Friday, September 30, 2011

Stocks end rotten quarter in sour mood

Global risk assets are set to end a miserable quarter in lacklustre fashion as the previous session’s rare pieces of good news on the US economy and eurozone debt crisis are submerged by the strong undercurrent of investor nervousness.
The FTSE All-World equity index is down 1.1 per cent, and commodities are lower, with Brent crude off 1 per cent to $102.97 a barrel. “Core” sovereign debt is in favour, softening yields.
The Asia-Pacific region has had a weak day, dipping 0.8 per cent; the FTSE Eurofirst 300 is suffering a loss of 1.6 per cent; and S&P 500 futures suggest Wall Street will open with a decline of 0.9 per cent.
Traders can be excused a moment of reflection given the torrid time they have endured over the past three months. Worries about a slowing global economy and headlines relating to festering eurozone fiscal woes have regularly caused sharp lurches in sentiment.
Thursday saw some bright spots, with better than expected US data joining a German “yes” vote for the expansion of the European bail-out fund to provide hope to optimists.
But the underlying mood remains broadly downbeat. Many traders recognise that the danger of a destabilising Greek default is still a possibility, while other evidence of economic weakness has emerged with news on Friday that German retail sales in August experienced their biggest monthly decline in four years.
In addition, investors are noting building concerns about prospects for the Chinese economy after the country’s property and banking shares were hit on worries over a housing market correction.
The Shanghai Composite index, which will be closed next week for the Golden Week holiday, fell 0.3 per cent. Hong Kong’s Hang Seng, which is more heavily exposed to sentiment on such stocks, slid 2.3 per cent, leaving it nursing a loss for the quarter of 21 per cent, its worst 3-month slide in 10 years.
The cost of insuring Beijing’s debt against default, as measured by 5-year credit default swaps, is up 23 basis points to 197 basis points, the highest since March 2009.
Risk aversion can be seen in the dollar index gaining 0.6 per cent and the German retail data helping push the euro down 0.8 per per cent to $1.3478. Gold is up 0.4 per cent to $1,621 an ounce.
The dour tone is expressed vividly by the FTSE All-World index, which is sitting on a loss for the quarter of 17 per cent.
Similarly, the Reuters-Jefferies CRB index, a commodities basket, is down 9 per cent, though this fails to reflect the battering afforded some important constituents. Copper, considered a global economic barometer and currently trading at $3.27 a pound, is down 24 per cent since the start of July.
As racier plays lost their charm, so perceived havens have benefited. An auction of 7-year US notes on Thursday was as sturdy as the five-year auction on Wednesday, again setting a record low yield – at 1.496 per cent for the seven-year – with strong demand from investors.
US 10-year Treasuries and German Bunds have had a solid quarter. Yields on the former are currently down 6 basis points to 1.94 per cent, a fall of 122 basis points over the period. Bund yields, which breached 1.7 per cent for the first time, are currently down 11bp at 1.90 per cent.
However, the quarter can perhaps best be summed up by one word: volatility. The Chicago Board Option Exchange’s Vix index, which measures market expectations of future equity vacillations, is up 135 per cent as investors scramble to protect portfolios, or indeed trade the volatility itself.
The “fear gauge” as the Vix is also known, has averaged 21.5 over the past 12 months but currently sits at 38.8, having averaged 30.2 since the start of July. Meanwhile, at the beginning of this week the CBOE extended the trading hours of the Vix future to give “market participants more time to establish or offset Vix futures positions surrounding potential market-moving events — overnight news, banking actions or key economic reports — before the general market opens”. Quite.
Trading Post.
With the market’s attention focused on the eurozone, many traders seem to have forgotten about the yen.
The Japanese unit has sat for eight weeks in a 2-yen range just above its record high to the dollar of Y75.93. On Friday it is weaker by 0.1 per cent at Y76.87.
The chart evokes a standoff between the irresistible force (yen appreciation) and an immovable object (the interventionist Bank of Japan).
Is something about to pop?
Possibly. Japanese bank Mizuho, in comments likely to give the BoJ palpitations, reckons the US dollar could fall to Y60.
Chief technical analyst Hiroyuki Tanaka, according to a Bloomberg report, says the US dollar has bottomed out around 30 per cent below the preceding low on four occasions since 1971.
With the previous trough of Y79.75 the yen may hit Y60 in 2013, he concludes.
A more fundamental approach from Capital Economics plumps for a weaker yen, however. The research boutique argues that Japan’s oft-cited and interlinked debt and demographic burden will finally take their toll.
“We continue to expect the yen to depreciate gradually against the dollar, to Y85 by the end of this year and to Y90 by end-2012.”
(Source: Financial Times)

IBM Tops Microsoft in Value for First Time Since 1996

IBM passed Microsoft Corp. (MSFT) to become the world’s second-most valuable technology company, a reflection of industry changes including the shift away from the personal computer.
IBM’s market value rose to $214 billion yesterday, while Microsoft’s fell to $213.2 billion, the first time IBM has exceeded its software rival based on closing prices since 1996, according to Bloomberg data. IBM is now the fourth-largest company by market value and, in technology, trails only Apple Inc. (AAPL), the world’s most valuable company.
Chief Executive Officer Sam Palmisano sold IBM’s PC business six years ago to focus on corporate software and services. Though Microsoft has expanded into online advertising and games, it gets most of its revenue and earnings from the Windows and Office software used primarily on PCs.
“IBM went beyond technology,” said Ted Schadler, an analyst with Forrester Research Inc. “They were early to recognize that computing was moving way beyond these boxes on our desks.”
IBM, based in Armonk, New York, has gained 22 percent this year, while Microsoft, based in Redmond, Washington, has dropped 8.8 percent. IBM rose $1.62 to $179.17 yesterday in New York Stock Exchange composite trading, and Microsoft fell 13 cents to $25.45 in Nasdaq Stock Market trading.
Apple, which long competed against IBM and Microsoft in the PC business, passed Microsoft in market value last year, on rising sales of iPhones, iPods and iPads. Apple’s market capitalization is now $362.1 billion.

Palmisano’s Strategy

Palmisano, who is also chairman, has spent his nine years at the helm sharpening the company’s focus on software and services for corporations and government. Once known as the world’s largest computer company, IBM in 2005 sold its PC unit to Lenovo Group Ltd. (992), calling it “commoditized.’’ The company has spent more than $25 billion investing in its software, computer-services and consulting businesses.
The maneuvers have helped increase per-share profit for more than 30 straight quarters. Palmisano has boosted sales by 20 percent from 2001 through last year, while keeping the costs of the 426,000-employee company little changed. IBM pulled in more than half of its $99.9 billion in revenue last year from services and is now the world’s largest computer-services provider.
The company is betting it can add another $20 billion to revenue through 2015. Palmisano is investing in emerging markets and analytics, as well as cloud-computing and an initiative called Smarter Planet to connect roads, electrical systems and other infrastructure to the Internet.

