Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. We did alright yesterday, precious metal mining stocks were being thrashed around, the deepness of the South African mining crisis I believe is still a long way away from being felt. I don't for a second believe that companies are not going to use this as an opportunity to cut back non-profitable assets. Amplats remember is due to release their review of their assets in the coming weeks. Lonmin have announced their massive deep discounted right issue this morning, that is underwritten by Citi, HSBC, J.P. Morgan Cazenove, Standard Bank, BNP Paribas, Investec, Rand Merchant Bank and Standard Chartered. Fat fees no doubt too, but assuming lots of risks if the other shareholders say no. Including Xstrata, who have not indicated to acting CEO Simon Scott whether they will follow their roughly 25 percent rights. I find that strange. But what Scott could tell us is that they had again batted away Xstrata looking to do a reserve takeover. So, I am presuming that there are tensions between the two, and I think that Xstrata will follow their rights. Doesn't sound too good to me.
Richemont released numbers for their first half to end September this morning. The immediate news that people have chosen to focus on is that Johann Rupert will give up the CEO role at the beginning of March and focus just on the Executive chairman role. And to get his golf handicap lower than the current levels, whatever that is. So in a sense that is giving back a little of control. His family interests of course will still have voting rights and control the business. Remember that when I am talking about these numbers, that the per share numbers should be divided by ten, that is the GDR (Global depository receipt) that is traded here in Johannesburg. It is a ten here for each one in Zurich. The price, as at the close last evening in Europe is 52.98 Euros, or 64.30 Swiss Francs.
In order to get to the price here, you have to divide by ten, so 5.298 Euros and 6.43 Swiss Francs and then multiply by the exchange rate, 11.1051 ZAR to the Euro and 9.2102 ZAR to the Swiss Franc. All these reported numbers are in Euros, which does not quite make that much sense, as the primary listing is Zurich. Switzerland is however surrounded by mountains and the rest of Europe. If it wasn't for Switzerland my parents would never have met and I wouldn't be writing this letter. Thanks Switzerland, you mean more to me than cheese, chocolate or Richemont.
Sales increased 21 percent in Euro terms, only 12 percent in constant currencies. Operating margins increased by 150 basis points to 27 percent. Yowsers. Profits for the period increased by a whopping 52 percent to 1.081 billion Euros, earnings per diluted share, for the first half increased by 54 percent to 1.947 Euros. One tenth of that, 0.1947 Euros multiplied by 11.1051 gets you to 2.16 ZAR worth of earnings for the first half of the year.
Their net cash position is now more than 3 billion Euros, and represents around 11 percent of their current market cap. Wow. Everything kind of moving in the right direction. The key issues that are making people anxious, alongside the news that Rupert is stepping down as CEO is that sales growth seems to be slowing: "Sales growth rates moderated, as evidenced by the October sales which grew by 12 % at actual exchange rates. At constant exchange rates, they were 7 % higher. Richemont is seeing good growth in Europe, supported by Asian tourism which is compensating for slower domestic Asia Pacific sales."
Jumping around a little here, but if sales in the second half grow at roughly 11 percent, sales for the full year to March should top 10 billion Euros, roughly 10.25 billion by my back of the matchbox calculation. If margins are roughly the same as this time last year, 23 percent and not the same as the first half 27 percent, for the full year, earnings for the full year could only increase by around 16 percent to 2,359 billion Euros. Stick that back into Rands (divide by 10 first) and you get roughly 458 ZA cents worth of earnings for the full year. So, if the company manages to buy back roughly 1 percent of shares in issue (the A shares) then I would presume that around 573 million shares in issue at year end. That would translate to roughly 4.11 Euros worth of earnings. At 58.07 ZAR a share that means the stock trades on less than 13 times earnings forward, 12.69 to be exact.
Two of their key regions that were looking stodgy were pointing to a muted recovery, both Japan and North America recorded constant currency sales of 4 percent better than the prior period. Total group sales for the half topped 5.1 billion Euros, 2.103 billion Euros coming from the Asia Pacific region, the biggest surprise was from the European region, which accounted for 36 percent of sales and showed a 23 percent rise from the prior period. As Richemont say in the results release: "The region enjoyed good growth, with visitors/travellers driving the above-average increase. The highest growth rates were in the Maisons' own boutiques in tourist destinations, including the Middle East." The whole culture around "gifting" is still not completely understood by the Western world.
Just last weekend I was watching a program on the China News Network channel, it was on two different women in their mid to late thirties and their families anxieties around them not getting married. But in-between the day to day hectic lives of the two individuals, it had them celebrating a day called singles day in November, and even Christmas being celebrated. When asked, why do you celebrate Christmas, the answer from an academic was, we Chinese celebrate everything. And of course celebrating everything comes the practice of gift giving. There are certain anxieties around Beijing cracking down heavily on Chinese government officials being too conspicuous and raising suspicions of corrupt state officials. This could be a negative for sales in Asia. At the same time this morning we saw a stronger than anticipated Chinese retail sales. Better Industrial production and better fixed asset investments too.
