Friday March 7th, 2014 Friday March 7th, 2014

Lafayette College Investment ClubLafayette College Investment Club

Meeting AgendaMeeting Agenda

• 1) Announcements1) Announcements• BAT (Bloomberg) Rescheduled BAT (Bloomberg) Rescheduled • Market MadnessMarket Madness• SMC – Interviews and Night (Info session)SMC – Interviews and Night (Info session)

• 2) Market Update2) Market Update

• 3) Portfolio Overview3) Portfolio Overview

• 4) SELL IBM (PARTIAL SHORT TERM GAIN)4) SELL IBM (PARTIAL SHORT TERM GAIN)

• 5) SELL EXPE (PARTIAL SHORT TERM GAIN)5) SELL EXPE (PARTIAL SHORT TERM GAIN)

• 6) BUY ATVI (Activision Blizzard)6) BUY ATVI (Activision Blizzard)

Market UpdateMarket UpdateOthman Guennoun, Connor Steigerwald, Emily Othman Guennoun, Connor Steigerwald, Emily

EvankoEvanko

Friday, March 7Friday, March 7thth, 2014, 2014

Crisis in UKRAINE Crisis in UKRAINE

• Russia sent troops into Ukraine to ensure their loyalty and the control over Ukraine's resources

-Russia is the largest energy exporter

• After troops were sent in: -Oil and natural gas gas prices rose -Price of gold spiked as tensions increased

• Ukraine is 6th largest wheat exporter, 4th largest barley exporter

-Wheat barley and corn--> price of grain spiked -Ukraine is the largest producer of Sunflower oil

• U.S. dollar increased in value because it was looked at like gold

• Financial markets rattled, triggered a global stock selloff -Three major U.S. stock indexes had biggest one-day

declines in a month

• Ukraine allies threatened to retaliate against Russia with economic sanctions

• Russia felt the most market pain

• Yields on Ukraine bonds went up currency fell

• Diplomatic push by Kerry and UK

• Russia withdrew from Ukraine and stocks reached all time highs

Financial MarketsFinancial Markets

CHEVRON (CVX)CHEVRON (CVX)• Chevron 1.9% of the portfolio, 80 shares valued at $9188 following the close on Thursday.

• Chevron won a counter-suit blaming an Ecuadorian environmental group for obtaining evidence through racketeering.

• The environment group - originally won $19 billion dollars from Chevron for human rights and environmental violations, which Chevron had refused to pay.

• The company had been claiming the environmental group had obtained evidence illegally.

• Because of the victory in the counter-suit, Chevron has restored confidence to investors, and analysts are predicting more steady growth.

ExxonMobilExxonMobil

• Spending cuts and and decrease in Spending cuts and and decrease in performance makes investors nervousperformance makes investors nervous

• Return on Capital Employed (ROCE) for 2013 : Return on Capital Employed (ROCE) for 2013 : 17%. Usually great for other companies but not 17%. Usually great for other companies but not for Exxonfor Exxon

• Despite high prices – Exxon can’t have ROCE of Despite high prices – Exxon can’t have ROCE of 20% which what it usually has20% which what it usually has

• On Wednesday, CEO announces spending cuts On Wednesday, CEO announces spending cuts – 10% decrease in capital expenditures budget.– 10% decrease in capital expenditures budget.

• Stock goes down 3% after announcementStock goes down 3% after announcement

First Chinese Bond Default First Chinese Bond Default since the 90ssince the 90s

• Bond Default: failure to pay interest or principal when Bond Default: failure to pay interest or principal when duedue

• Shanghai Chaori Solar Energy Science and Technology Shanghai Chaori Solar Energy Science and Technology Company announced that it can’t pay interests on its Company announced that it can’t pay interests on its Chaori bond.Chaori bond.

• Can only pay 4million yuan out of 89.8 million yuan.Can only pay 4million yuan out of 89.8 million yuan.

• Scared investors who invest in China.Scared investors who invest in China.

• Might lead to contagion?Might lead to contagion?

• Some say it’s a good thing for the economy: “A normal Some say it’s a good thing for the economy: “A normal economy needs defaults to better price bonds and economy needs defaults to better price bonds and other debt products” other debt products”

Unemployment Rate for Unemployment Rate for FebruaryFebruary

• Economists predict 152,000 increase in Economists predict 152,000 increase in nonfarm payrolls compared to 113,000 in nonfarm payrolls compared to 113,000 in JanuaryJanuary

• Unemployment rate expected to go down by Unemployment rate expected to go down by one tenth to 6.5%one tenth to 6.5%

• If rate goes down, stock should riseIf rate goes down, stock should rise

PREDICTIONS ON FRIDAY’s Reports

Stocks Close Mostly UPStocks Close Mostly UP

• S&P 500 rose 3.22 point (0.2%)S&P 500 rose 3.22 point (0.2%)

