Investment Strategy Published by Raymond James & Associates Please read domestic and foreign disclosure/risk information beginning on page 3 and Analyst Certification on page 3. © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 Jeffrey D. Saut, Chief Investment Strategist, (727) 567-2644, [email protected] August 31, 2015 Investment Strategy ____________________________________________________________________________________________ "DeVoe's Unprovable but Highly Probable Theories" For the College Humor Magazine I submitted a collection of many ‘laws’ and other items , including my College Course Descriptions: 1) If it’s green, wiggles or slithers, it’s biology; 2) If it stinks, it’s probably chemistry, although don’t rule out economics; 3) If it doesn’t work, it’s most likely physics, although don’t rule out economics; 4) if it’s incomprehensible, it’s most likely mathematics, but that’s part of economics also; 5) if it stinks, doesn’t work, is incomprehensible, and doesn’t make sense, it’s either economics or philosophy. . . . Ray DeVoe I don’t claim to be an economist, although I do have a degree in economics. Fortunately, I have forgotten most of the economics I learned at university. Also fortunate is that I work with one of the best economists on Wall Street in the form of Scott Brown, Ph.D., but I digress. For the past few months I have been suggesting the economy was doing better, which has brought about cat calls from many of the negative nabobs. My sense has been that GDP was growing by at least 3%. Bolstering that belief, on one of my CNBC appearances I actually heard Tim Geithner say, “I think the U.S. economy is stronger than the official figures suggest.” Last week that proved to be the case as the Gross Domestic Product (GDP) figures came in much stronger than anticipated, prompting Scott Brown to write, “Real GDP rose at a 3.7% annual rate in the 2nd estimate for 2Q15 (vs. +2.3% in the advance estimate).” Now I have always found the terms “real” versus “nominal” to be interesting. The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP. Last week’s “real” GDP number brings back memories of a Jim Grant conference where Van Hoisington (Hoisington Investment Management) was a guest speaker. He began (as paraphrased): Real GDP does not exist. I mean, literally, it does not exist. It’s a figment of the imagination of scorekeepers at the Department of Commerce who apply various adjustments to nominal GDP. Nominal GDP is what’s in your billfold. You go to a grocery store, you give them a dollar. That’s nominal GDP. That’s the sales that are entered as nominal growth. Nominal interest rates are what you pay. You have never met a real interest rate; I have never met one. You have never met a real GDP; I have never met one. “Nominal versus Real,” what a novel concept; so, let’s see what happens if we apply it to the stock market. Measuring the D-J Industrials Average (INDU/16643.01) from its then all-time high of 11722.98 in the spring of 2000 shows that index is higher by 42%. However, in “real” terms the Industrials are virtually unchanged. Of course, hereto, you have never met a “Real Dow.” I have never met a “Real Dow.” While these charts from Advisor Perspectives are a few months old, you’ll get the idea. We live in a nominal world, not a “real” (inflation-adjusted) world. So, what happened in nominal terms last week? Actually, the saga began in early July when my timing models said the equity markets were going into a period of contraction that should last into August 13 – 18th +/- 3 sessions. Since Friday August 21st fell within that +/- 3-session margin of error, August 21st’s 531-point drop should have come as no surprise. Normally, or should I say nominally, that Friday should have been “it” on the downside. But, as I stated on CNBC that morning, “Never on a Friday,” meaning once the stock market gets into one of these “selling skeins” it rarely bottoms on a Friday, giving participants over the weekend to brood about their losses and show up Monday/Tuesday in “sell mode” . . . aka, “Turning Tuesday.” And, that is pretty much the way it played, which is why I stated on CNBC the following Monday (8/24/15) today is “it,” the bottom/capitulation. Tuesday morning that “call” was looking good, but the early/mid-session strength gave way to late-session weakness as a number of trading platforms like the BATS Exchange were “off line,” causing liquidity to evaporate. That freaked traders out and they hit what bids were out there, leaving the senior index off 205 points at the closing bell. Still, our conviction was high and we bought some stocks. Obviously that conviction was rewarded on Wednesday (+619 points) and Thursday (+369 points). The 1300- point Dow Wow, from Monday’s intraday low to Thursday’s intraday high, took the Industrials back up to resistance levels, which is why we said, “We would not look for much more upside strength.” Importantly, last Monday did qualify as a 90% Downside Day, as well as the most oversold the S&P 500 (SPX/1988.87) has been since the 1987 crash. At such inflection points what you typically see is a two- to seven-session recoil rebound. I think
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Investment Strategy Published by Raymond James & Associates
Please read domestic and foreign disclosure/risk information beginning on page 3 and Analyst Certification on page 3.
