To market, to market to buy a fat pig. Our markets slipped back yesterday, the headlines that I was reading pointed to worries somewhat about the jobs number today. I saw that Joe Weisenthal asked whether or not we would see a three handle. Meaning a number at the beginning of the thousand would have a three, i.e. three hundred thousand. Perhaps the ADP numbers were a little "light" 4000 odd below expectations, but the current expectations are around 200 thousand. The unemployment rate is supposed to drop to around 6.6 percent. This morning there are some German factory order numbers that comfortably beat expectations. For the time being the European data is better. So much so that the ECB president yesterday (the coolest central banker in the world) suggested that there was not too much to do. Read the press conference statement.
Now remember that the ECB has a similar mandate to ours: "to maintain price stability: safeguarding the value of the euro." As simple as that. I guess the deflationary threats that Europe are currently facing are somewhat of a problem. The word deflation was used five times in the Q&A segment of the press conference, all led by journalists and not once in the statement by the ECB. Is it then fair to say that the ECB is not worried just as of yet, or are they (the ECB) reactionary? But, in the statement the ECB suggest that they are worried about long periods of low inflation: "The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation." But at the same time, the ECB did say that they are not worried right now. So why get your knickers in a knot?
Yesterday we had the AMCU union members here at our workplace visiting Lonmin headquarters (the South African ones) and whilst our hardships might have included battling traffic here, one should feel for the workforce that have been without a job for 10 weeks plus. David McKay has a piece: Anatomy of the platinum strike ... 10 weeks on. The last three lines: "End of Week 10, Employee earnings lost = R5bn, Companies revenue lost = R11bn" Wow. And right now, as we speak, Amplats are talking about shutting some mines and mechanising others. There is a simple interview with Chris Griffiths on CNBCAfrica. Griffiths expect workers to return soon. Amplats is going to reposition themselves. No doubt about it, Michael spoke at length about it yesterday, remember?
The massive issue is as ever, are fewer skilled workers, using mechanised methods going to replace many more lesser skilled workers? Yes. Probably. The prickly issue of remuneration of the upper echelons of the business world, relative to the rank and file worker should always been seen against a relative skill set point of view. Because as equally as it may seem for the unions to say that it is not fair that the big chiefs get paid a big salary, the highest paid employees have skills that very few in South Africa have. It is easy to acquire those skills, if in the words of warren Buffett you "won the ovarian lottery". It means that you were born with better circumstances than the average person and as such had access to quality schools, quality tertiary education and quality opportunities because of your peers and their parents networks. How do you break that cycle for the many that are born into poverty and struggle even to enter the middle classes? Better education and improved skill sets is possibly the key to everything changing in South Africa. We desperately need the political will here.
Nooooooo (slow motion one), what is going on with Google? You saw right, the price halved, but that did not mean that your value halved. Simply, because two years after announcing that, the founders and essentially controllers of the business, Larry Page and Sergey Brin, would split the shares and control the company through their special voting rights B shares, the stock has finally split.
So what you need to know is that as a Google shareholder you now have double the shares and own share code GOOG and share code GOOGL, one each for the old GOOG. Essentially at the same price, the GOOG and GOOGL find themselves, there is something sneaky about that too. They essentially are class A shares, which have one-tenth of a voting right (GOOGL), class C shares which have NO voting rights. And then there are class B shares, which you and I cannot own. According to a WSJ article that I read, Brin and Page through these shares (each one has TEN voting rights) control the course of the company by essentially having 56 percent of the vote, because of their ownership of the B shares. If you are looking for the nitty gritty, goto the Fourth Amended and Restated Certificate of Incorporation of Google Inc. on their investor relations page, and then do a search for the word voting.
Complicated? Not really. Double the shares in issue at half the price means nothing for valuations, the two separate stocks will share the earnings. BHP Billiton with two different country share registers (UK and Australia) where the PLC and Limited shares trade separately have a far more complicated structure than this one. Take the earnings per share projections and simply slice it in half to represent what you would see in front of you now. It is that simple. And let us be very honest here. Who better to have control over the business here than the founders and managers?
The only issue from now on becomes, well, which one do you own from here? From a pricing point of view it makes no difference. The two stocks will trade within a whisker of one another. But I am guessing that if you intend voting your stock on some matter in the future, you must then own the Class A shares, the one with the ticker GOOGL. If you intend not ever voting (because essentially it does not matter now, Page and Brin control the company) then own the GOOG shares. Because the deals will be done using the GOOG shares, with no voting rights. In other words, they will have better liquidity and are more easily tradable over time.