Fourth all time high in six sessionsFourth all time high in six sessions

• Dow Jones rose 61.71 points (0.4%)Dow Jones rose 61.71 points (0.4%)

• Nasdaq Composite Index goes down by 5.85 Nasdaq Composite Index goes down by 5.85 points (0.1%) points (0.1%)

Because of weakness in biotechnology stocks Because of weakness in biotechnology stocks

Portfolio UpdatesPortfolio UpdatesBy: Peter Oberender and Angel Stoychev By: Peter Oberender and Angel Stoychev

Portfolio overviewPortfolio overview

• Pfeizer – FDA approval on Lipitor sold over the Pfeizer – FDA approval on Lipitor sold over the countercounter

• Clorox – UBS downgrade to sell; no organic Clorox – UBS downgrade to sell; no organic growth, lower margins anticipatedgrowth, lower margins anticipated

• Baidu – Quarter 4 earnings disappointBaidu – Quarter 4 earnings disappoint

• Ebay – Proxy fights continueEbay – Proxy fights continue

• Nuverra Environmental – EarningsNuverra Environmental – Earnings

• 4.86% 4.86%

• Up 9.2% last 3 monthsUp 9.2% last 3 months

• Positive fourth quarter earningsPositive fourth quarter earnings

• Sold 3.7 Billion in corporate bonds Sold 3.7 Billion in corporate bonds

Gilead Science INC: GILD

Caterpillar INC: CATCaterpillar INC: CAT

• 4.02% 4.02%

• Up 15.63% In past 3 monthsUp 15.63% In past 3 months

• Sales of construction equipment rose despite weather Sales of construction equipment rose despite weather conditionsconditions

General Electric Co: GEGeneral Electric Co: GE

• 4.72% 4.72%

• Down 1.1% in past 3 monthsDown 1.1% in past 3 months

• $3 billions in bond sales$3 billions in bond sales

• Signed one year agreement with NYPASigned one year agreement with NYPA

UnitedHealth Group Inc: UnitedHealth Group Inc: UNHUNH

• 3.96%3.96%

• Up 6.72% last 3 monthsUp 6.72% last 3 months

• In Feb online bill payment grows to more than 50,000In Feb online bill payment grows to more than 50,000

IBMIBMShort-term GainsShort-term Gains

50 Shares50 Shares

ThesisThesis

• IBM currently 4.75% of portfolioIBM currently 4.75% of portfolio

• Already have substantial positions in techAlready have substantial positions in tech

• Free up cash – continued diversificationFree up cash – continued diversification

Why IBM?Why IBM?

• Hardware business is erodingHardware business is eroding

• Composed of servers, chips, storage gearComposed of servers, chips, storage gear

• Cannot keep pace with Cloud computingCannot keep pace with Cloud computing

• Lowest quarterly revenue in 4 yearsLowest quarterly revenue in 4 years

Inorganic GrowthInorganic Growth

• Unable to grow business internallyUnable to grow business internally

• Sold computer server piece to LenovoSold computer server piece to Lenovo

• J.P. Morgan: “IBM model not nimble enough to J.P. Morgan: “IBM model not nimble enough to jumpstart revenue and growth.”jumpstart revenue and growth.”

• Consulting services largest part of businessConsulting services largest part of business

ConclusionConclusion

• IBM still has value in services and techIBM still has value in services and tech

• Our position is too large in portfolioOur position is too large in portfolio

• Undergoing transformation processUndergoing transformation process

• Short-term gains allows for diversificationShort-term gains allows for diversification

EXPEEXPESell half position (short term gains)Sell half position (short term gains)

Expedia BackgroundExpedia Background

• Expedia is the number 2 brand player in the online Expedia is the number 2 brand player in the online travel industry.travel industry.– Hotels.com, Trivago (Europe), E-Long (China) are a few Hotels.com, Trivago (Europe), E-Long (China) are a few

of their online search engines.of their online search engines.– Currently a majority market share owner domestically Currently a majority market share owner domestically

roughly 14.23% of the market vs. PCLN roughly 14.23% of the market vs. PCLN – Currently a minority market share owner internationallyCurrently a minority market share owner internationally

• With a goal of growing its user base, Expedia aims to With a goal of growing its user base, Expedia aims to continue investing in developing its technology and continue investing in developing its technology and content to improve its product offerings and expand its content to improve its product offerings and expand its presence across geographical segments. presence across geographical segments. – While it remains positive about its long-term growth While it remains positive about its long-term growth

potential, it is wary of increasing competition in potential, it is wary of increasing competition in international as well as domestic markets. international as well as domestic markets.

Thesis for Sept BuyThesis for Sept Buy

• If you recall back in September I bought Expedia If you recall back in September I bought Expedia for a back half of the year story.for a back half of the year story.

• Q3 and Q4 because business is easier in that Q3 and Q4 because business is easier in that period for Expedia drives higher revenue and period for Expedia drives higher revenue and sales.sales.