© 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
Jeffrey D. Saut, Chief Investment Strategist, (727) 567-2644, [email protected] August 31, 2015 Investment Strategy ____________________________________________________________________________________________
"DeVoe's Unprovable but Highly Probable Theories"
For the College Humor Magazine I submitted a collection of many ‘laws’ and other items , including my College Course Descriptions: 1) If it’s green, wiggles or slithers, it’s biology; 2) If it stinks, it’s probably chemistry, although don’t rule out economics; 3) If it doesn’t work, it’s most likely physics, although don’t rule out economics; 4) if it’s incomprehensible, it’s most likely mathematics, but that’s part of economics also; 5) if it stinks, doesn’t work, is incomprehensible, and doesn’t make sense, it’s either economics or philosophy.
. . . Ray DeVoe
I don’t claim to be an economist, although I do have a degree in economics. Fortunately, I have forgotten most of the economics I learned at university. Also fortunate is that I work with one of the best economists on Wall Street in the form of Scott Brown, Ph.D., but I digress. For the past few months I have been suggesting the economy was doing better, which has brought about cat calls from many of the negative nabobs. My sense has been that GDP was growing by at least 3%. Bolstering that belief, on one of my CNBC appearances I actually heard Tim Geithner say, “I think the U.S. economy is stronger than the official figures suggest.” Last week that proved to be the case as the Gross Domestic Product (GDP) figures came in much stronger than anticipated, prompting Scott Brown to write, “Real GDP rose at a 3.7% annual rate in the 2nd estimate for 2Q15 (vs. +2.3% in the advance estimate).”
Now I have always found the terms “real” versus “nominal” to be interesting. The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP. Last week’s “real” GDP number brings back memories of a Jim Grant conference where Van Hoisington (Hoisington Investment Management) was a guest speaker. He began (as paraphrased):
Real GDP does not exist. I mean, literally, it does not exist. It’s a figment of the imagination of scorekeepers at the Department of Commerce who apply various adjustments to nominal GDP. Nominal GDP is what’s in your billfold. You go to a grocery store, you give them a dollar. That’s nominal GDP. That’s the sales that are entered as nominal growth. Nominal interest rates are what you pay. You have never met a real interest rate; I have never met one. You have never met a real GDP; I have never met one.
“Nominal versus Real,” what a novel concept; so, let’s see what happens if we apply it to the stock market. Measuring the D-J Industrials Average (INDU/16643.01) from its then all-time high of 11722.98 in the spring of 2000 shows that index is higher by 42%. However, in “real” terms the Industrials are virtually unchanged. Of course, hereto, you have never met a “Real Dow.” I have never met a “Real Dow.” While these charts from Advisor Perspectives are a few months old, you’ll get the idea. We live in a nominal world, not a “real” (inflation-adjusted) world. So, what happened in nominal terms last week?
