To market, to market to buy a fat pig. OK, the very late and delayed jobs report was a bit of a downer. The headline number, the number of jobs created for the month of September was 148 thousand, the unemployment rate was lower at 7.2 percent. The participation rate was flat, possibly indicating that it had bottomed out. And perhaps the anxiety around the baby boomers coming out of the workforce. Over one-third of those unemployed have been so for more than half a year. If you read these numbers here in South Africa you would be forgiven for having a warm glow come over you, but in America they demand more. And expect more. So that is why when the government healthcare portal doesn't work, they hake a song and a dance and a noise about it. If you demand excellence, strangely you end up with that. If you accept mediocrity, you get worse than that, really. At the end of the day it is about accountability.
The theory was that a worse jobs number would continue to delay the end of the Fed's taper, which I guess is good news for stocks in the very short term. I am not too sure why it is helpful, but I guess that an easy monetary bias will be maintained. More of the same with Janet Yellen, she is certainly very short, but I am sure packs the greatest of economic punches. I think that she will surprise everyone, positively of course. After all was said and done, the S&P 500 closed at another record high. Always be asking, is it expensive?
Many people warn of the lost quarter of a century from 1929 to 1954 as the time it took for the Dow Jones to reach the same level prior to the most famous stock market wipeout of October 1929 and the subsequent resulting great depression as a great example of what can happen. True, it can. Back in 1929 some financial institutions were trading at more than 4 times book. Valuations were crazy, there was mega leverage and the SEC did not even exist yet. The Fed had few powers and were new. 10 thousand banks failed during that time and deposits were wiped out, as much as 140 billion Dollars. That is equal to 1,854 trillion Dollars in todays money. Ask yourself, how was there not civil unrest of epic proportions? There were of course, and many a shanty town and uprising were quashed by police, but having presented that number, you would have thought it would have been more. Hence, Bernanke the student of the era was not prepared to have a repeat. So, the lesser of the two evils has been government intervention and broad based central bank stimulus.
It is a company that serves 69 million customers daily in over 34 thousand restaurants in 118 countries (obviously around the world). The company provides jobs for 1.8 million people globally, third only in a commercial sense to WalMart and China Railway Engineering corp. The Chinese Army and the US Defense dept employ more people than those commercial ventures. It is a company that opens 28 new restaurants a week around the world. You guessed it, McDonald's, who reported numbers on Monday that I guess failed to impress Mr. Market. Year to date sales are only two percent higher, net income is up 3 percent, whilst EPS is up 5 percent. Earnings per share for the quarter were 6 percent better (7 excluding the currency translation) at 1.52 Dollars. One cent negative currency translation for the quarter, three cents so far this year!
Europe and America were OK, from a sales perspective, if not at all inspiring, with the major disappointment being China, Japan and Australia. Why? Well, the release suggests an ongoing challenging environment. The only main new menu innovation was the mighty wings launch in Atlanta, you guessed it, chicken wings! The lack of acceleration in sales has promoted a few broker price target downgrades, and all around negative sentiment.
A little history and background to cheer you up a little. Everyone knows who Ray Kroc was, but perhaps Fred Turner, or plain old "Fred" who died at the beginning of the year, is considered by many internally as the person who set the standards for quality. Fred was a stickler for size and quantities and many of the systems he put in place (the 30 something employee at McDonald's) around sizes and consistency still remain today. Ray Kroc's wife (Joan, 26 years his junior), when she died in 2003 left 1.6 billion Dollars to the Salvation Army. Wow.
I found something amazing. Number of shares in issue in 1996 or McDonalds was 1,389 million. Ten years later it was 1,204 million (as per the 2006 annual report, page 20). In that time, earnings per share increased from 1.08 Dollars to 2.30, whilst the dividend rose a whopping 85 cents a year, to 1 buck from 15 cents in 1996. Systemwide stores grew from below 21 thousand in 1996 to 31.6 thousand in 2006. Fast forward to the 2012 annual report, page 9 (things were super sized back then) and the number of shares in issue is just a whicker over a billion, 1,003 million in issue.
In 16 years, the number of shares in issue have been reduced by a whopping 386 million. Earnings per share last year clocked 5.36 Dollars and the dividend rose to 2.87 Dollars. Over the last three years however, 107.8 million shares, roughly 36 million a year. There are now under 1 billion shares in issue. At this rate in a few (that is three) years time the number of shares in issue over a two decade period would have reduced by nearly one third. That is amazing, truly amazing. Another amazing fact about McDonald's is that the dividend has risen each and every year since they starting paying one back in 1976. The current quarterly payout is 81 cents (raised 5 percent in September) to bring the annual payout to 3.24 percent. At the current share price (95.28) that is a yield of 3.4 percent on the button. With a rough 5 percent increase in earnings, McDonald's is hardly cheap at 16.9 times forward, especially if they are only growing earnings at single digits.
I feel inclined suggest that one leaves the investment alone, there is a fabulous yield underpin and the brand is amazing. The store presence is still growing at an astonishing rate, 1 store rolled out roughly every six hours, somewhere around the world. The plan is to be in each and every neighbourhood. For the time being the sales momentum seems more like soggy fries than the delicious (must eat hot) fries that they normally sell. There is no way that this company is transformative in any way whatsoever, you could argue that the menu changes slowly to adapt to the ever aware society, in terms of health priorities. They are doing that, offering apples instead of fries with their happy meals, watch this short Bloomberg video: McTaco? McOmelette? Meet McDonald's Top Chef Dan Coudreaut. Interesting, isn't it?
Accumulate on weakness, that is the perfect time to be adding to a solid company, when most people are not really paying that much attention, and have lost the faith.
Another company with a fabulous last decade, a spotty prior decade, but the original maker of the home computer,
A new iPad mini was announced too, a better processor, better graphics and of course a better battery life. To be brutally honest, I think that for most home users an iPad is all they need, mail, the internet and apps for doing different and out there things of their particular interest. I have seen with my own eyes people make the shift seamlessly and enjoy the product experience a whole lot more. I know that the product is a beautiful one, people who have them tell others how wonderful it it, to the point where it becomes a little nauseating, hence the term Apple fanboy. Fangirl sounds a little derogatory, or not? These beautiful products are available in major territories (where rich people live and the demand is high) in early to mid November. Here, I guess hopefully by Christmas.
At the beginning of the product launch event, and the company has a tendency to do this, they unveiled the newer Mac's. The kind that is allergic to cheese and pickles. Rather the seemingly overpriced laptops. But I will let you in on a secret, they are probably worth every single cent. The updates are few and far between, the move is easier than you think, but more importantly the performance (better) is absolutely astonishing. I am amazed by the quality each and every day of my Mac. It is truly a beautiful machine that deserves more airtime and the users prior were all right. The first few weeks are hard, you make mistakes, but I tell you, it is worth it. So on that note, I cannot wait for the new operating system, OS X Mavericks is what it is called. I will let you know how it goes!
The stock price? Tell me that you cared more about the product release than the share price and I might have to look at you funny. Well, Apple closed (including the after hours move) around flat. I guess that the market got it right then, moving north in recent days ahead of the product launch, expect another one in around two months time.
Sharing is caring. Here it is, there are around two weeks left for public comments around shale gas legislation in this country, here is a great article about it from the US: The shale-gas boom won't do much for climate change. But it will make us richer. Good. And create jobs. Much needed jobs.
Home again, home again, jiggety-jog. Stocks are lower here! We ran out of time to cover the superb production numbers from BHP Billiton yesterday, we will do that tomorrow. The stock is zoning in on their all time high, somewhere around 323 ZAR if memory serves me correct.
Sasha Naryshkine
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