To market, to market to buy a fat pig. Earnings, earnings and more earnings. Commodity prices have been caned lately and the currency, the local one anyhow, has reversed its recent gains to be trading at what looks like pathetic levels historically. All the while our market bumbles along and lower, US equity markets are trading near their all time highs. Without what even looks close to full employment. Japanese central bank policies still baffle most, but hey, they are trying really hard. Remember that Japanese and US collective wealth, if I remember right is around half of global wealth. That is right. So it matters that Japanese money is looking for higher yields. In the mean time locally we could well be closer to a rate cut, the inflation data today was in a sense pleasing that it did not breach the upper end of the range, 6 percent. Intel and Yahoo looked soft, and missed earnings expectations, Intel was downgraded to a sell I saw.
Surely falling commodity prices must be good for the US, lower inflation and because their gasoline price moves all the time, lower prices at the pump equals more breathing room for the consumer. But perhaps the biggest bit of "news" around, at least in the broader circles is that the parameters of the spreadsheet that Reinhart and Rogoff could possibly have been wrong. Now, they are economists (famous and well regarded) I hear you say. BUT, some MIT academics have blown holes in their analysis, which was used by none other than Paul Ryan in his budget presentation. Ouch. Well, it could have been worse, you might have been a Malthus fan, or a Marx fan. Perhaps Marx was the reincarnation of Malthus. Not likely, Marx was 16 when Malthus died. Ah well, predictions are difficult at the best of times.
This morning we have received the third quarter production report from BHP Billiton, the quarter that just ended. I guess at face value the report looks a little light in some departments, but the severe weather in Australia specifically impacted on iron ore production. Yesterday Byron and I saw one of those mega Komatsu trucks that were driverless, carrying off a whack of iron ore. Not in person of course, but rather on the screens in front of us, which admittedly are looking a little old. But they still work, and in keeping low cost over here at Vestact, I suspect they are not going to be changed unless we HAVE to change them.
So, what is the short analysis of BHP Billiton? Well importantly the full year production guidance has remained unchanged. Guidance for 183 million tons of iron ore has been reiterated, even if the quarter only produced 40.205 tons of the red metal. It was a 5 percent fall from the prior quarter, but a slight increase on the production from the comparable quarter this time last year. The company expects a yearly rate approaching 200 million tons in just three odd months time, so in other words at the end of the financial year. Wow, that is simply astonishing. 50 odd million tons per quarter run rate.
Petroleum is their next most important business division. This line was interesting: "Onshore US produced more than five million barrels of liquids during the March 2013 quarter and the Eagle Ford is now our single largest liquids producing field." These gas assets that they overpaid for (at the time) are going to be absolutely huge inside of the next decade. The landscape of North Dakota has been transformed, thanks to the extraction of shale gas from the Bakken formation. One of the most sparsely populated US states is now attracting loads of attention, as shale gas extraction moves the US away from expensive imports. Most of the oil comes from over the state border in Montana, which at least has 1 million people in the whole state, only marginally better than North Dakota. In terms of population density however, Montana has fewer people per square mile than North Dakota, and only Wyoming and Alaska are more sparsely populated. From this recent piece from Prof Mark J Perry, Market forces and fracking have created wealth and jobs, comes the graph of how market forces have created thousands of new jobs:
The same author has a rather comprehensive piece on how the change has been massive for these far flung regions: America's oil and gas revolution. There has been a 40 percent increase in US oil production in half a decade. The US will probably produce more oil than Saudi. That last paragraph is amazing: "A study by Merrill Lynch pegged that contribution at 2.2 percent of America's GDP -- equivalent to an economic stimulus of $1 billion every day." Please. Let us frack here. We will, as I have been told. Hopefully business will lead but I guess that is not going to happen. Government thinks that they are the leaders here. Another story for another day.
Let us get back to those BHP Billiton petroleum numbers inside of the third quarter company release. 55.42 million barrels of oil equivalent were produced, that was below this time last year and below the quarter prior to this. The natural gas year to date run rate is ten percent ahead of where it was this time last year. Eagle Ford formation of course is in Southern Texas, where the weather is a whole lot more agreeable than Montana or North Dakota. Check out this piece The Bright Lights of Big Oil, where the graph is published, from Bloomberg:
Amazing hey? If you wondered how the US shale gas revolution was going, then these two graphs should quite perfectly explain that. BHP Billiton's onshore oil and gas businesses in the US are in Texas, Arkansas and Louisiana. I used the North Dakota/Montana example just to show you how the landscape has changed. BHP Billiton has approximately 50 years worth of current production in these fields, with approximately 8 billion barrels of oil equivalent. Across their petroleum division, their unit operating cash costs per barrel are 6.9 Dollars a barrel, at the bottom end of their peer group. So this is going to become a more and more important part of their business, and perhaps even their biggest business in two to three years. The "protection" that this energy segment gives you over their diversified peers, makes them a unique commodities proposition.
