MasterCard Allies with Western Union – Analyst Blog
In an attempt to expand its prepaid card offering, yesterday, card giant – MasterCard Inc. (MA) announced a global strategic alliance with money transfer giant – Western Union Co. (WU) – to offer consumer-friendly prepaid card service across the latter’s multiple non-US locations.
According to the agreement, MasterCard is offering a prepaid card that will enable to move money from Western Union directly to MasterCard’s credit, debit and prepaid cards, and vice versa. This prepaid card can be refilled at all MasterCard rePower locations as well as at about 485,000 global agent locations of Western Union.
This service further assures a reliable, secure and convenient financial payment service to the consumers across the globe. The companies, who have been functioning in this area of service in the USsince last year, have already successfully tapped the US market with 1.2 million prepaid cards as of September 2011, that almost doubled from year-ago period. Meanwhile, Western Union consumers loaded about $120 million on prepaid cards during the third quarter of 2011.
Besides, with the rapid evolvement of eCommerce and the regulatory challenges against the vanilla credit and debit cards, prepaid cards are now making up for the lost revenue opportunities for most card giants such as MasterCard, Visa Inc. (V) and American Express Co. (AXP). According to Mercator Advisory Group, the US prepaid card market had inflated to $40.85 billion in 2010 against mere $2.7 billion in 2005.
On the flip side, Western Union has been able to take a proactive step to further knead its prepaid card services, while its expanded money transfer network is expected to help both the company and MasterCard to reach out to forsaken consumers worldwide.
Moreover, the service users of Western Union can now load money on the prepaid card rather than remitting cash and this card can be used wherever MasterCard is accepted. This, in turn, is likely to create an efficient electronic payment service portal in the near-to-intermediate term.
Further validating this opinion, there lay an unexplored market for prepaid cards for the senior group of the society, whereby MasterCard estimated about 2.5 billion adults being underserved within the US itself, while about 25% of this lot is devoid of any kind of a conventional financial payment service.
Hence, while a highly developed nation like the US generates a healthy opportunity for the simplified prepaid debit cards, we believe that ample opportunities lay ahead for both MasterCard and Western Union in the under-developed and developing nations across the globe, where there are no ATMs along with other unbanked regions.
Overall, given the regulatory challenges hovering on the credit and debit cards, the move of MasterCard to direct its synergies toexpand its prepaid card offering appears a viable one, as prepaid cards are out of the scope of any regulatory limitations so far. The attempt will enable the company to process smaller dollar transactions, which is further expected to drive transaction volumes and therefore, the top line. Furthermore, this will also enhance MasterCard’s operating and competitive leverage in the upcoming quarters.
Given the growth catalysts in the near term, MasterCard holds a Zacks #2 Rank, implying a near-term Buy, while the long-term stance remains Neutral.
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NHS Deal for Computer Sciences – Analyst Blog
Virginia-based tech giant Computer Sciences Corp. (CSC) ended this month on a high note. Yesterday, the company clinched an information technology (IT) outsourcing deal with Royal Berkshire NHS (National Health Services) Foundation Trust. The 7-year deal has the option to be extended by another 3 years depending on the level of work accomplished. Financial details were kept confidential.
Per the deal terms, Computer Sciences will perform all technological outsourcing jobs for the trust’s latest project. Computer Sciences will be responsible for day-to-day hosting, developing and managing a lot of the trust’s IT and back-office processes. The company will also offer IT help desk, networking, infrastructure, desktop engineering, application development and support, as well as advice regarding clinically driven health informatics.
Company officials are excited about the deal, as they think that it would actually help Computer Sciences to evolve as a key player in the healthcare sector and mitigate the odds of success with the U.K. NHS contract.
In May 2011, the U.K. President reportedly excluded Computer Sciences from future NHS contracts, pending reviews from the health department about the tech firm’s inability to meet the prior project deadline. In September 2011, the Government announced that it would dismantle the entire NHS program, eliminating the ~$250 million of revenue that CSC was expected to earn from NHS in the fourth quarter of fiscal 2012. However, this would be offset by contract termination fees as agreed upon by the parties.
The uncertainty regarding the passing of the MOU is significant, as is evident from the persistent decline in share prices. However, we can only hope that the success with the Royal Berkshire NHS Foundation Trust will add some luster to the company’s fundamentals, which remain impacted by the U.K. issue.