Share Record

“Computing is now found in things that no one thinks of as‘computers’,” said Palmisano at a trade show keynote in February. “Today, there are nearly a billion transistors per human, and each one costs one ten-millionth of a cent. Yes, some of these transistors are going into servers, PCs, smart phones, MP3 players and tablets. But an increasing number of them are going into appliances and automobiles, power grids, roadways, railways and waterways.”
IBM plans to almost double operating earnings to at least $20 a share in 2015. Investors have taken notice: Shares have climbed 35 percent since the company first announced the goal in May 2010.

Microsoft’s Slump

Microsoft, the world’s largest software company, was worth three times as much as IBM in January 2000 and hit a market capitalization of more than $430 billion in July 2000, according to Bloomberg data. Microsoft fell to about $135 billion in March 2009 during the economic downturn, before recovering with the market.
Microsoft, which had $69.9 billion in revenue for the fiscal year ending in June, got about 60 percent of its sales from the Windows and Office units in the most recent quarter.
“They were trapped in the classic innovator’s dilemma”because their software business was so good,” said Schadler.“The bet that Microsoft made in the PC business was to double down and double down and double down.”
CEO Steve Ballmer said investors may not appreciate the company’s progress in other businesses, including server software and online versions of Office, given the higher profile of its consumer businesses.
“People are saying, ‘Where do you go next?’,” said Ballmer at the company’s annual meeting in November. There probably isn’t “as much appreciation for the incredible growth and success we’ve had with enterprises since people relate better to the consumer market. But it’s great products with great earnings and particularly in some high-visibility categories.”

Xbox, Bing

The company’s server software and Office divisions boosted sales last quarter, as did the entertainment division, which includes its Xbox games business. Revenue at the online services division, including the Bing search engine, climbed to $662 million, while its operating loss widened to $728 million.
Microsoft also cut a deal with Nokia Oyj (NOK1V) this year to make its Windows Phone the primary operating system for the company’s smartphones. The deal is designed to help both companies compete against Apple and Google Inc. (GOOG)’s Android operating system, which is available for free to handset makers such as Motorola Mobility Holdings Inc. and Samsung Electronics Co.
Still, mobile computing is unlikely to ever be as profitable for Microsoft as the PC business, said Forrester’s Schadler.
“They’re never going to win in that business the way they did in the PC business,” he said.
(Source: Bloomberg)

Morgan Stanley Seen as Risky as Italian Banks

Morgan Stanley which owns the world’s largest retail brokerage, is being priced in the credit-default swaps market as less creditworthy than most U.S., U.K. and French banks and as risky as Italy’s biggest lenders.
The cost of buying the swaps, or CDS, which offer protection against a default of New York-based Morgan Stanley’s debt for five years, has surged to 456 basis points, or $456,000, for every $10 million of debt insured, from 305 basis points on Sept. 15, according to prices provided by London-based CMA. Italy’s Intesa Sanpaolo SpA (ISP) has CDS trading at 405 basis points, and UniCredit SpA (UCG) at 424, the data show. A basis point is one-hundredth of a percent.
“The CDS spreads are making investors and creditors nervous” about Morgan Stanley, said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who rates the company’s stock “outperform,” in an e-mail.
The price of Morgan Stanley credit-default swaps has continued to climb even though the firm’s shares have risen this week. The stock jumped 93 cents, or 6.6 percent, to $15.09 in New York Stock Exchange composite trading yesterday, the fourth-biggest gainer in the 81-member S&P 500 Financials Index. Shares are down 45 percent since the start of the year.

Implied Risk

Moody’s Analytics, an arm of Moody’s Investors Service that’s separate from the company’s credit-rating business, said in a report yesterday that Morgan Stanley’s CDS prices imply that investors see the bank’s credit rating as having declined to Ba2 from Ba1 in the last month. The company is actually rated six grades higher at A2 by Moody’s Investors Service.
By comparison, Bank of America Corp. (BAC) and France’s Societe Generale (GLE) SA, which have CDS trading at 403 basis points and 320 basis points respectively, have prices that imply a rating of Ba1, higher than the implied rating on Morgan Stanley, said Allerton Smith, a banking-risk analyst at Moody’s Analytics in New York.
Mark Lake, a spokesman for Morgan Stanley in New York, declined to comment.
Morgan Stanley was the biggest recipient of emergency loans from the Federal Reserve during the financial crisis and also benefited from capital provided by Tokyo-based Mitsubishi UFJ Financial Group Inc., now the biggest shareholder, and the U.S. Treasury, which it repaid with interest.

2008 Peak

While the price of Morgan Stanley’s credit-default swaps is at the highest level since March 2009, it’s nowhere near the peak reached in 2008. On Oct. 10 of that year, the annual price for five-year protection rose to the equivalent of 1,300 basis points, according to data provided by CMA, a unit of CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market.
The credit-default swaps market can be thinly traded, and the recent jump in prices may reflect no more than a single big counterparty seeking to hedge contracts, said Hintz, a former Morgan Stanley treasurer. Morgan Stanley, one of the biggest traders of CDS among U.S. banks, doesn’t make a market in its own swaps, according to Smith of Moody’s Analytics.
The CDS market has features “that may not exist in other markets like the bond market or the equities market,” Smith said in a telephone interview. Having fewer participants trading in the Morgan Stanley name could result in a “disproportionate spread movement,” he said.
The daily average trading volume in Morgan Stanley shares over the last three months is 27 million shares, according to data compiled by Bloomberg. By contrast, a three-month studyreleased this week by the Federal Reserve Bank of New York found that most single-name CDS trade less than once a day, while the most active trade more than 20 times per day.

Swaps Volume

Trading in Morgan Stanley credit-default swaps has risen recently to 257 contracts last week, compared with 187 forGoldman Sachs Group Inc. (GS), according to the Depository Trust & Clearing Corp. That compares with a weekly average of 73 trades in Morgan Stanley and 91 in Goldman Sachs in the six months that ended on Aug. 26, DTCC data show.
There was a net $4.6 billion of protection bought and sold on Morgan Stanley debt as of Sept. 23, according to DTCC. Even with the higher trading volume, investor skittishness in the face of Europe’s sovereign debt crisis may be leaving few market participants willing to sell CDS protection to meet the demand for hedges, said Hintz.
“With the EU teetering, few other firms are going to jump in and write CDS on a global capital markets player like MS,”Hintz said in his e-mail, referring to the European Union and to Morgan Stanley’s stock-market ticker symbol.

