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General Body Meeting 04.14.11

General Body Meeting 04.14.11. Agenda. Announcements News Updates Tech Sector Minipitch Financial Sector Pitch. Announcements. Announcements. Newsletter Out now! Vote on costs Competition Update 12 schools. News Updates. S&P Negative Outlook on US Debt. Not a downgrade!

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General Body Meeting 04.14.11

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  1. General Body Meeting 04.14.11

  2. Agenda • Announcements • News Updates • Tech Sector Minipitch • Financial Sector Pitch

  3. Announcements

  4. Announcements • Newsletter • Out now! • Vote on costs • Competition Update • 12 schools

  5. News Updates

  6. S&P Negative Outlook on US Debt • Not a downgrade! • Dow was down about 2% • Look for rising interest rates • Budget debate and outcome is something to watch • Investor reaction: • PIMCO no longer has US debt in its flagship bond fund • Skunked – by Bill Gross

  7. Gilead News Update • Study halted due to lack of evidence of Truvada’s benefits • Research shows that the drug is ineffective in women • Study in Kenya, Tanzania and South Africa • Unexpected • Been sold since 2004 • Numerous studies prove it works • Blood tests necessary to test how often test subjects took the drug

  8. Gilead Earnings Update • Adjusted EPS of $0.87 v. projected EPS of $0.97 • Quarterly revenue fell 7.6% to $1.93 billion • Net income fell to $0.80 from $0.92 a year earlier • Causes • US sales hit by temporary at state funded AIDS drug assistance programs • Federal government recently increase budget for ADAPs by 6% • Royalty, contract and other revenue down 79% • Caused by decrease in sales of Tamiflu

  9. Earnings Update Cont. • Positive indicators • Management still expect full year product sales of $7.1-8.1 billion • Increased Federal budget for ADAPs • Total product sales increase by 4% • Truvada up 2% (failed test?), Atripla up 7% • “Gilead maintained its full year guidance…” (Cowen and Co. Analyst) • Increase R&D costs $254.4 million from $218.7 million a year earlier • Licensing deal with MicroDoseTherapeutx Inc. for an experimental respiratory virus treatment

  10. Q1 2011 Earnings JMP, BAC, C

  11. JP Morgan Chase: The Good News • Net income: $5.55 billion ($1.28 per share) • Increased quarterly dividend from $0.20 to $0.25 • Tier 1 common capital ratio increased from 9.1% to 10% • Added 16,300 employees over ltm

  12. …And the bad news • $208 million loss in retail financial services • Mortgage originations declined 29% from last quarter • Raised concerns about loan growth

  13. Bank of America: The Good • Net income: $2 billion ($0.17 per diluted share) • Tier 1 common capital ratio increased from 8.60% to 8.64% • Loss provisions reduced by over $2 billion • Global banking and markets segment had over $2 billion in profits • Lower credit costs, gains from equity investments, higher asset management/banking fees • Tuesday: Announcement that they merged corporate and investment banking divisions and Christian Meissner joins Rubinoff and Saggurti to head new joint division

  14. The Bad • $2.4 billion loss in mortgage business • Smaller loss than previous quarters, but recovery is slower than other big banks • $1.8 billion decline in fixed income, currency and commodity sales, trading revenue

  15. Citigroup • Net income: $3 billion (10 cents per share) • Revenues down 22% since Q1 2010 to $19.7 billion • Investment banking profit down 46% since Q1 2010 to $1.7 billion • Plans for 10-for-1 reverse stock split in early May

  16. Glencore News Update Alan Calabrese

  17. Glencore Overview • Swiss based commodities trader • One of the world’s largest suppliers of commodities and raw materials • Metals, minerals, crude oil, oil products, coal, natural gas, and agricultural products • Revenue (2010): $144.9 Billion • Net Income (2010): $3.799 Billion

  18. Glencore IPO • Aiming to raise $9 billion to $11 billion by listing 15% to 20% of its share capital • Dual listing of its shares in London and Hong Kong • IPO may value Glencore at about $55 billion to $60 billion • Valuation places Glencore within $10 Billion • Ahead of Morgan Stanley, one of the biggest commodities traders on Wall Street

