Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. In the middle part of the day we threatened to set new highs for the Jozi all share index, but when the closing bell rang we had ended completely flat. Slightly disappointing I guess, but the US markets were trying to make head or tail of where to start and with limited systems. Limited telephone systems, limited connectivity, a power supply that was not exactly stable, but there were people there. Trading and jigging before the end of the month, as some short term types do so well. All things considered having seen all the pictures of the water and storm damage, I think that it is a pretty good outcome. But the longest closure in 120 plus years certainly tells us that this was no ordinary storm. And now some are starting to wonder if changing weather patterns, remember Hurricane Irene a mere 14 months ago, might see this as a more regular occurrence. Maybe. I am in the middle on climate change, the last ice age wasn't brought on by us, but we may well have had a hand in changing the weather here by accelerating the next one! The climate change debate is almost as heated as politics and religion. And I want to make friends here.
The biggest stock to jump amongst the "majors" was Sun International, which released a trading update at midday exactly. Margins had increased, revenue had increased 11 percent, led by the casino division. EBIDTA increased by nearly 20 percent. The Wild Coast has been upgraded. I remember having one of the most awesome fish curries ever (no really) at the Fishmonger there. It was a pretty rubbish day, all rainy as it can be down there, but the food was amazing. I had to walk through the room of not so good looking and not so happy people who were not really winning any money in order to get to the restaurants. But, they go back, turns out losers don't know when to stop either.
And whilst tax revenue collections from these institutions boost government coffers, create employment and help develop areas, it is an area that feels like it will always have more regulation, and not less. The Italians used the lottery to finance wars, no really, according to Wiki. The folks in Milan, the Golden Ambrosian Republic needed to attack the fellows from the Republic of Venice. And to fund it, they leveraged off human weaknesses. The history of the business that Sun International are in are as old as human records (almost). I am guessing that whilst we might want to regulate this pastime more and more, but how would that turn out, one needs a balance. As Voltaire, the French philosopher said: "A lottery is a tax on stupidity." Quite. The odds are completely stacked against you. And strangely people think that investing in the equity market in companies decades old, that have sound business models and the best management, somehow that is a gamble. Hmmmm......
Digest these links.
I really enjoyed this post from Bob McTeer titled Sandy and GDP. The first part is simple enough to understand, about what does add to GDP and what does not. The second part is where I want to focus on, this one line specifically: "The most important driver of our prosperity over time is productivity, or output per hour or per day worked. Ideally, productivity will grow briskly because of new technology, innovation and trade, but in the short-term higher output per hour worked can be a substitute for hours worked. More people would be employed today had productivity not grown in recent years." As we often say around here, humans are going to have to continue to innovate in order to be able to get ahead. There are more of us, not less of us. Earth has no plan B. Mars? OK, maybe. But in order to stay ahead of the pack (humans do this in a rather cordial way, when compared to animals) you are going to have to continue to evolve. Sorry.
This is always a very emotive issue, gold as an investment class. Where should it be in your portfolio, or should you keep it in watches and jewellery? This is possibly the most re-tweeted post that I have ever had, when I mentioned a couple of days a link to this entry: Why doesn't the U.S. return to the gold standard so that the Fed can't "create money out of thin air"? Now the reason why this post obviously carries weight is that the St Louis Fed published it on their website. I have always maintained that gold is valuable because it falls into the Goldilocks argument, there is just enough of it and not enough of it. And it is hoarded by cultures for centuries because their ancestors did it. Anyhow, the piece was about price stability, the thing that Jean-Claude Trichet used to get mad about. That last line: "Price stability evidently depends less on whether money is "created out of thin air" and more on the credibility of the monetary authority to manage the economy's money supply in a responsible manner." And inflation has been low for a long time. Thanks Ben, job well done.
Donald Duck and Darth Vader. Luke Skywalker or Scrooge McDuck? Now Jabba the hut and Jafar, perhaps I could see that, but the similarities are few. We could go on, but we would run short of time. We could also talk about the force, but that too has been flogged. Disney was down nearly 2 percent as they announced that they were buying the Star Wars franchise from Lucasfilm for a cool 4.05 billion Dollars. Wow. Half cash, half Disney stock. Will it work? I guess. At the same time they announced film number seven is coming. Steve Jobs became a big holder of Walt Disney when Pixar (which he bought from Lucasfilm) was acquired by Disney. But does this means that they (Disney) now own the Indiana Jones franchises too? Not too sure, but I guess so. I am more aligned to Jones than Skywalker. The adventurous spirit!
