Stock Market Predictions

Analysis: Can Zynga break free from Facebook?

Stock Market Predictions

Technically, the admission is called a risk factor. But since Zynga, the wildly popular maker of mobile and social games such as "Mafia Wars" and "FarmVille," generates about 95 percent of its revenue through Facebook, the worry for investors is that its relationship with Mark Zuckerberg's social network is less a risk factor than a business model.

And how Zynga ultimately performs as a public company -- it is aiming to raise $925 million at a $9 billion valuation when it begins trading on the Nasdaq on Friday -- will depend in large part on its ability to break free from Facebook. Or at least its ability to convince investors that it can do so.

So far, however, the skeptics remain unconvinced. At Zynga's IPO roadshow luncheon in San Francisco on Monday, investors spent most of the question and answer time with Zynga executives asking about Facebook.

"Any time you have such a large reliance on a single company, you have to be concerned," said Dan Niles, chief investment officer of AlphaOne Capital Partners, who didn't attend the luncheon but watched one of Zynga's presentations over the Internet.

From an investment perspective, ignoring the fact that all but 5 percent of Zynga's $828 million in revenue in the first nine months of this year came from Facebook could be detrimental.

Zynga conceded that point in its IPO prospectus, noting that, "any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock."

Facebook takes a 30 percent cut of the revenue Zynga derives from the social network, which features more than 222 million monthly active Zynga users, according to the data tracking website AppData. Zynga itself makes most of its money from less than 3 percent of its players, who buy virtual items like trucks and poker chips.

Being so dependent on one company clearly poses risks to Zynga's growth potential. If Facebook's user growth slows, for instance, Zynga's growth is likely to slow as well. Or, in an extreme case, if Facebook suddenly decided to banish games, it could harm Zynga's entire business.

Zynga is also beholden to Facebook in other ways. According to a regulatory filing on July 18, the company has to publish some of its games exclusively on Facebook before other platforms.

What's worse, Zynga may have botched one main attempt it has thus far made at trying to break away from Facebook.

When the company unveiled its new online platform "Zynga Direct" during a rare media event at its San Francisco headquarters in October, it was billed as a way for Zynga to deal directly with its consumers without an intermediary.

But when players visited Zynga's website to sign up for a user name, called a "Z Tag," they were told to first install the Zynga app on Facebook, giving the impression that it was being more closely integrated with the world's largest social network instead of being weaned off of it.

A Zynga spokesman on Wednesday declined to comment on the company's IPO.

FACEBOOK FLIPSIDE

The counter argument is that Zynga's reliance on the platform may attract investors looking to bet on Facebook's growth. With Facebook's IPO at least several months away, there currently are not many ways to gain exposure to Facebook on the stock market.

"Ahead of Facebook's IPO, Zynga is the closest proxy investors have," said Robert W. Baird & Co analyst Colin Sebastian. "As of today, Zynga is highly dependent on Facebook and could bring in investors who are looking to find ways to gain exposure to social media."

Akram Yosri, managing partner of 3i Capital Group, attended Zynga's roadshow presentation in New York and said he was satisfied with how management responded to questions about Facebook and how Zynga can grow in partnership with the social network.

"They didn't dodge the question," said Yosri, whose firm has $1.4 billion in assets under management. "As long as it's a working relationship, it's a plus for Zynga because Facebook is going to be there a long time and has a proven business model. "

Zynga also gathers lots of data on its millions of users, more than half of whom are female, which marketers could find attractive.

CHINA AND BEYOND

Still, Zynga faces a long road to a less Facebook-dependent future. According to regulatory filings, Zynga's contract with Facebook doesn't come up for review until 2015. This gives it three years to find new revenue sources outside the social network such as moving into new markets like Asia and making more games for mobile devices.

In July, Zynga entered mainland China's games market for the first time, partnering with Chinese platform Tencent for a local version of the game "CityVille."

"Zynga has at least until that time to expand its presence in Asia and it is trying to do that aggressively in mobile," said Steve Soranno, an equity analyst at Calvert Investment Management, which has $12 billion of assets under management.

Soranno added, however, that investors might find Zynga too risky to bet on while it is building out its business in these new areas since it is unclear whether the company can deliver a high enough or sustainable return on capital investment.

"That's a relative unknown for a young company in an industry that is developing this rapidly. This raises risks for going in(to the stock) that early," Soranno said.

Zynga's total expenses rose 115 percent to $747.9 million in the first nine months of the year, a sign that its international ambitions are adding to costs.

With regard to mobile, while games such as "Words With Friends" have become hits, its roughly 13 million mobile users are dwarfed by the hundreds of millions of users who play it on Facebook.

