My only other observation from the old (30 years plus) South African Monopoly board to the new one, is that Cape Town quite rightly has replaced Jozi as the prime property on the board. The other observation is that airports have supplanted railways as the means of transport. It is great for kids, it teaches them to transact and be patient, to own and that life is not always easy. In much the same way of course the equities market can be rewarding in the long run and equally frustrating in the short run. Your patience is always going to be tested. But what I would do to get my hands on an original board of Monopoly!!!
We were chatting about British American Tobacco on Wednesday, their size and scale, their shareholders and the South African portion, but we did not really touch on whether or not it is an investable company. Quite clearly on a four percent yield in Pound terms and little chance of interest rate hikes (aggressively at least) any time soon, the boxes that the company ticks from an investment point of view makes them quite compelling. Strong cash flows, aggressive share buy backs to boost earnings have all held their shareholders in good stead. Plus, if you own them here, in the face of a weakening Rand it has been a solid investment. In the last 12 months the stock is up 21.85 percent in Rand terms, but actually down 4.1 percent in Pound Sterling terms. The Pound to the Dollar touched a four year high earlier in the week, reflecting the strength of the UK economy. Some, including myself, might be very surprised by that.
There are however many reasons not to own any company in this industry. Rising litigation and associated costs from the companies are a real concern, although the consumers of the products are well advised of the health risks of using the product. OK, so that part is obvious. Companies selling the product (cigarettes) still have pricing power, but recent surveys in rich countries have produced a sharp negative corresponding price increase versus stick consumption. Stick consumption plummeted when consumers (and this was done in France) were faced with real price increases, their tendencies to smoke less appeared over a decade. However, and this could be a risk to the company, as people become richer their health patterns improve and the less they tend to smoke. Smoking is obviously bad for your health. In many emerging markets smoking is seen as a luxury.
And too much of it can kill you, not too dissimilar to eating too much bad food, that is equally bad for you. There is increasing awareness around food consumption and what is worse for you, fizzy drinks and the like. Governments rate viewing cigarettes and the industry as a soft target. But the regulators realise that there is a tipping point. But do you (if you were a regulator) try and kill the industry at the risk of losing the revenue and see a rise in the illicit cigarette trade? Or, do you try and save on the future obligations in healthcare spend by encouraging people to be more healthy? I suppose you can't nanny people, but the flip side of that argument is if you pay for their healthcare then you have a right to tell them what they can and can't consume. Is that fair? I think so.
These are all assumptions, the other assumption we often make as investors is that the past is somehow going to be somewhat similar to the future. You see that all the time, people comparing a period in history to now. For instance that 1929 chart to now. Back then there was no transatlantic flights, let alone seamless face to face communication anywhere in the world via a smartphone. No two times are the same, but pattern recognition and chart viewing has meant that we somehow draw a parallel in different times. Cash flows for BAT have been flat for four years. Volumes are in decline. It is a business that we will continue to avoid, too many headwinds in the coming years. I would go so far as to say that if you own it, this is about as good as it gets, but I have been saying that for a while. Avoid.
Michael's musings: The CERNERverse
As Sasha mentioned in early February we added Cerner to the stocks that we cover. They provide technology to the healthcare industry, the core of their business is moving as much information from paper to digital, with what they call Electronic Medical Records (EMR). Cerner's aim is "support evidence-based clinical decisions, prevent medical errors and empower patients in their care." Moving patient information to digital means that one set of records are kept for a patient that can then be accessed by the doctor treating them or the patient themselves.
Moving to digital is a win for everyone involved. For the doctors they have quick access to all the patients' data, meaning that they can make a more informed decision about what is wrong. For the patient, you want to know that the doctor has quick and easy access to all your medical records. The human body is very complex and the more data that is at the hand of the doctor the better. Then for hospitals this system gives them the ability to offer better products and be more efficient which will lead to cost saving.
On the Cerner webpage they say that 98 000 people die a year due to medical error. Some of these errors could be as trivial as bad doctor handwriting or giving medication that the patient is allergic to. That is a scary figure!
They only have a market cap of $17 billion on a PE of 43, so they are small and pricey but you are paying for the huge growth potential. Revenue for the quarter past was up 15%, their gross margins grew from 81.3% to 83.5%, with EPS growing 9.7%. For the next quarter revenue is expected to grow 11.7% - 17.3%, and more importantly EPS is expected to be up 14.9% - 17.9%.
As a patient (and most likely doctors) in a couple of years I will avoid hospitals that do not have an EMR system, and going forward healthcare treatment will be customised to your DNA which means having EMR is even more important. Given the huge growth potential in this sector, margin growth and the strong earnings growth this definitely a stock to have in your portfolio.
Home again, home again, jiggety-jog. Today is jobs day, it is that time of the month when everyone gets excited about the health of the US economy, because jobs of course is a proxy for that. Whilst exciting at the time and even you can predict what it is, the ISM numbers across Europe looked decent in the struggling economies. So that is good news. Jobs are very important and it is always much better to have one, than to not have one, right? Of course.
Sasha Naryshkine, Byron Lotter and Michael TreherneEmail usFollow Sasha, Byron and Michael on Twitter 011 022 5440
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