action.

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The article 3 Reasons McDonald's Should Raise Its Wages Before the U.S. Government Does originally appeared on Fool.com.

Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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5 Biggest Mortgage Originators in America

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During the last decade, mortgage originators have been taken on a roller-coaster ride. Prior to the crisis, they couldn't underwrite enough mortgages and, in many cases, went too far by handing out home loans to people who had no hopes of paying them back.

This came to a screeching halt when the credit markets froze in 2008-2009, and origination volumes plummeted. And while the overall market has since been on an uneven path to recovery, it will be years, if not decades, before we see volumes akin to the frenzy between 2003 and 2005.


Out of all of this turmoil, one clear winner has emerged: Wells Fargo. To be fair, the California-based bank has always been a leader in the mortgage market. But it's never dominated the field like it does today.

It's estimated that Wells Fargo underwrites roughly one out of every three domestic mortgages. And up until the middle of last year, it consistently originated more than $100 billion in home loans each quarter. It's a veritable giant, even when compared to the four other biggest mortgage originators in America.

The secret to Wells Fargo's success has been twofold. First, by avoiding the costly mistakes of its competitors -- namely, Bank of America and Citigroup -- it wasn't forced to retreat from the market in order to resize its operations. In the last five years, for instance, Bank of America went from being the nation's biggest originator to being less than a quarter of Wells Fargo's size.

In the second case, Wells Fargo capitalized on its strength going into the crisis by acquiring its larger competitor Wachovia. The move more than doubled the size of Wells Fargo's balance sheet, and gave it a nationwide chain of retail banks through which it could reach prospective homebuyers.

But even Wells Fargo's dominance couldn't shield it from the carnage inflicted on the industry by last year's sharp rise in interest rates following the Federal Reserve's announcement that it would begin reducing its support for the economy.

In the most recent quarter, Wells Fargo originated $47 billion in home loans. That's almost 60% less than the $112 billion that it underwrote in the same period last year. And the same story has unfolded at JPMorgan ChaseUS Bancorp, Bank of America, and Quicken Loans, which saw volumes drop by 44%, 34%, 56%, and 45%, respectively.

At the end of the day, there's no question that the mortgage and housing markets are critical underpinnings of the U.S. economy. And it's for this reason that investors and citizens alike should care deeply about the vitality of the nation's biggest mortgage originators.

Will things pick back up as interest rates continue to normalize? That remains to be seen; but it's certainly worth hoping that will soon be the case.

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The article 5 Biggest Mortgage Originators in America originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Why Whole Foods Market Stock Has Crashed 34% in 2014

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Whole Foods Market  investors are having a tough year. After a solid 2013, the natural  food retailer's stock has crashed 34% so far in 2014.  While Whole Foods faces serious challenges, fear over the falling stock price have taken the focus away from what is really happening with the business. Let's take a look at both the hype and reality behind Whole Foods' stock decline in 2014, and look at the challenges that await investors on the road ahead. 

WFM Chart


WFM data by YCharts

Competition concerns miss the mark
Many pundits feel the entry of lower priced retailers, such as Kroger  and Wal-Mart, into the organic food business is hurting Whole Foods on prices. There are two reasons to believe that this argument is overstated.

1. Low-priced competition is not new
A Kiplinger article by Anne Kates Smith outlined the competitive threats facing Whole Foods. The author pointed to slowing same-store sales, and wondered if Whole Foods was ceding growth to small upstarts and low-priced retailing giants. She explained that Whole Foods may lose customers to Wal-Mart, which was quickly moving into the hot organic food industry, at a lower price point. These sound like familiar arguments, right? It may surprise you, but the article I'm referencing was written in 2006.

Since that time, low-priced markets like Wal-Mart and Kroger have certainly targeted the organic market more aggressively, but I feel Whole Foods has advantages over both. 

  • The Whole Foods customer doesn't simply want their product at a cheap price, they want to feel good about their purchases. Since the article was written, Whole Foods management has taken a leadership position on social issues like workers pay, and GMO labeling, that matter to their customers tremendously. 
  • Further, Whole Foods goes out of its way to make its shopping experience unique. From the moment you walk in, you are greeted with brightly colored produce and terrific smells. The produce is labelled so that you know where it was sourced from and engaged, knowledgeable, and happy, staff members await you with gourmet samples at every turn. Whole Foods pays its store employees more than Kroger or Wal-Mart, which shows in its store experience. 
  • Finally, Whole Foods has pushed back on price. Today, Whole Foods has expanded its organic "365 Everyday Value" line to more than 500 everyday organic products at a more affordable price. A recent review by Today showed that many Whole Foods 365 items, such as organic milk and olive oil, where cheaper than Safeway and other supermarkets. 

While new natural "upstart" competitors are also present, they were in 2006 as well. Trader Joe's, which the author mentioned in 2006, has enjoyed rapid growth alongside Whole Foods. 

Organic food sales grew an estimated 11.5% last year, to $35.1 billion, and that growth rate is projected to grow faster over the next five years. While that means increased competition, it also means that the industry can support more than one winner. Yet, Whole Foods, which was recently ranked as the 23rd most valuable brand by Interbrand, should remain at the forefront of customers' minds, and shopping lists.The Whole Foods mix of pricing, store experience, and social consciousness should allow it to enjoy as much of the projected industry growth as anyone.

 

2. Whole Foods margins have withstood "365" pricing admirably 
The grocery business has notoriously tight margins. Yet, while Whole Foods' operating margins have dipped slightly this year, they are still near all-time highs, and far ahead of traditional grocers, like Kroger.

WFM Operating Margin (TTM) Chart

WFM Operating Margin (TTM) data by YCharts

Whole Foods' operating margin is the percentage of profit it takes from sales, after expenses. This wide lead would suggest Whole Foods still does a pretty good job of marking up its products and charging a premium above its costs, despite its lower-priced competitors. In doing so, Whole Foods' business benefits by having higher returns on invested capital (below).

WFM Return on Invested Capital (TTM) Chart

WFM Return on Invested Capital (TTM) data by YCharts

Return on capital is a great tool for evaluating the profitability of a business. It tells us how much money a business makes, versus the costs of starting and running the business. As illustrated in the chart above, Whole Foods earns 14.69% to Kroger's 10.46%. So, for every dollar investors give Whole Foods to open new stores, hire employees, and run its business, they return about $0.14. That extra "four cents," Whole Foods returns (per dollar invested) over Kroger is reinvested in its business, which is a competitive advantage.

The real reason for  Whole Foods' stock decline
Whole Foods has also lowered its outlook for 2014 four times this year. Most recently, the outlook for total sales growth was set at a range of 9.6%-9.9%, and same-store sales at 4.1% to 4.4%. By contrast, it came into the year expecting total sales growth of 11%-13%, and same-store sales growth of 5.5%-7% for 2014. This uncertainty has rattled many skittish investors, and it's affected the stock significantly.

The bigger concern to long-term investors is Whole Foods' 2014 sales growth. Total sales growth has stagnated and same-store sales, a key metric for retailers, has declined in each quarter of 2014 (see chart below). Same-store sales growth in the second and third quarter of 2014, was the lowest result since 2010.

Whole Foods Market 2014 Q1 Q2 Q3
Revenue growth*  10% 9.7%  10%
Same-store sales growth* 5.4% 4.5% 3.9% 

*over the same quarter in 2013

Focus on what matters
Whole Foods is not losing customers to low-priced retailers. I believe that if the company simply decided to keep operating its existing stores, in its current markets, it would deliver excellent returns for years because its customers are fiercely loyal. The problem is that Whole Foods wants to be a hyper growth company.

