"The divergence in the respective share prices, the New York ADR and the Paris listed one are remarkable, from the middle of May onwards this year. That has everything to do with the markedly weaker Euro to the Dollar. The L'Oreal ADR in New York is down 10 percent more than the listed entity in Paris since then! Obviously the Dollar strengthening has not been good for the ADR share price, that makes complete sense. More Americans in Paris I guess this year for Christmas than the other way around."
To market, to market to buy a fat pig. A ramp up at the end, driven largely by resource stocks again, in particular AngloGold Ashanti, which surged 11.6 percent against the backdrop of better results, improved efficiencies. Not everyone was as comfortable with their (AngloGold Ashanti) language, the stock was flying however in New York, up over 22 percent! Wow. Even though there has been this amazing move, the ADR price is still down over 13 percent YTD. Wow, heroics mean little when shareholders have been suffering for an absolute age.
Traffic was nightmarish this morning in and around Sandton and Rosebank, sadly all the traffic lights were not working. City Power had an unfortunate tweet in the middle of the night that enraged a few people: "Power will be restored sometime tonight." I guess we take electricity for granted. My only observation is that when other options become more economically viable, people will take them and go off the grid both at a residential and commercial level. It really needs to make economic sense, in other words, once you have exhausted all of your current options. Your stove, your geyser, a pool pump and kettle chew power, start with those things first. People find solutions to people problems and will eventually decide, that is the way of the world.
Check this article out, from one of my favourite sources: It's the greatest achievement in human history, and one you probably never heard about. Capitalism. I read somewhere that Liberia has been an independent state and has never been colonised, at any point in their history. Both the USA and Canada were once colonies, how came they are different to Liberia? Democracy and capitalism work very closely together, of that there is no doubt. The richer the country, the better the democracy and vice versa. Think North and South Korea. Crazy dumb and progress, the one countries citizens worries about what they are going to eat next, the other countries citizens worry where they are going to eat out for dinner.
Results from L'Oreal yesterday, for their third quarter to end September, the biggest company of their kind on the planet. According to their annual report from 2013, in sales from 2013, this is the spread: L'Oreal: 28.88 billion Dollars, Unilever: 20.70 billion Dollars, Procter & Gamble: 20.08 billion Dollars, Estee Lauder: 9.98 billion and in fifth place, Shiseido: 8.38 billion Dollars. Earlier this year Shiseido sold two brands, Carita as well as Decleor (excuse me for leaving off accents here) to L'Oreal. Smaller in the bigger picture, sizeable nonetheless.
Just a reminder, if you needed one, the major shareholder is the Bettencourt Meyers family, the relatives of founder Eugene Schueller. It is well known that Schueller, a French chemist (as you can see from the surname of German stock), funded a fascist party in France. The party was a Nazi sympathiser, we all know what that means. Schueller had one daughter, Liliane, who inherited the family business when her father died in 1957. Liliane's husband, Andre Bettencourt, was also a member of the same said political party, La Cagoule. Andre was a member of the French government, a cabinet minister. Together they had only one daughter, Francoise, (please don't crucify me for the lack of accents, a publishing nightmare), who is a board member currently.
Francoise is married to Jean-Pierre Meyers, who is also a board member, along with their son Jean-Victor Meyers. Now lean in closely, this is where it gets interesting. Jean-Pierre Meyers's grandparents were killed at Auschwitz, his grandfather was a Rabbi. So the granddaughter of a Nazi sympathiser married the grandson of a Rabbi killed at Auschwitz. Francoise Bettencourt-Meyers is published on Jewish-Christian relations, I guess the story shows that love does really conquer all.
Why is all of this important, the family history? It is important to know who currently controls the company. Which (the shareholding structure) is not as easy to find as you might think. I do know that there are, as of July 2014, 48.5 million less shares in issue. The company bought back the shares from Nestle, long time shareholder at 124.48 Euros a share. Current price as of last evening close in Paris was 124.10 Dollars. The unofficial ADR program (5 for 1) closed at 30.05 Dollars last evening, down four and one quarter of a percent. More on that in a moment.