Sometimes it just happens, a business cannot keep up with the times and just fades into the background because Mr. & Ms. Consumer wants a different product or service. I am sure that the list is longer than you and I can imagine. Recently I can think of Nokia and RIM having been the dominant folks in their fields now struggling to keep up with those companies that presented handsets that consumers were more receptive to. I always thought that the money payments space could be that, and whilst there were more and more migrant workers, transfer methods were becoming easier. Access to banking products traditionally only available to middle class people are now available to everyone. Money transfers are the next big thing and are available already. Just the other day I paid Byron some money using the FNB app on both of our smartphones, all we did was sign in and boom!
The internet has taken away the need to wire money exclusively via a Western Union, for instance. And here is my point, last evening, after the bell, the company reported. Now this company has a proud 160 plus year history. They introduced the first ever stock ticker back in 1869. Before Joburg was even founded. They introduced money transfer in 1871. They delivered the first singing telegram in 1933. They introduced the first commercial satellite in the USA in 1974. They introduced the first disposable pre-paid phone card in 1993. And then the internet was invented. OK, apologies, Al Gore "invented" the internet. Everyone knows that! Kidding! He was misquoted.
Western Union might be a very old pioneer company, but in this present format it has not been listed for too long. Quarterly revenues from 6 years ago have not grown that much, earnings have a little. But as you will see in the next segment that Byron will cover, the results of none other than Visa, that is the future. Western Union fell 29 percent after releasing these results. They point to compliance related changes, soft economic conditions, but I think that the third reason is more to blame, "competitive pressures in certain money transfer corridors". However, according to the World Bank over half of the adults on the planet are unbanked. No bank account at all. Wow. Via the Huffington Post, which links to the World Bank website: New Database Shows Three Quarters of World's Poor Are "Unbanked". Nice intro for Visa.
- Byron's beats
Last night after the market closed, Visa reported full year numbers which beat expectations. This stock has been one of our best performers. It is up 45% in a year and has nearly doubled since June last year. Like all companies it comes with some risks but there is no doubt this is a fantastic business, sitting in a sweet spot as our globe shifts from cash to plastic. According to the website Visa processes more than 10 000 transactions a second in over 200 countries around the world. But at current levels is it a good investment? Let's look at the numbers.
These numbers are quite complicated because the year included lots of once offs. A big litigation provision and various tax reversals had to be excluded which meant earnings for the year came in at $4.2bn or $6.20 per share. For the quarter per share earnings came in at $1.54 verse expectations of $1.50. The stock is up 1.8% pre market and is looking to open around $141. As you can see immediately, this share is expensive trading on 22.7 times historic earnings. Earnings for next year however are expected to come in at $7.18 showing growth of 16%.
So does the future of this company look bright enough to justify its share price and make it a good investment going forward? This company is not a credit provider, it owns and operates the infrastructure to process payments electronically whether it be by card, mobile or online. This infrastructure has the capacity to process 24 000 transactions a second with fraud protection for clients and guaranteed payment for merchants. Their efficiency is vital.
The company has two massive growth kickers. The first one is with existing clients. As people get richer they spend more, plain and simple. The second one is the adoption of electronic payments over cash. The penetration is less than you think. If you are reading this message the chances are you live a very much first world based lifestyle where electronic payments are the norm. The truth is that more than 80% of transactions are still cash!
Globally they are diversifying in the right places. Naturally their services will be required where the growth is happening. The efficiency their systems bring to the market is vital for any country to grow. Transporting physical cash is dangerous and slow. We know this very well in South Africa. They also make life easier for travellers. Gone are the days of traveller cheques, just draw with your Visa card.
Below is the breakdown of their payments volume geographically. As you can see, still dominated by the US. This is a good thing. Firstly because the US economy is showing good signs of strength and secondly it shows more room to grow globally. If you are wondering where Europe is, they have franchised that region and take an annual licensing fee. $704 million was extracted from Europe which showed a 7% growth from last year. You see electronic payments are government friendly especially for tax evasive nations.
The systems are in place and the demand is there. This company along with a few competitors are changing the way we consume. We continue to add to this game changer.
Crow's nest. Nonfarm payrolls tomorrow. That is going to be a huge focus ahead of the most important US elections since...... errr Since the last one!!
Sasha Naryshkine and Byron Lotter
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