While Zynga was one of the earliest game makers on the Facebook platform, it lacks that first mover advantage on mobile. For instance, Disney released a mobile game in September called "Where's my Water" that is ranked ahead of some Zynga titles in Apple's App store.

And investors said that Zynga may already be losing market share on Facebook itself, as video game companies such as Electronic Arts make large acquisitions to compete with it. Indeed, AlphaOne's Niles pointed to EA's "The Sims Social" game, which has 28 million monthly active users, as a successful example of encroachment by another video game company on Zynga's turf.

Over time, however, there is hope the Zynga can break free from Facebook with services like "Zynga Direct." Though that service still has no date for when it will launch or which games will be available, Sterne Agee analyst Arvind Bhatia said that it "should help reduce Zynga's platform risk somewhat."

(Reporting By Liana B. Baker in New York, additional reporting by Alistair Barr; Editing by Peter Lauria and Steve Orlofsky)

(Corrects spelling of analyst's surname to Soranno from Sorrano in paragraphs 22, 23 and 24)

Solutia aims to lift stock with dividend, strong forecast

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The company - which makes a key chemical used to make tires, as well as parts for Apple's (AAPL.O) iPad - has seen its stock drop 34 percent so far this year, despite a string of strong earnings announcements and aggressive debt reduction.

"There's a fundamental disconnect between the financial performance of our company ... and the value that the public financial marketplace is putting on that success," Solutia Chief Executive Jeffry Quinn told Global Markets. "When you see that disconnect, it gets frustrating."

The company said on Thursday it will pay a quarterly dividend of 3.75 cents in March to shareholders of record as on February 15.

The dividend, Quinn said, was designed to show Wall Street "the confidence and strength we see in our businesses."

Quinn told Global Markets earlier this year he was considering such a dividend.

Solutia forecast 2012 adjusted earnings of $2.00 to $2.30 a share, above the $2.00 it expects for 2011. Analysts expect $2.24 a share in earnings for 2012, according to Thomson Global Markets I/B/E/S.

St. Louis-based Solutia expects 2012 revenue of $2.12 billion to $2.27 billion, while analysts, on average, expect $2.23 billion.

EUROPE

St. Louis-based Solutia is taking a "very conservative view" of European GDP in its 2012 estimates, Quinn said.

While he does see bumpy times ahead for that continent, "We've done well even with a soft European economy."

Part of Solutia's strength is its vast product line. The company sells insoluble sulfur to tire manufacturers. That material binds rubber together and is essential for tire production.

Solutia also sells film layers for electronic devices and glass. It recently launched a film product that will significantly block infrared solar heat in automobile windows.

While the company is spending heavily to expand into China, it was "a little disappointed" by its July 2010 purchase of Vistasolar, a German maker of protective coatings solar equipment, for $294 million, Quinn said.

"The market moved to China so rapidly," Quinn said. "The first 6 months was great. But 2011 was a little bit of a disappointment for that business because of a loss of share.

"But I think long-term we'll be very please with that acquisition."

Solutia shares closed at $15.28 on Thursday, up 2.6 percent for the day.

(Reporting by Ernest Scheyder in New York and Vaishnavi Bala in Bangalore; Editing by Sreejiraj Eluvangal, Gary Hill)

Amazon shares give up 2011 gains on profit concern

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The shares slipped 30 cents to close at $180.21, but touched $170.25 earlier in the day. That put the stock at the lowest level since late March and left it in negative territory for the year.

As recently as mid-October, the shares hit a record $246.71, up more than 35 percent for the year to date.

Since then, Amazon has launched its Kindle Fire tablet at a $199 price point, which IHS iSuppli and other computer industry analysis firms estimate is close to cost.

The Fire has received a lot of negative reviews, but most analysts expect sales to be very strong. While that may be positive for Amazon's long-term goal of selling more digital content, profit will be pressured in the short term.

"There's a lot of concern about how profitable this company can be," said RJ Hottovy, an equity analyst at Morningstar.

He expects Amazon to sell at least 5 million Kindle Fire tablets in the fourth quarter and is considering raising that estimate.

"With the Kindle Fire selling so well, that means additional margin pressure," the analyst said.

Since the middle of November, when Amazon started shipping the Kindle Fire, shares of the company are down more than 20 percent. Stock of eBay, a big e-commerce rival, are down less than 5 percent in the same period, while the Nasdaq Composite Index has lost 4.9 percent.

In addition to the Kindle Fire launch, Amazon is investing heavily in digital content, such as movies and TV shows, and new distribution centers to support its fast-growing online retail business.

