8-9-13 9:53 AM EDT | Email Article
 

By William L. Watts, MarketWatch

 

Former Federal Reserve chief Alan Greenspan in the 1990s popularized the notion of "creative destruction," a theory constructed by Austrian economist Josef Schumpeter and derived from a concept contained in the writings of Karl Marx. It refers to the rejuvenating power of technology and innovation that can brutally level firms and entire industries while allowing new enterprises to thrive in their wake. In a note, analysts at Goldman Sachs highlight eight examples of creative destruction they think are about to unleash chaos and innovation on the marketplace. -- William L. Watts

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

E-cigarettes

 

Goldman analyst Judy Hong estimates that electronic cigarettes, which eschew tobacco for a nicotine vapor that smokers can inhale, could account for more than 10% of total tobacco industry volume and 15% of the profit pool by 2020. That would "alter the status quo of the U.S. tobacco market and accelerate the volume decline of traditional cigarettes," Hong wrote. "The U.S. cigarette industry has been characterized by the predictable pricing power of the Big 3 [Altria Group (MO), Lorillard (LO) and Reynolds American (RAI)] to offset volume decline and drive modest profit growth. E-cigs could alter this dynamic and it is not obvious that all of the Big-3 companies" will be winners, Hong said. "Cigarette trademarks cannot be transferred to e-cigs, technology plays a key role in e-cigs and smaller companies may be willing to accept much lower margins than the Big 3 are willing to accept." She notes that Lorillard has been the most aggressive, acquiring e-cig maker Blu in 2012, while Altria Group and Reynolds have been "much more deliberate."

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

Cancer immunotherapy

 

Cancer immunotherapy is the big story right now in the pharma sector and Goldman Sachs's initial projection of $10 billion to $15 billion by 2025 in melanoma, lung- and renal-cancer treatments may only be a start, write analysts Jami Rubin and Keyur Parekh. While immunotherapy is being studied in later lines of treatment, it's conceivable that it could eventually be used in a manner similar to chemotherapy today, i.e. as a first-line therapy across a diverse range of tumor types, they say. Bristol-Myers Squibb (BMY) has a clear lead over rivals with Phase-3 trials under way on its treatments of three types of cancer, Goldman says. Merck & Co. (MRK) and Roche also have some promising products, but lag Bristol-Myers Squibb, they said.

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

LED lighting

 

LED lighting has transformed products from handsets to televisions over the last decade or so. Next up, the technology may be used to transform general lighting, says Goldman analyst Brian Lee. LEDs offer energy savings of 50% to 85%, enjoy a longer life span and have more functionality than other types of lighting, he writes, adding that demand for LED lighting is a "large and early-stage" opportunity--potentially reaching $11 billion as soon as 2015--but that is currently in its infancy with less than 5% penetration of the general-lighting market. Lee likes Cree (CREE) given that 80% to 85% of its sales are derived from general-lighting products, versus 10% to 20% for most of its peers. Taiwan-based Epistar could also stand to benefit.

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

Alternative capital

 

Should Warren Buffett (pictured) be nervous? Low interest rates and the attendant search for yield has seen pension funds and traditional investors move into property-catastrophe, or P-CAT, reinsurance, notes Goldman's Michael Nannizzi. A flood of new capital could undercut the ability of reinsurers to push for rate hikes after large losses, he said, noting that a basic rationale for owning reinsurers is that they return capital to shareholders when losses are light, but are able to push through higher prices after large losses. That means traditional reinsurance firms will have to redeploy capital elsewhere. Since P-CAT "carries the highest pure return for reinsurers, replacing the lost earnings will prove difficult and potentially cause reinsurers to accept lower portfolio [returns on equity] in the future," the analyst said.