Winning deals is not new for this tech giant. But headwinds in its government business are actually affecting the company’s ability to execute on the deals that it wins at regular intervals. This apart, Computer Sciences’ disappointing second quarter 2012 results and stiff competition from Accenture plc (ACN) and Hewlett-Packard Company (HPQ) in the IT and cloud computing space concern us.
Computer Sciences has a Zacks #5 Rank, implying a short-term Strong Sell rating.
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Earning Scorecard: DISH Network – Analyst Blog
DISH Network Corp. (DISH) reported its third-quarter 2011 financial results, where the top line exceeded the Zacks Consensus Estimate, but the bottom line fell short of the Zacks Consensus Estimate.
However, the alarming sign is that net subscriber loss mounted in the previous quarter to 111,000 compared with a net loss of a mere 29,000 in the prior-year quarter. As of September 30, 2011, DISH Network had approximately 13.945 million subscribers.
Fourth Quarter Highlights
Quarterly GAAP net income came in at $447.7 million or 71 cents per share compared with a net income of $446.3 million or 55 cents per share in the prior-year quarter. The third quarter of 2011 EPS of 71 cents missed the Zacks Consensus Estimate by a penny.
Quarterly total revenue increased 12.3% to $3,602.7 million from $3,207.7 million in the year-ago quarter. This was mainly due to an increase in subscriber related revenue and contribution from Blockbuster. The third-quarter 2011 revenue also surpassed the Zacks Consensus Estimate of $3,582 million.
Agreements of Analysts
Of the 13 analysts covering the stock in the last 7 days, none revised their estimates for the fourth quarter of 2011. Likewise, for the first quarter of fiscal 2012, none out of the six analysts changed the EPS estimation.
For fiscal 2011, out of the 10 analysts, none increased or decreased their estimates. Similarly, for 2012, out of the 14 analysts, none revised their estimates.
We believe that such cautious outlook followed by the analysts is mainly due to huge loss of subscribers coupled with the lack of proper promotional efforts initiated by DISH Network. However, recent loss of Netflix Inc. (NFLX) customers coupled with aggressive marketing strategies undertaken by the company to distribute free Blockbuster Movie Pass may attract new customers going forward.
Currently, the Zacks Consensus EPS Estimate for the fourth quarter of 2011 is pegged at 61 cents per share. The projected annual growth rate is 9.62%. Similarly, for the first quarter of fiscal 2012, the current Zacks Consensus EPS Estimate of 71 cents per share reflects a year-over-year decline of 1.85%.
Magnitude of Estimate Revisions
For the fourth quarter of 2011 and first quarter of 2012, during the last 7 days, the current Zacks Consensus Estimate remained unchanged at 61 and 71 cents, respectively. Likewise, for fiscal 2011 and 2012, the current Zacks Consensus Estimate remained unchanged at $3.30 to $2.71, respectively, in the last 7 days.
Earning Surprises
With respect to earnings surprises, the company notched up an average earnings surprise of 1.89% in the trailing four quarters. However, in the recent quarter, DISH Network missed the Zacks Consensus Estimate by a penny or 1.39%.
The ongoing quarter remains at breakeven (essentially a proxy for future earnings surprises) 1.32%, however, the first quarter of 2012 reflects a downside potential of 1.41%. Likewise, for fiscal 2011 and fiscal 2012, the Zacks Consensus Estimates upside potentials came in at 0.00% and 0.74%, respectively.
Our Recommendation
Availability of higher unutilized spectrum assets and higher marketing expenditure will act as catalyst for DISH Network going forward. Moreover, the company is upgrading their service quality by acquiring movie chain and video game retailer Blockbuster Inc. This is expected to reduce the company’s churn rate going forward.
However, continuous loss of subscribers, stiff competition, higher programming content costs and higher churn rate will act as headwinds for the stock going forward.
We thus maintain our long-term Neutral recommendation for DISH Network. Currently, DISH Network has a Zacks #3 Rank, implying a short-term Hold rating on the stock.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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TransDigm Kept at Neutral – Analyst Blog
We recently maintained a Neutral recommendation on TransDigm Group Inc. (TDG).
Based in Cleveland, Ohio, TransDigm Group Inc. is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today. The company’s business is well diversified due to the broad range of products it offers to its customers.
TransDigm Group has large, renowned customers in the aerospace/defense sector. These include: (1) distributors of aerospace components; (2) worldwide commercial airlines, including national and regional airlines; (3) large commercial transport and regional and business aircraft OEMs; (4) various armed forces of the United States and friendly foreign governments; (5) defense OEMs; (6) system suppliers; and (7) various other industrial customers.
