The Mission Report

The MissionIR Report - June 2015

In-depth analysis, timely updates, latest market news


Market News

Company Updates


Airline Profits Expected to Soar on Cheap Oil, Plane Efficiency

The International Air Transport Association raised its 2015 forecast for industry profits to $29.3 billion, a record high and nearly 80% up on last year. Fuel represents more than 25% of the industry's costs, and the sharp fall in the price of oil last year is translating into bigger margins, says CNN Money.

Costs may have fallen but few of those savings are being passed on to passengers. Globally, carriers are expected to make $8.27 profit per passenger on average this year, according to IATA, with North American airlines expected to make the most at $18.12 per passenger on average.

"The industry's fortunes are far from uniform. Many airlines still face huge challenges," said IATA director Tony Tyler.

European airlines should pocket profits of $6.30 per passenger, while carriers in Latin America will make only $2.27 per passenger.

Airlines are becoming more efficient, filling more seats on flights. The load factor, which measures the proportion of occupied seats, should hit a record 83% this year.

But IATA said there could be a bumpy ride ahead for some airlines.

"The business of providing global connectivity is still a very tough one," Tyler said.

Headwinds include rising costs -- such as airport charges and taxes -- a lack of airport capacity, and slower economic growth.

The four major carriers saved a combined $3.4 billion on fuel in the first three months of the year according to their financial reports, allowing all of them to post record first-quarter profits. Since fuel is the largest expense category for airlines, lower prices shaved their cost by 33%, when compared to last year.

But the average fare paid to fly American (AAL), United (UAL) and Southwest (LUV) airlines in the quarter fell only 66 cents to $192.39. Delta (DAL) was not included because it doesn't disclose fare information.

The reason that fares have remained high in the face of lower fuel cost is that demand for travel is strong. The four airlines, which account for the overwhelming majority of U.S. air travel, filled about 81% of their seats.

The trade group pointed out that airline profit margins are still below that of most of corporate America. It also said passengers are benefiting from increased profitability even, if it's not through lower fares, because airlines are spending more on capital improvements.

"Airlines have been reinvesting 85% of cash flow from operations back into the product through acquiring new aircraft, refurbishing airport check-in areas/lounges/gates, adding seats to the schedule, initiating new routes and adding staff," said Victoria Day, spokeswoman for the association. "Air travel remains one of the best bargains for consumers."

The Rise of Sustainable Investments

Investors worldwide are increasingly seeking opportunities that promise to bring environmental and social benefits, in addition to market rates of return, writes Project Syndicate. If this trend continues, with the advancement of environmental or social objectives enhancing an investment’s value, it will strengthen the commitment to sustainability that is already gaining momentum among businesses around the world.

Last year, one out of every $6 of assets under professional management in the United States — a total of $6.6 trillion — was allocated toward some form of sustainable investment, especially public equities.

Some 1,260 companies, managing $45 trillion worth of assets, are signatories of the United Nations’ “principles for responsible investment,” which recognize environmental, social, and governance (ESG) factors — and thus the long-term health and stability of companies and markets — as critical to investors. One signatory, CalPERS, one of the world’s largest institutional investors, has gone a step further: it will require all of its investment managers to identify and integrate ESG factors into their decisions — a bold move that could transform capital markets.

The number of companies issuing sustainability reports has grown from fewer than 30 in the early 1990s to more than 7,000 in 2014. And, in a recent Morgan Stanley survey, 71% of respondents stated that they are interested in sustainable investing.

To be sure, a major barrier to incorporating ESG criteria into investment decisions remains: many investors — including 54% of the respondents in the Morgan Stanley survey — believe that doing so could lower the financial rate of return. But there is mounting evidence that this is not the case, with several recent studies indicating that sustainable investments do as well as — or even outperform — traditional investments.

A seminal 2012 study that analyzed two groups of companies — similar in terms of industry, size, financial performance, and growth prospects — found that those in the “high sustainability group” had superior share-price performance. And a new study by Morgan Stanley’s Institute for Sustainable Investing, which analyzed the performance of 10,228 open-ended mutual funds and 2,874 separately managed accounts in the U.S., found that sustainable investments usually met — and often exceeded — the median returns of comparable traditional investments for the periods examined.

Many ESG factors come into play when evaluating sustainable investment options. For example, the Generation Foundation — the think tank of Generation Investment Management (on whose advisory board I serve) — identifies 17 environmental factors, 16 social factors, and 12 governance factors relevant to sustainability.

The challenge is to distinguish between the ESG factors that have a material influence on company performance and those that do not. But the data that companies currently report are inadequate to enable investors to make this distinction.

The non-profit Sustainability Accounting Standards Board (SASB) is attempting to change that by developing material sustainability accounting standards for 80 industries, consistent with the Security and Exchange Commission’s compliance regulations. More than 2,800 participants — including companies with market capitalization totaling $11 trillion and investors with $23.4 trillion in assets under management — have been involved in the SASB process.

Using the SASB’s proposed standards for 45 industries, as well as other metrics, a new study — the most definitive so far — has found that companies that perform well on material sustainability factors have better operational performance, are less risky, and earn significantly higher shareholder returns than companies that perform poorly.