Next up, and perhaps most pleasing was the base metals division, and in particular copper, where the year to date increase is 12 percent better than this time last year. The reason being that the continued ramp up at Escondida should see that this years production is on track to increase by around 20 percent over next year. At the same said plant there is a massive new project to build a newer and better concentrator plant, which is around one third finished. At a whopping cost of 2.2 billion Dollars. Completion is only set during the first half of the 2015 calendar year, so somewhere around the middle of 2015. Which I guess is not that far away, a little more than 24 months. That is great to see, because whilst they might not have had the same issues that some of their peers have had in Chile (most noticeably Anglo American), the asset has been a little patchy. BHP Billiton are of course 57.5 percent owners of the worlds biggest copper mine, Escondida.
Their production report is always useful, because of course it gives you insight into what to expect. Many commodity companies trade in tandem with commodity prices, which are always volatile. For traders these are of course wonderful, because the volatility is immense. We are however at the other end of the spectrum. We are investors, and longer term than most. Whilst massive infrastructure development might have taken place in the developing world already, resource consumption in some of their key commodity businesses continues to rise with rising GDP per capita. More copper for greater electricity generation, more gasoline and diesel for greater transport, more fertilizer (Jansen potash project) with richer mouths to feed is going to be needed in the coming years. BHP Billiton is still the premier mining company on the planet. And we will continue to recommend them. The next big announcement is of course the production report for the year, and then the results, those are in four odd months time. Till then.
Byron beats the streets Yesterday we saw results from our favoured healthcare stock in our US portfolios, Johnson & Johnson. What a history this company has. It was founded in 1886 and has been listed since 1944. It has boasted 29 consecutive years of adjusted earnings increases and 50 years of consecutive dividend increases. It now has a market cap of $227bn and boasts annual sales of $67bn.
As you will know from the previous coverage I've done on the stock, there are three divisions to this business. Consumer (21% of sales), Pharmaceutical (39% of sales) and Medical Devices & Diagnostics (40% of sales). For the quarter these sales equated to $17.5bn which was up 8.5% from the first quarter last year. This was helped by higher drug sales and the acquisition of Synthes (medical devices) which will be fully integrated into earnings after this quarter.
Regionally these sales come from all over the world. 46% from the US, 25% from Europe, 11% from the Western Hemisphere excluding the US (I'm assuming this is mostly Central and South America) and 18% from Asia-Pacific and Africa. And where is the growth coming from? The US grew sales 11.2%, Europe 6.8%, Western Hemisphere excluding the US 4% and Asia-Pacific and Africa 6.3%. The Synthes acquisition probably skewed sales slightly in the US. This is a good mix and well balanced growth across the regions.
Profits of $3.5bn for the quarter translated to $1.22 a share. There were some once off charges for litigation and transaction costs. Without these the company made $1.44. Estimates for the full year come in at around $5.40. The stock trades at $83.45 or 15 times this year's earnings. Interestingly the stock has done very well lately, up over 19% this year so far. This is because, as we can see, sales are growing fast enough to justify a higher rating. There is another reason though. The whole sector has done well because defensive healthcare stocks are seen as more attractive in these uncertain times. Times are always uncertain but investors see these times as more uncertain than others. I disagree but I am not complaining. Stocks with more certain growth rates should always afford a better rating.
Overall I am very pleased with the numbers. It's great to see a strong comeback from their pharma division following a run of call backs due to bad quality. This division grew sales 14.7%. I have said this before but I really like the mix of sales. Many analysts feel that the pharma division on its own would afford a much higher rating but the diversification for me is a bonus. I like both consumer goods and medical devices as a theme.
We continue to add to the stock as the market leader in a sector which is benefiting from a well deserved rerating. And it is certainly not too late, the long term future looks strong as developing nations become richer and become more significant in their sales mix.
Crow's nest. Stocks are trading lower here again, it has been a torrid quarter, if you want to look at it that way. Mining companies have weighed heavily on the overall exchange, gold miners are as a collective down a whopping 35 percent this year. Wow. Platinum stocks are down a whopping 25 percent this year. Yip, the market is down "only" three percent so far this year, thanks for nothing resource stocks.
Sasha Naryshkine and Byron Lotter
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