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Citi’s Corbat Asked to Prove His Bank Isn’t the Next Wells Fargo By Bloomberg

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© Reuters. Citi’s Corbat Asked to Prove His Bank Isn’t the Next Wells Fargo

(Bloomberg) — A public slap from regulators, new limits on dealmaking and a surprise handover of the CEO reins all made for plenty to talk about on Citigroup Inc (NYSE:).’s earnings call.

The recent swirl of news surrounding the bank has investors and analysts feeling anxious. It’s even led to a bit of deja vu, with the worry that Citigroup is in for a round of regulatory oversight similar to what rival Wells Fargo (NYSE:) & Co. has spent years trying to work through, with a Federal Reserve-imposed asset cap that’s caused the company to miss out on at least $4 billion in profits.

The tension came to a head in a contentious conference call Tuesday between the bank’s top executives and analysts, who spent the almost two-hour event calling on outgoing Chief Executive Officer Mike Corbat to do everything from moving up his retirement date to giving a firm number for what the bank will need to spend to put regulators’ concerns to rest.

“Why isn’t Citigroup the new Wells Fargo in terms of the regulatory issues?” Erika Najarian, an analyst at Bank of America Corp (NYSE:)., asked on the call, adding that asset-cap and the business-activity limitations for Wells Fargo came long after its own consent order. “How can you reassure your current investors and your prospective investors that you’re not going down the same laborious regulatory remediation route?”

Wells Fargo, in 2018, was banned from growing until it convinces regulators it has cleaned up its act. The limit came two years after the San Francisco-based bank settled allegations that it opened millions of accounts for customers without their permission. Corbat, for his part, sought to assure investors on Tuesday that his bank isn’t on a similar path.

Not Easy

There was “no widespread customer harm — the company did not profit from the activities,” Corbat said. Still, he cautioned, “this won’t be a quick or easy fix.”

Citigroup last week said it entered into consent orders with the Federal Reserve and the Office of the Comptroller of the Currency, which also slapped the bank with a $400 million fine for failing to fix longtime deficiencies in its underlying infrastructure and controls.

The bank on Tuesday affirmed its commitment to spend $1 billion on improving those efforts this year. Still, executives didn’t present a clear picture of what those expenses may look like going forward.

“The remediation work will cost what it will cost,” Corbat said. “These are investments we need to make. In hindsight, we should have done this faster and prevented it from coming to this.”

Citigroup this year has already hired thousands of people to help it navigate the new years-long process of improving risk and controls, an effort it’s starting just as CEO-elect Jane Fraser is set to take the reins in February.

Timing Questioned

The timeline for new management also spurred questions by some analysts Tuesday — with one asking when Fraser would first appear on an earnings conference call, and another wanting to know when the bank would set new targets for profitability to which executives could be held accountable.

“Speaking on behalf of investors and the people I speak with, there’s a collective sense of extreme disappointment,” Wells Fargo analyst Mike Mayo said on the call. “Why not step aside now and have a new CEO — Jane Fraser — take over as a way to demonstrate the increased sense of urgency?”

Corbat said a transition period was needed before Fraser takes over. In the meantime, she’s still leading the firm’s global consumer-banking operations, helping the firm craft its plans for returning workers to North American offices and embarking on the gap analysis required as part of the consent orders.

Plus, Corbat recalled his own experience when he took the reins of Citigroup in 2012, after the board ousted then-CEO Vikram Pandit following a series of setbacks with regulators.

“It’s important to the company that we have a real transition,” Corbat said. “As you recall, my transition was about five minutes.”

©2020 Bloomberg L.P.





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The Case for Netflix By Investing.com

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© Reuters.

By Liz Moyer and Yasin Ebrahim

Investing.com — Netflix (NASDAQ:) faces new competitors and an uphill battle with subscriber growth, but don’t let that sway you.

Overseas markets are a big source of growth, and the streaming giant is on better footing operationally now that production is gearing back up after lockdowns in the spring that affected the television and film production cycle. 

