"The question that I hear asked often, what is it that Tesla does that someone else can't do better? Or cheaper? The answer lies in other consumer products. You can buy one kind of smartphone, if money were no object you would certainly buy the BEST one. Ditto with Tesla, they are not the cheapest, they certainly (like another technology company I know well), make beautiful products. Are they the best? Time will tell but as expected, Musk certainly thinks so."
To market, to market to buy a fat pig. Things change, sometimes quickly and sometimes slowly. Byron used the example of men losing their hair. One day they look into the mirror and say, is that really me? Where did all the follicular activity go? If you think about the changes in your life time, even if you are twenty, there have been many. As someone who is 60-70 there is more of a reference point in terms of all the amazing technological innovations that have and still will take place in your life. The advent of the 24 hour news channel, videos and global distribution, the internet, the personal computer and more recently smartphone technology leaps. All these innovations contribute to make us more productive in our jobs and save time, freeing them up for us to do the things that we suspect as important to us. I would love you to think deeply about the things that you cannot do without, and the changes that you have seen in your life that made you better, as a person and as a worker bee.
For me, electricity is a necessity. As a young kid we lived in places where there were wood burning stoves, paraffin fridges and paraffin lamps at night, I did not imagine I was missing anything. As you can imagine, you can't miss what you do not know. A mode of transport, at a cheap cost is something that middle income people cannot live without. Ever. A fridge is pretty cool too, the icebox became a thing of the past.
The internet and technology is nothing short of amazing. Think of how this message would have reached you 20 years ago, by letter. And perhaps only once a quarter, which is still unfortunately the traditional way of the industry here in South Africa. Those of you who still own unit trusts (you should cash that in and send the money here), how often do you ever hear from those people, relative to what they charge you? Not often, yet we are conditioned to believe that is the way it must be. I believe that the future of education and unlocking the human spirit is deep in the internet, Facebook and Google are doing great work here.
The future is unknown. To make bold predictions and be right is either luck, good guessing, great insight or a combination of all of those things. Even five years is a long, long time. I have no idea what the oil price will be in five years from now, I know that the combustion engine has hardly changed since the early design, what I do know is that people like Elon Musk are trying to change the way that you see this conventional transport method. Musk is also trying to take people off the grid, ironically we all thought that by being connected we were more powerful. As we know as long suffering "load shedded people", this is not the case. More on Tesla numbers later.
So, I want to hear from you. We can publish your comments on an anonymous basis, or call you by your initials, or just by your first name. Let us all know what it is that you cannot do without, what you think are the biggest technological changes in your life and most importantly, what you think will happen in the coming five years. What amazing hardware do you think there will be, the speed at which android technology is moving I would not be surprised to see multiple robotic advancements, human looking robots doing either dangerous or menial jobs. Stay alert, stay ahead and make sure that you stay ahead of the pack, a robot or process is looking to take our jobs!!!
Philosophy lesson over. What has moved really quickly and has taken the market by storm is the oil price, which is now trading close to the highs of the year. That (the oil price) has moved rapidly from a few months ago when people were suggesting a whole scale bond default of oil secondary producers. What has happened is that the prospects of deflation have evaporated and now the speed of the oil price recovery has meant that some folks are talking about inflation. And of course the Fed having to act quicker on rates. Personally, and you know our view, if you spend too much time worrying about what the Fed is going to do next, that is possibly too much energy expended on a subject that you have no power to change. Focus on what you can, keep it simple. Save more, spend enough of your hard earned wages in order to enjoy the one thing that is unique to you, your life. Save more, I am kidding, eat old bread and drink bad tea, always be saving!
Markets in New York sold off overnight, there was a weaker than anticipated ADP employment report, which points to a rocky recovery after a dull first quarter in the US. You get the sense that just as the European recovery is starting to take hold (even though the Greek bailout flops around like a rag doll), the stronger Dollar is impacting the US economy negatively. Consumers have also been stung by the period of "great pity" as one client calls it, thanks to the 2008 washout and subsequent job losses in the middle classes. Of course asset prices, which have risen, means that people have done better with their asset base, if not with their earnings potential.