Whole Foods currently has 388 stores, it wants to be over 500 by 2017, and 1,200 total eventually. Most Whole Foods stores today are located in areas where residents have very high disposable income. To get to 1,200 stores that will need to change. Whole Foods is already opening stores in some lower income neighborhoods, and attempting to bring its experience to more people, which is unchartered territory.

Most of Whole Foods' woes this year come back to one thing, it isn't growing as fast as expected. It remains to be seen if it can support growth to 1,200 stores, as it runs out of affluent new areas for growth. That said, the stock is not really priced for huge growth today.

Whole Foods stock has performed much worse than its underlying business has in 2014; it's worth a look.

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The article Why Whole Foods Market Stock Has Crashed 34% in 2014 originally appeared on Fool.com.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Is AT&T Making Wise Bets on Its Future?

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In the last 12 months, AT&T has spent approximately $23.2 billion on capital projects, or 17.78% of its total revenue. That far exceeds the 16.5% and 15.5% of total revenue AT&T directed toward capital expenditures in 2013 and 2012, respectively. So AT&T is clearly making big, aggressive bets on its future, but on what, and are these investments wise?

AT&T has demonstrated in SEC filings and press releases that its operational focus lies in 4G LTE and broadband infrastructure, also called Project VIP,, an initiative that the company announced in 2012 saying at the time that it would invest $14 billion over three years to "significantly expand and enhance its wireless and wireline IP broadband networks to support growing customer demand for high-speed Internet access and new mobile, app and cloud services." AT&T is also making investments that complement Project VIP, such as fixed network access for businesses and small cell technologies to improve network performance.


According to AT&T, virtually all of its capital expenditures are spent on wireless and wireline networks. The company's wireless expenditures, which include improvements to data networks, accounted for 52% of total spending last year. The remaining 48% was spent on wireline, including broadband and U-verse during 2013. Importantly, AT&T guided that the ratio for wireless and wireline spending would be "proportionally consistent" this year versus 2013.

Let's look at where AT&T is putting money to work, and whether those investments will pay off and make AT&T a good investment opportunity. 

Making wireless improvements to catch Verizon
AT&T spent approximately $11.8 billion during the first six months of 2014 on capital projects, much of which was tied to the company's 4G LTE buildout, or wireless expenditures. This is an initiative to cover the entire U.S. and offer more 4G-related services, like Verizon has done, to further improve AT&T's wireless services segment, which makes up nearly 50% of total company revenue.

Source: Verizon.

AT&T famously boasts the nation's "best" 4G network, and Verizon undoubtedly has the largest network by covering 97% of Americans. As a result, Verizon has been able to combine its data and voice services, also called VoLTE, onto one high-performance 4G LTE network. Meanwhile, AT&T is still building its network to offer similar services , essentially playing catch-up to Verizon.  

Infonetics Research expects the VoLTE market to grow 145% annually until 2017, at which point it will be valued at $17 billion. The reasons for this growth likely lie in the benefits of VoLTE, which include better connectivity, improved call quality, reduced battery drain, and high-definition video talk. With Verizon offering nationwide VoLTE services, and with 4G networks being 10 times faster than older 3G networks, making large investments in 4G is important for AT&T. The company expects its 4G network construction to be complete by early next year.

Fighting off Google
Last year, AT&T's broadband internet business accounted for 10% of the company's $128.7 billion in total revenue, after growing 25% compared to 2012. Broadband has quickly become an important business for AT&T, a growth engine, and a market made highly competitive by demand for faster speeds and broad coverage.

AT&T's most significant broadband investments can be separated into two segments: its GigaPower service and fixed network access for business customers, including free Wi-Fi. AT&T has launched the GigaPower fiber network in a few cities, and plans to launch the service in 100 additional cities in the near future. GigaPower's current speed of 300 megabits per second, or Mbps, is 30 times faster than the average broadband speed. However, Google's  competing Fiber service has seen impressive demand and offers speeds up to 1 gigabit per second, or Gbps, which is 100 times faster than the average broadband. In response, AT&T announced earlier this year its plan to increase broadband speeds from 300 Mbps to 1 Gbps in order to compete with Google.

With AT&T cutting the prices of its mobile plans and with broadband being its biggest growth driver, such broadband investments are necessary. While AT&T hasn't said specifically how much it will spend on GigaPower's infrastructure and construction, it is probably a substantial amount as Google Fiber's buildout construction is estimated to be quite costly. In fact, Goldman Sachs has estimated that if Fiber were to reach 50 million households, less than half of all U.S. homes, Google might have to spend as much as $70 billion.

 

A never-ending cycle
That said, AT&T has countless other projects that could become a big part of AT&T's long-term future. One is maximizing the use of spectrum with small cells in the face of increased data use and FCC restrictions on how much spectrum a company can own in a specific region. Another is the planned acquisition of DIRECTV to pave a way into emerging markets such as Latin America.

AT&T's capital expenditures are certainly warranted given the competition it faces in key industries. With GigaPower still in the early stages of development, investors can expect continued investments while other projects like 4G LTE are completed. New projects like 5G and maximizing the synergies between DIRECTV and AT&T might also become relevant capital expenditures, demonstrating the never-ending investments in the telecom space.

Foolish thoughts
In AT&T's most recent annual report, the company did say that 2014 would be a peak investment year, and that its capital investments will soon trend back toward historic levels following the completion of Project VIP. The problem, according to research firm BTIG, is AT&T's reduction of service prices for consumers could result in a 5% decline in total revenue during the next two quarters, and also cause long-term pressure on its average revenue per user. Meanwhile, Verizon's decision to limit price cuts should result in a low-to-mid-single-digit growth rate.

All things considered, AT&T's spending exceeds while its revenue growth lags its primary competitor. While AT&T's capital expenditures might decline after 2014, the uncertainty surrounding its revenue per user and future margins are most certainly a concern. If aggressive pricing plans do eventually weigh on AT&T's top and bottom line, it would be hard to call the stock a good investment opportunity, or a company whose capital investments will decline as a percentage of total revenue. It might be best to watch, but not invest in AT&T until these current capital investments are complete and the company's performance can be further assessed. 

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The article Is AT&T Making Wise Bets on Its Future? originally appeared on Fool.com.

Brian Nichols owns shares of Verizon Communications. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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What Are Investors to Make of PepsiCo's Share Buybacks?

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PepsiCo is one of the best-known stocks in the consumer space, with the company holding a large number of well-known brands, including its flagship Pepsi and Gatorade beverages, in addition to food products like Frito-Lay and Quaker Oats. PepsiCo is appreciated by investors for its long track record of steady growth and reliable dividend payments.


Recently, PepsiCo has accelerated its share buyback program in an effort to return even more cash to shareholders. PepsiCo is spending billions of dollars this year to buy back shares. It's reasonable to question this strategy, since PepsiCo's free cash flow is actually down over the first half of the year, as compared to the same period last year.

Nevertheless, management is confident in its capital allocations plans going forward. Here are PepsiCo's share buyback plans for 2014.

Is PepsiCo spending too much on share buybacks?
Earlier this year, PepsiCo announced it would significantly increase its capital allocation programs after providing first-quarter results. At the time, management revealed it would return approximately $8.7 billion to shareholders through a combination of dividends and share repurchases in 2014. Of this, PepsiCo planned to utilize $3.7 billion for dividend payments and $5 billion for share repurchases. In all, this would represent a 35% increase in total cash returns to shareholders versus the prior year.