But Netflix is losing market share and will have to fight to keep it from eroding further.

Investing.com’s Liz Moyer argues the bull case for Netflix, while Yasin Ebrahim explains why this is one stock to avoid. This is .

The Bull Case

If you’re bullish on Netflix, you’re not going to let a little lull in subscriber growth get you down.

Earlier this week, Netflix reported disappointing results. It added 2.2 million global subscribers in the quarter, but that was short of its own guidance. Profits of $1.74 a share also fell short. 

The numbers even failed to meet the expectations of analysts, but several Wall Street analysts raised their price targets despite the miss, and many confirmed a positive outlook on the stock. The shares are up 50% this year.

The pandemic was a boost to Netflix’s business earlier this year as hunkered down people comforted themselves by binge-streaming. It added 25 million new subscribers in the first half of the year. The nationwide shut down of movie theaters during the worst of the spring virus wave also pushed more people seeking entertainment to streaming services like Netflix. Habits are hard to change.

Now that things are opening back up (in fits and starts), subscriber growth naturally won’t keep pace with this spring. But that doesn’t mean Netflix’s business is broken.

One metric some analysts jumped on was positive free cash flow in the quarter. Netflix has had trouble keeping this measure in the green as it spends on new content, but the company says it’s on track for $2 billion in cash flow this year and an operating margin of 19%. The CEO was optimistic on the company’s ability to maintain positive cash flow next year even as production — and spending — gets going again on new shows.

Even if new subscribers are slowing in the U.S., Netflix still has an opportunity to expand overseas, where rates are growing at 30% or more. Michael Morris of Guggenheim, who rates the stock a buy with a $570 price target, says opportunities in India and South Asia are encouraging.

High-growth, mobile markets “stay basic to the Netflix bull case,” he writes, “with native partnerships as a key driver.”

Netflix also faces new competition from Disney + as well as older foes such as Amazon (NASDAQ:) and Apple (NASDAQ:), but its content keeps a loyal following coming back for more. In the early days of the pandemic lockdowns, audiences flocked to Tiger King, a true crime documentary series.

Next up: season four of The Crown, the wildly popular Netflix original series about the British royal family. That starts streaming in mid-November. 

The Bear Case

 

Netflix may still sit on the streaming throne, but its competitors have made significant strides and are banging at the door, threatening to usurp the streaming giant.

 

Earlier this month, data showed that competitors including Amazon’s prime video are starting to close the gap on the streaming giant. Netflix saw its market share slip to 25% in the third quarter from 32% in the second, according to streaming services company Reelgood.

 

Amazon has managed to close the gap with its prime video racking up market share of 21% in the third quarter, sharply up from 1% in Q2. Hulu, HBO Max and Disney, in third, fourth and fifth position respectively, are also chipping away at Netflix’s market share.

 

Following its weaker-than-expected third quarter results earlier this week, the company said performance would continue to stutter in the first half of 2021, but could recover in H2,  underpinned by a heavy slate of new content.

 

“The state of the pandemic and its impact continues to make projections very uncertain … we expect paid net adds are likely to be down year over year in the first half of 2021 as compared

to the big spike in paid net adds we experienced in the first half of 2020,” Netflix said.

 

But some question whether subscriber growth will return in a meaningful way next year, when the potential of a Covid-19 vaccine may see countries lift restrictions rapidly, leading to

weaker streaming demand.

 

“I would have seen Netflix, frankly, as a stock to avoid, should there be, for example, a vaccine, or should lockdowns ease greatly,” Alex DeGroote, who owns DeGroote Consulting, said in an interview on CNBC.

 

That echoed similar sentiments from Benchmark Capital Partners, one of the five Wall Street firms with a sell rating on the stock.

 

“Despite high customer additions and lower churn, we are concerned with mounting streaming competition, potentially restricted pricing power from a global economic downturn

and surveys suggesting that streaming services are among the first household budget items to be cut with job losses,” Benchmark said in April.





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This SPAC Found the Right Fit in CarID By Investing.com

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© Reuters.