Trading Decline

The rise in Morgan Stanley’s CDS prices may also relate to an expected decline in third-quarter trading revenue or to the company’s exposure to French banks, Smith said.
Ruth Porat, the bank’s chief financial officer, said at an investor conference on Sept. 13 that the fixed-income trading environment in the third-quarter was worse than 2010’s fourth quarter, when Morgan Stanley posted its lowest debt-trading revenue since the 2008 crisis. The company, led by Chief Executive Officer James Gorman, 53, reported second-quarter revenue from both investment banking and fixed-income trading that beat rival Goldman Sachs for the first time on record.
Morgan Stanley had $39 billion of cross-border exposure to French banks at the end of December before accounting for offsetting hedges and collateral, according to an annual filing with the U.S. Securities Exchange Commission. Cross-border outstandings include cash deposits, receivables, loans and securities, as well as short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements.

‘Galloping Wider’

While Morgan Stanley hasn’t updated those figures, Hintz estimated in a Sept. 23 note to investors that the bank’s total risk to France and French lenders is less than $2 billion when collateral and hedges are included.
As of June 30, Morgan Stanley had about $5 billion of funded exposure to Greece, Ireland, Italy, Portugal and Spain, which was reduced to about $2 billion when offsetting hedges were accounted for, according to a regulatory filing. The company also had about $2 billion in overnight deposits in banks in those countries and about $1.5 billion of unfunded loans to companies in those countries, the filing shows.
“Their spreads just are galloping wider,” Smith said.“Is it rational that Morgan Stanley CDS spreads would be wider than French bank CDS spreads if the concern is exposure to French banks? I don’t think that makes perfect sense.”

Bond Yield Climbs

Goldman Sachs, which like Morgan Stanley converted from a securities firm to a bank in 2008, had $38.5 billion of gross cross-border exposure to French banks as of June 30, according to a regulatory filing. The firm’s five-year credit-default swaps are trading at 308 basis points, according to CMA.
Morgan Stanley’s 10-year debt has also shown signs that investors are growing concerned. The yield on the company’s $1.5 billion of 5.5 percent senior unsecured notes that comes due in July 2021 has climbed to 6.3 percent from 5.46 percent on Sept. 15, according to prices reported by Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
That’s still lower than the 6.91 percent yield on 4.125 percent bonds issued by Intesa Sanpaolo that come due more than a year earlier, in April 2020, according to Bloomberg data.
Morgan Stanley’s reliance on the debt markets, instead of depositors, to provide funding for its assets may be one cause of concern, some analysts said. Morgan Stanley and Goldman Sachs, which were the second-biggest and biggest U.S. securities firms before converting to banks, both got less than 10 percent of their funding from depositors as of June 30, according to company filings with the SEC.
By contrast, Bank of America and JPMorgan Chase & Co. (JPM), the two largest U.S. banks by assets, funded more than half of their balance sheets with retail deposits at the end of June, filings show.
“The market is just very sensitive to anybody considered to be wholesale funded,” John Guarnera, a financial analyst at Societe Generale in New York, said in a Sept. 23 telephone interview. “If you’re a bank, you can fall back on the fact that you have a strong retail deposit base. Morgan Stanley has deposits, but not like you’d see out of a BofA or a JPMorgan.”
(Source: Bloomberg)

Toyota, Honda Return to Full Production

Toyota Motor Corporation and Honda Motor Co.’s return to full production this month is boosting U.S. auto sales back near the pace reached before Japan’s earthquake.
September light-vehicle sales, to be released Oct. 3, probably rose to a 12.8 million seasonally adjusted annual rate, the average estimate of 14 analysts surveyed by Bloomberg. That would be the fastest pace since April, when lost output caused by Japan’s tsunami crimped supply of parts and finished cars.
“Recovering inventory levels have helped to bring buyers back into the market,” said Jeff Schuster, executive director of global forecasting at J.D. Power & Associates.
Jesse Toprak, who develops forecasts at, went so far as to title his latest report “What Recession?” as the auto rebound defies consumer confidence that is near a two-year low. Toyota has said it expects to reverse monthly U.S. sales declines beginning next month, and Honda is adding overtime shifts at two Ohio plants. Better supply also probably meant incentives rose from the lowest in almost six years.
“The big story this month was better inventory and favorable pricing” for consumers, said Jessica Caldwell, an analyst at Santa Monica, California-based
Sales declines at Toyota and Honda contributed to the U.S. auto sales pace slowing from a 13.1 million rate averaged in the year’s first four months to as low as 11.6 million in June, according to researcher Autodata Corp.

Toyota Still Recovering

Toyota slipped behind Ford Motor Co. (F) to third in U.S. sales this year through August, which was the first month in the past year that its global production increased. The Toyota City, Japan-based automaker is still recovering and may say sales dropped 15 percent, the average estimate of five analysts surveyed by Bloomberg, leaving it in third again.
“With the launch of the new Camry, October should be even better,” said Paul Atkinson, who operates Toyota dealerships in Bryan and Madisonville, Texas. “We’re selling as fast as they’re coming off the damn truck.”
Toyota, ramping up production of the redesigned Camry sedan, may say sales dropped 15 percent, the average estimate of five analysts surveyed by Bloomberg. The Toyota City, Japan-based automaker’s global production increased for the first time in 12 months in August.
Toyota shares fell 0.5 percent to 2,688 yen in Tokyo at the 3 p.m. close of Tokyo trading. Nissan gained 0.4 percent, while Honda fell 1.4 percent.

Overtime at Honda

Sales may decline 6.1 percent at Honda, the average of five analysts’ estimates, after deliveries slid 20 percent or more in each of the past four months. The Tokyo-based automaker is scheduling overtime shifts at its Marysville and East Liberty assembly plants in Ohio, Ron Lietzke, a spokesman, said in a Sept. 28 phone interview.
Honda began the month with 32 days supply of vehicles, from 28 in August, Westlake Village, California-based J.D. Power said in a Sept. 22 statement. The industry standard is about 60 days.
General Motors Co. (GM) and Ford are anticipating that demand will keep increasing as the largest U.S. automakers negotiate labor contracts that boost production and add jobs.
GM, which reached a new four-year contract with the United Auto Workers this month, may report a 19 percent increase in September sales, the average of eight analysts’ estimates. The Detroit-based automaker and union said the accord adds or retains 6,400 jobs and reopens an assembly plant in Tennessee.