Similarly, a new framework recently proposed by Morgan Stanley for valuations of companies in 29 industries includes ESG factors that pose material risks or opportunities. Whereas a company is traditionally valued based exclusively on how it deploys financial capital to generate returns, the new framework incorporates how it deploys natural, human, and social capital, as well as the transparency of its governance practices. This new approach to company valuation reflects the view that the most successful companies will be those that deploy all four kinds of capital responsibly.

Material ESG factors can affect a company’s financial performance and shareholder returns through several channels. For example, more efficient energy and resource use can lower costs; better management of human talent can boost productivity; stricter safety, health, and environmental rules can reduce the risk of serious accidents; and new green or fair-trade products that appeal to consumers can increase revenues.

Consider investments that improve the energy efficiency of data centers, which use 10-20 times more energy than average commercial buildings, and thus are responsible for considerable greenhouse-gas emissions. Decisions about data-center specifications are important for managing costs, obtaining a reliable supply of energy and water, and lowering reputational risks, particularly given the increasing global regulatory focus on climate change. Google’s construction of data centers that use 50% of the energy of an average data center has brought it considerable savings.

Similar success stories have played out across sectors. Since 2011, the chemical company DuPont has invested $879 million in research and development of products with quantifiable environmental benefits; it has recorded $2 billion in annual revenue from products that reduce greenhouse-gas emissions, and an additional $11.8 billion in revenue from renewable resources like wind and solar power.

Likewise, the multinational consumer goods company Procter & Gamble reported $52 billion in sales of “sustainable innovation products” from 2007 to 2012. That is roughly 11% of the company’s total sales over that period.

There are good reasons to believe that, by investing in improving material sustainability, companies can increase shareholder value.

In fact, if a company is to fulfill its fiduciary responsibility to its investors, it has little choice but to go beyond financial returns to incorporate ESG factors that are likely to have a material impact on its performance over time. This is precisely the kind of incentive that could propel the world toward a more sustainable future.

U.S. Monthly Crude-Oil Production Hits Highest Level in More than 40 Years

U.S. crude-oil production in May reached its highest monthly level in 43 years, according to the Energy Information Administration on Tuesday.

In its latest Short-term Energy Outlook Report, the government agency also raised its estimates on U.S. crude-oil output for 2015 and 2016, compared with previous estimates.

May production averaged about 9.6 million barrels a day. In May of 2014, production average almost 8.4 million barrels a day, which was the highest monthly average since March 1988.

“Despite the large decline in crude-oil prices since June 2014, this May’s estimated oil output in the United States is the highest for any month since 1972,” Adam Sieminski, EIA administrator, said in a statement. Oil prices still trade more than 40% below their peak of around $106 in June of last year.

“Production still is expected to decline in the second half of this year,” said Sieminski.

The EIA report estimates 2015 U.S. oil production of 9.43 million barrels a day — that is up from a previous estimate of 9.19 million. Output in 2016 is expected to decline to 9.27 million barrels a day, but that figure is a bit higher than the previous estimate of 9.21 million barrels.

West Texas Intermediate crude prices are forecast to average $55.35 a barrel this year and $62.04 a barrel in 2016, the EIA said. Those compare with previous estimates of $54.32 for 2015 and $65.57 for 2016. July crude traded above $60 Tuesday on the New York Mercantile Exchange.

Brent crude, the global benchmark, was forecast to average $60.53 a barrel this year and $67.04 a barrel next year. Those numbers are down from estimates of $60.79 for 2015 and $70.49 for 2016. Brent crude on Tuesday traded close to $65.

ENGlobal (ENG)

ENGlobal recently reported its financial results for the quarter ended March 28, 2015. The company generated $23.1 million in revenues during the quarter with a net income of $0.6 million, or $0.02 per diluted share. During the quarter ended March 28, 2015, ENGlobal incurred non-cash expenses for depreciation, amortization and stock compensation of $0.6 million.

Mark Hess, ENGlobal's Chief Financial Officer, said, "We ended the first quarter with a healthy cash balance and working capital of $24.4 million, and have no borrowings under our current credit facility. In addition, notes receivable totaling $5.1 million were collected after the end of the quarter, contributing significantly to our cash position. While there is always room for improvement, I believe we are in a strong financial position and poised for future growth."

About ENGlobal

As a top-ranked provider of energy-related automation and engineering services, ENGlobal Corp. (ENG) emphasizes quality and safety to deliver innovative, energy-related automation integration services and EPCM projects for clients worldwide. Operating through two strategic business segments, ENGlobal provides its services to the energy, pulp and paper, and government sectors throughout the United States and internationally.

ENGlobal's Automation segment provides a wide range of services related to the design, fabrication and implementation of distributed control, instrumentation and process analytical systems. Products and services supporting the environmental technology fields are also offered by the Automation segment. The Engineering (EPCM) segment provides consulting services for the development, management and execution of projects requiring professional engineering, construction management, and related support services. Within the Engineering segment, ENGlobal's Government Services group provides engineering, design, installation and operation and maintenance of various government, public sector and international facilities, and specializes in the turnkey installation and maintenance of automation and instrumentation systems for the U.S. defense industry worldwide.