Recently, the company came out with its fourth-quarter 2011 earnings per share from continuing operations of $1.20, outpacing the Zacks Consensus Estimate by $0.04 and prior-year earnings of $0.96. For fiscal 2011, earnings per share from continuing operations came in at $2.80, below the Zacks Consensus Estimate of $3.02, above prior-year earnings of 2.52 cents.
Net sales were $343.0 million, a rise of 53.7% year over year. Organically, sales during the quarter increased by approximately 13.7%, driven by improved commercial aftermarket and OEM markets and increase in defense sales. Sales during the quarter were also aided by acquisitions of Semco Instruments, McKechnie Aerospace and Talley Actuation.
For fiscal 2011, net sales were $1.21 billion, up 45.7% year over year. Besides, about 50% of sales growth was derived from recent acquisitions and strong organic revenue growth in both the commercial OEM and aftermarket aerospace markets.
By fiscal 2012, the company expects to achieve revenue growth in Commercial OEM market in the mid-teen percentage range, about 10% in commercial after market and decline slightly in the Defense market. Fiscal 2012 will witness considerable uncertainty regarding the overall economy and also regarding the United States Defense Budget.
TransDigm Group’s business is sensitive to the number of flight hours that its customers’ planes spend aloft, the size and age of the worldwide aircraft fleet and customers’ profitability. These items are, in turn, affected by general economic conditions. Further, the military and defense market is significantly dependent upon government budget trends, particularly the DOD budget.
In addition to normal business risks, its supply of products to the United States Government is subject to unique risks largely beyond its control. Major competitors of the company are Goodrich Corp. (GR), Honeywell International Inc. (HON) and United Technologies Corp. (UTX).
We expect the company to perform in line with the market and hence maintained a Neutral recommendation.
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Earnings Preview: Zumiez – Analyst Blog
Zumiez Inc. (ZUMZ) is scheduled to report third-quarter 2011 financial results on December 1, 2011. The current Zacks Consensus Estimate for the quarter is earnings of 41 cents a share.
Second-Quarter 2011, Summary
Zumiez reported second-quarter earnings of 8 cents a share, beating the Zacks Consensus Estimate of 5 cents a share. The company also outpaced earnings of 2 cents a share posted in the second quarter of fiscal 2010.
Net sales in the reported quarter increased 14.9% year over year to $112.2 million from $97.7 million a year ago. Comparable store sales rose 7.5% in the quarter compared with an increase of 9.3% in second-quarter 2010. Total revenue missed the Zacks Consensus Estimate of $152 million.
Management Guidance
For the third quarter of 2011, management expects comparable store sales to increase in the low-single-digit range and net income to come in the band of 37 cents to 39 cents per share.
Zacks Consensus
The analyst covered by Zacks expects Zumiez to post third-quarter 2011 earnings of 41 cents a share, higher than the prior-year quarter’s earnings of 40 cents. The current Zacks Consensus Estimate ranges between earnings of 40 cents and 43 cents a share.
For fiscal 2011, the Zacks Consensus Estimate stood at $1.08 per share, substantially higher than the previous fiscal earnings of $2.05. The current Zacks estimate ranges between $1.03 and $1.12 a share.
Agreement of Estimate
For the third quarter of fiscal 2011, out of 18 analysts covering the stock, 2 have revised their estimates upward, while none have revised in the opposite direction in the last 30 days. For fiscal 2011, out of 18 analysts, 2 analysts have positively revised the estimate while 1 moved downward in the last 30 days.
Among the 18 analysts covering the stock, no estimate revisions were witnessed for the last 7 days. Estimates for fiscal 2011 likewise witnessed no movement in either direction in the past one week.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate remains constant at 41 cents per share for third-quarter 2011 despite a positive revision in estimates by analysts over the last 30 days. The consensus estimate for fiscal 2011 has also remained constant at $1.08 per share.
Surprise History
With respect to earnings surprises, Zumiez showed a favorable trend in the last four quarters. The company has recorded positive surprises in the trailing four quarters with a low of 4.3% and a high of 200%. On average, the earnings surprise was a positive 68.1%. Based on the current flow, we expect the company to bring healthy results in the upcoming quarter.
Our View
Currently, Zumiez maintains a Zacks #2 Rank, which translates into a short-term Buy rating. Our long-term recommendation on the stock remains Neutral.
