Money with a dash of Funny: January 2015

Friday 30 January 2015

Card is king

"The company has monster margins, remembering that their job is to process the payment, they are neither a bank or financial institution, they are a technology business that benefits from increased consumer payments. They have the payment networks and whilst Bitcoin and some other "unique" payment methods may be adopted by out there consumers, the internet shopping and ecommerce shift is a huge opportunity for them."

To market, to market to buy a fat pig. There was a period, like the Grand old Duke of York, when we were up (we were up!) and then we were down (we were down). There were also periods of being neither halfway up or down, in equities markets it is one or the other, I remember a day when the local market was around flat, that hardly ever happens. By the end of the local session we were off, pretty much across the board. There was of course the small matter of the new(ish) Reserve Bank Governor Lesetja Kganyago delivering the deliberations of the MPC. He is from the Eastern Cape, from a small town by the name of Alexandria. If I am not mistaken, that is the region where Woolies sources their long life milk. Those in the know will confirm that it is before Kenton-on-Sea, if you are coming from the Port Elizabeth side. When there is enough rain, it is certainly a beautiful part of the world. It is a great story, the rise through the ranks (for the SARB governor), a masters from the London School of Economics through to ultimately his appointment as chief of the bank last November. I have not seen a note with his signature yet, Michael pointed out yesterday, have you?

If you are interested in the deliberations and the statement of the MPC you can read them here -> MPC statement January 2015 final. Fuel prices retreating as a result of lower oil prices, thanks to technological advances. The near term inflation outlook has improved significantly. He mentioned load shedding. Shloading as I like to call it. The inflation outlook for this year has been revised sharply down, expected to average just 3.5 percent over the course of the year, when compared to a previous forecast of 5.3 percent. The lowest it is expected to get, with regards to internal calculations is 3.5 percent in the second quarter. As a result of their base being so low, an assumption that the oil price will recover and that the Rand will weaken, inflation next year is expected to be around 5.4 percent. Well, like all of us, all central bankers are data watchers and will act accordingly. Unlike being a whale watcher, this inflation and growth beast is less beautiful to look at, equally more frequent and sometimes nasty.

The Rand strengthened, perhaps the outlook for the domestic economy has improved over the last six months with lower petrol prices. That is good for everybody. Whilst the broader market is only up 2.3 percent for the year (not bad if you annualise that), retailers as a collective have been on fire, up 14.3 percent collectively. The Food retailers have also had a great time of it, the only other sector in double digits (and out of the blocks like crazy again this year) are the gold mining companies, up 29.1 percent as a collective. Well done, hurrah. Over the seas and far away, in what has really been a volatile month, the US markets closed comfortably in the green, the broader market S&P 500 nearly up a percent, ditto the nerds of NASDAQ, whilst blue chips, the Dow Jones Industrial Average added 1.3 percent. Energy was the only sector to end in the red.

Visa takes you places. It seems that it has taken you further as an investor in its not so long period as an investment, the company has only been listed since March 2008, March 18 to be precise, be sure to put that into your calendar as the day BEFORE my birthday, OK? Accepting all presents now, we are open. Just a refresher in terms of ownership structure, the Western European operation is a separate business under the same brand, principally owned by the member banks in that region. Since it listed back then, the company has returned an astonishing 285 percent to their shareholders, that is nothing short of remarkable.

Let us hammer straight into these numbers -> Visa Inc. Reports Fiscal First Quarter 2015 Net Income of $1.6 billion or $2.53 per Diluted Share and Announces a Four-for-One Stock Split. That just about says it all, the headline that is. Payments processed increased 10 percent to 17.6 billion inside of the three months, the company is capable of processing a lot more than that, around 56 000 transactions a second. That is a whole lot of swipes. They have that processing power for a reason. I can think that many governments and societies would want to be cash free, take the awful events at the Bedford centre yesterday for instance, no cash = no cash in transit heists. It would eliminate crime activities if there was a trail, it is a "no brainer".

As you also saw from the link to the investor relations page, the company will do a 4 for 1 split, meaning that the share price will adjust accordingly too. In other words, on the 19th of March (its my birthday!) you will see four times the number of shares, equally you would see the share price trading at 60 odd Dollars, factoring in an after hours bounce of 4.64 percent (at 259.5 Dollars) it is likely to be closer to 65 Dollars. The dividend, which was declared yesterday at 48 cents a quarter, will adjust to 12 cents a quarter, the earnings per share will simply be divided by four times more shares in issue. It is simple. Why do companies do share splits? As a member of the Dow Jones, which is a price weighted index (i.e. the bigger the share price, the more the influence over the index), it makes sense when your share price gets "too high" that you adjust. Equally for retail investors it makes sense. It is basically for more liquidity, although with average volume, around 2.37 million shares swapped hands daily, that does not seem like too much of a problem.

Share buybacks, why do companies do that? There is still an amount of 4.2 billion Dollars outstanding, the company bought back in the region of 5.6 million shares so far in the first four months of the fiscal year. Or around one percent of stock. If you are a committed holder of the shares of the business, this has a positive impact, provided that the company does not issue too many shares to their staff. Although, as a holder of the business, you want the staff to be incentivised. It is a tricky balancing act. In the transcript call (you have to sign up, it is free, I often point to these, it is worth it: Earnings Call Transcript) the company talks about the currency headwinds and in fact lower gas prices in the US shaved a little off. Lower gas prices = less money spent to fill up the same tank.

The company has monster margins, remembering that their job is to process the payment, they are neither a bank or financial institution, they are a technology business that benefits from increased consumer payments. They have the payment networks and whilst Bitcoin and some other "unique" payment methods may be adopted by out there consumers, the internet shopping and ecommerce shift is a huge opportunity for them. Apple pay for instance is where you store your credit card details. This is a great business, which trades at a premium to the market, for a reason. There are still many more growth prospects across all territories on the planet, if you are positive on the prospects for all economies, look no further than Visa as a firm buy.

Not enough! I want more, just like Oliver Twist. This is a cry for help from the readers of our daily newsletter, thanks to all those who tweeted in the affirmative, I need more votes though! This is in order to secure a semi final spot in Share Shootout. It is very simple, if you have a Twitter account, follow the link (via the image below) and then click on the retweet button. If you do not know what a retweet button looks like, then here -> . OK, help please! Follow the link via the image and then retweet.

Byron beats the streets

Last week we received fourth quarter and full year results from GE. I must say their investor presentations are great. I guess they have to be for such a complicated business with so many moving parts. Here is the presentation if you would like to have a look. Lots of images, graphs and tables to simplify things.

