"The conclusion back then remains exactly the same, the enduring quality of the business remains. In fact for 128 years that they have been around (there were three brother that founded the business, not two), there have been only 7 CEO's, including the current chap, Alex Gorsky. Listed since 1944, 29 consecutive years of unbroken earnings increases and currently in the 52 year of unbroken higher dividend payments."
To market, to market to buy a fat pig. The markets ended the session here locally on a positive note, after having spent most of the day climbing after a negative start. Earnings from some of the big US banks were all pleasing, JP Morgan, Goldman Sachs both beat comfortably and their stocks rose. JNJ, which we will look at later was a beat, their stock slid however, we will have a look at the quality of the numbers. The action however was away from the markets, where Fed chair Janet Yellen made some observations in a biannual congressional testimony: "Valuation metrics in some sectors do appear substantially stretched–particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year."
You can read the full prepared comments, from the Fed website: Semiannual Monetary Policy Report to the Congress. It continues today, the hearing that is. If you are looking for the Q&A session, then read the WSJ who had running commentary: Live-Blog Recap, Janet Yellen. That unfortunately requires a username and password. You can follow two WSJ employees and their Twitter streams, that is for free. Check the tweets of Josh Zumbrun and Sudeep Reddy.
Just as an aside and something to think about deeply in terms of the direction that the developing world is moving in, Sudeep had a tweet further back that really resonated positively with me:
1 out of 3 workers globally is still in agriculture. In U.S. & U.K., it's 1 out of 50. #WSJ125 http://t.co/N4399CsO32 pic.twitter.com/2qCcPah2TW
— Sudeep Reddy (@Reddy) July 8, 2014
Back to the reaction to the Fed Chair and her prepared comments as well as the Q&A session sent markets lower. Now of course Janet Yellen is not an equities specialist, the off the wall The Real Fly said in a tweet that Janet Yellen is currently working on a newsletter called "social media is just a fad". Yellen owns stocks like Conoco Phillips and Pfizer, in conjunction with her husband, George Akerlof, who if you needed reminding is the recipient of a Nobel Prize in Economics for his work The Market for Lemons: Quality Uncertainty and the Market Mechanism.
The internet is so awesome that you can find the paper, even though it was first published in 1970, you are looking at the original there. According to the Wiki entry on Internet Al Gore invented it US classrooms had 3 percent internet coverage, by 2002 that number was 92 percent. Janet Yellen did not grow up with the internet, it happened later in her life. For many people in the developing world the internet exists, but they do not have access to it. By one measure only 39 percent of all of the world have internet access. There are many more people to join and enjoy access to the ever growing dynamic library.
To end off, our old pal Cullen Roche (who has written a book, I shall see if I can read it!) had a post titled Yellen: Stocks and Bonds Are Overvalued, in which he points out the obvious: Not to mention the fact that, despite being Fed Chief, Janet Yellen doesn't understand the concept of "value" relative to what is a proper "value", any better than anyone else pretending to do so.... Meaning that her and the Fed's guesses are about as good as the rest of the market.
It would be amiss of us not to talk about the Chinese GDP number for the second quarter released this morning, China is of course the second biggest economy on the planet, after the US. If you include the collective European Union (505 million people), China falls into third place on the ranking tables. As we learnt from the European financial crisis, Europe can and can't be a collective.
First things first, China is not finished. Everyone always talks about that a lot. There might be a large portion of the chattering classes that suggest the same, over and over again. I suspect that the Chinese officials are well aware that the country needs to move across in time to a consumer based economy. More consumer, less development. Although with more people in the cities now that should naturally happen. Many fear the explosive loan growth is an issue, I think in time it will be more measured, there is a natural progression here. Michael will cover these in detail tomorrow, that is right up his alley. What I find quite funny is that the price of London real estate, which also rises really quickly, that is just expected.