By Christiana Sciaudone

Investing.com — This auto parts company has nary a warehouse in sight, and that’s the plan. 

Onyx Enterprises connects customers — mostly comprised of gearheads, for now — to parts distributors via CARiD.com, an e-commerce company it owns and operates. Onyx is poised to go public in a merger with a special purpose acquisition company Legacy Acquisition Corp., which will change its name to PARTS iD, and move from specialty accessories and parts into repair and collision, a market 10-times the size of the one CARiD currently serves.

“There is a lot of competition in the market,” said Nino Ciappina, interim general manager at Onyx, in a video interview. “What makes us different is the tech infrastructure, which we purpose-built over the past 10 years.”

Here’s what CARiD says sets it apart: The technology to source 17 million SKUs — or stock keeping units, aka, individual products — and growing. Compare that to rival Carparts.Com Inc (NASDAQ:), which has about 830,000 SKUs, according to its most recent quarterly report. The rival also boasts more than 840,000-square-feet of warehouse space, and growing.

CARiD’s model does not require significant investments in distribution centers or inventory.

There are millions of parts and accessories given how many different models of cars are made each year — this is known as fitment — making servicing the market as a whole a challenge. 

“It creates an incredible amount of friction in this particular industry,” Ciappina said. E-commerce solutions that exist aren’t built for this kind of multidimensional industry. “We wanted to control the accuracy of the data.”

After the reverse merger, CARiD will have up to $55.5 million of cash on the balance sheet to fund future growth and potential acquisitions. The implied pro forma enterprise value is $331.1 million.

CARiD, which estimates it will bring in $401 million in revenue this year, has more than 800 partners and 2,800 shipping locations in the U.S. 

“We can offer a wide selection and get goods to consumers relatively quickly, regardless of what you’re ordering,” Ciappina said. “Our business model is completely unique.”

That was exactly what Legacy Acquisition was looking for. 

Legacy is led by a couple dozen former corporate executives and entrepreneurs, largely African-Americans, with years of experience at places like Procter & Gamble Company (NYSE:), Coty (NYSE:) and Maytag.

Legacy Chief Executive Officer Edwin Rigaud said he has made it a point to get underrepresented groups involved in capitalism.  

“The more talent we can bring to Wall Street, the better off we all are,” Rigaud said in the same interview. “There is African-American talent that’s been sitting there waiting to do things, and not knowing exactly how to do it. This is my legacy.”

Legacy went public in November 2017, raising about $300 million. 

“We have 25-plus experts who know how to look at an opportunity like this and really determine in depth to determine whether it’s the right fit for the right company and whether it has growth potential,” Rigaud said. “There aren’t other Spac teams that are comparable with the expertise that we have.”        

CARiD’s market specialty equipment and accessories — think, custom rims —  still represents the center of the business, but the focus is on building out product lines like repair that have a higher purchase frequency. After all, how often does one need new chrome rims?

“Our core objective is to win the automotive space, we know that’s the much bigger opportunity,” Ciappina said. “That is the quickest path to $1 billion in revenue.” 

CARiD sees a specialty equipment market of about $46 billion compared to more than $400 billion for the broader industry. That’s a lot of a warehouse space — if you need it.

   

 





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Volkswagen: Significant Upside From Closing The EV Gap (OTCMKTS:VLKAF)

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Volkswagen (OTCPK:VLKAF) is the leading global auto manufacturer, with strong, longer-term prospects on the back of its broad core product offerings, scale, and improved cost management. It comes as no surprise to me that Volkswagen has been resilient through COVID-19. However, an underappreciated aspect of VW is the fact that it is also the leading legacy auto manufacturer in the electric vehicle (EV) space.

A review of the EV Virtual Tour event strengthens my belief that the potential for VW’s EV volumes and contribution to ramp up is currently being ignored by the market. Valuing VW’s projected EBITDA contribution from EVs at a Tesla-like (NASDAQ:TSLA) multiple would yield upside of over 40% from current levels.

