"Netflix are ramping up their international business aggressively, spending money, making a loss. Content is expensive and will get more expensive, the company will have to spend a whole lot of money on marketing. Expectations are however that once you own both the subscriber and the content, you are the king, Netflix is moving faster and muscling in on the older and more established businesses in the space more than almost anyone would have expected."
To market, to market to buy a fat pig. It could have been better here locally, it was not to be. Resources stocks, except Sasol which slumped along with the oil price, led the charge in a upward direction, again the stand out companies were the gold businesses. Company news on the local front after the retailers having reported sales updates is looking a little thin here. Luckily for us market junkies, there is the small matter of earnings season having started in the US. I wanted to point out a headline that I read, having retrieved a specific company news story via Google alerts in my inbox (try and recite that sentence in 1990 and imagine the reaction), only to point out the mistake that many people make: JSE flat as investors trade cautiously. Investing in my mind is something that requires careful analysis and patience. A trade is shorter dated, anywhere from seconds to months, to me that headline is wrong. Investors would not trade in and out on a single day, their objectives are different from traders, investors own companies whilst traders own share prices. Forgive me for being so precious.
I was asked another question, I am pretty sure that the chap won't mind if I regurgitate (no names!), it went like this: ... do you think gold might have some legs due to deflation and more quantative easing? With the question was an associated article, Gold shares 'a multi-generational opportunity', from our old pal Marc Ashton, who is over at Moneyweb. Not only does Marc write for Moneyweb and Mineweb, he is the chap who runs the place, a young chap in that sort of a position. Marc has the energy required for such a job, of that I have no doubt. Anyhow, Marc is writing the article in which Investec fund manager John Biccard believes that gold shares are the right investment for 2015. He is certainly right so far, the gold shares as a collective are up 34 percent this year so far, following a market out-performance last year (12.2 percent as is to a market that returned 7.6 percent).
As exciting as that sounds, trading in and out of a share price is not something that we do. My explanation to the question was to pull out the old Warren Buffett quotes on gold, why you should not own them at all as an investment, there are three separate quotes:
"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
"The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end."
"What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As 'bandwagon' investors join any party, they create their own truth - for a while."
If someone tells you that the gold price should do x or y or z, for historical reasons, well, that is about as good as looking at a graph. I am not bashing the metal as an investment, if it works for you, it works for you. The middle Buffett quote is the part where he says basically that one ounce will never pay you a dividend. Absolutely ever. Whilst I am writing this the gold price has topped 1300 Dollars per fine ounce for the first time since August last year, expect another day of gold stocks to be on fire(ball)!
Stocks eked out a gain towards the end of the session in the US last evening, after having started better and slipping mid session. Of course the biggest talking point throughout the day was the State of the Union address by Barack Obama, his penultimate one. He really is a top orator, he is not for everybody however. His proposals of taxing rich people more was met with heckling (after the speech) from the Republicans. I saw one rather interesting quote from "Tea Party member" Rand Paul which actually resonated with me: "I propose that we cut everyone's taxes, from the richest to the poorest, and we cut spending at the same time". Either I am getting old, or grumpy, or even worse, both! I get what he is trying to say, let people decide what they want to do with their money, less government, more personal choices. That does strike a chord with me.
Company corner snippets
Netflix, the company that you love and can't quite figure out at the same time. I remember reading a T-shirt that said "Beer will change the world, I don't know how, but it will". I found it on an old Twitter photo of mine - > I'm not sure either!, there you go. Netflix is the same, it has to some extent been responsible for chord cutting in the US, people choosing what they want to watch, when they want to watch it. Last evening we saw the Fourth-Quarter 2014 Financial Results from the company, 57 million subscribers in nearly 50 million countries. In the US there are now 39.11 million users, the rest are "international" users.
In their release: "It is increasingly clear that virtually all entertainment video will be Internet video in the future. We believe there is big growth ahead in the US market for Netflix, even if we may not get there in a straight line of 6 million annual net adds." In two years, as they point out (we made this point last week methinks) that they have had 45 Emmy, 10 Golden Globe and 2 Academy award nominations. House of Cards, Game of Thrones, Marco Polo, you would know these Netflix shows. Virunga I have seen advertised. That is all nice, original content, with more coming, what about the company making money though? Well. In their US business revenues for the fourth quarter of 917 million Dollars translated to 257 million Dollars. Their international business loses money. EPS for the quarter was 1.38 Dollars, 4.44 Dollars for the full year, more than double last year. The stock? Traded up 16 percent after-hours to an incredible and eye popping 404 Dollars. I guess you need not be a genius to work out that the market expects great things from this business, really great things.
They (Netflix) are ramping up their international business aggressively, spending money, making a loss. Content is expensive and will get more expensive, the company will have to spend a whole lot of money on marketing. Expectations are however that once you own both the subscriber and the content, you are the king, Netflix is moving faster and muscling in on the older and more established businesses in the space more than almost anyone would have expected. I am going to suggest that if you think that this trend will continue (which I do) then the company will do better and better. Accumulate cautiously over time, do not give yourself too much time however!!!