Sometimes GE's diversification is its curse. As you can imagine, oil and gas orders have declined yet their aviation business has shown solid growth. Both are a direct impact of movements in the oil price. Here is a table which illustrates all of GE's businesses and comparisons to Q4 of 2013.

As you can see GE capital is slowing. This has been done on purpose as they sell off segments of this business and become less reliant on banking activities. The company believes that more stable and predictable industrial business is far better for the company. GE capital was still responsible for 24% of profits in the quarter and 42% of profits for the year. Management want to get this down to one quarter of earnings in 2016.

For the full year the company made $16.7bn in operating earnings. This equated to $1.65 per share which was up 1% from the previous year and came from $148bn of sales (up 2%). The share trades at 14.5 times earnings and a solid yield of over 3%. The company is not growing very quickly but it's price correctly reflects that.

There certainly are positives to take out of the release. The order book is growing at 3% and the cost cutting they are doing has done wonders for margins (up 50bps for the quarter). GE is still very much a US company and the strong economy is expected help GE grow sales by 2-5% for the year of 2015. With strong cost cuts this should bode well for earnings growth. Expectations are for 6% growth in earnings per share to $1.73 for 2015. That is solidly above inflation in this low interest rate environment.

The business is moving in the right direction with more focus on aviation, medical devices, transport and their biggest segment, power and water. The power segment involves the supply of electrical power which actually benefits from lower oil and gas prices. As you can see from the table above, Oil and Gas contributed 10.3% to profits. Not tiny but the company will certainly be able to deal with a slow down in demand for drilling products.

The company has also been very active in the acquisition department. The much publicised $17bn Alstom deal is still awaiting competition approval from the European competition authorities. They are buying the French companies energy division which again targets power generation, a segment you would expect to constantly grow as populations get bigger and people get wealthier.

All in all the company is working very hard at managing the the things which they can control. Operationally and strategically I feel they are moving in the right direction. Unfortunately the demand for their many products remains volatile. I wouldn't call it a conviction buy but I'd be happy to hold and benefit from the solid yield.

Home again, home again, jiggety-jog. Stocks are up! Across the board. This is seemingly a good January, you must bear in mind that last year was pretty sloppy, stocks were up only 7.6 percent, we are up about 3 percent already this month. Go January!

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Thursday 29 January 2015

The Zucks Book

"Last evening Facebook reported results, you can view them, of course via their IR website which looks distinctly like Facebook itself -> Facebook Q4 and Full Year 2014 Earnings. There are some important metrics. Can we have a look at the quarter and year separately, mostly as a result of the company growing so quickly. Annual revenue grew by 58 percent from the prior year, operating income grew to 4.994 billion Dollars from 2.804 billion the year prior. Net income for the year nearly doubled to 2.94 billion Dollars, operating margins grew from 36 percent to 40 percent in 2013 to 2014. On a per share basis, excluding special items and stock compensation, EPS grew from 93 cents to 177 cents. The stock I guess is still steeply priced at (the after market price) of 74.85 Dollars on a 42 multiple. On a GAAP basis (nerds unite, we're moving to convergence), the company earned 110 cents, the multiple is a more eye popping 68 times."

To market, to market to buy a fat pig. A big day for the local equities markets yesterday, led by financials and industrials, the local market closed above the 51 thousand point mark. Guess who announces their outlook for the medium term today, no doubt revised against the backdrop of a vicious fall in oil prices? The MPC, our committee set up of 8 members of the central bank, the governor, three deputies and four other senior ranking officials. I thought it was seven, the SARB website distinctly says 8, in the members column there are only seven and that includes a vacant deputy governor spot. Anyone up for the job? Whilst last evening the FOMC had possibly the least interesting announcement in a while, this one is likely to highlight how cheaper energy costs is having a positive impact on the country. And by cheaper energy, I do not mean electricity, I mean the petrol that you stick in your car. It is a regular occurrence, you run out, you are stranded. Until this point in time we have not with any great deal of success changed that.

Over the seas and far away it was another day of heavy selling for the energy stocks specifically, down 3.6 percent as a collective. Yowsers, NYMEX WTI crude oil is at 44.51 Dollars as a I write this, Brent is at 48.63 Dollars a barrel. Not all oil is the same. Brent in fact is an acronym for the formation layers of the oil field in the North sea, being "Broom(oseBerg), Rannoch, Etive, Ness and Tarbert." WTI stand for West Texas Intermediate, it is actually lighter than Brent. Most of the major pipelines for oil converge in a tiny town in Oklahoma, a place called Cushing. It could have been gushing, not so? Don't stress, it all has to do with the different relative weights, the sulphur content and of course, where it comes from and the demand, that ultimately sets the price. To get yourself more into the subject (impress your friends, after this you will have none) then check out all the different grades via Wikipedia: List of crude oil products. Here locally we use a referenced price in Dubai, we should pay more attention there. Although the truth is that they all trade close enough to one another.

So why did the oil price fall in a heap and drag the rest of the US market lower with it? The clues (if you are a central bank statement sleuth, the modern day Sherlock or Poirot) are supposedly to be found in the Federal Open Market Committee release. Like every other watcher of these supposedly important data points, inflation, jobs, general improvements in the US economy, jobs and the list goes one, productivity, money supply and so on, the Fed will make up their minds when they are sure that they can start raising rates. The timing needs to be right, many armchair critics always blame the Fed for X or Y, Greenspan this, Helicopter Bernanke that, I always find it amusing that in the end it is all "fine".

I can understand that for many, fixed income markets are a whole lot more important than equities markets, in fact the outstanding US market issuance (according to sifma) is 38.4 trillion Dollars. Relative to their equities market, which is around 21.13 trillion Dollars, the bond market is far bigger and more important, for now of course. Treasuries account for 32.3 percent, mortgage related debt at 22.7 percent, corporate debt at 20.1 percent. There is more mortgage related debt in the US than corporate debt, does that make you feel better or worse?

Remembering that total US GDP is 17 trillion (that is each and every year), the measures can be used in any way, in other words whilst some people might say oh, the US equities market is 120 percent of GDP, let me panic, others might say, well Apple is the biggest stock and 65 percent of their sales are outside of the US, perhaps the old ratios are no longer as valid as they were in the past when the world was a little more isolated and countries more insular in their trade. The market is not the economy. To finish off, before we dive into matters of a company nature, the broader market S&P 500 lost over a percent and a third, the nerds of NASDAQ less than one percent whilst the blue chips measure, the Dow Jones lost 1.13 percent on the day, all in the last part of the session, post the Fed's release. All this against the rise of Apple, which added 5.94 percent on the session.