Zumiez is a mall-based specialty retailer of action-sports related apparel, footwear, equipment and accessories. The company’s strategy is based on offering action-sports merchandise focused on young men and women in the age of group of 12 to 24 years, enabling the company to carve a distinct niche for itself.
Furthermore, the company’s stores are strategically located in busy areas of the mall, such as food courts, movie theatres and music/game stores, which are generally frequented by the company’s target customers.
Moreover, the company is currently in the early phase of its store expansion program and plans to enlarge its network by opening 45 new stores during fiscal 2011, including its first store in Canada.
On the flip side, the company operates in a highly fragmented specialty retail sector and faces intense competition from larger teenage-focused retailers, such as Abercrombie & Fitch Co. (ANF) and Aeropostale Inc. (ARO). Furthermore, Zumiez also competes with large-format sporting goods stores, such as Big 5 Sporting Goods Corp. (BGFV) and Dick's Sporting Goods Inc. (DKS) as well as local snowboard and skate shops.
Being in such a competitive industry, Zumiez may find it difficult to execute new business strategies, which in turn, may impact its operations adversely.
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Canadian Solar Modules for Saferay – Analyst Blog
A leading player among the global solar companies, Canadian Solar Inc. (CSIQ) has delivered its solar modules to saferay for an 8.5 MW power plant located in Lindenhof near Neubrandenburg in the German state of Mecklenburg-Vorpommern.
The photovoltaic system will use 36,000 CS6P-P solar modules manufactured and supplied by Canadian Solar. These modules are of high quality, reliability and have the capacity to produce clean and cheap energy. The project company saferay is about to complete the solar park installation with the plant expected to be ready in December 2011.
Recently, in September 2011, saferay completed the Senftenberg II/III 78 MW partial complex in Brandenburg, which is part of the world's largest 166 MW solar power plant, using modules provided by Canadian Solar. Therefore, with this assistance to build the Lindenhof solar power plant, Canadian Solar has further entrenched its successful collaboration with the German project company.
Again in September, Canadian Solar had supplied its high quality solar modules for a German solar power plant built by GP JOULE GmbH. Built on a 152 hectare surface in the Southern Brandenburg region of Eastern Germany, the open-space solar power plant has a specified output of 70 MW.
GP JOULE has installed approximately 306,000 solar modules on four fields located in a former lignite mining strip in the East German city of Meuro near Senftenberg.
The world is now looking for environmentally-friendly solutions to generate cleaner energy. Riding on this wave, Canadian Solar recently unveiled its proprietary Intelligrated Power solar module series. Intelligrated Power modules integrate the intelligence of panel electronics with specially designed modules to deliver state-of-the-art features that maximize system performance, simplify installation and improve safety, significantly reducing the cost of design and installation.
Canadian Solar is a vertically integrated manufacturer of silicon ingots, wafers, cells, solar modules and custom-designed solar power applications. The company reported an adjusted loss per share of 80 cents in the third quarter of 2011, compared with the Zacks Consensus Estimate of a loss of 51 cents per share.
The company presently retains a short-term Zacks #5 Rank (Strong Sell). We have a long-term Neutral recommendation on the stock. The company mainly competes with Suntech Power Holdings Co. Ltd. (STP).
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PAY Announces Preliminary Results – Analyst Blog
VeriFone Systems Inc. (PAY), an electronic payment solutions provider, recently reported preliminary results for the fourth quarter of 2011.
The company expects revenues between $409 million and $411 million, up from its previous estimate of $395 million and $400 million.
Excluding amortization of step-down in deferred revenue on acquisition, VeriFone expects revenues between $414 million and $416 million.
Earlier in the month, VeriFone signed a definitive agreement with Nordic Capital Fund V to acquire European-based Point for approximately €600 million or $824 million. VeriFone will also retire Point’s debt of approximately €170 million.
Management expects to close the acquisition by the end of 2011. The transaction is expected to be accretive to the bottom line by $0.08 – $0.10 in fiscal 2012 and by $0.30 – $0.35 in fiscal 2013.
VeriFone expects the acquisition to add approximately $260 million to the top line in the first year. The acquisition is also expected to be immediately accretive to gross margins, operating margins and growth rates. The company further expects total services revenue to exceed 30% of total sales in fiscal 2012 and 50% by fiscal 2015.
Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, stock compensation, acquisition-related expenses, restructuring costs and certain other expenses and income that result from unique or unplanned events) is estimated between $77 million and $81 million. As of October 31, 2011, VeriFone had cash and cash equivalents of $595 million.
Excluding any impact from the planned acquisition of Point, VeriFone expects revenues between $400 million and $405 million for the first quarter of fiscal 2012. Net income is projected to be in the range of $0.50 - $0.52.
Excluding any impact from Point, VeriFone projects revenues in the range of $1.70 billion to $1.72 billion for fiscal 2012. Net income is projected to come between $2.45 and $2.50.
The company will announce its fourth-quarter results on December 14, 2011.
We currently have a Neutral recommendation on VeriFone. The company holds a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
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Raytheon to Make Miniature Decoys – Analyst Blog
Raytheon Company (RTN) received authorization from the U.S. Air Force to begin Low Rate Initial Production (“LRIP”) of its Miniature Air Launched Decoy Jammer (“MALD-J”) variant. Concurrently, the Air Force also exercised a contract option and Raytheon received a $5 million order to convert Lot 4 MALD production of the baseline to the MALD-J variant.
MALD is a high-tech, low-cost flight vehicle that is modular, air-launched and programmable. It weighs less than 300 pounds and has a range of approximately 500 nautical miles.
The variant protects aircrews and their aircraft by duplicating the combat flight profiles and signatures of U.S. and allied aircraft that confuses enemy air defenses. MALD-J will help in saving the lives of aviators as the commanders will be able to use MALD-J to conduct dangerous stand-in jamming missions instead of using manned aircraft.
Besides maintaining the features of the basic MALD platform, it adds more to the radar-jamming capability. The company expects to begin delivery in 2012.
Based in Waltham, Massachusetts, Raytheon Company is a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world. It is one of the best-positioned companies among the large-cap defense players because of its non-platform-centric focus.
Looking forward, the company enjoys strong order bookings and order backlog, an improving balance sheet, growing cash flow, and operational improvements. Future growth will be driven by its focus on ISR unmanned systems, training, cyber security, Standard Missile-6, Patriot, Zumwalt and THAAD.
The positives are, however, offset by apprehensions over future growth of the U.S. defense budget, the fate of high-cost programs, risks related to key project executions and order cancellations.
Raytheon currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also have a long-term Neutral recommendation on the stock. The company competes with The Boeing Company (BA) and Northrop Grumman Corporation (NOC), both of which a presently retain Zacks # 3 Ranks (short-term Hold).
In October this year, Raytheon reported third-quarter 2011 adjusted earnings of $1.39 per share, beating the Zacks Consensus Estimate of $1.33. Results were also higher than the year-ago quarterly earnings of $1.35 per share. The Zacks Consensus Estimate for fourth quarter and fiscal 2011 are $1.35 and $5.05, respectively.
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Toyota Bringing Prius PHV – Analyst Blog
Toyota Motor Corp. (TM) has started taking orders for its much awaited plug-in version of Prius hybrid car that comes with an excellent mileage and affordable price. The automaker will start delivering the plug in hybrid vehicle (PHV) from January next year in Japan.
A PHV shares the characteristics of both a conventional hybrid electric vehicle (which includes an electric motor and an internal combustion engine) and an all-electric vehicle, having a plug to connect to the electrical grid for recharging the batteries.
The Prius PHV Concept was first unveiled in Frankfurt Motor Show in 2009, while the production version of the vehicle was launched at the same auto show in September this year.
Technology and Performance
Prius PHV is based on the third generation Prius model and equipped with 4.4 kWh lithium-ion batteries, which is co-developed with Panasonic Corporation (PC). The 5-seater car’s high capacity batteries can be charged from a household outlet and any other charging stations in 90 minutes on 200 volts.
The vehicle can travel up to 26.4 km (16.4 miles) per charge. On a full charge and with a full tank of gasoline, the car could technically travel up to 1,000 km (620 miles). It boasts a mileage of 61.0 km per liter in (143 miles per gallon) in combined EV and hybrid driving modes under Japanese test conditions.
Meanwhile, the U.S. version of the Prius PHV will provide a mileage of 87 mpg. It will be delivered in the U.S. from March next year as the company has started taking online orders.
Pricing and Competition
Including subsidies for green vehicles, Prius PHV is priced at ¥3.2 million ($41,000) in Japan, $32,000 in the U.S. and €37,000 in Europe. The automaker plans to sell 35,000 to 40,000 units per year in Japan and 60,000 units globally.