Ford, Chrysler

Ford has discussed with the UAW adding as many as 10,000 union jobs in the U.S., according to three people familiar with the talks. Some of those workers would assemble Fusion sedans, which are currently made in Mexico, said one of the people who asked not to be identified because the negotiations are private.
Deliveries this month may rise 5.9 percent for Dearborn, Michigan-based Ford, the average of eight analysts’ estimates.
Sales at Fiat SpA-controlled Chrysler Group LLC, which has extended its UAW contract to Oct. 19, may climb 20 percent, the average of seven analysts’ estimates.
Confidence among U.S. consumers stagnated in September near a two-year low as the share of households saying it was difficult to find a job climbed to the highest level in almost three decades. The Conference Board’s sentiment index increased by 0.2 to 45.4 from an August reading that was the lowest since April 2009, the New York-based researcher said Sept. 27.

Auto Industry Shrinks

“The economy is stopped dead in its tracks,” George Magliano, a New York-based economist at IHS Automotive, said in a phone interview. “Considering that, the auto business is showing pretty good strength. The industry is hiring, it’s producing more and there’s pent-up demand.”
GM and Ford will be adding back only a portion of the jobs they shed during the recession that sent auto sales to a 27-year low of 10.4 million in 2009, according to Autodata Corp.
GM had about 49,000 U.S. hourly employees at the end of 2010, a year after its U.S.-backed bankruptcy. That’s down from 111,000 such workers at the end of 2005, the company said in a Sept. 28 conference call with analysts.
Last year, about 962,000 U.S. workers were employed making vehicles and parts, according to the Bureau of Labor Statistics in Washington. That’s down 32 percent from 1.41 million in 2005.
The downsizing of the industry, achieved in part by U.S.-backed bankruptcies for GM and Chrysler, meant cutting production capacity. That prevented U.S. automakers from raising output and offsetting industrywide constraints on inventory after the Japan earthquake and tsunami in March, said Alan Baum, an industry consultant at Baum & Associates.

‘Limited Ability’

GM, Ford and Chrysler “had a fairly limited ability to capitalize because there are a lot fewer auto plants and workers than there were four years ago,” said Baum, who is based in West Bloomfield, Michigan. “You can’t just add a shift willy-nilly.”
Nissan Motor Co., whose better supply of parts has buoyed inventory levels above its Japan-based rivals, may say deliveries climbed 18 percent, the average of five analysts’estimates.
Hyundai Motor Co. (005380), South Korea’s largest automaker, and its affiliate Kia Motors Corp. (000270), may combine to sell 20 percent more vehicles than a year earlier, according to the average of three estimates. Both automakers are based in Seoul.
Industrywide deliveries may rise to 12.7 million cars and light trucks this year, the average of 18 analysts’ estimates surveyed by Bloomberg in August. Sales may climb to 13.6 million in 2012, the average of 15 estimates. The U.S. averaged annual sales of 16.8 million vehicles from 2000 to 2007, according to Woodcliff Lake, New Jersey-based Autodata.
(Source: Bloomberg)


·         Current price: Rs. 520/-
·         Target price: Rs.  675/-
·         Investment horizon: Atleast 1 year


V.S.T Tillers Tractors Ltd (VTTL) was incorporated in the year 1967 in Bangalore, India. It was promoted by the V.S.T Group, a well known business house in South India, in technical collaboration and joint venture with Mitsubishi Heavy Industries and Mitsubishi Corporation, Japan for the manufacture of Power Tillers and Diesel Engines. The plant went into production in the year 1970. In 1984, an additional technical and financial collaboration with Mitsubishi Agricultural Machinery Company Ltd, Japan for the manufacture of 18.5 HP, 4 wheel drive Tractor was entered into. It currently holds about 3% of the company’s equity.

The manufacturing plant is located in Whitefield Industrial area near Bangalore.  The main products of the Company namely Power Tillers and Tractors . The company, besides selling its products in India, also exports to various countries in Africa, Middle East, Europe and South east Asia.   


·         The company has a high quality ethical management with a long standing track record of consistent performance and good management practices

·         It is a leader in power tillers and enjoys a good market share in the small HP tractors.

·         It’s association with Mitsubishi has helped it gain access to latest technology, for it’s products

·         It has a strong balance sheet, with negligible debt and tight control on working capital

·         With higher disposable incomes in the hands of farmers and a gradual shift towards mechanisation, demand for the company’s products can only improve

·         The company has adopted a judicious pricing policy as would ensure that it earns an operating margin of atleast 15% and does not unduly burden it’s customers. Hence, it’s topline growth is essentially volume led

·         Falling commodity prices and some slowdown in the automobiles segment augur well for the company. It’s vendors, who were hitherto busy catering to the auto segment would now be able to meet company’s requirements, on time

·         It has strong return ratios with OPMs in a band of 15-20% and ROCE of 46%. It has minimum dividend payout of atleast 15% every year

·         It has well entrenched distribution network across the country, with strengths especially in South India

·         Sales is expected to grow at atleast 20% every year, with operating margins averaging around 15%


·         Competition is intensifying for company’s products with companies like M&M, Greaves Cotton, which are larger in size and have a wider national presence, eyeing the same product segments. The Chinese products are also making their way into the Indian markets

·         Market share is more important for the management, than margins. If the competition does intensify, there may be some pressure on margins

·         The company is predominantly a south-based company. It needs to reach out to other parts of the country, more aggressively

·         The stock has low volumes, on the bourses


 I continue to be positive on the agri-theme in India. I strongly believe that many agro based industries, will do well, in future, due to increasing focus on food security. This is one more investible story, within the same theme. With an estimated growth of 20% plus and a strong balance sheet and with operations in the hands of competent management, the stock is cheap at about 6.5 times FY13 profit estimates. A 30% growth target, seems achievable. BUY.

P.S. Please visit their website http:, for details on financials.

Disclaimer: The details given above are true to the best of our knowledge. Readers are advised to use their own due diligence before investing in the stock. We or our friends/relatives or Capital Portfolio Advisors, shall not be held responsible for any loss that the readers may incur on their investment,  done on the basis of this note. Readers are further informed that the author and/or his affiliates may have a direct or indirect interest in this recommendation.