Byron asked why did the US sell off last evening, the Fed did very little, did they not? My explanation was simple. Fed says they will take their time, they might = stronger Dollar = weaker commodities prices = energy sector sell off = sentiment spreads to rest of market = broader sell off. Understood? He said it still doesn't make sense..

Facebook. Most people, even your grandmother, has heard of it. Do you not want to be friends with your grandmother on Facebook, what is that all about? The service works seamlessly in the background whilst many users of what has become a transformative and useful service are not too aware of the company dynamics. I mean that from a profitability point of view. Sure, you know that Mark Zuckerberg is crazy rich and just around 30 years old, you know his wife is Priscilla, they live in a fairly modest suburb considering his personal wealth. His dog, Beast, has many more likes (2,127,338 when I checked this morning) than your business or organisation is likely to have. Beast last posted on the first of January, before that in September, when it was bath time. The truth is, and Facebook confirms this, people are interested in people and their goings on, the conversation does not have to be Philosophy 301.

Last evening Facebook reported results, you can view them, of course via their IR website which looks distinctly like Facebook itself -> Facebook Q4 and Full Year 2014 Earnings. There are some important metrics. Can we have a look at the quarter and year separately, mostly as a result of the company growing so quickly. Annual revenue grew by 58 percent from the prior year, operating income grew to 4.994 billion Dollars from 2.804 billion the year prior. Net income for the year nearly doubled to 2.94 billion Dollars, operating margins grew from 36 percent to 40 percent in 2013 to 2014. On a per share basis, excluding special items and stock compensation, EPS grew from 93 cents to 177 cents. The stock I guess is still steeply priced at (the after market price) of 74.85 Dollars on a 42 multiple. On a GAAP basis (nerds unite, we're moving to convergence), the company earned 110 cents, the multiple is a more eye popping 68 times.

Number of users, that is important right? And I guess that the daily users, which as per the slide below, from the slide presentation represent 64 percent of average monthly users. Daily users are exactly that, daily users. They are pretty much across the globe too, well represented across all territories, as per the slide below:

Not all two customers are the same, different territories and societies adopt different methodologies either quicker or slower than one another.

There are more users in the faster growing and more populated Asia, on a per revenue basis however, the North Americans (US and Canada) absolutely smoke the rest of the world. The Facebook ARPU measurement is a pretty standard one, it is a monthly number. On that measure, the geography that we fall into Rest of World, registered a pathetic 94 US cents, per month. The US and in Canada, that is 9 Dollars per user per month. There is plenty more scope for growth here across all of their territories.

And then the number of users, as per the prepared comments from chief, number 1, Mark Zuckerberg: Facebook 4Q 2015 Earnings Call Transcript: "1.39 billion people now use Facebook each month and 890 million people daily, an increase of 165 million monthly actives and 133 million daily actives this year. Time spent per person per day across our services continued to rise, growing this quarter by more than 10% compared to last year and this doesn't even include WhatsApp, which joined us late last year. "

I think that point is well made. When we think Facebook, we do not thing Instagram and particularly not WhatsApp. And almost never Oculus, which certainly does have the opportunity to change the way that we do a lot of business. You can get all of your executives to stick a set of the glasses on and "meet" across the globe at a much lower cost in terms of time and resources. Cisco of course has great technology in terms of the virtual boardroom, I think that this application has many more uses, mostly entertainment.

The stock ended lower in the aftermarket, the jump in expenses is the problem. The headcount grew 45 percent last year. Wow. Research and development costs have jumped sharply, as have marketing and sales costs. These are concerns for short term watchers, however, if you have not been convinced, let me try convince you quickly. As Michael said across the desk, they are not concerned about building a business for the next quarter, they are building a business for the next decade and beyond. The IPO was a disaster, they said. Well, the stock has doubled in less than three years, the company would not think, looking back that having raised money at a higher price was a disaster, now would they? They would not monetize mobile, remember that? Well, the company reported last evening that mobile ad revenue was 69 percent of total ad revenue, fancy that!

Facebook is changing the world. There was a Deloitte report, titled Facebook's global economic impact, which "estimates that through these channels Facebook enabled 227 billion Dollars of economic impact and 4.5 million jobs globally in 2014." Of course for you, the investor or potential investor it matters that people start using advertising more aggressively. The nature of the beast is progressing, the Zuck said five years ago it was mostly text and photos. Nowadays it is photos, a little text and videos. In five years time we may get used to the idea of updating our life and uploading videos on the fly, provided the bandwidth costs are cheap.

Facebook is starting to morph into a company with different irons in the fire, Oculus is potentially an entertainment revolution, to sell that many could be a huge challenge. They, Facebook, have only owned Oculus for 10 months. Give them time. If you think the Zuck is really the man to continue to drive this business to new heights, it will continue to attract users, this business is ONLY 11 years old next week, 4 February. Mark Zuckerberg is young, exceptionally talented and a visionary. Like Facebook, stronger cashflows in the future, they have the potential to change the future. We continue to buy.

I need your help again sports lovers. This is a cry for help from the readers of our daily newsletter. In order to secure a semi final spot in Share Shootout, I need your votes. It is very simple, if you have a Twitter account, follow the link (via the image below) and then click on the retweet button. If you do not know what a retweet button looks like, then here it is -> . OK, help please! Follow the link via the image and then retweet.

Things we are reading, we think that you should read them too

New industries shake up the old and 3D printing will be the same - Technology and Finance: Drivers of a Profit Margin Explosion. The numbers here are all estimates and forecasts so lets see how accurate it is when we get to 2018.

From one disrupting technology to another, Uber is in South Africa and is causing waves already - Uber targets 'revolutionising' SA transport. Their forecast is that they will create 15000 jobs in the coming years and make transportation cheaper and easier. I can't say that I agree with the City of Cape Towns response to Uber.

Would you give your money to Keynes? Given the volatility of his returns most people wouldn't or even worse they would have pulled their money just before his purple patch - Would Keynes Have Been Fired as a Money Manager Today?. The tricky thing here is the question; are the low returns temporary or is my fund manager just weak?

Home again, home again, jiggety-jog. Markets are lower here to start with, fairly mixed across the board however. Food producers up, retailers up, we will see what the SARB says later, with regards to rates. I suspect a let us watch it for the time being, if inflation falls heavily towards the bottom end of the range, then we are likely to drop rates, for now, we are on hold.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Wednesday 28 January 2015

34 000 iPhones an hour...