In terms of just share buybacks, PepsiCo's $5 billion in planned repurchases this year would represent a 60% increase from the $3 billion in buybacks conducted last year.

PepsiCo generated $1.7 billion of free cash flow over the first six months of 2014. In the same period, PepsiCo bought back $2.1 billion of its own shares. Its share repurchases more than doubled from the same six months last year. Meanwhile, PepsiCo expects to generate $7 billion in free cash flow this year, which would fall short of its total cash returns to shareholders.

While that might normally give some investors cause for concern that perhaps PepsiCo was getting too aggressive with its capital allocation, it's worth noting that PepsiCo is a very strong company. PepsiCo's diluted earnings per share were up 5.5% through the first half of the year. It's seeing especially strong results in the emerging markets, where growth is far superior to growth in more mature economies.

For example, PepsiCo realized organic revenue growth of 8% last quarter in developing and emerging markets. This was double the growth rate of PepsiCo Americas Foods. Meanwhile, PepsiCo Americas Beverages increased organic revenue by just 1%, so it's clear that the emerging markets will be a major growth avenue to fuel PepsiCo's shareholder rewards programs going forward.

PepsiCo expects to generate enough cash to keep buying back stock at such an aggressive pace without putting its financial position in danger.  Management expects 8% earnings growth this year. Of course, some of this has to do with PepsiCo's share buybacks. PepsiCo's Chief Financial Officer stated during the company's most recent conference call with analysts that PepsiCo's diluted share count declined by 2% last quarter. Plus, PepsiCo is in the process of shaving $1 billion off its expenses this year as part of a companywide productivity program.

The Foolish bottom line
PepsiCo holds a diversified business across several different product categories, which helps provide more consistent cash flow. For that matter, PepsiCo's sales are almost evenly split between food and beverages. And since PepsiCo's products are foods and beverages, it generates fairly reliable cash flow. Thanks to projected cost savings and an outlook for solid organic growth, fueled mostly by the emerging markets, PepsiCo is confident in returning a huge amount of cash flow to shareholders through share buybacks.

It's reasonable to be concerned about PepsiCo's capital allocation methods, since dividends and share buybacks this year are likely to exceed free cash flow. If this continues, PepsiCo may need to curtail its share buybacks somewhat in future quarter. That's why investors should continue to monitor the company's financial performance. For the time being, however, there doesn't seem to be an immediate reason for alarm, because PepsiCo holds a premier brand and highly profitable company. That's why, for the time being, PepsiCo's share repurchase plans make sense.

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The article What Are Investors to Make of PepsiCo's Share Buybacks? originally appeared on Fool.com.

Bob Ciura owns shares of PepsiCo. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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The Nation's 5 Largest Homebuilders

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This article was updated on Oct. 3, 2014.

America's biggest problem right now continues to be unemployment.


Officially, 5.9% of Americans are unemployed. But once you factor in the people who only have part-time positions and those who have left the labor force out of discouragement, the number is considerably higher. 

What's the solution? 

While this has been an important question for the past six years, there's no easy answer to it. Economists on the left argue that additional fiscal stimulus is needed. Those on the right say that regulations and structural issues are impeding the recovery and should therefore be removed. 

Either way -- though, for the record, I tend to fall into the former's camp -- one thing is certain: The one sector that has more power to help than any other is housing.

As my colleague Morgan Housel discussed, it's estimated that between 2.1 and 3.05 jobs are generated for every home built in the United States. Thus, if there's any sector investors and analysts should be watching right now, its homebuilding. 

With this in mind, the following chart reveals the five biggest players in the field by the number of units sold during the most recent quarter.

As you can see, D.R. Horton is far and away the largest. In the three months ended June 30, it sold a total of 7,676 homes, helped in large part by a massive increase in the first half of 2013, when sales shot up by 34% on a year-over-year basis.

The runner-up is Lennar  which sold 5,457 homes over the same time period, followed by PulteGroup , NVR , and KB Home with sales of 3,798, 2,943, and 1,793 units, respectively -- though, it's important to point out that Lennar and KB Home's most recent quarters ended Aug. 31.

One of the explanations for the variation is the average selling price. D.R. Horton moves so many houses because its units are the cheapest, selling for an average of $272,277 last quarter, compared to more than $320,000 for the others. The highest average price among the five goes to NVR, at $368,000.

Another reason has to do with the geographic areas in which theses companies market their homes. KB Home derives most of its revenue from the West Coast, NVR from the Mid-Atlantic, and D.R. Horton from the South. Lennar gets a plurality from the East Coast, and Pulte from the Northeast and Southwest.

At the end of the day, given the role of the housing sector in the overall economy, these are important statistics for analysts and investors to watch. Not only will they give you insight into the homebuilding sector itself, which is ripe with investment opportunities, but they could also help you see what's coming down the road in the broader economy.

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The article The Nation's 5 Largest Homebuilders originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Is This the Real Perk Tesla Motors Inc. Got From Nevada?

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Elon Musk's Tesla Motors is one of the standard bearers of the electric-vehicle revolution . However, leading is sometimes expensive, particularly when an industry is just getting its start. That's why Tesla is pushing the envelope on the batteries used to power autos. And with a little help from Nevada, its plans for a giant battery manufacturing plant are one step closer to fruition. But why pick this state over the others? (Hint: It wasn't just about the money...)

Cutting-edge
There's no question that an all-electric car is cutting-edge. Musk noted as much when he announced that Tesla was opening its patents to the world earlier this year: "[E]lectric car programs ... at the major manufacturers are small to nonexistent, constituting an average of far less than 1% of their total vehicle sales." In other words, there is no electric-car industry to speak of yet.

Musk has been aggressive in his efforts to push the accelerator, however, giving away the competitive advantage that patents often provide and spending ahead of demand to build charging networks domestically and abroad. Another big push for Tesla has been the so-called Gigafactory. 

Source: Author.


The Gigafactory is nothing short of audacious, since this $5 billion project, which it was recently announced will be located in Nevada, is expected to produce more lithium-ion batteries in 2020 than were made globally in 2013. The goal is to reduce the cost of batteries, one of the most expensive components of an electric car, by 30% or more. Tesla is taking the leading role, pitching in an anticipated $2 billion. Partners like Panasonic will help cover the rest of the cost. 

Where, oh where?
Musk put the battle for location front and center when he announced his plans for the Gigafactory, singling out Texas, Arizona, New Mexico, and Nevada as potential sites. Although it was never said, this set the stage for an incentive bidding war. And the winner was Nevada, with a $1.3 billion package. As the project is a partnership, the benefit of this will accrue mostly to the factory -- not specifically to Tesla. However, one not-so-small benefit added to the package was meant for Tesla alone.

The big number in the Nevada deal is $1.1 billion worth of tax abatements over 20 years. Essentially, Tesla and its partners won't have to pay taxes on construction materials and factory equipment for two decades. The state sales tax in Nevada is just under 7%, so that will go a long way toward keeping construction costs down. This break is projected to save a grand total of $725 million over the 20-year span.

During the construction phase alone, this abatement will be a big benefit. However, Tesla and its partners will also be relieved of property and business tax burdens for 10 years. That should be worth another $300 million or so, according to Reuters. Nevada Governor Brian Sandoval thinks these concessions are well worth the cost, since he estimates the plant will boost the state's economy by as much as $100 billion over the next two decades.