At the end of the session, the broader market S&P 500 closed down 0.45 percent, the nerds of NASDAQ lost 0.4 percent and the Dow Jones Industrial Average shed 0.48 percent. At the worst stage, around 2 hours before the market closed, stocks were off as much as a percent. On the local front we saw a sell off through the day, it intensified as the ADP numbers filtered through. At the end of the session the local market had shed 1.33 percent, resources the laggards, down over one and a half percent.
Company corner
BHP Billiton shareholders have overwhelmingly supported the demerger and the creation of South32 by default. Via the IR page: Shareholder support for demerger of South32 by BHP Billiton. Shareholders voted 98.05 percent in favour of the deal. When is this going to happen then? Very, very soon. 18 May soon, which is not next Monday, rather the Monday thereafter. Yesterday was also the BHP Billiton General Meeting, chair Jac Nasser was speaking from Perth, here are a few extracts:
"There are very few companies that have prospered for over 100 years. By repeatedly reshaping itself, your company has evolved to become one of the world's largest companies and a leader in resources. We know you expect BHP Billiton to be strong and resilient; a company that delivers sustainable long-term value through economic and commodity cycles."
And then about the demerger, and what it means for the BHP we know:
"The demerger of South32 simplifies BHP Billiton's portfolio, while retaining the benefits of scale and diversification. We have 41 assets today, which would be reduced to a core portfolio of 19. The demerger enables us to focus on our petroleum, copper, iron ore, coal and potash assets, which together generated 96 per cent of the Group's Underlying Earnings Before Interest and Tax in the 2014 financial year. Our large, long life assets have delivered strong growth for shareholders over the last ten years."
South32 will be a company with multiple assets and not really that profitable when compared to the old big daddy, not that the new team, led by Graham Kerr cannot change that. Old time South African mining personality, Keith Rumble, who used to run Impala Platinum for a period of five years plus, was present in London. For South32, being able to focus on assets that previously were non core does give Kerr more flexibility. These assets ARE the core of South32, they will see them as such, not like an older head office. They are everything to the new team, we wish them well. There you go, in a couple of weeks time, you will get 1 South32 share for each 1 BHP Billiton share that you held on the 15th of May, close of business. That is the last day to trade. We will revert with a little more, post the demerger and "what to do" regarding the new shares.
Tesla released results last evening. Elon Musk is amazing, his energy is electric and contagious. His simplicity of explaining what is essentially a very complex product is the hallmark of a great businessman and can-doer. There are many people that would have approached the projects of space travel and make it cheaper (much cheaper), electric vehicles and better technology with very different methods. If at all. Yet he finds the time to immerse himself into these projects for the betterment of humanity, at the expense of his personal life. Sadly. I guess that is somehow how life works, the best and amazing people in terms of their business lives aren't as successful in their personal lives. Whatever makes you happy, I am all for it, pity nobody, be generous.
Back to Tesla, the company that is run by the modern day Iron Man and the company that is trying to change the world one invention at a time. Read through the Tesla Motors - First Quarter 2015 Shareholder Letter. If you want to see the earnings transcript, sign up at SeekingAlpha and then read it. Tesla Motors (TSLA) Elon Reeve Musk on Q1 2015 Results - Earnings Call Transcript. I learnt that Musk's second name is Reeve, that is what I learned today.
I also learned that the Powerwall and Powerpack units (the new batteries) are sold out until the middle of next year, in the one week that they have been available. Musk said: "So, it's like crazy off the hook. Yeah. And it seems to have gone super viral." The Gigafactory is key to the rolling out of the battery product en masse. The question that I hear asked often, what is it that Tesla does that someone else can't do better? Or cheaper? The answer lies in other consumer products. You can buy one kind of smartphone, if money were no object you would certainly buy the BEST one. Ditto with Tesla, they are not the cheapest, they certainly (like another technology company I know well), make beautiful products. Are they the best? Time will tell but as expected, Musk certainly thinks so.