  19. Glencore IPO • More in common with an investment bank, a hedge-fund manager or a private-equity firm than with a mining conglomerate • Perhaps IPO now due to market timing • Hard business to value • Nothing else like it really exists

  20. Union Pacific Corporation (UNP) • Q1 Earnings Report • Expected: $1.31 EPS • Actual: $1.29 EPS ($.02 less than expected) • Share Price Performance (April 20th) • Fell 2.1% • Current Price: $95.29 • Why Underperforming? • Higher Fuel Costs

  21. Sell Off: Overreaction • Financial Success: • Earnings grew 24% • Operating Margin Grew from 24.9% to 25.3% • Double Digit Revenue Growth • Company Growth: • Sales Rose 13% • Volumes increased by 5% • Led by chemical and industrial shipments

  22. Tech Sector Minipitch

  23. HP Update • Recap: • Feb 22 – shares fell 9.7% • Currently: 41.03 (-12.55% from August 2010) • Key Concerns • Weakness in personal computer, technology service segments • First full quarter with new CEO, Leo Apotheker • Netbook decline

  24. HP Update • IT Services Optimism • Uptick in IT spending expected • 23% blade server revenue growth, 30% router and switching revenue growth(increasing market share) • WebOS Tablet & Compelling Mobile Strategy • Possibly leapfrogging competition, music streaming ahead of Apple • Major investments in Palm to pay off • Compare with Dell…

  25. HP Update • Unified Strategy • WebOS as a maturing platform receiving significant attention • More likely than Android to match iOS user experience, consumer-friendlyness • WebOS on printers, computers, represents a strong strategy (Apple has yet to leverage iOS on their own PCs) • Integration of Palm continues to proceed smoothly

  26. HP Update • Summary: • HPQ is cheap, 10.39P/E, beaten up over soft guidance on PC sales, magnified by general unease about CEO and company strategy • Disappointment over netbook sales will fade as tablet sales take over • HP’s method of leveraging WebOS, product diversity, represents a unique strength

  27. HP Update • Proposal: • Increase position in HP from 13 shares to 45, buy 32 shares at 41.14

  28. Cisco • Recap: • Shares fell 8.67% on Feb 9 • Continued declines from ~22 to ~17 • Key Concerns: • Worrisome language in financial reporting • Rising competition • Period of company transition

  29. Cisco • Main Business Troubles • “Cisco needs to choose between protecting share or preserving margins” • Typically took 70 to 80% margins, compared to competitors (IBM, ORCL, HPQ) which take 40% margins • Beginning to lose market share to smaller competitors, margin has decreased to 64% in FY 2010

  30. Cisco • Difficult Transition • Refocusing on core businesses • April 12: cuts Flip, which it bought for $590m • Only a “drop in the bucket,” <1% of company • “More changes are required, but more changes are expected” • No clear positive catalyst to reverse short to medium-term declines • Current uptick in IT spending may be captured by competitors (such as HP)

  31. Cisco • Proposal • Sell stake in Cisco, 83 shares at 17.00 (1,411)

  32. Visa Inc. Derek Creadore SiddhantTrivedi AleksandarZvorinji Margaret Szczerbicki John Troncoso

  33. Company Summary

  34. Thesis • Market leader in a fast growing industry • Global tread towards using plastic instead of cash • 80% of the world's transactions still involve cash or checks • Large international exposure, thus might not be hit as hard by impending US regulation • Market over-reacting to impending financial regulation • Visa’s dominate network size makes it more attractive as it allows customers to use Visa’s services in more locations

  35. Industry Overview

  36. Introduction • A thought: Commerce has become a technical issue. It is not only about making a financial transaction, it is about having a relationship with the consumer while they are exchanging currency for goods and services • Nearly 1 in every 3 consumer purchases in the United States is made with a payment card—including credit, debit, and prepaid products • Of every $100 spent by consumers, nearly $40 is in a form other than cash or check

  37. The industry landscape The Why! Psychology of a card program The Players Cardholder Banks Issuing and Acquiring Corporate Sponsor Merchant / POI Processor The Programs Specifics Access Device (Card, Transponder, Terminals ….) Rewards (Points, coupons…) Program (Loyalty supplier, database, rules) Collateral (setup, statements, printed materials) The How! Technology (Systems, processing, hardware, firmware, Issuing)