Actually, the saga began in early July when my timing models said the equity markets were going into a period of contraction that should last into August 13 – 18th +/- 3 sessions. Since Friday August 21st fell within that +/- 3-session margin of error, August 21st’s 531-point drop should have come as no surprise. Normally, or should I say nominally, that Friday should have been “it” on the downside. But, as I stated on CNBC that morning, “Never on a Friday,” meaning once the stock market gets into one of these “selling skeins” it rarely bottoms on a Friday, giving participants over the weekend to brood about their losses and show up Monday/Tuesday in “sell mode” . . . aka, “Turning Tuesday.” And, that is pretty much the way it played, which is why I stated on CNBC the following Monday (8/24/15) today is “it,” the bottom/capitulation. Tuesday morning that “call” was looking good, but the early/mid-session strength gave way to late-session weakness as a number of trading platforms like the BATS Exchange were “off line,” causing liquidity to evaporate. That freaked traders out and they hit what bids were out there, leaving the senior index off 205 points at the closing bell. Still, our conviction was high and we bought some stocks. Obviously that conviction was rewarded on Wednesday (+619 points) and Thursday (+369 points). The 1300-point Dow Wow, from Monday’s intraday low to Thursday’s intraday high, took the Industrials back up to resistance levels, which is why we said, “We would not look for much more upside strength.”
Importantly, last Monday did qualify as a 90% Downside Day, as well as the most oversold the S&P 500 (SPX/1988.87) has been since the 1987 crash. At such inflection points what you typically see is a two- to seven-session recoil rebound. I think
Raymond James Investment Strategy
© 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2
that started on Tuesday, leaving us four sessions into said rebound. If correct, it would imply some kind of downside retest beginning sometime this week. Yet by far, at least for me, the biggest event of last week was Monday’s Dow Theory “sell signal.” As repeatedly stated last week, we are temporarily ignoring that signal, but it does make me nervous. The next few weeks should tell us if ignoring such a signal is right or wrong. If wrong, we will change our views. In the meantime, on the premise that we are in a successful downside retest environment, we continue to urge you to get your shopping list together. Last Monday we gave a list of our fundamental analysts’ best ideas for sustainable high single-digit (or higher) free cash flow yields companies. Last week another list was compiled with our fundamental analysts’ strongest conviction ideas. While the list consisted of 12 names, only three of them screened well on our algorithm system. Those were: Ctrip.com (CTRP/$69.50/Strong Buy); Jarden (JAH/$52.34/Strong Buy); and Yadkin Financial (YDKN/$20.39/Strong Buy).
I also bought some mutual funds last week. I have met with Columbia Threadneedle’s portfolio manager David King a number of times and have become comfortable with his investment style. The two funds I bought were Columbia Flexible Capital Income Fund (CFIAX/$11.51) and Columbia Convertible Securities Fund (PACIX/$18.07). CFIAX takes a different tack from most other equity income funds in that it is able to invest across ALL asset classes without sector or security constraints. PACIX is just what its name states, a convertible securities fund. Those of you that have followed my work over the years know that I really like converts. In fact, one idea I shared with David was Iridium Communications’ 6.75% convertible preferred (IRDMB/$279.50), which is currently yielding 6% and whose common shares (IRDM/$7.18) have a Strong Buy rating from our fundamental analyst. Last week I also met with arguably the best straight preferred portfolio manager (PM) in the country. Don Crumrine is the PM for a number of preferred stock mutual funds and closed end funds. I bought one of his funds as well last week, the Flaherty & Crumrine Dynamic Preferred and Income fund (DFP/$22.42). As a sidebar, Don managed a preferred portfolio for Charlie Munger and Warren Buffett. For more information on such funds, please contact our mutual fund research, and our closed-end funds, research departments.