So, the shareholding after the company had bought some of the Nestle shares has been reduced to 560 million shares in total. At 124 Euros that equals a market cap of 69.32 billion Euro, at the current exchange rate of around 1.25 = 86.81 billion Dollars, this is a sizeable company. Here is the breakdown, Tethys SA is Liliane Bettencourt (the courts in France have declared that her daughter has power of attorney), Francoise votes on her own, and Nestle has the reduced stake (recall the story Byron wrote in February -> Nestle make their intentions clear). See here below:
Nestle will of course vote with the family, together as you can see, they now control 56.6 percent of the company, the Bettencourt Meyers family have one third.
Were the numbers that bad to warrant a four and one quarter of a percent sell off? Perhaps they were, it was certainly a miss, from the perspective of sales. And as this is only an update: Sales: 16.56 billion euros. Gains, very marginal gains though. Here is the table of sales:
These are undoubtably disappointing numbers, there are no two ways about it. I noticed in their annual report that both Argentina and Brazil were big markets of theirs in hair products. I am sure that with many emerging markets, the current pressures are telling on imported products. Just as an aside, Brazil is one of the only territories (as a result of wonderful diversity) that in their hair products all 8 types of hair exists. 8 types? For a more in depth look at their skin and hair types around the world, follow the link.
What to do now? Nothing, in fact I think that this is a massive opportunity. The divergence in the respective share prices, the New York ADR and the Paris listed one are remarkable, from the middle of May onwards this year. That has everything to do with the markedly weaker Euro to the Dollar. The L'Oreal ADR in New York is down 10 percent more than the listed entity in Paris since then! Obviously the Dollar strengthening has not been good for the ADR share price, that makes complete sense. More Americans in Paris I guess this year for Christmas than the other way around.
Stay long, be patient. The company expects quicker sales in the coming quarter. They are still beautifully placed to maintain and take market share in what is an incredibly exciting space. Buy!
Michael's musings: Check me, check you
Last week Luxottica released their 3Q results. You will remember that the company has been in a bit of turmoil lately with the ex-CEO, failing out with the founder and Chairman Leonardo Del Vecchio. Since then Del Vecchio took over executive roles until he recently appointed co-CEOs. Due to the "management crisis" so to speak the stock dropped around 10% at the start of October, it has recovered most of that lost ground over the last week though.
The results for the 3Q or the first 9 months have been strong with sales up 6.8%, margins grew by 70bps to 16.6% and operating income up 16.1% compared to the same period last year. Due to the increased sales and margins the company produced record free cash flow of 316 million Euros, which they used to pay down their debt. Their debt at the end of the last quarter was 1,429 billion Euros which they have reduced to 1,119 billion for this quarter, at that rate they will have no debt next year this time. I can't see any mention of what they plan to do with all the free cash once the debt is paid off but if I were to guess, stock buy-backs and further investment to grow their optical category.
Here is a breakdown of sales in the different regions:
Starting with the disappointing European number, the reason given was that there was not as much sun out this year as there was last year. Emerging markets had a very solid quarter with Del Vecchio having the following to say, "Luxottica also continued to grow stronger in
emerging markets, reporting increases in sales of more than 30% in China, Brazil, India and the Middle East."
This a company that combines the luxury goods theme through all the brands that they sell and the healthcare theme through their optical division. The stock is not cheap at a PE of 33 but the valuation is for good reason. The company has a growing consumer base, growing margins and big cashflows. Buy
Home again, home again, jiggety-jog. The European commission have slashed their outlook for the broader Eurozone, both for this year and next year. Oh dear. I guess that was coming, inflation is set to be really low there too, perhaps not too much of a "problem". Stocks are lower here. US futures are also marginally lower.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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