"The highlights include higher gross margins, 39.9 percent, 65 percent sales outside of the US, most impressive was the fact that the company managed to sell 74.5 million iPhones (74.468 million to be precise) in a single quarter, a record. The results were littered with records like AB de Villiers and a Wanderers one day match, revenue for the quarter was 30 percent higher than the prior quarter at a whopping 74.6 billion Dollars, earnings of 18 billion Dollars. Basic earnings per share clocked 3.08, above 3 Dollars a share for the first time, a whole Dollar stronger than the same reporting period last year. Those are expected to be stronger (the impact) in the current quarter as hedges expire and the Dollar remains strong."

To market, to market to buy a fat pig. It was interesting to see the headlines against the backdrop of loads of snow in the Northwest of the US which suggested that the stronger Dollar was starting to weigh on some specific company results and their outlook specifically. So, the conundrum for the Federal reserve, if they raise rates, that would make the Dollar more appealing (in a search for yield) and as such be more of a drag for businesses reporting in the US. I just guess that you have to roll with the punches, you have to take the good with the bad, the Dollar used to be too weak, now it is too strong. People still buy "stuff", currencies do have an impact, you probably find higher taxation has a bigger impact in the long run.

3M reported numbers inline with estimates, they face currency headwinds in the coming year, nothing that a post-it can't paper over. Perhaps more likely a scotch guard, or a whole array of products actually, everything from boat care through to animal care. You might have had to put a "bucket" on your dogs head, that was more than likely made by 3M. Products that have a broad range of uses across multiple industries, healthcare to electronics, transportation to manufacturing. It is a monster global company, sales of 31 billion Dollars, run by a Swedish chap by the name of Inge Thulin, he is 60 years old and oversees operations in 200 countries globally, where around 89 thousand people are employed, it is truly a global giant. The share price has doubled in the last five years, the stock (for a steady as you go industrial company) looks a bit stretched at 23 times earnings.

That was the good, 3M, the bad and the ugly in the US markets were Caterpillar and Microsoft respectively, the companies share prices hammered. Guiding in the wrong direction. Microsoft sank 9.25 percent, I have been seeing reports for ages suggesting that the company is overvalued, it is still as we speak on a higher rating than Apple. In other words, the market is willing to pay more for the current earnings of Microsoft (future too) than they are willing to pay for Apple. A whole lot more on Apple in a second or two, their results were spectacular. Microsoft, that once off upgrade (new operating system) was a once off, sales slowing, they are certainly struggling, not too dissimilar to IBM. A much younger version of IBM. Earnings! My favourite season.

Caterpillar? Down over seven percent, lower energy prices are hurting their energy and transportation units, natural gas and oil businesses pulling back on capex. First it was the mining companies, which were more than offset by a surge in their energy business, now sadly oil and gas producers are pulling back. And a stronger Dollar, did we not mention that part?

How can everyone get their estimates on Apple so wrong? So very, very wrong. In a good way for the company that is, and by extension their shareholders. The company absolutely blew away any expectations that "the street" had for the last quarter, crushing it. Last evening Apple inc. presented their results for the quarter to end 27 December 2014, their first quarter of the current financial year. Check it out: Apple Reports Record First Quarter Results. This was the most successful three months of any company in corporate history.

The highlights include higher gross margins, 39.9 percent, 65 percent sales outside of the US, most impressive was the fact that the company managed to sell 74.5 million iPhones (74.468 million to be precise) in a single quarter, a record. The results were littered with records like AB de Villiers and a Wanderers one day match, revenue for the quarter was 30 percent higher than the prior quarter at a whopping 74.6 billion Dollars, earnings of 18 billion Dollars. Basic earnings per share clocked 3.08, above 3 Dollars a share for the first time, a whole Dollar stronger than the same reporting period last year. Those are expected to be stronger (the impact) in the current quarter as hedges expire and the Dollar remains strong.

Other highlights during the quarter were that the company shipped their one billionth iOS device, which happened to be a Space Gray (or Grey) 64 Gig iPhone 6 Plus. The company saved the iPhone for prosperity, how many other companies can you think of that have sold that many units? Bearing in mind that they are not cheap, the devices that is. The results would have been much better if there had not been, as the company put it, fierce foreign exchange volatility. Cash on hand? 178 billion Dollars and a sequential (from the prior quarter) of 22.7 billion Dollars. That amount is just mind blowing.

Let us match these results up against expectations, one of the very best known analysts covering the company, a fellow by the name of Gene Munster from a firm called Piper Jaffray expected the company to sell 65 million. He got it wrong by a whopping ten million and he is amongst the best. Why? I think that if you look at this graphic it is easy to see that the Chinese influence is the key here to the big jump, revenue up 157 percent when compared to the prior quarter, it is now their second biggest market and potentially, as soon as next quarter, the biggest. And...... Bearing in mind iPhone 6 only was released in October in China. Astonishing. For a detailed look at their sales by territory and absolute product sale, check out the Q1 2015 Unaudited Summary Data. Here is the last quarter only, revenue numbers are in millions, units in thousands:

As you can clearly see, it is not all about the base, it is all about the iPhone. Still. Inside of the new iOS, CEO Tim Cook on the conference call (sign up and read it for free -> Earnings Call Transcript) spoke of the positive impact of developers adding Healthkit to their apps. Apple could change the future of health with their technology. Obviously Apple Pay has been well received too, in total, thus far, 750 banks and credit unions have signed on, 200 thousand points of sale already. Just to remind you, you load the details on your phone, your fingerprint is the key as to authorisation. Reminder, in case you forgot, your fingerprint is unique. Apple watch? When is that coming, my eldest daughter wants one, I asked why? She said for being able to tap it and let me know she is there. April folks, April. That is definitely a growth product, from a zero base. It will be one to watch, that is for sure.

Where is the growth likely to come from? Well, good question, I am pretty sure that in the coming days folks will predict that this is as good as it gets. That always happens. A survey crowd called ChangeWave suggested that iPhone owners had a 97 percent satisfaction rating in the US. The other three percent obviously cannot use it and prefer a Nokia 3310. No, that last part is not true. Obviously the key here is to outsell all the other smart phones, the same said company, ChangeWave had more than 55 percent of people who intend to buy their phone are likely to buy an Apple iPhone.

Also, and this is pretty mind-blowing, there were more than half a billion physical and landing page (www.apple.com) visits inside of the last quarter. There are currently 447 store locations, only 182 outside of the US with 40 store openings expected by the middle of next year in China alone. 72 percent of global subscribers through 375 carriers sell phones, whilst there may not even be 1000 Apple stores, these companies account for 210 thousand point of sales. Where you can walk in and sign a contract, get a new phone, happy days!

The products are so good that the Mac is growing in the face of a slowing PC market. Having said that, Mac revenue for the quarter was "only" 6.9 billion Dollars. iPad sales fell, the excitement about the product remains, the renewal cycle is not that often. For instance, I have an iPad, the original, I feel no haste to renew, as it does everything that I want. For now. I am pretty sure that I might be pressed to get a newer smaller one, the light one which I will be able to read too, sorry Kindle. Makes me think ....