The call for this week: A few weeks ago I said I was not concerned with China’s wrongly named “devaluation” and its potential to start a currency war. Over the weekend China stated there is no basis for the renminbi’s continued depreciation. Speaking to China’s impact on the U.S., Gluskin Sheff’s David Rosenberg notes that China’s economy has only a 16% correlation to the U.S. economy and is therefore insignificant. Bank of America Merrill Lynch writes that $19 billion of mutual fund redemptions occurred last Tuesday, the second largest since 2007, which smacks of capitulation. Of course, capitulation was also registered by two consecutive 90% Downside Days (August 21st and 24th), which were followed by last Thursday’s 90% Upside Day. Such capitulation is typically followed by a two- to seven-session “throwback rally” and then a downside retest. If that pattern plays, it should tell us over the next few weeks if ignoring last Monday’s Dow Theory “sell signal” is the correct strategy. And this morning our late week “call” to not expect much more upside above the 1970 – 2000 level on the SPX appears to be playing with the S&P preopening futures off some 16 points. Stay tuned . . .
Raymond James Investment Strategy
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Important Investor Disclosures Raymond James & Associates (RJA) is a FINRA member firm and is responsible for the preparation and distribution of research created in the United States. Raymond James & Associates is located at The Raymond James Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716, (727) 567-1000. Non-U.S. affiliates, which are not FINRA member firms, include the following entities that are responsible for the creation and distribution of research in their respective areas: in Canada, Raymond James Ltd., Suite 2100, 925 West Georgia Street, Vancouver, BC V6C 3L2, (604) 659-8200; in Latin America, Raymond James Latin America, Ruta 8, km 17, 500, 91600 Montevideo, Uruguay, 00598 2 518 2033; in Europe, Raymond James Euro Equities SAS (also trading as Raymond James International), 40, rue La Boetie, 75008, Paris, France, +33 1 45 64 0500, and Raymond James Financial International Ltd., Broadwalk House, 5 Appold Street, London, England EC2A 2AG, +44 203 798 5600.
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For clients in the United States: Any foreign securities discussed in this report are generally not eligible for sale in the U.S. unless they are listed on a U.S. exchange. This report is being provided to you for informational purposes only and does not represent a solicitation for the purchase or sale of a security in any state where such a solicitation would be illegal. Investing in securities of issuers organized outside of the U.S., including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S. Securities and Exchange Commission. There may be limited information available on such securities. Investors who have received this report may be prohibited in certain states or other jurisdictions from purchasing the securities mentioned in this report. Please ask your Financial Advisor for additional details and to determine if a particular security is eligible for purchase in your state.
The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. Persons within the Raymond James family of companies may have information that is not available to the contributors of the information contained in this publication. Raymond James, including affiliates and employees, may execute transactions in the securities listed in this publication that may not be consistent with the ratings appearing in this publication.
Additional information is available on request.
Analyst Information
Registration of Non-U.S. Analysts: The analysts listed on the front of this report who are not employees of Raymond James & Associates, Inc., are not registered/qualified as research analysts under FINRA rules, are not associated persons of Raymond James & Associates, Inc., and are not subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public companies, and trading securities held by a research analyst account.
Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks. The author owns shares of the common stock of Iridium Communications Inc.
The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.
Ratings and Definitions
Raymond James & Associates (U.S.) definitions
Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months.
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Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions
Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Latin American rating definitions
Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.
Raymond James Europe (Raymond Euro Equities SAS & Raymond James Financial International Limited) rating definitions
Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.
Rating Distributions
Coverage Universe Rating Distribution* Investment Banking Distribution
RJA RJL RJ LatAm RJ Europe RJA RJL RJ LatAm RJ Europe
Strong Buy and Outperform (Buy) 57% 65% 64% 40% 21% 42% 0% 0%
Market Perform (Hold) 38% 34% 36% 34% 8% 23% 0% 0%
Underperform (Sell) 5% 2% 0% 25% 6% 33% 0% 0%
* Columns may not add to 100% due to rounding.
Suitability Categories (SR)
Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal.
Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small dividend, and the potential for long-term price appreciation.
Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets.
High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and risk of principal.
Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, and a substantial risk of principal.
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Raymond James Relationship Disclosures
Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months.
Company Name Disclosure
Ctrip.com International, Ltd.
Raymond James & Associates makes a market in shares of CTRP.
Iridium Communications Inc.
Raymond James & Associates makes a market in shares of IRDM.