If you look at it from a different angle, any taxes the Gigafactory will pay wouldn't exist at all if the factory were sited elsewhere. So it's almost a wash for the state. Except that Nevada will have to build and maintain new roads and other infrastructure (the Reno Gazette-Journal estimates that will cost about $100 million). And Tesla will get access to discounted electricity for up to eight years, too ($8 million according to the RGJ). Another $200 million or soof the $1.3 billion will come from tax credits that Tesla can sell to other companies, estimates the RGJ.

All in all, it's a pretty good deal for a site that is in close proximity to Tesla's California factory. However, there's another little kicker: Tesla also got official approval to sell its vehicles directly to the public in Nevada, something that Texas and Arizona, its competitors for the Gigafactory, don't allow. That will mean more money going directly to Tesla from each car sale in the state, over and above the incentive package.

Source: Author.

The clincher 
It's not unusual for a company to get incentives to locate in a state. In fact, Musk said it wasn't the best financial offer on the table. So, the incentives in and of themselves aren't really that important. However, add in the ability to sell direct, and all of a sudden the deal offered by Nevada has real long-term appeal for Tesla. 

Among the reasons Musk cited for picking Nevada was an ability to "get things done." Since the Nevada governor signed the bills backing the deal just a few days after they were submitted to the legislature for approval, it looks like Musk was right. But the real "get things done" here was likely the concession to allow Tesla to sell directly in the state, something that Nevada car dealers backed despite the fact that they had originally been opposed to this not-so-little compromise.

Tesla has been fighting for the right to sell directly on a state-by-state basis across the country. Getting a decent incentive deal for the factory and adding another state to the direct-sales approval list (which is now up to eight states, in some form) advances two goals at once. You know the old saying about killing two birds with one stone?

It may seem a small thing to add one state to the direct-sales list, but in a battle like this, every stepping stone counts. And this helps get Tesla closer to the tipping point, where direct sales are simply the accepted norm. Add the Tesla-specific direct-sales approval to the money side of the deal, and it's no wonder Nevada won this bidding war.

Warren Buffett's worst auto nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to ride this mega-trend. Click here to access our exclusive report on this stock.

The article Is This the Real Perk Tesla Motors Inc. Got From Nevada? originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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"What Tax Bracket Am I In?" -- "It's Complicated."

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You don't need a Hogwarts sorting hat to figure out what tax bracket you're in. Photo: Flickr user Cleavers.

This article was updated on Oct. 3, 2014.

It's common for us taxpayers to think about, and occasionally look up, our tax bracket, to see how big a tax hit we're taking. But many people misunderstand the tax bracket concept.


You might, for example, glance at the table below, which features the tax brackets for the current tax year, and note that your taxable income of $50,000 parks you in the 25% bracket. You might then assume that your tax rate for those 50,000 dollars (as a single person) is 25%. Wrong!

Tax Rate

Single filers

Married filing jointly

or qualifying

widow/widower

Married filing

separately

Head of household

10%

Up to $9,075

Up to $18,150

Up to $9,075

Up to $12,950

15%

$9,076-$36,900

$18,151-$73,800

$9,076-$36,900

$12,951-$49,400

25%

$36,901-$89,350

$73,801-$148,850

$36,901-$74,425

$49,401-$127,550

28%

$89,351-$186,350

$148,851-$226,850

$74,426-$113,425

$127,551-$206,600

33%

$186,351-$405,100

$226,851-$405,100

$113,426-$202,550

$206,601-$405,100

35%

$405,101-$406,750

$405,101-$457,600

$202,551-$228,800

$405,101-$432,200

39.6%

$406,751 or more

$457,601 or more

$228,801 or more

$432,201 or more

Source: Bankrate.com. 

Here's what really happens: Your first $9,075 of taxable earnings are taxed at 10%. Then, your next $27,824 is taxed at 15%. Finally, the remainder of your taxable income, $13,101, is taxed at 25%. So actually, most of your dollars got hit with a 15% tax rate. Still, the answer to the question, "What tax bracket am I in?" isn't 15%.

When someone refers to your "tax bracket," it usually means the highest rate at which you're being taxed -- and the rate at which your next dollar of taxable income will be taxed. That's also referred to as your "marginal" tax rate. Most of us have more than a single rate that affects us, though. For example, someone with taxable income of, say, $500,000, will actually pay taxes at every bracket's rate. In our example, your tax bracket, and your marginal tax rate, would be 25%.

The marginal tax rate matters for planning purposes. If you're wondering whether to generate more income in the year, for example, you'll know that it will be taxed at your marginal rate. Just remember to keep things in perspective: If additional income kicks you into a higher bracket, it doesn't mean that all your income will suddenly get taxed at that rate -- not at all.

The tax rate that should usually interest you most is your "effective" tax rate. That's the tax rate you actually pay on your taxable income. In the example above, you'd pay $907.50 (that's 10% of $9,075), plus $4,173.60 (that's 15% of your next $27,824), and $3,275.25 (that's 25% of your final $13,101). Add them up, and your total tax paid would be $8,356.35. Divide that by the $50,000 you started with, and you'll see that your effective tax rate is 17%. That's much more attractive than 25%, right?

So, next time you ask yourself, "What tax bracket am I in?" be sure to look at the big picture, not just your marginal tax rate.

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The article "What Tax Bracket Am I In?" -- "It's Complicated." originally appeared on Fool.com.

Longtime Fool specialist Selena Maranjian , whom you can follow on Twitter , has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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3 Reasons CBS' Stock Could Rise

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CBS Corp. stock went up during Q4 2013 and Q1 of this year, but has since come back down to about where it was a year ago. In early August the company reported Q2 earnings of $0.78 per share that were up 4% year over year and higher than analyst expectations. The company followed that with strong guidance for continued year-over-year earnings increases for the rest of the year. The uncertainties that have pushed this stock back down recently may have caused a buying opportunity for those paying close attention to the following three reasons that this stock may rise again. There's no guarantee the stock will go up, but let's dig in on three reasons it could.

1. CBS is becoming a leading content creator
CBS Corp. is a TV network, meaning advertising was its main revenue generator for most of its history. However, the advertising segment of the company has seen headwinds recently with lowered revenues due to increased low-cost advertising competition.


Now, the company is actively transforming itself into more of a "content creation" company with less focus on advertising while airing other companies' content, and more focus on creating award-winning series. Financially, this move to content creation could mean big increases in the company's bottom line as the company fully owns the rights to its created content instead of rights to air content by other companies.

This will only work if the company can actually create great content, which seems to be working well so far. As the company continues to win awards for its own content, investors will see that this transformation is working and that the company is proving itself as a content-creator, not just an advertiser. CBS has ownership in more than 70% of its total fall lineup, including top-rated TV series like NCIS and The Big Bang Theory. The company leads all broadcast networks with 47 Emmy nominations this year, and was major winner at the most recent Emmy awards at the end of September.


With more than 100 million viewers per week, CBS TV is proving that content is doing well for CBS. Image source: CBS

2. Increasingly lucrative international deals
CBS is signing major deals with international networks to carry these shows it's creating, often signing deals before the show is even released. By the time a show is set to release, it already has international deals set up, and it can mean a substantial amount of revenue per episode. According to CBS management during the earnings conference call, "The numbers are truly extraordinary with rarely a number being below $2 million per episode for a brand-new drama and north of $3 million for some of the more established hits."