Guidance for the current quarter, post the hip-hip hurrah of the Christmas period is as follows: revenue between $52 billion and $55 billion, gross margin between 38.5 percent and 39.5 percent. That was marginally ahead of expectations too. The dividend will possibly get a review soon, in the coming months. We continue to hold and accumulate the stock, there will no doubt be a slew of reviews moving their 12 month target price higher and higher. At the moment the company, more importantly their product, looks unstoppable. The stock is up 5,74 percent pre market (after having been down 3.5 percent in the normal session), perhaps it is going even higher in the normal trading session. The stock is up 5.8 percent in Frankfurt, after having a poor day yesterday.

Sasol have just stuck out an announcement, something that I guess was to be expected a little. In response to lower oil prices, the decision with regards to give the final phase of the Louisiana investment, the gas to liquids plant (and not the Ethane cracker, that part IS going ahead) has been put on the back burner. David Constable said in the release: Albeit at a much slower pace, we will continue to progress the U.S. GTL facility. This will allow us to evaluate the possibility of phasing in the project in the most pragmatic and effective manner. The Sasol share price is up over two percent, even whilst the oil price is falling, this is quite possibly a response from the market suggesting that the dividend is going to be OK, for the time being. I guess it is not great news for global expansion, it is a reminder that their prospects in the medium term are determined by energy markets.

Things we are reading, we think that you should read them too

The thought of only having one card in my wallet is very appealing - This is Swyp, the latest card that wants to store all your other credit cards. This technology might be dead in the water before it even gets going due to people adopting payment systems like Apple pay.

Timing the market is very tricky and probably a fools errand - Video blog: How Keynes gave up on market timing. I would agree that you can't time the market, that is why we are "actively passive".

An interesting look at the margin expansion of US companies - Technology and Finance: Drivers of a Profit Margin Explosion

This is interesting -> Why Greece Won't Leave the Euro. It turns out that this might set a precedent and Germany certainly does not want that!

Home again, home again, jiggety-jog. Markets are up! Earnings were poor yesterday, that is OK, they are good today! There has actually been a whole host of production reports and exciting sales reports that we will have to deal with tomorrow unfortunately, we have run out of time today. That is the sad truth, we cannot cover it all in one day, that is what Twitter is for. We are well aware that our phones have been on the fritz, many apologies, you know how to contact us if needs be, our voIP provider has been very patchy with their "service".

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Tuesday 27 January 2015

Poor Problems

"An uncomfortable conversation for many people to have, poverty, specifically when we talk a lot about companies, their progress and profits most of the time. It is encouraging that we are making progress, by we, I refer to the royal we, humanity. If you are feeling down on yourself about the progress of the national football team, or the attacks on foreign shop owners in and around Joburg, then lift your spirits with the 2015 GATES ANNUAL LETTER. Their big bet segment suggests: "The lives of people in poor countries will improve faster in the next 15 years than at any other time in history. And their lives will improve more than anyone else's.""

To market, to market to buy a fat pig. Another good day for the equities market as a whole, it certainly was not the case across the board. Resource stocks took some pain, industrials were much better. In terms of on the box excitement, it was off to Athens to see what gives with the victors, what they are saying and most importantly, how they intend to pay back the money. We can leave that for another day, in solidarity for all things Greek I decided to have something close to a Greek lunch, there was however no three hour nap in the afternoon and definitely no mastika or tsikoudia! Help me out my Greek friends!

I have heard several folks talk about poverty in Eastern Europe and specifically in Greece, Portugal and Spain, from what I have read an income (still working in many cases) of 60 percent of the national median income. When you think of extreme poverty you do not think of Europe, it is all relative I guess. As standards of living rise, so do costs, one Dollar can buy a lot less in Germany than it can in say, Gabon. In some places, on a relative basis it is easier to be poor, for instance, in Portugal rather than in Spain, they are next door to one another. It is not unsurprising that the Nordic states, the Scandinavians have the lowest levels of poverty, the cradle to grave socialism seems to work really well. Smart and rich and educated with compassion seemingly all go together. Depending on where you are in society, you either think that the government should do more, or should do less, there is no one complete right answer, just the right answer for you. I think that the long and short of it, is notwithstanding the improvements in the developing world, it is still "better" to be poor in Europe, if there was a place to be poverty stricken.

An uncomfortable conversation for many people to have, poverty, specifically when we talk a lot about companies, their progress and profits most of the time. It is encouraging that we are making progress, by we, I refer to the royal we, humanity. If you are feeling down on yourself about the progress of the national football team, or the attacks on foreign shop owners in and around Joburg, then lift your spirits with the 2015 GATES ANNUAL LETTER. Their big bet segment suggests: "The lives of people in poor countries will improve faster in the next 15 years than at any other time in history. And their lives will improve more than anyone else's." Whilst Gates may have taken a sideswipe at Zuckerberg (of Facebook) for wanting everyone to have the internet, Bill and Melinda Gates are trying to solve the problems of the world in other ways, by being on the ground. In order to achieve their goals they had to be rich. They have to have the support of their rich friends, Buffett et al. Read it, you will feel a whole lot better.

And on that specific score of inequalities and what you can do as an investor, if you think about it, when you invest in a company and take ownership, you have an obligation to society. If for instance I choose to fund a company that is searching for a cure for cancer, that is better than for instance funding a company that makes tobacco products. I am just saying, you can choose where to allocate your capital, investing money should be no different. The ethics of investing are an area that I think is growing, in the direction of being more, rather than less. Bill Gates and his pals would not have gotten rich and then embarked on this project equally if the enablers were not in place. i.e. If Bill Gates had been born in the USSR under communism, could he have changed the landscape of desktop computing as we know it? The short answer is no, when you enable people and unleash the human spirit, it ends up being good for society. Whilst it is sad for folks potentially to be losing tens of thousands of jobs at IBM (see story below) the fact that 100 years ago the company only employed around 3 percent of their current workforce. I wonder how many people have worked at IBM over time? Millions. Without innovation and without the ability to innovate (too much intervention) Bill Gates would not have got rich and would not have been able to help society.

