Investors Dig Morgan Stanley’s Transformation

Morgan Stanley (NYSE: MS) shares are popping on Thursday–up 4.7% in midday trading and reaching 52-week highs.

The New York investment bank announced $980 million in net profits for the quarter, and $8.5 billion in revenues. The profits were just a shade below analysts’ expectations but the revenues were much higher than expected.

Along with the earnings release the firm announced a $500 million share repurchase program, which surely contributed to the stocks surging higher.

Morgan Stanley is in the midst of a transformation right now. For decades, it fought neck-to-neck with Goldman Sachs as the top underwriter and M&A advisor in investment banking. In recent years, however, its star has dimmed a bit.

Now, Morgan Stanley has the country’s biggest retail brokerage business, eclipsing longtime rivals Merrill Lynch and UBS.  And that will serve as the company’s strategy going forward, which is eschewing the volatility of investment banking and focusing more on the stable–but less sexy–business of brokerage and wealth management.

CEO James Gorman has aggressively trimmed costs (including bankers’ pay, for which cash bonus is capped at $125K) to increased return on equity. In fact, he had a message for investment banking employees who may be disgruntled with the pay decreases.

Gorman said on Bloomberg TV, to such bankers: “You’re naive, read the newspaper, No. 1. No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem which is much bigger than the job. And No. 3, if you’re really unhappy, just leave. I mean, life’s too short.”

Zing!

Heathrow 787 Fire Denting Boeing Shares

Midday Friday July 12, shares of Boeing Co. dropped 7% on news that an Ethiopian Airlines 787 Dreamliner caught on fire at London’s Heathrow International Airport.

The fire led to suspensions of incoming and outgoing flights at London’s busiest international hub.

It’s the latest hole in Boeing’s armor and the fallout could affect future orders of the much-maligned 787 Dreamliner. From a competitive standpoint, it’s good news for Boeing’s chief rival, Airbus.

Shares of related companies, such as Precision Cast (PCP), are also down on Friday.

Details of the fire are still forthcoming, so I’d say that the 7% drop is perhaps a bit premature. Depending on what caused the fire, it may or may not have long-term consequences for the company. Nevertheless, it’s terrible publicity for Boeing.

S&P’s Ratings ‘Puffery’

I’m not sure if this is court room desperation or fact (ok, it’s fact), but credit rating agency Standard & Poor’s (S&P’s) launched an interesting defense in court, against the government’s civil lawsuit seeking $5bn on grounds that S&P defrauded investors during the financial crisis by slapping on “AAA” ratings on piles of dung (a.k.a. mortgage-backed securities).

S&P, in its defense, stated that any reasonable investor would not have relied that much on S&P’s ratings, which were mere “puffery” (in there own words).

“They’re seeking to blame the entire financial crisis on Standard & Poor’s,” S&P lawyer John Keker said in court. “Those generic statements don’t make a scheme to defraud. For a scheme to defraud, there has to be a specific intent to harm the victim, in this case the investor.”

Well, Keker does have a point. And the entire financial crisis probably shouldn’t be laid on S&P alone. There are other ratings agencies (Moody’s, Fitch Ratings), and of course the banks, mortgage finance companies, shady mortgage brokers, and not to mention the U.S. government itself, should all share the blame.

But I digress. Getting back to S&P–the fact that S&P ripped its own work (which is its own bread and butter business) in public is pretty eye-opening (and funny). But believe it or not, S&P is absolutely correct.

Professional investors don’t trust the credit ratings. And most Wall Street banks, institutional investors, and funds know that the ratings are hogwash. Sure, a “CC+” rated security might be worst off than a “AAA” rated security, relatively speaking, but no investor would rely solely on those ratings without doing their own homework first.

So in the end, I don’t think S&P intended to deceive investors. What it did intend to do was get as much money as possible from their clients (the issuers who hired them to rate their securities), by slapping on the “AAA” stickers as quickly as possible.

Samsung and HTC

Samsung Galaxy S4

Samsung Galaxy S4

Korean electronics giant Samsung saw its shares tumble on July 8 as it announced June quarterly earnings of 9.5 trillion won ($8.5 billion), which was slightly below the expected 10 trillion won forecast by analysts (they’re a tough bunch to please). Shipments of 74 phone units during the quarter was also 2 million off expectations, which prompted several bank analysts to downgrade Samsung’s stock.

Taiwanese phone maker HTC suffered a similar fate–its shares fell 7% Monday–albeit on a far worse outlook, with its earnings falling drastically short of expectations.

During the quarter, both companies released shiny new phones, Samsung the Galaxy S4, and HTC the One. Both phones have been hits, and are widely critiqued as being superior on the smartphone market in terms of build quality, processor speed, screen resolution/size, and having the latest Android OS incarnations.

For HTC, its troubles are deeply ingrained. It hasn’t been able to gain traction in the developed markets and it relied the One to launch a comeback. Unfortunately, it fumbled the execution and due to logistical and supply chain issues, the One was delayed from Feb to Apr, which is the same month as the release of the much more bally-hooed S4. Factoring in high marketing expenses, and HTC may be running out of cash–and time–to turn itself around. It’s a shame really, as the One might just be the best-looking Android device on the market.

