To market, to market to buy a fat pig. I have been away for a few days, on the South Coast, with the kids on half term. Apologies for the down time, we will make it up to you as best as we can. Often the time away from the screens (you always have your emails nowadays) is a time for reflection. And I am pretty sure that if I asked you on the 1st of January if you would take an average year (15 percent for the market is average), I suspect that we would have taken it with both hands. This year has not been without its dramas, the most recent being the US government shutdown and the debt ceiling debate. We came into the year with the automatic cuts, those automatic cuts became reality, as the US budget attempts to slash 1.1 trillion Dollars in spend all the way through to 2021. And all the while the Tea Party types have demanded more and more. Discretionary spend as a percentage of US GDP is set to fall to 5.5 percent (of a projected much larger GDP) by 2023, from as much as 8.3 percent last year. So with all these concessions, in a sense, you would think that the relationships between left and right of centre would be a little more amicable.
What history has taught us however is that the masses become uneasy when there is an economic downturn, looking for someone to blame, and turning to people who seemingly have radical answers to their economic dilemmas. Look at the Golden Dawn in Greece (they have just had their funding pulled) who increased their number of votes from 4500 to 440,000 in 16 years, from 1996 to 2012, most of that recently. It is far easier to blame immigrants than the system, right? It is far easier to blame foreign workers than take a little time for self reflection, right? If there was more to do, i.e. more work to go around, there would be more economic prosperity and less time to think about who is to blame.
As decent a year as we have had over year, the Americans have had an exceptional one, valuations at the beginning of the year were way too cheap, stock prices have seen multiple expansion. The same, or modestly better earnings but investors willing to pay higher multiples on the basis that the worst of the storms have passed. The S&P 500 is up 23 and a half percent year to date. The NASDAQ is up a whopping 30 and a half percent year to date, but it has definitely not been a tide that has raised all of the tech boats. The Apple share price has hardly budged this year, but yet it makes up the largest part of the tech sector. Google and Amazon have rallied (both around 43 percent year to date), Microsoft and Intel have had really good years in the face of lower PC sales. Surprising, but true.
Facebook (at a little over one and one third of a percent of the NASDAQ) is up 88 percent year to date. And reports numbers post the bell tomorrow. Not bad for a company that a year ago had "investors" worried that they could not monetise mobile. Pfff... investors my foot. The entire issued share capital of Facebook turns over every 290 trading days, and that would include the shareholders who do nothing. Zuck owns 426 million Facebook shares, with an option to acquire another 60 million shares. The way that I read the annual report, those are exercisable at 6 cents. Yes, 6 cents. Let us just say that it would be dumb for the Zuck not to. Not great for other shareholders, but good for him, through the A and B shares arrangement Zuckerberg maintains voting control. More on this company in a couple of days time when their results are released. It will be interesting to see their monthly active users trends.
Hey Apple. Remember the annoying orange? The little animated fruit that laughed at the demise of the other fruit around it? This is not it. This is a write-up on the fourth quarter of the Apple results, which were released after the closing bell last evening. Here goes, you can read along as we try and explain: iPhone Sales Grow 26% to Establish New September Quarter Record, with the key product sales numbers being as per the release:
The Company sold 33.8 million iPhones, a record for the September quarter, compared to 26.9 million in the year-ago quarter. Apple also sold 14.1 million iPads during the quarter, compared to 14 million in the year-ago quarter. The Company sold 4.6 million Macs, compared to 4.9 million in the year-ago quarter.
And since then, Apple announced that they would return cash to shareholders, an astonishing 36 billion Dollars. An amount that is larger than the market capitalisation of Anglo American. Or even Sasol. Marginally less than the whole of MTN. The original announcement of what the company would do with their cash pile came in March (the 19th, that is my birthday, diarise please) of last year, 2012. So it has been a little over a year and a half since the grand announcement.
If the buyback program were completed today, as far as I read, that would retire roughly 8 percent of the shares in issue at the current share price. And to think that if you add the cash and cash equivalents, short term marketable securities and long term marketable securities, you get to a number of nearly 147 billion US dollars. After that 36 billion buyback and reintroduction of the dividend. Remembering that the dividend is currently 3.05 US dollars per quarter, the current yield being 2.3 percent per annum, at the closing price last evening. Tim Cook suggested that the current program would be revisited during the first quarter of next year. Which if you needed reminding, today is the 303rd day of the calendar year. There are only 63 days remaining inside of this calendar year!!! Today is also exactly a year on from the landing of Hurricane Sandy on the East Coast of the US, which caused 70 billion Dollars worth of damage, and the loss of 286 lives.