"There's also concern about how long it will take for all these investments to pay off, or whether they will pay off," Hottovy said.

BEST BUY COMPETITION

Concern about Amazon profit was exacerbated this week when Best Buy Co reported lower-than-expected earnings, hurt by heavy promotional activity this holiday season.

Amazon competes with Best Buy on sales of consumer electronics, and the Internet giant is known to aggressively match or beat rivals' prices, according to Chad Bartley, an analyst at Pacific Crest Securities.

"Best Buy's online business did significantly better than its traditional business, a sign that e-commerce continues to take market share," Bartley said.

"On the negative side, Best Buy results make it clear there's a lot of discounting this holiday," the analyst added.

In the past seven weeks, Amazon's consumer electronics prices averaged 9 percent to 10 percent lower than the average on leading e-commerce websites, including those run by Best Buy, Costco, Target, and Wal-Mart, according to Goldman Sachs data.

GOLDMAN WARNING

On Tuesday, Goldman Sachs analysts, led by Heather Bellini, warned that Amazon earnings estimates are probably too high for 2012.

The Goldman analysts forecast earnings per share of $1.42 next year, well below analysts' average estimate of more than $2 a share.

Amazon's current share price is based on assumptions that earnings per share will climb next year from low levels at the end of this year, the analysts added.

"For the stock to materially appreciate in the near term would require the company to beat and raise on the bottom line over the next few quarters," Bellini and her colleagues wrote. "Given our lower operating forecasts for 2012, we see this scenario as unlikely."

(Reporting by Alistair Barr; editing by John Wallace)

(Corrects share price performance in first and second paragraphs)

Olympus tells lenders cash crunch looms: report

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Senior officials from the company met lenders on Friday, telling them they would come up with a new business plan in early May that could include equity tie-ups to bolster its balance sheet.

The company's main lender, Sumitomo Mitsui Banking Corp, agreed at the meeting to continue its support for the company, a source told Global Markets.

Assuming no new long-term borrowing, the company said cash and deposits would fall to 183.7 billion yen($2.36 billion) at the end of March 2013 and 94.2 billion yen a year after that, the Nikkei business said. Reserves could run out completely in 2015, the paper said.

Olympus's profits on its medical equipment business are hampered by losses on a struggling camera unit.

The company withdrew its full-year earnings forecast on Wednesday, but at Friday's meeting offered an internal forecast for a 7 percent year-on-year decline in sales to 790 billion yen and a 5.6 percent gain in operating profit to 35.6 billion yen.

($1=77.7 yen)

(Reporting by Isabel Reynolds; Editing by Robert Birsel)

Kroger sees hit, then gain, as pension plans merge

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Kroger said it would borrow money at low interest rates to make a significant up-front pension contribution that will reduce future pension contribution related expenses. The fund merger also will lower administrative costs and investment fees.

Kroger said employees and retirees will gain because the pension plan will be more fully funded, which significantly reduces risk of decreased benefit payments. Kroger and the union also agreed to a set of calculations for retirement payments, which will be in effect for a decade.

The four United Food and Commercial Workers/multi-employer pension funds will merge into a new fund as of January 1, 2012, the company said.

Kroger, the largest traditional U.S. grocer, employs more than 338,000 workers. The company said the merged fund will secure pension benefits for more than 65,000 workers from 14 UFCW union locals. Eleven of those union locals have approved the deal. Kroger expects the remaining three locals to grant their approval by December 21.

The company plans to contribute about $650 million to the new fund in January. It now expects to incur a charge of about 73 cents per share in the fourth quarter of 2011 because of that contribution, though the exact effect on profit will depend on how much it actually contributes.

The new arrangement should lead to a lower 2012 pension expense and increase fiscal 2012 profit by 4 cents to 6 cents per share, Kroger said.

"This will establish funding certainty that benefits both participants and the company," Mike Schlotman, Kroger's chief financial officer, said on a conference call with analysts.

As of January 1, assets in the new fund will total about $2.5 billion. Kroger will be responsible for the investment and custody of all assets of the new plan. The assets previously were managed by the union and Kroger trustees.

The four funds involved in the merger represent roughly 30 percent of the current underfunding of all the multi-employer plans to which Kroger contributes.

Kroger has agreed to fund the unfunded obligation by March 2018. Underfunded pension plans don't have enough money readily available to cover current and future retirement obligations.

"Given the low interest rate environment, we believe it is prudent to fund a significant portion of this obligation now," Schlotman said.