JNJ released their second quarter results before the market opened yesterday, here, take a look: Johnson & Johnson Reports 2014 Second-Quarter Results. Pretty significant numbers in some way, pretty insignificant in the bigger picture. First and foremost, why own a conglomerate inside of the health space, why not own separate businesses in the same space? JNJ is actually a fairly rare company as far as investments go, in my last look at the business, in May of 2014, a post titled Great diversified business, we described the business:
The difference between JNJ and their "peers" as it were is that they are probably not an out and out pharma company, neither are they a consumer business. Nor are they a devices and diagnostics business. They are all of those things. In fact, in the last annual report the sales breakdown is 39 percent pharma, 40 percent devices and diagnostics and the balance, 21 percent is their consumer division. The acquisition of the business Synthes, an orthopaedics business has boosted the sales of the devices division specifically.
The conclusion back then remains exactly the same, the enduring quality of the business remains. In fact for 128 years that they have been around (there were three brother that founded the business, not two), there have been only 7 CEO's, including the current chap, Alex Gorsky. Listed since 1944, 29 consecutive years of unbroken earnings increases and currently in the 52 year of unbroken higher dividend payments. That counts for a lot. In their description of themselves, the company suggests that they touch the lives of over one billion people a day. As such, you can see that almost everyone knows their brands and business.
Their devices and diagnostics business as a standalone is currently the biggest in the world. I say currently, because there is a fair amount of M&A in this space. Very exciting, joint replacements through to monitoring devices for diabetes and other chronic diseases. That business reported flat sales versus the prior year comparable quarter, mostly domestic factors in the US, that geography experienced a fall in sales.
The Pharma business, the 8th largest standalone of its kind on the planet had a solid quarter. This was also where the surprises came from, sales were 21.1 percent higher when measured against the prior years Q2. Domestically (the US) sales rocketed 36.6 percent. Why? Well, a chronic set of Hepatitis C drugs (OLYSIO and SOVRIAD) had a fabulous quarter, and has had a very decent first half. The second half is not expected to be repeated, not because everyone will be cured with this exceptionally expensive therapy, but rather as a result of Gilead having a therapy for Sovaldi. As Gilead point out on their website, 500 million people worldwide are living with chronic hepatitis B or C infection, making viral hepatitis many times more common than HIV.
Lastly their consumer division, not great, but increasing worldwide sales when compared to Q2 2013 up 3.6 percent, slice off 1.2 percent for currency translation. Internationally doing a lot better than in their home base, that is the beauty of it all, the global environment that we live in means many more customers have access to quality products. If you have scale, eventually the price for the consumer gets cheaper, reactively speaking.
The guidance for the full year was raised somewhat, $5.85 - $5.92 per share is what the company said. At the closing price last evening 103.28 that translates through to 17.5 times earnings. The yield, currently is 2.7 percent. Which is more than US treasuries, the ten year yields 2.54 percent, which is close to a 52 week low.
The company is not expensive and it is not cheap. The quality is not in doubt, that remains enduring. If JNJ increase their dividend by 6.5 percent each and every year, in ten years time you would have had a return of around 38 percent. And you would still own JNJ, who spends around 11.7 percent of annual revenue searching for the next blockbuster drug, therapy or product. We continue to buy what is the best quality healthcare business on the planet, in our opinion.
Michael's musings: Old Foes Unite
IBM and Apple are joining forces to get more Apple products into the business world, by developing simple business apps for iOS. IBM will offer purpose built apps and support technicians, which will reach IBMs vast customer base.
In 1984 Apple and IBM where at opposite ends of the computer market, where IBM was the entrenched player and Apple was the disruptive new kid. Here is the famous Apple ad 1984, where Apple paints IBM as a Big Brother type figure.
For Apple this is a very positive move as enterprises have not been a core focus of theirs, even though 1/3 of the iPads sold last years were for enterprises. Becoming engrained in the systems of businesses also helps so ensure repeat business because corporate customers are stickier than individuals.
This also has an impact on the smartphone wars, where it is estimated that next year 30% of smartphones sold will be used for enterprise use. So this is an important segment to get a foothold.
The advantage of using Apple is that compared to other product offering, all the hardware and software comes from one company. Your laptop, tablet and phone all are made by the same people and all talk the same language, making integration far easier for the user. This deal looks good for Apple, IBM and enterprise users.
Home again, home again, jiggety-jog. Markets are higher here at the start, the overall market is up 12.5 percent year to date. If you had slept for six and a half months and woken up you would have thought that very little had happened so far this year.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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