Samsung’s issues are more benign. Analysts may have hyped it up too much last year on unexpectedly stellar S3 sales, and Samsung now suffers from sky-high expectations, which is a consequence of its own success. The concerns here are that there are market headwinds that the high-end smartphone market is reaching saturation, Samsung’s focus on hardware (instead of hardware-software ecosystem), and that Samsung’s other businesses–namely the slow-growth TV business (in which it is the world leader)–may be slowing the company down.

If Apple’s recent success (or Sony’s failure, if you prefer) is a lesson, it’s that winning the war takes more than a great product. It takes a combination of timing, execution, vision, and marketing. It’s a formula that is hard to sustain, even for Apple.

Using Cultural Advantage to Generate Above-Average Returns

The article originally appeared on The Epoch Times

(By Warren Song & Frank Yu)

Professional investors typically use the S&P 500 Index as a benchmark to measure their portfolio’s investment performance.

As the S&P includes companies operating in all sectors, it is a good proxy to track trends of the overall global economy. But by investing in a few U.S. companies that are uniquely positioned to lead their fields internationally, an investor’s portfolio can have a leg up on the S&P 500 in terms of performance.

Tuning out short-term gains and losses driven by geopolitical and macroeconomic events, stock performance is usually determined by a company’s industry, and its long-term competitive advantages within its industry. Since today’s global marketplace is the most transparent in history, let’s identify a few companies that should have distinct competitive advantages in their global industries for the next 10 to 20 years. These advantages will ensure that their revenues and profits can grow consistently in the long term (exceeding inflation). We know companies like these will, in the medium- and long-term, generate higher returns for shareholders compared to the S&P 500 Index.

In order for a brand to have staying power, a few things must be satisfied:

• The company must be an industry leader; it must be a pioneer in that industry.
• The company must have a competitive advantage over others in the same industry.
• Most importantly, the company must represent something (or have a continuing vision) that consumers will covet long term.

In the global lens, the American way of life is often romanticized and coveted, and this is especially true among people in developing countries where much of the future growth will come from. In this article, we’ll examine three industry-leading companies that can best utilize those ideals to long-term success. Let’s call them the “cultural advantage” portfolio.

There are three companies that obviously fall into this “cultural advantage:” Costco Wholesale Corp., McDonald’s Corp., and Texas Roadhouse Inc.

Growth of Club Stores
Seattle-based Costco (Nasdaq: COST) has a few distinct advantages. The club store concept has taken off globally: big space, lots of brand name choices, members only, and the best prices. In addition, it’s the first name that comes to mind in this sector.

Wal-Mart Stores Inc.’s Sam’s Club brand is a distant No. 2 in term of sales per square foot, compared to Costco. Wal-Mart, however, which has had its share of labor controversies, is almost the opposite of Costco on labor issues, as Costco has a reputation of higher pay, good benefits, and low employee turnover. These factors make it nearly impossible to elevate Sam’s Club’s reputation above that of Costco.

The barrier of entry in this field is almost insurmountable. There is just no real estate space available in many of the ideal markets anymore, and because Costco owns the land and buildings of most of its stores it doesn’t have to worry about rent or real estate price hikes, whereas the cost for any would-be competitor to acquire new land will become prohibitively expensive, in addition to the big disadvantage of lacking scale at the outset. Costco’s recent successes in Japan, Taiwan, and the U.K. have proven its leading status.

Fast Food is King
McDonald’s (NYSE: MCD) is the clear leader in the global fast-food industry and will remain so for a long time because of its valuable real estate holdings (owns nearly 50 percent of its real estate and property). In addition, this industry is here to stay—in economic prosperity or decline. The reason is that as people all over the world spend less time cooking at home, the fast-food industry will likely be an integral part of workers maintaining high productivity rates.

Another big reason is that the global income gap will become wider and wider over time and more middle-class families will shift from fast casual dining to fast food. In addition, people in higher income brackets will maintain their fast-food intake because of convenience and time constraints.

Some other companies have enjoyed success in isolated regions (such as Yum! Brands in China), but because they are not industry leaders (nor do they have the typical McDonald’s association with America), they will not be able to pose a real challenge to McDonald’s in financial terms. Younger upstart brands in this sector can grow to a certain extent, but will not pose a serious challenge to McDonald’s in the long term.

No Messin’ With Texas
Right now, the state of Texas (and its cultural associations) invoke more goodwill from people around the world than the United States as a whole. To many, Texas represents the true American spirit in the eyes of global viewership: the Wild West, the fight with Mexico for freedom, small government, low taxes, oil boom, business friendliness, low housing prices, open roads, and the list goes on.

The restaurant chain Texas Roadhouse (Nasdaq: TXRH), even though it was founded in Louisville, Ky., captures this spirit well. It incorporates the Texas spirit into the entire operation of its restaurants: from the food, music, and drinks, to the way waiters and waitresses dress and dance. Texas Roadhouse not only has tremendous growth opportunity outside the United States, it also has room to grow within the domestic market. This is really a very smart concept.

Culture is the most endearing distinction between countries and the most admired country in the world can always enjoy this advantage.

The American sports culture is also very popular abroad, so athletic apparel and footwear maker Nike Inc. is also a possible candidate. One problem is that in this field, barrier of entry is relatively low, so its advantage over its competitors, such as Adidas AG and relative newcomer Under Armour, may not be permanent.