The worrywarts will point out the obvious, even though there have been growth in iPhone sales, the other products have been slipping, or in the case of the iPods, not even worth mentioning! But also, the fact that the average selling price of the iPhone fell 6.6 percent must be worrying at some level. This current quarter hardly caught any of the sales of the newer products, only ten days of sales of the iPhone 5C and 5S. And in the current quarter that we are in, the first quarter of their 2014 financial year, the company anticipates that they will generate revenue of between 55 and 58 billion Dollars. To put that into perspective, the quarter past, the one that we are talking about now, saw sales of 37.5 billion Dollars. The expectations are for a whopping 20 billion more in festive season sales! Wow.
Sales of iPhones only? Well, not entirely, this is what Tim Cook, the CEO anticipates: We're excited to go into the holidays with our new iPhone 5c and iPhone 5s, iOS 7, the new iPad mini with Retina Display and the incredibly thin and light iPad Air, new MacBook Pros, the radical new Mac Pro, OS X Mavericks and the next generation iWork and iLife apps for OS X and iOS. iPad sales have been flat, and the newer fresher models could possibly wow folks to upgrade at Christmas time.
Margins have levelled out at 37 percent, but are comfortably off the highs. Again, the worrywarts will point out that Apple will continue to have to discount their phones, or search for more revenue by selling a cheaper phone, obviously something much cheaper than currently. But that is not going to be the plan I suspect. Apple are in the business of selling products that people really want. Well crafted and at the top end of the range. I am pretty sure that BMW and Daimler battle with this too. Ironically Apple generates more in annual sales than Daimler. Most of the companies globally that are ahead of Apple on the annual revenue list are the oil and gas businesses as well as utilities, energy is still the most important business by global sales!
Where to next though for Apple? I suspect that the company will continue to be hugely profitable, generating huge excesses of cash that will continue to be returned to shareholders either through share buybacks and increasing dividend payments. The company continues to invest nearly 1 billion Dollars a quarter in research and development, looking for better ways to maximise their current product offering and future product offering. Earnings for the full year ahead are expected to register a high teens growth, 18-19 percent. Expect EPS around 48 Dollars a share. We continue to accumulate the stock, but are always mindful that the next disruptive consumer device is just around the corner!
Michael's musings. When is it too expensive? (Part 1)
With markets locally and over the ocean reaching record highs, doomsday sayers are getting a larger audience from people who are anxious. At what point do you as investor start to say, the market is too high and it is a bubble that is just waiting to pop?
What is the reason for a high P/E ratio? There are a number of reasons, the first is due to stable earnings and dividend payments from a company. If a company is a big player in a stable sector that is expected to continue to be viable for the foreseeable future, investors are willing to pay more for that companies earnings because the earnings are 'certain'.
The next reason for a high P/E ratio is due to high growth being expected in the earnings. Using my Google example from my piece a couple of weeks ago; Google shortly after listing in 2004 had a P/E of 93, since then up until the end of 2012, their earnings have grown by 1468% and the share price has grown by 245% (based on current prices the share price is up 420%).
Taking Netflix as an example, Goldman Sachs has forecast their revenue to rise by 50% from the end of 2012 to the end of 2014, and forecast earnings to go from 0.2 to 5.41 over the same period (very impressive earnings growth!). Given those assumptions, Goldman Sachs is willing to pay $360 for the stock, but as results come in they are either going to be higher or lower than their forecast resulting in a marked change in the value of the share.
In this case, the share price will change for two reasons, the first is an earnings rerating (change in P/E ratio) and the second is due to that multiple being applied to a different earnings figure. If we assume that earnings grew faster than expected, the share price will increase because investors will give the share a higher P/E ratio and then because the earnings base is higher; the share gets a double bump up.
Given the mix of certainty and expected growth, certain sectors in the market go thought cycles of favour and disfavour. As a sector comes into favour its mix of certainty and growth has improved, resulting in an earnings rerating, so investors are willing to pay a higher earnings multiple for a stock. Large returns are normally made over a short period of time when a stock get an earnings rerating.
Part 2 will cover how P/E ratios relate to the broader market, and if we think that things are getting "over heated"
Home again, home again, jiggety-jog. Markets are flat. There is terrible news. The Europeans have clicked over to daylight savings, which means we get an hour less trade in the morning. And an hour less in the afternoon when the US change over to their daylight savings program. This is worse than contemplating what it is that you must wear for Halloween. Sigh, why do we involve ourselves in a tradition that is spreading globally. The US National Retail Federation suggest that Halloween spending by US consumers is expected to be 6.9 billion Dollars this year, costumes (including for furry friends) is expected to be 2.6 billion on its own. Oh, how much is 6.9 billion Dollars? The combined economic output of both Malawi and Somalia. more or less. Don't beat up on Malawi.
Sasha Naryshkine and Michael Treherne
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