In its 29 years of operations, ENGlobal has created a global workforce of more than 400 industry leaders in a variety of fields, ranging from drafters and designers to technical specialists. The company’s highly experienced core leadership team has established a solid financial foundation and proven ability to consistently grow company revenues and value.

Net Element, Inc. (NETE)

Last week, Net Element told investors that it has launched its online payments processing business in Kazakhstan by securing a contract with, the country's largest online events ticketing website and 2nd largest online merchant serving the Kazakhstan market. A new agreement with Kazkommertsbank ("KAZKOM"), Kazakhstan's largest bank, allows Net Element's pending subsidiary PayOnline to process online transactions for merchants in the countries served by the bank, including also Russia, Kyrgyzstan and Tajikistan. According to Kazakhstan Ministry of Transport and Communications, e-commerce in the region is forecast to be $3.6 billion in 2015 and grow to $5 billion in 2017.

“Net Element's facilitation of this banking relationship with its pending acquisition PayOnline is an example of how we intend to grow in emerging markets, where we can nimbly deliver those services best suited for a given market," stated Oleg Firer, CEO. "We expect this agreement to accelerate our growth in the region."

About Net Element, Inc.

Net Element is a technology-driven group specializing in mobile payments and value-added transactional services that add convenience to mobile phone users’ lives and everyday commerce. The company’s innovations enable consumers to conduct commerce transactions from their mobile device, while online and offline payment capabilities allow merchants to reliably transact business anywhere and anyhow.

The company owns and operates TOT Group, Inc., a global mobile payments and transaction processing provider. TOT Group companies include Unified Payments, which was recognized by Inc. Magazine as the No. 1 fastest growing private company in America in 2012; Aptito, a next-gen cloud-based point of sale (“POS”) payments platform; and TOT Money, a mobile billing solutions provider and Russia’s top-ranked SMS content provider, according to Beeline, the country’s second largest telecommunications operator.

Net Element has headquarters in Miami, Florida, with international presence in selected emerging markets. Utilizing its global development centers and high-level business relationships, Net Element has positioned itself for continued growth in the mobile commerce and alternative payments environments.

VistaGen Therapeutics, Inc.

VistaGen continues to make progress on its clinical pipeline following a previously announced Cooperative Research and Development Agreement (CRADA) with the U.S. National Institute of Mental Health (NIMH). Under the CRADA VistaGen and the NIMH are conducting a phase 2 clinical study of AV-101 in subjects with Major Depressive Disorder (MDD). Dr. Carlos Zarate, chief of the Section on the Neurobiology and Treatment of Mood Disorders and chief of the Experimental Therapeutics and Pathophysiology Branch at the NIMH, will be the principal investigator of the NIH-funded study, which is expected to be completed this year.

In addition to depression, VistaGen is also pursuing applications of AV-101 for other indications involving the central nervous system, including chronic neuropathic pain, epilepsy and neurodegenerative diseases such as Parkinson’s and Huntington’s disease. The company’s alignment with the World Health Organization’s (WHO) call for a new approach to depression treatment, along with the NIH’s willingness to fully-sponsor the impending phase 2 clinical study, validates VistaGen’s primary focus of advancing AV-101’s potential as a revolutionary antidepressant.

About VistaGen Therapeutics, Inc.

VistaGen is a clinical-stage biopharmaceutical company developing innovative medicine for depression and diseases and conditions involving the central nervous system (CNS). VistaGen's AV-101 is a new generation orally-available NMDA receptor glycine B-site antagonist entering Phase 2 clinical development for Major Depressive Disorder. Based on preclinical studies, AV-101 may also have potential as a treatment for other CNS-related conditions, including chronic neuropathic pain and epilepsy, as well as neurodegenerative diseases such as Parkinson's disease and Huntington's disease.

AV-101's fundamentally novel mechanism of action places it among a new generation of glutamatergic antidepressants with breakthrough potential to treat millions of MDD sufferers worldwide who are poorly served by SSRIs, SNRIs and other current depression therapies. Like ketamine, AV-101 modulates (down-regulates) NMDA receptor channel activity. However, unlike ketamine's antagonistic activity, which results from its blocking the NMDA receptor channel, AV-101's antagonistic activity results from its selective binding to, and blocking of, the functionally-required glycine-binding co-agonist site of the NMDA receptor. Targeting the glycine-binding co-agonist site of the NMDA receptor may bypass potential adverse effects that occur with ketamine without affecting the robust efficacy observed in previous clinical studies. This may then result in the "glutamate surge" that has been associated with the rapid-acting antidepressant effects of ketamine.

VistaGen is also leveraging its proprietary pluripotent stem cell technology and clinically-predictive bioassay systems, CardioSafe 3D™ and LiverSafe 3D™, for drug rescue applications focused on producing proprietary new chemical entities (NCEs) that are novel, safer versions of drug candidates previously optimized and tested for efficacy by pharmaceutical companies and others but terminated before FDA approval due to heart or liver toxicity.


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