One of the very biggest Pharma companies on the planet reported earnings before the US market closed last evening, and also guided forward for the current year, Johnson & Johnson. Unfortunately the company has to as a result of being global, deal with a firmer US Dollar, which will shave as much as 4 billion Dollars off their revenue guidance this year. That is around the same amount, four percent in revenue lower, just as a result of the stronger Dollar. The faster and higher rated pharma business is also expected to face headwinds. Here are the results, read them through: Johnson & Johnson Reports 2014 Fourth-Quarter and Full-Year Results. You can see that their very biggest business segment is the US Pharma business, the second biggest segment is their international Medical Devices business. European growth as a whole was stodgy, growing only at 1.9 percent whilst Asia Pacific and Africa grew at only 0.4 percent. The US business was by far and away the biggest growth engine for this company.
Let us look at 2014 first, full year sales were up 4.2 percent to 74.3 billion Dollars, EPS clocked 5.70 Dollars (excluding special items it was 5.97 Dollars) with the quarterly dividend currently 70 cents, or 2.80 Dollars a year, a yield of 2.76 percent at current levels. 2015 looking ahead from the business was as follows: adjusted earnings guidance for full-year 2015 of $6.12 to $6.27 per share. Wow. So what now? The stock traded lower on the guidance being less than anticipated, down to 101.29 (2.64 percent lower) on the basis that the growth is not enough to justify their current 16 plus times valuation. At the top end of the guidance, 6.27 the multiple is still 16 times.
Why own this company? Is it not old and tired and very unexciting? Can you "do better"? All these businesses are looking for the next big therapy, last year JNJ spent 11.4 percent of group revenue on research and development. You have to trust that the brightest and smartest medical scientists on the planet are working on and rolling out cutting edge medical technologies, they certainly have the backing of capitalism, you the shareholder part with large sums of money in order to achieve this outcome. In fact just four days ago they announced that they were part of an NGO tasked with finding an Ebola vaccine. Money finds a way, we should be grateful that shareholders part annually with so much in order to advance medicine and make us healthier for longer.
That is one of the main reasons why you buy Johnson & Johnson. You buy them because there is an unbroken history of over 50 years (I think 52 this year) of higher dividends. Imagine that! Each and every single year, JNJ will pay you more and more. EPS growth is bound to be muted unless there is a second round excitement to some of the newer therapies, as well as of course a stronger looking consumer in Europe and Asia Pacific. The US will continue to be strong. Whilst this is not exactly a screaming buy, it is a quality business, a must own in the portfolio. It will continue to form one of the more important parts of our investments in the medical healthcare/pharma and devices sector. Buy on weakness.
Things we are reading, we think that you should read them too
Cattle numbers in the US are lower than it was in the 1980's - Cattle Inventory. It would seem that this is due to lower consumption numbers and higher beef prices - U.S. beef industry. Our assumption in the office was that people were switching from beef to something cheaper like chicken and pork, turns out that people in the US are just eating less meat all round - Per Capita Consumption of Poultry and Livestock, 1965 to Estimated 2015, in Pounds. The story I have been told is that higher population numbers and a bigger push to consume protein, leads to higher consumption numbers, so higher prices. If you look at the consumption numbers it drops off from 2008, people just didn't have as much money to buy meat anymore.
Amazon are pushing hard into the streaming business - Amazon Original Movies. Given Netflix's solid results so far (beating analysts estimates by 60% last night) this could be a major part of Amazon in the coming years.
QE is not something that we pay too much attention to around here, it has a short term impact on the market - What European QE Will Look Like, and What Happens if It Doesn't Work. This is a quick look at how the EU may implement it so you can sound intelligent at your next cocktail party.
Home again, home again, jiggety-jog. That Klaus Schwab is a genius. He is of course the founder of the World Economic Forum (WEF), all the networks can talk about is Davos each and every year. He invites people, gets different levels of memberships, holds the annual meeting in a very scenic (and cold) setting. Politicians, academics, NGO's join 100 odd billionaires and most importantly for Klaus/Davos and WEF there are reams of journalists. This is the pinnacle in financial journalism, getting a ticket (they are very limited) to such a prestigious event is worth talking about. It is like the ordinary fan being elevated to rub shoulders with all the finest sports folks and administrators in the world, if just only for five days and if just only for looking. For the wealthy? What does it mean? Hobnobbing and a chance to chat more on an informal basis with the rich and famous. Do I care that 1 percent of the world own 50 percent of the wealth? No. Taxing rich people will not help, governments and organisations spend money worse than individuals. Giving middle income people the needs and tools to get rich, i.e. less red tape (which means for the folks who set the laws, lower employment) and more freedom, that is how to narrow the gap, in my opinion.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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