Thursday, September 29, 2011

Biotech Investors Bow Out as Hurdles Grow

When Human Genome Sciences Inc. (HGSI)’s lupus drug, Benlysta, won regulatory approval in March as the first treatment for the disease in more than 50 years, the company estimated the product may be worth $2.5 billion a year.
Since then, the Rockville, Maryland-based company’s stock has plunged 47 percent to $13.65 at the close of yesterday’s Nasdaq Stock Market trading. The drop mirrors declines for other biotechnology companies with drug approvals the last two years, and spotlights a trend that may slow the pace of acquisitions and decrease returns for potential buyers, analysts and industry officials said.
“The bull thesis a couple of years ago was that these stocks are going up before approval, and will go up after approval,” said Eric Schmidt, a New York-based analyst with Cowen & Co., in telephone interview. Now, “most stocks are down 20, 30, 40, and in some cases, 50 percent or more since their drugs were approved.”
The shares of Seattle-based Dendreon Corp. (DNDN), Savient Pharmaceuticals Inc. (SVNT), of East Brunswick, New Jersey and Cambridge, Massachusetts-based Vertex Pharmaceuticals Inc. (VRTX) all fell this year after their products were approved for sale.
The decline is driven by the idea that new biotechnology products are so expensive and complex it can take years for sales to grow as insurers and the U.S. government seek to cut medical costs and regulators tighten safety checks, said Michael Yee of RBC Capital Markets.

‘Hurdles’ at the Start

Investors increasingly “fear the risks of commercial disappointment,” Yee, RBC’s director of biotechnology equity research in San Francisco, said in a telephone interview.“That’s a reflection of underappreciated commercial logistical issues with the launch, as well reimbursement hurdles at the start, and physician comfort in the first few months.”
The U.S. Food and Drug Administration increased scrutiny of potential safety hazards after criticism from consumer groups and Congress for taking years to identify heart risks tied to drugs such as Merck & Co.’s painkiller Vioxx and GlaxoSmithKline Plc (GSK)’s diabetes pill Avandia.
In many cases, that has led to an insistence on so-called risk management studies that continue for years after the product is approved, and watch for dangerous side effects that may arise as the drug is used by more and more people. When Human Genome’s Benlysta was approved, the FDA mandated further safety studies be done.

Market Challenges

“Almost any drug that comes to market has its own particular challenges,” said Ron Cohen, chief executive officer of Hawthorne, New York-based Acorda Therapeutics Inc. (ACOR), in a telephone interview. Acorda’s stock has fallen 27 percent since Jan. 22, 2010, when its pill to improve walking in multiple sclerosis patients was cleared in the U.S. “Just getting approval, and even reimbursement, is not necessarily sufficient anymore to guarantee the drug will be a major success.”
After hitting the market in March, sales of Acorda’s Ampyra reached $133.1 million in 2010 and the company has estimated 2011 revenue could reach $205 million to $230 million. European regulators approved the drug on May 20.
Dendreon’s prostate-cancer drug Provenge was approved by U.S. regulators in April 2010, and the company estimated 2011 sales might reach as high as $400 million. When doctors didn’t prescribe the medicine as quickly as expected, Dendreon was forced to withdraw its revenue estimate in August, and this month said it would cut 25 percent of its workforce. Shares had declined 74 percent this year to $9.12 at yesterday’s close on the Nasdaq.

Disappointing Sales

“There has been a half a dozen biotech launches that have disappointed,” said Christopher Raymond, an analyst at Robert W. Baird in Chicago, in a telephone interview. “People had unrealistic expectations. It’s not that the launch is going necessarily bad, but the companies have done worse than people had hoped.”
The high prices for biotechnology drugs also is slowing acceptance. Human Genome’s Benlysta for lupus patients with moderate to severe systemic disease will cost about $35,000 a year, David Southwell, the company’s chief financial officer, said at a Sept. 15 investor conference.
The treatment is bought by doctors ahead of time, then given intravenously to patients in medical offices or at centers and hospitals. The procedure means “there’s a bit of a gap between the actual agreement to reimburse the drug and the perception of the rheumatologists that they will get paid,”Southwell said.

Wary Doctors

As a result, a physician with 100 lupus patients may prescribe the drug to only a few initially to see how the reimbursement process works, then expand from there, he said.
For these reasons, “first-year guidance is very, very difficult to give, there’s huge variability around it,”Southwell said.
One result of the shift is that major pharmaceutical companies that traditionally scooped up biotechs before they gained approval for an experimental drug are now delaying bids until a product is approved and the shares have fallen, said NPS Pharmaceuticals Inc. (NPSP) Chief Executive Officer Francois Nader.
“It’s a buyer’s market,” said Nader, whose Bedminster, New Jersey-based company is developing a therapy for short bowel syndrome. “The trend we have seen recently is big pharma stepping in only after a drug is approved, rather than when it is in the regulatory review process” as in the past.
That, in turn, has pressured biotechnology companies to strengthen their balance sheets and seek new sources of revenue to market their new products, he said.
Other companies with new drugs have faced similar issues to Human Genome, said Schmidt of Cowen & Co.

Vertex Decline

Vertex saw its stock rise to $56.26 a day after the May 23 approval of its hepatitis C drug Incivek, which is being sold for $49,200 for a 12-week treatment course. Two months later, the company reported second-quarter revenue from Incivek of $75 million, more than double estimates by analysts, and three times that of a rival drug from Whitehouse Station, New Jersey-based Merck.
Still, the shares have declined 18 percent since the approval to $45.69 yesterday.
It’s a “$10 billion stock, they’re having a great launch, they’re blowing away expectations, yet still people can’t take up their peak sales estimates,” Schmidt said.
“I think we’ve beat the expectations at launch and we’ll try to continue that,” Matthew Emmens, Vertex’s CEO, said at an investor conference. “I think we’ve done a little better than you thought we would.”

Next Up

The next companies to face declining shares once their experimental medicines are cleared for sale may be Incyte Corp., of Wilmington, Delaware, InterMune Inc. (ITMN), of Brisbane,California, and Tarrytown, New York-based Regeneron Pharmaceuticals Inc. (REGN), Schmidt said.
Still, biotechnology company officials say the industry is beginning to adjust to the change.
During the U.S. recession, which began in December 2007 and ended in June 2009, biotechnology companies were running low on funds, said Nader, of NPS. By the third quarter of 2008, 46 percent had less than one year of cash available, according to data from the Biotechnology Industry Organization.
That forced many to look for partnerships, mergers and new sources of revenue to continue operations, Nader said. The biotechnology companies that survived the recession tend to have healthier balance sheets -- only 29 percent had less than one year of cash last year.
NPS is currently targeting institutional investors at least a year before its drug will likely hit the market after approval, in late 2012 or early 2013, he said.
“Conventional investors on Wall Street don’t seem to look out beyond what’s happening the next hour,” said Rajiv Kaul, who manages the $1.3 billion Fidelity Select Biotechnology Portfolio, in an interview. That provides an opening for long-term investors, when the market eventually turns around.
“All this creates massive opportunity where you can find situations where people are not looking out into the future,”Kaul said.
(Source: Bloomberg)