Drawn away a little from discussing the market, enablers and companies finding better destinations to invest are in our interests of course, let us wrap up and take a look. The local equities market as we said was good, the all share index topped 50 thousand for the first time in a while, in the US stocks rose ever so slightly, it was however blue chips that were the laggards. Meanwhile, if you have not noticed, there will definitely be lower volumes today as Snowmageddon/Snowpocalypse strikes the North East of North America. Polar air and all with a monster winter storm that is set to dump as much as 3 feet of snow, around one metre. Wow, that is a LOT of snow. Once in a lifetime? Surely not. I can see some friends who live in the region posting pictures to Facebook, hopefully their heating stays on for as long as possible. Talking of power, if you think we have problems here, I feel for Pakistan which had an 80 percent outage on Sunday.

Company corner snippets

Did you see the news that IBM (might be) will be laying off around 111000 people, in other words, one in five of their staffers are set to go. Most of it in the US. It begs the question however, if you cut your workforce by 20 percent, do you a) enjoy significantly higher productivity from your existing workforce to offset the drop in resources and b) the cost savings benefit of letting that many people go, offsets a drop in resources. i.e. it makes IBM more flexible. It is pretty astonishing that a company that large can chop that many people, the official line from the company is that they are not chopping that many people. The company denies it for now, we shall have to wait and see what transpires, it is hard to see a great company in a slump. It is another reminder that great companies can lose their mojo and that the landscape can change dramatically. Evolve or be eaten, the same applies to companies.

PPC stuck out a trading update that the market liked like a hole in the head. The stock sank to the lowest price since the middle of 2005, ending the day at 2220, down 6.29 percent. No really, the price was nearly lower in both 2011 and 2012, not this low however. This is the very worst price for the stock since back then. Why? What did the trading update (along with the results of the AGM and the election of directors) say? Here goes: "headline earnings per share for the six months ended 31 March 2015 is expected to be between 25% and 45% lower compared to the headline earnings as reported for the comparable period ended 31 March 2014, which translates to expected headline earnings of between 72 cents and 53 cents." The release fleshes it out a little more as to why earnings are expected to be that much lower: "the main contributors to the decline were a once off tax credit in the prior reporting year and an increase in finance costs in the current year." I guess the reason for the very wide range is that we are only in January and results themselves are expected to be released around 19 May this year, that is around four months away.

Things we are reading, we think that you should read them too

The disruptive power of the internet, has long had an impact on television - The future of TV is coming into focus, and looks pretty great.

This article highlights the power of the internet and how people make a way in spite of governments best efforts - CUBAN YOUTH BUILD SECRET COMPUTER NETWORK DESPITE WI-FI BAN

QE was the word of last week, here is one of our favourite market bloggers giving more insight into QE - INITIAL THOUGHTS ON EUROPEAN QE

Home again, home again, jiggety-jog. The follow through from a late surge on Wall Street saw us trend higher at the beginning, the Greeks have their new finance minister, looks like a well educated lefty, what do you expect. With the financial capital of the world being snowed under today, expect lighter than usual volumes. With a heavy fall of snow, of course.

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Monday 26 January 2015

Tzatziki tastes better than Austerity

"The questions to ask are simple. How much muscling room does this newly found confidence have for less austerity at the negotiating tables and more importantly, as Tsipras, the head of Syriza has said, basically we will see another renegotiation. Let us be fair here, the money that has been given to one is from another. Some might feel a really bad taste in their mouths coming back to the negotiating table"

To market, to market to buy a fat pig. Oh, there you go, the anti austerity crowd, a collection known as Syriza in Greece has won the election, by seemingly a much bigger margin than some anticipated. Not a clear majority, a deal has been struck with a small bunch of independents to give them enough to lead. Greeks are clearly tired of austerity. The IMF and other European countries have basically given the Greeks a long lifeline, the Troika owns 80 percent of Greek debt, which just happens to be 175 percent of GDP. As the WSJ points out however, the debt is long dated, the interest rates are low and payment options are kind. The problem for the creditors however is that Greek debt is not owned internally, check this WSJ article to see just how high it is, relative to the other nations in the region: Who Owns the Government Bonds the ECB Will Buy? Greece is a different case. Ireland and Portugal are pretty different too, from all of the other European nations.

The questions to ask are simple. How much muscling room does this newly found confidence have for less austerity at the negotiating tables and more importantly, as Tsipras, the head of Syriza has said, basically we will see another renegotiation. Let us be fair here, the money that has been given to one is from another. Some might feel a really bad taste in their mouths coming back to the negotiating table, if, as this WSJ article points out Greek Vote Sets Up New Europe Clash, if Greece cannot pay the ECB back in July and August (an amount of 7 billion Euros), that could trigger an exit. Maybe. There is a small matter of 4.3 billion Euros that is due in March. I suspect that nobody wants to leave the Eurozone, I can tell you that equally no person likes austerity imposed on them. It is always good for other people. The Germans are clear, continue along the path of structural reforms, perhaps we can negotiate. Again.

If it is true that one in four households in Greece are just above the poverty line, I guess that needs to be addressed too. Christine Lagarde's comments, three years ago now, about how she had more sympathy for poverty stricken people in Sub Saharan Africa than Greeks hit by the austerity crisis, in which she described Greeks as rampant tax dodgers, struck a nerve. I am sure that it is not all Greeks, however when the perception remains that not much has changed in that department, too many government workers, too easy a lifestyle funded by someone else, then a reality check is needed. Lazy is a powerful word, we use euphemisms, such as the Mediterranean lifestyle. It is probably not a coincidence that there is a slower way of life in warmer countries than there is in cooler countries, where you have to spend more time indoors. Anyhow, as I have said all along, the Greeks must do what the Greeks must do, there are consequences to everything. Greece has a poor history of paying their debts back, since the war of independence in 1821, the country has been in technical default 50 percent of the time.

I was thinking this morning, on what can be described as a morning run, does this change any plans of Stephen Saad, Bob van Dijk, Brian Joffe, Johann Rupert, Sifiso Dabengwa, Adrian Gore, David Constable and many more? No. Greece is small, the population is getting smaller, less over the last three years. 37 percent of the population have a tertiary education in Greece, the OECD average is 40.4 percent. In Germany, those with tertiary educations are just over one in four, around 26.9 percent of the population. That does not mean that Germans have fewer skills, they have different skills. My point about the CEO's of the companies that we own for our clients is worth making, the reaction from the market has actually been pretty muted. Perhaps the time for the Greeks to do what they have to and to deal with the consequences has arrived. We are not experts on the country, we have nearly no exposure to the country from an investment point of view either. If people want to sell assets if they are worried about contagion or something else, then so be it, Mario Draghi and his team are on a fixing mission as we speak.