Continuing on the trend of more content creation driving increased revenues, as the company continues to develop award-winning series, these international deals will keep coming and could be more and more lucrative. For example, with NCIS: New Orleans, which had a large international deal in place before it aired in the U.S., the company expects as much as $5 million in revenue per episode, not including advertising revenue to come when it does air. These international revenues could go a long way in helping the company to win on its content creation plan, and will make the company much stronger in the coming years than it was in its advertising past. 

3. Lowered advertising revenue is no longer a surprise
CBS' Q2 earnings were positive and the company reported year-over-year revenue growth. However, results were not as positive as analysts were hoping for, missing earnings growth expectations. Furthermore those results were considerably lower than that of competitors Disney and Time Warner at 24% and 29% earnings growth year over year, respectively.

The cause of the less-than-expected revenues was mainly attributed to the lowered advertising revenues as the company struggles to compete with other, lower-cost advertising options. The same was the case in Q1, but by Q3 analysts should be expecting advertising to be a fading revenue generator for CBS. So this reason that the stock price has been down in Q2 and so far in Q3 will likely be much less of an issue when Q3 is reported.

With lowered advertising revenues now in consideration, and more revenue to come from better content creation and international deals, CBS is more likely to meet or exceed revenue expectations in Q3 and Q4, which could help the stock price to rise back toward its Q1 high near $67 as investors see CBS proving its future as a company with much more than just advertising offerings.

Foolish final watch
While CBS' most recently reported earnings results may not have been as impressive as they could have been, they were still good results and the company has what looks like a strong plan for future growth. With growth in content creation, lucrative international deals, and furthered non-reliance on advertising, CBS looks like it's making the right moves to keep increasing earnings further going forward and that could lead to a rise in the stock's price.

Your cable company is scared, but you can get rich
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The article 3 Reasons CBS' Stock Could Rise originally appeared on Fool.com.

Bradley Seth McNew owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Week's Winners and Losers: Pimco Waning, Netflix Gaining

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CROUCHING TIGER, HIDDEN DRAGON (2000) MICHELLE YEOH TIGE 025
Moviestore collection Ltd./AlamyA sequel to "Crouching Tiger, Hidden Dragon" is coming to Netflix and IMAX.
There were plenty of winners and losers this week, with the world's leading online auctioneer revealing long-overdue plans to separate into two companies and the top dog in single-cup coffee brewers taking another legal hit for questionable technology. Here's a rundown of the week's best and worst.

Tesla (TSLA) -- Winner

The self-driving car may be here sooner than you think. Tesla CEO Elon Musk turned heads this week after an excerpt from a CNNMoney interview showed him promising that a Tesla that can drive itself 90 percent of the time will be available as early as next year.

Musk also tweeted about a car that the company will unveil next Thursday -- along with other potential announcements. Tesla cars are as expensive as Tesla stock, but it's hard to find an automaker raising the bar the way that Musk's futuristic company is doing.

Pimco -- Loser

It's been a week since mutual fund manager Pimco saw Bill Gross -- the legendary bond fund manager who made the Pimco Total Return Fund (PTTRX) a household name with more than $200 billion in assets -- announce that he was leaving for a new gig at fund rival Janus.

Now we're seeing the fallout. Days ago, we learned that a record $23.5 billion was withdrawn from the fund in September. It's not just the retail investors who are clearing out now that the longtime manager has moved on. Reports on Thursday said Schwab (SCHW) was dropping the fund from its target-date funds, which aim to craft dynamic asset strategies that evolve based on a certain retirement year.

Netflix (NFLX) -- Winner

The world's leading premium streaming service has become even more of a juggernaut since rolling out original shows, and now it's taking that strategy to the movies. Netflix revealed this week that it's bankrolling the "Crouching Tiger, Hidden Dragon" sequel, making it available to Netflix subscribers at the same time that it hits IMAX screens next summer.

Netflix also said it would fund four future Adam Sandler projects. It's not clear if these will be theatrical releases or if they will go directly to Netflix, but it's still another example of the company leveraging its growing user base of more than 50 million streaming subscribers to score magnetic content.

Let's just hope that the four Sandler movies aren't "Grown Ups 3," "4," "5" and "6."

Keurig Green Mountain (GMCR) -- Loser

Keurig may have gone too far in designing its Keurig 2.0. Another java distributor is suing the company behind the leading single-cup coffeemaker for allegedly engaging in anti-competitive measures with scanning technology that ensure that its new brewers only accept licensed Keurig portion packs.

Canada's Coffee Club is suing Keurig Green Mountain for $600 million. Even if Keurig Green Mountain prevails, reviews haven't been kind to the machine, which was introduced this summer, primarily because it doesn't accept older K-Cups or the refillable pods that coffee lovers use with their own ground-up beans.

EBay (EBAY) -- Winner

After months of speculation and activist prodding, eBay is finally breaking up. The online marketplace giant announced on Tuesday that it will separate eBay and PayPal, giving investors the ability to purchase either the auction site operator or the faster-growing financial payments platform.

It seems a bit desperate coming on the heels of Apple (AAPL) Pay's launch. It's still the right call. Each company will be able to focus on its own objectives, which for PayPal is about to prove more challenging.

Motley Fool contributor Rick Munarriz owns shares of Keurig Green Mountain and Netflix. The Motley Fool recommends eBay, IMAX, Keurig Green Mountain, Netflix and Tesla Motors. The Motley Fool owns shares of eBay, IMAX, Netflix and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. Check out our free report on the Apple Watch to learn where the real money is to be made for early investors.

 

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3 Things to Watch For When CalAmp Corp. Reports Earnings

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CalAmp will report second-quarter earnings for its 2015 fiscal year after the closing bell on October 6th.

What will it take to get CalAmp back on track?It hasn't been a good year for CalAmp shareholders, who've seen their shares fall by 40% since the start of 2014. Two of CalAmp stock's worst days this year were the result of disappointing earnings. The company's 2014 fiscal fourth quarter report shaved nearly a quarter off share values in April, and its 2015 first-quarter earnings report caused another double-digit decline in July. Investors are certainly hoping for a better response to the company's upcoming earnings, but with shares down 12% over the past month, optimism seems a little hard to come by.

Can CalAmp surpass expectations after repeatedly lowering them over the past year?
CalAmp's management seems to have a knack for tamping down Wall Street's expectations. The difference between analyst estimates issued before and after CalAmp's own forward guidance shows that the company has nudged these estimates lower in each of the past three quarters, with the year-ago quarter's consensus staying at the same level after CalAmp released its guidance:

Reporting Period

CalAmp EPS Guidance

Analyst EPS Consensus* 

Actual Result

Q2 2014

$0.14 to $0.18 

Unavailable / $0.16 

$0.19

Q3 2014

$0.19 to $0.23

$0.21  / $0.21 

$0.23

Q4 2014

$0.19 to $0.23

 $0.24 / $0.21

$0.20

Q1 2015

$0.17 to $0.21

$0.23 / $0.18

$0.19

Q2 2015

$0.17 to $0.21

$0.22  / $0.17

?


Sources: CalAmp earnings reports and news recaps.
* Consensus estimates reported here here are displayed as those assessed both before and / after CalAmp issued its own quarterly guidance.

Despite besting these tamped-down expectations in three of the last four reported quarters, CalAmp has nevertheless damaged itself by repeatedly issuing guidance below Wall Street's advance estimates. You could certainly make the case that analyst expectations are irrelevant and growth is what really matters, and while that may be true over the long term, Wall Street's lofty projections -- and CalAmp's inability to reach them with its own projections -- have had a major impact on CalAmp's shares over the past year.