 

Buffett's Berkshire Hathaway (BRKA)(BRK/A), a large writer of P-CAT risk, serves as a potential example, according to Nannizzi. Berkshire recently announced its entry into the excess-and-surplus insurance market along with a new quota-share relationship with global reinsurance broker AON PLC (AON), Nannizzi notes. Both events indicate Berkshire is "effectively building capacity in new markets at the same time we expect writings of P-CAT business will likely recede," said the analyst. Meanwhile, Goldman reiterated its sell rating on RenaissanceRe Holdings (RNR) and PartnerRe Ltd. (PRE)(PRE).

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

Natural-gas engines

 

Natural gas now costs around the equivalent of $1.50 a gallon, 40% cheaper than diesel, according to Goldman. Meanwhile, the use of natural gas in transportation is just starting to gain traction, write analysts Jerry Revich and Ravi Gill.The opportunity for highest transportation is in high-mileage trucking, were fuel-cost savings would be greatest. They say engine-maker Cummins (CMI) makes the cheapest engine for the truck industry, making it the "most attractive" investment tied to the growing role for natural-gas engines. Westport Innovations (WPT.T) is also levered to natural-gas engine adoption thanks to its auto products, liquid natural-gas tanks, proprietary engine technology and spark-ignited engine joint venture with Cummins and Weichai, the analysts said, but they warn that the company's primary profit driver--the Cummins Westport JV--bears watching due to its slated expiration in 2021.

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

Software-defined networking

 

Beware the cloud. It's already rained down havoc on the traditional PC-centric software and hardware model, and now it's networking's turn, write analysts Simona K. Jankowski and Kent Schofield. Software-defined networking, or SDN, is set to break a bottleneck that's left networking equipment stuck in a decade-old paradigm centered on integrated hardware and software boxes. They note that the $50 billion server market has already been disrupted and reinvented for the cloud era for the cloud era through virtualization technology, boosting new leaders like VMware (VMW) while collapsing market caps for former leaders such as Dell (DELL) and Hewlett-Packard (HPQ). SDN adoption will happen slowly over the next five to 10 years, they expect. And while investors initially assumed Cisco would be disrupted, the company's strategic moves over the past year have positioned it well for SDN, the analysts write. Rival Juniper Networks (JNPR), however, lacks the scale in Ethernet switching, with just 2% to 3% market share, which will likely prevent it from being able to ape Cisco's platform strategy, they said. Brocade Communications Systems (BRCD) may also struggle.

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

3-D printing

 

The 3-D printing industry is growing by more than 20% annually and is widely expected to accelerate in coming years, notes analyst Cristina Colon. Industry consulting group Wohlers Associates sees 23% compound annual growth from 2013 to 2020, with annual revenues reaching $6 billion by 2017 and $10.8 billion by 2021. Stratasys (SSYS) is the largest vendor of 3-D printers in terms of unit shipments, Colon says, and was the share leader even before its merger last year with Objet. 3-D Systems (DDD) is the second-largest vendor and has also been on an acquisition spree, while there are other companies based on the idea of delivering on-demand 3-D printing services. At left, a sample object printed with a 3D printer on display in New York.

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

Big Data

 

Thank social media, machines, blogs and myriad other sources for the explosion in information that's been dubbed "Big Data." Goldman's Greg Dunham says a next-generation database is needed to handle the explosion of data, with the need for newer technologies sparked by an inability to deal with "web scale" use by traditional products. Platforms like Hadoop, Mongo DB, HBase and Cassandra have emerged out of necessity from web providers, he notes. Return on investment for big-data projects "depends on the ability to draw useful insights," Dunham writes. Goldman says Teradata (TDC) is most exposed to Big Data trends, while Informatica (INFA) has launched a version of its Power Center product used by Facebook and Open Table. Qlik Tech (QLIK) and Tableau Software (DATA) may also benefit from growth in data as companies try to harvest insights from all types of data, Dunham writes.

-William L. Watts; 415-439-6400; AskNewswires@dowjones.com

 

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(END) Dow Jones Newswires

08-09-13 0953ET

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Copyright 2014 MarketWatch
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