Raymond James & Associates received non-investment banking securities-related compensation from IRDM within the past 12 months.
Jarden Corporation Raymond James & Associates co-managed a follow-on offering of JAH shares within the past 12 months.
Raymond James & Associates makes a market in shares of JAH.
Raymond James & Associates received non-securities-related compensation from JAH within the past 12 months.
Yadkin Financial Corporation
Raymond James & Associates makes a market in shares of YDKN.
Stock Charts, Target Prices, and Valuation Methodologies
Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies.
Target Prices: The information below indicates target price and rating changes for the subject companies included in this research.
Valuation Methodology: Our valuation methodology for shares of CTRP is based on a DCF analysis.
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Valuation Methodology: Our valuation methodology for Iridium Communications is based primarily on forward enterprise value/operational EBITDA relative to the stock’s historical trading range and current peer group averages. We are basing our 12-month price target on 2017 estimates which better reflect Iridium’s core catalyst - a fully deployed NEXT constellation. Our analysis may also take into account company-specific growth initiatives and their impact on Iridium's projected growth rate.
Valuation Methodology: JAH valuation is based on our target P/E multiple.
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Valuation Methodology: For Yadkin, our valuation methodology utilizes a 12-month estimate of intrinsic value and also takes into consideration the company's price/tangible book value and P/E ratio in comparison to its return on tangible equity and its peer group.
Risk Factors
General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.
Specific Investment Risks Related to the Industry or Issuer
Company-Specific Risks for Ctrip.com International, Ltd. Increased Competition The online travel space is highly competitive and rapidly evolving. Ctrip faces competition from both online and offline agencies, travel suppliers direct websites, consolidators, travel search engines (i.e. Qunar). While Ctrip is the leading travel consolidator in China today, we note other agencies are aggressively pursuing the market. We believe Ctrip has historically had its biggest competitive advantages in its call center which it has run more efficiently vs. competitors, in our opinion. We believe this competitive advantage will be less so for its website business and hence we believe the “online” travel market will be much more competitive.
Disruptions in Travel Industry Ctrip’s results are highly sensitive to the macroeconomic environment as well as disruptions in the travel industry from weather, natural disasters, terrorist events, contagious diseases, etc. Ctrip’s results were significantly impacted by the global recession of 2008-2009. Higher air fares or hotel rates could also negatively impact the volume of travel and adversely impact Ctrip’s results.
Lower Commission Rates While we believe Ctrip typically charges a supplier friendly commission level, approximately 14% for hotel bookings and 4% for air bookings, the general trend for the online travel industry has been towards lower commission levels.
Increasing Advertising Costs We believe advertising costs are likely to increase longer-term as the online travel environment becomes more competitive
Increasing Labor Costs With increased inflation in China, we expect labor costs to continue to increase over the longer-term. We believe a higher mix of online bookings could help offset rising labor costs given lower labor needs.
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Foreign Exchange Fluctuations in foreign exchange can have a significant impact on Ctrip’s results when they are translated into U.S. currency as Ctrip shares trade on the NASDAQ. That said, we believe the Chinese currency likely remains undervalued which should serve as a positive for Ctrip’s dollar denominated results.
Acquisitions Ctrip has been acquisitive in the past and we expect will continue to be acquisitive in the future. As with any acquisition, there exists operational risks that could adversely affect the company.
Government Restrictions on VIE Structure Ctrip is a Cayman Islands incorporated company and a foreign person under PRC law. Due to foreign ownership restrictions in the air-ticketing, travel agency, advertising and value-added telecommunications industries, Ctrip conducts part of our business through contractual arrangements with its affiliated Chinese entities. These entities hold the licenses and approvals that are essential for its business operations. While Ctrip believes it is in compliance with existing PRC laws, rules and regulations, the PRC could decide that Ctrip is in violation and would have broad discretion in dealing with such violation, including revoking its business licenses or the business licenses of its affiliated Chinese entities, requiring Ctrip to restructure its ownership structure or operations.