CalAmp's third-quarter guidance may very well become the prime mover of its share prices after the second-quarter report is made public. However, the erratic and somewhat cyclical nature of CalAmp's growth might also have something to do with its tendency toward offering underwhelming guidance.

Can CalAmp start painting a more consistent picture of growth?
CalAmp's year-over-year growth rates have fluctuated wildly, but in a fairly recognizable pattern, over the past two years. Seasonal weakness in the first quarter has led to strengthening through the second and third quarters. Based on its recent history, CalAmp's fiscal second quarter should have better growth rates than its first, but the company's most recent guidance now implies that both revenue and EPS will be essentially flat  year-over-year . That would make this the weakest quarter of the past two years, since CalAmp has put together double-digit percentage growth on the top line in each of the past eight quarters, even in the one quarter during which EPS declined:

Reporting Period

Year-over-Year Revenue Growth

Year-over-Year Adjusted EPS Growth

Q2 2013 

30%

55%

Q3 2013 

35%

89%

Q4 2013 

29%

78%

Q1 2014 

10%

(11%)

Q2 2014 

34%

12%

Q3 2014 

43%

35%

Q4 2014 

24%

25%

Q1 2015 

10%

19%

Source: CalAmp earnings reports.

Concentrated revenue
CalAmp's reliance on a few large customers has been a major factor behind the chunkiness of its growth, and its first-quarter earnings call  offered investors little assurance that the company has smoothed out these chunks for the second quarter. Executives expect Wireless Datacom segment revenue to rise year-over-year for the second quarter, but this will be offset by a "sharp decline" in Positive Train Control revenues.

Management also expects the second half of CalAmp's 2015 fiscal year to be "significantly stronger" than its first half, so investors will be watching comments and guidance issued during the second-quarter report very closely. The current consensus  on Wall Street calls for $59 million in revenue and $0.17 in EPS, with projections rising to $65.2 million  in revenue and $0.24 in EPS for the upcoming third quarter. Wall Street's third-quarter estimates imply year-over-year growth of just 3% on the top line and 4% on the bottom line, and CalAmp will have to do better than that to regain investor optimism. You can't call it a growth stock when there's hardly any growth taking place.

A return to the higher growth rates of earlier quarters will be essential to restoring market optimism that's been lost in CalAmp's recent "underperformance." Despite (or perhaps because of) these recent weak spots, CalAmp is doubling down on big contracts from large customers, as evidenced by comments made during the company's first-quarter earnings call.

Can (and should) CalAmp sign up any more large customers?
CalAmp's management expects revenue from a telematics supply deal with Caterpillar should hit the high end of a $5 million to $10 million projection for the second half of fiscal 2015. Let's say that works out to $9 million -- that would be worth roughly 8% of CalAmp's revenue over its two most recent quarters.

Caterpillar was the only customer CalAmp executives singled out by name in its last earnings call, but it's hardly the only one with the power to move the company's fortunes on its own. Another major customer, though highlighted only as an "OEM customer  in the commercial solar power industry," had a significant impact on CalAmp's first quarter, and executives believe that this customer will provide significant buoyancy to second-half revenue. One key customer also contributed roughly a fifth of all revenue  earned by CalAmp's Satellite segment in the first quarter.

Plenty of tech companies are more reliant on a single major customer than CalAmp, but it's hard to deny that these large deals contribute to the yo-yo nature of CalAmp's growth. Its deal with Caterpillar should help CalAmp grow its revenue in the near term, but it will have to be augmented and eventually replaced by other deals. Will CalAmp be able to diversify during the second half, or will it find itself relying more on big contracts to drive its gains?

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The article 3 Things to Watch For When CalAmp Corp. Reports Earnings originally appeared on Fool.com.

Alex Planes owns shares of CalAmp. Follow him on Twitter @TMFBiggles for more insight into investing, markets, economic history, and cutting-edge technology. The Motley Fool recommends CalAmp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Sears Reverts to Plan B for Canadian Business

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Having failed to find a buyer for its Canadian operations, Sears Holdings is reverting to Plan B: selling shares to existing investors. But if savvy institutional investors didn't want a stake in Sears Canada, why should small, retail investors be saddled with it?

This stock maneuver may indeed signal the final sale for Sears Canada.


Sears unveiled yesterday a plan to raise about $380 million for most of its 51% stake in the Canadian unit, offering for sale as many as 40 million shares in a bid to increase its liquidity. Yet underscoring the difficulty it apparently knows it faces in the task, Sears will once again be turning to chairman and CEO Eddie Lampert for the bulk of the money as he is expected to buy up half the shares offered.

Dipping into his pocket once more
It was just last month that Lampert apparently became the lender of last resort to the retailer, loaning the company on a short-term basis $400 million to get it through the Christmas season and quell any concerns vendors might have had that they wouldn't get paid. The retailer has seen revenues plummet and profits vanish as losses now grow wider.

Last year J.C. Penney had to similarly spring into action to prevent an exodus of suppliers after it was suggested one of its lenders was no longer financing deliveries to its stores amid talks it might file for bankruptcy.

The sale might not be enough for Sears, though, as The Wall Street Journal reports that Euler Hermes, an insurer that protects vendors against nonpayment by customers, is cancelling Sears policies come Monday. No doubt that was the impetus behind the stock sale, as the Journal said vendors fears were allayed knowing that Lampert was ensuring cash would be on hand.

Once again, though, it's Lampert who is being forced to step up to the plate to keep the company afloat.

Treading water
Earlier this year he had put an end to his hedge fund's practice of loaning Sears money on a short-term basis, something he'd done since 2010. That action, however, was seen as him trying to extricate himself financially from the retailer and raised caution flags among analysts.

Even though Sears stock jumped 7% yesterday on the news that it is going to the Lampert well once more, the fact that he has to be there personally to get any cash into the business -- and that it comes so soon after injecting $400 million into the company -- should itself raise even more warning flags. It continues to amount to Lampert burning the furniture to heat the house: He's getting rid of anything of value Sears owns just to pay the bills.

Burning like a house a-fire. Photo: Flickr user Melissa

Sears Canada is failing. It suffered a 6.8% drop in same store sales that led it to contribute $140 million less revenue to its parent. Gross margins collapsed 230 basis points due to lower profits in its home, home appliances, footwear, and apparel units.

Even so, the value of the business somehow manages to continue growing. Despite falling revenues, tumbling margins, a dearth of customers, a string of store closures, and a CEO about to leave, Sears valuation of the Sears Canada business has increased from $620 million at the end of last December to $765 million in August.

Suffering from abandonment issues
While some might view the sale as a sign Lampert's ready to focus solely on Sears Holdings, investors up north are likely to see this as a case of abandonment. It's stock fell 1% yesterday on the Toronto exchange (Sears Canada will apply to trade on the Nasdaq exchange once the stock sale is completed).

The entrance of Wal-Mart and Target into the Canadian market heralded a new level of fierce competition and the resurgence of Hudson's Bay have left Sears unmoored and adrift. And as things deteriorated at home for its parent, Sears Canada, once a crown jewel of the company, faltered.

Maybe it was the same not-so-benign neglect that seeped into all aspects of Sears operations after Lampert took control, using financial gymnastics instead of marketing prowess to engineer quarterly results. Ultimately, it's now that same financial derring-do that's going to be needed to simply keep the whole ship afloat.

A third wind?
But don't think Lampert will be any more successful with this stock sale than he was with his other machinations. It seems a rather lofty goal to assume investors will buy up shares in this faltering business with the gusto, and Sears Holding may realize much less than the $380 million it's counting on.