"In a volatile financial environment, this plan represents a long term solution for a secure retirement," said UFCW International President Joseph Hansen. The union said the deal covers 170,000 retired and active Kroger workers in 15 states, primarily in the Midwest and South.

Defined pension benefit plans provide a pre-set monthly benefit, paid by the employer, upon retirement.

Many U.S. companies have replaced those plans with defined contribution plans such as 401(k)s, where employees contribute a portion of their salaries to investment accounts that do not promise a specific benefit.

Kroger and direct rivals like Safeway Inc (SWY.N) and Supervalu Inc (SVU.N) are squeezing costs as they compete with non-union discounter Wal-Mart Stores Inc (WMT.N), which sells more groceries than any other U.S. retailer.

Shares in Kroger were up 1.1 percent at $23.80 in midday trading on the New York Stock Exchange.

(Reporting by Jessica Wohl in Chicago and Lisa Baertlein in Los Angeles, editing by Gerald E. McCormick and Gunna Dickson)

Lender Processing Services shares tank after Nevada sues co

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The lawsuit filed on December 15 in the 8th Judicial District of Nevada includes allegations of widespread document execution fraud, improper control over foreclosure attorneys and the foreclosure process, and misrepresentations about LPS' fees and services.

"Former employees and industry players describe LPS as an assembly-line sweatshop, churning out documents and foreclosures as fast as new requests came in and punishing network attorneys who failed to keep up the pace," Attorney General Catherine Cortez Mast said in a statement on her website. (here)

When contacted, Lender Processing Services said it had no immediate comment to make on the matter.

On November 17, two of LPS' employees were indicted for allegedly supervising a robosigning scheme on documents that were used to initiate foreclosure on local homeowners.

In May, Attorneys general in California and Illinois had subpoenaed Lender Processing Services and peer Nationwide Title Clearing Inc as part of probes into alleged "robosigning" in the mortgage servicing industry.

Shares of the company were trading at $14.59 on Friday on the New York Stock Exchange.

(Reporting by Satyanarayan Iyer and Arnav Das Sharma in Bangalore; Editing by Sriraj Kalluvila)

Shares of Asustek slip after tablet recall

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An Asustek official said the number of tablets involved was only about 300, so the recall would not have an impact on the company.

Asustek shares were off 1.22 percent by 0130 GMT (8:30 p.m. EST), underperforming a broader market's .TWII 0.45 percent rise.

The Taiwanese PC vendor said in a statement on its website that it would recall Eee Pad Transformer Prime tablets sold in Taiwan before December 3 because of Wifi signal instability.

The tablet, the first featuring the NVIDIA Corp's (NVDA.O) Tegra 3 quad-core processor, was launched on December 1.

(Reporting by Clare Jim; Editing by Chris Lewis)

Covidien to spin off pharma business, shares jump

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The spin-off, anticipated by Wall Street for several years, would likely take up to 18 months and be carried out as a tax-free distribution to shareholders.

The two units "have distinctly different business models, sales channels, customers, capital requirements and talent bases," Chief Executive Jose Almeida said in a statement.

Covidien's pharmaceutical business, which carries lower margins than its other businesses, accounts for about $2 billion of total company sales. After the spin-off, Covidien's medical products business would generate about $9.6 billion in sales, the company said.

BMO Capital Markets analyst Joanne Wuench said in a research note that the spin-off "removes a low-margin business and it will leave Covidien as more of a pure play for medtech investors with higher top line and better operating margins," adding that the pharma division has been "responsible for most of the negative surprises out of the company."

The Covidien decision follows a similar move by Abbott Laboratories Inc (ABT.N), which in October announced that it would split off its pharmaceuticals business into a separate publicly traded company.

Covidien's pharmaceutical business is one of the world's largest producers of bulk acetaminophen and the largest U.S. supplier of opioid pain medications. It is among the top 10 U.S. generic drug manufacturers, the company said.

It is also one of the world's leading suppliers of generators used to produce technetium-99m, a critical diagnostic medical isotope. It is the only manufacturer that offers a fully integrated system of diagnostic contrast media in prefilled syringes and injectors.

During a conference call with analysts, executives declined to say how much the transaction would cost.

Asked why management decided not to sell the pharmaceutical unit, Almeida said: "A spin is something we control ... and the tax efficiency component cannot be ignored."

The company was rumored to have been trying to sell the unit for quite some time. Management declined to say whether it had spoken to another party about a deal.

Covidien will not maintain any ownership in the spun-off company, which will likely seek out its own acquisitions to round out its product offerings, Almeida said.

The capital structure of the two new companies is expected to mirror Covidien's capital structure today, suggesting Covidien will reduce its debt load in the deal.