The car’s attractive price and alluring performance poses a significant threat to Nissan Motors’ (NSANY) Leaf electric car and General Motor’s (GM) Volt PHV. Both Nissan and GM are trying very hard to lead in the field of rechargeable cars.
The Prius PHV is priced lower than Leaf electric car and cheaper than Volt PHV, pricing at $41,000 (before subsidies).
Future of Toyota Hybrids
Toyota occupied the No.1 spot in hybrid offerings after introducing Prius in 1997. Since then, the automaker sold more than 3.4 million hybrid vehicles to date. It expects to launch as many as 10 more gasoline-electric models by 2015 and offer a fuel-sipping option across its entire line-up by 2020.
Meanwhile, Honda Motor Co. (HMC) sold 770,000 hybrids worldwide and Nissan sold 17,500 Leaf cars globally.
In May 2011, Toyota introduced Prius Alpha hatchback wagon, which is also derived from the third generation Prius model, as Prius V (5-seater) in Japan. The vehicle is priced at ¥2.35 million ($29,000) and is equipped with nickel-metal hydride (NiMH) batteries like its predecessor.
Toyota plans to sell Prius V in North America in a year. It also plans to sell the 7-seater version of Prius Alpha in Europe as Prius Plus in mid-2012. The automaker intends to sell 2,000 units of Prius V per month in North America and 2,000 units of Prius Plus per month in Europe.
This year, Toyota also signed a memorandum of understanding Ford Motor Co. (F) on the equal product development collaboration in order to manufacture a gas-electric hybrid engine for pickup trucks and sport utility vehicles (SUVs). It has also partnered with Tesla Motors Inc. (TSLA) to collaborate on producing electric vehicles based on its small SUV RAV4.
All these initiatives will definitely help Toyota to maintain its top position in the HV market as well as lift its overall position from the backlash of recent mishaps, including the twin disaster in Japan and severe floods in Thailand.
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Goldman Seeds Hedge Funds – Analyst Blog
According to the Wall Street Journal, New York based-The Goldman Sachs Group Inc. (GS) has planned to invest in hedge funds. After 2008 financial crisis, Goldman has molded its way of using its capital. The bank has pooled funds of $600 million from its clients, which included pension funds, wealthy families and large institutions to create a new fund.
Goldman plans to use the new fund for providing start-up money to hedge-fund managers varying from 8 to 10 new hedge funds. Moreover, in each hedge fund Goldman would invest $75 million to $150 million from the new fund created, which in turn, is expected to raise approximately $1 billion in total.
Hedge fund is a portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns. Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a initial minimum investment. Investments in hedge funds are illiquid as they often require investors to keep their money in the fund for at least one year.
Overall, this new venture would be beneficial for the bank. It would earn fees on the total amount managed by the fund coupled with fees generated from hedge funds’ business conducted through bank's trading unit. On the other side, investors will gain due to the hedge funds' profits, excluding a percentage of the hedge-fund managers' fees.
According to the Journal, Goldman fund has already started working. In September, the fund invested approximately $100 million in a New York-based hedge fund called Palestra Capital Management LLC.
Previously, Goldman and a number of its peers, such as Morgan Stanley (MS) and J.P. Morgan Chase & Co. (JPM), bought hedge funds in expectation of high returns. But unfortunately, at the peak of 2008 financial crisis, they incurred huge losses.
On the regulatory front, the new fund has no limit on investment or trading as Goldman is using only clients' money for the venture rather than its own money. Moreover, the existing goodwill of Goldman in the market and its association with hedge funds will facilitate new hedge-fund managers to raise more cash from other investors and from brokers.
In spite of volatile returns in the recent years, the hedge fund industry has bounced back sharply. The assets have outpaced the height reached in 2008 and currently amounted to more than $2 trillion, according to Chicago-based Hedge Fund Research.
Additionally, seeders are raising more cash. According to the results of a survey of about 40 global hedge fund seeders generated by New York-based firm-the Acceleration Capital Group, the total capital projected to be invested with emerging managers in the first half of 2011 was expected to be around $2.5 billion, double the amount expected in comparable survey showed in 2009.
Further, the business of seeding hedge funds is expanding as large number of money managers is interested in raising new funds and investments from large financial institutions.
Goldman currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. Moreover, considering the fundamentals, we are maintaining a long-term Underperform recommendation on the stock.
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