Let's hope Lampert's got a Plan C waiting in the wings.

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The article Sears Reverts to Plan B for Canadian Business originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Is SodaStream a Short Sell?

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Source: SodaStream.

SodaStream stock has lost more than 50% of its market value during the last year, and it has a big short interest ratio of more than 35% of its float. This is clearly indicating that there's a lot of negativity surrounding SodaStream stock lately. The company is having difficulties in streamlining its business and accelerating sales growth in the U.S., and this seems to be the main reason for concern when it comes to SodaStream.


On the other hand, the business is still firing on all cylinders in international markets, and SodaStream stock could offer substantial upside potential from current levels if things turn for the better. Also, the possibility of an acquisition makes a short bet on SodaStream a particularly risky position.

Is SodaStream a short sell, or will the bears regret their pessimism as the stock pops higher during the coming months?

A tale of two markets
SodaStream is facing considerable headwinds in the U.S. The company can't seem to overcome difficulties in that region, and excess inventory from the holiday quarter remain a considerable drag on performance. While total sales increased 6.6%, to $141.2 million during the second quarter of 2014, sales in the Americas region fell by a worrisome 14%, to $40.9 million.

When looking at performance excluding the U.S., the company is doing quite well across its different products. Total sales, excluding the U.S., grew 20% year over year during the last quarter, with gas refill units increasing 20%, flavor units growing 21%, and soda maker units increasing 4%.

Performance was very different in the U.S., though. Gas refills increased 7%, but flavor sales declined 11%, and machine sales fell off a cliff, with a decline of more than 55% during the second quarter. According to CEO Daniel Birnbaum: "The softness was mainly attributable to our demand creation efforts, which were not as effective as expected, combined with the fact that most retailers are still carrying excess soda maker inventory."

Reasons for optimism
Management believes that there are some reasons to be optimistic regarding the prospects for a turnaround in the U.S during the coming months. During the earnings conference call, Birnbaum quoted data from NPD saying that sell-through rates of gas refills grew 28% in the U.S. during the last quarter, which is an indication of resilient demand as users continue putting their machines to active use.

The company acknowledges that it needs to streamline both its product and marketing strategy in the U.S. SodaStream is putting more focus on the health benefits of its products and platforms over the value proposition and cost benefits, which have traditionally been a big part of SodaStream's marketing message in the U.S.

According to management, this marketing strategy has been very effective in Europe. Considering that big soda players such as Coca-Cola and PepsiCo are facing considerable headwinds due to stagnant or even declining demand as consumers are increasingly conscious about the health implications of soda consumption, this seems to be a smart move by SodaStream.

Big upside potential
While SodaStream's problems in the U.S. are a valid reason for concern, the company is still firing on all cylinders in international markets. If sales in the U.S., as a percentage of total revenues, continue declining over time, overall performance should improve, as a bigger share of the business will be coming from global markets. Needless to say, if management is right about the prospects for a turnaround in the U.S. during the coming quarters, growth rates should accelerate materially.

Importantly, SodaStream is trading at historically low valuation levels when looking at ratios such as forward P/E or Enterprise Value/EBITDA. This means the company's problems are incorporated into valuation ratios to a considerable degree, and the stock offers substantial upside potential if things turn for the better.

SODA PE Ratio (Forward) Chart

SODA P/E Ratio (Forward) data by YCharts.

There have been plenty of rumors and news reports regarding a possible acquisition of SodaStream during the last several quarters. PepsiCo was rumored to be interested in an acquisition this summer, an idea which makes a lot of sense considering that rival Coca-Cola is entering in the home soda market via a partnership with Keurig Green Mountain.

According to The Marketer, a british private equity firm is interested in acquiring SodaStream for $40 per share, a premium of roughly 30% above current market prices. It's hard to tell if these rumors will lead to some kind of deal in the future, but the fact remains that SodaStream has the first-mover advantage in the home soda industry, which makes it an interesting candidate for an acquisition. Besides, the purchase price has become increasingly more convenient for a potential acquirer lately.

Key takeaway
SodaStream's problems in the U.S. are a serious drawback, but the business is still doing remarkably well in international markets. The stock is priced for considerable upside if management can lead the company to a successful turnaround, and the possibility of an acquisition is a major risk for SodaStream shorts. A short position in SodaStream does not look like a great idea when considering risk versus potential for gains at current levels.

Apple Watch revealed: The real winner is inside
Apple recently revealed the product of its secret-development "dream team" -- Apple Watch. The secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see where the real money is to be made, just click here!

The article Is SodaStream a Short Sell? originally appeared on Fool.com.

Andrés Cardenal owns shares of SodaStream. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

 

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Can Automotive Drive NVIDIA Corporation's Tegra to Profitability?

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NVIDIA , which specializes in graphics-related processors, on Wednesday announced that the 2015 Honda Civic, Civic Tourer, and CR-V will feature the company's Tegra processors. These processors will provide the brains behind the in-car audio and information systems found in the cars.

While this announcement isn't a big deal in and of itself (NVIDIA has already publicly announced its goal to ship 25 million processors over the next five years for use in vehicles), it's a good springboard for some deeper discussion of the company's automotive ambitions.


NVIDIA's software focus is showing
NVIDIA's analyst day presentation featured a segment on the company's automotive-related business. One point made in the slide deck was that "the modern car is becoming an extremely powerful visual computer" and that "within the next 10 to 15 years, every car will need one."

This is all well and dandy, but what I found particularly interesting as I dug deeper into NVIDIA's automotive related analyst day slides, is the following line from the presentation: "Car makers need a car computer platform partner, not a chip supplier. [emphasis by NVIDIA]"

To support this point, NVIDIA said about 80% of the research and development that goes into building an in-car computer is actually "software engineering & expertise."

This could suggest that design wins are fairly sticky in this market, particularly if there's significant collaboration between NVIDIA and its customers on the software side of things for each in-car computer system that NVIDIA's chips power.

What's the opportunity worth?
As nice as the market sounds qualitatively, I'd like to try to actually quantify the opportunity.

Further along in NVIDIA's analyst day automotive business presentation, the company suggested that it sold approximately 4.5 million chips into the automotive market cumulatively through fiscal 2014. A look at the chart indicates NVIDIA sold about 2 million automotive-focused units during fiscal 2014.

Source: NVIDIA; author annotations. 

CEO Jen-Hsun Huang stated last November that approximately 25% of the company's fiscal third-quarter 2014 Tegra revenue came from automotive. Naively applying this 25% figure to NVIDIA's fiscal 2014 Tegra revenue base of $398 million gives us $99.5 million in automotive-related revenue.

From these numbers, the implied average selling price per automotive solution is $49.75. This suggests that over the next five years, NVIDIA is poised to generate approximately $1.24 billion from automotive chip sales. These sales probably carry higher gross margin than traditional smartphone and tablet Tegra products, particularly as much of the value of the solution reportedly comes from software.

Is automotive a game changer for NVIDIA?
A $1.24 billion opportunity over five years indicates an average of $248 million in annual revenue (keep in mind that the actual contribution will be lower earlier during those five years and the run rate exiting those five years will be higher).

This isn't enough to support Tegra on its own, but it does make getting to breakeven against a $400 million annual Tegra R&D investment meaningfully easier than trying to do it with tablets and phones alone.