  38. Transaction breakdown

  39. Players in the game • Visa & Mastercard- license their payment brands to Issuers and Acquirers • Issuing banks- provide consumers with the credit cards in their pocket • Acquiring banks- is the bank set up by the merchant to accept transaction processing for cards accepted • Merchant- store that accepts customer’s card as payment

  40. Request Request Auth Auth Settlement Settlement Online card transaction process Merchant’s bank initiates transaction -Routes to locations determined by card ids for approval and processing Collects card ID/number, Merchant ID, Amount. Merchant accepts card -Validates card by signature check or PIN Processes transaction Consumer’s bank approves transaction, sends back to merchant Settlement will post to statement. Processor Visa or MC systems Legacy Hosts

  41. How money is made • All card associations and companies charge an interchange fee to the merchants that offer their cards • VISA and MasterCard:1.2% to 3% • AMEX: 2.5% to 5%, Discover Card: 1.2% to 4% • The issuing bank lends credit and takes on the risk that the consumer will pay them back for the items they purchase • The issuing bank get paid the majority of the interchange (between .03% and 1% based on size of issuing volume)

  42. How money is made (2) • Processors (Visa) charge a fee to handle transaction bundling and data reporting, etc. Ranging between 1 cent to 25 cents per transaction • Processors (Visa) also charge the banks an annual fee, to simply be a part of their network • Card issuers (Chase, BAC, Citi) charge consumers a fee to have a card, ranging from $25 to $300 a year • Cost per card, by card manufactures range from 10 cents to $5 dollars based on the type of card (i.e. smart card)

  43. Types of cards • Charge cards • American Express • Retail store card • Credit cards • VISA and MasterCard • Secured credit cards • Debit cards • Stored-value cards • Gift cards and phone cards • Membership cards • Smart cards

  44. Charge cards • Charge cards • American Express • Retail store and gas cards • Interesting points • No line of credit – must be paid off each month • Heavy penalties for late payment • In the past most retail stores offered one • Profitable for the stores • Single retailer version limited use • Service & extended warranty sales opportunities

  45. Credit cards • Credit cards • VISA and MasterCard • Affinity cards • Airline cards • Interesting points • Limited in what can be done • Payment pretty straight forward • Requires credit check and approval • Market seems to be at saturation point • Operates on an open platform

  46. Secured credit cards • Secured credit cards • Target market is credit consumers • Requires a deposit of between $500 and $2,000 • Monthly payment is required otherwise draw down on deposit and high penalty • Requires high maintenance and yearly fees • Operates on an open platform with some level of authorizations

  47. Debit cards • Debit cards • Started out as ATM only cards • Requires a pin • Access to a bank/ checking account (continual deposits) • No credit line (instead an overdraft line) • Concern by retailers on fees • Runs on bank transaction networks (Interlink and Maestro) • Networks originally designed for banks to share information • Operates on an open and/or closed platform with security • Filtered (selective use) and open available

  48. Recent Regulations • Along with the financial regulation bill the Credit Card Accountability, Responsibility and Disclosure (CARD) Act will hinder credit card companies • bill puts restrictions on interest rate increases, a 45 day notice before changing interest rates, restrictions on fees that can be charged, requirements for more disclosure, and puts limits on ability of those under the age of 21 to obtain cards

  49. Effects of Regulation • Fed says won't meet the April 21st deadline to firm up debit card fee rule, industry hopes for softer stance • Financial regulation could dramatically reduce transaction costs that companies collect off of debit card swipes (Durbin Amendment) • Congress proposed rules that would limit debit card interchange fees at just $0.12 per transaction, significantly lower than the average $0.44 the card companies are currently charging

  50. Effects of Regulation on Visa • Durbin amendment prohibits exclusive agreements • Banks that have exclusive agreements with Visa may begin switching some or all of their transactions through regional networks • This would decrease the number of transactions Visa handles and since Visa earns revenue based on the number of transactions it switches, revenue will be hurt • While Visa collects minor interchange fees, it could indirectly be affected by the cap, since banks would have their interchange profits squeezed and look for Visa to charge them less because of this

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