To market, to market to buy a fat pig. Monday. A while back, in-between we had heritage day, tricky for me because I cant really put a finger on my heritage, I know that I am born around these parts (geographically speaking) but two generations back my ancestors are not. They come from far colder places than these, but I am not eating cabbage on a sunny day! So I lit some wood (very bad me) and cooked some meat and made a stew in a three legged pot. And watched my team draw with my colleagues team, that was enough for them to advance to the final, you know who I am talking about!
Not advancing on Monday was Mr. Market, although we did try hard. Of course the rest of the world was having a good work yesterday, I do honestly believe that we should move these holidays to Mondays or Fridays, it would be a whole lot less disruptive having a stop-start week. On Wall Street last evening stocks came off their best levels, in fact ending as low as they were high, if you catch my drift.
A tale of two companies, part two in a way. We expected that Apple would set a record with the number of phones sold over the weekend, we did not quite expect 9 million units, the consensus was around 7-8. But I guess that is good, no, very good. Just as good is the fact that over 200 million downloads of the new iOS have taken place so far, out of 700 million odd devices. Remember that not all devices can be updated, only from the iPhone 4 and iPad 2 onwards. And, more importantly for the stock holders, in telling the market that they had sold more phones than anticipated, their guidance was raised towards the top end of the range. Prompting broker upgrades. Sigh, how often does one see that. The smartest folks on the street are having to flip and flop, because their time frames when producing these reports are 12 months out. They are expected to be miracle workers with rudimentary instrumentation.
I am pretty sure that you might of heard of the four year old known as Jack who hated the new iOS so much that he cried. That YouTube clip was seen 1 million times plus. I am going to let you in on a little secret. I upgraded my handset and then my eldest daughter had a look at it. She is 8. So double Jack's age. She was so amazed and she went on about the upgrade for 2 minutes. I had not told her what I had done. She kept saying, wow dad, what have you done with your phone, it is so amazing! I guess that if I put that up on Youtube and then told everyone on your social networks, perhaps I would have got 50 hits at most. So there. Humans tend to focus on the bad, rather than the good, it is in our DNA.
Blackberry's stock was halted Monday evening, the company had just recently laid off 40 odd percent of their workforce (4500 people) in an attempt to recapture their former glory and return to the businesses number one phone. I don't think that the company is that broken, perhaps it is. The saddest part is that in agreeing to sell itself for 9 Dollars a share (or 4.7 billion Dollars in total), that is almost HALF of the late January price of this year. Sad. What happened? 10 quarters ago the company was making record profits. The share price ironically was at an all time high when the company was in growth phase, back in 2007, the stock reached nearly 150 Dollars. I honestly hate to see businesses fall from grace and in years to come I think that the comparison between this one and Palm will be well documented. Palm was bought by HP in 2010 for a mere 1.2 billion Dollars, the tech bubble bursting saw the stock fall 90 percent. Ouch.
Ex cash (2.8 billion cash!!!) however, the company is valued at ONLY 1.9 billion Dollars. This is possibly the cheapest deal ever done, or 0.17 times sales and an 80 percent discount to book value. I found all those interesting factoids here: BlackBerry Ltd's tentative buyout at $4.7-billion would make it cheapest tech takeover ever. Wow. You might well say, oh dear that is sad for Michael Lazaridis. But I guess 5.69 percent of 4.7 billion Dollars is better than nothing, right? And I am pretty sure that 250 million Dollars is a fair chunk of change. Anyhow, Lazaridis has an Academy and Emmy Award, you cannot take that away from him! The awards are for technical achievements, a digital barcoding reader for film editing is what RIM invented, meaning that editors could search much easier.
At the same time that you might be thinking poor shareholders, if you read the above article, the cash burn and fall in market share that the company has experienced might well see that the price is fair. Wow. How the mighty have fallen and this possibly concludes (Fairfax's partners could/might even walk away, who knows?) the best known example currently of consumers falling out of love with your product. So quickly. Another reminder to always remain vigilant.
Michael's musings! Can you get too high?
As I write this piece Naspers is sitting on a P/E of 54, with their major source of earnings, Tencent sitting on a P/E of 42. There are two reasons for having such high ratios, the first is that the current earnings are very low due to an unforeseen expense, or as is this case the market expects very high growth rates. Are these P/E ratios too high and the stock price unsustainable?
There is no doubt that if Tencent has a poor earnings result the stock prices will take a hammering, but what is more likely to happen is that the share price will slowly tick up while earning continue to blaze skywards, resulting in the P/E ratio coming down over time. If we assume that earnings will grow at 30% (which is a reasonable assumption given that the current six month earnings figure is higher than the 2010 full year figure) and that the share price grows at 15% p.a., in eight years' time, the share price will have more than doubled and the P/E ratio will be at 20. At which time Tencent will be a more mature company paying hopefully a substantial dividend compared to your initial investment.
One of the best case studies for buying a high quality, high P/E company is Google. Shortly after listing in 2004 the Google P/E was sitting at 93. From 2004 until 2012 earnings have grown by 1468% (not too shabby Nige) and the price was up 275% (up 370% on todays price), resulting in the P/E going from 93 to 22. Right about now I bet that you are thinking, "but Google was a no brainer buy", really? Would you have bought the company with a P/E of 93 (it wasn't too expensive?), would you have bought the company while the share price was halving in 2008 (it wasn't doomed like the rest of the economy?).
The general trend for high P/E stocks is for the earning to grow at a higher rate than the share price, which will bring down the P/E ratio as it gets harder to keep growing at over 25% p.a. The rationale for buying high quality, high P/E companies is that as an investor you want to lock in the purchase price early, watch the earning grow at a rapid pace and then when earning growth starts to slow, the company will start to pay out a dividend which will be a high percentage compared to your initial purchase price. The risk to buying a high P/E stock is that if growth is not as high as analysts estimate the share price will take a pounding, but I would still take that risk and overpay for a quality company's stock than underpay for an average company's stock.
Home again, home again, jiggety-jog. We are about flat to start with, having to catch up both a good and bad session prior to this. I hope you all enjoyed your day off, if you did indeed have one off. We shall talk about the looking showdown on Capitol Hill in the blog tomorrow. It is too much for me to bear, politicians with their chests out bumping up against one another like roosters. Sigh.
Sasha Naryshkine and Michael Treherne
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