India direly needs a new direction

India has quickly come to regret Manmohan Singh’s second term as prime minister. The country’s most respected bureaucrat was handed a powerful mandate by his country’s voters two years ago and had a magnificent opportunity to modernise the economy. How distant that dream now seems.
Far from being in pole position among emerging markets, as it deserves, India trails in terms of attracting foreign capital and beating inflation. Some economists and industrialists fear India’s economy could shrink back towards what was derisively called the “Hindu rate of growth” from initial projections of 9 to 7 per cent this year. There is even speculation that the Singh government may not last the distance until elections in 2014 – though those who predict this may not appreciate that India’s electorate has nowhere else to go. 
Senior executives complain bitterly about New Delhi’s painfully slow or inconsistent decision-making. Many local companies are focusing their investments on Africa or Latin America. Mr Singh’s administration will totter “on its last legs for the next three years”, says one executive. A more profound question is being posed: does India, with its 1.2bn people, suffer such a lack of vision and accountability that those apparently bright prospects of two years ago can never be achieved?
Then, India had sound hopes of narrowing the development gap with China and competing with the damaged economies of the west, not least by attracting capital looking for a home of high return. A clear parliamentary majority, supported by able – if elderly – policymakers, held the promise of momentum to build on the financial reforms of 20 years ago and push ahead to double-digit economic growth.
Back then, few could predict that Mr Singh, the veteran reformer who has just celebrated his 79th birthday, had passed his best – as most now acknowledge. Equally, none could have foreseen that the government’s ability to act would be hampered by the illness of Sonia Gandhi, the silent power behind executive government, and the seeming shyness of her 41-year-old son Rahul. But there can be no psychological excuses for the scandals such as the corruption one that has besmirched the government.
When taken in the full context of post-independence history, Mr Singh’s watch of course deserves plaudits for high economic growth and stability. There have been no communal massacres between Hindus and Muslims and no wars with regional rival, nuclear armed Pakistan.
Yet with its young population and fast rising prices India urgently needs new direction – and Mr Singh urgently needs to salvage what until a year ago could have been seen as a near Nehruvian legacy. He has tried to wriggle from the mire with two limp cabinet reshuffles. Now he needs to execute his strongest suit, administrative reform, to restore a sense of principled purpose.
The four critical reforms are all potentially near at hand – but often appear elusive. The first is the overhaul of the arcane tax system, repeatedly delayed by opposition from powerful states. Direct sales tax and goods and services tax reform would iron out disparities between India’s 28 states, improve compliance and end a Byzantine system in which taxes are levied on taxes. Leading industrialists such as Adi Godrej, chairman of the eponymous Mumbai-based consumer goods empire, identify this as the single greatest move Mr Singh can make to accelerate economic growth.
The second is new land reform laws, which are crucial to unlocking India’s much-needed industrialisation and create jobs.
Third is the mines and mineral development bill. This sector has committed heinous, but largely unobserved, wrongs to the environment and rural communities. India has plenty of natural resources to feed its factories but either they are illegally exploited or untapped.
Finally, Mr Singh must cleanse the state’s procurement processes. He can lean on internet technology to run honest tenders and secure financial transfers.
There are a string of other reforms, including raising the foreign investment caps in the insurance sector, opening multi-brand retailing to foreign direct investment and boosting farm output. But Mr Singh’s chief aide, Montek Singh Ahluwalia, warns that approaching India’s parliamentary democracy with a shopping list of reforms is an exercise in futility.
Reforms, like the clipping of subsidies, take place at the margins. Or they come in response to calamity, most notably in 1991 when India’s balance of payments problems threatened default. Today’s crisis is not yet showing up in the current account. Many Indians sense their country’s economy might never fulfil its potential, especially if Mr Singh’s leadership continues to falter and the political system jams.
(Source: Financial Times)

Retailers switch on to TV shopping

“The world is full of channel flickers.” Asked to explain the rise in TV shopping, Mike Hancox, chief executive of Ideal Shopping Direct, happily admits that couch potatoes are a key driver of sales. “We see huge spikes in calls following ad breaks on the main terrestrial TV channels.”
In the downturn, TV shopping executives say they have a growing audience as more people spend time at home watching the telly. This is reflected in steadily rising sales – the UK TV shopping market is worth £756m, according to research house Verdict, and is predicted to reach £800m by 2015.
In an increasingly multichannel retail world, TV channels are looking to boost sales by moving online, and big high street names including Argos and Debenhams are trying to tap into the growing appeal of TV selling.