But in order to get this stock split through, the company had to concede to some shareholders who had filed a class action lawsuit against the company in which they would compensate shareholders if there was a significant price difference between the A & C shares. I found a Yahoo finance article (Dissecting Google's unorthodox stock split): "a guarantee to compensate Class C shareholders if their nonvoting status causes the value of their stock to fall well below the Class A stock price during the first year of trading." It continues: "The settlement will require Google to pay Class C shareholders if the average trading price of their stock is at least 1 percent below the Class A shares through April 2, 2015." Perhaps another small reason to own the Class C share? Either way it does very little to sway one away from owning what we still consider a quality business. We continue to accumulate.
Lynx, I'm reading this, you should too
You will no doubt agree with me here, when you look at the data portion of your contract. How many people make as many calls as they used to? Not as many. Check it out via the BusinessInsider: We're Spending A Lot More Time Online Thanks To Smartphones And Tablets
I saw this tweet from Simon Dingle yesterday, it is an amazing info graphic of What happens in a single second online. Be sure to scroll down to the bottom. There are 4051 pictures posted to Facebook every single second. I was surprised to read that 1 edit is made to Wikipedia every second, I would have thought more initially. But then again, it takes effort and time to be able to edit. Nevertheless, Wiki is an amazing human achievement, with the broader community giving up their time for free to make sure that they all trend towards what is accepted as a truth.
When I saw this, I had a fat chuckle: Top broadband speeds in South Africa. See that Cell C’s LTE speeds are absolutely awful. So whilst trying to attract people to their network to call, the others, including Vodacom and MTN (and even Telkom Mobile) have speeds much quicker. And data? well seemingly that is growing at a breakneck speed. So Cell C and their call for less might be attracting a lot of attention, but the future is data. And their data offering is ... how should we say, right down with Neotel and iBurst.
Byron beats the streets
Today I am writing about a very interesting business called Monsanto who released results on Wednesday. Some of you may have heard of this business because it operates in a very controversial industry, generic seed manufacture. There is an ongoing debate about whether this is a good thing or not. Generically modified food scares people. Here is how the company describe their business from the latest annual report.
"Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Our seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.
We manage our business in two segments: Seeds and Genomics and Agricultural Productivity. We view our Seeds and Genomics segment as the driver for future growth for our company."
If you want more info go and explore their website Monsanto
Both the investment story and the environmental story are based on the following premise. Over the past decade 70% of the growing demand for food has been supplied by growth in acres farmed. This is of course unsustainable because land is finite. So are our jungles, forests, fresh water supply and nature reserves. Therefore to be able to keep supply up with demand, farmers need to grow the yield of their current land. That is where Monsanto comes in. They manufacture high-yielding conventional and biotech seeds; advanced traits and technologies that enable more nutritious and durable crops and safe and effective crop protecting solutions.
The business is very profitable. For the quarter, sales came in at $5.8bn which resulted in net income of $1.67bn. It is a massive business with a market cap of $61.5bn. That is bigger than Richemont, Naspers or MTN. Earnings for the full year are expected to come in at $5.24 per share. The stock trades at $117, 22 times forward. Not cheap but they are expected to grow earnings by 16.5% in 2015. As you can imagine earnings can be very unpredictable. Soybeans and Corn are their main products (top selling seeds), depending on the weather and all other things affecting crops, demand is volatile and dependant on many external factors.
As mentioned earlier, this technology is controversial. They have been adopted in the US and South America but it seems like Europe is not convinced. I chatted to a client of ours who is a farmer in the Natal Midlands and he said that commercial farmers have certainly adopted this kind of technology in South Africa. He said that over the last ten years his yield has increased over 50% because of better farming methods and technologies. This applies to the improvement of machinery, seeds, herbicides and technique.
Investment case. Populations are growing and so will the demand for food. Populations are also getting richer so demand per person will increase. Consumer patterns will also change as wealthier populations demand more meat. The feed for these animals will require high yielding crops. I would also see demand growing as farms in developing nations become more sophisticated, especially as subsistence farming shifts to commercial.
Environmental case. I strongly believe that it is fantastic for both the environment and for mankind. We still have hundreds of millions of people starving. Higher yields mean more supply and more importantly, cheaper prices. As far as the environment is concerned the biggest threat to every single endangered animal is habitat. If people are starving, protected reserves would have to make way for farmland. We have to increase the yields of our currently used arable land, especially in Africa. We are buyers of this stock at current levels. If you are on the other side of this argument please feel free to send me your side of the story.
Home again, home again, jiggety-jog. We are about flat here today. Which is not where we want the cricketers to be later on today. Phew. I guess that there have been so many people with their sports hearts shattered so many times before.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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