But what now though? The stock is down today. That tells you that the balance of the market is disappointed with the recent sales growth slowing and the stepping aside of Johann Rupert. There is possibly one thing that is unknown and that is also the tailwinds that the company has enjoyed with a weakening Euro, those could turn. Ironically it would be when globally the economy is looking like it is continuing to improve. I am going to leave you with this, the richer people get, they want lots of average and poorly made "stuff" and superior well made items, costlier, but high quality. Imagine when Europe bounces back. We continue to accumulate the stock on weakness, it looks cheap for the first time in a while.
- Byron's beats
McDonalds has 33 500 restaurants serving 62 million people a day in 119 countries. They sell 75 hamburgers every second, have a workforce of 1 million people in the US alone and are the biggest toy distributor in the world. The McDonalds sign is globally recognized by their golden arches, they look to open a restaurant a day in China over the next three years and even the queen of England owns one in her property portfolio.
Unfortunately, for the first time in 9 nine years these 33 500 stores reported a decline in sales. The company reported that same store sales (stores open at least 13 months) dropped 1.8% in October versus expectations of -1.1%. The stock was down 2% on the news. Before we panic too much, there were less trading days this period compared to last which had quite a big impact but for a company we expect to show strong growth, this is of course negative news.
Per region the US was the biggest disappointment. Same store sales (SSS) were down 2.2% due to modest consumer demand and heightened promotional activity. A 1.3% adjustment is needed because of less trading days but again the number is still negative. They cite heavy competitive activity as one of the reasons. Burger King, Wendy's and Taco Bell have all been innovating their menus with exciting new products.
Europe also fell 2.2% but would have been flat were it not for the negative trading day impact. This is where McDonalds have been struggling in the last few quarters. They seem to have more exposure to Europe than the others. Not only has sales been weak but the Euro has also weakened which is not good for the dollar reporting financials. You know our thesis on Europe though. Things are going to turn out better than what the market thinks.
Developing markets also struggled. SSS was down 2.4% but up 1% on a trading day adjusted basis. They are still opening up stores extremely quickly in these areas so you would expect decent overall revenue growth by year end. We are still happy to add to McDonalds at these levels and will take advantage of the recent fall in the share price. They are a good proxy to the European consumer, will benefit when momentum in the US continues and will continue growing in the big developing areas.
The going has been tough for Apple shareholders over the last 6 to 7 weeks, for a number of reasons. After having started the year at roughly 405 Dollars per share the stock rose all the way up to 700 Dollars plus by mid September. An amazing and meteoric rise for any company, but this now became the most valuable company in America. People want these expensive products, because they are beautifully crafted. But in recent weeks there have been unrest and problems with their outsourced manufacturing facilities in China, and people have just not been able to get their new iPhone 5. The iPad mini has been priced at perhaps a little too expensive, and there might be margin compression there at some stage, as well as cannibalization away from their main product offering in that regard. The iPad 3 was given an upgrade. Some are expecting an iPhone 6 shortly and are almost willing to wait a little longer for that. That could see the current quarters iPhone sales fall comfortably short of the estimates. The quicker product cycle might not necessarily be a good thing for the allure of the products.
Added to that there have been recent management reshuffling, which obviously means that Tim Cook wants to stamp his own authority on the future of the company, I have no problem with that. Strangely, the stock has fallen to a level where the yield is roughly two percent. Some people point out that the world's biggest hedge fund is Apple Treasury with that enormous pile of cash and cash equivalents, short term marketable securities and long term marketable securities which is over 120 billion Dollars. Or, at the current share price of 537.75 Dollars, roughly 24 percent of the current price. Whoa! Apple are loosening the purse strings a little, but last year they generated 41 billion Dollars in net income. And capex has jumped significantly, to sort these supply chain problems out.
I suspect that there are going to be margin pressures for all of their products, but they would more than offset that with their increased product sales. The iPad mini sold over three million in three days, last weekend. Clearly people want the products as much as before. Too much too soon is my sense, plus people also pointed to capital gains tax regulations perhaps getting tweaked, meaning that some might lock those gains in this year, the stock is still up 35 percent year to date. The analyst community have pencilled in around 13.50 for the current quarter. Some are even suggesting that the dividend will become increasingly juicy. The stock still looks cheap, competition is hotting up, some are wondering if they have lost their way a little in terms of product innovation. We are still buyers on weakness around here.
Crow's nest. Stocks are lower here because there was a rather nasty sell off in the second half of the US session. US futures are flat, the mood is iffy after a momentous week for all humans. Hah-hah. Feeling flat and tired here, getting man flu is not good.
Sasha Naryshkine and Byron Lotter
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