Company-Specific Risks for Jarden Corp. Risks to Jarden Corp. include: 1) inventory reductions on the part of Jarden’s key mass retail customers that could dampen shipments; 2) adverse weather conditions that could adversely affect consumer demand within its more seasonal businesses (skiing, baseball, fishing, fresh preserve, etc.); 3) foreign currency exchange rates, particularly a strengthening of the U.S. dollar (roughly 40% of its sales are outside the U.S.); and 4) rapid increases in commodity and transportation costs.
Company-Specific Risks for Yadkin Financial Corporation Interest Rate Risk As a commercial bank, Yadkin’s revenue stream is sensitive to changes in interest rates, and earnings estimates could vary based on changes in the slope of the yield curve.
Credit Risk Yadkin originates residential, commercial and consumer loans, which may enter default, especially during times of economic stress. Depending on the health of the economy and the creditworthiness of its borrowers, loans could default more rapidly than anticipated which could translate into higher losses at the bank.
Macroeconomic Risk If unemployment levels rise or if the housing market weakens further, credit losses could accelerate more rapidly than anticipated causing downside to our earnings expectations. Conversely, if unemployment levels decline and the housing market strengthens meaningfully or if losses in weak markets are less than expected, there could be upside to our estimates.
Competition Substantial competition exists in all of Yadkin's primary markets, from domestic banks and thrifts, foreign banks, and specialty finance companies. The level and aggressiveness of competition could lead to adverse pressures on both asset yields and funding costs which could negatively impact Yadkin's margins and pressure its profitability.
Capital/Dilution Risk Yadkin's capital levels are too thin. In order to boost its capital to levels that we believe regulators would prefer, the company will likely need to raise new common equity which could result in significant shareholder dilution. The ultimate timing and amount of capital that Yadkin will raise is impossible to predict and could dilute shareholders more than investors expect.
Acquisition Risk In July 2014, Yadkin closed its merger of equals with VantageSouth Bancshares. While improved asset quality at both institutions reduces credit risk, significant integration risk exists. This acquisition poses execution risk, and the ability of management to achieve revenue and expense goals is not a given.
Company-Specific Risks for Iridium Communications Inc. Satellite Failure Iridium’s current constellation is currently operating at a high level of availability (>95%) and is projected to provide service through 2017. The satellites, however, have a limited design life and could fail prior to the launch of NEXT, thereby degrading the quality of Iridium’s service. Since 2001, eight Iridium operational satellites have failed and were subsequently replaced with in-orbit spares. Iridium has five remaining in-orbit spares that the company expects to consume over the next several years if additional satellites fail.
Low Gateway Redundancy Unlike traditional “bent-pipe” networks, Iridium’s satellite constellation is reliant on a single ground station (a.k.a. gateway) located in Tempe, Arizona. While Iridium maintains back-up facilities, in the event of a catastrophic failure, they would likely require a notable lead time which would have a negative effect on the company’s quality of service.
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NEXT Development Iridium’s future profitability is greatly reliant on the successful development and deployment of Iridium NEXT before its current satellite constellation ceases. During this process it is not uncommon to encounter manufacturing or launch delays, launch failures, in-orbit satellite failures, an inability to achieve and/or maintain orbital placement, delays in receiving regulatory approvals or insufficient funds. Furthermore, Iridium NEXT may not be completed on time and the costs associated with the project may be greater than expected.
Competition There are currently other satellite operators providing services similar to Iridium on a global or regional basis: Inmarsat, Globalstar, Orbcomm, SkyTerra, Thuraya, and Asia Cellular Satellites. In addition, several regional mobile satellite services companies, including ICO, TerreStar, and SkyTerra are attempting to exploit their spectrum positions into a U.S. consumer mobile satellite services business. This increased competition could result in excess industry capacity, downward price pressure, and aggressive price discounting.
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