Almeida expects improved profits for the pharmaceutical company once it stands on its own, noting that it has an advancing pipeline in place, but declined to give a specific growth forecast.

Michael Weinstein, an analyst with JPMorgan, said once the transaction is completed, Covidien should have one of the best revenue and profit growth profiles among top medical device makers.

Covidien shares were up $1.44 or 3.4 percent at $43.60 in afternoon trade on the New York Stock Exchange. Earlier it traded as high as $44.37.

(Reporting by Debra Sherman in Chicago, Bill Berkrot in New York and Kavyanjali Kaushik in Bangalore; Editing by Michele Gershberg, Gerald E. McCormick)

Cablevision down 15 percent as executive quits

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Cablevision announced the sudden resignation of Tom Rutledge, a nine-year veteran of the company, late on Thursday, leading to speculation that he would be joining a larger rival such as Charter Communications Inc (CHTR.O). It also raised the possibility that the Dolan-family-controlled Cablevision would be vulnerable as an acquisition target for Time Warner Cable (TWC.N) or Comcast Corp (CMCSA.O).

Analysts at Miller Tabak and ISI Group downgraded Cablevision on the news and others on Wall Street described the news as a major loss for Cablevision.

Although Rutledge renewed a five-year employment contract two years ago that would have taken him through to 2014, Bryan Kraft of Evercore Partners noted that a one-time special cash and stock award totaling $18.5 million he received at the signing of his employment contract became fully vested this month. Kraft said this might be an indication that Rutledge has been planning to resign for some time.

Rutledge's departure was especially of concern to investors because his long-time No. 2 John Bickham stepped down as president of Cablevision's cable operations last month.

Shares fell $2.10 to $11.80 in early trading on the New York Stock Exchange.

(Reporting By Yinka Adegoke; Editing by Gerald E. McCormick, Dave Zimmerman)

Michael Kors makes a glitzy market debut

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Shares of the luxury brand touched a high of $25.23, before ending the day at $24.20 -- up 21 percent -- valuing the company at about $4.62 billion.

A day earlier, the company raised the number of shares on offer by 13 percent to 47.2 million and priced its offering above its expected range, raising $944 million.

Michael Kors' offering follows a successful $2.1 billion IPO of Italian fashion house Prada SpA (1913.HK) in Hong Kong and a $487 million IPO of Italian luxury shoemaker Salvatore Ferragamo.

Strong fundamentals, a high growth rate and good brand value make the company a good buy, according to industry analysts.

"I think the company is doing extremely well," NPD Group's chief retail industry analyst Marshal Cohen said. "One of the few brands that is going to see a surge through the holiday season."

The company, which is known for its glitzy designs, has seen its net income grow by 85 percent to $72.5 million in fiscal 2011 and boasts a gross profit margin of 55.5 percent.

The luxury goods industry has rebounded strongly after the sharp downturn of 2009, and analysts see 2011 to be another record year, particularly for watchmakers, luxury hotels, fashion and leather goods groups.

As of October 1, Michael Kors Holdings -- which sells fashion accessories, footwear and apparel -- operated 169 retail stores in North America and 34 stores in Europe and Japan.

The company said it is looking to more than double its store count in North America, and have about 100 stores each in Europe and Japan.

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Founder and Chief Creative Officer Michael Kors, who is a judge on the "Project Runway" TV show, is selling 5.8 million shares and is likely to pocket around $116 million.

The company is not selling any shares in the offering, with the entire proceeds going to the selling shareholders.

Concerns regarding the company's ability to sustain its phenomenal growth rates and insiders selling a large stake are overblown, said Josef Schuster, founder of IPOX Schuster, a fund that specializes in investing in newly public companies.

"Michael Kors still has a lot of opportunities to expand in areas like merchandizing and new-store openings, and you will see the company maintain growth rates over time even if the economy is not doing well."

The company competes with retailers such as Coach (COH.N), Burberry (BRBY.L), Ralph Lauren (RL.N) and Hermes International (HRMS.PA).

Its biggest shareholder is investment firm Sportswear Holdings Ltd, which will cut its stake to 37.7 percent from 51.9 percent after the offering.

Sportswear Holdings is led by Silas Chou and Lawrence Stroll who have previously had a hand in developing other lifestyle brands including Tommy Hilfiger and Pepe Jeans.

Morgan Stanley, J.P. Morgan and Goldman Sachs were the lead underwriters on the offering.

(Reporting by Tanya Agrawal and Brenton Cordeiro in Bangalore, additional reporting by Phil Wahba in New York; Editing by Anil D'Silva)