To market, to market to buy a fat pig. Woo-hoo! Just as the market opened in New York the S&P 500 crested 1700 points for the very first time! I saw that some folks are talking about 2000 points on the S&P 500, of course it will get there, it is just a matter of time. Personally and also in this office we are not too keen on putting a specific target on an index, inside of a specific time horizon. That tells you what your time frames are. And to be honest, even the best guess does not know the unknown-unknown, the political or economic event that can scupper a rally in the short term. Think Greece, rising bond yields in Spain, Ireland, Portugal, Iceland and whatever other long list that you have there.
For the time being all of the economic news, and earnings (more importantly) have been good. And remain good, albeit it "only" ahead of expectations. The market price today (this is in general) represents the price that the collective are willing to pay for future earnings. And last evening, that closing price was nearly 1707 on the S&P. But is that expensive? We all know that future earnings today are not what they turn out, this time next year that number could differ by as much as ten percent. Either better, or worse. Currently, for the 2014 FY, the collective S&P 500 earnings are 123 Dollars (more or less). So quite simply, at current levels, the S&P 500 trades on a 13.9 times forward multiple, admittedly 2014 earnings. What? Where I am getting all this garbage from?
Well, there are people who are much cleverer than I am (who don't use the word cleverer) who have loads of time, or who are better at managing their time. It is strange how wonderfully successful people tend to have more time to fit more in, inside of 24 hours. But I want you to look at this .pdf, titled: Earnings, Revenues, & Valuation: S&P 500/400/600.
Dr. Edward Yardeni and Joe Abbott (from Yardeni research) update this piece week to week, and normally on a Thursday, so right there you have your freshest piece to date. The rolling 12 months earnings, the next two quarters this year and then the first two quarters next year have the S&P 500 on collective earnings of 118.26 Dollars. That puts the valuation of the biggest and most solid benchmark index globally, the S&P 500, on a 14.43 times earnings. That is hardly expensive by historical standards. Still at this point! A simple rerating of 15 times, closer to the historical average, implies a 1773 level for the S&P. Around 65 points more than current levels.
Be cautious when making these assumptions however, of where index levels should, or could be. Again, the levels are not blindly set, the overall market consists of real companies with divergent fortunes and earnings. For instance, if Apple inc., one of the bigger constituents of the S&P 500 traded at the same multiple as the market (14.43 times), the stock would be at 578 Dollars and not the current 456 Dollars a share. But that is what makes a market, different valuations for different companies, reflective of the future. Google trades on a 27 multiple, indicating that the collective is willing to pay a lot more for their earnings than for Apple's earnings.
I can't disseminate the graph that I would really like to, I read the disclaimers at the bottom of the .pdf, so you're are going to have to read it for yourself. But the graph I refer to is the S&P 500 blue angels graph. That tells a whole story by itself.
Crazy, but in 2000, at the height of that market, the S&P 500 was trading at 33 times earnings, thanks to the flying tech stock weightings in the broader market. For the whole period from 1991-2000 the average multiple was 20 times earnings. This table is fantastic, from this article: Lessons from the Intelligent Investor Part 3: State of the Market in 2013.
On a 33 multiple the S&P 500 index would currently trade around 4000 points. On a through the nineties average of 20 times, we would be closer to 2400 points. So my conclusion is, even though we are record highs, stocks are not that expensive. What is also interesting to note is that companies have perhaps returned a whole lot less to their shareholders than they could have, through the last decade, by way of dividends. Perhaps that is a function of lower rates globally. But, just as importantly, why it is always better to be in the market, than trying to time it, is that multiple expansion comes quicker than you think.
There was a trading update from one of the firm favourites here at Vestact, a stock that has been mostly in our client portfolios for the better half of ten years, Sasol. Higher volumes at the end of the day is what you want to see, that is good for the company, their shareholders and the country. The more fuel that Sasol produces here, the better for all South Africans, that means that we have to import less oil. As it stands, oil makes about 22-23 percent of all imports, imagine if Sasol did not produce fuels for the local market!