• It traded at a steep discount for no fundamental It traded at a steep discount for no fundamental reason besides management misguidance.reason besides management misguidance.

• Management set achievable targets that they hit Management set achievable targets that they hit and the stock reverted back to its mean June 2013 and the stock reverted back to its mean June 2013 price of 75 a share.price of 75 a share.

• Essentially it was a mean reversion tradeEssentially it was a mean reversion trade

What has changed?What has changed?

• Management has set achievable targets going forward and did apparently Management has set achievable targets going forward and did apparently learn there lesson.learn there lesson.

• However, in the short term owning this stock could be troublesome.However, in the short term owning this stock could be troublesome.

• 1) Much of Expedias growth reported in Q3 and Q4 was due to Trivago 1) Much of Expedias growth reported in Q3 and Q4 was due to Trivago and E-longand E-long

• 2) There is still incremental technology-related spend being directed 2) There is still incremental technology-related spend being directed toward the Expedia Traveler Preference Program (ETP) as new hotels toward the Expedia Traveler Preference Program (ETP) as new hotels come onto the platform.come onto the platform.

• 3) Is an improved European macro outlook driving higher growth in travel 3) Is an improved European macro outlook driving higher growth in travel bookings?bookings?

• We have a large position, we are looking to trim to take some gains and We have a large position, we are looking to trim to take some gains and allocate elsewhere. allocate elsewhere.

• Still long thesis intact as growth across the board is solid.Still long thesis intact as growth across the board is solid.

Activision Blizzard Activision Blizzard (ATVI)(ATVI)

Buy 2000 shares at Market PriceBuy 2000 shares at Market Price

4% of Portfolio4% of Portfolio

By: George Rakic and Benjamin TschanBy: George Rakic and Benjamin Tschan

Company OverviewCompany Overview

• Activision Blizzard Inc. (July 9Activision Blizzard Inc. (July 9thth, , 2008) is a world wide mobile, 2008) is a world wide mobile, online and video-game online and video-game publisherpublisher

• Sector: TechnologySector: Technology

• Industry: SoftwareIndustry: Software

SegmentationSegmentation(Geo)(Geo)

• US: 53% of revenuesUS: 53% of revenues

• Europe: 40% of revenuesEurope: 40% of revenues

• Asia Pacific: 7% of revenuesAsia Pacific: 7% of revenues

SegmentationSegmentation(Business)(Business)

• Activision Publishing Inc. (67%)Activision Publishing Inc. (67%)• Call of Duty, SkylanderCall of Duty, Skylander

• Blizzard Entertainment Inc. (26%)Blizzard Entertainment Inc. (26%)• Diablo, Starcraft, WoWDiablo, Starcraft, WoW

• Activision Blizzard Distribution (7%)Activision Blizzard Distribution (7%)• Sales distribution in Europe, manufacturers of Sales distribution in Europe, manufacturers of

interactive entertainment hardwareinteractive entertainment hardware

Revenue Stream and Revenue Stream and GrowthGrowth

• 3 main Revenue 3 main Revenue Channels:Channels:• Software Purchases Software Purchases • Monthly Subscriptions Monthly Subscriptions • ““In-Game” PurchasesIn-Game” Purchases

• Revenue:Revenue:• $4.755B (2011)$4.755B (2011)• $4.856B (2012)$4.856B (2012)• $4.583B (2013)$4.583B (2013)

This Year’s RevenueThis Year’s Revenue

• Revenues fell by 5.6% due to a loss in WoW Revenues fell by 5.6% due to a loss in WoW subscriptionssubscriptions

• However, expected to rise due to the new However, expected to rise due to the new expansions coming up later this yearexpansions coming up later this year

10 Year Preformance10 Year Preformance

CompetitorsCompetitors

ATVI TTWO ZYNG EA Average

Revenue 4.58B 2.45B 873M 3.66B 2.89B

EBITDA 1.48B 526M 74M 223M 575M

Net Income

987M 371.15M -37M -36M 321M

Profit Margin

67% 63% 72% 41% 61%

EPS .95 3.73 -.05 -.12 1.13

P/E 21.23 5.56 N/A N/A N/A

Why a Good Why a Good Investment?Investment?

• Strong value inside a companyStrong value inside a company

• Really cheap (the street not happy with Really cheap (the street not happy with revenues)revenues)

• Pays dividendsPays dividends

• Coming up with new game Heroes of the Coming up with new game Heroes of the StormStorm

• New Expansions for released gamesNew Expansions for released games

CatalystsCatalysts

• Candy Crush (Kings) IPOCandy Crush (Kings) IPO

• Report another dip in revenuesReport another dip in revenues

• Game coming out will not be a successGame coming out will not be a success

Buy 2000 shares at Buy 2000 shares at Market PriceMarket Price

4% of Portfolio4% of Portfolio