Company corner snippets

Kumba Iron Ore stuck out a trading update on Friday afternoon, of course with sliding iron ore prices their earnings were always going to be much lower than the period before. The Rand of course has been somewhat of a cushion, for these numbers of course. For the first half, headline earnings were 16 percent lower to 6.5 billion Rand, for the full year they are anticipated to be 10.61 to 11.41 billion Rand, in other words 4.1 to 4.9 billion Rand, lower than the first half by quite some margin. Results for the full year are anticipated to be around the 10th of February, there was some brief respite in terms of the falling iron ore price, the price has trended lower (like most commodity prices), stabilising somewhat after five straight months of downward direction. We are more or less at the same commodity price on iron ore today than the middle of 2009. Remembering that the iron ore price was flat for nearly 30 years, from the early 1980's all the way through to 2003. It was then that something changed, the Chinese demand exploded. Governments (who then taxed more) did nothing, it was all the demand from a new customer, where their government changed everything.

Spar hit us with a voluntary announcement this morning, voluntary because it was small relative to their market capitalisation. Their business in Ireland wants to buy the trading business (I guess that does not mean the physical properties of course) of ADM Londis. As per their website: Londis is owned and run by locals, so every Londis is shaped by and for the local community it lives in. In other words, we're Local Like You. Sounds familiar, not so? Sounds like your local Spar. The business has annual sales of 200 million Euros across 200 stores, it will cost Spar 23 million Euros. Spar has a total turnover of nearly 55 billion Rands. 200 million Euros is around 2.6 billion Rand. You can see that this is not really a big deal, what it does represent however is the group and their tactics to spread their wings further afield. You would hardly say that Ireland sounds like a great destination, however Ireland is a gateway to the rest of the European continent, there are still cheap assets there and distressed sellers who are feeling beat up. Now could be the time to strike!

The fellows from Reinet have released a consolidated NAV table as at the end of the last year. 73 percent of the NAV is comprised of British American Tobacco, around 3.35 billion Euros back then. Phew, that is a lot of eggs in one basket, it is however getting smaller. Credit must be given to the team for having not sold the shares, the right thing to have done in the whole unbundling process was to have held British American Tobacco and Richemont separately, and NOT to have sunk your BATS shares into more Reinet. The best investment of those three companies over the last five years was Richemont by a country mile, second was BATS and last, but having doubled, was Reinet. I guess what matters in time will be how the folks investing at Reinet can sweat the rest of the portfolio, whether or not you feel that paying the management fees (the structure has a cost of 1 and 10, I think) is fair value, that is another question altogether.

Things we are reading, we think that you should read them too

The quickest way to learn 9 new stats is by looking over theses graphs - The nine most important economic charts of the week.

A look at how Apple is taking over the world - Chart: Demand for Apple's iPhone 6/6+ stays strong. It is scary to think how they are growing marketshare even though they control such a large part of it already. The more people that own an iPhone the more they will also be spending in the app store.

Some more awesome Apple info, just to wet your appetite ahead of their results tomorrow - This is the difference between Microsoft and Apple

Doing nothing is very hard for us in a modern society, both in investing and our general lives - Doing Nothing is a Decision

Home again, home again, jiggety-jog.We had a slow start this morning as the market digested the news from Greece. However things have turned around and we're seeing some solid buying. Not for the commodities however, gold and the diversified miners are taking a beating

Sasha Naryshkine, Byron Lotter and Michael Treherne

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Friday 23 January 2015

Aspen scores again

"The therapy (which sounds like a one trick druid from the Asterix series), is an anti-coagulant and compliments their recent acquisitions in this space. It is currently only available in Germany, Switzerland and Austria. Subject to approval from the German competitions authorities, they will fork out that fairly sizeable sum. The product is pretty small for now, having revenues of only 68 million Euros only."

To market, to market to buy a fat pig. Wow, up, up and away. Not as much here locally, that was due to a weakening Euro relative to the Rand, Dollar strength and that led to general emerging market strength. Flows in equal stronger currencies, that is not necessarily good for the dual listed businesses, even though they would have had a tailwind from their primary listed prices. Why did we get these on fire markets? As the message headline from yesterday suggested "il QE", it was our version of trying to make quantitative easing sound more European. Italian of course. Our Italian is sadly confined to eating Americanised Italian food, the original pizzas do not have cheese on them, they were made for poor people, flatbreads.

The whole idea of the ECB stimulus is not intended to avoid people from eating flatbreads again, rather to inspire confidence, to get the banks lending to businesses and consumers again. OK, so if you need to read the entire statement and the Q&A session, here goes: Introductory statement to the press conference (with Q&A). What you don't get when you read the Q&A is actually how funny the ECB president is, he is truly a genius not only in delivery, rather being able to go toe to toe with folks in English. Bearing in mind that many of the folks present have English as their second languages too. To get a very good idea of what the ECB are trying to achieve, here is an answer from ECB chief Mario Draghi:

This programme should increase the lending capacity of the banks. This programme, the national central banks, the ECB would buy bonds, and then banks will have this money, and this money can be used either to repay some liabilities, or it would be placed in our deposit facility, in which case they would have to pay a negative interest rate, so there is an incentive to lend to the private sector, stronger incentive than there was simply on collateralised borrowing as we used to do in the past, namely out of TLTROs. In this case, there is no limitation. The limitation, the three-year maturity that was present in the TLTROs, in this case isn't there.

As a result of negative interest rates in the Eurozone, banks can keep the money on deposit, they will however "lose" it if they do not lend the money out. At the end of the day too, Draghi is right, governments need to continue to reform. Which is why the Germans have been against this, part worried about the inflationary impact of this bond buying program, and in part worried about that the much needed reforms would not take place. Greece decides this weekend, we will see what transpires, no need to try and make any early predictions based on early polls. Alexis Tsipras, a former communist (yes, this is true) and rabble rouser could "win" the election with his lefty party Syriza.

By win, I mean get the most votes and then get the extra seats, the system is not too different to Italy. 250 seats up for grabs, you need at least 3 percent of the votes to get into parliament, the winner gets an extra 50 seats, that is the simple way of explaining Greek politics. In order to rule, you need at least 151 seats, there is nobody that would get there. I think what you must remember is that Syriza is a badly cobbled together coalition itself of the far left, a splinter group of the Communist party, workers party, active citizens and so on. It is very different when you are in power from being an opposition with one aim, to unseat the incumbents. It is very different to govern, you need to be more conservative and actually show leadership skills. Being a rabble rouser is all fine, being in charge is very different. Anyhow, Greece must make up their own mind.

The upshot for global markets was a positive spin, as you can imagine, this met and beat the expectations (if there is such a thing), the quantum of the program. Markets ended around one and a half percent higher, tech stocks surged even further, over a percent and three quarters higher on the day, it has been an excellent shortened week for stocks across the globe, including here. Of course there have been company results, companies at the end of the day are the most important factor in determining where share prices will go and by extension where the index will end up. Companies, their prospects and results, not central banks set the index price ultimately.