The company released a trading statement at 16:30 exactly, HEPS for the full year to end June are expected to be higher, in the 20-30 percent range. EPS for the same time period are expected to be higher by 7 to 17 percent. So what does that translate to? EPS was 3910 cents this time last year, and HEPS was 4228 cents. Translate forward to the middle of the range and you get 5285 cents for HEPS (25 percent) and 4379 for EPS. Why the massive divergence?
Simple really, there are two impairments, one in their wax expansion project here and the other in their Iranian chemicals business, Arya. The difference is 9.06 ZAR a share, or multiplying by the number of shares in issue (644.8 million) you get 5.841 billion Rand, most of that being Arya, by as much as 3.6 billion over the last year. Paul winced when I told him. That is a BIG number. Plus, 1.6 billion ZAR in operating profits that might not be recovered in the disposal process of the Iranian asset (currently valued at 2.3 billion Rand, or 230 million Dollars). As much as another 100 million Dollars, or 1 billion Rand may be written off when Sasol eventually sells the asset, as a result of the weakening Iranian Rial. 2 billion Dollars worth of losses have been recognized in these full year results.
In order to be taken more than seriously in North America and in order to get the re-rating, Sasol have to get rid of this asset. And if that means short term (medium term) pain for all of their shareholders, then so be it. Full year results are expected on the 9th of September, which is a Monday. Nearly five weeks time. The all time high for Sasol is 518 ZAR, reached in May 2008, remember those days my friends....... the stock has reached a high of 479.98 ZAR this morning, there has been a big move upwards since yesterday. Nearly 4 percent yesterday and another percent this morning.
Byron beats the streets
Yesterday, just after the close we received a very good looking trading update from another one of our recommended stocks, City Lodge.
".... headline earnings for the year ended 30 June 2013, which include the costs and effects of the BEE deal, are anticipated to be between 42% and 47% higher than the previous year, whilst diluted headline and basic earnings per share are anticipated to be between 40% and 45% higher than the previous year.
Normalised headline earnings, which excludes the costs and effects of the BEE deal, are however anticipated to be between 28% and 33% higher than the previous year, whilst normalised diluted headline earnings per share are anticipated to be between 27% and 32% higher than the previous year."
Let's look at these numbers in more detail. For the first half of the year the company managed to grow normalised headline earnings per share by 31% to 295c. For comparative reasons it is best to look at the number which excludes the BEE deal. So a range of 28% to 33% looks to be in line with the first half. Last year the company made normalised diluted headline earnings per share of 442.8c. Add the middle of the range 31% and we should expect around R5.80 for the year.
The stock is trading at R128 which puts it on a multiple of 22. That may seem expensive but there are a lot of factors here. Firstly there is that generous dividend they usually pay. Last year the company had a dividend cover of 1.7 times. If they keep it that way we should expect R3.40. That is a yield of 2.7%. Not as good as it used to be but that is because the share price has run. The other prevailing factor is the property underpin.
According to my latest calculations, using the listed property index as a benchmark, their directors estimated replacement value of the hotels they own should be around R4.56bn. The current market cap is R5.4bn.
That calculation of mine was done in January. When the full year results come out later this month we should get an updated version of the estimation which will give us some clarity. Occupancies were at 63% for the half year, I expect this to have grown. All in all a good update, we will do a full analysis when the results come out on the 14 of August.
Home again, home again, jiggety-jog. Jobs day today! All the data so far has been good, expectations are for 183 thousand new jobs that have been created for the month of July. Watch out for the revisions too, plus hours worked, average hourly wages AND the unemployment rate. So much to get through, it is possibly for Mr. Market, a good outcome if the number is "just right". Like Goldilocks and her porridge, let us all eat the baby bear porridge. If you are not too distracted, tune in to the action at 14:25 on your favourite business channel for all the action! And all the shouting guests that you could ever dream of.
Sasha Naryshkine and Byron Lotter
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