It’s the patter that counts

There are some things you still cannot buy on TV shopping channels. The most square-eyed channel hopper will struggle to find any type of goods being sold at their full retail price – though you can guarantee this will be prominently displayed on screen with a red cross slashed through it.
The level of the discount, and the temporary nature of the offer are the key selling tactics for a medium that understands the limited attention span of its remote control-clutching audience.
Live auction channel Price Drop TV is the most extreme example. An on-screen stopwatch counts down the seconds remaining before the deal ends. Products such as compilation CDs start at ludicrously high prices which get lower as more units are sold. Shouty presenters and booming claxons emphasise the bargains shoppers can secure, if only they hurry up and dial the premium rate phone hotline.
As Mike Hancox, the chief executive of Ideal Shopping Direct, puts it: “Our skill is closing the sale.” In the world of TV shopping, this sense of urgency is what compels people to buy (though in practice, most items are still available to purchase afterwards on their respective websites). Retail analysts believe that high street retailers like Argos who are testing the TV shopping format will struggle to replicate this.
The real skill of the TV shopping presenter is getting viewers to buy items they never knew they wanted. Demonstrating a Sat Nav, one presenter livens up her commentary on the functionality. “Imagine you’re alone in your car on a rainy night, and have broken down miles from a petrol station…think how grateful you’ll be for that emergency alert button.”
Their product knowledge and sophisticated patter is something that sales assistants in high street shops struggle to match.
Argos began a year-long trial of its Sky TV shopping channel in June in an attempt to reach new audiences and boost flagging sales. “TV shopping appeals to two types of customer; bargain hunters and inspiration seekers,” says Darren Frost, head of Argos TV.
Although the average TV shopper is aged between 35 and 65, Argos is pushing toys and children’s clothing in an attempt to fill “a gap in the market”. Coleen Rooney made a guest appearance on Tuesday to promote her Argos jewellery range, but the channel’s main purpose is to point shoppers towards the Argos website or call centre.
Matthew Walton, retail analyst at Verdict, estimates that Argos has already grabbed a 1.6 per cent share of the UK TV shopping market, and says its biggest advantage is its store network. “Using click and collect, TV shopping customers will be able to buy and receive a product the same day, which is something no other TV retailer currently offers,” he says.
The impending digital switchover and the rise of internet-connected TVs could provide a further boost. “The downturn is good for distance retail. We were founded 18 years ago in a recession, so we have previous experience of that,” says Dermott Boyd, the UK chief executive of shopping channel QVC. The channel has just announced a 4 per cent rise in its second quarter UK sales, compared with the same period a year ago.
“In a recession, people spend more time at home, and more time in front of a screen, whether it’s a TV, laptop or smartphone,” he says. A fifth of QVC’s sales come via its website, and 2 per cent via its smartphone app, which launched in April.
Private equity firms also sense the growth opportunity. Ideal Shopping Direct was taken private by private equity house Inflexion in a £78m deal in June. It is projected to lift sales by 11 per cent to £130m this year.
In a possible sales lesson for high street retailers, Mr Hancox says that laptops are a top seller for the channel’s older viewer demographic.
“By demonstrating the product and demystifying it, we take away the embarrassment for the pre-internet generation,” he says, adding that showing how to keep in touch with your grandchildren on Skype is an effective sales technique.
Ironically, Ideal Shopping and QVC both say that TVs themselves are among the worst-selling items in the current climate. However, the quick stock-turn of the TV shopping model means they can avoid the headwinds buffeting high street electrical chains. “We can change our product lines pretty quickly if we see strength or softness in any particular area,” Mr Boyd says. “If we had 700 stores, that would be much harder.”
Products shoppers would struggle to find on the average high street do particularly well on TV. QVC has had success selling upmarket products, such as Lulu Guinness handbags and Space NK cosmetics, showing that TV shopping also appeals to more affluent shoppers.
Despite the problems high street retailer HMV is facing, music is one of QVC’s fastest-growing categories. Artists including Sheryl Crow and Elaine Paige have performed live in the TV studio, before conducting a chat-show style interview on the sofa, and flogging specially produced box sets.
Other high street retailers are producing video content on their websites which they believe will appeal to home shoppers. Debenhams TV is essentially a series of video clips showcasing products online, although these are also streamed on flat screens and internet kiosks inside its trial Debenhams Extra internet concept store in Coventry.
“We call it sticky content, as it makes people stay on the website for longer,” says Michael Sharp, chief executive. Customers are able to purchase product by clicking on tabs which appear within the video, meaning Debenhams can track exactly what customers are responding to. “We’re finding products sell faster online through moving images than still ones,” he says.
(Source: Financial Times)

Private sector education booms in Brazil

Investors in Brazil frequently complain about the country’s weak education system, characterised by high-quality public universities and private colleges that are let down by poor state schools.
But while this remains a problem, private sector education companies have started a revolution in post-secondary education that has tripled the number of places available to the country’s booming lower middle classes.
Some of these, such as Anhanguera Educacional Participações, are entering the ranks of the world’s largest education companies by student numbers as they rapidly expand their reach through Latin America’s biggest economy.
“Between 2000 and 2010, Brazil has gone from 1.8m students in higher education to 6m-6.5m today,” said Alexandre Oliveira, principal investment officer at the International Finance Corporation, the private sector arm of the World Bank and an investor in Anhanguera. “That additional capacity has essentially come from the private sector.”
Education is one of the key challenges for Brazil as it struggles to emerge from its status as a middle income economy.
The country has several world-class universities and is known for innovative high-technology companies, such as Embraer, one of the world’s largest commercial aircraft producers, as well as technology-intensive banks and other groups.
But its weak state school system puts students from lower middle class, or poor, families at a disadvantage compared with those wealthy enough to attend private schools, who tend to perform better in entrance exams for the elite universities.
According to the Organisation of Economic Co-operation and Development, Brazilian students perform significantly below international averages on reading. The proportion of Brazilians aged 25-34 who had obtained a tertiary education by 2009 was only about 10 per cent, or about a third of the average for the OECD.
About half of that age group had obtained an upper secondary education by 2009 – double that of older generations, of whom only about a quarter finished secondary school. But the number was still well below the OECD average of 80 per cent.
However, education experts said the picture is changing, thanks to reforms introduced in the 1990s under the government of Fernando Henrique Cardoso. At that time, the government decided to concentrate its resources on trying to boost school attendance while opening tertiary and post-secondary education to the private sector, Mr Oliveira said.
These programmes were continued under his successor as president, Luiz Inácio Lula da Silva, who enlarged programmes such as the “Bolsa Familia” – a system of welfare payments that award a monthly stipend to parents whose children attend school.
Wage increases boosted the incomes of the poor, lifting more than 30m people into the middle classes over the past decade. As these people have begun emerging from school, the demand for post-secondary education has exploded, leading to a boom in the private education business, led by companies such as Anhanguera and Kroton.
As these people have begun emerging from school, the demand for post-secondary education has exploded, leading to a boom in the private education business, led by companies such as Anhanguera and Kroton. The industry is attracting foreign interest too with Pearson, the owner of the FT, last year paying R$888m to buy a division of Sistema Edu­cacional Brasileiro, a leading Brazilian education company.
Brazil’s hot economy is also fuelling demand for talent that makes it highly lucrative for students to increase their skills.
An acquisition by Anhanguera increased the number of students educated at its schools and centres to 400,000 and the group aims for about 1m students in the next three to five years.
The aim of this rapid expansion was to “take advantage of the economic boom going on in Brazil right now”, Alexandre Dias, its chief executive officer, told the Financial Times.
(Source: Financial Times)