Company corner snippets

C'mon Harry, let us go some place warm, let's go to Aspen is what Lloyd said to his pal in that classic from 1994, Dumb and Dumber. OK, it is not a classic, it was exceptionally funny slapstick humour that I enjoyed. What has been a great investment and a wonderful company has been Aspen Pharmacare. Stephen Saad and Gus Attridge never sit still, they are the founders of this business. The company listed in 1999, there were 367 million shares in issue, the turnover was 522 million Rand. At last June, 15 years on, turnover was 29.5 billion Rands, number of shares in issue 455.9 million. OK, that aside, the company has bought numbers of businesses over the years, businesses from majors that they could sweat harder and "do better" than the big cumbersome majors. The company has announced this morning a transaction in which Aspen International will acquire the rights of a therapy called Mono-Embolex from Novartis, which as per the release is "an injectable anti-coagulant, for a consideration of US$142.3 million." At the ruling exchange rate, that amounts to 1.623 billion Rand.

The therapy (which sounds like a one trick druid from the Asterix series), is an anti-coagulant and compliments their recent acquisitions in this space. It is currently only available in Germany, Switzerland and Austria. Subject to approval from the German competitions authorities, they will fork out that fairly sizeable sum. The product is pretty small for now, having revenues of only 68 million Euros. So the therapy is small, if you require further reading material, be my guest, Wikipedia -> Certoparin sodium and this page -> Certoparin Sodium: Sodium salt of depolymerized heparin obtained by isoamyl nitrite degradation of heparin from pork intestinal mucosa. Pig stomach mucous, to manufacture anticoagulants, which treat blood clotting. That is the simplest way of explaining it. As Byron said from across the table, all you need to know is that the guys at Aspen know exactly what is going on. The stock is up on the news and is in fact, if it closes here, will be at an all time high.

AVI stuck out a trading update this morning. All divisions did pretty well, other than their smallest, the personal care division, as per the release: "revenue declined following the revision of trading terms with Coty". Sales for the six months to end December topped 6 billion Rand, an increase of 11.1 percent. Consolidated headline earnings per share is expected to show an increase of between 8 to 11 percent, 249 to 256 cents per share for the six months. AVI results are expected on the 9th of March. The stock is down over one and one quarter of a percent, relative to a market which is marginally higher.

Whoa, can you read the Anglo American Platinum trading statement? It actually was not posted on the Amplats website, believe it or not, it was nowhere online, only on the SENS service. The first part is pretty basic and self explanatory: headline earnings and headline earnings per share ("HEPS") for the period are likely to decrease to be between R650 million and R875 million and 250 cents and 335 cents per share respectively. The prior year it was 1.451 billion Rand, 556 cents per share. Basic EPS is "likely to increase to be between R495 million and R705 million and 190 cents and 270 cents per share respectively." The upshot of it all is that the stock is down 3.3 percent, not good. I am interested to see in the results (9 February) the further action taken with regards to the unprofitable mines to reflect the reality of lower platinum prices. Phew, we still continue to avoid single commodity stocks, the prospects still look patchy at best.

Byron beats the streets

Last night after hours we received earnings from Starbucks for their first quarter of the financial year. The numbers look good and the share price shot up 5% after hours. Lets look at the numbers.

Revenues increased by 13% but remember this now includes Starbucks Japan which was recently acquired. Global comparable sales increased 5%. Earnings per share increased 83% to $1.30 per share, this also includes Japan for the first time. Highlights for the quarter included, 9 million more customer transactions in the US over the comparable period; the opening of 512 new stores including the first Starbucks Reserve Roastery and Tasting Room (Sasha wrote about this last year); $1.6bn now loaded on Starbucks Cards; 1 in 7 Americans received a Starbucks gift card in Q1 (WOW!); 896 000 new Rewards members in the quarter.

As you can see, its been a busy quarter for a company that never sits still. In fact I was reminded of an Onion headline the other day which gave me a good chuckle. "New Starbucks Opens in Restroom of Existing Starbucks." I've hacked a table from the presentation which sums up the quarter. The decrease on Margins actually comes from the Japanese business. If you exclude that, margins in fact increased by 70 basis points.

From what I read and see in daily life, coffee is growing everywhere. Research has shown (in moderation of course) that it is actually good for you and it's allure as a gourmet product has spiralled it up the list for anyone who claims to be cool. Whats more exciting for Starbucks is that 70% of their sales come from the US. A recent study from Statista suggests that the US is still quite low on the list of coffee drinking nations. Global leading 20 coffee consuming countries in 2013 (average per capita cups per day). Which means there is still plenty room to grow in its country of origin. Other studies I have read suggest that within the US, minority groups are the fastest growing coffee consumers. Thats always a good sign.

The room for expansion outside the US is also huge. Paul said that the presence of Starbucks in China was huge. The brand is strong and the Chinese sure love strong brands (sorry for the generalisation).

Fundamentals? The stock is expensive, it always has been. Earnings expectations for the year are $3.17, trading at $86.26 we have forward earnings of 27 times. But these earnings are expected to grow by 24% in 2016 to $3.93. As far as PEG ratios are concerned, the market is right. We expect Starbucks to beat these lofty expectations and continue to add.

Things we are reading, we think that you should read them too

The one trick pony, Google, keeps adding small but new revenue streams - Google allegedly close to launching its own wireless service using Sprint and T-Mobile. The long term goal here I think is to control the infrastructure linking everyone and everything.

This article highlights how quickly the world changes and by extension how companies have the opportunity to grow (or die if they don't adapt) - 3 ways to fix our broken training system. 65 percent of today's school kids will end up doing jobs that haven't even been invented yet.

Looking at ways of being more efficient and helping feed more people - The Drought Fighter

Home again, home again, jiggety-jog. Markets were higher, now they are lower. Gold, platinum and resource stocks are lower on the whole, the copper price is lower. It is still wall to wall coverage of Davos, I am paying attention to who is there and what is going on, I am not too sure that it is relevant for our business. It is fun however to see journalists from Sandton interviewing business leaders from Sandton in the Snow, what did that all cost? Talking of that, one of my favourite market presenters, Nozipho Mbanjwa asked Telkom CEO, Sipho Maseko why he had to be there, at Davos. He replied that Telkom were always looking for partners, business partners. The last time I remember Telkom talking to someone else, government as the main shareholder rebuffed the advances from a South Korean business, KT Corp. I guess the Davos experience still means that face to face is still the way, millennials must have been absent, they prefer to "hang out".

Sasha Naryshkine, Byron Lotter and Michael Treherne

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