How do you value this company? After all, they sell only around 11-12 thousand vehicles a quarter. That is nothing in the bigger picture. They spend an enormous amount of money on R&D, the company makes a loss. Revenues for the whole quarter a little above 1.1 billion Rand. That means for a company that sells in the region of five billion Dollars worth of cars a year, with a market capitalisation of 29 billion Dollars, big things are being expected. All the other manufacturers have price to sales ratios (total value to total sales) of between 0.5 and 1 times, from Toyota to Daimler. In fact for the less luxury manufacturers, the ratio of closer to 0.5 times. In Tesla's case this ratio is 9.2 times. In other words, it is overpriced on that metric of a factor of 18-19 times. They do have better gross margins, Tesla that is. Daimler also has revenues of 145 billion Dollars, there is size and scale there. I am pretty sure that Tesla does not want to churn out millions of cars, it would be *nice*, I get the sense is to focus on the quality of the vehicle.
The company is NOT going to be profitable any time soon. As a shareholder the ride is going to be wild, it could be very bitter if the execution is wrong. The metrics, in terms of valuations look out there and too much to pay. It is a disruptor. We could be on the cusp of the next energy revolution, not too dissimilar to when nuclear technology took hold. Ironically it is off the grid, away from reliance on utilities and more onus is passed on to the individuals. The more rich people you get, the more demand there will be for the product. The more conscious people get of their surroundings, the more the economics are less likely to form part of the equation. This investment is NOT for the investor who prefers steady and predictable, this investment is a big bet that the future of battery and transportation is changing rapidly, and these guys are at the forefront. You are going to have to be VERY patient along the way, for the time being momentum is definitely with Elon Musk and his company, expect a few broker upgrades in the coming days.
Holy smokes, what has happened to the Aspen share price? Well, a lot actually and unless you were short the shares I am afraid that it has not gone in the right direction for you. We have been a little puzzled, there are three explanations and it is possibly a combination of these things. First and foremost, Glaxo have sold shares and have indicated that they are possibly exiting out the business in time. It has been a good relationship of injecting assets, on Glaxo's part, in return for greater ownership of Aspen. Relative in size and scale it was a lot more significant in the life of Aspen than Glaxo. The relationship between the two however went back some .... excuse my use of street language! With Glaxo exiting, there is a likelihood that the market would anticipate another bout of share price weakness and perhaps even another discounted placement. There is a connection between the cash flow needs of Glaxo (results yesterday) and them possibly exiting the remainder of Aspen pronto. Take every cent you need, in this case it is negative for the Aspen share price.
Secondly there is always the possibility of a large deal in the works. The management of Aspen have always indicated that if the right deal presented itself, they would ALWAYS be up for it. Using ever increasingly expensive scrip to pay for deals is something that shareholders have been on board with. It has worked in the past, the company does not close deals for the sake of it. That has been proven over time. In fact, back in the day the company passed over deals as they did not make sense. Obviously if there was the sense that something was happening, from a deal point of view, the company is obliged to let the market know. That has not happened yet. It is always a possibility.
Lastly, the stock is not cheap, the stock has never looked cheap for that matter. That is simply another argument to use. I suspect that whilst this is the case, this is a business that you must own. It is relatively small by global standards, yet the chaps in charge have global aspirations. They are more than a safe set of hands that will continue to create value for themselves and their shareholders. The best is still to come. I am very happy to recommend the company as a strong buy at these levels, if you are underrepresented in your portfolio, or have none at all, get them now.
Things that we are reading
More on Munger and Buffett, there will be lots over the coming weeks: The Wit And Wisdom Of Warren Buffett and Charlie Munger.
Google did something complicated yesterday, the announcement from a while back. They paid an adjustment payment. Here it is: Adjustment Payment Information.
This is worth a read, is Apple going to take Tesla on with a car? An electric vehicle? BusinessInsider reckons that could be the case: A steep rise in Apple's R&D spending points to a big new project underway.
This is different. Via the FT: Chinese manufacturers look to Rwanda as wages rise at home. Why can't we have that here?
Home again, home again, jiggety-jog. Is Greece really on the brink of not being able to pay anyone back? I hear that doctors who have done work off the normal register, i.e. call work, have not been paid for over four months. That is hardly a good outcome for anyone. We have started by seeing some selling on the local front, selling across the globe actually. I suspect that in the end that "things" will get tight with the Greeks, they will however get the money they need to tie them down, perhaps even best case scenario, a partial write down of debt, or an extension. It will happen. Oh, and all you Bayern fans out there, sorry for that, ok?
Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.
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