Foolish takeaway
Automotive is an interesting opportunity that I suspect will go a long way to getting the company's Tegra division to at least breakeven. It will be interesting to see how much tablet market share NVIDIA can gain with its Tegra processors, and I suspect that NVIDIA will aggressively target "nontraditional" computing opportunities such as Android TVs and set-top boxes with Tegra.

Apple Watch revealed: The real winner is inside
Apple recently revealed the product of its secret-development "dream team" -- Apple Watch. The secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see where the real money is to be made, just click here!

The article Can Automotive Drive NVIDIA Corporation's Tegra to Profitability? originally appeared on Fool.com.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple and Nvidia. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

 

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Why Cliffs Natural Resources Inc. Stock Fell Off a Cliff Today

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Iron ore and metallurgical coal miner Cliffs Natural Resources saw shares plummet 16.8% today at the time of this writing as it has officially become "Analysts realize the stock isn't doing well and pile on 'sell' ratings" week. This week alone Wells Fargo, RBC Capital, Deutche Bank, and Nomura have all issued some sort of analyst call that either lowers Cliffs to a sell raging or lowers the price target. 

So what: You don't need to look at the analyst ratings for Cliffs to know that things have been rough for the company over a year or so. All you need to do is look at the prices for iron ore. 



Iron Ore Spot Price (Any Origin) data by YCharts

At today's prices of less than $90 per ton, Cliffs and just about every other producer of iron ore is struggling. The comapny's US Iron Ore production remains profitable, but every other part of the business--Canaidan Iron Ore, Austrailian Iron Ore, and North American metallurgical coal-- are hemorrhaging money. Add to the fact that Cliffs has gone through a complete management overhaul as a result of activist Cassablanca Capital's efforts, and you get a recipe that's causing short-minded investors to salivate.  

Now what: Cliffs big drop today wasn't a result of anything changing with the company. It was more just a result of a few lead lemmings leading the way off the cliff. There is likely some concerns whether the company can maintain its dividend and whether its plan to buy back $200 million worth of stock is prudent because of the atrocious market it's in today. 

That being said, today's valuation basically says a company that owns 60% of the US' total Iron ore production is worth less than its current assets--cash, inventory, and accounts receivable. If an investor out there thinks that iron ore prices won't remain this low forever and has the patience to wait, then this could be a potential time to look at buying shares. 

Top dividend stocks for the next decade
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The article Why Cliffs Natural Resources Inc. Stock Fell Off a Cliff Today originally appeared on Fool.com.

Tyler Crowe owns shares of Cliffs Natural Resources. You can follow him at Fool.com under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool. The Motley Fool owns shares of Cliffs Natural Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

 

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Market Wrap: Jobs Report Boosts Stocks, Dollar

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A Career Choice Fair Ahead Of Initial Jobless Claims
Patrick T. Fallon/Bloomberg/Getty Images

By BERNARD CONDON

Investors think the U.S. economy is at a perfect temperature for stocks: not too hot, not too cold. The latest evidence came Friday in a jobs report that showed a pickup in hiring last month that could mean more people with paychecks, more spending and higher corporate profits. But the report also showed that wages were stagnant, which cheered investors worried anything pushing up inflation could prompt the Federal Reserve to raise interest rates soon and kill the rally.

All major stock indexes rose sharply. The Dow Jones industrial average (^DJI) closed 208 points higher. All 10 sectors in the Standard and Poor's 500 index (^GPSC) rose. "The solid payroll report is great for economic growth and stock prices," said Anastasia Amoroso, global market strategist at J.P. Morgan Funds.

The good news pushed up the value of the dollar against other major currencies to the highest level in more than four years. U.S. bonds and gold fell as investors fled traditional "safe haven" assets.

284,000 Jobs Are Far Above Expectations

U.S. employers added 248,000 jobs in September, beating market expectations of a 215,000, the Labor Department reported. The hiring helped drive down the unemployment rate to 5.9 percent, the lowest since July 2008. Hiring in July and August was also stronger than initially estimated.

Still, average hourly wages fell a penny last month, the Labor Department reported. Wages are now up just 2 percent in the past year. "Wage inflation essentially came in zero, and that tells you that the Fed won't be in any rush to raise interest rates," said James Abate, managing director of Centre Asset Management.

The Dow rose 208.64, or 1.2 percent, to 17,009.69. It was the third 200-point move in a little over a week as markets turn more volatile. The S&P 500 index climbed 21.73 points, or 1.1 percent, to 1,967.90. The Nasdaq composite (^IXIC) rose 45.43 points, or 1 percent, to 4,447.62. Even with the gains on Friday, all three indexes ended more than half a percent lower for the week, adding to losses last week.

The Situation Abroad

Earlier in the week, investors were rattled by a sharp drop in small-company stocks, pro-democracy protests in Hong Kong, and falling oil prices that hurt energy companies, big components in stock indexes.

Many economists predict the Fed will wait until mid-2015 to start raising rates, then proceed with further hikes slowly. The central bank's low-rate polices have helped keep borrowing rates low for consumers and businesses.

The good news in the U.S. contrasts with troubling signs in Europe. The Chinese economy is slowing, and 18-country eurozone is teetering on another recession. On Thursday, the European Central Bank disappointed investors by not announcing details of more stimulus measures. All major European indexes ended the week sharply lower.

The prospect of a two-speed global economy drove up the value of the U.S. dollar on Friday. The U.S. Dollar Index, which measures the dollar against six other major currencies, surged 1.3 percent. The euro fell 1.2 percent to $1.2515 while the dollar gained 1.2 percent to 109.76 yen.

Unofficial Start to Earnings Season

Investors will get a better sense of how much the improving economy is helping company profits next week when aluminum maker Alcoa (AA) kicks off the unofficial start to corporate earnings season. Financial analysts expect earnings per share for the S&P 500 to rise 6.8 percent from a year earlier, then surge 12 percent the next quarter and for all of next year, according to S&P Capital IQ, a research firm.

The S&P 500 seems reasonably valued, if you believe the earnings forecasts. The index is trading at 15.6 times its expected earnings per share over the next 12 months, according to S&P Capital IQ. That is only a point higher, that is, more expensive, than the long-term average. In stocks making big moves:
  • Shares of Mylan (MYL) jumped 8 percent after the generic drug maker raised its outlook for the third quarter and year. The stock rose $3.73 to $50.23.
  • Salix Pharmaceuticals (SLXP) rose 1.2 percent. The company gained on news it is scrapping its merger with the subsidiary of an Italian drugmaker after the U.S. created new limits on the tax benefits of incorporating overseas. The stock rose $1.78 to $152.87.

Benchmark U.S. crude fell $1.27 to close at $89.74 a barrel on the New York Mercantile Exchange, its lowest level since April of 2013. Brent crude, a benchmark for international oils used by many U.S. refineries, fell $1.11 to close at $92.31 on the ICE Futures exchange in London.

In other energy futures trading on the NYMEX, wholesale gasoline fell 3 cents to close at $2.379 a gallon, heating oil fell 2.2 cents to close at $2.616 a gallon and natural gas rose 10.7 cents to close at $4.039 per 1,000 cubic feet.

Prices for gold and Treasurys fell as traders moved money out of assets that are considered safer. Gold fell $22.20, or 1.8 percent, to $1,192.90 an ounce. Silver fell 22 cents to $16.83 an ounce and copper was flat at $3 a pound. The yield on the 10-year Treasury note rose to 2.44 percent from 2.43 percent on Thursday.

What to Watch Monday:
  • The Container Store (TCS) reports quarterly financial results after U.S. markets close.

 

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