India’s Birla plans $17bn global expansion

Two of India’s largest family-run groups plan to invest billion of dollars around the globe as they seek to boost revenues by expanding in fast-growing emerging markets and by acquiring distressed assets of companies based in developed markets.
Aditya Birla Group, India’s aluminium-to-retail and mobile telephony conglomerate, plans investments of $17bn across its 33 companies aimed at almost doubling the group’s revenues to $65bn by 2015. Godrej, one of India’s oldest conglomerates, said it would invest several billion dollars in developing markets in an effort to boost the company’s sales by at least 10 times to $30bn by 2020. 
 Kumar Mangalam Birla, chairman of the family owned group, and Adi Godrej, the 68-year-old chairman of eponymous Indian consumer goods-to-palm oil group Godrej, told the Financial Times that the bulk of the investments would be rolled out over the next two to five years.
The substantial capital inputs are in stark contrast to India’s investment environment, which has been damped by record high inflation, rising commodity prices and ballooning lending rates. The aggressive moves come as the groups seek to meet the demands of India’s fast-growing economy amid a global scramble to tie up mineral resources.
Both conglomerates have a record of big-ticket global expansions, reflecting the changing face of corporate India. Companies have for decades been content to stay at home but now are cash rich and increasingly looking for opportunities overseas, where inflation and interest rates are lower and valuations are attractive following the 2008 financial crisis.
When Mr Birla took the reins in 1995 from his late father Aditya Vikram Birla, the group was India-centric and generated $2bn in revenues. Today, following 22 acquisitions, the group is a multinational worth $35bn, operating in 33 countries and generating more than 60 per cent of its revenues overseas.
The 44-year-old Mr Birla said the majority of the investment – about $10bn – would go to developing greenfield projects at its aluminium and cements companies, and to securing resources such as copper and coal needed to meet the nation’s rising demand for construction materials for nascent infrastructure projects. The remaining $7bn will be invested in Birla’s mobile phone carrier, its pulp business, and its viscose staple fibres unit.
“Buying resource assets is something that we are very keen on,” Mr Birla said. “We bought copper mines, we’ve been buying fibre and pulp assets, coal assets for our power … Control over key resources and raw materials is a big theme for us going forward in terms of our investment focus.”
Mr Godrej said the group plans to expand heavily in Africa, Asia and Latin America through a series of acquisitions.
“We have a capital-light model so in the past we used to throw a lot of cash to our shareholders,” Mr Godrej said. “Now we think that we can give better returns to our stakeholders if we use the money for inorganic growth.”
(Source: Financial Times)

Amazon Bargain Tablet to Grow Market Without Being ‘IPad Killer’

Amazon 's Kindle Fire is poised to help Chief Executive Officer Jeff Bezos lure bargain tablet-computer shoppers. It’s unlikely to dislodge Apple Inc. (AAPL)from its perch at the top of the market.
The Kindle’s $199 price, at less than half the cost of Apple’s most affordable iPad tablet, holds appeal for consumers who want a low-priced machine for reading books and watching movies, said Herman Leung, an analyst at Susquehanna Financial Group. Consumers who want a bigger screen or the ability to chat over video will probably stay loyal to Apple, Leung said.
Bezos may ship as many as 4 million units of the Kindle Fire this year, in part by undercutting Apple, said Brian Blair, an analyst at Wedge Partners Corp. in New York. Still, Amazon will need to release a larger version with a faster processor to siphon share from the iPad, which according to EMarketer Inc. had 85 percent of the market at the end of 2010.
“I don’t see this as an iPad killer,” said Leung, who is based in San Francisco. The Kindle Fire “caters to a much lower-end consumer. A bigger screen and a more powerful processor over time -- those are the two main things that will enable them to get there.”
The Kindle Fire will have a 7-inch display, smaller than Apple’s iPad, the company said at an event in New York yesterday. The device will run on Google Inc.’s Android software and have a dual-core processor, Seattle-based Amazon said. The Kindle Fire offers Wi-Fi connectivity and comes with a 30-day free trial of Amazon Prime, the company’s $79-a-year membership service that includes streaming video and free two-day shipping.

Tablet Market Growth

Amazon is angling to grab a piece of a market that Cambridge, Massachusetts-based Forrester Research Inc. (FORR) predicts will grow 51 percent a year through 2015. The company’s shares rose yesterday on optimism that the Kindle Fire will avoid the fate that befell tablets from Hewlett-Packard Co. (HPQ) and Research In Motion Ltd. (RIM), which failed to gain traction with consumers.
Amazon gained $5.50, or 2.5 percent, to $229.71 on the Nasdaq Stock Market. The stock has risen 28 percent this year.
The company’s next device must offer more built-in features, such as video chat, an upgrade to the dual-core processor and the option of a bigger screen, said Wedge Partners’ Blair. The Kindle Fire also lacks a microphone or a connection to a 3G wireless network.
Amazon will have to beef up its application store after the company said one offered by Google won’t be available, saidColin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco.

IPad’s Advantage

“The iPad looks a little more elegant to the eye,”Sebastian said. “The iPad’s more powerful, and when you restrict it to Amazon’s Android app market, you’re missing a lot.”
Apple leads the market for mobile applications, the downloadable software that lets users access games, tools and other information. It boasts more than 425,000 -- more than 100,000 of them custom-designed for the iPad.
While the new Kindle will add to Amazon’s sales, estimated by analysts to rise 32 percent to $64.6 billion in 2012, the company may disappoint if the tablet doesn’t bring in revenue quickly, Steve Weinstein, an analyst at Pacific Crest Securities in Portland, Oregon, said in a note this week.
Sales of Amazon’s electronic books, movies and music on the device may help make up for the narrower profit margins that are likely to result from the low price, Blair said. He expects Amazon to sell out of the device this year.

‘Powerful’ Kindle Fire

“I don’t think it’s a question of stealing customers yet,” Blair said. “But it’s an iTunes-like offering of content, and that’s powerful. The number of people who really want the front-facing camera are going to be small relative to the people who want to pay $199 for this thing.”
Amazon may spend about $250 on each Kindle Fire, for a loss of more than $50 per device, Gene Munster, an analyst at Piper Jaffray Cos., said in a research report yesterday. That compares with a $350 cost of production for Apple’s tablet, giving the Cupertino, California-based company a profit of $149 per unit.
Apple started selling the original iPad in April 2010, and introduced the iPad 2 in March of this year. The touch-screen device, which has a 9.7-inch diagonal display, is already Apple’s biggest source of revenue after the iPhone. The company shipped 9.25 million iPads in the quarter that ended June 25.
Two other tablets have failed to make a dent in Apple’s dominance. Research In Motion’s PlayBook, introduced in the second quarter, shipped 200,000 units, less than half of what analysts predicted. Hewlett-Packard, meanwhile, discontinued its TouchPad in August -- only about a month after its debut.

‘Bad for Nook’

Amazon’s Kindle Fire could also take share from Barnes & Noble Inc. (BKS)’s Nook Color electronic reader, which sells for $50 more and lets users buy and read digital books, Blair said. Barnes & Noble, based in New York, fell 91 cents, or 6.9 percent, to $12.30 yesterday on the New York Stock Exchange.
“This is going to have more content outside of just books, and overall better content at a better price point,” he said.“This is bad for Nook sales.”
The Kindle Fire will expand the tablet market, rather than take customers from Apple, said Peter Misek, an analyst at Jefferies & Co. in New York.
That’s because Amazon has created a new part of the market by targeting bargain hunters, said Lance Strate, a professor of communication and media studies at Fordham University in New York.
“With the other Android products, what we get is kind of a cheap imitation of the iPad,” Strate said. “What Amazon has is something is different, with a separate set of advantages and disadvantages. You’re not going to beat Apple at its own game, but Amazon can create its own.”
(Source: Bloomberg)