Closing the Product Gap

VW ambitiously highlighted its plan to reach a c. 3-4% EV share by 2020 and c. 6-8% by 2021 (up from the sub-1% level in 2019) at its EV Virtual Tour event. The target is underpinned by the following core products – VW ID.3, ID.4, Skoda Enyaq, CUPRA el-Born, and the Audi Q4 e-tron.

Source: VW Virtual Investors Meeting Slide (E-Mobility)

Interestingly, the ID.3 performs well against peers – according to an ADAC study (cited by VW as seen below), the ID.3 total cost of ownership over a five-year period is c. 12% below that of a Nissan Leaf (OTCPK:NSANY) and c. 21% below that of a Tesla Model 3. Meanwhile, the ID.4 is also expected to price at a c. 16% discount to the Tesla Model Y.

Source: VW Virtual Investors Meeting Slides (ID Sales)

Importantly, VW’s first EV (the ID.3) to be built off its MEB platform represents the first of at least six MEB-based models to be launched in the upcoming year. It also means VW’s EV product cycle is without precedent and will grant VW the broadest portfolio of BEVs on the market. In other words, competition is coming for Tesla.

Targeting 1 million EVs by 2022/23 and c. 3 million EVs by 2025

In 2022, the goals get even more ambitious – VW is launching the Q5 e-tron, the electric Porsche Macan, and the VW Buzz, which will drive c. 1 million units by 2022 (or 2023 at the latest). If achieved, VW will likely have narrowed (or even closed) the volume gap relative to Tesla.

Looking further ahead to 2025, the company expects to sell up to 3 million EVs/year, which would make it the market leader by far. To achieve this target, VW will require over 150 GWh of batteries in Europe and North America and a similar capacity in Asia. In aggregate, c. 75-80% of EV sales will be contributed by Europe and Mainland China, with Europe set to be the main market at an over 50% share.

Tesla’s growth prospects can’t be ignored either, but by 2025, VW stands a solid chance of becoming a strong competitor to Tesla. The major strategic difference lies in their focus – Tesla is dependent on the North American market (car and pickup trucks), while VW is focused on selling in China and Europe.

Source: VW Virtual Investors Meeting Slides (Group Sales)

Optimizing the Production Footprint

VW stands to gain from the production side as well – EV production represents an opportunity to streamline the production footprint and move towards multi-brand production plants. By optimizing its production footprint, VW stands to gain from economies of scale. Assuming execution proceeds as planned, VW’s Mosel plant could prove to be a major breakthrough in terms of scale, producing Audi, Seat, and VW electrics cars, and highlighting the flexibility in its MEB platform-based production strategy.

Source: VW Virtual Investors Meeting Slide (E-Mobility)

EVs Could be EPS Accretive

Also notable was VW’s confirmation that contribution margins on its EV products are already positive and on par with comparable internal combustion engine (ICE) vehicles. However, operating margins remain subdued due to the high fixed costs and relatively low volumes at present. This should change as VW scales – the ID.4 is expected to match ICE Golf profitability levels, while the Skoda Enyaq should match Octavia profitability, which translates into a c. 3-4% margin for the ID.3 and c. 5-6% for the Enyaq.

While the initial OP margin expectations are modest, I believe EVs can be EPS accretive as VW scales and gains market share going forward. Details are fuzzy at this point, but VW plans to confirm its long-term 2025 group profitability targets with the upcoming planning round. These numbers are crucial – while the quarterly disclosure of EV sales is a step in the right direction, further transparency is key in convincing the market to assign due credit to VW’s EV efforts.

Next Step – Closing the Valuation Gap

Like most other legacy auto manufacturers, VW shares are trading at a depressed c. 6x EBITDA multiple, which largely ignores its EV leadership. However, improved transparency and strong execution should eventually drive a re-rating. The opportunity is significant – if we were to value VW’s implied EBITDA contribution from the EV lineup at a Tesla-like multiple, for instance, VW shares could be worth upwards of €200/share (over 40% upside to current levels).

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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